STOCKHOLDERS’ EQUITY

Capitalization

On October 29, 2014, the Board of Directors approved the 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 the Company liquidates, dissolves, or winds 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 the Company may designate in the future.

The 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 the Company's stockholders.

Stock Options

2004 Stock and Incentive Award Plan

The 2004 Stock and Incentive Award Plan (the “2004 Plan”) provides for the grant of incentive options to employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to employees, directors and other service providers. A total of 7,000,000 shares of 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 common stock on the date of grant. The term of an incentive stock option may not exceed ten years.

On October 25, 2016, the Company amended the 2004 Stock and Incentive Award Plan to increased the shares of common stock reserved for issuance by 250,000 shares.

As of May 31, 2018, there remained approximately 1.8 million shares available for granting under the 2004 Plan.

The following table summarizes information about stock option activity for the fiscal year ended May 31, 2018:



	Shares		Weighted- average exercise price		Weighted average remaining contractual life	Aggregate intrinsic value (in thousands)
Outstanding at beginning of year - June 1, 2017	1,667,443		$	15.01
Granted	518,498		$	16.78
Exercised	(271,344	)	$	14.83
Forfeited	(204,184	)	$	16.24
Expired	(14,000	)	$	15.75
Outstanding at end of year - May 31, 2018	1,696,413		$	15.42	5.58	$	9,520
Options exercisable at year-end	652,543		$	14.41	3.48	$	4,321
Options expected to vest in future periods	1,043,870		$	16.05	6.90	$	5,199

Stock options are granted at exercise prices equal to the quoted market price of common stock at the date of the grant. Options vest 25% per year over four years for employees. Grants to directors vest 33.33% per year over three years. Stock options granted prior to May 1, 2007 and after June 1, 2017 expire on the tenth anniversary of the grant date. Stock options granted between May 1, 2007 through May 31, 2017 expire on the seventh anniversary of the grant date.

The Company measures 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, 2018, 2017 and 2016 was $4.95, $4.70, and $4.16, respectively. The following assumptions were used in arriving at the fair value of options granted during 2018, 2017 and 2016, respectively: risk-free interest rates of 2.08%, 1.30% and 1.48%; expected volatility of 30%, 31%, and 31%; and expected lives of 4.72 years, 4.80 years, and 4.81 years. The Company does not declare dividends therefore a dividend yield of zero was used for the years ended May 31, 2018, 2017 and 2016. 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 the Company's stock. The expected option lives are based on historical experience of employee exercise behavior.

The total intrinsic value of options exercised during the years ended May 31, 2018, 2017 and 2016 was $0.7 million, $2.8 million, and $0.1 million, respectively. As of May 31, 2018, there was $3.9 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a weighted average period of 3 years.

Cash received from option exercises during 2018, 2017 and 2016 was $2.0 million, $9.9 million and $1.3 million, respectively. The tax benefit realized from stock options exercised during the year ended May 31, 2016 was $0.1 million. Due to the valuation allowance there was no tax benefit realized from stock option exercises during the years ended May 31, 2018 and 2017.

Performance Share and Restricted Stock Unit Awards

The Company grants restricted stock units to certain employees under the 2004 Plan which give the recipients the right to receive shares of Company stock upon vesting. The restricted stock unit awards vest in four equal annual installments beginning on the first anniversary of the grant date. Restricted stock unit awards granted to directors vest over one year. Unvested restricted stock unit awards will be forfeited if the recipient ceases to be employed by the Company.

The following table summarizes information about restricted stock unit activity for the year ended May 31, 2018:



	Restricted Stock Units		Weighted Average Grant-Date Fair Value
Non-vested at beginning of year, June 1, 2017	439,297		$	15.55
Granted	299,392		$	16.60
Vested	(158,756	)	$	16.83
Canceled	(105,431	)	$	18.25
Non-vested at end of year, May 31, 2018	474,502		$	16.23

The fair value of each restricted stock unit is the market price of Company stock on the date of grant. The weighted average grant date fair value of restricted stock units granted during the years ended May 31, 2018, 2017 and 2016 was $16.60, $16.54 and $15.21, respectively. The total intrinsic value of restricted stock units (meaning the fair value of the units on the date of vest) vesting during the years ended May 31, 2018, 2017 and 2016 was $2.7 million, $2.9 million, and $2.5 million, respectively. As of May 31, 2018, there was $5.1 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted average period of 3 years.

