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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TULLY'S COFFEE CORPORATION
(Exact name of issuer as specified in its charter)
WASHINGTON 91-1557436
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2010 AIRPORT WAY SOUTH, SEATTLE, WASHINGTON 98134
(Address of registrant's principal executive's offices) (Zip Code)
Registrant's telephone number, including area code (206) 233-2070
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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ITEM 1. BUSINESS
GENERAL
Tully's Coffee Corporation and its subsidiary (collectively
"Tully's" or the "Company") have 59 Company-operated retail stores in the
Seattle/Western Washington, San Francisco/Northern California, and Sun
Valley, Idaho markets. The Company sells high quality, premium roasted whole
bean coffees, rich brewed coffees, Italian-style espresso and cold beverages,
baked goods and pastries along with coffee-related hardware and supplies. In
addition to its Company-operated stores, Tully's has 15 licensed stores in
Asia and 3 licensed stores in the San Francisco International airport.
Tully's also sells its products to wholesale accounts and provides office
coffee service. The Company's philosophy is straightforward - provide an
upscale atmosphere, with quick, friendly service where customers can relax
and enjoy some of the finest coffee and espresso drinks available. It is
management's goal to make each location warm and inviting with employees who
go out of their way to make customers feel special. The Company believes that
developing customer loyalty and brand recognition is of the utmost importance
in its business and expansion strategy.
COMPANY BACKGROUND
Tully's was incorporated in July of 1992, after its founder and
Chairman of the Board, Tom T. O'Keefe, determined an opportunity to develop,
own and operate a chain of specialty coffee stores existed in the greater
Puget Sound area. Mr. O'Keefe is the owner of a company, which owns and
manages several commercial and retail properties in the area that was
approached by numerous companies, including Starbucks Corporation, inquiring
about locating specialty coffee stores in the properties owned and managed by
his company. As a result, Mr. O'Keefe began researching the specialty coffee
industry and determined an opportunity existed for development of an
organization focused on the sale of high-quality coffee beans, coffee drinks
and coffee related products in an upscale atmosphere which emphasized customer
service. On September 16, 1992 Tully's opened its first store in Kent,
Washington. In January 1995 Tully's moved into the former Starbucks Coffee
roasting plant and headquarters where it maintains its executive offices,
warehouse and coffee roasting facilities. Tully's opened 12 stores in fiscal
year 1999 (ending March 28, 1999), and acquired 11 Company-operated and 11
licensed stores through the purchase of Spinelli Coffee Company. Tully's
address is 2010 Airport Way South, Seattle, Washington 98134. Its telephone
number is (206) 233-2070 or 1-800-96Tully.
THE BUSINESS OF TULLY'S COFFEE
The Company wants each Tully's location to be a warm and inviting
atmosphere that will attract customers and encourage those customers to stay
and enjoy its coffee, espresso and other beverages and food products. Tully's
seeks to employ people who contribute to the "Coffee experience" of its
customers.
Tully's strives to develop customer loyalty and brand recognition by
providing superior service and offering quality coffee products that are
competitively priced. Management believes that the Company's staff is well
trained and knowledgeable about the coffee products offered for sale. It is the
Company's belief that customer service, along with product freshness,
consistency and variety, have become its trademark.
Another important element of the Company's strategy is to become an
integral part of the local communities it serves. This is accomplished in a
variety of ways such as becoming involved with fundraisers and charitable
organizations, participating in primary and secondary school programs and by
providing jobs to area high school students. Community involvement not only
helps the Company by building goodwill, but also strengthens its market
position.
The Company's objective is to establish Tully's as the most
respected brand of coffee in the world. As part of this brand building
strategy, the Company has carried a management infrastructure larger than
required for a comparable sized company that is not growing and has spent
significant amounts marketing and building its brand. This decision was made
consciously and in anticipation of continuing growth. Tully's combination of
strong comparable store sales growth, new store openings and a growing
wholesale business are a result of this brand building effort.
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MARKETING, SALES AND CUSTOMER SERVICE
STORES
Tully's focus on consistency and quality in both its products and
customer service is the basis for its marketing program as the Company strives
for increased exposure in the community. Stores and kiosks are intended to be
billboards themselves as the Company opens new locations. Point of sale signage,
custom bags, boxes, cups, gift sets, products and literature with the Company's
distinctive name and logo are intended to increase name awareness and to portray
the Company's image in terms of color, layout, typeface, wording, graphics and
display.
WHOLESALE
Tully's uses its wholesale and office coffee service accounts to
provide additional opportunities for coffee consumers to experience the
Company's coffee and reinforce its branded logo and name. The Company's product
is delivered to its wholesale and coffee service accounts in branded
packaging. Tully's also provides logoed coffee cups, banners and point of use
signage to these accounts. This type of secondary brand marketing reinforces
the Company's brand awareness and exposes the Company's coffee products to
coffee consumers who may not have previously sampled the products in one of
its stores. The Company believes that the quality of its products sells them
to these coffee consumers and that by identifying the product as Tully's, a
potential new customer for its retail stores and wholesale division is
created.
COMMUNITY
Tully's commitment to local community involvement is another key
element of its marketing strategy. The Company has provided and is planning on
continuing to provide monetary, service and/or product donations to a host of
local non-profit organizations, including schools, sports teams, churches, food
banks, charity and service organizations. The Company also provides product and
resource donations to national organizations including the Cystic Fibrosis
Foundation, the Juvenile Diabetes Foundation, Childhaven and Big Brothers and
Sisters. Such community involvement often times results in the Company's name
and logo being displayed in promotional materials for organizations and
events, at events themselves and in media coverage of the organization or
event.
SEATTLE MARINERS BASEBALL TEAM AND SAFECO FIELD
Tully's strives to establish brand name and product recognition by
making its products available in high volume consumer areas. An example of this
strategy is the Company's agreement with the Seattle Mariners Baseball
Organization.
In 1999, Tully's entered into a five-year agreement with the Seattle
Mariners Baseball Organization under which the Company operates a store in
Safeco Field, the team's home field. As the "Official Coffee of the Seattle
Mariners", Tully's sells its coffee and cups to the food concessionaire and
all coffee sold in at Safeco Field is Tully's coffee in Tully's logo cups.
Tully's receives prominent exposure during each game through a variety of
signage arrangements in Safeco Field, including a large permanent sign with
its name and logo on the left field wall. The Company may associate its logo
with the Mariners logo in promotions. The partnership provides the Company
exposure to millions of people annually through local and national television
broadcasts.
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MEDIA
In media, Tully's strives for a fun and lively, yet professional
feel to its promotions. Newspaper ads and radio and television spots are
designed to portray the warm, friendly, sophisticated feel of the stores as
grand openings, hiring, product specials, community involvement and special
events are announced. Management believes that the various forms of planned and
spontaneous media coverage the Company has experienced have given it positive,
repeat exposure to potential as well as existing customers.
EXPANSION
The Company's principal strategy for expansion is new store
development. Depending upon the amount of capital resources available to it,
during the next 12 months the Company anticipates opening a number of
additional retail locations in the Seattle and San Francisco Bay areas.
The Company's development plans also include expansion into other
major North American cities. In executing this strategy the Company believes
it will be most successful if it develops a nucleus of stores in each new
location with emphasis on high-density metropolitan locations. Management
believes that once it has established a strong identity in these metropolitan
locations, the surrounding suburban retail areas will provide adequate growth
capability within these market areas.
The Company may also expand operations through strategic acquisitions.
It used the acquisition of Spinelli Coffee Company to establish store
operations in the San Francisco Bay area. This type of acquisition strategy
allows the Company to move into a new geographic area with a base of operating
stores in locations which fit the Company's store profile. This provides the
Company with an established infra-structure for operations in the new area
from which the Company can further expand. It also gives the Company an
established customer base for its store operations. At the present time the
Company has not extended into any agreements for future acquisitions.
The Company's overseas operations are currently conducted through
licensing arrangements. It expects that for the foreseeable future its overseas
operations will continue to be conducted through its existing licensing
arrangements, and possibly new agreements, none of which are imminent. The
Company believes that its licensees intend to aggressively pursue expansion in
their respective territories.
COMPETITION
The specialty coffee market is highly competitive. Some of Tully's
competitors have greater financial and marketing resources and brand name
recognition combined with a larger customer base than Tully's. Tully's
competes with a number of specialty coffee retailers including Starbuck's
Coffee, SBC and Peet's Coffee & Tea as well as other lesser
know companies. Nationally, coffee manufacturers such as Kraft, General
Foods, Proctor and Gamble, and Nestle distribute coffee products in
supermarkets and convenience stores, which may serve as substitutes for
Tully's coffees and coffee drinks. Tully's coffee beverages compete directly
against all restaurant and beverage outlets that serve coffee and a growing
number of espresso stands, carts, and stores. Tully's whole bean coffees and
its coffee beverages compete indirectly against all other coffees on the
market. Tully's believes that its customers choose among retailers primarily
on the basis of product quality, service and convenience, and, to a lesser
extent, on price.
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The development of the specialty coffee industry has shown that there
is room for a variety of retailers, each seeking its own niche. Management
acknowledges that there is a high concentration of specialty coffee outlets
(stores, carts, kiosks, and drive throughs) in both Seattle and San Francisco,
but believes these markets are highly fragmented. There are many single location
operators. Tully's believes that it has developed significant brand identity and
customer loyalty which gives it a competitive advantage over the numerous single
location operators.
Management believes there are certain areas within each city which are
important to Tully's development and marketing due to their demographics,
visibility and/or population density. These areas are primary Company targets
for new retail stores. Industry competitors often target the same areas for
similar reasons. Tully's has and will continue to open new retail stores in
these areas, even if it means being across the street or in the same office
building as a competitor.
Tully's faces intense competition for suitable new store sites
and for qualified personnel to operate both new and existing stores. There
can be no assurance that Tully's will be able to continue to secure sites at
acceptable rent levels or that Tully's will be able to attract a sufficient
number of qualified workers. Tully's wholesale and office coffee service
businesses also face significant competition from established wholesale and
mail order suppliers, many of whom have greater financial and marketing
resources than Tully's.
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STORE OPERATIONS AND MANAGEMENT / EMPLOYEES
As of July 1, 1999, Tully's employed 545 people, of which approximately
500 are in retail stores or regional personnel, with the remainder in the
Company's administrative, wholesale, roasting and warehouse operations. All
employees are non-union and management anticipates this will continue to be the
case. Approximately 220 of its employees are full-time.
Tully's knows that its employees are an integral part of its business,
and has structured its benefit program accordingly. Employees who consistently
work 20 hours or more per week are considered full time employees, who are
eligible for vacation, holidays, medical and dental insurance, childbirth and
sick leave. To promote product loyalty and enhance expertise, all employees
receive discounts on beverages and resale items. Each employee also becomes a
shareholder. Upon successfully completing barista skills testing, the employee
is granted 100 shares of stock. Tully's believes that its current relations with
the employees are excellent.
To maintain Tully's high standards of quality products and customer
service, all employees complete a 3 day training course prior to working in a
Company store, plus 16 hours committed to on-site training while working in a
store. Training hours are devoted to orientation, which includes Company
history and philosophy, as well as cash register and paperwork procedures,
store equipment use, cash handling, retail product knowledge, sales techniques,
customer service and thorough familiarization with Tully's Employee Handbook.
Training also includes Coffee 101, an intensive course which examines coffee
history, roasting, decaffeination processes, and tastings, or cuppings, of
Tully's proprietary blends. Barista testing concludes the training program, with
extensive, hands on drink preparation.
Tully's is committed to attracting and retaining the best people in the
coffee business. It has developed a sense of partnership with its employees
through its corporate culture, employee ownership and quality employee benefits.
As continued evidence of this, Tully's has adopted a Stock Option Plan, a
Stock Purchase Plan and a 401k plan to help attract and retain employees. The
401k plan will be offered to participating employees to enable them to
accumulate wealth for retirement on a tax-deferred basis. Participation in
the plan will be voluntary. Employee's electing to participate will make
pre-tax contributions from their salary. Tully's may make discretionary
matching contributions for employees that participate, adding to employee
account balances. Any Company contribution will be vested over several years
and will be designed to reward employee loyalty.
SUPPLIERS AND EQUIPMENT VENDORS
COFFEE MARKETS. Coffee is the world's second largest agricultural product and is
grown commercially in over fifty countries in tropical regions of the world. The
price and supply of coffee are subject to significant volatility. While most
coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. There are many varieties of coffee and a range of quality grades
within each variety. Tully's purchases only premium grade arabica coffee beans
and believes these beans are the best available from each producing region. We
seek to purchase the finest qualities and varieties of coffee by identifying the
unique characteristics and flavor of the varieties available from each region of
the world. The background and experience of our personnel allows us to maintain
our commitment to serve and sell only the highest quality coffee.
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The supply and price of coffee can be affected by multiple factors in
the producing countries, including weather and economic and political
conditions. In addition, green coffee prices have been affected in the past,
and may be affected in the future, by the actions of certain organizations and
associations that have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting
coffee supplies worldwide.
During the buying season, we may enter into forward commitments for the
purchase of green coffee that may only be available in small quantities.
Rotating our coffee selection enables us to provide our customers with a wider
variety of coffees, as well as certain coffees that are available only on a
seasonal basis. We contract for future delivery of green coffee to help ensure
adequacy of supply. As of July 20, 1999, the Company had approximately
$1,200,000 in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee well into
fiscal year 2000. Tully's believes, based on relationships established with
its suppliers in the past, that the risk of non-delivery on such purchase
commitments is remote.
ROASTING. Tully's procures and roasts green coffee beans to its
exacting specifications at its roasting plants in Seattle and San Francisco.
We employ a roasting process that varies based upon the variety, quality,
origin and physical characteristics of the coffee beans being roasted. Each
batch is craft roasted to maximize the flavor characteristics of each batch.
FRESHNESS. The Company is able to roast to order for its retail and
wholesale and office coffee service accounts. All of the Company's retail
stores and wholesale customers receive fresh roasted coffee shipped promptly
after roasting.
EQUIPMENT AND STORE SUPPLIES. Tully's purchases the equipment, fixtures
and supplies for its retail store locations from a number of different vendors.
We do not have agreements with any of these vendors. The materials are purchased
through purchase orders on an as needed basis. In the past we have used
different vendors for the same type of equipment and supplies as we searched
for the best sources and best vendors to meet our requirements. As Tully's has
expanded, we have attempted to standardize our purchasing systems and begun to
use particular vendors and suppliers for particular products on a more regular
basis. We believe that this means that Tully's relationships with its vendors
will develop into reliable, long-term relationships that will benefit Tully's.
However, if for some reason a particular supplier or vendor is unable to meet
our needs, begins to deliver unsatisfactory materials or is not price
competitive, Tully's believes that there are a number of alternative sources
to meet all of its equipment, store supplies and other materials needs.
GOVERNMENTAL REGULATION
Tully's is subject to the general laws and regulations relating to the food
service industry. There are no specific laws or regulations that govern the
coffee industry as a whole, or coffee retailers specifically, that are
materially different than other retail or wholesale food businesses.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Tully's is subject to foreign currency exchange rate exposure,
primarily related to its retail operations in Asia. At the present time, Tully's
does not hedge foreign currency risk, but may hedge known transaction exposure
in the future.
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PATENTS AND TRADEMARKS
Tully's does not hold any patents. The Company owns several
trademarks that are registered with the United States Patent and Trademark
Office, including Swirkle-Registered Trademark- and Tullini-Registered
Trademark. In addition, it has applied for federal trademark registration in
the United States for, Tully's-TM-. Since Tully's filed the federal trademark
registration it has received notice that two other companies are claiming
rights to the trademark Tully's. Tully's believes that the claim of one of
these companies is not likely to impact Tully's because that company filed
its application after Tully's and apparently cannot demonstrate use of the
trademark prior to Tully's. The second company also filed its own trademark
application after the Company. This Company has filed an objection to the
issuance of a trademark to the Company. It is claiming use of a Tully's
trademark prior to the Company. If it can successfully support its claim,
then it may be granted an exclusive right to use of the trademark in certain
geographic areas in connection with its current and possibly future
operations. It currently operates a chain of 4 restaurants in up-state New
York. At the present time Tully's and the second company are conducting
discovery related to the relative rights that each party has in the Tully's
tradename.
Tully's has also filed for various trademark registrations in several
countries outside the United States. These filings are in various stages of the
registration process.
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 Tully's fiscal year that includes the December 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 of Tully's business, results for any
quarter are not necessarily indicative of the results that may be achieved for
the full fiscal year.
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ITEM 2. FINANCIAL INFORMATION.
SELECTED TULLY'S COFFEE FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations," our Consolidated Financial Statements and Notes
thereto and other financial information included elsewhere in this registration
statement. The selected consolidated statements of operations data for each of
the three fiscal years ended on the Sunday closest to March 31, and the
selected consolidated balance sheet data at fiscal year end are derived from
our audited consolidated financial statements which are included elsewhere in
this registration statement. The selected consolidated statements of
operations data for the fiscal year ends March 31, 1996 and April 2, 1995 and
the consolidated balance sheet data at March 31, 1996 and April 2, 1995 have
been derived from audited consolidated financial statements that have not
been included herein.
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<TABLE>
<CAPTION>
YEAR ENDED
PRO FORMA YEAR ---------------------------------------------------------------
ENDED MARCH 29, MARCH 28, MARCH 29, MARCH 30, MARCH 31, APRIL 2,
1999(1) 1999(2) 1998 1997 1996 1995
-------------- ---------- ---------- ---------- --------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net Sales $ 22,180 $ 20,210 $ 9,020 $ 5,430 $ 2,710 $ 1,520
Operating Expenses
Cost of goods sold and related occupancy
costs 11,370 10,710 5,010 2,850 1,530 865
Selling, general and administrative costs 13,290 12,090 6,100 3,620 2,330 1,395
Stock option expense 830 830 565 630 410 40
Depreciation and amortization 1,784 1,670 615 450 230 115
---------- ---------- ---------- ---------- --------- -------
27,274 25,300 12,290 7,550 4,500 2,415
---------- ---------- ---------- ---------- --------- -------
Operating loss 5,094 5,090 3,270 2,120 1,790 895
Other expense (income):
Interest expense 889 830 260 170 30 10
Loan guarantee fee expense 730 730 290 180 - -
Miscellaneous, net (50) (70) - 10 - -
---------- ---------- ---------- ---------- --------- -------
Net loss 6,663 6,580 3,820 2,480 1,820 905
Preferred stock dividend/accretion 5,970 5,970 - - - -
---------- ---------- ---------- ---------- --------- -------
Net loss applicable to common stockholders $ 12,633 $ 12,550 $ 3,820 $ 2,480 $ 1,820 $ 905
---------- ---------- ---------- ---------- --------- -------
---------- ---------- ---------- ---------- --------- -------
Basic and diluted loss per share $ 0.88 $ 0.88 $ 0.29 $ 0.20 $ 0.19 $ 0.92
---------- ---------- ---------- ---------- --------- -------
---------- ---------- ---------- ---------- --------- -------
Shares used in calculating net loss per share 14,298,754 14,298,754 13,366,176 12,687,569 9,409,162 982,854
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) (5,800) (1,620) (100) 50 (770)
Total assets 20,720 8,080 3,980 3,110 1,430
Long-term debt and bank lines of credit,
including current portion 130 4,260 2,520 930 70
Stockholders' equity (3) 9,980 430 430 1,230 360
</TABLE>
(1) Gives effect to the acquisition of Spinelli Coffee Company ("Spinelli")
as if it had occurred on March 30, 1998. See "Unaudited Combined Pro Forma
Financial Information."
(2) Includes nine months of operations data as a result of Tully's
acquisition of Spinelli Coffee Company. See "Unaudited Combined Pro Forma
Financial Information."
(3) Reflects the issuance of additional preferred stock. See "Item 10--Recent
Sales of Unregistered Securities."
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 Tully'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 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.
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The following is a discussion and analysis of the financial condition
and results of operations of Tully's Coffee and should be read in conjunction
with Tully's Coffee financial statements and notes thereto.
OVERVIEW
As of March 28,1999, Tully's had 59 Company-operated stores and 18
licensed stores operating in 3 states and 3 foreign countries. Tully's
operates coffee roasting facilities in Seattle, Washington and San Francisco,
California. Tully's acquired 22 stores in fiscal 1999 through its acquisition
of Spinelli Coffee Company in June, 1998. Tully's sells high quality, premium
roasted whole bean coffees, rich brewed coffees, Italian-style espresso and
cold beverages, baked goods and pastries along with coffee-related hardware
and supplies.
GENERAL
Tully's derives approximately 87% of net sales from its
Company-operated retail stores. Domestic and international wholesale, office
coffee service and mail order account for the remaining 13% net sales.
The Company's fiscal year ends on the Sunday Closest to March 31.
Fiscal years 1999, 1998 and 1997 all included 52 weeks. The fiscal year ending
April 2, 2000 will include 53 weeks.
Net sales increased to $20,207,000 in fiscal 1999 from $9,020,000 in
fiscal 1998 due primarily to the Company's acquisition of Spinelli, its store
expansion program and comparable store sales increases. Comparable store sales
increased by 14% for fiscal 1999 and fiscal 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED:
MARCH 28, MARCH 29, MARCH 30,
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net Sales 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------
Cost of goods sold and related
occupancy costs 53.0% 55.5% 52.5%
Selling, general and administrative 59.8% 67.6% 66.7%
Stock option expense 4.1% 6.2% 11.6%
Depreciation and amortization 8.3% 6.8% 8.3%
- -------------------------------------------------------------------------------
Operating loss -25.2% -36.3% -39.0%
Interest income (expense) -4.1% -2.9% -3.1%
Loan guarantee fee expense -3.6% -3.2% -3.3%
Miscellaneous, net 0.3% 0.0% -0.2%
- -------------------------------------------------------------------------------
Net loss -32.6% -42.4% -45.7%
- -------------------------------------------------------------------------------
</TABLE>
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FISCAL YEAR ENDED MARCH 28, 1999, COMPARED TO FISCAL YEAR ENDED
MARCH 29, 1998
REVENUES
Net sales for fiscal year 1999 (ended March 28, 1999), increased
124% to $20,207,000 from $9,020,000 for fiscal 1998. The Spinelli acquisition
accounted for approximately $5,800,000 of their increase. Retail sales
increased 108% to $17,537,000 from $8,451,000, due to the addition of new
Company-operated stores combined with an increase in comparable store sales of
14%. Comparable store sales increases resulted from an increase in the number
of transactions combined with an increase in the average dollar value per
transaction. During fiscal 1999, the Company opened 12 new stores and acquired
11 Company-operated stores and 11 licensed stores with the Spinelli purchase.
At fiscal year end, there were 59 Company-operated stores and 3 licensed
stores in North America and 15 licensed stores in Singapore, Taiwan and Japan.
Domestic and international wholesale, office coffee service and mail
order sales increased 369% to $2,670,000 for fiscal 1999 compared with $569,000
for fiscal 1998 due to new accounts and the Spinelli purchase.
OPERATING EXPENSES
Cost of goods sold and related occupancy costs as a percent of net
sales decreased to 53.0% for fiscal 1999 from 55.5% for fiscal year 1998. This
decrease was due primarily to lower green coffee cost.
Selling, general and administrative costs as a percentage of net sales
decreased to 59.8% in fiscal 1999 from 67.6% in fiscal 1998. This decrease was
due primarily to lower store labor, general and administrative and marketing
costs as a percentage of net sales.
As a percent of net sales, stock option expense decreased to 4.1% for
fiscal 1999 from 6.2% for fiscal year 1998. The expense is a noncash charge
representing the difference between the exercise price and fair market value of
the stock at the date of grant. Stock option expense is comprised primarily of
options to purchase common stock granted to officers and key employees by
Tully's majority stockholder. The options were issued from the majority
stockholder's shares rather than newly issued shares of Tully's to avoid
diluting the other stockholders.
Depreciation and amortization as a percentage of net sales increased to
8.3% for fiscal 1999 from 6.8% for fiscal 1998 due primarily to the purchase of
Spinelli and the amortization of goodwill associated with that transaction.
INTEREST AND OTHER EXPENSES (INCOME)
Interest expense for fiscal 1999 was $834,000 compared to $258,000 for
fiscal 1998. The increase was due to higher average borrowings on the Company's
bank line of credit, the issuance of convertible debt and the assumption of debt
with the Spinelli purchase.
Miscellaneous income is primarily royalties and fee income from the
Company's Asian licensees acquired with Spinelli.
Loan guarantee fee expense for fiscal 1999 was $729,000 compared with
$295,000 for fiscal
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1998. This non-cash expense is for options granted to the CEO and a Board
member to purchase common stock of the Company, issued in exchange for the
guarantees of the bank line of credit.
Management believes the combination of strong comparable store sales
growth, new store openings and a growing wholesale business together with
slower growth in selling, general and administrative expenses and stock
option expenses will allow the Company to achieve profitable operations.
While the Company has experienced increased losses while it has been
expanding, net losses as a percentage of net sales have decreased by 9.8%
comparing FY '99 with FY '98. Management expects this trend to continue.
Throughout fiscal 1999, 1998 and 1997, the Company has carried a management
infrastructure larger than required for a comparable sized company that is
not growing and has spent significant amounts marketing and building its
brand. This decision was made consciously and in anticipation of continuing
growth. The Company believes that selling, general and administrative
expenses and stock offering expenses, both of which are a function of this
infrastructure, are expected to grow much slower than net sales.
FISCAL YEAR ENDED MARCH 29, 1998, COMPARED TO FISCAL YEAR ENDED MARCH 30, 1997
REVENUES
Net sales for fiscal year 1998 increased 66% to $9,020,000 from
$5,430,000 for fiscal 1997. Retail sales increased 65% to $8,450,000 from
$5,132,000, due to the addition of new Company-operated stores combined with an
increase in comparable store sales of 14%. Comparable store sales increases
resulted from an increase in the number of transactions combined with an
increase in the average dollar value per transaction. During fiscal 1998, the
Company opened 11 new stores. At fiscal year end, there were 33 Company-operated
stores and 3 licensed stores in Asia.
Domestic and international wholesale, office coffee service and mail
order sales increased 91% to $569,000 for fiscal 1998 compared with $298,000 for
fiscal 1997.
OPERATING EXPENSES
Cost of goods sold and related occupancy costs as a percent of net
sales increased to 55.5% for fiscal 1998 from 52.5% for fiscal year 1997. This
increase was due primarily to higher green coffee cost.
Selling, general and administrative costs as a percentage of net sales
increased to 67.6% in fiscal 1998 from 66.7% in fiscal 1997. This increase was
due primarily to increased marketing costs as a percentage of net sales.
As a percent of net sales, stock option expense decreased to 6.2% for
fiscal 1998 from 11.6% for fiscal year 1997. The expense is a noncash charge
representing the difference between the exercise price and fair market value of
the stock at the date of grant. Stock option expense is comprised primarily of
options to purchase common stock granted to officers and key employees by
Tully's majority stockholder. The options were issued from the majority
stockholder's shares rather than newly issued shares of Tully's to avoid
diluting the other stockholders.
Depreciation and amortization as a percentage of net sales increased to
6.8% for fiscal 1998 from 8.3% for fiscal 1997.
INTEREST AND OTHER EXPENSES (INCOME)
Interest expense for fiscal 1998 was $258,000 compared to $175,000 for
fiscal 1997. The increase was due to higher average borrowings on the Company's
bank line of credit.
Loan guarantee fee expense for fiscal 1998 was $295,000 compared
with $179,000 for fiscal 1997. This non-cash expense is for options granted
to the CEO and a Board member to purchase common stock of the Company, issued
in exchange for the guarantees of the bank line of credit.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Tully's ended the period with $1.1 million in total cash and working
capital of negative $5.8 million. Cash and cash equivalents increased by $1.1
million for the fiscal year ended March 28, 1999 to $1.1 million.
Cash used in operating activities totaled $3.8 million for the fiscal
year ended 1999, resulting primarily from net loss before non-cash charges of
$2.7 million, a $.6 million increase in current assets offset by a $.3 million
increase in current liabilities .
Cash used by investing activities for the fiscal year ended 1999
totaled $11.1 million. This included capital additions to property, plant and
equipment of $4.2 million related to opening 12 new Company-operated stores and
remodeling certain existing stores. The acquisition of Spinelli used $6.9
million.
Cash provided from financing activities for the fiscal year ended
1999 $15.9 million and included cash generated from the issuance of
Investment Units consisting of Preferred Stock and warrants in the amount of
$11.9 million, net of offering costs. Since the end of the fiscal year ended
1999, the Company generated an additional $10.8 million in cash, net of
operating costs, from the sale of additional Investment Units.
Cash requirements for fiscal 2000, other than normal operating
expenses, are expected to consist primarily of capital expenditures related
to the addition of new Company-operated retail stores. Tully's also
anticipates making additional expenditures to enhance its production capacity
and information systems and remodel certain existing stores. While there can
be no assurance that amounts and timing of the expenditures will occur as
planned, management believes that cash proceeds from the sale of the
Investment Units will be sufficient for our capital needs for the next twelve
months.
YEAR 2000 ISSUES
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.
The Company has investigated the impact of the year 2000 problem on
our business, including our operational, information and financial systems.
We have tested certain systems for compliance. Although we are not presently
aware of any material operational issues or costs associated with preparing
our 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 July 20, 1999, Tully's had expended
approximately $5,000.
We are in the process of identifying and working with our
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
most 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.
14
<PAGE>
Tully's expects that its review of non-information technology
systems(including voice communications and security) will be completed before
the end of the current fiscal year. 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 flows from operations.
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.
Tully's is in the process of confirming the state of year 2000
readiness of these parties. It is anticipated Tully's will complete this
process prior to the end of the fiscal year. Tully's is in the process of
developing a contingency plan to address potential year 2000 problems. The
contingency plan is anticipated to be completed mid-third quarter.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will require Tully's to recognize certain derivatives on its
balance sheet at fair value. Changes in the fair values of derivatives that
qualify as cash flow hedges will be recognized in comprehensive income until the
hedged item is recognized in earnings. Tully's expects that this new standard
will not have a significant effect on its results of operations. SFAS 133 as
amended by SFAS 137 is effective for fiscal years beginning after June 15,
2000.
UNAUDITED COMBINED PRO FORMA FINANCIAL INFORMATION
The Pro Forma Consolidated Financial Information has been prepared
from, and should be read in conjunction with, the historical consolidated
financial statements and notes thereto of each of Tully's. Spinelli Coffee
Company's financial information has been prepared from internal financial
statements for period March 30, 1998 to June 25, 1998.
On June 26, 1998, the Company acquired all the outstanding shares of
Spinelli Coffee Company for a total purchase price of $8.4 million. Spinelli
Coffee Company had 11 Company-operated stores and 3 licensed stores in the San
Francisco Bay area as well as 8 licensed stores in Asia and a roasting and
warehouse facility. The acquisition has been accounted for under the purchase
method of accounting in fiscal 1999. The purchase price has been allocated to
the assets acquired and liabilities assumed based on management's estimates,
arms-length negotiations with the sellers and in certain cases, independent
appraisals of asset fair values. The residual of approximately $5.1 million
was recorded as "Goodwill" and is being amortized on a straight-line basis
over 15 years. The results of operations of the acquired companies have been
included in consolidated results of operations of the Company from the date of
the acquisition.
