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 Consolidated 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 former 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 former Chief Executive Officer entered into a new employment agreement which became effective as of the time of the Merger and superseded the previous employment agreement.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 former 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 equity-based awards to selected employees and directors of the Company. The 2011 Plan, which included time-based, performance-based and exit-based options as well as restricted stock units, provided that 22,289 shares of common stock of Holdings are available for grant.

On June 17, 2013, Veronica Hagen and the Company entered into a Retirement Agreement (the "Retirement Agreement") whereby she retired from the position of President and Chief Executive Officer effective June 19, 2013 and retired from the Company on August 31, 2013. Per the terms of the Retirement Agreement, the Company modified her equity-based awards in that certain time-based and exit-based awards became fully vested, with all remaining awards forfeited. Per ASC 718, the change in vesting conditions was treated as a Type III modification whereby the original equity awards are considered forfeited and new, fully vested awards are granted.

On June 18, 2013, the Company announced the appointment of J. Joel Hackney Jr. as President and Chief Executive Officer, effective June 19, 2013. Per the terms of his employment agreement, Mr. Hackney received 9,000 equity-based awards, which included 3,000 restricted stock units. As a result, the Company amended the 2011 Plan to increase the number of shares of Holdings common stock available for grant from 22,289 to 31,289. At December 28, 2013, the indirect parent has 4,894 shares available for future incentive awards.

On July 3, 2013, Michael Hale accepted the position of Senior Vice President and Advisor to the Chief Executive Officer and subsequently announced his retirement from the Company effective January 31, 2014. Other than the change in title and role, all of the terms and conditions of his employment agreement remain as indicated except for certain modification to his equity-based awards in that certain time-based awards became fully vested. Per ASC 718, the change in vesting conditions was treated as a Type III modification whereby the original equity awards are considered forfeited and new, fully vested awards are granted.

During 2013, the Board of Directors reviewed the historical and projected financial performance of the Company in regard to the satisfaction of the performance-vested options. Under the current vesting conditions, a performance-based option would become vested if certain free cash flow targets are achieved in either a given fiscal year or based on cumulative targets over multiple fiscal years. As none of these targets have been achieved since the date of grant and, based on recent performance, not expected to be satisfied in the next several years, the Board of Directors decided to modify the terms of the performance-vesting options. As a result, on August 30, 2013, vesting terms for all performance-based options were modified to vest on terms similar to existing exit-based options, substituting 15% for 20% as the required annual internal rate of return component. In addition, to align the vesting conditions between the amended performance-based options and the exit-based options, the vesting terms of the exit-based options were modified to reduce the required annual internal rate of return component to 15%.

Stock Options

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. Modified performance-based options and 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.

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
Granted	6,817		1,000
Canceled / Forfeited	(3,882	)	1,000
Exercised	—		—
Outstanding - December 28, 2013	23,395		$	1,000
Exercisable - December 28, 2013	2,738		$	1,000

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 would have been recognized when it was probable that both the performance target will be achieved and the requisite service period was satisfied. Compensation expense is not recognized for modified performance-based options and exit-based options until they vest. As of December 28, 2013, unrecognized compensation expense related to non-vested options granted under the 2011 Plan totaled $2.2 million.

The weighted-average fair value of stock options granted during fiscal 2013 and 2012 was $568.420 and $275.079, respectively, using the Black-Scholes option pricing model. The following weighted-average assumptions were used:



	Fiscal 2013		Fiscal 2012
Risk-free interest rate	1.55	%	0.35	%
Dividend yield	—	%	—	%
Expected life	6.4 years		3.3 years
Volatility	59.00	%	38.02	%

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. Prior to 2013, the expected life was 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. However, subsequent equity grants utilize the Simplified Method as allowed under SAB Topic 14 to derive the expected life assumption. The estimated fair value of the options that have been granted under the 2011 Plan were determined using a third-party valuation specialist.

Restricted Stock Units

Restricted stock units represent a promise to deliver shares to the individual at a future date if certain vesting conditions are met. Under the Holdings Plan, restricted stock unit's will become vested on the third anniversary of the date of grant and will be settled in shares of Holdings. Dividend equivalent shares will accrue if dividends are paid on Holdings common stock and will vest proportionately with the restricted stock unit's to which they relate.

Changes in restricted stock units outstanding under the 2011 Plan are as follows:



	Number of Shares		Weighted Average Exercise Price
Outstanding - December 29, 2012	$	—	$	—
Granted	3,000		1,000
Canceled / Forfeited	—		—
Exercised	—		—
Outstanding - December 28, 2013	3,000		$	1,000

The fair value of each restricted stock unit is measured as the grant-date price of the common stock which is expensed on a straight-line basis over the three year vesting period. As of December 28, 2013, unrecognized compensation expense related to non-vested restricted stock units granted under the 2011 Plan totaled $2.5 million.

Call Option on Common Stock

Under the 2011 Plan, the Company set forth a management equity subscription agreement whereby certain selected employees of the Company were able to invest in shares of Holding’s common stock. The agreement contains an employer call option clause that states that the Company can repurchase the common stock from the employee prior to the third anniversary of the purchase date. This feature creates an in-substance service period because the employer can repurchase the shares at the original purchase price (or less) if the employee terminates within the specified time period. The employee does not partake in any of the risks or rewards of stock ownership until the end of the three year implied service period. As a result, the cash acquired by the Company for the common stock shares have been recorded as a liability, as they are subject to repayment upon employee termination and compensation cost will be recognized over the implied three-year requisite service period equal to the fair value of the call option.

Other Compensation Agreements

In contemplation of the Merger, the former Chief Executive Officer entered into an employment agreement which became effective as of the time of the Merger. The agreement provided that as long as Ms. Hagen was an employee in good standing on April 23, 2013, that she would be entitled to a one-time grant of shares in Holdings having a value equal to $694,000 (the “Equity Award”). In accordance with the terms of her employment agreement, Ms. Hagen received the equity award of 694 shares of Holdings common stock (less applicable withholding taxes) on the appropriate date. The Company recognized compensation expense on a straight-line basis over the requisite service period and has no further obligations under the agreement.

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 28, 2013		Fiscal Year Ended December 29, 2012		Fiscal Year Ended December 31, 2011
Stock options	$	950	$	532	$	441
Restricted stock units	500		—		—
Employee call option	2,443		—		—
Equity award	97		310		287
Total	$	3,990	$	842	$	728