U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K-SB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 000-28595
PEABODYS COFFEE, INC.
(Name of Small Business Issuer in its Charter)
Nevada 98-0209293
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3845 Atherton Road, Suite 9
Rocklin, California 95765
(Address of Principal Executive Office) (ZipCode)
(916) 632-6090
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filings requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $2,141,946.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, based upon the average bid and asked price of such common equity
as of June 27, 2001, [in the past 60 days], was approximately $833,093.
TABLE OF CONTENTS
PART I (Alternative 2)
Item 1 Description of Business 3
Item 2 Description of Property 20
Item 3 Directors, Executive Officers and Significant Employees 20
Item 4 Remuneration of Directors and Officers 21
Item 5 Security Ownership of Management and Certain Securityholders 22
Item 6 Interest of Management and Others in Certain Transactions 23
PART II
Item 1 Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters 24
Item 2 Legal Proceedings 25
Item 3 Changes in and Disagreements with Accountants 25
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Compliance with Section 16(a) of the Exchange Act 26
Item 6 Reports on Form 8-K 26
PART F/S
PART III
Index to Exhibits 28
SIGNATURES 29
INFORMATION REQUIRED IN ANNUAL REPORTS OF
TRANSITIONAL SMALL BUSINESS ISSUERS
PART I (ALTERNATIVE 2)
ITEM 1. DESCRIPTION OF BUSINESS
(FORM 1-A MODEL B ITEM 6)
OVERVIEW
Peabodys Coffee, Inc., a Nevada corporation (the "Company" or "Peabodys"),
is in the business of selling specialty coffee drinks. Peabodys sells its coffee
drinks by the use of coffee espresso bars (kiosks), positioned primarily in
corporate and institutional locations. Peabodys believes that the highest level
of growth, stability and return on investment in the specialty coffee market is
available through targeting a "captive" market niche, and by avoiding direct
competition with "retail" companies such as Starbucks, Peet's, Diedrich Coffee,
Seattle's Best and others located in fixed, traditional, store-front locations.
As described in detail below, Peabodys' kiosks require comparatively lower
levels of capital investment, overhead and advertising, and are relatively
simple to operate.
Peabodys' kiosks, while usually appearing permanent, are portable and often
completely self-contained, with the exception of electrical supply. They are
generally located in commercial and educational facilities, including corporate
office buildings, universities, and hospitals. The Company also operates one
fixed store-front location in South Lake Tahoe which occupies approximately 300
square feet and offers "to go" products only. Peabodys' marketing strategy is to
enter into subcontracts with companies having general contracts for food and
beverage services for the above sites, and to enter into direct contracts with
the host facility. Both subcontracts and direct contacts allow Peabodys to
locate its coffee kiosks in the sites in exchange for a percentage of the gross
revenue generated by the kiosks. Three of Peabodys' existing foodservice
provider clients, Sodexho-America, The Compass Group and ARAMARK, control
several thousand institutional foodservice sites across the country (Nations
Restaurant News Special Report-Top 100 Contract Chains 1999), potentially
providing the Company with the opportunity for growth, although the Company
recognizes that not all of these sites are suitable locations for the Company's
kiosks.
As of March 31, 2001, the Company was operating 23 kiosk outlets and had
achieved profitability at the "unit level" at 19 of these locations. Of the 4
non-profitable locations, 2 were opened in the first quarter of 2001. The
Company designates a kiosk to be profitable at the "unit level" when the kiosk
generates net income after accounting for all expenses directly related to the
specific unit. These direct expenses consist of: cost of goods sold, occupancy
costs, operating expenses and fully loaded labor costs which include employer
contributions, benefits and workers compensation.
Despite the "unit level" profitability described above, the Company has not
been profitable. As the accompanying financial statements show, in its last
fiscal year which ended on March 31, 2001, the Company had a net operating loss
of $890,879, and an overall net loss of $821,376. These losses indicate that any
profits at the unit level are overshadowed by the Company's expenses at the
corporate level. These corporate level expenses consist of: (i) corporate
salaries; (ii) professional fees (primarily legal and accounting); (iii)
consultant fees; (iv) lease payments and related expenses to maintain corporate
offices; (v) insurance premiums; (vi) interest expense on Company debt; and
(vii) depreciation expense on the
Company's capital assets, which consist primarily of the kiosks. The Company's
balance sheet as of March 31, 2001 showed a shareholders' deficit of $197,834,
and current liabilities exceeding current assets by $721,624.
Because of the Company's operating losses and financial situation, note 3
of the accompanying financial statements expresses a "going concern opinion:"
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplates continuation of the Company as a going
concern. Going concern contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business over a reasonable length of time.
However, the Company has sustained operating losses since
its inception and has a net capital deficiency of $197,834
as of March 31, 2001.
In view of these matters, realization of certain assets in
the accompanying financial statements is dependent upon
continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financial
requirements through raising additional capital and the
success of its future operations.
In order to address the issue of the Company's continuation as a going
concern, the Company has taken the following actions:
The Company has launched its plan to eliminate debt from its balance sheet
through a combination of converting debt to equity and negotiating settlements
at less than full value. For the combined fiscal years ended March 31, 2001 and
March 31, 2000, this plan has resulted in debt conversion/debt forgiveness of
approximately $1.5 million. Although the success of this debt
conversion/forgiveness improves the appearance of the Company's balance sheet,
it does not directly improve the profitability of the Company's operations.
However, the Company believes that a consistently improving balance sheet will
enhance the Company's ability to attract investment capital. Based on the
success of the debt reduction plan, the Company intends to continue with efforts
to further reduce its debt by using the same or similar approach.
Second, due to a challenging economic climate that has hampered capital
raising efforts, the Company has adjusted its game plan by refocusing on organic
growth. The Company has implemented a program for eliminating all non-value
adding overhead at both the corporate and field levels. Marginal sites have
either been closed or relocated and all existing sites are continually evaluated
to ensure that they meet acceptable performance standards.
Third, the Company has focused its operating plan on improving the
economics of existing sites and increasing brand awareness. The operating plan
is targeted to increase revenue by educating the customer, providing higher
levels of service through enhanced training programs, and improving product
quality by implementing whole bean coffees and grinders at the site level. In
addition, the Company has overhauled its distribution system whereby all vendors
now direct-ship all products to the operating unit. The Company has re-evaluated
its retail pricing policies, resulting in a new menu rollout with increased
prices that are supported by a higher quality product. The Company anticipates
improvements to average unit revenues, comparable store sales results, and cost
of goods sold.
Fourth, the Company has redirected its efforts away from conventional
equity capital markets, and has begun exploring potential alliances with
strategic partners, and merger/acquisition candidates. The Company is seeking
potential partners who can add value to its brand and operating strength with
financial resources and/or market access. The Company is in preliminary
discussions with a number of possible candidates who meet the desired criteria.
It is the Company's intention to solidify one or more of these possibilities
within the next three months.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The preparation of this section requires management to make estimates and
assumptions about the past, current and future activities, business practices,
and financial records of the Company. Actual results may differ from these
estimates and assumptions. Foreseeable risks and uncertainties are described
elsewhere in this report and in detail under "Risk Factors Affecting the
Company".
The Statements of Loss and Accumulated Deficit show consistent sales and
gross profit, and an increase in the net loss for the year ended March 31, 2001
over the prior year. However, the stockholder's deficit decreased due to
infusion of capital. Although net losses increased for fiscal year 2001, the
operating loss is less after consideration of a significant increase in
professional fees.
REVENUES
Net revenues for the twelve months ended March 31, 2001 increased 0.8% to
$2,141,946 from $2,124,395 for the corresponding period in fiscal 2000. This was
due primarily to an increase in the average kiosk revenue as the number of
operating kiosks declined from 26 to 23. Retail kiosk and cart sales accounted
for 100% of revenues for both periods. For the twelve months ended March 31,
2001, net revenue was generated from 8 different clients and special events,
with the largest client being Sodexho America, representing 23.3% of total net
revenue.
COSTS AND EXPENSES
Cost of goods sold for the twelve months ended March 31, 2001 decreased to
$876,738 from $877,074 for the same period in fiscal 2000. As a percentage of
net revenues, cost of goods sold decreased to 40.9% for the twelve months ended
March 31, 2001 from 41.3% for the comparable period in fiscal 2000. The decrease
as a percentage of net revenues was primarily due to a reduction in distribution
costs resulting from the implementation of direct shipments from vendors to the
Company's retail operating units. During the twelve months ended March 31, 2001,
5 units were closed or relocated due to unacceptable unit level operating
performance. For the twelve months ended March 31, 2001, these 5 units accounted
for $135,825 of the Company's net revenue, and $83,797 of the total operating
loss.
Employee compensation and benefits for the twelve months ended March 31,
2001 decreased to $1,102,508 from $1,107,772 for the same period in fiscal 2000.
As a percentage of net revenues, employee compensation and benefits for the
twelve months ended March 31, 2001 remained consistent with the comparable
period in fiscal 2000.
General and administrative expenses for the twelve months ended March 31,
2001 decreased to $256,717 from $287,122 for the same period in fiscal 2000. As
a percentage of net revenues, general and administrative expenses decreased to
12.0% for the twelve months ended March 31, 2001 from 13.5% for
the comparable period in fiscal 2000. The decrease as a percentage of net
revenues was primarily due to reduced travel expenditures and reduced telephone
expenses resulting from budget cuts in travel and an improved telecommunication
service provider arrangement.
Occupancy costs for the twelve months ended March 31, 2001 decreased to
$276,382 from $311,370 for the same period in fiscal 2000. As a percentage of
net revenues, occupancy costs decreased to 12.9% for the twelve months ended
March 31, 2001 from 14.7% for the comparable period in fiscal 2000. The decrease
as a percentage of net revenues was primarily due to lower revenue sharing rates
resulting from both renegotiated contracts and new client contracts at lower
revenue sharing rates.
Director and professional fees for the twelve months ended March 31, 2001
increased to $372,662 from $200,106 for the same period in fiscal 2000. As a
percentage of net revenues, director and professional fees increased to 17.4%
for the twelve months ended March 31, 2001 from 9.4% for the comparable period
in fiscal 2000. The increase as a percentage of net revenues was primarily due
to the engagement of various consultants for business development, public
relations, and other services for assisting the Company with its capital raising
efforts.
Depreciation and amortization expense for the twelve months ended March 31,
2001 increased to $126,959 from $113,503 for the same period in fiscal 2000. The
increase was primarily due to the purchase of equipment in fiscal year 2000
generating a full year of depreciation in fiscal year 2001.
Interest expense for the twelve months ended March 31, 2001 decreased to
$18,877 from $66,372 for the same period in fiscal 2000. As a percentage of net
revenues, interest expense decreased to 0.9% for the twelve months ended March
31, 2001 from 3.1% for the comparable period in fiscal 2000. The decrease was
primarily due to savings from the conversion of interest bearing debt into
shares of common stock.
Operating losses for the twelve months ended March 31, 2001 increased to
$890,879 from $774,223 for the same period in fiscal 2000. As a percentage of
net revenues, operating losses increased to 41.6% for the twelve months ended
March 31, 2001 from 36.4% for the comparable period in fiscal 2000. The increase
as a percentage of net revenues was primarily due to increased director &
professional fees related to the engagement of various consultants for business
development, public relations, and other services for assisting the Company with
its capital raising efforts.
