6. Share Based Compensation
Successor share-based compensation
Chinos Holdings, Inc. 2011 Equity Incentive Plan
On March 4, 2011, the Parent adopted the Chinos Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”), which authorizes equity awards to be granted for up to 91,740,627 shares of the common stock of the Parent, of which options for 66,871,219 shares have been issued to certain members of management and are outstanding, including (i) 41,909,564 options with an exercise price of $1.00 that become exercisable over the requisite service period and (ii) 24,961,655 options with an exercise price of $1.00 that only become exercisable when certain owners of the Parent receive a specified level of cash proceeds, as defined in the equity incentive plan, from the sale of their initial investment. The options have terms of up to ten years and become exercisable over a period up to seven years.
Accounting for Share-Based Compensation
The fair value of the time-based awards is recognized as compensation expense on a straight line basis over the requisite service period of the award, included in selling, general and administrative expenses on the statement of operations and comprehensive income (loss). The fair value of the options exercisable when certain owners of the Parent receive a specified level of cash proceeds will not be recognized until such event occurs. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and the expected dividend yield. At grant date, the Company estimates an amount of forfeitures that will occur prior to vesting.
The fair value of stock options was estimated at the date of grant using an option pricing model with the following weighted average assumptions:
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Option Valuation Assumptions |
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Risk-free interest rates(1) |
2.6 | % | ||
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Dividend yield |
— | |||
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Expected volatility(2) |
44.2 | % | ||
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Expected term(3) |
6.4 | |||
| (1) | Based on the U.S. Treasury yield curve in effect at the time of grant. |
| (2) | Based on average volatility of stock prices of companies in a peer group analysis. |
| (3) | Represents the period of time (in years) options are expected to be outstanding. |
Accounting for Option Modification
On December 21, 2012, the Company paid a dividend of $197.5 million to stockholders of record of the Parent on December 17, 2012. In conjunction with the declaration and payment of the dividend, the Board of Directors of the Company approved a modification of certain outstanding vested and unvested options in the form of a reduced exercise price to $0.78 from $1.00. As a result of the modification, the Company recorded additional share-based compensation based on the difference between the fair value of the options immediately preceding and immediately following the modification. The incremental fair value of $0.9 million attributable to vested options was recognized in the fourth quarter of fiscal 2012. The incremental fair value of $3.0 million attributable to unvested options will be recognized over the remaining weighted-average vesting period of 3.0 years.
As of February 2, 2013, there was $14.5 million of total unrecognized compensation cost related to non-vested options that is expected to be recognized over the remaining weighted-average vesting period of 3.0 years. The weighted-average grant-date fair value of options granted was $0.47.
The following table summarizes stock option activity for fiscal 2012:
| Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
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| (in years) | (in millions) | |||||||||||||||
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Outstanding at January 28, 2012 |
65,167,719 | $ | 0.78 | |||||||||||||
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Granted |
4,178,000 | $ | 0.78 | |||||||||||||
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Exercised |
(39,000 | ) | $ | 0.78 | ||||||||||||
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Forfeited |
(2,435,500 | ) | $ | 0.78 | ||||||||||||
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Outstanding at February 2, 2013 |
66,871,219 | $ | 0.78 | 8.3 | $ | 21.4 | ||||||||||
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Exercisable at February 2, 2013 |
8,909,049 | $ | 0.78 | 8.2 | $ | 2.9 | ||||||||||
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Expected to vest at February 2, 2013 |
64,643,467 | $ | 0.78 | 8.3 | $ | 20.7 | ||||||||||
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The following table summarizes stock option vesting activity for the Successor period:
| Shares | Weighted Average Grant Date Fair Value |
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Unvested at January 28, 2012 |
65,167,719 | $ | 0.47 | |||||
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Granted |
4,178,000 | $ | 0.47 | |||||
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Vested |
(8,948,049 | ) | $ | 0.47 | ||||
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Forfeited |
(2,435,500 | ) | $ | 0.47 | ||||
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Unvested at February 2, 2013 |
57,962,170 | $ | 0.47 | |||||
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The following table summarizes the shares available for grant as stock options or other share-based awards under the 2011 Plan:
| Shares | ||||
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Available for grant at January 28, 2012 |
26,572,908 | |||
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Granted |
(4,178,000 | ) | ||
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Forfeited and available for reissuance |
2,435,500 | |||
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Available for grant at February 2, 2013 |
24,830,408 | |||
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Acquisition-related share-based compensation
In connection with the Acquisition, all outstanding share-based awards granted prior to the Transactions became fully vested. Because the acceleration of the awards was not a term of the original award agreements, but was provided for in the merger agreement, the acceleration was determined to be a modification of the original awards. This modification required the Company to calculate a revised fair value of the awards, which totaled (i) $213.1 million for awards settled in cash and (ii) $9.6 million for awards rolled over by members of management.
Awards settled in cash
The total pre-tax revised fair value attributable to pre-combination service was $178.0 million. This amount was recorded as consideration transferred to acquire the Company. The total pre-tax revised fair value attributable to post-combination service was $35.1 million. Because there was no future service requirement to the Parent, this amount was immediately recorded as share-based compensation expense in the statement of operations of the Successor.
Awards rolled over by management
The total pre-tax revised fair value attributable to pre-combination service was not material. Therefore, the entire pre-tax revised fair value of $9.6 million associated with the awards rolled over by management was deemed attributable to post-combination service. Because there was no future service requirement to the Parent, this amount was immediately recorded as share-based compensation expense in the statement of operations of the Successor.
The total acquisition-related share-based compensation expense recorded by the Successor from the awards settled in cash and rolled over by management was $44.7 million.
Predecessor share-based compensation
Share-based compensation of Predecessor reflects the fair value of employee share-based awards, including stock options, time and performance-based restricted stock, and associate stock purchase plans, recognized as compensation expense on a straight-line basis over the requisite service period of the award. All outstanding share-based awards granted as of immediately prior to the Transactions became fully vested in connection with the Acquisition. The equity incentive plans of the Predecessor no longer exist.