<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-26829
TULLY'S COFFEE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1557436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2010 AIRPORT WAY SOUTH
SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 233-2070
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes _____ No __X__.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE 14,394,655
<S> <C>
(Title of Each Class) Number of Shares Outstanding at
September 26, 1999
</TABLE>
<PAGE>
TULLY'S COFFEE CORPORATION
Form 10-Q
For the Quarterly Period Ended September 26, 1999
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1 Consolidated Balance Sheets at September 26, 1999
and March 28, 1999 3
Consolidated Statements of Operations for the
13 and 26 Week Periods Ended September 26, 1999
and September 27, 1998 4
Consolidated Statements of Cash Flows for the 26
Week Periods Ended September 26, 1999 and
September 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, 1999 March 28, 1999
(unaudited)
------------------------- ------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,553,653 $ 1,149,160
Accounts receivable, net 838,448 695,037
Inventories, net 2,859,590 1,808,556
Prepaid expenses 475,297 84,197
------------------------- ------------------------------
Total current assets 13,726,988 3,736,950
Property and equipment, net 12,329,309 10,991,722
Goodwill, net 4,797,026 4,973,370
Other intangible assets, net 1,219,565 760,320
Other assets 425,451 256,657
------------------------- ------------------------------
Total assets $ 32,498,339 $ 20,719,019
========================= ==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 41,504 $ 27,744
Bank line of credit 3,000,000 6,500,000
Accounts payable 1,174,133 1,808,619
Accrued liabilities and other current
liabilities 2,078,157 1,199,413
------------------------- ------------------------------
Total current liabilities 6,293,794 9,535,776
Long-term debt, net of current portion 21,641 128,978
Capital lease obligation 176,897 192,754
Deferred lease costs 874,099 885,232
------------------------- ------------------------------
Total liabilities 7,366,431 10,742,740
Stockholders' equity:
Series A convertible preferred stock, no par;
30,000,000 shares authorized 13,768,070
and 6,217,480 issued and outstanding,
stated value of $2.50 and a liquidation
preference of $34,420,175 and $15,543,700
at September 26, 1999 and March 28, 1999,
respectively 31,602,652 14,351,934
Common stock, no par value; 120,000,000
shares authorized; 14,394,655 and
14,314,000 shares issued and outstanding 7,626,397 7,444,922
Additional paid-in capital 18,369,197 10,489,829
Accumulated deficit (32,466,338) (22,310,406)
------------------------- ------------------------------
Total stockholders' equity 25,131,908 9,976,279
------------------------- ------------------------------
Total liabilities and stockholders' equity $ 32,498,339 $ 20,719,019
========================= ==============================
</TABLE>
The accompanying notes are an integral part of
these financial statements
3
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
(unaudited) (unaudited)
-------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 6,755,365 $5,498,985 $ 12,870,427 $ 8,683,921
Cost of sales and related occupancy
expense 3,187,342 2,668,587 6,145,081 4,344,364
Selling, general and administrative
costs 4,126,343 3,090,856 7,746,134 5,123,604
Stock option compensation expenses 115,031 153,403 320,119 306,806
Depreciation and amortization 587,657 419,863 1,142,712 660,108
------------ ------------ ------------- -------------
Operating loss (1,261,008) (833,724) (2,483,619) (1,750,961)
------------ ------------ ------------- -------------
Other expense 165,177 467,668 423,562 700,408
------------ ------------ ------------- -------------
Net loss $(1,426,185) $(1,301,392) $(2,907,181) $ (2,451,369)
Preferred stock dividend/accretion 1,254,566 1,248,000 7,248,751 1,765,248
============ ============ ============= =============
Net loss applicable to common
stockholders $(2,680,751) $(2,549,392) $(10,155,932) $ (4,216,617)
============ ============ ============= =============
Weighted average number of common
and common equivalent shares
outstanding 14,374,908 14,333,747 14,340,828 14,328,074
============ ============ ============= =============
Basic and diluted net loss per common
share $ (0.19) $ (0.18) $ ( 0.71) $ ( 0.29)
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of
the financial statements
4
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
--------------------------------------------------
September 26, September 27,
1999 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,907,181) $ (2,451,369)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 1,142,712 660,108
Stock option expense 320,119 306,806
Provisions for doubtful accounts (22,469) 10,573
Stock issued in exchange for services 11,635 50,000
Loan guarantee fee expense 250,498 334,374
Deferred lease costs (11,134) 142,943
Imputed officer compensation 60,000 60,000
Changes in assets and liabilities
Accounts receivable (120,942) 198,788
Inventories (1,051,034) 391,016
Prepaid expense and other assets (559,892) (56,520)
Accounts payable (634,486) (815,083)
Accrued liabilities 878,745 260,217
-------------- --------------
Net cash used in operating activities (2,643,429) (908,147)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,254,372) (1,345,047)
Purchase of Spinelli Coffee Company, net - (6,916,184)
Additions to intangible assets (338,989) -
-------------- --------------
Net cash used in investing activities (2,593,361) (8,261,231)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit - 2,542,979
Repayment of bank line of credit (3,500,000) -
Payments on notes payable (109,434) (99,462)
Proceeds from the issuance of note payable - 2,500,000
Proceeds from the issuance of convertible
preferred stock 18,876,955 4,597,000
Stock issuance costs (1,626,238) (25,670)
Checks drawn in excess of bank balances - (113,893)
-------------- --------------
Net cash provided by financing activities 13,641,283 9,400,954
-------------- --------------
Net increase in cash and cash equivalents 8,404,493 231,576
Cash and cash equivalents at beginning of period 1,149,160 21,566
-------------- --------------
Cash and cash equivalents at end of period $ 9,553,653 $ 253,142
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Deemed preferred stock dividend on convertible
preferred stock issuance as a result of
beneficial conversion feature of attached
common stock warrants 7,248,751 1,765,248
Noncash investing and financing activities:
Accrued liability for preferred stock
to be issued for commissions 1,355,183 229,850
Accrued liability (or Acct. Payable) to
purchase equipment 52,935 0
</TABLE>
The accompanying notes are an integral part of
the financial statements
5
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TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Tully's Coffee
Corporation ("Tully's" or the "Company") and its wholly owned subsidiary,
Spinelli Coffee Company, after elimination of all significant intercompany
items and transactions. Certain amounts previously reported have been
reclassified to conform with current year presentations with no effect on
total equity or net income. The accompanying unaudited consolidated financial
statements as of September 26, 1999 and September 27, 1998, and for the
13-week and 26-week periods ended September 26, 1999 and September 27, 1998
have been prepared by Tully's pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The consolidated financial
statements contained in this form 10-Q are unaudited. In the opinion of
management all adjustments (consisting only of normal recurring adjustments
and accruals) necessary for a fair presentation for the interim periods have
been reflected. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10 for the year ended March 28, 1999. The results of
operations for the 13-weeks and 26-weeks ended September 26, 1999 are not
necessarily indicative of the results for the entire year ending April 2,
2000.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
September 26, 1999 March 28, 1999
<S> <C> <C>
Coffee
Unroasted (Green) coffee $ 1,662,470 $ 696,281
Roasted coffee 176,117 114,847
Other goods held for sale 493,091 547,064
Packaging and other 527,912 450,364
---------------------- ---------------------
$ 2,859,590 $1,808,556
====================== =====================
</TABLE>
As of September 26, 1999, the Company has fixed-price purchase commitments
for green coffee totaling approximately $590,000.
3. Loss per Common Share
Basic loss per common share have been calculated based on the
weighted-average common shares of 14,374,908, 14,333,747, 14,340,828 and
14,328,074 for the 13 weeks ended September 26, 1999, the 13 weeks ended
September 27, 1998, the 26 weeks ended September 26, 1999 and the 26 weeks
ended September 27, 1998, respectively. The Company had a net loss for all
periods presented herein; therefore none of the options, warrants and
convertible preferred stock outstanding during the each of the periods
presented were included in the computation of diluted loss per share as they
were antidilutive.
6
<PAGE>
4. Stockholders' equity
Convertible Preferred stock
In August 1999, the Shareholders approved an amendment to the Company's
Articles of Incorporation increasing the number of authorized shares of
Preferred Stock from 10,000,000 to 30,000,000. The increase in authorized
shares allowed the Company to accept additional subscriptions, convertible
preferred stock.
For the 26-week period ending September 26, 1999, the Company issued
1,887,696 units or 7,550,782 shares of Series A Preferred Stock, with an
aggregate purchase price of $18,876,955 bringing the total number of units
issued to 3,442,018 and aggregate proceeds of the offering to $34,420,175.
Each unit consists of 4 shares of the Company's Series A Preferred Stock and
a Warrant to purchase two shares of the Company's Common Stock at an exercise
price of $0.33 per share. The unit offering price was $10.00.
Common stock
In August 1999, the shareholders approved an amendment to the Company's
Articles of Incorporation, increasing the authorized number of common shares
from 40,000,000 to 120,000,000.
Warrants
In connection with the Series A convertible preferred stock issued during the
26-week period ending September 26, 1999, the Company issued warrants to
purchase 3,775,391 shares of common stock at an exercise price of $0.33 per
share bringing the total number of shares of common stock subject to purchase
under the warrants to 6,884,035 shares . The exercise price of the warrant at
the date of issuance was below the fair market value of the common stock and
is therefore considered an "in the money" or beneficial conversion feature.
Accounting for the issuance of convertible preferred stock with a
nondetachable beneficial conversion feature at the date of issue requires that
the conversion feature be recognized and measured in the financial statements
by allocating a portion of the preferred stock offering proceeds to additional
paid in capital. The discount resulting from the allocation of the proceeds to
the beneficial conversion feature is analogous to a dividend and is recognized
as a return to preferred shareholders from the date of issuance through the
date the warrants are exercisable.
As a result of the aforementioned accounting, the Company allocated
$7,248,751 of the preferred stock proceeds to additional paid in capital. As
the warrants were exercisable upon issuance, the entire allocation was
recognized as a preferred dividend through a charge to retained earnings and
a credit to preferred stock during the period. The weighted-average fair
value of the warrants on the date of grant was $1.92 per share of common
stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Certain statements herein, including anticipated store openings, planned
capital expenditures, projected goodwill amortization and trends in or
expectations regarding the Company's operations, specifically including the
effect of problems associated with the Year 2000, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are based on currently available operating,
financial and competitive information, and are subject to risks and
7
<PAGE>
uncertainties. Actual future results and trends may differ materially
depending on a variety of factors, including, but not limited to, coffee and
other raw materials prices and availability, successful execution of internal
performance and expansion plans, the impact of competition, the effect of
legal proceedings, and other risks detailed herein and in the Company's
annual and quarterly filings with the Securities and Exchange Commission.
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's Form 10 for the year ended March 28,1999. This analysis is
provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
OVERVIEW
The Company's fiscal year ends on the Sunday closest to March 31. Fiscal year
1999 had 52 weeks. The fiscal year ending on April 2, 2000 will include 53
weeks.
The Company intends to continue its aggressive growth strategy and as a
result, expects to incur costs of additional investment in its brand,
infrastructure and management team to support a larger organization in the
future. As a result, selling, general and administrative costs are expected
to increase at a faster rate than net revenues in the near term. While store
contribution is positive, it has not been sufficient to overcome the
incremental costs associated with growth. The Company believes that in the
longer term, selling, general and administrative costs will increase at a
slower pace than net revenues enabling the Company to realize economies of
scale.
During the 26 weeks ended September 26, 1999, Tully's Coffee Corporation
("Tully's" or the "Company") derived approximately 86% of net revenues from
its Company-operated retail stores. Specialty sales consisting of domestic and
international product sales to wholesale customers, office coffee service,
direct mail order sales and royalty and licensing fees account for the
remaining 14% of net sales.
During the first 26 weeks of fiscal year 2000 Tully's completed a private
placement raising approximately $18.9 million in the 26 week period bringing
the total raised in the offering to $34.4 million. Investors purchased
1,887,696 investment units at $10 per unit during the 26 week period and a
total of 3,442,018 units over the course of the offering . Each unit
consisted of four shares of Class A Preferred Stock and a Warrant to purchase
two shares of common stock at an exercise price of $0.33 per share of common
stock. The proceeds have been used to repay $3 million in debt, for capital
expenditures on new and acquired stores and working capital, leaving cash of
$9 million at September 26, 1999. The Company plans to use the remaining
proceeds to fund expansion in its existing and new markets and for working
capital.
RESULTS OF OPERATIONS
COMPARING THE 13 WEEK PERIODS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
Revenues
Net revenues for the 13 weeks ended September 26, 1999, increased 23% to
$6,755,000 from $5,499,000 for the corresponding period in fiscal 1999.
Revenues for Spinelli Coffee Company are included for the full 13 weeks in
both years since the purchase of Spinelli was completed at the beginning of
the 13 week period ended September 27, 1998. Retail sales increased 23% to
$5,762,000 from $4,668,000 due primarily to the opening of new retail stores
within the last year. Retail sales increases were affected to a lesser extent
by an increase in comparable store sales (stores open 13 weeks or longer) of
6%. Comparable store sales overall were reduced by a decline in sales in the
stores acquired from Spinelli. Management anticipated a temporary sales
decline due to the change in name and merchandise. Comparable store sales have
improved as remodels and increased training efforts in these stores were
completed. Excluding the stores acquired from Spinelli comparable store sales
increased 13%. During the 13 weeks ended September 26, 1999, the Company
opened two new stores. The Company ended the period with 59 Company-operated
stores in the United States.
Specialty sales revenues increased 19% to $993,000 for the 13 weeks ended
September 26, 1999, compared to $831,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales
to wholesale and coffee service accounts.
8
<PAGE>
Costs and expenses
Costs of goods sold and related occupancy expenses for the 13 weeks ended
September 26, 1999 increased to $3,187,000 from $2,669,000 for the same
period last year. As a percentage of sales, cost of goods sold and related
occupancy expenses decreased to 47.2% for the 13 weeks ended September 26,
1999 from 48.5% for the comparable period in fiscal 1999. The decrease as a
percentage of net sales was due primarily to improved coffee purchasing and
lower store occupancy costs.
Selling, general and administrative costs for the 13 weeks ended September
26, 1999 increased to $4,126,000 from $3,091,000 for the same period last
year. As a percentage of net sales, selling, general and administrative costs
increase to 61.1% for the 13 weeks ended September 26, 1999 compared to 56.2%
for the same period last year. This increase as a percentage of net sales is
due primarily to higher marketing costs for the 13 weeks ended September 26,
1999 and to a lesser extent to higher general and administrative costs as a
percentage of net sales reflecting planned investment in additional
infrastructure to support expansion.
Stock option expense decreased to $115,000 for the 13 weeks ended September
26, 1999 from $153,000 in the same period last year. Stock option expense is
a noncash charge representing the difference between the exercise price and
fair market value of stock at the date of grant.
Depreciation and amortization for the quarterly period ended September 26,
1999 was $588,000 compared to $420,000 for the quarterly period ended
September 27, 1998. This 40% increase is a result of operating eleven
additional stores in the current period. As a percentage of net
revenue depreciation and amortization increased to 9% for the 13 week period
ended September 26, 1999 compared to 8% in the similar period ended September
27, 1998.
Other expenses decreased to $165,000 of net expenses in the quarterly period
ended September 26, 1999 compared to $468,000 in net expenses in the quarter
ended September 27, 1998. This is primarily a result of less interest expense
and noncash loan guarantee fees related to a lower balance on the bank line of
credit.
Net loss
For the 13 weeks ended September 26, 1999 net operating loss was $1,426,000,
an increase of $125,000 from $1,301,000 for the 13 weeks ended September 27,
1998, respectively. While gross margin increased by 1.3% and stock option and
other expenses decreased for the 13 week period, this was more than offset by
higher selling, general and administrative costs and depreciation and
amortization as described above. Net loss applicable to common stockholders
increased to $2,681,000 from $2,549,000 for the 13 weeks ended September 26,
1999 compared to the 13 weeks ended September 27, 1998. Net loss applicable to
common stockholders per share increased to $0.19 per share compared to $0.18
in the prior year period due to the reasons described above.
COMPARING THE 26 WEEK PERIODS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
Revenues
Net revenues for the 26 weeks ended September 26, 1999, increased 48% to
$12,870,000 from $8,684,000 for the corresponding period in fiscal 1999.
Revenues of Spinelli are included for the full 26 weeks ended September 26,
1999 and for the last 13 weeks of the 26 week period ended September 27, 1998.
Retail sales increased 44% to $11,052,000 from $7,659,000 due primarily to
operating 23 more retail stores for all or part of the comparable periods.
Retail sales increases were affected to a lesser extent by an increase in
comparable store sales (stores open 13 weeks or longer) of 10%. Comparable
store sales overall were reduced by a decline in sales in the stores acquired
from Spinelli. Management anticipated a temporary sales decline due to the
change in name and merchandise. Comparable store sales have improved as
remodels and increased training efforts in these stores were completed.
Excluding the stores acquired from Spinelli, comparable store sales increased
13%.
9
<PAGE>
Sales in the stores acquired from Spinelli have improved recently due to store
remodels and increased store training and merchandising efforts. During the 26
weeks ended September 26, 1999, the Company opened four new stores.
Specialty sales revenues increased 77% to $1,818,000 for the 26 weeks ended
September 26, 1999, compared to $1,025,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales
to wholesale and coffee service accounts driven by the Company's sales
efforts and specialty sales included with the acquisition of Spinelli.
Costs and expenses
Cost of goods sold and related occupancy expenses for the 26 weeks ended
September 26, 1999 increased to $6,145,000 from $4,344,000 for the same
period last year. As a percentage of net sales, cost of goods sold and
related occupancy expenses were 47.7% for the 26 weeks ended September 26,
1999 and 50.0% for the corresponding period of fiscal 1999. The decrease as a
percentage of net revenue was due primarily to improved coffee purchasing.
Selling, general and administrative costs for the 26 weeks ended September
26, 1999 increased to $7,746,000 from $5,124,000 for the same period last
year. As a percentage of sales, selling, general and administrative costs
increased to 60.2% compared to 59.0% for the same period last year. This
increase as a percentage of net sales is primarily due to higher marketing
costs together with planned investment in additional infrastructure.
Stock option expense increased to $320,000 for the 26 weeks ended September
26, 1999 from $307,000 in the same period last year. This is a noncash charge
representing the difference between the exercise price and fair market value
of stock at the date of grant.
Depreciation and amortization for the 26 weeks ended September 26, 1999 was
$1,143,000 or 9% of net revenues compared to $660,000 or 8% of net revenues
for the 26 week period ended September 27, 1998. This 73% increase is a result
of operating eleven additional stores in the current period in addition to the
stores acquired from Spinelli Coffee Corporation in June 1998 and only had 13
weeks of related depreciation during the 26 weeks ended September 27, 1998.
Other expenses and income decreased 40% to $424,000 of net expenses for the
26 week period ended September 26, 1999 compared to $700,000 in expense in
the similar period ended September 27, 1998. This is primarily a result of
lower interest expense and noncash loan guarantee expenses due to a lower
balance on the bank line of credit.
Net loss
Net loss for the 26 weeks ended September 26, 1999 was $2,907,000, an
increase of $456,000 from $2,451,000 in the first 26 weeks of the prior year.
While gross margin increased by 2.3% and other expenses decreased for the 26
week period, this was more than offset by higher selling, general and
administrative costs, stock option expense and depreciation and amortization
as described above. Net loss applicable to common stockholders increased to
$10,156,000 from $4,217,000 for the 26 weeks ended September 26, 1999
compared to the same period ended September 27, 1998. Net loss per common
share increase to $0.71 per share compared to $0.29 per share in the prior
period. This increase is primarily attributable to higher non-cash and
non-operating costs associated with the beneficial conversion feature
attached to the warrants that were issued with the preferred stock in the
current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $9,554,000 in cash and cash equivalents and
with working capital of $7,433,000. Cash and cash equivalents increased
$8,404,000 during the 26 week period ended
10
<PAGE>
September 26, 1999. The increase is the result of $19 million in private
placement funds received throughout the 26 week period ended September 26,
1999, offset by operating activities during the same period and repayments of
the bank line of credit. Net cash used in operating activities was $2,643,000
resulting primarily from a net loss before non-cash charges of $1,156,000 and
an increase in non-cash net operating assets.
Cash used by investing activities for the first 26 weeks of fiscal 2000
totaled $2,593,000. These investments included opening four new
Company-operated stores, new store construction work in progress, enhancing
information systems and capital improvements to certain existing stores.
During the first 26 weeks of fiscal year 2000 Tully's sold a total of
1,887,696 units of an "investment unit" at a price of $10.00 per unit. Each
investment unit consisted of 4 shares of the Company's Class A convertible
Preferred Stock and a Warrant to purchase two shares of the Company's common
stock at an exercise price of $0.33 per share. In total during the 26 week
period, Tully's received $18,876,955 upon the issuance of 7,550,782 shares of
Class A convertible Preferred Stock convertible into an equal number of shares
of common stock and Warrants to buy 3,775,391 shares of common stock at $0.33
per share. The total number of units issued are 3,442,018, the aggregate
proceeds of the offering is $34,420,175 and the total number of shares of
common stock subject to purchase under the warrants are 6,884,035 shares. The
investment units were offered and sold only to accredited investors pursuant
to Rule 506 of Regulation D.
Tully's has plans to continue to use the funds raised to pursue the company's
strategy of expansion in its existing and new markets and to a lesser extent
abroad. The Company may also pursue acquisitions as a means for further growth
because they offer an established infrastructure and customer base. At the
present time the Company has not entered into any agreements for future
acquisitions.