Net loss for the twelve months ended March 31, 2001 increased to $821,376
from $372,608 for the same period in fiscal 2000. As a percentage of net
revenues, net losses increased to 38.3% for the twelve months ended March 31,
2001 from 17.5% for the comparable period in fiscal 2000. The net loss increase
was primarily due to a decrease in extraordinary income and an increase in
director and professional fees. Extraordinary income for the twelve months ended
March 31, 2001 decreased to $88,380 from $467,987 for the same period in fiscal
2000. As a percentage of net revenues, extraordinary income decreased to 4.1%
for the twelve months ended March 31, 2001 from 22.0% for the comparable period
in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company ended its fiscal year with a working capital
deficit of $721,624. Cash and cash equivalents increased $4,987 during the
twelve months ended March 31, 2001. Cash utilized by operating activities
totaled $334,138 during the fiscal year 2001, primarily due to a net loss of
$821,376 offset by non-cash items of depreciation and forgiveness of debt,
combined with changes in current assets and liabilities as detailed in the
Statements of Cash Flows.
The Company had net cash applied to investing activities for the twelve
months ended March 31, 2001 totaling $55,494. This included capital additions to
property and equipment of $68,100 primarily related to the equipment purchase
for the opening of the two Kaiser Hospitals, and costs associated with
refurbishing and relocating existing kiosks. The Company also disposed of
equipment for $22,500.
The Company had net cash provided from financing activities for the twelve
months ended March 31, 2001 totaling $394,619. Cash from financing activities
primarily consists of $110,200 from net short-term borrowing and $285,532 net
proceeds from the sale of Company stock. These amounts were utilized in the
day-to-day operations of the Company.
Management has been successful in eliminating debt from its balance sheet
through a combination of converting debt to equity and negotiating settlements
at less than full value. This plan has resulted in debt conversion/debt
forgiveness of approximately $1.5 million over the past two fiscal years. The
Company intends to continue with efforts to further reduce its debt by using the
same or similar approach.
Although the success of this debt conversion/forgiveness improves the
appearance of the Company's balance sheet, it does not directly improve the
profitability of the Company's operations. However, the Company believes that
operating results subsequent to March 31, 2001 will indicate substantial overall
operating improvements that in conjunction with a consistently improving balance
sheet will provide the means to attract equity capital based on the current
success of its plan addressing the "Going Concern" issue.
Management estimates that the number of Company-operated units will need to
grow to at least 30 with comparable or slightly improved performance to the
existing units in order to reach break even with operational costs. The Company
estimates that this growth to 30 units will require approximately $300,000 of
additional investment capital (in addition to the investment capital required to
address the current working capital deficit) and approximately six months to
achieve. In anticipation of this growth and the need for additional capital, the
Company is planning to release a private placement offering memorandum in July
2001. The details of the private placement are still being contemplated and
there can be no assurance that the Company will be successful in attracting
investors.
INDUSTRY OVERVIEW
According to the National Coffee Association's ("NCA") 2000 study, citing
an article titled "Java's Jumpin' and Jivin" published in CafeCuisine Magazine
in September 2000, 79% of the adult population in the U.S. drinks coffee. These
coffee drinkers will spend about $18.5 billion dollars on their beverage of
choice, compared with $13 billion in 1993. The NCA's 2000 National Coffee
Drinking Trends study found that much of the recent growth in coffee drinking
came from the 18-to-24-year-old consumers.
In The Specialty Coffee Association of America's 1999 Coffee Market Survey,
48.5% of Americans consider themselves to be coffee drinkers. On average they
drink 1.4 cups per day. The U.S. coffee market consists of two distinct product
categories: (1) commercial ground roast, mass-merchandised regular brewed coffee
and (2) specialty coffees (premium grade arabica coffees sold in whole bean and
ground form) and other premium coffees.
Within the specialty coffee category, specialty coffee retail sales have
become the fastest-growing segment. As reported in Specialty Coffee Association
of America's 1999 Coffee Market Survey:
During the past five years, specialty coffee beverage retailers have
become the fastest growing distribution channel in the specialty
coffee industry. The number of these retail beverage outlets is
expected to reach 12,000 locations by the end of 1999. This number
will include 3,500 coffee cafes, 2,700 coffee bars and kiosks, 2,100
espresso carts, and 1,200 Roaster-Retailers. . . . Although current
U.S. consumption is flat, consumers are purchasing more value-added
products through the specialty coffee industry, which is driving up
the overall market value. In short, consumers are not drinking more
coffee, but they are just choosing to drink better coffee. Coffee
consumers have been moving away from priced-based purchasing to a
purchasing trend that focuses on product variety and quality. This
quality-conscious purchasing trend has evolved coffee from a beverage
of pseudo-commodity characteristics to one with cultural and sensory
ties.
The Company believes that several factors have contributed to the increase
in demand for specialty coffee, evolving coffee from a staple drink to a gourmet
beverage, including:
o Greater consumer awareness of specialty coffee as a result of its
increasing availability and expanded coffee menus which market coffees
in a multitude of roasts, blends and varieties;
o Increased quality differentiation over commercial grade coffees by
consumers;
o Increased demand for all premium food products, including specialty
coffee, where the differential in price from the commercial brands is
small compared to the perceived improvement in product quality and
taste; and
o Ease of preparation of specialty coffees resulting from the increased
use of automatic drip coffee makers and home espresso machines.
COMPANY BACKGROUND
PEABODYS CA
The current business of the Company began with the formation of Peabodys
Coffee, Inc., a California corporation ("Peabodys CA"), in 1995. Co-founder Todd
Tkachuk (who is currently an officer and director with the Company) conceived of
a company which would contract with an institutional food service vendor (the
"client"), such as Sodexho America, The Compass Group, or ARAMARK, that held the
food service contract for an institutional setting (the "host organization"),
such as a corporate facility, college, university, or hospital. As with the
Company today, Peabodys CA would enter into a subcontract with the client (which
had a general contract to provide food services to the host facility) to install
coffee kiosks at the host organization. In return, Peabodys CA paid the client a
percentage of the gross revenues generated by each kiosk.
The Peabodys CA model, which is now the model of the Company today, differs
from traditional specialty coffee retailers in the following significant ways:
o No direct competition with Starbucks and other retail specialty coffee
sellers operating from fixed, "store-front" locations.
o Access to large numbers of sites through foodservice clients who have
relationships already in place with such sites.
o Captive customer populations at such sites, such as office buildings,
hospitals and schools, resulting in no direct competition at the site
itself, and therefore no need for significant advertising expenses.
o Low initial investment and short time periods required to open new
sites.
o No expenses for utilities or common area maintenance charges, since
these are usually provided for in the foodservice provider's general
contract.
o Kiosks can be relocated easily if necessary
THE COMPANY
Concurrent with Peabodys CA's development of its specialty coffee business,
as described above, the Company was existing as a development stage company
formed for the purpose of mineral exploration and mine development. The Company
was incorporated under the laws of the State of Nevada on July 26, 1989 with the
name Kimberly Mines, Inc. Several months later the Company was the surviving
company in a merger with Blue Ute Mining & Exploration, Inc., a Utah
corporation. On August 15, 1997 the Company changed its name to Mine-A-Max
Corporation. The Company continued to exist as a development stage mining
company until its merger with Peabodys CA in 1999.
THE MERGER
On March 12, 1999, Peabodys CA entered into a Plan and Agreement of
Reorganization (the "Agreement") with the Company. The Agreement provided for a
share exchange in which the Company offered shareholders of Peabodys CA one (1)
share of the Company's common stock in exchange for one (1) share of Peabodys CA
common stock. The shares were offered by the Company in reliance on the
exemption from registration provided by Rule 506 of Regulation D. The Agreement
provided further that, after the Company had acquired a majority of the
outstanding stock of Peabodys CA, the Company would effect a merger of Peabodys
CA into the Company. On March 15, 1999 the Company filed an Amendment to
Articles of Incorporation with the State of Nevada changing its name from
Mine-A-Max Corporation to Peabodys Coffee, Inc. On June 30, 1999, the Company
effected a merger ("Merger"), with Peabodys CA as the disappearing corporation
and the Company as the surviving corporation.
In effecting the Merger, the Company did not send a notice of approval of
the Merger and appraisal price of the shares to Peabodys CA shareholders in
accordance with Corp. C. ss. 1301(a) for the exercise of dissenters' rights.
Consequently, no Peabodys CA shareholders delivered a demand to exercise
dissenters' rights under Corp. C. ss. 1301(b) in connection with the Merger, and
there were no "dissenting shares," as defined in Corp. C. ss. 1300(b). Peabodys
CA did, however, send a Confidential Offering Circular and Term Sheet and a
subscription agreement to all of its shareholders to allow each shareholder to
participate in the exchange of shares immediately preceding the Merger. Peabodys
CA received executed subscription agreements from shareholders holding over 90%
of its outstanding common stock.
On June 30, 1999, in effecting the Merger, all shares of Peabodys CA common
stock were converted to shares of the Company's common stock, including those of
shareholders who did not execute the subscription agreement.
It is possible that former Peabodys CA shareholders who did not execute the
above-mentioned subscription agreement may seek to exercise their dissenters
rights. If any former Peabodys CA shareholder wishes to exercise dissenters
rights, the Company, as the successor in interest to Peabodys CA, would seek to
settle the action by allowing the retroactive exercise of dissenters rights on
terms negotiated between the parties. It is difficult to accurately quantify the
potential exposure to the Company with respect to the Merger. Given the
insolvency of Peabodys CA at the time of the announcement of the Merger, the
Company estimates that the most it would possibly pay to former Peabodys CA
shareholders in settlement would be approximately $ .10 per share. This would
lead to an estimated maximum total exposure of approximately $55,000. This is an
estimate only, and in this context such estimate may prove inaccurate.
The Company has yet to compete the formalities in connection with the
Merger. However, the Company has issued new share certificates to the former
holders of Peabodys CA shares. The Company has not filed the proper document to
effect the Merger in the State of California, as set forth in Corp. C. ss.
1108(d). When this document is filed, because more than six (6) months will have
elapsed between the filing of the Articles of Merger in the State of Nevada and
the filing of the proper document in California, the Merger will be effective in
California as of the date of the later filing, all in accordance with Corp. C.
ss. 1108(e). The effect on the Company of this later effective date is not clear
at this time.
BUSINESS STRATEGY AND OPERATION
In order to take advantage of the growing market for specialty coffee as
described in the "Industry Overview," above, the Company has developed a
business strategy based on the following concepts:
Business and Institutional Locations. The Company focuses on locating its
coffee kiosks in business and institutional facilities. The Company has
experienced both lower competition and reduced advertising and marketing
expenses by installing kiosks in such areas, since the kiosks have a nearby
captive audience of employees and students at business and institutional sites.
Quality Coffee. Peabodys strives to offer coffees of a very high quality.
The product mix offered by each kiosk can be tailored to meet the taste and
preferences of each locale.
