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, 2000
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 is not 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. [ ]
State issuer's revenues for its most recent fiscal year: $2,124,395.
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 May 4, 2000, [in the past 60 days], was approximately $9,217,722.
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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 21
Item 4 Remuneration of Directors and Officers 22
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 25
Item 2 Legal Proceedings 26
Item 3 Changes in and Disagreements with Accountants 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Compliance with Section 16(a) of the Exchange Act 27
Item 6 Reports on Form 8-K 27
PART F/S
PART III
Index to Exhibits 29
SIGNATURES 30
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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 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, Diedrich Coffee, Seattle's Best and
others located in fixed, store-front locations. As described in detail below,
Peabodys' kiosks require comparatively lower levels of capital investment,
overhead and advertising, and are simple to operate.
Peabodys' kiosks, while usually appearing permanent, are portable and often
completely self-contained, with the exception of power. They are generally
located in commercial and educational facilities, including corporate offices,
industrial facilities, office buildings, universities, colleges, hospitals and
entertainment venues. Peabodys' marketing strategy is to enter into subcontracts
with companies having general contracts for food services for the above sites,
which 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'
foodservice provider clients, Sodexho-Marriot, The Compass Group and ARAMARK,
control more than 8,500 institutional foodservice sites across the country
(Nations Restaurant News Special Report-Top 100 Contract Chains 1999), 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.
The Company is currently operating 26 kiosk outlets and has achieved
profitability at the "unit level" at 24 of these locations. 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, 2000, the Company had a net operating loss
of $774,223, and an overall net loss of $372,608. 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, 2000 showed
a shareholders' deficit of $399,335, and current liabilities exceeding current
assets by $926,443.
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Because of the Company's operating losses and financial situation, note 3
of the accompanying financial statements expresses a "going concern opinion:"
These statements are presented on the basis that the Company is an on-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. The accompanying financial statements show a
loss from the results of operations of $774,4223, that the Company has a
shareholders' deficit of $399,335, and current liabilities exceed current
assets by $926,443. Without an infusion of additional capital, the
Company's ability to continue operations is doubtful.
In order to address the issue of the Company's continuation as a going
concern, the Company has taken the following actions:
First, the Company launched its plan to eliminate $1 million of debt from
its balance sheet. As of March 31, 2000, this plan has resulted in debt
conversion and/or debt forgiveness totaling approximately $979,000. The debt
conversion/debt forgiveness transactions consist of the following: (i) the
conversion into common stock of $307,500 of bridge notes in default, and debt
forgiveness of $205,000 of accrued interest on the bridge notes; (ii) $31,900 of
trade debt converted into common stock, and debt forgiveness of an additional
$26,700 of trade obligations; (iii) short term notes, with principal values
totaling $167,000, were converted into common stock by the noteholders who used
their debt to exercise options held by the noteholders; and (iv) debt
forgiveness of $240,900 related to the settlement of accrued professional fees.
These transactions were effected in the third and fourth quarters of the
Company's fiscal year ending March 31, 2000 ("fiscal 2000"). 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. 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. In addition, the Company believes that a consistently
improving balance sheet will enhance the Company's ability to attract investment
capital.
Second, the Company recognizes that it must continue to grow while
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. As such, the Company has recently engaged the services of various
consultants to enhance M & A activity within the industry by locating potential
acquisition targets, and to further develop the Company's core institutional
operations.
Third, on June 19, 2000, the Company acquired certain assets of Arrosto
Coffee Company, LLC. Included in the acquired assets is a coffee roasting
facility in southern California which has the capacity to meet current
production demands and could potentially lower the Company's cost of roasted
coffee by as much as 35%. In addition, the acquired assets bring to the Company
existing wholesale trade and the potential for further wholesale trade
development which opens a new channel of distribution for growth into the
specialty coffee market.
Fourth, the Company believes that its "fully reporting" status in
conjunction with an improving balance sheet and defined M & A opportunities will
enhance the Company's goal of attracting new capital. The Company clearly
realizes the importance of attracting new investment capital and, as such, has
engaged the services of various consultants to assist in accomplishing this
goal.
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MANAGEMENT'S 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 a substantial increase
in Sales and Gross Profit, and a substantial decrease in the Net Loss for the
year ended March 31, 2000 over the prior year. The Company also shows a
significant ongoing increase in the Accumulated Deficit at year-end. Although
the Net Loss is reduced in 2000, the loss is substantial and indicates poor
operating performance.
REVENUES
Net revenues for the twelve months ended March 31, 2000 increased 18.4% to
$2,124,395 from $1,794,838 for the corresponding period in fiscal 1999. This was
due primarily to an increase in the number of operating kiosks from 23 to 26.
Retail kiosk and cart sales accounted for 100% of revenues for both periods. For
the twelve months ended March 31, 2000, net revenue was generated from 11
different clients and special events, with the largest client being The Compass
Group, representing 28.2% of total net revenue.
COSTS AND EXPENSES
Cost of goods sold for the twelve months ended March 31, 2000 increased to
$877,074 from $685,176 for the same period in fiscal 1999. As a percentage of
net revenues, cost of goods sold increased to 41.3% for the twelve months ended
March 31, 2000 from 38.2% for the comparable period in fiscal 1999. The increase
as a percentage of net revenues was primarily due to a slow payment history
resulting in a decrease in purchasing power. During the twelve months ended
March 31, 2000, 6 units were closed because of unit level operating losses.
These units accounted for $90,400 of the Company's net revenue, $46,900 of cost
of goods sold (51.9%), and $40,500 of the total operating loss.
Employee compensation and benefits for the twelve months ended March 31,
2000 increased to $1,107,772 from $929,879 for the same period in fiscal 1999.
As a percentage of net revenues, employee compensation and benefits for the
twelve months ended March 31, 2000 remained consistent with the comparable
period in fiscal 1999.
General and administrative expenses for the twelve months ended March 31,
2000 increased to $287,122 from $257,059 for the same period in fiscal 1999. As
a percentage of net revenues, general and administrative expenses decreased to
13.5% for the twelve months ended March 31, 2000 from 14.3% for the comparable
period in fiscal 1999.
Occupancy costs for the twelve months ended March 31, 2000 increased to
$311,370 from $303,101 for the same period in fiscal 1999. As a percentage of
net revenues, occupancy costs
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decreased to 14.7% for the twelve months ended March 31, 2000 from 16.9% for the
comparable period in fiscal 1999. 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, 2000
increased to $200,106 from $110,325 for the same period in fiscal 1999. As a
percentage of net revenues, director and professional fees increased to 9.4% for
the twelve months ended March 31, 2000 from 6.1% for the comparable period in
fiscal 1999. The increase as a percentage of net revenues was primarily due to
the engagement of an investor relations firm and increased legal and accounting
fees associated with filing the Company's Form 10-SB registration statement.
Depreciation and amortization expense for the twelve months ended March 31,
2000 increased to $113,503 from $101,657 for the same period in fiscal 1999. The
increase was primarily due to the acquisition of property and equipment
associated with the Northern Lights Coffee purchase in April 1999.
