Exhibit 10.2

GENERAL SECURITY AGREEMENT

This General Security Agreement made as of the 1st day of November, 2002,

Between:   TULLY'S COFFEE CORPORATION

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3100 AIRPORT WAY SOUTH

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SEATTLE, WA 98134

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    (the "Debtor")
And:
 
 
 
 
KENT CENTRAL, L.L.C.

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1001 FOURTH AVENUE, SUITE 4700

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SEATTLE, WA 98154

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    (the "Lender")

I.   Security
1.1
 
For value received, the Debtor grants and creates the security constituted by
this General Security Agreement and agrees to the terms, covenants, agreements,
conditions, provisos and other matters set out in this General Security
Agreement.
1.2
 
As general and continuing security for the Obligations (defined in clause 2.1
hereof), the Debtor hereby grants to the Lender a security interest in all
presently owned and hereafter acquired personal property of the Debtor of
whatsoever nature and kind and wheresoever situate and all proceeds thereof and
therefrom, including Cash Proceeds and Proceeds, renewals thereof, Accessions
thereto and substitutions therefor (all of which are herein collectively called
the "Collateral"), including, without limiting the generality of the foregoing,
all the presently owned or held and hereafter acquired right, title and interest
of the Debtor in and to all Accounts, Goods (including all accessories,
attachments, additions and Accessions thereto) Chattel Paper, Deposit accounts,
Documents (whether negotiable or not), Instruments, Intangibles and General
Intangibles, Investment Property, Money, Securities and Software, and all:
 
 
 
 
(a)
 
Inventory of whatsoever nature and kind and wheresoever situate;
 
 
 
 
(b)
 
Equipment (other than Inventory) of whatsoever nature and kind and wheresoever
situate, including, without limitation, all machinery, too1s, apparatus, plant,
furniture, fixtures and vehicles of whatsoever nature and kind;
 
 
 
 
(c)
 
book accounts and book debts and generally all Accounts, debts, dues, claims,
choses in action and demands of every nature and kind howsoever arising or
secured, including letters of guarantee and advices of credit which are now due,
owing or accruing or growing due to or owned by or which may hereafter become
due, owing or accruing or growing due to or owned by the Debtor (all of which
are herein collectively called the "Debts");
 
 
 
 
(d)
 
deeds, documents, writings, papers, books of account and other books relating to
or being records of Debts, Chattel Paper or Documents or by which such are or
may hereafter be secured, evidenced, acknowledged or made payable;
 
 
 
 
(e)
 
contractua1 rights and insurance claims and all goodwill, patents, trademarks,
copyrights and other intellectual or industrial property;
 
 
 
 
(f)
 
monies other than trust monies lawfully belonging to others;
 
 
 
 
 
 
 

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(g)
 
personal property described in any schedule now or hereafter annexed hereto;
 
 
 
 
(h)
 
right, title and interest of the Debtor in and to leasehold property; and
 
 
 
 
(i)
 
goodwill of the Debtor;
1.3
 
In this General Security Agreement:
 
 
1.3.1
 
any reference to "Authorized Officer" shall mean, with respect to Debtor,
Anthony J. Gioia, Kris Galvin or any other person designated in writing by the
President or Chief Financial Officer of Debtor to serve as an Authorized Officer
for the purposes of this Agreement.
 
 
1.3.2
 
any reference to "Business Premises" shall mean real property which the Debtor
uses in its business, if any, excluding the real property leased by Lender to
Debtor with a primary street address of 3100 Airport Way South, Seattle,
Washington;
 
 
1.3.3
 
any reference to "Debtor" and the personal pronoun "it" or "its" and any verb
relating thereto and used therewith shall be read and construed ass required by
and in accordance with the context in which such words are used depending upon
whether the Debtor is one or more corporations and, if more than one Debtor
executes this General Security Agreement, this General Security Agreement shall
apply and be binding upon each of them jointly and severally and all obligations
hereunder shall be joint and several;
 
 
1.3.4
 
any reference to "Environmental Laws" shall mean any laws, regulations, orders,
by-laws, permits or lawful requirements of any governmental authority with
respect to environmental protection or regulating hazardous materials;
 
 
1.3.5
 
any reference to "General Security Agreement" shall, unless the context
otherwise requires, be deemed a reference to this General Security Agreement as
amended from time to time by written agreement together with the schedules
hereto and any schedules added hereto pursuant to the provisions hereof;
 
 
1.3.6
 
any reference to "Hazardous Materials" shall mean any asbestos material, urea
formaldehyde, explosives, radioactive materials, pollutants, contaminants,
hazardous substances, and corrosive substances, toxic substances, special waste
or waste of any kind including, without limitation, compounds known as
chlorobiphenyls and any substance the storage, manufacture, disposal, treatment,
generation, use, transport, remediation or release of which into the environment
is prohibited, controlled or licensed under Environmental Laws:
 
 
1.3.7
 
any reference to the "Loan Documents" shall mean, collectively, that certain
Promissory Note of even date herewith in the principal amount of up to
$2,890,037.09 (the "Note"); this General Security Agreement and any other
instruments or documents evidencing or relating to the foregoing, but expressly
excluding the Lease Agreement date August 16, 1999 entered into between Lender
and Debtor (the "Lease").
 
