<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-26829
TULLY'S COFFEE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1557436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2010 AIRPORT WAY SOUTH
SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 233-2070
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes _____ No __X__.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE 14,394,655
<S> <C>
(Title of Each Class) Number of Shares Outstanding at
September 26, 1999
</TABLE>
<PAGE>
TULLY'S COFFEE CORPORATION
Form 10-Q
For the Quarterly Period Ended September 26, 1999
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1 Consolidated Balance Sheets at September 26, 1999
and March 28, 1999 3
Consolidated Statements of Operations for the
13 and 26 Week Periods Ended September 26, 1999
and September 27, 1998 4
Consolidated Statements of Cash Flows for the 26
Week Periods Ended September 26, 1999 and
September 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TULLY'S COFFEE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, 1999 March 28, 1999
(unaudited)
------------------------- ------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,553,653 $ 1,149,160
Accounts receivable, net 838,448 695,037
Inventories, net 2,859,590 1,808,556
Prepaid expenses 475,297 84,197
------------------------- ------------------------------
Total current assets 13,726,988 3,736,950
Property and equipment, net 12,329,309 10,991,722
Goodwill, net 4,797,026 4,973,370
Other intangible assets, net 1,219,565 760,320
Other assets 425,451 256,657
------------------------- ------------------------------
Total assets $ 32,498,339 $ 20,719,019
========================= ==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 41,504 $ 27,744
Bank line of credit 3,000,000 6,500,000
Accounts payable 1,174,133 1,808,619
Accrued liabilities and other current
liabilities 2,078,157 1,199,413
------------------------- ------------------------------
Total current liabilities 6,293,794 9,535,776
Long-term debt, net of current portion 21,641 128,978
Capital lease obligation 176,897 192,754
Deferred lease costs 874,099 885,232
------------------------- ------------------------------
Total liabilities 7,366,431 10,742,740
Stockholders' equity:
Series A convertible preferred stock, no par;
30,000,000 shares authorized 13,768,070
and 6,217,480 issued and outstanding,
stated value of $2.50 and a liquidation
preference of $34,420,175 and $15,543,700
at September 26, 1999 and March 28, 1999,
respectively 31,602,652 14,351,934
Common stock, no par value; 120,000,000
shares authorized; 14,394,655 and
14,314,000 shares issued and outstanding 7,626,397 7,444,922
Additional paid-in capital 18,369,197 10,489,829
Accumulated deficit (32,466,338) (22,310,406)
------------------------- ------------------------------
Total stockholders' equity 25,131,908 9,976,279
------------------------- ------------------------------
Total liabilities and stockholders' equity $ 32,498,339 $ 20,719,019
========================= ==============================
</TABLE>
The accompanying notes are an integral part of
these financial statements
3
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TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
(unaudited) (unaudited)
-------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 6,755,365 $5,498,985 $ 12,870,427 $ 8,683,921
Cost of sales and related occupancy
expense 3,187,342 2,668,587 6,145,081 4,344,364
Selling, general and administrative
costs 4,126,343 3,090,856 7,746,134 5,123,604
Stock option compensation expenses 115,031 153,403 320,119 306,806
Depreciation and amortization 587,657 419,863 1,142,712 660,108
------------ ------------ ------------- -------------
Operating loss (1,261,008) (833,724) (2,483,619) (1,750,961)
------------ ------------ ------------- -------------
Other expense 165,177 467,668 423,562 700,408
------------ ------------ ------------- -------------
Net loss $(1,426,185) $(1,301,392) $(2,907,181) $ (2,451,369)
Preferred stock dividend/accretion 3,617,532 517,248 7,248,751 1,765,248
============ ============ ============= =============
Net loss applicable to common
stockholders $(5,043,717) $(1,818,640) $(10,155,932) $ (4,216,617)
============ ============ ============= =============
Weighted average number of common
and common equivalent shares
outstanding 14,374,908 14,333,747 14,340,828 14,328,074
============ ============ ============= =============
