Stock-Based Compensation

Under the provisions of Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation” (“ASC 718”), all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the statement of operations.

On April 8, 2014, the Board unanimously approved the 2014 Omnibus Incentive Plan (the “Omnibus Plan”), which is an amendment and restatement of our Second Amended and Restated 2002 Long-Term Incentive Plan, as amended (the “2002 Plan”). The Omnibus plan became effective upon stockholder approval at the Annual Meeting of Shareholders on June 30, 2014 (the “Omnibus Plan Effective Date”). The Omnibus Plan includes the following key modifications, effective upon the 2014 Omnibus Plan Effective Date:


•	Increase of the Aggregate Share Reserve. The aggregate share reserve increased by an additional 5,900,000 shares of Common Stock for a total share reserve of 6,113,891 shares of Common Stock under the Omnibus Plan. As of August 2, 2014, there were 6,052,911 shares outstanding under the Omnibus Plan.


•	Cash Performance Awards. The Omnibus Plan includes Cash Performance Awards that may be granted with the intent to comply with the “performance-based compensation” exception under Section 162(m) of the Code. Because Cash Performance Awards may be made in addition to stock-based awards, the 2002 Plan has been renamed the “2014 Omnibus Incentive Plan.”


•	Term Extension. We extended the term of the Omnibus Plan until May 8, 2024 (the 2002 Plan was scheduled to expire on June 16, 2021).

Restricted Stock Units

Beginning in fiscal 2013, certain of our employees have been awarded restricted stock units, pursuant to restricted stock unit agreements. The restricted stock units awarded to employees cliff vest at varying times, most typically following between one and three years of continuous service from the award date. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2013 whereby the awardee completes 10 years of service, attains age 55 and retires. All restricted stock units immediately vest upon a change in control of the Company.

The following table summarizes share-settled restricted stock units outstanding as of August 2, 2014:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 2, 2014	230		$	9.05
Granted	322		4.81
Vested	(3	)	9.05
Canceled	—		—
Outstanding as of August 2, 2014	549		$	6.57

Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted units activity was $0.2 million for the second quarter of 2014 and $1.8 million for the first twenty-six weeks of 2014. There was no compensation expense related to restricted units for the second quarter of 2013 or the first twenty-six weeks of 2013. As of August 2, 2014, there was $0.6 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over the weighted average period of two years. The total fair value of units vested was less than $0.1 million during the first twenty-six weeks of 2014. No units were vested during the second quarters of 2014 and 2013 or the first twenty-six weeks of 2013.

Additionally, beginning in the first quarter of fiscal 2014, certain of our employees have been awarded cash-settled restricted stock units, pursuant to cash-settled restricted stock unit agreements. The cash-settled restricted stock units awarded to employees cliff vest at varying times up to approximately three years of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2013 whereby the awardee completes 10 years of service, attains age 55 and retires. All cash-settled restricted stock units immediately vest upon a change in control of the Company. We may, in our sole discretion, at any time during the term, convert the cash-settled restricted stock units for stock-settled restricted stock units. The cash-settled restricted stock units are treated as liability awards in accordance with ASC 718.

The following table summarizes cash-settled restricted stock units outstanding as of August 2, 2014:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 2, 2014	—		$	—
Granted	1,219		4.93
Vested	—		—
Canceled	(53	)	4.99
Outstanding as of August 2, 2014	1,166		$	4.93

Restricted Shares

Certain of our employees and all of our directors have been awarded non-vested stock (restricted shares), pursuant to non-vested stock agreements. The restricted shares awarded to employees generally cliff vest after up to three years of continuous service. Beginning in November 2012, certain shares awarded after such date may also vest upon a qualified retirement at age 65, or upon a qualified early retirement under the provisions adopted in 2013 whereby an awardee completes 10 years of service, attains age 55 and retires. All restricted shares immediately vest upon a change in control of the Company. Grants of restricted shares awarded to directors vest in full after one year.