15
<PAGE>
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TULLY'S COFFEE SPINELLI COFFEE
MARCH 30, 1998- MARCH 30, 1998- PRO FORMA PRO FORMA
MARCH 28, 1999 JUNE 25, 1998 ADJUSTMENTS COMBINED
--------------- --------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $ 20,210 $1,970 $ - $ 22,180
Cost of goods sold and related occupancy costs 10,710 660 - 11,370
Selling, general and administrative costs 12,090 1,200 - 13,290
Stock option expense expense 830 - - 830
Depreciation and amortization 1,670 - (A) 114 1,784
---------- ------ ------- ----------
Operating loss (income) 5,090 (110) 114 5,094
Interest expense (income) 830 (10) (B) 69 889
Loan guarantee fee expense 730 - - 730
Miscellaneous, net (70) 20 - (50)
---------- ------ ------- ----------
1,490 10 69 1,569
---------- ------ ------- ----------
Net loss (income) 6,580 $ (100) $ 183 6,663
------ -------
------ -------
Preferred stock dividend/accretion 5,970 5,970
---------- ----------
Net loss used in calculating net loss per share $ 12,550 $ 12,633
---------- ----------
---------- ----------
Basic and diluted net loss per common share $ 0.88 $ 0.88
---------- ----------
---------- ----------
Shares used in computing basic and
diluted net loss per share calculations 14,298,754 14,298,754
---------- ----------
</TABLE>
See accompanying notes to the unaudited combined financial statements.
1. THE PERIODS, COMBINED
The Tully's Coffee Corporation consolidated statement of operations
for the year ended March 29, 1999 has been combined with the Spinelli Coffee
Company statements of operations for the period March 30, 1998 to June 25,
1998 as if the merger had occurred as of the beginning of the period. The
results of Spinelli Coffee Company for the period June 26, 1998 to March 28,
1999 have already been consolidated into the Tully's Coffee Corporation
consolidated statement of operations for the year ended March 28, 1999 as the
merger was effected June 26, 1998.
2. PRO FORMA BASIS OF PRESENTATION
These Unaudited Pro Forma Combined Statements of Operations have been
made for the purposes of presenting such pro forma information as necessary to
comply with the disclosure requirements of the Securities Exchange Commission.
The Unaudited Pro Forma Combined Statements of Operations does not purport to
be indicative of the combined Statements of Operations of future periods or
indicative of
16
<PAGE>
the results of operations of future periods or indicative of the results that
actually would have been realized had the entities been a single entity
during these periods.
3. PRO FORMA EARNINGS PER SHARE
The unaudited Pro Forma Combined Statement of Operations for Tully's
Coffee Corporation have been prepared as if the merger was completed at the
beginning of the periods presented. The pro forma basic net loss per share is
based upon the combined weighted average number of shares of Tully's Coffee
Corporation Common Stock outstanding during the period.
The Pro Forma diluted net loss per share is computed using the
weighted average number of Tully's Coffee Corporation Common Stock and
dilutive common equivalent shares outstanding during the period. Common Stock
equivalent shares consist of incremental common shares issuable upon
conversion of the exercise of stock options and warrants using the treasury
stock method. Common equivalent shares are excluded from the computation if
the effect is antidilutive. The combined Company had a pro forma net loss for
the year ended March 28, 1999; therefore, none of the options and warrants
outstanding during the period presented were included in the computation of
pro forma dilutive earnings per share as they were antidilutive.
4. PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
The objective of pro forma information is to show what the
significant effects on the historical financial information might have been
had the companies been merged for the period presented.
The purchase price of $8.4 million consists of $6.7 million paid to
the seller, $221,243 of acquisition costs and the assumption of $1,446,356
in liabilities of the seller.
The categories of assets acquired and obligations assumed, at the
date of the acquisition is as follows:
<TABLE>
<S> <C>
Assets acquired
Cash $ 5,059
Accounts receivable 163,595
Inventories 965,415
Prepaid and other current assets 41,172
Goodwill and other intangible assets 5,522,928
Property and equipment 1,538,027
Other assets 131,403
------------
Total assets $ 8,367,599
------------
------------
Liabilities assumed
Current liabilities $ (520,478)
Other liabilities (925,878)
------------
$(1,446,356)
------------
------------
</TABLE>
The company incurred costs associated with the acquisition during
1999 of $221,243. Costs were primarily for professional fees and
expenditures to facilitate integration of business systems of the acquired
business with the Company following the merger. Such costs were capitalized
as part of the purchase price.
17
<PAGE>
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired. The goodwill will be capitalized and
amortized over a period of fifteen years. The property plant and equipment
will be depreciated over the remaining estimated lives of such assets. The
Unaudited Pro Forma Combined Statement of Operation reflects adjustments for
such amortization and depreciation.
Detail of the specific pro forma adjustments for all of the period
March 30, 1998 to June 24, 1998, are as follows:
<TABLE>
(in thousands)
<S> <C>
(A) AMORTIZATION AND DEPRECIATION
Amortization of goodwill $ 84
Amortization of leasehold interests 5
Depreciation of property plant and
equipment and leasehold improvements 25
----
Total pro forma adjustment $114
----
----
</TABLE>
(B) INTEREST EXPENSE
In connection with this acquisition Tully's issued a $2,500,000
convertible note to a director of the Company. Had the Company issued the
note on March 30, 1998, the Company would have recorded an additional $69,000
in interest expense. The note was converted into 1,000,000 shares of
preferred stock on March 28, 1999.
18
<PAGE>
ITEM 3. PROPERTIES.
RETAIL LOCATIONS
Tully's currently leases space for all of its Company-operated store
locations. All of these locations are secured by long term leases with options
to extend beyond the initial lease term. Base lease terms are typically ten
years with two to four five year options to extend. Tully's firmly believes
that its current locations are situated in suburban and urban areas that have
high levels of pedestrian or vehicular traffic, or both.
Tully's has spent considerable time designing the look and feel of
the interior of its retail stores. Of utmost importance was creating a
sophisticated, yet warm and inviting environment. The materials used for the
interior improvements, including cherry wood cabinets, real slate tile
flooring, an eclectic furniture package and a distinctive paint pattern for
the walls, were all carefully and strategically selected to enhance the image
projected for Tully's by its stores. It is intended that all stores project
and maintain a consistent look and feel regardless of the square footage or
dimensional variations. The design and materials used were also selected to
not be regional specific so as to allow for consistent usage in other parts of
the country.
STORE DESIGN AND CONSTRUCTION COSTS
Tully's has designed a store look and feel that it believes will best
meet its needs as they relate to the image, atmosphere and high level of
customer service that Tully's wants to present to its customers. The package
is tailored to be flexible enough to meet the different requirements presented
by various types of locations, e.g., Central Business District office
buildings and neighborhood center locations. The Company's expansion plans in
the Puget Sound and San Francisco Bay Areas, as well as in other U.S. markets,
were a major factor in the selection of materials, colors, fixtures and
equipment. Management feels it is critical to have a store design that is
similar from one store to another in order to strengthen its brand and instill
a feeling of consistency with its customers. While meeting these goals Tully's
also believes the stores are not only cost effective to build in all markets,
but are enduring from a design perspective.
EXECUTIVE OFFICE, WAREHOUSE AND ROASTING FACILITIES
Tully's currently occupies 8,400 square feet of space at 2010 Airport
Way South in Seattle, Washington where its executive offices, roasting plant
and warehouse facilities are located. While this space is currently
serviceable for Tully's needs, it has commenced a search to locate larger
premises that will meet its needs in the future. Tully's does not anticipate
any problems in securing the new premises. It also believes that the rent for
its current offices is substantially below market and therefore it will be
able to sublet the existing premises without difficulty for the remaining 5
year term of the lease. Tully's also maintains a 14,000 square foot office and
roasting facility in San Francisco. Tully's currently anticipates maintaining
this facility as a regional office and additional roasting facility to meet
its growth needs in that area. The lease for 5,700 square feet of the San
Francisco premises expires in July, 2000. While Tully's has the right to
extend the lease for additional periods, it is possible that it will not renew
the lease for this portion of the property. Both facilities have adequate
lease terms, with options to extend. Tully's believes that the present
facilities satisfy the immediate growth plans of Tully's and that there are
adequate additional spaces available to Tully's at competitive lease rates
into which it can relocate to meet
19
<PAGE>
its facilities needs as it continues to expand. The Seattle plant was
previously occupied by Starbuck's Coffee, which maintained its executive
offices, warehouse and roasting facility at this location.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of Common Stock and Series A Preferred Stock of (i) those
persons known by management of Tully's to own beneficially more than 5% of
Tully's outstanding Common Stock, (ii) the directors and director nominees of
Tully's, (iii) the executive officers named in the Summary Compensation Table
set forth in the "Executive Compensation" section of this registration
statement and (iv) all current directors and officers of Tully's as a group.
Such information is provided as of July 1, 1999. According to the rules
adopted by the SEC, a person is a "beneficial owner" of securities if he or
she has the right to acquire beneficial ownership of such securities within 60
days through the exercise of an option, warrant, right of conversion of a
security or otherwise. Except as noted otherwise, the indicated owners have
sole voting and investment power with respect to shares beneficially owned. An
asterisk in the percent of class column indicates beneficial ownership of less
than 1%.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF SERIES A
NAME AND ADDRESS OF STOCK BENEFICIALLY PERCENT PREFERRED STOCK PERCENT
BENEFICIAL OWNER (2) OWNED (1) OF CLASS BENEFICIALLY OWNED (1) OF CLASS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tom T. O'Keefe (3)........................... 5,145,431 23.6% 40,000 1.7%
George Hubman (4)............................ 1,271,510 5.8% 200,000 2.0%
Keith McCaw (5).............................. 1,046,835 4.8% 2,000,000 20.0%
Graham S. Anderson (6)....................... 466,751 2.1% 40,000 *
Stephen R. Griffin (7)....................... 377,703 1.7% - -
Marc Evanger (8)............................. 254,000 1.2% - -
Richard J. Padden (9)........................ 130,667 * 20,000 *
Lawrence L. Hood (10)........................ 120,251 * 10,000 *
Larry A. Culver (11)......................... 30,500 * 40,000 *
James Cameron Towne (12)..................... 20,000 * 20,000 *
Robert J. Holmes (13)........................ 14,250 * 10,000 *
All Directors and Executive Officers
as a Group (11 Persons).................... 8,877,898 40.7% 2,380,000 23.8%
</TABLE>
20
<PAGE>
NOTES TO BENEFICIAL OWNERSHIP TABLE
(1) Computed in accordance with Rule 13d-3(d)(1) of the Exchange Act.
(2) The address for all persons listed unless otherwise noted 2010 Airport
Way South, Seattle, WA 98134
(3) Assumes certain officers and employees exercise options for the purchase
of 1,479,999 shares from Mr. O'Keefe at an exercise price of $0.33 -
$0.01 and includes options to purchase 376,324 shares of common stock
which are immediately exercisable at a price of $0.01 - $2.25 per share
under the Company's stock option plan.
(4) Assumes the exercise of options for the purchase of 288,279 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 100,000 shares of common
stock at an exercise price of $0.33.
(5) Assumes the exercise of options for the purchase of 3,500 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 1,000,000 shares of common
stock at an exercise price of $0.33.
(6) Assumes the exercise of options for the purchase of 40,417 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 20,000 shares of common
stock at an exercise price of $0.33.
(7) Assumes the exercise of options for the purchase of 341,936 shares of
common stock at an exercise price of $0.01 - $2.25.
(8) Assumes the exercise of options for the purchase of 252,500 shares of
common stock at an exercise price of $0.01 - $1.78.
(9) Assumes the exercise of options for the purchase of 22,500 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 10,000 shares of common
stock at an exercise price of $0.33.
(10) Assumes the exercise of options for the purchase of 26,917 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 5,000 shares of common
stock at an exercise price of $0.33.
(11) Assumes the exercise of options for the purchase of 2,500 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 20,000 shares of common
stock at an exercise price of $0.33.
(12) Assumes the exercise of options for the purchase of 4,000 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 10,000 shares of common
stock at an exercise price of $0.33.
(13) Assumes the exercise of options for the purchase of 4,250 shares of
common stock at an exercise price of $0.01 and the exercise of Series A
Preferred Stock warrants for the purchase of 5,000 shares of common
stock at an exercise price of $0.33.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the executive officers and directors
of Tully's Coffee are listed below along with their business experience during
the last five years. The business address of all officers of Tully's Coffee is
2010 Airport Way South, Seattle, Washington 98134. The Tully's Coffee Board of
Directors consists of ten directors. Directors are elected to serve one year
terms. Executive officers of Tully's Coffee are appointed by the Board of
Directors. No family relationships exist among any of the directors or
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------
<S> <C> <C>
Tom T. O'Keefe 44 Chairman and Chief Executive Officer
Marc Evanger 44 Vice President - Corporate Planning and Development and Director
Stephen R. Griffin 42 Vice President - Finance, Chief Financial Officer & Secretary
21
<PAGE>
Graham Anderson 66 Director
Larry A. Culver 57 Director
Robert J. Holmes 54 Director
Lawrence L. Hood 40 Director
George Hubman 56 Director
Keith McCaw 44 Director
Richard J. Padden 46 Director
James Cameron Towne 56 Director
</TABLE>
TOM T. O'KEEFE - CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER.
Tom T. O'Keefe is the founder of Tully's Coffee. Mr. O'Keefe also serves as
President and CEO of O'Keefe Development Corporation (ODC), a real estate
firm that has acquired or developed shopping centers, office buildings and
warehouses throughout the Puget Sound area. Prior to founding ODC, Mr. O'Keefe
was a commercial real estate broker with Coldwell Banker Commercial Real
Estate Services. Mr. O'Keefe works with and is a founder of several
non-profit organizations, including the Cystic Fibrosis Foundation and the
Juvenile Diabetes Guild of Seattle. He has served as president and event
chairperson for these organizations. Additionally, he is a Trustee for the
Villa Academy, a school his children attend in Seattle. Mr. O'Keefe has
served as a Director and Chairman of the Board since the Company's inception.
STEPHEN R. GRIFFIN - VICE PRESIDENT - FINANCE, CHIEF FINANCIAL
OFFICER AND SECRETARY. Mr. Griffin joined Tully's in 1994. From 1989 to 1994,
Mr. Griffin served in various capacities at Olympic Management Company,
including Chief Operating Officer, from 1992 to 1994 and Vice
President-Controller and Treasurer for Olympic and its affiliates, a diverse
group of real estate entities from 1989 to 1992. He was Director of
Acquisitions for Hillhaven Corporation from 1983 to 1989 and with
Arthur Andersen & Co prior to that. Mr. Griffin is a graduate of the
University of Washington with a BA in Business Administration.
GRAHAM S. ANDERSON - DIRECTOR . Mr. Anderson is former Chairman and
President of the Pettit-Morry Company, a Regional Insurance Brokerage.
Mr. Anderson is a Director of a variety of companies including Marker
International (manufacturer and retailer of ski hardware and apparel), the
Commerce Bank, Janss Center and is former Chairman of the National
Association of Insurance Brokers and a member of Eldore LLC. Mr. Anderson has
served as a Director since February 7, 1994.
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<PAGE>
LARRY A. CULVER - DIRECTOR. Mr. Culver has more than 35 years
experience in the hospitality industry. In 1982, Larry founded Inn Ventures,
Inc. Since then, Mr. Culver and his staff have developed and managed more than
$300,000,000 in hotel product. Mr. Culver has been recognized by numerous
organizations for his accomplishments and innovative leadership including
being the recipient of the "Inn of the Year Award", "Hotelier of the Year
Award" and a finalist for several of Marriott International's highest awards.
He actively serves on various Boards of Directors of civic and charity groups
such as Big Brothers and Big Sisters of King County (Past President, Board of
Directors, and Executive Committee); Northwest Harvest Food Drive; Fred
Hutchinson Cancer Research; WSU Board of Trustees; WSU Foundation; WSU
Advisory Board for School of HRA. Mr. Culver has served as a Director of the
Company since February 5, 1998.
MARC EVANGER - VICE PRESIDENT CORPORATE PLANNING AND DEVELOPMENT AND
DIRECTOR. Mr. Evanger joined Tully's in December 1998. From 1984 to 1998 he
was with Quality Food Centers (QFC), most recently as Senior Vice President
of Finance and Administration and Chief Financial Officer. During his tenure,
QFC grew from 20 to 145 stores, completed numerous acquisitions, a leveraged
buyout and an IPO. He retired in 1998 following the merger of QFC and Fred
Meyer, Inc. From 1978 to 1984, he was with Price Waterhouse & Company.
Mr. Evanger is a former member of the Board of Directors of Associated
Grocers, is currently a director of the Bellevue Boys & Girls Club and is
active in other charitable and community activities. Mr. Evanger is a
graduate of the University of Washington and Central Washington University.
Mr. Evanger has served as a Director of the Company since March 1999.
ROBERT J. HOLMES - DIRECTOR. Robert J. Holmes is President and CEO
of Harbor Properties, Inc., a real estate development and recreation company
located in Seattle. Harbor Properties is involved in the development and
management of residential, retail and office real estate as well as resort
and ski area operations. For the 10 years prior to joining Harbor, Mr. Holmes
was President, CEO and then Chairman of Intrawest USA, one the larger real
estate developers in the Puget Sound area. He also served in an executive
position with the parent company's Resort Development Group where he focused
on the acquisition of ski and resort companies throughout North America. Mr.
Holmes is a past Chairman and Director of the Seattle Housing Resources Group,
Director of the Bellevue Downtown Association and Director of Historic Seattle
Preservation and Development Authority. He currently serves on the Executive
Committee of the Downtown Seattle Association and sits on its Board of
Directors. Mr. Holmes has served as a Director since February 5, 1998.
LAWRENCE L. HOOD - DIRECTOR. Mr. Hood is a Principal and Managing
Partner of Pacific Portfolio Consulting, L.P., an independent, fee only
investment advisory firm. Prior to founding Pacific Portfolio , Mr. Hood was
a principal in charge of the investment division of Kibble & Prentice, Inc.,
a regional financial services firm. Mr. Hood has over seventeen years of
investment related experience, and has participated in a number of operating
companies in various stages of development. Mr. Hood served as a director for
A-Sport, Inc. and is a past member of the Charles Schwab Advisory Board.
Mr. Hood is a graduate of the University of Puget Sound, where he majored in
Economics and Finance. Mr. Hood has served as a Director since February 7,
1994.
GEORGE HUBMAN - DIRECTOR. Mr. Hubman retired as Vice President of
Sales and Marketing at WRQ, the sixteenth largest software company in the
U.S., in December, 1993. Mr. Hubman was co-founder of WRQ and held the
position since the Company's formation in 1981. Prior to WRQ , Mr. Hubman's
career included sales positions with Hewlett Packard and IBM. He currently
sits on the boards of Precision Digital Images, King County Big Brothers and
Big Sisters, Childhaven and served two years on the board of Interex, the
International Association of Hewlett-Packard Computer Users. He is a past
president of
23
<PAGE>
Washington State University's College of Business and Economics advisory
committee. Mr. Hubman has served as Director since February 7, 1994.
KEITH MCCAW - DIRECTOR. Mr. McCaw retired as a Board Member and Vice
President of McCaw Communications Company and Vice President of the Radio
Common Carrier Division where his primary focus was on acquisitions and
corporate development. He coordinated McCaw Cellular's first five applications
to the F.C.C. McCaw Cellular was sold to AT&T in 1994 for $11.5 billion.
Together with other family members, Mr. McCaw is a lead investor in NexTel
Communications and several other high tech ventures. He is involved with many
cultural and educational organizations and is currently self employed and
managing personal investments. Mr. McCaw has served as a Director of the
Company since February 5, 1998.
RICHARD J. PADDEN - DIRECTOR. Mr. Padden is of counsel to the law
firm of Carney Badley Smith & Spellman, P.S. Mr. Padden has been a practicing
attorney in Seattle for over 20 years with Carney Badley Smith & Spellman, P.S.
specializing in commercial and corporate law. Mr. Padden is a founder,
principal and board member of Grays Harbor Paper, LP and is a principal and
board member of Safeworks, L.L.C., S&P Foods, Inc. and Brown's Sugarless
Bakery, Inc. Mr. Padden is active in many charitable and volunteer
organizations. He is past president of the Washington Chapter of Cystic
Fibrosis and is a founder and past president of the Patrons of Cystic
Fibrosis Guild. Mr. Padden has served as director since February 7, 1994.
JAMES CAMERON TOWNE - DIRECTOR. Mr. Towne has been Chairman of
Greenfield Development Corporation, a remediation and development company
since 1995. From 1982 to 1995, he was President, CEO or Chairman of various
companies, including Osteo Sciences Corporation, Photon Kinetics, Inc., MCV
Corporation, Metheus Corporation and Microsoft Corporation. Mr. Towne also
serves on the board of directors of Cutter & Buck, a specialty upscale
sportswear and outerwear clothing retailer. He has a bachelor's degree in
economics and a master's degree in business administration from Stanford
University. Mr. Towne has served as a director of the Company since February 5,
1998.
KEY EMPLOYEES
R. J. SELFRIDGE - VICE PRESIDENT - OPERATIONS. Prior to joining
Tully's in late 1993, R.J. Selfridge was employed by Nordstrom for ten years.
He was a manager of Nordstrom's restaurant division headquarters and
commissary in Seattle. At Nordstrom, he coordinated the expansion of espresso
bars and cafes into all West Coast stores. More recently, Mr. Selfridge was
in charge of cafe and espresso operations in the Northeast, while
headquartered in New Jersey. He also helped develop and bring to market the
company's signature Nordstrom Blend, a custom whole bean coffee. Mr.
Selfridge brings over 20 years of retail food service operations experience
to Tully's.
SIOBHAN C. FOODY - VICE PRESIDENT - WHOLESALE. Prior to joining
Tully's in 1995 as Director of Wholesale (having served as Vice President -
Wholesale since 1998). Ms. Foody worked as a manufacturers' representative in
the housewares and gourmet coffee industries for six years . Ms. Foody
represented major coffee accessory lines currently marketed by Tully's. A
native of Seattle, Ms. Foody graduated from the University of Washington with
a Bachelor of Arts degree in economics.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation earned during the last
three fiscal years by our Chief Executive Officer and its next four most
highly compensated executive officers (collectively referred to herein as the
"Named Executive Officers") whose total annual salary and bonus for that year
exceeded $100,000. No executive officer received compensation in excess of
$100,000 during the last fiscal year.
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<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------------- --------------------------------------
RESTRICTED
NAME AND STOCK ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS AWARDS COMPENSATION
- --------------------------- ----------- ------ ----- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tom T. O'Keefe 1999 - - 179,712 - -
President, Chairman and 1998 - - 123,567 - -
Chief Executive Officer (1) 1997 - - 54,833 - -
</TABLE>
(1) While Mr. O'Keefe has received no cash or other compensation for his
services, Tully's has recorded compensation expense for the
estimated fair market value of his past services and for fiscal
year 1999. The value of these services were recorded at $120,000
for fiscal year 1999. Mr. O'Keefe has drawn no salary since Tully's
inception.
GRANTS OF STOCK OPTIONS
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options
granted to executive officers to purchase Tully's Coffee Common Stock granted
during the fiscal year ended March 28, 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL OF ASSUMED ANNUAL RATES
OPTIONS OF STOCK APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------------
NAME GRANTED(1) FISCAL YEAR (3) ($/SHARE) DATE 0%($) 5%($) 10%($)
- -------------- ---------- --------------- ----------- ---------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Tom T. O'Keefe 8,500 0.9% $0.0100 2009 $ - $ 53 $ 75
9,250 1.0% $2.2500 2009 - 13,089 18,344
161,962(2) 17.2% $0.0100 2009 - 1,019 1,427
</TABLE>
(1) Options to purchase Tully's common stock and are subject to various
vesting terms.
(2) These options were granted as compensation for Mr. O'Keefe's agreement
to personally guarantee a $6,000,000 line-of-credit which Tully's
maintains with a commercial bank.
(3) A total of 1,132,632 stock options were granted to employees and
non-employees during fiscal 1999 of which 283,000 were options issued
to key employees of the Company to purchase common stock owned
directly by Tom T. O'Keefe while the remaining portion were options
issued under the Company's 1994 stock option plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the number and
value of unexercisable options held by the following executive officers on March
28, 1999. None of these options to purchase common stock were exercised during
fiscal year 1999.
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Tom T. O'Keefe 376,324 9,250 $752,272 -
</TABLE>
(1) These amounts represent the difference between the exercise price of the
in-the money options and the fair market value of Tully's Coffee common stock
on March 28, 1999.
TULLY'S COFFEE STOCK OPTION PLAN
In 1994, Tully's adopted its 1994 Stock Option Plan under which the
Board of Directors will from time-to-time grant certain rights to eligible
employees and directors to purchase common stock. As of July 1, 1999,
1,493,058 options to purchase stock at $0.33 - $2.25 per share have been
granted. These options vest pro-rata over five years beginning with the date of
grant.
The purpose of the Option Plan is to promote Company success by
aligning employee financial interests with long-term shareholder value. At the
present time Tully's is authorized to issue options for 5% of common and
preferred stock outstanding shares under the Plan. The shareholders have been
asked to approve an amendment to the Plan which increases the number of shares
that may be issued under the Option Plan. Under the proposed amendment the
number of shares issuable under the Option Plan would be increased to an amount
not to exceed 4,200,000 shares of Tully's Common Stock. However, the total
number of shares which may be issued under Tully's Option Plan and the Employee
Stock Purchase Plan, if adopted by the shareholders, cannot exceed 4,200,000
shares, in the aggregate.
The Board of Directors has the general authority to grant options under
the Option Plan to employees and officers of Tully's and to generally exercise
all authority of the Board under the Option Plan. However, the Executive
Compensation Committee of the Board of Directors (comprised entirely of
non-employee directors) has been delegated the authority to grant options to
certain members of senior management.
The Option Plan may be modified, amended, or terminated by the Board
except with respect to incentive stock options granted prior to such action. The
Board shall have the authority to adopt such modifications, procedures, and
subplans as may be necessary or desirable to comply with provisions of the laws
of foreign countries in which Tully's or its subsidiaries may operate to assure
the viability of the benefits from options granted to employees employed in such
countries and to meet the objectives of the Option Plan. Notwithstanding the
foregoing, shareholder approval is required for any amendment which increases
the number of shares subject to the Option Plan (other than in connection with
automatic adjustments due to changes in capitalization or the assumption or
substitution of options in connection
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<PAGE>
with mergers or acquisitions). Shareholder approval may also be required if
there are "material changes" to the Option Plan for purposes of Section
162(m) of the Code or to comply with new legislation.
VESTED STOCK OPTIONS
During the fiscal year ended March 28, 1999, Tom T. O'Keefe granted
options to purchase 283,000 shares of common stock owned by him to key Tully's
employees. These options were fully vested as of the date of the grants and are
exercisable indefinitely at the exercise price of $0.01 per share. The options
were granted to the key employees as performance bonuses and to tie their
respective interests to those of Tully's. The options were issued for Mr.
O'Keefe's shares rather than newly issued shares of Tully's to avoid diluting
the other shareholders. Although the options were not granted by Tully's, under
generally accepted accounting principles, Tully's was required to record an
increase in paid in capital and a noncash charge to compensation expense of
$511,659 in fiscal year 1999 which respresented the difference between the
estimated fair market value of the underlying shares on the grant dates and the
exercise price.
TULLY'S COFFEE STOCK PURCHASE PLAN
The Company's shareholders have been asked to ratify the 1999
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan, if
approved by the shareholders, will allow all employees who have been with
Tully's for 3 months and who are working more than 20 hours a week to authorize
payroll deductions at a rate of 2, 4, 6, 8, or 10% of base pay (including
overtime or bonuses) to be applied toward the purchase of Tully's common stock.
The total number of shares of common stock reserved for issuance under the
Purchase Plan cannot exceed 4,200,000. Provided, that the total number of shares
which may be issued under Tully's Purchase Plan and its Option Plan cannot
exceed 4,200,000 in the aggregate.
As of July 1, 1999, there were approximately 320 employees eligible to
participate in the Purchase Plan. The Purchase Plan, which is to be administered
by the Board, will terminate on December 31, 2005, or earlier at the discretion
of the Board or in the event all shares reserved under the plan have been
purchased.
Separate six-month offerings of the Company's shares of Common Stock
will commence on January 1 and July 1 of each year. No employee may purchase
more than 2,250 shares of stock during any single offering. An employee must
authorize a payroll deduction before the start of an offering in order to
participate in that offering. On the last business day of the offering, the
employee will be deemed to have exercised the option to purchase as many
shares as the employee's payroll deduction will allow, at the option price.
The option price is 85% of the lesser of (i) the fair market value of the
stock on the first business day of the offering, or (ii) the fair market
value of the stock on the last business day of the offering. The fair market
value of Tully's stock shall initially be determined on a quarterly basis by
Tully's Board of Directors. When and if the stock is quoted or traded in an
over the counter market or exchange, then the fair market value shall mean
the closing bid price as reported on the National Association of Securities
Dealers Automated Quotation System or, if the stock is traded on a stock
exchange, the closing price for the stock on the principal such exchange.
No employee shall be permitted to purchase any shares under the
Purchase Plan if such employee, immediately after such purchase, owns shares
possessing five percent or more of the total combined voting power or value of
all classes of stock of Tully's or its parent or subsidiary corporations. The
fair market value of all shares purchased by an employee under the Purchase Plan
during any calendar year
27
<PAGE>
may not exceed $25,000.
The Board of Directors may at any time amend or terminate the Purchase
Plan, provided that no employee's existing rights under any offering already
commenced may be adversely affected thereby. No amendment may be made to the
Purchase Plan without prior approval of the shareholders of Tully's if such
amendment would increase the number of shares reserved thereunder, materially
modify the eligibility requirements, or materially increase the benefits that
may accrue to participants.
COMPENSATION OF DIRECTORS
The Directors of Tully's receive no cash compensation for serving on
the Board of Directors, but are reimbursed reasonable expenses incurred in
attending Board and Committee meetings. They are granted options to purchase 500
shares of stock per attended Board meeting and 250 shares of stock per attended
Committee meeting.
EMPLOYMENT AGREEMENTS AND COMPENSATORY ARRANGEMENTS
Tully's generally does not enter into employment agreements or
written compensatory arrangements with its employees, including management.
It does have an employment agreement with one of its officers pursuant to
which that officer receives annual compensation in an amount less than
$100,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Until March 11, 1999 when the relationship was terminated, Tully's
had engaged the services of O'Keefe Development Corporation ("ODC"), a
company owned by Mr. O'Keefe, to oversee tenant improvements for Tully's new
locations at a price of $5,000 per store. The services rendered by ODC
primarily consist of providing a project manager to coordinate and oversee
the subcontractors who make the tenant improvements or remodeling work at the
locations. During fiscal year 1999 Tully's paid a total of $70,000 to ODC for
its services. Company believes that the terms of this relationship were
commercially reasonable and were on terms which were no less favorable to
Tully's than could be negotiated in an arms-length transaction with an
unrelated third party.
Richard Padden, a director of Tully's, is a principal in the law firm
of Carney Badley Smith & Spellman, which provides legal services to Tully's.
Laurence Hood, a director of Tully's, is a prinicpal of Pacific
Portfolio Consulting, LLC, a registered investment advisory firm. That firm
will render investment advisory services in connection with administration of
the Company's 401k employee benfit plan.
Tully's leases the premises for 3 of its stores from Harbor
Properties, Inc., whose President and CEO is Robert J. Holmes, a director of
the Company. During fiscal year 1999 and 1998 the Company paid rent in the
total amount of $185,131 and $136,285, respectively, to Harbor Properties.
Tully's has a $6,000,000 line of credit arrangement with a
commercial bank, which expires March 31, 2000. Interest is charged at the
prime lending rate plus 0.5%. The line is collateralized by all of the
Company's assets and is personally guaranteed by Tom T. O'Keefe and George
Hubman, both Company Directors. Mssrs. O'Keefe and Hubman receive a guarantee
fee of 1.0% of the operating line's monthly average balance. In payment of
the guarantee fee, the Company issued options to purchase the Company's
Common Stock in total amounts of 113,169, 130,964 and 397,254 for the fiscal
years ended March 30, 1997, March 29, 1998 and March 28, 1999, respectively.
The value of the options were recorded as compensation expense. All of these
options were issued with an exercise price of $0.01 per share.
Tully's believes that all of these relationships are commercially
reasonable and are on terms that are no less favorable to Tully's than could
have been negotiated in an arms-length transaction with an unrelated third
party. With respect to transactions with affiliated parties in the future, all
material
28
<PAGE>
transactions between Tully's and its officers, directors, principal
shareholders and affiliates will be approved by a majority of Tully's Board
of Directors who do not have an interest in the transaction, and will be on
terms no less favorable to Tully's than those that could be obtained from
unaffiliated third parties.