Basic and diluted net loss per common
share $ (0.35) $ (0.13) $ ( 0.71) $ ( 0.29)
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of
the financial statements
4
<PAGE>
TULLY'S COFFEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
--------------------------------------------------
September 26, September 27,
1999 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,907,181) $ (2,451,369)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 1,142,712 660,108
Stock option expense 320,119 306,806
Provisions for doubtful accounts (22,469) 10,573
Stock issued in exchange for services 11,635 50,000
Loan guarantee fee expense 250,498 334,374
Deferred lease costs (11,134) 142,943
Imputed officer compensation 60,000 60,000
Changes in assets and liabilities
Accounts receivable (120,942) 198,788
Inventories (1,051,034) 391,016
Prepaid expense and other assets (559,892) (56,520)
Accounts payable (634,486) (815,083)
Accrued liabilities 878,745 260,217
-------------- --------------
Net cash used in operating activities (2,643,429) (908,147)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,254,372) (1,345,047)
Purchase of Spinelli Coffee Company, net - (6,916,184)
Additions to intangible assets (338,989) -
-------------- --------------
Net cash used in investing activities (2,593,361) (8,261,231)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit - 2,542,979
Repayment of bank line of credit (3,500,000) -
Payments on notes payable (109,434) (99,462)
Proceeds from the issuance of note payable - 2,500,000
Proceeds from the issuance of convertible
preferred stock 18,876,955 4,597,000
Stock issuance costs (1,626,238) (25,670)
Checks drawn in excess of bank balances - (113,893)
-------------- --------------
Net cash provided by financing activities 13,641,283 9,400,954
-------------- --------------
Net increase in cash and cash equivalents 8,404,493 231,576
Cash and cash equivalents at beginning of period 1,149,160 21,566
-------------- --------------
Cash and cash equivalents at end of period $ 9,553,653 $ 253,142
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Deemed preferred stock dividend on convertible
preferred stock issuance as a result of
beneficial conversion feature of attached
common stock warrants 7,248,751 1,765,248
Noncash investing and financing activities:
Accrued liability for preferred stock
to be issued for commissions 1,355,183 229,850
Accrued liability (or Acct. Payable) to
purchase equipment 52,935 0
</TABLE>
The accompanying notes are an integral part of
the financial statements
5
<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 September 26, 1999 and September 27, 1998, and for the
13-week and 26-week periods ended September 26, 1999 and September 27, 1998
have been prepared by Tully's pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The consolidated financial
statements contained in this form 10-Q are unaudited. In the opinion of
management all adjustments (consisting only of normal recurring adjustments
and accruals) necessary for a fair presentation for the interim periods have
been reflected. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10 for the year ended March 28, 1999. The results of
operations for the 13-weeks and 26-weeks ended September 26, 1999 are not
necessarily indicative of the results for the entire year ending April 2,
2000.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
September 26, 1999 March 28, 1999
<S> <C> <C>
Coffee
Unroasted (Green) coffee $ 1,662,470 $ 696,281
Roasted coffee 176,117 114,847
Other goods held for sale 493,091 547,064
Packaging and other 527,912 450,364
---------------------- ---------------------
$ 2,859,590 $1,808,556
====================== =====================
</TABLE>
As of September 26, 1999, the Company has fixed-price purchase commitments
for green coffee totaling approximately $590,000.
3. Loss per Common Share
Basic loss per common share have been calculated based on the
weighted-average common shares of 14,374,908, 14,333,747, 14,340,828 and
14,328,074 for the 13 weeks ended September 26, 1999, the 13 weeks ended
September 27, 1998, the 26 weeks ended September 26, 1999 and the 26 weeks
ended September 27, 1998, respectively. The Company had a net loss for all
periods presented herein; therefore none of the options, warrants and
convertible preferred stock outstanding during the each of the periods
presented were included in the computation of diluted loss per share as they
were antidilutive.
