FAIR VALUE MEASUREMENTS

9 Months Ended

Oct. 27, 2012

FAIR VALUE MEASUREMENTS

9. FAIR VALUE MEASUREMENTS

The Company measures its financial assets and liabilities at fair value on a recurring basis and measures its nonfinancial assets and liabilities at fair value as required or permitted.

Fair value is defined as the price that would be received pursuant to the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. In order to determine the fair value of certain assets and liabilities, the Company applies the three-level hierarchy of valuation techniques based upon whether the inputs reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s assumptions of market participant valuation (unobservable inputs) and requires the use of observable inputs if such data is available without undue cost and effort. The hierarchy is as follows:

• Level 1 — quoted prices for identical instruments in active markets.

• Level 2 — inputs other than Level 1 inputs, which are observable either directly or indirectly.

• Level 3 — unobservable inputs.

Level 3 assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may result in a significantly lower or higher fair value measurement.

Recurring Fair Value Measurements

Derivative Liability

The Series B Preferred shares are required to be measured at fair value each reporting period. The fair value of the Series B Preferred shares was estimated using an option pricing model that requires Level 3 inputs, which are highly subjective and determined using the following significant assumptions:

	October 27, 2012			July 28. 2012
Conversion price	$	1.75		$	1.75
Expected volatility		66	%		66	%
Expected term (in years)		9.1			9.3
Risk free interest rate		1.86	%		1.58	%
Expected dividends	$	—		$	—

The following table presents the activity recorded for the derivative liability during the first three quarters ended:

	October 27, 2012
	(In thousands)
Beginning balance as of January 28, 2012	$	20,076
Gain on change in fair value		(6,333	)
Balance as of April 28, 2012		13,743
Loss on change in fair value		8,219
Balance as of July 28, 2012	$	21,962
Gain on change in fair value		(5,558	)
Ending balance as of October 27, 2012	$	16,404

The derivative liability is included in other current liabilities in the accompanying Condensed Consolidated Balance Sheet. Changes in the fair value of the derivative liability are included in (gain) loss on derivative liability in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Operations.

Money Market Funds

As of October 27, 2012, and January 28, 2012, the Company had approximately $10.0 million and $19.8 million held in money market funds, respectively. The fair value of money market funds is determined based on Level 1 inputs which consist of quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. Money market funds are included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheet.

Non-Recurring Fair Value Measurements

On a non-recurring basis, using a discounted cash flow model, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs including, but not limited to, moderate comparable store sales and margin growth, projected operating costs based primarily on historical trends, and an estimated weighted-average cost of capital rate. During the first three quarters of fiscal 2012 and 2011 the Company recorded $4.1 million and $12.8 million of impairment charges, respectively, in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Operations.