2010 Stock Incentive Plan

In October 2010, Parent’s board of directors adopted the Associated Materials Group, Inc. 2010 Stock Incentive Plan (“2010 Plan”). The 2010 Plan is an incentive compensation plan that permits grants of equity-based compensation awards to employees, directors and consultants of Parent and its subsidiaries. Awards under the 2010 Plan may be in the form of stock options (either incentive stock options “ISO’s” or non-qualified stock options) or other stock-based awards, including restricted stock awards, restricted stock unit awards and stock appreciation rights.

The maximum number of shares originally reserved for the grant or settlement of awards under the 2010 Plan was 6,150,076 shares of Parent common stock, subject to adjustment in the event of any share dividend or split, reorganization, recapitalization, merger, consolidation, spinoff, combination, or any extraordinary dividend or other similar corporate transaction. In November 2014, Parent’s board of directors and Parent’s stockholders approved an amendment and restatement to the 2010 Plan to increase the maximum number of shares which may be issued under the 2010 Plan by 1,400,000 shares of common stock, from 6,150,076 to 7,550,076 shares of Parent common stock. Any shares subject to awards which terminate or lapse without payment of consideration may be granted again under the 2010 Plan. In the event of a change in control, Parent’s compensation committee may, at its discretion, accelerate the vesting or cause any restrictions to lapse with respect to outstanding awards, or may cancel such awards for fair value, or may provide for the issuance of substitute awards.

Stock Options

Options granted under the 2010 Plan were awarded at exercise prices at or above the fair market value of such stock on the date of grant. Each option holder was granted awards with time-based vesting and/or performance-based vesting provisions. Subject to the option holders’ continued employment on each vesting date, the time-based options vest with respect to 20% of the shares on each anniversary of the grant date, with accelerated vesting of all unvested shares in the event of a change in control, as defined in the 2010 Plan. Subject to the option holders’ continued employment on each vesting date, the performance-based options vest based on the achievement of Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”) targets as established by Parent’s board of directors annually with respect to 20% of the shares per year over a five-year period, or if the target for a given year is not achieved, the option may vest if the applicable Adjusted EBITDA target is achieved in the next succeeding year. In addition, the performance-based options also provide that in the event of a change in control, that portion of the option that was scheduled to vest in the year in which the change in control occurs and in any subsequent years shall vest immediately prior to such change in control. If a liquidity event occurs (defined as the first to occur of either a change in control or an initial public offering (“IPO”) of Parent’s common stock), any portion of the performance-based option that did not vest in any prior year because the applicable Adjusted EBITDA target was not met will vest if and only if the H&F Investors receive a three times return on their initial cash investment in Parent. Each option award has a contractual life of ten years.

The stock underlying the options awarded under the 2010 Plan is governed by the stockholders agreement of Parent. Stock purchased as a result of the exercise of options is subject to a call right by Parent, and as a result, other than in limited circumstances, stock issued upon the exercise of the option may be repurchased at the right of Parent. This repurchase feature results in no compensation expense recognized in connection with options granted by Parent, until such time as the exercise of the options could occur without repurchase of the shares by Parent, which is only likely to occur upon a liquidity event, change in control or the completion of an IPO offering of shares of Parent’s common stock. Upon such liquidity event, change in control or IPO, the repurchase feature, with respect to outstanding option awards, is removed and compensation expense related to all option awards, to the extent vested, is recognized immediately.

For the year ended January 3, 2015, Parent granted time-based options and performance-based options to purchase 3.4 million and 0.2 million shares of Parent’s common stock, respectively. None of the 2012, 2013 and 2014 tranches of performance-based awards granted were vested as of January 3, 2015 since the targets for these fiscal years were not achieved.

Stock option activity during the year ended January 3, 2015 is summarized below:



	Shares		Weighted Average Exercise Price		Remaining Contractual Term(years)
Options outstanding December 28, 2013	4,835,438		$	10.52
Granted	3,598,963		9.19
Exercised	—		—
Forfeited	(2,931,841	)	10.25
Options outstanding January 3, 2015	5,502,560		$	9.77	8.5
Options exercisable January 3, 2015	1,158,541		$	12.14	6.4

The fair value of the options granted during 2014, 2013 and 2012 was estimated at the date of the grant using the Black-Scholes model. The weighted average assumptions and fair value of the options were as follows:



	Years Ended
	January 3, 2015			December 28, 2013			December 29, 2012
Dividend yield	—		%	—		%	—		%
Annual risk-free rate	2.26		%	1.99		%	1.69		%
Expected life of options (years)	8.17			7.19			8.27
Volatility	42.2		%	52.3		%	51.0		%
Weighted average fair value of options granted per share	$	1.95		$	2.58		$	1.74

The expected dividend yield is based on Parent’s historical and expected future dividend policy. The annual risk-free interest rate is based on zero coupon treasury bond rates corresponding to the expected life of the awards. The expected lives of the awards are based on the contractual term, the vesting period and the expected lives used by a peer group with similar option terms. Due to the fact that the shares of common stock of Parent have not and do not trade publicly, the expected volatility assumption was derived by referring to changes in the common stock prices of several peer companies (with respect to industry, size and leverage) over the same timeframe as the expected life of the awards.

In September 2011, Parent’s board of directors modified certain performance-based and time-based options held by eligible participants to reduce the exercise price of such options. The number of options repriced was 2.4 million to 43 employees, with a weighted average exercise price prior to repricing of $19.25 and an average remaining contractual life of 9.3 years. The compensation cost relating to this repricing resulted in additional unrecognized non-cash expense of $1.3 million that may be recognized over the remaining life of the options subject to vesting conditions.

In June 2011, Parent’s board of directors modified certain outstanding performance-based options held by eligible participants to reduce the Adjusted EBITDA target of such options for the portion of the award vesting in 2011 and to defer the establishment of Adjusted EBITDA targets for subsequent tranches, which will be set at an amount equal to or greater than the Company’s budgeted Adjusted EBITDA as determined by Parent’s board of directors within 90 days of the commencement of each fiscal year. The number of options included in the modification was 0.5 million to 8 employees, with a weighted average exercise price of $10.00 and an average remaining contractual life of 9.3 years. There was no incremental compensation cost related to this modification.

Restricted Stock and Restricted Stock Units Awards

Grants of restricted stock and restricted stock units have been awarded to certain officers and board members under the 2010 Plan. The awards vest at various dates with vesting periods up to five years. The weighted average fair value of restricted stock and restricted stock unit awards was $5.61 for 2014 and $4.25 for both 2013 and 2012, and was calculated using the estimated market value of the shares on the date of grant.

The following table summarizes the Company’s restricted stock and restricted stock unit award activity for the year ended January 3, 2015:



	Shares		Weighted Average Fair Value Per Share
Nonvested at December 28, 2013	85,600		$	4.25
Granted	62,982		5.61
Vested	(88,382	)	5.22
Forfeited	(8,000	)	4.25
Nonvested at January 3, 2015	52,200		$	4.25

As of January 3, 2015, there was $13.4 million of unrecognized compensation cost related to Parent’s stock-based awards granted under the 2010 Plan and this cost is expected to be recognized at the time of a liquidity event or IPO. Compensation cost of $0.5 million, $0.2 million and $0.1 million was incurred related to Parent’s equity-based compensation plans recorded during 2014, 2013 and 2012, respectively, which was primarily included in SG&A expenses in the Consolidated Statements of Comprehensive Loss. The Company did not receive any cash as a result of vesting and exercise of equity-based compensation awards for the year ended January 3, 2015.