Low Cost Operations. The cost of opening and operating each kiosk is less
than the cost of opening and operating the fixed, retail stores operated by many
other specialty coffee retailers. Each kiosk can achieve profitability with
sales as low as $300 per day.
SITE FORMAT AND OPERATIONS
Each existing Peabodys site consists of a kiosk that measures approximately
ten feet long, three feet deep, and four feet high (counter level), with related
equipment and display space. Standard equipment on the kiosk includes a
two-group espresso machine, two espresso grinders, a coffee brewer, blender, and
cash register, and display racks for baked goods and other non-coffee items. All
kiosks are equipped with wheels for unit mobility, although at most sites the
kiosk remains in the same location permanently. Under the terms of its
contracts, Peabodys is usually allotted both dry and cold storage space within
the host's commissary facilities, at no charge to the Company.
Peabodys utilizes a client-host/captive-consumer model. This model has two
distinctive components. The client-host component means that Peabodys
establishes relationships with its "clients" (large institutions and food
service providers) with the intention of multiple kiosk placements within the
client's area of operation. In lieu of rent, Peabodys normally pays the client a
percentage of the revenues generated by each kiosk, thereby giving the client
incentive to assist Peabodys in a successful kiosk placement. Clients with
widespread operations provide many opportunities for Peabodys to place its
kiosks.
The captive-consumer component refers to the placement of kiosks in heavy
traffic areas where people (potential customers) have already congregated for
other reasons. Examples of typical placements are the lobbies of large
buildings, or school campuses. Unlike a fixed store which relies on attracting
foot traffic to its location, Peabodys already has a customer base at its
location. Peabodys locates its kiosks where the customers are, as opposed to
requiring the customer to come to Peabodys' location.
The typical Peabodys site, which includes the kiosk, related components,
and workspace for employees, occupies a footprint of approximately 100 square
feet. Due to the client-host/captive-consumer model described above, the Company
incurs no fixed rental expense for this real estate. Likewise, there are no
common area maintenance charges, and all utilities, such as electricity, heat,
air conditioning, and water, are furnished by the host or client at no cost to
Peabodys.
Each Peabodys location is staffed with a site manager and from two to eight
baristas (the Italian term for a person skilled in the art of espresso
preparation), depending on the population of the site's captive customer base,
the hours of operation, the mix of hours available from part-time employees, and
similar factors. To assure available staffing at all times, Peabodys is also
building a pool of on-call labor to work on an as-needed basis, much as schools
draw from a pool of substitute teachers to fill in as needs arise.
Most baristas work part-time, typically in four-hour intervals. Site
managers, all of whom are full-time employees, serve customers during their
shifts in addition to performing supervisory and administrative duties such as
recruiting, hiring, and supervising staff, assuring compliance with corporate
procedures and the Company's key operating imperatives, taking inventory, and
completing daily performance reports for corporate headquarters. Specific
accountabilities for site managers include quality and service, employee
performance, sales, and profitability. Site manager compensation is strongly
performance-related, with execution of the four operating imperatives and
over-budget profitability bringing open-ended gain-share rewards.
Standout site managers, known as "cell leaders," oversee strategic
groupings of sites. Cell leaders remain accountable for their own sites'
performance, but take on additional duties to support the cell, for which they
earn extra compensation. In particular, such duties include: (i) building peer
chemistry within the cell; (ii) participating in training and coaching projects;
(iii) designing and executing local site-specific marketing programs; (iv)
supporting new site openings; and (v) implementing specific initiatives to
support the four key operating imperatives within the cell. Given these
additional responsibilities, cell leaders receive somewhat higher staffing
support at their own sites.
Establishing and maintaining Peabodys' specialty coffee kiosks is
relatively simple. The kiosk is compact, modular in design, and self-contained.
No significant preparation is needed at the host location other than provision
for electrical power. The kiosk, while generally appearing permanent, is usually
portable and can be moved from location to location. The cost of a kiosk,
including internal plumbing, equipment, inventory and signage is approximately
$30,000. Turnaround time for manufacturing a complete kiosk is approximately
four to six weeks. The Company currently utilizes Michaelo Espresso of Seattle,
Washington as its kiosk manufacturer.
SITE EXPENSES
In lieu of rent or lease payments, Peabodys pays a percentage of the
revenue generated by each kiosk to the foodservice provider or the host at an
average rate of approximately 12.9%. The Company contracts its services either
directly with the host facility, or subcontracts its services indirectly through
the foodservice provider who is a party to a contract to provide food service to
the host facility. When the Company contracts its services directly with the
host, the Company pays the host facility the percentage of gross revenue that is
agreed to in the contract. When the Company contracts with a foodservice
provider, such as ARAMARK, Compass, or Sodexho America, the Company pays the
percentage of gross revenue to the foodservice provider, and incurs no expenses
directly with the host facility. Other nominal expenses such as water and power
are normally included in this above-described payment.
SITE LOCATIONS
As of March 31, 2001, the Company operated 23 coffee kiosks throughout
California and Nevada as follows: In California, 21 units in the following
geographic markets: 5 in San Diego; 2 in the San Bernardino Valley; 3 in San
Jose; 5 in Santa Cruz; 4 in Sacramento; and, 1 in South Lake Tahoe. In Nevada,
the Company operated 2 units in Reno. The Company's 23 operating units were
located in the following venues: 13 were located at educational sites (i.e.
colleges and universities); 5 were located at corporate office facilities; 4
were located at hospitals; and, 1 was a 300 square foot store-front retail
location serving "to-go" products only.
SUPPLIERS
The Company procures its coffee from Grounds For Enjoyment, Inc. ("GFE") in
Redlands, California. GFE is a specialty coffee roaster serving California, and
Peabodys is GFE's largest specialty coffee account. The Company has no contract
in effect with GFE other than the purchase orders it places. The Company
believes that GFE's current roasting capacity may not be sufficient to meet its
needs for the foreseeable future, but the Company believes that there is an
abundance of other suppliers who could fulfill the Company's supply requirements
if necessary. Any risk associated with having only one supplier, therefore,
appears to be minimal.
The Company provides its proprietary specifications for varietals, roast,
and grind and proportions (for brewed coffees) to GFE, which in turn purchases
green beans, and then roasts, blends, and grinds (for brewed coffees) to
Peabodys' specifications. Finished product is bagged, sealed, and shipped to the
Company as ordered. In April and May of 2001, the Company tested on-site
grinding of fresh roasted whole beans for its brewed coffee to increase
freshness and quality. The results of the test were encouraging and the Company
is in the process of installing grinders at all of its locations. The Company
believes that GFE's current roasting capacity may not be sufficient to meet its
needs for the foreseeable future, but the Company believes that there is an
abundance of other suppliers whom could fulfill the Company's supply
requirements if necessary.
For both its brewed and espresso beverages, the Company uses only the
"arabica" species of coffee. At present, the Company uses predominantly
Colombian Supremo, which is a type of arabica
coffee. This type was selected due to its apparent popularity and ready
availability. The Company is testing an expanded offering of brewed coffee
varietals to provide customers a greater choice of coffees. Growing regions for
such additional varietals include Africa, Indonesia, and South America.
Peabodys' espresso is a blend of Colombian Supremo and coffees from Sumatra and
Ethiopia. The Company generally uses a dark roast, typical of the Pacific
Northwest style.
Because coffee in green bean form is a commodity, and is therefore subject
to commodity price swings caused by weather conditions, political climate, and
similar supply and demand factors, it is sometimes assumed that margins for
specialty coffee companies are vulnerable to the same factors. However, the
price of green coffee represents only a relatively small portion of Peabodys'
cost of goods sold for specialty coffee beverages. As a result, if green coffee
prices were to double, for example, the Company's costs would increase by only
about 5 cents per drink. Given consumers' price inelasticity for specialty
coffee, an increase of such size can generally be passed along to the customer.
Among other menu items offered by Peabodys' kiosks, baked goods and fruit
smoothies are the most prominent. Such products are sourced from local vendors
at each site. The Company is analyzing several alternatives to reduce costs,
increase shelf life, and/or increase revenues, including
lunch/afternoon-oriented products. Juice drinks, sodas, and bottled waters are
purchased at customary wholesale prices from distributors of such products, who
deliver directly to the sites as ordered.
EXPANSION PLANS
To date the Company's expansion has been curtailed primarily by capital
constraints. For a complete discussion of capital constraints, liquidity and
capital resources, see "Overview" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations," beginning on page 3.
As described in more detail in the "Overview" section of Item 1 above, at
March 31, 2001, the Company was operating 23 kiosk units, most of which are
profitable at the unit level. The Company as a whole is not profitable however,
since the profits generated at the unit level are overshadowed by the Company's
expenses at the corporate level. Management estimates that the number of Company
operated units will need to expand to at least 30 with comparable or slightly
improved performance to the existing units in order to reach break-even with
operational costs (although management estimates that such break-even could
potentially be reached with less than 30 units if locations with higher
profitability are opened or acquired). The Company estimates that this growth to
30 units will require approximately $300,000 of additional investment capital
(in addition to the investment capital required to address the current working
capital deficit) and approximately six months to achieve.
If the Company is able to raise the capital needed for expansion of its
operations, the Company anticipates that expansion will come from the following,
described in detail below: (i) adding additional locations under current
contracts; (ii) developing new relationships with additional foodservice
providers and (iii) developing direct contracts with host company facilities
that control a significant number of locations such as large retailers,
healthcare organizations and property owners.
The Company believes that its most significant growth will come from
expanded relationships with its current clients. In an effort to lessen the
seasonal impact on revenues that the Company has experienced from a high
concentration of university and college locations, the Company is targeting
healthcare (i.e. hospitals) and large retailers for its primary growth.
Hospitals and retailers offer considerably more operating days and consistency
throughout the course of a year. Also, three of the Company's existing clients,
Sodexho-America, The Compass Group and ARAMARK, control several thousand
institutional foodservice sites across the country (Nations Restaurant News
Special Report-Top 100 Contract Chains 1999). Many of these sites are a
potential location for a Peabodys kiosk. Also, the Company believes that there
is opportunity to acquire existing kiosks located in key locations.
In addition to the future development of the Company's core institutional
operations, the Company is exploring opportunities in additional channels of
trade within the specialty coffee industry. The Company believes that drive-thru
and wholesaling offer both synergy with the Company's core operations and high
growth potential on their own.
On March 12, 2001, the Company entered into contracts to provide coffee
kiosk services at two large Kaiser Permanente hospitals in southern California.
Kaiser Permanente is the largest HMO healthcare provider in the U.S. The Company
believes that the new relationship with Kaiser has the potential of creating
substantive growth opportunities in the Company's most desirable growth venue
i.e. hospitals, which offer solid consistent revenue opportunities throughout
the entire year.
MARKETING STRATEGY
Peabodys' marketing strategy is based on its contractual relationships with
foodservice providers and other direct clients with multiple facilities (i.e.
Kaiser). These foodservice providers, such as Sodexho-America, The Compass
Group, and ARAMARK, have general contracts with host facilities such as
corporate offices, industrial facilities, office buildings, universities,
colleges, hospitals and entertainment venues. Peabodys contracts with the
foodservice providers to allow Peabodys to locate its kiosks on the sites with
which the foodservice provider has a general contract. In return, Peabodys pays
the foodservice provider a percentage of gross revenues, averaging 12.9% for the
twelve months ended March 31, 2001. Additionally, Peabodys contracts directly
with certain multi-unit clients who control their own facilities and in return
Peabodys pays the host (client) a percentage of gross revenues directly.
