Shareholders’ Equity and Share-Based Compensation

Common stock: Our authorized shares of 120,000,000 consist of 115,000,000 shares of common stock and 5,000,000 shares of “undesignated stock.” Our Board of Directors has the power to issue any or all of the shares of undesignated stock without shareholder approval, including the authority to establish the rights and preferences of the undesignated stock.

Each outstanding share of our common stock includes one common share purchase right. Each right entitles the registered holder to purchase from us one one-tenth of one share of common stock at a price of $100 per common share, subject to adjustment and the terms of the shareholder rights agreement under which the dividend was declared and paid. The rights become exercisable immediately after the earlier of (i) 10 business days following a public announcement where a person or group has acquired beneficial ownership of 15 percent or more of our outstanding common shares (subject to certain exclusions) or (ii) 10 business days following the commencement or announcement of an intention to make a tender offer or exchange offer for our common shares, the consummation of which would result in the beneficial ownership by a person or group of 15 percent or more of our outstanding common shares. The rights expire on November 19, 2018, which date may be extended by our Board subject to certain additional conditions.

Stock incentive plans: During fiscal 2008, we established the 2007 Stock Incentive Plan (“2007 Plan”) and ceased granting options under the 2001 Incentive Stock Option Plan and the 2001 Outside Directors Option Plan (“2001 Plans”). The 2007 Plan provides for the issuance of stock-based awards, including stock options, restricted stock, restricted stock units and deferred stock, to employees, directors and consultants. Stock options issued to employees under the plans generally have a 10-year life, an exercise price equal to the fair market value on the grant date and a five-year annual vesting period. Stock options granted to independent directors under these plans have a seven-year life and an exercise price equal to the fair market value on the date of grant. Stock options granted to independent directors prior to fiscal 2010 vested annually over three years, and options granted in or after fiscal 2010 vest in one year. The restricted stock granted to independent directors vests in one year, provided that they remain on the Board. Restricted stock units are granted to employees and have a five-year annual vesting period. As with stock options, restricted stock and restricted stock unit ownership cannot be transferred during the vesting period.

At April 26, 2014, the aggregate number of shares available for future grant under the 2007 Plan for stock options and restricted stock awards was 439 shares. Full value awards such as restricted stock and restricted stock unit awards reduce the number of shares available for issuance by a factor of two, and if such an award were forfeited or terminated without delivery of the shares, the number of shares again become eligible for issuance would be multiplied by a factor of two. Although the 2001 Plans remain in effect for options outstanding, no new options can be granted under these plans.

Restricted stock and restricted stock units: We issue restricted stock to our non-employee directors and restricted stock units to employees. The fair value of restricted stock and our restricted stock unit awards are measured on the grant date based on the market value of our common stock. The related compensation expense as calculated under ASC 718, net of estimated forfeitures, is recognized over the applicable vesting period. Unrecognized compensation expense related to the restricted stock and restrict stock unit awards was approximately $2,333 at April 26, 2014, which is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of restricted stock vested was $804, $666, and $511 for fiscal years 2014, 2013, and 2012, respectively.

A summary of nonvested restricted stock and restricted stock units for the years ended April 26, 2014, April 27, 2013 and April 28, 2012 is as follows:



	Year Ended
	April 26, 2014				April 27, 2013				April 28, 2012
	Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share		Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share		Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	279		$	9.74	242		$	9.81	181		$	11.07
Granted	147		10.03		119		8.50		118		8.24
Vested	(85	)	9.47		(69	)	12.05		(49	)	10.51
Forfeited	(23	)	9.37		(13	)	9.63		(8	)	10.85
Outstanding at end of year	318		9.59		279		9.74		242		9.81

Stock Options: We issue incentive stock options to our employees and non-qualified stock options to our independent directors. A summary of stock option activity under all stock option plans during the fiscal year ended April 26, 2014 is as follows:



	Stock Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at April 27, 2013	3,421		$	13.59	5.09	$	1,176
Granted	226		11.04		—	—
Canceled or forfeited	(205	)	17.56		—	—
Exercised	(507	)	9.77		—	1,534
Outstanding at April 26, 2014	2,935		$	13.77	5.00	$	6,333

Shares vested and expected to vest	2,903		$	13.81	4.96	$	6,241
Exercisable at April 26, 2014	2,077		$	15.23	3.79	$	3,808

The aggregate intrinsic value of stock options represents the difference between the exercise price of stock options and the fair market value of the underlying common stock at day's end for all in-the-money options. We define in-the-money options at April 26, 2014 as options having exercise prices lower than the $13.06 per share market price of our common stock. There were in-the-money options to purchase 1,091 shares exercisable at April 26, 2014. The total intrinsic value of options exercised during fiscal years 2014, 2013, and 2012 was $1,534, $562, and $624, respectively. The total fair value of stock options vested was $1,541, $1,898, and $2,497 for fiscal years 2014, 2013, and 2012, respectively.

