STOCKHOLDERS’ EQUITY

1. Capitalization

On October 29, 2014, our Board of Directors approved our Amended and Restated Certificate of Incorporation (the “Amended Certificate”). Under the Amended Certificate, the authorized capital stock is 80,000,000 shares, consisting of 75,000,000 shares of common stock, par value $.01 per share and 5,000,000 shares of preferred stock, par value $.01 per share.

The holders of common stock are entitled to one vote for each share held. Subject to preferences applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for dividend payments. If we liquidate, dissolve, or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no pre-emptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.

Our board of directors has the authority to (i) issue the undesignated preferred stock in one or more series, (ii) determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly un-issued series of undesignated preferred stock and (iii) fix the number of shares constituting any series and the designation of the series, without any further vote or action by our stockholders.

2. Stock Options

1997 Stock Option Plan

In 1997, we adopted a Stock Option Plan (the “1997 Plan”). The 1997 Plan provided for the grant to key employees of both nonqualified stock options and incentive stock options and to members of the Board of Directors and consultants of nonqualified stock options. A total of 1,497,674 shares of our common stock were available to be issued under the 1997 Plan pursuant to the exercise of options. All stock options were to have an exercise price of not less than the fair market value of the shares on the date of grant. Options are exercisable over a period of time to be designated by the administrators of the 1997 Plan (but not more than 10 years from the date of grant) and are subject to such other terms and conditions as the administrators may determine. The vesting schedule is subject to the discretion of our Board of Directors. Options are exercisable immediately upon vesting. In addition, all options, whether vested or not, become exercisable in full immediately upon a change of control, as defined under the 1997 Plan. The 1997 Plan terminated in March 2007 and as such, no further options will be granted under this plan.

2004 Stock and Incentive Award Plan

The 2004 Stock and Incentive Award Plan (the “2004 Plan”) provides for the grant of incentive options to our employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to our employees, directors and other service providers. A total of 6,750,000 shares of our common stock have been reserved for issuance under the 2004 Plan, of which up to 800,000 shares may be issued upon the exercise of incentive stock options. The compensation committee of the Board of Directors administers the 2004 Plan. The committee determines vesting terms and the exercise price of options granted under the 2004 Plan, but for all incentive stock options the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years.

On October 5, 2011, we amended the 2004 Stock and Incentive Award Plan to increase the maximum number of shares of our common stock with respect to which stock options may be granted during any calendar year to one employee from 200,000 shares to 500,000 shares.

The following table summarizes information about stock options activity for the fiscal year ended May 31, 2016.



	2016
	Shares		Weighted- average exercise price		Weighted average remaining contractual life	Aggregate intrinsic value (in thousands)
Outstanding at beginning of year	2,299,313		$	14.86
Granted	564,380		$	14.22
Exercised	(145,260	)	$	13.73
Forfeited	(304,563	)	$	13.85
Expired	(132,252	)	$	22.75
Outstanding at end of year	2,281,618		$	14.45	3.79	$	164
Options exercisable at year-end	1,313,698		$	14.25	2.34	$	130
Options expected to vest in future periods	854,189		$	14.72	5.76	$	30

As of May 31, 2016, there remained approximately 2.2 million shares available for granting of options under the 2004 Plan. Options are exercisable into common stock.

The following table summarizes information about stock options outstanding at May 31, 2016.



Range of exercise prices	Number outstanding	Weighted- average remaining life in years	Weighted- average exercise price		Number Exercisable	Weighted- average exercise price
$10.25 - $14.24	1,398,385	3.46	$	12.93	957,571	$	13.14
$14.25 - $18.24	684,427	4.75	16.04		228,571	15.84
$18.25 - $22.24	183,695	3.01	19.30		112,445	19.23
$22.25 - $26.24	14,250	0.48	23.62		14,251	23.62
$26.25 - $30.24	861	0.60	26.94		860	26.94
	2,281,618	3.79	$	14.45	1,313,698	$	14.25

Stock options are granted at exercise prices equal to the quoted market price of our common stock at the date of the grant. Options vest 25% per year over four years for employees and 100% after one year for consultants. Grants to directors vest 33.33% per year over three years. Stock options granted prior to May 1, 2007 expire on the tenth anniversary of the grant date. Stock options granted on or after May 1, 2007, expire on the seventh anniversary of the grant date.

We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value of options granted during the years ended May 31, 2016, 2015 and 2014 was $4.16, $4.74, and $4.10, respectively. The following assumptions were used in arriving at the fair value of options granted during 2016, 2015 and 2014, respectively: risk-free interest rates of 1.48%, 1.54% and 1.44%; expected volatility of 31%, 31%, and 34%; and expected lives of 4.81 years, 4.76 years, and 4.74 years. We do not declare dividends therefore a dividend yield of zero was used for the years ended 2016, 2015 and 2014. Risk-free interest rates reflect the yield on zero-coupon U.S. Treasury bonds whose maturity period equals the expected term of the option. Expected volatilities are based on the historical volatility of our stock. The expected option lives are based on our historical experience of employee exercise behavior.

The total intrinsic value of options exercised during the years ended 2016, 2015 and 2014 amounted to $0.1 million, $1.6 million, and $1.0 million, respectively. As of May 31, 2016, there was $3.3 million of total unrecognized compensation cost related to non-vested options. The cost is expected to be recognized over a weighted average period of 3 years.