The foodservice provider or the host facility receives the following
benefits from entering into a contract with Peabodys:
INCREMENTAL REVENUE STREAM. Peabodys provides on average 12.9% gross
revenue sharing for the foodservice provider or the host.
NO INVESTMENT REQUIRED. Peabodys provides everything: Plant, equipment,
products, personnel, training, and management.
NO OPERATIONAL INVOLVEMENT. Peabodys takes full responsibility for kiosk
operation.
INCREASED CUSTOMER AND HOST SATISFACTION. Peabodys brings specialty coffee
to captive customers at work, hospital, convention, education, or
entertainment locations providing convenience for the customer at no
cost to the host or foodservice provider.
COMPETITION
The Company competes with a growing number of specialty coffee retailers
including Starbucks, Coffee Beanery, Caribou, Java City, Diedrich, Tully's, New
World Coffee-Manhattan Bagel, Peet's Coffee and many others. The attractiveness
of the specialty coffee market may draw additional competitors with
substantially greater financial, marketing and operating resources than
Peabodys. A number of nationwide coffee manufacturers, such as Kraft General
Foods, Proctor & Gamble, and Nestle, distribute coffee products in supermarkets
and convenience stores, which may serve as substitutes for our coffees and
provide additional competition.
The performance of individual coffee kiosks may also be affected by factors
such as traffic patterns and the type, number and proximity of competing
coffeehouses. In addition, factors such as inflation, increased coffee bean,
food, labor and employee benefit costs and the availability of experienced
management and hourly employees may also adversely affect the specialty coffee
retail business in general and our coffee kiosks in particular.
The Company is aware of other companies which sell specialty coffee from
kiosks and coffee carts, but these are all very small operations with only a few
kiosk locations each. The Company is not aware of any other company, on either a
regional or national level, which specializes in sales of specialty coffee from
kiosks or coffee carts on the same scale as the Company, or which has a number
of units approaching that of the Company. The Company acknowledges that several
large, well-capitalized multi-unit retailers, such as Starbucks, Diedrich or the
Second Cup, are capable of entering the kiosk and coffee cart market. Currently,
however, to the Company's knowledge none of these retailers are focusing on the
kiosk or coffee cart market.
INTELLECTUAL PROPERTY
The Company has a registered service mark for its rhinoceros logo. The
Company is aware of another entity in North Carolina that is utilizing the name
"Peabodys" in the coffee industry. The North Carolina entity has received a
federal trademark registration of the name "Peabodys." The Company believes that
it has the right to use the name "Peabodys" in the areas in which it is used by
the Company because of first use of the name in those areas. However, if it were
determined that the Company were not able to continue utilizing the name
"Peabodys," it could have a material adverse effect on the Company in that the
Company would have to select a different name under which to do business, and
the Company would have to re-establish any lost goodwill and name recognition.
Because of its speculative nature, such potential adverse effect is impossible
to quantify at this time.
EMPLOYEES
The Company currently has 92 employees of which 20 are full-time employees
and 6 of which are administrative.
SEASONALITY
Because the Company serves both hot and cold coffee drinks, the sales of
the Company's products at most kiosk locations do not appear to be significantly
affected by the seasons. However, those kiosks which are located in educational
facilities are affected by the seasons to the extent that sales are
significantly less when school is not in session.
RISK FACTORS AFFECTING THE COMPANY
COMPLETION OF MERGER. As described above, on June 30, 1999, the Company
effected a merger with Peabodys CA as the disappearing company and the Company
as the surviving company (the "Merger"). In effecting the Merger, the Company
did not send a notice of approval of the Merger and appraisal price of the
shares to Peabodys CA shareholders in accordance with Corp. C.ss.1301(a) for the
exercise of dissenters' rights. Consequently, no Peabodys CA shareholders
delivered a demand to exercise dissenters' rights under Corp. C.ss.1301(b) in
connection with the Merger, and there were no "dissenting shares," as defined in
Corp. C.ss.1300(b). It is not clear at this time whether any former Peabodys CA
shareholders will seek to enforce their dissenters' rights, and, if so, what the
Company's liability will be.
The Company has yet to complete formalities in connection with the Merger,
and as of the date of this filing, has not filed the proper document to effect
the Merger in the State of California, as set forth in Corp. C. ss. 1108(d).
When this document is filed, because more than six (6) months will have elapsed
between the filing of the Articles of Merger in the State of Nevada and the
filing of the proper document in California, the Merger will be effective in
California as of the date of the later filing, all in accordance with Corp. C.
ss. 1108(e). The effect on the Company of this later effective date is not clear
at this time.
LATE PAYMENTS RELATING TO DEBT. Pursuant to the Merger, the Company by
operation of law assumed all of the obligations of Peabodys CA. In an earlier
private placement, Peabodys CA offered and sold units, with each unit consisting
of a secured promissory note ("Secured Note") and warrants to purchase common
stock. The Company is now obligated to make quarterly payments on the principal
balance outstanding and to repay such Secured Notes. As of March 31, 2001, the
Company is in default on the principal balance of the Secured Notes in the
amount of $40,000 and is approximately $29,376 in arrears on such interest
payments relating to the Secured Notes. Under the terms of the Security
Agreement relating to the Secured Notes, a noteholder has the right to (i)
declare all principal and interest immediately due and owing; (ii) exercise its
rights and remedies under the California Commercial Code as a secured creditor
having a security interest in the collateral, which includes, but is not limited
to, equipment, inventory, accounts, trademarks and tradenames and other
intellectual property rights (the "Collateral"), and, in particular, sell any
part of the Collateral and (iii) exercise any other rights or remedies of a
secured party under California law. As of the date hereof, the Company has not
received any notice of default relating to the Secured Notes.
OPERATING LOSSES; LIMITED OPERATING HISTORY; DEVELOPMENT STAGE OF COMPANY.
Prior to the Merger, Peabodys CA had incurred operating losses in each quarter
since its inception and has a significant accumulated deficit. Peabodys CA's
operating loss for the fiscal year ended March 31, 1999 was $632,359, and its
shareholders' deficit was $929,526. For the fiscal year ended March 31, 2000,
the Company's operating loss was $774,223 and its shareholders' deficit was
$399,335. It is anticipated that the Company will continue to incur losses,
until it is able to increase revenues sufficient to support operations. The
Company had an operating loss of $890,879 for the fiscal year ending March 31,
2001, and its shareholders' deficit was $197,834 at the end of that period. The
Company's possible success is dependent upon the successful development and
marketing of its services and products, as to which there is no assurance. Any
future success that the Company might enjoy will depend upon many factors,
including factors out of its control or which cannot be predicted at this time.
These factors may include changes in or
increased levels of competition, including the entry of additional competitors
and increased success by existing competitors, changes in general economic
conditions, increases in operating costs, including costs of supplies, personnel
and equipment, reduced margins caused by competitive pressures and other
factors. These conditions may have a materially adverse effect upon the Company
or may force the Company to reduce or curtail operations.
NEED FOR ADDITIONAL CAPITAL. Additional capital will be required to
effectively support the operations and to otherwise implement the Company's
overall business strategy, including rapid growth in designated regions.
However, there can be no assurance that financing will be available when needed
on terms that are acceptable to the Company. The inability to obtain additional
capital will restrict the Company's ability to grow and may reduce the Company's
ability to continue to conduct business operations. If the Company is unable to
obtain additional financing, it will likely be required to curtail its marketing
and development plans and possibly cease its operations. Any additional equity
financing may involve substantial dilution to the Company's then-existing
shareholders.
RELIANCE ON MAJOR CLIENTS. The Company's two largest clients represent
44.2% of its gross revenue for the year ended March 31, 2001. The same two
clients represented 54.7% of the gross revenue for the year ended March 31,
2000. Although this indicates a trend toward less reliance on major clients, the
Company would experience a material decline in revenues if it were to lose
either of these major clients.
GENERAL RISKS OF BUSINESS. The Company has formulated its business plans
and strategies based on certain assumptions regarding the size of the specialty
coffee markets, the Company's anticipated share of the market, and the estimated
price and acceptance of the Company's products. Although these assumptions are
based on the best estimates of management, there can be no assurance that the
Company's assessments regarding market size, potential market share of the
Company, the price at which the Company will be able to sell its products,
market acceptance of the Company's products and a variety of other factors will
prove to be correct.
DEPENDENCE ON COFFEE SUPPLIER; FLUCTUATIONS IN AVAILABILITY AND COST OF
GREEN COFFEE. The Company largely depends upon a third-party supplier for whole
bean coffee, although the Company has no contract currently in effect with the
supplier other than purchase orders placed from time to time by the Company. The
Company believes that its relationship with such supplier is good and the
supplier will be able to meet the Company's requirements for coffee during the
foreseeable future. In the event such relationship terminates, the Company
believes that numerous other suppliers can fulfill the Company's supply
requirements. In addition, the Company's supply of coffee may be affected by
fluctuations in the cost and availability of high quality whole coffee beans.
Coffee supply and price are subject to volatility. Coffee of the quality sought
by the Company trades on a negotiated basis at a substantial premium above
commodity coffee pricing, dependent upon supply and demand at the time of
purchase. Supply and price may be affected by multiple factors including
weather, politics, and economics in the producing countries. An increase in the
prices of specialty coffees could have an adverse effect on the Company's
profitability.
COMPETITION. As described above, the Company competes indirectly against
specialty coffee retailers (such as Starbucks, Diedrich Coffee and others),
restaurant and beverage outlets that serve coffee, and directly with a growing
number of espresso stands, carts, and stores in the Company's markets. The
Company's coffee beverages compete directly against all other coffees on the
market, including those sold in supermarkets. The specialty coffee segment is
becoming increasingly competitive. The coffee industry, and particularly the
Company's market of commercial and industrial locations, is dominated by large
companies such as Sodexho-America, The Compass Group, and ARAMARK, each of whom
has significantly greater financial, marketing, distribution and management
resources than the Company.
Competitors with significant economic resources in both existing nonspecialty
and specialty coffee businesses and companies in retail foodservice businesses
could at any time enter the Company's proposed market with competitive coffee
products. The Company competes against both other specialty retailers and
restaurants for store sites, and there can be no assurance that management will
be able to continue to secure adequate sites.
ABILITY TO MANAGE RAPID GROWTH. The success of the Company will require
significant expansion of its business. Any such expansion could place a
significant strain on the Company's resources and would require the Company to
hire additional personnel to implement additional operating and financial
controls and improve coordination between marketing, administration and finance
functions. The Company would be required to install additional reporting and
management information systems for sales monitoring, inventory control and
financial reporting. There can be no assurance that the Company would be able to
manage any substantial expansion of its business, and a failure to do so could
have a materially adverse effect on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the continued service of Todd Tkachuk. Loss of the services of Mr.
