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 (loss) for the three and six month periods ended September 30, 2013, includes stock-based compensation expense of $108 net of tax, or $0.01 per diluted share, and $217 net of tax, or $0.02 per diluted share, respectively. Net income for the three and six month periods ended September 30, 2012, includes stock-based compensation expense of $122 net of tax, or $0.01 per diluted share, and $269 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 stock-based 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” and together with the 1999 Plan, the 2004 Plan and the 2006 Plan collectively, the “Plans”).

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 2006 and 2008 remain outstanding.

Under each of the Plans, option exercise prices equal the fair market value of the common shares at their respective grant dates. Options granted to officers and employees expire no later than 10 years after the date of the grant. In most circumstances prior to fiscal year 2014, options granted to directors, officers, and employees generally 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 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 19,000 of the total 158,000 options granted in fiscal 2014 and 77,000 of the total 551,000 options granted in fiscal 2013. The Black-Scholes weighted-average value at each grant date per option granted in fiscal 2014 was $3.03 and $3.01 and in fiscal 2013 was $3.05, $3.02, $3.02 and $2.82. 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:

		Volatility		Risk-free interest rate		Expected term of options (in years)
2014 $3.03 value per option	%	31.2	%	1.3	%	7.0	%
2014 $3.01 value per option	%	31.2	%	1.3	%	7.0	%
2013 $3.05 value per option	%	34.0	%	1.2	%	7.0	%
2013 $3.02 value per option	%	35.5	%	1.2	%	7.0	%
2013 $3.02 value per option	%	34.9	%	1.1	%	7.0	%
2013 $2.82 value per option	%	30.9	%	1.3	%	7.0	%

The remaining 139,000 options granted in fiscal 2014 had a weighted-average value per option of $1.90 and $1.71. The remaining 474,000 options granted in fiscal 2013 had a weighted-average value per option of $1.86, $1.75, and $1.75 at the grant date. These valuations 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 method:

	2014 $1.90 value per option		2014 $1.71 value per option		2013 $1.86 value per option		2013 $1.75 value per option		2013 $1.75 value per option
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%
Volatility	34.9	%	34.9	%	34.0	%	34.9	%	30.1	%
Risk-free interest rate	1.9	%	1.9	%	1.8	%	1.1	%	1.3	%
Expected term of options (in years)	10.0		10.0		10.0		10.0		10.0
Forfeiture adjustment	1.1	%	1.8	%	0.2	%	0.2	%	0.2	%
Suboptimal behavior factor	1.7		1.7		1.9		1.9		1.9

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

			Aggregate Intrinsic Value			Weighted- Average Exercise Price
Outstanding at March 31, 2013	1,231,498		$	720	7	$	8.20
Granted	158,000			—	10		8.58
Exercised	(88,500	)		159	—		6.86
Canceled or expired	(325,785	)		—	—		9.32
Outstanding at September 30, 2013	975,213			1,547	8		8.34
Options exercisable at September 30, 2013	414,880			716	6		8.43
Unvested options expected to become exercisable after September 30, 2013	560,333			831	9		8.28
Shares available for future option grants at September 30, 2013 (a)	501,113

(a) May be decreased by restricted stock grants.

Cash received from stock option exercises during the first six months of fiscal 2014 was approximately $607. The aggregate intrinsic value of options exercised during the first six months of fiscal 2014 was approximately $159. 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 2014.

During the first six months of fiscal 2014 and fiscal 2013, stock option compensation expense recorded in selling, general and administrative expenses was $248 and $368, respectively, before taxes of $94 and $154, respectively. As of September 30, 2013, there was $789 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 two 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 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 is as follows.

			Weighted – Average Grant Date Fair Value
Non-vested at March 31, 2013	24,125		$	7.51
Granted	31,196			8.91
Vested	(24,125	)		7.51
Cancelled	—			—
Non-vested at September 30, 2013	31,196			8.91

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. 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 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 six months of fiscal 2014 and fiscal 2013, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $102 and $96, respectively, before taxes of $39 and $40, respectively. As of September 30, 2013, there was approximately $267 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of approximately two years.