Exhibit 10.1

SERVICES AGREEMENT

This Agreement is dated effective as of January 7, 2008 by and between Tully’s
Coffee Corporation (“Tully’s”), Pinnacle Management, Inc., an Idaho corporation
(“Pinnacle Management”), and Carl Pennington, Sr. (“Pennington”) (collectively,
the “Parties”).

Recitals

A. Tully’s desires to engage Pinnacle Management in order to obtain the services
of Pennington as the President of Tully’s, subject to the terms and conditions
of this Agreement.

B. Pennington has agreed to serve as the President of Tully’s subject to the
terms and conditions of this Agreement, and Pinnacle Management has agreed to
make Pennington available to Tully’s, subject to the terms and conditions of
this Agreement.

Agreement

In consideration of the mutual covenants contained herein, and other good and
valuable consideration, the Parties agree as follows:

 

1. Position; Effort; Term.

Subject to the terms set forth herein, Tully’s hereby engages Pinnacle
Management and retains Pennington to serve as the President of Tully’s and
Pennington hereby accepts the position of President, effective as of January 15,
2008 (the “engagement’).

1.1 Position and Duties. Tully’s and Pennington agree that Pennington shall
serve as the President of Tully’s and that Pennington shall have such duties and
responsibilities as are consistent with such position and as are assigned to him
by the Tully’s Board of Directors (the “Board”). It is understood that
Pennington’s responsibilities may be modified or expanded, but not decreased, at
any time by the Board in order to accommodate the needs of Tully’s. Pennington
shall report directly to the Board. Pennington and Pinnacle Management shall
perform all duties hereunder in accordance with (i) all applicable federal,
state and local laws and regulations and (ii) all company policies adopted by
Tully’s Board from time to time. Pinnacle Management and Tully’s understand and
agree that each is an independent principal and not an agent, employee, partner
or joint venturer of the other in the performance of this Agreement, and neither
of them nor their agents shall in any way act or undertake to act on behalf of
or hold itself out as the agent of the other party, except for the personal
authority delegated to Pennington in his capacities as President and as a member
of the Board,

1.2 Efforts. Pennington agrees to devote his full-time efforts to his duties
with Tully’s and agrees that he will not directly or indirectly engage in or
participate in any activities that would conflict with the best interests of
Tully’s. It is further agreed and understood that as the President of Tully’s,
the hours which Pennington is required to work will vary considerably and will
frequently require more than 40 hours per week. It is understood and agreed that
such work, including any hours in excess of 40 hours per week, is a regular and
normal part of Pennington’s responsibilities for which he is compensated by
Pinnacle Management, and does not in any way constitute employment by Tully’s
for which Pennington is entitled to receive additional compensation from Tully’s
except as provided in this Agreement. It is understood that Pennington may have
other responsibilities with respect to Pinnacle Management but that these will
not result in any significant time conflicts and that Pennington will devote the
time and attention necessary to fulfill these duties to Tully’s. Notwithstanding
the foregoing, Pennington shall be permitted to take leave for holidays
according to the holiday schedule used by Tully’s for its employees in Seattle,
and to take four weeks of vacation in each year of this term, and no adjustment
shall be made to the fee payable to Pinnacle Management as the result of such
personal leaves of absence of Pennington. Except with the prior consent of both
parties, Pennington shall be the only employee, agent or representative of
Pinnacle Management assigned to the engagement.

1.3 Term. Except as provided in Section 6, Tully’s shall employ Pinnacle
Management for the period commencing on January 7, 2008 (the “Effective Date”)
and continuing for one year. This Agreement shall renew for a term of one year
upon mutual agreement at least 90 days before each annual expiration date. The
period during which Pinnacle Management is engaged pursuant to the terms of this
Agreement shall be referred to herein as the Engagement Period. Sections 4, 5,
6.7, 7.3 and 7.6 shall survive the termination of this Agreement.

1.4 Board Seat. The parties acknowledge that Pennington is currently a member of
the Board. The parties acknowledge and agree that, subject to reelection by the
Tully’s Shareholders at each annual meeting, Pennington shall continue to be a
member of the Board following his execution of this Agreement and throughout the
Engagement Period. During the term of this Agreement, Pennington shall receive
no compensation for his services on the Board except as provided in this
Agreement.

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2. Cash Compensation.

2.1 Monthly Service Fee. For all services rendered by Pinnacle Management and
Pennington under this Agreement, Tully’s shall pay Pinnacle Management a fee of
$24,166.66 per month, which shall be paid in arrears in semi-monthly
installments of $12,083.33 on the 15th and 30th day of each calendar month. The
first fee payment of $12,083.33 shall be paid on January 30, 2008. Upon mutual
agreement of Tully’s and Pinnacle Management, the amount of this fee may be
adjusted to take into account any change in the services to be rendered by
Pinnacle Management and Pennington. Pinnacle Management shall pay Pennington
such compensation as may be agreed by Pennington and Pinnacle Management, but
Tully’s shall pay no salary or other cash compensation to Pennington.

