SHAREHOLDERS’ DEFICIT

Preferred Stock

In conjunction with the Term Loan, the Company issued 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 10, “Fair Value Measurements–Recurring Fair Value Measurements” for further discussion on the accounting treatment of the Series B Preferred.

Stock-Based Compensation

During the first half of fiscal 2015, the Company maintained three stock-based incentive plans: (1) the 2005 Performance Incentive Plan (the "2005 Plan”), (2) the 2015 Long-Term Incentive Plan (the "2015 Plan") and (3) the amended and restated Employee Stock Purchase Plan (the “ESPP”).

The types of awards that could be granted under the 2005 Plan included 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 included 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 was 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. The 2005 Plan expired on March 22, 2015. Therefore, as of August 1, 2015, there were no remaining shares of the Company's common stock available for award grants under the 2005 Plan.

On March 19, 2015, the Board of Directors approved the 2015 Plan to replace the expiring 2005 Plan. On June 4, 2015, the 2015 Plan was approved by the Company’s shareholders. Initially, 7.0 million shares were available for grants under the 2015 Plan. The types of awards that can be granted under the 2015 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 2015 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 2015 Plan are 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 2015 Plan is ten years after the grant date of the award. Any shares subject to awards under prior stock plans that are canceled, forfeited or otherwise terminate without having vested or been exercised, will become available for future award grants under the 2015 Plan. As of August 1, 2015, there were 6.8 million shares of the Company's common stock available for award grants under the 2015 Plan.

The Company accounts for stock-based compensation expense in accordance with ASC Topic 718, “Stock Compensation”. 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

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 common shares at the respective grant dates. No stock options were granted by the Company during the first half of fiscal 2015 or fiscal 2014 under either the 2005 Plan or the 2015 Plan. A summary of stock option (incentive and nonqualified) activity for the first half of fiscal 2015 is presented below:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs.)	Aggregate Intrinsic Value ($000s)
Outstanding at January 31, 2015	1,913,227		$	4.11
Granted	—		—
Exercised	—		—
Forfeited or expired	(75,925	)	12.63
Outstanding at August 1, 2015	1,837,302		$	3.75	1.3	$	—
Vested and expected to vest at August 1, 2015	1,836,958		$	3.76	1.3	$	—
Exercisable at August 1, 2015	1,830,436		$	3.76	1.3	$	—

There were no stock options exercised during the first half of fiscal 2015 or 2014.

Restricted Stock Awards

A summary of service-based restricted stock awards activity under the 2005 Plan for the first half of fiscal 2015 is presented in the following table. No restricted stock awards were granted under the 2015 Plan during the first half of fiscal 2015. 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 shares vesting each year on the anniversary of the grant date.



	Shares		Weighted- Average Grant-Date Fair Value
Outstanding at January 31, 2015	964,001		$	1.99
Granted	2,750,000		2.81
Vested	(359,268	)	2.16
Forfeited	(25,749	)	2.13
Outstanding at August 1, 2015	3,328,984		$	2.65

The weighted-average grant-date fair value per share of service-based restricted stock awards granted during the first half of fiscal 2015 and 2014 was $2.81 and $2.86, respectively. The total fair value of service-based restricted stock awards vested during the first half of fiscal 2015 and 2014 was $1.0 million and $1.2 million, respectively.

Performance-Based Restricted Stock Awards

During the first quarter of fiscal 2012, the Company granted 675,000 performance-based restricted stock awards under the 2005 Plan 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. During the first quarter of fiscal 2015, 200,000 shares with a fair value totaling $0.6 million vested as a result of the Company achieving certain financial targets in fiscal 2014. There were no performance-based restricted stock awards granted in the first half of fiscal 2015.

Restricted Stock Units

A summary of restricted stock units activity under the 2005 Plan and the 2015 Plan for the first half of fiscal 2015 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 January 31, 2015	150,000		$	2.25
Granted	125,000		1.42
Vested	(150,000	)	2.25
Forfeited	—		—
Outstanding at August 1, 2015	125,000		$	1.42

The weighted-average grant-date fair value per share of restricted stock units granted during the first half of fiscal 2015 and 2014 was $1.42 and $2.25, respectively. The total fair value of awards vested during the first half of fiscal 2015 and 2014 was $0.2 million and $0.3 million, respectively.

Stock-based compensation expense recognized related to nonvested stock options, restricted stock awards and restricted stock units during the second quarter of fiscal 2015 and 2014 was $0.7 million and $0.3 million, respectively, and during the first half of fiscal 2015 and 2014 was $1.4 million and $0.8 million, respectively. At August 1, 2015, the Company had approximately $6.3 million of stock-based compensation cost related to non-vested 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 3.2 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 annual purchasing period, whichever is lower. 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. Shares issued under the ESPP during the first half of fiscal 2015 and 2014 were 294,743 and 174,335, respectively.