Annual report pursuant to Section 13 and 15(d)

Note 7 - Share-Based Payments

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Note 7 - Share-Based Payments
 12 Months Ended
Sep. 30, 2011
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Note 7.        Share-based Payments

In March 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which will be utilized to provide equity opportunities and performance–based incentives to attract, retain and motivate those persons who make (or are expected to make) important contributions to the Company.  A total of 2,000,000 shares are available for issuance under the plan. As of September 30, 2011, a total of 693,682 shares have been granted under the plan, 150,000 shares were in the form of stock options, and all others were in the form of restricted stock or other share grants.

Stock Option Plans

Under the Company’s previous share based long-term incentive compensation plan, the 1997 Stock Option Plan, the Company granted non-qualified stock options to employees.  There are no shares available for grant under the plan which expired on December 31, 2006.  Options issued under that plan expire in 10 years and generally vested 1/36 per month, with full vesting after three years.

Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on historical experience and future expectations. Stock compensation expense related to options for the years ended September 30, 2011, 2010 and 2009 was approximately $90,000, $92,000 and $78,000, respectively.

In May 2009, the Company granted 150,000 stock options to its independent board members under the 2008 Stock Incentive Plan. The options vest evenly over 36 months, at a rate of 1/36 of the grant per month.  The options have a ten year life. The estimated forfeiture rate was 1.44% based on the Company’s prior forfeiture history. The Company did not grant any options in the years ended September 30, 2011 and 2010.

The table below outlines the weighted average assumptions for options granted during the year ended September 30, 2009.

Weighted Average Assumptions
     
Expected Volatility
    42.19 %
Expected Dividend Yield
    0 %
Risk-free Interest Rate
    3.06 %
Expected Term (in years)
    6.5  
Fair Value of Options Granted
  $ 1.83  

During the year ended September 30, 2009, the Company used historical volatility of its common stock over a period equal to the expected life of the options to estimate their fair value. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.

The expected term of the options represents the estimated period of time until exercise and is based on the simplified method. To value option grants for actual stock-based compensation, the Company used the Black-Scholes option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments.

Option Activity

The following table summarizes the stock options outstanding and exercisable at September 30, 2011:

             
Weighted Average
       
     
Shares
     
Exercise Price
Per Share
   
Remaining
Contractual Term
(years)
     
Aggregate
Intrinsic
Value
 
Outstanding at September 30, 2008
    2,439,980     $ 1.41              
Granted
    150,000       3.92              
Exercised
    (320,980 )     1.40              
Forfeited
    -       -              
Outstanding at September 30, 2009
    2,269,000     $ 1.58              
Granted
    -       -              
Exercised
    (435,000 )     1.43              
Forfeited
    -       -              
Outstanding at September 30, 2010
    1,834,000     $ 1.61              
Granted
    -                      
Exercised
    -                      
Forfeited
    -                      
Outstanding at September 30, 2011
    1,834,000     $ 1.61    
2.37
   
$ 4,529,000
 
Exercisable on September 30, 2011
    1,800,667     $ 1.57    
2.27
   
$ 4,524,000
 

No stock options were exercised during fiscal year 2011. During the year ended September 30, 2010, a number of stock option holders exercised 325,000 stock options, using the cashless exercise option available under the plan which entitled them to 186,220 shares of common stock. Proceeds received during the years ended September 30, 2010 and 2009 were $157,900 and $449,372, respectively, from the exercise of 110,000 and 320,980 stock options, respectively.

The aggregate intrinsic value in the table above is before income taxes, based on the Company’s closing stock price of $4.08 on the last day of business for the period ended September 30, 2011. The total intrinsic value of options exercised during the years ended September 30, 2010 and 2009 was approximately $1,792,000 and $1,599,000, respectively.

Total unrecognized compensation cost for stock options as of September 30, 2011 was approximately $60,000. This compensation cost will be recognized over a weighted average period of 8 months.  The deferred tax asset and realized tax benefit from stock options exercised and other share-based payments for the years ended September 30, 2011, 2010 and 2009 was not recognized, based on the Company’s election of the “with and without” approach.

Restricted Stock

The Company issues restricted stock to employees and consultants. Such issuances may have vesting periods that range from one to three years or the issuances may be contingent on continued employment for periods that range from one to three years. In addition, the Company has issued stock awards to certain employees that contain vesting provisions or provide for future issuance contingent on continued employment.

A summary of the non-vested stock activity for fiscal year 2011, 2010 and 2009 is summarized in the table below:

   
Shares
   
Weighted Average
Grant -Date
Fair Value
 
Total Outstanding September 30, 2008
    2,555     $ 2.65  
Stock Granted
    223,182       3.14  
Vested
    (100,913 )     2.93  
Cancelled
    (5,235 )     2.45  
Total Outstanding September 30, 2009
    119,589     $ 3.16  
Stock Granted
    35,250       4.71  
Vested
    (105,250 )     3.61  
Forfeited
    (5,000 )     4.71  
Total Outstanding September 30, 2010
    44,589     $ 3.16  
Stock Granted
    293,750       5.71  
Vested
    (142,335 )     4.97  
Forfeited
    (2,500 )     5.07  
Total Outstanding September 30, 2011
    193,504     $ 5.68  

The Company granted a total of 293,750 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the year ended September 30, 2011. The fair value of the awards granted was approximately $1,677,000. All such shares of restricted stock vest and all such shares must be issued pursuant to promises to issue common stock between September 2011 and December 2013, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date. The Company granted 35,250 shares of restricted stock during the year ended September 30, 2010. The fair value of the awards granted was approximately $166,000. All such shares of restricted stock vested in September 2010. The Company granted 223,182 shares of restricted stock during the year ended September 30, 2009.  The fair value of the awards granted was approximately $702,000. All such shares of restricted stock vest between September 2009 and December 2011, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting date.

The Company recognized share-based compensation expense for restricted stock of approximately $706,000 and $379,000 for the years ended September 30, 2011 and 2010, respectively, $212,000 and $206,000 of which is included in accrued expenses at year end since the related shares have not yet been issued at September 30, 2011 and 2010, respectively.  Share based compensation expense for the year ended September 30, 2009 was $296,000 ($147,000 of which was included in accrued expenses at September 30, 2009). This expense is included in selling, general and administrative expenses for the respective periods. As of September 30, 2011, there was approximately $1,098,000, representing approximately 194,000 unvested shares, of total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the incentive plans. This unrecognized cost will be recognized over the weighted average period of the next 1.84 years.

Common Stock Purchase Warrants

The Company did not issue any common stock purchase warrants in fiscal year 2011, 2010 or 2009.  There were no warrant exercises during fiscal year 2011.  In fiscal year 2010, a warrant holder exercised 30,000 warrants using the cashless exercise option available within the warrant agreements which entitled the warrant holder to 23,085 shares of common stock.  In fiscal 2010, warrant holders exercised 626,500 warrants which provided proceeds of $725,600. In fiscal year 2009, warrant holders exercised 400,000 warrants and the Company received $289,000 of proceeds from the exercise of these warrants.  During fiscal year 2009, warrant holders also exercised 90,000 warrants using the cashless exercise option which entitled the warrant holders to 67,524 shares of common stock.  There is no unrecognized compensation cost related to warrants as of September 30, 2011.

At September 30, 2011, 80,000 warrants issued in connection with investor relations were outstanding and exercisable. These warrants have an exercise price of $1.30, remaining life of 4.79 years and aggregate intrinsic value of $222,400.  The aggregate intrinsic value is before taxes, based on the Company’s closing price of $4.08 on the last day of business for the year ended September 30, 2011.