STOCK-BASED COMPENSATION

At December 28, 2014, we had stock-based employee compensation plans as described below. For the years ended December 28, 2014, December 29, 2013, and December 30, 2012, the total compensation expense (included in selling, general, and administrative expense) related to these plans was $5.8 million, $6.4 million, and $4.7 million ($5.8 million, $6.1 million, and $4.5 million, net of tax), respectively.

Stock Plans

The Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the 2004 Plan) is designed to provide incentives to employees, and non-employee directors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a three-year period and expire not more than 10 years from date of grant. Restricted stock units (RSUs) vest over three to five year periods from date of grant. There is an aggregate of 6,687,956 shares reserved for issuance under the 2004 Plan. As of December 28, 2014, there were 2,625,011 shares available for grant under the 2004 Plan. Key terms of the 2004 Plan include the following:

•

The terms of outstanding awards may not be amended to (i) reduce the exercise price of outstanding stock options or stock appreciation rights (SARs), or (ii) cancel, exchange, substitute, buy out or surrender outstanding options or SARs in exchange for cash, other awards, stock options or SARs with an exercise price that is less than the exercise price of the original stock options or SARs (as applicable) without shareholder approval

•

Shares of the Company’s common stock are limited from again being made available for issuance under the 2004 Plan when: (i) shares of common stock not issued or delivered as a result of the net settlement of an outstanding SAR or stock option, (ii) shares of common stock used to pay the exercise price or withholding taxes related to an outstanding award, or (iii) shares of common stock repurchased on the open market with the proceeds of the stock option exercise price


•	There is a minimum exercise price with respect to stock options or SARs to be granted under the 2004 Plan such that no stock option or SAR may be granted under the Plan with a per share exercise price that is less than 100% of the fair market value of one share of the Company’s common stock on the date of grant

•

There is a limitation against the payment of any cash dividend or dividend equivalent right (DER) with respect to awards that vest based upon the attainment of one or more performance measures such that no awards granted under the 2004 Plan based upon the attainment of one or more performance measures will be entitled to receive payment of any cash dividends or DERs with respect to such awards unless and until such awards vest.

We also have a Long-Term Incentive Plan (LTIP) under which restricted stock units (RSUs) are awarded to eligible executives and eligible key employees. The RSUs that vest under this plan reduce the shares available to grant under the 2004 Plan.

RSUs were awarded to certain key employees as part of the LTIP 2010, LTIP 2011, and LTIP 2012 plans with company-specific performance goals set for each plan over three-year performance periods. The value of these units weas charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. No RSUs were earned under the LTIP 2010, LTIP 2011, and LTIP 2012 plans. In 2013 and 2012, we reversed $0.5 million and $1.1 million, respectively, of previously recognized compensation cost for these RSUs when we determined the specific relative performance goals would not be achieved.

Additional RSUs were awarded to certain of our key employees as part of the LTIP Second Half 2012 plan. The performance measures for this plan set specific goals for employees who can influence key metrics set forth in the new business strategy during the July 2012 to December 2012 performance period. For fiscal year 2012, $0.6 million was charged to compensation expense for the LTIP Second Half 2012 plan. Final assessment of these goals was completed in the second quarter of 2013, resulting in a reversal of $0.1 million of compensation expense. At May 1, 2013, 74,321 units vested at a grant price of $7.59 per share.

On February 27, 2013, RSUs were awarded to certain of our key employees as part of the LTIP 2013 plan. These awards have a market condition. The number of shares for these units varies based on the relative ranking of our total shareholder return (TSR) against the TSRs of the constituents of the Russell 2000 Index during the January 2013 to December 2015 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The grant date fair value for these RSUs was $11.91 per share. Additional RSUs related to the LTIP 2013 plan were awarded on May 28, 2013, with a grant date fair value of $11.56 per share. Compensation expense of $80 thousand and $42 thousand was recognized in connection with these RSUs for the years ended December 28, 2014 and December 29, 2013, respectively. As of December 28, 2014, total unamortized compensation expense for these grants was $0.1 million. As of December 28, 2014, the maximum achievable RSUs outstanding under this plan are 26,400 units.

