SHAREHOLDERS’ (DEFICIT) EQUITY

Preferred Stock

In conjunction with the Term Loan, the Company issued convertible series B preferred stock (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 11, “Fair Value Measurements – Recurring Fair Value Measurements” for further discussion on the accounting treatment of the Series B Preferred.

Shareholder Protection Rights Plan

On March 22, 2013, the Company’s Board of Directors adopted a Shareholder Protection Rights Agreement (the “New Rights Plan”) and declared a dividend of one preferred share purchase right (a “Right”) on each outstanding share of common stock, par value $0.01 per share. The New Rights Plan replaces the previous Shareholder Protection Rights Agreement that was adopted on December 7, 2011, which was amended to expire upon adoption of the New Rights Plan. The dividend was paid to shareholders of record on April 1, 2013, upon certification by the Nasdaq Global Select Market to the SEC that the Rights were approved for listing. The New Rights Plan was approved by the Company's shareholders at the 2013 annual meeting of shareholders.

If any person or group acquires between 20% and 50% of the Company’s common stock, the Board of Directors may, at its option, exchange one share of the Company’s common stock for each Right. Under the New Rights Plan, among other things, a person or group which acquires 20% or more of the common stock of the Company will trigger the ability of the shareholders (other than the 20% holder) to exercise the Rights for an exercise price of $10.00 per Right (subject to certain adjustments from time to time) and to purchase a number of shares of common stock with a market value of twice the exercise price of the Rights exercised. The Rights are redeemable at any time by the Company at $0.01 per Right. In addition to the Board of Directors’ redemption, in connection with a “Qualified Offer” (as defined in the New Rights Plan), holders of 10% of the common stock of the Company then outstanding (excluding shares held by the offeror and its affiliates and associates), upon providing proper written notice, may direct the Board of Directors to call a special meeting of shareholders for the purposes of voting on a resolution authorizing the redemption of the Rights pursuant to the provisions of the New Rights Plan. Such meeting must be held on or prior to the 90^th business day following the Company’s receipt of such written notice. The New Rights Plan will expire on March 22, 2016.

Stock-Based Compensation

The Company maintains two stock-based incentive plans: (1) the 2005 Performance Incentive Plan (the "2005 Plan”) and (2) the amended and restated Employee Stock Purchase Plan (the “ESPP”). The types of awards that may be granted under the 2005 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 2005 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 2005 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 2005 Plan is ten years after the grant date of the award. As of January 31, 2015, the maximum number of shares of the Company’s common stock that was available for award grants under the 2005 Plan was 2.7 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 future award grants under the 2005 Plan. The 2005 Plan was terminated on March 22, 2015. On March 19, 2015, the Board of Directors approved the 2015 Long-Term Incentive Plan (the "2015 Plan") to replace the expiring 2005 Plan. The 2015 Plan is subject to approval by shareholders at the 2015 Annual Meeting.

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 Fiscal Year Ended
	January 31, 2015		February 1, 2014		February 2, 2013
	Stock Options	ESPP	Stock Options	ESPP	Stock Options	ESPP
Expected life	NA	1 year	NA	1 year	4 years	0.5 years
Expected volatility	NA	60%	NA	63%	87% - 88%	71%
Risk-free interest rate	NA	0.1%	NA	0.1%	0.5% - 0.9%	0.1% - 0.2%
Expected dividends	NA	$—	NA	$—	$—	$—

Under the 2005 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. No stock options were granted by the Company during fiscal years 2014 or 2013. A summary of stock option (incentive and nonqualified) activity for fiscal 2014 is presented below:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs.)	Aggregate Intrinsic Value ($000s)
Outstanding at February 1, 2014	2,209,379		$	5.11
Granted	—		—
Exercised	(1,500	)	1.64
Forfeited or expired	(294,652	)	11.66
Outstanding at January 31, 2015	1,913,227		$	4.11	1.76	$	135
Vested and expected to vest at January 31, 2015	1,911,749		$	4.11	1.75	$	134
Exercisable at January 31, 2015	1,881,808		$	4.13	1.72	$	123

At January 31, 2015, incentive and nonqualified options to purchase 1,913,227 shares were outstanding and 2,702,092 shares were available for future grant under the Company’s stock compensation plans. In each of fiscal 2014, 2013 and 2012, the Company did not recognize tax benefits related to stock-based compensation due to a full valuation allowance against various deferred tax assets. See “Income Taxes” in Notes 1 and 10 for further discussion regarding the realizability of the Company’s deferred tax assets and its assessment of a need for a valuation allowance.

The weighted-average grant-date fair value per share of options granted during fiscal 2012 was $1.07. There were 1,500, 10,375 and 143,900 stock options exercised during fiscal 2014, 2013, and 2012, respectively. The total intrinsic value of options exercised during fiscal years 2014 and 2013 was immaterial.The total intrinsic value of options exercised in fiscal 2012 was $0.3 million.

Restricted Stock Awards

A summary of service-based restricted stock awards activity under the 2005 Plan for fiscal 2014 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 4 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 February 1, 2014	1,319,571		$	2.13
Granted	255,000		1.90
Vested	(448,788	)	2.26
Forfeited	(161,782	)	2.23
Outstanding at January 31, 2015	964,001		$	1.99

The weighted-average grant-date fair value per share of service-based restricted stock awards granted during each of fiscal 2014, 2013 and 2012 was $1.90, $2.53 and $1.75, respectively. The total fair value of awards vested during fiscal 2014, 2013 and 2012 was $1.3 million, $1.2 million and $0.4 million, respectively.

During 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 fiscal 2012 was $1.77. There were no performance-based restricted stock awards granted in either fiscal 2014 or 2013.

Restricted Stock Units

A summary of restricted stock units activity under the 2005 Plan for fiscal 2014 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 February 1, 2014	122,480		$	3.47
Granted	150,000		2.25
Vested	(122,480	)	3.47
Forfeited	—		—
Outstanding at January 31, 2015	150,000		$	2.25

The weighted-average grant-date fair value per share of restricted stock units granted during each of fiscal 2014, 2013 and 2012 was $2.25, $3.47 and $1.57, respectively. The total fair value of the restricted stock units vested during each of fiscal 2014, 2013 and 2012 was $0.3 million, $0.4 million, and $0.2 million, respectively.

Stock-based compensation expense recognized related to nonvested stock options, restricted stock awards and restricted stock units during fiscal 2014, 2013 and 2012, was $1.6 million, $2.6 million and $2.8 million, respectively. At January 31, 2015, the Company had approximately $1.5 million of compensation cost related to nonvested stock options, service-based restricted stock awards, performance-based restricted stock awards, and restricted stock units expected to be recognized over a weighted-average period of approximately 1.7 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 purchasing period, whichever is lower. Historically, the Company's purchase period has been equal to six months; however, following the June 2013 ESPP purchase, the Compensation Committee of the Board of Directors of the Company changed the purchase period to one year. 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. On March 20, 2014, the Board of Directors approved an amendment to the ESPP to increase the number of authorized shares thereunder from 2.1 million shares to 2.5 million shares. Such amendment was approved by the shareholders at the 2014 annual meeting of shareholders.

The Company recognized compensation expense related to the ESPP of $0.1 million in each of fiscal 2014, 2013 and 2012. During fiscal 2014, 2013 and 2012, the Company issued 174,335, 149,398 and 236,668 shares at an average price of $2.14, $1.50 and $1.50, respectively, under the ESPP.