6
<PAGE>
4. Stockholders' equity
Convertible Preferred stock
In August 1999, the Shareholders approved an amendment to the Company's
Articles of Incorporation increasing the number of authorized shares of
Preferred Stock from 10,000,000 to 30,000,000. The increase in authorized
shares allowed the Company to accept additional subscriptions, convertible
preferred stock.
For the 26-week period ending September 26, 1999, the Company issued
1,887,696 units or 7,550,782 shares of Series A Preferred Stock, with an
aggregate purchase price of $18,876,955 bringing the total number of units
issued to 3,442,018 and aggregate proceeds of the offering to $34,420,175.
Each unit consists of 4 shares of the Company's Series A Preferred Stock and
a Warrant to purchase two shares of the Company's Common Stock at an exercise
price of $0.33 per share. The unit offering price was $10.00.
Common stock
In August 1999, the shareholders approved an amendment to the Company's
Articles of Incorporation, increasing the authorized number of common shares
from 40,000,000 to 120,000,000.
Warrants
In connection with the Series A convertible preferred stock issued during the
26-week period ending September 26, 1999, the Company issued warrants to
purchase 3,775,391 shares of common stock at an exercise price of $0.33 per
share bringing the total number of shares of common stock subject to purchase
under the warrants to 6,884,035 shares . The exercise price of the warrant at
the date of issuance was below the fair market value of the common stock and
is therefore considered an "in the money" or beneficial conversion feature.
Accounting for the issuance of convertible preferred stock with a
nondetachable beneficial conversion feature at the date of issue requires that
the conversion feature be recognized and measured in the financial statements
by allocating a portion of the preferred stock offering proceeds to additional
paid in capital. The discount resulting from the allocation of the proceeds to
the beneficial conversion feature is analogous to a dividend and is recognized
as a return to preferred shareholders from the date of issuance through the
date the warrants are exercisable.
As a result of the aforementioned accounting, the Company allocated
$7,248,751 of the preferred stock proceeds to additional paid in capital. As
the warrants were exercisable upon issuance, the entire allocation was
recognized as a preferred dividend through a charge to retained earnings and
a credit to preferred stock during the period. The weighted-average fair
value of the warrants on the date of grant was $1.92 per share of common
stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Certain statements herein, including anticipated store openings, planned
capital expenditures, projected goodwill amortization and trends in or
expectations regarding the Company's operations, specifically including the
effect of problems associated with the Year 2000, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are based on currently available operating,
financial and competitive information, and are subject to risks and
7
<PAGE>
uncertainties. Actual future results and trends may differ materially
depending on a variety of factors, including, but not limited to, coffee and
other raw materials prices and availability, successful execution of internal
performance and expansion plans, the impact of competition, the effect of
legal proceedings, and other risks detailed herein and in the Company's
annual and quarterly filings with the Securities and Exchange Commission.
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's Form 10 for the year ended March 28,1999. This analysis is
provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
OVERVIEW
The Company's fiscal year ends on the Sunday closest to March 31. Fiscal year
1999 had 52 weeks. The fiscal year ending on April 2, 2000 will include 53
weeks.
The Company intends to continue its aggressive growth strategy and as a
result, expects to incur costs of additional investment in its brand,
infrastructure and management team to support a larger organization in the
future. As a result, selling, general and administrative costs are expected
to increase at a faster rate than net revenues in the near term. While store
contribution is positive, it has not been sufficient to overcome the
incremental costs associated with growth. The Company believes that in the
longer term, selling, general and administrative costs will increase at a
slower pace than net revenues enabling the Company to realize economies of
scale.
During the 26 weeks ended September 26, 1999, Tully's Coffee Corporation
("Tully's" or the "Company") derived approximately 86% of net revenues from
its Company-operated retail stores. Specialty sales consisting of domestic and
international product sales to wholesale customers, office coffee service,
direct mail order sales and royalty and licensing fees account for the
remaining 14% of net sales.