The Company grants performance share awards to certain employees under the 2004 Plan which gives the recipients the right to receive shares of Company stock if certain criteria is met. The performance criteria is established by the compensation committee for vesting of the performance share awards and is determined by the achievement of relative total shareholder return ("TSR"). Performance share awards are subject to additional conditions, including the recipient’s continued employment with the Company.

The following table summarizes information about performance unit award activity for the year ended May 31, 2018:



	Performance Unit Awards		Weighted Average Grant-Date Fair Value
Non-vested at beginning of year, June 1, 2017	361,164		$	18.54
Granted	135,135		$	23.83
Vested	—		$	—
Canceled	(44,443	)	$	22.76
Non-vested at end of year, May 31, 2018	451,856		$	19.75

During fiscal years 2018, 2017 and 2016, we granted performance unit awards that include a three-year market condition. Vesting of the performance unit awards is based on the Company's level of attainment of specified total shareholder return ("TSR") targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods. It is also subject to the continued employment of the grantees. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model on the date of the grant. For the years ended May 31, 2018, 2017 and 2016, the weighted average grant date fair market value for new grants was $23.83, $22.61 and $18.07, respectively. Compensation cost is recognized over the performance period which is typically three years. As of May 31, 2018, 0.5 million performance share units with a weighted average remaining contractual term of 2 years and $3.9 million of unrecognized compensation cost were outstanding.

Compensation Expense

The following tables represents the break out of share-based compensation included in the Company's consolidated statement of operations:



	Year ended May 31,
(in thousands)	2018		2017			2016
Cost of sales	$	119	$	299		$	172
Research and development	554		314			349
Sales and marketing	1,778		1,762			1,489
General and administrative	5,461		4,026			2,291
Acquisition, restructuring and other items, net	—		(218		)	(1,061		)
	$	7,912	$	6,183		$	3,240

The income tax benefit on the compensation expense recognized for all share-based compensation arrangements was $1.8 million, $2.2 million and $1.0 million for the years ended May 31, 2018, 2017 and 2016, respectively. The income tax benefit for 2018, 2017 and 2016 are negated by the full valuation allowance established as of May 31, 2016.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the “Stock Purchase Plan”) provides a means by which employees (the “participants”) are given an opportunity to purchase the Company's common stock through payroll deductions. A total of 2,500,000 shares of 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 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 the Company's common stock have been reserved for issuance under the Stock Purchase Plan. During the year ended May 31, 2017, an additional 500,000 shares of the Company's common stock were reserved for issuance under the Stock Purchase Plan.

The Company uses 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 May 31, 2018, 2017 and 2016, 89,943, 129,185 and 137,957 shares, respectively, were issued at an average price of $14.03, $11.00 and $10.67, respectively, under the Stock Purchase Plan. As of May 31, 2018, 1.2 million shares remained available for future purchases under the Stock Purchase Plan.

Share Repurchases

On November 6, 2016, the Board of Directors approved the Repurchase Program under which they authorized the Company the option to repurchase up to $25.0 million of its outstanding common stock during the twenty-four month period ending November 6, 2018. During the second quarter of fiscal year 2017, the Company repurchased 500,000 shares of common stock in the open market at an aggregate cost of $7.8 million under the Repurchase Program. During the fourth quarter of fiscal year 2017, the Company repurchased 370,000 shares of common stock in the open market at an aggregate cost of $5.7 million under the Repurchase Program. As of May 31, 2018, $11.4 million remained available for repurchase under the Repurchase Program.

In February 2017, the Company retired 642,305 shares of treasury stock. These retired shares are now included in the Company’s pool of authorized but unissued shares. The retired stock had a carrying value of approximately $9.9 million and $0.01 was the par value that was deducted from common stock and the remaining $9.9 million was deducted from additional paid-in capital.