<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
AMENDMENT 1
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-26829
------------------------
TULLY'S COFFEE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1557436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 AIRPORT WAY SOUTH 98134
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 233-2070
------------------------
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
COMMON STOCK, NO PAR VALUE 15,735,108
(Title of Each Class) Number of Shares Outstanding at
October 1, 2000
</TABLE>
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<PAGE>
TULLY'S COFFEE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets at October 1, 2000 and April 2,
2000........................................................ 3
Consolidated Statements of Operations for the 13 and 26 Week
Periods Ended October 1, 2000 and September 26, 1999........ 4
Consolidated Statements of Cash Flows for the 26 Week
Periods Ended October 1, 2000 and September 26, 1999........ 5
Notes to Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3 Quantitative and Qualitative Disclosures about Market
Risk........................................................ 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 15
Item 2 Changes in Securities....................................... 15
Item 6 Exhibits and Reports on Form 8-K............................ 15
SIGNATURE................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 1, 2000 APRIL 2, 2000
--------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 683,208 $ 5,058,464
Accounts receivable, net.................................. 1,708,757 865,582
Inventories, net.......................................... 6,743,898 3,632,509
Prepaid expenses.......................................... 1,406,319 908,677
------------ ------------
TOTAL CURRENT ASSETS.................................. 10,542,182 10,465,232
PROPERTY AND EQUIPMENT, NET................................. 25,235,884 18,414,242
GOODWILL, NET............................................... 5,184,871 4,963,722
OTHER INTANGIBLE ASSETS, NET................................ 1,685,543 1,430,509
OTHER ASSETS................................................ 1,805,240 1,569,960
------------ ------------
TOTAL ASSETS.......................................... $ 44,453,720 $ 36,843,665
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 42,763 $ 93,559
Bank line of credit....................................... 6,000,000 3,000,000
Accounts payable.......................................... 3,254,314 3,985,686
Accrued liabilities and other current liabilities......... 1,999,931 2,148,010
Checks drawn in excess of bank balances................... 0 1,284,481
------------ ------------
TOTAL CURRENT LIABILITIES............................. 11,297,008 10,511,736
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 133,409 13,761
CAPITAL LEASE OBLIGATION.................................... 174,160 191,512
DEFERRED LEASE COSTS........................................ 883,072 840,571
------------ ------------
TOTAL LIABILITIES..................................... 12,487,649 11,557,580
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value;
17,500,000 shares authorized, 15,378,264 issued and
outstanding, stated value of $2.50 and a liquidation
preference of $38,445,600 at October 1, 2000 and
April 2, 2000, respectively............................. 35,207,874 35,207,874
Series B convertible preferred stock, no par value;
8,000,000 shares authorized 4,575,709 issued and
outstanding, stated value of $2.50 and a liquidation
preference of $11,439,273 at October 1, 2000............ 10,179,954 0
Common stock, no par value; 120,000,000 shares authorized;
15,735,108 and 15,491,334 shares issued and outstanding
at October 1, 2000 and April 2, 2000, respectively...... 8,819,526 8,559,703
Note receivable from stockholder.......................... (389,243) (230,662)
Additional paid-in capital................................ 22,900,220 20,919,918
Accumulated deficit....................................... (44,752,260) (39,170,748)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................ 31,966,071 25,286,085
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 44,453,720 $ 36,843,665
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------- ---------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26,
2000 1999 2000 1999
----------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES.................................. $ 9,618,535 $ 6,755,365 $18,412,204 $ 12,870,427
COST OF SALES AND RELATED OCCUPANCY EXPENSE... 5,162,814 3,187,342 9,784,046 6,145,081
SELLING, GENERAL AND ADMINISTRATIVE COSTS*.... 5,823,293 4,126,343 11,680,416 7,746,134
STOCK OPTION COMPENSATION EXPENSE............. 28,224 115,031 128,128 320,119
DEPRECIATION AND AMORTIZATION................. 981,263 587,657 1,849,950 1,142,712
----------- ----------- ----------- ------------
OPERATING LOSS.......................... (2,377,059) (1,261,008) (5,030,336) (2,483,619)
----------- ----------- ----------- ------------
OTHER EXPENSE................................. 323,630 165,177 551,282 423,562
----------- ----------- ----------- ------------
NET LOSS................................ $(2,700,689) $(1,426,185) $(5,581,618) $ (2,907,181)
PREFERRED STOCK DIVIDEND/ACCRETION............ 0 3,617,532 0 7,248,751
----------- ----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.... $(2,700,689) $(5,043,717) $(5,581,618) $(10,155,932)
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARE OUTSTANDING................ 15,690,074 14,374,908 15,634,708 14,340,828
=========== =========== =========== ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE... $ (0.17) $ (0.35) $ (0.36) $ (0.71)
=========== =========== =========== ============
</TABLE>
--------------------------
* Excluding non-cash stock option compensation expense of $28,224, $115,031,
$128,128 and $320,119 for the thirteen and twenty-six weeks ended
October 1, 2000 and September 26, 1999, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
------------------------------------
OCTOBER 1, 2000 SEPTEMBER 26, 1999
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS.................................................. $(5,581,618) $(2,907,181)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES
Depreciation and amortization........................... 1,849,950 1,142,712
Employee stock option expense........................... 128,128 320,119
Stock options issued for services....................... 16,347 0
Provisions for doubtful accounts........................ 137,552 (22,469)
Stock issued in exchange for services................... 46,326 11,635
Loan guarantee fee expense.............................. 314,596 250,498
Deferred lease costs.................................... 42,501 (11,134)
Imputed officer compensation............................ 0 60,000
Changes in assets and liabilities
Accounts receivable................................... (980,727) (120,942)
Inventories........................................... (3,111,389) (1,051,034)
Prepaid expense and other assets...................... (732,922) (559,892)
Accounts payable...................................... (731,372) (634,486)
Accrued liabilities................................... 1,407,009 878,745
----------- -----------
Net cash used in operating activities................... (7,195,619) (2,643,429)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (8,305,644) (2,254,372)
Additions to intangible assets............................ (718,381) (338,989)
----------- -----------
Net cash used in investing activities................... (9,024,025) (2,593,361)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit.................... 3,000,000 --
Repayment of bank line of credit........................ (3,500,000)
Payments on notes payable............................... (109,434)
Proceeds from the issuance of note payable.............. 51,500 0
Proceeds from issuance of common stock.................. 55,997 0
Proceeds from the issuance of convertible preferred
stock................................................. 11,439,273 18,876,955
Stock issuance costs.................................... (1,259,320) (1,626,238)
Note receivable from stockholder........................ (158,581) 0
Checks drawn in excess of bank balances................. (1,284,481) 0
----------- -----------
Net cash provided by financing activities............. 11,844,388 13,641,283
----------- -----------
Net increase in cash and cash equivalents............... (4,375,256) 8,404,493
Cash and cash equivalents at beginning of period........ 5,058,464 1,149,160
----------- -----------
Cash and cash equivalents at end of period.............. $ 683,208 $ 9,553,653
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Deemed preferred stock dividend on convertible preferred
stock issuance as a result of beneficial conversion
feature of attached common stock warrants................. 7,248,751
Noncash investing and financing activities:
Accrued liability for preferred stock to be issued for
commissions............................................. 1,355,183
Issuance of common stock warrants in payment of
liability............................................... 1,554,983
Common Stock issued to purchase stores/equipment.......... 157,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Tully's Coffee
Corporation ("Tully's" or the "Company") and its wholly owned subsidiary,
Spinelli Coffee Company, after elimination of all significant intercompany items
and transactions.
The Company's fiscal year ends on the Sunday closest to March 31. Fiscal
year 2000 included 53 weeks. The fiscal year ending on April 1, 2001 will
include 52 weeks.
The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Results of operations for
the 13 and 26-month periods ended October 1, 2000 are not necessarily indicative
of future financial results.
