12. Capital Stock and Share-Based Employee Compensation

Preferred Stock - RTI is authorized, under its Certificate of Incorporation, to issue up to 250,000 shares of preferred stock with a par value of $0.01. These shares may be issued from time to time in one or more series. Each series will have dividend rates, rights of conversion and redemption, liquidation prices, and other terms or conditions as determined by the Board of Directors. No preferred shares have been issued as of June 4, 2013 and June 5, 2012.

The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors - Under the Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for directors (the "Directors' Plan"), non-employee directors are eligible for awards of share-based incentives. Restricted shares granted under the Directors' Plan either cliff vest after a one year period or vest in equal amounts after one, two, and three years provided the director continually serves on the Board of Directors. Options issued under the Directors' Plan become vested after 30 months and are exercisable until five years after the grant date. Stock option exercises are settled with the issuance of new shares of common stock.

All options awarded under the Directors' Plan have been at the fair market value at the time of grant. A committee, appointed by the Board of Directors, administers the Directors' Plan. At June 4, 2013, we had reserved 24,000 shares of common stock under the Directors' Plan, 23,000 of which were subject to options outstanding, for a net of 1,000 shares of common stock currently available for issuance under the Directors' Plan.

The Ruby Tuesday, Inc. Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan - A committee, appointed by the Board of Directors, administers the Ruby Tuesday, Inc. Stock Incentive Plan ("SIP") and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan ("1996 SIP"), and has full authority in its discretion to determine the key employees and officers to whom share-based incentives are granted and the terms and provisions of share-based incentives. Option grants under the SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such committee. The majority of options granted under the SIP and 1996 SIP vest within three years following the date of grant, and the majority expire five or seven years after grant. A majority of the currently unvested restricted shares granted in fiscal year 2013 are performance-based and a majority of the unvested restricted shares granted in fiscal year 2012 are service-based. All of the currently unvested restricted shares granted during fiscal 2011 are service-based. The SIP and 1996 SIP permit the committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons. These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons. All options awarded under the SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.

At June 4, 2013, we had reserved a total of 4,763,000 and 499,000 shares of common stock for the SIP and 1996 SIP, respectively. Of the reserved shares at June 4, 2013, 1,077,000 and 308,000 were subject to options outstanding for the SIP and 1996 SIP, respectively. Stock option exercises are settled with the issuance of new shares. Net shares of common stock available for issuance at June 4, 2013 under the SIP and 1996 SIP were 3,686,000 and 191,000, respectively.

Chief Executive Officer Awards

On December 1, 2012, James J. Buettgen became President and CEO of the Company. In connection with Mr. Buettgen's appointment as CEO, on December 3, 2012 he received an initial award of approximately 68,000 service-based restricted shares and 102,000 performance-based restricted shares, both of which cliff vest 2.5 years following the grant date. Pursuant to the terms of Mr. Buettgen's employment agreement, the Company has guaranteed the earning of the performance-based restricted shares as the greater of the target value of the award or based on the Company's achievement of certain performance conditions related to fiscal 2013, which will be measured in the first quarter of fiscal 2014.

In addition to the above, on December 3, 2012, Mr. Buettgen received a one-time make-whole equity award which was comprised of approximately 179,000 service-based restricted shares and 253,000 service-based stock options. The restricted shares cliff vest 2.5 years following the grant date and the stock options vest in three equal annual installments following the date of grant.

Finally, on that same date, Mr. Buettgen received a one-time high-performance and inducement award which was comprised of approximately 250,000 service-based restricted shares, 250,000 service-based stock options, and 250,000 performance-based stock options. The restricted shares cliff vest 2.5 years following the grant date and the service-based stock options vest in three equal annual installments following the date of grant. The performance-based stock options will cliff vest if and when the Company's stock price appreciates to $14 per share for a period of 20 consecutive days within Mr. Buettgen's first three years of employment.

Stock Options

The following table summarizes the activity in options under these stock option plans (Options and Aggregate Intrinsic Value are in thousands):

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Service-based vesting:
Balance at June 1, 2010	4,046		$	19.70
Granted	927			9.39
Exercised	(249	)		7.64
Forfeited	(1,485	)		29.70

Balance at May 31, 2011	3,239		$	13.10
Granted	253			7.87
Exercised	(61	)		5.82
Forfeited	(715	)		28.24

Balance at June 5, 2012	2,716		$	8.79
Granted	503			7.81
Exercised	(591	)		6.93
Forfeited	(717	)		11.03
Balance at June 4, 2013	1,911		$	8.27	4.69	$ 2,352
Exercisable	1,408		$	8.43	4.04	$ 1,502

Performance-based vesting:
Balance at June 5, 2012	–		$	–
Granted	250			7.81
Balance at June 4, 2013	250		$	7.81	6.50	$ 423
Exercisable	–		$	–	–	$ –

The aggregate intrinsic value represents the closing stock price as of June 4, 2013 less the strike price, multiplied by the number of options that have a strike price that is less than that closing stock price. The total intrinsic value of options exercised during fiscal 2013, 2012, and 2011 was $1.0 million, $0.1 million, and $1.5 million, respectively.

At June 4, 2013, there was approximately $1.9 million of unrecognized pre-tax compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value at grant date of awards vested during fiscal 2013, 2012, and 2011 totaled $2.2 million, $5.5 million, and $4.4 million, respectively.

