UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2004
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 000-26829
Tully’s Coffee Corporation
(Exact Name of Registrant as Specified in its Charter)
| Washington | 91-1557436 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 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 by checkmark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act) 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.
| Common Stock, No Par Value |
16,630,770 | |
| (Title of Each Class) | Number of Shares Outstanding at October 31, 2004 |
TULLY’S COFFEE CORPORATION
Form 10-Q
For the Quarterly Period Ended September 26, 2004
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this report, we refer to Tully’s Coffee Corporation as “we,” “us,” or “Tully’s.” We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our operations and our financial condition, 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. The forward-looking statements are not guarantees of future performance and results or performance may differ materially from those expressed in our forward-looking statements. In addition to the factors discussed under “Factors That May Affect Our Future Results” in this report, the following possible events or factors could cause our actual results to differ materially:
| • | future sources of financing may not be available when needed or may not be available on terms favorable to Tully’s; |
| • | our growth strategy may not succeed if we are unable to achieve market acceptance in new geographic areas or to locate and open stores in suitable locations; |
| • | our marketing and new product introduction strategies may not succeed; |
| • | our strategies for reductions of cost and improvement of gross margins may not succeed; |
| • | competition within the retail specialty coffee market is strong and may intensify; |
| • | competition and consolidation within the food service and supermarket channels could result in reduced opportunities for product placement or increased price competition among coffee suppliers, thereby adversely affecting our revenues or gross margins; |
| • | 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 either interrupt the supply or increase the price of premium coffee beans, thereby significantly increasing our operating costs. |
In addition, this document contains forward-looking statements relating to estimates regarding the specialty coffee business. You should not place undue reliance on any of these forward-looking statements. Except to the extent required by the federal securities laws, we do not intend to update or revise the forward-looking statements contained in this report.
3
TULLY’S COFFEE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 26, 2004 (unaudited) |
March 28, 2004 |
|||||||
| (dollars in thousands, except share data) |
||||||||
| Assets | ||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 863 | $ | 1,247 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $179 and $134 at September 26, 2004 and March 28, 2004, respectively |
1,953 | 889 | ||||||
| Inventories |
2,288 | 2,170 | ||||||
| Prepaid expenses and other current assets |
597 | 664 | ||||||
| Total current assets |
5,701 | 4,970 | ||||||
| Property and equipment, net |
12,450 | 14,004 | ||||||
| Goodwill, net |
523 | 523 | ||||||
| Other intangible assets, net |
823 | 874 | ||||||
| Other assets |
531 | 573 | ||||||
| Total assets |
$ | 20,028 | $ | 20,944 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | 3,276 | $ | 2,177 | ||||
| Accrued liabilities |
4,341 | 3,949 | ||||||
| Current portion of long-term debt |
2,933 | 912 | ||||||
| Current portion of capital lease obligation |
212 | 233 | ||||||
| Convertible promissory note, net of discount |
2,988 | — | ||||||
| Deferred revenue |
1,909 | 2,124 | ||||||
| Total current liabilities |
15,659 | 9,395 | ||||||
| Long-term debt, net of current portion |
— | 2,167 | ||||||
| Capital lease obligation, net of current portion |
120 | 203 | ||||||
| Deferred lease costs |
1,428 | 1,406 | ||||||
| Convertible promissory note, net of discount |
— | 2,931 | ||||||
| Deferred licensing revenue, net of current portion |
9,377 | 10,296 | ||||||
| Total liabilities |
26,584 | 26,398 | ||||||
| Stockholders’ deficit |
||||||||
