STOCK-BASED COMPENSATION

At December 30, 2012, we had stock-based employee compensation plans as described below. For the years ended December 30, 2012, December 25, 2011, and December 26, 2010, the total compensation expense (included in selling, general, and administrative expense) related to these plans was $4.7 million, $7.3 million, and $8.5 million ($4.5 million, $7.1 million, and $6.2 million, net of tax), respectively.

Stock Plans

On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately 3,500,000, which represent the shares that were available at that time under the 1992 Stock Option Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the 1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further awards will be issued under the 1992 Plan. The 2004 Plan is designed to provide incentives to employees, non-employee directors, and independent contractors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a three-year period and expire not more than 10 years from date of grant. Restricted stock units vest over three to five year periods from date of grant. On June 3, 2009, at the 2009 Annual Meeting of Shareholders of Checkpoint Systems, Inc., the shareholders of the Company approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan, Effective Date: February 17, 2009 (the “Omnibus Incentive Plan”), which was amended and restated to extend the term of the Omnibus Incentive Plan by an additional five years and to re-approve the performance goals set forth under the Omnibus Incentive Plan. The 2004 Plan was further amended on June 2, 2010, at the 2010 Annual Meeting of Shareholders of Checkpoint Systems, Inc., when our shareholders approved the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the “Plan”), which was amended and restated to:


•	increase the number of shares of the Company’s common stock reserved for issuance under the Plan by 3,250,000 shares to an aggregate of 6,687,956 shares;

•

revise the “repricing” provision such that the new provision will provide that, except in respect of certain corporate transactions, the terms of outstanding awards may not be amended to (i) reduce the exercise price of outstanding stock options or stock appreciation rights (“SARs”), or (ii) cancel, exchange, substitute, buy out or surrender outstanding options or SARs in exchange for cash, other awards, stock options or SARs with an exercise price that is less than the exercise price of the original stock options or SARs (as applicable) without shareholder approval;

•

impose a limitation on certain shares of the Company’s common stock from again being made available for issuance under the Plan such that the following shares of the Company’s common stock may not again be made available for issuance: (i) shares of common stock not issued or delivered as a result of the net settlement of an outstanding SAR or stock option, (ii) shares of common stock used to pay the exercise price or withholding taxes related to an outstanding award, or (iii) shares of common stock repurchased on the open market with the proceeds of the stock option exercise price;


•	establish a minimum exercise price with respect to stock options or SARs to be granted under the Plan such that no stock option or SAR may be granted under the Plan with a per share exercise price that is less than 100% of the fair market value of one share of the Company’s common stock on the date of grant; and

•

establish a limitation against the payment of any cash dividend or dividend equivalent right (“DER”) with respect to awards that vest based upon the attainment of one or more performance measures such that no awards granted under the Plan based upon the attainment of one or more performance measures will be entitled to receive payment of any cash dividends or DERs with respect to such awards unless and until such awards vest.

As of December 30, 2012, there were 3,308,264 shares available for grant under the 2004 Plan.

Our 1992 Stock Option Plan (1992 Plan) allowed us to grant either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to purchase up to 16,000,000 shares of common stock. Only employees were eligible to receive ISOs and both employees and non-employee directors of the Company were eligible to receive NSOs. On February 17, 2004, the Plan was amended to allow an independent consultant to receive NSOs. All ISOs under the 1992 Plan expire not more than ten years (plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase price of not less than 100% of the fair market value of the stock at the date of grant. As of December 30, 2012, there were no shares available for grant under the 1992 Plan.

On December 27, 2007, we adopted a stand alone inducement stock option plan authorizing the issuance of options to purchase up to 270,000 shares of our common stock, which were granted to the newly elected President and CEO of the Company in connection with his hire. The non-qualified stock options provide for three vesting instances: 60% on December 31, 2010; 20% on December 31, 2011; and 20% on December 31, 2012. The options also have a market condition. The market condition specifies that any unvested tranche will vest immediately as soon as the Company’s stock price exceeds 200% of the December 27, 2007, strike price of $22.71. In addition, there were 230,000 shares issued out of our Omnibus Incentive Compensation Plan with similar vesting and market based criteria as described above.

To determine the fair value of stock options with market conditions we used the Monte Carlo simulation lattice model using the following assumptions: (i) expected volatility of 37.04%, (ii) risk-free rate of 4.1%, (iii) expected term of 10 years, and (iv) an expected dividend yield of zero. The weighted average fair value of the stock options with market conditions was $12.43 per share.

During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted stock units (RSUs) were awarded to eligible executives. During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded to eligible key employees.

On December 4, 2007, RSUs were awarded to certain key employees of the Company’s Alpha Security Products Division as part of the LTIP plan. The number of shares for these units varies based on the Company’s Alpha^® product revenues. These units had the potential to vest 33% per year, over a three-year period ending at the end of fiscal 2010. The weighted average price for these RSUs was $21.84 per share. At December 26, 2010, we reversed $0.6 million of previously recognized compensation cost since it was determined that the Company did not achieve the revenue targets set forth in the plan. Accordingly, no remaining RSUs were earned under this plan.

