(7) Stock Options

2013 Long-Term Incentive Plan

On July 31, 2013, the Company’s board of directors approved the adoption of the 2013 Long-Term Incentive Plan, which replaced the 2004 Incentive Plan in conjunction with the Company’s initial public offering. The Company will no longer make awards under the 2004 Incentive Plan. However, the 2004 Incentive Plan will continue to govern outstanding awards granted prior to its termination. As of September 29, 2013, there have been no options granted under the 2013 Long-Term Incentive Plan. The Company has 1,500,000 shares reserved for future issuance under the 2013 Long-Term Incentive Plan. See Note 8, “Subsequent Events” for options granted after September 29, 2013.

Stock Options Granted Under the 2001 and 2004 Equity Incentive Plans

The Company has granted stock options under its 2001 and 2004 Equity Incentive Plans (the “Plans”). The Plans permit the granting of awards to employees and nonemployee officers, consultants, agents, and independent contractors of the Company in the form of stock appreciation rights, stock awards, and stock options. The Plans give broad powers to the Company’s board of directors to administer and interpret the Plans, including the authority to select the individuals to be granted options and rights and to prescribe the particular form and conditions of each option to be granted.

Under the Plans, the number of shares and exercise price of each option are determined by the committee designated by the Company’s board of directors. The options granted are generally exercisable within a 10-year period from the date of grant, upon the consummation of an IPO under the Securities Act or at the discretion of the board of directors. Certain options have been issued to key executives, which are exercisable without restriction. Options issued and outstanding expire on various dates through the year 2023. The range of exercise prices of options outstanding as of September 29, 2013, is $7 to $14 per option, and the options vest over a range of immediately to five-year periods.

Under the 2001 Plan, the Company had 746,749 shares reserved for issuance. In September 2011, the 2001 Plan expired with options outstanding under the plan still available for exercise. As of December 30, 2012 and September 29, 2013, a total of 3,960,998 and 4,289,994 shares of common stock have been reserved for issuance under the 2004 Equity Incentive Plan and a total of 500,000 shares of non-voting common stock have been reserved for issuance under a Stock Option Agreement and Plan (the “Agreement”). In 2007, the Company entered into the Agreement, which granted a certain key executive 500,000 options of non-voting common stock.

Activity under the Plans and the Agreement is as follows:


Options	Shares (Thousands)			Weighted Average Exercise Price		Aggregate Intrinsic Value (Thousands)		Weighted Average Remaining Term (Years)
Outstanding—December 25, 2011		4,261			9.19	$	2,229		6.34

Granted		504			8.65
Exercised		—			—
Canceled		(552	)		7.67

Outstanding—December 30, 2012		4,213			9.30	$	5,348		5.93

Granted		848			10.06
Exercised		—			—
Canceled		(316	)		8.40

Outstanding—September 29, 2013		4,745			8.99	$	15,434		6.22

On February 26, 2013, the Company issued 59,865 stock options to Bryant Keil, the Company’s Founding Chairman and current member of the board of directors, which are exercisable without restriction and vested immediately. The fair value of the options was determined using the Black-Scholes-Merton option pricing model. The Company used the following assumptions for purposes of valuing these option grants: common stock fair value of $9.47 per share; expected life of options—five years; volatility—46.6%; risk-free interest rate—0.8%; and dividend yield—0.0%. The Company used the simplified method for determining the expected life of the options. The Company was unable to calculate specific stock price volatility as a private company, and as such, the Company used a blended volatility rate for comparable publicly traded companies.

On July 29, 2013, the Company entered into employment agreements with certain executives, including Charlie Talbot, its Chief Financial Officer, and John Morlock, its Senior Vice President of Operations. The terms of the agreements are substantially similar to one another and include compensation arrangements consistent with their current compensation arrangements as well as the acceleration of 278,272 unvested stock options under the 2004 Equity Plan, of which 141,341 options include a performance condition that restricts the option holders’ ability to exercise vested options until the consummation of an IPO under the Securities Act or at the discretion of the Company’s board of directors. Accordingly, all outstanding options are now fully vested as of the date of the executed agreements. In accordance with ASC Topic 718, Compensation – Stock Compensation, the Company does not expect to record an incremental charge related to the accelerated vesting of unvested options that do not contain a performance condition since the modification did not result in incremental value. The Company has estimated the potential compensation cost to be recorded upon consummation of an IPO associated with all vested options, including those modified to accelerate vesting, is approximately $7.5 million as of September 29, 2013.

On August 1, 2013, the Company modified stock option agreements for all current employees and the Company’s Founding Chairman to revise the exercise price of $14.00 per option on 718,593 options to an exercise price of $10.59 per option and issued 122,271 stock options to the same Founding Chairman at an exercise price of $10.59 per option. All of these options contain a performance condition that restricts the option holders’ ability to exercise vested options until the consummation of an IPO under the Securities Act or at the discretion of the Company’s board of directors. In accordance with ASC Topic 718, Compensation – Stock Compensation, the Company expects to record a charge of approximately $0.7 million during the fourth quarter of 2013 related to the incremental value associated with the reduced exercise price at the time performance conditions have been met and a charge of approximately $0.6 million associated with options issued to the Founding Chairman at the time performance conditions have been met.

On August 8, 2013, the Company entered into an employment agreement with Aylwin Lewis, its Chief Executive Officer and President. The agreement includes a compensation arrangement consistent with his current compensation arrangement as well as the grant of 227,187 options under the 2004 Equity Plan, which are exercisable without restriction and vest over a period of four years. In accordance with ASC Topic 718, Compensation – Stock Compensation, fair value of the options was determined using the Black-Scholes-Merton option pricing model. The Company used the following assumptions for purposes of valuing these option grants: common stock fair value of $10.59 per share; expected life of options—seven years; volatility—48.0%; risk-free interest rate—1.3%; and dividend yield—0.0%. The Company used the simplified method for determining the expected life of the options.

On August 20, 2013, the Company issued 81,064 replacement stock options to Bryant Keil, under the 2004 Equity Plan, which are exercisable without restriction and vested immediately. The fair value of the options was determined using the Black-Scholes-Merton option pricing model. The Company used the following assumptions for purposes of valuing these option grants: common stock fair value of $10.59 per share; expected life of the options – five years; volatility – 48.0%; risk-free rate – 1.6%; and dividend yield – 0.0%. The Company used the simplified method for determining the expected life of the options. In accordance with ASC Topic 718,Compensation – Stock Compensation, the Company recorded a charge of $0.4 million related to these options.

Stock-based Compensation

In accordance with ASC Topic 718, Compensation—Stock Compensation, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). For those options that are exercisable without restriction, the Company recognized $2.4 million and $2.3 million for the 39 weeks ended September 29, 2013 and for the 39 weeks ended September 23, 2012, respectively, with a corresponding increase to additional paid-in-capital. As of September 29, 2013, and September 23, 2012, the unrecognized stock compensation expense was $1.2 million and $2.1 million, respectively, which will be recognized through fiscal year 2018. The Company records stock based compensation expense within general and administrative expenses in the consolidated statements of operations.