<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-26829
TULLY'S COFFEE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1557436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 AIRPORT WAY SOUTH
SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 233-2070
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 14,854,031
(Title of Each Class) Number of Shares Outstanding at
December 26, 1999
<PAGE>
TULLY'S COFFEE CORPORATION
Form 10-Q
For the Quarterly Period Ended December 26, 1999
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
-----------------
<S> <C> <C>
Item 1 Consolidated Balance Sheets at December 26, 1999
(unaudited) and March 28, 1999 3
Consolidated Statements of Operations for the 13
and 39 Week Periods Ended December 26, 1999 and
December 27, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the 39
Week Periods Ended December 26, 1999 and December
27, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, 1999
(unaudited) March 28, 1999
------------------------- ------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,008,926 $ 1,149,160
Accounts receivable, net 1,203,341 695,037
Inventories, net 3,447,384 1,808,556
Prepaid expenses 856,974 84,197
------------------------- ------------------------
Total current assets 15,516,625 3,736,950
Property and equipment, net 14,228,658 10,991,722
Goodwill, net 4,859,031 4,973,370
Other intangible assets, net 1,327,564 760,320
Other assets 505,020 256,657
------------------------- ------------------------
Total assets $ 36,436,898 $20,719,019
========================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 172,178 $ 27,744
Bank line of credit 3,000,000 6,500,000
Accounts payable 1,379,719 1,808,619
Accrued liabilities and other current
liabilities 3,391,461 1,199,413
------------------------- ------------------------
Total current liabilities 7,943,358 9,535,776
Long-term debt, net of current portion 8,044 128,978
Capital lease obligation 157,033 192,754
Deferred lease costs 854,822 885,232
------------------------- ------------------------
Total liabilities 8,963,257 10,742,740
Stockholders' equity:
Series A convertible preferred stock, no par;
30,000,000 shares authorized 15,373,664
and 6,217,480 issued and outstanding,
stated value of $2.50 and a liquidation
preference of $38,434,160 and $15,543,700
at December 26, 1999 and March 28, 1999,
respectively 35,199,663 14,351,934
Common stock, no par value; 120,000,000
shares authorized; 14,854,031 and
14,314,000 shares issued and outstanding 7,942,721 7,444,922
Additional paid-in capital 20,181,638 10,489,829
Accumulated deficit (35,850,381) (22,310,406)
------------------------- ------------------------
Total stockholders' equity 27,473,641 9,976,279
------------------------- ------------------------
Total liabilities and stockholders' equity $ 36,436,898 $ 20,719,019
========================= ========================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty nine Weeks Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
(unaudited) (unaudited)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 7,324,110 $ 5,948,137 $ 20,133,741 $14,632,058
Cost of sales and related occupancy
expense 3,542,507 2,894,442 9,687,481 7,238,806
Selling, general and administrative
costs 4,655,203 3,317,102 12,400,742 8,725,635
Stock option compensation expenses 231,840 288,644 551,961 595,450
Depreciation and amortization 683,819 331,318 1,816,024 991,426
-------------------------------------- ------------------ -------------------
Operating loss 1,789,259 883,369 4,322,467 2,919,259
-------------------------------------- ------------------ -------------------
Other expense, net 57,119 458,370 427,387 1,158,778
-------------------------------------- ------------------ -------------------
Net loss $(1,846,378) $(1,341,739) $ (4,749,854) $(4,078,037)
Preferred stock dividend/accretion 1,541,370 1,203,987 8,790,121 2,969,235
-------------------------------------- ------------------ -------------------
Net loss applicable to common
stockholders $(3,387,748) $(2,545,726) $(13,539,975) $(7,047,272)
====================================== ================== ===================
Weighted average number of common
and common equivalent shares
outstanding 14,475,308 14,302,500 14,385,654 14,298,918
====================================== ================== ===================
Basic and diluted net loss per common
share $ (0.23) $ (0.18) $ (0.94) $ (0.49)
====================================== ================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
4
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
December 26, December 27,
1999 1998
(unaudited)
------------------------ -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,749,854) $(4,078,037)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,816,024 991,426
