11. Stock Based Compensation

Stock Plans

Total share based compensation included in net income for the year ended January 2, 2015 was $6.4 million. The number of shares available for future issuance under the Company's stock plans as of January 2, 2015 were 1,726,938. The Company issues new shares as shares are required to be delivered under the plan.

Stock Options and SARs

The Company has granted stock options to employees and directors of the Company at exercise prices equal to the market value of the stock at the date of grant. The options generally vest ratably over four years, based on continued employment, with a maximum term of ten years.

Stock option activity under the Company’s stock option plans for the year ended January 2, 2015 is summarized as follows:


	Option Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding as of December 27, 2013	366,714	$	4.39
Exercised	(8,750)		4.04
Forfeited or expired	(60,297)		6.35
Outstanding as of January 2, 2015	297,667	$	4.00	6.79	$	1,399,979
Exercisable at January 2, 2015	17,667	$	3.96	0.44	$	83,798

A summary of the Company’s stock option activity for the years ended December 27, 2013 and December 28, 2012 was as follows:


	December 27, 2013			December 28, 2012
	Option Shares		Weighted Average Exercise Price	Option Shares		Weighted Average Exercise Price
Outstanding at beginning of year	3,898,864	$	4.34	867,375	$	5.53
Granted (1)	—		—	3,196,563		4.00
Exercised	(109,683)		4.29	(76,986)		2.53
Forfeited or expired (1)	(3,422,467)		4.33	(88,088)		5.46
Outstanding at end of year	366,714	$	4.39	3,898,864	$	4.34
Exercisable at end of year	86,714	$	5.63	702,301	$	5.86

(1)

Includes 2,916,563 of unvested performance-based stock options granted in 2012 and subsequently surrendered and replaced with SARs in 2013 and 470,000 vested stock options surrendered in 2013 and replaced with SARs. See SARs discussion below.

The fair value of the SARs and stock options is estimated using the Black-Scholes option pricing valuation model. The determination of fair value is affected by the Company's stock price, expected stock price volatility, expected term of the award and the risk-free rate of interest. The weighted average fair value of the stock options granted in 2012 was $1.31. The following assumptions were used to determine the fair value of the stock options granted to employees in 2012:


Expected volatility		43%
Risk-free rate		0.35%
Expected term (in years)		2-6

Other information pertaining to stock option activity during the years ended January 2, 2015, December 27, 2013 and December 28, 2012 was as follows (in thousands):


	Year Ended
	January 2, 2015		December 27, 2013		December 28, 2012
Total intrinsic value of stock options exercised	$	36	$	163	$	177

The following table summarizes information about the Company’s stock options outstanding:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price	Number Exercisable		Weighted Average Exercise Price
$0.00 - $4.00	297,667	6.79	$	4.00	17,667	$	3.96

On February 8, 2012, the Compensation Committee approved the fiscal year 2012 through 2015 equity compensation target for the Chief Executive Officer and Chief Operating Officer. Under this target, a single performance-based option grant was made to the Company’s Chief Executive Officer and the Chief Operating Officer of 1,912,500 options and 1,004,063 options, respectively, totaling 2,916,563 options, each with an exercise price of $4.00 and a fair value of $1.31. One-half of the options vest upon the achievement of at least 50% growth of pro forma earnings per share and the remaining half vest upon the achievement of at least 50% pro forma EBITDA growth. Each metric can be achieved at any time during the six-year term of the award based on a trailing twelve month period measured quarterly. The grants will expire if neither target is achieved during the six-year term. The base year for the performance calculation is fiscal 2011 for both pro forma earnings per share and pro forma EBITDA performance targets.

In March of 2013, the performance-based stock option grants were surrendered by the Company’s Chief Executive Officer and Chief Operating Officer and replaced with SARs, totaling 2,916,563, equal in number to the number of options granted to each of them in 2012. The terms and conditions and the specific performance targets that must be achieved in order for the SARs to vest are the same as those of the surrendered options, with the exception that the SARs will be settled in cash, stock or any combination thereof, at the Company’s discretion.

In addition, 470,000 vested stock options were surrendered and replaced with SARs with an extended life during 2013. Subsequently, in 2014, the extended life of the SARS was rescinded and the SARS expired unexercised.

SAR activity for the year ended January 2, 2015 was as follows:


	Number of SARs		Weighted Average Exercise Price		Weighted Average Fair Value
Outstanding as of December 27, 2013		3,386,563	$	4.31	$	0.99
Expired		(470,000)		6.25		1.23
Outstanding as of January 2, 2015		2,916,563	$	4.00	$	0.96
Exercisable at January 2, 2015		—	$	—	$	—

The following assumptions were used to determine the fair value of the SARs granted to employees in 2013:


Expected volatility		43%
Risk-free rate		0.35%
Expected term (in years)		2

As of January 2, 2015, 100% of total outstanding options and SARs were performance-based. The Company has recorded $0.5 million of compensation expense in 2014 and 2013 and $0.6 million in 2012, related to these options and SARs in accordance with ASC 718, "Stock Compensation".

Restricted Stock Units

Under the stock plans, participants may be granted restricted stock units, each of which represents a conditional right to receive a common share in the future. The restricted stock units granted under this plan generally vest over one of the following vesting schedules: (1) a four-year period, with 50% vesting on the second anniversary and 25% of the shares vesting on the third and fourth anniversaries of the grant date, (2) a four-year period, with 25% vesting on the first, second, third and fourth anniversary, or (3) a three-year period with 33% vesting on the first, second and third anniversary. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the applicable requisite service period. Restricted stock unit activity for the year ended January 2, 2015, was as follows:


	Number of Restricted Stock Units		Weighted Average Grant-Date Fair Value
Nonvested balance as of December 27, 2013		2,910,304	$	4.17
Granted		914,233		6.00
Vested		(1,321,949)		3.95
Forfeited		(187,375)		6.51
Nonvested balance as of January 2, 2015		2,315,213	$	5.41

The Company recorded restricted stock units based compensation expense of $5.0 million, $4.8 million and $4.2 million in 2014, 2013 and 2012, respectively, which is included in stock compensation expense, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. As of January 2, 2015, there was $6.5 million of total restricted stock units compensation related to the nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 1.94 years.

Common Stock Subject to Vesting Requirements

Shares of common stock subject to vesting requirements were issued to employees of acquired companies. These shares vest over a period of up to five years. Compensation was based on the market value of the Company’s common stock at the time of grant and is recognized on a straight-line basis. The activity for common stock subject to vesting requirements for the year ended January 2, 2015 was as follows:


	Number of Shares of Common Stock Subject to Vesting Requirements		Weighted Average Grant-Date Fair Value
Nonvested balance as of December 27, 2013		177,647	$	3.31
Granted		164,474		6.04
Vested		(77,647)		2.73
Nonvested balance as of January 2, 2015		264,474	$	7.54

The Company recorded compensation expense of $0.9 million, $0.8 million and $0.7 million, during the years ended January 2, 2015, December 27, 2013 and December 28, 2012, respectively, related to common stock subject to vesting requirements. As of January 2, 2015, there was $1.0 million of total stock based compensation related to granted common stock subject to vesting requirements not yet recognized, which is expected to be recognized over a weighted average period of 3.0 years.

Common stock subject to vesting requirements of $4.6 million will be issued in 2015 in relation to the equity portion of the Technolab earn-out. These shares will be subject to a four year vesting period. Compensation expense of $0.7 million was recorded in 2014 for these shares.