Tully's anticipates that cash requirements for the remainder of fiscal year
2000, other than normal operating expenses, are to consist primarily of
capital expenditures related to the addition of new Company-operated retail
stores. This growth of the Company's store base could be both through new
stores and acquisition of existing competitors or operators in existing and
new markets. The Company also anticipates making additional expenditures to
expand its administrative offices and production capacity and to enhance
information systems and remodel certain existing stores. As a result, selling,
general and administrative costs are expected to increase at a faster rate
than net revenues in the near term. In the longer term, selling, general and
administrative costs are expected to grow at a slower pace than net revenues.
While there can be no assurance that amounts and timing of the expenditures
will occur as planned, management believes that its cash on hand will be
sufficient for its capital needs for the next twelve months.
The Company has funded its capital requirements principally through private
placements of common and preferred stock and long term debt. To date, the
Company continues to use cash and operate at a loss. The Company's ability to
achieve positive cash flow depends upon a variety of factors, including the
timely introduction and market success of its new stores and products, the
costs of producing and marketing such products and various other factors, some
of which may be beyond the Company's control. If the Company requires
additional capital, it would seek such funding through additional public or
private financing, although there can be no assurance that the Company will be
able to obtain such financing.
YEAR 2000 COMPLIANCE
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs, at
the Company and elsewhere, with time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to produce and
distribute products, process transactions or engage in similar normal
business activities.
11
<PAGE>
The Company has investigated the impact of the year 2000 problem on its
business, including operational, information and financial systems and has
tested certain systems for compliance. Although it is not presently aware of
any material operational issues or costs associated with preparing its
internal systems for the year 2000, there can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of
the necessary systems and changes to address all year 2000 issues. The
Company estimates the cost of making systems compliant is approximately
$40,000. As of September 26, 1999, Tully's had expended approximately $25,000.
The Company is in the process of identifying and working with significant
suppliers, customers and financial institutions to ensure that those parties
have appropriate plans to remedy year 2000 issues when their systems may
affect our systems or otherwise impact operations. Although we have no reason
to conclude that any specific supplier represents a risk, the reasonably
likely worst-case scenario would entail disruption to our business due to the
inability of a number of our suppliers to provide product. We are unable to
quantify such a scenario, but it could potentially materially harm our
results of our operations, liquidity or financial position.
Tully's has completed its review of non-information technology systems
(including voice communications and security) will be completed before the
end of November 1999. The estimated cost to remedy non-information technology
systems is not expected to be material. Tully's expects that the source of
funds for evaluation and remediation of year 2000 compliance issues will be
cash on hand.
The third parties whose year 2000 problems could have the greatest effect on
Tully's are believed by Tully's to be banks that maintain Tully's depository
accounts and credit card processing systems, the company that processes
Tully's payroll and companies that supply or distribute coffee beans and
other goods.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Coffee commodity prices are subject to substantial price fluctuations, caused
by various factors including weather, political and economic conditions in
certain coffee-producing countries and other supply-related concerns. Also,
agreements establishing export quotas or restricting coffee supplies
worldwide have in the past effected the price of coffee. If coffee prices
were to rise significantly this could have a negative influence on the
Company.
The Company has fixed-price purchase commitments with certain of its vendors
to maintain the supply of green coffee and stabilize its costs of goods sold.
As of September 26, 1999 Tully's had approximately $590,000 in fixed-price
purchase commitments which along with its current inventory levels the
Company believes will be sufficient to meet all its coffee needs through
fiscal year end. The Company believes that the risk of non-delivery on these
purchase commitments is remote.
Tully's future operating results and earnings could be impacted by other
factors outside its control. These would include increased competition,
finding ideal locations for future expansion and increased costs of
operations including finding skilled personnel to maintain its current and
new operations.
SEASONALITY
Tully's business is subject to seasonal fluctuations. Significant portions of
Tully's net revenues and profits are realized during the third quarter of its
fiscal year. This period includes the Thanksgiving through New Years holiday
season. In addition, quarterly results are affected by the timing of the
opening of new stores, and Tully's rapid growth may conceal the impact of
other seasonal influences. Because of the seasonality
12
<PAGE>
of Tully's business, results for any quarter are not necessarily indicative
of the results that may be achieved for the full fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Asia. This exposure has had a minimal
impact on the Company. At the present time, the Company does not hedge
foreign currency risk, but may hedge known transaction exposure in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is or may from time to time be a party to routine litigation
incidental to our business. Management believes the ultimate resolution of
these routine matters will not materially harm our business, financial
condition, operating results, or cash flow.
ITEM 2. CHANGES IN SECURITIES
Investment Units Consisting of Shares of Class A Preferred Stock and Warrants
At various dates during the first 26 weeks of fiscal year 2000 the Company
sold a total of 1,887,656 units of an "investment unit" at a price of $10.00
per unit. Each investment unit consisted of 4 shares of the Company's Class A
Preferred Stock together with a Warrant to purchase two shares of the
Company's common stock at an exercise price of $0.33 per share of common
stock. In total, Tully's received $18,876,955 as the result of the sale of
the investment units which resulted in the issuance of 7,550,782 shares of
Class A Preferred Stock convertible into 7,550,782 shares of common stock and
Warrants to buy 3,775,391 shares of common stock at $0.33 per share. This
brought the total number of shares issued to 13,768,070, the aggregate
proceeds of the offering to $34,420,175 and the total number of shares of
common stock subject to purchase under the warrants to 6,884,035 shares The
investment units were offered and sold pursuant to Rule 506 of Regulation D
only to accredited investors. A total of 582 accredited investors purchased
these investment units during this offering.
On August 11, 1999, the shareholders of Tully's approved four amendments to
the Company's Articles of Incorporation. These included amendments to
increase the number of authorized shares of common stock form 40,000,000 to
120,000,000 shares and an increase in the number of authorized Class A
Preferred Stock from 10,000,000 to 30,000,000.
Warrants
The warrants issued as part of the investment units are non-detachable from
the Series A Preferred Stock. Each warrant entitles the holder to purchase
two shares of Tully's common stock at a price of $0.33 per share purchased.
The warrants may be exercised, in whole or in part, at any time after they
are issued. Any warrants outstanding, but unexercised, at the time Tully's
commences a Qualified Offering will be cancelled immediately prior to the
commencement of such Qualified Offering. The holder of the warrant may
exercise it at any time prior to the tenth anniversary of the issuance of the
warrant.
13
<PAGE>
The warrants include provisions for anti-dilution protection right for the
shares of common stock issuable upon exercise of the warrants. Under these
anti-dilution rights, if Tully's were to issue additional stock in connection
with a stock split, reverse stock split or stock dividend then the exercise
price ($0.33 per share) and the number of shares issuable under the warrants
would be adjusted so that the new conversion price and the number of shares
of common stock issuable upon exercise of the warrants will be
proportionately increased or reduced to reflect such split or dividend.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on August 11, 1999. There
were a total of 10,056,728 shares of the Company's common stock and 6,343,530
shares of the Company's preferred stock present at the meeting, either in
person or represented by proxy. The number of shares present at the meeting
represented a quorum for each of their respective classes.
There were three matters submitted to the shareholders of the Company for
ratification or approval. The specific matters submitted for voting by the
shareholders and the results of the voting were as follows:
Proposal 1: Amendments to the Articles of Incorporation to:
(i) increase the number of authorized shares of
common stock from 40,000,000 to 120,000,000 shares;
(ii) to increase the number of authorized shares of
preferred stock from 10,000,000 to 30,000,000 shares,
including the designation of a specific (Class "A")
preferred stock consisting of 17,500,000 shares and
designating the rights and preferences of such Class
A preferred stock; (iii) to eliminate the cumulative
voting rights in connection with the election of
Directors of the Company and (iv) to eliminate and
deny the existing preemptive rights of shareholders
of the Company in connection with the issuance of
shares by the Company.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,023,711 33,017 4,305,111
Preferred Stock 6,310,730 32,800 3,656,120
</TABLE>
Proposal 2: Amended the Employee stock option plan to increase
the number of shares reserved for issuance under the
plan from 718,000 shares of common stock to 4,200,000
shares.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,015,428 41,300 4,305,111
Preferred Stock 6,323,530 20,000 3,656,120
</TABLE>
Proposal 3: To approve the 1999 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,029,011 27,717 4,305,111
Preferred Stock 6,283,530 60,000 6,565,120
</TABLE>
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Articles of Incorporation, as amended
10.1 Tully's Coffee Corporation Amended and Restated
1994 Stock Option Plan.
10.2 Tully's Coffee Corporation 1999 Employee Stock
Purchase Plan
</TABLE>
(b) Current Reports on Form 8-K
None.
15
<PAGE>
TULLY'S COFFEE CORPORATION
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TULLY'S COFFEE CORPORATION.
Date: November 15, 1999 By: /s/ STEPHEN R. GRIFFIN
---------------------------------
Stephen R. Griffin
Vice President - Finance and
Chief Financial Officer
16
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TULLY'S COFFEE CORPORATION
Pursuant to the provisions of RCW 23B.10.070 of the Washington Business
Corporation Act, the undersigned adopts and submits for filing the following
Articles of Amendment and Restatement of the Articles of Incorporation of
TULLY'S COFFEE CORPORATION (the "Corporation"). The original Articles of
Incorporation of the Corporation were filed on July 16, 1992, and amended by
Articles of Amendment to the Articles of Incorporation filed on July 26, 1993,
April 10, 1995, June 8, 1998 and October 23, 1998.
FIRST: The name of the Corporation is Tully's Coffee Corporation.
SECOND: Effective upon the filing of these Articles of Amendment and
Restatement with the Washington Secretary of State's Office, the original
Articles of Incorporation of the Corporation and all amendments thereto shall be
replaced and superseded by the following Amended and Restated Articles of
Incorporation of the Corporation:
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TULLY'S COFFEE CORPORATION
ARTICLE I. NAME
The name of the Corporation is TULLY'S COFFEE CORPORATION.
ARTICLE II. SHARES
2.1 AUTHORIZED CAPITAL.
The total number of shares which the Corporation is authorized to issue
is 150,000,000, consisting of 120,000,000 shares of Common Stock without par
value and 30,000,000 shares of Preferred Stock without par value. The Common
Stock is subject to the rights and preferences of the Preferred Stock as
hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES.
The Preferred Stock may be issued from time-to-time in one or more
series in any manner permitted by law and the provisions of these Amended and
Restated Articles of
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<PAGE>
Incorporation of the Corporation, as determined from time-to-time by the
Board of Directors and stated in the resolution or resolutions providing for
the issuance thereof, prior to the issuance of authority to fix and determine
and to amend, subject to the provisions hereof, the designation, preferences,
limitations and relative rights of the shares of any series that is wholly
unissued or to be established. Unless otherwise specifically provided in the
resolution establishing any series, the Board of Directors shall further have
the authority, after the issuance of shares of a series whose number it has
designated, to amend the resolution establishing such series to decrease the
number of shares of that series, but not below the number of share of such
series then outstanding.