During the first 26 weeks of fiscal year 2000 Tully's completed a private
placement raising approximately $18.9 million in the 26 week period bringing
the total raised in the offering to $34.4 million. Investors purchased
1,887,696 investment units at $10 per unit during the 26 week period and a
total of 3,442,018 units over the course of the offering . Each unit
consisted of four shares of Class A Preferred Stock and a Warrant to purchase
two shares of common stock at an exercise price of $0.33 per share of common
stock. The proceeds have been used to repay $3 million in debt, for capital
expenditures on new and acquired stores and working capital, leaving cash of
$9 million at September 26, 1999. The Company plans to use the remaining
proceeds to fund expansion in its existing and new markets and for working
capital.
RESULTS OF OPERATIONS
COMPARING THE 13 WEEK PERIODS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
Revenues
Net revenues for the 13 weeks ended September 26, 1999, increased 23% to
$6,755,000 from $5,499,000 for the corresponding period in fiscal 1999.
Revenues for Spinelli Coffee Company are included for the full 13 weeks in
both years since the purchase of Spinelli was completed at the beginning of
the 13 week period ended September 27, 1998. Retail sales increased 23% to
$5,762,000 from $4,668,000 due primarily to the opening of new retail stores
within the last year. Retail sales increases were affected to a lesser extent
by an increase in comparable store sales (stores open 13 weeks or longer) of
6%. Comparable store sales overall were reduced by a decline in sales in the
stores acquired from Spinelli. Management anticipated a temporary sales
decline due to the change in name and merchandise. Comparable store sales have
improved as remodels and increased training efforts in these stores were
completed. Excluding the stores acquired from Spinelli comparable store sales
increased 13%. During the 13 weeks ended September 26, 1999, the Company
opened two new stores. The Company ended the period with 59 Company-operated
stores in the United States.
Specialty sales revenues increased 19% to $993,000 for the 13 weeks ended
September 26, 1999, compared to $831,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales
to wholesale and coffee service accounts.
8
<PAGE>
Costs and expenses
Costs of goods sold and related occupancy expenses for the 13 weeks ended
September 26, 1999 increased to $3,187,000 from $2,669,000 for the same
period last year. As a percentage of sales, cost of goods sold and related
occupancy expenses decreased to 47.2% for the 13 weeks ended September 26,
1999 from 48.5% for the comparable period in fiscal 1999. The decrease as a
percentage of net sales was due primarily to improved coffee purchasing and
lower store occupancy costs.
Selling, general and administrative costs for the 13 weeks ended September
26, 1999 increased to $4,126,000 from $3,091,000 for the same period last
year. As a percentage of net sales, selling, general and administrative costs
increase to 61.1% for the 13 weeks ended September 26, 1999 compared to 56.2%
for the same period last year. This increase as a percentage of net sales is
due primarily to higher marketing costs for the 13 weeks ended September 26,
1999 and to a lesser extent to higher general and administrative costs as a
percentage of net sales reflecting planned investment in additional
infrastructure to support expansion.
Stock option expense decreased to $115,000 for the 13 weeks ended September
26, 1999 from $153,000 in the same period last year. Stock option expense is
a noncash charge representing the difference between the exercise price and
fair market value of stock at the date of grant.
Depreciation and amortization for the quarterly period ended September 26,
1999 was $588,000 compared to $420,000 for the quarterly period ended
September 27, 1998. This 40% increase is a result of operating eleven
additional stores in the current period. As a percentage of net
revenue depreciation and amortization increased to 9% for the 13 week period
ended September 26, 1999 compared to 8% in the similar period ended September
27, 1998.
Other expenses decreased to $165,000 of net expenses in the quarterly period
ended September 26, 1999 compared to $468,000 in net expenses in the quarter
ended September 27, 1998. This is primarily a result of less interest expense
and noncash loan guarantee fees related to a lower balance on the bank line of
credit.
