Note 5 – Stock-based Compensation

The Company has adopted an incentive stock plan (the “Plan”) that is intended to attract and retain directors, officers and employees of the Company and to motivate and reward these individuals with long-term, equity-based incentive compensation, which the Company believes will lead to the achievement of the Company’s overall goal of increasing stockholder value. Awards granted under the Plan may be in the form of qualified or non-qualified stock options, restricted stock, stock appreciation rights, long-term incentive compensation units consisting of a combination of cash and shares of the Company’s common stock, or any combination thereof within the limitations set forth in the Plan. The Plan is administered by the compensation committee of the Company’s Board of Directors (the “Board”), which selects eligible employees and non-employee directors to participate in the Plan and determines the type, amount, duration and other terms of individual awards. At June 30, 2013, 423,750 shares of the Company’s common stock were available for future issuance under the Plan.

Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation – Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement. The Company recorded $193,000 and $147,000 of stock-based compensation expense during the three-month periods ended June 30, 2013 and July 1, 2012, respectively. The Company records the compensation expense related to stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals. No stock-based compensation costs have been capitalized as part of the cost of an asset as of June 30, 2013.

Stock Options: The following table represents stock option activity for the three-month periods ended June 30, 2013 and July 1, 2012:

The total intrinsic value of the stock options exercised during the three-month periods ended June 30, 2013 and July 1, 2012 was $9,000 and $645,000 respectively. As of June 30, 2013, the intrinsic value of the outstanding and exercisable stock options was $124,000 and $86,000, respectively.

The Company received no cash from the exercise of stock options during the three-month period ended June 30, 2013 and received cash in the amount of $64,000 from the exercise of stock options during the three-month period ended July 1, 2012. Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise. The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations. The Company used cash of $4,000 and $268,000 to remit the required income tax withholding amounts from “cashless” option exercises during the three months ended June 30, 2013 and July 1, 2012, respectively. The Company’s net outflow of cash upon the exercise of stock options was $4,000 and $204,000 during the three-month periods ended June 30, 2013 and July 1, 2012, respectively.

To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value. The following table sets forth the assumptions used to determine the fair value, and the resulting grant-date fair value per option, of the non-qualified stock options which were awarded to certain employees during the three-month periods ended June 30, 2103 and July 1, 2012, which options vest over a two-year period, assuming continued service.

For the three-month periods ended June 30, 2013 and July 1, 2012, the Company recognized compensation expense associated with stock options as follows (in thousands):

As of June 30, 2013, total unrecognized stock option compensation expense amounted to $184,000, which will be recognized as the underlying stock options vest over a weighted-average period of 1.29 years. The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.

Non-vested Stock: The Board granted 42,000 shares of non-vested stock with a fair value of $5.62 per share to the Company’s non-employee directors during the three-month period ended September 30, 2012, and granted 30,000 shares of non-vested stock to the Company’s non-employee directors during each of the three-month periods ended October 2, 2011 and September 26, 2010 with a weighted-average fair value per share of $4.44 and $4.36, respectively. These shares vest over a two-year period, assuming continued service. The fair value of the non-vested stock granted to the Company’s non-employee directors was based on the closing price of the Company’s common stock on the date of the grant.

During the three-month period ended June 27, 2010, the Board awarded 345,000 shares of non-vested stock to certain employees in a series of grants, each of which will vest only if (i) the closing price of the Company’s common stock is at or above certain target levels for any ten trading days out of any period of 30 consecutive trading days and (ii) the respective employees remain employed through July 29, 2015. The Company, with the assistance of an independent third party, determined that the aggregate grant date fair value of the awards amounted to $1.2 million.

Performance Bonus Plan: In July 2012, the Company implemented a performance bonus plan for certain executive officers that provides for awards of cash or shares of common stock, or a combination therof, in the event that the aggregate average market value of the common stock during the relevant fiscal year, plus the amount of cash dividends paid in respect of the common stock during such period, increases.

In connection with this performance bonus plan, subsequent to June 30, 2013, the Company granted to certain executive officers 17,048 shares of common stock with a value of $93,000 and a cash award of $258,000. Of the total compensation expense of $351,000, $155,000 was recognized during fiscal year 2013 and $196,000 will be recognized as compensation expense during fiscal year 2014. Although there are restrictions as to the subsequent transfer of the shares of stock awarded, ownership in the stock was vested upon issuance.

For the three-month periods ended June 30, 2013 and July 1, 2012, the Company recognized compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying consolidated statements of income, as follows (in thousands):

As of June 30, 2013, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $490,000, which will be recognized over the respective vesting terms associated with each of the blocks of non-vested stock grants indicated above, such grants having an aggregate weighted-average vesting term of 1.8 years. The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has received non-vested stock grants that remain non-vested as of such individual’s separation date.