2.3 DIVIDENDS.
The holders of shares of the Preferred Stock shall be entitled to
receive dividends out of the funds of the corporation legally available therefor
at the rate and at the time or times, whether cumulative or noncumulative, as
may be provided by the Board of Directors in designating a particular series of
Preferred Stock. If such dividends on the Preferred Stock shall be cumulative,
then if dividends shall not have been paid, the deficiency shall be fully paid
or the dividends declared and set apart for payment at such rate, but without
interest on cumulative dividends, before any dividends on the Common Stock shall
be paid or declared and set apart for payment. The holders of the Preferred
Stock shall not be entitled to receive any dividends thereon other than the
dividends referred to in this Section.
2.4 REDEMPTION.
The Preferred Stock may be redeemable at such price, in such amount,
and at such time or times as may be provided by the Board of Directors in
designating a particular series of Preferred Stock. In any event, such Preferred
Stock may be repurchased by the Corporation to the extent legally permissible.
2.5 LIQUIDATION.
In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of the Preferred Stock
shall not be entitled to receive any distributive amounts referred to in this
Section, unless otherwise provided by the Board of Directors in designating a
particular series of Preferred Stock.
2.6 CONVERSION.
Shares of Preferred Stock may be convertible into Common Stock of the
Corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
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<PAGE>
2.7 VOTING RIGHTS.
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
2.8 SERIES A PREFERRED STOCK.
The rights, preferences, privileges and restrictions granted to and
imposed on the Series A Preferred Stock, which shall consist of 17,500,000
shares are as set forth below:
a. DIVIDENDS. The holders of shares of Series A Preferred
Stock shall share ratably (on an as-if converted to Common Stock basis) with the
holders of the Corporation's Common Stock in any dividends, when and if such
dividends are declared by the Corporation's Board of Directors.
b. LIQUIDATION. In the event of any liquidation, dissolution
or winding up of the affairs of the Corporation (other than a deemed
liquidation, dissolution and winding up in connection with a Sale Transaction as
hereinafter defined), whether voluntary or involuntary, before any distribution
shall be made to the holders of the Common Stock, the holders of the Series A
Preferred Stock at the time outstanding shall be entitled to be paid an amount
per share equal to $2.50 (the "Original Series A Issue Price"), plus all
declared but unpaid dividends (the "Series A Liquidation Preference"). If the
assets and funds available for distribution to the holders of the Series A
Preferred Stock are insufficient to permit the payment to such holders of the
full Series A Liquidation Preference, then, subject to the rights of any series
of Preferred Stock which may from time-to-time come into existence, the entire
assets and funds of the corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock in
proportion to the amount of such stock owned by each such holder. Assuming
distribution of the full Series A Liquidation Preference, the holders of the
Common Stock at the time outstanding shall be entitled to be paid an amount per
share equal to $2.25, plus all declared but unpaid dividends (the "Common Stock
Liquidation Preference"). If, after full payment of the Series A Liquidation
Preference, the assets and funds available for distribution to the holders of
the Common Stock are insufficient to permit the payment to such holders of the
full Common Stock Liquidation Preference, then the assets and funds of the
Corporation remaining after full payment of the Series A Liquidation Preference
and legally available for distribution shall be distributed ratably among the
holders of the Common Stock in proportion to the amount of such stock owned by
each such holder. Assuming distribution of the full Series A Liquidation
Preference and the full Common Stock Liquidation Preference, subject to the
rights of any series of Preferred Stock which may from time-to-time come into
existence, the remaining assets of the Corporation available for distribution to
Shareholders shall be distributed among the holders of Series A Preferred Stock
and Common Stock pro rata based on the number of shares of Common Stock held by
each (assuming, for this purpose, full conversion of all such Series A Preferred
Stock).
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<PAGE>
Any (i) acquisition of the Corporation by means of a merger,
consolidation or other form of corporate reorganization in which outstanding
shares of the Corporation are exchanged for securities or other consideration
issued, or caused to be issued, by the acquiring entity or its subsidiary (other
than a mere reincorporation transaction or a merger which will not result in
more than fifty percent (50%) of the Corporation's capital stock outstanding
immediately after the effective date of such merger being owned of record or
beneficially by persons other than the holders of such capital stock immediately
prior to such merger), or (ii) sale, conveyance or transfer of all or
substantially all of the assets of the Corporation (in either case, a "Sale
Transaction") shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this SECTION 2.8(b), and shall entitle the
holders of the Series A Preferred Stock to receive at the closing of the Sale
Transaction, in redemption of such Holders' Series A Preferred Stock, in cash,
securities or other property (valued at the fair market value thereof as
determined by the Board of Directors in good faith), in an amount per share (the
"Series A Sale Transaction Liquidation Preference") equal to the Series A
Liquidation Preference reduced by the amount by which the Common Stock
Transaction Amount (as hereinafter defined) exceeds $1.78 (as adjusted for stock
splits, stock dividends, and the like); provided, however, that in no event
shall the Series A Sale Transaction Liquidation Preference be less than $1.78.
For these purposes, (1) the term "Common Stock Transaction Amount" means the
amount or value of consideration payable to the Corporation or the holders of
the Corporation's outstanding equity securities with respect to the Sale
Transaction divided by the aggregate number of shares of Common Stock then
issued and outstanding and issuable on exercise or conversion of Eligible Common
Stock Equivalents, and (ii) the term "Eligible Common Stock Equivalents" means
options, warrants or other rights to acquire Common Stock and other debt or
equity securities convertible into Common Stock which are then, or as a result
of the Sale Transaction will become, exercisable or convertible at an exercise
or conversion price of $1.78 (as adjusted for stock splits, stock dividends and
the like) or less.
Each holder of Series A Preferred Stock shall have the right to elect
the benefits of Section 2.8(c)(i) or other applicable conversion provisions in
lieu of receiving payment in a liquidation, dissolution or winding up (or deemed
liquidation, dissolution or winding up) of the Corporation pursuant to this
SECTION 2.8(b).
c. CONVERSION. The holders of Series A Preferred Stock shall
have conversion rights as follows:
i. OPTIONAL CONVERSION. Subject to subsection
2.8(c)(iii), each share of Series A Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of
such share at the office of the Corporation or any transfer agent for the
Series A Preferred Stock, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the sum of $1.78 plus
any declared but unpaid dividends on such share by the Conversion Price (as
defined in subsection 2.8(c)(iv)) at the time then in effect for such share.
-4-
<PAGE>
ii. AUTOMATIC CONVERSION. Each share of Series A
Preferred Stock shall automatically be converted into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
the sum of $1.78 plus any declared but unpaid dividends on such share by the
Conversion Price at the time then in effect for such share immediately upon
the earlier of (A) a "Qualified Public Offering" (as defined herein), or (B)
the date upon which the Corporation obtains the consent of the holders of at
least seventy-five percent (75%) of the then outstanding shares of Series A
Preferred Stock (each, an "Automatic Conversion Event"). For purposes of this
subsection 2.8(c)(ii), "Qualified Public Offering" shall mean the
consummation of the Corporation's first sale of its Common Stock to the
public pursuant to a registration statement on Form S-1 or Form SB-2 (or any
successor form) under the Securities Act of 1933, as amended, at an aggregate
price to the public of at least $15 million and a per share price to the
public of at least $5.00 (as adjusted for stock splits, combinations,
recapitalizations and the like). Upon the occurrence of an Automatic
Conversion Event, the outstanding shares of Series A Preferred Stock shall be
converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the corporation or its transfer agent; provided, that the
Corporation shall not be obligated to issue to any such holder certificates
evidencing the shares of Common Stock issuable upon such conversion unless
certificates evidencing the shares of Series A Preferred Stock are delivered
to the Corporation or its transfer agent.
iii. MECHANICS OF OPTIONAL CONVERSION. The holder of
any shares of Series A Preferred Stock may exercise the optional conversion
right described in subsection 2.8(c)(i) by surrendering to the Corporation or
any transfer agent of the corporation the certificate or certificates for the
shares to be converted, duly endorsed, at the office of the Corporation or of
any transfer agent for the Series A Preferred Stock, accompanied by written
notice specifying the number of shares to be converted and the name or names
in which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series A Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock as of such date.
iv. CONVERSION PRICE ADJUSTMENTS OF SERIES A
PREFERRED STOCK. The conversion price per share for shares of Series A
Preferred Stock (the "Conversion Price") shall initially be $1.78, and shall
be subject to adjustment as provided below:
A. If the corporation should (I) declare a
dividend or make a distribution on its Common Stock in shares of its Common
Stock, (II) subdivide or reclassify its outstanding shares of Common Stock
into a greater number of shares, or (III) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
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<PAGE>
Conversion Price then in effect at the time of the record date for such
dividend or distribution or the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of any shares of Series A Preferred Stock which may thereafter be
surrendered for conversion or automatically converted shall be entitled to
receive the number of shares of Common Stock which the holder would have
owned or been entitled to receive had such Series A Preferred Stock been
converted prior to such date. Successive adjustments to the Conversion Price
shall be made whenever any event specified above shall occur.
B. (I) Upon each issuance by the
Corporation of any Additional Stock (as defined in subsection 2.8(c)(iv)(C)),
after the date upon which any shares of Series A Preferred Stock were first
issued (the "Purchase Date") without consideration or for a consideration per
share less than the Conversion Price for the Series A Preferred Stock in
effect immediately prior to the issuance of such Additional Stock, the
Conversion Price for the Series A Preferred Stock in effect immediately prior
to each such issuance shall forthwith (except as otherwise provided in
subsection 2.8(c)(iv)(B)(II)) be reduced to a per share amount determined by
multiplying such Conversion Price by a fraction, the numerator of which shall
be the number of shares of Common Stock deemed outstanding (as defined in the
following sentence) immediately prior to such issuance plus the number of
shares of Common Stock which the aggregate consideration received by the
corporation for such issuance of Additional Stock would purchase at such
Conversion Price; and the denominator of which shall be the number of shares
of Common Stock deemed outstanding (as defined in the following sentence)
immediately prior to such issuance plus the number of shares of such
Additional Stock. For the purposes of the preceding sentence, all outstanding
shares of Common Stock and all shares of Common Stock issuable upon
conversion of outstanding Preferred Stock or other convertible instruments or
upon exercise of options or warrants or other rights to acquire Common Stock
or convertible securities (and the resulting securities fully converted into
shares of Common Stock, if so convertible) shall be "deemed outstanding."
(II) No adjustment of the
Conversion Price for the Series A Preferred Stock shall be made in an amount
less than one cent ($.01) per share; provided that any adjustments which are
not required to be made by reason of this sentence shall be carried forward
and shall be either taken into account in any subsequent adjustment made
prior to three years from the date of the event giving rise to the adjustment
being carried forward, or shall be made at the end of three years from the
date of the event giving rise to the adjustment being carried forward. Except
to the limited extent provided for in subsections 2.8(c)(iv)(B)(V)(c) and (d)
below, no adjustment of such Conversion Price pursuant to this subsection
2.8(c)(iv)(B) shall have the effect of increasing the Conversion Price above
the Conversion Price in effect immediately prior to such adjustment.
