8.  Stock-Based Compensation

As of September 30, 2011, the Company had outstanding 3,950,000 non-qualified common stock options issued outside of the Amended and Restated 2000 Equity Incentive Plan (the “2000 Plan”). The Company granted 250,000 of these stock options during the first quarter of Fiscal 2012 and 3,700,000 of the options prior to Fiscal 2008, with exercise prices equal to the fair market value of the Company’s common stock on the grant date as inducement grants to new officers and employees of the Company. Included in the 3,950,000 options were 2,000,000 options granted to the Company’s President and Chief Executive Officer, 850,000 options granted to the Company’s Executive Vice President of Sales and Marketing, 650,000 options granted to the Company’s former Senior Vice President of Customer Service, 250,000 options granted to the Company’s Senior Vice President of Program Management and 200,000 options granted to the Company’s Senior Vice President of Human Resources. Although the options were not granted under the 2000 Plan, they are governed by terms and conditions identical to those under the 2000 Plan. All options are subject to the following vesting provisions: one-fourth vests one year after the issuance date and 1/48th vests on the first day of each full month thereafter, so that all shall be vested on the first day of the 48th month after the issuance date. All outstanding options have a contractual term of ten years.

Valuation and Expense Information

For the three months ended September 30, 2011 and 2010, the Company recognized stock-based compensation expense of $0.4 million and $0.7 million, respectively. For the six months ended September 30, 2011 and 2010, the Company recognized stock-based compensation expense of $0.9 million and $1.3 million, respectively. The following table summarizes, by statement of operations line item, stock-based compensation expense (in thousands):

The Company calculated the estimated fair value of each stock option on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions:

The Company’s computation of expected volatility for the three and six months ended September 30, 2011 and 2010 was based on historical volatility. The expected life, or term, of options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options’ expected terms. Included in the calculation of stock-based compensation expense is the Company’s estimated forfeiture rate. Stock-based compensation expense is based on awards that are ultimately expected to vest and accordingly, equity-based compensation recognized in the three and six months ended September 30, 2011 and 2010 has been reduced by estimated forfeitures. Management’s estimate of forfeitures is based on historical forfeitures.

Information relating to all outstanding stock options, except for rights associated with the 2000 Employee Stock Purchase Plan, is as follows:

The weighted average per share grant date fair value of options granted during the three months ended September 30, 2011 and 2010 was $1.13 and $0.66, respectively. The weighted average per share grant date fair value of options granted during the six months ended September 30, 2011 and 2010 was $1.71 and $1.02, respectively. There were no options exercised during the three months ended September 30, 2011 and 2010. There were no options exercised during the six months ended September 30, 2011. The total intrinsic value of options exercised during the six months ended September 30, 2010 was approximately $1,150. As of September 30, 2011, there was approximately $1.7 million of total compensation cost related to unvested stock option awards that is expected to be recognized as expense over a weighted average period of 2.5 years.

During the six months ended September 30, 2011 and 2010, the Company issued a total of 36,378 and 61,091 shares of stock, respectively, to non-employee directors who elected to take payment of all or any part of the directors’ fees in stock in lieu of cash. The shares of stock were valued based on the closing price of the Company’s common stock on the date of grant and the weighted average grant date fair value for the shares issued during the six months ended September 30, 2011 and 2010 was $1.40 and $0.90, respectively.

A summary of restricted stock unit activity for the six months ended September 30, 2011 is as follows:

The restricted stock units were valued based on the closing price of the Company’s common stock on the date of issuance, and compensation cost is recorded on a straight-line basis over the vesting period. The related compensation expense recognized has been reduced by estimated forfeitures. The Company’s estimate of forfeitures is based on historical forfeitures.

The total fair value of restricted stock units vested and issued by the Company during the three months ended September 30, 2011 and 2010 was approximately $22,800 and $36,000, respectively. The total fair value of restricted stock units vested and issued by the Company during the six months ended September 30, 2011 and 2010 was approximately $0.6 million and $0.3 million, respectively. The Company recorded expense of approximately $0.2 million and $0.3 million associated with its restricted stock awards and units during the three months ended September 30, 2011 and 2010, respectively. The Company recorded expense of approximately $0.4 million and $0.5 million associated with its restricted stock awards and units during the six months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there was approximately $0.9 million of total compensation cost related to nonvested restricted stock units that is expected to be recognized as expense over a weighted average period of 2.1 years.

Stockholder Rights Plan

The Company has entered into a rights agreement, as amended, with Mellon Investor Services LLC, as rights agent. In connection with the rights agreement, the Company’s board of directors authorized and declared a dividend distribution of one preferred stock purchase right for each share of the Company’s common stock authorized and outstanding. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, at a purchase price of $10.00 per unit, subject to adjustment. The description and terms of the rights are set forth in the rights agreement. The rights agreement will expire on the 30th day after the 2014 annual meeting of stockholders unless continuation of the rights agreement is approved by the stockholders at that meeting. The rights are intended to protect the Company’s stockholders in the event of an unfair or coercive offer to acquire the Company. The rights, however, should not affect any prospective offeror willing to make an offer at a fair price and otherwise in the best interests of the Company and its stockholders, as determined by the board of directors. The rights should also not interfere with any merger or other business combination approved by the board of directors.