Note 2 — Stock Options and Stock-Based Compensation

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at March 31, 2018, 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 fiscal 2018 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, and the expected option life. Upon adoption of ASU 2016-09, the Company accounts for forfeitures as they occur, rather than estimate expected forfeitures. As a result, during the fourth quarter of fiscal 2017, we reclassified the fiscal 2017 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 fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for the fiscal years ended March 31, 2018, 2017 and 2016:

	Fiscal 2018			Fiscal 2017			Fiscal 2016
Expected volatility		40	%		41	%		43	%
Risk free interest rate	1.88% to 2.56%			1.03% to 1.92%			1.25% to 1.65%
Dividend yield		0.0	%		0.0	%		0.0	%
Weighted average option life	4.4 to 4.5 years			4.4 to 4.5 years			4.4 to 4.5 years

For the fiscal years ended March 31, 2018, 2017 and 2016, the Company recorded share-based compensation expense of $3,164,000, $2,432,000, and $2,192,000, respectively. The table below shows the amounts recognized in the financial statements for the fiscal years ended March 31, 2018, 2017 and 2016.

	Fiscal 2018		Fiscal 2017		Fiscal 2016
Cost of revenue	$	1,749,000	$	1,507,000	$	1,288,000
General and administrative		1,415,000		925,000		904,000
Total cost of stock-based compensation included in income before income taxes		3,164,000		2,432,000		2,192,000
Amount of income tax benefit recognized		1,105,000		946,000		852,000
Amount charged to net income	$	2,059,000	$	1,486,000	$	1,340,000
Effect on basic earnings per share	$	0.11	$	0.08	$	0.07
Effect on diluted earnings per share	$	0.11	$	0.08	$	0.07

All options granted in the fiscal years ended March 31, 2018, 2017 and 2016 were granted at fair value and are non-statutory stock options. The following table summarizes information for all stock options for the fiscal years ended March 31, 2018, 2017 and 2016:

	Fiscal 2018			Fiscal 2017			Fiscal 2016
Options outstanding – beginning of the year		1,143,928			1,115,465			1,163,179
Options granted		334,200			267,950			276,275
Options exercised		(314,846	)		(115,592	)		(200,753	)
Options cancelled/forfeited		(98,843	)		(123,895	)		(123,236	)
Options outstanding – end of year		1,064,439			1,143,928			1,115,465
During the year, weighted average exercise price of:
Options granted	$	52.57		$	37.13		$	35.51
Options exercised	$	27.59		$	22.74		$	19.75
Options cancelled/forfeited	$	35.59		$	36.90		$	33.44
At the end of the year:
Price range of outstanding options	$12.71-$57.75			$12.71-$45.73			$9.05-$45.55
Weighted average exercise price per share	$	39.45		$	32.02		$	30.36
Options available for future grants		260,961			505,493			650,345
Exercisable options		445,387			585,424			529,691

The following table summarizes the status of stock options outstanding and exercisable at March 31, 2018:

Range of Exercise Prices	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 $32.10		292,156		2.84	$	24.96		195,387	$	21.42
$32.11 to $34.78		177,354		2.91		34.41		85,900		34.37
$34.79 to $44.86		186,408		3.19		41.20		106,502		41.22
$44.87 to $57.75		408,521		4.38		52.58		57,598		45.60
Total		1,064,439		3.40	$	39.45		445,387	$	31.78

The following table summarizes the status of all outstanding options at March 31, 2018, and changes during the fiscal year then ended:

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of March 31, 2018
Options outstanding, March 31, 2017		1,143,928		$	32.02
Granted		334,200			52.57
Exercised		(314,846	)		27.59
Cancelled – forfeited		(81,586	)		36.22
Cancelled – expired		(17,257	)		27.57
Options outstanding, March 31, 2018		1,064,439		$	39.45		3.41	$	12,986,338
Options vested and expected to vest		959,664		$	39.76		3.43	$	10,249,240
Ending exercisable		445,387		$	31.78		2.45	$	8,360,918

The weighted average fair value of options granted during fiscal 2018, 2017 and 2016 was $19.24, $13.38, and $13.68, respectively. The total intrinsic value of options exercised during fiscal years 2018, 2017 and 2016 was $7,780,000, $2,620,000, and $3,581,000 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. During the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized stock compensation expense for performance-based options in the amount of $649,000, $49,000, and $28,000, respectively.

The Company received $3,426,000, $2,367,000, and $3,749,000 of cash receipts from the exercise of stock options during fiscal 2018, 2017 and 2016, respectively. As of March 31, 2018, $5,496,000 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted average period of 3 years.