 
 
 
 
 
 

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1.3.8
 
any reference to "Permitted Senior Encumbrances" shall mean any one or more of
(i) those certain security interest filings made by UCC Ueshima Coffee
Company Ltd. ("UCC Coffee") pursuant to that certain Tully's Coffee Exclusive
License Agreement dated April 11, 2001, between UCC Coffee and Debtor and
evidenced by those certain UCC-1 Financing Statements filed in the State under
File Nos. 2001-101-0027 and 2001-102-0089 and certain filings made with the
United States Trademark Office; (ii) that certain UCC-1 Financing Statement
filed by Fres-Co System USA, Inc. in the State under filing no. 2000-278-0261;
(iii) that certain UCC-1 Financing Statement filed by Tri-Brands, Inc. in the
State under filing no. 2001-031-0234 (together with any related filing in the
state of Oregon); and (iv) all UCC filings made by any lender to Debtor under
the "Asset Based Financing Facility" described in Section 22.2 below.
 
 
1.3.9
 
any reference to "UCC" shall mean the Uniform Commercial Code of the State as
amended from time to time, including any amendments thereto and any Act
substituted therefor and amendments thereto;
 
 
1.3.10
 
any reference to the "State" shall mean the State of Washington; and
 
 
1.3.11
 
the terms "Goods", "Chattel Paper", "Documents", "Equipment", "Accounts"
"Consumer Goods", "Instruments", "Intangibles", "General Intangibles",
"Investment Property", "Securities", "Proceeds", "Inventory", "Software",
"Deposit accounts" and "Accessions" and other words and expressions which have
been defined in the UCC shall be interpreted in accordance with their respective
meanings given in the UCC (either in the singular or plural thereof), as the
context requires unless otherwise defined herein or unless the context otherwise
requires.
II.
 
Obligations Secured
2.1
 
The security constituted by this General Security Agreement is general and
continuing security for payment, performance and satisfaction of each and every
obligation, indebtedness and liability of the Debtor to the Lender under the
Loan Documents (including interest thereon), present or future, direct or
indirect, absolute or contingent, matured or not, extended or renewed,
wheresoever and howsoever incurred, and any ultimate unpaid balance thereof,
including all future advances and re-advances, and whether the same is from time
to time reduced and thereafter increased or entirely extinguished and thereafter
incurred again and whether the Debtor be bound alone or with another or others
and whether as principal or surety (all of which obligations, indebtedness and
liabilities are herein collectively called the "Obligations").
2.2
 
This General Security Agreement and the security constituted hereby are in
addition to and not in substitution for any other security or securities which
the Lender may now or from time to time hold or take from the Debtor or from any
other person whosoever.
III.
 
Representations and Warranties of Debtor
3.1
 
The Debtor represents and warrants that:
 
 
3.1.1
 
this General Security Agreement has been authorized, executed and delivered in
accordance with resolutions of the directors of the Debtor and all other matters
and things have been done and performed so as to authorize and make the
execution and delivery of this General Security Agreement, the creation of the
security constituted hereby and the performance of the Debtor's obligations
hereunder legal, valid and binding;
 
 
 
 
 
 
 

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3.1.2
 
the Collateral is genuine and is owned by the Debtor free of all security
interests, mortgages, liens, claims, charges and other encumbrances (herein
collectively called "Encumbrances"), save for the security constituted by this
General Security Agreement and the Permitted Senior Encumbrances and Debtor
shall not increase, expand or add to the obligations which are presently secured
by the Permitted Senior Encumbrances;
 
 
3.1.3
 
the Debtor has good and lawful authority to create the security in the
Collateral constituted by this General Security Agreement;
 
 
3.1.4
 
with respect to Goods (including Inventory) comprised in the Collateral, the
locations specified in the Location Schedule are accurate and complete (save for
Goods in transit to such locations and Inventory on lease or consignment) and
all fixtures or Goods about to become fixtures which form part of the Collateral
will be situate at one of the locations specified in the Location Schedule
attached hereto;
 
 
3.1.5
 
except as set forth in the attached Schedule 3.1.5, there are no existing or, to
Debtor's knowledge threatened claims, actions, orders or investigations under
any Environmental Laws against the Debtor or against the Business Premises.
 
 
3.1.6
 
the obligations (the "Paid-Off Obligations") which are or were secured by
security agreements perfected by and/or related to those certain UCC-1 Financing
Statements filed in the State under File Nos. 94-213-0426, 99-152-0016,
2001-102-0088, 98-014-0246, 98-279-0155, 2001-172-0049, 2001-1720-0050,
2001-172-0051, and 2001-172-0052 (the "To Be Terminated Financing Statements")
have been satisfied in full. All of the To Be Terminated Financing Statements,
except the one filed under 2001-1720052 (the "Colburne Financing Statement"),
shall be terminated no later than November 7, 2002, the failure to do so being
an Event of Default hereunder and under the Note. In addition thereto, Debtor
shall have either (a) terminated the Colbourne Financing Statement by
November 7, 2002, or (b) provided Lender with evidence of the satisfaction of
all obligations related to the Colbourne Financing Statement by November 7, 2002
and thereafter diligently and continuously be pursuing the filing of a
termination statement for the Colbourne Financing Statement, the failure to do
either being an Event of Default hereunder and under the Note.
IV.
 
