Note 15. Share-Based Compensation

We have two active share based stock plans, the Employee Stock Plan and Non-employee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock and other types of awards consistent with the purpose of the plans.

Of the original 0.4 million shares approved for issuance under the Non-employee Director Stock Plan, 0.5 million options, restricted stock units and restricted stock awards were granted, 0.1 million options were cancelled or expired and added back into the plan. Approximately 2,000 shares remain available for future issuance as of August 29, 2012. Compensation cost for share-based payment arrangements under the Non-employee Director Stock Plan, recognized in general and administrative expenses for fiscal years 2012, 2011 and 2010 was approximately $0.1 million, $0.3 million and $0.3 million, respectively.

Of the original 2.6 million shares approved for issuance under the Employee Stock Plan, 4.3 million options and restricted stock units were granted, 2.6 million options and restricted stock units were cancelled or expired and added back into the plan. Approximately 0.9 million shares remain available for future issuance as of August 29, 2012. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in general and administrative expenses for fiscal years 2012, 2011 and 2010 was approximately $0.8 million, $0.5 million and $1.0 million, respectively.

The calculated but unrecognized tax benefit for the tax deductions from both share-based compensation plans totaled approximately $27,000, $71,000 and $90,000, respectively.

Stock Options

Stock options granted under either the Employee Stock Plan or the Non-employee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.

Option awards under the Non-employee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Non-employee Director Stock Plan in fiscal years 2012, 2011 or 2010. However, options to purchase 38,000 shares at option prices from $1.98 to $6.45 per share remain outstanding as of August 29, 2012.

Options granted under the Employee Stock Plan generally vest 25% on the anniversary date of each grant and expire six years from the date of the grant. However, options granted to executive officers under the Employee Stock Plan vest 50% on the first anniversary date of the grant date, 25% on the second anniversary of the grant date and the remaining 25% vest on the third anniversary of the grant date and expire ten years from the grant date. All options granted in fiscal years 2012, 2011 and 2010 were granted under the Employee Stock Plan.

The Company has segregated option awards into two homogenous groups for the purpose of determining fair values for its options because of differences in option terms and historical exercise patterns among the plans. Valuation assumptions are determined separately for the three groups which represent, respectively, the Employee Stock Plans and the Non-employee Director Stock Option Plan. The assumptions are as follows:

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The Company estimated volatility using its historical share price performance over the expected life of the option. Management believes the historical estimated volatility is materially indicative of expectations about expected future volatility.

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The Company uses an estimate of expected lives for options granted during the period based on historical data.

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The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

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The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend yield for future periods within the expected life of the option.

The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model which determine inputs as shown in the following table for options granted under the Employee Stock Plan:


	Year Ended
	August 29, 2012			August 31, 2011			August 25, 2010
Dividend yield		—	%		—	%		—	%
Volatility		56.79	%		57.10 – 57.20	%		59.00	%
Risk-free interest rate		0.93	%		1.50 – 2.10	%		2.20	%
Expected life (in years)		4.25			4.25			4.25

A summary of the Company’s stock option activity for the three years ended August 29, 2012, August 31, 2011 and August 25, 2010 is presented in the following table:


	Shares Under Fixed Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
						*(Years)*		*(In thousands)*
Outstanding at August 26, 2009		1,025,451		$	8.77		4.6	$	43
Granted		306,750			3.44		0		0
Exercised		0			0		0		0
Forfeited/Expired		(35,314	)		10.81		0		0

Outstanding at August 25, 2010		1,296,887		$	7.53		4.4	$	711
Granted		116,637			5.39		0		0
Exercised		(7,125	)		3.77		0		0
Forfeited/Expired		(34,473	)		9.00		0		0

Outstanding at August 31, 2011		1,371,926		$	7.33		3.9	$	375
Granted		59,426			4.42		0		0
Exercised		0			0		0		0
Forfeited/Expired		(256,128	)		11.36		0		0

Outstanding at August 29, 2012		1,175,224		$	6.31		3.8	$	1,456

Exercisable at August 29, 2012		806,133		$	7.16		2.9	$	764

The intrinsic value for stock options is defined as the difference between the current market value and the grant price.