Investors should read these interim statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto for the fiscal year
ended April 2, 2000 included in our annual report on Form 10-K, as amended, SEC
File No. 0-26829.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will require the Company 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 of fiscal years beginning
after June 15, 2000. In June 2000, SFAS 138 was issued, which amends provisions
of SFAS 133. SFAS 138 will be implemented by the company concurrently with
SFAS 133.
In April 2000, the Financial Accounting Standards Board issued FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." The interpretation clarifies the application of APB
25 for certain issues, such as the definition of "employee" for purposes of
Opinion 25, the accounting consequence of various modifications to the terms of
a fixed stock option plan, and criteria for determining whether a plan qualifies
as a noncompensatory plan. The Company has reviewed the interpretation and does
not believe it has a material impact on the accounting treatment of its previous
stock-based compensation transactions. The Company will consider the
interpretation within the accounting treatment of future stock-based
compensation transactions.
6
<PAGE>
2. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 1, 2000 APRIL 2, 2000
--------------- -------------
(UNAUDITED)
<S> <C> <C>
Coffee
Unroasted coffee.......................................... $4,705,217 $1,947,755
Roasted coffee............................................ 281,982 267,374
Other goods held for sale................................... 1,425,088 1,110,934
Packaging and other......................................... 331,611 306,446
---------- ----------
$6,743,898 $3,632,509
========== ==========
</TABLE>
3. DEBT
On June 15, 2000, the Company signed a new line-of-credit agreement for an
available amount of $6.0 million at substantially the same terms as the previous
agreement, which matured on June 30, 2000. The new agreement matures on July 1,
2001.
$6.0 million was outstanding under this line of credit at October 1, 2000.
The interest rate on this line of credit is prime plus 1/2 percent and was at
10.0% at October 1, 2000. This line is secured by the assets of the Company, and
has been guaranteed by the Company's chief executive officer and by a director.
The outstanding balance on this bank line is due on July 1, 2001.
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In May 2000, the Company commenced a Series B Preferred Stock accredited
investor financing to raise up to $20 million in equity capital. The Series B
Preferred Stock is junior in liquidation preference to the Company's Series A
Preferred Stock and to a stated dollar amount of liquidation preference for the
holders of the common stock. As of November 14, 2000, the Company had received
aggregate proceeds of $12.1 million related to this offering. The Company
expects to complete this offering later in the quarter ending December 31, 2000.
WARRANTS
As a part of the sale of Investment Units during the 26-week period ended
September 26, 1999, the Company issued warrants to purchase 3,775,391 shares of
common stock at an exercise price of $0.33 per share. The exercise price of the
warrants at the date of issuance was below the fair market value of the common
stock and is therefore considered an "in the money" or beneficial conversion
feature. Accounting for the issuance of convertible preferred stock with a
nondetachable beneficial conversion feature at the date of issue requires that
the conversion feature be recognized and measured in the financial statements by
allocating a portion of the preferred stock offering proceeds to additional
paid-in capital. The discount resulting from the allocation of the proceeds to
the beneficial conversion feature is analogous to a dividend and is recognized
as a return to preferred shareholders from the date of issuance through the date
the warrants are exercisable.
As a result of the aforementioned accounting, the Company allocated
$7.2 million of the Series A Preferred Stock proceeds to additional paid in
capital during the 26 week period ended September 26, 1999. As the warrants were
exercisable upon issuance, the entire allocation was recognized as a preferred
dividend through a charge to retained earnings and a credit to preferred stock
during the period. The weighted-average fair value of the warrants on the date
of grant was $1.92 per share of common stock.
7
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of October 1, 2000 the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $945,000. The Company
believes, based on relationships 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.
In connection with the Series B Preferred Stock offering, the Company has
entered into an agreement to provide a placement fee to the placement agents.
The fee is to be calculated at 10% of the first $10 million of proceeds from the
offering and 8% of any subsequent proceeds. The fee is due in equal amounts of
cash and warrants to purchase common stock. The exercise price of the warrants
will be $.01 per share. As of October 1, 2000, $500,000 has been paid to the
placement agents and an additional $615,000 has been accrued.
