NOTE 7 — Stockholders' Equity and Stock-Based Compensation

The Company maintains the following stock plans approved by its shareholders: the 1997 Stock Incentive Plan, the 2005 Stock Incentive Plan, the 2006 Equity Incentive Plan for Non-Employee Directors and the 2013 Directors' Equity Incentive Plan. Under these plans, the Company may grant options to purchase common stock to its employees and non-employee members of the Board at a price not less than 100% of the fair market value of the common stock on the option grant date. In general, options granted to employees typically vest ratably over three years and are exercisable up to 10 years from the date of grant, and options granted to non-employee members of the Board vest ratably over approximately three years and are exercisable up to 10 years from the grant date.

The Company may also grant shares of restricted stock to its employees and non-employee members of the Board. The grantee cannot transfer the shares before the respective shares vest. Shares of nonvested restricted stock are considered to be currently issued and outstanding. Restricted stock grants to employees generally have original vesting schedules of one to three years, while restricted grants to non-employee members of the Board typically vest six months to one year after the date of grant.

Black-Scholes assumptions

The Company uses the Black-Scholes option-pricing model to value its stock options for grants to employees and non-employee directors. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant and is expensed on a straight-line basis over the vesting period, as the stock options are subject to pro-rata vesting. The expected volatility assumption is based on the historical volatility of the Company's stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical experience and represents the period of time that awards are expected to be outstanding. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

The weighted average assumptions relating to the valuation of stock options granted were as follows:



	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	August 3, 2013	July 28, 2012	August 3, 2013	July 28, 2012
Expected dividend yield	N/A	—%	—%	—%
Expected volatility	N/A	74.9%	75.6%	73.6%
Risk-free interest rate	N/A	0.7%	0.76 - 0.84%	1.0%
Expected term	N/A	5.0 years	5.0 years	4.9 years

Stock-Based Compensation Activity — Stock Options

The following tables present a summary of stock option activity for the twenty-six weeks ended August 3, 2013:



	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Life
Outstanding, beginning of period	3,696,094		$	4.89
Granted	91,633		6.25
Exercised	(34,795	)	2.69
Canceled - Vested	(65,471	)	11.70
Canceled - Unvested (Forfeited)	(53,551	)	3.62
Outstanding, end of period	3,633,910		$	4.84	$	10,253	8.35 years
Vested and expected to vest, end of period	3,182,273		$	5.04	$	8,756	8.23 years
Exercisable, end of period	1,079,853		$	8.16	$	1,795	6.43 years



	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested, beginning of period	2,865,360		$	1.83
Granted	91,633		3.82
Vested	(349,385	)	1.97
Forfeited	(53,551	)	1.90
Nonvested, end of period	2,554,057		1.88

The weighted average fair value for options granted during the twenty-six weeks ended August 3, 2013 and July 28, 2012 was $3.82 and $1.13, respectively. The fair value of options vesting during the twenty-six weeks ended August 3, 2013 and July 28, 2012 was approximately $1.97 and $3.23, respectively. The aggregate intrinsic value of options exercised during the twenty-six weeks ended August 3, 2013 was $0.1 million. There were no options exercised during the twenty-six weeks ended July 28, 2012.

As of August 3, 2013, there was approximately $2.8 million of total unrecognized compensation expense related to nonvested stock options granted, which is expected to be recognized over a weighted average period of approximately 2.0 years.

Stock-Based Compensation Activity — Restricted Stock

The following table presents a summary of restricted stock activity for the twenty-six weeks ended August 3, 2013:



	Number of Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Nonvested, beginning of period	819,902		$	2.89
Granted	128,761		6.52
Vested	(84,624	)	4.66
Forfeited	(692,344	)	2.54
Nonvested, end of period	171,695		6.16		$	1,159

The weighted average fair value for restricted stock granted during the twenty-six weeks ended August 3, 2013 and July 28, 2012 was $6.52 and $1.66, respectively. The total fair value of restricted stock vesting during the twenty-six weeks ended August 3, 2013 and July 28, 2012 was approximately $0.5 million and $0.4 million, respectively. The aggregate intrinsic value of restricted stock vesting during the twenty-six weeks ended August 3, 2013 and July 28, 2012 was approximately $0.5 million and $0.1 million, respectively.

As of August 3, 2013, there was approximately $0.8 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of approximately 1.4 years.

Compensation Expense

The total pre-tax compensation expense related to all stock-based awards for the thirteen weeks ended August 3, 2013 and July 28, 2012 was approximately $0.6 million and $0.5 million, respectively. The total pre-tax compensation expense related to all stock-based awards for the twenty-six weeks ended August 3, 2013 and July 28, 2012 was approximately $1.3 million and $1.0 million, respectively. Stock-based compensation expense is included in merchandise, buying and occupancy expense for the buying and distribution employees, and in selling, general and administrative expense for all other employees.