 

3. Other Benefits.

3.1 Monthly Vehicle Cost Reimbursement. Tully’s shall provide Pinnacle
Management a monthly vehicle cost reimbursement of $600.00, paid in arrears in
semi-monthly installments of $300.00. Pinnacle shall reimburse Pennington for
vehicle costs as agreed by Pinnacle Management and Pennington.

3.2 Expenses. Tully’s shall reimburse Pennington for all actual out-of-pocket
expenses reasonably related to carrying out his duties and responsibilities
under this Agreement in accordance with Tully’s established policies in effect
from time to time, including travel expenses back and forth from Seattle, WA to
Boise, Idaho. Such travel expenses shall include airline tickets for
Pennington’s spouse for purposes of searching out for permanent housing, but
shall not include the costs of such permanent housing.

3.3 Stock Options. Upon the execution of this Agreement, Tully’s and Pennington
shall also enter into a Stock Option Agreement substantially in the form
attached hereto as Exhibit A (the “Stock Option Agreement”). The Stock Option
Agreement shall provide for options (the “Stock Options”) to purchase 62,500
shares of Tully’s common voting stock. Subject to Pennington being Tully’s
President (or otherwise being an eligible Tully’s employee or director) on the
applicable vesting date, the Stock Options shall vest as follows: one-fifth
(1/5th) of the Stock Options shall vest on each successive anniversary as
described in Exhibit A. The exercise price for each of the Stock Options shall
represent Tully’s estimate of the fair market value of its common stock as of
the date of the grant of such Stock Options.

Except as otherwise provided for herein, all of the Stock Options shall be
subject to the terms and conditions contained in the Stock Option Agreement.
Issuance of the Stock Options and any shares related thereto shall be made only
in accordance with all applicable state and federal securities laws.

3.4 No Other Benefits. Pennington shall be provided the same “employee purchase
discount” benefits as are made available to other members of the Board. Tully’s
shall not provide Pennington with any of the standard employee benefits which it
offers to eligible employees, including but not limited to medical, dental,
vision, short term, long term, supplemental life, Section 125 pre-tax spending
accounts, and 401(k) savings benefits. Pinnacle Management and Pennington shall
be solely responsible for the tax consequences applicable to Pinnacle Management
and Pennington by reason of this Agreement and the engagement, including income
taxes, employment insurance, social security, workers compensation and any other
tax.

 

4. Protection of Confidential Information.

4.1 Confidential Information. Pennington and Pinnacle Management recognize that
during the course of this engagement, Pennington and Pinnacle Management will
have access to certain trade secrets, customer lists, drawings, designs,
marketing plans, management organization information (including, without
limitation, data and other information relating to members of the Board and
other management personnel of Tully’s), operating policies or manuals, business
plans, financial records, or other financial, commercial, business or technical
information relating or belonging to Tully’s or information designated or
considered as confidential or proprietary that Tully’s may receive belonging to
suppliers, customers or others who do business with Tully’s (collectively,
“Confidential Information”). As used herein, Confidential Information does not
include any information that has been previously disclosed to the public by
Tully’s or is in the public domain (other than by reason of Pennington’s or
Pinnacle Management’s breach of this Section 4.1). Pennington and Pinnacle
Management agree that all Confidential Information shall remain the exclusive
property of Tully’s. In any dispute over whether information is Confidential
Information for purposes of enforcement of this Agreement, it shall be the
burden of Pennington and Pinnacle Management to show both that such contested
information is not Confidential Information within the meaning of the Agreement,
and that it does not constitute a trade secret under the laws of the State of
Washington.

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For purposes of this Agreement and without limiting the foregoing description of
Confidential Information, “Confidential Information” includes: all nonpublic
information relating to Tully’s and all information regarding Tully’s current or
former employees, investors and customers. Examples of Confidential Information
include, without limitation: the identities of past, present or potential
customers, investors or employees, marketing plans, contract information, trade
secrets as defined by Washington law, and any other sorts of items or
information regarding Tully’s or its customers, investors or employees that are
not generally known to the public at large.

4.2 Nondisclosure of Confidential Information. At all times during and following
this engagement, except to the extent required by an order of a court having
competent jurisdiction or under subpoena from an appropriate government agency,
Pennington and Pinnacle Management agree not to disclose to anyone outside
Tully’s, nor to use for any purpose other than Pinnacle Management and
Pennington’s work for Tully’s and for Tully’s benefit, (i) any Confidential
Information or (ii) any information Tully’s has received from others which
Tully’s is obligated to treat as confidential or proprietary.

