Stock Options and Awards

In 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), and authorized 199,650 shares of common stock to be reserved for issuance pursuant to the 1997 Plan. The 1997 plan expired in 2007. Because the 1997 Plan has expired, no further awards will be issued under this plan. In 2003, the Company adopted the 2003 Stock Incentive Plan (the “2003 Plan”) and authorized 200,000 shares of common stock to be reserved for issuance pursuant to the 2003 Plan. As of September 30, 2013, there were 76,750 shares available to be granted under the 2003 Plan. In 2007, the Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”) and authorized 250,000 shares of common stock to be reserved for issuance pursuant to the 2007 Plan. As of September 30, 2013, there were 107,283 shares available to be granted under the 2007 Plan. In 2003, the Company issued non-qualified stock options to non-officer employees hired as part of an acquisition. These options were granted at their fair value on the date of grant. These options vested over a period of four years and expire ten years from the date of grant. Under all of the stock incentive plans, both incentive stock options and non-qualified stock options may be granted to officers, key employees and other persons providing services to the Company. The 2003 Plan and 2007 Plan also provide for awards of nonvested shares of common stock. All of the Company's stock incentive plans have a ten year life. The total number of available shares under all plans for future awards was 184,033 as of September 30, 2013.

Options issued under any of the stock option plans are not affected by termination of the plan. The Company issues stock options at their fair market value on the date of grant. Vesting of stock options granted pursuant to the Company's stock incentive plans is determined by the Company's compensation committee. Generally, options granted to employees vest over four years and expire ten years from the date of grant. Options granted to non-employee directors have historically included cliff vesting after six months from the date of grant and expire three years from the date of grant. In fiscal 2011, 2012 and 2013, the Company granted certain officers including its Chief Executive Officer and non-employee directors shares of nonvested common stock instead of stock options. The vesting periods for the officers', the Chief Executive Officer's and the directors' nonvested stock awards are four years, three years and one year, respectively.

We measure and recognize compensation expense for all stock-based payment awards made to employees and directors including employee stock options and awards of nonvested stock based on estimated fair values, as described in note 1. Stock-based compensation expense incurred and recognized for the years ended September 30, 2013 and 2012 related to stock options and nonvested stock granted to employees and non-employee directors under the Company's stock incentive and employee stock purchase plans totaled approximately $149 thousand and $92 thousand, respectively. The classification of the cost of share-based compensation, in the statements of operations, is consistent with the nature of the services being rendered in exchange for the share based payment. The following table summarizes stock-based compensation expense in the Company's consolidated statements of operations:



	Year ended
	September 30, 2013		September 30, 2012
	(Amounts in thousands)
Cost of sales	$	1	$	—
Engineering and development	4		5
Selling, general and administrative	144		87
Total	$	149	$	92

For the year ended September 30, 2013, the Company granted 7,500 nonvested shares to certain key employees, 36,000 nonvested shares to certain officers, which includes 30,000 shares granted to the Chief Executive Officer and 13,750 nonvested shares to its non-employee directors. For the year ended September 30, 2012, the Company granted 1,750 stock options to certain key employees, 28,000 nonvested shares to certain officers including its Chief Executive Officer and 10,000 nonvested shares to its non-employee directors.

The Company measures the fair value of nonvested stock awards based upon the market price of its common stock as of the date of grant. The Company uses the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of a number of assumptions including volatility of the Company's stock price, the weighted average risk-free interest rate and the weighted average expected life of the options, at the time of grant. The expected dividend yield is equal to the divided per share declared, divided by the closing share price on the date the options were granted. All equity compensation awards granted for the year ended September 30, 2013 were non-vested stock awards. The table below summarizes the assumptions used to value the options that were issued for fiscal year 2012:



	Year ended
	September 30, 2013	September 30, 2012
Expected volatility	—%	52%
Expected dividend yield	—%	2.92%
Risk-free interest rate	—%	1.32%
Expected term (in years)	0.00	7.25

The volatility assumption is based on the historical weekly price data of the Company's stock over a period equivalent to the weighted average expected life of the Company's options. Management evaluated whether there were factors during those periods which would distort the volatility figures if used to estimate future volatility and concluded that there were no such factors.

The risk-free interest rate assumptions are based on U.S. Treasury rates determined at the date of option grant.

The expected terms of employee stock options represent weighted-average periods that the stock options are expected to remain outstanding. They are based upon the historical average of the actual terms that stock options were outstanding, or are expected to be outstanding. Management believes this historical data is representative of the expected term of options granted for the years ended September 30, 2013 and 2012.

As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, expense for grants beginning upon adoption on October 1, 2005 has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rates for the years ended September 30, 2013 and 2012 were based on actual forfeitures.

No cash was used to settle equity instruments granted under share-base payment arrangements in any of the years in the two-year period ended September 30, 2013.

The following tables provide summary data of stock option award activity:



	Number of Shares		Weighted average exercise price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Outstanding at September 30, 2011	245,425		$	7.13	—	—
Granted	1,750		$	3.43	—	—
Expired	(750	)	$	4.79	—	—
Forfeited	—		—		—	—
Exercised	—		—		—	—
Outstanding at September 30, 2012	246,425		$	7.11	—	—
Granted	—		—		—	—
Expired	(97,500	)	$	8.46	—	—
Forfeited	—		—		—	—
Exercised	(41,249	)	2.77		—	—
Outstanding at September 30, 2013	107,676		$	7.56	2.89 Years	$	88
Exercisable at September 30, 2013	104,925		$	7.67	2.77 Years	$	78
Vested and expected to vest at September 30, 2013	107,676		$	7.56	2.89 Years	$	88

There were no stock options granted in the year ended September 30, 2013. The weighted average grant date fair value of stock options granted during the year ended September 30, 2012 was $3.43. The aggregate intrinsic value of stock options exercised during the year ended September 30, 2013 was $218 thousand. There were no stock options exercised in fiscal 2012.

The following table provides summary data of nonvested stock award activity:



	Number of nonvested shares		Weighted Average grant date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Nonvested shares outstanding at September 30, 2011	55,849		$	3.86	—	—
Activity in 2012:
Granted	38,000		$	3.56	—	—
Vested	(27,766	)	$	3.87	—	—
Forfeited	(29,333	)	—		—	—
Nonvested shares outstanding at September 30, 2012	36,750		$	3.68	—	—
Activity in 2013:
Granted	57,250		$	5.80	—	—
Vested	(18,000	)	$	3.79	—	—
Forfeited	(2,500	)	6.63		—	—
Nonvested shares outstanding at September 30, 2013	73,500		$	5.21	2.18 Years	$	520
Vested at September 30, 2013	81,217		$	3.67	0.26 Years	$	574
Vested and expected to vest at September 30, 2013	154,717		$	4.40	1.17 Years	$	1,094

As of September 30, 2013 there was $267 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including stock option and nonvested stock awards) granted under the company's stock incentive plans. This cost is expected to be expensed over a weighted average period of approximately 2.27 years. The total fair value of shares vested during the years ended September 30, 2013 and 2012 was $76 thousand and $141 thousand, respectively.