(III) In the case of the issuance of
Common Stock for cash, the consideration shall be deemed to be the amount of
cash paid therefor, before deducting any reasonable discounts, commissions or
other expenses allowed, paid or
-6-
<PAGE>
incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(IV) In the case of the issuance of
the Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors. In the case of the
issuance of Additional Stock that is sold together with other securities or
assets of the corporation for a consideration which covers both the
Additional Stock and such other securities or assets, the consideration per
share for the Additional Stock will be that portion of the total
consideration received by the Corporation which is allocated to the
Additional Stock as determined in good faith by the Board.
(V) In the case of the issuance
after the Purchase Date of options or warrants to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities (other than the issuance of
any options pursuant to the Option Plan defined in Section 2.8(c)(iv)(QIV)),
such issuances shall be deemed issuances of "Additional Stock" and the
following provisions shall apply for all purposes of this subsection
2.8(c)(iv)(B):
(a) The aggregate maximum
number of shares of Common Stock deliverable upon exercise of such options or
warrants to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options, warrants or rights were issued
and for a consideration equal to the consideration (determined in the manner
provided in subsections 2.8(c)(iv)(B)(III) and (IV), if any, received by the
Corporation upon the issuance of such options, warrants or rights plus the
minimum exercise price provided in such options, warrants or rights for the
Common Stock covered thereby.
(b) The aggregate maximum
number of shares of Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable securities or upon the
exercise of options or warrants to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof, shall be deemed to have been issued at the time such securities were
issued or such options, warrants or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options, warrants or rights (excluding
any cash received on account of accrued interest or accrued dividends), plus
the minimum additional consideration, if any, to be received by the
Corporation upon the conversion or exchange of such securities or the
exercise of any related options, warrants or rights (the consideration in
each case to be determined in the manner provided in subsections
2.8(c)(iv)(B)(III) and (IV)).
(c) In the event of any
change in the number of shares of Common Stock deliverable or in the
consideration payable to the Corporation upon exercise of such options or
rights or upon conversion of or in exchange for such
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<PAGE>
convertible or exchangeable securities, including, but not limited to, a
change resulting from the anti-dilution provisions thereof, the Conversion
Price of the Series A Preferred Stock, to the extent in any way affected by
or computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or exchange of such
securities.
(d) Upon the expiration
of any such options or rights, the termination of any such rights to convert
or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, the Conversion Price of the Series A
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which
remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities.
(e) The number of shares
of Common Stock deemed issued and the consideration deemed paid therefor
pursuant to subsections 2.8(c)(iv)(B)(V)(a) and (b) shall be appropriately
adjusted to reflect any change, termination or expiration of the type
described in either subsection 2.8(c)(iv)(B)(V)(c) or (d).
C. "Additional Stock" shall mean any
shares of Common Stock issued (or deemed to have been issued pursuant to
subsection 2.8(c)(iv)(B)(V)) by this corporation after the Purchase Date,
other than:
(I) Common Stock issued pursuant
to a transaction described in subsection 2.8(c)(iv)(A) hereof;
(II) up to four hundred thousand
(400,000) shares of Common Stock (as adjusted for stock splits and the like)
issued or issuable upon exercise of options to purchase Common Stock
outstanding as of August 31, 1998;
(III) warrants to purchase up to
four million (4,000,000) shares of Common Stock (as adjusted for stock splits
and the like) sold and issued as a unit with the shares of Series A Preferred
Stock and the shares of Common Stock issued or issuable upon exercise
thereof; and
(IV) shares of Common Stock (as
adjusted for stock splits and the like) issued or issuable upon exercise of
options to purchase Common Stock granted or issued after August 31, 1998,
pursuant to that certain 1994 Stock Option Plan adopted October 1994, by the
Corporation (the "Option Plan") up to but not exceeding five percent (5%) of
the aggregate number of: (i) the outstanding shares of Common Stock as of the
date of these Articles of Amendment; and (ii) the outstanding shares of the
Series A Preferred Stock.
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v. OTHER DISTRIBUTIONS. In the event the
Corporation shall declare a distribution to all holders of shares of its
Common Stock which is payable in (A) securities other than its Common Stock,
(B) evidences of indebtedness issued by Corporation or other persons, (C)
assets (excluding cash dividends), or (D) options or rights, then, in each
such case the holders of the Series A Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders
of the number of shares of Common Stock of the Corporation into which their
shares of Series A Preferred Stock are convertible as of the record date
fixed for the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
vi. RECAPITALIZATIONS. If at any time or from
time-to-time there shall be a recapitalization, reclassification or
reorganization of the Common Stock such that the Common Stock shall be
changed into the same or different number of shares of any class or series of
stock (other than a subdivision or combination transaction provided for
elsewhere in this SECTION 2.8(c)), provision shall be made so that the
holders of the Series A Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock the number of shares
of stock or other securities or property of the Corporation or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization, reclassification or reorganization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this SECTION 2.8(c) with respect to the rights of the holders
of the Series A Preferred Stock after the recapitalization, reorganization or
reclassification, to the end that the provisions of this SECTION 2.8(c)
(including adjustment of the Conversion Price then in effect and the number
of shares purchasable upon conversion of the Series A Preferred Stock) shall
be applicable after that event as nearly equivalent as may be practicable.
vii. NO IMPAIRMENT. The Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this SECTION 2.8(c) and
in the taking of all such action as may be necessary or appropriate in order
to protect the conversion rights of the holders of the Series A Preferred
Stock against impairment.
viii. NO FRACTIONAL SHARES AND CERTIFICATE AS TO
ADJUSTMENTS.
A. No fractional shares shall be issued
upon conversion of the Series A Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock the holder is at the time converting into Common Stock and the number
of shares of Common Stock issuable upon such aggregate conversion.
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B. Upon the occurrence of each adjustment
or readjustment of the Conversion Price of Series A Preferred Stock pursuant
to this SECTION 2.8(c), the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof
and prepare and furnish to each holder of Series A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (I) such adjustment and readjustment, (II) the
Conversion Price at the time in effect, and (III) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of Series A Preferred Stock.
ix. NOTICES OF RECORD DATE. In the event of any
taking by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to
receive any other right, this corporation shall mail to each holder of Series
A Preferred Stock, at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
x. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock such
number of its shares of Common Stock as shall from time-to-time be sufficient
to effect the conversion of all outstanding shares of the Series A Preferred
Stock; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Series A Preferred
Stock, the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purposes.
xi. NOTICES. Any notice required by the provisions
of this SECTION 2.8(c) to be given to the holders of shares of Series A
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at the address
appearing on the books of the Corporation for each holder.
d. VOTING RIGHTS. Each share of Series A Preferred Stock
is entitled to cast one vote for each share of Common Stock into which such
share is then convertible on all matters submitted to a vote of the
Shareholders of the Corporation, except in connection with the election of
Directors of the Corporation, in which case all Shareholders (Preferred and
Common) may cumulate their votes and cast them all for one or more of the
Director candidates, provided, however, that so long as shares of Series A
Preferred Stock are
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outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent) of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock:
(i) alter or change the rights, preferences
or privileges of the shares of Series A Preferred Stock so as to affect
adversely the shares;
(ii) increase the authorized number of shares of
Series A Preferred Stock; or
(iii) create any new class or series of stock
or any other securities convertible into equity securities of the Corporation
having a preference over or being on parity with the Series A Preferred Stock
with respect to voting, dividends or upon liquidation.
ARTICLE III. REGISTERED OFFICE AND AGENT
The registered agent and registered office of the Corporation re as
follows:.
Registered Agent Registered Office, Street and
Mailing Address
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Washington Corporate Services, Inc. 701 Fifth Avenue
2250 Columbia Center
Seattle, Washington 98104
ARTICLE IV. DIRECTORS
The number of Directors of this Corporation shall be fixed by the
Bylaws and may be increased or decreased from time-to-time in the manner
specified therein.
ARTICLE V. LIMITATION OF LIABILITY
A Director of this Corporation shall not be personally liable to this
Corporation or its Shareholders for monetary damages for conduct as a Director,
except for:
a. Acts or omissions involving intentional misconduct by the
Director or a knowing violation of law by the Director;
b. Conduct violating RCW 23B.08.310 (which involves certain
distributions by the Corporation); or
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c. Any transaction from which the Director will personally
receive a benefit in money, property or services to which the
Director is not legally entitled.
If the Washington Business Corporation Act is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of this Corporation shall be
eliminated or limited to the fullest extent permitted by the Washington Business
Corporation Act, as so amended. Any repeal or modification of the foregoing
paragraph by the Shareholders of this Corporation shall not adversely affect any
right or protection of a Director of this Corporation with respect to any acts
or omissions of such Director occurring prior to such repeal or modification.
ARTICLE VI. INDEMNIFICATION
This Corporation shall indemnify and advance expenses to its Directors,
Officers, Agents and Employees, as follows:
6.1 DIRECTORS AND OFFICERS.
This Corporation shall indemnify its Directors and Officers to the full
extent permitted by the Washington Business Corporation Act now or hereafter in
force. However, such indemnity shall not apply on account of: (1) acts or
omissions of the Director or Officer finally adjudged to be intentional
misconduct or a knowing violation of law; (2) conduct of the Director finally
adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with
respect to which it was finally adjudged that such Director or Officer
personally received a benefit in money, property or services to which the
Director or Officer was not legally entitled.
This Corporation shall advance expenses for such persons pursuant to
the terms set forth in the Bylaws, or in a separate Directors' Resolution or
Contract.
6.2 EMPLOYEES AND AGENTS WHO ARE NOT DIRECTORS OR OFFICERS.
This Corporation shall indemnify and advance expenses to its employees
and agents who are not Directors or Officers to the extent authorized by the
Board of Directors or the Bylaws, and consistent with the law.
6.3 IMPLEMENTATION.
The Board of Directors may take such action as is necessary to carry
out these indemnification and expense advancement provisions. The Board is
expressly empowered to adopt, approve and amend from time-to-time such Bylaws,
resolutions, contracts or further
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indemnification and expense advancement arrangements as may be permitted by
law, implementing these provisions. Such Bylaws, resolutions, contracts or
further arrangements shall include, but not be limited to, implementing the
manner in which determinations as to any indemnity or advancement of expenses
shall be made.
6.4 SURVIVAL OF INDEMNIFICATION RIGHTS.
No amendment or repeal of this Article shall apply to or have any
effect on any right to indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
ARTICLE VII. PREEMPTIVE RIGHTS
Preemptive rights shall not exist with respect to shares of stock or
securities convertible into shares of stock of the Corporation.
ARTICLE VIII. CUMULATIVE VOTING
The Shareholders of the Corporation shall not have the right to
cumulate their votes in the election of Directors.
DATED: July ____, 1999.
