Stock-Based Compensation

FASB guidance requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values.

The Company elected to adopt the alternative transition method provided in FASB guidance for calculating the tax effects of share-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (the “APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee and director share-based awards that are outstanding upon adoption. In addition, the Company elected to recognize excess income tax benefits from stock option exercises and vesting of restricted stock and performance shares in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. The Company measures the tax benefit associated with excess tax deductions related to stock-based compensation expense by multiplying the excess tax deductions by the statutory tax rates. The Company records tax shortfalls for the stock compensation related to vested stock options and performance awards that have been forfeited to paid-in capital to the extent there is APIC Pool balance available. If there is no APIC Pool balance available, the Company records these tax shortfalls to its provision for income taxes. During fiscal 2012, 2011, and 2010, the Company recorded $1.3 million, $0.7 million and $2.3 million, respectively, of tax shortfalls to paid-in capital.

The Company had one stock incentive plan under which shares were available for grant at February 2, 2013: the 2005 Stock Incentive Plan (the “2005 Plan”). The Company also previously granted share awards under its 1996 Long-Term Incentive Plan (the “1996 Plan”) and the 2000 Stock Incentive Plan (the “2000 Plan”) that remain unvested and/or unexercised as of February 2, 2013; however, the 1996 Plan expired during fiscal 2006 and the 2000 Plan expired during fiscal 2009, and no further share awards may be granted under the 1996 Plan and 2000 Plan. The 2005 Plan, the 2000 Plan, and the 1996 Plan are collectively referred to as the “Plans.”

The 2005 Plan permits the granting of options, restricted common stock, performance shares, or other equity-based awards to the Company’s employees, officers, directors, and consultants. The Company believes the granting of equity-based awards helps to align the interests of its employees, officers and directors with those of its stockholders. The Company has a practice of issuing new shares to satisfy stock option exercises, as well as for restricted stock and performance share grants. The 2005 Plan was approved by the Company’s stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of incentive awards covering 12,500,000 shares of Class A common stock. An amended and restated 2005 Plan was approved subsequently by the Company’s stockholders on May 19, 2010, which increased the incentive awards capacity to 17,500,000 shares of Class A common stock. An aggregate of 22,557,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of February 2, 2013, 4,807,704 shares were available for future grants.

Options

The Plans provide that the per-share exercise price of a stock option may not be less than the fair market value of Class A common stock on the date the option is granted. Under the Plans, outstanding options generally vest over periods ranging from three to five years from the grant date and generally expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the expected price volatility, option lives, and forfeiture rates.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the periods indicated using the Black-Scholes option-pricing model:



	Fiscal 2012		Fiscal 2011		Fiscal 2010
Dividend Yield	—	%	—	%	—	%
Expected Volatility	48.58	%	54.00	%	59.00	%
Risk-Free Interest Rate	0.48	%	0.88	%	1.12	%
Expected Life of Options (in Years)	3.3		3.3		3.3

The Company recorded $1.2 million, $1.1 million, and $0.3 million of compensation expense related to options, or $0.01, $0.01, and less than $0.01 per basic and diluted share, related to stock options outstanding during fiscal 2012, 2011, and 2010, respectively.

At February 2, 2013, there was $0.6 million of total unrecognized compensation expense related to nonvested stock options under the Company’s share-based payment plans, which will be recognized over an average period of 1.6 years, representing the remaining vesting periods of such options through fiscal 2015.

The following table summarizes the Company’s stock option activities with respect to its Plans for fiscal 2012, as follows (aggregate intrinsic value in thousands):



Options	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at January 28, 2012	3,474,204		$	4.64
Granted	125,000		$	3.10
Exercised	(6,001	)	$	3.15
Canceled	(2,029,036	)	$	4.81
Outstanding at February 2, 2013	1,564,167		$	4.29	2.43	$	—
Vested and expected to vest in the future at February 2, 2013	1,487,831		$	4.32	2.35	$	—
Exercisable at February 2, 2013	1,066,815		$	4.59	1.74	$	—

