Stock-Based Compensation

The Company uses a broad-based equity incentive plan and accounts for stock-based compensation in accordance with ASC 718, “Compensation — Stock Compensation.” The fair value of all stock options granted is recognized as an expense in the Company’s Statements of Operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period. Stock options may be granted to officers, other employees, consultants and directors. The Company recorded total stock-based compensation expense of $2.0 million and $1.5 million for the three months ended October 31, 2014 and October 31, 2013, respectively.

Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted was based on the simplified method due to the limited amount of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate. For the three months ended October 31, 2014, there were no stock options awards granted.

For the three months ended October 31, 2013, assumptions used in the Black-Scholes model are presented below:



	Three Months Ended October 31,
	2014	2013
Average expected life, in years	N/A	6
Expected volatility	N/A	55.84%
Risk-free interest rate	N/A	1.7%
Dividend rate	N/A	0.00%

The following table summarizes option activity during the three months ended October 31, 2014:



	Number of Shares (in thousands)		Weighted average exercise price per share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	1,496		$	24.79
Granted	—		—
Exercised	(9	)	13.34
Cancelled/Forfeited	(34	)	29.96
Outstanding at October 31, 2014	1,453		24.75		6.8	$	14,511
Exercisable at October 31, 2014	918		26.85		5.8	$	8,574

There were no stock options granted during the three months ended October 31, 2014, and 179,601 stock options were granted during the three months ended October 31, 2013. The weighted average grant date fair value per share of stock options granted was $11.14 during the three months ended October 31, 2013. The fair value per share of stock options vested was $11.21 during the three months ended October 31, 2014 and $15.65 for the three months ended October 31, 2013. There were 9,194 stock options exercised during the three months ended October 31, 2014 and 40,000 stock options exercised in the three months ended October 31, 2013. The total intrinsic value of stock options exercised was $0.1 million during the three ended October 31, 2014, and $0.2 million for the three months ended October 31, 2013.

The following table summarizes nonvested stock option activity during the three ended October 31, 2014:



	Number of shares (in thousands)		Weighted average grant date fair value per share
Nonvested at July 31, 2014	660		$	10.81
Granted	—		—
Vested	(93	)	11.21
Cancelled/Forfeited	(32	)	13.24
Nonvested at October 31, 2014	535		10.59

As of October 31, 2014, approximately $4.7 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized over a weighted average period of 1.9 years. As of October 31, 2013, approximately $7.5 million of total unrecognized compensation expense related to nonvested stock options was expected to be recognized over a weighted average period of 2.9 years.

Cash received from option exercises was $0.1 million, $1.3 million and $0.6 million for the three months ended October 31, 2014, fiscal 2014, and the three months ended October 31, 2013, respectively.

Restricted Stock and Restricted Stock Unit Awards: Restricted stock and restricted stock unit activity during the three months ended October 31, 2014:



	Restricted Stock				Restricted Stock Units
	Number of shares (in thousands)		Weighted average grant date fair value per share		Number of shares (in thousands)		Weighted average grant date fair value per share
Outstanding at July 31, 2014	366		$	20.47	310		$	19.72
Granted	—		—		201		28.77
Vested	(36	)	33.05		(41	)	23.15
Cancelled/Forfeited	(20	)	20.38		(22	)	20.26
Outstanding at October 31, 2014	310		19.01		448		23.44

There were no restricted stock awards granted during the three months ended October 31, 2014, and 95,735 restricted stock awards granted during the three months ended October 31, 2013. The weighted average fair value per share of restricted stock granted during the three months ended October 31, 2013 was $20.89. The weighted average fair value per share at the grant date of restricted stock vested was $33.05 for the three months ended October 31, 2014 and was $41.55 for the three months ended October 31, 2013. The total intrinsic value of restricted stock vested was $1.0 million in the three months ended October 31, 2014 and was $0.6 million for the three months ended October 31, 2013. The total intrinsic value of restricted stock units vested in the three months ended October 31, 2014 was $1.2 million and was $40 thousand for the three months ended October 31, 2013.

As of October 31, 2014, there was $4.4 million of unrecognized compensation expense related to nonvested restricted stock expected to be recognized over a weighted average period of 2.2 years. As of October 31, 2014, there was $9.2 million of unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of 3.2 years. As of October 31, 2013, $7.3 million of unrecognized compensation expense related to nonvested restricted stock was expected to be recognized over a weighted average period of 3 years, and $5.4 million of unrecognized compensation expense related to nonvested restricted stock units was expected to be recognized over a weighted average period of 3.5 years.

Performance Share Units: In the first quarter of fiscal 2015, the Company began granting performance share units under the 2005 Equity Incentive Plan. Each performance share unit represents one equivalent share of the Company's common stock. The performance share units cliff vest after three years based on the achievement of a performance based market condition, except that 40% of the October 2014 awards will vest after two years if the performance based market condition is achieved. The number of shares of common stock ultimately issued in connection with these performance share units is based on a measurement of the comparative performance of the Company's common stock against the total shareholder return of a selected group of peer companies. The number of shares of common stock ultimately issued will range from zero to two hundred percent of the granted performance share units.

Compensation expense related to these performance stock unit awards that are classified as market condition awards under GAAP is determined based on the grant-date fair value, the number of shares issuable pursuant to the award and is recognized over the vesting period. The fair value at the grant date is measured using the Monte-Carlo model. For the three months ended October 31, 2014, the Monte Carlo fair value per performance share unit was $32.44. The Monte-Carlo option-pricing model uses similar input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the performance based market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied. Compensation cost is not reversed if the achievement of the market condition does not occur.

Assumptions used in the Monte-Carlo model are presented below:



	Three Months Ended October 31,
	2014	2013
Expected term, in years	2.81	N/A
Expected volatility	52.76%	N/A
Risk-free interest rate	0.89%	N/A
Dividend rate	0.00%	N/A

Performance share award activity during the three months ended October 31, 2014:



	Number of Shares (in thousands)		Weighted average grant date fair value		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	—		$	—
Granted	123		32.44
Vested	—		—
Cancelled/Forfeited	(3	)	32.44
Outstanding at October 31, 2014	120		32.44		2.9	$	3,623

There were 122,787 performance share units granted during the three months ended October 31, 2014. The weighted average fair value per share of performance share units granted during the three months ended October 31, 2014 was $32.44. As of October 31, 2014, there was $3.5 million of unrecognized compensation expense related to nonvested performance share units expected to be recognized over a weighted average period of 2.9 years.