We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We recognize the fair value of the stock options on a straight-line basis as compensation expense. All options are recognized over the requisite service periods of the awards, which are generally the vesting periods.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. ASC 718 requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards expected to vest. The following factors are the significant assumptions used in the computation of fair value of options:

Expected life. The expected life of options granted represents the period of time they are expected to be outstanding. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We have examined our historical pattern of option exercises in an effort to determine if there were any discernible patterns of activity based on certain demographic characteristics. Demographic characteristics tested included age, salary level, job level and geographic location. We have determined there were no meaningful differences in option exercise activity based on the demographic characteristics tested.

Expected volatility. We estimate the volatility of our common stock at the date of grant based on historical volatility consistent with ASC 718 and SEC Staff Accounting Bulletin No. 107, Share Based Payments. Our decision to use historical volatility instead of implied volatility was based upon analyzing historical data along with the lack of availability of history of actively traded options on our common stock.

Risk-free interest rate. The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a term similar to the expected life of the options.

Dividend yield. We use an expected dividend yield consistent with our dividend yield over the period of time we have paid dividends.

The following table provides the weighted-average fair value of options granted and the related assumptions used in the Black-Scholes model:



	Year Ended
	April 26, 2014			April 27, 2013		April 28, 2012
Fair value of options granted	$	4.96		$	3.43	$	3.46
Risk-free interest rate	2.03 - 2.34%			0.71 - 1.13%		1.10 - 1.50%
Expected dividend rate	2.32		%	2.43%		0.71 - 2.15%
Expected volatility	54.09 - 54.37%			45.60 - 46.15%		44.59 - 46.85%
Expected life of option	5.9 - 6.9 years			5.9 - 6.8 years		5.9 - 6.8 years

Employee stock purchase plan: We have an employee stock purchase plan (“ESPP”), which enables employees after six months of continuous employment to elect, in advance and semi-annually, to contribute up to 15 percent of their compensation, subject to certain limitations, toward the purchase of our common stock at a purchase price equal to 85 percent of the lower of the fair market value of the common stock on the first or last day of the participation period. The ESPP plan requires participants to hold any shares purchased under the ESPP for a minimum period of one year after the date of purchase. Compensation expense recognized on shares issued under our ESPP is based on the value of a traded option to purchase shares of our stock at a 15 percent discount to the stock price. The total number of shares reserved under the ESPP is 2,500. The number of shares of common stock issued under the ESPP totaled 195, 214, and 160 shares in fiscal 2014, 2013, and 2012, respectively. The number of shares of common stock reserved for future employee purchases under the ESPP totaled 990 shares at April 26, 2014. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986.

Total share-based compensation expense: As of April 26, 2014, there was $5,034 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize the cost over a weighted-average period of 2.9 years.

The following table presents a summary of the share-based compensation expense by equity type as follows:



	Year Ended
	April 26, 2014		April 27, 2013		April 28, 2012
Stock options	$	1,451	$	1,812	$	2,565
Restricted stock and stock units	1,000		765		256
Employee stock purchase plan	446		460		441
	$	2,897	$	3,037	$	3,262

A summary of the share-based compensation expenses for stock options, restricted stock, restricted stock units and shares issued under the ESPP for the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012 is as follows:



	Year Ended
	April 26, 2014		April 27, 2013		April 28, 2012
Cost of goods sold	$	657	$	633	$	610
Selling	810		856		982
General and administrative	859		980		1,059
Product design and development	571		568		611
	$	2,897	$	3,037	$	3,262

We received $4,954 in cash from option exercises under all share-based payment arrangements for the fiscal year ended April 26, 2014. The tax (expense) benefit related to non-qualified options and restricted stock units under all share-based payment arrangements totaled $(126), $346, and $325 for fiscal years 2014, 2013, and 2012, respectively.