At August 29, 2012, there was approximately $0.4 million of total unrecognized compensation cost related to unvested options that are expected to be recognized over a weighted-average period of 1.9 years.

The weighted-average grant-date fair value of options granted during fiscal years 2012, 2011 and 2010 was $2.00, $2.49 and $1.66 per share, respectively.

During fiscal years 2012, 2011 and 2010, cash received from options exercised was approximately zero, $27,000 and zero, respectively.

Restricted Stock Units

Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at the closing market price of the Company’s common stock at the date of grant.

A summary of the Company’s restricted stock unit activity during fiscal years is presented in the following table:


	Restricted Stock Units			Weighted Average Fair Value		Weighted-Average Remaining Contractual Term
				*(Per share)*		*(In years)*
Unvested at August 26, 2009		80,155		$	9.62		1.1
Granted		16,000			3.46		—
Vested		(26,889	)		7.67		—
Forfeited		(4,077	)		9.62		—

Unvested at August 25, 2010		65,189			8.13		0.8
Granted		82,822			5.39		—
Vested		(51,189	)		9.42		—
Forfeited		0			0		—

Unvested at August 31, 2011		96,822			5.11		2.1
Granted		69,713			4.46		—
Vested		0			0		—
Forfeited		(2,589	)		5.39		—

Unvested at August 29, 2012		163,946		$	4.83		1.8

At August 29, 2012, there was approximately $0.5 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock Awards

Under the Non-employee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may opt to receive 20% more shares of restricted stock awards by accepting more than the minimum required stock instead of cash. The number of shares granted is valued at the closing market price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant.

Supplemental Executive Retirement Plan

The Company has a Supplemental Executive Retirement Plan (“SERP”) designed to provide benefits for selected officers at normal retirement age with 25 years of service equal to 50% of their final average compensation offset by Social Security, profit sharing benefits, and deferred compensation. None of the Company’s executive officers participates in the Supplemental Executive Retirement Plan. Some of the officers designated to participate in the plan have retired and are receiving benefits under the plan. Accrued benefits of all actively employed participants become fully vested upon termination of the plan or a change in control (as defined in the plan). The plan is unfunded and the Company is obligated to make benefit payments solely on a current disbursement basis. On December 6, 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits and participation. As a result, a curtailment gain of approximately $88,000 was recognized. The net benefit recognized for the SERP for the years ended August 29, 2012, August 31, 2011 and August 25, 2010 was zero, and the unfunded accrued liability included in “Other Liabilities” on the Company’s consolidated Balance Sheets as of August 29, 2012 and August 31, 2011 was approximately $108,000 and $127,000, respectively.

Nonemployee Director Phantom Stock Plan

Under the Company’s Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”), nonemployee directors deferred portions of their retainer and meeting fees which, along with certain matching incentives, were credited to phantom stock accounts in the form of phantom shares priced at the market value of the Company’s common stock on the date of grant. Additionally, the phantom stock accounts were credited with dividends, if any, paid on the common stock represented by phantom shares. Authorized shares (100,000 shares) under the Phantom Stock Plan were fully depleted in early fiscal year 2003; since that time, no deferrals, incentives or dividends have been credited to phantom stock accounts. As participants cease to be directors, their phantom shares are converted into an equal number of shares of common stock and issued from the Company’s treasury stock. As of August 29, 2012, 29,627 phantom shares remained unissued under the Phantom Stock Plan.

401(k) Plan

The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity to accumulate personal funds for their retirement. The Company matches 25% of participants’ contributions made to the plan up to 6% of their salary up until September 2009 when the Company stopped the match. The Company resumed the employee match feature in the first quarter of fiscal year 2012. The net expense recognized in connection with the employer match feature of the voluntary 401(k) employee savings plan for the years ended August 29, 2012, August 31, 2011 and August 25, 2010, was $164,000, zero and $105,000, respectively.