Share-Based Compensation

9 Months Ended

Oct. 30, 2011

Share-Based Compensation

Share-Based Compensation

(3)           Share-Based Compensation

The Company recognizes compensation expense for its share-based payments based on the fair value of the awards at grant date.  Share-based payments consist of stock option grants and the related compensation cost is recognized over the requisite service period of the award.  For both the third quarter of fiscal 2012 and the third quarter of fiscal 2011, share-based compensation decreased pre-tax income by $0.1 million.  For both the thirty-nine weeks ended October 30, 2011 and October 31, 2010, share-based compensation decreased pre-tax income by $0.3 million.  

Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. 

Stock Incentive Plan

Under our 2003 Incentive Stock Option Plan, options may be granted to officers and key employees, not to exceed 500,000 shares.  According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant.  Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100,000. In the event that the foregoing results in a portion of an option exceeding the $100,000 limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option.  As of October 30, 2011, the Company had 272,620 shares authorized for future option grants.  Upon exercise, the Company issues these shares from the unissued shares authorized.

Under our Non-Qualified Stock Option Plan for Non-Management Directors, options may be granted to Directors of the Company who are not otherwise officers or employees of the Company, not to exceed 200,000 shares.  According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant.  The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur.  All options under the plan shall be non-qualified stock options.  As of October 30, 2011, the Company had 96,457 shares remaining to be issued under this plan.  Upon exercise, the Company issues these shares from the unissued shares authorized.

The fair value of each option grant is separately estimated. The fair value of each option is amortized into share-based compensation on a straight-line basis over the requisite service period as discussed above.  We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model.  The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility.

The following summarizes information concerning stock option grants during fiscal 2012 and 2011:

	Year Ended		Thirteen Week Periods Ended				Thirty-Nine Week Periods Ended
	January 30, 2011		October 30, 2011		October 31, 2010		October 30, 2011		October 31, 2010
Stock options granted		145,000		-		45,000		22,500		145,000
Weighted average exercise price	$	13.91		-		12.94		10.60		13.91
Weighted average grant date fair value	$	6.12		-		5.60		4.65		6.12

The weighted average for key assumptions used in determining the fair value of options granted in the periods indicated together with a summary of the methodology applied to develop each assumption are as follows:

	Year Ended			Thirteen Week Periods Ended					Thirty-Nine Week Periods Ended
	January 30, 2011			October 30, 2011		October 31, 2010			October 30, 2011			October 31, 2010
Expected price volatility		52.0	%		N/A		54.0	%		58.4	%		52.0	%
Risk-free interest rate		1.3	%		N/A		0.8	%		0.9	%		1.3	%
Weighted average expected lives in years		4.6			N/A		4.3			3.8			4.6
Dividend yield		0.0	%		N/A		0.0	%		0.0	%		0.0	%
N/A - No stock options were issued during the thirteen week period ended October 30, 2011.

EXPECTED PRICE VOLATILITY -- This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.

RISK-FREE INTEREST RATE -- This is the applicable U.S. Treasury rate for the date of the grant over the expected term.  An increase in the risk-free interest rate will increase share-based compensation.

EXPECTED LIVES -- This is the period of time over which the options granted are expected to remain outstanding and is based on management's expectations in relation to the holders of the options. Options granted have a maximum term of five years. An increase in the expected life will increase share-based compensation.

DIVIDEND YIELD --- The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.

As of October 30, 2011, total unrecognized share-based compensation related to non-vested stock options is $0.6 million with a weighted average expense recognition period of 2.5 years.