Note B - Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at December 31, 2014, options for up to 19,365,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors and consultants at exercise prices not less than the fair market value of the stock at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant and the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the board of directors expire at the end of five years and ten years from date of grant, respectively.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 12.40% and 12.12% for the three months ended December 31, 2013 and 2014, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended December 31, 2013 and 2014 using the Black-Scholes option-pricing model:


	Three Months Ended December 31,
	2013			2014
Risk-free interest rate		1.35	%		1.64	%

Expected volatility		47	%		46	%

Expected dividend yield		0.00	%		0.00	%

Expected forfeiture rate		12.40	%		12.12	%

Expected weighted average life of option in years		4.4 years			4.4 years

All options granted in the nine months ended December 31, 2013 and 2014 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date and are non-statutory stock options.

For the three months ended December 31, 2013 and 2014, the Company recorded share-based compensation expense of $676,000 and $432,000, respectively. For the nine months ended December 31, 2013 and 2014, the Company recorded share-based compensation expense of $1,546,000 and $1,594,000, respectively. The table below shows the amounts recognized in the financial statements for stock compensation expense for time based options and performance based options during the three and nine months ended December 31, 2013 and 2014, respectively.


	Three Months Ended
	December 31, 2013			December 31, 2014
Cost of revenues	$	180,000		$	239,000
General and administrative		496,000			193,000


Total cost of stock-based compensation included in income before income tax provision		676,000			432,000
Amount of income tax benefit recognized		(267,000	)		(164,000	)

Amount charged against net income	$	409,000		$	268,000

Effect on diluted net income per share	$	(0.02	)	$	(0.01	)


	Nine Months Ended
	December 31, 2013			December 31, 2014
Cost of revenues	$	477,000		$	733,000
General and administrative		1,069,000			861,000


Total cost of stock-based compensation included in income before income tax provision		1,546,000			1,594,000
Amount of income tax benefit recognized		(611,000	)		(606,000	)

Amount charged against net income	$	935,000		$	988,000

Effect on diluted net income per share	$	(0.04	)	$	(0.05	)

Summarized information for all stock options for the three and nine months ended December 31, 2013 and 2014 follows:


	Three Months Ended December 31, 2013					Three Months Ended December 31, 2014
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,191,251		$	20.39		1,136,073		$	26.42
Options granted		142,650			40.24		122,825			34.78
Options exercised		(69,276	)		16.33		(21,734	)		15.27
Options cancelled		(4,057	)		21.90		—			—

Options outstanding, ending		1,260,568		$	22.85		1,237,164		$	27.45


	Nine Months Ended December 31, 2013					Nine Months Ended December 31, 2014
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,100,930		$	18.65		1,115,984		$	24.80
Options granted		382,650			31.14		208,875			37.93
Options exercised		(188,327	)		15.14		(78,684	)		17.54
Options cancelled		(34,685	)		22.94		(9,011	)		25.86

Options outstanding, ending		1,260,568		$	22.85		1,237,164		$	27.45

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2014:


									Exercisable
			Weighted		Outstanding		Exercisable		Options –
			Average		Options –		Options –		Weighted
			Remaining		Weighted		Number of		Average
	Number of		Contractual		Average		Exercisable		Exercise
Range of Exercise Price	Outstanding Options		Life		Exercise Price		Options		Price
$7.78 to $22.07		343,924		3.32	$	16.41		294,176	$	15.51
$22.08 to $24.24		340,841		2.94	$	23.45		149,588	$	23.35
$24.25 to $34.78		273,099		3.55	$	31.45		61,690	$	27.80
$34.79 to $45.55		279,300		4.36	$	42.02		9,539	$	40.29

Total		1,237,164		3.50	$	27.45		514,993	$	19.72

A summary of the status for all outstanding options at December 31, 2014, and changes during the three months then ended, is presented in the table below:


	Number of Options			Weighted Average Exercise Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of December 31, 2014
Options outstanding at October 1, 2014		1,136,073		$	26.42
Granted		122,825			34.78
Exercised		(21,734	)		15.27
Cancelled – forfeited		—			—
Cancelled – expired		—			—

Ending outstanding		1,237,164		$	27.45		3.50	$	13,429,112

Ending vested and expected to vest		1,078,621		$	26.28		3.39	$	12,851,985

Ending exercisable at December 31, 2014		514,993		$	19.72		2.85	$	9,041,701

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2013 and 2014, was $16.70 and $14.22, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options under which vesting occurs only upon the Company achieving certain revenue or earnings per shares targets on a calendar year basis as determined by the Company’s board of directors. These options were valued in the same manner as the time-vesting options. However, the Company only recognizes stock compensation to the extent that the targets are determined to be achieved which allow the performance options to vest. The Company recognized $285,000 and ($30,000) of stock compensation expense for the three months ended December 31, 2013 and 2014, respectively, for performance-based stock options. The Company recognized $448,000 and $113,000 of stock compensation expense for the nine months ended December 31, 2013 and 2014, respectively, for performance-based stock options. The current period reduction reflects changes in management’s estimate of certain performance based measurements not being achieved for the current fiscal year.