| Series A Convertible Preferred stock, no par value; 17,500,000 shares authorized, 15,378,264 shares issued and outstanding with a stated value of $2.50 per share and a liquidation preference of $38,446 at September 26, 2004 and March 28, 2004 |
34,483 | 34,483 | ||||||
| Common stock, no par value; 120,000,000 shares authorized; 16,630,770 and 16,491,187 shares issued and outstanding at September 26, 2004 and March 28, 2004, respectively, with a liquidation preference of $37,419 (September 26, 2004) and $37,105 (March 28, 2004) |
9,300 | 9,286 | ||||||
| Series B Convertible Preferred stock, no par value; 8,000,000 shares authorized, 4,990,709 shares issued and outstanding with a stated value of $2.50 per share and a liquidation preference of $12,477 at September 26, 2004 and March 28, 2004 |
11,066 | 11,066 | ||||||
| Deferred stock compensation |
(14 | ) | (74 | ) | ||||
| Additional paid-in capital |
27,803 | 27,738 | ||||||
| Accumulated deficit |
(89,194 | ) | (87,953 | ) | ||||
| Total stockholders’ deficit |
(6,556 | ) | (5,454 | ) | ||||
| Total liabilities and stockholders’ deficit |
$ | 20,028 | $ | 20,944 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TULLY’S COFFEE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
| Thirteen-Week Periods Ended |
Twenty-Six Week Periods Ended |
|||||||||||||||
| September 26, 2004 |
September 28, 2003 |
September 26, 2004 |
September 28, 2003 |
|||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Net sales |
||||||||||||||||
| Sales of products |
$ | 12,274 | $ | 12,565 | $ | 24,231 | $ | 24,752 | ||||||||
| Licenses, royalties, and fees |
516 | 236 | 1,030 | 468 | ||||||||||||
| Recognition of deferred revenue |
566 | 495 | 1,133 | 955 | ||||||||||||
| Net sales |
13,356 | 13,296 | 26,394 | 26,175 | ||||||||||||
| Cost of goods sold and operating expenses |
||||||||||||||||
| Cost of goods sold and related occupancy expenses |
6,094 | 6,011 | 11,822 | 11,789 | ||||||||||||
| Store operating expenses |
4,289 | 4,329 | 8,446 | 8,577 | ||||||||||||
| Other operating expenses |
731 | 489 | 1,358 | 894 | ||||||||||||
| Marketing, general and administrative costs |
1,539 | 1,734 | 3,767 | 3,710 | ||||||||||||
| Depreciation and amortization |
801 | 925 | 1,760 | 1,848 | ||||||||||||
| Evaluation of business integration opportunity |
— | — | 120 | — | ||||||||||||
| Store closure and lease termination costs |
1 | 110 | 1 | 145 | ||||||||||||
| Total cost of goods sold and operating expenses |
13,455 | 13,598 | 27,274 | 26,963 | ||||||||||||
| Operating loss |
(99 | ) | (302 | ) | (880 | ) | (788 | ) | ||||||||
| Other income (expense) |
||||||||||||||||
| Interest expense |
(123 | ) | (132 | ) | (239 | ) | (256 | ) | ||||||||
| Interest income |
— | 1 | 1 | 2 | ||||||||||||
| Miscellaneous income |
13 | 23 | 24 | 46 | ||||||||||||
| Loan guarantee fee expense |
(56 | ) | (66 | ) | (113 | ) | (132 | ) | ||||||||
| Total other income (expense) |
(166 | ) | (174 | ) | (327 | ) | (340 | ) | ||||||||
| Loss before income taxes |
(265 | ) | (476 | ) | (1,207 | ) | (1,128 | ) | ||||||||
| Income taxes |
— | (7 | ) | (34 | ) | (13 | ) | |||||||||
| Net loss |
$ | (265 | ) | $ | (483 | ) | $ | (1,241 | ) | $ | (1,141 | ) | ||||
| Net loss per share – basic and diluted |
$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.07 | ) | ||||
| Weighted average shares used in computing basic and diluted net loss per share (in thousands) |
16,549 | 16,447 | 16,529 | 16,428 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| Twenty-Six Week Periods Ended |
||||||||
| September 26, 2004 |
September 28, 2003 |
|||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (1,241 | ) | $ | (1,141 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
1,760 | 1,848 | ||||||
| Store closure and lease termination costs |
1 | 145 | ||||||
| Non-cash interest expense |
93 | 57 | ||||||
| Employee stock option compensation expense |
12 | 47 | ||||||
| Loan guarantee fee expense |
113 | 132 | ||||||
| Provision for doubtful accounts |
45 | 45 | ||||||
| Loss (gain) on sale of property and equipment |
4 | (1 | ) | |||||
| Recognition of deferred licensing revenues |
(1,133 | ) | (954 | ) | ||||
| Changes in assets and liabilities |
||||||||
| Accounts receivable |
(1,109 | ) | (311 | ) | ||||
| Inventories |
(67 | ) | 444 | |||||
| Prepaid expenses and other assets |
36 | 375 | ||||||
| Accounts payable |
1,099 | (511 | ) | |||||
| Accrued liabilities |
394 | 285 | ||||||