NEW STORE LEASES
As of October 1, 2000 the Company had entered into 38 leases for stores that
had not yet been opened. These lease agreements are similar in nature to the
Company's existing lease agreements. Annual rent expense under these leases will
be approximately $1.8 million.
6. SEGMENT REPORTING
The Company presents segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
established reporting and disclosure standards for an enterprise's operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Company's senior management.
The Company is organized into a number of business units. The Company's
retail store operations comprise 82% of total revenues. The remainder of the
Company's revenues is generated from the wholesale sales to domestic and foreign
customers. Operating income/(loss) represents earnings before interest income
and expense. Asset information by reportable segment is not reported, since the
Company does not produce such information internally.
8
<PAGE>
The tables below present information by operating segment:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY SIX WEEKS ENDED
--------------------------- ---------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26,
2000 1999 2000 1999
----------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Retail Store Operations................. $ 8,021,509 $ 5,747,060 $15,120,805 $11,036,554
All other business units................ 1,597,026 1,008,305 3,291,399 1,833,873
----------- ----------- ----------- -----------
Total Revenues............................ 9,618,535 6,755,365 18,412,204 12,870,427
=========== =========== =========== ===========
Operating income/ (loss)
Retail Store Operations................. 126,248 334,279 346,218 399,692
All other business units................ 146,254 199,432 299,958 428,749
Unallocated Corporate Expenses.......... (2,819,568) (1,946,602) (5,979,082) (3,623,349)
Interest, Net........................... (153,623) (13,294) (248,712) (112,273)
----------- ----------- ----------- -----------
Net loss.................................. (2,700,689) (1,426,185) (5,581,618) (2,907,181)
=========== =========== =========== ===========
Depreciation and amortization
Retail Store Operations................. 644,290 390,997 1,190,876 747,157
All other business units................ 91,645 23,291 148,866 33,908
Unallocated Corporate Expenses.......... 245,330 173,369 510,208 361,647
----------- ----------- ----------- -----------
Total Depreciation & Amortization......... $ 981,265 $ 587,657 $ 1,849,950 $ 1,142,712
=========== =========== =========== ===========
</TABLE>
7. LOSS PER COMMON SHARE
Basic loss per common share has been calculated based on the
weighted--average common shares of 15,631,789 and 14,340,828 for the 13 weeks
ended October 1, 2000 and September 26, 1999, respectively. The Company had a
net loss for all periods presented herein; therefore none of the options,
warrants and convertible preferred stock outstanding during the periods
presented were included in the computation of diluted loss per share as they
were antidilutive. See note 4 for discussion of preferred stock
dividend/accretion applicable to common stockholders.
8. SUBSEQUENT EVENTS
Subsequent to October 1, 2000 the Company entered into an agreement that
contemplates the purchase of 10 retail locations from another company. These
locations are all within the greater Portland, Oregon area. Consummation of this
transaction is contingent upon the Company's completion, to its satisfaction, of
it's due diligence review of the other company and of the proposed transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We believe that certain statements herein, including anticipated store
openings, planned capital expenditures, projected goodwill amortization and
trends in or expectations regarding the Company's operations, 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 and in the Company's annual and quarterly
filings with the Securities and Exchange Commission.
9
<PAGE>
The following information should be read in conjunction with the financial
statements. This analysis is provided pursuant to applicable Securities and
Exchange Commission regulations and is not intended to serve as a basis for
projections of future events.
OVERVIEW
The Company's fiscal year ends on the Sunday closest to March 31. Fiscal
year 2000 included 53 weeks. The fiscal year ending on April 1, 2001 will
include 52 weeks.
For the 26 weeks ended October 1, 2000, Tully's derived approximately 82% of
net revenues from sales in its Company-operated retail stores. Specialty sales,
which consist of product sales to wholesale customers, office coffee service,
direct mail order sales and royalty and licensing fees from licensed stores,
accounted for the remaining 18% of net sales.