Covenants of the Debtor
4.1
 
The Debtor covenants and agrees that at all times while this General Security
Agreement remains in effect the Debtor will:
 
 
4.1.1
 
defend the Collateral for the benefit of the Lender against the claims and
demands of all other persons;
 
 
4.1.2
 
not, without the prior written consent of the Lender:
 
 
 
 
(a)
 
create or permit to exist any Encumbrance against any of the Collateral which
ranks or could in any event rank in priority to or pari passu with the security
constituted by this General Security Agreement, save for Encumbrances approved
in writing by the Lender prior to creation or assumption; or
 
 
 
 
 
 
 

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(b)
 
grant, sell, exchange, transfer, assign, lease or otherwise dispose
(collectively, a "Disposition") of the Collateral unless (i) after such
Disposition the aggregate net book value of the remaining Collateral, excluding
goodwill, is equal to or greater than the aggregate net book value of the
Collateral, excluding goodwill, on the date of this General Security Agreement,
or (ii) the net sales proceeds from the Disposition of such Collateral, after
payment of ordinary, necessary and reasonable sales' costs and commissions, is
paid to Lender to reduce the Obligations (and the permitted outstanding
principal balance of the Note shall be correspondingly reduced);
 
 
 
 
provided always, that until default, the Debtor may: (y) in the ordinary course
of the Debtor's business, sell or lease Inventory, and (z) make a disposition of
Collateral in connection with the Asset Based Financing Facility referred to,
and subject to the limitations contained, in Section 22.2 below;
 
 
4.1.3
 
fully and effectively maintain and keep maintained valid and effective the
security constituted by this General Security Agreement;
 
 
4.1.4
 
notify the Lender promptly of:
 
 
 
 
(a)
 
any change in the information contained in the Schedules hereto relating to the
Debtor, or any change in the Debtor's name;
 
 
 
 
(b)
 
the details of any significant acquisition of Collateral outside the ordinary
course of business;
 
 
 
 
(c)
 
the details of any material claims or litigation affecting Debtor or the
Collateral; and
 
 
 
 
(d)
 
any material loss or damage to the Collateral not covered by insurance;
 
 
4.1.5
 
keep the Collateral in good order, condition and repair (in the locations
specified in the Location Schedule or such other locations as the Lender may
approve in writing) and not use the Collateral in violation of the provisions of
this General Security Agreement or any other agreement relating to the
Collateral or any policy insuring the Collateral or any applicable statute, law,
by-law, rule, regulation or ordinance;
 
 
4.1.6
 
carry on and conduct the business of the Debtor in a commercially reasonable
manner and so as to protect and preserve the Collateral and to keep, in
accordance with generally accepted accounting principles, consistently applied,
proper books of account for the Debtor's business as well as accurate and
complete records concerning the Collateral and, at the Lender's request, mark
any and all such records and the Collateral so as to indicate the security
constituted by this General Security Agreement;
 
 
4.1.7
 
forthwith pay when due:
 
 
 
 
(a)
 
all obligations to its employees and all obligations to others which relate to
its employees when due, including, without limitation, all taxes, duties,
levies, government fees, claims and dues related to its employees;
 
 
 
 
(b)
 
all taxes, assessments, rates, duties, levies, government fees, claims and dues
lawfully levied, assessed or imposed upon it or the Collateral when due, unless
the Debtor shall in good faith contest its obligations so to pay and shall
furnish such security as the Lender may require; and
 
 
 
 
(c)
 
all Encumbrances which rank or could in any event rank in priority to or pari
passu with the security constituted by this General Security Agreement,
including the Permitted Senior Encumbrances;

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    4.1.8   insure the Collateral for such periods, in such amounts, on such
terms and against loss or damage by fire and such other risks as the Lender
shall reasonably direct (but in any event in accordance with prudent business
practice) with loss payable to the Lender and the Debtor, as insureds, as their
respective interests may appear, and to pay when due all premiums for such
insurance, provided that Lender agrees that Debtor may, at its option, finance
the payment of any such premiums;
 
 
4.1.9
 
make available to the Lender from time to time during normal business hours
promptly upon request:
 
 
 
 
(a)
 
any Documents, Instruments, Securities and Chattel Paper comprised in or
relating to the Collateral;
 
 
 
 
(b)
 
all books of account and all records, ledgers, reports, correspondence,
schedules, documents, statements, lists and other writings relating to the
Collateral for the purpose of inspecting, auditing or copying the same;
 
 
 
 
(c)
 
all financial statements prepared by or for the Debtor regarding the Debtor's
business to the extent such disclosure is not in violation of any applicable
laws or regulations;
 
 
 
 
(d)
 
all policies and certificates of insurance relating to the Collateral; and
 
 
 
 
(e)
 
such information concerning the Collateral, the Debtor and Debtor's business and
affairs as the Lender may reasonably require;
 
 
4.1.10
 
forthwith pay when due all reasonable costs, charges, expenses and legal fees
and disbursements which may be incurred by the Lender in:
 
 
 