4.3 Return of Confidential Information. When this engagement ends and at any
other time at Tully’s request, Pennington and Pinnacle Management shall promptly
give Tully’s all materials containing Confidential Information that Pennington
or Pinnacle Management has or controls.

4.4 Conflict of Interest. As an affiliate of Pinnacle Management, Impact Sales,
Inc., and PinnPointe Consulting Group, LLC (collectively, the “Pinnacle
Affiliates”), Pennington acknowledges that he may have a “conflicting interest”
(as defined in RCW 23B.08.700) with respect to Tully’s. If and to the extent
that Pennington has a conflicting interest with respect to any transaction or
other matter involving Tully’s and the Pinnacle Affiliates, then Pennington
shall disclose the existence and nature of his conflicting interest to the Board
and all facts known to Pennington relating to the transaction or other matter
that an ordinarily prudent person would reasonably believe to be material to a
judgment about the transaction or other matter. A breach of this Section 4.4
shall constitute a breach of Pennington’s duties to Tully’s as a director under
RCW 23B.08.300 and as an officer under RCW 23B.08.420, and Pennington shall not
be entitled to indemnification or advancement of expenses pursuant to Article VI
of Tully’s articles of incorporation or otherwise with respect to such breach.

 

5. Noncompetition and Nonsolicitation of Employees.

5.1 Noncompetition. During the term of this Agreement and during the one-year
period immediately following the end of such term (collectively, the
“Restriction Period”), Pennington shall not, directly or indirectly, engage in,
or become associated with any entity, whether as principal, partner, member,
employee, consultant or shareholder (other than as a holder of not in excess of
1% of the outstanding voting shares of any publicly traded company), that, as a
material part of their business, engages in the Specialty Coffee Business (as
defined below) in any of the geographic areas in which the Company has conducted
business during the Engagement Period. As used herein, the “Specialty Coffee
Business” means (i) the business of developing and operating specialty stores
featuring the sale of coffee drinks, teas and/or other beverages; and/or
(ii) the wholesale distribution of whole coffee beans, ground coffee and coffee
drinks. Pennington is a shareholder of Impact Sales, Inc., a grocery broker
serving Tully’s and other manufacturers, and Pennington serves as a board member
of Impact Sales, Inc.; subject to the provisions of Section 4.4, this shall not
be considered as engaging in competition with Tully’s for purposes of this
Section 5.1.

5.2 Nonsolicitation. During the Restriction Period, Pinnacle Management and
Pennington shall not directly or indirectly solicit any employee to leave his or
her employment with Tully’s. In addition, Pinnacle Management and Pennington
shall not (a) disclose to any third party the names, backgrounds or
qualifications of any Tully employees or otherwise identify them as potential
candidates for employment; (b) personally or through any other person approach,
recruit or otherwise solicit employees of Tully’s to work for any other
employer; or (c) participate in any pre-employment interviews with any person
who was employed by Tully’s during the term of this Agreement.

5.3 Acknowledgement re Restrictions in Sections 4 and 5. Pennington and Pinnacle
Management acknowledge and agree that their covenants and obligations with
respect to confidentiality, Tully’s property, and nonsolicitation of employees
contained in Sections 4 and 5 of this Agreement relate to special, unique and
extraordinary matters and that a violation of any of the terms of such covenants
or obligations will cause Tully’s irreparable injury for which adequate remedies
are not available solely at law. Therefore, Pennington and Pinnacle Management
agree that Tully’s shall be entitled to an injunction, restraining order or such
other equitable relief (without the requirement to post bond) restraining
Pennington and Pinnacle Management from committing any violation of the
covenants and obligations set forth in Sections 4 and 5 of this Agreement. These
injunctive remedies are cumulative and are in addition to any other rights and
remedies that Tully’s may have at law or in equity.

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Pennington and Pinnacle Management acknowledge and agree that, given
Pennington’s experience, knowledge and position with Tully’s, the restrictions
contained in Sections 4 and 5 of this Agreement are reasonable and necessary in
order for Tully’s to protect its reasonable business interests.

 

6. Termination.

6.1 Mutual Agreement. During the Engagement Period, this engagement may be
terminated at any time by mutual agreement of the Parties on terms to be
negotiated at the time of such termination.

6.2 Termination by Pinnacle Management. Pinnacle Management or Pennington may
also terminate this Agreement on thirty days’ written notice to Tully’s at the
address listed below. The notice will be effective on the date that it is
postmarked for delivery by the U.S. postal service, or accepted by an
alternative delivery service. If Pinnacle Management or Pennington terminates
this Agreement there shall be no termination payment paid by Tully’s in
connection with such termination.