ITEM 8. 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 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
Currently there is no public market for Tully's Coffee Common Stock and
none is expected to develop in the immediate future.
SHARES ELIGIBLE FOR FUTURE SALE
2,880,600 of the Company's issued and outstanding common shares are
freely tradeable or "unrestricted securities." However, at the present time
there is no public market for any of the Company's securities. The remaining
shares of common stock and 24,999,125 shares of its Series A Preferred Stock
outstanding as of July 1, 1999 are "restricted securities" under the
Securities Act of 1933 and may only be sold in the public market upon the
expiration of the holding periods under Rule 144, described below, subject to
the volume, manner of sale and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the then outstanding shares of our common stock
(approximately 143,140 shares as of July 1, 1999); or
- the average weekly trading volume during the four calendar
weeks preceding filing of notice of the sale of shares of
common stock.
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. A stockholder who is deemed not to have been an
"affiliate" of the Company at anytime during the 90 days preceding a sale,
and who has beneficially owned restricted shares for at least two years,
would be entitled to sell shares under Rule 144(k) without regard to the
volume limitations, manner of sale provisions or public information
requirements.
In addition, as of July 1, 1999, there were outstanding warrants to
purchase 4,999,825 shares of common stock and options to purchase 3,163,471
shares of common stock, of which 2,465,647 options
29
<PAGE>
were fully vested. The number of shares reserved for issue upon exercise of
options under our 1994 Employee Stock Option Plan cannot exceed 5% of the
issued and outstanding shares of the Company. We intend to register the shares
of common stock issuable or reserved for issuance under the plan as soon as
practicable following the date of this registration statement.
Holders of warrants to purchase 4,999,825 shares of common stock
issuable upon exercise of such warrant are entitled to registration rights with
respect to these shares for resale under the Securities Act of 1933. If these
holders, by exercising their registration rights, cause a large number of shares
to be registered and sold in the public market, these sales could harm the
market price for our common stock. See "Description of Capital
Stock--Registration Rights."
ESCROWED SHARES
As a condition to registering two prior offerings by Tully's of its
common shares under the Washington State Securities Act, Tully's founders,
Tom T. and Cathy O`Keefe, have placed in escrow with Seafirst Bank, certain
shares of Common Stock beneficially owned by them.
These shares will be released from escrow to the founders when Tully's
satisfies one or more of the following requirements:
a. Tully's has demonstrated annual earnings per share for two consecutive
fiscal years of at least $0.075 per share per year.
b. Tully's has demonstrated average annual earnings over five years of at
least $0.075 per share.
c. Tully's establishes for its Common Stock a bona fide over-the-counter
trading market and such stock maintains an average bid price equal to
or greater than $2.625 per share for any period of twenty-six
consecutive weeks. In determining whether a bona fide market has been
established, all transactions in Tully's stock by any director or
officer of Tully's, or any affiliates of such persons, during the
period in which the market is claimed to have existed will be excluded.
In addition, Tully's will have disseminated to the public during said
period, at least two quarterly unaudited financial statements or one
annual audited financial statement.
Unless released pursuant to subparagraphs (a), (b), or (c) above, all
of the escrowed shares shall remain in escrow until the sixth anniversary of the
effective date of the offering. On each of the sixth, seventh, eighth, and ninth
anniversary dates, 25% of the escrowed shares shall be released from escrow,
such that no shares will remain in escrow as of nine years from the effective
date of the offering.
While the shares are escrowed the shares will remain in the ownership
of Tom and Cathy O'Keefe. They will have the right to vote the shares and will
also be entitled to any dividends, share dividends, stock splits or any other
benefit which may inure to them as the result of owning such shares.
Mr. and Mrs. O'Keefe have also agreed under the terms of the escrow
agreement that upon a liquidation or dissolution of Tully's and following
payment to Tully's creditors, its shares then held in escrow, if any, will be
subordinate to all other shares of Tully's Common Stock with respect to any
amounts paid to shareholders as a result of such liquidation or dissolution
of Tully's. Any such liquidation or payment to
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<PAGE>
shareholders shall be paid as follows: (1) holders of shares, including
Shares purchased in the Offering but excluding shares held in escrow, shall
receive $1.50 per share, (2) the founders shall receive $1.50 per share on
the escrowed shares, (3) thereafter, all shares shall participate in any
remaining distributions on a pro rata basis
DIVIDENDS
Shareholders are entitled to receive such dividends, if any, that are
declared by Tully's Board of Directors out of funds legally available therefore
and, upon the liquidation, dissolution or winding up of Tully's, are entitled to
share ratably in all net assets available for distribution to such holders after
satisfaction of all obligations of Tully's, including stock preferences. Tully's
Board of Directors presently does not intend to pay any dividends, but to retain
and use any earnings to finance the growth of its business for an indefinite
period. The line of credit arrangement restricts Tully's ability to pay
dividends without the bank's permission. Future dividend policies will depend
upon Tully's earnings, financial needs and other pertinent factors.
LIMITATIONS ON SHARES AND TRANSFER AGENT
2,880,600 of Tully's shares of Common Stock, were qualified with
the United States Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended and Regulation A and are not deemed
"restricted securities." The remaining 11,433,400 issued and outstanding
shares of Common Stock are deemed "restricted shares." None of its shares of
Preferred Stock nor any of the shares of Common Stock which may be issued
upon conversion of the Preferred Shares or exercise of the Warrants have been
registered or otherwise qualified with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended. They
were offered and sold pursuant to the exemption from registration under Rule
506 of Regulation D promulgated by the United States Securities and Exchange
Commission. As "restricted securities" under the Federal securities laws non
of these shares are freely transferable. Therefore, neither Units nor any of
the Shares may be sold or otherwise transferred unless they are subsequently
registered under Federal and applicable state securities laws or there exists
an exemption from the applicable registration requirements with respect to
such sale or transfer.
TRANSFER AGENT AND REGISTAR
Tully's intends to act as its own transfer agent and registrar.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
As of July 1, 1999, the Company has sold a total of $24,999,125 of
"investment units" at a price of $10.00 per unit, payable in cash. Each of the
investment units consists of 4 shares of the Company's
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<PAGE>
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. The rights, preferences and other features of the preferred shares and
the warrants are described in Item 11. The investment units were offered and
sold only to accredited investors. The investment units were offered and
issued pursuant to Rule 506 of Regulation D. As of July 1, 1999 there were a
total of 582 accredited investors that purchased the shares.
In addition to the investment units that have been sold, As of July
1, 1999 the Company has received subscriptions for an additional 681,145
units, with an aggregate purchase price of $6,811,450. The Company has not
yet accepted these subscriptions because as of this date it does not have a
sufficient number of authorized shares of Class A Preferred Stock to issue
upon acceptance of the subscriptions. The Company's Board of Directors has
proposed certain amendments to the Company's Articles of Incorporation, which
amendments include an increase in the number of authorized Class A Preferred
Shares to 17,500,000 shares. When and if the Shareholders ratify and approve
the proposed Articles of Amendment, the Company will accept the subscriptions
and issue the Preferred Shares and Warrants.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL
At the present time Tully's is authorized to issue 40,000,000 shares
of common stock, no par value and 10,000,000 shares of preferred stock. All
outstanding shares of stock will, when issued, be fully paid and
non-assessable. As of July 1, 1999, 14,314,000 shares of common stock were
issued and outstanding. As of that same date there were 9,999,650 shares of
preferred stock issued and outstanding which were convertible into 9,999,650
shares of Common Stock. There were also 2,499,913 Warrants outstanding to
purchase an additional 4,999,825 shares of Common Stock at a price of $0.33
per share. The Board of Directors has submitted a proposal to the Company's
shareholders to amend its Articles of Incorporation to, among other things,
increase its authorized capital to 120,000,000 shares of Common Stock and
30,000,000 shares of Preferred Stock.
At the present time shareholders of common stock may have preemptive
rights to subscribe for additional shares of stock. Each share of common
stock is entitled to one vote on all matters submitted to a vote of
shareholders, except in connection with the election of Directors, in which
case shareholders may cumulate their votes and cast them all for one or more
of the director candidates. Shareholders are entitled to cumulate votes by
multiplying the number of votes they are entitled to cast by the number of
directors for whom they are entitled to vote, and to cast the product for a
single candidate or distribute the product among two or more candidates. The
proposed amendments to the Company's Articles of Incorporation, if ratified
by the shareholders, would eliminate preemptive rights and cumulative voting
in the election of directors. Holders of common stock have no subscription or
redemption rights, and shares of preferred stock have no sinking fund
provisions. All outstanding shares of common stock are, and those outstanding
upon completion of this Offering will be, fully paid and non-assessable.
Under Washington corporate law, shareholders owning two-thirds of the
outstanding shares must approve amendments to Tully's Articles of Incorporation
and other major corporate actions, such as adopting a plan of merger,
consolidation or exchange involving Tully's or its stock, or the sale of
substantially all of Tully's assets other than in the regular course of
business.
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<PAGE>
PREFERRED STOCK
The Series A Preferred Stock has certain limited dividend rights, is
convertible into shares of Tully's common stock, has liquidation preferences
over Tully's common stock and does have voting rights. In the event of any
liquidation or winding up of Tully's, the holders of the Series A Preferred
Stock shall be entitled to receive, prior and in preference to the holders of
Common Stock and any series of preferred stock ranked junior to the Series A
Preferred Stock an amount (the "Liquidation Amount") equal to the original
purchase price of the Series A Preferred Stock (aggregating $24,999,125 as of
July 1, 1999 then held by such holders, plus all declared but unpaid
dividends, and shall thereafter be entitled to participate on an as converted
basis with the holders of Common Stock.
Each share of the Series A Preferred Stock is automatically convertible
into one share of Tully's common stock when and if Tully's makes a "Qualified
Offering" of its common stock. Qualified Offering is defined as an offering of
Tully's common stock in excess of $15 million made pursuant to a registration
statement made effective under the Securities Act of 1933. Each share of
Preferred Stock is entitled to cast one vote on all matters submitted to a vote
of shareholders, except in connection with the election of Directors, in which
case shareholders may cumulate their votes and cast them all for one or more of
the director candidates.
REGISTRATION RIGHTS
The holders of the Preferred Shares have certain rights granted to them
to require registration of the common shares received upon conversion of the
Preferred Shares. These rights generally allow persons holding the converted
common shares to require Tully's to use its best efforts to register the shares
for resale under the Securities Act of 1933, as amended and under such state
securities laws as may be necessary. These rights include the right to demand
("demand registration rights") that Tully's file a registration statement for
the converted shares at the shareholders' option no more than one time following
Tully's initial public offering, if any and thereafter unlimited rights once
Tully's is eligible to use a certain form of Securities and Exchange Commission
registration statement that is available to issuers who have been filing
periodic reports with the Commission (i.e., quarterly, annual and other reports
as required of "reporting companies under the Securities Exchange Act of 1934,
as amended).
WARRANTS
The warrants 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 by the holder,
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 Warrants include provisions for "weighted average anti-dilution
protection rights" for both the Preferred Shares and the shares of common stock
issuable upon any exercise of the warrants. Under these anti-dilution rights, if
Tully's were to issue additional stock at less than the conversion price for the
Preferred Shares (i.e. $2.50 per share), the conversion price for the Preferred
Shares and the exercise price under the warrants ($0.33 per share) would be
adjusted so that the new conversion price would be equal to take into account
the decreased value of the shares of common stock as represented by the new
selling price.
33
<PAGE>
GOVERNING LAW
Tully's was formed under the Washington Business Corporation Act and
its operations are subject to that law and to its Articles of Incorporation and
Bylaws. Under Washington law, management of corporate business and affairs is
entrusted to a board of directors.
PROPOSED AMENDMENTS TO THE ARTICLES OF INCORPORATION
The Board of Directors has approved, and is proposing that the
Shareholders ratify the adoption of Articles of Amendment and Restatement of
the Articles of Incorporation of the Company (the "Articles of Amendment"). A
shareholders meeting has been set for August 11, 1999 at which the
shareholders will vote on the proposed Articles of Amendment. The purpose for
the adoption of the Articles of Amendment is twofold: (i) to consolidate the
various amendments that have been made to the Company's Articles of
Incorporation since its formation into a single document, and (ii) to make
certain additional amendments to the Company's Articles of Incorporation
which the Board of Directors believes are in the overall best interest of the
Company at this time.
The new amendments to the Articles of Incorporation contained in the
Articles of Amendment are as follows:
(i) An increase in the number of authorized shares of common stock
from 40,000,000 to 120,000,000 shares;
(ii) An increase in the number of authorized preferred shares from
10,000,000 to 30,000,000 shares;
(iii) The elimination of cumulative voting rights in connection with
the election of Directors of the Company; and
(iv) The denial and elimination of existing preemptive rights in
connection with the issuance of shares by the Company.
AMENDMENT TO ARTICLES OF INCORPORATION AUTHORIZING ADDITIONAL SHARES OF CAPITAL
STOCK
General. In the proposed Articles of Amendment, the Board of
Directors is proposing that the Shareholders approve an amendment to the
Company's Articles of Incorporation (the "Capital Stock Amendment") which
authorizes the Company to issue a combined total of 150,000,000 shares,
consisting of 120,000,000 shares of Common Stock without par value and
30,000,000 shares of Preferred Stock without par value.
At the present time, the Company is authorized to issue 50,000,000
shares, consisting of 40,000,000 Common Shares without par value and 10,000,000
Preferred Shares without par value. The Company has issued 14,361,839 of the
Common Shares. The Company has issued all 10,000,000 shares of Class A Preferred
Stock and has issued 2,500,000 Warrants to purchase 5,000,000 additional shares
of common stock. In the aggregate, the Class A Preferred Shares and Warrants are
convertible into 15,000,000 shares of Common Stock. As of July 2, 1999, the
Company has also received subscriptions, which have not yet been accepted by the
Board of Directors, to purchase an additional 2,724,230 shares of Class A
Preferred Stock and 1,362,115 Warrants which, when and if issued, would be
convertible into a total of 5,448,460 shares of additional Common Stock. The
subscriptions for the additional shares of Preferred Stock and Warrants will be
accepted by the Board of Directors upon approval of the Articles of
34
<PAGE>
Amendment authorizing the issuance of additional shares of Preferred Stock.
Common Shares. If the Articles of Amendment are approved by the
shareholders, the additional Common Shares will provide authorized and unissued
shares of common stock which may be used by the Company for any proper corporate
purpose. Such purpose might include, without limitation, issuance as part or all
of the consideration required to be paid by the Company in the acquisition of
other businesses or properties, or issuance in public or private sales for cash
as a means of obtaining additional capital for use in the Company's business and
operations, including the use of the additional authorized shares in connection
with the Company's Employee Stock Option Plan and its Employee Stock Purchase
Plan. There are no transactions presently under review by the Board of Directors
which contemplate the issuance of Common Shares, except under the employee
benefit plans.
All of the shares of Common Stock that have been or will be issued are
of a single class, fully paid and non-assessable, voting shares. All of the
Common Stock is subject to the rights and preferences as have been and may in
the future be granted to the holders of the Preferred Stock, as such shares of
Preferred Stock are issued.
Preferred Shares. If the proposed amendment is approved, the Board of
Directors would be empowered, without the necessity of further action or
authorization by the Company's shareholders (unless such action or authorization
is required in a specific case by applicable laws or regulations or stock
exchange rules), to authorize the issuance of the Preferred Shares from time to
time in one or more series or classes, and to fix by resolution the
designations, preferences, limitations, and relative rights of each such series
or class. Each series or class of Preferred Shares could, as determined by the
Board of Directors at the time of issuance, rank, with respect to dividends and
redemption and liquidation rights, senior to the Company's shares of Common
Stock, without par value. 10,000,000 shares of Preferred Stock are presently
authorized by the Company's Amended Articles of Incorporation.
The Board of Directors created the "Class A Preferred Shares" on June
24, 1998. The rights, preferences, limitations and liabilities of the Class A
Preferred Shares were set by action of the Board of Directors and were filed as
an Amendment to the Company's Articles of Incorporation with the Office of the
Secretary of State of the State of Washington on October 23, 1998, as required
by the Washington Business Corporation Act. That prior amendment has been
incorporated in the Articles of Amendment which the Shareholders of the Company
are being asked to approve.
If the Articles of Amendment are approved by the shareholders, the
Company will be authorized to issue up to 30,000,000 shares of Preferred Stock,
17,500,000 of which will be the Class A Preferred Shares with the rights,
preferences, limitations and liabilities as set forth in Section 2.8 of the
Articles of Amendment. At the present time, the Company has issued all
10,000,000 of the Preferred Shares which were previously authorized to be
issued. As of July 2, 1999, the Company has also received offers to purchase an
additional 2,724,230 shares of Class A Preferred Stock. Upon approval of the
Articles of Amendment, the Board of Directors of the Company intends to accept
such subscriptions and authorize the issuance of the additional Class A
Preferred Shares. The Board of Directors will have the authority, without
further shareholder approval, to issue up to the 17,500,000 shares of Class A
Preferred Stock from time-to-time,
The remaining 12,500,000 Preferred Shares may be issued by the Board of
Directors, without the necessity of further action or authorization by the
Company's shareholders (unless such action or authorization is required in a
specific case by applicable laws or regulations or stock exchange rules). The
Board of Directors will have the authority, without further shareholder
approval, to issue these
35
<PAGE>
12,500,000 shares of Preferred Stock from time to time, in one or more
series. The Board will have the right to establish the number of shares to be
included in each such series and to fix the designation, powers, preferences
and rights of the shares of each such series and the price, qualifications,
limitations or restrictions thereof, including dividend, redemption,
liquidation, conversion and voting rights, some or all of which may be
superior to those of the holders of Common Stock. The issuance of the
Preferred Stock could decrease the amount of earnings and assets available
for distribution to the holders of Common Stock or could otherwise adversely
affect the rights of the holders of the Common Stock.
If the Articles of Amendment are approved by the Company's
shareholders, the newly approved Preferred Shares will provide authorized and
unissued shares of Preferred Stock which may be used by the Company for any
proper corporate purpose. Such purpose might include, without limitation,
issuance as part or all of the consideration required to be paid by the Company
in the acquisition of other businesses or properties, or issuance in public or
private sales for cash as a means of obtaining additional capital for use in the
Company's business and operations. There are no transactions presently under
review by the Board of Directors which contemplate the issuance of Preferred
Shares.
It is not possible to state the precise effects of the authorization of
the Preferred Shares upon the rights of the holders of the Company's Common
Shares until the Board of Directors determines the respective preferences,
limitations, and relative rights of the holders of each class or series of the
Preferred Shares. However, such effects might include: (a) reduction of the
amount otherwise available for payment of dividends on Common Shares, to the
extent dividends are payable on any issued Preferred Shares; (b) restrictions on
dividends on the Common Shares; (c) dilution of the voting power of the Common
Shares to the extent that the Preferred Shares had voting rights; (d) conversion
of the Preferred Shares into Common Shares at such prices as the Board
determines, which could include issuance at below the fair market value or
original issue price of the Common Shares; and (e) the holders of Common Shares
not being entitled to share in the Company's assets upon liquidation until
satisfaction of any liquidation preference granted to holders of the Preferred
Shares.
Although the Board of Directors would authorize the issuance of
additional Preferred Shares based on its judgment as to the best interests of
the Company and its shareholders, the issuance of additional authorized
Preferred Shares could have the effect of diluting the voting power per share
and could have the effect of diluting the book value per share of the
outstanding Common Shares. In addition, the Preferred Shares could, in certain
instances, render more difficult or discourage a merger, tender offer or proxy
contest and thus, potentially have an "anti-takeover" effect, especially if
Preferred Shares were issued in response to a potential takeover. In addition,
issuances of authorized Preferred Shares can be implemented, and have been
implemented by some companies in recent years, with voting or conversion
privileges intended to make acquisition of the Company more difficult or more
costly. Such an issuance could deter the types of transactions which may be
proposed or could discourage or limit the shareholders' participation in certain
types of transactions that might be proposed (such as a tender offer), whether
or not such transactions were favored by the majority of the shareholders and
could enhance the ability of officers and directors to retain their positions.
AMENDMENT OF ARTICLES OF INCORPORATION TO ELIMINATE CUMULATIVE VOTING
In proposing the Articles of Amendment, the Board of Directors of the
Company has approved, and is proposing that the Shareholders approve, an
amendment to the Company's Articles of Incorporation (the "Cumulative Voting
Amendment") to eliminate the cumulative voting rights that currently exist with
respect to the election of persons to the Company's Board of Directors.
36
<PAGE>
At the present time, the Company's Articles of Incorporation allow for
cumulative voting by the shareholders in connection with the election of
Directors. Cumulative Voting refers to a particular method of voting shares of
stock that allows a shareholder to cast all of his or her votes (determined by
multiplying the number of his shares by the number of Director positions being
filled) for just one Director. With cumulative voting, a minority shareholder
can elect a person to a seat on a Company's Board of Directors.
Without cumulative voting, the entire Board of Directors of the Company
will be elected by a majority of the shareholders voting at the Company's annual
meeting. With cumulative voting, the result is different. Instead of electing
each director separately, all the director positions are voted on at once with
the top vote-getters taking seats on the Board. If three positions are being
filled, each shareholder gets three votes for each of his or her shares, which
can be voted in any fashion that the shareholder wants.
With three positions open, a shareholder with 30 shares gets 90 votes
(three times 30 votes), while a shareholder with 70 shares gets 210 votes (three
times 70 votes). If the 30 percent shareholder votes all of his or her 90 votes
for one candidate, that candidate will be one of the top three vote-getters
because the remaining 210 votes can only give two other candidates more than 90
votes. Since the three candidates receiving the most votes are elected to the
board, the minority shareholder will have the right to control one seat on the
Board of Directors.
Without cumulative voting, each Director of the Company is elected by
the holders of a majority of the Company's outstanding shares. This permits the
Directors to administer the affairs of the Company for the benefit of all
shareholders. The Board of Directors believes that cumulative voting is
undesirable because it is directed toward the election of one or more Directors
by a special group of shareholders. The shareholder or special group electing a
Director by cumulative voting may seek to have that Director represent the
shareholder's or group's special interest rather than the interests of the
shareholders as a whole. Having Directors who owe their positions to special
groups of shareholders could interfere with the effectiveness of the Board and
could be contrary to the interests of the Company and its shareholders as a
whole.
The majority of state legislatures, including the State of Washington,
the state in which the Company is incorporated, do not require cumulative
voting. The majority of companies listed on the New York Stock Exchange do not
elect Directors by cumulative voting. The Board of Directors believes that
adoption of the Articles of Amendment and the Cumulative Voting Amendment is
appropriate to ensure that Directors will represent all the shareholders and not
a particular group.
AMENDMENT OF ARTICLES OF INCORPORATION TO ELIMINATE PREEMPTIVE RIGHTS
In proposing the Articles of Amendment, the Board of Directors of
the Company has approved, and is proposing that the Shareholders approve, an
amendment to the Company's Articles of Incorporation (the "Preemptive Rights
Amendment") to deny and eliminate preemptive rights for the Company's
shareholders in connection with the offer and sale on shares of the Company's
capital stock.
Preemptive Rights are entitlements that existing shareholders have to
purchase new shares of stock that are to be issued by the Company. In the State
of Washington, in which the Company is incorporated, these rights automatically
exist unless the Articles of Incorporation specifically waive them.
37
<PAGE>
At the present time, the Company's Articles of Incorporation do not
specifically waive preemptive rights and as a result such rights may exist in
the Company's existing shareholders. Nevertheless, virtually all of the
Company's existing shareholders acquired their shares with the understanding
that there were no preemptive rights. Adoption of the proposed Preemptive
Rights Amendment is intended to eliminate existing preemptive rights, if any,
with respect to these prior stock offerings and will correct the
inconsistency between the Company's Articles of Incorporation and the
representations previously made to the Company's shareholders.
The existence of preemptive rights complicates capital fund-raising
efforts. By forcing the Company to offer its shares to existing shareholders
before it offers them to outside investors, these rights can postpone the
sale of Company shares to outsiders. Because preemptive rights require the
Company's shares to be offered pro rata among existing shareholders, they can
also delay funding from an existing investor by requiring the Company to
first offer a percentage of the shares the investor wants to purchase to the
other existing shareholders. At best, this requirement will delay funding. At
worst, it will prevent it. If any of the existing shareholders exercise their
preemptive rights, the investor may decide not to provide funding because
there are not enough shares left to purchase.
The existence of preemptive rights can also present problems for the
Company when and if it is ready to go public. At that time, the underwriter of
the Company's initial public offering will insist on assurances from Company
counsel that the Company can sell its stock to the general public. If the
Company's shareholders have preemptive rights, Company counsel may be unable to
give that opinion without the Company first taking expensive and time consuming
steps to honor those rights.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Articles of Incorporation of Tully's contain a broad
indemnification provision intended to permit Tully's to indemnify officers and
directors for their acts and omissions arising out of the performance of their
duties on behalf of Tully's. However, it is the policy of the United States
Securities and Exchange Commission that agreements to provide indemnification
for securities law violations by the issuer or controlling persons are contrary
to public policy and therefore unenforceable.
Under applicable Washington law, officers and directors of a
corporation have certain fiduciary duties to the corporation and its
shareholders, violation of which may be actionable and may entitle shareholders
to sue for injunctive remedies and damages. Under the Washington Business
Corporations Act, certain significant corporate acts, such as dissolution of a
corporation or sale of substantially all of its assets, require approval by
holders of two-thirds of the shares entitled to vote on such matters
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required as a part of this Registration
Statement are included beginning on the index page F-1 of this Registration
Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During Tully's Coffee last two fiscal years there were no changes or
disagreements with accountants on accounting and financial disclosure of the
type required to be disclosed in this item.
38
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
The financial statements required as a part of this Registration
Statement are included beginning on the index page F-1 of this Registration
Statement.
EXHIBITS
The following exhibits required by item 601 of Regulation S-K are
attached hereto:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Articles of Incorporation, as amended*
3.2 Bylaws*
4.1 Tully's Coffee Corporation 1994 Stock Option Plan**
4.2 Lease Agreement between Tully's and Airport Way Rentals*
4.3 Proposed Amendments to the Articles of Incorporation*
4.4 Borrowing Agreement between Tully's and SeaFirst Bank*
4.5 Tom T. O'Keefe Stock Escrow Agreement**
4.6 Form of Registration Rights Agreement**
23.1 Consent of PricewaterhouseCoopers LLP*
27.1 Financial Data Schedule*
</TABLE>
* Filed herewith
** To be filed by amendment
39
<PAGE>
TULLY'S COFFEE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of PricewaterhouseCoopers LLP, independent accountants ................................ F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Operations......................................................... F-4
Consolidated Statements of Stockholders' Equity............................................... F-5
Consolidated Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tully's Coffee Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position
of Tully's Coffee Corporation and its subsidiary as of March 28, 1999 and
March 29, 1998, and the results of their operations and their cash flows for
the years ended March 28, 1999, March 29, 1998 and March 30, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
July 20, 1999
Seattle, Washington
F-2
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 AND MARCH 29, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,149,160 $ 21,566
Accounts receivable, net of allowance for doubtful
accounts of $166,236 and $54,218, respectively 695,037 353,030
Inventories, net 1,808,556 617,301
Prepaid expenses 84,197 6,249
------------ ------------
Total current assets 3,736,950 998,146
Property and equipment, net 10,991,722 6,507,135
Goodwill, net 4,973,370 146,706
Other intangible assets, net 760,320 343,079
Other assets 256,657 83,363
------------ ------------
Total assets $20,719,019 $ 8,078,429
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 27,744 $ 33,343
Bank line of credit 6,500,000
Accounts payable 1,808,619 2,092,503
Accrued liabilities 1,199,413 375,385
Checks drawn in excess of bank balances - 113,893
------------ ------------
Total current liabilities 9,535,776 2,615,124
Bank line of credit - 4,157,000
Long-term debt, net of current portion 128,978 103,072
Capital lease obligation 192,754 133,873
Deferred lease costs 885,232 642,168
------------ ------------
Total liabilities 10,742,740 7,651,237
------------ ------------
Commitments and contingencies (Note 11)
Stockholders' equity
Series A Convertible Preferred stock, no par;
10,000,000 shares authorized 6,217,480 issued
and outstanding at March 28, 1999, stated value of
$2.50 and a liquidation preference of $15,543,700 14,351,934 -
Common stock, no par value; 40,000,000 shares
authorized; 14,314,000 and 14,265,200 shares issued
and outstanding 7,444,922 7,348,840
Additional paid-in capital 10,489,829 2,839,319
Accumulated deficit (22,310,406) (9,760,967)
------------ ------------
Total stockholders' equity 9,976,279 427,192
------------ ------------
Total liabilities and stockholders' equity $20,719,019 $ 8,078,429
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales $20,207,183 $ 9,020,314 $ 5,430,003
Cost of goods sold and related occupancy expenses 10,705,398 5,012,058 2,850,176
Selling, general and administrative costs 12,087,455 6,096,606 3,617,814
Stock option compensation expense 832,898 564,412 627,017
Depreciation and amortization 1,669,389 613,970 454,784
------------- ------------- -------------
Operating loss 5,087,957 3,266,732 2,119,788
------------- ------------- -------------
Other expense (income)
Interest expense 833,838 258,170 174,827
Miscellaneous expense (income) (69,968) 7,561
Loan guarantee fee expense 728,831 294,669 179,452
------------- ------------- -------------
1,492,701 552,839 361,840
------------- ------------- -------------
Net loss $ 6,580,658 $ 3,819,571 $ 2,481,628
------------- ------------- -------------
------------- ------------- -------------
Preferred stock dividend/accretion 5,968,781 - -
------------- ------------- -------------
Net loss applicable to
common stockholders $12,549,439 $ 3,819,571 $ 2,481,628
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of
common and common equivalent
shares outstanding 14,298,754 13,366,176 12,687,569
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted net loss per common share $ 0.88 $ 0.29 $ 0.20
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TULLY'S COFFEE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
MARCH 28, 1999, MARCH 29, 1998 AND MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK AMOUNT COMMON STOCK
----------------------------- -----------------------------
SHARES SERIES A SHARES AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996 12,416,174 $ 3,786,296
Issuance of 113,169 options in exchange
for loan guarantees
Sale of common stock at $1.75 426,006 745,511
Issuance of common stock in connection with 21,152
purchases of goods and services 34,845
Leasehold interests satisfied by majority shareholders
Stock issuance costs (55,922)
Issuance of stock options
Imputed officer compensation
Net loss
-------------- -------------- -------------- --------------
BALANCE, MARCH 30, 1997 12,863,332 4,510,730
-------------- -------------- -------------- --------------
Issuance of 130,964 options in exchange
for loan guarantees
Sale of common stock at $2.25 per share 1,305,533 2,937,449
Issuance of common stock in connection with 75,000
purchase agreements 168,750
Issuance of common stock in connection with 21,335
purchases of goods and services 48,004
Stock issuance costs (316,093)
Issuance of stock options
Imputed officer compensation
Net loss
-------------- -------------- -------------- --------------
BALANCE, MARCH 29, 1998 14,265,200 7,348,840
-------------- -------------- -------------- --------------
Issuance of 323,924 options in exchange
for loan guarantees
Sale of preferred stock at $2.50 per share 5,217,480 $13,043,700
Conversion of note into preferred stock 1,000,000 2,500,000
Issuance of common stock warrants (5,968,781)
Issuance of common stock in connection with
purchase agreements 10,000 22,500
Preferred stock dividend/accretion 5,968,781
Issuance of common shares in connection with
purchases of goods and services 38,800 73,582
Stock issuance costs (1,191,766)
Issuance of stock options
Imputed officer compensation
Net loss
-------------- -------------- -------------- --------------
BALANCE, MARCH 28, 1999 6,217,480 $14,351,934 14,314,000 $ 7,444,922
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
NOTES
RECEIVABLE ADDITIONAL
FROM PAID-IN ACCUMULATED
STOCKHOLDERS CAPITAL DEFICIT TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996 $ (54,462) $ 960,587 $ (3,459,768) $ 1,232,653
Issuance of 113,169 options in exchange
for loan guarantees 179,452 179,452
Sale of common stock at $1.75 745,511
Issuance of common stock in connection with
purchases of goods and services 34,845
Leasehold interests satisfied by majority shareholders 27,644 27,644
Stock issuance costs (55,922)
Issuance of stock options 26,818 600,199 627,017
Imputed officer compensation 120,000 120,000
Net loss (2,481,628) (2,481,628)
-------------- -------------- -------------- --------------
BALANCE, MARCH 30, 1997 1,860,238 (5,941,396) 429,572
-------------- -------------- -------------- --------------
Issuance of 130,964 options in exchange
for loan guarantees 294,669 294,669
Sale of common stock at $2.25 per share 2,937,449
Issuance of common stock in connection with
purchase agreements 168,750
Issuance of common stock in connection with
purchases of goods and services 48,004
Stock issuance costs (316,093)
Issuance of stock options 564,412 564,412
Imputed officer compensation 120,000 120,000
Net loss (3,819,571) (3,819,571)
-------------- -------------- -------------- --------------
BALANCE, MARCH 29, 1998 2,839,319 (9,760,967) 427,192
-------------- -------------- -------------- --------------
Issuance of 323,924 options in exchange
for loan guarantees 728,831 728,831
Sale of preferred stock at $2.50 per share 13,043,700
Conversion of note into preferred stock 2,500,000
Issuance of common stock warrants 5,968,781 -
Issuance of common stock in connection with
purchase agreements 22,500
Preferred stock dividend/accretion (5,968,781) -
Issuance common shares in in connection with
purchases of goods and services 73,582
Stock issuance costs (1,191,766)
Issuance of stock options 832,898 832,898
Imputed officer compensation 120,000 120,000
Net loss (6,580,658) (6,580,658)
-------------- -------------- -------------- --------------
BALANCE, MARCH 28, 1999 $ - $ 10,489,829 $(22,310,406) $ 9,976,279
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,580,658) $ (3,819,571) $ (2,481,628)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 1,669,389 613,970 454,784
Stock option expense 832,898 564,412 627,017
Provision for doubtful accounts 96,082 54,218
Stock issued in exchange for services 112,018 48,004 34,845
Loan guarantee fee expense 728,831 294,669 179,452
Deferred lease costs 243,065 336,486 80,831
Imputed officer compensation 120,000 120,000 120,000
Loss on sale of property 24,215 7,561
Changes in assets and liabilities
Accounts receivable (290,430) (307,709) (41,436)
Inventories (225,840) (301,822) (122,368)
Prepaid expenses and other assets (78,669) 5,272 17,445
Accounts payable (888,542) 983,052 (82,225)
Accrued liabilities 487,014 184,219 15,027
---------------- ---------------- ----------------
Net cash used in operating activities (3,750,627) (1,224,800) (1,190,695)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,097,609) (3,142,153) (1,338,044)
Proceeds from sale of property and equipment - 323,040
Purchase of Spinelli Coffee Company, net of
cash acquired (6,916,184)
Additions to intangible assets (40,745) (170,600) (37,579)
---------------- ---------------- ----------------
Net cash used in investing activities (11,054,538) (3,312,753) (1,052,583)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit 2,343,000 3,642,000 2,313,277
Repayment of bank line of credit - (1,985,000) (710,000)
Payments on notes payable (648,282) 77,453 (34,669)
Advance to stockholder (42,356)
Proceeds from the issuance of convertible note 2,500,000
Proceeds from issuance of common stock 2,937,449 745,511
Proceeds from issuance of preferred stock 13,043,700
Stock issuance costs (1,191,766) (316,093) (55,922)
Checks drawn in excess of bank balances (113,893) 113,893
---------------- ---------------- ----------------
Net cash provided by financing activities 15,932,759 4,469,702 2,215,841
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,127,594 (67,851) (27,437)
Cash and cash equivalents
Beginning of period 21,566 89,417 116,854
---------------- ---------------- ----------------
End of period $ 1,149,160 21,566 $ 89,417
---------------- ---------------- ----------------
---------------- ---------------- ----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 258,171 $ 220,929 $ 139,436
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Noncash investing and financing activity
Accounts Payable to purchase equipment $ 132,000 $ 703,227 $
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Notes issued to purchase equipment $ 91,325 $ 50,402 $ 20,097
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Note payable converted into preferred stock $ 2,500,000 - -
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Common stock issued to purchase equipment, leasehold
improvements $ - $ 168,750 $ -
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Leasehold interests satisfied by majority shareholder in
settlement of amounts due Company from shareholder $ - $ $ 70,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Deemed preferred stock dividend on preferred stock
issuance as a result of beneficial conversion feature of
attached common stock warrants $ 5,968,781 - -
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND NATURE OF OPERATIONS
Tully's Coffee Corporation, (the "Company") was formed in 1992 for the
purpose of developing and operating retail specialty coffee shops. The
Company sells high quality, premium roasted whole bean coffees, rich brewed
coffees, Italian-style espresso and cold beverages, baked goods and
pastries along with coffee-related hardware and supplies. In addition to
its retail operations, the Company sells roasted coffee to wholesale
accounts. Wholesale operations represent approximately 8% of revenue. The
Company's fiscal years end on the Sunday closest to March 31.