Stock option expense 551,959 595,450
Provisions for doubtful accounts 35,850 14,078
Stock issued in exchange for services 11,635 50,000
Loan guarantee fee expense 349,729 547,011
Deferred lease costs (30,410) 187,166
Loss on disposition of property (4,855)
Imputed officer compensation 90,000
Changes in assets and liabilities
Accounts receivable (544,154) (1,121,812)
Inventories (1,638,828) 415,007
Prepaid expense and other assets (1,021,140) (285,929)
Accounts payable (428,900) (314,347)
Accrued liabilities 637,441 2,514
------------------------ -----------------------
Net cash used in operating activities (5,015,503) (2,907,473)
------------------------ -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,684,549) (2,196,793)
Purchase of Spinelli Coffee Company, net (6,916,184)
Additions to intangible assets (455,492)
------------------------ -----------------------
Net cash used in investing activities (5,140,041) (9,112,977)
------------------------ -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit 2,343,000
Repayment of bank line of credit (3,500,000)
Payments on notes payable (11,221) (20,860)
Proceeds from the issuance of note payable 2,500,000
Proceeds from the issuance of common stock 125,194
Proceeds from the issuance of convertible
preferred stock 22,890,460 7,732,382
Stock issuance costs (489,123) (32,892)
Checks drawn in excess of bank balances (113,893)
------------------------ -----------------------
Net cash provided by financing
activities 19,015,310 12,407,737
------------------------ -----------------------
Net increase in cash and cash equivalents 8,859,766 387,287
Cash and cash equivalents at beginning of period 1,149,160 21,566
------------------------ -----------------------
Cash and cash equivalents at end of period $10,008,926 $ 408,853
======================== =======================
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 8,790,121 2,969,235
Noncash investing and financing activities:
Accrued liability for preferred stock to be
issued for commissions 1,554,608
Stock issued for property and equipment and
intangibles 360,970
</TABLE>
The accompanying notes are an integral part of the 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. Certain amounts previously reported have been reclassified to
conform with current year presentations with no effect on total equity or net
income. The accompanying unaudited consolidated financial statements as of
December 26, 1999 and December 27, 1998, and for the 13-week and 39-week periods
ended December 26, 1999 and December 27, 1998 have been prepared by Tully's
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The consolidated financial statements contained in this form 10-Q
are unaudited. In the opinion of management all adjustments (consisting only of
normal recurring adjustments and accruals) necessary for a fair presentation for
the interim periods have been reflected. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10 for the year ended March 28, 1999. The results
of operations for the 13-weeks and 39-weeks ended December 26, 1999 are not
necessarily indicative of the results for the entire year ending April 2, 2000.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
December 26, 1999 March 28, 1999
---------------------- ---------------------
<S> <C> <C>
Coffee
Unroasted coffee $1,707,759 $ 696,281
Roasted coffee 191,580 114,847
Other goods held for sale 869,961 547,064
Packaging and other 678,084 450,364
---------------------- ---------------------
$3,447,384 $1,808,556
====================== =====================
</TABLE>
As of December 26, 1999, the Company has fixed-price purchase commitments for
coffee totaling approximately $2.9 million.
3. Loss per Common Share
Basic loss per common share have been calculated based on the weighted-average
common shares of 14,475,308, 14,302,500, 14,385,654 and 14,298,918 for the 13
weeks ended December 26, 1999, the 13 weeks ended December 27, 1998, the 39
weeks ended December 26, 1999 and the 39 weeks ended December 27, 1998,
respectively. The Company had a net loss for all periods presented herein;
therefore none of the options, warrants and convertible preferred stock
outstanding during the each of the periods presented were included in the
computation of diluted loss per share as they were antidilutive. See note 4 for
discussion of preferred stock dividend/accretion included in net loss applicable
to common stockholders.
4. Stockholders' equity
Convertible preferred stock
In August 1999, the Shareholders approved an amendment to the Company's Articles
of Incorporation increasing the number of authorized shares of Preferred Stock
from 10,000,000 to 30,000,000. The increase in authorized shares allowed the
Company to accept additional subscriptions for the investment units it was
offering.