6.3 Death or Disability. During the term of this Agreement, this Agreement shall
terminate automatically (i) upon Pennington’s death, (ii) due to a physical or
mental disability or infirmity that prevents the performance of Pennington’s
employment related duties hereunder for a period of three months or longer (a
“Disability”), or (iii) if Pinnacle Management should otherwise not be able to
make the services of Pennington available to Tully’s as provided under this
Agreement.

6.4 Termination by Tully’s. During the term of this Agreement, this Agreement
may be terminated for “Cause” by Tully’s effective immediately upon delivery of
written notice thereof to Pinnacle Management and Pennington. “Cause” shall mean
(i) commission by Pennington or Pinnacle Management of any act of theft, fraud,
or dishonesty with respect to Tully’s business; (ii) breach by Pennington or
Pinnacle Management of any of the material terms and conditions of this
Agreement which breach is not remedied to Tully’s reasonable satisfaction within
ten days of written notice of the same to Pennington and Pinnacle Management;
(iii) Pennington or Pinnacle Management engaging in willful and serious
misconduct that is injurious to Tully’s reputation or business; or
(iv) Pennington or Pinnacle Management having been convicted of, or entered a
plea of guilty or nolo contendere to, a crime that constitutes a felony or which
arises out of any act involving moral turpitude.

If Tully’s terminates this Agreement without Cause and such termination is not
the result of a Change of Control as set forth in Section 6.5 hereof, Tully’s
shall pay to Pinnacle Management a termination fee equal to three months of the
then-current monthly fee provided in Section 2 of this Agreement. If Tully’s
terminates this Agreement for Cause, there shall be no termination fee payment
due in connection with such termination.

6.5 Change of Control. If there is a Change in Control, (i) Tully’s or such
successor shall pay to Pinnacle Management a termination fee equal to the total
of the monthly fee payments under Section 2 of this Agreement for the
then-remaining term of the Agreement (but not less than six (6) months of the
then-current monthly fee provided in Section 2 of this Agreement), and (ii) 100%
of Pennington’s Stock Options granted under Section 3.3 hereof shall vest as of
the effective date of such Change of Control date.

As used herein, the phrase “Change in Control” shall mean either (i) a sale of
substantially all of the assets of Tully’s to a third party other than as part
of a transfer of said assets to an entity directly or indirectly controlled by
existing Tully’s shareholders holding a majority of the outstanding shares of
the common voting stock of Tully’s; or (b) a sale of more than fifty percent
(50%) of the outstanding voting stock of Tully’s to one or more third parties in
a single transaction or series of transactions. For purposes of this
Section 6.6, the sale of stock by shareholders as secondary sellers in
connection with a public offering of stock by Tully’s, and sales of stock by
shareholders in a public stock market after a public offering of stock by
Tully’s shall not be considered to be sales in a single transaction or series of
transactions.

6.6 Other Compensation. Upon termination of this Agreement, Tully’s agrees to
pay Pinnacle Management all fees and expense reimbursements that are due and
owing to Pinnacle Management as of the date of termination, less legal
deductions Pennington or Pinnacle Management may owe to Tully’s. Pinnacle
Management and Pennington agree that their respective execution of this
Agreement constitutes their authorization for all such legal deductions.
Pennington and Pinnacle agree to return to Tully’s all of Tully’s property of
any kind which may be in their possession as of the date of the termination.

6.7 Cooperation and Non-disparagement. Upon the termination of this Agreement
for any reason other than the death or Disability of Pennington, Pinnacle
Management and Pennington shall cooperate with Tully’s, as reasonably requested
by Tully’s, to effect a transition of Pennington’s responsibilities and to
ensure that Tully’s is aware of all matters being handled by Pennington and
Pinnacle Management. After the termination of this Agreement, the Parties agree
that they shall each refrain from making any written or oral statements
disparaging Tully’s, Pinnacle Management and/or Pennington.

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7. Miscellaneous.

7.1 Essential Terms and Modification of Agreement. It is understood and agreed
that the terms and conditions described in this Agreement constitute the
essential terms and conditions of the services arrangement between Tully’s,
Pinnacle Management and Pennington, all of which have been voluntarily agreed
upon. Tully’s, Pinnacle Management and Pennington agree that there are no other
essential terms or conditions of the engagement that are not described within
this Agreement, and that any change in the essential terms and conditions of
this Agreement will be written down in a supplemental agreement which shall be
signed by Tully’s, Pinnacle Management and Pennington before it is effective.
Pennington, Pinnacle Management, and Tully’s agree that this Agreement replaces
and supersedes any and all other prior agreements, written or oral, regarding
the terms of such an engagement or any employment of Pennington by the Company.

