Employee Equity Incentive Plan

9 Months Ended

Oct. 01, 2011

Notes to Financial Statements

Note 4.Employee Equity Incentive Plan

Stock Option Plans

At the discretion of management, and with approval of the Board of Directors, the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Board of Directors determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years. The Company, under its Second Amended and Restated 2007 Equity Incentive Plan, is authorized to issue stock options that total no more than 20% of the shares of common stock issued and outstanding, as determined on a fully diluted basis.  Beginning in 2007, stock options were no longer issuable under the Company’s 2000 Non-Qualified Incentive Stock Plan.  The remaining amount available for issuance under the Second Amended and Restated 2007 Equity Incentive Plan totaled 918,927 at October 1, 2011. The stock option awards generally vest ratably over a four-year period following grant date after a passage of time.  However, some stock option awards are performance based and vest based on the achievement of certain criteria established by the Company.

The fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes based option valuation model.  The table below outlines the weighted average assumptions for options granted to employees during the nine months ended October 1, 2011.

Nine Months Ended October 1, 2011	2011
Volatility		31.55	%
Expected dividends		0.00	%
Expected term	5.8 years
Risk-free rate		2.21	%

The Company calculated expected volatility from the volatility of publicly held companies in similar industries, as the historical volatility of the Company’s common stock does not cover the period equal to the expected life of the options.  The dividend yield assumption is based on the Company’s history and expectation on future dividend payouts on the common stock.  The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.  The expected term of the options represents the estimated period of time until exercise and is based on historical experience of awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.  The estimation process for the fair value of performance based stock options was the same as for non-performance based options.

1) Non-performance Based Stock Options

The majority of options granted by the Company are comprised of non-performance based options granted to employees.  These options vest ratably over a defined period following grant date after a passage of time and do not have performance vesting requirements.

The following table summarizes non-performance based stock option activity at October 1, 2011, and changes during the nine months then ended:

				Weighted Average
						Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at January 1, 2011		12,926,131		$	1.52
Options Granted		1,387,177			1.57
Options Classification from Employee to Non-Employee		(67,500	)		1.55
Options Exercised		(43,248	)		0.61
Options Forfeited		(352,803	)		1.48
Outstanding at October 1, 2011		13,849,757		$	1.53		7.02	$	165,463
Exercisable at October 1, 2011		6,044,998		$	1.47		6.58	$	107,381

The aggregate intrinsic values in the table above are before income taxes, based on the Company’s closing stock price of $0.82 on the last day of business for the period ended October 1, 2011.

2) Performance Based Stock Options

The Company also grants stock option awards that are performance based and vest based on the achievement of certain criteria established by the Company.  If performance criteria are not met, the compensation expenses are not recognized and the expenses that have been recognized will be reversed.

The following table summarizes performance based stock options activity at October 1, 2011 and changes during the nine months then ended:

			Weighted Average
					Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at January 1, 2011		1,000,000	$	1.65
Options Granted		200,000		1.59
Options Exercised		-		-
Options Forfeited		-		-
Outstanding at October 1, 2011		1,200,000	$	1.64		9.18	$	-
Exercisable at October 1, 2011		-	$	-		-	$	-

As of October 1, 2011, there was $2,839,908 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans for employee stock options.  That cost is expected to be recognized over a weighted average period of 1.86 years as of October 1, 2011.  The weighted average fair value of options granted during the nine months ended October 1, 2011 was $0.53.  The realized tax benefit from stock options for the nine months ended October 1, 2011 was $0, based on the Company’s election of the “with and without” approach. The fair value of the options that vested during the nine months ended October 1, 2011 was $1,483,510.

Restricted Stock

Restricted stock awards granted by the Company to employees generally have two vesting conditions, a service condition for continuous employment and a stock market condition tied to the Company’s stock price.

The following table summarizes activity of restricted stock awards granted to employees at October 1, 2011 and changes during the nine months then ended:

			Weighted Average
			Award-Date
	Shares		Fair Value
Unvested shares at January 1, 2011		1,000,000	$	1.27
Granted		-		-
Vested		-		-
Forfeited		-		-
Unvested shares at October 1, 2011		1,000,000	$	1.27
Expected to Vest as of October 1, 2011		1,000,000	$	1.27

As of October 1, 2011, there was $899,501 of total unrecognized compensation expense related to restricted stock awards to employees under the plans.  That cost is expected to be recognized over a period of 2.12 years as of October 1, 2011.

For the employee equity incentive plans, the Company recognized share-based compensation expense of $2,025,564 in general and administrative expenses in the statement of operations for the nine months ended October 1, 2011.  The Company recognized $659,698 in share-based compensation expense for the comparable period in 2010.