Net loss
For the 13 weeks ended September 26, 1999 net operating loss was $1,426,000,
an increase of $125,000 from $1,301,000 for the 13 weeks ended September 27,
1998, respectively. While gross margin increased by 1.3% and stock option and
other expenses decreased for the 13 week period, this was more than offset by
higher selling, general and administrative costs and depreciation and
amortization as described above. Net loss applicable to common stockholders
increased to $5,044,000 from $1,819,000 for the 13 weeks ended September 26,
1999 compared to the 13 weeks ended September 27, 1998. Net loss applicable to
common stockholders per share increased to $0.35 per share compared to $0.13
in the prior year period due to the reasons described above.
COMPARING THE 26 WEEK PERIODS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
Revenues
Net revenues for the 26 weeks ended September 26, 1999, increased 48% to
$12,870,000 from $8,684,000 for the corresponding period in fiscal 1999.
Revenues of Spinelli are included for the full 26 weeks ended September 26,
1999 and for the last 13 weeks of the 26 week period ended September 27, 1998.
Retail sales increased 44% to $11,052,000 from $7,659,000 due primarily to
operating 23 more retail stores for all or part of the comparable periods.
Retail sales increases were affected to a lesser extent by an increase in
comparable store sales (stores open 13 weeks or longer) of 10%. Comparable
store sales overall were reduced by a decline in sales in the stores acquired
from Spinelli. Management anticipated a temporary sales decline due to the
change in name and merchandise. Comparable store sales have improved as
remodels and increased training efforts in these stores were completed.
Excluding the stores acquired from Spinelli, comparable store sales increased
13%.
9
<PAGE>
Sales in the stores acquired from Spinelli have improved recently due to store
remodels and increased store training and merchandising efforts. During the 26
weeks ended September 26, 1999, the Company opened four new stores.
Specialty sales revenues increased 77% to $1,818,000 for the 26 weeks ended
September 26, 1999, compared to $1,025,000 for the corresponding period in
fiscal year 1999. Specialty sales growth was driven primarily by higher sales
to wholesale and coffee service accounts driven by the Company's sales
efforts and specialty sales included with the acquisition of Spinelli.
Costs and expenses
Cost of goods sold and related occupancy expenses for the 26 weeks ended
September 26, 1999 increased to $6,145,000 from $4,344,000 for the same
period last year. As a percentage of net sales, cost of goods sold and
related occupancy expenses were 47.7% for the 26 weeks ended September 26,
1999 and 50.0% for the corresponding period of fiscal 1999. The decrease as a
percentage of net revenue was due primarily to improved coffee purchasing.
Selling, general and administrative costs for the 26 weeks ended September
26, 1999 increased to $7,746,000 from $5,124,000 for the same period last
year. As a percentage of sales, selling, general and administrative costs
increased to 60.2% compared to 59.0% for the same period last year. This
increase as a percentage of net sales is primarily due to higher marketing
costs together with planned investment in additional infrastructure.
Stock option expense increased to $320,000 for the 26 weeks ended September
26, 1999 from $307,000 in the same period last year. This is a noncash charge
representing the difference between the exercise price and fair market value
of stock at the date of grant.
Depreciation and amortization for the 26 weeks ended September 26, 1999 was
$1,143,000 or 9% of net revenues compared to $660,000 or 8% of net revenues
for the 26 week period ended September 27, 1998. This 73% increase is a result
of operating eleven additional stores in the current period in addition to the
stores acquired from Spinelli Coffee Corporation in June 1998 and only had 13
weeks of related depreciation during the 26 weeks ended September 27, 1998.
Other expenses and income decreased 40% to $424,000 of net expenses for the
26 week period ended September 26, 1999 compared to $700,000 in expense in
the similar period ended September 27, 1998. This is primarily a result of
lower interest expense and noncash loan guarantee expenses due to a lower
balance on the bank line of credit.
Net loss
Net loss for the 26 weeks ended September 26, 1999 was $2,907,000, an
increase of $456,000 from $2,451,000 in the first 26 weeks of the prior year.