 
(a)
 
inspecting the Collateral upon or after the occurrence of an Event of Default;
 
 
 
 
(b)
 
negotiating, preparing, perfecting and registering this General Security
Agreement and other documents, whether or not relating to this General Security
Agreement, including the Loan Documents;
 
 
 
 
(c)
 
investigating title to the Collateral;
 
 
 
 
(d)
 
taking, recovering, keeping possession of and insuring the Collateral upon or
after the occurrence of an Event of Default; and
 
 
 
 
(f)
 
all other actions and proceedings taken in connection with the preservation of
the Collateral under the terms of this General Security Agreement and the
confirmation, perfection and enforcement of this General Security Agreement and
of any other security held by the Lender as security for the Obligations;
 
 
4.1.11
 
at the Lender's request at any time and from time to time execute and deliver
such further and other documents and instruments and do all other acts and
things as the Lender reasonably requires in order to give effect to this General
Security Agreement or to confirm and perfect, and maintain perfection of, the
security constituted by this General Security Agreement in favor of the Lender;
 
 
4.1.12
 
permit the Lender and its representatives, at all reasonable times, access to
all the Debtor's property, assets and undertakings and to all its books of
account and records for the purpose of inspection and render all assistance
necessary for such inspection;
 
 
4.1.13
 
not store, manufacture, dispose, treat, generate, use, transport, remediate or
release Hazardous Materials on or from the Business Premises except in
compliance with all Environmental Laws;
 
 
 
 
 
 
 

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4.1.14
 
notify the Lender in writing of any of the following matters of which Debtor has
actual notice of and which could have a material adverse affect upon Debtor's
business or the Collateral:
 
 
 
 
(a)
 
any enforcement, clean-up, removal, litigation or other governmental,
regulatory, judicial or administrative action instituted, contemplated or
threatened against the Debtor or the Business Premises pursuant to any
Environmental Laws;
 
 
 
 
(b)
 
all claims, actions, orders or investigations, made or threatened by any third
party against the Debtor or the Business Premises relating to damage,
contribution, cost recovery, compensation, loss or injuries resulting from any
Hazardous Materials or any breach of the Environmental Laws; and
 
 
 
 
(c)
 
the discovery of any Hazardous Materials or any occurrence or condition on the
Business Premises or any real property adjoining or in the vicinity of the
Business Premises which could subject the Debtor or the Business Premises to any
fines, penalties, orders or proceedings under any Environmental Laws.
V.
 
Payments and Proceeds
5.1
 
Subject to the rights of the holders of any Permitted Senior Encumbrances, after
default under this General Security Agreement, the Lender may notify all or any
Account Debtors of the security constituted by this General Security Agreement
and may also direct such Account Debtors to make all payments on the Collateral
to the Lender.
VI.
 
Lender Actions
6.1
 
The Debtor hereby authorizes the Lender to:
 
 
 
 
(a)
 
file such financing statements and other documents and do such acts, matters and
things (including completing and adding schedules hereto identifying the
Collateral or any permitted Encumbrances affecting collateral or identifying the
locations at which the Debtor's business is carried on and the Collateral and
records relating thereto are situate), consistent with the terms and conditions
of this General Security Agreement, as the Lender may deem appropriate to
perfect and continue the security constituted hereby, to protect and preserve
the Collateral and to realize upon the security constituted hereby and the
Debtor hereby irrevocably constitutes and appoints the Lender the true and
lawful attorney of the Debtor, with full power of substitution to do any of the
foregoing in the name of the Debtor whenever and wherever it may be deemed
necessary or expedient by the Lender; and
 
 
 
 
(b)
 
make enquiries from time to time of any governmental authority with respect to
the Debtor's compliance with Environmenta1 Laws and the Debtor agrees that the
Debtor will from time to time provide to the Lender with such written
authorization as the Lender may reasonably require in order to facilitate the
obtaining of such information.
6.3
 
If the Debtor fails to perform any of its Obligations hereunder, the Lender may,
after written notice to Debtor, but shall not be obliged to, perform any or all
of such Obligations without prejudice to any other rights and remedies of the
Lender hereunder, and any payments made and any reasonable costs, charges,
expenses and legal fees and disbursements incurred in connection therewith shall
be payable by the Debtor to the Lender forthwith with interest until paid at the
highest rate borne by any of the Obligations and such amounts shall form part of
the Obligations and constitute a charge upon the Collateral in favor of the
Lender prior to all claims subsequent to this General Security Agreement.
 
 
 
 
 
 
 

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VII.
 
