(9) EQUITY INCENTIVE PLANS

The cost of all employee stock options, as well as other equity-based compensation arrangements, is reflected in the consolidated statements of income based on the estimated fair value of the awards.

Stock Options

The Company has two equity incentive plans, both of which benefit certain of the Company’s employees and directors: the TISM, Inc. Stock Option Plan (the TISM Stock Option Plan) and the Domino’s Pizza, Inc. 2004 Equity Incentive Plan (the 2004 Equity Incentive Plan) (collectively, the Equity Incentive Plans). The TISM Stock Option Plan has been amended to prohibit the granting of additional stock options. As of December 30, 2012, the number of options granted and outstanding under the TISM Stock Option Plan was 27,181 shares of non-voting common stock and the number of options granted and outstanding under the 2004 Equity Incentive Plan was 4,635,358 shares of common stock. As of December 30, 2012, the maximum number of shares that may be granted under the 2004 Equity Incentive Plan is 15,600,000 shares of voting common stock of which 4,372,607 shares were authorized for grant but have not been granted.

The Company recorded total non-cash compensation expense of $13.4 million, $14.0 million and $17.6 million in 2010, 2011 and 2012, respectively, which reduced net income by $8.2 million, $8.8 million and $10.9 million in 2010, 2011 and 2012, respectively. All non-cash compensation expense amounts are recorded in general and administrative expense.

Options granted under the Equity Incentive Plans prior to fiscal 2009 were generally granted at the market price at the date of the grant, expire ten years from the date of grant and vest within five years from the date of grant. Options granted under the Equity Incentive Plans in fiscal 2010, 2011 and 2012 were granted at the market price at the date of the grant, expire ten years from the date of grant and generally vest within three years from the date of grant. Additionally, all options granted become fully exercisable upon vesting.

As part of the 2012 Recapitalization and pursuant to the anti-dilution provisions in the Company’s Equity Incentive Plans, the Company made cash payments totaling approximately $13.5 million on certain stock options, reduced the exercise price on certain other stock options by an equivalent per share amount and, in certain circumstances, both reduced the stock option exercise price and made a cash payment totaling $3.00 per share. In accordance with the equity restructuring guidance, these anti-dilution payments were accounted for as modifications/settlements and were recorded as increases in total stockholders’ deficit. Affected stock option exercise prices presented below have been adjusted to reflect these 2012 Recapitalization-related actions.

Stock option activity related to the Equity Incentive Plans is summarized as follows:


	Common Stock Options
	Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Life		Aggregate Intrinsic Value
						(Years)		(In thousands)
Options at January 3, 2010		9,893,894		$	9.38
Options granted		675,500			11.87
Options cancelled		(497,760	)		9.93
Options exercised		(1,075,967	)		8.80

Options at January 2, 2011		8,995,667		$	9.60
Options granted		392,000			19.24
Options cancelled		(170,213	)		10.30
Options exercised		(3,773,763	)		8.88

Options at January 1, 2012		5,443,691		$	10.78
Options granted		215,670			32.28
Options cancelled		(58,153	)		11.91
Options exercised		(938,669	)		9.55

Options at December 30, 2012		4,662,539		$	11.50		5.5	$	144,449

Exercisable at December 30, 2012		3,666,245		$	10.49		5.0	$	117,136

The total intrinsic value of options exercised was approximately $5.5 million, $50.2 million and $27.5 million in 2010, 2011 and 2012, respectively. Cash received from the exercise of stock options was approximately $9.5 million, $33.5 million and $8.9 million in 2010, 2011 and 2012, respectively. The tax benefit realized from stock options exercised was approximately $2.1 million, $13.5 million and $8.7 million in 2010, 2011 and 2012, respectively.

As of December 30, 2012, there was $4.1 million of total unrecognized compensation cost related to unvested options granted under the Equity Incentive Plans which will be recognized on a straight-line basis over the related vesting period. This unrecognized compensation cost is expected to be recognized over a weighted average period of 1.6 years.

Management estimated the fair value of each option grant made during 2010, 2011 and 2012 as of the date of the grant using the Black-Scholes option pricing method. Weighted average assumptions are presented in the following table. The risk-free interest rate is based on the estimated effective term, and is the five-year U.S. Treasury Bond rates as of the grant date. The expected life (years) is based on several factors, including, among other things, the vesting term and contractual term as well as historical experience. The expected volatility is based principally on the historical volatility of the Company’s share price.


	2010			2011			2012
Risk-free interest rate		2.1	%		2.1	%		1.0	%
Expected life (years)		4.6			5.0			5.0
Expected volatility		45.0	%		45.0	%		45.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Weighted average fair value per share	$	4.78		$	8.04		$	13.70

Option valuation models require the input of highly subjective assumptions. In management’s opinion, existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options, as changes in subjective input assumptions can significantly affect the fair value estimate.

Other Equity-Based Compensation Arrangements

The Company granted 25,000 shares of restricted stock in 2010 to an employee and officer of the Company pursuant to the related employment agreements. The restricted stock grant was considered granted for accounting purposes in the year the related employment agreement was signed and the related per share expense was amortized on a straight-line basis over the period from the accounting grant date to the end of fiscal 2010. As of December 30, 2012, there was no unrecognized compensation cost related to this restricted stock grant. Separately, the Company granted 42,000 shares, 53,125 shares and 22,420 shares of restricted stock in 2010, 2011 and 2012, respectively, to members of its board of directors. These grants generally vest one-year from the date of the grant and have a fair value equal to the market price of the Company’s stock on the grant date. The Company recorded total non-cash compensation expense of $1.2 million, $0.7 million and $0.8 million in 2010, 2011 and 2012, respectively, related to these restricted stock awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 30, 2012, there was approximately $0.1 million of total unrecognized compensation cost related to these restricted stock grants.

The Company granted 602,355 shares, 376,309 shares and 282,170 shares of performance-based restricted stock in 2010, 2011 and 2012, respectively, to certain employees of the Company. The performance-based restricted stock awards are separated into three tranches and have time-based and performance-based vesting conditions with the last tranche vesting three years from the issuance date. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service and age requirements. These awards are considered granted for accounting purposes when the performance target is set, which is generally in the fourth quarter of each year. The Company recorded total non-cash compensation expense of $4.3 million, $7.2 million and $11.5 million in 2010, 2011 and 2012, respectively, related to these awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 30, 2012, there was an estimated $15.4 million of total unrecognized compensation cost related to performance-based restricted stock.

Restricted stock and performance-based restricted stock activity related to the Equity Incentive Plans is summarized as follows:


	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		958,674		$	14.33
Shares granted (1)		304,590		$	33.22
Shares cancelled		(43,274	)	$	29.89
Shares vested		(528,148	)	$	19.65

Nonvested at December 30, 2012		691,842		$	17.61

(1)

The weighted average grant date fair value for performance-based restricted shares granted was calculated based on the market price on the grant dates. Certain tranches will ultimately be valued when the performance condition is established for each tranche, which generally occurs in the fourth quarter of each fiscal year.