While gross margin increased by 2.3% and other expenses decreased for the 26
week period, this was more than offset by higher selling, general and
administrative costs, stock option expense and depreciation and amortization
as described above. Net loss applicable to common stockholders increased to
$10,156,000 from $4,217,000 for the 26 weeks ended September 26, 1999
compared to the same period ended September 27, 1998. Net loss per common
share increase to $0.71 per share compared to $0.29 per share in the prior
period. This increase is primarily attributable to higher non-cash and
non-operating costs associated with the beneficial conversion feature
attached to the warrants that were issued with the preferred stock in the
current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $9,554,000 in cash and cash equivalents and
with working capital of $7,433,000. Cash and cash equivalents increased
$8,404,000 during the 26 week period ended
10
<PAGE>
September 26, 1999. The increase is the result of $19 million in private
placement funds received throughout the 26 week period ended September 26,
1999, offset by operating activities during the same period and repayments of
the bank line of credit. Net cash used in operating activities was $2,643,000
resulting primarily from a net loss before non-cash charges of $1,156,000 and
an increase in non-cash net operating assets.
Cash used by investing activities for the first 26 weeks of fiscal 2000
totaled $2,593,000. These investments included opening four new
Company-operated stores, new store construction work in progress, enhancing
information systems and capital improvements to certain existing stores.
During the first 26 weeks of fiscal year 2000 Tully's sold a total of
1,887,696 units of an "investment unit" at a price of $10.00 per unit. Each
investment unit consisted of 4 shares of the Company's Class A convertible
Preferred Stock and a Warrant to purchase two shares of the Company's common
stock at an exercise price of $0.33 per share. In total during the 26 week
period, Tully's received $18,876,955 upon the issuance of 7,550,782 shares of
Class A convertible Preferred Stock convertible into an equal number of shares
of common stock and Warrants to buy 3,775,391 shares of common stock at $0.33
per share. The total number of units issued are 3,442,018, the aggregate
proceeds of the offering is $34,420,175 and the total number of shares of
common stock subject to purchase under the warrants are 6,884,035 shares. The
investment units were offered and sold only to accredited investors pursuant
to Rule 506 of Regulation D.
Tully's has plans to continue to use the funds raised to pursue the company's
strategy of expansion in its existing and new markets and to a lesser extent
abroad. The Company may also pursue acquisitions as a means for further growth
because they offer an established infrastructure and customer base. At the
present time the Company has not entered into any agreements for future
acquisitions.
Tully's anticipates that cash requirements for the remainder of fiscal year
2000, other than normal operating expenses, are to consist primarily of
capital expenditures related to the addition of new Company-operated retail
stores. This growth of the Company's store base could be both through new
stores and acquisition of existing competitors or operators in existing and
new markets. The Company also anticipates making additional expenditures to
expand its administrative offices and production capacity and to enhance
information systems and remodel certain existing stores. As a result, selling,
general and administrative costs are expected to increase at a faster rate
than net revenues in the near term. In the longer term, selling, general and
administrative costs are expected to grow at a slower pace than net revenues.
While there can be no assurance that amounts and timing of the expenditures
will occur as planned, management believes that its cash on hand will be
sufficient for its capital needs for the next twelve months.
The Company has funded its capital requirements principally through private
placements of common and preferred stock and long term debt. To date, the
Company continues to use cash and operate at a loss. The Company's ability to
achieve positive cash flow depends upon a variety of factors, including the
timely introduction and market success of its new stores and products, the
costs of producing and marketing such products and various other factors, some
of which may be beyond the Company's control. If the Company requires
additional capital, it would seek such funding through additional public or
private financing, although there can be no assurance that the Company will be
able to obtain such financing.
YEAR 2000 COMPLIANCE
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs, at
the Company and elsewhere, with time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to produce and
distribute products, process transactions or engage in similar normal
business activities.