Default
7.1
 
The Debtor shall be in default under this General Security Agreement, unless
otherwise agreed in writing by the Lender, upon the occurrence of any of the
following events:
 
 
7.1.1
 
the Debtor makes default in payment when due, after the expiration of any
applicable grace periods, of any of the Obligations which are indebtedness or
liabilities or the Debtor fails to perform or satisfy any other of the
Obligations; or
 
 
7.1.2
 
the Debtor is in breach of any written term, condition, proviso, agreement or
covenant to the Lender contained in any of the Loan Documents, or any
representation or warranty given by an Authorized Officer of the Debtor to the
Lender in connection with the Loan Documents is untrue; or
 
 
7.1.3
 
the Debtor makes an assignment for the benefit of its creditors, is declared
bankrupt, makes a proposal or otherwise takes advantage of provisions for relief
under the Bankruptcy Act or similar legislation in any jurisdiction, or makes an
authorized assignment; or
 
 
7.1.4
 
there is instituted by or against the Debtor, and not dismissed within 90 days
thereof, any formal or informal proceeding for the dissolution or liquidation
of, settlement of claims against, or winding up of affairs of, the Debtor; or
 
 
7.1.5
 
the Debtor ceases or an officer of Debtor with apparent authority to bind Debtor
threatens to Lender or any holder of a Permitted Senior Encumbrance to cease to
carry on business or makes or agrees to make a bulk sale of assets or commits or
an officer of Debtor with apparent authority to bind Debtor threatens to Lender
or any holder of a Permitted Senior Encumbrance to commit an act of bankruptcy;
or
 
 
7.1.6
 
a receiver, receiver and manager or receiver-manager of all or any material part
of the Collateral or of any other material property, assets or undertakings of
the Debtor is appointed; or
 
 
7.1.7
 
any execution, sequestration, extent or other process of any court materially
adversely affecting the Collateral becomes enforceable against the Debtor or a
distress or ana1ogous process is levied upon the Collateral or any material part
thereof; or
 
 
7.1.8
 
an order is made or an effective resolution is passed for winding-up the Debtor;
or
 
 
7.1.9
 
without the prior written consent of the Lender, the Debtor creates or permits
to exist any Encumbrance against any of the Collateral (other than any of the
Permitted Senior Encumbrances) which ranks or could in any event rank in
priority to or pari passu with the security constituted by this General Security
Agreement; or
 
 
7.1.10
 
the holder of any Encumbrance against any of the Collateral (other than the
holder of any Permitted Senior Encumbrance) does anything to enforce or realize
on such Encumbrance; or
 
 
7.1.12
 
the Lender in good faith believes that a material adverse change has occurred in
the financial condition of Debtor; or
 
 
7.1.13
 
any certificate, statement, representation, warranty or audit report herewith,
heretofore or hereafter furnished by an Authorized Officer of the Debtor to the
Lender, whether in connection with any of the Loan Documents or otherwise
(excluding the Lease):
 
 
 
 
(a)
 
proves to have been false in any material respect at the time as of which the
facts therein set forth were stated or certified; or
 
 
 
 
 
 
 

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(b)
 
proves to have knowingly omitted any substantial contingent or unliquidated
liability or claim against the Debtor when such disclosure was called for in
such certificate, etc.;
 
 
 
 
or upon the date of execution of this General Security Agreement, there shall
have been any material adverse change in any of the facts disclosed by any such
certificate, statement, representation, warranty or audit report, which change
shall not have been disclosed to the Lender at or prior to the time of such
execution.
VIII.
 
Enforcement
8.1
 
Upon any default under this General Security Agreement, the Lender may declare
any or all of the Obligations to become immediately due and payable.
8.2
 
Upon default under this General Security Agreement, the security hereby
constituted will immediately become enforceable.
8.3
 
To enforce and realize on the security constituted by this General Security
Agreement, the Lender may take any action permitted by law or in equity, as it
may deem expedient, and in particular, without limiting the generality of the
foregoing, the Lender may do anyone or more of the following:
 
 
8.3.1
 
appoint by instrument a receiver, receiver and manager or receiver-manager (the
person so appointed is herein called the "Receiver") of the Collateral, with or
without bond as the Lender may determine, and from time to time in its sole
discretion remove such Receiver and appoint another in its stead;
 
 
8.3.2
 
enter upon any premises of the Debtor and take possession of the Collateral with
power to exclude the Debtor, its agents and its servants therefrom, without
becoming liable as a mortgagee in possession;
 
 
8.3.3
 
preserve, protect and maintain the Collateral and make such replacements thereof
and repairs and additions thereto as the Lender may deem advisable;
 
 
8.3.4
 
sell, lease or otherwise dispose of or concur in selling, leasing or otherwise
disposing of all or any part of the Collateral, whether by public or private
sale or lease or otherwise, in such manner, at such price as can be reasonably
obtained therefor and on such terms as to credit and with such conditions of
sale and stipulations as to title or conveyance or evidence of title or
otherwise as to the Lender may seem reasonable, provided that the Debtor will
not be entitled to be credited with the proceeds of any such sale, lease or
other disposition until the monies therefor are actually received; and
 
 
8.3.5
 
exercise all of the rights and remedies of a secured party under the UCC.
8.4
 
A Receiver appointed pursuant to this General Security Agreement shall be the
agent of the Debtor and not of the Lender and, to the extent permitted by law or
to such lesser extent permitted by its appointment, shall have all the powers
oft the Lender hereunder, and in addition shall have power to carry on the
business of the Debtor and for such purpose from time to time to borrow money
either secured or unsecured, and if secured by a security on any of the
Collateral, any such security may rank in priority to or pari passu with or
behind the security constituted by this General Security Agreement, and if it
does not so specify such security shall rank in priority to the security
constituted by this General Security Agreement.
 