6
<PAGE>
For the 39-week period ending December 26, 1999, the Company issued 2,289,460
investment units consisting of 9,156,184 shares of Series A Preferred Stock and
Warrants to purchase 4,578,188 shares of Common Stock, with an aggregate
purchase price of $22,890,459 bringing the total number of units issued to
3,842,416 and aggregate proceeds of the offering to $38,424,160. Each unit
consists of 4 shares of the Company's Series A Preferred Stock and a Warrant to
purchase two shares of the Company's Common Stock at an exercise price of $0.33
per share. The unit offering price was $10.00.
Common stock
In August 1999, the shareholders approved an amendment to the Company's Articles
of Incorporation, increasing the authorized number of common shares from
40,000,000 to 120,000,000.
Warrants
In connection with the Series A convertible preferred stock issued during the
39-week period ending December 26, 1999, the Company issued warrants to purchase
4,578,188 shares of common stock at an exercise price of $0.33 per share
bringing the total number of shares of common stock subject to purchase under
the warrants to 7,686,832 shares. The exercise price of the warrant at the date
of issuance was below the fair market value of the common stock and is therefore
considered an "in the money" or beneficial conversion feature. Accounting for
the issuance of convertible preferred stock with a nondetachable beneficial
conversion feature at the date of issue requires that the conversion feature be
recognized and measured in the financial statements by allocating a portion of
the preferred stock offering proceeds to additional paid in capital. The
discount resulting from the allocation of the proceeds to the beneficial
conversion feature is analogous to a dividend and is recognized as a return to
preferred shareholders from the date of issuance through the date the warrants
are exercisable.
As a result of the aforementioned accounting, the Company allocated $8,790,121
of the preferred stock proceeds to additional paid in capital. As the warrants
were exercisable upon issuance, the entire allocation was recognized as a
preferred dividend through a charge to retained earnings and a credit to
preferred stock during the period. The weighted-average fair value of the
warrants on the date of grant was $1.92 per share of common stock.
During the 39-week period ending December 26, 1999, warrants for 504,572 common
shares were exercised with aggregate proceeds of $125,194. As of December 26,
1999 the total number of shares of common stock subject to purchase under the
warrants is 7,182,260 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Certain statements herein, including anticipated store openings, planned capital
expenditures, projected goodwill amortization and trends in or expectations
regarding the Company's operations, specifically including the effect of
problems associated with the Year 2000, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are based on currently available operating, financial and competitive
information, and are subject to risks and uncertainties. Actual future results
and trends may differ materially depending on a variety of factors, including,
but not limited to, coffee and other raw materials prices and availability,
successful execution of internal performance and expansion plans, the impact of
competition, the effect of legal proceedings, and other risks detailed herein
and in the Company's annual and quarterly filings with the Securities and
Exchange Commission.
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Form 10 filed with the Commission on July 26, 1999. This analysis is provided
pursuant to applicable Securities and Exchange Commission regulations and is not
intended to serve as a basis for projections of future events.
7
<PAGE>
OVERVIEW
The Tully's Coffee Corporation ("Tully's" or the "Company") fiscal year ends
on the Sunday closest to March 31. Fiscal year 1999 had 52 weeks. The fiscal
year ending on April 2, 2000 will include 53 weeks.
The Company intends to continue its aggressive growth strategy and as a
result, expects to incur costs of additional investment in its brand,
infrastructure and management team to support a larger organization in the
future. As a result, selling general and administrative costs are expected to
increase at a faster rate than net revenues in the near term. While store
contribution is positive, it has not been sufficient to offset the costs
associated with growth. The Company believes that in the longer term,
selling, general and administrative costs will increase at a slower pace than
net revenues enabling the Company to realize economies of scale.
During the 39 weeks ended December 26, 1999, the Company derived
approximately 86% of net revenues from its Company-operated retail stores
compared with 87% for the same period in the prior year. Specialty sales
consisting of product sales to wholesale customers, office coffee service,
direct mail order sales and royalty and licensing fees from licensed stores in
the Pacific Rim account for the remaining 14% of net sales.
