Stock options

Company Stock Incentive Plan

In 1994, Tully’s shareholders approved a Stock Incentive Plan (the “1994 Plan”). In August 1999, the Company’s shareholders approved an amended plan, which established the maximum number of shares issuable under the 1994 Plan and the Employee Stock Purchase Plan at 525,000; and in June 2003, the Company’s Board of Directors further amended the 1994 Plan. By its terms, the 1994 Plan expired in October 2004 (this did not terminate outstanding options).

In December 2004, Tully’s shareholders approved the 2004 Stock Option Plan, which authorizes the issuance of up to 312,500 shares of common stock under the 2004 Stock Option Plan and Tully’s Employee Stock Purchase Plan.

In March 2010, Tully’s shareholders approved the 2010 Stock Option Plan, which authorizes the issuance of up to 312,500 shares of common stock under the 2010 Stock Option Plan and Tully’s Employee Stock Purchase Plan. As of December 26, 2010, no options had been granted under the 2010 Stock Option Plan. The provisions of the 2010 Stock Option Plan, 2004 Stock Option Plan (and the 1994 Plan prior to its expiration) are summarized as follows:


•	The Company may issue incentive or nonqualified stock options to its employees and directors. Stock options are granted solely at the discretion of the Company’s Board of Directors and are issued at a price determined by its Board of Directors.


•	The term of each option granted is for such period as determined by the Board of Directors, but not more than ten years from date of grant.


•	Options are nontransferable and may generally be exercised based on a vesting schedule determined by the Company’s Board of Directors.


•	The plan provides for acceleration of outstanding options under certain conditions, including but limited to certain changes in control of the Company.

Other Equity Instruments

The Company has granted warrants to purchase common stock. These warrants have up to one year vesting periods and generally have ten year lives. Issued, outstanding and exercisable warrants as of July 3, 2011 are summarized as follows:



	Outstanding warrants	Number exercisable	Exercise Price
Issued to guarantors of debt	93,191	93,191	$	2.64
Issued with Series A Preferred Stock investment units	783	783	$	0.08
Totals	93,974	93, 974

Stock Options

The Company issues new shares of common stock upon the exercise of stock options granted under the 1994 Plan, the 2004 Stock Option Plan and the 2010 Stock Option Plan, although it is no longer granting options from the 1994 Plan.

Determining Fair Value of Stock Awards Using Black Scholes

Valuation and Amortization Method.

The Company estimates the fair value of stock option awards granted using the Black-Scholes option valuation model. The fair value of each option grant is estimated on the date of grant. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life.

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based primarily on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, expected exercises and post-vesting forfeitures.

Expected Volatility.

The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor used in the Black-Scholes option valuation model is based on its historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate.

The risk-free interest rate used in the Black-Scholes option valuation model is the implied risk-free interest rate with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield.

The Company uses an expected dividend yield of zero in the Black-Scholes option valuation model, consistent with historical experience on the date of grant.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. A summary of the weighted average assumptions and resulting weighted average fair value results for options granted during the periods presented is as follows:



	Thirteen Week Periods Ended
	June 27, 2010			July 3, 2011
Weighted average risk free interest rate	17.2		%	—
Expected dividend yield	—		%	—
Expected lives	5 years			—
Weighted average expected volatility	113		%	—
Weighted average fair value at date of grant	$	1.32		—

No assumptions are presented for the First Quarter Fiscal 2012 because no options were granted during this period.

Expected Forfeitures.

The Company primarily uses historical data to estimate pre-vesting option forfeitures. It records stock-based compensation only for those awards that are expected to vest. For Fiscal 2012 the Company estimates its pre-vesting option forfeiture rate at 18%.

Stock-based Compensation

Stock-based compensation expense related to stock-based awards was $21,000 and $24,000, respectively, for First Quarter Fiscal 2011 and First Quarter Fiscal 2012, respectively. Stock-based compensation expense is included in marketing, general and administrative costs in our Condensed Consolidated Statements of Operations. This is a non-cash expense.

As of July 3, 2011, the Company had approximately $141,000 of total unrecognized compensation cost related to 69,000 non-vested stock-based awards granted under all equity compensation plans. The Company expects to recognize this cost over a period of approximately five years.

Stock Award Activity

As of July 3, 2011 options for 308,990 shares were outstanding under the 1994 Plan, the 2004 Stock Option Plan, and the 2010 Stock Option Plan, of which 283,990 were fully vested.

The following table summarizes activity under our stock option plans:



	Number of shares		Weighted- average exercise price per share		Weighted- average remaining contractual term
Outstanding at April 3, 2011	316,488		$	5.02	8.6 years
Granted	—		—
Exercised	—		—
Forfeited	(7,498	)	$	10.73
Outstanding at July 3, 2011	308,990		$	4.25	8.4 years
Exercisable or convertible at the end of the period	283,990		$	5.70	8.6 years

The aggregate intrinsic value of options outstanding at July 3, 2011 was $20,000. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the actuarially-determined fair market value of the Company’s stock of $0.31 per share as of June 30, 2010 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on July 3, 2011.

No options were exercised in First Quarter Fiscal 2011 or First Quarter Fiscal 2012.