Tkachuk could have a material adverse effect on the Company's growth, revenues,
and prospective business. The Company does not maintain key-man insurance on the
life of Mr. Tkachuk. In addition, in order to successfully implement and manage
its business plan, the Company will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that the Company will be able to find, attract and retain
existing employees or that it will be able to find, attract and retain qualified
personnel on acceptable terms.
LACK OF DIVIDENDS. The Company has not to date paid any dividends with
respect to its shares of Common Stock and does not intend to pay dividends in
the foreseeable future. Instead, the Company intends to apply any earnings to
the expansion and development of its business.
THIN MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. The Company's common stock
has been traded on the OTC Bulletin Board since November 1997. The Company
believes that factors such as announcements of developments related to the
Company's business, fluctuations in the Company's quarterly or annual operating
results, failure to meet securities analysts' expectations, general conditions
in the marketplace and the worldwide economy, developments in intellectual
property rights and developments in the Company's relationships with clients and
suppliers could cause the price of the Company's common stock to fluctuate,
perhaps substantially.
OTC ELIGIBILITY RULE. Recent changes to the rules of the NASD require that
companies trading on the OTC Bulletin Board, such as the Company, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board ("OTC Eligibility
Rule"). If the Company fails to remain current on its reporting requirements,
the Company could be removed from the OTC Bulletin Board. As a result, the
market liquidity for the Company's securities could be severely adversely
affected by limiting the ability of broker-dealers to sell the Company's
securities and the ability of shareholders sell their securities in the
secondary market.
ITEM 2. DESCRIPTION OF PROPERTY
(FORM 1-A MODEL B ITEM 7)
The Company's principal executive offices are located at 3845 Atherton
Road, Suite 9, Rocklin, California, 95765, and its telephone number is (916)
632-6090. The facility is utilized in the following manner: a) administrative
offices, b) professional offices, c) storage and warehousing, and d) product
development. The facility consists of approximately three thousand (3,000)
square feet of office and warehouse space, leased for $2,857 per month. The
lease expires in September 2001. The Company believes that its existing
facilities are adequate for its current use.
The kiosks which the Company owns and uses for its day-to-day operations on
its sites vary from site to site, but generally measure approximately 10 feet
long, 3 feet deep, and 4 feet high (counter level) with related equipment and
display space. Standard equipment on each kiosk includes a two-group espresso
machine, two espresso grinders, a coffee brewer, blender, and cash register, and
display racks for baked goods and other non-coffee items. All kiosks are
equipped with wheels for unit mobility, although at most sites the kiosk remains
in the same location permanently. The cost of a kiosk, including internal
plumbing, equipment, inventory and signage is approximately $30,000. The Company
currently utilizes Michaelo Espresso of Seattle, Washington as its kiosk
manufacturer. Turnaround time for manufacturing a complete kiosk is
approximately four to six weeks. See, "Site Format and Operations" on page 12
and "Site Locations" on page 14.
ITEM 3. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
(FORM 1-A MODEL B ITEM 8)
The following table sets forth certain information regarding the officers
and directors of Peabodys:
Name Age Position
--------------------------------------------------------------------------------
Todd N. Tkachuk 40 President, Chief Financial Officer, Secretary and
Chairman of the Board of Directors
Barry Gibbons 54 Director
Roman Kujath 67 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are five seats on the Company's board of directors. Two directors have
resigned (E. Del Thachuk and William Bossung), creating two vacancies which the
company has not yet filled.
Directors serve without cash compensation and without other fixed
remuneration. Officers are elected by the Board of Directors and serve until
their successors are appointed by the Board of Directors. Biographical resumes
of each officer and director are set forth below.
Todd N. Tkachuk was President, Chief Financial Officer, and Secretary of
Peabodys CA since October 1996, and was a Director of that company since its
inception. In connection with the Merger, Mr. Tkachuk became President, Chief
Financial Officer, and Secretary, and a Director, of the Company. In January of
2000, Mr. Tkachuk became Chairman of the Board. Prior to his involvement with
Peabodys, Mr. Tkachuk served as President of Tony's Coffee Company, a Vancouver,
Canada-based specialty coffee company. From 1987 to 1991, Mr. Tkachuk served as
President and CEO of Skytech Data Supply, a wholesale distributor of computer
consumables and peripherals. Mr. Tkachuk holds a B.A. in Business Management
from Western Washington University (1983).
Barry J. Gibbons became a Director and Chairman of the Board of Peabodys CA
in October 1996, and became a Director and Chairman of the Board of the Company
in connection with the Merger. In January of 2000, Mr. Gibbons stepped down from
being Chairman of the Board, but remains a director to the Company. From January
1989 to December 1993, Mr. Gibbons served as Chief Executive Officer and
Chairman of Burger King Corporation. From 1984 to 1989, Mr. Gibbons was an
employee of Grand Metropolitan, the U.K.-based international food, drink and
retailing group. Mr. Gibbons graduated from Liverpool University in 1969 with a
degree in Economics.
Roman Kujath has been a director of Peabodys CA since June 1998, and of the
Company since the Merger. Mr. Kujath has been president of Roman M. Kujath
Architects, Ltd. since 1975. Mr. Kujath has been responsible for over $1 billion
worth of construction, including the $100 million Place De Ville in Ottawa for
the Campeau Corporation. Mr. Kujath is a member of the Royal Architectural
Institute of Canada, a past corporate member of the American Institute of
Architects, a member of the Architectural Institute of British Columbia and the
Alberta Association of Architects.
ITEM 4. REMUNERATION OF DIRECTORS AND OFFICERS
(FORM 1-A MODEL B ITEM 9)
(a) The following table sets forth the aggregate annual remuneration of each of
the three highest paid persons who are officers or directors for the fiscal year
ending March 31, 2001.
Name of Capacities in which Aggregate
Individual or Group Remuneration was received Remuneration
--------------------------------------------------------------------------------
Todd N. Tkachuk Officer and Director $ 66,000.00
Barry Gibbons Consulting Agreement $ 24,000.00
Officers and Directors as $ 90,000.00
a Group (2 persons)
(b) Mr. Tkachuk does not have an employment agreement with the company. He
serves in his capacity as President, Secretary and Chief Financial Officer
pursuant to his election to those positions by the board of directors.
Mr. Gibbons, doing business as Festina, has entered into a consulting
agreement with the Company. The Executive Services Agreement, as amended by the
Addendum to Executive Services Agreement, provides for compensation to be paid
to Festina in a monthly amount of $2,000. Effective March 31, 2001, the monthly
compensation amount of $2,000 was eliminated.
The Company adopted its 1995 Stock Option Plan in 1995. The 1995 Plan
provides for the granting of options to purchase up to 500,000 shares of common
stock. All of these options had been granted however, and 32,500 of these
options were either cancelled or forfeited. There are no plans to amend the Plan
or to grant any of the remaining 32,500 options under this Plan.
The Company adopted its 1999 Stock Option Plan in 1999. The 1999 Plan
provides for the granting of options to purchase up to 500,000 shares of common
stock, of which 489,000 had been granted. Of the 489,000 options granted,
297,000 were either cancelled or forfeited, leaving 308,000 options available to
the Company for future use. The Company anticipates that it may grant the
remaining options for the purchase of 308,000 shares to employees hired in the
future.
ITEM 5. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS
(FORM 1-A MODEL B ITEM 10)
(a) Voting Securities (no other person holds or shares the power to vote the
securities described below.)
NAME AND ADDRESS NUMBER OF PERCENTAGE OF
OF OWNER TITLE OF CLASS SHARES OWNED CLASS(1)
------------------------------------------------------------------------
Todd N. Tkachuk Common Stock 516,269 3.7%
1717 Chelsea Way
Roseville, CA 95661
Barry Gibbons Common Stock 1,100,000 7.8%
6665 S. W. 69th Lane
Miami, FL 33143
Roman Kujath Common Stock 521,368 3.7%
8926 119th Street
Edmonton, Alberta
Canada T6G 1W9
All Officers and Directors Common Stock 2,137,637 15.2%
As a Group (3 persons)
---------------------------------
(1) Percentage based on 14,120,217 shares of Common Stock outstanding.
(b) The Company currently has no non-voting securities outstanding.
(c) Options, Warrants and Rights
SECURITIES CALLED FOR BY EXERCISE EXERCISE
NAME OF HOLDER OPTIONS, WARRANTS AND RIGHTS PRICE DATE
-------------- ---------------------------- ----- ----
Todd N. Tkachuk 146,000 Shares of Common Stock $0.70 (96,000 shares) fully vested
$0.80 (50,000 shares) fully vested
Roman Kujath 121,429 Shares of Common Stock $0.80 (20,000 shares) fully vested
$0.70 (31,429 shares) fully vested
$1.00 (70,000 shares) fully vested
All Officers and Dirs. 267,429 Shares of Common Stock $0.70 (127,429 shares)
As a Group (3 persons) $0.80 ( 70,000 shares)
$1.00 ( 70,000 shares)
(d) The Company has no parents.
ITEM 6. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
(FORM 1-A MODEL B ITEM 11)
The Company pays $2,000 per month to Barry J. Gibbons, doing business as
Festina, for consulting services pursuant to an Executive Services Agreement.
The Company has currently outstanding 70,000 options to purchase common
stock under Peabody CA's 1995 Stock Option Plan, which were assumed by the
Company pursuant to the Merger. Todd Tkachuk, President of the Company, has been
issued 112,500 options at an exercise price of $0.04 per share and 50,000
options at an exercise price of $0.80 per share. Todd Tkachuk has exercised all
112,500 of his options at an exercise price of $0.04 per share. Barry Gibbons, a
Director of the Company, has been issued 100,000 options at an exercise price of
$0.04 per share, and has exercised all 100,000 options. Roman Kujath, a Director
of the Company, has been issued 20,000 options at an exercise price of $0.80 per
share, none of which have been exercised.
The Company has currently outstanding 163,429 options to purchase common
stock under Peabody CA's 1999 Stock Option Plan, which were assumed by the
Company pursuant to the Merger. Todd Tkachuk has been issued 96,000 such options
at an exercise price of $0.70 per share, none of which have been exercised.
Roman Kujath has been issued 60,000 at an exercise price of $0.70 per share,
28,571 of which have been exercised. Roman Kujath holds warrants for 70,000
shares of common stock at an exercise price of $1.00 per share.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The Common Stock is traded in the over-the-counter market with quotations
carried on the National Association of Securities Dealers, Inc's "OTC Bulletin
Board" under the trading symbol "PBDY." Prior to the Merger of Peabodys CA into
the Company, and the associated amendment of the Articles of Incorporation to
change the Company's name, the Company was called Mine-A-Max Corporation, and
traded under the symbol "MAMX" and, for a brief period, "MAMXD." The transfer
agent and registrar for the Company is Interwest Transfer Company, Inc., located
in Salt Lake City, Utah.
The following table sets forth for the periods indicated the high and low
bid prices for shares of the Company's common stock for the past two years, as
reported on the OTC Bulletin Board. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Sales Price (1)(2)
------------------
High Low
---- ---
1999(3)
First Quarter 3.125(4) 0.020
Second Quarter 3.375 1.000
Third Quarter 1.7188 0.531
Fourth Quarter 0.5313 0.4375
2000(3)
First Quarter 1.4063 0.2813
Second Quarter 1.75 0.25
Third Quarter 0.51 0.2188
Fourth Quarter 0.25 0.065
2001(3)
First Quarter 0.1563 0.0625
(1) The source for data used in this chart is and OTC Quote Summary Report
provided by NASDAQ Trading and Marketing Services.