The following table summarizes non-vested shares of stock outstanding as of August 2, 2014:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 2, 2014	1,856		$	14.82
Granted	299		4.50
Vested	(461	)	18.01
Canceled	(91	)	12.49
Outstanding as of August 2, 2014	1,603		$	12.11

Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted shares activity was $1.9 million for the second quarter of 2014 and $5.1 million for the second quarter of 2013. Compensation expense related to restricted shares activity was $3.7 million for the first twenty-six weeks of 2014 and $7.6 million for the first twenty-six weeks of 2013. As of August 2, 2014, there was $8.8 million of unrecognized compensation cost related to restricted shares awards that is expected to be recognized over the weighted average period of one year. The total fair value of shares vested was $4.5 million during the second quarter of fiscal 2014 and $0.1 million during the second quarter of fiscal 2013. The total fair value of shares vested was $8.3 million for the first twenty-six weeks of 2014 and $7.6 million for the first twenty-six weeks of 2013.

In connection with the GoJane acquisition, we granted restricted shares to the two individual stockholders of GoJane, with compensation expense recognized over the three year cliff vesting period. If the aggregate dollar value of the restricted shares on the vesting date is less than $8.0 million, then we shall pay to the two individual stockholders an amount in cash equal to the difference between $8.0 million and the fair market value of the restricted shares on the vesting date. As of the second quarter of 2014, we recorded additional compensation expense of $1.1 million and a corresponding liability of $3.4 million based on the Company's stock price as of August 2, 2014. As of the first twenty-six weeks of 2014, we recorded additional compensation expense of $2.0 million. As of the second quarter of 2013 and the first twenty-six weeks of 2013, we recorded no additional compensation expense.

On October 31, 2013, we entered into Restricted Stock Award Rescission Agreements with certain executives to rescind 229,760 aggregate shares of restricted stock granted on March 29, 2013 under the Aéropostale, Inc. 2002 Long-Term Incentive Plan. The rescission did not have a material impact on the unaudited condensed consolidated financial statements for any period presented and we recorded $1.0 million of compensation cost during the third quarter of 2013 as a result of rescinding such restricted stock awards.

Performance Shares

Certain of our executives have been awarded performance shares, pursuant to performance share agreements. The performance shares cliff vest at the end of three years of continuous service with us. The shares awarded during fiscal 2013 are contingent upon meeting various separate performance conditions based upon consolidated earnings targets or market conditions based upon total shareholder return targets. All performance shares immediately vest upon a change in control of the Company (as communicated to the executives awarded performance shares). Compensation cost for the performance shares with performance conditions related to consolidated earnings targets is periodically reviewed and adjusted based upon the probability of achieving certain performance targets. If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes. The fair value of performance based awards is based upon the fair value of the Company's common stock on the date of grant. For market based awards that vest based upon total shareholder return targets, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market based award based upon the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company and its peer group. Compensation expense for market based awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

The following table summarizes performance shares of stock outstanding as of August 2, 2014:



	Performance-based			Market-based
	Performance Shares			Performance Shares
	Shares	Weighted Average Grant-Date Fair Value		Shares	Weighted Average Grant-Date Fair Value
	(In thousands)			(In thousands)
Outstanding as of February 2, 2014	—	$	—	391	$	20.01
Granted	—	—		676	5.34
Vested	—	—		—	—
Canceled	—	—		—	—
Outstanding as of August 2, 2014	—	$	—	1,067	$	10.71

Total compensation expense is being amortized over the vesting period. Compensation expense related to the market-based performance shares was $1.0 million for the second quarter of 2014 and $0.6 million for the second quarter of 2013. Compensation expense related to the market-based performance shares was $1.7 million for the first twenty-six weeks of 2014 and $0.8 million for the first twenty-six weeks of 2013. Certain of our performance-based performance shares did not achieve a grant date and therefore are not reflected in the table.