11
<PAGE>
The Company has investigated the impact of the year 2000 problem on its
business, including operational, information and financial systems and has
tested certain systems for compliance. Although it is not presently aware of
any material operational issues or costs associated with preparing its
internal systems for the year 2000, there can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of
the necessary systems and changes to address all year 2000 issues. The
Company estimates the cost of making systems compliant is approximately
$40,000. As of September 26, 1999, Tully's had expended approximately $25,000.
The Company is in the process of identifying and working with significant
suppliers, customers and financial institutions to ensure that those parties
have appropriate plans to remedy year 2000 issues when their systems may
affect our systems or otherwise impact operations. Although we have no reason
to conclude that any specific supplier represents a risk, the reasonably
likely worst-case scenario would entail disruption to our business due to the
inability of a number of our suppliers to provide product. We are unable to
quantify such a scenario, but it could potentially materially harm our
results of our operations, liquidity or financial position.
Tully's has completed its review of non-information technology systems
(including voice communications and security) will be completed before the
end of November 1999. The estimated cost to remedy non-information technology
systems is not expected to be material. Tully's expects that the source of
funds for evaluation and remediation of year 2000 compliance issues will be
cash on hand.
The third parties whose year 2000 problems could have the greatest effect on
Tully's are believed by Tully's to be banks that maintain Tully's depository
accounts and credit card processing systems, the company that processes
Tully's payroll and companies that supply or distribute coffee beans and
other goods.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Coffee commodity prices are subject to substantial price fluctuations, caused
by various factors including weather, political and economic conditions in
certain coffee-producing countries and other supply-related concerns. Also,
agreements establishing export quotas or restricting coffee supplies
worldwide have in the past effected the price of coffee. If coffee prices
were to rise significantly this could have a negative influence on the
Company.
The Company has fixed-price purchase commitments with certain of its vendors
to maintain the supply of green coffee and stabilize its costs of goods sold.
As of September 26, 1999 Tully's had approximately $590,000 in fixed-price
purchase commitments which along with its current inventory levels the
Company believes will be sufficient to meet all its coffee needs through
fiscal year end. The Company believes that the risk of non-delivery on these
purchase commitments is remote.
Tully's future operating results and earnings could be impacted by other
factors outside its control. These would include increased competition,
finding ideal locations for future expansion and increased costs of
operations including finding skilled personnel to maintain its current and
new operations.
SEASONALITY
Tully's business is subject to seasonal fluctuations. Significant portions of
Tully's net revenues and profits are realized during the third quarter of its
fiscal year. This period includes the Thanksgiving through New Years holiday
season. In addition, quarterly results are affected by the timing of the
opening of new stores, and Tully's rapid growth may conceal the impact of
other seasonal influences. Because of the seasonality
12
<PAGE>
of Tully's business, results for any quarter are not necessarily indicative
of the results that may be achieved for the full fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Asia. This exposure has had a minimal
impact on the Company. At the present time, the Company does not hedge
foreign currency risk, but may hedge known transaction exposure in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is or may from time to time be a party to routine litigation
incidental to our business. Management believes the ultimate resolution of
these routine matters will not materially harm our business, financial
condition, operating results, or cash flow.
ITEM 2. CHANGES IN SECURITIES
Investment Units Consisting of Shares of Class A Preferred Stock and Warrants
At various dates during the first 26 weeks of fiscal year 2000 the Company
sold a total of 1,887,656 units of an "investment unit" at a price of $10.00
per unit. Each investment unit consisted of 4 shares of the Company's Class A
Preferred Stock together with a Warrant to purchase two shares of the
Company's common stock at an exercise price of $0.33 per share of common
stock. In total, Tully's received $18,876,955 as the result of the sale of
the investment units which resulted in the issuance of 7,550,782 shares of
Class A Preferred Stock convertible into 7,550,782 shares of common stock and
Warrants to buy 3,775,391 shares of common stock at $0.33 per share. This
brought the total number of shares issued to 13,768,070, the aggregate
proceeds of the offering to $34,420,175 and the total number of shares of
common stock subject to purchase under the warrants to 6,884,035 shares The
investment units were offered and sold pursuant to Rule 506 of Regulation D
only to accredited investors. A total of 582 accredited investors purchased
these investment units during this offering.