Interest expense for the twelve months ended March 31, 2000 decreased to
$66,372 from $105,727 for the same period in fiscal 1999. As a percentage of net
revenues, interest expense decreased to 3.1% for the twelve months ended March
31, 2000 from 5.9% for the comparable period in fiscal 1999. The decrease was
primarily due to savings from the conversion of interest bearing debt into
shares of common stock. $312,000 of debt was converted to common stock in
December 1999, $4,500 in April 1999 and $77,000 in March 1999.
Operating losses for the twelve months ended March 31, 2000 increased to
$774,223 from $632,359 for the same period in fiscal 1999. As a percentage of
net revenues, operating losses increased to 36.4% for the twelve months ended
March 31, 2000 from 35.2% for the comparable period in fiscal 1999. The increase
as a percentage of net revenues was primarily due to the engagement of an
investor relations firm and increased legal and accounting fees associated with
filing the Company's Form 10-SB registration statement.
Net loss for the twelve months ended March 31, 2000 decreased to $372,608
from $738,086 for the same period in fiscal 1999. As a percentage of net
revenues, net losses decreased to 17.5% for the twelve months ended March 31,
2000 from 41.1% for the comparable period in fiscal 1999. The decrease was
primarily due to extraordinary income resulting from debt forgiveness of
$205,000 of accrued interest payable on notes, and $260,000 on creditor
obligations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company ended its fiscal year with a working capital
deficit of $926,443. Cash and cash equivalents increased $22,835 during the
twelve months ended March 31, 2000. Cash utilized by operating activities
totaled $401,194 during the fiscal year 2000, primarily due to an operating loss
of $774,223 offset by a combined increase in accounts payable and accrued
expenses of $317,002.
Cash utilized for investing activities for the twelve months ended March
31, 2000 included capital additions to property and equipment of $144,479
primarily related to the acquisition of Northern Lights Coffee and the opening
of the South Lake Tahoe retail unit.
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The Company had net cash provided from financing activities for the twelve
months ended March 31, 2000 totaling $606,648. Cash from financing activities
primarily consists of $59,995 from net short-term borrowing and $556,027 net
proceeds from the sale of Company stock. These amounts were utilized in the
day-to-day operations of the Company.
Management has instituted a plan to eliminate a minimum of $1 million of
debt from its balance sheet. Currently, this ongoing program has resulted in
debt conversion and/or debt forgiveness totaling approximately $979,000.
Management is confident that it will meet its debt reduction objective. Although
this debt conversion/forgiveness will improve the appearance of the Company's
balance sheet, and therefore assist the Company in raising investment capital,
it will not directly improve the profitability of the Company's operations. In
conjunction with the debt reduction program, the Company has successfully
secured $300,000 of private equity capital in January 2000, from a source that
the Company feels may represent the potential for additional future equity
investments. In addition, the Company believes that it has the means to attract
other sources of 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 40 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 40 units will require approximately $500,000 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 currently negotiating with several alternative sources of capital.
Management believes that one or more of these sources could be in place in
fiscal year 2001. However, there can be no assurances that such capital will be
in place.
INDUSTRY OVERVIEW
According to the National Coffee Association's 1999 study, cited 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.
The National Coffee Association estimates that 47% of Americans - 108
million people - drank specialty coffee beverages in 1998, up from 35% - 80
million people - in 1997. The U. S. specialty coffee industry now purchases over
2.7 million bags of arabica coffees, which represents $396 million, or 5% of the
world's output. U. S. retail coffee bean sales exceed $2.1 billion, and beverage
retail sales exceed $3.1 billion, annually.
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
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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 including:
o Greater consumer awareness of specialty coffee as a result of its
increasing availability;
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 Marriott, 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.
As with the Company today, Peabodys CA would open a new site in
approximately three weeks, at an all-in cost, including initial inventory and
pre-opening expenses, of less than $30,000. Because physical plant consisted of
a self-contained kiosk that required minimal, if any, tenant improvements, the
Company would relocate to a new site, if necessary, without abandoning a large
fixed investment. As mentioned above, in return for its right to provide
turn-key specialty coffee service, Peabodys CA would compensate the food service
vendors through revenue-sharing, typically averaging about 15% of total revenues
generated at the site.
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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 food service 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 generally 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: (i) elect a new board of
directors for the Company composed of the former management of Peabodys CA; (ii)
amend the Company's articles of incorporation to change its name to "Peabodys
Coffee, Inc.;" (iii) amend and restate the Company's bylaws; and (iv) 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") by filing Articles of Merger in the State of Nevada, with
Peabodys CA as the disappearing corporation and the Company as the surviving
corporation, with the outstanding shares of Peabodys CA converted into shares of
the Company on a one-to-one basis.
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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.
This notice is required to be sent to shareholders within 10 days following the
approval of the reorganization by the outstanding shares. Within 30 days of the
mailing of such notice, any shareholder who wishes to require the corporation to
purchase their shares for cash must make a demand on the corporation and submit
the certificates representing their shares. The demand must contain a statement
as to what the shareholder claims to be the fair market value of the shares as
of the day before the announcement of the proposed merger (Corp. C. ss.
1301(c)). If the corporation agrees with the shareholders claim as to fair
market value, the shareholder is entitled to the agreed price with interest
thereon at the legal rate applied to judgments; if the corporation does not
agree with the shareholder's claim as to fair market value, the shareholder may
file an action in the proper superior court to determine the fair market value
(Corp. C. ss. 1303(a), 1304(a)).
The Company did not send a notice of approval of the Merger and appraisal
price of the shares to Peabodys CA shareholders. 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. Although Peabodys CA did not meet the technical notice requirement set
forth in Corp. C. ss. 1301, all Peabodys CA shareholders received notice of the
Merger through the distribution of the above-described disclosure document and
subscription agreement in connection with the share exchange immediately
preceding the Merger. 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. At this time, one
former Peabodys CA shareholder, holding 5,000 shares of common stock, has sent
the Company a letter requesting that he be entitled to exercise dissenters'
rights. The Company is in the process of settling this request.
It is difficult to accurately quantify the potential exposure to the
Company with respect to the Merger. Of the 5,902,736 shares of Peabodys CA
common stock outstanding prior to the Merger, approximately 5,279,871 shares
have given their written approval of the Merger, leaving approximately 550,000
shares which presumably could seek to exercise dissenters' rights. Pursuant to
applicable law, the fair market value for dissenting shares is determined as of
the day before the first announcement of the term of the proposed
reorganization. Corp. C. ss. 1300(a). In the case of the Merger, that date would
be March 12, 1999. On that date, the most recently prepared balance sheet of
Peabodys CA (dated December 31, 1998, approximately 75 days earlier) showed that
Peabodys CA's liabilities exceeded its assets, for a total shareholders' deficit
of $1,043,669, which meant that Peabodys CA's shares had a book value negative $
.18 per share. Peabodys CA's financial condition had not changed substantially
on March 12, 1999 when the reorganization was announced. Book value is one
method used to determine fair market value. Given the insolvency of Peabodys CA
at the time
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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 is in the midst of completing formalities in connection with
the Merger, such as issuing 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 areas. 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 use 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. Currently, Peabodys per-unit revenue averages
approximately $450 per operating day.