(2) The Company began trading on the OTC Bulletin Board in approximately
November of 1997.
(3) The Company's trading symbol during 1997 and 1998 was MAMX. In the
first quarter of 1999 the Company changed its trading symbol to PBDY.
(4) On February 26, 1999 the Company effected a 100 to 1 reverse stock
split of its outstanding shares.
The Company's Common Stock is not listed on an exchange or NASDAQ, but is
currently traded in the over-the-counter market with price quotes listed on the
OTC Bulletin Board of the National Association of Securities Dealers, Inc
("NASD"). Accordingly, an investor may find it more difficult to dispose of, or
obtain accurate quotations as to the market value of the common stock.
Recent changes to the rules of the NASD require that companies trading on
the OTC Bulletin Board, such as the Company, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board ("OTC Eligibility Rule"). If the Company
fails to remain current on its reporting requirements, the Company could be
removed from the OTC Bulletin Board. As a result, the market liquidity for the
Company's securities could be severely adversely affected by limiting the
ability of broker-dealers to sell our securities and the ability of shareholders
to sell their securities in the secondary market.
HOLDERS
There are approximately 490 holders of the Company's common stock, which is
the only class of stock currently outstanding.
DIVIDENDS
The Company has not paid any cash dividends on its common or preferred
stock and does not anticipate paying any such cash dividends in the foreseeable
future. Earnings, if any, will be retained to finance future growth. The Company
may issue shares of common stock and preferred stock in private or public
offerings to obtain financing, capital or to acquire other businesses that can
improve its performance and growth. Issuance and or sales of substantial amounts
of common stock could adversely affect prevailing market prices of the Company's
common stock through dilution.
ITEM 2. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party or to which
its property is subject, nor to the best of management's knowledge are any
material legal proceedings contemplated.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company's principal accountant is Nicholson & Olson, LLP of Roseville,
California. There have been no disagreements between the Company's management
and the Company's accountant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company was furnished with no late reports on Forms 3, 4 or 5 during
the period covered by this report.
ITEM 6. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
PART F/S
PEABODYS COFFEE, INC.
(A NEVADA CORPORATION)
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
YEARS ENDED
MARCH 31, 2001 AND 2000
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT ............................................. 1
FINANCIAL STATEMENTS
Balance Sheets .................................................. 2
Statements of Loss .............................................. 3
Statements of Stockholders' Deficit ............................. 4
Statements of Cash Flows ........................................ 5
Notes to Financial Statements ................................... 6-19
NICHOLSON
& OLSON
INDEPENDENT AUDITOR'S REPORT
CERTIFIED PUBLIC ACCOUNTANTS
729 Sunrise Avenue, Suite 303
Roseville, California 95661
(916) 786-7997
To the Board of Directors and
Shareholders of Peabodys Coffee, Inc.
We have audited the accompanying balance sheets of Peabodys Coffee, Inc. (a
Nevada corporation) as of March 31, 2001 and 2000, and the related statements of
loss, stockholders' deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peabodys Coffee, Inc. as of
March 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a net deficit in both working capital and stockholders' equity, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Nicholson & Olson
Certified Public Accountants
Roseville, California
June 25, 2001
PEABODYS COFFEE, INC.
BALANCE SHEETS
MARCH 31, 2001 AND 2000
ASSETS 2001 2000
------------ ------------
Current Assets
Cash $ 8,358 $ 3,371
Other receivables 21,505 22,866
Inventories 50,383 28,786
Prepaid expenses 84,133 8,701
------------ ------------
Total Current Assets 164,379 63,724
Property and equipment (net) 421,414 456,269
Deposits and other assets 102,376 70,839
------------ ------------
Total Assets $ 688,169 $ 590,832
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Cash overdraft $ 48,558 $ --
Accounts payable 420,081 604,680
Accrued expenses 310,544 236,809
Other current liabilities 52,000 --
Capital lease obligations -- 1,113
Short-term borrowings 14,820 87,565
Bridge note financing 40,000 60,000
------------ ------------
Total Current Liabilities 886,003 990,167
------------ ------------
Stockholders' Deficit
Common stock authorized - 50,000,000 shares,
issued and outstanding, 14,120,217 and 8,059,304,
$.001 par value 14,120 8,059
Paid-in capital 4,261,758 3,244,942
Accumulated deficit (4,473,712) (3,652,336)
------------ ------------
Total Stockholders' Deficit (197,834) (399,335)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 688,169 $ 590,832
============ ============
See accompanying notes to financial statements
PEABODYS COFFEE, INC.
STATEMENTS OF LOSS
YEARS ENDED MARCH 31, 2001 AND 2000
2001 2000
------------ ------------
Sales $ 2,141,946 $ 2,124,395
Cost of Sales 876,738 877,074
------------ ------------
Gross Profit 1,265,208 1,247,321
Operating Expenses
Employee compensation and benefits 1,102,508 1,107,772
General and administrative expenses 256,717 287,122
Occupancy 276,382 311,370
Director and professional fees 372,662 200,106
Depreciation and amortization 126,959 113,503
Settlement costs and other 20,859 1,671
------------ ------------
Total Operating Expenses 2,156,087 2,021,544
------------ ------------
Operating Loss (890,879) (774,223)
Interest expense (18,877) (66,372)
------------ ------------
Net loss before extraordinary item (909,756) (840,595)
Extraordinary item - forgiveness of debt 88,380 467,987
------------ ------------
Net Loss $ (821,376) $ (372,608)
============ ============
Earnings Per Common Share:
Net loss before extraordinary item $ (0.09) $ (0.13)
Extraordinary item .01 .07
------------ ------------
Net loss $ (0.08) $ (0.06)
============ ============
See accompanying notes to financial statements
PEABODYS COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 2001 AND 2000
Common Stock Additional Total
---------------------------- Paid-in Accum. Stockholders'
Shares Amount Capital Deficit Deficit
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 5,829,871 $ 5,830 $ 2,344,372 $ (3,279,728) $ (929,526)
Conversion of convertible
debt into common stock 310,835 311 313,526 -- 313,837
Exercise of warrants 65,000 65 1,235 -- 1,300
Stock issued under
settlement agreement 36,421 36 36,385 -- 36,421
Sale of common stock 1,231,000 1,231 428,996 -- 430,227
Exercise of stock options 297,571 297 166,203 -- 166,500
Stock issued under service
agreements 29,000 29 11,542 -- 11,571
Stock issued for business
acquisition 5,000 5 4,995 -- 5,000
Mine-A-Max recapitalization,
net of cost 254,606 255 (62,312) -- (62,057)
Net Loss -- -- -- (372,608) (372,608)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 8,059,304 8,059 3,244,942 (3,652,336) (399,335)
Conversion of convertible
debt into common stock 20,000 20 19,980 -- 20,000
Exercise of warrants 27,250 27 2,698 -- 2,725
Stock issued under
settlement agreements 1,243,055 1,244 238,264 -- 239,508
Sale of common stock 3,288,333 3,288 350,219 -- 353,507
Exercise of stock options 312,275 312 67,825 -- 68,137
Stock issued under service
agreements 670,000 670 313,330 -- 314,000
Stock issued under
non-compete agreement 500,000 500 24,500 -- 25,000
Net Loss -- -- -- (821,376) (821,376)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2001 14,120,217 $ 14,120 $ 4,261,758 $ (4,473,712) $ (197,834)
============ ============ ============ ============ ============
See accompanying notes to financial statements
PEABODYS COFFEE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001 AND 2000
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (821,376) $ (372,608)
Adjustments to reconcile net loss to net cash
provided by (applied to) operating activities:
Depreciation and amortization 126,959 113,503
Gain on extraordinary item - forgiveness of debt (88,380) (467,987)
Loss on disposal of property and equipment 2,481 819
Changes in operating assets and liabilities:
Receivables 6,361 (4,668)
Inventories (9,935) 12,405
Prepaid expenses 233,278 340
Cash overdraft 48,558 --
Accounts payable 38,931 213,248
Accrued expenses 128,985 103,754
------------ ------------
Net cash applied to operating activities (334,138) (401,194)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale and transfer of equipment 22,500 --
Additions to property and equipment (68,100) (144,479)
Changes to deposits and other assets (9,894) 1,500
Acquisition of intangibles -- (39,640)
------------ ------------
Net cash applied to investing activities (55,494) (182,619)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term borrowings 225,200 67,695
Principal reductions of short-term borrowings (115,000) (12,700)
Net proceeds from sale of stock 285,532 556,027
Payments on capital lease obligations (1,113) (4,374)
------------ ------------
Net cash provided by financing activities 394,619 606,648
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,987 22,835
CASH AND CASH EQUIVALENTS
Beginning of year 3,371 (19,464)
------------ ------------
End of year $ 8,358 $ 3,371
============ ============
See accompanying notes to financial statements
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
The notes to the financial statements include a summary of significant
accounting policies and other notes considered essential to fully disclose and
fairly present the transactions and financial position of the company as
follows:
Note 1 - Significant Accounting Policies
Note 2 - Related Party Transactions
Note 3 - Going Concern
Note 4 - Inventories
Note 5 - Acquisitions
Note 6 - Recapitalization
Note 7 - Property and Equipment, and Intangible Assets
Note 8 - Accounts Payable
Note 9 - Accrued Expenses
Note 10 - Lease Obligations
Note 11 - Short-Term Borrowings
Note 12 - Income Taxes
Note 13 - Bridge Note Financing
Note 14 - Stockholders' Deficit
Note 15 - Stock Option Plans
Note 16 - Warrants
Note 17 - Earnings Per Common Share
Note 18 - Supplemental Disclosures of Non-Cash Investing and Financing
Transactions
Note 19 - Forgiveness of Debt
Note 20 - Risks and Uncertainties
Note 21 - Concentrations
Note 22 - Commitments and Contingencies
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Peabodys Coffee, Inc. (the "Company") owns and operates retail espresso coffee
bar kiosks in a variety of corporate and institutional locations throughout
California and Nevada. The Company has gained access to this segment of the
specialty coffee market by contracting with existing food service providers such
as Sodexho America, Aramark, and The Compass Group, and by contracting directly
with host facilities. The Company's product offerings include: high quality
coffee and espresso beverages, fruit smoothies, pastries, accompaniments, and
coffee related accessories.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from these estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation and amortization are
primarily accounted for on the straight-line method over the estimated useful
lives of the assets, generally ranging from five to seven years. The
amortization of site improvements is based on the shorter of the lease term or
the life of the improvement. Amortization expense related to any capital leases
is included in depreciation expense.
Intangible Assets
-----------------
Goodwill represents the excess of acquisition costs over the fair value of
assets acquired. Amortization is recorded on a straight-line basis over twenty
years. It is the Company's policy to evaluate the ongoing profitability of the
acquired assets in order to determine if any impairment of the net goodwill
value has occurred.
Non compete agreements are amortized on a straight line basis over the term of
the agreement.