In May 2000 the Company commenced a Series B accredited investor financing
to raise up to $20 million in equity capital. As of November 14, 2000, the
Company had received aggregate proceeds of $12.1 million. The Company
anticipates it will receive $7.9 million additional funding prior to
December 31, 2000.
The Company's cash flow from operations is not sufficient to cover operating
expenses and the Company has not made a profit from operations in any year since
inception. The Company has historically funded its cash flow shortfalls through
the issuance of equity securities and through borrowings.
The Company expects to move toward profitability as it consolidates its
Seattle and San Francisco roasting operations, new packaging equipment comes
on-line and distribution and warehouse operations are brought in-house. In
addition, the Company expects to continue to leverage its general and
administrative costs and to see the benefits from its recent elimination of
duplicate general and administrative costs in its San Francisco operation.
RESULTS OF OPERATIONS
COMPARING THE 13 WEEK PERIODS ENDED OCTOBER 1, 2000 AND SEPTEMBER 26, 1999
REVENUES
Net revenues for the 13 weeks ended October 1, 2000 increased 41% to
$9.6 million from $6.8 million for the corresponding period in fiscal year 2000.
Retail sales increased 40% to $8.0 million from $5.7 million due primarily to
the opening of new retail stores within the last year. During the 13 weeks ended
October 1, 2000, the Company opened ten new stores. The Company ended the period
with 88 Company-operated stores in the United States compared to 59 at
September 26, 1999. The increase in retail sales was also driven, to a lesser
extent, by an increase in comparable store sales of 8%. Comparable stores are
stores open for the full period in the prior year. The comparable store sales
increase is primarily the result of an increase in the average transaction price
for the 13 weeks ended October 1, 2000.
Specialty sales increased 58% to $1.6 million for the 13 weeks ended
October 1, 2000, compared to $1 million for the corresponding period in fiscal
year 2000. Specialty sales growth was driven primarily by an increase in sales
to wholesale and coffee service accounts and, to a lesser extent by an increase
in sales to licensees.
OPERATING EXPENSES
Costs of sales and related occupancy expense for the 13 weeks ended
October 1, 2000 increased to $5.2 million from $3.2 million for the same period
last year. This increase was primarily due to operating 29 more stores during
the 13 weeks ended October 1, 2000, compared to the same period in
10
<PAGE>
the prior year and, to a lesser extent, to specialty revenue growth from
wholesale and international product sales. As a percentage of net revenues, cost
of sales and related occupancy expense increased to 53.7% for the 13 weeks ended
October 1, 2000 from 47.2% for the comparable period in fiscal 2000. This change
was due to price increases in paper products and, to a lesser extent, to
increased sales of lower margin non-coffee products and fixtures to licensees
and higher occupancy costs.
Selling, general and administrative costs for the 13 weeks ended October 1,
2000 increased to $5.8 million from $4.1 million for the same period last year.
As a percentage of net revenues, selling, general and administrative costs
decreased to 60.5% for the 13 weeks ended October 1, 2000 compared to 61.0% for
the same period last year. This decrease was due to a reduction in the rate of
growth of personnel in the general and administrative and corporate office
functions as compared to the prior year.
Stock option compensation expense is a noncash charge representing the
difference between the exercise price and fair market value of stock at the date
of grant for options granted to employees. Stock option compensation expense
decreased to $28,000 for the 13 weeks ended October 1, 2000 from $115,000 in the
same period last year. Fewer options were issued during the 13 weeks ended
October 1, 2000 as compared to in the corresponding 13 weeks in the prior year.
Depreciation and amortization for the 13 weeks ended October 1, 2000 was
$981,000 compared to $588,000 for the comparable period last year. This increase
is a result of fixed asset additions related to the 29 additional stores
operated during the current period in addition to depreciation on fixed asset
additions in our new corporate headquarters and roastery. As a percentage of net
revenues, depreciation and amortization increased to 10.2% for the 13 week
period ended October 1, 2000 compared to 8.7% in the similar period ended
September 26, 1999.
