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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED JULY 2, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-26829
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TULLY'S COFFEE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
WASHINGTON 91-1557436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 AIRPORT WAY SOUTH
SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
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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.
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<CAPTION>
<S> <C>
COMMON STOCK, NO PAR VALUE 15,628,583
(Title of Each Class) Number of Shares Outstanding at July 2, 2000
</TABLE>
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TABLE OF CONTENTS
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ITEM NO. PAGE NO.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS.......................................... 3
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS........................................ 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 10
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 12
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS........................................... 13
ITEM 2 CHANGES IN SECURITIES....................................... 13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................ 13
SIGNATURE........................................................................... 14
</TABLE>
2
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document that are subject to
risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our financial condition, operations,
plans, objectives and performance. Additionally, when we use the words
"believe," "expect," "anticipate," "estimate" or similar expressions, we are
making forward-looking statements. Many possible events or factors could affect
our future financial results and performance. This could cause our results or
performance to differ materially from those expressed in our forward-looking
statements. You should consider these risks when you review this document, along
with the risk factors we discuss in our Form 10-K/A for the fiscal year ended
April 2, 2000, which include the following possible events or factors:
- our growth strategy may not be as successful as we expect if we are unable
to achieve market acceptance in new geographic areas or to locate and open
stores in suitable locations;
- competition within the retail specialty coffee market may intensify;
- adverse changes in the general economic climate, interest rates or other
factors affecting discretionary spending by consumers could adversely
affect our revenues and growth potential; and
- natural or political events could interrupt the supply or increase of
premium coffee beans thereby significantly increasing our operating costs.
You should not place undue reliance on these forward-looking statements.
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
JULY 2, 2000 APRIL 2, 2000
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 205,625 $ 5,058,464
Restricted cash........................................... 4,830,500
Accounts receivable, net of allowance for doubtful
accounts of $451,084 and $357,290 respectively.......... 1,615,018 865,582
Inventories, net.......................................... 6,501,304 3,632,509
Prepaid expenses.......................................... 1,741,395 908,677
----------- -----------
Total current assets.................................... 14,893,842 10,465,232
Property and equipment, net................................. 21,407,663 18,414,242
Goodwill, net............................................... 4,875,346 4,963,722
Other intangible assets, net................................ 1,595,845 1,430,509
Other assets................................................ 1,796,998 1,569,960
----------- -----------
Total assets............................................ $44,569,694 $36,843,665
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 27,292 $ 93,559
Bank line of credit....................................... 6,000,000 3,000,000
Accounts payable.......................................... 6,848,977 3,985,686
Accrued liabilities and other current liabilities......... 1,298,344 2,148,010
Checks drawn in excess of bank balances................... 232,609 1,284,481
----------- -----------
Total current liabilities............................... 14,407,222 10,511,736
Long-term debt, net of current portion...................... 13,761 13,761
Capital lease obligation.................................... 182,092 191,512
Deferred lease costs........................................ 858,066 840,571
Preferred stock subscriptions............................... 4,830,500
----------- -----------
Total liabilities....................................... 20,291,641 11,557,580
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred stock, no par;............. 35,207,874 35,207,874
17,500,000 shares authorized, 15,378,264 issued and
outstanding, stated value of $2.50 and a liquidation
preference of $38,445,660
Common stock, no par value; 120,000,000 shares authorized;
15,628,583 and 15,491,334 shares issued and outstanding
at July 2, 2000 and April 2, 2000 respectively.......... 8,730,540 8,559,703
Note Receivable from stockholder.......................... (334,430) (230,662)
Additional paid-in capital................................ 22,725,746 20,919,918
Accumulated deficit....................................... (42,051,677) (39,170,748)
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Total stockholders' equity.............................. 24,278,053 25,286,085