TULLY'S COFFEE CORPORATION
By________________________
Tom T. O'Keefe
Its Chairman and Chief Executive Officer
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TULLY'S COFFEE CORPORATION
AMENDED AND RESTATED
1994 STOCK OPTION PLAN
1. INTRODUCTION
This Plan establishes the right of and procedures for TULLY'S COFFEE
CORPORATION (the "Company") to grant stock options to its key employees and
directors. The Plan provides for the granting of two types of options, namely
(1) Non-Qualified Stock Options to employees and directors and (2) Incentive
Stock Options to employees only as the latter are defined and governed by
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). This
Plan sets forth provisions applicable to both types of options, to Non-Qualified
Options only, to Incentive Stock Options only, and to the procedures allowed for
the conversion of Non-Qualified Stock Options into Incentive Stock Options.
2. PROVISIONS APPLICABLE TO BOTH NON-QUALIFIED OPTIONS AND INCENTIVE STOCK
OPTIONS
The provisions of this Section 2 apply to both Non-Qualified Options and
Incentive Stock Options granted by the Company.
2.1 OBJECTIVES OF THE PLAN
The purpose of this Plan is to encourage ownership of shares of common
stock of the Company by key employees and directors of the Company and any
current or future subsidiary. This Plan is intended to provide an incentive for
maximum effort in the successful operation and management of the Company and is
expected to benefit the shareholders by enabling the Company to attract and
retain individuals of the best available talent through the opportunity to
share, by the proprietary interests created by this Plan, in the increased value
of the Company's shares to which such individuals have contributed.
2.2 STOCK RESERVED FOR THIS PLAN
The number of shares of common stock of the Company reserved for issue upon
the exercise of options granted under this Plan shall not exceed four million
two hundred thousand (4,200,000) of the issued and outstanding shares of the
Company (the "Shares"), provided that, a portion of the shares so authorized may
be allocated to the 1999 Employee Stock Option Plan. The number of shares
allocated to each plan shall be determined by the Board of Directors of the
Company (the "Board"), but shall
<PAGE>
not exceed four million two hundred thousand (4,200,000) Shares for both
plans. Shares allocated to this Plan which are subject to any option under
this Plan which are not exercised in full or Shares as to which the right to
purchase is forfeited through default or otherwise, shall remain available
for other options under this Plan.
2.3 ADMINISTRATION OF THIS PLAN
This Plan will be administered by the Board. No member of the Board who is
or may become eligible to receive an option under this Plan and no member of the
Board who is not a "disinterested person" as that term is defined in
Section 16b(3) of the Securities Exchange Act of 1934 shall participate in the
deliberations or actions of the Board in respect to this Plan. A committee of
not less than three members of the Board who are disinterested persons shall be
appointed by the Board to carry out the administrative duties of the Board
hereunder.
A majority of the Board shall constitute a quorum, and acts of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Board, shall be deemed the acts of the
Board.
The Board on consideration of recommendations of the President and of other
officers, if the Board shall deem the same appropriate, shall:
(a) Determine the number of Shares subject to each option, the terms
thereof, and the type of options to be granted and direct the President, or
other officer in his absence, to issue each such option;
(b) Prescribe rules and regulations from time to time for
administration of this Plan; and
(c) Decide any questions arising as to the interpretation or
application of any provision of this Plan.
Any action, decision, interpretation, or determination by the Board with
respect to this Plan shall be final and binding upon any and all employees or
directors.
2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING OPTIONS
An option may be granted to any officer, key employee or director who, at
the time the option is granted, is an employee or director of the Company or of
any subsidiary. In its determination of an employee or director to whom an
option shall be granted and the number of Shares to be covered by such option,
the Board shall take into account the duties of the employee or director, the
present and potential contributions of the employee or director to the success
of the Company, the anticipated number of years of service remaining before the
attainment by the
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employee or director of the age of retirement, and other factors deemed
relevant by the Board in connection with accomplishing the purpose of this
Plan. An employee or director who has been granted an option to purchase
Shares of the Company, whether under this Plan or otherwise, may, if the
Board shall so determine, be granted additional options.
2.5 VESTING OF OPTIONS
The Board shall have the authority to establish the time of times at which
the optioned Shares may be purchased and whether all of the options may be
exercised at one time or in increments.
2.6 RIGHTS OF OPTIONEE IN EVENT OF MERGER, CONSOLIDATION, TENDER OFFER,
TAKEOVER BID, SALE OF ASSETS OR DISSOLUTION
(a) Notwithstanding anything in this Plan to the contrary, the
Optionee may purchase the full amount of optioned Shares for which options have
been granted to the Optionee and for which the options have not been exercised
under the following conditions:
(1) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing twenty-seven (27) days and ending (7) days
prior to the scheduled effective date of a merger or consolidation (as such
effective date may be delayed from time to time) wherein the Company is not to
be the surviving corporation, which merger or consolidation is not between or
among the Company and other corporations related to or affiliated with the
Company;
(2) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the initial date of a tender offer or
takeover bid for the Shares (other than a tender offer by the Company) subject
to the Securities Exchange Act of 1934 and the rules promulgated thereunder and
ending on the day preceding the scheduled termination date of acceptance of
tenders of Shares by the offeror under any such tender offer or takeover bid (as
such termination date may be extended by such offeror);
(3) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the date the shareholders of the Company
approve a sale of substantially all the assets of the Company and ending seven
(7) days prior to the scheduled closing date of such sale (as such closing date
may be delayed from time to time); and
(4) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the date the shareholders of the
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Company approve the dissolution of the Company and ending seven (7) days
prior to the scheduled effective date of such dissolution.
(b) If the merger, consolidation, tender offer, takeover bid, sale of
assets, or dissolution, as the case may be and as described in Subsections (1)
through (4) of Section 2.6(a), once commenced, is canceled or revoked, the
conditional purchase of Shares for which the option to purchase would not have
otherwise been exercisable at the time of said cancellation or revocation, but
for the operation of this Section 2.6, shall be rescinded. With respect to all
other Shares conditionally purchased, the Optionee may rescind such purchase at
his option.
(c) If the merger, consolidation, tender offer, takeover bid, or sale
of assets does occur or one hundred twenty (120) days passes after the effective
date of the dissolution of the Company, as the case may be and as described in
Subsections (1) through (4) of Section 2.6(a), and the Optionee has not
conditionally purchased all optioned Shares, all unexercised options shall
terminate on the effective, termination, or closing date, or one hundred twenty
(120) days after the effective date of said dissolution, as the case may be.
(d) If the Company shall be the surviving corporation in any merger
or is a party to a merger or consolidation which is between or among the Company
and other corporations related to or affiliated with the Company, any option
granted hereunder shall pertain and apply to the securities to which a holder of
the number of Shares of common stock subject to the option would have been
entitled.
(e) Nothing herein shall allow the Optionee to purchase optioned
Shares, the options for which have expired.
2.7 TERMS AND EXPIRATION OF OPTIONS
Each option granted under this Plan shall be in writing, shall be subject
to such amendment or modification from time to time as the Board shall deem
necessary or appropriate to comply with or take advantage of applicable laws or
regulations and shall contain provisions to the following effect, together with
such other provisions as the Board shall from time to time approve:
(a) That, subject to the provisions of Section 2.7(b) below, the
option, as to the whole or any part thereof, may be exercised only by the
Optionee or his personal representative;
(b) That neither the whole nor any part of the option shall be
transferable by the Optionee or by operation of law otherwise than by the will
of, or by the laws of descent and distribution applicable to, a deceased
Optionee and that the option and any and all rights granted to the Optionee
thereunder and not theretofore
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effectively and completely exercised shall automatically terminate and expire
upon any sale, transfer, or hypothecation of any attempted sale, transfer, or
hypothecation of such rights or upon the bankruptcy or insolvency of the
Optionee or his or her estate;
(c) That subject to the foregoing provisions, an option may be
exercised at different times for portions of the total number of option Shares
for which the right to purchase shall have vested provided that such portions
are in multiples of one hundred (100) shares;
(d) That the Optionee shall have no right to receive any dividend on
or to vote or exercise any right in respect to any Shares the certificate for
which has not been issued to him;
(e) That the option shall expire at the earliest of the following:
(1) The date specified in the option;
(2) Three (3) months after voluntary or involuntary termination
of Optionee's employment other than termination as described in paragraphs (3)
or (4) below;
(3) Upon the discharge of Optionee for misconduct, willfully or
wantonly harmful to the Company;
(4) One (1) year after Optionee's death or permanent and total
disability (within the meaning of Section 22 (e)(3) of the Code); or
(5) In the event of a merger, consolidation, tender offer,
takeover bid, sale of assets, or filing of Articles of Dissolution, as the case
may be and as described in Subsections (1) through (4) of Section 2.6(a), on the
date specified in Section 2.6(c). However, if the merger, consolidation, tender
offer, takeover bid, or sale of assets does not occur or if Articles of
Dissolution are revoked, as the case may be and as described in Subsections (1)
through (4) of Section 2.6(a), all options which are terminated pursuant to this
Subsection (e)(5) shall be reinstated as if no action with respect to any of
said events had been contemplated or taken by any party thereto and all
Optionees shall be returned to their position on the date of termination;
(f) That, to the extent an option provides for the vesting thereof in
increments, such vesting shall cease as of the date of the Optionee's death,
disability, or voluntary or involuntary termination of Optionee's employment
with the Company; and
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(g) That the terms of the option shall not be affected by any change
of duties or position so long as the Optionee shall continue to be employed by
the Company or a subsidiary.
2.8 NOTICE OF INTENT TO EXERCISE OPTION
The Optionee (or other person or persons, if any, entitled thereto
hereunder) desiring to exercise an option granted hereunder as to all or part of
the Shares covered thereby shall in writing notify the Company at its principal
office in Seattle, Washington, to the effect specifying the number of option
Shares to be purchased and, if required by the Company, representing in form
satisfactory to the Company that the Shares are being purchased for investment
and not with a view to resale or distribution. With respect to any Shares
conditionally purchased pursuant to Section 2.6(a) above and for which such
purchase has not been voluntarily or otherwise rescinded pursuant to
Section 2.6(b), the Optionee shall be deemed to have given to the Company the
notice of exercise required by this Section 2.8 as of ten (10) days prior to the
closing or effective date of the merger, consolidation, tender offer, takeover
bid, or sale of assets or as of the tenth (10th) day before the filing of
Articles of Dissolution, as the case may be and as described in Subsections (1)
through (4) of Section 2.6(a).
2.9 METHOD OF EXERCISE OF OPTION
Within ten (10) days after receipt by the Company of the notice provided in
the foregoing Section 2.8, but not later than the expiration date specified in
Section 2.7(e), the option shall be exercised as to the number of Shares
specified in the notice by payment to the Company of the amount specified in
either Section 3.2 or Section 4.5, as may be applicable. Payment of the
purchase price provided in the option shall be made in cash, in shares of the
Company's common stock owned by the Optionee, or in any combination of cash and
shares of the Company's common stock. Payment in shares of the Company's common
stock shall be deemed to be the equivalent of payment in cash of the fair market
value of those shares. For purposes of the preceding sentence, "fair market
value" shall be determined by the Board in the same manner as utilized in
determining the fair market value at the time other options are granted.