The following table summarizes unrecognized compensation cost and the weighted-average years expected to be recognized related to performance share awards outstanding as of August 2, 2014:



	Performance-based		Market-based
	Performance Shares		Performance Shares
Total unrecognized compensation (in millions)	$	—	$	7.6
Weighted-average years expected to be recognized over (years)	0		2

Cash-Settled Stock Appreciation Rights ("CSARs")

In conjunction with the execution of the employment agreement with Thomas P. Johnson on May 3, 2013, we granted him an award of CSARs, with an award date value of $5.6 million. The number of CSARs granted was determined in accordance with the agreement by dividing $5.6 million by the Black Scholes value of the closing price of a share of the Company's common stock on the award date. The CSARs are currently being treated as a liability based award. For the second quarter of 2014, our expected volatility was 59%, expected term was 3.3 years, risk-free interest rate was 1.06% and expected forfeiture rate was 0%. The CSARs have a term of seven years and will vest in equal 1/3 increments over three years. Additionally, we may, in our sole discretion, at any time during the term, exchange a CSAR for another form of equity which is of equal value to the CSAR at the time of the exchange. For the second quarter of 2014 and the first twenty-six weeks of 2014, this incentive award did not have a material impact on the unaudited condensed consolidated financial statements. For the second quarter of 2013 and first twenty-six weeks of 2013, we recorded $0.4 million of expense related to this incentive award. As of August 2, 2014, there was $0.1 million of unrecognized compensation cost related to CSARs that is expected to be recognized over the weighted average period of two years. As a result of the departure of Mr. Johnson after the end of the second quarter of 2014, 2/3 of these CSARs were forfeited (see note 17 for a further discussion).

Stock Options

We have an Omnibus Incentive Plan under which we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees. Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over four years on a pro-rata basis and expire after eight years. All outstanding stock options immediately vest upon (i) a change in control of the Company (as defined in the plan) and (ii) termination of the employee within one year of such change of control.

The fair value of options granted in prior years was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model requires certain assumptions, including estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). For the first twenty-six weeks of 2014, our expected volatility was 55.4% to 56.1%, expected term was 3.96 years, risk-free interest rate was 1.17% to 1.35% and expected forfeiture rate was 0%. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the unaudited condensed consolidated statements of operations.

The effects of applying the provisions of ASC 718 and the results obtained through the use of the Black-Scholes option-pricing model are not necessarily indicative of future values.

The following table summarizes stock option transactions for common stock during the first twenty-six weeks of 2014:



	Number of Shares		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(In years)	(In millions)
Outstanding as of February 2, 2014	377		$	16.61
Granted	30		3.38
Exercised	—		—
Canceled¹	(110	)	13.84
Outstanding as of August 2, 2014	297		$	16.31	1.77	$	—
Options vested as of August 2, 2014 and expected to vest²	297		$	16.31	1.77	$	—
Exercisable as of August 2, 2014	262		$	17.78	1.00	$	—

¹ The number of options canceled includes approximately 110,000 expired shares.

²The number of options expected to vest takes into consideration estimated expected forfeitures.

We recognized less than $0.1 million in compensation expense related to stock options during the second quarters of 2014 and 2013. We recognized less than $0.1 million in compensation expense related to stock options during the first twenty-six weeks of 2014 and the first twenty-six weeks of 2013. For the first twenty-six weeks of 2014 and twenty-six weeks of 2013, the intrinsic value of options exercised was zero.

The following table summarizes information regarding non-vested outstanding stock options as of August 2, 2014:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Non-vested as of February 2, 2014	10		$	6.41
Granted	30		3.38
Vested	—		—
Canceled	(5	)	6.43
Non-vested as of August 2, 2014	35		$	3.81

As of August 2, 2014, the total unrecognized compensation cost related to non-vested options that we expect to be recognized over the remaining weighted-average vesting period of two years is not material to the unaudited condensed consolidated financial statements.