----------- -----------
Total liabilities and stockholders' equity.............. $44,569,694 $36,843,665
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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THIRTEEN WEEKS ENDED
JULY 2, 2000 JUNE 27, 1999
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(UNAUDITED)
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Net revenues................................................ $ 8,793,669 $ 6,115,062
Cost of sales and related occupancy expense................. 4,621,232 3,024,179
Selling, general and administrative costs................... 5,857,121 3,556,569
Stock option compensation expense........................... 99,904 205,088
Depreciation and amortization............................... 868,687 555,055
----------- -----------
Operating loss.......................................... (2,653,275) (1,225,829)
----------- -----------
Other expense, net.......................................... 227,654 258,385
Net loss................................................ (2,880,929) (1,484,214)
Preferred stock dividend/accretion.......................... 3,631,219
----------- -----------
Net loss applicable to common stockholders.................. $(2,880,929) $(5,115,433)
=========== ===========
Weighted average number of common and common equivalent
shares outstanding......................................... $15,579,344 $14,366,747
=========== ===========
Basic and diluted net loss per common share................. $ (0.19) $ (0.36)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
THIRTEEN WEEKS ENDED
JULY 2, 2000 JUNE 27, 1999
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(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(2,880,929) $(1,484,214)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 868,687 555,055
Stock option compensation expense....................... 99,904 205,088
Provisions for doubtful accounts........................ 93,794
Stock issued in exchange for services................... 23,292 1,510
Stock options issued for services....................... 16,347
Loan guarantee fee expense.............................. 134,593 159,406
Deferred lease costs.................................... 17,495 (1,598)
Imputed officer compensation............................ 30,000
Changes in assets and liabilities
Accounts receivable................................... (843,230) (42,127)
Inventories........................................... (2,868,795) (575,834)
Prepaid expense and other assets...................... (1,059,756) (454,974)
Accounts payable...................................... 2,863,291 (644,739)
Accrued liabilities................................... 705,317 1,117,366
----------- -----------
Net cash used in operating activities................... (2,829,990) (1,135,061)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (3,619,927) (1,245,746)
Additions to intangible assets............................ (195,391) (176,715)
----------- -----------
Net cash used in investing activities................... (3,815,318) (1,422,461)
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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 and capital leases.............. (75,687)
Proceeds from the issuance of note payable................ 7,308
Proceeds from the issuance of common stock................ 23,796 135,000
Proceeds from the issuance of convertible preferred
stock................................................... 9,456,300
Stock issuance costs...................................... (1,219,415)
Note Receivable from Stockholder.......................... (103,768)
Checks drawn in excess of bank balances................... (1,051,872)
----------- -----------
Net cash provided by financing activities............... 1,792,469 4,879,193
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (4,852,839) 2,321,671
Cash and cash equivalents at beginning of period............ 5,058,464 1,149,160
----------- -----------
Cash and cash equivalents at end of period.................. $ 205,625 $ 3,470,831
=========== ===========
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................. $ 3,631,219
Restricted cash and liability for preferred stock
subscriptions........................................... 4,830,500 6,111,575
Noncash investing and financing activities:
Common stock issued to purchase stores/equipment.......... 123,750
Issuance of common stock warrants in payment of
liability............................................... 1,554,983
</TABLE>
The accompanying notes are an integral part of the financial statements
6
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TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Tully's Coffee
Corporation ("Tully's" or the "Company") and its wholly owned subsidiary,
Spinelli Coffee Company, after elimination of all significant intercompany items
and transactions. Certain amounts previously reported have been reclassified to
conform to current year presentations with no effect on total equity or net
income.
The financial statements included in this Form 10-Q are unaudited and do not
contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. The financial
statements in the Company's April 2, 2000 annual report on Form 10-K include a
summary of significant accounting policies of the Company and should be read in
conjunction with this Form 10-Q. In the opinion of management, all material
adjustments necessary to present fairly the results of operations for such
period have been included. All such adjustments are of a normal and recurring
nature. The results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year.
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.