Through franchises, licenses and one joint venture, the Company operates
16 stores internationally. The Company entered into a joint venture to
operate three stores in Japan during 1999. The Company made a $82,500
capital contribution in exchange for a 12% interest in this venture and
its share of losses for 1999 is approximately $12,000.
As of March 28, 1999, the Company operated 59 retail stores in the Seattle
and San Francisco metropolitan areas.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant inter-company balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents represent short-term investments consisting of money
market funds. The Company considers all short-term investments with a
maturity of three months or less when purchased to be cash equivalents.
The Company places its cash and cash equivalents with one financial
institution.
INVENTORIES
Inventories are stated at the lower of cost (on the first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation of property and equipment, which includes
amortization of assets under capital leases, is provided on the
straight-line method over estimated useful lives, generally ranging from
three to seven years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the related lease life,
generally three to fifteen years. The cost of property held under capital
lease is equal to the lower of the net present value of the minimum lease
payments or the fair value of the leased property at the inception of the
lease. Expenditures for additions and betterments are capitalized and
expenditures for repairs and maintenance are charged to expense as
incurred. The cost and accumulated depreciation of assets sold or retired
are removed from the accounts, and the related gains and losses are
included in the results of operations.
F-7
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
When facts and circumstances indicate that the cost of long-lived assets
may be impaired, an evaluation of recoverability is performed by comparing
the carrying value of the asset to projected undiscounted future cash
flows. Upon indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss based on
discounted cash flow by a charge against current operations.
INTANGIBLE ASSETS
Intangible assets include leasehold interests (see Note 10), trademark and
logo design costs, covenants not to compete, goodwill and other assets.
Amortization of leasehold interests is provided the life of the lease,
including options to renew. Goodwill is amortized on the straight-line
method over 15 years. Other intangible assets are amortized on the
straight-line method over 5 to 15 years.
Costs in excess of net assets acquired "Goodwill" is amortized on a
straight-line basis over the expected periods to be benefited. The Company
assesses the recoverability of this intangible asset by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operations. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
CASH MANAGEMENT
Checks issued but not presented for payment to the bank are reflected as
"Checks drawn in excess of bank balances" in the accompanying financial
statements.
REVENUE RECOGNITION
Revenue is recognized at the time of the sale or upon delivery of the
products.
STORE PRE-OPENING COSTS
Costs incurred in connection with start-up and promotion of new store
openings are expensed as incurred.
ADVERTISING COSTS
Costs incurred for advertising and promotions are expensed when incurred
and totaled $433,990, $234,640 and $56,499 during 1999, 1998 and 1997
respectively.
RENT EXPENSE
Certain lease agreements provide for scheduled rent increases during the
lease terms or for rental payments commencing on a date other than the
date of initial occupancy. Rent expense is recorded on a straight-line
basis over the respective terms of the leases.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-8
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
OFFICER COMPENSATION
In accordance with Staff Accounting Bulletin (SAB) 5T added by SAB
79 "Accounting for Expenses on liabilities paid by principal
stockholder", the Company records an amount in the financial
statements for compensation expense for its President who draws no
salary. The Company recognized as compensation expense $120,000 in
1999, 1998 and 1997 and corresponding increases to additional
paid-in capital have been recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents and other current
assets and liabilities, such as accounts payable, accrued
liabilities and accounts receivable as presented in the consolidated
financial statements approximates fair value based on the short-term
nature of these instruments. The Company believes the carrying
amounts of the Company's notes payable, line of credit and long-term
debt approximate fair value because the interest rates are subject
to change with, or approximate, market interest rates.
STOCK-BASED COMPENSATION
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation". The Company has chosen to continue to
account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the amount an employee must pay to
acquire the stock.
NET LOSS PER SHARE
Statement of Financial Accounting Standards No.128 "Earnings per
Share" (SFAS 128) was issued in February 1997. This pronouncement
modified the calculation and disclosure of loss per share. All
periods presented have been prepared under the provisions of SFAS
128. Under these provisions, basic loss per share is calculated as
loss available to the common stockholder divided by the
weighted-average number of common shares outstanding during the
period. Diluted loss per share is based on the weighted-average
number of shares of common stock and common stock equivalents
outstanding during the periods, including options and warrants
computed using the treasury stock method. Common stock equivalent
shares are excluded from the calculation of diluted loss per share
if their effect is antidilutive. The Company had a net loss for all
periods presented herein; therefore none of the options, warrants and
convertible preferred stock outstanding during each of the periods
presented were included in the computation of diluted loss per share
as they were antidilutive. Such instruments convertible into a total
of 10,929,862, 2,000,894 and 1,418,629 shares of common stock were
excluded from the calculations of diluted loss per share for the
years ended March 28, 1999, March 29, 1998 and March 30, 1997,
respectively.
RECLASSIFICATIONS
Reclassifications of prior year balances have been made to conform
to the current year classifications.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities."
This pronouncement will require Tully's to recognize certain
derivatives on its balance sheet at fair value. Changes in the fair
values of derivatives that qualify as cash flow hedges will be
recognized in comprehensive income until the hedged item is
recognized in earnings. Tully's expects that this new standard will
not have a significant effect on its results of operations. SFAS 133
was amended by SFAS 137, deferring the effective date to fiscal
years beginning after June 15, 2000.
2. ACQUISITIONS
On June 26, 1998, the Company acquired all the outstanding shares of
Spinelli Coffee Company for a total purchase price of $8.4 million.
Spinelli Coffee Company had 11 Company-operated stores, 3 licensed
stores, both a roasting and warehouse facility in the San Francisco
Bay area as well as 8 licensed stores in Asia. The acquisition has
been accounted for under the purchase method of accounting in fiscal
1999. The purchase price has been allocated to the assets acquired
and liabilities assumed based on management's estimates, arms-length
negotiations with the sellers and in certain cases,
F-9
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
independent appraisals of asset fair values. The residual of
approximately $5.1 million was recorded as "Goodwill" and is being
amortized on a straight-line basis over 15 years. The results of
operations of the acquired companies have been included in
consolidated results of operations of the Company from the date of the
acquisition.
The purchase price of $8.4 million consists of $6.7 million paid to
the seller, $221,243 of acquisition expense and the assumption of
$1,446,356 in liabilities of the seller.
The by categories of assets acquired and obligations assumed, at the
date of the acquisition is as follows:
<TABLE>
<S> <C>
Assets acquired
Cash $ 5,059
Accounts receivable 163,595
Inventories 965,415
Prepaid and other current assets 41,172
Goodwill and other intangible assets 5,522,928
Property and equipment 1,538,027
Other assets 131,403
------------
Total assets $ 8,367,599
------------
------------
Liabilities assumed
Current liabilities $ (520,478)
Other liabilities (925,878)
------------
$(1,446,356)
------------
------------
</TABLE>
The company incurred costs associated with the acquisition during
1999 of $221,243, primarily for professional fees and direct
costs. Such costs were capitalized as part of the purchase price.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquired entity had been
acquired as of the beginning of the period presented, including the
impact of certain adjustments:
<TABLE>
<CAPTION>
UNAUDITED
----------------------------
YEAR ENDED YEAR ENDED
MARCH 29, MARCH 28,
1998 1999
---------- -----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Net sales $ 15,789 $ 22,180
---------- -----------
---------- -----------
Net loss $ 4,695 $ 6,663
---------- -----------
---------- -----------
Preferred stock dividend/accretion $ - $ 5,970
---------- -----------
Net loss used in calculating loss
per common share $ 4,695 $ 12,633
---------- -----------
---------- -----------
Basic and diluted net loss per
common share $ 0.35 $ 0.88
---------- -----------
---------- -----------
</TABLE>
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the years
presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved
from combined operations.
F-10
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<S> <C>
BALANCE AT MARCH 31, 1996 $ -
Additions charged to costs and expenses 8,718
Deductions (8,718)
---------
BALANCE AT MARCH 30, 1997 $ -
Additions charged to costs and expenses 54,218
Deductions -
---------
BALANCE AT MARCH 29, 1998 $ 54,218
Additions charged to costs and expenses 144,689
Deductions (32,671)
---------
BALANCE AT MARCH 28, 1999 $ 166,236
---------
---------
</TABLE>
4. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Coffee
Unroasted $ 696,281 $ 72,030
Roasted 114,847 55,098
Other goods held for sale 547,064 402,214
Packaging and other supplies 450,364 102,050
---------- ----------
1,808,556 631,392
Reserve for obsolete inventory - (14,091)
---------- ----------
$1,808,556 $ 617,301
---------- ----------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Facility under capital lease $ 87,634 $ 87,634
Machinery and equipment 4,180,325 2,238,758
Leasehold improvements 8,055,382 4,583,789
Office equipment, furniture and fixtures 1,214,774 839,516
Software 127,823 80,322
----------- -----------
13,665,938 7,830,019
Less: Accumulated depreciation and
amortization (2,674,216) (1,322,884)
----------- -----------
$10,991,722 $ 6,507,135
----------- -----------
</TABLE>
Accumulated depreciation related to assets held under capital leases
included in the above balance as of March 28, 1999 and March 29, 1998
was $26,267 and $23,046, respectively.
F-11
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
6. INTANGIBLE ASSETS
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Goodwill $5,297,422 $ 202,458
Leasehold interests 397,848 -
Lease Commissions 134,849 118,090
Trademark and logo design costs 241,199 212,098
Covenants not to complete 85,000 60,000
Other 23,560 23,560
----------- -----------
6,179,878 616,206
Less: Accumulated amortization (446,188) (126,421)
----------- -----------
$5,733,690 $ 489,785
----------- -----------
----------- -----------
</TABLE>
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 4,481,000 $ 2,421,000
Stock options 944,000 671,000
Goodwill 229,000 -
Allowance for doubtful accounts 60,000 18,000
Accrued vacation 41,000 20,000
Other 41,000 -
----------- -----------
Total deferred tax assets 5,796,000 3,130,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (249,000) (33,000)
----------- -----------
Total deferred tax liabilities (249,000) (33,000)
----------- -----------
Total deferred tax assets 5,547,000 3,097,000
Less: Valuation allowance (5,547,000) (3,097,000)
----------- -----------
Net deferred tax assets $ - $ -
----------- -----------
----------- -----------
</TABLE>
At March 28, 1999, the Company had accumulated tax net operating loss
carryforwards of approximately $12,600,000 which expire through 2019.
The Company's ability to use its net operating losses to offset future
income could be subject to restrictions enacted in the United States
Internal Revenue Code of 1986 as amended. These restrictions limit
future use of net operating loss and credit carryfowards if certain
stock ownership changes occur.
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net of Federal benefit (1.6) -- --
Change in tax rate (2.0) -- --
Other 1.3 1.75 1.9
Valuation allowance 36.3 32.25 32.1
------ ------ ------
--% --% --%
------ ------ ------
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commissions payable $ 410,085 -
Employee wages and taxes 589,420 $ 285,474
Other 199,908 89,911
----------- -----------
$ 1,199,413 $ 375,385
</TABLE>
9. BANK LINE OF CREDIT AND LONG-TERM DEBT:
At March 28, 1999, the Company had $6,500,000 outstanding under a
$6,500,000 bank line of credit expiring March 31, 2000. Interest is
charged at the prime lending rate plus 1/2% (8.25% at March 28, 1999).
The line is collateralized by all of the Company's assets, and is
guaranteed by the CEO and a board member in return for a guarantee fee
of 1.0% of the line's monthly average balance. In 1999, 1998 and 1997,
in exchange for the guarantee, the Company issued stock options for
323,924, 130,964 and 113,169 shares of common stock with an estimated
fair market value of $728,828, $294,669 and $179,452 to the guarantors,
respectively.
The line of credit agreement contains certain covenants and
restrictions requiring, among other things, a minimum level of tangible
net worth, limitations on capital expenditures and certain other
restrictions. The Company is in compliance with these provisions at
March 28, 1999.
In June 1998, the Company amended its bank line of credit agreement,
which reduced the amount available under the line to $6,500,000 through
March 1999 and $6,000,000 through the term of the agreement.
On April 1, 1999, the Company paid $500,000 on the line of credit.
In June 1998, the company issued a convertible note to a shareholder in
the amount of $2,500,000. The note accrues interest at a rate of 12%
per annum and matures on June 30, 2003. The note and any accrued
interest is convertible at any time into Series A Preferred Stock at a
conversion rate of $10.00 for four shares of the stock plus warrants to
purchase two shares of common stock at a price of $0.33 per share. The
note was converted on March 28, 1999 into 1,000,000 shares of Series
A Preferred Stock.
F-12
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable in monthly installments of $2,420, $ 133,612 -
including interest at 10.25%, through June 2004,
collateralized by equipment
Note payable in monthly installments of $542,
including interest at 10.9%, through January 2001,
collateralized by equipment 10,313 $ 15,366
Note payable in monthly payments of $442,
including interest at 10.9%, through January 1999,
collateralized by equipment - 3,797
Note payable in monthly installments of $501,
including interest at 4.8%, through June 2000,
collateralized by equipment 12,797 18,090
Note payable in monthly installments of $2,000,
including interest at 9.5%, through January 2000,
repaid in fiscal 1999 - 99,162
----------- ----------
156,722 136,415
Less: Current portion (27,744) (33,343)
----------- ----------
$ 128,978 $ 103,072
----------- ----------
</TABLE>
Future principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2000 $ 27,744
2001 27,759
2002 21,216
2003 21,844
Thereafter 58,159
----------
$ 156,722
----------
</TABLE>
10. RELATED PARTY TRANSACTIONS
A company controlled by the majority stockholder of the Company
provides development services to the Company. The Company incurred
costs of $112,542, $48,500 and $50,000 related to services provided by
this company during 1999, 1998 and 1997.
F-13
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
A director of the Company provides legal services to the Company.
During 1999, 1998 and 1997, the Company incurred costs of $137,683
$64,950 and $13,760, respectively, related to services performed by
the director, (of which $0, $10,614 and $1,527 was payable at March
28, 1999, March 29, 1998 and March 30, 1997, respectively).
During 1997, the Company entered into certain purchase agreements with
third parties to assume leases for certain locations and purchase
certain assets such as equipment and leaseholds. In settlement of
amounts owed to the Company by the majority shareholder, 40,000 shares
of common stock valued at $1.75 per share were issued by the majority
shareholder, rather than the Company, to the lessees. The estimated
fair value of the stock at the transaction dates ($70,000) has been
recorded as leasehold interests.
In June 1998, the Company issued a $2,500,000 convertible note to a
director of the Company. The Company incurred interest expense of
$223,383 related to the note. The note was converted into 1,000,000
shares of preferred stock on March 28, 1999. (See Note 9).
A company owned by a director of the Company leases space for three
retail stores to the Company. Rental expense for 1999, 1998 and 1997
was $185,131, $136,285 and $0, respectively.
Certain stockholders provide a guarantee on the Company's line of
credit (See Note 9).
11. COMMITMENTS
LEASE COMMITMENTS
The Company leases retail and office space under operating leases
which expire through 2016. The leases provide for minimum annual
payments, contingent rentals based upon gross sales and, in certain
cases, escalation clauses and options to renew leases. Rental
expense is recorded on a straight-line basis over the respective
terms of the leases. Rental expense under these leases was
$1,411,804, $960,455 and $542,674 for 1999, 1998 and 1997,
respectively. Contingent rental expense was $131,766, $88,197 and
$23,414 for 1999, 1998 and 1997, respectively. The majority
shareholder has guaranteed performance under one of the Company
operating leases.
In connection with certain leases, lessors granted tenant improvement
allowances. These amounts, included in the financial statements under
the caption deferred lease costs, are amortized into income on a
straight-line basis over the life of the related lease. Also recorded
in deferred lease costs is the excess of rental expense computed on a
straight-line basis over the actual rent payments required by the terms
of the Company's leases.
The Company has subleased certain space through 2003. Sublease
income is $40,596 in 2000 and 2001 and $21,548 and $3,000 in 2002 and
2003, respectively.
F-14
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
Minimum future rental payments under noncancelable operating leases
as of March 28, 1999 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2000 $ 2,393,994
2001 2,235,341
2002 2,005,665
2003 1,721,888
2004 1,346,593
Thereafter 3,640,424
-----------
Total $13,343,905
-----------
-----------
</TABLE>
Minimum future rental payments under capital leases as of March 28,
1999 are summarized as follows:
<TABLE>
<S> <C>
2000 $ 60,760
2001 57,474
2002 45,500
2003 42,165
2004 33,334
Thereafter 251,547
----------
Total minimum lease payment 490,780
Less: Amount representing interest (268,191)
----------
Present value of net minimum lease payments
under capital lease $ 222,589
----------
----------
</TABLE>
PURCHASE COMMITMENTS
During 1998, the Company entered into certain purchase agreements with
third parties to assume leases for certain locations and purchase
certain assets such as equipment and leasehold improvements and obtain
non-compete agreements from the sellers. In the aggregate, the Company
paid $86,200 in cash, issued a $108,456 note payable due in equal
payments over 45 months, and issued 75,000 shares of common stock,
valued at $2.25 per share, to the sellers in connection with the
purchase agreements.
As of July 20, 1999, the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $1.2 million. The
Company believes, based on relationships
F-15
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
established with its suppliers in the past, that the risk of loss on
non-delivery on such purchase commitments is remote. Such contracts are
generally short-term in nature and the Company believes that their cost
approximates fair market value.
The Company entered into a sponsorship agreement, effective February 5,
1999 through 2003, which provides for certain advertising and marketing
rights in exchange for an annual fee. The annual fee is $241,500 for
1999, $476,000 for 2000 and increases by the rate of 3% per year
thereafter.
CONTINGENCIES
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of July 20, 1999, the Company
was not aware of any pending legal proceedings which in the opinion of
management would adversely affect operations, or cash flow.
12. STORE OPERATIONS
Between March 28, 1999 and July 20, 1999, the Company opened 3 new
stores and entered into lease agreements for these additional stores.
The lease terms are commensurate with the Company's existing lease
agreements.
13. STOCK OPTIONS
The Company has a stock option plan (the "Plan") which allows for the
granting of incentive stock options and non-qualified stock options. The
number of shares of common stock of the Company reserved for issue upon
the exercise of options granted under the Plan cannot exceed 5% of the
issued and outstanding shares of the Company. Grants, terms and vesting
provisions are determined by the Board of Directors. The options vest
pro rata over five years beginning with the employee's hire date and
remain exercisable for a period not to exceed seven years from the date
of grant. During 1999, 1998 and 1997, 359,000, 200,451 and 201,948
options, respectively, were granted at exercise prices of $2.25, $1.75
and $1.50, respectively, per share (the estimated fair value at the
grant date) pursuant to the plan.
During 1999, 1998, and 1997, options to purchase 283,000, 240,350 and
352,786 shares, respectively, of common stock owned by the majority
stockholder at an exercise price of $.01 per share were granted to
certain key employees by the stockholder. The options were issued from
the majority stockholder's shares rather than newly issued shares of the
Company to avoid diluting the other stockholders. These options, all of
which were outstanding and fully vested as of March 28, 1999, are
exercisable indefinitely. Although the options were not granted by the
Company, generally accepted accounting principle requires that the
Company record an expense related to these grants. In 1999 and 1998, the
Company recorded an increase to additional paid-in capital and a
non-cash charge to compensation expense of $701,256 and $540,787,
respectively. In 1997, the Company recorded an increase to additional
paid-in capital of $572,074, a decrease to stockholder receivable of
$26,818 and a non-cash charge to compensation expense of $598,892. The
amount of expense recorded represents the difference between the
estimated fair value of the underlying shares valued at $2.25 on the grant
dates and the exercise price.
F-16
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
The Company granted fully vested options to its directors as compensation
for attending Board of Director meetings, and to certain outside
contractors. Non-cash charges of $70,416, $23,625 and $28,125 were recorded
in 1999, 1998 and 1997 related to these options for 33,500, 10,500 and
17,500 shares, respectively.
In addition, in exchange for a guarantee on its line of credit, the Company
issued stock options for 323,924, 130,964 and 113,169 shares of common
stock in 1999, 1998 and 1997 respectively (see Note 9).
Subsequent to March 28, 1999, options to purchase 6,500 shares of common
stock at an exercise price of $0.01 per share were granted to certain
employees and non-employees in connection with the Plan.
F-17
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
Stock option activity including amounts granted by the majority
shareholder, under all plans for 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
Balance, April 1, 1996 733,226 $.025
Granted 685,403 .449
------------- ---------
Balance, March 30, 1997 1,418,629 0.230
Granted 582,265 0.610
------------- ---------
Balance, March 29, 1998 2,000,894 0.340
Granted 1,132,632 0.720
Forfeited (49,885) 0.010
------------- ---------
Balance, March 28, 1999 3,083,641 0.485
------------- ---------
------------- ---------
<CAPTION>
1999 1998 1997
---------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
---------- ---------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
FAIR VALUE FAIR VALUE FAIR VALUE
Weighted average fair value of options
granted during the year whose exercise
price was less than the fair value of the
stock on the date of grant 929,188 $2.01 381,814 $2.24 483,455 $1.67
Weighted average fair value of options
granted during the year whose exercise
price was equal to the fair value of the
stock on the date of grant 203,444 $0.89 200,451 $0.41 201,948 $0.51
--------- ------- -------
1,132,632 --- 582,265 685,403
--------- ------- -------
--------- ------- -------
</TABLE>
In 1999, 1998 and 1997, the majority shareholder granted options to
purchase 283,000, 240,350, and 243,863 shares of his common stock,
respectively. These shares are presented as outstanding in the tables
above.
F-18
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
The following table summarizes information about fixed-price options
outstanding at March 28, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
---------------------------------------------- --------------------------
WEIGHTED- WEIGHTED-AVERAGE WEIGHTED-
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
---------- ------------ ------------ ------------------ ------------- -----------
(YEARS)
<S> <C> <C> <C> <C> <C>
$0.0033 300,000 $0.0033 4 300,000 $0.0033
0.01 1,986,605 0.01 7.7 1,778,804 0.01
0.33 41,078 0.33 5 42,432 0.33
1.50 201,948 1.50 7 121,169 1.50
$1.75 -2.25 554,010 1.90 9.1 236,742 $1.80
---------- ---------
3,083,641 2,479,147
---------- ---------
---------- ---------
</TABLE>
The following table presents net loss for 1999, 1998 and 1997, as
if the Company accounted for compensation expense related to stock options
under the fair value method prescribed by SFAS 123:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------
MARCH 28,1999 MARCH 29,1998 MARCH 31, 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Net loss-as reported $ (6,580,658) $ (3,819,571) $ (2,481,628)
Net loss-pro forma (6,696,739) $ (3,860,160) $ (2,503,129)
Basic and diluted loss per
common share
As reported (0.88) (0.29) (0.20)
Pro forma $(0.89) $(0.29) $(0.20)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following weighted average
assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------
MARCH 28,1999 MARCH 29,1998 MARCH 30, 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Risk free interest rate 4.17% to 5.72% 4.55% to 6.05% 4.84% to 6.07%
Expected lives 5-7 years 5-7 years 5-7 years
</TABLE>
As of March 28, 1999, March 29, 1998 and March 31, 1997 options for
2,479,147, 1,659,112 and 1,237,208 shares respectively, were exercisable.
14. STOCKHOLDERS' EQUITY
F-19
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
- --------------------------------------------------------------------------------
PREFERRED STOCK
In June 1998, the Company offered 2,000,000 Investment Units in a
Regulation D offering. 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
warrants have a ten year life. The per share offering price was $2.50.
The Series A Preferred Stock is convertible into one share each of
common stock, has preference over common stock upon liquidation of the
Company, and the right to participate in any dividend payable on the
common stock. The Preferred Stock also has voting rights. Each share of
Preferred Stock is automatically convertible into one share of the
Company's common stock if the Company makes a 'Qualified Offering' of its
common stock. A Qualified Offering is defined as an offering of the
Company's common stock in excess of $15 million made pursuant to a
registration statement filed under the Securities Act of 1933.
As of July 20, 1999, the offering is oversubscribed by 6,507,100 units,
with an aggregate purchase price of $16,267,750. The Company has not yet
accepted these subscriptions because as of this date does not have a
sufficient number of authorized shares of Class A Preferred Stock to
issue upon acceptance of the subscriptions. The Company's Board of
Directors has proposed certain amendments to the Company's Articles of
Incorporation which include an increase in the number of authorized
Class A Preferred Shares to 17,500,000. When and if the shareholders
ratify and approve the proposed amended Articles, the Company will
accept the subscriptions and issue the Preferred Shares and Warrants.
COMMON STOCK
During 1997, the Company issued 426,006 shares of common stock in a
Regulation D securities offering. Proceeds of the offering were $745,511.
In 1998, in a Regulation A offering, the Company issued 1,305,533 shares
of common stock for a total of $2,937,449. The proposed amendment
discussed above, if approved, would increase the authorized number of
common shares to 120,000,000.
The line of credit arrangement restricts the Company's ability to pay
dividends without the bank's permission.
WARRANTS
In connection with the preferred stock offering, the Company issued
2,870,387 warrants in 1999 to purchase common stock at an exercise price
of $0.33 per share. The exercise price of the warrant at the date of
issuance was below the fair market value of the common stock and is
therefor considered an "in the money" or beneficial conversion feature.
Accounting for the issuance of a convertible preferred stock with a non
detachable 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
excerciseable. As a result of the aformentioned accounting, the Company
allocated $5,968,781 of the preferred stock proceeds to additional paid
in capital. As the warrants are excercisable the entire allocation was
recognized as a preferred dividend through a charge to retained earnings
and a credit to preferred stock. The weighted average fair value of the
warrants on the date of grant was $2.08. In relation to preferred stock
oversubscribed, as of July 20, 1999, an additional 3,253,550 warrants are
pending issue upon approval of proposed amended Articles.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registrant statement to be signed on
its behalf by the undersigned, unto duly authorized.
