12. STOCK-BASED COMPENSATION

Equity Incentive Plan Description

On September 20, 2007, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2007 Equity Incentive Plan (the “2007 Plan”). The types of equity based awards available for grant under the 2007 Plan include stock options, stock appreciation rights, restricted stock and restricted stock units, performance units, and other discretionary awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2007 Plan. In conjunction with the approval of the 2007 Plan, our 2002 Stock Option Plan was terminated (with the exception of currently outstanding options) and no additional options will be granted under the 2002 Stock Plan. At April 27, 2014 there were 632,963 shares available for future equity based grants under the company’s 2007 Plan.

Stock Options

Under our 2007 Plan, employees, directors, and others associated with the company may be granted options to purchase shares of common stock at the fair market value on the date of grant. No options were granted to employees in fiscal 2014, 2013 or 2012, respectively.

No options were granted to outside directors during fiscal years 2014 and 2012.

During fiscal year 2013, an outside director was granted 2,000 option shares to purchase shares of common stock at the fair market value on the date of grant. Options granted to outside directors vest immediately on the date of grant (October each fiscal year) and expire ten years after the date of grant.

The fair value of stock options granted to an outside director at each grant date during fiscal 2013 was $5.03, using the following assumptions:


	2014		2013			2012
Risk-free interest rate		-		0.67	%		-
Dividend yield		-		3.00	%		-
Expected volatility		-		61.70	%		-
Expected term (in years)		-		5			-

The fair value of the above option award was estimated on the date of grant using a Black-Scholes option-pricing model. The assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions, actual historical experience, and groups of participants 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 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.

The company recorded compensation expense of $10,000, $62,000, and $134,000 within selling, general, and administrative expense for incentive stock options in fiscal 2014, 2013, and 2012, respectively.

The following table summarizes stock option activity for fiscal 2014, 2013, and 2012:

	2014					2013					2012
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
outstanding at beginning
of year		182,825		$	6.99		209,475		$	7.22		268,875		$	6.81
granted		-			-		2,000			12.13		-			-
exercised		(23,125	)		8.40		(23,025	)		8.92		(59,400	)		5.50
canceled/expired		(5,750	)		9.28		(5,625	)		9.37		-			-
outstanding at end of year		153,950			6.70		182,825			6.99		209,475			7.22

	Options Outstanding							Options Exercisable
	Number		Weighted-Avg.					Number
Range of	Outstanding		Remaining			Weighted-Avg.		Exercisable		Weighted-Avg.
Exercise Prices	at 4/27/14		Contractual Life			Exercise Price		at 4/27/14		Exercise Price
$1.88 - $1.88		40,000		4.7	years	$	1.88		40,000	$	1.88
$4.59 - $5.41		6,000		1.8		$	4.86		6,000	$	4.86
$7.08 - $9.57		99,950		3.2		$	8.42		99,950	$	8.42
$10.11 - $12.13		8,000		4.7		$	10.62		8,000	$	10.62
		153,950		3.6		$	6.70		153,950	$	6.70

At April 27, 2014, the aggregate intrinsic value for options exercisable was $1.8 million and had a weighted average contractual term of 3.6 years. At April 27, 2014, the aggregate intrinsic value for options outstanding was $1.8 million.

The aggregate intrinsic value for options exercised was $224,000, $90,000, and $220,000, in fiscal 2014, 2013, and 2012, respectively.

There was no unrecognized compensation cost related to incentive stock option awards at April 27, 2014.

Time Vested Restricted Stock Awards

On July 1, 2009 (fiscal 2010), two executive officers were granted 80,000 shares of time vested restricted common stock. This time vested restricted stock award vests in equal one-third installments on July 1, 2012, 2013, and 2014. The fair value (the closing price of the company’s common stock) of this restricted stock award is measured at the date of grant (July 1, 2009) and was $5.08 per share.