Cash received from option exercises during 2016, 2015 and 2014 was $1.3 million, $4.3 million and $1.3 million, respectively. The tax benefit realized from stock options exercised during the years ended 2016, 2015 and 2014 were $0.1 million, $0.5 million and $0.1 million, respectively.

3. Performance Share and Restricted Stock Unit Awards

We grant restricted stock units to certain employees under the 2004 Plan which give the recipients the right to receive shares of our stock upon vesting. The restricted stock unit awards vest in equal annual installments over the term of the grants. Unvested restricted stock unit awards will be forfeited if the recipient ceases to be employed by us, competes with our business or otherwise engages in activities detrimental to our business before such date.

The following table summarizes information about restricted stock unit activity for the year ended May 31, 2016.



	Non-Vested Stock Award Units		Weighted Average Grant-Date Fair Value
Non-vested at beginning of year	563,101		$	13.73
Granted	259,917		$	15.21
Vested	(160,845	)	$	15.39
Canceled	(112,396	)	$	13.81
Non-vested at end of year	549,777		$	14.62
Awards expected to vest in future periods	482,594		$	14.62

The fair value of each restricted stock unit is the market price of our stock on the date of grant. The weighted average grant date fair value of restricted stock units granted during the years ended May 31, 2016, 2015 and 2014 was $15.21, $14.75 and $13.23, respectively. The total intrinsic value of restricted stock units vesting during the years ended 2016, 2015 and 2014 was $2.5 million, $2.4 million, and $1.8 million, respectively. As of May 31, 2016, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2 years.

We grant performance share awards to certain employees under the 2004 Plan which gives the recipients the right to receive shares of our stock if certain criteria is met. The performance criteria is established by the compensation committee for vesting of the performance share awards and may include factors such as the achievement of relative total shareholder return ("TSR"), certain sales, operating income and earnings per share (“EPS”) goals. Performance share awards are subject to additional conditions, including the recipient’s continued employment with us.

Performance share units are valued using a Monte Carlo simulation model on the date of grant. As of May 31, 2016, 2015 and 2014, the weighted average grant date fair market value for new grants was $18.07, $19.83 and $25.56, respectively. Compensation cost is recognized over the performance period which is typically three years. As of May 31, 2016, 0.4 million performance share units with a weighted average remaining contractual term of 3 years and $4.6 million of unrecognized compensation cost were outstanding. As of May 31, 2015, 0.2 million performance share units with a weighted average remaining contractual term of 3 years and $2.2 million of unrecognized compensation cost were outstanding.

4. Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the “Stock Purchase Plan”) provides a means by which our employees (the “participants”) are given an opportunity to purchase our common stock through payroll deductions. A total of 2,000,000 shares of our common stock have been reserved for issuance under the Stock Purchase Plan. Shares are offered through two purchase periods, each with duration of approximately 6 months, commencing on the first business day of the first and third fiscal quarters. An employee is eligible to participate in an offering period if, on the first day of an offering period, he or she has been employed in a full-time capacity for at least six months, with a customary working schedule of 20 or more hours per week and more than five months in a calendar year. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of our stock are not eligible to participate in the Stock Purchase Plan. The purchase price of the shares of common stock acquired on each purchase date will be the lower of (i) 85% of the fair market value of a share of common stock on the first day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last day of the purchase period, subject to adjustments made by the Board of Directors. The Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. During the year ended May 31, 2015, an additional 800,000 shares of our common stock have been reserved for issuance under the Stock Purchase Plan.

We use the Black-Scholes option-pricing model to calculate the purchase date fair value of the shares issued under the Stock Purchase Plan and recognize expense related to shares purchased ratably over the offering period. During the years ended 2016, 2015 and 2014, 137,957, 119,001 and 146,275 shares, respectively, were issued at an average price of $10.67, $11.89 and $9.30, respectively, under the Stock Purchase Plan. As of May 31, 2016, 1.0 million shares remained available for future purchases under the Stock Purchase Plan.

5. Other items

Share-based compensation expense recognized in the consolidated statement of operations during the years ended 2016, 2015 and 2014 amounted to $3.2 million, $6.0 million and $5.5 million, respectively. The income tax benefit recognized in earnings on the compensation expense recognized for all share-based compensation arrangements amounted to $1.0 million, $2.0 million and $1.8 million, respectively. Income tax expense of $0.8 million, $1.3 million and $0.5 million was recorded in continuing operations for the excess of cumulative book deductions over actual tax deductions for the years ended 2016, 2015 and 2014, respectively. The income tax benefit on all share based compensation expense in 2016 as well as the income tax expense on the excess book deductions over actual tax deductions in 2016 are negated by the full valuation allowance established at May 31, 2016. Additional income tax expense of $0.1 million for 2014 was recorded in shareholder’s equity for the excess book deductions to the extent prior tax deductions exceeded prior book deductions.

As part of his employment agreement, the Company awarded James C. Clemmer, the Company’s President and CEO, 250,000 performance shares, 200,000 options and 50,000 restricted stock units. The award was unanimously approved by the Company's independent compensation committee. The performance shares have a three years term with payouts to be made in shares of the Company's common stock at the end of the term ranging between 0 and 200 percent of the grant amount depending on the Company's total shareholder return relative to a peer group of companies. The options will vest in four equal installments beginning on the first anniversary of the grant date, have a strike price equal to the closing price of the company's common stock as of April 4, 2016 and expire, if not exercised, on April 4, 2023. The restricted stock units will vest in four equal installments beginning on the first anniversary of the grant date.