Answers to Common Questions about the $2.64 (originally $0.33) Warrants Issued with the Series A Preferred Stock
We have received many inquiries from our Series A shareholders regarding the warrants issued to them when they purchased investment units in our 1998-1999 offerings of Investment Units or in our 2005 rights offering. For this reason, we are making this memorandum available to all of our holders of record of these warrants.
Following you will find answers to common questions about these warrants. This is general information and it doesn’t confirm what, if any, warrants may be outstanding for you. This information is subject to revision, so please keep your shareholder address current with our transfer agent (Mellon Investor Services), and please visit www.tullys.com from time to time for current information about the company.
What are the $2.64 Warrants?
The $2.64 Warrants were issued to investors as part of the offering of investment units completed in 1998 and 1999, and in the rights offering completed in early 2005. Giving effect to the June 2007 reverse split of our common stock, each warrant currently is exercisable for approximately 0.25 shares of common stock at $2.64 per share.
How did the June 2007 one-for-eight reverse split of Tully’s Common Stock affect my Warrants?
The reverse split, which was approved by our shareholders in June 2007, had the effect of reducing the number of shares of our outstanding common stock to 1/8th of the number of outstanding shares before the split. Similarly, the reverse split decreased the number of shares issuable upon exercise of a Warrant, and increased the exercise price per share, by a factor of eight. For example, a person who could purchase 1,000 shares of common stock for $0.33 each before the reverse split (at a total exercise price of $330.00) now will be entitled to purchase 125 shares of common stock for $2.64 (at a total exercise price of $330.00).
What if I have exercised all of my $2.64 Warrants already?
If you have already exercised all of your $2.64 Warrants, please disregard this memorandum.
Is exercising the $2.64 Warrants risky?
Yes. The exercise of your $2.64 Warrant means that you are making an investment decision to buy our common stock at the exercise price. You should consider the risks of exercising your Warrants as carefully as you would consider any other investment. Among other things, you should review carefully consider the risks described under the heading “Risk Factors” in our most recent Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, and the other information set forth in our periodic and other filings with the SEC.
Must I exercise my $2.64 Warrants?
No. You are not required to exercise your $2.64 Warrants or take any other action with respect to the Warrants at this time.
What happens if I choose not to exercise my $2.64 Warrants?
Each $2.64 Warrant will expire on the earlier of the expiration date shown in the warrant agreement (which is generally October 6, 2009 or earlier) or the completion of a “Qualified Public Offering,” as defined in Section 1.4 of the warrant agreement.
How does the proposed underwritten public offering of Tully's common stock affect my warrants?
On April 27, 2007, Tully's filed a registration statement for a proposed underwritten public offering of its common stock, and has subsequently amended that registration statement. The registration statement has not been declared effective by the SEC. On August 14, 2007, Tully's announced that it had postponed the proposed public offering due to volatile stock market conditions. The company said that it believes that completion of the offering under current market conditions would not be in the best interest of shareholders and that it will continue to monitor the financial markets.
The proposed public offering described in the amended registration statement, if completed, would not constitute a "Qualified Public Offering" under the definition of Section 1.4 of the warrant agreement and, therefore, would not cause the Warrants to expire.
How do I exercise my $2.64 Warrants?
Please review the warrant agreement that was provided with your purchase of investment units. Contact Tully's Investor Relations or click here to obtain the form you may use for the exercise of your $2.64 Warrants. Note that the exercise of warrants is processed through Tully's Investor Relations Department, NOT our stock transfer agent (Mellon Investor Services).
For convenience, click here to download the form you may use for the exercise of your $2.64 Warrants.
When can the $2.64 Warrants be exercised?
The warrants are fully exercisable at this time and may be exercised at any time prior to their expiration, subject to the limitations and requirements set forth in the warrant agreement.
What is Tully’s recommendation with respect to the exercise of the $2.64 Warrants?
We cannot provide a recommendation. Each warrant holder should determine, based on his or her own investigation, if and when to exercise any or all of his or her $2.64 Warrants. Among other things, you should carefully consider the risks described under the heading “Risk Factors” in our most recent Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, and the other information set forth in our periodic reporting and other filings to the SEC.
Is there a required holding period for stock purchased upon exercise of the $2.64 Warrants?