During fiscal 2012 and 2011, we granted 253,000 and 927,000 stock options, respectively, to certain employees under the terms of the SIP and 1996 SIP. The stock options awarded in those fiscal years vest in equal annual installments over a three-year period following grant of the award, and have a maximum life of seven years. There are no performance-based vesting requirements associated with these stock options. These stock options do provide for immediate vesting if the optionee retires during the option period. For employees meeting this criterion at the time of grant, the accelerated vesting provision renders the requisite service condition non-substantive and we therefore fully expense the fair value of stock options awarded to retirement-eligible employees on the date of grant. As a result, we recorded expense during the first quarters of fiscal 2012 and 2011 of $1.2 million and $2.3 million, respectively, related to stock options awarded to our former CEO.

The weighted average Black-Scholes grant date fair value for options awarded during fiscal 2013, 2012, and 2011 was $4.37, $4.60, and $5.42 per share, respectively. With the exception of options awarded to our former CEO, the grant date fair value of stock options is amortized over the respective vesting period of the awards. Our former CEO was the only recipient of stock option awards during fiscal 2012. The weighted average assumptions used in our Black-Scholes option-pricing model are as follows:

	2013	2012	2011
Risk-free interest rate	0.62%	0.80%	1.52%
Expected dividend yield	0%	0%	0%
Expected stock price volatility	71.84%	75.63%	73.36%
Expected life (in years)	4.50	4.50	4.50

As previously mentioned, our CEO was awarded 250,000 performance-based stock options on December 3, 2012. We estimated the grant date fair value of this award at $2.14 per share using the Monte-Carlo simulation model. The primary assumptions used in our Monte-Carlo simulation model are as follows:

	2013
Risk-free interest rate	0.34%
Expected dividend yield	0%
Expected stock price volatility	46.71%
Expected life (in years)	1.52

Restricted Stock

The following table summarizes the status of our restricted stock activity (in thousands, except per-share data):

		2013				2012			2011
	Shares	Weighted Average Fair Value			Shares	Weighted Average Fair Value			Shares	Weighted Average Fair Value
Performance-Based Vesting:
Non-vested at beginning of year	423		$	7.75	299		$	7.24	721	$	7.13
Granted	344			6.99	384			7.87	–		–
Vested	(89	)		7.31	(260)			7.33	(421)		7.05
Forfeited	(322	)		7.82	–			–	(1)		7.82
Non-vested at end of year	356		$	7.06	423		$	7.75	299	$	7.24

Service-Based Vesting:
Non-vested at beginning of year	797		$	8.37	551		$	8.22	427	$	7.42
Granted	795			7.47	495			8.30	235		10.21
Vested	(340	)		7.56	(248)			7.89	(111)		9.39
Forfeited	(116	)		8.92	(1)			9.39	–		–
Non-vested at end of year	1,136		$	7.92	797		$	8.37	551	$	8.22

The fair value of restricted share awards is based on the closing price of our common stock at the time of grant. At June 4, 2013, unrecognized compensation expense related to restricted stock grants expected to vest totaled $4.7 million and will be recognized over a weighted-average vesting period of 1.8 years.

During the first quarter of fiscal 2013, we granted 213,000 service-based restricted shares and 242,000 performance-based restricted shares of our common stock to certain employees under the terms of the SIP and 1996 SIP. The service-based restricted shares cliff vest 2.5 years following the grant date. Vesting of the performance-based restricted shares is also contingent upon the Company's achievement of certain performance conditions related to fiscal 2013, which will be measured in the first quarter of fiscal 2014. In addition to satisfaction of the performance conditions, recipients must satisfy the same 2.5 year service condition as is required for the service-based restricted shares.

During the first quarter of fiscal 2012, we granted 186,000 service-based restricted shares and 384,000 performance-based restricted shares of our common stock to certain employees under the terms of the SIP and 1996 SIP. The service-based restricted shares cliff vest on December 1, 2013. Vesting of the performance-based restricted shares, including 203,000 shares that were awarded to our former CEO, was also contingent upon the Company's achievement of certain performance conditions related to fiscal 2012, which was measured in the first quarter of fiscal 2013. We recorded expense during the first quarter of fiscal 2012 of $0.7 million related to the performance-based restricted shares awarded on August 23, 2011 to our former CEO. In addition to satisfaction of the performance conditions, recipients must satisfy the same service condition as is required for the service-based restricted shares.

The Executive Compensation and Human Resources Committee of the Board of Directors determined during the first quarter of fiscal 2013 that the performance condition was not achieved for 314,000 performance-based restricted shares awarded in August 2011 to vest. As a result, the restricted shares were cancelled and returned to the pool of shares available for grant under the SIP and 1996 SIP.

During the fourth quarter of fiscal 2012, we granted 221,000 service-based restricted shares of our common stock to certain employees under the terms of the SIP. The shares vest in three equal installments over periods ranging from the grant date through October 2017.

During fiscal 2011, we granted 174,000 service-based restricted shares of our common stock to certain employees under the terms of the 1996 SIP. The service-based restricted shares cliff vest over a three-year period. Also during fiscal 2011, we awarded 124,000 shares of our common stock to our former CEO and recognized an expense of $1.2 million on the grant date.

During fiscal 2013, 2012, and 2011, we granted 63,000, 88,000, and 61,000 restricted shares, respectively, to non-employee directors. The shares awarded in fiscal 2013 and 2012 vest over a one year period and the shares awarded in fiscal 2011 vest in three equal installments over a three-year period following grant of the award.