3. Stock-Based Compensation

Incentive Stock Option Awards

On October 8, 2012, we granted to an outside director 2,000 options to purchase shares of common stock at the fair market value on the date of grant. These options vested immediately and expire ten years after the date of grant. The fair value of this option award was estimated on the date of grant using the Black-Scholes option pricing model. The fair value of stock options granted to this outside director during the nine month period ended January 27, 2013 was $ 5.03 per share using the following assumptions.

	Grant on October 8, 2012
Risk-free interest rate	0.67	%
Dividend yield	3.00	%
Expected volatility	61.70	%
Expected term (in years)	5

The assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions, actual historical experience, and groups of employees that have similar exercise patterns that are considered separately for valuation purposes. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield rate is based on historical experience and future dividend yields in effect at the time of grant. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the company’s common stock. The expected term of the options is based on the contractual term of the stock option award and expected participant exercise trends.

At January 27, 2013, options to purchase 182,825 shares of common stock were outstanding, had a weighted average exercise price of $6.99 per share, and a weighted average contractual term of 4.6 years. At January 27, 2013, the aggregate intrinsic value for options outstanding was $1.8 million.

At January 27, 2013, outstanding options to purchase 169,825 shares of common stock were exercisable, had a weighted average exercise price of $7.23 per share, and a weighted average contractual term of 4.6 years. At January 27, 2013, the aggregate intrinsic value for options exercisable was $1.6 million.

The aggregate intrinsic value for options exercised for the nine months ended January 27, 2013 and January 29, 2012, was $90,000 and $196,000, respectively.

The remaining unrecognized compensation cost related to incentive stock option awards at January 27, 2013, was $19,000 which is expected to be recognized over a weighted average period of 0.7 years.

We recorded $53,000 and $101,000 of compensation expense on incentive stock option grants within selling, general, and administrative expense for the nine months ended January 27, 2013, and January 29, 2012, respectively.

Common Stock Awards

On October 8, 2012, we granted a total of 1,658 shares of common stock to certain outside directors. These shares of common stock vested immediately and were measured at $12.13 per share, which represents the closing price of the company's common stock at the date of grant.

On October 1, 2011, we granted a total of 3,075 shares of common stock to our board of directors. These shares of common stock vested immediately and were measured at $8.45 per share, which represents the closing price of the company's common stock at the date of grant.

We recorded $20,000 and $26,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the nine month period ending January 27, 2013 and January 29, 2012, respectively.

Time Vested Restricted Stock Awards

We did not grant any time vested restricted stock awards through the third quarter of fiscal 2013.

We recorded $116,000 and $131,000 of compensation expense within selling, general, and administrative expense for time vested restricted stock awards for the nine month periods ending January 27, 2013, and January 29, 2012, respectively.

At January 27, 2013, there were 123,335 shares of time vested restricted stock outstanding and unvested. Of the 123,335 shares outstanding and unvested, 70,000 shares (granted on January 7, 2009) vest in equal installments on May 1, 2013 and 2014, respectively. The remaining 53,335 shares (granted on July 1, 2009) vest in equal installments on July 1, 2013, and 2014, respectively. At January 27, 2013, the weighted average fair value of these outstanding and unvested shares was $4.06 per share.

During the nine month period ended January 27, 2013, 61,665 shares of time vested restricted stock vested and had a weighted average fair value of $232,000 or $3.76 per share. During the nine month period ended January 29, 2012, 10,000 shares of time vested restricted stock vested and had a weighted average fair value of $18,800 or $1.88 per share.

At January 27, 2013, the remaining unrecognized compensation cost related to the unvested restricted stock awards was $86,000, which is expected to be recognized over a weighted average vesting period of 1.1 years.

Performance Based Restricted Stock Units

On July 11, 2012, certain key members of management were granted performance based restricted common stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.

The company recorded compensation expense of $119,000 within selling, general, and administrative expense for performance based restricted stock units for the nine month period ending January 27, 2013. No compensation expense was recorded for performance based restricted stock units for the nine month period ending January 29, 2012, as the performance based restricted stock units granted in fiscal 2009 were fully vested in fiscal 2011 and no performance based restricted stock units were granted in fiscal years 2010 through 2012. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.

As of January 27, 2013, the remaining unrecognized compensation cost related to the performance based restricted stock units was $493,000, which is expected to be recognized over a weighted average vesting period of 2.4 years.

Other Share-Based Arrangements

Effective May 2, 2011, we entered into an agreement in which we granted a non-employee a stock appreciation right that is indexed on 70,000 shares of our common stock. This agreement requires us to settle in cash an amount equal to $35,000, plus the excess, if any, over a stock appreciation right value of $700,000 at May 2, 2011. This stock appreciation right value of $700,000 represents the 70,000 indexed shares of common stock noted above measured at the closing price per share of $10 at May 2, 2011. The cash settlement in connection with the stock appreciation right value would represent the difference between a stock appreciation right value that is indexed on the 70,000 shares of common stock noted above and based on the highest closing price per share of our common stock for the period May 2, 2011 through June 30, 2012 (limited to $12 per share) and the $700,000 stock appreciation right value at May 2, 2011. During the first quarter of fiscal 2013, this award fully vested and was paid out at a fair value totaling $174,000.

Compensation expense associated with this agreement was $40,000 and $44,000 for the nine months ended January 27, 2013, and January 29, 2012, respectively.