NOTE 3.

Stock-Based Compensation

The Company follows guidance provided by Accounting Standards Codification (“ASC”) 718, “Accounting for Stock-Based Compensation”. Compensation cost is recognized for all awards granted and modified based on the grant date fair value of the awards. Net income for the three and nine month periods ended December 31, 2012, includes stock-based compensation expense of $84 net of tax, or $0.01 per diluted share, and $353 net of tax, or $0.04 per diluted share, respectively. Net income for the three and nine month periods ended December 31, 2011, includes stock-based compensation expense of $121 net of tax, or $0.01 per diluted share, and $311 net of tax, or $0.03 per diluted share, respectively. Stock based compensation expense is included in selling, general and administrative expenses. Additional compensation cost will be recognized as new restricted stock grants are awarded.

The Company maintains the 1999 Long-Term Incentive Plan (the “1999 Plan”), the 2004 Long-Term Incentive Plan (the “2004 Plan”), the 2006 Long-Term Incentive Plan (the “2006 Plan”), and the 2012 Incentive Compensation Plan (the “2012 Plan”).

Under the terms of the 2012 Plan, 750,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, certain employees, and other key individuals of the Company through October 2022. Under the terms of the 2006 Plan, 500,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through July 2016. Under the terms of the 2004 Plan, 200,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through September 2014. The 1999 Plan expired in July 2009, and no further grants or awards may be made under this plan. Under the 1999 Plan, unexercised options granted in fiscal years 2004, 2006, 2007 and 2008 remain outstanding.

Under each of the 1999, 2004, 2006, and 2012 Plans, option exercise prices equal the fair market value of the common shares at their respective grant dates. Prior to May 1999, options granted to officers and employees and all options granted to non-employee directors expired if not exercised on or before five years after the date of the grant. Beginning in May 1999, options granted to officers and employees expire no later than 10 years after the date of the grant. Options granted to directors, officers, and employees vest ratably over three years beginning one year after the date of the grant. In certain circumstances, including a change of control of the Company (as defined in the various Plans), option vesting may be accelerated.

The Company entered into an employment agreement with Brad Pedersen, President and Chief Executive Officer of the Company, effective May 22, 2012, and granted Mr. Pedersen a stock option to purchase 400,000 shares of common stock at an exercise price equal to the stock price of $8.10 on that date. This stock option was reported in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 22, 2012.

The Black-Scholes option-pricing model uses dividend yield, volatility, risk-free rate, expected term, and forfeiture assumptions to value stock options and was used to value 61,000 options granted in fiscal 2013 and all of the options granted in fiscal 2012. The Black-Scholes weighted-average value at each grant date per option granted in fiscal 2013 was $3.02 and $3.05 and was $2.75, $2.58, $2.72, $2.81, and $2.13 in fiscal 2012. Expected volatilities are based on historical volatility of the Company’s common stock and other factors, and the risk-free rate for periods within the option’s contractual life is based on the U.S. Treasury yield curve at the time of the grant. The Company uses historical data to estimate the expected option term and assumed no forfeitures because of the limited number of employees at the executive and senior management levels who receive stock options, past employment history, and current stock price projections. The Company used the following assumptions to estimate the fair value of option grants under the Black-Scholes method:


	2013 $3.02 value per option			2013 $3.05 value per option			2012 $2.75 value per option			2012 $2.58 value per option			2012 $2.72 value per option			2012 $2.81 value per option			2012 $2.13 value per option
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		35.5	%		34.0	%		25.6	%		25.8	%		25.8	%		25.4	%		25.3	%
Risk-free interest rate		1.2	%		1.2	%		1.5	%		1.6	%		1.6	%		1.9	%		1.9	%
Expected term of options (in years)		7.0			7.0			7.0			7.0			7.0			7.0			7.0

The remaining 350,000 options granted in fiscal 2013 had a weighted-average value per option of $1.86 at the grant date. This valuation used a Monte Carlo simulation because the option vesting was based on service and market conditions. Expected volatilities are based on the historical volatility of the Company’s common stock and other factors and the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses the option contractual life for the expected option term and assumes a forfeiture rate using historical data for Company officers who receive stock options. The Company used the following assumptions to estimate the fair value of option grants under the Monte Carlo simulation:


	2013 $1.86 value per option
Dividend yield		0.0	%
Volatility		34.0	%
Risk-free interest rate		1.8	%
Expected term of options (in years)		10.0
Forfeiture adjustment		0.2	%
Suboptimal behavior factor		1.9

The following table summarizes stock option activity under all plans and other grants authorized by the Board of Directors.