SITE FORMAT AND OPERATIONS
Each existing Peabodys site consists of a kiosk that measures approximately
six 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
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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.
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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 Marriott, 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
<TABLE>
<CAPTION>
SITE; HOST LOCATION CLIENT DATE OPENED
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IBM Bldg 11; IBM San Jose, CA The Compass Group June 1995
IBM Bldg 55; IBM San Jose, CA The Compass Group October 1997
STL Labs; IBM San Jose, CA The Compass Group April 1996
San Jose City College; SJCC San Jose, CA The Compass Group January 1996
Concord Airport Plaza Concord, CA The Compass Group February 1996
Web TV Mountain View, CA The Compass Group October 1999
EM Building, UCSC Santa Cruz, CA Sodexho-Marriot November 1995
College 10; UCSC Santa Cruz, CA Sodexho-Marriot April 1997
Sinsheiner Labs; UCSC Santa Cruz, CA Sodexho-Marriot April 1997
Applied Science, UCSC Santa Cruz, CA Sodexho-Marriot March 1996
Sutter Memorial Hospital Sacramento, CA Sutter Health October 1995
Sutter General Hospital Sacramento, CA Sutter Health October 1995
California State Fair; Cal Expo Sacramento, CA Cal Expo August 1998
College of Education; UNR Reno, NV The Compass Group August 1998
Library; UNR Reno, NV The Compass Group December 1997
Peabodys Lake Tahoe S. Lake Tahoe, CA n/a June 1999
Convention Center-Location 1 Reno, NV ARAMARK April 1997
Convention Center-Location 2 Reno, NV ARAMARK April 1997
Convention Center-Location 3 Reno, NV ARAMARK January 2000
Livestock Center Reno, NV ARAMARK April 1997
Center Hall, UCSD San Diego, CA UCSD April 1999
Social Science Bldg.; UCSD San Diego, CA UCSD April 1999
Warren Bldg.; UCSD San Diego, CA UCSD April 1999
Nierenburg Hall; UCSD San Diego, CA UCSD April 1999
SDSU-1; San Diego State University San Diego, CA Aztec Shops August 1999
SDSU-2; San Diego State University San Diego, CA Aztec Shops August 1999
</TABLE>
SUPPLIERS
The Company procures its coffee from Terranova Roasting Co., Inc.
("Terranova") in Sacramento, California. Terranova is a coffee roaster serving
central California, and Peabodys is Terranova's largest specialty coffee
account. The Company has no contract in effect with Terranova other than the
purchase orders it places. The Company believes that Terranova will be able to
meet its needs for the foreseeable future, but if the relationship should
terminate the Company believes that other suppliers could fulfill the Company's
supply requirements. Any risk associated with having only
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<PAGE>
one supplier, therefore, appears to be minimal.
As described below in "Expansion Plans," subsequent to March 31, 2000, the
Company has completed the acquisition of certain assets of Arrosto Coffee
Company LLC. The acquired assets include a coffee roasting facility. The
Company's motivation in doing this is to achieve cost savings by roasting its
own coffee. In addition, the acquisition gives the Company complete control over
the brand specifications of its core coffee products and opens new wholesale
trade channels. The acquisition is not in response to a risk perceived by the
Company with respect to having one supplier. As stated above, this risk is
minimal since there appear to be many potential suppliers that could supply the
Company with its coffee on terms similar to those existing between the Company
and its current supplier, Terranova.
The Company provides its proprietary specifications for varietals, roast,
and grind and proportions (for brewed coffees) to Terranova, 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. The Company is currently testing on-site grinding for
its brewed coffee to increase freshness and quality. From its current
facilities, Terranova has sufficient capacity to support Peabodys' growth to
approximately 200 sites.
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.
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As described in more detail in the "Overview" section of Item 1 above, at
March 31, 2000, the Company was operating 26 kiosk units, most of which are
profitable at the unit level. The Company as a whole is not profitable, however,
since the profits 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 40 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 40 units if locations with higher profitability are
opened or acquired). The Company estimates that this growth to 40 units will
require approximately $500,000 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 and
property owners.
The Company believes that its most significant growth will come from
expansion of its current contracts. Three of the Company's existing clients,
Sodexho-Marriott, The Compass Group and ARAMARK, control more than 8,500
institutional foodservice sites across the country (Nations Restaurant News
Special Report-Top 100 Contract Chains 1999). Each of these sites is a potential
location for a Peabodys kiosk. Also, the Company believes that there is
opportunity to acquire existing kiosks located in key locations. To date, the
Company has acquired seven (7) kiosks from other companies. Six of the seven
have resulted in a positive cash flow at the unit level to the Company.
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. As such, the Company has recently engaged the
services of various consultants to enhance M & A activity within the industry by
locating potential acquisition targets, and to further develop the Company's
core institutional operations.
On June 19, 2000, the Company acquired certain assets of Arrosto Coffee
Company, LLC. Included in the acquired assets is a coffee roasting facility in
southern California which has the capacity to meet current production demands
and potentially lower the Company's cost of roasted coffee by as much as 35%.
The Arrosto assets also bring existing wholesale trade and the potential for
further wholesale expansion which represents a new channel of trade for the
Company.
On May 16, 2000, the Company entered into a non-binding letter of intent to
acquire the specialty coffee operating units of Sacramento based Capitol Coffee.
Capitol Coffee has contracts with the Los Rios Community College District which
include two profitable coffee kiosks at American River College in Sacramento.
The Company is currently in the process of conducting its due diligence review
of Capitol Coffee and cannot assess the likelihood of a formal agreement and
subsequent closing until the due diligence process is complete.
On June 12, 2000, the Company entered into a non-binding letter of intent
to acquire the specialty coffee assets of Portland based Caffe Diva Group, Ltd.
("Diva"). Diva is a specialty coffee retailer and roaster with twenty-two
drive-thru locations in six states. The Company is currently in the early stages
of its due diligence process, therefore no meaningful assessment of the
likelihood of reaching a formal agreement and subsequent closing can be made.
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<PAGE>
MARKETING STRATEGY
Peabodys' marketing strategy is based on its contractual relationships with
foodservice providers and hosts. These foodservice providers, such as
Sodexho-Marriott, 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, 2000. Additionally,
Peabodys contracts directly with certain host facilities.
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 coffeehouses 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 coffeehouses 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-
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<PAGE>
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 97 employees of which 26 are full-time employees
and 5 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"). The Merger followed a share exchange,
which began on March 12, 1999, through which the Company acquired more than 51%
of the shares of Peabody CA in exchange for its shares, offered to the
shareholders of Peabodys CA on a one-to-one exchange basis. 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 is in the midst of completing formalities in connection with
the Merger such as issuing new share certificates to the former holders of
Peabodys CA shares. The Company, as of the date of this filing, has not filed
the proper document to effect the Merger in the State of California, as
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<PAGE>
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, 2000, the
Company is in default on the principal balance of the Secured Notes in the
amount of $60,000 and is approximately $32,700 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. 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 $774,223 for the fiscal
year ending March 31, 2000, and its shareholders' deficit was $399,335 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
54.7% of its gross revenue for the year ended March 31, 2000. The same two
clients represented 74.7% of the gross revenue of Peabodys CA's for the year
ended March 31, 1999. Although this indicates a trend toward
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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.
