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The following is an excerpt from a DEF 14A SEC Filing, filed by TULLYS COFFEE CORP on 3/1/2007.
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Report of the Compensation Committee on Executive Compensation


The Compensation Committee of the Board of Directors furnished the following report to the Board of Directors for Fiscal 2006:


Executive Compensation Philosophy


The Compensation Committee of the Board of Directors was composed of outside directors during Fiscal 2006, consisting of Ms. Ainsworth-Jones, Mr. Evanger and Mr. Hubert. The Compensation Committee is responsible for evaluating compensation levels and compensation programs for Tully’s executives and for making recommendations to the Board of Directors regarding appropriate compensation awards for executive management. The Compensation Committee periodically consults with other members of the Board of Directors (in particular, Mr. O’Keefe, as Chairman, and Mr. Fluke, as chair of the Audit Committee) with respect to executive compensation matters and particularly matters involving the President and the Chief Financial Officer. Additionally, the Compensation Committee periodically consults with the President and with the Chief Financial Officer regarding other executive and management compensation matters.


The executive compensation program of Tully’s is designed to attract, retain and motivate executive officers capable of leading Tully’s to meet its business objectives, to enhance long-term shareholder value and to reward



executive management based on contributions to both the short and long term success of Tully’s. The Compensation Committee’s philosophy is for Tully’s to use compensation policies and programs that align the interests of executive management with those of the shareholders and to provide compensation programs that create incentives for and reward both the short and long term performance of the executive officers based on the success of Tully’s in meeting its business objectives. While the components of compensation described below are discussed separately, the Board of Directors and the Compensation Committee take into account the full compensation package provided by Tully’s to its executive officers.


Executive Compensation Components


Base Salary .    Recommendations for base salaries for executive officers are made at levels believed by the Compensation Committee to be sufficient to attract and retain qualified executive officers based upon the requirements and resources of Tully’s and the market practices of other companies. A change in base salary of an executive officer is based on an evaluation of the performance of the executive, prevailing market practices, and the performance and financial condition of Tully’s as a whole.


Incentive Bonus .    The Compensation Committee believes that a portion of the total cash compensation for executive officers should be based on Tully’s success in meeting its short-term performance objectives and contributions by the executive officers that enable Tully’s to meet its long-term objectives, and has structured the executive compensation program to reflect this philosophy. This approach creates a direct incentive for executive officers to achieve desired short-term corporate goals that also further the long-term objectives of Tully’s, and places a portion of each executive officer’s annual compensation at risk. In Fiscal 2006, the incentive compensation for the President and for the Chief Financial Officer was dependent upon Tully’s achieving a targeted level of operating results. The incentive bonus for Fiscal 2006 did not provide for any payment of the incentive bonus unless 100% of this target was achieved. This target was not achieved and therefore no incentive bonus was payable to the President or the Chief Financial Officer for Fiscal 2006.


Stock Options .    The Compensation Committee believes that periodic grants of stock options are a key component of our executive compensation program. Stock options are awarded by the Board of Directors to executive officers based on the executive’s responsibilities, and his or her actual historical contributions and anticipated future contributions to the attainment of our strategic goals. These awards are designed to retain executive officers and to motivate them to enhance stockholder value by aligning the financial interests of executive officers with those of stockholders.


Recruitment and Retention .    It is the philosophy of the Compensation Committee to recruit qualified senior executives and then to retain them for continuing service from year to year, so that Tully’s will receive the benefits from management stability and from more consistent year-to-year planning and execution of strategies for the benefit of Tully’s and its shareholders. The Compensation Committee believes that these goals are facilitated through written terms of employment with senior executives, setting forth the key elements of compensation, and including severance pay provisions in those terms of employment.


President and Chief Operating Officer Compensation.     During Fiscal 2006, Mr. Dresel’s compensation as President and COO (principal executive officer) was based upon the compensation package established in the September 30, 2004 employment letter with Mr. Dresel. In March 2006, the members of the Compensation Committee approved an adjustment in Mr. Dresel’s base salary, effective as of November 1, 2005, to an annual rate of $200,000, and this was ratified by the Board of Directors in March 2006. In establishing and modifying the President’s compensation package, the Committee pursued the objectives discussed above. The Committee believes that Mr. Dresel’s compensation during Fiscal 2006 was in line with our compensation strategy, considering the individual performance of the President and the cash resources and needs of Tully’s.


Code Section 162(m)


The Compensation Committee also considers the potential impact of Section 162(m) of the U.S. Internal Revenue Code. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1 million in any taxable year for the Chief Executive Officer and certain other senior



executive officers, other than compensation that is performance-based under a plan that is approved by the shareholders of the corporation and that meets certain other technical requirements. Based on these requirements, the Compensation Committee has determined that Section 162(m) will not prevent Tully’s from receiving a tax deduction for any of the compensation paid to executive officers. At the present time, our executive officer compensation levels do not exceed $1 million. If the individual cash compensation of any executive officer should ever approach the $1 million level, the Compensation Committee will consider what actions might be required.


Compensation Committee (for Fiscal 2006)

Kathi Ainsworth-Jones, Chair

Marc Evanger

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