 
 
 
 
 
 

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8.5
 
Subject to applicable law and the claims, if any, of the holders of any
Permitted Senior Encumbrances, all amounts realized from the disposition of the
Collateral pursuant to this General Security Agreement will be applied as the
Lender, in its sole discretion, may direct as follows:
 
 
Firstly:
 
in or toward payment of all costs, charges and expenses, including legal fees
and disbursements incurred by the Lender in connection with or incidental to:
 
 
 
 
(a)
 
the exercise by the Lender of all or any of the powers granted to it pursuant to
this General Security Agreement; and
 
 
 
 
(b)
 
the appointment of the Receiver and the exercise by the Receiver of all or any
of the powers granted to the Receiver pursuant to this General Security
Agreement, including the Receiver's reasonable remuneration and all outgoings
properly payable by the Receiver;
 
 
Secondly:
 
in or toward payment to the Lender of all principal and other monies (except
interest) due in respect of the Obligations;
 
 
Thirdly:
 
in or toward payment to the Lender of all interest remaining unpaid in respect
of the Obligations; and
 
 
Fourthly:
 
any surplus will be paid to the Debtor.
IX.
 
Deficiency
9.1
 
If the amounts realized from the disposition of the Collateral are not
sufficient to pay the Obligations in full to the Lender, the Debtor will
immediately pay to the Lender the amount of such deficiency.
X.
 
Rights Cumulative
10.1
 
All rights and remedies of the Lender set out in this General Security Agreement
are cumulative and no right or remedy contained herein is intended to be
exclusive but each will be in addition to every other right or remedy contained
herein or in any existing or future general security agreement or now or
hereafter existing at law or in equity or pursuant to any other agreement
between the Debtor and the Lender that may be in effect from time to time.
XI.
 
Appointment of Attorney
11.1
 
The Debtor hereby irrevocably appoints the Lender or the Receiver, as the case
may be, with full power of substitution, to be the attorney of the Debtor for
and in tile name of the Debtor to sign, endorse or execute under seal or
otherwise any deeds, documents, transfers, checks, instruments, demands,
assignments, assurances or consents that the Debtor is obliged to sign, endorse
or execute under the terms and conditions of this General Security Agreement and
generally to use the name of the Debtor and to do all things as may be necessary
or incidental to the exercise of all or any of the powers conferred on the
Lender or the Receiver, as the case may be, pursuant to this General Security
Agreement.
XII.
 
Liability of Lender
12.1
 
The Lender shall not be responsible or liable for any debts contracted by it,
for damages to persons or property or for salaries or non-fulfillment of
contracts during any period when the Lender shall manage the Collateral upon
entry of the business of the Debtor, as herein provided, nor shall the Lender be
liable to account as mortgagee in possession or for anything except actual
receipts or be liable for any loss or realization or for any default or omission
for which a mortgagee in possession may be liable.

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12.2   The Lender shall not be bound to do, observe or perform or to see to the
observance or performance by the Debtor of any obligations or covenants imposed
upon the Debtor nor shall the Lender, in the case of Securities Instruments or
Chattel Paper, be obliged to reserve rights against other persons, nor shall the
Lender be obliged to keep any of the Collateral identifiable.
12.3
 
The Lender shall not be obliged to inquire into the right of any person
purporting to be entitled under the UCC to information and materials from the
Lender by making a demand upon the Lender for such information and materials and
the Lender shall be entitled to comply with such demand and shall not be liable
for having complied with such demand notwithstanding that such person may in
fact not be entitled to make such demand.
12.4
 
The Debtor will indemnify the Lender and hold the Lender harmless from and
against any and all claims, costs, losses, demands, actions, causes of action,
lawsuits, damages, penalties, judgments and liabilities of whatsoever nature and
kind in connection with or arising out of any representation or warranty given
by an Authorized Officer of the Debtor, being untrue, the breach of any term,
condition, proviso, agreement or covenant to the Lender, or the exercise of any
of the rights and or remedies of the Lender, or any transaction contemplated in
this General Security Agreement.
12.5
 
The Debtor hereby waives any applicable provision of law permitted to be waived
by it which imposes higher or greater obligations upon the Lender than provided
in this General Security Agreement.
12.6
 
Any amount owing by the Debtor hereunder shall, from the date of disbursement
until the date the recipient receives reimbursement, be deemed advanced to the
Debtor by the Lender, shall be deemed to be Obligations and shall bear interest
at the highest rate per annum from time to time charged by the Lender on any of
the other Obligations until paid.
XIII.
 
Appropriation of Payments and Offset
13.1
 
Subject to any applicable provisions of the UCC, any and all payments made in
respect of the Obligations from time to time and monies realized from any
security held therefor (including monies collected in accordance with or
rca1ized on any enforcement of this General Security Agreement) may be applied
to such part or parts of the Obligations as the Lender may see fit, and the
Lender may at all times and from time to time change any appropriation as the
Lender may fit or, at the option of the Lender, such payments and monies may be
held unappropriated in a collateral account or released to the Debtor, all
without prejudice to the liability of the Debtor or to the rights of the Lender
hereunder.
13.2
 
Without limiting any other right of the Lender, whenever any of the Obligations
is immediately due and payable or the Lender has the right to declare any of the
Obligations to be immediately due and payable (whether or not it has so
declared), the Lender may, in its sole discretion, set off against any of the
Obligations any and all monies then owed to the Debtor by the Lender in any
capacity, whether or not due and to do so even though any charge therefor is
made or entered on the Lender's records subsequent thereto, and the Lender shall
be deemed to have exercised such right to set off immediately at the time of
making its decision.
XIV.
 