7
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TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVENTORY
Inventories consist of the following:
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<CAPTION>
JULY 2, 2000
(UNAUDITED) APRIL 2, 2000
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Coffee
Unroasted coffee...................................... $4,531,003 $1,947,755
Roasted coffee........................................ 330,293 267,374
Other goods held for sale............................... 1,427,910 1,110,934
Packaging and other..................................... 212,098 306,446
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$6,501,304 $3,632,509
========== ==========
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3. DEBT
On June 15, 2000, the Company signed a new line-of-credit agreement for an
available amount of $6 million at substantially the same terms as the previous
agreement, which matured on June 30, 2000. The new agreement matures 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 July 2, 2000, the Company had received stock
subscriptions and cash of $4,830,500, which is presented as restricted cash and
included in liability for preferred stock subscription because the cash was
being held in escrow by the Company pending the closing. On July 31, 2000 the
Company completed a first closing of this equity financing receiving aggregate
proceeds of $9,065,600. The Company expects to complete a final closing later in
the quarter ending October 1, 2000.
In June 1998 the Company commenced an offering of Investment Units. Each
Investment Unit consisted 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 per unit offering price was $10.00.
During the 13-week period ended June 27, 1999 the Company issued 945,630
Investment Units or 3,782,520 shares of Series A Preferred Stock, with aggregate
proceeds to the Company of $9,456,300.
WARRANTS
As a part of the sale of Investment Units during the 13-week period ended
June 27, 1999, the Company issued warrants to purchase 1,891,260 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
8
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TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
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
$3,631,219 of the preferred stock proceeds to additional paid-in capital during
the 13 week period ended June 27, 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.
During the 13-week period ended July 2, 2000, warrants to purchase 71,896
common shares were exercised with aggregate proceeds of $23,796. As of July 2,
2000, the total number of shares of common stock subject to purchase under all
outstanding warrants was 7,751,072 shares.
STOCK OPTIONS
Stock Option Compensation expense of $99,904 and $205,088 for the 13 week
periods ended July 2, 2000 and June 27, 1999, respectively, is disclosed
separately in the Statement of Operations and would otherwise be included in
Selling, General and Administrative expenses.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of August 14, 2000 the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $1.8 million. 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, discussed in
note 4, 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 preferred stock issued and 8% of the remaining $10 million. The
fee is due in equal amounts of cash and stock warrants to purchase common
shares. The exercise price of the warrants shall be $.01 per common share. As of
July 2, 2000, no liability had been recorded and no amounts had been paid.
CONTINGENCIES
In the ordinary course of its business, the Company may become involved in
legal proceedings from time to time. The Company was not aware of any pending
legal proceedings, which, in the opinion of management, would adversely affect
operations, or cash flow.
NEW STORE LEASES
As of August 14, 2000 the Company has entered into 32 leases for new stores
which have not yet been opened. The lease commitments are commensurate with the
Company's existing lease agreements. Annual rent expense under these leases will
be approximately $1.5 million.
9
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TULLY'S COFFEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 81% 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.
The tables below present information by operating segment:
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THIRTEEN WEEKS ENDED
JULY 2, 2000
(UNAUDITED) JUNE 27, 1999
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(UNAUDITED)
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Revenues
Retail Store Operations................................... $ 7,099,297 $ 5,289,494
All other business units.................................. 1,694,372 825,568
----------- -----------
Total Revenues.............................................. $ 8,793,669 $ 6,115,062
=========== ===========
Operating income/(loss)
Retail Store Operations................................... $ 26,772 $ 118,913
All other business units.................................. 136,400 225,355
Unallocated Corporate Expenses............................ (2,949,012) (1,729,504)
Interest, Net............................................. (95,089) (98,978)
----------- -----------
Net loss.................................................... $(2,880,929) $(1,484,214)
=========== ===========
Depreciation and amortization
Retail Store Operations................................... $ 546,587 $ 355,640
All other business units.................................. 74,523 14,576
Unallocated Corporate Expenses............................ 247,577 184,839
----------- -----------
Total Depreciation & Amortization........................... $ 868,687 $ 555,055
=========== ===========
</TABLE>
7. LOSS PER COMMON SHARE
Basic loss per common share has been calculated based on the
weighted-average common shares of 15,579,344 and 14,366,747 for the 13 weeks
ended July 2, 2000 and June 27, 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 included in net
loss applicable to common stockholders.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION THAT WE BELIEVE
IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE 13 WEEK PERIODS ENDED JULY 2, 2000 AND JUNE 27,
1999. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS REPORT AND IN
CONJUNCTION WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN OUR FORM 10-K/A FOR THE FISCAL YEAR ENDED APRIL 2,
2000. WE BELIEVE THAT CERTAIN STATEMENTS HEREIN, INCLUDING ANTICIPATED STORE
OPENINGS, PLANNED CAPITAL EXPENDITURES, AND TRENDS IN OR EXPECTATIONS REGARDING
OUR OPERATIONS, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 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 OUR FORM 10-K/A FOR THE FISCAL YEAR ENDED APRIL 2, 2000.
