Stock-based Compensation

Stock-Based Benefit Plans

The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits the grant of stock options, stock appreciation rights (SARs), restricted stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under its 2012 Inducement Option Plan (the Inducement Plan) and under prior plans, though no further grants can be made under these plans. At March 31, 2014, 1,744,000 shares were available for future grant under the 2007 Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over periods ranging from two years to four years based upon continued employment with the Company.

The Company began granting cash-settled SARs in the first quarter of fiscal 2014. The SARs vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vest ratably each month over the remaining period based upon continued employment with the Company. The SARs expire seven years after the date of grant. These SARs allow the holder to receive in cash the difference between the SARs' exercise price (which is the closing market price of the Company's common stock on the grant date) and the closing market price of the Company's common stock on the date the holder exercises the SAR. The SARs are recorded as a liability in accrued compensation and benefits in the Company's balance sheet.

The Company has an Employee Stock Purchase Plan (ESPP) which permits eligible employees to purchase shares of the Company’s common stock through payroll deductions. As approved by the Board of Directors, effective August 1, 2010, shares under the ESPP are purchased at a price equal to 85% of the lesser of the fair market value of the Company’s common stock as of the first day or the last day of each six-month offering period. The offering periods under the ESPP commence on approximately February 1 and August 1 of each year. At March 31, 2014, 453,000 shares were available for future issuance under the ESPP.

Stock-Based Compensation

The following table outlines the effects of total stock-based compensation including expense related to SARs.



	Three Months Ended March 31,						Six Months Ended March 31,
	2014				2013		2014			2013
				(In thousands)
Stock-based compensation
Cost of sales	$	54			$	44	$	104		$	87
Research and development	776				577		1,425			1,099
Selling, general and administrative	1,190				848		2,139			1,723
Total stock-based compensation	2,020				1,469		3,668			2,909
Tax effect on stock-based compensation	(386		)		—		(688		)	—
Net effect on net income	$	1,634			$	1,469	$	2,980		$	2,909

Compensation related to SARs included in total stock-based compensation	$	465			$	—	$	622		$	—

As of March 31, 2014, there was approximately $10.6 million of total unrecognized stock-based compensation expense related to options and awards under the Company’s stock-based benefit plans that will be recognized over a weighted-average period of approximately 2.68 years. Future stock option and award grants will add to this total whereas quarterly amortization and the vesting of the existing stock option and award grants will reduce this total. In addition, as of March 31, 2014, there was approximately $200,000 of total unrecognized stock-based compensation expense under the Company’s ESPP that will be recognized over a weighted-average period of approximately four months. As of March 31, 2014, there was approximately $5.6 million of total unrecognized stock-based compensation expense related to SARs that will be recognized over a weighted-average period of approximately 3.61 years. Future SAR grants will add to this total whereas quarterly amortization and the vesting of the SARs will reduce this total. In addition, because the SARs are settled with cash, the fair value of the SARs must be revalued on a quarterly basis which will likely impact the amount of expense in future periods.

The Company uses the Black-Scholes option pricing model to estimate the fair value of the options and SARS granted and rights to acquire stock granted under the ESPP. The weighted average estimated fair values of stock option grants and rights granted under the ESPP, as well as the weighted average assumptions used in calculating these values during the three and six month periods ended March 31, 2014 and 2013 were based on estimates at the date of grant as follows:



	Three Months Ended March 31,						Six Months Ended March 31,
	2014			2013			2014			2013
Options
Weighted-average fair value of grants	$	5.12		$	4.27		$	4.69		$	4.31
Expected term in years	4.42			4.45			4.42			4.45
Estimated volatility	52		%	58		%	51		%	59		%
Risk-free interest rate	1.18		%	0.61		%	1.04		%	0.53		%
Dividend yield	—		%	—		%	—		%	—		%
ESPP
Weighted-average fair value of grants	$	2.66		$	2.30		$	2.66		$	2.30
Expected term in years	0.49			0.49			0.49			0.49
Estimated volatility	27		%	32		%	27		%	32		%
Risk-free interest rate	0.41		%	0.11		%	0.41		%	0.11		%
Dividend yield	—		%	—		%	—		%	—		%

The Company issues RSUs from time to time. The estimated fair value of RSU awards is calculated based on the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of RSUs granted in the three month period ended March 31, 2014 was $11.26 per share. The weighted average grant date fair value of RSUs granted in the six month periods ended March 31, 2014 and March 31, 2013, was $11.17 per share and $9.14 per share, respectively.

A summary of the Company’s stock option activity and related information for the six months ended March 31, 2014 follows (number of shares and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at September 30, 2013	5,351		$	7.51
Granted	1,245		$	11.06
Exercised	(916	)	$	6.70		$	5,287
Cancelled/Expired	(37	)	$	10.90
Outstanding at March 31, 2014	5,643		$	8.40	4.45	$	40,321
Exercisable at March 31, 2014	2,804		$	6.61	3.14	$	25,064
Vested and expected to vest after March 31, 2014	5,494		$	8.35	4.41	$	39,555

A summary of the Company’s RSU activity and related information for the six months ended March 31, 2014 under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at September 30, 2013	269		$	9.02
Granted	76		$	11.17
Vested	(91	)	$	8.90	$	1,059
Forfeited	(1	)	$	10.64
Outstanding at March 31, 2014	253		$	9.70	$	3,932

A summary of the Company’s SAR activity and related information for the six months ended March 31, 2014 under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at September 30, 2013	—		$	—
Granted	779		$	10.96
Exercised	—		$	—
Cancelled/Expired	(2	)	$	10.96
Outstanding at March 31, 2014	777		$	10.96	6.61	$	3,564
Exercisable at March 31, 2014	—		$	—	—	$	—