2.10 RECAPITALIZATION
The aggregate number of Shares for which options may be granted hereunder,
the number of Shares covered by each outstanding option and the price per Share
thereof in each such option shall be proportionally adjusted for an increase or
decrease in the number of outstanding shares of common stock of the Company
resulting from a division or consolidation of shares or any other increase or
decrease in such shares effected without receipt of consideration by the Company
excluding any decrease resulting from the purchase of shares for the treasury.
If the adjustment would result in a fractional share, the Optionee shall be
entitled to one (1) additional share, provided
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that the total number of shares to be granted under this Plan shall not be
increased above the equivalent number of Shares initially allocated or later
increased by approved amendment to this Plan.
2.11 SUBSTITUTIONS AND ASSUMPTIONS
The Board shall have the right to substitute or assume options in
connection with mergers, reorganizations, separations, or other "corporate
transactions" as that term is defined in and said substitutions and assumptions
are permitted by Section 424 of the Code and the regulations promulgated
thereunder. The number of Shares reserved pursuant to Section 2.2 may be
increased by the corresponding number of options assumed and, in the case of a
substitution, by the net increase in the number of Shares subject to options
before and after the substitution.
2.12 TERMINATION
The Board may at any time modify, amend, or terminate this Plan provided,
however, that no amendment or modification shall increase the number of Shares
as to which options may be granted under this Plan or change the class of
employee to whom options may be granted under this Plan. No amendment,
modification, or termination of the Plan may adversely affect options granted
prior to such action.
2.13 GRANTING OF OPTIONS
The granting of any option pursuant to this Plan shall be entirely in the
discretion of the Board and nothing herein contained shall be construed to give
any officer, employee or director any right to participate under this Plan or to
receive any option under it.
The granting of an option pursuant to this Plan shall not constitute any
agreement or an understanding, express or implied, on the part of the Company or
a subsidiary to employ the Optionee for any specified period.
2.14 GOVERNMENT REGULATIONS
This Plan and the granting and exercise of any option hereunder and the
obligations of the Company to sell and deliver Shares under any such option
shall be subject to all applicable laws, rules and regulations and to such
approvals by any governmental agencies as may be required.
2.15 PROCEEDS FROM SALE OF STOCK
Proceeds of the purchase of optioned Shares by an Optionee shall be for the
general business purposes of the Company.
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2.16 SHAREHOLDER APPROVAL
This Plan shall be submitted to the shareholders for their approval within
twelve (12) months from the date hereof. The Company may grant options prior to
such approval which shall be conditioned upon subsequent shareholder approval.
2.17 COMPLIANCE WITH SECURITIES LAWS
The Board shall have the right to:
(a) require an Optionee to execute, as a condition of the exercise of
an option, a letter evidencing Optionee's intent to acquire the Shares for
investment and not with a view to the resale or distribution thereof,
(b) place appropriate legends upon the certificate or certificates
for the Shares; and
(c) take such other acts as it deems necessary in order to cause the
issuance of optioned Shares to comply with applicable provisions of State and
Federal Securities Laws.
In furtherance of the foregoing, and not by way of limitation thereof, no
option shall be exercisable unless such option and the Shares to be issued
pursuant thereto shall be registered under appropriate Federal and State
Securities Laws, or shall be exempt therefrom, in the opinion of the Board upon
advice of counsel to the Company. Each option agreement shall contain adequate
provisions to assure that there will be no violation of such laws. This
provision shall in no way obligate the Company to undertake registration of
options or Shares hereunder. Issue, transfer or delivery of certificates for
Shares pursuant to the exercise of options may be delayed, at the discretion of
the Board, until the Board is satisfied that the applicable requirements of the
Federal and State Securities Laws have been met.
2.18 TERMINATION DATE OF PLAN
This Plan shall not extend beyond October 19, 2004.
3. PROVISIONS APPLICABLE SOLELY TO NON-QUALIFIED STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any options granted under this Plan which are not Incentive Stock
Options.
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3.1 OPTION PRICE
The option or purchase price of each Share optioned under this Plan shall
be determined by the Board at the time of the action for the granting of the
option.
3.2 METHOD OF EXERCISE OF OPTION
The amount to be paid by the Optionee upon exercise of a Non-Qualified
Option shall be the full purchase price thereof provided in the option, together
with the amount of federal, state, and local income and FICA taxes required to
be withheld by the Company. An Optionee may elect to pay his federal, state, or
local income and FICA withholding tax by having the Company withhold shares of
common stock of the Company having a value equal to the amount required to be
withheld. The value of the shares to be withheld is deemed to equal the fair
market value of the Shares on the day the option is exercised. An election by
an Optionee to have shares withheld for this purpose will be subject to the
following restrictions:
(a) If an Optionee has received multiple option grants, a separate
election must be made for each grant;
(b) The election must be made prior to the day the option is
exercised;
(c) The election will be irrevocable;
(d) The election will be subject to the disapproval of the Board;
(e) If the Optionee is an officer of the Company within the meaning
of Section 16 of the Securities Exchange Act of 1934 ("Section 16"), the
election may not be made within six (6) months following the grant of the
option; and
(f) If the Optionee is an officer of the Company within the meaning
of Section 16, the election must be made either six (6) months prior to the day
the option is exercised or the ten (10) day "window" beginning on the third day
following the release of the Company's quarterly or annual summary statement of
sales and earnings.
3.3 ELIGIBILITY
A Non-Qualified Option under this Plan may be granted to either employees
or directors of the Company as determined by the Board in accordance with
Section 2, above.
-9-
<PAGE>
4. PROVISIONS APPLICABLE SOLELY TO INCENTIVE STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any options granted under this Plan which are Incentive Stock
Options.
4.1 CONFORMANCE WITH INTERNAL REVENUE CODE
Options granted under this Plan which are "Incentive Stock Options" shall
conform to, be governed by and interpreted in accordance with Sections 422 and
424 of the Code and any regulations ("Regulations") promulgated thereunder and
amendments to the Code and Regulations.
4.2 OPTION PRICE
The option or purchase price of each Share optioned under the Incentive
Stock Option provisions of this Plan shall be determined by the Board at the
time of the action for the granting of the option but shall not, in any event,
be less than the fair market value of the Company's common stock on the date of
grant.
4.3 LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTION
The aggregate fair market value of the option Shares (determined as of the
date of grant) with respect to which an Optionee's right to exercise vest in any
one calendar year (under this Plan or any other plan of the Company which
authorized Incentive Stock Options) shall not exceed One Hundred Thousand
Dollars ($100,000).
4.4 LIMITATION ON GRANTS TO SUBSTANTIAL SHAREHOLDERS
An employee may not, immediately prior to the grant of an Incentive Stock
Option hereunder, own stock in the Company representing more than ten percent
(10%) of the voting power of all classes of stock of the Company unless the per
share option price specified by the Board for the Incentive Stock Options
granted such an employee is at least one hundred ten percent (110%) of the fair
market value of the Company's common stock on the date of grant and such option,
by its terms, is not exercisable after the expiration of five (5) years from the
date such option is granted.
4.5 METHOD OF EXERCISE OF OPTION
The amount to be paid by the Optionee upon exercise of an Incentive Stock
Option shall be the full purchase price thereof provided in the option.
-10-
<PAGE>
4.6 ELIGIBILITY
An Incentive Stock Option under this Plan may be granted to employees (but
not directors) of the Company as determined by the Board in accordance with
Section 2, above.
5. EXCHANGE OF NON-QUALIFIED OPTIONS FOR INCENTIVE STOCK OPTIONS
At the Optionee's election and in accordance with the procedures described
below, an Optionee may exchange a Non-Qualified Option granted pursuant to this
Plan for an Incentive Stock Option for the identical number of Shares.
5.1 NOTICE OF INTENT TO EXCHANGE
Not less than seven (7) days prior to the desired date of exchange, the
Optionee shall notify the Company in writing to that effect specifying the
number of option Shares granted under Non-Qualified Options which are to be
exchanged for option Shares granted under Incentive Stock Options and the
desired date of exchange.
5.2 LIMITATIONS ON AMOUNT OF OPTIONS EXCHANGED
Notwithstanding the number of option Shares specified by the Optionee as
desired to be exchanged pursuant to this Section 5, the Company will allow
exchanges for only so many options as will not violate the aggregate dollar
limitations specified in Section 4.3 above with that limit being based on a
calculation of the fair market value on the date of exchange. If an Optionee
requests to exchange more option Shares than would be allowed by the preceding
sentence, the Company shall deem the request to apply only to the maximum number
of option Shares which would be allowed and shall disregard the request as to
the excess.
5.3 EFFECT OF EXCHANGE
If an exchange does occur, the Optionee shall surrender the Non-Qualified
Option for cancellation and shall execute a new Incentive Stock Option for the
number of option Shares exchanged and, if all of the Non-Qualified Options have
not been exchanged, shall execute a new Non-Qualified Option (or an amendment to
the existing option) to specify the remainder of Shares under the Non-Qualified
Option. The new Incentive Stock Option shall be deemed a new option granted on
the date of exchange.
-11-
<PAGE>
DATE Amended Plan adopted by Board of Directors________________________________
DATE Amended Plan adopted by Shareholders______________________________________
DATE Amended Plan shall terminate______________________________________________
-12-
<PAGE>
TULLY'S COFFEE CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
Tully's Coffee Corporation (the "Company") does hereby establish its 1999
Employee Stock Purchase Plan (the "Plan") as follows:
1. PURPOSE OF PLAN. The purpose of this Plan is to provide eligible
employees who wish to become shareholders in the Company a convenient method of
doing so. It is believed that employee participation in the ownership of the
business will be to the mutual benefit of both the employees and the Company.
It is the intention of the Company to have the Plan qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986.
The provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that Section
of the Code.
2. DEFINITIONS.
2.1 "BASE PAY" means regular straight time earnings, plus review
cycle bonuses and overtime payments, payments for incentive compensation, and
other special payments except to the extent that any such item is specifically
excluded by the Board of Directors of the Company (the "Board").
2.2 "ACCOUNT" shall mean the funds accumulated with respect to an
individual employee as a result of deductions from his paycheck for the purpose
of purchasing stock under this Plan. The funds allocated to an employee's
account shall remain the property of the respective employee at all times but
may be commingled with the general funds of the Company.
2.3 "CODE" shall mean the Internal Revenue Code of 1986 as
further amended.
3. EMPLOYEES ELIGIBLE TO PARTICIPATE. Any regular employee of the
Company or any of its subsidiaries who is in the employ of the Company on one or
more offering dates is eligible to participate in the Plan, except (a) employees
whose customary employment is twenty (20) hours or less per week, and
(b) employees whose customary employment is for not more than five (5) months in
any calendar year.