	Number of Shares			Aggregate Intrinsic Value (in thousands)		Approximate Remaining Contractual Term (Years)		Weighted- Average Exercise Price

Outstanding at March 31, 2012		759,577		$	800		7	$	8.17
Granted		411,000			—		10		8.09
Exercised		(25,415	)		162		—		6.39

Canceled or expired		(32,001	)		—		—		8.55

Outstanding at December 31, 2012		1,113,161			740		7		8.17


Options exercisable at December 31, 2012		607,159			625		6		8.20
Unvested options expected to become exercisable after December 31, 2012		506,002			114		9		8.14

Shares available for future option grants at December 31, 2012 (a)		641,357

(a)	May be decreased by restricted stock grants.

Cash received from stock option exercises during the first nine months of fiscal 2013 was approximately $41. In lieu of a cash payment for stock option exercises, the Company received 14,739 shares of common stock, which were retired into treasury, valued at the price of the common stock at the transaction date. The aggregate intrinsic value of options exercised during the first nine months of fiscal 2013 was approximately $35. The intrinsic value of stock options is the amount by which the market price of the stock on the date of exercise exceeded the market price of stock on the date of grant. There was no tax benefit generated to the Company from options granted prior to April 1, 2006 and exercised during fiscal 2013.

During the first nine months of fiscal 2013 and fiscal 2012, stock option compensation expense recorded in selling, general and administrative expenses was $468 and $237, respectively, before taxes of $196 and $99, respectively. As of December 31, 2012, there was $762 of unrecognized compensation cost related to stock options granted-but-not-yet-vested that are expected to become exercisable. This cost is expected to be recognized over a weighted-average period of approximately three years.

Except as otherwise authorized by the Board of Directors, it is the general policy of the Company that the stock underlying the option grants consists of authorized and unissued shares available for distribution under the applicable Plans. Under the 1999, 2004, 2006 and 2012 Plans, the Incentive and Compensation Committee of the Board of Directors (made up of independent directors) may at any time offer to repurchase a stock option that is exercisable and has not expired.

A summary of restricted stock award activity under all plans follows.


	Number of Shares			Weighted – Average Grant Date Fair Value

Non-vested at March 31, 2012		21,094		$	8.54
Granted		23,934			7.52
Vested		(20,903	)		8.56
Cancelled		—			—

Non-vested at December 31, 2012		24,125			7.51

Restricted stock awards are utilized both for director compensation and awards to officers and employees, and are distributed in a single grant of shares which are subject to forfeiture prior to vesting and have voting and dividend rights from the date of issuance. Other than the restricted stock granted in fiscal 2012 and the first nine months of fiscal 2013, outstanding restricted stock awards to officers and employees have forfeiture and transfer restrictions that lapse ratably over three years beginning one year after the date of the award. Restricted stock awards granted to officers and employees in fiscal 2012 contain forfeiture and transfer restrictions that lapse after six months.

Restricted stock awards granted to non-employee directors prior to fiscal 2012 contain forfeiture provisions that lapse after one year and transfer restrictions that lapse six months after the person ceases to be a director. In certain circumstances, including a change of control of the Company as defined in the various Plans, forfeiture lapses on restricted stock may be accelerated.

The fair value of restricted stock awards is based on the market price of the stock at the grant date and compensation cost is amortized to expense on a straight-line basis over the requisite service period as stated above. The Company expects no forfeitures during the vesting period with respect to unvested restricted stock awards granted. During the first nine months of fiscal 2013 and fiscal 2012, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $141 and $299, respectively, before taxes of $59 and $125, respectively. As of December 31, 2012, there was approximately $181 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of less than one year.