As described above in "Expansion Plans," the Company has completed the
acquisition of certain assets of Arrosto Coffee Company LLC. The acquired assets
include a coffee roasting facility. The Company's motivation in doing this is to
achieve cost savings by roasting its own coffee. In addition, the acquisition
gives the Company complete control over brand specification of its core product
and opens new wholesale trade channels.
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-Marriott, 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
rapid 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
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<PAGE>
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 $2,480 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 6 feet
long, 3 feet deep, and 4 feet high (counter
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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
--------------------------------------------------------------------------------
Barry Gibbons 53 Director
Todd N. Tkachuk 39 President, Chief Financial
Officer, Secretary and Chairman
of the Board of Directors
Roman Kujath 66 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.
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.
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).
21
<PAGE>
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, 2000.
Name of Capacities in which Aggregate
Individual or Group Remuneration was received Remuneration
--------------------------------------------------------------------------------
Todd N. Tkachuk Officer and Director $ 67,000.00
Barry Gibbons Consulting Agreement $ 37,500.00
Officers and Directors as $104,500.00
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. The Agreement provides that it will
remain in effect until terminated by either party with 90 days prior notice.
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, and all of these options have been granted. There are no plans to amend
the Plan or to grant any more 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 444,000 have been granted. The Company anticipates that it may
grant the remaining options for the purchase of 56,000 shares to employees hired
in the future.
ITEM 5. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
(FORM 1-A MODEL B ITEM 10)
(a) Voting Securities (no other person holds or shares the power to vote the
securities described below.)
22
<PAGE>
NAME AND ADDRESS NUMBER OF PERCENTAGE OF
OF OWNER TITLE OF CLASS SHARES OWNED CLASS(1)
--------------------------------------------------------------------------------
Todd N. Tkachuk Common Stock 403,769 5.0%
1717 Chelsea Way
Roseville, CA 95661
Barry Gibbons Common Stock 680,000 8.4%
6665 S. W. 69th Lane
Miami, FL 33143
Roman Kujath Common Stock 396,368 4.9%
8926 119th Street
Edmonton, Alberta
Canada T6G 1W9
All Officers and Directors Common Stock 1,480,137 18.3%
As a Group (3 persons)
---------------------------------
(1) Percentage based on 8,059,304 shares of Common Stock outstanding.
(b) The Company currently has no non-voting securities outstanding.
(c) Options, Warrants and Rights
<TABLE>
<CAPTION>
SECURITIES CALLED FOR BY EXERCISE EXERCISE
NAME OF HOLDER OPTIONS, WARRANTS AND RIGHTS PRICE DATE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Todd N. Tkachuk 258,500 Shares of Common Stock $0.04 (112,500 shares) fully vested
$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. 379,929 Shares of Common Stock $0.04 (112,500 shares)
As a Group (3 persons) $0.70 (127,429 shares)
$0.80 ( 70,000 shares)
$1.00 ( 70,000 shares)
</TABLE>
(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.
23
<PAGE>
The Company has currently outstanding 302,500 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, of which none
have been exercised. Barry Gibbons, Chairman of the Board, 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 444,000 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.
24
<PAGE>
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 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)
---------------
High Low
---- ---
1997
Fourth Quarter(2) 0.5 0.15625
1998
First Quarter 0.1875 0.04
Second Quarter 0.1875 0.03125
Third Quarter 0.125 0.03
Fourth Quarter 0.06 0.02
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
(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.
25
<PAGE>
(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 477 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.
26
<PAGE>
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
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
NAME POSITION
---- --------
Todd Tkachuk Director, Officer
Roman Kujath Director
Barry Gibbons Director
The Company's Form 10-SB Registration Statement became effective on
February 19, 2000, making the Company a reporting company. Each of the
above-named individuals failed to file a Form 3 reporting the event by which
they became a reporting person, but each individual reported such event on a
timely filed Form 5.
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.
27
<PAGE>
PART F/S
PEABODYS COFFEE, INC.
(A NEVADA CORPORATION)
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
YEARS ENDED
MARCH 31, 2000 AND 1999
28
<PAGE>
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT...................................................1
FINANCIAL STATEMENTS
Balance Sheet.............................................................2
Statements of Loss........................................................3
Statements of Stockholders' Deficit.......................................4
Statements of Cash Flows..................................................5
Notes to Financial Statements..........................................6-23
<PAGE>
NICHOLSON
& OLSON
INDEPENDENT AUDITOR'S REPORT
LIMITED LIABILITY PARTNERSHIP
-----------------------------
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, 2000 and 1999, 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 audit.
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, 2000 and 1999, 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 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.
Nicholson & Olson
Certified Public Accountants
Roseville, California
June 28, 2000
<PAGE>
PEABODYS COFFEE, INC.
BALANCE SHEETS
YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
Current Assets
<S> <C> <C>
Cash $ 3,371 $ 4,774
Other receivables 22,866 18,198
Inventories 28,786 41,191
Prepaid expenses 8,701 9,041
------------ ------------
Total Current Assets 63,724 73,204
Property and equipment (net) 456,269 423,375
Deposits and other assets 70,839 57,976
------------ ------------
Total Assets $ 590,832 $ 554,555
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Cash overdraft $ -- $ 24,238
Accounts payable 604,680 724,944
Accrued expenses 236,809 339,930
Capital lease obligations 1,113 5,487
Short-term borrowings 87,565 17,482
Bridge note financing 60,000 372,000
------------ ------------
Total Current Liabilities 990,167 1,484,081
------------ ------------
Stockholders' Deficit
Common stock authorized - 50,000,000 shares,
issued and outstanding, 8,059,304 and 5,829,871
$.001 par value 8,059 5,830
Paid-in capital 3,244,942 2,344,372
Accumulated deficit (3,652,336) (3,279,728)
------------ ------------
Total Stockholders' Deficit (399,335) (929,526)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 590,832 $ 554,555
============ ============
</TABLE>
See accompanying notes to financial statements
-2-
<PAGE>
PEABODYS COFFEE, INC.