4. OFFERINGS. There will be twelve separate consecutive six-month
offerings pursuant to the Plan. The first offering shall commence on January
1, 2000 and terminate June 30, 2000. Thereafter, offerings shall commence on
each subsequent July 1 and January 1 and terminate each succeeding December 31
and June 30, and the
<PAGE>
final offering under this Plan shall commence on July 1, 2005 and terminate
on December 31, 2005. In order to become eligible to purchase shares, an
employee must sign an Enrollment Agreement, and any other necessary papers on
or before the commencement date (January 1 or July 1) of the particular
offering in which he or she wishes to participate. Participation in one
offering under the Plan shall neither limit, nor require, participation in
any other offering.
5. PRICE. The purchase price per share shall be the lesser of: (1) 85%
of the fair market value of the stock on the offering date; or (2) 85% of the
fair market value of the stock on the last business day of the offering. Fair
market value shall mean the closing bid price as reported on the National
Association of Securities Dealers Automated Quotation System (the "NASDAQ"), or
if the stock is traded on a stock exchange, the closing price for the stock on
the principal such exchange. Until such time as the stock is reported on NASDAQ
or listed on an exchange, reference to the fair market value shall be determined
on such basis as shall be established or specified for that purpose by the Board
or by a committee selected by the Board. Notwithstanding any provision of the
Plan to the contrary, no determination made with respect to the fair market
value of common stock subject to an option shall be inconsistent with Section
423 of the Code or regulations promulgated thereunder.
6. OFFERING DATE. The "offering date" as used in this Plan shall be the
commencement date of the offering, if such date is a regular business day, or
the first regular business day following such commencement date. A different
date may be set by resolution of the Board.
7. NUMBER OF SHARES TO BE OFFERED. The maximum number of shares that may
be offered under the Plan shall not exceed four million two hundred thousand
(4,200,000) shares of the Company; provided that a portion of the shares so
authorized may be allocated to the 1994 Stock Option Plan. The number of shares
allocated to each plan shall be determined by the Board but shall not exceed
four million two hundred thousand (4,200,000) shares for both plans. The shares
to be sold to participants under the Plan will be common stock of the Company.
If the total number of shares allocated to this Plan for which options are to be
granted on any date in accordance with Section 10 exceeds the number of shares
then available under the Plan (after deduction of all shares for which options
have been exercised or are then outstanding), the Company shall make a pro rata
allocation of the shares remaining available in as nearly a uniform manner as
shall be practicable and as it shall determine to be equitable. In such event,
the payroll deductions to be made pursuant to the authorizations therefor shall
be reduced accordingly and the Company shall give written notice of such
reduction to each employee affected thereby.
-2-
<PAGE>
8. PARTICIPATION.
8.1 An eligible employee may become a participant by completing
an Enrollment Agreement provided by the Company and filing it with Shareholder
Services prior to the commencement of the offering to which it relates.
8.2 Payroll deductions for a participant shall commence on the
offering date, and shall end on the termination date of such offering unless
earlier terminated by the employee as provided in Paragraph 14.
9. PAYROLL DEDUCTIONS.
9.1 At the time a participant files his authorization for a
payroll deduction, he or she shall elect to have deductions made from his pay on
each payday during the time he or she is a participant in an offering at the
rate of 2%, 4%, 6%, 8%, or 10% of his base pay.
9.2 All payroll deductions made for a participant shall be
credited to his account under the Plan. A participant may not make any separate
cash payment into such account nor may payment for shares be made other than by
payroll deduction.
9.3 A participant may discontinue his participation in the Plan
as provided in Section 14, but no other change can be made during an offering
and, specifically, a participant may not alter the rate of his payroll
deductions for that offering.
10. GRANTING OF OPTION. On the offering date, this Plan shall be deemed
to have granted to the participant an option for as many full shares as he or
she will be able to purchase with the payroll deductions credited to his account
during his participation in that offering. Nothwithstanding the foregoing, no
participant may purchase more than 2,250 shares of stock during any single
offering.
11. EXERCISE OF OPTION. Each employee who continues to be a participant
in an offering on the last business day of that offering shall be deemed to have
exercised his option on such date and shall be deemed to have purchased from the
Company such number of full shares of common stock reserved for the purpose of
the Plan as his accumulated payroll deductions on such date will pay for at the
option price.
12. EMPLOYEE'S RIGHTS AS A SHAREHOLDER. No participating employee shall
have any right as a shareholder with respect to any shares until the shares have
been purchased in accordance with Section 11 above and the stock has been issued
by the Company.
-3-
<PAGE>
13. EVIDENCE OF STOCK OWNERSHIP.
13.1 Promptly following the end of each offering, the number of
shares of common stock purchased by each participant shall be deposited into an
account established in the participant's name at a stock brokerage or other
financial services firm designated by the Company (the "ESPP Broker").
13.2 The participant may direct, by written notice to the Company
at the time of his enrollment in the Plan, that his ESPP Broker account be
established in the names of the participant and one other person designated by
the participant, as joint tenants with right of survivorship, tenants in common,
or community property, to the extent and in the manner permitted by applicable
law.
13.3 A participant shall be free to undertake a disposition (as
that term is defined in Section 424(c) of the Code) of the shares in his account
at any time, whether by sale, exchange, gift, or other transfer of legal title,
but in the absence of such a disposition of the shares, the shares must remain
in the participant's account at the ESPP Broker until the holding period set
forth in Section 423(a) of the Code has been satisfied. With respect to shares
for which the Section 423(a) holding period has been satisfied, the participant
may move those shares to another brokerage account of participant's choosing or
request that a stock certificate be issued and delivered to him.
13.4 A participant who is not subject to payment of U.S. income
taxes may move his or her shares to another brokerage account of his or her
choosing or request that a stock certificate be issued and delivered to him or
her at any time, without regard to the satisfaction of the Section 423(a)
holding period.
14. WITHDRAWAL.
14.1 An employee may withdraw from an offering, in whole but not
in part, at any time prior to the last business day of such offering by
delivering a Withdrawal Notice to the Company, in which event the Company will
refund the entire balance of his or her deductions as soon as practicable
thereafter.
14.2 To re-enter the Plan, an employee who has previously
withdrawn must file a new Enrollment Agreement in accordance with Section 8.1.
The employee's re-entry into the Plan will not become effective before the
beginning of the next offering following the employees' withdrawal, and if the
withdrawing employee is an officer of the Company within the meaning of
Section 16 of the Securities Exchange Act of 1934, the employee may not re-enter
the Plan before the beginning of the second offering following his or her
withdrawal.
15. CARRYOVER OF ACCOUNT. At the termination of each offering the Company
shall automatically re-enroll the employee in the next offering, and the
-4-
<PAGE>
balance in the employee's account shall be used for option exercises in the
new offering, unless the employee has advised the Company otherwise. Upon
termination of the Plan, the balance of each employee's account shall be
refunded to him or her.
16. INTEREST. No interest will be paid or allowed on any money in the
accounts of participating employees.
17. RIGHTS NOT TRANSFERABLE. No employee shall be permitted to sell,
assign, transfer, pledge, or otherwise dispose of or encumber either the
payroll deductions credited to that employees account or any rights with regard
to the exercise of an option or to receive shares under the Plan other than by
will or the laws of descent and distribution, and such right and interest shall
not be liable for, or subject to, the debts, contracts, or liabilities of the
employee. If any such action is taken by the employee, or any claim is asserted
by any other party in respect of such right and interest whether by garnishment,
levy, attachment or otherwise, such action or claim will be treated as an
election to withdraw funds in accordance with Section 14.
18. TERMINATION OF EMPLOYMENT. Upon termination of employment for any
reason whatsoever, including but not limited to death or retirement, the balance
in the account of a participating employee shall be paid to the employee or the
employee's estate.
19. AMENDMENT OR DISCONTINUANCE OF THE PLAN. The Board shall have the
right to amend, modify, or terminate the Plan at any time without notice,
provided that no employee's existing rights under any offering already made
under Section 4 hereof may be adversely affected thereby, and provided further
that no such amendment of the Plan shall, except as provided in Section 20,
increase the shares to be offered above the total number of shares to be offered
unless shareholder approval is obtained therefor.
20. CHANGES IN CAPITALIZATION. In the event of reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, offerings of rights, or any other change in the structure of the
common shares of the Company, the Board may make such adjustment, if any, as it
may deem appropriate in the number, kind, and the price of shares available for
purchase under the Plan, and in the number of shares which an employee is
entitled to purchase.
21. SHARE OWNERSHIP. Notwithstanding anything herein to the contrary, no
employee shall be permitted to subscribe for any shares under the Plan if such
employee, immediately after such subscription, owns shares (including all shares
which may be purchased under outstanding subscriptions under the Plan)
possessing 5% or more of the total combined voting power or value of all classes
of shares of the Company or of its parent or subsidiary corporations. For the
foregoing purposes the rules of Section 425(d) of the Code shall apply in
determining share ownership. In addition, no employee shall be allowed to
subscribe for any shares under the Plan
-5-
<PAGE>
which permits him or her rights to purchase shares under all "employee stock
purchase plans" (as described in Section 423 of the Code) of the Company and
its subsidiary corporations to accrue at a rate which exceeds $25,000 of the
fair market value of such shares (determined at the time such right to
subscribe is granted) for each calendar year in which such right to subscribe
is outstanding at any time.
22. ADMINISTRATION. The Plan shall be administered by the Board. The
Board shall be vested with full authority to make, administer, and interpret
such rules and regulations as it deems necessary to administer the Plan, and any
determination, decision, or action of the Board in connection with the
construction, interpretation, administration, or application of the Plan shall
be final, conclusive, and binding upon all participants and any and all persons
claiming under or through any participant. The Board may delegate any or all of
its authority hereunder to such committee as it may designate.
23. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received by Shareholder Services of the Company or when received in
the form specified by the Company at the location, or by the person, designated
by the Company for the receipt thereof.
24. TERMINATION OF THE PLAN. This Plan shall terminate at the earliest of
the following:
24.1 December 31, 2005.
24.2 The date of the filing of a Statement of Intent To Dissolve
by the Company or the effective date or a merger or consolidation wherein the
Company is not to be the surviving corporation, which merger or consolidation is
not between or among corporations related to the Company. Prior to the
occurrence of either of such events, on such date as the Company may determine,
the Company may permit a participating employee to exercise the option to
purchase shares for as many full shares as the balance of his account will allow
at the price set forth in accordance with Section 5. If the employee elects to
purchase shares, the remaining balance of such employees account will be
refunded to him or her after such purchase.
24.3 The date the Board acts to terminate the Plan in accordance
with Section 19 above.
24.4 The date when all shares reserved under the Plan have been
purchased.
25. LIMITATIONS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is
intended to provide common stock for investment and not for resale. The Company
-6-
<PAGE>
does not, however intend to restrict or influence any employee in the conduct
of his own affairs. An employee, therefore, may sell stock purchased under
the Plan at any time he or she chooses, subject to compliance with any
applicable Federal or state securities laws. THE EMPLOYEE ASSUMES THE RISK
OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
26. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Company's common stock under this Plan is subject to the approval
of any governmental authority required in connection with the authorization,
issuance, or sale of such shares.
-7-
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<PAGE>
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