To determine the fair value of RSUs with market conditions that were awarded on February 27, 2013, we used a Monte Carlo simulation using the following assumptions: (i) expected volatility of 47.01%, (ii) risk-free rate of 0.35%, and (iii) an expected dividend yield of zero.

To determine the fair value of RSUs with market conditions that were awarded on May 28, 2013, we used a Monte Carlo simulation using the following assumptions: (i) expected volatility of 45.23%, (ii) risk-free rate of 0.41%, and (iii) an expected dividend yield of zero.

On May 2, 2013, a cash-based performance award was awarded to our CEO under the terms of our 2013 LTIP plan. Our relative TSR performance determines the payout as a percentage of an established target cash amount of $0.4 million. Because the final payout of the award is made in cash, the award is classified as a liability and the fair value is marked-to-market each reporting period. As of December 28, 2014, the fair value of the award is $0.47 per dollar of the target cash amount awarded. The value of this award is charged to compensation expense on a straight-line basis over the vesting period. Compensation expense of $0.1 million and $0.1 million was recognized in connection with this award for the years ended December 28, 2014 and December 29, 2013, respectively. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.

To determine the fair value of the cash-based performance award as of December 28, 2014, we used a Monte Carlo simulation using the following assumptions: (i) expected volatility of 38.42%, (ii) risk-free rate of 0.26%, and (iii) an expected dividend yield of zero.

On February 27, 2014, RSUs were awarded to certain key employees as part of the LTIP 2014 plan. The number of shares for these units varies based on the growth of our earnings before interest, taxes, depreciation, and amortization (EBITDA) during the January 2014 to December 2016 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $14.90 per share. Compensation expense of $0.3 million was recognized in connection with these RSUs for the year ended December 28, 2014. As of December 28, 2014, total unamortized compensation expense for this grant was $0.8 million. As of December 28, 2014, the maximum achievable RSUs outstanding under this plan are 153,820 units.

Stock Options

Option activity under the principal option plans as of December 28, 2014 and changes during the year then ended were as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 29, 2013	2,450,660		$	17.70	4.35	$	4,285
Granted	212,080		14.78
Exercised	(69,836	)	9.05
Forfeited or expired	(243,457	)	16.93
Outstanding at December 28, 2014	2,349,447		$	17.77	3.98	$	2,716
Vested and expected to vest at December 28, 2014	2,312,566		$	17.85	3.90	$	2,642
Exercisable at December 28, 2014	1,932,834		$	18.89	3.02	$	1,971

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2014 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 28, 2014. This amount changes based on the fair market value of our stock. The total intrinsic value of options exercised for the years ended December 28, 2014, December 29, 2013, and December 30, 2012, was $0.3 million, $0.8 million, and $0.1 million, respectively.

As of December 28, 2014, $1.1 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.7 years.

Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended December 28, 2014 was $2.0 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $0.1 million and $0.3 million for the fiscal years ended December 28, 2014 and December 29, 2013. We have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.

Restricted Stock Units

We issue service-based restricted stock units with vesting periods up to five years. These awards are valued using their intrinsic value on the date of grant. The compensation expense is recognized straight-line over the vesting term.

Nonvested service-based restricted stock units as of December 28, 2014 and changes during the year ended December 28, 2014 were as follows:



	Number of Shares		Weighted- Average Vest Date (in years)	Weighted- Average Grant Date Fair Value
Nonvested at December 29, 2013	852,508		0.64	$	17.36
Granted	349,040			$	14.38
Vested	(198,353	)		$	14.73
Forfeited	(62,338	)		$	12.81
Nonvested at December 28, 2014	940,857		0.56	$	17.11
Vested and expected to vest at December 28, 2014	905,394		0.51
Vested at December 28, 2014	61,250		—

The total fair value of restricted stock awards vested during 2014 was $2.9 million as compared to $4.2 million during 2013. As of December 28, 2014, there was $3.3 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Other Compensation Arrangements

During fiscal 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled $0.9 million at December 28, 2014, of which $1.1 million, $1.2 million, and $1.2 million was expensed for the years ended December 28, 2014, December 29, 2013, and December 30, 2012, respectively. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.