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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

---

 

FORM 10-Q

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         .

 

Commission File Number 001-31390

 

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(763) 551-5000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  x  NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   o		Accelerated filer   x
Non-accelerated filer   o  (Do not check if a smaller reporting company)		Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  o  NO  x

 

As of January 2, 2009 35,498,980 shares of the registrant’s common stock were outstanding.

 

 

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CHRISTOPHER & BANKS CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

			Page
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheet (Unaudited)
		As of November 29, 2008, March 1, 2008 and December 1, 2007	3
		Condensed Consolidated Statement of Operations (Unaudited)
		For the Three Months Ended November 29, 2008 and December 1, 2007	4
		Condensed Consolidated Statement of Operations (Unaudited)
		For the Nine Months Ended November 29, 2008 and December 1, 2007	5
		Condensed Consolidated Statement of Cash Flows (Unaudited)
		For the Nine Months Ended November 29, 2008 and December 1, 2007	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.		Management’s Discussion and Analysis of
		Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures
		About Market Risk	29
Item 4.		Controls and Procedures	30
		PART II
		OTHER INFORMATION
Item 1.		Legal Proceedings	30
Item 1A.		Risk Factors	30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.		Defaults Upon Senior Securities	31
Item 4.		Submission of Matters to a Vote of Security Holders	31
Item 5.		Other Information	31
Item 6.		Exhibits	31
		Signatures	32
		Index to Exhibits	33

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

		November 29,			March 1,			December 1,
		2008			2008			2007
ASSETS
Current assets:
Cash and cash equivalents		$	74,086,872		$	78,492,297		$	46,701,459
Short-term investments		—			—			48,300,000
Accounts receivable		6,742,115			5,222,976			6,811,678
Merchandise inventories		53,151,343			43,840,338			46,943,191
Prepaid expenses		11,242,887			11,597,280			11,497,446
Other current assets		11,136,411			9,482,393			4,582,421
Total current assets		156,359,628			148,635,284			164,836,195
Property, equipment and improvements, net		129,067,110			133,598,580			136,373,593
Long-term investments		15,875,812			23,350,000			—
Goodwill		—			—			3,587,052
Other assets		8,794,687			6,207,858			4,337,972
Total assets		$	310,097,237		$	311,791,722		$	309,134,812
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	14,793,920		$	15,380,692		$	8,483,503
Accrued salaries, wages and related expenses		8,087,824			9,246,050			9,529,895
Other accrued liabilities		22,288,773			28,040,623			20,902,975
Total current liabilities		45,170,517			52,667,365			38,916,373
Non-current liabilities:
Deferred lease incentives		24,822,736			24,854,278			22,336,658
Deferred rent obligations		10,037,563			11,720,689			11,673,329
Other		4,219,500			3,722,195			3,362,258
Total non-current liabilities		39,079,799			40,297,162			37,372,245
Commitments		—			—			—
Stockholders’ equity:
Preferred stock – $0.01 par value, 1,000,000 shares authorized, none outstanding		—			—			—
Common stock – $0.01 par value, 74,000,000 shares authorized, 45,302,778, 45,050,290 and 45,052,590 shares issued and 35,498,980, 35,259,572 and 35,574,772 shares outstanding at November 29, 2008, March 1, 2008 and December 1, 2007, respectively		453,028			450,503			450,526
Additional paid-in capital		111,930,607			110,359,847			109,766,765
Retained earnings		226,322,245			221,928,654			232,341,185
Common stock held in treasury, 9,803,798, 9,790,718 and 9,477,818 shares at cost at November 29, 2008, March 1, 2008 and December 1, 2007, respectively		(112,858,959		)	(112,711,809		)	(109,712,282		)
Accumulated other comprehensive income (loss)		—			(1,200,000		)	—
Total stockholders’ equity		225,846,921			218,827,195			232,846,194
Total liabilities and stockholders’ equity		$	310,097,237		$	311,791,722		$	309,134,812