TULLY'S COFFEE CORPORATION
Date 7/26/1999 By /s/ Tom T. O'Keefe
-------------- ----------------------------
Tom T. O'Keefe, President
This registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Tom T. O'Keefe
- -------------------------------- President, Chief Executive Officer 7/26/1999
Tom T. O'Keefe and Chairman of the Board
/s/ Stephen R. Griffin
- -------------------------------- Vice President - Finance and Chief 7/26/1999
Stephen R. Griffin Financial Officer
40
<PAGE>
/s/ Graham Anderson
- -------------------------------- Director 7/26/1999
Graham Anderson
/s/ Larry A. Culver
- -------------------------------- Director 7/26/1999
Larry A. Culver
/s/ Marc Evanger
- -------------------------------- Director 7/26/1999
Marc Evanger
/s/ Robert J. Holmes
- -------------------------------- Director 7/26/1999
Robert J. Holmes
/s/ Lawrence L. Hood
- -------------------------------- Director 7/26/1999
Lawrence L. Hood
/s/ George Hubman
- -------------------------------- Director 7/26/1999
George Hubman
- -------------------------------- Director
Keith McCaw
/s/ Richard J. Padden
- -------------------------------- Director 7/26/1999
Richard J. Padden
/s/ James Cameron Towne
- -------------------------------- Director 7/26/1999
James Cameron Towne
</TABLE>
41
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
TULLY'S COFFEE CORPORATION
Pursuant to the provisions of RCW 23B.10.060 of the Washington Business
Corporation Act, the undersigned adopts the following Articles of Amendment to
the Articles of Incorporation of TULLY'S COFFEE CORPORATION filed on July 16,
1992, as amended by the Amendment to Articles of Incorporation filed on July 26,
1993, and by the Amendment to Articles of Incorporation filed on April 10, 1995:
FIRST: The name of the Corporation is TULLY'S COFFEE CORPORATION.
SECOND: The following Articles of Amendment to Articles of
Incorporation were adopted by the Shareholders and Directors of the
Corporation on _______, 1998, as follows:
Article 2 is hereby amended to read as follows:
ARTICLE 2. SHARES
2.1 AUTHORIZED CAPITAL
The total number of shares which the Corporation is authorized
to issue is 50,000,000, consisting of 40,000,000 shares of Common Stock
without par value and 10,000,000 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
Articles of 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
<PAGE>
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 shares 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 upon the liquidation, dissolution,
or winding up of the affairs of the Corporation other than the
distributive amounts referred to in this Section, unless otherwise
provided by the Board of Directors in designating a particular series
of Preferred Stock.
-2-
<PAGE>
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.
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.
THIRD: The foregoing Amendment does not provide for an exchange,
reclassification, or cancellation of issued shares.
FOURTH: Except as modified herein, the Articles of Incorporation of
Tully's Coffee Corporation as filed on July 16, 1992, as amended by the
Amendment to Articles of Incorporation filed on July 26, 1993, and by the
Amendment to Articles of Incorporation filed on April 10, 1995, shall remain
unchanged and in full force and effect.
FIFTH: The foregoing Amendment to the Articles of Incorporation was
proposed by the Corporation's Directors and approved by the Corporation's
Shareholders in accordance with the provisions of RCW 23B.10.030 and RCW
23B.10.040.
I certify that I am the President of Tully's Coffee Corporation, and am
authorized to execute the foregoing Articles of Amendment to Articles of
Incorporation on behalf of the Corporation.
DATED: ___________, 1998.
TULLY'S COFFEE CORPORATION
By__________________________
Tom T. O'Keefe
Its President
-3-
<PAGE>
AMENDMENT TO 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 the following Amendments to the Articles
of Incorporation of Tully's Coffee Corporation filed on July 16, 1992, as
amended by that certain Amendment to Articles of Incorporation of Tully's Coffee
Corporation filed on July 26, 1993.
FIRST: The name of the Corporation is TULLY'S COFFEE CORPORATION.
SECOND: The following Amendment to Articles of Incorporation was
adopted by the Shareholders of the Corporation on December 14, 1994, as follows:
Article 2 is hereby amended to read as follows:
ARTICLE 2. SHARES
The total authorized number of shares of this
Corporation is 50,000,000 shares, which shall consist of a
single class of stock.
THIRD: The foregoing Amendment does not provide for an exchange,
reclassification, or cancellation of issued shares.
FOURTH: Except as modified herein, the Articles of Incorporation of
Tully's Coffee Corporation as filed on July 16, 1992, as amended by that certain
Amendment to Articles of Incorporation of Tully's Coffee Corporation as filed on
July 26, 1993, shall remain unchanged and in full force and effect.
FIFTH: The foregoing Amendment to the Articles of Incorporation was
proposed by the Corporation's Directors and adopted by its Shareholders, in
accordance with the provisions of RCW 23B.10.030 and 23B.10.040.
I certify that I am an officer of TULLY'S COFFEE CORPORATION, and am
authorized to execute the foregoing Amendment to Articles of Incorporation on
behalf of the Corporation.
DATED: April ___, 1995
TULLY'S COFFEE CORPORATION
By:_____________________________
Tom T. O'Keefe
Its President
<PAGE>
BYLAWS
OF
TULLY'S COFFEE CORPORATION
ARTICLE 1. OFFICES
The principal office of the Corporation in the State of Washington
shall be located in the City of Mercer Island, County of King. The Corporation
may have such other offices, either in or out of the State of Washington, as the
Board of Directors (at times referred to herein as the "Board") may designate or
as the business of the Corporation may require from time to time.
ARTICLE 2. SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of the shareholders of this
Corporation shall be held each year during the month of April for the purpose of
electing directors and transacting such other business as may come before the
meeting. The failure to hold an annual meeting at the time stated in these
Bylaws does not affect the validity of any corporate action.
2.2 SPECIAL MEETINGS. Except as otherwise provided by law, special
meetings of shareholders of this Corporation shall be held whenever called by
any officer or the Board of Directors. Special meetings shall also be held
whenever the holders of at least ten percent (10%) of all of the votes entitled
to be cast on any issue presented for consideration at the proposed special
meeting, sign, date and deliver to the Corporation's Secretary one (1) or more
written demands for the meeting, describing the purpose or purposes for which
such meeting is to be held. Only business within the purpose or purposes
described in the meeting notice required by the Washington Business Corporation
Act may be conducted at a special shareholders, meeting.
2.3 PLACE OF MEETINGS. Meetings of shareholders shall be held
at the principal office of the Corporation or at such other place in or out
of the State of Washington as determined by the Board of Directors, pursuant
to proper notice.
2.4 RECORD DATE. The Board of Directors is authorized to
determine the record date for one (1) or more voting groups in order to
determine the shareholders entitled to notice of a shareholders' meeting, to
demand a special meeting, to vote, or to take any other action. If the Board
has not determined a record date, it shall be fixed as follows:
<PAGE>
(a) If the Board of Directors has not fixed the record date
for determining shareholders entitled to notice of and to vote at an annual or
special shareholders' meeting, it shall be the day before the first notice is
delivered to shareholders.
(b) If the Board has not fixed the record date for determining
shareholders entitled to a share dividend, it shall be the date the Board of
Directors authorizes the share dividend.
(c) If the Board has not fixed the record date for determining
shareholders entitled to a distribution, other than one involving a purchase,
redemption, or other acquisition of the Corporation's shares, it shall be the
date the Board authorizes the distribution.
(d) If the Board has not fixed a record date for determining
the shareholders entitled to demand a special meeting, it shall be the date the
first shareholder signs the demand.
A record date may not be more than sixty (60) days before the
meeting or action requiring a determination of shareholders.
A determination of shareholders entitled to notice of or to
vote at a shareholders, meeting is effective for any adjournment of the meeting
unless the Board of Directors fixes a new record date, which it must do if the
meeting is adjourned to a date more than one hundred twenty (120) days after the
date fixed for the original meeting.
2.5 SHAREHOLDERS' LIST FOR MEETING. After fixing a record date
for a meeting, an alphabetical list shall be prepared of the names of all of
the Corporation's shareholders on the record date who are entitled to notice
of a shareholders' meeting. The list shall be arranged by voting group, and
within each voting group by class or series of shares, and shall show the
address of and number of shares held by each shareholder.
The shareholders, list must be available for inspection by any
shareholder, beginning ten (10) days prior to the meeting and continuing through
the meeting, at the Corporation's principal office or at a place identified in
the meeting notice in the city where the meeting will be held. A shareholder,
the shareholder's agent, or the shareholder's attorney is entitled to inspect
the list, during regular business hours and at the shareholder I s expense,
during the period it is available for inspection. The Corporation shall make the
shareholders' list available at the meeting, and any shareholder, the
shareholder's agent, or the shareholder's attorney is entitled to inspect the
list at any time during the meeting or any adjournment. Refusal or failure to
-2-
<PAGE>
prepare or make available the shareholders, list shall not affect the validity
of action taken at the meeting.
2.6 NOTICE. Written notice of each shareholders' meeting
stating the date, time, and place and, in case of a special meeting, the
purpose or purposes for which such meeting is called, shall be given by the
Corporation not less than ten (10) (unless a greater period of notice is
required by law in a particular case) nor more than sixty (60) days prior to
the date of the meeting, to each shareholder of record entitled to vote
unless required by law to send notice to all shareholders regardless of
whether or not such shareholders are entitled to vote, to the shareholder's
address as it appears on the current record of shareholders of this
Corporation.
Notice of a special meeting must include a description of the
purpose or purposes for which the meeting is called.
If an annual or special shareholders, meeting is adjourned to
a different date, time, or place, notice need not be given of the new date,
time, and place if the new date, time or place is announced at the meeting
before adjournment. However, if a new record date for the adjourned meeting is
or must be fixed under Section 2.4 of this Article 2, notice of the adjourned
meeting must be given under this Section to persons who are shareholders as of
the new record date.
2.7 WAIVER OF NOTICE. A shareholder may waive any notice
required to be given by these Bylaws, or the Articles of Incorporation of
this Corporation, or any provision of the Washington Business Corporation
Act, as amended, before or after the meeting that is the subject of such
notice. A valid waiver is created by any of the following three methods:
(a) In writing, signed by the shareholder entitled to the
notice and delivered to the Corporation for inclusion in its corporate records;
(b) Attendance at the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting; or
(c) Failure to object at the time of presentation of a matter
not within the purpose or purposes described in the meeting notice.
2.8 QUORUM OF SHAREHOLDERS. At any meeting of shareholders, a
majority in interest of all the shares entitled to vote on a matter,
represented by shareholders of record in person or by proxy, shall constitute
a quorum of that voting group for action on that matter.
-3-
<PAGE>
Once a share is represented at a meeting, other than to object
to holding the meeting or transacting business, it is deemed to be present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting
pursuant to Section 2.4 of this Article 2. At such reconvened meeting, any
business may be transacted which might have been transacted at the meeting as
original notified.
If a quorum exists, action on a matter is approved by a voting
group if the votes cast within the voting group favoring the action exceed the
votes cast within the voting group opposing the action, unless the Washington
Business Corporation Act, as amended, the Articles of Incorporation or these
Bylaws of this Corporation, require a different vote.
2.9 PROXIES. Shareholders of record may vote at any meeting
either in person or by proxy executed in writing. A proxy is effective when
received by the person authorized to tabulate votes for the Corporation. A
proxy is valid for eleven (11) months unless a longer period is expressly
provided in the proxy.
2.10 VOTING. Subject to the provisions of the laws of the State
of Washington, and unless otherwise provided in the Articles of
Incorporation, each outstanding share, regardless of class, is entitled to
one (1) vote on each matter voted on at a shareholders, meeting; provided,
however, that for the election of directors, shareholders are entitled to
cumulate votes by multiplying the number of votes they are entitled to cast
by the number of directors for whom they are entitled to vote, and to cast
the product for a single candidate or distribute the product among two or
more candidates.
2.11 ADJOURNMENT. A majority of the shares represented at the
meeting, even if less than a quorum, may adjourn the meeting from time to
time. At such reconvened meeting at which a quorum is present, any business
may be transacted which might have been transacted at the meeting as
originally notified.
ARTICLE 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by
or under authority of, and the business and affairs of the Corporation shall
be managed under the direction of, a Board of Directors (at times referred to
herein as the "Board"), except as otherwise provided by its Articles of
Incorporation.
3.2 GENERAL STANDARDS FOR DIRECTORS.
(a) A director shall discharge the duties of a director,
including duties as a member of a committee:
-4-
<PAGE>
(1) In good faith;
(2) With the care an ordinarily prudent person in a
like position would exercise under similar circumstances; and
(3) In a manner the director reasonably believes to
be in the best interests of the Corporation.
(b) In discharging the duties of a director, a
director is entitled to rely on information, opinions, reports, or
statements, including financial statements and other financial data, if
prepared or presented by:
(1) One or more officers or employees of the
Corporation whom the director reasonably believes to be reliable and competent
in the matters presented;
(2) Legal counsel, public accountants, or other
persons as to matters the director reasonably believes are within the person's
professional or expert competence; or
(3) A committee of the board of directors of which
the director is not a member if the director reasonably believes-the committee
merits confidence.
(c) A director is not acting in good faith if the
director has knowledge concerning the matter in question that makes reliance
otherwise permitted by subsection (b) of this Section 3.2 unwarranted.
(d) A director is not liable for any action taken as a
director, or any failure to take any action, if the director performed the
duties of the director's office in compliance with this Section 3.2.
3.3 NUMBER AND QUALIFICATIONS. The Board of Directors shall
consist of at least one (1) individual; provided, however, that the number of
directors may be increased or decreased from time to time to any number not
less than one (1) by the shareholders or by the Board of Directors at any
regular or special meeting.
A director need not be a resident of the State of Washington
nor a shareholder of the Corporation.
3.4 ELECTION AND TERM OF OFFICE.
(a) Directors shall be elected at the first annual
shareholders, meeting and at each annual meeting thereafter.
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(b) The terms of the initial directors of the Corporation
expire at the first shareholders, meeting at which directors are elected.
(c) The terms of all other directors expire at the next annual
shareholders, meeting following their election.
(d) The term of a director elected to fill a vacancy expires
at the next shareholders, meeting at which directors are elected.
(e) A decrease in the number of directors does not shorten an
incumbent director's term.
(f) Despite the expiration of a director's term, each director
shall continue to serve until the director's respective successor is elected and
qualified or until there is a decrease in the number of directors.
3.5 MEETINGS AND ACTION OF THE BOARD.
(a) REGULAR MEETINGS. The Board of Directors may hold regular
meetings at such times and at such places in or out of the State of Washington,
as the Board by vote may determine, and if so determined, no notice thereof need
be given.
(b) SPECIAL MEETINGS. The Board of Directors may hold special
meetings in or out of the State of Washington, at any time or place, whenever
called by any officer or two (2) or more directors, notice thereof being given
to each director by the officer calling or by the officer directed to call the
meeting.
(c) Any or all directors may participate in a regular or
special meeting by, or conduct the meeting through the use of, any means of
communication by which all directors participating can hear each other during
the meeting. A director participating in a meeting by this means is deemed to be
present in person at the meeting.
3.6 NOTICE.
(a) No notice is required for regular meetings of the Board of
Directors.
(b) Notice of special meetings of the Board of Directors shall
be given at least two (2) days prior to the date of the meeting, stating the
date, time, and place thereof. Such notice may be oral or written. The purpose
of the meeting need not be given in the notice.
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3.7 WAIVER OF NOTICE. A director may waive notice of a special
meeting of the Board of Directors either before or after the meeting, and
such waiver shall be deemed to be the equivalent of giving notice. The waiver
must be in writing, signed by the director entitled to the notice and
delivered to the Corporation for inclusion in its corporate records.
Attendance at or participation in a meeting shall constitute waiver of any
required notice to the director of the meeting, unless the director at the
beginning of the meeting, or promptly upon the director's arrival, objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
3.8 QUORUM AND VOTING.
(a) A majority of the members of the Board of Directors shall
constitute a quorum for the transaction of business.
(b) If a quorum is present when a vote is taken, the
affirmative vote of a majority of directors present is the act of the Board of
Directors, except as otherwise required by the Articles of Incorporation or by
these Bylaws.
3.9 ADJOURNMENT. A majority of the directors present, even if
less than a quorum, may adjourn a meeting and continue it to a later time.
Notice of the adjourned meeting or of the business to be transacted there,
other than by announcement at the meeting at which the adjournment is taken,
shall not be necessary. At an adjourned meeting at which a quorum is present,
any business may be transacted which could have been transacted at the
meeting as originally called.
3.10 RESIGNATION AND REMOVAL.
(a) Any director of this Corporation may resign at any time by
giving written notice to the Board of Directors, its Chairperson, the President,
or Secretary of this Corporation. Any such resignation is effective when the
notice is delivered, unless the notice specifies a later effective date.
(b) The shareholders, at a special meeting called expressly
for that purpose, may remove from office with or without cause one or more
directors and elect their successors.
(c) A director may be removed only if the number of votes cast
for removal exceeds the number of votes cast against removal.
3.11 VACANCIES. Unless otherwise provided by the Washington
Business Corporation Act, as amended, in the case of any vacancy in the Board
of Directors, including a vacancy resulting from an increase in the number of
directors, the remaining directors, whether constituting a quorum or not, or
the shareholders, may fill
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the vacancy. If the directors in office constitute fewer than a quorum of the
Board, they may fill the vacancy by the affirmative vote of a majority of all
the directors in office.
3.12 COMPENSATION. By resolution of the Board of Directors, each
director may be paid expenses, if any, for attendance at each meeting of the
Board of Directors, and may be paid a stated salary as director or a fixed sum
for attendance at each meeting of the Board of Directors, or both. No such
payment shall preclude any director from serving this Corporation in any other
capacity and receiving compensation therefor.
3.13 PRESUMPTION OF ASSENT. A director who is present at a
meeting of the Board of Directors when action is taken is deemed to have
assented to the action taken unless:
(a) The director objects at the beginning of the meeting, or
promptly upon the director's arrival, to holding it or transacting business at
the meeting;
(b) The director's dissent or abstention from the action is
entered in the minutes of the meeting; or
(c) The director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the Corporation within a reasonable time after adjournment of
the meeting.
The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
3.14 COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors may designate from among its members an
Executive Committee and one or more other committees, each of which:
(a) Must have two (2) or more members;
(b) Must be governed by the same rules regarding meetings,
action without meetings, notice and waiver of notice, and quorum and voting
requirements as applied to the Board of Directors; and
(c) To the extent provided in such resolution, shall have and
may exercise all of the authority of the Board of Directors, except no such
committee shall have the authority to:
(1) Authorize or approve a distribution except
according to a general, formula or method prescribed by the Board of Directors;
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(2) Approve or propose to shareholders action
which the Washington Business Corporation Act, as amended, requires to be
approved by the shareholders;
(3) Fill vacancies on the Board of Directors or
on any of its committees;
(4) Amend the Articles of Incorporation;
(5) Adopt, amend, or repeal these Bylaws;
(6) Approve a plan of merger not requiring
shareholder approval; or
(7) Authorize or approve the issuance or sale
or contract for sale of shares, or determine the designation and relative
rights, preferences, and limitations on a class or series of shares, except
that the Board of Directors may authorize a committee, or a senior executive
officer of the Corporation, to do so within limits specifically prescribed by
the Board of Directors.
ARTICLE 4. SPECIAL MEASURES
APPLYING TO BOTH SHAREHOLDERS' MEETINGS
AND DIRECTORS MEETINGS
4.1 ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken at a meeting of the shareholders or the Board of Directors may be
accomplished without a meeting if the action is taken by all of the
shareholders entitled to vote thereon, or by all of the members of the Board
of Directors, as the case may be. The action must be evidenced by one or more
written consents describing the action to be taken, signed by all of the
shareholders entitled to vote thereon, or by all directors, as the case may
be, and delivered to the Corporation for inclusion in the minutes. Directors'
consents may be signed either before or after the action taken.
A shareholder may withdraw consent only by delivering a
written notice of withdrawal to the Corporation prior to the time that all
consents are in the possession of the Corporation. A director may not withdraw
consent.
Action taken by unanimous written consent is effective when
the last director signs the consent, unless the consent specifies a later
effective date. Action taken by unanimous written consent of the shareholders
effective when all consents are in possession of the Corporation, unless the
consent specifies a later effective date.
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If the corporate laws of the State of Washington require that
notice of a proposed action be given to nonvoting shareholders and the action is
to be taken by unanimous consent of the voting shareholders, the Corporation
must give its nonvoting shareholders written notice of the proposed action at
least ten (10) days before the action is taken. The notice must contain or be
accompanied by the same material that would have been required to be sent to the
nonvoting shareholders a notice of meeting at which the proposed action would
have been submitted to such shareholders for action.
4.2 CONFERENCE TELEPHONE. Meetings of the shareholders and
Board of Directors may be effectuated by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other during the meeting. Participation by such
means shall constitute presence in person at such meeting.
4.3 ORAL AND WRITTEN NOTICE. Oral notice may be communicated in
person or by telephone, wire or wireless equipment, which does not transmit a
facsimile of the notice. Oral notice is effective when communicated.
Written notice may be transmitted by mail, private carrier, or
personal delivery; telegraph or teletype; or telephone, wire, or wireless
equipment which transmits a facsimile of the notice. Written notice is effective
at the earliest of the following:
(a) When received;
(b) five (5) days after its deposit in the U.S. mail
if mailed with first-class postage; or
(c) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the addressee. Notwithstanding the previous sentence,
written notice by the Corporation to a shareholder is effective when mailed, if
it is in comprehensible form and if mailed with first-class postage and
correctly addressed to the shareholder's address shown on the Corporation's
current record of shareholders.
ARTICLE 5. OFFICERS
5.1 POSITIONS. The officers of this Corporation shall be a
President and a Secretary or a Secretary/Treasurer, each of whom shall be
appointed by the Board of Directors. Such other officers and assistant
officers as may be deemed necessary may be appointed by the Board or
appointed by a duly appointed officer to whom such authority has been
delegated by Board resolution, including a Treasurer, and one or
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more Vice-Presidents. No officer need be a shareholder or a director of this
Corporation. Any two or more offices may be held by the same person.
The Board of Directors in its discretion may elect a Chairman
from among its members to serve as Chairman of the Board, who, when present,
shall preside at all meetings of the Board, and who shall have such other powers
as the Board may determine. The Chairman shall be the chief executive officer of
the Corporation. If the Board fails to elect a Chairman, the President of the
Corporation shall be its chief executive officer as well as its chief operating
officer.
5.2 APPOINTMENT AND TERM OF OFFICE. The officers of this
Corporation shall be appointed annually by the Board of Directors at the
first meeting of the Board held after each annual meeting of the
shareholders. If officers are not appointed at such meeting, such appointment
shall occur as soon as possible thereafter. Each officer shall hold office
until a successor shall have been appointed and qualified or until said
officer's earlier death, resignation, or removal.
5.3 POWERS AND DUTIES. If the Board appoints persons to fill
the following officer positions, such officers shall have the powers and
duties set forth below:
(a) PRESIDENT. The President shall be the chief operating
officer of this Corporation and, subject to the direction and control of the
Board of Directors, shall have general supervision of the business of this
Corporation. Unless a Chairman of the Board of Directors has been elected and is
present, the President shall preside at meetings of the Board and shall be the
chief executive officer of the Corporation. The President or any Vice-President
or such other persons as are specifically authorized by vote of the Board shall
sign all bonds, deeds, mortgages, and any other agreements, and such signatures
shall be sufficient to bind this Corporation. The President shall perform such
other duties as the Board of Directors shall designate.
(b) VICE-PRESIDENT. During the absence or disability of the
President, the Vice-President (or in the event that there be more than one
Vice-President, the Vice Presidents in the order designated by the Board of
Directors) shall exercise all functions of the President, except as limited by
resolution of the Board of Directors. Each Vice-President shall have such duties
as may be assigned from time to time to such Vice President by the President or
by the Board of Directors.
(c) SECRETARY. The Secretary shall:
(1) Prepare minutes of the directors, and
shareholders, meetings and keep them in one or more books provided for
that1purpose;
(2) Authenticate records of the Corporation;
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(3) See that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law;
(4) Be custodian of the corporate records and
of the seal of the Corporation (if any), and affix the seal of the Corporation
to all documents as may be required;
(5) Keep a register of the post office
address of each shareholder which shall be furnished to the Secretary by such
shareholder;
(6) Sign with the President, or a Vice-
President, certificates for shares of the Corporation, the issuance of which
shall have been authorized by resolution of the Board of Directors;
(7) Have general charge of the stock transfer
books of the Corporation; and
(8) In general, perform all the duties
incident to the office of Secretary and such other duties as from time to
time may be assigned by the President or by the Board of Directors. In the
Secretary's absence, an Assistant Secretary may perform the Secretary's
duties.
(d) TREASURER. The Treasurer shall have the care and custody
of -the money, funds, and securities of the Corporation, shall account for the
same, and shall have and exercise, under the supervision of the Board of
Directors, all the powers and duties commonly incident to this office.
5.4 SALARIES AND CONTRACT RIGHTS. The salaries, if any, of the
officers shall be fixed from time to time by the Board of Directors. The
appointment of an officer shall not of itself create contract rights.
5.5 RESIGNATION OR REMOVAL. Any officer of this Corporation may
resign at any time by giving written notice to the Board of Directors, or to
any officer of this Corporation. Any such resignation is effective when the
notice is delivered, unless the notice specifies a later date, and shall be
without prejudice to the contract rights, if any, of such officer.
The Board of Directors, by majority vote, may remove any
officer or agent appointed by it, with or without cause. The removal shall be
without prejudice to the contract rights, if any, of the person so removed.
5.6 VACANCIES. If the office of any officer becomes vacant by
any reason, the directors may appoint a successor or successors who shall
hold office for the unexpired term.
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ARTICLE 6. CONTRACTS, LOANS,
CHECKS AND DEPOSITS
6.1 CONTRACTS. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation, and
such authority may be general or confined to specific instances.
6.2 LOANS. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board. Such authority may be general
or confined to specific instances.
6.3 LOANS TO OFFICERS AND DIRECTORS. No loans shall be made by
the Corporation to its officers or directors, unless first approved by the
holders of two-thirds (2/3) of the shares, and no loans shall be made by the
Corporation secured by its shares.
6.4 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation, shall be signed by such officer or officers, agent
or agents, of the
Corporation and in such manner as is from time to time
determined by resolution of the Board of Directors.
6.5 DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
of Directors may select.
ARTICLE 7. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
7.1 ISSUANCE OF CERTIFICATES FOR SHARES. No shares of this
Corporation shall be issued unless authorized by the Board of Directors. Such
authorization shall include the maximum number of shares to be issued, the
consideration to be received, and a statement that the Board considers the
consideration to be adequate. Certificates for shares of the Corporation
shall be in such form as is consistent with the provisions of the Washington
Business Corporation Act, as amended, and shall state:
(a) The name of the Corporation and that the Corporation is
organized under the laws of the State of Washington;
(b) The name of the person to whom issued; and
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(c) The number and class of shares and the designation of the
series, if any, which such certificate represents.
7.2 TRANSFER OF STOCK. Shares of stock may be transferred by
delivery of the certificate accompanied by either an assignment in writing on
the reverse side of the certificate or by a written power of attorney to
assign and transfer the same on the books of this Corporation. The shares
shall be transferable on the books of this Corporation upon surrender thereof
so assigned or endorsed.
7.3 LOSS OR DESTRUCTION OF CERTIFICATES. In case of the loss,
mutilation, or destruction of a certificate of stock, a duplicate may be
issued upon such terms as the Board of Directors shall prescribe.
7.4 RECORD DATE AND TRANSFER BOOKS. As set forth in Section 2.4
of these Bylaws, the Board of Directors may fix in advance a record date for
any such determination of shareholders, such date in any case to be not more
than sixty (60) days and, in case of a meeting of shareholders, not less than
ten (10) days prior to the date on which the particular action, requiring
such determination of shareholders, is to be taken.
7.5 VOTING RECORD. As set forth in Section 2.5 of these Bylaws,
the officer or agent having charge of the stock transfer books for shares of
this Corporation shall make at least ten (10) days before each meeting of
shareholders a complete record of the shareholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each.
ARTICLE 8. BOOKS AND RECORDS
8.1 MINUTE BOOK, BOOKS OF ACCOUNTS, AND SHARE REGISTER. The
Corporation:
(a) Shall keep as permanent records minutes of all meetings of
its shareholders and the Board of Directors, a record of all actions taken by
the shareholders or the Board without a meeting, and a record of all actions
taken by a committee of the Board exercising the authority of the Board on
behalf of the Corporation;
(b) Shall maintain appropriate accounting records;
(c) Or its agent shall maintain a record of the shareholders
of the Corporation, in a form that permits preparation of a list of the names
and addresses of all shareholders, in alphabetical order by class of shares
showing the number and class of shares held by each; and
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(d) Shall keep a copy of the following records at its
principal office:
(1) The Articles or Restated Articles of
Incorporation and all amendments to them currently in effect;
(2) The Bylaws or Restated Bylaws and all
amendments to them currently in effect;
(3) The minutes of all shareholders, meetings,
and records of all actions taken by shareholders without a meeting, for the
past three (3) years;
(4) Its financial statements for the past
three (3) years, including balance sheets showing in reasonable detail the
financial condition of the Corporation as of the close of each fiscal year,
and an income statement showing the results of its operations during each
fiscal year prepared on the basis of generally accepted accounting
principles, or, if not, prepared on a basis explained therein;
(5) All written communications to
shareholders generally within the past three (3) years;
(6) A list of the names and business
addresses of its current directors and officers; and
(7) Its most recent annual report delivered to
the Washington Secretary of State.
8.2 COPIES OF RESOLUTIONS. Any person dealing with the
Corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the Board of Directors or shareholders, when
certified by the President or Secretary of the Corporation.
ARTICLE 9. FISCAL YEAR
AND FINANCIAL STATEMENTS
9.1 FISCAL YEAR. The fiscal year end of the Corporation shall
be determined by resolution of the Board of Directors.
9.2 FINANCIAL STATEMENTS. Not later than four months after the
close of each fiscal year, and in any event prior to the annual meeting of
shareholders, the Corporation shall prepare:
(a) A balance sheet showing in reasonable detail the financial
condition of the Corporation as of the close of its fiscal year; and
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(b) An income statement showing the results of the
Corporation's operation during its fiscal year.
Such statements may be consolidated or combined statements of
the Corporation and one or more of its subsidiaries, as appropriate. If
financial statements are prepared by the Corporation for any purpose on the
basis of generally accepted accounting principles, the annual statements must
also be prepared, and disclose that they are prepared, on that basis. If
financial statements are prepared only on a basis other than generally accepted
accounting principles, they must be prepared, and disclose that they are
prepared, on the same basis as other reports and statements prepared by the
Corporation for the use of others.
Upon written request, the Corporation shall promptly mail to
any shareholder a copy of the most recent balance sheet and income statement. If
prepared for other purposes, the Corporation shall also furnish upon written
request a statement of sources and applications of funds, and a statement of
changes in shareholders, equity, for the most recent fiscal year.
If the annual financial statements are reported upon by a
public accountant, the accountant's report must accompany them. If not, the
statements must be accompanied by a statement of the President or the person
responsible for the Corporation's accounting records:
(a) Stating the person's reasonable belief whether the
statements were prepared on the basis of generally accepted accounting
principles and, if not, describing the basis of preparation; and
(b) Describing any respects in which the statements were not
prepared on a basis of accounting consistent with the basis used for statements
prepared for the preceding year.
For purposes of this section, "shareholder" includes a
beneficial owner whose shares are held in a voting trust or by a nominee on the
beneficial owner's behalf.
ARTICLE 10. CORPORATE SEAL
The seal of this Corporation, if the Corporation has a corporate seal,
shall consist of the name of the Corporation, the state of its incorporation and
the year of its incorporation.
ARTICLE 11. INDEMNIFICATION OF
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
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11.1 DEFINITIONS. As used in this Article 11:
(a) "Act" means the Washington Business Corporation Act, now
or hereafter in force.
(b) "Corporation" means this Corporation, and any domestic or
foreign predecessor entity which, in a merger or other transaction, ceased to
exist.
(c) "Director" means an individual who is or was a director of
the Corporation or an individual who, while a director of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.
(d) "Expenses" include counsel fees.
(e) "Indemnitee" means an individual made a party to a
proceeding because the individual is or was a director, officer, employee, or
agent of the Corporation, and who possesses indemnification rights pursuant to
the Articles of Incorporation, these Bylaws, or other corporate action. If the
Articles of Incorporation so provide, the term shall also include, for officers,
employees, or agents, service at the Corporation's request as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise. "Indemnitee" shall also include the heirs, executors, and other
successors in interest of such individuals.
(f) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including an excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
(g) "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, and whether formal or informal.
