US EXPANSION IN THE SPECIALITY COFFEE MARKET
April 2001

According to the Specialty Coffee Association, the United States specialty coffee retail sales exceed $2.1 billion and specialty coffee beverage sales exceed $3.3 billion annually in a $17 billion coffee market in 2000. Specialty coffee beverage retailers have been the fastest growing distribution channel in the specialty coffee business. There are over 12,000 locations at the end of 2000 as compared to 6,000 just five years ago. Cross outlet competition is sharpening as away-from-home consumption is growing through new or existing locations to gain market share at the expense of at-home consumption, represented by supermarkets and mass merchandisers.

Although total coffee consumption is flat, consumers are purchasing more value- added coffee products (i.e. specialty coffee drinks); and such purchases are driving the market. Coffee consumers have been moving away from price-based drinks to beverages with a focus on product variety and quality. This quality conscious purchasing trend has evolved coffee from a beverage with commodity characteristics to one with cultural and sensory ties. In the 1970's there were less than 100 roasters in the country, with the large roasters accounting for nearly all of the coffees consumed. Today, there are 1,200 specialty coffee roasters, each segmenting and fragmenting the market, adapting to a wide variety of niche markets. They are focusing on their ability to provide a wide range of coffee origins, freshly roasted in the appropriate style to meet the specific needs of local marketers.

There has been a trend of increased public awareness of the environmental issues associated with clear cutting of rain forests to provide land for sun-grown coffee. Recent changes in the coffee industry have included:

1. The Specialty Coffee Association of America ("SCAA") has changed its 14- year old mission statement to include the words: "social responsibility", "environmental sensitivity", and "sustainability".

2. The country of Nicaragua has embraced the policy of shade in its coffee plantations as public policy.

3. A Third National Conference on Coffee and the Environment, which is co- sponsored by the SCAA and the Smithsonian Migratory Bird Center, was held in San Francisco, California in April 2000.

4. Shade grown coffee and Fair Trade coffee now appears on the "offer" lists of most coffee brokers and importers and is offered by a majority of small to mid-size coffee roasters of specialty coffee.

5. Coffee producing countries, such as Costa Rica, have begun shade replantings on their sun coffee farms to improve the quality of their coffee beans and to benefit from premium prices paid for shade coffee.

One Company with a long history in the market is Thanksgiving Coffee Company Incs of Fort Bragg, California. For more than twenty-five years Thanksgiving has purchased and roasted high quality coffee beans and marketed them to the specialty coffee market. Of the total fiscal 2000 revenues of $5,391,482, 83% were from roasting coffee, 13% were from a bakery operation, 3% were from resale items, and 1% were from tea products. The Company buys green coffee beans through six main importers and retails over 100 varieties of its coffee and tea through its own distribution system in the Northern California market. In other parts of the nation Thanksgiving distributes its products either direct to retailers or through brokers and distributors and also markets directly to consumers through both the print and electronic media. It publishes a mail order catalogue that features most of its products, in addition to complementary products and accessories of third parties. The same product offerings are made on the Company's web site on the internet. The Company generally provides its wholesale customers with brewing, grinding and related equipment (leased from manufacturers) and product displays (designed and manufactured by the Company) at no charge if predetermined sales volumes are reached.

With the exception of its high-caffeinated coffees, the Company roasts only high quality arabica beans with a focus on organic and shade grown beans. Arabica beans are grown at high altitudes where the cooler climate results in slow growth and usually higher quality. In addition to its full line of classic specialty and estate coffees from over 20 countries currently, the Company is producing custom products for the American Birding Association under an exclusive ten-year contract and private-label products for over 100 retail and serving accounts in an effort to meet customers needs. The Company has the ability to have products custom packaged for retailers.

It has been the philosophy of the Company to not only provide an excellent cup of quality coffee but also procure, roast, package and market its products in a manner that is fair to all its customers and suppliers. The Company's motto, "Not Just a Cup, but a Just Cup,"(TM) reflects the Company's commitment to local coffee growers in developing nations

The Company sells organic and shade grown coffee to organizations focused on social and environmental issues. In fiscal 2000, the Company's coffee products were served and sold by prestigious environmental organizations such as The National Aquarium, Monterey Bay Aquarium, the Cape May Bird Observatory and by several other national institutions. The Company's roasting plant has been certified wholly organic by the Organic Crop Improvement Association (OCIA). The OCIA has also certified the organic practices of several farms from which the Company receives green beans.