STATEMENTS OF LOSS
YEARS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
Sales $ 2,124,395 $ 1,794,838
Cost of Sales 877,074 685,176
------------ ------------
Gross Profit 1,247,321 1,109,662
Operating expenses
Employee compensation and benefits 1,107,772 929,879
General and administrative expenses 287,122 257,059
Occupancy 311,370 303,101
Director and professional fees 200,106 110,325
Depreciation and amortization 113,503 101,657
Settlement costs and other fees 1,671 40,000
------------ ------------
2,021,544 1,742,021
------------ ------------
Operating Loss (774,223) (632,359)
Interest expense (66,372) (105,727)
------------ ------------
Net loss before extraordinary item (840,595) (738,086)
Extraordinary item - forgiveness of debt 467,987 --
------------ ------------
Net Loss $ (372,608) $ (738,086)
============ ============
Earnings per common share:
Net loss before extraordinary item $ (0.15) $ (0.18)
Extraordinary item .09 --
------------ ------------
Net loss $ (0.06) $ (0.18)
============ ============
See accompanying notes to financial statements
-3-
<PAGE>
PEABODYS COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
---------------------- -------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficit
---------- --------- ---------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 925,000 $ 185,000 7,006,565 $ 7,007 $ 1,201,438 $(2,541,642) $(1,148,197)
Sale of preferred stock 325,000 65,000 -- -- -- -- 65,000
Conversion of convertible debt
into common stock -- -- 180,000 180 49,320 -- 49,500
Exercise of warrants -- -- 60,000 60 540 -- 600
Stock issued under services
agreement -- -- 25,000 25 4,975 -- 5,000
Exercise of options -- -- 150,000 150 2,850 -- 3,000
Sale of common stock, net -- -- 150,000 150 29,850 -- 30,000
Canceled -- -- (5,000) (5) (4,995) -- (5,000)
Additional shares issued per split -- -- 33 -- -- -- --
Reverse 1 for 2 split -- -- (3,783,299) (3,783) -- -- (3,783)
Conversion of preferred stock (1,250,000) (250,000) 625,000 625 249,375 -- --
Conversion of convertible debt
into common stock -- -- 140,000 140 76,860 -- 77,000
Sale of common stock, net -- -- 925,000 925 501,415 -- 502,340
Exercise of stock options -- -- 25,000 25 975 -- 1,000
Stock issued under settlement
agreement -- -- 331,572 331 231,769 -- 232,100
Net loss -- -- -- -- -- (738,086) (738,086)
---------- --------- ---------- ------- ----------- ----------- -----------
Balance, March 31, 1999 0 0 5,829,871 5,830 2,344,372 (3,279,728) (929,526)
---------- --------- ---------- ------- ----------- ----------- -----------
Conversion of convertible debt -- -- 310,835 311 313,526 -- 313,837
into common stock
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, net -- -- 1,231,000 1,231 428,996 -- 430,227
Exercise of stock options -- -- 297,571 297 166,203 -- 166,500
Stock issued under services
agreement -- -- 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, March 31, 2000 0 $ 0 8,059,304 $ 8,059 $ 3,244,942 $(3,652,336) $ (399,335)
========== ========= ========== ======= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE>
PEABODYS COFFEE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000 AND 1999
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (372,608) $ (738,086)
Adjustments to reconcile net (loss) to net cash
provided by (applied to) operating activities:
Depreciation and amortization 113,503 101,057
Gain on extraordinary item - forgiveness of debt (467,987) --
Loss on disposal of property and equipment 819 --
Changes in operating assets and liabilities:
Receivables (4,668) (7,723)
Inventories 12,405 (1,078)
Prepaid expenses 340 1,838
Accounts payable 213,248 (106,176)
Accrued expenses 103,754 41,237
---------- ----------
Net cash used by operating activities (401,194) (708,931)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (144,479) (37,792)
Changes to deposits and other assets 1,500 (3,404)
Acquisition of intangibles (39,640) --
---------- ----------
Net cash used by investing activities (182,619) (41,196)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 67,695 --
Principal reductions of notes payable (12,700) (78,312)
Net proceeds from sale of stock 556,027 830,257
Payments on capital lease obligations (4,374) (5,069)
---------- ----------
Net cash provided by financing activities 606,648 746,876
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 22,835 (3,251)
CASH AND CASH EQUIVALENTS
Beginning of year (19,464) (16,213)
---------- ----------
End of year $ 3,371 $ (19,464)
========== ==========
See accompanying notes to financial statements
-5-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
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 - Acquisition
Note 6 - Recapitalization
Note 7 - Property and Equipment and Intangible Assets
Note 8 - Accounts Payable
Note 9 - Accrued Expenses
Note 10 - Capital Lease Obligations
Note 11 - Short-Term Borrowings
Note 12 - Lease Information
Note 13 - Income Taxes
Note 14 - Bridge Note Financing (Due and Payable on December 31, 1998)
Note 15 - Shareholders' Plans
Note 16 - Stock Option Plans
Note 17 - Warrants
Note 18 - Earnings Per Common Share
Note 19 - Supplemental Disclosures Non Cash Transactions
Note 20 - Forgiveness of Debt
Note 21 - Risk and Uncertainties
Note 22 - Concentrations
Note 23 - Fair Value of Financial Instruments
Note 24 - Subsequent Events
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Peabodys Coffee (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 Marriott, Aramark, and The Compass Group. 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 generally accepted
accounting principles 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.
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.
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability method of computing deferred income
taxes.
-6-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory
---------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
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.
Reclassifications
-----------------
Certain amounts from the March 31, 1999 financial statements have been
reclassified to conform with the current year presentation.
NOTE 2 - RELATED PARTY TRANSACTIONS
During the time period April 1, 1998 through June 29, 1998, the Company
purchased $30,088 of coffee beans from a supplier, Terranova Roasting Co., Inc.,
whose president, Stan Alfonso, was also a board member during the stated time
period. These purchases represented 100% of the total coffee beans purchased for
the time period. At June 29, 1998, $21,797 of purchases was accrued in accounts
payable.
A member of the Company's Board of Directors provided management and other
services to the Company on various business issues. Fees paid for such services
by the Company during the year ended March 31, 2000 and 1999, were $3,500
monthly. At March 31, 1999 and 2000, $20,300 and $19,821, respectively, was
accrued in accounts payable.
A member of the Company's Board of Directors elected on March 8, 1999 to convert
$43,000 of loans made to the Company into 61,429 shares of common stock at $0.70
per share. On March 9, 1999, the member elected to convert his shares of Series
B preferred stock into 100,000 shares of common stock.
On May 29,1998, a member of the Company's Board of Directors purchased 75,000
shares of common stock at the purchase price of $.40 per share. In addition, the
director was granted an option to purchase 150,000 shares of common stock. On
March 4, 1999 the director elected to convert $5,000 of loans made to the
Company into 7,143 shares of common stock at $0.70 per share.
-7-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
In February 1999, the Company granted 444,000 shares of common stock at an
option price of $0.70 per share to various members of Peabodys management and
employees.
On March 4, 1999, a member of the Board converted $105,000 of accrued fees and
loans made to the Company into 150,000 shares of common stock at $0.70 per
share.
As of March 31, 2000 and 1999, the Company owed to its President and employees
$158,723 and $14,625 in accrued wages, respectively. Additionally, there was an
amount of $11,437 and $11,042 owed to the Company by its employees at March 31,
2000 and 1999, respectively.
An officer of Mine-A-Max corporation was related to a board member of the
Company. Pursuant to the merger agreement, the Mine-A-Max corporate officer was
granted 35,000 stock options at an exercise price of $1.00.
In December 1999, members of the board of directors exercised 88,571 options at
$0.70 per share of common stock. Additionally, a related party to a member of
the board was issued 50,000 incentive options at $0.50 per share of common stock
and exercised 34,000 of these options in December of 1999.
As of March 31, 2000, board members held 309,929 options which represents 30% of
the outstanding options, and 826,562 warrants which represent 8% of the
outstanding warrants. A related party to a member of the board held 51,000
options.