During the first 39 weeks ended December 26, 1999 Tully's completed a private
placement raising approximately $22.9 million bringing the total capital
raised in the offering to $38.4 million. Accredited investors purchased
2,289,460 investment units at $10 per unit during the 39 week period and a
total of 3,843,416 units over the course of the offering. Each unit consisted
of four shares of Class A Preferred Stock and a Warrant to purchase two
shares of common stock at an exercise price of $0.33 per share of common
stock. The proceeds have been used to repay debt, for capital expenditures on
new and acquired stores and for working capital, leaving cash of $10.0
million at December 26, 1999. The Company plans to use the remaining proceeds
to fund expansion in its existing and new markets and for working capital.
RESULTS OF OPERATIONS
COMPARING THE 13 WEEK PERIODS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
Revenues
Net revenues for the 13 weeks ended December 26, 1999, increased 23% to
$7,324,000 from $5,948,000 for the corresponding period in fiscal 1999.
Revenues for Spinelli Coffee Company are included for the full 13 weeks in
both years since the purchase of Spinelli was completed at the beginning of
the 13 week period ended September 26, 1998. Retail sales increased 24% to
$6,224,000 from $5,023,000 due primarily to the opening of new retail stores
within the last year. Retail sales increases were affected to a lesser extent
by an increase in comparable store sales (stores open 13 months or longer) of
10%. Excluding the stores acquired from Spinelli, comparable store sales
increased 13%. During the 13 weeks ended December 26, 1999, the Company
opened three new stores. The Company ended the period with 61
Company-operated stores in the United States compared to 54 at the end of
December 1998.
Specialty sales revenues increased 19% to $1,100,000 for the 13 weeks ended
December 26, 1999, compared to $925,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by increased
sales to wholesale and coffee service accounts and an increase in the number
of licensed stores to 26 compared to 18 at the end of December 1998.
Costs and expenses
Costs of goods sold and related occupancy expenses for the 13 weeks ended
December 26, 1999 increased to $3,543,000 from $2,894,000 for the same period
last year. As a percentage of sales, cost of goods sold and related occupancy
expenses decreased to 48.4% for the 13 weeks ended December 26, 1999 from
8
<PAGE>
48.7% for the comparable period in fiscal 1999. The decrease as a percentage
of net sales was due primarily to improved coffee purchasing and lower store
occupancy costs.
Selling, general and administrative costs for the 13 weeks ended December 26,
1999 increased to $4,655,000 from $3,317,000 for the same period last year.
As a percentage of net sales, selling, general and administrative costs
increase to 63.6% for the 13 weeks ended December 26, 1999 compared to 55.8%
for the same period last year. This increase as a percentage of net sales is
due primarily to higher marketing costs for the 13 weeks ended December 26,
1999 and higher general and administrative costs reflecting planned
investment in additional infrastructure to support expansion, including;
field operations, training, administrative and executive personnel;
pre-opening costs for new stores; increased field operations costs; and
certain administrative costs associated with the Company's Special Meeting of
Shareholders and becoming a reporting company.
Stock option expense decreased to $232,000 for the 13 weeks ended December
26, 1999 from $289,000 in the same period last year. Stock option expense is
a non-cash charge representing the difference between the exercise price and
fair market value of stock at the date of grant.
Depreciation and amortization for the quarterly period ended December 26,
1999 was $684,000 compared to $331,000 for the quarterly period ended
December 27, 1998. This 107% increase is a result of operating nine
additional stores in the current period. As a percentage of net revenue,
depreciation and amortization increased to 9.3% for the 13 week period ended
December 26, 1999 compared to 5.6% in the similar period ended December 27,
1998.
Other expenses, net, decreased to $57,000 in the quarterly period ended
December 26, 1999 compared to $458,000 in net expenses in the quarter ended
December 27, 1998. This decrease is primarily a result of interest income
earned on proceeds from the Company's preferred stock offering and less
interest expense due to reduced debt outstanding and reduced non-cash loan
guarantee fees related to a lower balance on the bank line of credit.
