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Originally published October 10, 2012 at 11:59 AM | Page modified October 11, 2012 at 6:46 AM

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Struggling Tully's new plan: bankruptcy protection

The 20-year-old chain is cash-strapped and eager to renegotiate its real-estate leases.

Seattle Times business reporter

Tully's store closures

In recent weeks, Tully's Coffee closed four stores in California, one in Idaho and three in or near Seattle (824 E. Pike St., Northeast 47th Street and University Way Northeast, and Redmond Town Center). Its bankruptcy filing lists these stores as scheduled to close on Sunday:

• Wallingford

• Columbia Tower

• Fourth Avenue and Union Street

• Madison Park

• Bella Bottega Shopping Center, Redmond

• Bridle Trails Shopping Center, Kirkland

• TRC (Tacoma)

• Port Orchard

• Woodinville

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Strapped for cash and eager to renegotiate real-estate leases, Tully's Coffee filed for bankruptcy protection Wednesday, the latest step in a years-long struggle for the Starbucks wannabe.

"We're at a point where we need to position Tully's for the future," said CEO Scott Pearson. "We need to be able to keep this company operating, and this is the best option for us."

Although the Seattle coffee-shop chain is no longer burdened by the enormous debt that plagued it for years, it is low on cash. Tully's had just $1.8 million in cash on Jan. 1, the most recent date for which information is available, down from $2.8 million a year earlier.

The bankruptcy filing shows Tully's has assets of $5.9 million and liabilities of $3.7 million, much of it owed to vendors such as Aramark for uniforms and Green Mountain Coffee Roasters for coffee.

Under bankruptcy protection, the company also hopes to renegotiate terms on real-estate leases, including on cafes it is closing. When Starbucks closed hundreds of stores in 2008, it paid more than $100 million for the broken leases.

In the past few weeks, Tully's closed eight unprofitable stores, including three in the Seattle area. A total of 57 company-run stores remain, nine of which Tully's plans to close on Sunday.

Roughly 70 additional Tully's stores, mostly scattered around the Western U.S., are run by franchisees and licensed partners.

Tully's has about 600 employees and has offered jobs to 108 of the 115 employees affected by the Washington store closures. Workers in other states were offered the option to move to Washington.

The company's filing, made in U.S. Bankruptcy Court for Western Washington, is for Chapter 11 bankruptcy protection, which means it plans to stay in business.

If granted, the court's protection would ease Tully's financial burden so that it has time to look for new capital and make other changes, such as renegotiating leases. By contrast, a company that files for Chapter 7 bankruptcy intends to go out of business.

Wednesday's filing follows years of financial strife at Tully's, whose founder, real-estate developer Tom Tully O'Keefe, opened its first cafe 20 years ago.

O'Keefe declined an interview request Wednesday but wrote in an email: "It is a sad day in the history of Tully's; for its shareholders, employees and customers. Suffice it to say that the most important aspect of managing a business, or serving on its board of directors, is to protect the owners of the business, its shareholders, and make decisions in their best interest."

Although O'Keefe once said he wanted Tully's to "drag off of" Starbucks' education of consumers about gourmet coffee, the business did not go as well for the smaller chain.

While Howard Schultz's mermaid dynamo opened thousands of stores around the globe, Tully's fought to turn a profit. The company grew quickly but never gained the efficiencies enjoyed by Starbucks in what remains a low-margin business.

Tully's raced from 10 stores in 1995 to 59 stores just four years later.

It also made a big marketing push, paying more than $1 million in the late '90s to serve coffee at Safeco Field, beating out longtime Mariners' sponsor Starbucks. For $1.8 million, it also struck a marketing deal at the San Francisco Giants' ballpark.

That was in 2000, when the company had 851 employees and 75 company-operated stores.

Around that time, Tully's was counting on an initial public offering of stock to raise funds to enable it to keep growing and marketing itself. But the dot-com bust scared investors away from IPOs almost precisely when Tully's needed the money, leading the company to quash IPO plans.

Tully's posted profits for just two fiscal years, 2006 and 2009. The former included a large gain from the sale of the rights to operate Tully's stores in Japan, and the latter included the $40.3 million sale of its roastery and wholesale business to Green Mountain Coffee Roasters of Vermont.

Most of the money from Green Mountain went to pay off Tully's debt. Shareholders received $1.03 a share, not a great payout for roughly 6,000 investors, many of whom paid $1 a share in the '90s expecting an IPO.

Tully's is not technically a public company, but because it has more than 500 shareholders, it must file quarterly and other reports with the Securities and Exchange Commission.

The chain's most recent effort to go public came in 2007, when it was stymied again by a languishing stock market.

O'Keefe retired in 2010 as Tully's chairman and no longer sits on its board.

Pearson is Tully's eighth CEO since O'Keefe left that post in 2001.

In his 18 months on the job, Pearson said, he has cut costs in part by reducing head count at Tully's headquarters, much of it through attrition. The chain also renegotiated agreements with suppliers and reduced hours for some store employees.

Pearson said the chain has introduced sandwiches, soups and other food offerings that have helped boost sales during hours when customers do not typically buy coffee.

"We're challenged by a lot of different things, but the key is we need to keep as many stores as we can open and profitable and, by taking this action now, we're in the best position to do that," Pearson said.

Matt Farrell, a consultant with Deloitte Corporate Restructuring Group, which advised Tully's on the bankruptcy, said it is unclear what will happen to the value of Tully's shares.

"So much depends on what Tully's can do to capitalize the business in the coming months," he wrote in an email.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com. On Twitter @AllisonSeattle.

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