OVERVIEW
For the 13 weeks ended July 2, 2000, Tully's derived approximately 81% 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 19% of net sales for the 13 weeks ended July 2,
2000.
Tully's fiscal year ends on the Sunday closest to March 31. Fiscal year 2000
had 53 weeks. The fiscal year ending on April 1, 2001 will include 52 weeks.
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. In May 2000, the
Company commenced a Series B Preferred Stock accredited investor financing to
raise up to $20 million in equity capital. On July 31, 2000 the Company
completed a first closing of this equity financing receiving aggregate proceeds
of $9.1 million. The Company expects to complete a final closing late in the
quarter ending October 1, 2000.
RESULTS OF OPERATIONS
COMPARING THE 13 WEEK PERIODS ENDED JULY 2, 2000 AND JUNE 27, 1999
REVENUES
Net revenues for the 13 weeks ended July 2, 2000 increased 44% to $8,794,000
from $6,115,000 for the corresponding period in fiscal year 2000. Retail sales
increased 34% to $7,099,000 from $5,289,000 due primarily to the opening of new
retail stores within the last year. The increase in retail sales was also
driven, but to a lesser extent, by an increase in comparable store sales of 7%.
Comparable stores are stores open for the full period in the prior year. During
the 13 weeks ended July 2, 2000, the Company opened 13 new stores. The Company
ended the period with 78 Company-operated stores in the United States compared
to 59 at June 27, 1999.
Specialty sales increased 105% to $1,694,000 for the 13 weeks ended July 2,
2000, compared to $826,000 for the corresponding period in fiscal year 2000.
Specialty sales growth was driven primarily by an increase in the number of
licensed stores to 35 from 24 at June 27, 1999, and, to a lesser extent, by
increased sales to wholesale and coffee service accounts.
11
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OPERATING EXPENSES
Costs of sales and related occupancy expense for the 13 weeks ended July 2,
2000 increased to $4,621,000 from $3,024,000 for the same period last year. This
increase was primarily due to operating 19 more stores during the 13 weeks ended
July 2, 2000, compared to the same period in 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 52.5% for the 13 weeks ended July 2, 2000 from 49.5% for
the comparable period in fiscal 2000. This increase was due to higher sales of
lower margin non-coffee products and fixtures to licensees during the 13 weeks
ended July 2, 2000.
Selling, general and administrative costs for the 13 weeks ended July 2,
2000 increased to $5,857,000 from $3,557,000 for the same period last year. As a
percentage of net revenues, selling, general and administrative costs increased
to 66.6% for the 13 weeks ended July 2, 2000 compared to 58.2% for the same
period last year. This increase as a percentage of net revenues was due
primarily to general and administrative costs reflecting investment in
additional infrastructure to support expansion, including field operations and
administrative personnel and other costs, training and pre-opening costs for new
stores; higher marketing costs and specialty sales operating costs.
Stock option compensation expense decreased to $100,000 for the 13 weeks
ended July 2, 2000 from $205,000 in the same period last 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.
