STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

9 Months Ended

Oct. 27, 2012

STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

NOTE 9 — STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Dividends

In fiscal 2004, our Board of Directors declared our first cash dividend.  The declaration provided for an on-going cash dividend of $0.04 per share to be paid quarterly, subject to Board approval.  In July 2006, our Board of Directors authorized an increase in the quarterly cash dividend to $0.06 per share.  A quarterly dividend was paid each quarter through October 2011.  In December 2011, we announced that our Board of Directors had suspended the payment of a quarterly dividend.

Stockholder Rights Plan

On July 5, 2012, we adopted a stockholder rights plan (the “Rights Plan”).  The Rights Plan is embodied in the Rights Agreement dated as of July 5, 2012 (the “Rights Agreement”), between the Company and Wells Fargo Bank, National Association (the “Rights Agent”).  On July 5, 2012, the Board of Directors of the Company also authorized the issuance, and declared a dividend, of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, par value $0.01 per share (the “Common Shares”), outstanding at the close of business on July 16, 2012.

Initially, no separate certificates representing the Rights will be issued. Under the Rights Plan, the Rights would be distributed upon the earlier to occur of (i) the tenth day after the first date of public announcement by the Company or an Acquiring Person (an Acquiring Person generally is a person that, together with its affiliates and associates, is the beneficial owner of 15% or more of the outstanding Common Shares) (including, without limitation, pursuant to a report filed or amended pursuant to Section 13(d) of the Exchange Act) that a person has become an Acquiring Person, or such earlier date as a majority of the Board of Directors of the Company shall become aware of the existence of an Acquiring Person (the “Shares Acquisition Date”) or (ii) the tenth day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any person becomes an Acquiring Person) after the date of the commencement by any person (other than certain persons, including the Company, any subsidiary of the Company, and Company benefit plan related holders) of a tender or exchange offer upon the successful consummation of which such person, or any affiliate or associate of such person, would be an Acquiring Person (including any such date which is after the date of the Rights Agreement and prior to the issuance of the Rights) (the earlier of such dates, the “Distribution Date”).  Each Right entitles the registered holder to purchase from the Company one one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred Stock, $0.01 par value (the “Preferred Shares”), of the Company at a price of $8.25 (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement between the Company and the Rights Agent.

In the event any person becomes an Acquiring Person, then each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be null and void for all purposes of the Rights Agreement and the holder thereof shall thereafter have no rights with respect to such Rights, whether under the Rights Agreement or otherwise), will thereafter have the right to receive upon exercise, in lieu of Preferred Shares, that number of Common Shares having a market value of two times the Purchase Price. Under some circumstances, upon payment of the Purchase Price, the Company may substitute other equity and debt securities, property, cash or combinations thereof, including combinations with Common Shares, of equal value to the number of Common Shares for which the Right is exercisable.

The Rights will expire at 5:00 p.m. (Eastern time) on July 5, 2014 (the “Expiration Date”), unless the Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described in the Rights Agreement.  Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. The foregoing is a summary of the Rights Plan, as filed with the Securities and Exchange Commission in our Form 8-K filing, and is qualified in its entirety by reference to the detailed terms and conditions as set forth in the Rights Plan.

Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of ASC 718-10, “Stock Compensation.” Under various plans, we may grant options to purchase common stock to employees and non-employee members of our Board of Directors at a price not less than 100% of the fair market value of our common stock on the option grant date.  In general, options granted to employees vest over three years and are exercisable up to ten years from the date of grant, and options granted to Directors typically vest over a thirty-month period and are exercisable up to ten years from the grant date.

We may also grant shares of restricted stock to our employees and non-employee members of our Board of Directors.  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 Directors typically vest over six months.

Our restricted stock awards are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions.  In addition, certain of our restricted stock awards have performance-based vesting provisions and are subject to forfeiture, in whole or in part, if these performance conditions are not achieved.  We assess, on an ongoing basis, the probability of whether the performance criteria will be achieved and, once it is deemed probable, we begin recognizing compensation expense over the relevant performance period.  For those awards not subject to performance criteria, we expense the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period.

The fair market value of our restricted stock is determined based on the closing price of our common stock on the grant date.  Time-based grants, but not performance-based grants, of restricted stock participated in dividend payments to the extent dividends were declared and paid prior to vesting.  Total pre-tax compensation expense related to stock-based awards for the thirty-nine weeks ended October 27, 2012 and November 26, 2011 was approximately $1.5 million and $2.2 million, respectively.

Methodology Assumptions

We use the Black-Scholes option-pricing model to value our stock options for grants to our 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 our stock over a term equal to the expected term of the option granted.  The expected term of stock option awards granted is derived from our historical exercise 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 our stock options granted during the thirteen and thirty-nine week periods ended October 27, 2012 and November 26, 2011 were as follows:

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	October 27,		November 26,		October 27,		November 26,
	2012		2011		2012		2011
Expected dividend yield	0.0	%	6.04	%	0.0	%	4.0	%
Expected volatility	76.7	%	72.4	%	73.7	%	71.1	%
Risk-free interest rate	0.6	%	0.9	%	1.0	%	2.1	%
Expected term in years	5.0		5.0		4.9		5.0

Stock-Based Compensation Activity

The following table presents a summary of our stock option activity for the thirty-nine weeks ended October 27, 2012:

									Weighted
			Weighted		Aggregate				Average
	Number		Average		Intrinsic		Weighted		Remaining
	of		Exercise		Value		Average		Contractual
	Shares		Price		(in thousands)		Fair Value		Life
Outstanding, beginning of period	2,826,949		$	7.48	$	—	$	3.19
Vested	1,207,311		9.91		—		4.01
Unvested	1,619,638		5.67		—		2.58
Granted	614,844		1.93		829		1.15
Exercised	—		—		—		—
Canceled - vested (expired)	(690,617	)	7.31		—		3.06
Canceled - unvested (forfeited)	(1,021,942	)	5.56		—		2.50
Outstanding, end of period	1,729,234		$	6.71	$	900	$	2.56	7.59
Vested	681,399		11.86				4.79		5.41
Unvested	1,047,835		3.36		900		1.71		9.01
Exercisable, end of period	681,399		11.86		—		4.79		5.41

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options as of the last trading day of the quarter) that would have been received by the option holders had all option holders exercised their options on October 27, 2012.

The following table presents a summary of our restricted stock activity for the thirty-nine weeks ended October 27, 2012:

	Number		Weighted
	of		Average
	Shares		Fair Value
Unvested, beginning of period	446,904		$	5.03
Granted	1,075,452		1.67
Vested	(64,745	)	6.62
Canceled - unvested (forfeited)	(118,862	)	3.75
Unvested, end of period	1,338,749		$	2.37

The total fair value of shares of restricted stock that vested during the thirty-nine weeks ended October 27, 2012 and November 26, 2011 was approximately $0.4 million and $0.4 million, respectively.  As of October 27, 2012, there was approximately $1.5 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of approximately 1.5 years.