Net loss
For the 13 weeks ended December 26, 1999 net operating loss was $1,846,000,
an increase of $504,000 from $1,342,000 for the 13 weeks ended December 27,
1998. While gross margin increased by 0.3% and stock option and other expenses
decreased for the 13 week period, this was more than offset by higher
selling, general and administrative costs and depreciation and amortization
as described above. Net loss applicable to common stockholders, which
includes preferred stock dividend/accretion, increased to $3,388,000 from
$2,546,000 for the 13 weeks ended December 26, 1999 compared to the 13 weeks
ended December 27, 1998. Net loss applicable to common stockholders per share
increased to $0.23 per share compared to $0.18 in the prior year period due
to the reasons described above. This increase is primarily attributable to
higher non-cash and non-operating costs associated with the beneficial
conversion feature attached to the warrants that were issued as part of the
Investment Units in the current period.
COMPARING THE 39 WEEK PERIODS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
Revenues
Net revenues for the 39 weeks ended September 26, 1999, increased 38% to
$20,134,000 from $14,632,000 for the corresponding period in fiscal 1999.
Revenues of Spinelli Coffee Company are included for the full 39 weeks ended
December 26, 1999 and for the last 26 weeks of the 39 week period ended
December 27, 1998. Retail sales increased 36% to $17,224,000 from $12,687,000
due primarily to operating 21 more retail stores for all or part of the
comparable periods. Retail sales increases were affected to a lesser extent
by an increase in comparable store sales (stores open 13 months or longer) of
14%. During the 39 weeks ended December 26, 1999, the Company added six new
stores.
Specialty sales revenues increased 50% to $2,910,000 for the 39 weeks ended
December 26, 1999, compared to $1,945,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales
to wholesale and coffee service accounts driven by the Company's sales
efforts and specialty sales included with the acquisition of Spinelli.
Costs and expenses
9
<PAGE>
Cost of goods sold and related occupancy expenses for the 39 weeks ended
December 26, 1999 increased to $9,688,000 from $7,239,000 for the same period
last year. As a percentage of net sales, cost of goods sold and related
occupancy expenses were 48.1% for the 39 weeks ended December 26, 1999 and
49.5% for the corresponding period of fiscal 1999. The decrease as a
percentage of net revenue was due primarily to improved coffee purchasing and
lower store occupancy costs.
Selling, general and administrative costs for the 39 weeks ended December 26,
1999 increased to $12,401,000 from $8,726,000 for the same period last year.
As a percentage of sales, selling, general and administrative costs increased
to 61.6% compared to 59.6% for the same period last year. This increase as a
percentage of net sales is primarily due to higher 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.
Stock option expense decreased to $552,000 for the 39 weeks ended December
26, 1999 from $595,000 in the same period last year. This is a non-cash charge
representing the difference between the exercise price and fair market value
of stock at the date of grant.
Depreciation and amortization for the 39 weeks ended December 26, 1999 was
$1,816,000 or 9.0% of net revenues compared to $991,000 or 6.8% of net revenues
for the 39 week period ended December 27, 1998. This 83% increase is a result
of operating seven additional stores at December 26, 1999 compared with
December 27, 1998 in addition to the stores acquired from Spinelli Coffee
Corporation in June 1998 which only had 26 weeks of related depreciation
during the 39 weeks ended December 27, 1998.
Other expenses, net, decreased 63% to $427,000 for the 39 week period ended
December 26, 1999 compared to $1,159,000 in the similar period ended December
27, 1998. This decrease is primarily a result of interest income earned on
proceeds from the Company's preferred stock offering and less interest
expense due to reduced debt outstanding and reduced noncash loan guarantee
fees related to a lower balance on the bank line of credit.
Net loss
Net loss for the 39 weeks ended December 26, 1999 was $4,750,000, an increase
of $672,000 from $4,078,000 in the first 39 weeks of the prior year. While
gross margin increased by 1.4% and other expenses decreased for the 39 week
period, this was more than offset by higher selling, general and
administrative costs, stock option expense and depreciation and amortization
as described above. Net loss applicable to common stockholders increased to
$13,540,000 from $7,047,000 for the 39 weeks ended December 26, 1999 compared
to the same period ended December 27, 1998. Net loss per common share
increase to $0.94 per share compared to $0.49 per share in the prior period.
