Commitments and contingencies

Real estate lease commitments

The Company leases all of its retail and office space under operating leases, which have expiration dates through 2020. The leases provide for minimum annual payments, and (in certain cases) contingent rentals based upon gross sales, escalation clauses and/or options to renew. Rental expense is recorded on a straight-line basis over the respective terms of the leases.

In connection with certain leases, lessors have granted tenant improvement allowances. These amounts, included in liabilities under the caption “deferred lease costs,” are amortized into income on a straight-line basis over the life of the related lease. Also recorded in deferred lease costs is the “stepped rent” excess of rental expense computed on a straight-line basis over the actual rent payments required by the terms of these leases.

Minimum future rental payments under non-cancelable operating leases as of October 2, 2011 are summarized as follows:



Fiscal year
(dollars in thousands)
Remainder of Fiscal 2012	1,578
2013	2,653
2014	2,020
2015	1,499
2016	865
2017	499
Thereafter	1,139
Total	$	10,253

The Company has subleased some of its leased premises to third parties under agreements with varying terms through 2013. Expected future sublease receipts under such sub-lease agreements are summarized as follows:



Fiscal year
(dollars in thousands)
Remainder of Fiscal 2012	$	13
2013	15
Total	$	28

Capital lease commitments

As discussed in Note 3 above, the Company leases certain hardware and software under a capital lease arrangement with CIT. Minimum future lease payments as per the lease agreement are summarized as follows:



Fiscal year
(dollars in thousands)
Remainder of Fiscal 2012	$	15
2013	30
2014	30
2015	10
Total	$	85

Contingencies

On May 17, 2011, a lawsuit was filed against the Company in California state court by JH Development, LLC, a franchise area developer, alleging that (i) at the time the Company entered into agreements with the plaintiff, the Company concealed its financial strength and the fact that it was contemplating a sale of its wholesale division and rights to the “Tully's” trademark; (ii) the Company breached the franchise agreements with the plaintiff; (iii) the Company made false promises to the plaintiff; and (iv) the Company violated certain provisions of the California Corporations Code governing the sale of franchises. In its complaint, the plaintiff sought damages, rescission, and attorneys' fees and costs. After the lawsuit was removed to federal court, the court dismissed plaintiff's causes of action for concealment, breach of contract, and false promise. We have filed counterclaims against the plaintiff, and the plaintiff has asserted additional claims against us for intentional misrepresentation and breach of the implied covenant of good faith and fair dealing. The parties have agreed to suspend the court proceeding until after mediation, which is scheduled to be completed by January 9, 2012. We intend to vigorously defend these claims but cannot predict the outcome or financial impact to the Company at this time.

On October 17, 2011, a complaint was filed against the Company and GMCR, jointly, by Spinelli Pte. Ltd., a Singapore company. The lawsuit claims breach of contract, declaratory relief and fraudulent procurement related to the Spinelli brand and marks. We intend to vigorously defend these claims but cannot predict the outcome or financial impact to the Company at this time.

On November 4, 2011, The Irvine Company, LLC (the “plaintiff”), a landlord for one of the Company's stores, filed suit against the Company and JH Development, LLC ("JHD"), a franchise area developer. The plaintiff alleges that the Company entered a lease with the plaintiff in May 2000, then assigned the lease to JHD in October 2008. The plaintiff alleges that the Company and JHD then breached the lease by vacating prior to termination and failing to make payments. The only cause of action is a cause of action for breach of lease. The plaintiff seeks compensatory damages in the amount of $250,000, as well as attorney's fees and costs. We are investigating the claim and plan to vigorously defend against it.

The Company has provided real estate lease payment guarantees for several other locations on behalf of JHD, who has operated them as franchise locations since their purchase of these Southern California locations from Tully's in 2008. There are not currently any defaults on these other locations, so the Company does not believe any accrual for costs is appropriate at this time.

We are a party to various other legal proceedings arising in the ordinary course of our business, but are not currently a party to any other legal proceeding that we believe could have a material adverse effect on our financial position or results of operations.

Tully’s Coffee Asia Pacific – Limited Partnership Interest

On March 27, 2009, TCAP agreed to purchase, or cause a third party to purchase, one-half of AFCM’s partnership interest in TCAPPLP, equal to twenty-five percent (25%) of the total partnership interests outstanding, at a purchase price of US $4.0 million by March 27, 2010. As of October 2, 2011, TCAP had not met its obligation. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, the Company could face adverse economic consequences surrounding its wholly owned subsidiary TCAP.