Liability to Advance, Etc.
14.1
 
None of the preparation, execution, perfection and registration of this General
Security Agreement or the advance of any monies shall bind the Lender to make
any advance or loan or further advance or loan, or renew any note or extend any
time for payment of any indebtedness or liability of the Debtor to the Lender or
extend any term for performance or satisfaction of any obligation of the Debtor
to the Lender.
 
 
 
 
 
 
 

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14.2
 
Nothing herein contained shall in any way oblige the Lender to continue, renew,
extend time for payment of or accept anything which constitutes or would
constitute Obligations or any of them.
XV.
 
Waiver
15.1
 
No delay or omission by the Lender in exercising any right or remedy hereunder
or with respect to any of the Obligations shall operate as a waiver thereof or
of any other right or remedy, and no single or partial exercise thereof shall
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
15.2
 
The Lender may from time to time and at any time waive in whole or in part any
right, benefit or default under any clause of this General Security Agreement
but any such waiver or any right, benefit or default thereafter, or of any other
right, benefit of default, as the case may be.
XVI.
 
Assignment
16.1
 
The Lender may, without further notice to the Debtor, at any time mortgage,
charge, assign, transfer or grant a security interest in this General Security
Agreement and the security constituted hereby.
16.2
 
The Debtor expressly agrees that the assignee, transferee or secured party of
the Lender, as the case may be, shall have all of the Lender's rights and
remedies under this General Security Agreement.
XVII.
 
Satisfaction and Discharge
17.1
 
Any partial payment or satisfaction of the Obligations, or any ceasing by the
Debtor to be indebted to the Lender, shall be deemed not to be redemption or
discharge of the security constituted by this General Security Agreement.
17.2
 
The Debtor shall be entitled to a release and discharge of the security
constituted by this General Security Agreement upon full payment, by the Debtor
and payment to the Lender of all costs, charges, expenses and legal fees and
disbursements incurred by the Lender in connection with the Obligations and such
release and discharge.
XVIII.
 
No Merger
18.1
 
This General Security Agreement shall not operate so as to create any merger or
discharge of any of the Obligations, or any assignment, transfer, guarantee,
lien, contract, promissory note, bill of exchange or security in any form held
or which may hereafter be held by the Lender from the Debtor or from any other
person whomsoever.
18.2
 
The taking of a judgment with respect to any of the Obligations will not operate
as a merger of any of the terms, conditions, covenants, agreements or provisos
contained in this General Security Agreement.
18.3
 
The release and discharge of the security constituted by this General Security
Agreement by the Lender shall not operate as a release or discharge of any right
of the Lender to be indemnified and held harmless by the Debtor pursuant to
clause 12.4 hereof or of any other right of the Lender against the Debtor
arising under this General Security Agreement prior to such release and
discharge.
XIX.
 
Interpretation
19.1
 
In this General Security Agreement:
 
 
19.1.1
 
the invalidity or unenforceability of the whole or any part of any clause shall
not affect the validity or enforceability of any other clause or the remainder
of such clause;
 
 
 
 
 
 
 

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19.1.2
 
the headings have been inserted for reference only and shall not define, limit,
alter or enlarge the meaning of any provision of this General Security
Agreement; and
 
 
19.1.3
 
when the context so requires, the singular shall be read as if the plural were
expressed and the provisions hereof shall be read with all grammatical changes
necessary dependent upon the person referred to being a male, female, firm or
corporation.
XX.
 
Notice
20.1
 
Whenever either the Lender or the Debtor is required or entitled to notify or
direct the other or to make a demand upon or request of the other relating to
the Collateral, this General Security Agreement or the UCC, such notice,
direction, demand or request shall be sufficiently given if given in writing and
delivered to the party for whom it is intended at the address of such party
herein or as changed pursuant hereto or if sent by prepaid certified or
registered mail, addressed to the party for whom it is intended at the address
of such party herein set forth or as changed pursuant hereto.
20.2
 
Either the Lender or the Debtor may notify the other in accordance herewith of
any change in its principal address to be used for the purposes hereof.
XXI.
 
Variation
21.1
 
Save for any schedules which may be added hereto pursuant to the provisions
hereof, no modification, variation or amendment of any provision of this General
Security Agreement shall be made except by written agreement, executed by the
parties hereto and no waiver of any provision hereof shall be effective unless
in writing.
XXII.
 
Enurement and Subordination
22.1
 
This General Security Agreement shall enure to the benefit of the Lender and its
successors and assigns and shall be binding upon the respective heirs,
executors, personal representatives, successors and permitted assigns of the
Debtor.
 