On February 17, 2009, RSUs were awarded to certain key employees of the Company as part of the LTIP 2009 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2009 to December 2011 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $8.12 per share. At December 25, 2011, we reversed $0.5 million of previously recognized compensation cost since it was determined that the Company did not achieve the specific relative performance goals set forth in the plan. Accordingly, no RSUs were earned under this plan.

On February 12, 2010, RSUs were awarded to certain key employees of the Company as part of the LTIP 2010 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus a pool of peer companies during the January 2010 to December 2012 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $15.83 per share. Additional RSUs related to the LTIP 2010 plan were awarded on February 22, 2010, and March 11, 2010, with a weighted average price of $17.06 and $21.76 per share, respectively. At June 24, 2012, we reversed $0.8 million of previously recognized compensation cost since it was determined that the Company would not achieve the specific relative performance goals set forth in the plan. Accordingly, no RSUs were earned under this plan.

On February 17, 2011, RSUs were awarded to certain key employees of the Company as part of the LTIP 2011 plan. The number of shares for these units varies based on the Company achieving specific relative performance goals versus the Russell 2000 index during the January 2011 to December 2013 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $22.54 per share. At September 23, 2012, we assessed our performance versus the Russell 2000 index and determined that a portion of the goals identified in the plan would not be achieved. As a result, at September 23, 2012, we reversed $0.3 million of previously recognized compensation cost attributable to these goals. For fiscal year 2012, $0.1 million of income was charged against compensation expense. As of December 30, 2012, total unamortized compensation expense for this grant was $0.2 million. As of December 30, 2012, the maximum achievable RSUs outstanding under this plan are 37,356 units. These RSUs reduce the shares available to grant under the 2004 Plan.

On February 22, 2012, RSUs were awarded to certain key employees of the Company as part of the LTIP 2012 plan. The number of shares for these units varies based on the Company achieving certain levels of earnings before interest, taxes, depreciation, and amortization (EBITDA) during the January 2012 to December 2014 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $11.93 per share. For fiscal year 2012, $0.1 million was charged to compensation expense. As of December 30, 2012, total unamortized compensation expense for this grant was $0.2 million. As of December 30, 2012, the maximum achievable RSUs outstanding under this plan are 29,820 units. These RSUs reduce the shares available to grant under the 2004 Plan.

On July 24, 2012, RSUs were awarded to certain key employees of the Company as part of the LTIP Second Half 2012 plan. The number of shares for these units varies based on individual performance versus second half 2012 goals. These goals were developed for employees who can influence key metrics set forth in the new business strategy during the July 2012 to December 2012 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $7.59 per share. For fiscal year 2012, $0.6 million was charged to compensation expense. Final assessment of these goals, including any compensation expense true-up will be completed in the first half of 2013. As of December 30, 2012, the maximum achievable RSUs outstanding under this plan are 108,960 units. These RSUs reduce the shares available to grant under the 2004 Plan.

Stock Options

Option activity under the principal option plans as of December 30, 2012 and changes during the year then ended were as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 25, 2011	2,600,805		$	19.54	4.39	$	512
Granted	801,880		9.70
Exercised	(62,247	)	8.61
Forfeited or expired	(596,381	)	18.03
Outstanding at December 30, 2012	2,744,057		$	17.24	5.01	$	1,321
Vested and expected to vest at December 30, 2012	2,545,483		$	17.83	4.67	$	1,002
Exercisable at December 30, 2012	2,052,214		$	19.54	3.58	$	371

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 30, 2012. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended December 30, 2012, December 25, 2011, and December 26, 2010, was $0.1 million, $1.1 million, and $4.3 million, respectively.

As of December 30, 2012, $1.4 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.1 years.

Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended December 30, 2012 was $1.7 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $0.1 million and $1.3 million for the fiscal years ended December 30, 2012 and December 25, 2011. We have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.

Restricted Stock Units

We issue service-based restricted stock units with vesting periods up to five years. These awards are valued using their intrinsic value on the date of grant. The compensation expense is recognized straight-line over the vesting term.

Nonvested service-based restricted stock units as of December 30, 2012 and changes during the year ended December 30, 2012 were as follows:



	Number of Shares		Weighted- Average Vest Date (in years)	Weighted- Average Grant Date Fair Value
Nonvested at December 25, 2011	617,672		0.79	$	21.29
Granted	223,795			$	10.58
Vested	(196,254	)		$	11.24
Forfeited	(82,107	)		$	17.15
Nonvested at December 30, 2012	563,106		0.79	$	21.14
Vested and expected to vest at December 30, 2012	511,026		0.65
Vested at December 30, 2012	61,250		—

The total fair value of restricted stock awards vested during 2012 was $2.2 million as compared to $4.0 million during 2011. As of December 30, 2012, there was $1.4 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.5 years.

Other Compensation Arrangements

During fiscal 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled $1.0 million at December 30, 2012, of which $1.2 million, $0.6 million, and $0.2 million was expensed for the years ended December 30, 2012, December 25, 2011, and December 26, 2010, respectively. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets.