Share-Based Compensation - Stock Option Awards

Compensation is recognized for all share-based compensation arrangements by the Company. Share-based compensation expense for the third quarter of fiscal 2012 and fiscal 2011 related to stock option awards was $406,000 and $609,000, respectively. Stock-based compensation expense for the first nine-months of fiscal 2012 and fiscal 2011 related to stock option awards was $1,072,000 and $2,177,000, respectively. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.

As of October 27, 2012, the Company had two omnibus stock plans for which stock awards can be currently granted: the 2011 Omnibus Incentive Plan that provides for the issuance of up to 3,000,000 shares of the Company's stock and the 2004 Omnibus Stock Plan (as amended and restated in fiscal 2006) that provides for the issuance of up to 4,000,000 shares of the Company's common stock. The 2001 Omnibus Stock Plan expired on June 21, 2011. These plans are administered by the human resources and compensation committee of the board of directors and provide for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards under the plans. The types of awards that may be granted under these plans include restricted and unrestricted stock, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the human resources and compensation committee may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than ten years after the effective date of the respective plan's inception or be exercisable more than ten years after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. With the exception of market-based options, options granted generally vest over three years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of ten years from the date of grant.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.



	Fiscal 2012	Fiscal 2011
Expected volatility	97 - 98%	88 - 93%
Expected term (in years)	6 years	6 years
Risk-free interest rate	1.0%	1.7% - 2.7%

Market-Based Stock Option Awards

On October 3, 2012, the Company granted 2,125,000 non-qualified market-based stock options to its executive officers as part of the Company's long-term executive compensation program. The options were granted with an exercise price of $4.00 and each option will become exercisable in three tranches, as follows, on the dates when the Company's average closing stock price for 20 consecutive trading days equals or exceeds the following prices: Tranche 1 (50% of the shares subject to the option at $6.00 per share); Tranche 2 (25% at $8.00 per share); and Tranche 3 (25% at $10.00 per share). If an average closing price of $6.00 per share is not achieved on or before the third anniversary of the grant date, the entire option award will be forfeited. However, if the first tranche becomes exercisable, then the vesting of the second and third tranches can occur any time on or before the fifth anniversary of the grant date. Net shares issued upon the exercise of these market-based stock options (after shares are potentially withheld to cover the exercise price and applicable withholding taxes) may not be sold for a period of one year from the date of exercise. As of October 27, 2012, all 2,125,000 market-based stock option awards remain outstanding. The total grant date fair value was estimated to be $1,998,000 and is being amortized over the derived service periods for each tranche. Estimated non-cash compensation expense for fiscal 2013 related to this grant will be approximately $1,280,000. Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of 0.38%, a weighted average expected life of 3.3 years and an implied volatility of 78% and were as follows for each tranche:



	Fair Value (Per Share)		Derived Service Period
Tranche 1 ($6.00/share)	$	0.93	15	months
Tranche 2 ($8.00/share)	$	0.95	20	months
Tranche 3 ($10.00/share)	$	0.95	24	months

A summary of the status of the Company’s stock option activity as of October 27, 2012 and changes during the nine-months then ended is as follows:



	2011 Incentive Stock Option Plan		Weighted Average Exercise Price		2004 Incentive Stock Option Plan		Weighted Average Exercise Price		2001 Incentive Stock Option Plan		Weighted Average Exercise Price		Other Non- Qualified Stock Options		Weighted Average Exercise Price
Balance outstanding, January 28, 2012	160,000		$	2.25	2,345,000		$	6.03	1,226,000		$	6.15	650,000		$	4.30
Granted	2,225,000		$	3.92	20,000		$	1.70	—		$	—	—		$	—
Exercised	—		$	—	(81,000	)	$	1.03	—		$	—	—		$	—
Forfeited or canceled	(10,000	)	$	1.62	(143,000	)	$	6.80	(47,000	)	$	13.49	(125,000	)	$	5.06
Balance outstanding, October 27, 2012	2,375,000		$	3.81	2,141,000		$	6.13	1,179,000		$	5.86	525,000		$	4.12
Options exercisable at October 27, 2012	33,000		$	2.63	2,007,000		$	6.03	1,143,000		$	5.75	270,000		$	3.87

The following table summarizes information regarding stock options outstanding at October 27, 2012:



Option Type	Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Vested or Expected to Vest	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
2011 Incentive:	2,375,000	$	3.81	10.0	$	35,000	2,353,000	$	3.83	10.0	$	31,000
2004 Incentive:	2,141,000	$	6.13	6.1	$	244,000	2,127,000	$	6.12	6.0	$	244,000
2001 Incentive:	1,179,000	$	5.86	5.8	$	33,000	1,176,000	$	5.87	5.8	$	33,000
Non-Qualified:	525,000	$	4.12	7.7	$	27,000	500,000	$	4.10	7.7	$	26,000

The weighted average grant-date fair value of options granted in the first nine months of fiscal 2012 and fiscal 2011 was $0.98 and $4.65, respectively. The total intrinsic value of options exercised during the first nine months of fiscal 2012 and fiscal 2011 was $91,000 and $1,806,000, respectively. As of October 27, 2012, total unrecognized compensation cost related to stock options was $3,192,000 and is expected to be recognized over a weighted average period of approximately 0.9 year.