At March 31, 2000 there was a total of $45,695 in the short-term borrowings
related to members of the board of directors.
NOTE 3 - GOING CONCERN
These statements are presented on the basis that the Company is an on-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. The accompanying financial statements show an operating loss of
$774,223, and that the Company has a stockholders' deficit of $399,335, and
current liabilities exceed current assets by $926,443. Without an infusion of
additional capital, the Company's ability to continue operations is doubtful. No
adjustment has been made to the financial statements relating to the uncertainty
of continuing as a going concern.
-8-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 3 - GOING CONCERN (CONTINUED)
Management's Plan
-----------------
The Board and management acknowledge the issues raised as to the future of the
Company. As such, the Company has recently eliminated $1 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. The Company also anticipates an
immediate reduction in cost of goods sold from the recent acquisition of a
coffee roasting facility as well as a new supply agreement with a national food
and beverage distributor. In addition, the Company has engaged the services of
various consultants to enhance merger and acquisition activity and capital
raising efforts. The board and management believe that attaining "Fully
Reporting" status along with improving financial conditions will attract
investment and create opportunities for the Company.
NOTE 4 - INVENTORIES
At March 31, 2000 and 1999, inventories were comprised of the following:
2000 1999
------- -------
Coffee $ 7,712 $12,340
Other merchandise held for sale 13,584 15,364
Packaging and other supplies 7,490 13,487
------- -------
$28,786 $41,191
======= =======
NOTE 5 - ACQUISITION
In April 1999, the Company purchased the assets of a coffee company in San
Diego, California, an unrelated party, 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
-9-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
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 will be 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 $0.01) (128)
Paid in capital (319,502)
Accumulated Deficit 342,352
NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
At March 31, 2000 and 1999, property and equipment were comprised of the
following:
2000 1999
--------- ---------
Kiosk carts $ 255,023 $ 220,773
Kiosk equipment 233,327 202,527
Equipment and furniture 229,487 181,459
Signage 39,280 32,650
Site improvements 74,568 50,624
--------- ---------
831,685 688,033
Less: accumulated depreciation (375,416) (264,658)
--------- ---------
$ 456,269 $ 423,375
========= =========
At March 31, 2000, goodwill was comprised of the following:
2000 1999
-------- --------
Goodwill associated with purchase of business
(Northern Lights) $ 40,930 $ --
Other identifiable intangibles 3,000 3,000
Less: accumulated amortization (5,045) (2,300)
-------- --------
$ 38,885 $ 700
======== ========
-10-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS (CONTINUED)
The company recognized depreciation and amortization expense for the years ended
March 31, 2000 and 1999 as follows:
2000 1999
-------- --------
Depreciation $110,758 $101,057
Amortization 2,745 600
-------- --------
$113,503 $101,657
======== ========
NOTE 8 - ACCOUNTS PAYABLE
Of the $604,680 and $724,944 in accounts payable at March 31, 2000 and 1999,
respectively, approximately 80% and 68% have been outstanding for more than 90
days at March 31, 2000 and 1999, respectively.
NOTE 9 - ACCRUED EXPENSES
At March 31, 2000 and 1999, accrued expenses were comprised of the following:
2000 1999
-------- --------
Accrued interest $ 44,168 $198,043
Accrued wages 158,723 97,727
Estimated use tax 29,959 29,959
Other 3,959 14,201
-------- --------
$236,809 $339,930
======== ========
NOTE 10 - CAPITAL LEASE OBLIGATIONS
The Company leases certain office equipment under agreements classified as
capital leases, with original terms ranging from three to four years. Assets
recorded under capital leases are included in Property and Equipment.
Minimum future payments under non-cancelable lease obligations at March 31, 2000
are as follows:
Fiscal Year ending:
------------------
March 31, 2001 $ 1,006
-11-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 11 - SHORT-TERM BORROWINGS
During fiscal year 1999 and 2000, the Company borrowed funds to provide
short-term working capital. These working capital loans are unsecured,
non-interest bearing, and had a March 31, 2000 and 1999 balance of $87,565 and
$17,482, respectively.
NOTE 12 - LEASE INFORMATION
The Company entered into a lease agreement on August 25, 1998 for office
facilities through October 2001. Total future minimum lease payments are as
follows:
Fiscal Year Ending:
------------------
March 31, 2000 $ 19,621
NOTE 13 - INCOME TAXES
The Company has recorded a valuation allowances as an offset to the income tax
benefits of its net operating losses for the years ended March 31, 2000 and
1999. 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.
The details of deferred tax assets and liabilities are as follows:
Assets Liabilities Total
------------ ------------ ------------
March 31, 1999
Net Operating Losses $ 1,010,000 $ -- $ --
Valuation Allowance (1,010,000) -- --
------------ ------------ ------------
Net Deferred Tax $ -- $ -- $ --
============ ============ ============
March 31, 2000
Net Operating Losses $ 1,170,000 $ -- $ --
Valuation Allowance (1,170,000 -- --
------------ ------------ ------------
Net Deferred Tax $ -- $ -- $ --
============ ============ ============
-12-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 13 - INCOME TAXES (CONTINUED)
The Company's net operating loss carryovers and related expiration dates are as
follows:
March 31, 2011 $ 480,000
March 31, 2012 1,014,000
March 31, 2013 1,034,000
March 31, 2014 738,000
------------
$ 3,266,000
============
NOTE 14 - BRIDGE NOTE FINANCING (DUE AND PAYABLE ON DECEMBER 31,1998)
In May 1996, the Company issued "units" consisting of secured convertible
promissory notes and warrants to purchase the Company's common stock. The
offering closed August 1996 with $760,000 of notes and warrants sold. At March
31, 1999, $390,000 of principal notes had been converted to common stock, with
an outstanding principal balance of $372,000. At March 31, 2000 an additional
$312,000 of principal notes had been converted to common stock, with an
outstanding balance of $60,000.
In addition, the Company is obligated to make quarterly interest payments on the
principal balance outstanding, at nine percent (9%) per annum and to repay such
principal balance in full on December 31, 1998. As of March 31, 1999, the
Company was approximately $198,043 in arrears on interest payments relating to
the Secured Notes. On December 31, 1999 certain note holders elected to forgive
all accrued interest in exchange for warrants to purchase common stock. This
transaction is discussed in detail in Note 20. As of March 31, 2000, the Company
is approximately $32,684 in arrears on interest payments relating to the Secured
Notes. Under the terms of the Security Agreement relating to the Secured Notes,
a note holder has the right to: (a) declare all principal and interest
immediately due and owing, (b) 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 trade names and other intellectual property rights
(the "Collateral"), and, in particular, sell, any part of the Collateral, and
(c) exercise any other rights or remedies of a secured party under California
Law. As of March 31, 2000, the Company has not received any notice of default
relating to the Secured Notes.
-13-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 15 - STOCKHOLDERS' DEFICIT
COMMON STOCK
On August 18, 1998, the board of directors approved and the common stockholders
consented to a one-for-two reverse split of the Company's issued and outstanding
common stock. All common stock data has been restated to give effect to this
reverse stock split.