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

		Three Months Ended
		November 29,			December 1,
		2008			2007
Net sales		$	143,003,908		$	155,242,697
Costs and expenses:
Merchandise, buying and occupancy		91,914,238			90,522,545
Selling, general and administrative		45,204,023			42,933,371
Depreciation and amortization		6,548,133			5,430,983
Total costs and expenses		143,666,394			138,886,899
Operating income (loss)		(662,486		)	16,355,798
Interest income		619,178			1,163,225
Income (loss) from continuing operations before income taxes		(43,308		)	17,519,023
Income tax provision (benefit)		(3,855		)	6,447,001
Income (loss) from continuing operations		(39,453		)	11,072,022
Loss from discontinued operations, net of income tax		(1,334,013		)	(833,852		)
Net income (loss)		$	(1,373,466	)	$	10,238,170
Basic earnings (loss) per share:
Continuing operations		$	—		$	0.31
Discontinued operations		(0.04		)	(0.02		)
Earnings (loss) per basic share		$	(0.04	)	$	0.29
Basic shares outstanding		35,099,129			35,447,855
Diluted earnings (loss) per share:
Continuing operations		$	—		$	0.31
Discontinued operations		(0.04		)	(0.02		)
Earnings (loss) per diluted share		$	(0.04	)	$	0.29
Diluted shares outstanding		35,099,129			35,528,352
Dividends per share		$	0.06		$	0.06

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

		Nine Months Ended
		November 29, 2008			December 1, 2007
Net sales		$	426,850,378		$	438,623,317
Costs and expenses:
Merchandise, buying and occupancy		257,361,338			262,171,413
Selling, general and administrative		129,010,326			120,214,677
Depreciation and amortization		19,653,754			15,702,721
Total costs and expenses		406,025,418			398,088,811
Operating income		20,824,960			40,534,506
Interest income		2,031,770			3,382,476
Income from continuing operations before income taxes		22,856,730			43,916,982
Income tax provision		2,034,248			16,161,450
Income from continuing operations		20,822,482			27,755,532
Loss from discontinued operations, net of income tax		(10,087,651		)	(2,452,735		)
Net income		$	10,734,831		$	25,302,797
Basic earnings (loss) per share:
Continuing operations		$	0.59		$	0.78
Discontinued operations		(0.28		)	(0.07		)
Earnings per basic share		$	0.31		$	0.71
Basic shares outstanding		35,091,041			35,835,063
Diluted earnings (loss) per share:
Continuing operations		$	0.59		$	0.77
Discontinued operations		(0.28		)	(0.07		)
Earnings per diluted share		$	0.31		$	0.70
Diluted shares outstanding		35,093,991			35,925,734
Dividends per share		$	0.18		$	0.18

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended
		November 29, 2008			December 1, 2007
Cash flows from operating activities:
Net income		$	10,734,831		$	25,302,797
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,754,489			17,391,107
Impairment of store assets		1,220,550			—
Deferred income taxes		253,923			(5,585,486		)
Excess income tax benefit on exercise of stock options		—			(14,738		)
Stock-based compensation expense		1,577,843			1,788,292
Loss on disposal of furniture, fixtures and equipment		553,289			221,928
Changes in operating assets and liabilities:
Increase in accounts receivable		(1,519,139		)	(2,330,054		)
(Increase) decrease in merchandise inventories		(9,311,005		)	5,411,753
Decrease (increase) in prepaid expenses		354,393			(831,025		)
(Increase) decrease in prepaid income taxes and income taxes payable		(903,712		)	2,091,455
Decrease (increase) in other assets		8,993			(64,541		)
Decrease in accounts payable		(586,772		)	(7,876,176		)
(Decrease) increase in accrued liabilities		(7,057,224		)	470,658
Decrease in deferred lease incentives		(31,542		)	(500,116		)
(Decrease) increase in deferred rent obligations		(1,683,126		)	994,988
Increase in other liabilities		497,305			3,362,258
Net cash provided by operating activities		13,863,096			39,833,100
Cash flows from investing activities:
Purchases of property, equipment and improvements		(16,922,724		)	(26,868,274		)
Purchases of investments		—			(96,850,000		)
Sales of investments		5,000,000			96,825,000
Net cash used in investing activities		(11,922,724		)	(26,893,274		)
Cash flows from financing activities:
Proceeds from exercise of stock options		—			1,156,993
Dividends paid		(6,345,797		)	(6,445,651		)
Excess income tax benefit on exercise of stock options		—			14,738
Acquisition of common stock held in treasury		—			(14,955,845		)
Net cash used in financing activities		(6,345,797		)	(20,229,765		)
Net decrease in cash and cash equivalents		(4,405,425		)	(7,289,939		)
Cash and cash equivalents at beginning of period		78,492,297			53,991,398
Cash and cash equivalents at end of period		$	74,086,872		$	46,701,459

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CHRISTOPHER & BANKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008.