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of the asset and liability method of computing deferred
income taxes.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Stock Transaction Costs
-----------------------
Transaction costs related to the sale of common shares are recorded as a
reduction to capital raised by the Company.
Compensated Absences
--------------------
Employees of the Company are entitled to paid vacation depending on job
classification, length of service and other factors. It is impracticable to
estimate the amount of compensation for future absences, and accordingly, no
liability has been recorded in the accompanying financial statements. The
Company's policy is to recognize the costs of compensated absences when actually
paid to employees.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The carrying value of long-term
debt approximates fair value.
Reclassifications
-----------------
Certain amounts from the March 31, 2000 financial statements have been
reclassified to conform with the current year presentation.
NOTE 2 - RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors provided management and other
services to the Company on various business issues. Fees incurred for such
services during the years ended March 31, 2001 and 2000, amounted to $24,000 and
$37,500, respectively. At March 31, 2001 and 2000, $-0- and $20,300 of accrued
fees, respectively, were included in accounts payable.
At March 31, 2001 and 2000, shareholders and/or employees owed the Company
$12,137 and $11,437, respectively.
At March 31, 2001 and 2000, there was a total of $4,820 and $45,695,
respectively, in short-term borrowings related to members of the Board of
Directors.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended March 31, 2001 and 2000, members of the Board of
Directors exercised 112,500 and 88,571 options, respectively, at prices ranging
from $0.04 to $0.70 per share of common stock. In addition, a related party to a
member of the Board was issued 50,000 incentive options at $0.50 per share of
common stock during the year ended March 31, 2000 and exercised 12,275 and
34,000 of these options during the years ended March 31, 2001 and 2000,
respectively. The remaining 3,725 of the options expired during the year ended
March 31, 2001.
As of March 31, 2001 and 2000, board members held 197,429 and 309,929 options,
respectively, which represented 29% and 34% of the outstanding options. Board
members held 70,000 warrants as of March 31, 2001 and 2000 which represented 5%
and 6% of the outstanding warrants.
An officer of Mine-A-Max Corporation was related to a board member of the
Company. Pursuant to the merger agreement on June 30, 1999, the Mine-A-Max
corporate officer was granted 35,000 stock options at an exercise price of $1.00
per share. These options expired during the year ended March 31, 2001.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. Going concern contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business over a
reasonable length of time. However, the Company has sustained operating losses
since its inception and has deficits in both working capital and stockholders
equity of $721,624 and $197,834, respectively, as of March 31, 2001.
In view of these matters, realization of certain of the assets in the
accompanying financial statements is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financial requirements through raising additional capital and the success of its
future operations.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 3 - GOING CONCERN (CONTINUED)
The Board of Directors and management acknowledge the issues raised as to the
future of the Company. Over the past several years, the Company has eliminated
over $1.5 million of debt through a combination of debt forgiveness and
conversion of debt to equity, and intends to further reduce debt via the same
approach. Also, a concerted effort is to be placed on evaluation of how business
is being done, including site locations, product quality, menu selection and
pricing policy with the goal of achieving positive cash flow from operations. In
addition, the Company has engaged the services of various consultants to enhance
merger and acquisition activity and capital raising efforts. Management believes
the combination of the above efforts will allow the Company to continue as a
going concern.
NOTE 4 - INVENTORIES
At March 31, 2001 and 2000, inventories were comprised of the following:
2001 2000
------------ ------------
Coffee $ 13,587 $ 7,712
Other merchandise held for sale 21,419 13,584
Packaging and other supplies 15,377 7,490
------------ ------------
$ 50,383 $ 28,786
============ ============
NOTE 5 - ACQUISITIONS
During the year ended March 31, 2001, the Company purchased certain assets of a
coffee roasting company in Van Nuys, California, in exchange for the promise to
issue up to 320,000 shares of common stock at $0.20 per share. The ultimate
shares to be issued is contingent upon to the sellers ability to remove certain
liens. The seller has thus far been unable to remove the liens from the assets;
therefore, under the terms of the agreement the maximum consideration to be paid
is reduced by 40,000 shares per month through July 31, 2001. As of March 31,
2001 the maximum consideration to be paid is 160,000 shares at $0.20 per share;
therefore, $32,000 is included in other current liabilities in the accompanying
financial statements.
The purchase price has been allocated to the acquired assets on the basis of
their estimated fair value on the date of acquisition. The fair value of the
assets acquired is summarized as follows:
Inventory $ 11,662
Roasting equipment 52,338
----------
$ 64,000
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 5 - ACQUISITIONS (CONTINUED)
Effective December 12, 2000, the Company transferred possession of the roasting
equipment for $20,000. The Company has recorded this transfer in other current
liabilities until such time as clear title has been acquired. The book value of
the equipment has been adjusted to its net realizable value.
In April 1999, the Company purchased the assets of a coffee company in San
Diego, California, for $120,000 and 5,000 shares of common stock of the Company.
The purchase price has been allocated to the acquired assets on the basis of
their estimated fair value on the date of acquisition. The fair value of the
assets acquired is summarized as follows:
Inventory $ 5,125
Carts, kiosks and equipment 73,945
Intangibles 40,930
----------
$ 120,000
NOTE 6 - RECAPITALIZATION
On June 30, 1999, Mine-A-Max Corporation, a public shell corporation, acquired
88% of the outstanding stock of Peabodys Coffee, Inc., at which time Peabodys
was merged into Mine-A Max. Twelve percent of Peabodys' California shareholders
have dissenter rights, which could be exercised. For accounting purposes the
acquisition was treated as a recapitalization of Peabodys, with Peabodys as the
acquirer (reverse acquisition). Pro-forma statements are not provided given the
merger is to be considered a reverse acquisition and not a business combination.
Subsequent to the merger, Peabodys' stockholders own 95.82% of the recapitalized
company. The pre-merger balance sheet of Mine-A-Max at June 30, 1999 was as
follows:
Cash $ 157
Accounts payable (4,041)
Due to officers (18,838)
Common Stock par
(authorized 50,000,000, issued 254,606 at $0.001) (128)
Paid in capital (319,502)
Accumulated Deficit 342,352
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 7 - PROPERTY AND EQUIPMENT, AND INTANGIBLE ASSETS
At March 31, 2001 and 2000, property and equipment were comprised of the
following:
2001 2000
------------ ------------
Kiosk carts $ 276,133 $ 255,023
Kiosk equipment 263,345 233,327
Equipment and furniture 245,443 229,487
Signage 48,598 39,280
Site improvements 81,266 74,568
------------ ------------
914,785 831,685
Less: accumulated depreciation (493,371) (375,416)
------------ ------------
$ 421,414 $ 456,269
============ ============
Included in other assets at March 31, 2001 and 2000, were intangible
assets comprised of the following:
2001 2000
------------ ------------
Goodwill $ 40,930 $ 40,930
Non competition agreement 25,000 --
Other identifiable intangibles 14,600 14,600
------------ ------------
80,530 55,530
Less: accumulated amortization (13,692) (5,045)
------------ ------------
$ 66,838 $ 50,485
============ ============
The Company recognized depreciation and amortization expense for the years ended
March 31, 2001 and 2000 as follows:
2001 2000
------------ ------------
Depreciation $ 118,312 $ 110,758
Amortization 8,647 2,745
------------ ------------
$ 126,959 $ 113,503
============ ============
NOTE 8 - ACCOUNTS PAYABLE
Of the $420,081 and $604,680 in accounts payable at March 31, 2001 and 2000,
respectively, approximately 60% and 80% have been outstanding for more than 90
days at March 31, 2001 and 2000, respectively.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 9 - ACCRUED EXPENSES
At March 31, 2001 and 2000, accrued expenses were comprised of the following:
2001 2000
------------ ------------
Accrued interest $ 29,320 $ 44,168
Accrued wages 49,739 135,723
Estimated use tax 29,959 29,959
Accrued payroll taxes 197,231 23,000
Other 4,295 3,959
------------ ------------
$ 310,544 $ 236,809
============ ============
NOTE 10 - LEASE OBLIGATIONS
The Company leases office space under an operating lease expiring in September
2001. The lease agreement contains a renewal option. Rental expense under this
lease agreement amounted to $33,600 and $31,800 for the years ending March 31,
2001 and 2000, respectively.
NOTE 11 - SHORT-TERM BORROWINGS
During fiscal year 2001 and 2000, the Company borrowed funds to provide
short-term working capital. These working capital loans are unsecured,
non-interest bearing, and amounted to $14,820 and $87,565 as of March 31, 2001
and 2000 respectively.
NOTE 12 - INCOME TAXES
The Company has recorded a valuation allowance as an offset to the income tax
benefits of its net operating losses for the years ended March 31, 2001 and
2000. This allowance is due to the uncertainty of realizing the necessary income
to utilize the loss carry forwards.
In addition to future income consideration, there is additional uncertainty as
to the ultimate availability of some or all of the net operating losses due to
past and potential future ownership changes. Income tax laws can severely limit
the availability of losses after a certain level of ownership changes. Due to
the complexity of these rules coupled with ongoing losses the company has not
determined any potential limitation.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 12 - INCOME TAXES (CONTINUED)
The Company's net operating loss carryovers and related expiration dates are as
follows:
Fiscal Year End Expires Expires
March 31, Federal 3/31 California 3/31
--------------- ---------- ---- ---------- -------
1996 $ 480,000 2011 $ -- Expired
1997 1,014,000 2012 507,000 2002
1998 1,034,000 2013 517,000 2003
1999 738,000 2019 369,000 2004
2000 372,000 2020 186,000 2005
2001 821,000 2021 410,000 2011
---------- ----------
$4,459,000 $1,989,000
========== ==========
The details of deferred tax assets and liabilities are as follows:
March 31 March 31
2001 2000
------------ ------------
Deferred tax liabilities $ -- $ --
Deferred tax assets 1,290,000 1,170,000
Valuation Allowance (1,290,000) (1,170,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
NOTE 13 - BRIDGE NOTE FINANCING
In May 1996, the Company issued "units" consisting of secured convertible
promissory notes and warrants to purchase the Company's common stock. As of
March 31, 2001 and 2000, there were $40,000 and $60,000 respectively, of bridge
notes outstanding.
Interest payments on the principal balance outstanding is at nine percent (9%)
per annum due in full on December 31, 1998. As of March 31, 2001 and 2000, the
Company has accrued $29,320 and $32,684 of interest payable on these notes. The
Notes are secured by all assets of the Company. As of March 31, 2001, the
Company has not received any notice of default relating to the Secured Notes.
NOTE 14 - STOCKHOLDERS' DEFICIT
The Company is authorized to issue up to 50,000,000 shares of common stock, par
value, $.001 at March 31, 2001 and 2000. As of March 31, 2001 and 2000 there
were 14,120,217 and 8,059,304 shares of common stock outstanding.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - STOCKHOLDERS' DEFICIT (CONTINUED)
Pursuant to the reverse acquisition on June 30, 1999 with Mine-A-Max
Corporation, 254,606 shares of common stock were issued. Concurrent with the
reverse acquisition, Mine-A-Max changed its name to Peabodys Coffee, Inc. and
authorization to issue common shares increased to 50,000,000 shares.