INTEREST AND OTHER EXPENSE (INCOME)
Other expenses, net, increased to $324,000 for the 13-week period ended
October 1, 2000 compared to $165,000 for the same period in the prior year. This
increase is due primarily to increased interest expense and loan guarantee fees
on the line of credit.
NET LOSS
For the 13 weeks ended October 1, 2000, net operating loss was $2.7 million
an increase of $1.3 million from $1.4 million for the 13 weeks ended
September 26, 1999. As a percentage of net revenues, gross margins decreased by
7.4%, depreciation and amortization increased by 1.5% and other expenses, net,
increased by 1.0%. These changes were partially offset by decreases in selling,
general and administrative expense of 1.5% and stock option compensation expense
of 1.4%. Net loss applicable to common stockholders, which includes preferred
stock dividend/accretion, was unchanged. Net loss applicable to common
stockholders decreased to $0.17 per share compared to $0.19 for the same period
last year. This decrease is attributable to the increase in operating loss
offset by the non-cash and non-operating costs associated with the beneficial
conversion feature attached to the warrants that were issued as part of the
Series A Preferred Stock offering in the 13 week period ended September 26,
1999.
COMPARING THE 26 WEEK PERIODS ENDED OCTOBER 1, 2000 AND SEPTEMBER 26, 1999
REVENUES
Net revenues for the 26 weeks ended October 1, 2000, increased 43% to
$18.4 million from $12.9 million for the corresponding period in fiscal 1999.
Retail sales increased 37% to $15.1 million from $11 million due primarily to
operating 31 more retail stores for all or part of the comparable periods.
Retail sales increases were affected to a lesser extent by an increase in
comparable store sales
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(stores open 26 weeks or longer during both periods) of 7%. The comparable store
sales increase is the result of an increase in the average transaction price for
the 26 weeks ended October 1, 2000. During the 26 weeks ended October 1, 2000,
the Company opened 23 new stores. The Company ended the period with 88
Company-operated stores in the United States compared to 59 at September 26,
1999.
Specialty sales revenues increased 80% to $3.3 million for the 26 weeks
ended October 1, 2000, compared to $1.8 million for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales to
wholesale and coffee service accounts driven by the Company's sales efforts and,
to a lesser extent, by increased sales to licensees.
COSTS & EXPENSES
Cost of goods sold and related occupancy expense for the 26 weeks ended
October 1, 2000 increased to $9.8 million from $6.1 million for the same period
last year. As a percentage of net sales, cost of goods sold and related
occupancy expense were 53.1% for the 26 weeks ended October 1, 2000 and 47.7%
for the corresponding period of fiscal 1999. This change was due to price
increases in paper products and, to a lesser extent, to increased sales of lower
margin non-coffee products and fixtures to licensees and higher occupancy costs.
Selling, general and administrative costs for the 26 weeks ended October 1,
2000 increased to $11.7 million from $7.7 million for the same period last year.
As a percentage of sales, selling, general and administrative costs increased to
63.4% compared to 60.2% for the same period last year. This increase as a
percentage of net sales is due to higher marketing costs together with planned
investment in additional infrastructure.
Stock option compensation expense is a noncash charge representing the
difference between the exercise price and fair market value of stock at the date
of grant for options granted to employees. Stock option compensation expense
decreased to $128,000 for the 26 weeks ended October 1, 2000 from $320,000 in
the same period last year. Fewer of these options vested during the 26 weeks
ended October 1, 2000 than in the corresponding 26 weeks in the prior year.
Depreciation and amortization for the 26 weeks ended October 1, 2000 was
$1.9 million compared to $1.1 million for the comparable period last year. This
increase is a result of fixed asset additions related to the 31 additional
stores operated during the current period in addition to depreciation on fixed
asset additions in our new corporate headquarters and roastery. As a percentage
of net revenues, depreciation and amortization increased to 10.0% for the 26
week period ended October 1, 2000 compared to 8.9% in the similar period ended
September 26, 1999.
INTEREST AND OTHER EXPENSE (INCOME)
Other expenses, net, increased to $551,000 for the 26-week period ended
October 1, 2000 compared to $424,000 for the same period in the prior year. This
increase is due primarily to increased interest expense and loan guarantee fees
on the line of credit.
NET LOSS
For the 26 weeks ended October 1, 2000, net operating loss was $5.6 million
an increase of $2.7 million from $2.9 million for the 26 weeks ended
September 26, 1999. As a percentage of net revenues, gross margins decreased by
6.0%, selling, general and administrative expense increased by 2.7%, and
depreciation and amortization increased by 1.1%. These changes were offset by
decreases in stock option compensation expense of 1.8% and other expenses, net,
0.3%. Net loss applicable to common stockholders, which includes preferred stock
dividend/accretion, decreased to $5.6 million from $10.1 million for the 26
weeks ended October 1, 2000 and the 26 weeks ended September 26, 1999. The 26
week period ended October 1, 2000 included no preferred stock dividend/accretion
due to the
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conclusion of the Company's Series A Preferred Stock Offering during fiscal
1999. Net loss applicable to common stockholders decreased to $0.36 per share
compared to $0.71 for the same period last year. This decrease is attributable
to the increase in operating loss offset by the non-cash and non-operating costs
associated with the beneficial conversion feature attached to the warrants that
were issued as part of the Series A Preferred Stock offering in the 26 week
period ended September 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $683,000 in cash and cash equivalents with
negative working capital of $755,000. Negative working capital is the result of
current liabilities in excess of current assets. Cash and cash equivalents
decreased by $4.4 million during the 26-week period ended October 1, 2000. The
Company anticipates it will receive $7.9 million of additional funding prior to
December 31, 2000.
Cash used in operating activities was $7.2 million resulting primarily from
a net loss before non-cash charges of $5.6 million and from a decrease in
working capital other than cash. This decrease in working capital other than
cash resulted primarily from a $3.1 million increase in total inventory,
$2.8 million of which consisted of green coffee purchased during the peak coffee
harvest season and, to a lesser extent, from increases in accounts receivable
and prepaid expenses and a decrease in accounts payable. The decrease in working
capital other than cash was partially offset by an increase in accrued
liabilities.
Cash used by investing activities for the first 26 weeks of fiscal 2001
totaled $9.0 million. These investments included opening 23 new Company-operated
stores, new store construction work in progress, and capital improvements to
existing stores and to the Company's administrative and roasting facilities.
The Company has a bank line of credit totaling $6.0 million, of which
$6.0 million was outstanding at October 1, 2000. The interest rate on this line
of credit is prime plus 1/2 percent and was at 10.0% at October 1, 2000. This
line is secured by the assets of the Company, and has been guaranteed by the
Company's chief executive officer and by a director. The outstanding balance on
this bank line is due on July 1, 2001.
The Company has fixed-price purchase commitments with certain of its vendors
to maintain the supply of green coffee and stabilize its costs of goods sold. As
of October 1, 2000, Tully's had approximately $945,000 in fixed-price purchase
commitments which, together with its current inventory levels, the Company
believes will be sufficient to meet all its coffee needs until October 1, 2001.
The Company believes that the risk of non-delivery on these purchase commitments
is remote.
The Company has sponsorship agreements with PacBell Stadium in San Francisco
and Safeco Field in Seattle expiring in 2003 that provide for certain
advertising and marketing rights in exchange for annual fees. The annual fees
are, in the aggregate, $1,190,321, $1,355,031 and $1,470,182 due in 2001, 2002,
and 2003, respectively. The fees are due at the beginning of the major league
baseball season.
Cash requirements through fiscal year 2001, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. As of October 1, 2000, the
Company had entered into leases for 38 new store locations in Washington,
California and Oregon and expects to pursue other potential store locations in
these and other markets. Capital expenditures for the 38 new stores are
estimated to be $10.1 million and the annual lease commitment is approximately
$1.8 million. The Company expects the majority of these stores to be operational
by the quarter ending April 1, 2001. The Company also anticipates making
additional expenditures to expand its administrative offices and production
capacity and to enhance information systems and remodel certain existing stores.