 

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year.  In the opinion of management, the information contained herein reflects all adjustments, consisting of only normal adjustments except as otherwise stated in these notes, necessary to present fairly the Company’s financial position as of November 29, 2008 and December 1, 2007, and its results of operations and cash flows for the three and nine month periods ended November 29, 2008 and December 1, 2007.

 

NOTE 2 — DISCONTINUED OPERATIONS

 

On July 31, 2008, the Company announced its decision to exit its Acorn business when management concluded, after a comprehensive review and evaluation, that the concept had not demonstrated the potential to deliver an acceptable long-term return on the Company’s investment.  On July 30, 2008, the Company’s Board of Directors authorized a plan to close all of the Company’s 36 Acorn stores by December 31, 2008, allowing the Company to focus its resources on its two core brands, Christopher & Banks and C.J. Banks.

 

The Company closed 29 of its 36 Acorn stores during its third fiscal quarter ended November 29, 2008 and closed its seven remaining Acorn stores on December 24, 2008.  The operating results of all Acorn stores have been presented as discontinued operations, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), in the Condensed Consolidated Statement of Operations for the three and nine month periods ended November 29, 2008 as the impact of the remaining stores open as of November 29, 2008 were not material to the results of operations for these periods and because, upon closure of the remaining stores, the results of operations for all periods would be retroactively included in discontinued operations.

 

In addition to store-level operating losses, the loss from discontinued operations for the nine months ended November 29, 2008 includes approximately $3.9 million of lease termination costs, $1.2 million of long-lived asset impairment charges and $0.3 million of severance costs incurred in connection with exiting the Acorn division business.  The Company expects to incur approximately $0.7 million of additional charges related to closing the seven remaining Acorn stores during the fourth quarter of fiscal 2009.

 

The operating results of the discontinued operations are summarized below.

 

 

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Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18 (“FIN 18”).  As required by this authoritative guidance, income taxes are computed with and without the impact of results from discontinued operations and the difference in taxes between these computations is allocated to discontinued operations.

 

Income taxes allocated to the loss from discontinued operations for the three and nine month interim periods ended November 29, 2008, result from the fact that the estimated effective tax rate on continuing operations for these interim periods is 8.9%, while the effective tax rate for all operations, including combined results for continuing and discontinued operations is estimated to be 30.1%.  The difference in taxes between those allocable to continuing operations and total taxes previously estimated for all operations are allocated to discontinued operations.  Actual tax rates for fiscal 2009 could differ significantly from estimated rates based on the results of operations in the fourth quarter of fiscal 2009.

 

The balance sheet impact of the discontinued operations included current assets and current liabilities of approximately $600,000 each as of November 29, 2008.

 

For comparison purposes, the Company’s results from continuing and discontinued operations for the quarters ended March 1, 2008, May 31, 2008 and August 30, 2008 have been provided below.

 

 

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NOTE 3 — INVESTMENTS

 

The Company’s investments consist of the following:

 

 

As of November 29, 2008, the Company had approximately $15.9 million of long-term investments, which consisted solely of $19.6 million of auction rate securities (“ARS”) at cost, less a fair value adjustment of $3.7 million.  Fair value was based on management’s analysis of impairment factors taking into account the credit quality of the underlying securities and reflects the lack of liquidity of the Company’s investments.  All of the Company’s ARS are collateralized by student loans and currently have AAA (S&P) or Aaa (Moody’s) credit ratings.  As of November 29, 2008, the repayment of approximately 80% of the student loans, which serve as collateral for the ARS held by the Company, is substantially backed by the United States government.  Until February 2008, the ARS market was liquid and auctions for ARS held by the Company did not fail. However, beginning in February 2008, auctions for the ARS held by the Company began to fail and have continued to fail up to and as of the date of this report.

 

Based on current market conditions, management believes that it is likely that auctions related to the Company’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited the Company’s ability to access these funds.  Management anticipates the liquidity of the ARS will continue to be restricted until there is a successful auction, until such time as another market for the ARS develops, until the ARS are called by the issuer or until they are redeemed as described below.  The Company reclassified its ARS to long-term investments at March 1, 2008 to reflect the lack of liquidity of these investments.

 

All of the ARS owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, by UBS.  In August 2008, UBS announced a settlement in principle with the Securities and Exchange Commission, the New York Attorney General and other state regulatory agencies to restore liquidity to remaining clients who hold ARS.  On October 7, 2008, UBS issued a prospectus to the Company formalizing the settlement offer and offering the Company certain ARS rights.  Under the settlement, these ARS rights provide the Company the ability to redeem its ARS at par during a two-year time period beginning June 30, 2010.  During this time, the Company may choose to continue to hold some or all of its ARS and earn interest or sell some or all of them to UBS at par plus accrued interest.  The ARS rights are not transferable, tradeable or marginable and will not be listed or quoted on any securities exchange or any electronic communications network.