The Company is authorized to issue up to 35,000,000 at March 31, 1999 and
50,000,000 at March 31, 2000, shares of common stock, par value, $.001 at March
31, 1999 and 2000, respectively. As of March 31, 1999 there were 5,829,871
shares of common stock outstanding and 8,059,304 shares of common stock
outstanding at March 31, 2000.
Pursuant to the reverse acquisition 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 and authorization to issue common shares
increased to 50,000,000 shares.
As of March 31, 2000 and 1999 Peabodys had not paid any dividends with respect
to its shares of common stock.
Transaction costs are recorded as a reduction to capital raised by the Company.
PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of preferred stock, par
value $.001. In May 1998, the Company issued 325,000 shares of Series B
preferred stock for $65,000 cash. In March 1999, those holders of Series B
preferred stock elected to convert all preferred stock to shares of common
stock. There were no shares of Series A or B preferred stock outstanding at
March 31, 1999 or 2000.
In the event the Company issues Series A Preferred Stock, Series A Preferred
stockholder will be entitled to a liquidation preference of $1.73 per share,
voting rights equal to the number of shares of common stock the holder would
receive on conversion and a preemptive right to maintain ownership, with certain
conditions. The Series A Preferred stockholders are not entitled to any dividend
preference, and share proportionally with the holders of common stock and Series
B Preferred, any dividend that may be issued.
-14-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 15 - STOCKHOLDERS' DEFICIT (CONTINUED)
PREFERRED STOCK (CONTINUED)
The Series A Preferred Stock are convertible into shares of common stock, at the
option of the holder, on a one-for one basis, unless adjusted pursuant to
standard antidilution provisions. The Series A and B are identical except that
Series B stockholders are entitled to a liquidation preference of $0.40 per
share and have no preemptive rights.
Pursuant to the reverse acquisition with Mine-A-Max, there were no longer any
shares of Preferred Stock authorized at March 31,2000.
NOTE 16 - STOCK OPTION PLANS
Executives and other key employees have been granted options to purchase common
shares, up to an aggregate of 500,000 shares, of the Company's stock under the
1995 Stock Option Plan (the Plan), which was adopted in 1995. In accordance with
the terms of the Plan, the option's the maximum term of the options is ten
years. Options granted vest ratably over various time periods. If an option
granted under the 1995 Plan expires or terminates, the shares subject to any
unexercised portion of that option will again become available for the issuance
of further options under the applicable plan. The Board or committee designated
by the Board is empowered to determine the terms and conditions of each option
granted under the 1995 Plan. The exercise price for any option cannot be less
than the fair market value of the common stock on the date of the grant (110% if
granted to an employee who owns 10% or more of the common stock), and the
exercise price of a non-statutory option cannot be less than 85% of the fair
market value of the common stock on the grant date. As of March 31, 2000,
options to purchase 492,500 shares of common stock have been granted under the
1995 Plan at an exercise price ranging from $0.04 to $0.80 per share.
-15-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 16 - STOCK OPTION PLANS (CONTINUED)
The Board of Directors of the Company has adopted and approved the 1999 Stock
Option Plan, pursuant to which options to purchase up to an aggregate of 500,000
shares of the Company's common stock can be granted to officers, directors,
employees, consultants, vendors, customers, and others expected to provide
significant services to the Company or its subsidiaries. If an option under the
1999 Plan expires or terminates, the shares subject to any unexercised portion
of that option will again become available for the issuance of further options
under the plan. The plan will terminate on February 8, 2009, and no more options
may be granted under the 1999 Plan once it has been terminated. The Board or
designated committee is empowered to determine the terms and conditions of each
option granted under the 1999 Plan. The exercise price for any option cannot be
less than the fair market value of the common stock on the date of the grant
(110% if granted to an employee who owns 10% or more of the common stock), and
the exercise price of a non-statutory option cannot be less than 85% of the fair
market value of the common stock on the date of grant. As of March 31, 1999,
options to purchase 444,000 shares of common stock have been granted under the
1999 Plan at an exercise price of $0.70 per share.
In accordance with the provisions of SFAS 123, the Company applies APB 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation costs. If the Company had elected
to recognize compensation costs based on the fair value of the options at grant
date the Company's net income would not have changed for the year ended March
31, 2000.
The fair value of each option grant is estimated on the grant date to have no
current value, based upon the facts that the options are restricted, not
transferable nor assignable, and the uncertain financial position of the
Company. Pro-forma information regarding net income and pro-forma earnings per
share, as provided in SFAS 123, has not been included and is not considered
meaningful due to the lack of value.
An additional 72,500 options were issued during the year ended March 31, 1999 to
various individuals who provided significant services to the Company. These
options were not issued in conjunction with either stock option plan.
Options exercised under the 1995 Plan during the year ended March 31, 1999
totaled 100,000 shares at $0.04 per share.
-16-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 16 - STOCK OPTION PLANS (CONTINUED)
An additional 500,000 options were issued during the year ended March 31, 2000
to various individuals who provided significant services to the Company at $0.50
per share. These options were issued in conjunction with either stock option
plan. Additionally, 50,000 options were issued in conjunction with the reverse
acquisition at $0.50 per share.
Options exercised under the 1995 Plan during the year ended March 31, 2000
totaled 28,571 options exercised at $0.70 per share. Options exercised under
non-plan options were 60,000 at $0.70 per share and 209,000 options at $0.50 per
share.
Options forfeited due to employee termination of employment was 115,500 during
the year ended March 31, 2000.
A summary of the status of the Company's employee stock option plans as of March
31, 2000, and changes during the year, is presented below:
Year 2000 Year 1999
Options Options
---------- ----------
Outstanding at beginning of year 844,000 427,500
Granted 550,000 516,500
Exercised (297,571) (100,000)
Canceled (60,000) --
Forfeited (115,500) --
---------- ----------
Outstanding at end of year 920,929 844,000
========== ==========
NOTE 17 - WARRANTS
A summary of the status of the Company's warrants as of March 31, 2000 and
changes during the year is presented below:
Year 2000 Year 1999
Warrants Warrants
---------- ----------
Outstanding at beginning of year
(restated in 1999) 667,500 460,000
Granted 766,823 467,500
Exercised (65,000) (260,000)
Canceled (232,500) --
---------- ----------
Outstanding at end of year 1,136,823 667,500
========== ==========
-17-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 18 - 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 year
ended March 31, 2000 and 1999, were approximately 4,120,163 and 5,019,164,
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 year ended March 31, 2000 earnings per common share is equal to basic
earnings per common share because the effect of potentially dilutive securities
under the stock option plans and warrants were antidilutive and therefore not
included.
NOTE 19 - SUPPLEMENTAL DISCLOSURES NON CASH TRANSACTIONS
Non-cash transactions for the year ended March 31, 2000 are as follows:
Accounts payable forgiven in exchange for
warrants to purchase common stock $240,648
Accrued interest on bridge note obligations
forgiven in exchange for warrants to
purchase common stock 205,038
Conversion of obligations on bridge financing
notes into shares of common stock 313,837
Increase in stockholders' deficit resulting from
recapitalization with Mine-A-Max 62,085
Conversion of accounts payable into shares
of common stock 36,421
Issuance of common stock in exchange for
services provided 53,600
Note payable exchanged for account payable 3,750
Exchange of property and equipment for payable 5,000
Issuance of common stock in exchange for
property and equipment 5,000
-18-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 20 - FORGIVENESS OF DEBT
This income represents the forgiveness of accrued expenses, recorded as expenses
in prior years and in the nine months ended December 31, 1999.