On August 11, 1999, the shareholders of Tully's approved four amendments to
the Company's Articles of Incorporation. These included amendments to
increase the number of authorized shares of common stock form 40,000,000 to
120,000,000 shares and an increase in the number of authorized Class A
Preferred Stock from 10,000,000 to 30,000,000.
Warrants
The warrants issued as part of the investment units are non-detachable from
the Series A Preferred Stock. Each warrant entitles the holder to purchase
two shares of Tully's common stock at a price of $0.33 per share purchased.
The warrants may be exercised, in whole or in part, at any time after they
are issued. Any warrants outstanding, but unexercised, at the time Tully's
commences a Qualified Offering will be cancelled immediately prior to the
commencement of such Qualified Offering. The holder of the warrant may
exercise it at any time prior to the tenth anniversary of the issuance of the
warrant.
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<PAGE>
The warrants include provisions for anti-dilution protection right for the
shares of common stock issuable upon exercise of the warrants. Under these
anti-dilution rights, if Tully's were to issue additional stock in connection
with a stock split, reverse stock split or stock dividend then the exercise
price ($0.33 per share) and the number of shares issuable under the warrants
would be adjusted so that the new conversion price and the number of shares
of common stock issuable upon exercise of the warrants will be
proportionately increased or reduced to reflect such split or dividend.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on August 11, 1999. There
were a total of 10,056,728 shares of the Company's common stock and 6,343,530
shares of the Company's preferred stock present at the meeting, either in
person or represented by proxy. The number of shares present at the meeting
represented a quorum for each of their respective classes.
There were three matters submitted to the shareholders of the Company for
ratification or approval. The specific matters submitted for voting by the
shareholders and the results of the voting were as follows:
Proposal 1: Amendments to the Articles of Incorporation to:
(i) increase the number of authorized shares of
common stock from 40,000,000 to 120,000,000 shares;
(ii) to increase the number of authorized shares of
preferred stock from 10,000,000 to 30,000,000 shares,
including the designation of a specific (Class "A")
preferred stock consisting of 17,500,000 shares and
designating the rights and preferences of such Class
A preferred stock; (iii) to eliminate the cumulative
voting rights in connection with the election of
Directors of the Company and (iv) to eliminate and
deny the existing preemptive rights of shareholders
of the Company in connection with the issuance of
shares by the Company.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,023,711 33,017 4,305,111
Preferred Stock 6,310,730 32,800 3,656,120
</TABLE>
Proposal 2: Amended the Employee stock option plan to increase
the number of shares reserved for issuance under the
plan from 718,000 shares of common stock to 4,200,000
shares.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,015,428 41,300 4,305,111
Preferred Stock 6,323,530 20,000 3,656,120
</TABLE>
Proposal 3: To approve the 1999 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
SHARES VOTING VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------- --------- ------------- ----------------
<S> <C> <C> <C>
Common Stock 10,029,011 27,717 4,305,111
Preferred Stock 6,283,530 60,000 6,565,120
</TABLE>
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Articles of Incorporation, as amended
10.1* Tully's Coffee Corporation Amended and Restated
1994 Stock Option Plan.
10.2* Tully's Coffee Corporation 1999 Employee Stock
Purchase Plan
</TABLE>
*Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 26, 1999.
(b) Current Reports on Form 8-K
None.
15
<PAGE>
TULLY'S COFFEE CORPORATION
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TULLY'S COFFEE CORPORATION.
Date: June 30, 2000 By: /s/ STEPHEN R. GRIFFIN
---------------------------------
Stephen R. Griffin
Vice President - Finance and
Chief Financial Officer
16