 

On November 7, 2008, the Company’s Board of Directors accepted the UBS settlement offer.  Consequently, the Company reclassified the ARS from available-for-sale to trading securities and elected, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), to record the ARS rights at fair value on a recurring basis utilizing significant unobservable inputs in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).

 

The Company determined the fair value of the ARS rights to be approximately $3.7 million, which substantially offset the unrealized loss recorded within selling, general and administrative expense related to the fair value adjustment on the ARS.  The ARS rights were recorded within other non-current assets on the consolidated balance sheet.  Please see Note 12 for further disclosure regarding the Company’s accounting for fair value measurements.

 

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NOTE 4 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY

 

Merchandise inventories consisted of the following:

 

 

The Company does not have long-term purchase commitments or arrangements with any of its suppliers or agents.  The Company purchased approximately 17% and 19% of its merchandise from its largest overseas supplier during the first nine months of fiscal 2009 and 2008, respectively.  Although the Company has an established operating history with its largest vendor, there can be no assurance that this relationship can be maintained in the future or that the vendor will continue to supply merchandise to the Company.  If there should be any significant disruption in the supply of merchandise from this vendor, management believes that it will be able to shift production to other suppliers so as to continue to secure the required volume of product.  Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on the Company’s financial position or results of operations.

 

In the three and nine month periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise, respectively, through one buying agent (the “Agent”).  The Company has continued the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent.  The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of the Company.  Therefore, the Company and the Agent agreed to terminate their arrangement as of the end of December 2008.  While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position or results of operations.

 

NOTE 5 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

Property, equipment and improvements, net consisted of the following:

 

Description		Estimated Useful Life		November 29, 2008			March 1, 2008			December 1, 2007
Land		—		$	1,596,898		$	1,596,898		$	1,596,898
Corporate office, distribution center and related building improvements		25 years		12,020,131			12,014,667			11,856,863
Store leasehold improvements		Term of related lease, typically 10 years		97,497,444			97,525,439			92,834,115
Store furniture and fixtures		Three to 10 years		115,404,408			113,585,852			107,502,097
Computer hardware and software		Three to five years		32,138,294			21,595,000			18,172,079
Corporate office and distribution center furniture, fixtures and equipment		Seven years		3,162,791			3,055,898			2,902,305
Construction in progress		—		5,408,364			9,474,738			16,239,065
				267,228,330			258,848,492			251,103,422
Less accumulated depreciation and amortization				138,161,220			125,249,912			114,729,829
Net property, equipment and improvements				$	129,067,110		$	133,598,580		$	136,373,593

 

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The Company reviews long-lived assets with definite lives at least annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with SFAS No. 144.  While the Company recorded no impairments of long-lived assets employed in continuing operations in the three and nine month periods ended November 29, 2008, the current challenging economic environment, combined with the continued instability in the housing, credit, stock and financial markets, and increasing general economic uncertainty affecting the retail industry, make it reasonably possible that long-lived asset impairments could be identified and recorded in future periods.

 

NOTE 6 — ACCRUED LIABILITIES

 

Other accrued liabilities consisted of the following:

 

 

NOTE 7 — CREDIT FACILITY

 

The Company maintains an Amended and Restated Revolving Credit Facility (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  The Credit Facility provides the Company with revolving credit loans and letters of credit of up to $50.0 million, in the aggregate, subject to a borrowing base formula based on inventory levels.

 

In the first quarter of fiscal 2009, the Company and Wells Fargo entered into a Third Amendment to the Credit Facility (the “Third Amendment”).  The Third Amendment extended the maturity date of the Credit Facility by three years from June 30, 2008 to June 30, 2011.  In addition, the Third Amendment reduced the interest rate under the Credit Facility from the prime rate plus 0.25% to the prime rate minus 0.25%.  As of November 29, 2008, Wells Fargo’s prime rate was 4.0%.  The Third Amendment also provided the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29, 2008.

 

Interest under the Credit Facility is payable monthly in arrears.  The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, and a collateral monitoring fee.  For the nine months ended November 29, 2008, fees related to the Credit Facility totaled $21,082.  Borrowings under the Credit Facility are collateralized by the Company’s equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.  The Company had no revolving credit loan borrowings under the Credit Facility during the first nine months of fiscal 2009.  Historically, the Credit Facility has been utilized by the Company only to open letters of credit to facilitate the import of merchandise.  The borrowing base at November 29, 2008 was $36.2 million.  As of November 29, 2008, the Company had outstanding letters of credit in the amount of $4.2 million.  Accordingly, the availability of revolving credit loans under the Credit Facility was $32.0 million at November 29, 2008.

 

The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants.  As of November 29, 2008, the most recent measurement date, the Company was in compliance with all of these restrictive covenants under the Credit Facility.

 

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NOTE 8 — STOCKHOLDERS’ EQUITY

 

In fiscal 2008, the Company’s Board of Directors authorized and subsequently announced a one-year stock repurchase program enabling the Company to purchase up to $20.0 million of its common stock, subject to market conditions.  As of May 24, 2008, the expiration date of the repurchase program, the Company had repurchased 948,800 shares of its common stock under the program for a total cost, including commissions, of approximately $12.1 million.  No repurchases were made under the program in the first nine months of fiscal 2009.

 

NOTE 9 — STOCK-BASED COMPENSATION

 

The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”).  Under this method, stock-based compensation expense recognized for share-based awards includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, February 25, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based compensation awards granted subsequent to February 25, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

 

Total pre-tax compensation expense related to stock-based awards for the three months ended November 29, 2008 and December 1, 2007 was approximately $420,000 and $847,000, respectively.  For the nine months ended November 29, 2008 and December 1, 2007, pre-tax stock-based compensation expense totaled approximately $1.6 million and $1.8 million, respectively.  Stock-based compensation expense was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expenses for all other employees.

 

Methodology Assumptions

 

The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for grants to its 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.  The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting, is expensed on a straight-line basis over the vesting period of the stock options.  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 exercise experience.  The expected term assumption incorporates the contractual term of an option grant, as well as the vesting period of an award.  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 the Company’s stock option grants for the three and nine month periods ended November 29, 2008 and December 1, 2007 were as follows:

 

 

Stock-Based Compensation Activity

 

The following table presents a summary of the Company’s stock option activity for the nine months ended November 29, 2008:

 

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Table of Contents

 

		Number of Shares		Weighted Average Exercise Price			Aggregate Intrinsic Value			Weighted Average Fair Value			Weighted Average Remaining Contractual Life
Outstanding, beginning of period		1,889,454		$	18.83		$	—		$	6.79
Vested		1,485,011		19.34			—			6.83
Unvested		404,443		16.97			—			6.63
Granted		409,250		9.96			—			3.58
Exercised		—		—			—			—
Canceled - Vested		(405,163	)	20.73			—			7.09
Canceled - Unvested (Forfeited)		(88,829	)	15.85			—			5.94
Outstanding, end of period		1,804,712		16.56			—			6.04			6.02
Vested		1,204,222		18.67			—			6.74			4.49
Unvested		600,490		12.34			—			4.63			9.07
Exercisable, end of period		1,204,222		18.67			—			6.74			4.49

 

The Company may also grant shares of restricted stock to its employees and non-employee members of its Board of Directors.  Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’s restricted stock awards have performance-based vesting provisions and are subject to forfeiture if these performance conditions are not achieved.  The Company assesses, on an ongoing basis, the probability of whether the performance criteria are projected to be achieved and, if it is deemed probable, recognizes compensation expense over the relevant performance period.  For those awards not subject to performance criteria, the Company expenses 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 the Company’s restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

 

The following table presents a summary of the Company’s restricted stock activity for the nine months ended November 29, 2008:

 

 

NOTE 10 — INCOME TAXES

 

As of November 29, 2008, the Company’s liability for unrecognized tax benefits associated with uncertain tax positions was approximately $4.2 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.4 million.   The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.  At November 29, 2008, the Company had accrued approximately $0.9 million for the potential payment of interest and penalties.

 

The Company and its subsidiaries are subject to U.S. federal income tax and the income tax of various state and local jurisdictions.  The Internal Revenue Service has completed its audit for tax years through fiscal 2006.  The Company is not subject to state income tax examination by taxing authorities for taxable years prior to fiscal 2004.  At November 29, 2008, the Company did not expect its liability for unrecognized tax benefits to significantly increase or decrease in the remainder of fiscal 2009 or in fiscal 2010.

 

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