 
 
 
 
 
 

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22.2
 
Subject to Lender's approval of the terms and conditions of the "Asset Based
Financing Facility" (defined below), which approval shall not be unreasonably
withheld, Lender shall subordinate all of its right, title and interest in the
Collateral to the security interest of a new lender ("New Lender") so long as
(a) the obligations secured by the Collateral in favor of the New Lender (the
"New Obligations") do not exceed $1,000,000, (b) the New Lender agrees to
subordinate any guaranty of the New Obligations to the guaranty of the
Obligations by the present guarantors thereof, and (c) the collateral for the
New Obligations is given as security only and is not unconditionally sold to the
New Lender. The loan relating to the New Obligations is herein called the "Asset
Based Financing Facility". Any disapproval of the Asset Based Financing Facility
by Lender will be based on Lender's reasonable determination that the terms and
conditions of such Asset Based Financing Facility (other than the subordination)
adversely affects Lender's security interest in the Collateral. Lender agrees to
sign such subordination agreements or intercreditor agreements as such New
Lender may reasonably require in connection with such subordination. Subject to
clause (a) above, the terms of the Asset Based Financing Facility shall state,
as one of its terms, the maximum amount which Debtor is entitled to borrow
against eligible Accounts under the Asset Based Financing Facility, which shall
be expressed as a percentage of Debtor's eligible Accounts (such percentage is
herein called "Debtor's Account Borrowing Percentage"). Notwithstanding the
foregoing limitation on the amount of the New Obligations in clause (a) above,
in the event that after the original closing of the Asset Based Financing
Facility, the eligible Accounts of Debtor increase in total dollar amount,
Debtor may increase its borrowings under the Asset Based Financing Facility
above the $1,000,000 limitation by up to the Debtor's Account Borrowing
Percentage times the increased eligible Accounts so long as one-half (1/2) of
such borrowings is paid to Lender to reduce the Obligations (and the permitted
outstanding principal balance of the Note shall be correspondingly reduced). To
illustrate the foregoing, if at the original closing of the Asset Based
Financing Facility Debtor's Account Borrowing Percentage was 70% of then
eligible Accounts, then, if the amount of Debtor's eligible Accounts has grown
by $1,000,000 since the original closing, Debtor may borrow an additional
$700,000 under the Asset Based Financing Facility so long as $350,000 of such
borrowing is paid to Lender to be applied against the Note.
XXIII.
 
Copy of Agreement and Financing Statement
23.1
 
The Debtor hereby acknowledges receiving a copy of this General Security
Agreement.
XXIV.
 
Governing Law
24.1
 
This General Security Agreement shall be governed by and construed in accordance
with the laws of the State.
24.2
 
For the purpose of legal proceedings this General Security Agreement shall be
deemed to have been made in the State and to be performed there and the courts
of the State shall have jurisdiction over all disputes which may arise under
this General Security Agreement and the Debtor hereby irrevocably and
unconditionally submits to the non-exclusive jurisdiction of such courts,
provided always that nothing herein contained shall prevent the Lender from
proceeding at its election against the Debtor in the courts of any other State,
country or jurisdiction.
XXV.
 
Confidentiality and Nondisclosure.
25.1
 
The parties agree that the terms and conditions of that certain Confidentiality
and Nondisclosure Agreement dated October 8, 2002, are incorporated herein by
reference and, except in connection with any enforcement action by Lender under
this General Security Agreement, shall apply during the entire term of this
General Security Agreement and thereafter regardless of any earlier termination
of such agreement under its terms.
 
 
 
 
 
 
 

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XXVI.
 
Additional Borrowings; Leases.
26.1
 
Lender agrees that Debtor may (i) borrow additional funds from third parties and
grant additional security interest in the Collateral all provided that any such
borrowings and collateralizations are junior and subordinate to Lender (with the
exception of the New Lender provided for above), and (ii) enter into leases of
equipment and real or personal property.
XXV.
 
Cure of Any Applicable Defaults Under Guaranties.
27.
 
Lender agrees that, upon the occurrence of any default under the terms of any
guaranty given in connection with the Loan Documents, that Lender shall give
Debtor written notice of any such default and a thirty (30) day period to cure
any such default thereunder, including the right to replace such guaranty or pay
down the indebtedness evidenced by the Loan Documents by the amount of any such
guaranty and, concurrently with such pay down, the maximum permitted outstanding
balance under the Note shall correspondingly be reduced. Upon the death of a
guarantor under guaranty given in connection with the Loan Documents, Debtor
shall give Lender written notice of such death and Debtor shall replace such
guaranty with a substituted guaranty subject to Lender's reasonable approval or
pay down the indebtedness evidenced by the Loan Documents by the amount of any
such guaranty within thirty (30) days of such notice and, concurrently with such
pay down, the maximum permitted outstanding balance under the Note shall
correspondingly be reduced.

(Remainder of this Page Left Intentionally Blank)

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In Witness Whereof the Debtor has executed this General Security Agreement as of
the day and year first above written.

    TULLY'S COFFEE CORPORATION, a Washington corporation
 
 
By:
/s/ ANTHONY J. GIOIA

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    Name: Anthony J. Gioia

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    Title: President, CEO

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Location Schedule

Address(es) of Location of the Collateral

(Listing Attached)

17

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SCHEDULE 3.1.5

Claims, Actions, Orders or Investigations under Environmental Laws
against Debtor or against Business Premises

None.

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