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 September 30, 2017, 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 on the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from the date of grant with the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from date of grant, respectively. All options granted in the six months ended September 30, 2016 and 2017 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.

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 dividend yield, the expected forfeiture rate and the expected option life. Upon adoption of ASU No. 2016-09 as of fiscal 2017, the Company will account for forfeitures as they occur, rather than estimate expected forfeitures. As a result, during the fourth quarter of fiscal 2017, we reclassified the excess tax benefit of $0.5 million from additional paid in capital into the income tax provision line. 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. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2016 and 2017 using the Black-Scholes option-pricing model:

	Three Months Ended September 30,
	2016		2017
Risk-free interest rate		1.03%		1.79%
Expected volatility		42%		40%
Expected dividend yield		0.00%		0.00%
Expected weighted average life of option in years	4.4 years		4.4 years

For the three months ended September 30, 2016 and 2017, the Company recorded share-based compensation expense of $612,000 and $607,000, respectively. For the six months ended September 30, 2016 and 2017, the Company recorded share-based compensation expense of $1,128,000 and $1,529,000, respectively. The table below shows the amounts recognized in the unaudited consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and six months ended September 30, 2016 and 2017, respectively.

	Three Months Ended
	September 30, 2016			September 30, 2017
Cost of revenues	$	395,000		$	411,000
General and administrative		217,000			196,000
Total cost of stock-based compensation included in income before income tax provision		612,000			607,000
Amount of income tax benefit recognized		(234,000	)		(185,000	)
Amount charged against net income	$	378,000		$	422,000
Effect on basic earnings per share	$	(0.02	)	$	(0.02	)
Effect on diluted earnings per share	$	(0.02	)	$	(0.02	)

	Six Months Ended
	September 30, 2016			September 30, 2017
Cost of revenues	$	732,000		$	893,000
General and administrative		396,000			636,000
Total cost of stock-based compensation included in income before income tax provision		1,128,000			1,529,000
Amount of income tax benefit recognized		(432,000	)		(466,000	)
Amount charged against net income	$	696,000		$	1,063,000
Effect on basic earnings per share	$	(0.04	)	$	(0.06	)
Effect on diluted earnings per share	$	(0.04	)	$	(0.06	)

The following table summarizes information for all stock options for the three and six months ended September 30, 2016 and 2017:

	Three Months Ended September 30, 2016					Three Months Ended September 30, 2017
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding, beginning		1,074,521		$	31.56		1,151,722		$	33.24
Options granted		45,600			43.32		73,650			48.35
Options exercised		(14,593	)		20.61		(145,911	)		25.60
Options cancelled/forfeited		(2,609	)		39.33		(10,958	)		38.39
Options outstanding, ending		1,102,919		$	32.17		1,068,503		$	35.28

	Six Months Ended September 30, 2016					Six Months Ended September 30, 2017
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding, beginning		1,115,465		$	28.81		1,143,928		$	32.02
Options granted		90,500			44.52		151,050			47.11
Options exercised		(91,216	)		21.87		(211,832	)		25.93
Options cancelled/forfeited		(11,830	)		36.36		(14,643	)		39.28
Options outstanding, ending		1,102,919		$	32.17		1,068,503		$	35.28

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2017:

Range of Exercise Price	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
$12.71 to $29.27		217,809		2.10	$	20.29		217,809	$	20.29
$29.28 to $34.67		215,769		3.98	$	32.67		36,344	$	33.83
$34.68 to $38.70		242,022		3.04	$	35.40		56,847	$	34.98
$38.71 to $48.35		392,903		4.17	$	45.35		140,320	$	21.71
Total		1,068,503		3.37	$	35.28		451,320	$	30.42

The following table summarizes the status of all outstanding options at September 30, 2017, and changes during the three months then ended:

	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of June 30, 2017
Options outstanding at July 1, 2017		1,151,722		$	33.24
Granted		73,650			48.35
Exercised		(145,911	)		25.60
Cancelled – forfeited		(10,866	)		38.63
Cancelled – expired		(92	)		33.16
Ending outstanding		1,068,503		$	35.28		3.37	$	20,430,746
Ending vested and expected to vest		1,068,503		$	35.28		3.37	$	20,430,746
Ending exercisable at September 30, 2017		451,320		$	30.42		2.48	$	10,821,153

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2016 and 2017, was $14.78 and $17.15, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options which vest only upon the Company’s achievement of certain earnings per share 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-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. The Company recognized ($31,000) and $13,000 of stock compensation expense for the three months ended September 30, 2016 and 2017, respectively, for performance-based stock options.