As of March 31, 2001 and 2000 the Company had not paid any dividends with
respect to its shares of common stock.
NOTE 15 - STOCK OPTION PLANS
The Company maintains stock option plans under which the Company may grant
incentive stock options and non-qualified stock options to employees,
consultants and non-employee directors.
Under the 1995 and 1999 Stock Option Plans, the Company can grant options to
purchase common shares, up to an aggregate of 500,000 shares for each plan. The
maximum term of the options is ten years. Options vest and expire according to
the terms established at the grant date.
Options to purchase 70,000 and 295,000 shares of common stock were outstanding
as of March 31, 2001 and 2000, respectively, under the 1995 Plan at an exercise
price ranging from $0.04 to $0.80 per share.
Options to purchase 163,429 and 247,429 shares of common stock were outstanding
as of March 31, 2001 and 2000, respectively under the 1999 Plan at an exercise
price ranging from $0.70 to $1.00 per share.
Non plan options to purchase 450,000 and 378,500 shares of common stock were
outstanding as of March 31, 2001 and 2000, respectively, at an exercise price
ranging from $0.10 to $2.00 per share.
The Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, compensation costs are recognized as the difference
between the exercise price of each option and the market price of the Company's
stock at the date each grant becomes further vested. No compensation costs were
charged to income in the years ending March 31, 2001 and 2000. Had compensation
for the Company's stock option plans been determined based on the fair value at
the grant dates using the Black-Scholes model consistent with the method of FASB
Statement 123, the Company's net income would not have changed for the years
ending March 31, 2001 and 2000.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 15 - STOCK OPTION PLANS (CONCLUDED)
A summary of the status of the Company's employee stock option plans as of March
31, 2001, and 2000 is presented below:
Number of Options: 2001 2000
----------------- ------------ ------------
Outstanding at beginning of year 920,929 844,000
Granted 495,000 550,000
Exercised (312,275) (297,571)
Canceled (68,000) (60,000)
Forfeited (352,225) (115,500)
------------ ------------
Outstanding at end of year 683,429 920,929
============ ============
Additional information regarding options outstanding as of March 31, 2001 and
2000 is as follows:
Number of Number of
2001 Options 2000 Options
Exercise Price Outstanding Outstanding
-------------- ----------- -----------
$0.04 -- 175,000
$0.10 -- 12,500
$0.20 150,000 25,000
$0.50 -- 291,000
$0.60 -- 25,000
$0.70 127,429 247,429
$0.80 70,000 95,000
$1.00 136,000 50,000
$1.50 100,000 --
$2.00 100,000 --
------- -------
683,429 920,929
======= =======
NOTE 16 - WARRANTS
A summary of the status of the Company's warrants as of March 31, 2001 and 2000
is presented below:
Number of Warrants: 2001 2000
------------------- ------------ ------------
Outstanding at beginning of year 1,136,823 667,500
Granted 359,315 766,823
Exercised (27,250) (65,000)
Canceled -- (232,500)
Forfeited (40,250) --
------------ ------------
Outstanding at end of year 1,428,638 1,136,823
============ ============
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 16 - WARRANTS (CONTINUED)
Additional information regarding warrants outstanding as of March 31, 2001 and
2000 is as follows:
Number of Number of
2001 Options 2000 Options
Exercise Price Outstanding Outstanding
-------------- ----------- -----------
$0.10 150,000 --
$0.35 100,000 --
$0.70 641,231 708,731
$1.00 337,407 428,092
$2.00 100,000 --
$2.50 100,000 --
--------- ---------
1,428,638 1,136,823
========= =========
NOTE 17 - EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the average
number of common shares and common stock equivalents outstanding during the
year. The weighted average number of common shares outstanding during the years
ended March 31, 2001 and 2000, were approximately 10,005,796 and 6,728,672,
respectively.
Common stock equivalents are the net additional number of shares which would be
issuable upon the exercise of the outstanding common stock options and warrants.
For the years ended March 31, 2001 and 2000 fully diluted earnings per common
share are equal to basic earnings per common share because the effect of
potentially dilutive securities under the stock option plans and warrants are
anti-dilutive and therefore not included.
NOTE 18 - SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING
TRANSACTIONS
Non-cash investing and financing transactions for the years ended March 31, 2001
and 2000 are as follows:
2001 2000
------------ ------------
Accounts payable forgiven in exchange for
warrants granted to purchase common stock $ 8,734 $ 240,648
Accrued expenses forgiven in exchange for
warrants granted to purchase common stock 43,750 205,038
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 18 - SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING
TRANSACTIONS (CONTINUED)
2001 2000
------------ ------------
Accounts payable forgiven in exchange for options
granted to purchase common stock 19,370 --
Trade payables forgiven 16,526 22,301
Conversion of accounts payable and accrued
expenses into shares of common stock 190,400 36,421
Conversion of short-term borrowings into shares
of common stock 182,945 124,500
Conversion of obligations on bridge financing
notes into shares of common stock 20,000 313,837
Issuance of common stock for a note receivable 5,000 --
Issuance of common stock in exchange for
services provided 314,000 53,600
Issuance of common stock in exchange for
property and equipment -- 5,000
Issuance of common stock in exchange for a
non-compete agreement 25,000 --
Acquisition of equipment and inventory financed with
an obligation to issue common stock 64,000 --
Write-down of equipment to net realizable value 32,000 --
Exchange of property and equipment for payable -- 5,000
Note payable exchanged for account payable -- 3,750
Reclassification of current prepaid expenses to
other long-term assets 5,290 --
Increase in stockholders' deficit resulting from
recapitalization with Mine-A-Max Corporation -- 62,085
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 19 - FORGIVENESS OF DEBT
Forgiveness of debt amounted to $88,380 and $467,987 for the years ending March
31, 2001 and 2000, respectively. This income represents the forgiveness of trade
payables and accrued expenses recorded as expenses in the current and prior
years. Significant transactions relating to forgiveness of debt are explained in
the following paragraphs.
In 1996 the Company issued interest bearing, convertible, secured promissory
notes ("Bridge Notes"). The majority of the Bridge Note holders have elected to
convert their outstanding principal balance into common stock at a conversion
price of $1.00 per share. In addition, the Bridge Note holders who elected to
convert their outstanding principal, agreed to forgive the Company of its debt
obligations related to accrued interest on their Bridge Notes. For the years
ended March 31, 2001 and 2000, in exchange for the debt forgiveness of $9,266
and $205,038, respectively, the Company issued warrants to purchase 9,266 and
205,038 shares of the Company's common stock at a price per share of $1.00.
On September 30, 2000, the Company's legal counsel agreed to accept a
non-statutory option for the purchase of 150,000 shares of common stock, with an
exercise price of $0.20 per share as full and final settlement for accrued legal
fees totaling $20,000.
On December 31, 2000, a former employee of the Company agreed to forgive $34,484
of accrued expenses in exchange for warrants to purchase 100,000 shares of the
Company's common stock at a price per share of $0.10.
On November 3, 1999, the Company's former legal counsel agreed to accept $20,000
and warrants to purchase 240,000 shares of the Company's common stock at a price
per share of $1.00, as full and final settlement of accrued legal fees totaling
$260,865.
A tax effect was not attributed to the gain as the gain will reduce the
Company's prior net operating loss.
NOTE 20 - RISKS AND UNCERTAINTIES
The Company's success depends significantly upon the continued service of its
President. Loss of the services of the President could have a material adverse
effect on the Company's growth, revenues, and prospective business. The Company
does not maintain key-man life insurance on the President.
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 20 - RISKS AND UNCERTAINTIES (CONTINUED)
The Company has a registered service mark for its rhinoceros logo. The Company
is aware of another entity in North Carolina that is utilizing the name
"Peabodys" in the coffee industry. The North Carolina entity has received a
federal trademark registration of the name "Peabodys". While the Company
believes that it has the right to use the name "Peabodys", if it were determined
that the Company were not able to continue utilizing the name "Peabodys", it
could have a material adverse effect on the Company and the Company would have
to re-establish any lost goodwill and name recognition.
NOTE 21 - CONCENTRATIONS
The Company purchases 100% of its coffee bean inventory from one supplier. The
Company believes the supplier's current roasting capacity may not be sufficient
to meet its needs for the foreseeable future. In the event such relationship
terminates or the supplier's capacity is insufficient, the Company believes that
numerous other suppliers can fulfill the Company's inventory requirements.
The Company had approximately twenty-four kiosks in a variety of locations
throughout California and Nevada. The Company had sixteen contracts on these
locations with four major clients. The Company's four major clients represent
66% and 80% of its gross revenues for the years ended March 31, 2001 and 2000,
respectively, with the largest client representing 23% and 28%, respectively, of
gross revenues.
As of March 31, 2001 and 2000, the Company's officers and directors own
approximately 15% and 18%, respectively, of the outstanding shares of common
stock. The Company's dividend policy, as well as other major decisions such as
wages, acquisitions and financing by the Company will be significantly
influenced and controlled by such officers and directors.
NOTE 22 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2001, the Company has accrued $182,231 of payroll taxes and
$15,000 of penalties and interest due to the Internal Revenue Service and the
State of California. Management has met with the Internal Revenue Service and is
in the process of negotiating a payment plan. The Company has paid payroll taxes
for the month of June 2001 and intends to make current payments from this point
on.
In the normal course of business, the Company has various legal claims and other
contingent matters outstanding. Management believes that any ultimate liability
arising from these contingencies would not have a material adverse effect on the
Company's results of operations or financial condition at March 31, 2001 and
2000.
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2.1* Articles of Incorporation of Kimberley Mines, Inc.
2.2* Certificate of Amendment of Articles of Incorporation
(Mine-A-Max Corp.)
2.3* Certificate of Amendment of Articles of Incorporation
(Peabodys Coffee, Inc.)
2.4* Amended and Restated Bylaws of Peabodys Coffee, Inc.
3.1* Peabodys Coffee, Inc. 1995 Stock Option Plan
3.2* Peabodys Coffee, Inc. 1999 Stock Option Plan
6.1* Executive Services Agreement with Barry J. Gibbons
6.2** Asset Purchase Agreement with Arrosto Coffee Company, LLC
6.3*** Amendment No. 1--Arrosto Asset Purchase Agreement
6.4*** Amendment No. 2--Arrosto Asset Purchase Agreement
*Incorporated by reference to the Company's Registration Statement on Form
10-SB, as amended, originally filed with the Commission under the Exchange Act
on December 21, 1999.
**Incorporated by reference to the Company's Annual Report on Form 10-KSB, filed
with the Commission on June 29, 2000.
***Incorporated by reference to the Company's Amended Quarterly Report for the
Period Ending September 30, 2000, filed on Form 10-QSB/A with the Commission
under the Exchange Act on February 1, 2001.
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PEABODYS COFFEE, INC.,
A Nevada Corporation
By: /s/
-----------------------------------
Todd Tkachuk, President
Date: June 29, 2001
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/
----------------- President, Chief Financial Officer, June 29, 2001
Todd N. Tkachuk and Director (Principal Executive
Officer and Principal Financial Officer)
/s/
----------------- Director June 29, 2001
Roman Kujath
/s/
----------------- Director June 29, 2001
Barry Gibbons