Philosophy & Values Focus on Quality Executive Bios News Press Releases Investor Relations U.S. Franchising and Licensing International Business Development Contact Us

General Information About Our Common and Preferred Stock

We’re providing this informational memorandum to our shareholders in response to questions about the differences between our common stock and preferred stock.

The following information is general in nature and is not meant to be taken as legal or financial advice. In the event of any conflict between this information and our articles of incorporation, by-laws, SEC filings or other legal documents, those other documents shall govern.

GENERAL INFORMATION ABOUT OUR STOCK

On June 27, 2007, our shareholders approved two amendments to our Amended and Restated Articles of Incorporation. The first amendment effects a one-for-eight reverse stock split (the “reverse split”) of all issued and outstanding shares of our common stock. The second amendment changes the definition of “Qualified Public Offering” in Article II, Section 2.8(c)(ii) of our Articles of Incorporation to eliminate a requirement that such offering have a minimum per share price. The articles of amendment effecting these amendments to our Articles of Incorporation were filed with the Secretary of State of the State of Washington on June 27, 2007. These amendments became effective on June 28, 2007. The following discussion explains these amendments, as well as the differences in common stock and preferred stock relating to voting, dividends, and liquidation.

AUTHORIZED CAPITAL

Tully’s authorized capital stock consists of 163,500,000 shares, consisting of 120,000,000 shares of common stock, without par value, and 43,500,000 shares of preferred stock, without par value. The 43,500,000 shares of preferred stock are designated as follows: 31,000,000 shares are Series A Preferred Stock, 8,000,000 shares are Series B Preferred Stock, and 4,500,000 shares have not been designated.

COMMON STOCK

The holders of shares of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and have no cumulative voting rights. Subject to preferential rights that may be applicable to any outstanding shares of preferred stock, the holders of shares of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of the funds legally available.

In the event of any liquidation or winding up of Tully’s and only after distribution of the full Series A Liquidation Preference (described below), each one share of common stock is entitled to receive an amount up to $18.00, plus any and all declared but unpaid dividends with respect to such share of common stock (the “Common Stock Liquidation Preference”). Assuming distribution of the full Series A Liquidation Preference, Common Stock Liquidation Preference and the Series B Liquidation Preference (described below), and subject to the rights of any additional preferred stock that may in the future be designated and issued by us, our remaining assets available for distribution to shareholders would be distributed pro rata among the shareholders of our common stock, Series A Preferred Stock, and Series B Preferred Stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as converted basis.

PREFERRED STOCK

Our Articles of Incorporation authorize the Board of Directors to issue preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. The Board of Directors, subject to certain limitations provided in the Articles of Incorporation, can authorize the issuance of preferred stock with voting rights.

The Articles of Incorporation require the approval of a majority of the outstanding Series A Preferred Stock shares in order to (a) increase the authorized number of Series A Preferred Stock shares, (b) create any new class or series of stock or any other securities convertible into equity securities having a preference over or on parity with the Series A Preferred Stock with respect to voting, dividends or upon liquidation, or (c) adversely alter or change the rights, preferences or privileges of the Series A Preferred Stock. The Articles of Incorporation also require the approval of a majority of the outstanding Series B Preferred Stock shares in order to (a) increase the authorized number of Series B Preferred Stock shares, (b) create any new class or series of stock or any other securities convertible into equity securities having a preference over or on parity with the Series B Preferred Stock with respect to voting, dividends or upon liquidation, or (c) adversely alter or change the rights, preferences or privileges of the Series B Preferred Stock.

Series A Convertible Preferred Stock. Each share of the Series A Preferred Stock is convertible at any time by the holder into shares of common stock at the then effective conversion price. In addition, each share of Series A Preferred Stock is automatically convertible into shares of common stock at the then effective conversion price when and if we make a “Qualified Offering” of our common stock. “Qualified Offering” is defined as an underwritten public offering of our common stock with gross proceeds to Tully’s in excess of $15 million. The Series A Preferred Stock contains an anti-dilution protection right that provides for a weighted average adjustment of the conversion price in the event we issue shares of capital stock at an effective price less than the Series A Preferred conversion price then in effect, subject to certain limitations and exclusions. As a result of the reverse split, each eight shares of Series A Preferred Stock are convertible into approximately 1.13 shares of common stock. This means that, for example, a holder who converted 800 shares of Series A Preferred Stock would receive 113 shares of common stock.

Holders of Series A Preferred Stock are entitled to receive dividends when and if any dividends are declared to be paid by our Board of Directors. Voting rights of the Series A Preferred Stock are subject to adjustment for the anti-dilution adjustment. Accordingly, each eight shares of Series A Preferred Stock now have the equivalent vote of 1.13 shares of common stock. Series A Preferred Stock shareholders may exercise cumulative voting rights with respect to the election of Directors.

In the event of any liquidation or winding up of Tully’s, each share of Series A Preferred Stock is entitled to receive, prior and in preference to all other payments to the holders of Series B Preferred Stock and the shares of common stock, an amount up to $2.50, plus any and all declared but unpaid dividends with respect to such share of Series A Preferred Stock (the “Series A Liquidation Preference”). Assuming distribution of the full Series A Liquidation Preference, Common Stock Liquidation Preference and the Series B Liquidation Preference, and subject to the rights of any additional preferred stock that may in the future be designated and issued by Tully’s, our remaining assets available for distribution to shareholders would be distributed pro rata among the shareholders of our common stock, Series A Preferred Stock, and Series B Preferred Stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as converted basis.

Series B Convertible Preferred Stock. Each share of Series B Preferred Stock is convertible at any time by the holder into shares of common stock at the then effective conversion price. In addition, each share of Series B Preferred Stock is automatically convertible into shares of common stock at the then effective conversion price when and if we make a Qualified Offering of our common stock. The conversion price for the Series B Convertible Preferred shares is subject to an anti-dilution adjustment, but no adjustment has been required. As a result of the reverse split, each eight shares of Series B Preferred Stock are convertible into one share of common stock. This means that, for example, a holder who converted 800 shares of Series B Preferred Stock would receive 100 shares of common stock.

Holders of Series B Preferred Stock are entitled to receive dividends when and if any dividends are declared to be paid by our Board of Directors. Under our Articles of Incorporation, the proportionate voting privileges of our preferred and common stock have been maintained after the 1-for-8 reverse stock split. Accordingly, each eight shares of Series B Preferred Stock now have the equivalent vote of one share of common stock.

In the event of any liquidation or winding up of Tully’s, each share of Series B Preferred Stock is entitled to receive, after full satisfaction of the Series A Liquidation Preference and the Common Stock Liquidation Preference, and prior and in preference to all other payments to the holders of shares of common stock, an amount up to $2.50, plus any and all declared but unpaid dividends with respect to such share of Series B Preferred Stock (the “Series B Liquidation Preference”). Assuming distribution of the full Series A Liquidation Preference, Common Stock Liquidation Preference, and the Series B Liquidation Preference, and subject to the rights of any additional series or classes of preferred stock that may in the future be designated and issued by Tully’s, the remaining assets of Tully’s available for distribution to shareholders would be distributed pro rata among the shareholders of our common stock, Series A Preferred Stock, and Series B Preferred Stock, treating the shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock on an as converted basis.