Note B — Stock Options and Stock-Based Compensation

Under the Company’s Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at March 31, 2016, options exercisable 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. During fiscal 2016, based upon the historical experience of option cancellations, the Company has an estimated annualized forfeiture rate of 12.2%. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.

The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for fiscal years ended March 31, 2014, 2015 and 2016:

Fiscal 2014

Fiscal 2015

Fiscal 2016

Expected volatility

47%

45%

43%

Risk free interest rate

0.7% to 1.5%

1.3% to 1.7%

1.25% to 1.65%

Dividend yield

0.0%

Weighted average option life

4.4 to 4.5 years

For the fiscal years ended March 31, 2014, 2015 and 2016, the Company recorded share-based compensation expense of $2,140,000, $2,209,000, and $2,192,000, respectively. The table below shows the amounts recognized in the financial statements for the fiscal years ended March 31, 2014, 2015 and 2016.


	Fiscal 2014		Fiscal 2015		Fiscal 2016
Cost of revenue	$	672,000	$	1,021,000	$	1,288,000
General and administrative		1,468,000		1,188,000		904,000

Total cost of stock-based compensation included in income before income tax		2,140,000		2,209,000		2,192,000
Amount of income tax benefit recognized		835,000		862,000		852,000

Amount charged to net income	$	1,305,000	$	1,347,000	$	1,340,000

Effect on basic earnings per share	$	0.06	$	0.07	$	0.07

Effect on diluted earnings per share	$	0.06	$	0.06	$	0.07

All options granted in the three fiscal years ended March 31, 2014, 2015, and 2016 were granted at fair value and are non-statutory stock options. Summarized information for all stock options for the past three fiscal years follows:


	Fiscal 2014			Fiscal 2015			Fiscal 2016
Options outstanding – beginning of the year		1,100,952			1,115,984			1,163,179
Options granted		441,550			241,625			276,275
Options exercised		(310,729	)		(111,758	)		(200,753	)
Options cancelled/forfeited		(115,789	)		(82,672	)		(123,236	)

Options outstanding – end of year		1,115,984			1,163,179			1,115,465

During the year, weighted average exercise price of:
Options granted	$	33.06		$	37.64		$	35.51
Options exercised	$	15.31		$	17.27		$	19.75
Options cancelled/forfeited	$	23.33		$	32.31		$	33.44
At the end of the year:
Price range of outstanding options	$	7.78-$45.55		$	7.78-$45.55		$	9.05-$45.55
Weighted average exercise price per share	$	24.80		$	27.65		$	30.36
Options available for future grants		959,295			800,342			650,345
Exercisable options		430,294			559,168			529,691

The following table summarizes the status of stock options outstanding and exercisable at March 31, 2016:


Range of Exercise Prices	Number of Outstanding Options		Weighted Average Remaining Contractual Life		Outstanding Options – Weighted Average Exercise Price		Exercisable Options – Number of Exercisable Options		Exercisable Options – Weighted Average Exercise Price
$9.05 to $23.10		394,458		2.74	$	19.94		326,460	$	19.34
$23.11 to $34.78		456,246		3.72		32.70		117,986		27.71
$34.79 to $44.86		209,039		3.75		40.88		56,191		40.98
$44.87 to $45.55		55,722		2.85		45.55		29,054		45.55

Total		1,115,465		3.33	$	30.36		529,691	$	24.93

A summary of the status for all outstanding options at March 31, 2016, and changes during the fiscal year then ended is presented in the table below:


	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of March 31, 2016
Options outstanding, March 31, 2015		1,163,179		$	27.65
Granted		276,275			35.51
Exercised		(200,753	)		19.75
Cancelled – forfeited		(115,300	)		33.79
Cancelled – expired		(7,936	)		30.10

Options outstanding, March 31, 2016		1,115,465		$	30.36		3.33	$	10,862,335

Options vested and expected to vest		984,006		$	29.63		3.21	$	10,337,930

Ending exercisable		529,691		$	24.93		2.66	$	7,969,066

The weighted average fair value of options granted during fiscal 2014, 2015, and 2016 was $13.96, $15.00, and $13.68, respectively. The total intrinsic value of options exercised during fiscal years 2014, 2015, and 2016 were $7,726,000, $2,455,000, and $3,581,000 respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options pursuant to which vesting occurs only upon the Company achieving certain earnings per share targets as determined by the Company’s board of directors. The 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 probable which allow the performance options to vest. During fiscal years ended March 31, 2014, 2015, and 2016, the Company recognized stock compensation expense for performance-based options in the amount of $630,000, $211,000, and $28,000, respectively.

The Company received $3,386,000, $1,603,000, and $3,749,000 of cash receipts from the exercise of stock options during fiscal 2014, 2015, and 2016, respectively. As of March 31, 2016, $4,425,000 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted average period of 3 years.