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, 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. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 12.28% and 13.16% for the three months ended September 30, 2015 and 2016, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2015 and 2016 using the Black-Scholes option-pricing model:

	Three Months Ended September 30,
	2015		2016
Risk-free interest rate		1.61%		1.03
Expected volatility		44%		42%
Expected dividend yield		0.00%		0.00%
Expected forfeiture rate		12.28%		13.16%
Expected weighted average life of option in years	4.4 years		4.4 years

All options granted in the six months ended September 30, 2015 and 2016 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.

For the three months ended September 30, 2015 and 2016, the Company recorded share-based compensation expense of $488,000 and $612,000, respectively. For the six months ended September 30, 2015 and 2016, the Company recorded share-based compensation expense of $1,104,000 and $1,128,000, respectively. The table below shows the amounts recognized in the consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and six months ended September 30, 2015 and 2016, respectively.

Note B — Stock-Based Compensation and Stock Options (continued)

	Three Months Ended
	September 30, 2015			September 30, 2016
Cost of revenues	$	321,000		$	395,000
General and administrative		167,000			217,000
Total cost of stock-based compensation included in income before income tax provision		488,000			612,000
Amount of income tax benefit recognized		(188,000	)		(234,000	)
Amount charged against net income	$	300,000		$	378,000
Effect on basic earnings per share	$	(0.02	)	$	(0.02	)
Effect on diluted earnings per share	$	(0.01	)	$	(0.02	)

	Six Months Ended
	September 30, 2015			September 30, 2016
Cost of revenues	$	633,000		$	732,000
General and administrative		471,000			396,000
Total cost of stock-based compensation included in income before income tax provision		1,104,000			1,128,000
Amount of income tax benefit recognized		(425,000	)		(432,000	)
Amount charged against net income	$	679,000		$	696,000
Effect on basic net income per share	$	(0.03	)	$	(0.04	)
Effect on diluted net income per share	$	(0.03	)	$	(0.04	)

Summarized information for all stock options for the three and six months ended September 30, 2015 and 2016 follows:

	Three Months Ended September 30, 2015					Three Months Ended September 30, 2016
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding, beginning		1,167,042		$	28.15		1,074,521		$	31.56
Options granted		47,300			33.15		45,600			43.32
Options exercised		(59,804	)		16.91		(14,593	)		20.61
Options cancelled/forfeited		(18,952	)		36.25		(2,609	)		39.33
Options outstanding, ending		1,135,586		$	28.81		1,102,919		$	32.17

	Six Months Ended September 30, 2015					Six Months Ended September 30, 2016
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding, beginning		1,163,179		$	27.65		1,115,465		$	28.81
Options granted		87,000			33.85		90,500			44.52
Options exercised		(95,641	)		17.75		(91,216	)		21.87
Options cancelled/forfeited		(18,952	)		36.25		(11,830	)		36.36
Options outstanding, ending		1,135,586		$	28.81		1,102,919		$	32.17

Note B — Stock-Based Compensation and Stock Options (continued)

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2016:

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 $23.10		335,209		2.51	$	20.45		304,139	$	20.19
$23.11 to $34.77		190,134		2.86	$	30.75		118,443	$	28.96
$34.78 to $35.76		233,099		3.75	$	34.78		8,390	$	34.78
$35.77 to $46.20		344,477		3.72	$	43.50		103,684	$	43.26
Total		1,102,919		3.21	$	32.17		534,656	$	26.69

A summary of the status for all outstanding options at September 30, 2016, and changes during the three months 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 September 30, 2016
Options outstanding at July 1, 2016		1,074,521		$	31.56
Granted		45,600			43.32
Exercised		(14,593	)		20.61
Cancelled – forfeited		(2,110	)		39.21
Cancelled – expired		(499	)		39.82
Ending outstanding		1,102,919		$	32.17		3.21	$	8,387,418
Ending vested and expected to vest		971,976		$	31.50		3.09	$	8,045,668
Ending exercisable at September 30, 2016		534,656		$	26.69		2.55	$	6,712,666

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2015 and 2016, was $12.53 and $14.78, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options under which vesting occurs only upon the Company achieving certain revenue or earnings per shares 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-vesting options. However, the Company only recognizes stock compensation to the extent that the probable targets are determined to be achieved which allow the performance options to vest. The Company recognized ($63,000) and ($31,000) of stock compensation expense for the three months ended September 30, 2015 and 2016, respectively, for performance-based stock options.