This increase is primarily attributable to higher non-cash and non-operating
costs associated with the beneficial conversion feature attached to the
warrants that were issued with the preferred stock in the current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $10.0 million in cash and cash equivalents
and with working capital of $7.6 million. Cash and cash equivalents increased
$8.9 million during the 39 week period ended December 26, 1999. The increase
is the result of the continued funding of the Company's Investment Unit
offering throughout the 39 week period ended December 26, 1999, offset by
operating activities and capital expenditures during the same period and
repayments of the bank line of credit. Net cash used in operating activities
was $5,016,000 resulting primarily from a net loss before non-cash charges of
$2,020,000 and an increase in non-cash net operating assets.
Cash used by investing activities for the first 39 weeks of fiscal 2000
totaled $5,140,000. These investments included opening six new
Company-operated stores, new store construction work in progress, enhancing
information systems and capital improvements to certain existing stores and
the Company's administrative facilities.
During the first 39 weeks of fiscal year 2000 Tully's sold a total of
2,289,460 investment units at a price of $10.00 per unit. Each investment unit
consisted of 4 shares of the Company's Class A Convertible Preferred Stock and
a Warrant to purchase two shares of the Company's common stock at an exercise
price of $0.33 per share. In total during the 39 week period, Tully's received
$22,890,459 upon the issuance of 9,156,184 shares of Class A Convertible
Preferred Stock convertible into an equal number of shares of common stock and
Warrants to buy 4,578,188 shares of common stock at $0.33 per share. The total
number of units
10
<PAGE>
issued during the course of the offering is 3,842,416, the aggregate proceeds
of the offering is $38,424,159, the total number of shares of preferred stock
issued is 15,369,664 and the total number of shares of common stock subject
to purchase under the warrants is 7,686,832 shares. During the 39-week period
ending December 26, 1999, warrants for 504,572 common shares were exercised
with aggregate proceeds of $125,194. As of December 26, 1999 the total number
of shares of common stock subject to purchase under the warrants is 7,182,260
shares. The investment units were offered and sold only to accredited
investors pursuant to Rule 506 of Regulation D.
Tully's has and plans to continue to use the funds raised to pursue the
Company's strategy of expansion in its existing and new markets and to a
lesser extent abroad. The Company also intends to pursue additional
acquisitions as a means for further growth because they offer an established
infrastructure and customer base. At the present time the Company has not
entered into any agreements for future acquisitions.
Tully's anticipates that cash requirements for the remainder of fiscal year
2000 and through fiscal year 2001, other than normal operating expenses, are
to consist primarily of capital expenditures related to the addition of new
Company-operated retail stores. The Company has entered into leases for 25
new store locations in Washington and California and is pursuing numerous
other potential store locations in these as well as other markets. Capital
expenditures for the 25 new stores are estimated to be $5.4 million and the
annual lease commitment is approximately $1.2 million. 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. While there can be no assurance that amounts
and timing of the expenditures will occur as planned, management believes
that its cash on hand will be sufficient for its capital needs for the next
twelve months.
The Company has funded its capital requirements principally through private
placements of common and preferred stock and long term debt. To date, the
Company continues to use cash and operate at a loss. The Company's ability to
achieve positive cash flow depends upon a variety of factors, including the
timely introduction and market success of its new stores and products, the
costs of producing and marketing such products and various other factors,
some of which may be beyond the Company's control. If the Company requires
additional capital, it would seek such funding through additional public or
private financing, although there can be no assurance that the Company will
be able to obtain such financing.
YEAR 2000 COMPLIANCE
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs, at
the Company and elsewhere, with time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to produce and
distribute products, process transactions or engage in similar normal
business activities.
As a result of the year 2000 change over the company did not encounter any
disruption to its business operations and so far considers the transition to
calendar year 2000 to be smooth. While still too early to determine the
effects of the of the Year 2000 issues on its transactions with customers and
suppliers, so far the Company has not encountered any significant disruptions
to its business operations. The Company is continuing to monitor closely both
its internal systems and transactions with customers and suppliers for any
indication of Year 2000 related problems.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Coffee commodity prices are subject to substantial price fluctuations, caused
by various factors including weather, political and economic conditions in
certain coffee-producing countries and other supply-related concerns. Also,
agreements establishing export quotas or restricting coffee supplies
worldwide have in the past effected the price of coffee. If coffee prices
were to rise significantly this could have a negative influence on the
Company.
