Equity Compensation Plans

The Company accounts for stock-based compensation plans in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"), which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company's stock-based compensation plans have included a program for stock options and restricted stock units.

Predecessor Equity Compensation Plans

The Predecessor adopted various compensation plans to attract, retain and motivate directors, officers and employees of the Company and its subsidiaries. These plans included nonqualified stock options of common stock, restricted shares and restricted share units. In association with the Merger, the Predecessor's stock options, as well as the restricted shares and restricted share units, vested, if unvested, and were canceled and converted into the right to receive cash for each share, without interest, on January 28, 2011. With respect to the Company's stock options, the amount in cash was adjusted by the exercise price of $6.00 per share. As a result, the Company recognized $12.7 million in the Statement of Operations related to the accelerated vesting of its stock options, restricted shares and restricted share units during the one month ended January 28, 2011.

In addition, the Company maintained an employment agreement with its Chief Executive Officer that provided for a one-time award of equity and cash at the expiration date of the agreement. The equity award component was dependent upon an ending stock price at the measurement date and the cash component would have been equal to thirty percent of the equity award component. In contemplation of the Merger, the Chief Executive Officer entered into a new employment agreement which became effective as of the time of the Merger and superseded the previous employment agreement. Accordingly, the Chief Executive Officer has no further rights under the previous employment agreement.

Successor Equity Compensation Plans

In January 2011, Holdings adopted an Incentive Stock Plan (the “2011 Plan”), pursuant to which Holdings will grant options to selected employees and directors of the Company. The 2011 Plan, which includes time-based, performance-based and exit-based options, provides that 22,289 shares of common stock of Holdings are available for grant. At December 29, 2012, the indirect parent has 1,829 shares available for future incentive awards.

Changes in options outstanding under the 2011 Plan are as follows:



	Number of Shares	Weighted Average Exercise Price
Outstanding - January 1, 2011	—	$	—
Granted	17,699	1,000
Canceled / Forfeited	(842)	1,000
Exercised	—	—
Outstanding - December 31, 2011	16,857	1,000
Granted	4,582	1,000
Canceled / Forfeited	(979)	1,000
Exercised	—	—
Outstanding - December 29, 2012	20,460	$	1,000
Exercisable - December 29, 2012	1,083	$	1,000

Options granted under the 2011 Plan expire on the tenth anniversary date of the date of grant and vest based on the type of option granted. Time-based options vest based upon the passage of time in equal installments at the respective anniversaries of the date of grant. Performance-based options vest with each of the first five anniversaries of March 31, 2011 if certain annual financial performance targets are met. Exit-based options vest on the date, if any, when Blackstone receives cash proceeds with respect to its investment in the Company's equity securities that meets a specified financial yield. All options are subject to continued employment with the Company.

The fair value of each time-based award is expensed on a straight-line basis over the requisite service period, which is generally the three or five year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that both the performance target will be achieved and the requisite service period is satisfied. As of December 29, 2012, unrecognized compensation expense related to non-vested options granted under the 2011 Plan totaled $1.9 million.

The weighted-average fair value of stock options granted during fiscal 2012 and 2011 was $275.079 and $444.345, respectively, using the Black-Scholes option pricing model. The following weighted-average assumptions were used:



	Fiscal 2012		Fiscal 2011
Risk-free interest rate	0.35	%	1.83	%
Dividend yield	—	%	—	%
Expected life	3.3 years		4.9 years
Volatility	38.02	%	49.57	%

As the Company does not have sufficient historical volatility data for the common stock of Holdings, the stock price volatility utilized in the fair value calculation is based on the Company's peer group in the industry in which it does business. The risk-free interest rate is based on the yield-curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The expected life is based on the vesting schedule of the options and their contractual life, taking into consideration the expected time in which the share price of the option would exceed the exercise price of the option. The estimated fair value of the options that have been granted under the 2011 Plan were determined using a third-party valuation specialist.

Other Compensation Agreements

In contemplation of the Merger, the Chief Executive Officer entered into an employment agreement which became effective as of the time of the Merger. The agreement provides that as long as the Chief Executive Officer is an employee in good standing on April 23, 2013, that she would be entitled to a one-time grant of shares in the indirect parent having a value equal to $694,000 (the “Equity Award”). Further, the Equity Award could be granted at an earlier date if the condition of “Involuntary Termination” has been met. As of December 29, 2012, the unrecognized compensation expense related to the Equity Award granted under the employment agreement totaled $0.1 million.

Compensation Expense

Stock-based compensation expense is included in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amount of compensation expense recognized during the period is based on the portion of granted awards that are expected to vest. Ultimately, the total expense recognized of the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:



In thousands	Fiscal Year Ended December 29, 2012		Eleven Months Ended December 31, 2011
Stock options	$	532	$	441
Equity awards	310		287
Total	$	842	$	728