On January 7, 2009 (fiscal 2009), certain key management employees and a non-employee were granted 115,000 shares of time vested restricted common stock. Of these 115,000 shares, 105,000 and 10,000 were granted to employees and a non-employee, respectively. This time vested restricted stock award vests in equal one-third installments on May 1, 2012, 2013, and 2014. The fair value (the closing price of the company’s common stock) of this restricted stock award for key management employees is measured at the date of grant (January 7, 2009) and was $1.88 per share. The fair value (the closing price of the company’s common stock) of this restricted stock award for the non-employee is measured at the earlier date when the service period is met or the end of each reporting period. The fair value of the one-third installment that vested on May 1, 2012, May 1, 2013, and May 1, 2014 was $11.05, $16.25, and $18.61, respectively.

The following table summarizes the time vested restricted stock activity for fiscal 2014, 2013, and 2012:

	2014			2013			2012
	Shares			Shares			Shares
outstanding at beginning
of year		123,335			185,000			195,000
granted		-			-			-
vested		(61,667	)		(61,665	)		(10,000	)
outstanding at end of year		61,668			123,335			185,000

During fiscal 2014, 61,667 shares of time vested restricted stock vested and had a weighted average fair value of $249,000 or $4.04 per share. During fiscal 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 fiscal 2012, 10,000 shares of time vested restricted stock vested due to disability and had a weighted average fair value of $18,800 or $1.88 per share.

At April 27, 2014, there were 61,668 shares of time vested restricted stock outstanding and unvested. Of the 61,668 shares outstanding and unvested, 35,000 shares were granted on January 7, 2009 and 26,668 shares were granted on July 1, 2009. At April 27, 2014, the weighted average fair value of these outstanding and unvested shares was $4.17 per share. At April 28, 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 were granted on January 7, 2009 and 53,335 shares were granted on July 1, 2009. At April 28, 2013, the weighted average fair value of these outstanding and unvested shares was $4.04 per share.

At April 27, 2014, the remaining unrecognized compensation cost related to the unvested restricted stock awards was $5,000, which is expected to be recognized over a weighted average vesting period of 0.2 years.

We recorded compensation expense of $62,000, $140,000, and $189,000 within selling, general, and administrative expense for time vested restricted stock awards in fiscal 2014, 2013, and fiscal 2012, respectively.

Performance Based Restricted Stock Units

Fiscal 2014

On June 25, 2013, certain key members of management were granted performance based restricted common stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12, 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.

Fiscal 2013

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 agreements. 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.

Fiscal 2012

We did not grant any performance based restricted stock units during fiscal 2012. No performance based restricted units vested during fiscal 2012.

Overall

We recorded compensation expense of $581,000 and $340,000 within selling, general, and administrative expense for performance based restricted stock units in fiscal 2014 and 2013, respectively. No compensation expense was recorded for performance based restricted stock units in fiscal 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 that 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.

At April 27, 2014, the remaining unrecognized compensation cost related to the performance based restricted stock units was $924,000, which is expected to be recognized over a weighted average vesting period of 1.7 years.

Common Stock Awards

On October 1, 2013, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vested immediately and were measured at $18.84 per share, which represents the closing price of the company's common stock at the date of grant.

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 $57,000, $20,000, and $26,000 of compensation expense within selling, general, and administrative expense for these common stock awards for fiscal 2014, 2013, and 2012, respectively.

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 was indexed on 70,000 shares of our common stock. This agreement required 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 represented the 70,000 indexed shares of common stock noted above measured at the closing price per share of $10.00 at May 2, 2011. The cash settlement in connection with the stock appreciation right value represented the difference between a stock appreciation right value that is indexed on the 70,000 shares of common stock noted above and the highest closing price per share of our common stock for the period May 2, 2011 through June 30, 2012 (limited to $12.00 per share) and the $700,000 stock appreciate right value at May 2, 2011. This award vested over the period May 2, 2011 through June 30, 2012 and represented the non-employee’s required service period.

During the first quarter of fiscal 2013, this award fully vested and was paid out at a fair value totaling $174,000.

We recorded $40,000 and $134,000 of compensation expense within selling, general, and administrative expense for this agreement during fiscal 2013 and 2012, respectively.