Forgiveness of accrued interest payable (1) $205,038
Forgiveness of accrued attorney fees (2) 240,865
--------
445,903
Other miscellaneous debt forgiveness 22,084
--------
$467,987
========
(1) In 1995 and 1996 the Company issued bearing convertible secured promissory
notes ("Bridge Notes"). Effective December 31, 1999, the majority of the
Bridge Note holders 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 $205,038
of accrued interest associated with their Bridge Notes. In exchange for the
debt forgiveness of $205,038, the Company issued these note holders
warrants to purchase 205,038 shares of the Company's common stock at a
price per share of $1.00.
(2) 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 21 - RISKS AND UNCERTAINTIES
The Company largely depends upon a third party supplier for the supply of its
whole bean coffee. 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. While the Company seeks to carefully
anticipate its coffee needs, there can be no assurance that supplies and prices
will not be affected by political and social events, the weather in the coffee
growing regions of the world, unexpected demand or other market forces. Green
coffee is an international agriculture commodity product subject to considerable
price fluctuations. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's profitability could be
adversely affected if coffee prices were to rise substantially.
-19-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 21 - RISKS AND UNCERTAINTIES (CONTINUED)
The Company's success depends to a significant extent 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. 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 activities.
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.
The success of the Company will require rapid 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, implement additional
operating and financial controls and to improve coordination between marketing,
administration and finance functions. The Company would be required to install
additional reporting and management information systems for sales and inventory
monitoring. There can be no assurance that the Company would be able to manage
any substantial increase in its business, and a failure to do so could have a
materially adverse effect on the Company's operating results.
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.
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, 2000.
-20-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 22 - CONCENTRATIONS
As mentioned above, for the year ended March 31, 2000, the Company purchases
100% of its coffee bean inventory from one supplier. The Company believes that
the 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 inventory requirements.
In addition, at March 31, 2000 the Company had twenty-six kiosks in a variety of
locations throughout California and Nevada. The Company had four contracts on
these locations with Sodexho-Mariott, four contracts with Aramark, eight
contracts with The Compass Group and four locations with UCSD. Peabodys competes
indirectly against specialty retailers, restaurants and beverage outlets that
serve coffee, and directly, with a growing number of espresso stands, carts, and
stores in Northern America metropolitan markets. The specialty coffee segment is
becoming increasingly competitive. Competitors with significant economic
resources in both existing nonspecialty and specialty coffee businesses could at
any time enter the Company's market with competitive coffee products. There can
be no assurance that management will be able to continue to secure and maintain
these retail sites.
The Company's officers and directors own approximately 18% 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.
The Company's four major clients represent 80.2% of its gross revenue for the
year ended March 31, 2000. Two of these clients represented 74.7% of the gross
revenue for the year ended March 31, 1999.
-21-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable - The carrying amount of accounts
receivable and accounts payable in the balance sheet approximates fair
value.
Short-term borrowings and bridge notes financing - The carrying amount of
short-term borrowings and bridge note financing in the balance sheet
approximates fair value.
NOTE 24 - SUBSEQUENT EVENTS
On April 3, 2000 the Company entered into a consulting agreement with a
"Consultant" to provide consulting services, which shall consist of raising
capital for Peabodys operations and growth and maintaining positive investor
relations in the European market. The initial term of the agreement was for one
year, with a 30 day revocation clause. Compensation included the issuance of
200,000 restricted shares of the Company's stock and the grant to the consultant
of 300,000 options for the purchase of 300,000 shares of common stock with an
exercise price range of $1.00 to $2.00 and a term of five years.
On April 20, 2000, the Company entered into an agreement with a stock profiler
in New York for services. The Company issued 100,000 shares of it's restricted
common stock at various dates, 50,000 warrants exercisable at a price of $2.00,
and 150,000 warrants exercisable at $2.50 per share. These warrants expire on
December 31, 2003 and have various exercisable dates.
On April 27, 2000 the Company entered into an asset purchase agreement with a
company in North Carolina to purchase the Trade Name, the Marks, the
Registration and the Domain name of Peabodys Coffee Company. The Company agreed
to a purchase price of $25,000 for the sale, assignment, transfer and conveyance
of the assets. As of the date of this audit report, the purchase agreement had
not been finalized.
On May 16, 2000, the Company entered into a non-binding letter of intent, to
acquire certain assets of a coffee company related to specific site operations
on a college campus. As of the date of this audit report, a final agreement had
not been reached.
-22-
<PAGE>
PEABODYS COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 24 - SUBSEQUENT EVENTS (CONTINUED)
On June 12, 2000, the Company entered into a non-binding letter of intent with a
coffee company located in Oregon to acquire certain operating assets of the
Oregon company in exchange for shares of common stock in the Company. As of the
date of this audit report, a final agreement had not been reached.
Effective June 19, 2000, the Company completed the acquisition of substantially
all of the assets and business of the Arrosto Coffee Company located in Van
Nuys, California. The acquired company consisted primarily of fixed assets in
the amount of $147,910, inventory in the amount of $11,662 and certain
intangibles in the amount of $37,995. The Company also assumed certain
liabilities related to the acquired company, inclusive of accounts payable in
the amount of $37,568 and certain lease contracts with definitive terms and
payments. The purchase price for the assets consisted of the issuance of 320,000
shares of Peabodys common stock, which are deemed to be "restricted securities"
as that term is defined in Rule 144 promulgated under the Securities Act of
1933, as amended ("Securities Act"). The shares were valued, by both parties, at
$0.50 per share, for an aggregate valuation of $160,000, purchase price. As
further inducement for the Company to enter into the agreement, the Company
entered into a subscription agreement, pursuant to which Arrosto purchased from
Peabodys 220,000 units with each unit consisting of one share of Peabodys common
stock and one warrant for the purchase of a share of common stock at an exercise
price of $1.00 for a term of three years. The units were purchased for $0.50 per
unit, for a total purchase price of $110,000. Additional purchase costs are
recorded costs related to the transaction, such as expenses incurred in the
negotiating and preparing of the agreement and the closing and carrying out of
the transactions. The acquisition was accounted for under the purchase method
and the purchase price has been allocated to the acquired assets and liabilities
on the basis of their estimated fair value on the date of acquisition.
In May 2000, 100,000 options were exercised at $0.50 for proceeds of $50,000.
-23-
<PAGE>
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 Arrosto Asset Purchase Agreement
6.3 Consulting Agreement--Ward
6.4 Consulting Agreement--Lyman
*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.
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<PAGE>
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, 2000
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, 2000
Todd N. Tkachuk and Director (Principal Executive
Officer and Principal Financial
Officer)
________/S/____________ Controller June 29, 2000
Rolf Mandich
________/S/____________ Director June 29, 2000
Roman Kujath
________/S/____________ Director June 29, 2000
Barry Gibbons
30
