13. Stock-Based Compensation and Stock Incentive Plans

 

We use on a modified prospective basis, the provisions of the authoritative guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units and, prior to its termination, employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. The fair value of our stock-based options and performance-based restricted stock units, less expected forfeitures, is amortized over the awards’ vesting period on a graded vesting basis, whereas the restricted stock units and Employee Stock Purchase Plan stock units are amortized on a straight line basis. We have applied the provisions of authoritative guidance allowing the use of a “simplified” method, in developing an estimate of the expected term of “plain vanilla” share options.

 

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. Such awards include option grants, restricted stock unit awards, and, prior to its termination, shares expected to be purchased under an employee stock purchase plan. The estimated fair value of our stock-based options and performance-based restricted stock units, less expected forfeitures, is amortized over the awards’ vesting period on a graded vesting basis, whereas the restricted stock units and ESPP stock units are amortized on a straight line basis.

 

The effect of recording stock-based compensation was as follows:

 

		Year ended January 31,
		2012				2011				2010
		(in thousands)
Stock-based compensation expense by type of award:
Stock options		$	77			$	(60	)		$	94
Restricted stock units			1,317				766				639
Performance-based restricted stock units			1,964				2,107				1,628
Employee stock purchase plan			-				144				744
Total stock-based compensation		$	3,358			$	2,957			$	3,105

 

Since additional option grants and restricted stock unit awards are expected to be made each year and options and awards vest over several years, the effects of applying authoritative guidance for recording stock-based compensation for the year ended January 31, 2012 are not indicative of future amounts.

 

Determining Fair Value

 

We record the fair value of stock options, including rights granted under the ESPP prior to its termination, using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price, the expected option term, the risk-free interest rate over the option’s expected term, the expected annual dividend yield and the expected stock price volatility. The expected option term was determined using the “simplified” method for “plain vanilla” options. The expected stock price volatility was established using a blended volatility, which is an average of the historical volatility of our common stock over a period of time equal to the expected term of the stock option, and the average volatility of our common stock over the most recent one-year and two-year periods.

 

The fair value of stock options granted was estimated at the date of grant using the following assumptions:

 

		Year ended January 31,
		2012				2011				2010
Expected term (in years)			4-5				4-5				4-5
Expected volatility (range)			52	%			51%-53%				61	%
Weighted average volatility			52	%			53	%			61	%
Risk-free interest rate			0.8	%			1.5%-1.6%				1.2	%
Weighted average interest rate			0.8	%			1.6	%			1.2	%
Expected dividend yield			0	%			0	%			0	%

 

The fair value of ESPP stock granted was estimated at the date of grant using following assumptions:

 

		Year ended January 31,
		2012				2011				2010
Expected term (in years)			*				0.5				0.5
Weighted average volatility			*				48	%			71	%
Weighted average interest rate			*				0.1	%			0.3	%
Expected dividend yield			*				0	%			0	%

 

* No ESPP shares granted in fiscal 2012. The ESPP plan was cancelled in fiscal 2011

 

Stock Option Plans

 

2011 Compensation and Incentive Plan.

 

On July 20, 2011 our stockholders approved the adoption of our 2011 Compensation and Incentive Plan (the “2011 Plan”) under a number shares of common stock equal to 2.8 million plus the number of expired, terminated, surrendered or forfeited awards under the Amended and Restated 2005 Equity Compensation and Incentive Plan (the“2005 Plan”) subsequent to July 20, 2011 were authorized and terminated the Amended and Restated 2005 Equity Compensation and Incentive Plan. The 2011 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, and other equity based non stock option awards as determined by the plan administrator for the purchase of up to an aggregate of 2,800,000 shares of our common stock by officers, employees, consultants and directors of the Company. We may satisfy awards upon the exercise of stock options or vesting of restricted stock units with newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2011 Plan and determining the term of each award, award exercise price, the number of shares for which each award is granted and the rate at which each award vests. As of January 31, 2012, there were 1.9 million shares available for future grant.

 

Option awards may be granted to employees at an exercise price per share of not less than 100% of the fair market value per common share on the date of the grant. Restricted stock units and other equity-based non-stock option awards may be granted to any officer, employee, director or consultant at a purchase price per share as determined by the Board of Directors. Awards granted under the 2011 Plan generally vest over three years and expire seven years from the date of the grant.

 

Amended and Restated 2005 Equity Compensation and Incentive Plan

 

The 2005 plan was terminated upon the adoption of the 2011 Plan on July 20, 2011. No further awards will be granted under the 2005 Plan. The 2005 Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, and “other” non-stock option awards as determined by the plan administrator for the purchase of up to an aggregate of 2,800,000 shares of our common stock by officers, employees, consultants and directors of the Company. We may satisfy awards upon the exercise of stock options or vesting of restricted stock units with either newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2005 Plan and determining the term of each award, award exercise price, number of shares for which each award is granted and the rate at which each award is exercisable.

 

The following table summarizes the stock option activity (excluding restricted stock units):

 

		Year ended January 31,
		2012								2011								2010
		Shares				Weighted average exercise price				Shares				Weighted average exercise price				Shares				Weighted average exercise price
Outstanding at beginning of period			2,382,174			$	12.31				3,934,973			$	15.41				4,228,237			$	15.43
Granted			250,000				6.74				15,000				8.77				60,000				6.23
Exercised			(253,668	)			7.04				(309,195	)			6.71				(47,805	)			6.79
Forfeited/expired/cancelled			(253,135	)			16.11				(1,258,604	)			23.30				(305,459	)			15.38
Outstanding at end of period			2,125,371			$	11.83				2,382,174			$	12.31				3,934,973			$	15.41
Options exercisable at end of period			1,878,707			$	12.51				2,367,176			$	12.33				3,865,221			$	15.56
Weighted average remaining contractual term (in years)							2.10								1.95								3.38

 

The weighted-average fair valuation at grant date of stock options granted during the years ended January 31, 2012, 2011 and 2010, was $2.86, $3.70, and $3.21, respectively. As of January 31, 2012, the unrecognized stock-based compensation related to the unvested stock options was $682,000 net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for any future changes in estimated changes in forfeitures. This cost will be recognized over an estimated weighted average amortization period of seventeen months.

 

The total intrinsic value of options exercised during the years ended January 31, 2012, 2011 and 2010 was approximately $754,000, $473,000 and $60,000, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price.

 

The cash received from employees as a result of employee stock option exercises during fiscal years 2012, 2011 and 2010 was $1.8 million, $2.1 million, and $324,000, respectively.

 

The following table summarizes information about employee and director stock options outstanding and exercisable as of January 31, 2012:

 

		Options Outstanding												Options Exercisable
		Number outstanding				Weighted average remaining contractual terms (years)				Weighted average exercise price				Number exercisable				Weighted average exercise price
Range of exercise prices
$ 5.85 to 6.88			95,336				0.68			$	6.16				95,336			$	6.16
6.74 to 6.74			250,000				6.56				6.74				12,500				6.74
6.78 to 7.00			219,002				0.98				6.94				219,002				6.94
7.23 to 10.33			234,465				1.73				9.21				225,298				9.23
10.45 to 12.21			276,346				1.85				11.65				276,346				11.65
12.95 to 13.66			113,273				0.70				13.29				113,273				13.29
13.76 to 13.76			236,976				0.18				13.76				236,976				13.76
14.57 to 15.59			339,691				1.99				15.02				339,694				15.02
15.62 to 17.39			334,682				2.35				16.56				334,682				16.56
17.86 to 28.26			25,600				1.23				22.51				25,600				22.51
			2,125,371				2.10			$	11.83				1,878,707			$	12.51

 

Restricted Stock Units

 

Pursuant to the 2011 Plan, we may grant restricted stock units that entitle the recipient to acquire shares of our common stock. Awards of restricted stock units generally vest in equal increments on each of the first three anniversaries of the grant of the award. Stock-based compensation expense associated with the restricted stock units is charged for the market value of our stock on the date of grant, assuming nominal forfeitures, and is amortized over the awards’ vesting period on a straight-line basis for awards with only a service condition and graded vesting basis for awards that include both a performance and service condition. As of January 31, 2012 there were 1.9 million RSUs available to be granted. For fiscal 2012, approximately 51,000 RSUs were earned by our executive officers under the Company’s fiscal 2012 performance based plan

 

The following table summarizes the restricted stock unit activity:

 

		Year ended January 31,
		2012								2011								2010
						Weighted average								Weighted average								Weighted average
						grant date								grant date								grant date
		Shares				fair value				Shares				fair value				Shares				fair value
Nonvested at beginning of period			363,078			$	8.00				572,489			$	7.94				458,674			$	8.99
Awarded			855,143				10.10				223,020				8.12				523,346				6.45
Vested			(381,955	)			7.53				(353,542	)			8.15				(409,531	)			7.22
Forfeited/expired/cancelled			(114,901	)			9.73				(78,889	)			7.20				-				-
Nonvested at end of period			721,365			$	10.46				363,078			$	8.00				572,489			$	7.94

  

As of January 31, 2012 the unrecognized stock-based compensation related to the unvested restricted stock units was $4.5 million. This cost will be recognized over an estimated weighted average amortization period of 2.1 years. Due to the retirement of our Chief Executive Officer on December 8, 2011, his unvested restricted stock units were accounted for as a modification to the terms and conditions. This modification resulted in the cancellation of unvested restricted awards with a grant date value of $1.9 million and recognition of stock compensation expense of $1.3 million.

 

Employee Stock Purchase Plan

 

In September 1996, our Board of Directors adopted and the stockholders approved an employee stock purchase plan (the “ESPP”), effective January 1, 1997 as amended July 16, 2008, which provided for the issuance of a maximum of 2.2 million shares of common stock to participating employees who meet eligibility requirements. The Plan was terminated on May 31, 2010. The purchase price of the stock was 85% of the lesser of the average market price of the common stock on the first or last business day of each six-month plan period. During fiscal 2011 and 2010, the number of shares of common stock issued under the Employee Stock Purchase Plan were 135,632 and 282,889, respectively. The cash received from employees as a result of the ESPP during fiscal 2011 and 2010 was $660,000, and $1.5 million, respectively.