11.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. The Corporation shall indemnify and advance expenses to its
directors, officers, agents, and employees, as follows:
(a) DIRECTORS AND OFFICERS. The 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:
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(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 or officer
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 was not legally
entitled.
(b) EMPLOYEES-AND AGENTS WHO ARE NOT DIRECTORS. The
Corporation shall indemnify and advance expenses to its employees and agents who
are not directors to the same extent as directors and officers against liability
arising out of a proceeding to which such individual was made a party because
the individual is or was an employee or agent of the Corporation.
(c) ADVANCE FOR EXPENSES. The Corporation shall advance
expenses incurred by such persons who are parties to a proceeding in advance of
final disposition of the proceeding pursuant to the terms set forth in these
Bylaws, or in a separate directors, resolution or contract.
11.3 PROCEDURE FOR SEEKING INDEMNIFICATION AND/OR ADVANCEMENT OF
EXPENSES.
(a) NOTIFICATION AND DEFENSE OF CLAIM. Indemnitee shall
promptly notify the Corporation in writing of any proceeding for which
indemnification could be sought under this Article. In addition, Indemnitee
shall give the Corporation such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
With respect to any such proceeding as to which Indemnitee has
notified the Corporation:
(1) The Corporation will be entitled to
participate therein at its own expense;
(2) Except as otherwise provided below, to
the extent that it may wish, the Corporation, jointly with any other
indemnifying party similarly notified, will be entitled to assume the defense
thereof, with counsel satisfactory to Indemnitee. Indemnitee's consent to
such counsel will not be unreasonably withheld.
After notice from the Corporation to Indemnitee
of its election to assume the defense, the Corporation will not be liable
to Indemnitee under this Article
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for any legal or other expenses subsequently incurred by Indemnitee in
connection with such defense. However:
-- Indemnitee shall continue to have the right
to employ its counsel in such proceeding,
at Indemnitee's expense; and
-- If:
(i) The employment of counsel by
Indemnitee has been authorized by the Corporation;
(ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Corporation
and Indemnitee in the conduct of such defense; or
(iii) The Corporation shall not in fact
have employed counsel to assume the defense of such proceeding, the fees and
expenses of Indemnitee's counsel shall be at the expense of the Corporation.
The Corporation shall not be entitled
to assume the defense of any proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall reasonably have made the
conclusion that a conflict of interest may exist between the Corporation and
the Indemnitee in the conduct of the defense.
(b) INFORMATION TO BE SUBMITTED AND METHOD OF DETERMINATION
AND AUTHORIZATION OF INDEMNIFICATION. For the purpose of pursuing rights to
indemnification under this Article, the Indemnitee shall submit to the Board of
Directors:
-- A sworn statement requesting
indemnification; and
-- Reasonable evidence of all amounts for
which indemnification is requested
(together, constitutes "Indemnification
Statement").
Submission of an Indemnification Statement to the Board of Directors shall
create a presumption that the Indemnitee is entitled to indemnification
hereunder, and the Corporation shall, within sixty (60) calendar days
thereafter, make payments requested in the Indemnification Statement to or for
the benefit of the Indemnitee, unless
(i) Within such sixty (60) calendar day
period it shall be determined by the Corporation that the Indemnitee is not
entitled to indemnification under this Article;
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(ii) Such vote shall be based upon clear
and convincing evidence (sufficient to rebut the foregoing presumption); and
(iii) The Indemnitee shall receive notice
in writing of such determination, which notice shall disclose with
particularity the evidence upon which the determination is based.
At the election of the President, the
foregoing determination may be made either:
-- The written consent of the shareholders
owning a majority of the stock of the
Corporation;
-- A committee chosen by written consent of a
majority of the directors of the
Corporation, and consisting solely of two
(2) or more directors not at the time
parties to the proceeding; or
-- As provided by RCW 23B.08.550, as amended.
Any determination that the Indemnitee is not
entitled to indemnification, and any failure to make the payments requested
in the Indemnification Statement shall be subject to judicial review by any
court of competent jurisdiction.
(c) SPECIAL PROCEDURE REGARDING ADVANCE FOR EXPENSES. An
indemnitee seeking payment of expenses in advance of a final disposition of the
proceeding must furnish the Corporation, as part of the Indemnification
Statement:
(1) A written affirmation of the Indemnitee's
good faith belief that the Indemnitee has met the standard of conduct
required to be eligible for indemnification; and
(2) A written undertaking, constituting an
unlimited general obligation of the Indemnitee, to repay the advance if it is
ultimately determined that the director did not meet the required standard of
conduct.
If the Corporation determines that indemnification
is authorized, the Indemnitee's request for advance of expenses shall be
granted.
(d) SETTLEMENT. The Corporation is not liable to indemnify
Indemnitee for any amounts paid in settlement of any proceeding without the
Corporation's written consent. The Corporation shall not settle any proceeding
in any manner which would impose any penalty or limitation on Indemnitee without
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Indemnitee's written consent. Neither the Corporation nor Indemnitee will
unreasonably withhold its consent to a proposed settlement.
11.4 CONTRACT AND RELATED RIGHTS.
(a) CONTRACT RIGHTS. The right of an Indemnitee to
indemnification and advancement of expenses is a contract right upon which the
Indemnitee shall be presumed to have relied in determining to serve or to
continue to serve in his or her capacity with the Corporation. Such right shall
continue as long as Indemnitee shall be subject to any possible proceeding. Any
amendment to or repeal of this Article shall not adversely affect any right or
protection of an Indemnitee with respect to any acts or omissions of such
Indemnitee occurring prior to such amendment-or repeal.
(b) OPTIONAL INSURANCE, CONTRACTS, AND FUNDING. The
Corporation may:
(1) Maintain insurance, at its expense, to
protect itself and any Indemnitee against any liability, whether or not the
Corporation would have power to indemnify the individual against the same
liability under RCW 23B.08.510 or .520, or successor statute;
(2) Enter into contracts with any Indemnitee
in furtherance of this Article and consistent with the Act; and
(3) Create a trust fund, grant a security
interest, or use other means (including without limitation a letter of
credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.
(c) SEVERABILITY. If any provision or application of this
Article shall be invalid or unenforceable, the remainder of this Article and its
remaining applications shall not be affected thereby, and shall continue in full
force and effect.
(d) RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this
Article:
-- For indemnification is not paid in full by
the Corporation within sixty (60) days; or
-- For advancement of expenses is not paid in
full by the Corporation within twenty (20)
days,
after a written claim has been received by the Corporation, the Indemnitee may,
but need not, at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. To the extent successful in whole or in
part, the Indemnitee shall
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be entitled to also be paid the expense (to be proportionately prorated if
the Indemnitee is only partially successful) of prosecuting such claim.
Neither:
(1) The failure of the Corporation (including
its Board of Directors, its shareholders, or independent legal counsel) to
have made a determination prior to the commencement of such proceeding that
indemnification of or reimbursement or advancement of expenses to the
Indemnitee is proper in the circumstances, nor
(2) An actual determination by the
Corporation (including its Board of Directors, its shareholders, or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of expenses, shall be
a defense to the proceeding or create a presumption that the Indemnitee is
not so entitled.
11.5 EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Corporation shall not be obligated pursuant to the terms
of these Bylaws to indemnify or advance expenses to Indemnitee with respect
to any proceeding:
(a) CLAIMS INITIATED BY INDEMNITEE. Initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
these Bylaws or any other statute or law or as otherwise required under the
statute; but such indemnification or advancement of expenses may be provided by
the Corporation in specific cases if the Board of Directors finds it to be
appropriate.
(b) LACK OF GOOD FAITH. Instituted by Indemnitee to enforce or
interpret this Agreement, if a court of competent jurisdiction determines that
each of the material assertions made by Indemnitee in such proceeding was not
made in good faith or was frivolous.
(c) INSURED CLAIMS. For which any of the expenses or
liabilities for indemnification is being sought have been paid directly to
Indemnitee by an insurance carrier under a policy of officers' and directors'
liability insurance maintained by the Corporation.
(d) PROHIBITED BY LAW. If the Corporation is prohibited by the
Washington Business Corporation Act or other applicable law as then in effect
from paying such indemnification and/or advancement of expenses. For example,
the Corporation and Indemnitee acknowledge that the Securities and Exchange
Commission ("SEC") has taken the position that indemnification is not possible
for liabilities arising under certain federal securities laws, and federal
legislation prohibits
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<PAGE>
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Corporation has undertaken or may be required in the
future to undertake with the SEC to submit the question of indemnification to
a court in certain circumstances for a determination of the Corporation's
right under public policy to indemnify Indemnitee.
ARTICLE 12. AMENDMENTS TO BYLAWS
12.1 BY THE SHAREHOLDERS. These Bylaws may be amended or
repealed by a majority of all of the votes entitled to be cast, at any annual
or special meeting of the shareholders notice of the proposed amendment is
contained in the notice of the meeting.
12.2 BY THE BOARD OF DIRECTORS. These Bylaws may be amended or
repealed by the affirmative vote of a majority of the whole Board of
Directors at any meeting of the Board, if notice of the proposed amendment is
contained in the notice of the meeting. However, the directors may not modify
the Bylaws fixing their qualifications, classifications, or term of office.
ARTICLE 13. RULES OF ORDER
The rules contained in the most recent edition of Robert's Rules of
Order, newly revised, shall govern all meetings of shareholders and directors
where those rules are not inconsistent with the Articles of Incorporation, these
Bylaws, or other rules of order of this Corporation.
ADOPTED by the Board of Directors July 30th, 1992.
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AMENDMENT TO BYLAWS
OF
TULLY'S COFFEE CORPORATION
Pursuant to Article 12.2 of the Bylaws of Tully's Coffee Corporation,
as adopted by the Board of Directors July 30, 1992, the undersigned adopts the
following amendments to the Bylaws.
Article 2.1 is hereby amended to read as follows:
2.1 ANNUAL MEETING. The annual meeting of the shareholders of
this Corporation shall be held each year prior to the end of the calendar
year in which the fiscal year ends for the purpose of electing directors and
transacting such other business as may come before the meeting. The failure
to hold an annual meeting at the time stated in these Bylaws does not affect
the validity of any corporate action.
This amendment was adopted by vote of the Board of Directors at the
meeting of October 23, 1997.
- ----------------------- --------------------------
Tom T. O'Keefe Stephen R. Griffin
Chairman of the Board Vice President - Finance
President Secretary
<PAGE>
AIRPORT WAY LEASE
THIS LEASE AGREEMENT made this 9th day of November, 1994, by and between AIRPORT
WAY RENTALS (the "Lessor") and TULLY'S COFFEE CORPORATION, a Washington
Corporation (the "Lessee").
1. PREMISES. Lessor does hereby lease to Lessee those certain premises, to
wit: approximately 8,400 square feet of office and warehouse as outlined
on Exhibit A attached hereto (hereinafter called "Premises") being situated
upon land known as 2010 Airport Way S., Seattle, WA. See Legal attached as
Exhibit B.
2. TERM. This Lease shall be for a term of ten (10) years and 0 months
commencing December 15, 1994 (the "Commencement Date") and terminating
March 31 2005. Providing Lessee is not then in default, Lessor grants
Lessee four (4) five (5) year options to renew providing Lessee gives
Lessor written notice of its' intent to renew 180 days prior to the then
current term.
3. RENT. Lessee covenants and agrees to pay Lessor at 2025 1st Ave., Suite
710, Seattle, Washington 98121, or to such other party or at such other
place as Lessor may hereafter designate, monthly rent in advance without
offset or deduction, on or before the first (1st) day of each month of the
Lease term in the following amount:
<TABLE>
<S> <C>
Months 1-3 $0
Months 4-30 $3,200
Months 31-60 $3,600
Months 61-90 $3,900
Months 91-120 $4,200
Options Market Rent
</TABLE>
4. USE. Lessee shall use the Premises for the purposes of anything related to
Tully's Coffee office, roasting plant and warehouse operations and shall
comply with all governmental laws, ordinances, regulations, orders and
directives and insurance requirements applicable to Lessee's use of the
Premises.
5. RULES AND REGULATIONS. Lessee agrees to comply with any Rules and
Regulations attached hereto, as well as such other reasonable rules and
regulations as may from time to time be adopted by Lessor for the
management, good order and safety of common areas, the building and its
tenant(s). Lessee shall be responsible for the compliance with such rules
and regulations by its employees, agents and invitees. Lessor's failure to
enforce any of such rules and regulations against Lessee or any other
tenant shall not be deemed to be a waiver of same.
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<PAGE>
6. MAINTENANCE. Lessee agrees by taking possession that the Premises are in
tenantable and good condition. Lessee shall at its expense and at all
times keep and maintain the Premises, including but not limited to
storefronts, exterior doors and windows, tenant division walls and
mechanical, electrical, sprinkler and other utility systems, together with
connections to utility distribution systems, in good condition, repair and
order and in accordance with applicable laws, ordinances, rules,
regulations and requirements of government authorities and insurance rating
bureaus. Lessee shall further keep the Premises and adjoining common areas
in a neat, clean, safe and sanitary condition; protect water, drain, gas
and other pipes to prevent freezing or clogging and repair all leaks and
damage caused thereby; replace all glass and panels in windows and doors of
the Premises which become cracked, broken or damaged; and remove ice and
snow from entries and common areas immediately adjacent to the Premises.
After reasonable notice from Lessee, Lessor shall repair the roof, exterior
walls (excluding storefronts, doors and windows), foundations and common
areas and facilities, if any, and the cost thereof shall be shared as
provided in Section 8 hereof.
7. UTILITIES AND FEES. Lessee agrees to pay promptly when due all charges for
light, heat, water, sewer, garbage, fire protection and other utilities and
services to the Premises, and all license fees and other governmental
charges levied on Lessee's property and the operation of Lessee's business
on the Premises. Lessor shall not be liable for any injury or damages
suffered as a result of the interruption of utilities or services by fire,
or other casualty, strike, riot, vandalism, the making of necessary repairs
or improvements, or other causes beyond Lessor's control.
8. MONTHLY OPERATING EXPENSE ADJUSTMENTS. Lessee shall pay as additional
monthly rent all expenses incurred by Lessor for operation of the land and
building(s) described on Exhibits A and B hereto during the term or any
extension hereof, as follows:
a) Real Estate taxes and assessments.
b) Usual and necessary costs of operation, maintenance and repair as
determined by standard accounting practice, including without
limitation, all utilities and services not metered or charged directly
to Lessee, insurance, painting, upkeep and repair of building
exterior, roofing, parking, landscaping, and all common areas and
facilities.
Lessor shall from time to time estimate to Lessee its monthly expense based
upon existing costs. Such monthly estimated amount shall be paid by Lessee
on or before the first day of each month. Lessor, annually or upon
termination hereof, shall compute Lessee's actual expenses. Any
overpayment shall be refunded or credited to Lessee, at its option, and any
deficiency shall be paid by Lessee within fifteen (15) days after the date
of Lessor's statement. Lessor's records showing expenditures made for such
expenses shall be available for Lessee's inspection at any reasonable time.
9. LESSOR'S RESERVATIONS. Lessor reserves the right without liability to
Lessee: (a) to inspect the Premises, to show them to prospective tenants,
and if they are vacated, to prepare
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<PAGE>
them for re-occupancy; (b) to retain at all times and to use in appropriate
instances keys to doors within and into the Premises; (c) to make repairs,
alterations, additions or improvements, whether structural or otherwise, in
or about the building, and for such purposes to enter upon the Premises and
during the continuance of any work, to close common areas to interrupt or
temporarily suspend building services and facilities, all without affecting
any of Lessee's obligations hereunder, so long as the Premises are
reasonably accessible; and (d) generally to perform any act relating to the
safety, protection and preservation of the Premises or building.
10. POSSESSION. If Lessor does not deliver possession of the Premises at the
Commencement Date of the term of this Lease, Lessee may give Lessor written
notice of its intention to cancel this Lease if possession is not delivered
within ninety (90) days after receipt of such notice by Lessor. Lessor
shall not be liable for any damages caused by failure to deliver
possession of the Premises and Lessee shall not be liable for any rent
until such time as Lessor delivers possession. A delay of possession
shall not extend the term or the termination date. If Lessor offers
possession of the Premises or any portion thereof prior to the
Commencement Date of the term of this Lease, and if Lessee accepts such
early possession, then both parties shall be bound by all of the covenants
and terms contained herein during such period of early possession
including the payment of rent which shall be pro-rated accordingly and for
the number of days of such early possession.
11. ASSIGNMENT AND SUBLETTING. Lessee shall not either voluntarily or by
operation of law assign, transfer, convey or encumber this Lease or any
interest under it, or sublet to occupy or use the Premises without Lessor's
prior written consent. Lessor reserves the right to recapture the Premises
or applicable portion thereof in lieu of giving its consent by notice given
to Lessee within twenty (20) days after receipt of Lessee's written request
for assignment or subletting. Such recapture shall terminate this Lease as
to the applicable space effective on the prospective date of assignment or
subletting, which shall be the last day of a calendar month and not earlier
than sixty (60) days after receipt of Lessee's request hereunder. In the
event that Lessor shall not elect to recapture and shall thereafter give
its consent, Lessee shall pay Lessor a reasonable fee, not to exceed Five
Hundred And No/100 Dollars ($500.00) to reimburse Lessor for processing
costs incurred in connection with such consent. Lessor's consent shall not
release or discharge Lessee from future liability under this Lease and
shall not waive Lessor's right to consent to any future assignment or
sublease. Any assignment or subletting without Lessor's consent shall be
void and shall, at Lessor's option, constitute a default under this Lease.
A transfer by the present majority shareholders of ownership or control of
a majority of the voting stock of corporate Lessee shall be deemed an
assignment.
12. ALTERATIONS. After obtaining the prior written consent of Lessor, Lessee
may make minor alterations, additions and improvements in said Premises at
its sole cost and expense. Lessee agrees to save Lessor harmless from any
damage, loss, or expense arising therefrom and to comply with all laws,
ordinances, rules and regulations. Upon termination of this Lease, all
alterations, additions and improvements made in, to or on the Premises
(including without limitation all electrical, lighting, plumbing, heating,
air conditioning, and communications equipment and systems, doors, windows,
partitions, drapery, carpeting, shelving, counters, and
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<PAGE>
physically attached fixtures unless excluded by written agreement
annexed hereto), shall remain upon and be surrendered as a part of
the Premises; provided however, upon Lessor's request, Lessee shall
promptly remove those additions, alterations, or improvements as
may be specified by Lessor, and repair, and restore the Premises to
its original condition at Lessee's sole cost and expense.
13. LIENS. Lessee shall keep the Premises free from any liens arising
out of any work performed, materials furnished, equipment supplied,
or obligations incurred by or on behalf of Lessee. No work
performed, material furnished, equipment supplied or obligations
incurred by or on behalf of Lessee shall be deemed to be for the
immediate use and benefit of Lessor so that no mechanic's lien or
other lien shall be allowed against Lessor's estate in the
premises. Lessor does not authorize or consent to the performance
of any work, furnishing of material or supply of equipment incurred
by or on behalf of Lessee prior to Lessee providing Lessor with the
signed waiver of lien referred to above. Lessor may require, at
Lessee's sole cost and expense, a lien release and completion bond
in an amount equal to either the actual contract price or one and
one-half times the estimated cost of any improvements, additions or
alterations in the Premises which Lessee desires to make, to insure
Lessor against any liability for lien and to insure completion of
the work.
14. SIGNS. All signs or symbols placed by Lessee in the windows and
doors of the Premises, or upon any exterior part of the building,
shall be subject to Lessor's prior approval. Prior to termination
of this Lease, Lessee will remove all signs placed by it upon the
Premises, and will repair any damages caused by such removal.
15. INSURANCE.
A. Lessee shall pay for and maintain, during the entire Lease
Term, the following policies of insurance:
(i) Commercial general liability insurance, including
products, completed operations coverage and auto
liability insurance covering Lessee's operations and
the Premises including but not limited to coverage for
personal injuries with limits of not less than
$1,000,000 combined single limit for death, personal
injury, and property damage, per occurrence, including
Lessor as an additional insured. Such policies shall be
endorsed to provide contractual liability insurance
covering all liability assumed by Lessee under the
provisions of this Lease and a copy of said endorsement
will be delivered to Lessor prior to commencement of
the Term.
(ii) Special cause of loss or "all risk" perils property
insurance upon all building improvements and
alterations on the Premises and upon Lessee's property,
including but not limited to Fire and Extended
Coverage, Vandalism and Malicious Mischief, in the
amount of one hundred percent (100%) full replacement
cost, including Lessor as an additional insured, as its
interests may
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<PAGE>
appear, with a loss payable clause in favor of Lessor
to the extent of Lessor's interest in property damaged,
except to the extent proceeds are required to be paid
to holders of mortgages or trust deeds.
B. Each policy provided by Lessee shall expressly provide that it
it shall not be subject to cancellation or material change
without at least thirty (30) days prior written notice to the
other party. Lessee shall furnish the other, prior to
commencement of the Term, with insurance certificates and,
upon request, copies of such policies required to be
maintained hereunder.
16. INDEMNITY AGAINST LIABILITY FOR LOSS OR DAMAGE BY LESSEE.
A. Lessee assumes all liability for and shall indemnify, hold
harmless and defend Lessor from and against all loss, damage
or expense which the Lessor may sustain or incur, and against
any and all claims, demands, suits and actions whatsoever,
including expense of investigation and litigation, on account
of injury to or death of persons, including without limitation
employees of Lessor, employees of Lessee or its affiliated
companies (Lessee hereby acknowledges its immunity under the
Washington State Industrial Insurance Act and hereby waives
said immunity for purposes of this indemnification clause with
respect to any claims by its employees) or on account of
damage to or destruction of property, including without
limitation property owned by and property in the care, custody
or control of Lessor during the Term, due to or arising in any
manner from:
(i) The acts or negligence of Lessee or any contractor,
subcontractor, or agent of Lessee or their respective
employees;
(ii) Except as otherwise provided in Subsection 16(E), the
condition, use or operation of the Premises and/or
materials or substances used by Lessee or any of its
contractors, subcontractors or agents of Lessee or by
their respective employees, regardless of whether or not
furnished by Lessor under this Lease or otherwise;
(iii) Any damage or injury to persons or property arising out
of Lessee's breach or this Lease, including, but not
limited to, obligations of Lessee under Section 6,
Maintenance.
C. Lessee assumes all responsibility for and shall indemnify and
hold harmless Lessor and affiliated companies against, and
shall assume the defense of, any claims, suits or judgments
brought against Lessor or its affiliated companies under the
Federal Employer's Liability Act whenever employees of Lessee
or any of its contractors, subcontractors, or agents claim or
allege that they are employees of Lessor or its
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<PAGE>
affiliated companies within the meaning of said Act or that
they are furthering operational activities of Lessor or its
affiliated companies.
D. In the event any claim or suit is brought against Lessor or
affiliated companies by employees of Lessee or any of
contractors, subcontractors, or agents, under the theory
outlined in the preceding paragraph, Lessor shall give Lessee
reasonable notice in writing of the pendency of such claim or
suit and, upon receipt of such notice, Lessee shall forthwith
assume the defense of such claim or suit, and shall save and
hold harmless Lessor and affiliated companies, from all loss,
cost, expense and liability by reason thereof.
E. Lessee assumes all responsibility for and shall indemnify,
hold harmless and defend Lessor and affiliated companies, from
and against any and all claims, demands, suits and actions
whatsoever, including expense of investigation and litigation,
for injury to or death of Lessee or any contractor,
subcontractor, or agent or any of their respective employees,
due to the condition or state of repair of the portions of the
Premises which Lessee is responsible to maintain under this
Lease or other property of Lessor upon, about or in connection
with the terms of the Lease. Lessor assumes all responsibility
for and shall indemnify, hold harmless and defend Lessee and
affiliated companies, from and against any and all claims,
demands, suits and actions whatsoever, including expense of
investigation and litigation, for injury to or death of Lessee
or any contractor, subcontractor, or agent or any of their
respective employees, due to the condition or state of repair
of the portions of the Premises for which Lessor is
responsible to maintain under this Lease or other property of
Lessor upon, about or in connection with the terms of this
Lease.
F. It is mutually understood and agreed that the assumption of
liabilities and indemnification provided for in this Section
shall survive any termination of this Lease.
G. Notwithstanding the preceding provisions of this Section 16,
Lessor and Lessee each herewith and hereby release and relieve
the other and waive its entire right of recovery against the
other for loss or damage arising out of or incident to perils
insured against, whether due to the negligence of either
party, their agents, employees, contractors, invitees or
otherwise.
17. DAMAGE OR DESTRUCTION. If the Premises or the building shall be
damaged or destroyed by fire or other casualty, Lessor shall have
the option either (a) to repair or rebuild within one hundred
twenty (120) days, or (b) not to repair or rebuild, and to cancel
this Lease on thirty (30) days notice. If Lessor fails to give
Lessee written notice of its election within thirty (30) days from
the date of damage, or if the restoration of the Premises cannot be
completed within one hundred twenty (120) days from date of notice,
Lessee may cancel this Lease at its option on thirty (30) days
notice. During the period of untenantability, rent shall abate in
the same ratio as the portion of the Premises rendered
untenantable bears to the whole
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of the Premises; provided that if the damage is due to the fault or neglect
of Lessee, there shall be no abatement of rent.
18. EMINENT DOMAIN. If the whole of the Premises shall be taken by any public
authority under the power of eminent domain, or purchased by the condemnor
in lieu thereof, then the term of this Lease shall cease as of the date
possession is taken by such public authority. If only part of the Premises
shall be so taken, the Lease shall terminate only as to the portion taken,
and shall continue in full force and effect as to the remainder of said
Premises, and the monthly rent shall be reduced proportionately; provided,
however, if the remainder of the Premises cannot be made tenantable for the
purposes for which Lessee has been using the Premises or if more than
twenty-five percent (25%) of the rentable square footage of the Premises
shall be so taken, then either party, by written notice to the other, given
at least thirty (30) days prior to the date that possession must be
surrendered to the public authority, may terminate this Lease effective as
of such surrender of possession. If any part of the building other than the
Premises shall be so taken so as to render in Lessor's opinion the
termination of this Lease beneficial to the remaining portion of the
building, Lessor shall have the right within sixty (60) days of said taking
to terminate this Lease upon thirty (30) days written notice to Lessee. In
the event of any taking, whether whole or partial, Lessor shall be entitled
to all awards, settlements, or compensation which may be given for the land
and buildings. Lessee shall have no claim against Lessor for the value of
any unexpired term of this Lease.
19. INSOLVENCY. If Lessee shall be declared insolvent or bankrupt, or if
Lessee's leasehold interest herein shall be levied upon or seized under
writ of any court of law, or if a trustee, receiver or assignee be
appointed for the property of Lessee, whether under operation of State or
Federal statutes, then Lessor may, at its option, immediately, without
notice (notice being expressly waived), terminate this Lease and take
possession of said Premises, without, however, terminating Lessee's
obligations under this Lease.
20. DEFAULT AND RE-ENTRY. If Lessee fails to keep or perform any of the
covenants and agreements herein contained, then the same shall constitute a
breach hereof, and if Lessee has not remedied such breach within three (3)
days after written notice thereof from Lessor if the breach is non-payment
of rent or other charges, or within ten (10) days after written notice
thereof from Lessor in the event of the breach of any other covenant, then
Lessor may, at its option, without further notice or demand:
(a) Cure such breach for the account and at the expense of Lessee and such
expense shall be deemed additional rent due on the first of the
following month; or
(b) Re-enter the Premises, remove all persons therefrom, take possession
of the Premises and remove all personal property therein at Lessee's
risk and expense and (1) terminate this Lease, or (2) without
terminating the Lease or in any way affecting the rights and remedies
of Lessor or the obligations of Lessee, re-let the whole or any part
of the Premises as agent for Lessee, upon such terms and conditions as
Lessor may deem
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advisable. In either event, any monies received from Lessee and any
deposit or other amounts held by Lessor may first be applied by Lessor
to any damages suffered by Lessor as a result of such default,
including without limitation, costs and expenses incurred on re-entry
and re-letting, any unamortized tenant improvements and commissions,
cleaning, necessary repairs, restoration and alteration, and any
commissions incurred on re-letting, and the balance of such amounts
may be applied toward payment of other sums due to Lessor hereunder.
In the event the Premises are re-let for Lessee's account, Lessee
shall pay to Lessor monthly any deficiency; however, Lessor shall not
be required to pay any excess to Lessee. The above remedies of Lessor
are cumulative and in addition to RCW 59.12 or any other remedies now
or hereafter allowed by law or elsewhere provided for in this Lease.
21. REMOVAL OF PROPERTY. Any property of Lessee removed by Lessor in accordance
with Section 19 above may be stored by Lessor or may be deposited on any
area adjacent to the building at the sole risk and expense of Lessee and
without any further responsibility of Lessor, and Lessor may at its sole
discretion without or after removing said property, without obligation to
do so and without notice to Lessee, sell or dispose of the same at public
or private sale for the account of Lessee, in which event the proceeds
therefrom may be applied by Lessor upon any indebtedness due from Lessee to
Lessor. Lessee waives all claims for damages that may be caused by Lessor
re-entering the Premises and removing or disposing of said property as
herein provided.
22. COSTS AND ATTORNEYS' FEES. In the event either party shall commence legal
action to enforce any provision of this Lease, the court shall award to the
prevailing party all reasonable attorneys' fees and all costs incurred in
connection therewith, including fees and costs on appeal. Any action
relating to this Lease shall be brought in the County in which the Premises
are located or, at Lessor's election, in King County, Washington.
23. SUBROGATION WAIVER. Lessor and Lessee each herewith and hereby release and
relieve the other and waive its entire right of recovery against the other
for loss or damage arising out of or incident to the perils of fire,
explosion or any other perils described in the "extended coverage"
insurance endorsement approved for use in the state in which the Premises
are situated which occurs in, on or about the Premises, whether due to the
negligence of either party, their agents, employees or otherwise.
24. HOLDING OVER. If Lessee, with the implied or express consent of Lessor,
shall hold over after the expiration of the term of this Lease, Lessee
shall remain bound by all the covenants and agreements herein, except that
(a) the tenancy shall be from month-to-month and (b) the monthly rent to be
paid by Lessee shall be determined by multiplying the monthly rent in
effect immediately preceding such expiration by a factor, the numerator of
which shall be the applicable E.H. Boeckh & Associates Construction Index
for the Seattle area most current preceding such expiration, and the
denominator of which shall be the said Boeckh Index which was current at
the date of the commencement of this Lease. In no event, however, shall the
monthly rent be less than that in effect immediately preceding such
expiration.
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25. SUBORDINATION AND ATTORNMENT; MORTGAGE PROTECTION
A. SUBORDINATION-NOTICE TO MORTGAGEE. At the request of Lessor, Lessee
shall promptly execute, acknowledge and deliver, all instruments which
may be required to subordinate this Lease to any existing or future
mortgages, deeds of trust and/or other security documents on or
encumbering the Premises or on the leasehold interest held by Lessor,
and to any extensions, renewals, or replacements thereof, provided
that the mortgagee or beneficiary, as the case may be, shall agree to
recognize this Lease in the event of foreclosure if Lessee is not in
default at such time. Notwithstanding anything to the contrary in this
Lease, the Lessor shall not be in default under any provision of this
Lease unless written notice specifying such default is given to Lessor
and to all persons who have an interest in all or part of the Premises
as mortgagees and/or deed of trust beneficiaries, and the mortgagee or
deed of trust holder shall have been provided thirty (30) days within
which to cure or commence the cure of such default and thereafter
diligently pursue such cure to completion including, if necessary to
effectuate such cure, the commencement of judicial or non-judicial
foreclosure proceedings.
B. LESSEE'S CERTIFICATE. Lessee shall at any time and from time to time
upon not less than three (3) days prior written notice from Lessor
execute, acknowledge and deliver to Lessor a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and
certifying that this Lease as so modified is in full force and
effect), and the date to which the rental and other charges are paid
in advance, if any; and (b) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of the Lessor or
Lessee hereunder, or specifying such defaults if any are claimed; and
(c) setting forth the date of commencement of rents and expiration of
the Lease Term hereof. Any such statement may be relied upon by any
prospective purchaser on encumbrancer of all or any portion of the
Premises of which the Premises are a part.