The Company has fixed-price purchase commitments with certain of its vendors
to maintain the supply of green coffee and stabilize its costs of goods sold.
As of December 26, 1999 Tully's had approximately $2.9 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.
11
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Tully's future operating results and earnings could be impacted by other
factors outside its control. These would include increased competition,
finding ideal locations for future expansion and increased costs of
operations including finding skilled personnel to maintain its current and
new operations.
SEASONALITY
Tully's business is subject to seasonal fluctuations. Significant portions of
Tully's net revenues and profits are realized during the third quarter of its
fiscal year. This period includes the Thanksgiving through New Years holiday
season. In addition, quarterly results are affected by the timing of the
opening of new stores, and Tully's rapid growth may conceal the impact of
other seasonal influences. Because of the seasonality of Tully's business,
results for any quarter are not necessarily indicative of the results that
may be achieved for the full fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Asia. This exposure has had a minimal
impact on the Company. At the present time, the Company does not hedge
foreign currency risk, but may hedge known transaction exposure in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is or may from time to time be a party to routine litigation
incidental to our business. Management believes the ultimate resolution of
these routine matters will not materially harm our business, financial
condition, operating results, or cash flow.
ITEM 2. CHANGES IN SECURITIES
Investment Units Consisting of Shares of Class A Preferred Stock and Warrants
At various dates during the first 39 weeks of fiscal year 2000 the Company
sold a total of 2,289,460 investment units at a price of $10.00 per unit. Each
investment unit consisted of 4 shares of the Company's Class A Preferred Stock
together with a Warrant to purchase two shares of the Company's common stock
at an exercise price of $0.33 per share of common stock. In total, Tully's
received $22,890,459 as the result of the sale of the investment units which
resulted in the issuance of 9,156,184 shares of Class A Preferred Stock
convertible into 9,156,184 shares of common stock and Warrants to buy
4,578,092 shares of common stock at $0.33 per share. This brought the total
number of shares issued to 15,543,664, the aggregate proceeds of the offering
to $38,434,160 and the total number of shares of common stock subject to
purchase under the warrants to 7,686,832 shares. During the 39-week period
ending December 26, 1999, warrants for 504,572 common shares were exercised
with aggregate proceeds of $125,194. As of December 26, 1999 the total number
of shares of common stock subject to purchase under the warrants is 7,182,260
shares. The investment units were offered and sold pursuant to Rule 506 of
Regulation D only to accredited investors. A total of 670 accredited investors
purchased these investment units during this offering.
Warrants
The warrants issued as part of the investment units are non-detachable from
the Series A Preferred Stock. Each warrant entitles the holder to purchase
two shares of Tully's common stock at a price of $0.33 per share purchased.
The warrants may be exercised, in whole or in part, at any time after they
are issued. Any warrants outstanding, but unexercised, at the time Tully's
commences a Qualified Offering will be cancelled immediately prior to the
commencement of such Qualified Offering. The holder of the warrant may
exercise it at any time prior to the tenth anniversary of the issuance of the
warrant.
The warrants include provisions for anti-dilution protection right for the
shares of common stock issuable upon exercise of the warrants. Under these
anti-dilution rights, if Tully's were to issue additional stock in connection
12
<PAGE>
with a stock split, reverse stock split or stock dividend then the exercise
price ($0.33 per share) and the number of shares issuable under the warrants
would be adjusted so that the new conversion price and the number of shares
of common stock issuable upon exercise of the warrants will be
proportionately increased or reduced to reflect such split or dividend.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Current Reports on Form 8-K
None.
14
<PAGE>
TULLY'S COFFEE CORPORATION
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TULLY'S COFFEE CORPORATION.
Date: February 9, 2000 By: /s/ Stephen R. Griffin
----------------------------------------------
Stephen R. Griffin
Vice President - Finance and Chief Financial
Officer
15
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