7.2 Severability. If any term, covenant, condition or provision of this
Agreement or the application thereof to any person or circumstance shall, at any
time, or to any extent, be determined invalid or unenforceable, the remaining
provisions hereof shall not be affected thereby and shall be deemed valid and
fully enforceable to the extent permitted by law.

7.3 Governing Law; Attorneys Fees. This Agreement is made and shall be construed
and performed under the laws of the State of Washington. Any suit to enforce any
provision of this Agreement, or arising as a result of the relationship of the
Parties created by this Agreement, shall be brought in King County, Washington.
In the event that suit is brought to interpret or enforce any term or provision
of this Agreement, or in the event that any party hereto is forced to seek a
remedy other than monetary damages, including but not limited to injunctive
relief, the prevailing party in any such suit or proceeding shall, in addition
to any other relief to which such party may be entitled, be awarded its costs
and attorneys’ fees reasonably and actually incurred.

7.4 Waiver of Agreement. The waiver by Tully’s of a breach of any provision of
this Agreement by Pennington or Pinnacle Management shall not operate or be
construed as a waiver by Tully’s of any subsequent breach by Pennington or
Pinnacle Management.

7.5 Captions. The captions and headings of the paragraphs of this Agreement are
for convenience and reference only and are not to be used to interpret or define
the provisions hereof.

7.6 Assignment and Successors. The rights and obligations of Tully’s under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of Tully’s. The rights and obligations of Pennington and Pinnacle
Management hereunder are nonassignable.

7.7 Notices. Any notice required by this Agreement shall be sufficient if in
writing and delivered to the party or sent by certified mail, return receipt
requested and addressed as follows:

 

(a) If to Tully’s:    Tully’s Coffee Corporation    Attention: Chairman    3100
Airport Way South    Seattle, WA 98134    Telephone: 206-233-2070    Fax:
206-233-2077    and to    Patrick R. Lamb    Carney Badley Spellman, P.S.    701
Fifth Avenue, Suite 3600    Seattle, WA 98104    Telephone: 206-622-8020    Fax:
206-467-8215 (b) If to Pennington or Pinnacle Management:   

Pinnacle Management, Inc. and

Carl Pennington Sr.

   348 W. Parkcenter Blvd.    Boise, ID 83706

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Any party hereto may change the specified address by giving written notice of
such change to all other parties.

7.8 Authority. Tully’s represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any material agreement to
which it is a party or by which it is bound. Pennington represents and warrants
that he is fully authorized and empowered to enter into this Agreement and that
the performance of his obligations under this Agreement will not violate any
material agreement to which he is a party or by which he is bound. Pinnacle
Management represents and warrants that it is fully authorized and empowered to
enter into this Agreement and that the performance of its obligations under this
Agreement will not violate any material agreement to which it is a party or by
which it is bound.

[signatures appear on the following page]

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TULLY’S COFFEE CORPORATION     CARL PENNINGTON, SR. By:             Its        
          PINNACLE MANAGEMENT, LLC       By:           Its    

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EXHIBIT A

TO

SERVICES AGREEMENT

BETWEEN

TULLY’S COFFEE CORPORATION, PINNACLE MANAGEMENT, LLC

AND CARL PENNINGTON, SR

Form of Stock Option Agreement

 

 

TULLY’S COFFEE CORPORATION

(the “Company”)

NON-QUALIFIED STOCK OPTION AGREEMENT FOR PURCHASE OF STOCK

We are pleased to inform you that the Company has granted to you (the
“Optionee”) an option to purchase shares of the Company’s common stock
(“Option”) under the 2004 Stock Option Plan (the “Plan”) on the terms and
subject to the conditions set forth in this Stock Option Agreement.

This Stock Option Agreement is made and entered into pursuant to a specific
grant of options approved by the Company’s Board of Directors or the
Compensation Committee thereof as of the Date of Option Grant set forth below.
This Stock Option Agreement cancels, supercedes, and replaces any other oral or
written agreement, letter or other document between the parties related to this
Option.

FOR VALUABLE CONSIDERATION, the Company does hereby grant to the Optionee, in
accordance with the terms and conditions hereof, as of the Date of Option Grant,
the right and option to purchase the number of shares of common stock of the
Company (the “Option Shares”) for the Exercise Price Per Share as set forth
below, which right and option shall vest and become exercisable according to the
Vesting Schedule set forth below:

 

Name of Optionee:    Carl Pennington Sr. Number of Option Shares:    62,500
shares Exercise Price Per Share:    Estimated market value as of the grant date
Date of Option Grant:    At next Board meeting (“Grant Date”) Expiration Date:
   Ten years after Grant Date Vesting Schedule:   

One fifth (1/5th) of the options shall vest on first anniversary of Grant Date

One fifth (1/5th) of the options shall vest on second anniversary of Grant Date

One fifth (1/5th) of the options shall vest on third anniversary of Grant Date

One fifth (1/5th) of the options shall vest on fourth anniversary of Grant Date

One fifth (1/5th) of the options shall vest on fifth anniversary of Grant Date

EXECUTED as of January             , 2008.