C. MORTGAGE PROTECTION CLAUSE. Lessee agrees to notify any mortgagee
and/or trust deed holders, by registered mail, with a copy of any
notice of default served upon the Lessor, provided that prior to such
notice Lessee has been notified in writing (by way of Notice of
Assignment of Rents and Lease, or otherwise) of the addresses of such
mortgagees and/or trust deed holders. Lessee further agrees that if
Lessor shall have failed to cure such default, then the mortgagees
and/or trust deed holders have thirty (30) days within which to cure
such default or if such default cannot be cured within that time, then
such additional times as may be necessary if within such thirty (30)
days any mortgagee and/or trust deed holder has commenced and is
diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings
if necessary to affect such cure),
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in which event this Lease shall not be terminated if such remedies
are being so diligently pursued.
26. SURRENDER OF POSSESSION. Lessee shall, prior to the termination of this
Lease or of Lessee's right to possession, remove from the Premises all
personal property which Lessee is entitled to remove and those
alterations, additions, improvements or signs which may be required by
Lessor to be removed, pursuant to Sections 12 and 14 above, and shall
repair or pay for all damage to the Premises caused by such removal. All
such property remaining and every interest of Lessee in the same shall be
conclusively presumed to have been conveyed by Lessee to Lessor under
this Lease as a bill of sale, without compensation, allowance, or credit
to Lessee. Lessee shall upon termination of this Lease or of Lessee's
right of possession, deliver all keys to Lessor and peacefully quit and
surrender the Premises without notice, neat and clean, and in as good
condition as when Lessee took possession, except for reasonable wear and
tear as determined by Lessor.
27. LATE PAYMENT AND INTEREST. If any amount due from Lessee is not received
in the office of Lessor on or before the tenth (10th) day following the
date upon which such amount is due and payable, a late charge of five
percent (5%) of said amount shall become immediately due and payable,
which late charge Lessor and Lessee agree represents a fair and
reasonable estimate of the processing and accounting costs that Lessor
will incur by reason of such late payment. All past due amounts owing to
Lessor under this Lease, including rent, shall be assessed interest at an
annual percentage rate of twelve percent (12%) from the date due or date
of invoice, whichever is earlier, until paid.
28. NOTICE. Any notice required to be given by either party to the other
pursuant to the provisions of this Lease or any law, present or future,
shall be in writing, and shall be deemed to have been duly given or
sent if either delivered personally or deposited in the United States
Mail, postage prepaid, registered or certified, return receipt requested,
addressed to the Lessor at 2025 1st Ave., Suite 710, Seattle, Washington
or to Lessee at 2010 Airport Way S., Seattle, WA., or to such other
address as either party may designate.
29. NO WAIVER OR COVENANTS. Time is of the essence of this Lease. Any
waiver by either party of any breach hereof by the other shall not be
considered a waiver of any future similar or other breach.
30. ENTIRE AGREEMENT. It is expressly understood and agreed by Lessor and
Lessee that there are no promises, agreements, conditions,
understandings, inducements, warranties, or representations, oral or
written, express or implied, between them, other than as herein set
forth and that this Lease shall not be modified in any manner except
by an instrument in writing executed by the parties.
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31. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. The covenants and agreements
of this Lease shall be binding upon the heirs, executors, administrators,
successors and assigns of both parties hereto, except as herein above
provided.
32. LESSOR'S ASSIGNMENT. It is fully understood that Lessor shall have the
full right to assign this Lease, without any notice to Lessee, thereby
relieving Lessor from all and any liabilities; provided however, that
the assignee assumes all Lessor's responsibilities as set forth in this
Lease.
LESSOR: AIRPORT WAY RENTALS LESSEE: TULLY'S COFFEE CORPORATION
By: /s/ Arthur L. Wahl By: /s/ Tom T. O'Keefe
----------------------------------- -------------------------------
Art Wahl Tom T. O'Keefe
Its: Its: President
----------------------------------
Date: 11-10-94 Date: 11/9/94
33. LEASE CANCELLATION RIGHT BY LESSEE. It is understood and agreed that so
long as Lessee of the subject property is not in default, Lessee may
cancel this lease at the end of the 39th month of the subject lease
arrangement.
Any time after the 39th month, Lessee may present the Lessor with an
intent to vacate letter, and along with that letter a cashier's check
in the amount of one year's current prescribed rent plus taxes for that
year, and agree to leave the premises within 60 days of said notice.
If Lessee is in default at the time of the notice, the cancellation will
be accepted upon the cure of the default and the payment of the rent
indicated above.
By: /s/ Arthur L. Wahl By: /s/ Tom T. O'Keefe
----------------------------------- -------------------------------
Arthur L. Wahl Tom T. O'Keefe
Date: 11-10-94 Date: 11/9/94
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ARTICLES OF AMENDMENT AND RESTATEMENT OF THE
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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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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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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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.
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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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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
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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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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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<PAGE>
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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<PAGE>
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
--------------------------------------- ---------------------------------
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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<PAGE>
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
-12-
<PAGE>
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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<PAGE>
[LOGO] BUSINESS LOAN AGREEMENT
- -------------------------------------------------------------------------------
PART A
THIS BUSINESS LOAN AGREEMENT ("AGREEMENT") IS MADE BETWEEN TULLY'S COFFEE
CORPORATION ("BORROWER") AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION (FORMERLY KNOWN AS BANK OF AMERICA NW, N.A.) DOING BUSINESS AS
SEAFIRST BANK (INCLUDING ITS SUCCESSORS AND/OR ASSIGNS "BANK") WITH RESPECT
TO THE FOLLOWING:
1) LINE OF CREDIT. Subject to the terms of this Agreement, Bank will make
loans to Borrower under a revolving line of credit as follows:
(a) TOTAL AMOUNT AVAILABLE: $3,000,000; Three Million Dollars.
Subject to the provisions of any accounts receivable and/or inventory
borrowing plan required herein; it is expressly understood that
collateral ineligible for borrowing purposes is determined solely by
Bank. This Line of Credit replaces $2,000,000 Line of Credit expiring
August 31, 1997 under Business Loan Agreement dated March 21, 1996 and
$500,000 Line of Credit expiring March 31, 1997 under Borrowing Agreement
dated November 1, 1996.
(b) AVAILABILITY PERIOD: Advances are available from December 15,
1996 through March 31, 2000. However, if loans are made and/or new
promissory notes executed after the termination date, such advances will
be subject to the terms of this Agreement until repaid in full unless a
written statement signed by Bank and Borrower provides otherwise, or a
replacement loan agreement is executed. The making of such additional
advances alone, however, does not constitute a commitment by Bank to make
any further advances or extend the availability period.
(c) INTEREST RATE: Bank's publicly announced prime rate plus .50
percent of the principal per annum, adjusted on the date of any Bank
prime rate change.
(d) INTEREST RATE BASIS: All interest will be calculated on the basis
of actual number of days elapsed over a year of 360 days.
(e) REPAYMENT: At the times and in amounts as set forth in note(s)
required under Part B Article 1 of this Agreement.
(f) LOAN FEE: .50% annual fee on the total commitment amount, payable
each April 1st in advance.
(g) COLLATERAL: This revolving line of credit shall be secured by a
security interest, which is hereby granted, in favor of Bank on the
following collateral: first security interest in all assets of Borrower.
PART B
1. PROMISSORY NOTE(S). All loans shall be evidenced by promissory notes in
a form and substance satisfactory to Bank.
2. CONDITIONS TO AVAILABILITY OF LOAN/LINE OF CREDIT. Before Bank is
obligated to disburse/make any advance, or at any time thereafter which
Bank deems necessary and appropriate, Bank must receive all of the
following, each of which must be in form and substance satisfactory to
Bank ("loan documents"):
2.1 Original, executed promissory note(s);
2.2 Original executed security agreement(s) and/or deed(s) of trust
covering the collateral described in Part A;
2.3 All collateral described in Part A in which Bank wishes to have a
possessory security interest;
2.4 Financing statement(s) executed by Borrower;
2.5 Such evidence that Bank may deem appropriate that the security
interests and liens in favor of Bank are valid, enforceable, and
prior to the rights and interests of others except those consented
to in writing by Bank;
+2.6 The following guaranty(ies) in favor of the Bank: Tom T. O'Keefe,
George E. Hubman
+2.7 Subordination agreement(s) in favor of Bank executed by: N/A
2.8 Evidence that the execution, delivery, and performance by Borrower
of this Agreement and the execution, delivery, and performance by
Borrower and any corporate guarantor or corporate subordinating
creditor of any instrument or agreement required under this
Agreement, as appropriate, have been duly authorized;
2.9 Any other document which is deemed by the Bank to be required from
time to time to evidence loans or to effect the provisions of this
Agreement;
2.10 If requested by Bank, a written legal opinion expressed to Bank,
of counsel for Borrower as to the matters set forth in sections 3.1
and 3.2, and to the best of such counsel's knowledge after
reasonable investigation, the matters set forth in sections 3.3,
3.5, 3.6, 3.7, 3.8 and such other matters as the Bank may reasonably
request;
2.11 Pay or reimburse Bank for any out-of-pocket expenses expended in
making or administering the loans made hereunder including without
limitation attorney's fees (including allocated costs of in-house
counsel);
+2.12 Other (describe);
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Bank, except as Borrower has disclosed to Bank in writing, as of the date
of this Agreement and hereafter so long as credit granted under this
Agreement is available and until full and final payment of all sums
outstanding under this Agreement and promissory notes that:
+3.1 Borrower is duly organized and existing under the laws of the
state of its organization as a:
1
<PAGE>
<TABLE>
<S><C> General Limited Sole
/ X / Corporation ____ Partnership ____ Partnership ____ Proprietorship dba ____
</TABLE>
Borrower is properly licensed and in good standing in each state in
which Borrower is doing business and Borrower has qualified under, and
complied with, where required, the fictitious or trade name statutes of
each state in which Borrower is doing business, and Borrower has
obtained all necessary government approvals for its business
activities; the execution, delivery, and performance of this Agreement
and such notes and other instruments required herein are within
Borrower's powers, have been duly authorized, and, as to Borrower and
any guarantor, are not in conflict with the terms of any charter,
bylaw, or other organization papers of Borrower, and this Agreement,
such notes and the loan documents are valid and enforceable according
to their terms;
3.2 The execution, delivery, and performance of this Agreement, the loan
documents and any other instruments are not in conflict with any law or
any indenture, agreement or undertaking to which Borrower is a party or
by which Borrower is bound or affected;
3.3 Borrower has title to each of the properties and assets as reflected in
its financial statements (except such assets which have been sold or
otherwise disposed of in the ordinary course of business), and no
assets or revenues of the Borrower are subject to any lien except as
required or permitted by this Agreement, disclosed in its financial
statements or otherwise previously disclosed to Bank in writing;
3.4 All financial information, statements as to ownership of Borrower and
all other statements submitted by Borrower to Bank, whether previously
or in the future, are and will be true and correct in all material
respects upon submission and are and will be complete upon submission
insofar as may be necessary to give Bank a true and accurate knowledge
of the subject matter thereof;
3.5 Borrower has filed all tax returns and reports as required by law to be
filed and has paid all taxes and assessments applicable to Borrower or
to its properties which are presently due and payable, except those
being contested in good faith;
3.6 There are no proceedings, litigation or claims (including unpaid
taxes) against Borrower pending or, to the knowledge of the Borrower,
threatened, before any court or government agency, and no other event
has occurred which may have a material adverse effect on Borrower's
financial condition;
3.7 There is no event which is, or with notice or lapse of time, or both,
would be, an Event of Default (as defined in Section 7) under this
Agreement;
3.8 Borrower has exercised due diligence in inspecting Borrower's
properties for hazardous wastes and hazardous substances. Except as
otherwise previously disclosed and acknowledged to Bank in writing:
(a) during the period of Borrower's ownership of Borrower's properties,
there has been no use, generation, manufacture, storage, treatment,
disposal, release or threatened release of any hazardous waste or
hazardous substance by any person in, on, under or about any of
Borrower's properties; (b) Borrower has no actual or constructive
knowledge that there has been any use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or hazardous substance by any person in, on, under
or about any of Borrower's properties by any prior owner or occupant of
any of Borrower's properties; and (c) Borrower has no actual or
constructive notice of any actual or threatened litigation or claims of
any kind by any person relating to such matters. The terms "hazardous
waste(s)," hazardous substance(s)," "disposal," "release," and
"threatened release" as used in this Agreement shall have the same
meanings as set forth in the Comprehensive Environment Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq., the Superfund Amendments and Reauthorization Act
of 1986, as amended, Pub. L. No. 99-499, the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, as amended, 49 U.S.C.
Section 6901, et seq., or other applicable state or federal laws, rules
or regulations adopted pursuant to any of the foregoing.
+3.9 Each chief place of business of Borrower, and the office or offices
where Borrower keeps its records concerning any of the collateral, is
located at: 2010 Airport Way S., Seattle, WA 98134.
4. AFFIRMATIVE COVENANTS. So long as credit granted under this Agreement is
available and until full and final payment of all sums outstanding under
this Agreement and promissory note(s) Borrower will:
+4.1 Use the proceeds of the loans covered by this Agreement only in
connection with Borrower's business activities and exclusively for
the following purposes: working capital and to fund retail stores.
+4.2 Maintain current assets in an amount at least equal to N/A times
current liabilities, and not less than $ N/A. Current assets and
current liabilities shall be determined in accordance with generally
accepted accounting principles and practices, consistently applied;
+4.3 Maintain a tangible net worth of at least $250,000 at all times,
increasing to $2,500,000 by March 31, 2000, and not permit Borrower's
total indebtedness which is not subordinated in a manner satisfactory
to Bank to exceed N/A times Borrower's tangible net worth. "Tangible
net worth" means the excess of total assets over total liabilities,
excluding, however, from the determination of total assets (a) all
assets which should be classified as intangible assets such as
goodwill, patents, trademarks, copyrights, franchises, and deferred
charges (including unamortized debt discount and research and
development costs), (b) treasury stock, (c) cash held in a sinking or
other similar fund established for the purpose of redemption or other
retirement of capital stock, (d) to the extent not already deducted
from total assets, reserves for depreciation, depletion, obsolescence
or amortization of properties and other reserves or appropriations of
2
<PAGE>
retained earnings which have been or should be established in
connection with the business conducted by the relevant corporation,
and (e) any revaluation or other write-up in book value of assets
subsequent to the fiscal year of such corporation last ended at the
date of this Agreement;
+4.4 Upon request Borrower agrees to insure and to furnish Bank with
evidence of insurance covering the life of Borrower (if an
individual) or the lives of designated partners or officers of
Borrower (if a partnership or corporation) in the amounts stated
below. Borrower shall take such actions as are reasonably requested
by Bank, such as assigning the insurance policies to Bank or naming
Bank as beneficiary and obtaining the insurer's acknowledgment
thereof, to provide that in the event of the death of any of the
named insured the policy proceeds will be applied to payment of
Borrower's obligations owing to Bank;
Name: N/A Amount:
------------------------- -----------------------
Name: Amount:
------------------------- -----------------------
+4.5 Promptly give written notice to Bank of: (a) all litigation and
claims made or threatened affecting Borrower where the amount is
$50,000 or more; (b)any substantial dispute which may exist between
Borrower and any governmental regulatory body or law enforcement
authority; (c) any Event of Default under this Agreement or any
other agreement with Bank or any other creditor or any event which
become an Event of Default; and (d) any other matter which has
resulted or might result in a material adverse change in Borrower's
financial condition or operations;
+4.6 Borrower shall as soon as available, but in any event within 120
days following the end of each Borrower's fiscal years and within 45
days following the end of each month provide to Bank, in a form
satisfactory to Bank (including audited statements if required at
any time by Bank), such financial statements and other information
respecting the financial condition and operations of Borrower as
Bank may reasonably request;
+4.6a Updated personal financial statements for Guarantors to be provided
annually or upon request;
4.7 Borrower will maintain in effect insurance with responsible
insurance companies in such amounts and against such risks as is
customarily maintained by persons engaged in businesses similar to
that of Borrower and all policies covering property given as
security for the loans shall have loss payable clauses in favor of
Bank. Borrower agrees to deliver to Bank such evidence of insurance
as Bank may reasonably require and, within thirty (30) days after
notice from Bank, to obtain such additional insurance with an
insurer satisfactory to the Bank;
4.8 Borrower will pay all indebtedness taxes and other obligations for
which the Borrower is liable or to which its income or property is
subject before they shall become delinquent, except any which is
being contested by the Borrower in good faith;
4.9 Borrower will continue to conduct its business as presently
constituted, and will maintain and preserve all rights, privileges
and franchises now enjoyed, conduct Borrower's business in an
orderly, efficient and customary manner, keep all Borrowers
properties in good working order and condition, and from time to
time make all needed repairs, renewals or replacements so that the
efficiency of Borrower's properties shall be fully maintained and
preserved.
4.10 Borrower will maintain adequate books, accounts and records and
prepare all financial statements required hereunder in accordance
with generally accepted accounting principles and practices
consistently applied, and in compliance with the regulations of any
governmental regulatory body having jurisdiction over Borrower or
Borrower's business;
4.11 Borrower will permit representatives of Bank to examine and make
copies of the books and records of Borrower and to examine the
collateral of the Borrower at reasonable times;
4.12 Borrower will perform, on request of Bank, such acts as may be
necessary or advisable to perfect any lien or security interest
provided for herein or otherwise carry out the intent of this
Agreement;
4.13 Borrower will comply with all applicable federal, state and
municipal laws, ordinances, rules and regulations relating to its
properties, charters, businesses and operations, including
compliance with all minimum funding and other requirements related
to any of Borrower's employee benefit plans;
4.14 Borrower will permit representatives of Bank to enter onto
Borrower's properties to inspect and test Borrower's properties as
Bank, in its sole discretion, may deem appropriate to determine
Borrower's compliance with section 5.8 of this Agreement; provided
however, that any such inspections and tests shall be for Bank's
sole benefit and shall not be construed to create any responsibility
or liability on the part of Bank to Borrower or to any third party.
5. NEGATIVE COVENANTS. So long as credit granted under this Agreement is
available and until full and final payment of all sums outstanding under
this Agreement and promissory note(s):
+5.1 Borrower will not, during any fiscal year, expend or incur in the
aggregate more than $ N/A for fixed assets, nor more than $ N/A for
any single fixed asset whether or not payable that fiscal year or
later under any purchase agreement or lease;
+5.2 Borrower will not, without the prior written consent of Bank,
purchase or lease under an agreement for acquisition exceeding
$250,000, incur any other indebtedness for borrowed money exceeding
$250,000, mortgage, assign, or otherwise encumber any of Borrower's
assets, nor sell, transfer or otherwise hypothecate any such assets
except in the ordinary course of business. Borrower shall not
guaranty, endorse, co-sign, or otherwise become liable upon the
obligations of others, except by the endorsement of negotiable
instruments for deposit or collection in the ordinary course of
business. For purposes of this paragraph, the sale or assignment of
accounts receivable, or the granting of a security interest therein,
shall be deemed the incurring of indebtedness for borrowed money;
3
<PAGE>
+5.3 The total of salaries, withdrawals, or other forms of compensation,
whether paid in cash or otherwise, by Borrower shall not exceed the
following amounts for the persons indicated, nor will amounts in
excess of such limits be paid to any other person:
Name: N/A Amount:
------------------------- -----------------------
Name: Amount:
------------------------- -----------------------
5.4 Borrower will not, without Bank's prior written consent, declare any
dividends on shares of its capital stock, or apply any of its assets
to the purchase, redemption or other retirement of such shares, or
otherwise amend its capital structure;
+5.5 Borrower will not make any loan or advance to any person(s) or
purchase or otherwise acquire the capital stock, assets or
obligations of, or any interest in, any person, except: (a)
commercial bank time deposits maturing within one year, (b)
marketable general obligations of the United States or a State, or
marketable obligations fully guaranteed by the United States, (c)
short-term commercial paper with the highest rating of a generally
recognized rating service, (d) other investments related to the
Borrower's business which, together with such other investments now
outstanding, do not in the aggregate exceed the sum of $500,000 at
any time;
5.6 Borrower will not liquidate or dissolve or enter into any
consolidation, merger, pool, joint venture, syndicate or other
combination, or sell, lease, or dispose of Borrower's business as
a whole or such as in the opinion of Bank constitute a
substantial portion of Borrower's business or assets;
5.7 Borrower will not engage in any business activities or operations
substantially different from or unrelated to present business
activities or operations; and
5.8 Borrower, and Borrower's tenants, contractors, agents or other
parties authorized to use any of Borrower's properties, will not
use, generate, manufacture, store, treat, dispose of, or release any
hazardous substance or hazardous waste in, on, under or about any of
Borrower's properties; and any such activity shall be conducted in
compliance with all applicable federal, state and local laws,
regulations and ordinances, including without limitation those
described in section 3.8.
6. WAIVER, RELEASE AND INDEMNIFICATION. Borrower hereby: (a) releases and
waives any claims against Bank for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any of the
applicable federal, state or local laws, regulations or ordinances,
including without limitation those described in section 3.8, and (b) agrees
to indemnify and hold Bank harmless from and against any and all claims,
losses, liabilities, damages, penalties and expenses which Bank may
directly or indirectly sustain or suffer resulting from a breach of (i) any
of Borrower's representations and warranties with respect to hazardous
wastes and hazardous substances contained in section 3.8, or (ii) section
5.8. The provisions of this section 6 shall survive the full and final
payment of all sums outstanding under this Agreement and promissory notes
and shall not be affected by Bank's acquisition of any interest in any of
the Borrower's properties, whether by foreclosure or otherwise.
7. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events
of Default") shall terminate any and all obligations on the part of Bank
to make or continue the loan and/or line of credit and, at the option of
Bank, shall make all sums of interest and principal outstanding under the
loan and/or line of credit immediately due and payable, without notice of
default, presentment or demand for payment, protest or notice of non
payment or dishonor, or other notices or demands of any kind or character,
all of which are waived by Borrower, and Bank may proceed with collection
of such obligations and enforcement and realization upon all security which
it may hold and to the enforcement of all rights hereunder or at law:
7.1 The Borrower shall fail to pay when due any amount payable by it
hereunder on any loans or notes executed in connection herewith;
7.2 Borrower shall fail to comply with the provisions of any other
covenant, obligation or term of this Agreement for a period of (15)
days after the earlier of written notice thereof shall have been
given to the Borrower by Bank or Borrower or any Guarantor has
knowledge of an Event of Default or an event that can become an
Event of Default;
7.3 Borrower shall fail to pay when due any other obligation for
borrowed money, or to perform any term or covenant on its part to be
performed under any agreement relating to such obligation or any
such other debt shall be declared to be due and payable and such
failure shall continue after the applicable grace period;
7.4 Any representation or warranty made by Borrower in this Agreement or
in any other statement to Bank shall prove to have been false or
misleading in any material respect when made;
7.5 Borrower makes an assignment for the benefit of creditors, files a
petition in bankruptcy, is adjudicated insolvent or bankrupt,
petitions to any court for a receiver or trustee for Borrower or any
substantial part of its property, commences any proceeding relating
to the arrangement, readjustment, reorganization or liquidation
under any bankruptcy or similar laws, or if there is commenced
against Borrower any such proceedings which remain undismissed for a
period of thirty (30) days or, if Borrower by any act indicates its
consent or acquiescence in any such proceeding or the appointment of
any such trustee or receiver;
+7.6 Any judgment attaches against Borrower or any of its properties for
an amount in excess of $ 50,000 which remains unpaid, unstayed on
appeal, unbonded, or undismissed for a period of thirty (30) days;
7.7 Loss of any required government approvals, and/or any governmental
regulatory authority takes or institutes action which, in the
opinion of the Bank, will adversely affect Borrower's condition,
operations or ability to repay the loan and/or line of credit;
4
<PAGE>
7.8 Failure of Bank to have a legal, valid and binding first lien on,
or a valid and enforceable prior perfected security interest in,
any property covered by any deed of trust or security agreement
required under this Agreement;
7.9 Borrower dies, becomes incompetent, or ceases to exist as a going
concern;
7.10 Any of the preceding events occur with respect to any guarantor
of credit under this Agreement, or such guarantor dies or becomes
incompetent, unless the obligations arising under the guaranty
and related agreements have been unconditionally assumed by the
guarantor's estate in a manner satisfactory to Bank.
8. SUCCESSORS; WAIVERS. Notwithstanding the Events of Default above, this
Agreement shall be binding upon and inure to the benefit of Borrower and
Bank, their respective successors and assigns, except that Borrower may
not assign its rights hereunder. No consent or waiver under this
Agreement shall be effective unless in writing and signed by the Bank
and shall not waive or affect any other default, whether prior or
subsequent thereto, and whether of the same or different type. No delay
or omission on the part of the Bank in exercising any right shall
operate as a waiver of such right or any other right.
9. ARBITRATION.
9.1 At the request of either Bank or Borrower any controversy or
claim between the Bank and Borrower, arising from or relating to
this Agreement or any Loan Document executed in connection with
this Agreement or arising from any alleged tort shall be settled
by arbitration in King County Washington. The United States
Arbitration Act will apply to the arbitration proceedings which
will be administered by the American Arbitration Association
under its commercial rules of arbitration except that unless the
amount of the claim(s) being arbitrated exceeds $5,000,000 there
shall be only one arbitrator. Any controversy over whether an
issue is arbitrable shall be determined by the arbitrator(s).
Judgment upon the arbitration award may be entered in any court
having jurisdiction. The institution and maintenance of any
action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of
either party, including plaintiff, to submit the controversy or
claim to arbitration if such action for judicial relief is
contested.
For purposes of the application of the statute of limitations the
filing of an arbitration as provided herein is the equivalent of
filing a lawsuit and the arbitrator(s) will have the authority to
decide whether any claim or controversy is barred by the statute
of limitations, and if so, to dismiss the arbitration on that
basis. The parties consent to the joiner in the arbitration
proceedings of any guarantor, hypothecator or other party having
an interest related to the claim or controversy being arbitrated.
9.2 Notwithstanding the provisions of Section 9.1, no controversy or
claim shall be submitted to arbitration without the consent of
all parties if at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation
secured by real property;
9.3 No provision of this Section 9 shall limit the right of the
Borrower or the Bank to exercise self-help remedies such as
setoff, foreclosure or sale of any collateral, or obtaining any
ancillary provisional or interim remedies from a court of
competent jurisdiction before, after or during the pendency of
any arbitration proceeding. The exercise of any such remedy does
not waive the right of either party to request arbitration. At
Bank's option foreclosure under any deed of trust may be
accomplished by exercise of the power of sale under the deed of
trust or judicial foreclosure as a mortgage.
10. COLLECTION ACTIVITIES, LAWSUITS AND GOVERNING LAW. Borrower agrees to
pay Bank all costs and expenses (including reasonable attorney's fees
and the allocated cost for in-house legal services incurred by Bank),
to enforce this Agreement, any notes or any Loan Documents pursuant to
this Agreement, whether or not suit is instituted. If suit is
instituted by Bank to enforce this Agreement or any of these documents,
Borrower consents to the personal jurisdiction of the Courts of the
State of Washington and Federal Courts located in the State of
Washington. Borrower further consents to the venue of this suit, being
laid in King County, Washington. This Agreement and any notes and
security agreements entered into pursuant to this Agreement shall be
construed in accordance with the laws of the State of Washington.
+ll. ADDITIONAL PROVISIONS. Borrower agrees to the additional provisions set
forth immediately following this Section 11 or on any "Exhibit N/A"
attached to and hereby incorporated into Agreement. This Agreement
supersedes all oral negotiations or agreements between Bank and Borrower
with respect to the subject matter hereof and constitutes the entire
understanding and Agreement of the matters set forth in this Agreement.
11.1 If any provision of this Agreement is held to be invalid or
unenforceable, then (a) such provision shall be deemed modified
if possible, or if not possible, such provision shall be deemed
stricken, and (b) all other provisions shall remain in full force
and effect.
11.2 If the imposition of or any change in any law, rule, or
regulation guideline or the interpretation or application of any
thereof by any court of administrative or governmental authority
(including any request or policy whether or not having the force
of law) shall impose or modify any taxes (except U.S. federal,
state or local income or franchise taxes imposed on Bank),
reserve requirements, capital adequacy requirements or other
obligations which would: (a) increase the cost to Bank for
extending or maintaining any loans and/or line of credit to which
this Agreement relates, (b) reduce the amounts payable to Bank
under this Agreement, such notes and other instruments, or
(c) reduce the rate of return on Bank's capital as a consequence
of Bank's obligations with respect to any loan and/or line of
credit to which this Agreement relates, then Borrower agrees to
pay Bank such additional amounts as will compensate Bank
therefor, within five (5) days after Bank's written demand for
such payment, which demand shall be accompanied by an explanation
of such imposition or charge and a calculation in reasonable
detail of the additional amounts payable by Borrower, which
explanation and calculations shall be conclusive, absent manifest
error.
5
<PAGE>
11.3 Bank may sell participations in or assign this loan in whole or
in part without notice to Borrower and Bank may provide
information regarding the Borrower and this Agreement to any
prospective participant or assignee. If a participation is sold
or the loan is assigned the purchaser will have the right of set
off against the Borrower and may enforce its interest in the Loan
irrespective of any claims or defenses the Borrower may have
against the Bank.
+11.4 Proceeds from additional equity capital or subordinated debt
issued will be applied to the outstanding balance of the
revolving credit commitment.
12. NOTICES. Any notices shall be given in writing to the opposite party's
signature below or as that party may otherwise specify in writing.
13. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
This Business Loan Agreement (Parts A and B) executed by the parties on
_________ 19 __ Borrower acknowledges having read all of the provisions of
this Agreement and Borrower agrees to its terms.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS
SEAFIRST BANK
MET WHOLESALE BANKING, TEAM #7
- ------------------------------------------------------------------------------
By: Mary Knell Title: Vice President
- ------------------------------------------------------------------------------
Address: 701 Fifth Avenue, Floor 12 City, State, Zip: Seattle, WA 98104
- ------------------------------------------------------------------------------
Phone: (206) 358-3588 Fax: (206) 585-1794
- ------------------------------------------------------------------------------
TULLY"S COFFEE CORPORATION
(Borrower)
- ------------------------------------------------------------------------------
By: [ILLEGIBLE] Title: President
- ------------------------------------------------------------------------------
Address: 2010 Airport Way So. City, State, Zip: Seattle, WA 98134
- ------------------------------------------------------------------------------
Phone: (206) 233-2071 Fax: (206) 233-2077
- ------------------------------------------------------------------------------
6
<PAGE>
[LOGO]
PROMISSORY NOTE
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 03-31-2000 R26 9075799840 83002
- ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------------------
BORROWER: TULLYS COFFEE CORPORATION LENDER: BANK OF AMERICA NT&SA D/B/A SEAFIRST BANK
2010 AIRPORT WAY SOUTH 800 FIFTH AVENUE
SEATTLE, WA 98134 P.O. BOX 84448
SEATTLE, WA 98124
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT: $3,000,000.00 0.500% OVER THE INDEX DATE OF NOTE: DECEMBER 15, 1996
</TABLE>
PROMISE TO PAY. TULLYS COFFEE CORPORATION ("BORROWER") PROMISES TO PAY TO
BANK OF AMERICA NT&SA D/B/A SEAFIRST BANK ("LENDER"), OR ORDER, IN LAWFUL
MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF THREE MILLION
& 00/100 DOLLARS ($3,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER
WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE UNTIL PAID IN FULL.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON MARCH 31, 2000. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING JANUARY 1,
1997, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender to automatically deduct
from Borrower's CHECKING/SAVINGS account number 0067664003, or such other
Seafirst account as may be authorized in the future, the loan payment
according to the amount and terms of this Note. If the funds in the account
are insufficient to cover any payment, Lender shall not be obligated to
advance funds to cover the payment. At any time and for any reasons, Borrower
or Lender may voluntarily terminate Automatic Payments. Our business days are
Monday through Friday. Payments that come due on a Saturday, Sunday or legal
bank holiday, will be deducted on the following business day.
VARIABLE INTEREST RATE. THE INTEREST RATE ON THIS NOTE IS SUBJECT TO CHANGE FROM
TIME TO TIME BASED ON CHANGES IN AN INDEX WHICH IS THE LENDER'S PUBLICLY
ANNOUNCED REFERENCE RATE (THE "INDEX"). The interest rate change will not occur
more often than each day the Reference Rate changes. Lender will tell Borrower
the current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS OVER
THE INDEX. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT FEE. Early payments will not, unless agreed to by Lender in writing,
relieve Borrower of Borrower's obligation to continue to make payments under the
payment schedule. Rather, they will reduce the principal balance due and may
result in Borrower's making fewer payments.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $20.00, WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default if any of the following happens:
(a) Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or condition contained
in this Note or any agreement related to this Note, or in any other agreement
or loan Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or
misleading in any material respect either now or at the time made or
furnished. (d) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to
take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with
Lender. (f) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 2.500 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
WASHINGTON. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO
SUBMIT TO THE JURISDICTION OF THE COURTS SITUATED IN KING COUNTY, THE STATE OF
WASHINGTON. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF WASHINGTON.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note, as well as directions for payment from Borrower's accounts,
may be requested orally or in writing by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be confirmed in
writing. The following party or parties are authorized to request advances
under the line of credit until Lender receives from Borrower at Lender's
address shown above written notice of revocation of their authority: TOM T.
O'KEEFE AND STEVE GRIFFIN. Borrower agrees to be liable for all sums either:
(a) advanced in accordance with the instructions of an authorized person or
(b) credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on
this Note or by Lender's internal records, including daily computer
print-outs. Lender will have no obligation to advance funds under this Note
if: (a) Borrower or any guarantor is in default under the terms of this Note
or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower
or any guarantor ceases doing business or is insolvent; (c) any guarantor
seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Note or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender; or
<PAGE>
PROMISSORY NOTE PAGE 2
(Continued)
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly stated
in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew, extend (repeatedly and for any length of
time) or modify this loan, with the consent of Borrower, or release any party
or guarantor; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
TULLYS COFFEE CORPORATION
BY: /s/ Tom T. O'Keefe
-------------------------
TOM T. O'KEEFE, PRESIDENT
<PAGE>
AMENDMENT TO LIMITED GUARANTY AGREEMENT
This Amendment amends that certain Limited Guaranty Agreement dated
March 21, 1996 (the "Guaranty"), by Tom T. O'Keefe and George E. Hubman in favor
of Bank of America NW, N.A. Bank of America NW, N.A. has since merged into Bank
of America National Trust and Savings Association, but continues to do business
as Seafirst Bank. For mutual consideration, the parties agree as follows:
1. Section 2 of the Guaranty is amended in its entirety to read
as follows:
2. LIMITATION OF LIABILITY. THE LIABILITY OF GUARANTOR
UNDER THIS AGREEMENT SHALL BE LIMITED TO THE PRINCIPAL AMOUNT OF
$1,500,000.00, PLUS ALL INTEREST ON THE OBLIGATIONS, PLUS ALL
COLLECTION COSTS AND EXPENSES, ATTORNEYS' FEES, AND LEGAL EXPENSES
(INCLUDING THE ALLOCATED COST OF IN-HOUSE COUNSEL, AND INCLUDING ALL
LEGAL FEES INCURRED IN ANY ACTION, BANKRUPTCY PROCEEDING, ARBITRATION
OR OTHER ALTERNATIVE DISPUTE RESOLUTION PROCEEDING, OR APPEAL, OR IN
THE COURSE OF EXERCISING ANY JUDICIAL OR NONJUDICIAL REMEDIES)
RELATING TO (i) THE COLLECTION OF THE OBLIGATIONS AND (ii) THE
ENFORCEMENT OF THIS AGREEMENT. IF, HOWEVER, (a) BORROWER SHALL FAIL
TO ACHIEVE THE TANGIBLE NET WORTH COVENANT, AS DEFINED UNDER
SECTION 4.3 OF THE BUSINESS LOAN AGREEMENT DATED MARCH 14, 1997,
BETWEEN BORROWER AND BANK (THE "LOAN AGREEMENT"), OR (b) BORROWER
SHALL FAIL TO ACHIEVE A POSITIVE VARIANCE IN TOTAL SALES AGAINST
BUDGET AS OF EACH FISCAL QUARTER END, BEGINNING WITH THE SECOND FISCAL
QUARTER OF 1997, OR (c) BORROWER IS IN DEFAULT UNDER ANY OF THE LOAN
DOCUMENTS EVIDENCING THE OBLIGATIONS, THEN GUARANTOR'S LIABILITY UNDER
THIS AGREEMENT SHALL INCREASE TO THE LESSER OF (1) THE OUTSTANDING
PRINCIPAL BALANCE OF THE OBLIGATIONS, OR (2) $3,000,000. GUARANTOR'S
LIABILITY UNDER THIS AGREEMENT SHALL REDUCE TO $1,000,000 IF
(x) BORROWER ACHIEVES A FIXED CHARGE COVERAGE RATIO, DEFINED AS
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION DIVIDED
BY INTEREST EXPENSE (ASSUMING DEBT OF $1,000,000) OF AT LEAST 1.25%
FOR TWO CONSECUTIVE FISCAL QUARTERS AND (y) BORROWER SHALL NOT
OTHERWISE BE IN DEFAULT UNDER ANY OF THE LOAN DOCUMENTS EVIDENCING THE
OBLIGATIONS.
2. Except as specifically amended by this Amendment, all other
terms, conditions, and definitions of the Guaranty shall remain in full force
and effect.
DATED March _____, 1997.
GUARANTORS: LENDER:
SEAFIRST BANK
/s/ Tom T. O'Keefe
- ---------------------------------
TOM T. O'KEEFE
By /s/ Mary Knell
---------------------------------
Mary Knell, Vice President
/s/ George E. Hubman
- ---------------------------------
GEORGE E. HUBMAN
<PAGE>
[LOGO] LOAN MODIFICATION
AGREEMENT
- --------------------------------------------------------------------------------
This agreement amends the PROMISSORY NOTE dated DECEMBER 15, 1996
("Note") and Business Loan Agreement dated MARCH 27, 1997 ("Business Loan
Agreement"), each executed by TULLYS COFFEE CORPORATION ("Borrower") in favor
of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS
SEAFIRST BANK ("Bank"), regarding a loan in the maximum principal amount of
$3,000,000.00 (the "Loan"), which currently has a maximum principal amount of
$6,000,000.00. For mutual consideration, Borrower and Bank agree to amend the
above loan documents as follows:
1. CREDIT LIMIT. The maximum principal amount of Borrower's line of
credit is hereby changed to $6,700,000.00, and Borrower's maximum liability
for principal under the Note is also changed to $6,700,000.00 from June 28,
1998 to November 30, 1998. Then on December 1, 1998, the maximum principal
amount of Borrower's line of credit will be decreased to $6,500,000.00 and
reducing to $6,000,000.00 on April 1, 1999 and Borrower's maximum liability
for principal under the Note is also decreased to $6,000,000.00. Borrower must
make a principal payment in the amount necessary, if any, to reduce the
principal balance of this Note to the reduced maximum Borrowing amount.
2. MATURITY DATE. The maturity date of the Note is changed to MARCH 31,
2000. Bank's commitment to make advances to Borrower under its line of credit
is also extended to MARCH 31, 2000.
3. COVENANTS. The following covenants of the Business Loan Agreement are
modified as follows:
- PART B, SECTION 4.3, 1ST SENTENCE IS CHANGED TO: MAINTAIN A MINIMUM
TOTAL STOCKHOLDERS EQUITY OF $1,000,000.00.
PART B, SECTION 5.2, IS AMENDED TO READ: BORROWER WILL NOT WITHOUT THE
PRIOR WRITTEN CONSENT OF BANK, PURCHASE OR LEASE UNDER AN AGREEMENT FOR
ACQUISITION EXCEEDING $500,000.00, INCUR ANY OTHER INDEBTEDNESS FOR BORROWED
MONEY EXCEEDING $250,000.00 HOWEVER ADDITIONAL INDEBTEDNESS OF CONVERTIBLE
PREFERRED DEBT IS PERMITTED PROVIDED IT IS FULLY SUBORDINATED IN FORM AND
MANNER ACCEPTABLE TO BANK, MORTGAGE ASSIGN OR OTHERWISE ENCUMBER ANY OF
BORROWER'S ASSETS, NOR SELL, TRANSFER OR OTHERWISE HYPOTHECATE ANY SUCH
ASSETS EXCEPT IN THE ORDINARY COURSE OF BUSINESS.
- ON THE BASIS OF A COMPREHENSIVE REVIEW AND ASSESSMENT OF BORROWER'S
SYSTEMS AND EQUIPMENT AND INQUIRY MADE OF BORROWER'S MATERIAL SUPPLIERS,
VENDORS AND CUSTOMERS, BORROWER REASONABLY BELIEVES THAT THE "YEAR 2000
PROBLEM" (THAT IS, THE INABILITY OF COMPUTERS, AS WELL AS EMBEDDED MICROCHIPS
IN NON-COMPUTING DEVICES, TO PERFORM PROPERLY DATE-SENSITIVE FUNCTIONS WITH
RESPECT TO CERTAIN DATES PRIOR TO AND AFTER DECEMBER 31, 1999), INCLUDING
COSTS OF REMEDIATION, WILL NOT RESULT IN A MATERIAL ADVERSE CHANGE IN THE
OPERATIONS, BUSINESS, PROPERTIES, CONDITION (FINANCIAL OR OTHERWISE) OR
PROSPECTS OF BORROWER. BORROWER HAS DEVELOPED FEASIBLE CONTINGENCY PLANS
ADEQUATELY TO ENSURE UNINTERRUPTED AND UNIMPAIRED BUSINESS OPERATION IN THE
EVENT OF FAILURE OF ITS OWN OR A THIRD PARTY'S SYSTEMS OR EQUIPMENT DUE TO
THE YEAR 2000 PROBLEM, INCLUDING THOSE OF VENDORS, CUSTOMERS, AND SUPPLIERS,
AS WELL AS A GENERAL FAILURE OF OR INTERRUPTION IN ITS COMMUNICATIONS
AND DELIVERY INFRASTRUCTURE.
4. OTHER TERMS. Except as specifically amended by this agreement or any
prior amendment, all other terms, conditions, and definitions of the Note,
Business Loan Agreement, and all other security agreements, guaranties, deeds
of trust, mortgages, and other instruments or agreements entered into with
regard to the Loan shall remain in full force and effect.
DATED June 26, 1998.
Bank: Borrower:
SEAFIRST BANK TULLYS COFFEE CORPORATION
By /s/ Mary Knell By /s/ Tom T. O'Keefe
------------------------------------ ----------------------------------
TOM T. O'KEEFE, PRESIDENT
Title Vice President
----------------------------------
CONSENT OF GUARANTORS:
/s/ Tom T. O'Keefe
- ---------------------------------------
TOM T. O'KEEFE
/s/ George E. Hubman
- ---------------------------------------
GEORGE E. HUBMAN
<PAGE>
[LOGO] LOAN MODIFICATION
AGREEMENT
- --------------------------------------------------------------------------------
This agreement amends the PROMISSORY NOTE dated DECEMBER 15, 1996
("Note") and Business Loan Agreement dated MARCH 27, 1997 ("Business Loan
Agreement"), each executed by TULLYS COFFEE CORPORATION ("Borrower") in favor
of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS
SEAFIRST BANK ("Bank"), regarding a loan in the maximum principal amount of
$3,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank agree
to amend the above loan documents as follows:
1. CREDIT LIMIT. The maximum principal amount of Borrower's line of
credit is hereby changed to $6,000,000.00, and Borrower's maximum liability
for principal under the Note is also changed to $6,000,000.00. Then, on
August 31, 1998, the maximum principal amount of Borrower's line of credit
will be decreased to $3,000,000.00 and Borrower's maximum liability for
principal under the Note is also decreased to $3,000,000.00. Borrower must
make a principal payment in the amount necessary, if any, to reduce the
principal balance of the Note to the reduced maximum Borrowing amount.
2. COVENANTS. The following covenants of the Business Loan Agreement are
modified as follows:
BORROWER HAS CONDUCTED A COMPREHENSIVE REVIEW AND ASSESSMENT OF THE
BORROWER'S COMPUTER APPLICATIONS AND MADE INQUIRY OF THE BORROWER'S KEY
SUPPLIERS, VENDORS AND CUSTOMERS WITH RESPECT TO THE "YEAR 2000 PROBLEM"
(THAT IS, THE RISK THAT COMPUTER APPLICATIONS MAY NOT BE ABLE TO PROPERLY
PERFORM DATE-SENSITIVE FUNCTIONS AFTER DECEMBER 31, 1999) AND, BASED ON THAT
REVIEW AND INQUIRY, THE BORROWER DOES NOT BELIEVE THE YEAR 2000 PROBLEM WILL
RESULT IN A MATERIAL ADVERSE CHANGE IN THE BORROWER'S BUSINESS CONDITION
(FINANCIAL OR OTHERWISE), OPERATIONS, PROPERTIES, OR ABILITY TO REPAY THE
CREDIT.
3. OTHER TERMS. Except as specifically amended by this agreement or any
prior amendment, all other terms, conditions, and definitions of the Note,
Business Loan Agreement, and all other security agreements, guaranties, deeds
of trust, mortgages, and other instruments or agreements entered into with
regard to the Loan shall remain in full force and effect.
DATED June 8, 1998
Bank: Borrower:
SEAFIRST BANK TULLYS COFFEE CORPORATION
By /s/ Mary Knell By: /s/ Tom T. O'Keefe
----------------------------- ------------------------------
Title Vice President TOM T. O'KEEFE, PRESIDENT
--------------------------
CONSENT OF GUARANTORS:
/s/ Tom T. O'Keefe
- -----------------------------------
TOM T. O'KEEFE
/s/ George E. Hubman
- -----------------------------------
GEORGE E. HUBMAN
<PAGE>
[LOGO] LOAN MODIFICATION
AGREEMENT
- --------------------------------------------------------------------------------
This agreement amends the PROMISSORY NOTE dated DECEMBER 15, 1996
("Note") executed by TULLYS COFFEE CORPORATION ("Borrower") in favor of BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS SEAFIRST
BANK ("Bank"), regarding a loan in the maximum principal amount of
$3,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank agree
to amend the above loan documents as follows:
1. CREDIT LIMIT. The maximum principal amount of Borrower's line of
credit is hereby changed to $4,500,000.00, and Borrower's maximum liability
for principal under the Note is also changed to $4,500,000.00. Then, on May
31, 1998, the maximum principal amount of Borrower's line of credit will be
decreased to $3,000,000.00 and Borrower's maximum liability for principal
under the Note is also decreased to $3,000,000.00. Borrower must make a
principal payment in the amount necessary, if any, to reduce the principal
balance of this Note to the reduced maximum Borrowing amount.
2. OTHER TERMS. Except as specifically amended by this agreement or
prior amendment, all other terms, conditions, and definitions of the Note
and all other security agreements, guaranties, deeds of trust, mortgages, and
other instruments or agreements entered into with regard to the Loan shall
remain in full force and effect.
DATED April 20, 1998
Bank: Borrower:
SEAFIRST BANK TULLYS COFFEE CORPORATION
By /s/ Mary Knell By: /s/ Tom T. O'Keefe
----------------------------- ------------------------------
Title Vice President TOM T. O'KEEFE, PRESIDENT
--------------------------
<PAGE>
GENERAL GUARANTY AGREEMENT
In this agreement "Guarantor" refers to each person, partnership,
corporation, association or legal entity which signs this agreement. "Bank"
refers to Bank of America National Trust and Savings Association, doing
business as Seafirst Bank, its successor and assigns.
1. GUARANTOR'S PROMISE TO REIMBURSE BANK FOR BORROWER'S OBLIGATION TO
BANK.
To induce Bank to lend money, or extend other credit to TULLY'S COFFEE
CORPORATION ("Borrower") or for other consideration, Guarantor guarantees
payment to Bank of all the Obligations. "Obligations" means all principal,
interest, late charges, loan fees, collection costs and expenses, attorneys'
fees and legal expenses (including the allocated cost of in-house counsel, and
including all legal fees incurred in any action, bankruptcy proceeding,
arbitration or other alternative dispute resolution proceeding, or appeal, or in
the course of exercising any judicial or nonjudicial remedies) which Borrower
may now owe to Bank or for which Borrower may become obligated to pay or
reimburse Bank for in the future, under promissory notes or other instruments
executed by Borrower, and any other obligation which may arise from Borrower to
Bank of any kind or type.
2. BENEFIT FROM GUARANTOR'S PROMISE.
Guarantor is either financially interested in Borrower or will receive
other benefits, directly or indirectly, as a result of Guarantor's promise.
3. WRITTEN NOTICE NEEDED TO WITHDRAW GUARANTOR'S PROMISE
Guarantor's promise shall remain effective until Bank actually receives, at
its Metropolitan Wholesale, Team 7 office, written notice from Guarantor that
Guarantor withdraws Guarantor's promise. Withdrawal of Guarantor's promise will
have no effect on Guarantor's promise as to Obligations Borrower owes Bank
before the withdrawal is effective, or for renewals or extensions of those
Obligations made after Bank receives Guarantor's notice, or for amounts Bank is
then committed to advance to Borrower, or for attorneys' fees and all other
costs and expenses incurred by Bank in enforcing those Obligations. Also,
withdrawal of Guarantor's promise by one person who has signed this agreement
will have no effect on Guarantor's promise with respect to anyone else who has
signed this agreement.
4. BANK'S RIGHT NOT TO PROCEED AGAINST BORROWER OR OTHERS.
Guarantor's promise is joint and several as to each of the individuals or
entities signing below. Bank may enforce each Guarantor's promise without
attempting to collect Borrower's Obligations from Borrower, any co-maker, any
other guarantor, or anyone else who is liable for Borrower's Obligations.
5. BANK'S RIGHT NOT TO PROCEED AGAINST COLLATERAL.
Bank may enforce Guarantor's promise without attempting to enforce Bank's
rights in any collateral Bank now has or may later acquire as security for
Borrower's Obligations.
6. OTHER RIGHTS OF BANK AND GUARANTOR'S WAIVER OF NOTICE.
Bank may do any of the following things as many times as Bank wishes,
without Guarantor's permission and without notifying Guarantor, and this will
not affect Guarantor's promise:
(a) Bank may extend the time for repayment of any of Borrower's
Obligations.
(b) Bank may renew any of Borrower's Obligations.
-1-
<PAGE>
(c) Bank may stop lending money or extending other credit to
Borrower.
(d) Bank may make any other changes in its agreement with Borrower.
(e) Bank may exchange or release any collateral Bank now holds or may
later acquire as security for Borrower's Obligations.
(f) Bank may apply any money or collateral received from or on behalf
of Borrower to the repayment of any of Borrower's Obligations in any order
Bank wishes.
7. GUARANTOR'S ADDITIONAL WAIVERS OF NOTICE.
Bank does not have to notify Guarantor of any of the following events and
this will not affect Guarantor's promise:
(a) Bank does not have to notify Guarantor of Bank's acceptance of
Guarantor's promise.
(b) Bank does not have to notify Guarantor when Bank lends money,
leases equipment or extends other credit to Borrower or acquires
Obligations of Borrower.
(c) Bank does not have to notify Guarantor of Borrower's failure
to pay Borrower's Obligations when due, or of Borrower's failure to
perform any other duty owed to Bank when required.
Bank will use its reasonable efforts to notify Guarantor of any failure
by Borrower to pay the Obligations when due; provided, however, any
reasonable failure or delay by Bank in doing so shall not affect Guarantor's
promise.
8. GUARANTOR'S DUTY TO KEEP INFORMED OF BORROWER'S FINANCIAL CONDITION.
Guarantor is now adequately informed of Borrower's financial condition,
and Guarantor agrees to keep so informed. Bank does not have to provide
Guarantor with any present or future information concerning the financial
condition of Borrower, and this does not affect Guarantor's promise.
Guarantor has not relied on financial information furnished by Bank.
9. GUARANTOR'S AGREEMENT TO POSTPONE RIGHTS AGAINST BORROWER.
By paying Bank under this agreement, Guarantor may acquire rights
against Borrower such as subrogation rights. Guarantor agrees not to exercise
any of those rights until Borrower has fully paid its Obligations to Bank.
10. GUARANTOR'S ASSIGNMENT OF RIGHTS AGAINST BORROWER.
Guarantor assigns to Bank all rights Guarantor may have against Borrower
or Borrower's property in any proceeding under the federal Bankruptcy Code,
or any receivership or insolvency proceeding. This assignment includes all
rights of Guarantor to be paid by Borrower even though they have nothing to
do with this agreement. However, when Bank has been fully paid everything
owed under Guarantor's promise, Guarantor may then enforce any of these
rights which still remain. This assignment does not prevent Bank from
enforcing Guarantor's promise in any way.
-2-
<PAGE>
11. ATTORNEY'S FEES AND COLLECTION EXPENSES.
Guarantor agrees to pay a reasonable attorneys' fee and all other costs
and expenses which Bank may incur in enforcing or defending this agreement,
whether or not a lawsuit is started.
12. LAW THAT APPLIES AND WHERE GUARANTOR MAY BE SUED.
This agreement governed by Washington law. Guarantor consents to the
personal jurisdiction of the courts of the State of Washington and the
federal courts located in Washington so that Bank may sue Guarantor in
Washington to enforce this agreement. Guarantor agrees not to claim that
Washington is an inconvenient place for trial. At Bank's option, the venue
(location) of any suit to enforce this agreement may be in Seattle,
Washington.
13. MANDATORY ARBITRATION.
(a) At the request of either Bank or Guarantor, any controversy or
claim between Bank and Guarantor, arising from or relating to this
agreement, or arising from an alleged tort, shall be settled by
arbitration in Seattle, Washington. The United States Arbitration Act
shall apply even though this agreement is otherwise governed by
Washington law. The proceedings shall be administered by the American
Arbitration Association under its commercial rules of arbitration. Any
controversy over whether an issue is arbitrable shall be determined by
the arbitrator(s). Judgement upon the arbitration award may be entered
in any court having jurisdiction over the parties. The institution and
maintenance of an action for judicial relief or pursuit of an ancillary or
provisional remedy shall not constitute a waiver of the right of either
party, including the plaintiff, to submit the controversy or claim to
arbitration if such action for judicial relief is contested. For
purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this subsection is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be
arbitrated under this subsection is subject to any applicable statute
of limitations. The arbitrator(s) will have the authority to decide
whether any such claim or controversy is barred by the statute of
limitations and, if so, to dismiss the arbitration on that basis. The
parties consent to the joinder of any guarantor, hypothecator, or other
party having an interest relating to the claim or controversy being
arbitrated in any proceedings under this Section.
(b) Notwithstanding the provisions of subsection 13.(a), no
controversy or claim shall be submitted to arbitration without the
consent of all parties if at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation secured by
real property.
(c) No provision of this subsection shall limit the right of
Guarantor or Bank to exercise self-help remedies such as set-off,
foreclosure, retention or sale of any collateral, or obtaining any
ancillary, provisional, or interim remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration
proceeding. The exercise of any such remedy does not waive the right of
either party to request arbitration.
14. COUNTERPARTS.
This agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures to such
counterparts were upon the same instrument. This agreement shall become
effective as to each Guarantor when a counterpart signed by such Guarantor is
received, regardless of whether all other counterparts are received.
-3-
<PAGE>
15. CREDIT REPORTS.
Each individual Guarantor authorizes and directs Bank as Bank deems
necessary to obtain one or more credit reports about such Guarantor as
individuals in connection with Bank's decision to make the loan(s) guaranteed
by this agreement and/or any renewal, monitoring, or collection of any such
loan(s).
16. WHOLE AGREEMENT.
This agreement, including all counterparts, constitutes the entire
understanding between Bank and Guarantor concerning the guaranty reflected by
this agreement, and it may be changed only in writing signed by Bank and
Guarantor.
GUARANTOR HAS READ THIS AGREEMENT AND RECEIVED A COPY. BY SIGNING
THIS AGREEMENT, GUARANTOR AGREES TO ITS TERMS. GUARANTOR UNDERSTANDS THAT, AS
A RESULT, GUARANTOR IS LIABLE FOR THE OBLIGATIONS OF BORROWER IF BORROWER
FAILS TO PAY BANK WHEN THEY ARE DUE. IF THIS HAPPENS, BANK MAY, IF IT WANTS,
REQUIRE GUARANTOR TO PAY BORROWER'S OBLIGATIONS.
Dated as of April________, 1998.
Guarantor:
- ---------
/s/ Tom T. O'Keefe
- ------------------------
TOM T. O'KEEFE
/s/ George E. Hubman
- -----------------------
GEORGE E. HUBMAN
-4-
<PAGE>
[Letterhead] LOAN MODIFICATION
AGREEMENT
- -----------------------------------------------------------------------------
This agreement amends the PROMISSORY NOTE dated DECEMBER 15, 1996
("Note") executed by TULLYS COFFEE CORPORATION ("Borrower") in favor of BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS SEAFIRST
BANK ("Bank"), regarding a loan in the maximum principal amount of
$3,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank
agree to amend the above loan documents as follows:
1. CREDIT LIMIT. The maximum principal amount of Borrower's line
of credit is hereby changed to $4,500,000.00, and Borrower's maximum
liability for principal under the Note is also changed to $4,500,000.00.
Then, on April 10, 1998, the maximum principal amount of Borrower's line of
credit will be decreased to $3,000,000.00 and Borrower's maximum liability
for principal under the Note is also decreased to $3,000,000.00. Borrower
must make a principal payment in the amount necessary, if any, to reduce the
principal balance of this Note to the reduced maximum Borrowing amount.
2. OTHER TERMS. Except as specifically amended by this agreement
or any prior amendment, all other terms, conditions, and definitions of the
Note and all other security agreements, guaranties, deeds of trust,
mortgages, and other instruments or agreements entered into with regard to
the Loan shall remain in full force and effect.
DATED April 1, 1998
Bank: Borrower:
SEAFIRST BANK TULLYS COFFEE CORPORATION
By /s/ Mary Knell By /s/ Tom T. O'Keefe
------------------- ---------------------------
TOM T. O'KEEFE, PRESIDENT
Title Vice President
-------------------
<PAGE>
[Letterhead] LOAN MODIFICATION
AGREEMENT
- -----------------------------------------------------------------------------
This agreement amends the PROMISSORY NOTE dated DECEMBER 15, 1996
("Note") executed by TULLYS COFFEE CORPORATION ("Borrower") in favor of BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, DOING BUSINESS AS SEAFIRST
BANK ("Bank"), regarding a loan in the maximum principal amount of
$3,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank
agree to amend the above loan documents as follows:
1. CREDIT LIMIT. The maximum principal amount of Borrower's line
of credit is hereby changed to $3,500,000.00, and Borrower's maximum
liability for principal under the Note is also changed to $3,500,000.00.
Then, on March 31, 1998, the maximum principal amount of Borrower's line of
credit will be decreased to $3,000,000.00 and Borrower's maximum liability
for principal under the Note is also decreased to $3,000,000.00. Borrower
must make a principal payment in the amount necessary, if any, to reduce the
principal balance of this Note to the reduced maximum Borrowing amount.
2. MODIFICATION FEE. Borrower shall pay to Bank a modification fee
of $1,000.00 upon execution of this Agreement.
3. OTHER TERMS. Except as specifically amended by this agreement
or any prior amendment, all other terms, conditions, and definitions of the
Note and all other security agreements, guaranties, deeds of trust,
mortgages, and other instruments or agreements entered into with regard to
the Loan shall remain in full force and effect.
DATED February 9, 1998
Bank: Borrower:
SEAFIRST BANK TULLYS COFFEE CORPORATION
By /s/ Mary Knell By /s/ Tom T. O'Keefe
------------------- ---------------------------
TOM T. O'KEEFE, PRESIDENT
Title Vice President
---------------------------
Consent of Guarantors:
By /s/ Tom T. O'Keefe
---------------------------
TOM T. O'KEEFE
By /s/ George E. Hubman
----------------------------
GEORGE E. HUBMAN
<PAGE>
[LETTERHEAD]
MARY A. KNELL
Vice President
Metropolitan Wholesale Banking
June 8, 1998
Mr. Stephen Griffin
Vice President - Finance
Tully's Coffee Corporation
2010 Airport Way South
Seattle, WA 98134
RE: Business Loan Agreement dated December 15, 1996
Dear Steve:
This is to inform you that we consent and waive effective upon your
acknowledgement and acceptance below, the following provision contained
under the Business Loan Agreement dated December 15, 1996 between Seafirst
Bank ("Bank") and Tully's Coffee Corporation ("Borrower"):
- - Section 5.5: Bank hereby consents to the Borrower's purchase of Spinelli
Coffee Company under a Stock Purchase Agreement;
- - Section 11.4: Bank hereby waives covenant that proceeds from additional
equity capital or subordinated debt will be applied to the outstanding
balance of the revolving credit commitment and permits up to $8,000,000 to
to be used for the purchase of Spinelli Coffee Company and related expenses.
This waiver shall not be construed as a course of conduct. All other
conditions not specifically waived hereby shall be strictly construed. Please
sign below and return a copy to my attention at your earliest convenience.
Very truly yours,
/s/ Mary A. Knell
- ----------------------
Mary A. Knell
Accepted by:
Tully's Coffee Corporation
By: _____________________________
Its: ____________________________
<PAGE>
[LETTERHEAD]
MARY A. KNELL
Vice President
Metropolitan Wholesale Banking
March 1, 1998
Mr. Stephen Griffin
Vice President - Finance
Tully's Coffee Corporation
2010 Airport Way South
Seattle, WA 98134
RE: Business Loan Agreement dated December 15, 1996
Dear Steve:
This is to inform you that we waive the following provision contained under
the Business Loan Agreement dated December 15, 1996 between Seafirst Bank
("Bank") and Tully's Coffee Corporation ("Borrower"):
- - Section 4.3: Bank hereby waives the minimum tangible net worth at all times
covenant of $250,000 for the period from February 28, 1998 to August 31, 1998
This waiver shall not be construed as a course of conduct. All other
conditions not specifically waived hereby shall be strictly construed. Please
sign below acknowledging your acceptance and return a copy to my attention at
your earliest convenience.
Very truly yours,
/s/ Mary A. Knell
- ----------------------
Mary A. Knell
Accepted by:
Tully's Coffee Corporation
By: _____________________________
Its: ____________________________
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form 10 of our
report dated July 20, 1999 relating to the financial statements of Tully's
Coffee Corporation, which appear in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
July 26, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> MAR-28-1999
<CASH> 1,149,160
<SECURITIES> 0
<RECEIVABLES> 861,273
<ALLOWANCES> 166,236
<INVENTORY> 1,808,556
<CURRENT-ASSETS> 3,736,950
<PP&E> 13,665,938
<DEPRECIATION> (2,674,216)
<TOTAL-ASSETS> 20,719,019
<CURRENT-LIABILITIES> 9,535,776
<BONDS> 156,722
0
14,351,934
<COMMON> 7,444,922
<OTHER-SE> 10,489,829
<TOTAL-LIABILITY-AND-EQUITY> 20,719,019
<SALES> 20,207,183
<TOTAL-REVENUES> 20,207,183
<CGS> 10,705,398
<TOTAL-COSTS> 10,705,398
<OTHER-EXPENSES> 14,589,742
<LOSS-PROVISION> 143,690
<INTEREST-EXPENSE> 833,838
<INCOME-PRETAX> (6,580,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,580,658)
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<NET-INCOME> (6,580,658)
<EPS-BASIC> (0.88)
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