Note 5—Stock-Based Compensation:

Certain of the Company’s employees participate in stock-based compensation plans sponsored by Parent. These plans provide employees with the opportunity to receive cash awards and various types of stock-based compensation to be settled in shares of Parent’s. common stock. Since the Company’s employees directly benefit from participation in these plans and Parent’s corporate employees receiving such awards provide management and corporate support services to the Company, stock-based compensation expense has been allocated to the Company in accordance with Parent’s disclosure statements under U.S. Government Cost Accounting Standards or another systematic basis.

Stock-Based Compensation. The following table summarizes stock-based compensation expense recognized during the three and six months ended August 2, 2013 and during the three and six months ended July 31, 2012:


	Three Months Ended				Six Months Ended
	August 2, 2013		July 31, 2012		August 2, 2013		July 31, 2012
	(in millions)				(in millions)
Stock-based compensation expense:
Stock options	$	—	$	2	$	2	$	3
Vesting stock awards		6		7		13		14
Performance-based stock awards		—		1		—		1
Total stock-based compensation expense	$	6	$	10	$	15	$	18

Stock Options. Stock options granted during the three and six months ended August 2, 2013 and during the three and six months ended July 31, 2012 have a four year vesting period and a seven year contractual life.

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The expected term of all awards granted is derived from Parent’s historical experience. Expected volatility is based on an average of the historical volatility of Parent’s common stock and the implied volatility from traded options on Parent’s common stock. The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option on the date of grant. The Company uses historical data to estimate forfeitures.

In March 2013, Parent’s board of directors declared a special cash dividend of $1.00 per share of Parent common stock payable on June 28, 2013 to stockholders of record on June 14, 2013 (the “dividend record date”). In connection with Parent’s special cash dividend during the quarter, anti-dilutive adjustments were made to all outstanding stock options on the dividend record date to preserve their value following the special cash dividend, as required by Parent’s 2006 Equity Incentive Plan. The modifications were made to reduce the exercise prices of the outstanding stock options and to increase the number of shares issuable upon the exercise of each option such that the aggregate difference between the market price and exercise price times the number of shares issuable upon exercise was substantially the same immediately before and after the payment of the special dividend. To effect these modifications, on June 12, 2013, Parent increased the shares of stock subject to stock options by a factor of 1.0713, which is the ratio of Parent’s closing price of $14.87 on June 11, 2013, the last trading date prior to the ex-dividend date, to the opening price of $13.88 on the ex-dividend date, June 12, 2013, and decreased the exercise price of each of the stock options by a factor of 0.9334, which is the ratio of the opening price on the ex-dividend date to Parent’s closing price on June 11, 2013.

These adjustments did not result in additional share-based compensation expense, as the fair value of the outstanding options immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution. Given that the Company’s employees participate in the Parent’s 2006 Equity Incentive Plan, these adjustments are reflected in the “Special Dividend Adjustment” line in the stock option activity table below.

The weighted average grant-date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were as follows:


	Six Months Ended
	August 2, 2013			July 31, 2012
Weighted average grant-date fair value**	$	1.70		$	1.69
Expected term (in years)		5.0			5.0
Expected volatility		25.0	%		24.4	%
Risk-free interest rate		0.8	%		1.0	%
Dividend yield		3.9	%		3.7	%

**	Adjusted for additional awards granted for the $1.00 Special Dividend

Stock option activity for the Company’s employees during the six months ended August 2, 2013 was as follows:


	Shares of stocks under stock options			Weighted average exercise price		Weighted average remaining contractual term		Aggregate intrinsic value
	(in millions)					(in years)		(in millions)
Outstanding at January 31, 2013		3.6		$	16.95		2.8
Options granted		1.7			13.55
Options forfeited or expired		(1.3	)		18.49
Transfers from Parent, net		2.9			16.37
Special dividend adjustment		0.4
Outstanding at August 2, 2013		7.3			14.53		4.1		11
Exercisable at August 2, 2013		2.9			16.22		2.1		1

Vesting Stock Awards. Subsequent to fiscal 2012, grants of restricted stock units that had forfeitable dividend rights and no voting rights were not included in common stock outstanding until they vested. Prior to January 31, 2012, the Company granted restricted stock awards that have non-forfeitable dividend rights and voting rights and are included in shares outstanding upon issuance (prior to vesting). Vesting stock award activity for the six months ended August 2, 2013 was as follows:


	Shares of stock under stock awards			Weighted average grant-date fair value
		(in millions	)
Unvested stock awards at January 31, 2013		3.7		$	15.32
Awards granted		3.0			13.61
Awards forfeited		(0.3	)		14.99
Awards vested		(1.3	)		16.17
Transfers from Parent, net		1.0			14.98
Unvested stock awards at August 2, 2013		6.1			14.25

Performance-Based Stock Awards. Parent grants performance-based stock awards to certain officers and key employees. These awards vest at the end of a three-year performance period based upon the achievement of specific pre-established levels of performance. Compensation expense for performance-based stock awards is recognized over the three-year performance period based on the expected level of achievement that will be obtained and adjusted as appropriate to reflect actual shares issued.