 

TULLY’S COFFEE CORPORATION By    

By signing below and entering into this Stock Option Agreement, Optionee agrees
to the terms hereof, and all obligations and responsibilities as described in
the Plan and the attached Terms and Conditions, which shall constitute part of
this Stock Option Agreement.

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OPTIONEE   Address:          

TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION AGREEMENT

THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS

COVERING SECURITIES THAT HAVE BEEN REGISTERED

UNDER THE SECURITIES ACT OF 1933.

Capitalized Terms used in this Stock Option Agreement (the “Agreement”), if not
otherwise defined, have the meanings

given them in the Plan.

1. Time of Exercise of Option. Until it expires or is terminated as provided in
Section 2 hereof, the Option may be exercised from time to time to purchase the
number of whole shares of common stock as to which it has become exercisable.
Section 2.6 of the Plan sets forth provisions affecting the exercise and
termination of the Option in connection with certain circumstances, including
Merger, Consolidation, Tender Offer, Takeover Bid, Sale of Assets or Dissolution
as set forth therein.

2. Termination of Employment or Service.

2.1 General Rule. Except as provided in this Section 2, the Option may not be
exercised unless at the time of exercise the Optionee is employed by or is
serving as a director of the Company, and shall have been so employed or
provided such service continuously since the Date of Option Grant. For purposes
of this Agreement, the Optionee is considered to be employed by or in the
service of the Company if the Optionee is employed by or serving as a director
of the Company or any subsidiary of the Company (each, an “Employer”).

2.2 Termination Generally. If the Optionee’s employment by or service with the
Company terminates for any reason other than for cause, resignation in lieu of
dismissal, total disability, death or due to a Change of Control Event, as
provided in Sections 2.3, 2.4, 2.5, 2.6 or 2.7 hereof, then the Option may be
exercised at any time before the earliest of (a) the Expiration Date, (b) the
date that is three years after the date of termination, and (c) ten years after
the Date of Option Grant, but only if and to the extent the Optionee was
entitled to exercise the Option at the date of termination (provided that all
other conditions to exercise set forth herein shall have been met at the date of
exercise of the Option).

2.3 Termination for Cause or Resignation in Lieu of Dismissal.

(a) If the Optionee is terminated for cause or resigns in lieu of dismissal, the
Option shall be deemed to have terminated as of the time of the first act that
led or would have led to the termination for cause or resignation in lieu of
dismissal, and the Optionee shall thereupon have no right to purchase any shares
of common stock pursuant to the exercise of the Option, and any such exercise
shall be null and void.

(b) Termination for “cause” shall include (i) the violation by the Optionee of
any reasonable rule or policy of the Company; (ii) any willful misconduct or
gross negligence by the Optionee in the responsibilities assigned to him or her;
(iii) any willful failure to perform his or her job as required to meet the
objectives of the Company; (iv) any wrongful conduct of an Optionee that has an
adverse impact on the Company or that constitutes a misappropriation of the
assets of the Company; (v) unauthorized disclosure of confidential information;
(vi) the Optionee’s performing services for any other company or person that
competes with the Company while he or she is employed by or provides services to
the Company, without the written approval of the president or chief executive
officer of the Company; or (vii) removal as a director of the Company.

(c) “Resignation in lieu of dismissal” shall mean a resignation by the Optionee
as an employee or director, or both, if (i) the Company has given prior notice
to the Optionee of its intent to dismiss (or seek removal of) the Optionee for
circumstances that constitute cause, or (ii) within two months of the Optionee’s
resignation, the Board of Directors of the Company or the president or chief
executive officer of the Company determines that such resignation was related to
an act that would have led to a termination for cause.

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2.4 Resignation. If the Optionee resigns as an employee or director of the
Company, the Optionee’s right to exercise his or her option shall be suspended
for a period of two months from the date of resignation, unless the president or
chief executive officer of the Company or the Board of Directors determines
otherwise in writing. Thereafter, unless there is a determination that the
Optionee resigned in lieu of dismissal, the option may be exercised at any time
before the earlier of (a) the Expiration Date (which shall have been extended
for the period during which the Option has been suspended) or (b) the date that
is three years after the date of resignation, to the extent the Optionee was
entitled to exercise the Option at the date of resignation (provided all other
conditions to exercise set forth herein shall have been met at the date of
exercise of the Option).

