Note 4 – Stock-based Compensation

The stockholders of the Company have approved the 2006 Omnibus Incentive Plan (the “Plan”) which is an incentive stock 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, and 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 September 29, 2013, 385,702 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 $163,000 and $141,000 of stock-based compensation expense during the three-month periods ended September 29, 2013 and September 30, 2012, respectively, and recorded $356,000 and $288,000 of stock-based compensation expense during the six-month periods ended September 29, 2013 and September 30, 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 September 29, 2013.

Stock Options: The following table represents stock option activity for the six-month periods ended September 29, 2013 and September 30, 2012:

The total intrinsic value of the stock options exercised during the three-month periods ended September 29, 2013 and September 30, 2012 was $28,000 and $70,000, respectively, and was $37,000 and $715,000 during the six-month periods ended September 29, 2013 and September 30, 2012, respectively. As of September 29, 2013, the intrinsic value of the outstanding and exercisable stock options was $368,000 and $146,000, respectively.

The Company received no cash from the exercise of stock options during the six months ended September 29, 2013 and received cash in the amount of $95,000 from the exercise of stock options during the six months ended September 30, 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 $16,000 and $285,000 to remit the required income tax withholding amounts from “cashless” option exercises during the six months ended September 29, 2013 and September 30, 2012, respectively. Thus, the Company’s net outflow of cash upon the exercise of stock options was $16,000 and $190,000 during the six-month periods ended September 29, 2013 and September 30, 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 six-month periods ended September 29, 2013 and September 30, 2012, which options vest over a two-year service period.

For the three and six-month periods ended September 29, 2013, the Company recognized compensation expense associated with stock options as follows (in thousands):

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

As of September 29, 2013, total unrecognized stock option compensation expense amounted to $151,000, which will be recognized as the underlying stock options vest over a weighted-average period of 1.04 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 the following shares of non-vested stock to its non-employee directors:

These shares vest over a two-year service period. 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 provided for awards of cash or shares of common stock, or a combination thereof, in the discretion of the Compensation Committee of the Board, 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 September 2013, the performance bonus plan was amended to eliminate the Compensation Committee’s discretion to award cash, unless and to the extent that insufficient shares of common stock are available for issuance from the Company's 2006 Omnibus Incentive Plan.

      In connection with this performance bonus plan, during the three-month period ended September 29, 2013, the Company, in respect of fiscal year 2013, 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 was recognized as compensation expense during the six-month period ended September 29, 2013.  Although there are restrictions as to the subsequent transfer of the shares of stock awarded, ownership in the stock was vested upon issuance.

The performance bonus plan, as amended in September 2013, now provides that any shares of common stock that may be awarded in the future will vest over a two-year service period. This revision to the performance bonus plan, along with the requirement that awards now be made solely in shares of common stock, will provide that the compensation expense associated with performance bonus plan awards will be recognized ratably over a three-year period – the fiscal year in which the award is earned, plus the two-year vesting period. With respect to awards which may be earned pursuant to the performance bonus plan for fiscal year 2014, the Company has recognized compensation expense in the amount of $133,000 during the six-month period ended September 29, 2013.

For the three and six-month periods ended September 29, 2013, 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):

For the three and six-month periods ended September 30, 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 September 29, 2013, unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $551,000, 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 1.7 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.