Options vested and expected to vest in the future are comprised of all options outstanding at February 2, 2013, net of estimated forfeitures. Additional information regarding stock options outstanding as of February 2, 2013, is as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of February 2, 2013	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price Per Share		Number Exercisable as of February 2, 2013	Weighted- Average Exercise Price Per Share
$ 1.81 - $ 2.74	22,500	4.15	$	2.58	2,500	$	1.81
2.77 - 4.19	1,159,667	2.60	3.63		738,985	3.65
4.26 - 6.82	202,500	3.21	4.91		145,830	5.08
8.00 - 10.95	179,500	0.19	8.09		179,500	8.09
$ 1.81 - $10.95	1,564,167	2.43	$	4.29	1,066,815	$	4.59

The weighted-average grant-date fair value of options granted during fiscal 2012, 2011, and 2010 was $1.08, $1.49, and $1.49 per share, respectively. The total intrinsic value for options exercised during fiscal 2012, 2011, and 2010 was less than$0.1 million, $0.5 million, and $0.1 million, respectively.

Cash received from option exercises under all Plans for fiscal 2012, 2011, and 2010 was less than $0.1 million, $1.1 million, and $0.2 million, respectively. During fiscal 2012, 2011, and 2010, the Company did not realize tax benefits for the tax deductions from option exercises as it must first utilize its regular net operating loss carryforwards (see Note 3 - "Income Taxes") prior to realizing the excess tax benefits.

Restricted Common Stock and Performance Shares

Under the 2005 Plan, the Company grants directors, certain executives, and other key employees restricted common stock with vesting contingent upon completion of specified service periods ranging from one to three-and-one-half years. The Company also grants certain executives and other key employees performance share awards with vesting contingent upon a combination of specified service periods and the Company’s achievement of specified common stock price levels.

During fiscal 2012, 2011, and 2010, the Company granted 1,120,476, 431,388, and 972,700 shares, respectively, of restricted common stock to certain employees and directors under the Plans. The weighted-average grant-date fair value of the restricted common stock granted during fiscal 2012, 2011, and 2010 was $3.04, $3.87, and $3.48 per share, respectively. The Company recorded approximately $2.2 million, $1.5 million, and $1.3 million of compensation expense related to outstanding shares of restricted common stock held by employees and directors during fiscal 2012, 2011, and 2010, respectively.

During fiscal 2012, 2011, and 2010, the Company granted none, 400,000, and 1,000,000 performance shares, respectively, to certain officers under the 2005 Plan. The weighted-average grant-date fair value of the performance share grants made during fiscal 2011 and 2010, which included consideration of the probability of such shares vesting, was $3.08 and $2.56 per share, respectively. The Company recorded $(0.5) million, $2.0 million, and $0.2 million of compensation (benefit) expense during fiscal 2012, 2011, and 2010, respectively, related to performance shares granted to officers.

The fair value of nonvested restricted common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date. The fair value of nonvested performance shares is determined using the Monte-Carlo simulation model based on a number of factors, including the closing trading price of the Company’s common stock and the estimated probability of achieving the Company’s stock price performance conditions as of the grant date. As of February 2, 2013, the Company had no outstanding nonvested performance shares. The following table summarizes activity with respect to the Company’s nonvested restricted common stock and performance shares for fiscal 2012:



Nonvested Restricted Common Stock and Performance Shares	Number of Shares		Weighted- Average Grant- Date Fair Value
Nonvested at January 28, 2012	2,105,112		$	3.16
Granted	1,120,476		$	3.04
Vested	(1,020,974	)	$	3.63
Forfeited	(1,560,122	)	$	2.87
Nonvested at February 2, 2013	644,492		$	2.89

The fair value of restricted common stock and performance shares that vested during fiscal 2012 was $3.1 million.

At February 2, 2013, there was $1.7 million of total unrecognized compensation expense related to nonvested restricted common stock under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 1.6 years. These estimates utilize subjective assumptions about expected forfeiture rates, which could change over time. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the expense that will ultimately be recognized by the Company in its consolidated statements of operations.

The following table summarizes stock-based compensation recorded in the consolidated statements of operations:



	Fiscal Year Ended
	February 2, 2013		January 28, 2012		January 29, 2011
	(in thousands)
Cost of sales	$	300	$	271	$	2
Selling, general, and administrative expenses	2,649		4,376		1,785
Stock-based compensation	$	2,949	$	4,647	$	1,787