2.5 Termination Because of Total Disability. If the Optionee’s employment or
service to the Company terminates because of a permanent and total disability
(as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended), the Option may be exercised at any time before the earlier of (a) the
Expiration Date or (b) the date that is three years after the date of such
termination, but only if and to the extent the Optionee was entitled to exercise
the Option at the date of termination (provided that all other conditions to
exercise set forth herein shall have been met at the date of exercise of the
Option).

2.6 Termination Because of Death. If the Optionee dies while employed by or in
the service of the Company, the Option may be exercised at any time before the
earlier of (a) the Expiration Date or (b) the date that is 12 months after the
date of death, but only if and to the extent the Optionee was entitled to
exercise the Option at the date of termination. The Option may be exercised only
by the person or persons to whom the Optionee’s rights under the Option shall
pass by the Optionee’s will or by the applicable laws of descent and
distribution (provided all other conditions to exercise set forth herein shall
have been met at the date of exercise of the Option).

2.7 Termination Because of a “Change of Control Event.” The Option shall
terminate upon the occurrence of a Change of Control Event, as defined in
Section 2.7(e) (6) of the Plan and subject to the terms set forth therein.

2.8 Effect of Leave of Absence; Transfer of Employment. Absence on leave
approved by the Employer or on account of illness or disability shall not be
deemed a termination or interruption of employment or service. Vesting of the
Option shall continue during any medical, family, or military leave of absence
taken in accordance with the policies of the Company. Vesting of the Option and
the Expiration Date therefor shall be suspended during any other leave of
absence, whether paid or unpaid, except as otherwise determined by the Board of
Directors or appropriate committee thereof. A transfer of employment or other
relationship between or among the Company and any subsidiaries of the parent or
the Company shall not be deemed to constitute a termination of employment or
other cessation of relationship with the Employer.

2.9 Effect of Listing or Quotation of Common Stock. Effective as of the later of
(a) the date on which the Company’s common stock is listed or quoted on a
national securities exchange or market or (b) the expiration of any restrictive
period applicable to the Option under the requirements of Section 9 below, the
three year exercise period referenced in Sections 2.2 and 2.4 above will be
reduced to three months and in Section 2.5 to twelve months.

2.10 Failure to Exercise Option. To the extent that the Option of any deceased
Optionee or any Optionee whose employment or service terminates is not exercised
within the applicable exercise period, all further rights to purchase shares
pursuant to the Option shall cease and terminate.

3. Recapitalizations. The Option shall be adjusted for recapitalizations, stock
splits, stock dividends, and the like as described in Section 2.10 of the Plan.

4. Method of Exercise of Option. Subject to the provisions of Section 1 above,
the Option may be exercised in whole or in part; provided, however, that no
fewer than 100 shares (or the remaining shares then purchasable under the
Option, if less than 100 shares) may be purchased on any exercise of the Option.
The Option shall be exercised by delivery to the Secretary of the Company or his
or her designated agent of notice, substantially in the form attached hereto as
Annex 1, of the number of Option Shares with respect to which the Option is
being exercised, together with payment in full of the exercise price and any
applicable withholding taxes. Payment of the option exercise price shall be made
in cash or bank certified or cashier’s check for the number of Option Shares
being purchased. Before the issuance of shares of common stock upon the exercise
of the Option, the Optionee shall pay to the Company the amount of any
applicable federal, state or local tax withholding obligations. The Company may
withhold any distribution in whole or in part until the Company is so paid. The
Company shall have the right to withhold such amount from any other amounts due
or to become due from the Company to the Optionee, including salary (subject to
applicable law) or to retain and withhold a number of shares having a market
value not less than the amount of such taxes required to be withheld by the
Company to reimburse it for any such taxes and cancel (in whole or in part) any
such shares so withheld.

 

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5. Nonassignability of Option by Optionee. The Option is nonassignable and may
not be transferred, pledged or hypothecated in any manner by the Optionee,
either voluntarily or by operation of law, except by will or the applicable laws
of descent and distribution; shall not be subject to execution, attachment or
similar process; and shall be exercisable during the Optionee’s lifetime only by
the Optionee. Any purported transfer or assignment in violation of this
provision shall be void. The Option and any and all rights granted to the
Optionee hereunder and not theretofore duly exercised shall automatically
terminate and expire upon any purported assignment or transfer or upon the
bankruptcy or insolvency of Optionee or Optionee’s estate.

6. Conditions on Company’s Obligations.

6.1 No Violations of Law. The Company shall not be obligated to issue any Option
Shares upon exercise of the Option if the Company is advised by its legal
counsel that such issuance would violate applicable state or federal laws,
including securities laws and the requirements of any stock exchange or market
on which the common stock may then be listed. The Company will use its
reasonable best efforts to take steps required by state or federal law and
applicable regulations in connection with issuance of the Option Shares. The
inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company’s counsel to be necessary for
the lawful issuance and sale of any Option Shares hereunder, or to qualify for
an exemption from registration for the issuance and sale of any shares
hereunder, shall relieve the Company of any liability with respect to the
nonissuance or sale of such shares as to which such requisite authority or
qualification shall not have been obtained or satisfied.