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As the Company executes its growth strategy, management expects to have an
ongoing need for additional capital to fund this growth for the foreseeable
future. The Company has historically funded its capital requirements principally
through the issuance of equity securities and through borrowings. In May 2000,
the Company commenced a Series B Preferred Stock accredited investor financing
to raise up to $20 million in equity capital. As of November 14, 2000 the
Company had received aggregate proceeds of $12.1 million from this offering. The
Company anticipates it will receive $7.9 million of additional funding prior to
December 31, 2000 and expects to complete this offering in the quarter ending
December 31, 2000. While there can be no assurance that amounts and timing of
expenditures will occur as planned, management believes that cash proceeds from
this or an additional equity offering will be sufficient for its capital needs
for the next twelve months. If the Company's current equity capital raising
strategy is not successful, the Company would need to seek funding from other
sources or on other terms to continue to fund operations. There is no assurance
that the Company will be able to obtain such financing. In the event that other
funding sources are not available, the Company would need to modify or
discontinue its growth plans and new store construction and reduce selling,
general and administrative costs related to its growth plans.
SEASONALITY
Tully's business is subject to seasonal fluctuations. Significant portions
of Tully's net revenues and profits are realized during the third quarter of its
fiscal year. This period includes the Thanksgiving through New Years holiday
season. In addition, quarterly results are affected by the timing of the opening
of new stores, and Tully's rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of Tully's business, results for any
quarter are not necessarily indicative of the results that may be achieved for
the full fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Asia and Europe. This exposure has had a
minimal impact on the Company. At the present time, the Company does not hedge
foreign currency risk, but may hedge known transaction exposure in the future.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is or may from time to time be a party to routine litigation
incidental to our business. Management believes the ultimate resolution of these
routine matters will not materially harm our business, financial condition,
operating results, or cash flow.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended October 1, 2000, the Company issued 75,039 shares
of common stock to 12 purchasers upon exercise of warrants for aggregate
consideration of $19,880. The shares were issued under the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
During the quarter ended October 1, 2000, the Company issued 6,250 shares of
common stock to 6 employees upon exercise of stock options with aggregate
proceeds to the Company of $4,110 in reliance on the exemption from registration
provided by Rule 701 under the Securities Act.
During the quarter ended October 1, 2000, the Company issued 15,000 shares
of common stock to 1 non-employee upon exercise a stock options with aggregate
consideration to the Company of $33,750 in reliance on the exemption provided by
Section 4(2) of the Securities Act.
During the 26 weeks ended October 1, 2000, the Company issued 75,589 shares
to 13 vendors for goods and services provided to the Company. These goods and
services were valued at $170,076. Sales of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act.
In May 2000, the Company commenced a Series B Preferred Stock accredited
investor financing to raise up to $20 million in equity capital. As of
November 14, 2000 the Company has received aggregate proceeds of $12.1 million.
The Company expects to complete this offering during the quarter ending
December 31, 2000. Sales of the Series B Preferred Stock was made in reliance on
the exemption provided by Rule 506 of Regulation D under the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1 Amended and Restated Article of Incorporation
3.1.1 Articles of Amendment of the Restated Articles of
Incorporation containing the Statement of Rights and
Preferences of Series B Preferred Stock
3.1.2 Articles of Correction to the Amended and Restated Articles
of Incorporation
3.1.3 Articles of Correction to the Amended and Restated Articles
of Incorporation
4.1 Statement of Rights and Preferences of Series B Preferred
Stock (1)
4.2 Borrowing Agreement between Tully's and Bank of America
27 Financial Data Schedule
</TABLE>
------------------------
(1) See Exhibit 3.1.1
(b) Current Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized, in Seattle, Washington on November 28,
2000
<TABLE>
<S> <C> <C>
TULLY'S COFFEE CORPORATION
By: /s/ STEPHEN R. GRIFFIN
-----------------------------------------
Stephen R. Griffin
VICE PRESIDENT--FINANCE AND CHIEF
FINANCIAL OFFICER
Signing on behalf of the Registrant and as
principal financial officer
</TABLE>
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