Depreciation and amortization for the 13 weeks ended July 2, 2000 was
$869,000 compared to $555,000 for the comparable period last year. This increase
is a result of operating 19 additional stores in the current period. As a
percentage of net revenues, depreciation and amortization increased to 9.9% for
the 13 week period ended July 2, 2000 compared to 9.1% in the similar period
ended June 27, 1999.
INTEREST AND OTHER EXPENSES (INCOME)
Other expenses, net, decreased to $228,000 for the 13-week period ended July
2, 2000 compared to $258,000 for the same period in the prior year.
NET LOSS
For the 13 weeks ended July 2, 2000, net operating loss was $2,881,000, an
increase of $1,397,000 from $1,484,000 for the 13 weeks ended June 27, 1999. As
a percentage of net revenues, gross margins decreased by 3.0%, selling, general
and administrative costs increased by 8.4%, and depreciation and amortization
increased by 0.9%. These changes were partially offset by a decrease in stock
option compensation expense of 2.5% and other expense, net of 1.6%. Net loss
applicable to common stockholders, which includes preferred stock
dividend/accretion, decreased to $2,881,000 from $5,115,000 for the 13 weeks
ended July 2, 2000 compared to the 13 weeks ended June 27, 1999, due to the
conclusion of the Company's Series A Preferred Stock Offering during the 1999
period. Net loss applicable to common stockholders decreased to $0.19 per share
compared to $0.36 for the same period last year due to the reasons described
above. This decrease is primarily attributable to 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 June 27, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $5.0 million in cash and cash equivalents,
including $4.8 million in restricted cash that was being held in escrow by the
Company pending a first closing of the Company's Series B Preferred Stock
Offering and $0.2 million of checks drawn in excess of bank balances. Working
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capital at July 2, 2000 was $0.5 million. Cash and cash equivalents, excluding
restricted cash of $4.8 million, decreased by $4.9 million during the 13-week
period ended July 2, 2000.
Cash used in operating activities was $2,830,000 resulting primarily from a
net loss before non-cash charges of $1,627,000 and, to a lesser extent, to an
increase in working capital other than cash.
Cash used by investing activities for the first 13 weeks of fiscal 2001
totaled $3,815,000. These investments included opening 13 new Company-operated
stores, new store construction work in progress, capital improvements to
existing stores and to the Company's administrative facilities.
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 August 14, 2000, Tully's had approximately $1.8 million in fixed-price
purchase commitments which, together with its current inventory levels, the
Company believes will be sufficient to meet all its coffee needs through fiscal
year end. The Company believes that the risk of non-delivery on these purchase
commitments is remote.
The Company has sponsorship agreements with PacBell Stadium and Safeco Field
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.
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 July 2, 2000, the
Company had entered into leases for 32 new store locations in Washington and
California and expects to pursue other potential store locations in these as
well as other markets. Capital expenditures for the 32 new stores are estimated
to be $8.5 million and the annual lease commitment is approximately $1.5
million. The Company expects the majority of these stores to be operational by
the quarter ending December 31, 2000. The Company also anticipates making
additional expenditures to expand its administrative offices and production
capacity and to enhance information systems and remodel certain existing stores.
As the Company executed 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. On July 31, 2000 the Company
completed a first closing of this equity financing receiving aggregate gross
proceeds of $9.1 million. The Company expects to complete a final closing later
in the quarter ending October 1, 2000. While there can be no assurance that
amounts and timing of the 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.
The Company has a bank line of credit totaling $6.0 million of which $6.0
million was outstanding at July 2, 2000. The interest rate on this line of
credit is prime plus 1/2 percent and was at 10.0% at July 31, 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. These guarantees assisted the Company
in obtaining more favorable terms on its bank line than would have otherwise
been the case given that the Company's cash from operations is not sufficient to
fund its operations currently. The line is due on July 1, 2001.
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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
The Company issued 71,896 shares of common stock to 23 purchasers upon
exercise of warrants for aggregate consideration of $23,796. The shares were
issued under the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(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 August 16,
2000.
<TABLE>
<S> <C> <C>
TULLY'S COFFEE CORPORATION
By:
-----------------------------------------
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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