There is currently no public market for Tully’s common stock, and the shares issuable upon exercise of the warrants have not been registered under the Securities Act of 1933, the Washington State Securities Act or the securities laws of any other state. Accordingly, the shares would have to be held indefinitely unless they were subsequently registered under the Securities Act and applicable states securities laws or unless, in the opinion of counsel for the Company, a sale or transfer could be made without registration thereunder.
If we were to list our common stock on a stock market or exchange or a public market otherwise were to develop, and if the warrants were exercised for cash, then the shares issuable upon exercise could be eligible for resale in the public market one year after the exercise date. In addition, if we were to list our common stock on a stock market or exchange or a public market otherwise were to develop, and if the warrants were exercised in a cashless “net exercise” pursuant to Section 8 of the warrant, then the shares issuable upon exercise could be eligible for resale in the public market immediately after the exercise date (subject to lock-up agreements).
What is a "net exercise”?
Section 8 of the warrant provides that, in lieu of exercising the warrant by paying the exercise price in cash, the holder of the warrant may elect to exercise the warrant by authorizing Tully’s to retain (and not issue to the warrant holder upon exercise) a number of shares otherwise issuable upon exercise whose fair market value at the time of exercise equals the exercise price.
For example, if you held a warrant exercisable for 100 shares of common stock at $2.64 per share and you exercised that warrant for cash, you would pay us the exercise price of $264 (100 shares x $2.64 per share) and receive 100 shares of common stock. If, on the other hand, you elected to do a cashless “net exercise” of your warrant, and assuming hypothetically that the fair market value of Tully’s stock on the exercise date was $8.00, then you would not pay any cash exercise price but Tully’s would retain 33 shares (i.e., because 33 shares x $8.00 per share = the $264.00 exercise price otherwise payable in cash), and you would receive 67 shares of common stock.
What are the federal tax consequences of exercise of the $2.64 Warrants?
We believe that the exercise of the $2.64 Warrants generally should not be a taxable event to you for federal income tax purposes. In general, the $2.64 per share amount that you would pay to purchase the common stock will become your basis for the common stock purchased, and the date the common stock is issued to you will become your purchase date for purposes of determining capital gains holding periods. Please note this is a general discussion of federal income tax considerations and may not apply to your specific facts and circumstances.
We offer no opinion as to the effect of state, local or foreign tax laws. Moreover, special United States federal income tax rules may apply to certain kinds of taxpayers or in certain circumstances. The United States Internal Revenue Code of 1986, as amended, is subject to continual amendment and judicial and regulatory interpretation. Accordingly, each $2.64 Warrants holder is urged to consult the holder’s own tax advisor to determine the particular tax consequences of any exercise of $2.64 Warrants as applicable to the holder.
Where can I get additional information regarding the $2.64 Warrants?
Please review the warrant agreement.
How do I keep my warrant holder information current?
The warrants are not transferable separately from the Series A preferred shares. If you sell or otherwise transfer the Series A preferred shares, the remaining unexpired warrants will be transferred to the party receiving your Series A preferred shares. Please keep your Series A shareholder address and contact information current with our stock transfer agent, Mellon Investor Services:
Tully's Stock Transfer Agent
Mellon Investor Services
1-877-206-7059 (from outside the U.S., Puerto Rico or Canada, call 1-201-680-6579, collect)
www.bnymellon.com
PO Box 3447
South Hackensack, NJ 07606
I wish to verify my warrant information. How do I do it?
Records for our outstanding warrants are maintained by the Tully's Investor Relations department. Due to data security and shareholder confidentiality requirements, we cannot furnish information regarding your warrants in response to a telephone or email request. Instead, we require a signed letter from the warrant holder of record, which should be mailed to: Tully's Investor Relations Department, 3100 Airport Way South, Seattle, WA 98134. Please include your mailing address, phone number and email address in all letters.
I cannot find my warrant agreement. How do I obtain a replacement copy?
It is not necessary to have a copy of the warrant agreement in order to exercise your warrants. Holders of record of our Series A Preferred Stock may exercise their unexercised and unexpired warrants as described above using the attached form (we will verify all information and signatures at the time of the exercise).
If you wish to review the form of the warrant agreement that was issued to purchasers of the Series A Preferred Stock investment units, it may be obtained free of charge from the SEC EDGAR website. If you wish to obtain a printed replacement copy for your warrant agreement, please send a signed letter detailing your request to Tully's Investor Relations department (see above); a charge may be assessed for the replacement of lost documents.
Download the Form for Exercise of $2.64 Warrant from Series A Investment Units.