SHAREHOLDERS' EQUITY

9 Months Ended

Oct. 27, 2012

SHAREHOLDERS' EQUITY

8. SHAREHOLDERS’ EQUITY

Common Stock

In connection with certain lease modifications during fiscal 2011, the Company issued 900,000 shares of its common stock to one of its landlords. The fair value on the date of issuance was approximately $1.6 million, which is being amortized on a straight-line basis as a component of occupancy costs over the respective rent reduction period.

Preferred Stock

In conjunction with the Term Loan, the Company issued the Series B Preferred to an affiliate of Golden Gate Capital which, based on the initial conversion ratio, gives that affiliate the right to purchase up to 13.5 million shares of the Company’s common stock. The Series B Preferred shares have an exercise price initially equal to $1.75 per share of the Company’s underlying common stock. The initial holder of the Series B Preferred is entitled to customary registration rights with respect to the underlying common stock. See Note 9, “Fair Value Measurements – Recurring Fair Value Measurements” for further discussion on the accounting treatment of the Series B Preferred.

Stock-Based Compensation

The Company maintains two stock-based incentive plans: (1) the 2005 Performance Incentive Plan (the “Performance Plan”) and (2) the amended and restated Employee Stock Purchase Plan (the “ESPP”). The types of awards that may be granted under the Performance Plan include stock options, stock appreciation rights, restricted stock, and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock. Persons eligible to receive awards under the Performance Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the Performance Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and stock appreciation rights under the Performance Plan is ten years after the grant date of the award. As of October 27, 2012, the maximum number of shares of the Company’s common stock that was available for award grants under the Performance Plan was 2.3 million shares. Any shares subject to awards under prior stock plans that are canceled, forfeited or otherwise terminate without having vested or been exercised, as applicable, will become available for other award grants under the Performance Plan. The Performance Plan will terminate on March 22, 2015, unless terminated earlier by the Company’s Board of Directors.

The Company accounts for stock-based compensation expense in accordance with ASC Topic 718, “Stock Compensation” (“ASC 718”). The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of its stock options. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense to be recognized during the vesting period. The expected term of options granted is derived primarily from historical data on employee exercises adjusted for expected changes to option terms, if any. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based primarily on the historical volatility of the Company’s common stock. The Company records stock-based compensation expense using the straight-line method over the vesting period, which is generally three to four years. The Company’s stock-based awards generally begin vesting one year after the grant date and, for stock options, expire in seven to ten years or three months after termination of employment with the Company. The Company’s stock-based compensation expense resulted from awards of stock options, restricted stock, and stock appreciation rights, as well as from shares issued under the ESPP.

Stock Options

The fair value of the Company’s stock-based compensation activity was determined using the following weighted- average assumptions:

	For the Three Quarters Ended
	October 27, 2012		October 29, 2011
	Stock Options	ESPP	Stock Options	ESPP
Expected life	4 years	0.5 years	4 years	0.5 years
Expected volatility	87% - 88%	71%	83% - 84%	54%
Risk-free interest rate	0.53% - 0.92%	0.15%	0.67% - 1.61%	0.20%
Expected dividends	$—	$—	$—	$—

Under the Performance Plan, incentive and nonqualified stock options have been granted to employees and directors to purchase common stock at prices equal to the fair value of the Company’s shares at the respective grant dates. A summary of stock option (incentive and nonqualified) activity for the first three quarters of fiscal 2012 is presented below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs.)		Aggregate Intrinsic Value ($000s)
Outstanding at January 28, 2012		2,990,501		$	6.61
Granted		20,500			1.71
Exercised		(143,900	)		1.64
Forfeited or expired		(370,549	)		12.33
Outstanding at October 27, 2012		2,496,552		$	6.02		3.7	$	20
Vested and expected to vest at October 27, 2012		2,369,495		$	6.14		3.7	$	18
Exercisable at October 27, 2012		1,440,601		$	7.58		3.2	$	12

The weighted-average grant-date fair value per share of options granted during the first three quarters of fiscal 2012 and 2011 was $1.71 and $1.84, respectively. There were 143,900 and 70,825 stock options exercised during the first three quarters of fiscal 2012 and 2011, respectively. The total intrinsic value of options exercised during each of the first three quarters of fiscal 2012 and 2011 was $0.1 million.

Restricted Stock Awards

A summary of service-based restricted stock awards activity under the Performance Plan for the first three quarters of fiscal 2012 is presented in the following table. Except as described below, such restricted stock awards contain a service-based restriction as to vesting. These awards generally vest over four years with 25% of the grant vesting each year on the anniversary of the grant date.

	Shares			Weighted- Average Grant-Date Fair Value
Outstanding at January 28, 2012		765,523		$	3.91
Granted		1,505,782			1.76
Vested		(185,570	)		4.38
Forfeited or expired		(267,511	)		3.06
Outstanding at October 27, 2012		1,818,224		$	2.21

The weighted-average grant-date fair value per share of service-based restricted stock awards granted during the first three quarters of 2012 and 2011 was $1.76 and $3.51, respectively. The total fair value of awards vested during the first three quarters of fiscal 2012 and 2011 was $0.5 million and $0.9 million, respectively.

During the first three quarters of fiscal 2012, the Company granted 675,000 performance-based restricted stock awards which only vest upon the achievement of certain financial targets. The weighted-average grant-date fair value per share of performance-based restricted stock awards granted during the first three quarters of fiscal 2012 was $1.77. There were no performance-based restricted stock awards granted during the first three quarters of fiscal 2011.

Restricted Stock Units

A summary of restricted stock units activity under the Performance Plan for the first three quarters of fiscal 2012 is presented below. Restricted stock units contain a service-based restriction as to vesting. These awards generally vest 100% on the first anniversary of the grant date.

	Shares			Weighted- Average Grant-Date Fair Value
Outstanding at January 28, 2012		150,000		$	3.19
Granted		125,000			1.57
Vested		(125,000	)		3.19
Forfeited or expired		(25,000	)		3.19
Outstanding at October 27, 2012		125,000		$	1.57

Stock-based compensation expense recognized related to nonvested stock options, restricted stock awards and restricted stock units during each of the third quarters of fiscal 2012 and 2011 was $0.6 million and $0.8 million, respectively, and during the first three quarters of fiscal 2012 and 2011, was $2.1 million and $2.5 million, respectively.

At October 27, 2012, the Company had approximately $3.6 million of stock-based compensation cost related to nonvested stock options, service-based restricted stock awards and restricted stock units expected to be recognized over a weighted-average period of approximately 2.5 years, and $0.5 million of stock-based compensation cost related to certain performance-based restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

Employee Stock Purchase Plan (“ESPP”)

The Company’s ESPP provides a method for Company employees to voluntarily purchase Company common stock at a 10% discount from fair market value as of the beginning or the end of each six-month purchasing period, whichever is lower. The ESPP covers substantially all employees who have three months of service with the Company, excluding senior executives.

The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.

During the first three quarters of fiscal 2012 and 2011, the Company issued 114,897, and 95,798 shares at an average price of $1.58 and $2.35, respectively, under the ESPP.