6.2 Compliance with Securities Laws. As a condition to the exercise of the
Option, the Company may require the Optionee to represent and warrant at the
time of exercise that the Option Shares are being purchased only for investment
and without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any
relevant provision of the aforementioned laws. The Company may place a
stop-transfer order against any shares of common stock on the stock records of
the Company, and a legend may be stamped on stock certificates to the effect
that the shares of common stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation. The Board of Directors (or a committee thereof)
also may require such other action or agreement by the Optionee as may from time
to time be necessary to comply with the federal and state securities laws. THIS
PROVISION SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE COMMON
STOCK ISSUABLE UPON EXERCISE OF THE OPTION.

7. No Rights as a Shareholder. The Optionee shall have no rights as a
shareholder with respect to any shares of common stock until the date on which
the Optionee becomes the holder of record of those shares. No adjustment shall
be made for dividends or other rights for which the record date occurs before
the date the Optionee becomes the holder of record.

8. No Right to Employment or Service. Nothing in the Plan or this Agreement
shall confer upon the Optionee any right to be continued in the employment of
the Company or interfere in any way with the Company’s right to terminate the
Optionee’s employment at will at any time, for any reason, with or without
cause, without any pre- or post-termination warning, discipline or procedure, or
to decrease the Optionee’s compensation or benefits, or confer upon the Optionee
any right to be retained or employed by the Company or to the continuation,
extension, renewal or modification of any compensation, contract or arrangement
with or by the Company. Neither Optionee nor any other person shall have any
claim or right to be granted additional options under the Plan. Optionee shall
have no rights to or interest in any option except as set forth herein.

9. Market Stand-off. The Optionee agrees, in connection with any public equity
offering by the Company, (a) not to sell or otherwise dispose of any securities
of the Company in compliance with terms of the lock-up or similar agreement
proposed by the underwriters for such offering and (b) to execute an agreement
in the form proposed; provided that (x) substantially all of the Company’s
officers and directors enter into identical agreements, (y) the restrictive
period does not exceed 180 days following the offering, and (z) the failure to
execute a form of agreement shall not affect the enforceability of this
covenant. To enforce this covenant, the Company may impose stop-transfer
instructions with respect to the securities of the Optionee until the end of the
restrictive period.

10. Successors of Company. Subject to Section 2.7 hereof, this Agreement shall
be binding upon and shall inure to the benefit of any successor of the Company
but, except as provided herein, the Option may not be assigned or otherwise
transferred by the Optionee.

11. Notices. Any notices under this Agreement must be in writing and will be
effective when actually delivered or, if mailed, three days after deposit into
the United States mail by registered or certified mail, postage prepaid. Mail
shall be directed to the Company at its principal executive offices, Attention:
Secretary, and to Optionee at the address stated on the facing page of this
Agreement, or to such address as a party may certify by notice to the other
party.

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12. Amendments. The Company may at any time amend this Agreement if the
amendment does not adversely affect the Optionee. Otherwise, this Agreement may
not be amended without the written consent of the Optionee and the Company.

13. Governing Law. This Agreement shall be governed by the laws of the State of
Washington.

14. Complete Agreement. This Agreement constitutes the entire agreement between
the Optionee and the Company, both oral and written concerning the matters
addressed herein, and all prior agreements or representations concerning the
matters addressed herein, whether written or oral, express or implied, are
terminated and of no further effect. This Agreement and the Option represented
hereby is granted pursuant to and is governed by the Plan, amended from time to
time. In the event of any inconsistency or ambiguity between this Agreement and
the Plan, the provisions of the Plan, as interpreted by the Board of Directors
or designated committee thereof, shall control.

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Annex 1

Form of Notice of Exercise of Stock Option

Date:                     

 

To: Tully’s Coffee Corporation

I hereby exercise the non-statutory stock option granted to me by Tully’s Coffee
Corporation (the “Company”) on January 15, 2008, subject to all the terms and
provisions thereof and of the 2004 Stock Option Plan referred to therein, and
notify the Company of my desire to purchase                      shares of
common stock of the Company at the exercise price of $                      per
share, or an aggregate exercise price of $                     .

I hereby deliver the full exercise price and all applicable withholding taxes
with respect to this exercise as follows:

 

  ¨ cash, or

 

  ¨ bank certified or cashier’s check.

I further agree to execute such other documents as the Company may request in
connection with the exercise of this stock option.

 

By:     Print Name:     Address:           SSN: