Note 8. Stock-based Compensation:

The Company applies ASC 718, to account for employee stock-based compensation. ASC 718 requires all employee share-based payments be measured at fair value on the award's grant date. ASC 718 also requires the recognition of stock-based compensation in the financial statements for the number of awards that are expected to vest over the requisite service period. The estimated forfeiture rate will be reassessed in subsequent periods and may change based on new facts and circumstances.

Employee Stock Incentive Plans

In September 2010, stockholders approved the amendment and restatement of the Westell Technologies, Inc. 2004 Stock Incentive Plan (the "2004 SIP Plan") that permits the issuance of restricted Class A Common Stock, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock units and performance stock units share awards to selected officers, employees, and non-employee directors of the Company. There are a total of 5,404,424 shares available for issuance under this plan as of March 31, 2012.

Stock-Based Compensation Expense

Total stock-based compensation, excluding the impact of discontinued operations, is reflected in the Consolidated Statements of Operations as follows:

 

		Fiscal Year Ended March 31,
(in thousands)		2012				2011				2010
Cost of goods sold		$	55			$	50			$	77
Sales and marketing			173				273				316
Research and development			58				95				99
General and administrative			915				463				922
Stock-based compensation expense			1,201				881				1,414
Income tax benefit			(61	)			—				—
Total stock-based compensation expense after taxes		$	1,140			$	881			$	1,414

 

Stock Options

Typically, stock options granted by the Company have an exercise price that is equal to the reported value of the Company's stock on the grant date. Options usually vest annually from the date of grant over a period of four or five years. The Company's options have a contractual term of 7 or 10 years. Compensation expense is recognized ratably over the vesting period. Certain options provide for accelerated vesting if there is a change in control (as defined in the 2004 SIP Plan) or when provided within individual employment contracts.

The Company uses the Black-Scholes model to estimate the fair value of employee stock options on the date of grant. That model employs parameters for which the Company has made estimates according to the assumptions noted below. Expected volatilities were based on historical volatilities of the Company's stock. The expected option lives were derived from the output of the options valuation model and represent the period of time that options granted are expected to be outstanding based on historical trends. The risk-free interest rates were based on the United States Treasury yield curve for the same term as the expected term in effect at the time of grant. The dividend yield was based on expected dividends at the time of grant.

The Company recorded expense of $0.3 million, $0.4 million, and $1.4 million in the twelve months ended March 31, 2012, 2011 and 2010, respectively, related to stock options. During January 2010, the Company identified a $0.7 million error in the calculation of stock-based compensation expense for the prior year periods. The Company's legacy third-party equity accounting software incorrectly calculated award forfeitures used in determining stock-based compensation expense that resulted in an understatement of stock-based compensation expense in certain periods prior to the grant's final vesting date. The correction of the error during the third quarter of fiscal year 2010 resulted in changes to the timing of stock-based compensation expense over the vesting period of the awards during the relevant periods, but did not change the cumulative stock-based compensation expense related to those awards over time, as forfeitures are ultimately recorded to reflect the compensation expense for only those options that actually vest. Because stock-based compensation expense is a non-cash item, there was no impact to net cash provided by operations in any period. The cumulative impact of the $0.7 million error is included as additional expense in the general and administrative expense line on the Consolidated Statements of Operations in fiscal year 2010. In fiscal year 2011, the Company implemented a new third-party equity accounting software solution.

The Company received proceeds from the exercise of stock options of $1.7 million, $2.6 million, and $0 in fiscal years 2012, 2011 and 2010, respectively. The total intrinsic value of options exercised during the years ended March 31, 2012, 2011 and 2010 was $1.3 million, $892,000, and $17,000, respectively.

Option activity for the twelve months ended March 31, 2012 is as follows:

 

		Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value(a) (in thousands)
Outstanding on March 31, 2011			3,716,912			$	2.48				3.7			$	5,221
Granted			10,000				3.37
Exercised			(912,399	)			1.85
Forfeited			(257,574	)			2.03
Expired			(452, 836	)			6.10
Outstanding on March 31, 2012			2,104,103			$	2.04				3.3			$	1,440
Vested or expected to vest as of March 31, 2012			2,091,622			$	2.04				3.3			$	1,434
Exercisable on March 31, 2012			1,460,430			$	2.33				3.1			$	779

 

(a)	The intrinsic value for the stock options is calculated based on the difference between the exercise price of the underlying awards and the average of the high and low Westell Technologies' stock price as of the reporting date.

 

As of March 31, 2012, there was $0.2 million of pre-tax stock option compensation expense related to non-vested awards not yet recognized, including estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.15 years.

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

		Fiscal Year Ended March 31
		2012				2011				2010
Input assumptions:
Expected volatility			70	%			71	%			65	%
Risk-free interest rate			1.4	%			1.6	%			1.8	%
Expected life			5 years				5 years				5 years
Expected dividend yield			0.0	%			0.0	%			0.0	%
Output weighted-average grant-date fair value		$	1.93			$	1.12			$	0.20

The Company issues new shares of stock when stock options are exercised.

Restricted Stock

Vesting of restricted stock is subject to continued employment with the Company. During fiscal years 2012, 2011 and 2010, non-employee directors received grants of 70,000, 90,000 and 180,000 shares, respectively, that each vest 25% over four years.

The Company recognizes compensation expense on a straight-line basis over the vesting periods of the awards based on the market value of Westell Technologies stock on the date of grant adjusted for estimated forfeitures.

The following table sets forth restricted stock activity for the twelve months ended March 31, 2012:

 

		Shares				Weighted-Average Grant Date Fair Value
Non-vested as of March 31, 2011			170,000			$	1.25
Granted			70,000				3.44
Converted from RSUs			605,000				1.43
Converted from PSUs			798,000				1.43
Vested			(400,750	)			1.39
Forfeited			(197,250	)			1.43
Non-vested as of March 31, 2012			1,045,000			$	1.54

The Company recorded $0.5 million, $0.1 million, and $14,000 of expense in the twelve months ended March 31, 2012, 2011 and 2010, respectively, related to restricted stock. As of March 31, 2012, there was $1.1 million of pre-tax unrecognized compensation expense, including estimated forfeitures, related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.1 years.

Restricted Stock Units ("RSUs") and Performance-based RSUs ("PSUs")

In fiscal year 2012, 500,000 RSUs were awarded to certain executive officers. These awards convert into shares of Class A Common Stock on a one-for-one basis upon vesting and vest in equal annual installments over four years from the grant date.

In April 2010, executives were granted 620,000 RSUs with time-based vesting conditions, which converted into shares of Class A Common Stock during the first quarter of fiscal year 2012. Of these units, 25% vested on April 1, 2011 and the remaining shares vest 25% annually each April 1 thereafter. In addition, executives received 620,000 PSUs which converted to shares of restricted Class A Common Stock at the maximum rate of 140% during the first quarter of fiscal year 2012. The conversion rate was based upon fiscal year 2011 achievement against a return on assets ("ROA") metric. The actual conversion rate was 140%. On May 18, 2011, the first 25% of the performance awards vested and the remaining awards are scheduled to vest 25% annually on each subsequent April 1.

The Company recorded stock-based compensation expense of $0.3 million and $0.4 million for RSUs and PSUs in fiscal years 2012 and 2011, respectively. There was no RSU or PSU expense in fiscal years 2010. As of March 31, 2012, there was approximately $1.3 million of pre-tax unrecognized compensation expense, including estimated forfeitures, related to the RSUs and PSUs which is expected to be recognized over a weighted-average period of 3.2 years.

The following table sets forth the RSUs activity for the twelve months ended March 31, 2012:

 

		Shares				Weighted-Average Grant Date Fair Value
Non-vested as of March 31, 2011			605,000			$	1.43
Granted			500,000				3.25
Vested			—				—
Converted to restricted stock			(605,000	)			1.43
Forfeited			—				—
Non-vested as of March 31, 2012			500,000			$	3.25

The following table sets forth the PSUs activity for the twelve months ended March 31, 2012:

 

		Shares				Weighted-Average Grant Date Fair Value
Non-vested as of March 31, 2011			605,000			$	1.43
Granted			—				—
Incremental shares earned based on performance			228,000				1.43
Vested			—				—
Converted to restricted stock			(798,000	)			1.43
Forfeited			(35,000	)			1.43
Non-vested as of March 31, 2012			—			$	—

Non-qualified Non-public Subsidiary Stock Options

The Company's ConferencePlus subsidiary had a stock option plan for the purchase of ConferencePlus stock. There were no options granted in fiscal years 2012, 2011 or 2010. As a result of the sale of ConferencePlus, during the third quarter of fiscal year 2012, the Company purchased all outstanding ConferencePlus options with a strike price above fair market value. The purchase price for each option was equal to the difference between the fair market value of a share of ConferencePlus stock and the strike price for each option, resulting in an aggregate purchase price of $117,000 for the options. All remaining outstanding options were forfeited.

During fiscal year 2011, the Company initiated a cash tender offer for certain ConferencePlus employee stock options. Pursuant to the tender offer, employees tendered for purchase 732,191 options, and the Company accepted for purchase all such options. As a result, the Company paid an aggregate of $36,000 to the participating employees and incurred equity-based compensation expense of $63,000 related to the remaining unamortized equity-based compensation expense associated with the options tendered in the offer and to any amounts paid in excess of fair value. As of March 31, 2011, the Company had fully recognized the expense related to these outstanding options.