Note 7 - Stock Option Compensation Expense

9 Months Ended

Jun. 30, 2011

Pension and Other Postretirement Benefits Disclosure [Text Block]

7. STOCK OPTION COMPENSATION EXPENSE

The Company maintains long-term incentive plans that authorize the Board of Directors or its Compensation Committee (the “Committee”) to grant key employees, officers and directors of the Company incentive or nonqualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. The Committee determines the prices and terms at which awards may be granted along with the duration of the restriction periods and possible performance targets. All issuances are granted out of shares authorized, as the Company has no treasury stock. The Company has the option, in its sole discretion, to settle awards under its 2008 incentive plans in cash, in lieu of issuing shares.

Stock option awards.  Outstanding employee stock options expire 10 years from the date of grant or upon termination of employment. Options granted to employees in 2007 and 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. The fair value of all options is amortized on a straight-line basis over the vesting period. Annually options to purchase 7,500 shares of common stock are issued to each director, other than the CEO. In addition, newly elected directors receive options to purchase 7,500 shares of common stock. All options granted to directors vest immediately at time of grant. These options expire from 2011 through 2018.

Director options granted before 2008 expire 10 years from date of grant. Director options granted in 2008 or thereafter have a five-year term. At September 30, 2010, there were 427,087 options outstanding at an average exercise price of $22.21. Of the total outstanding, 410,837 options were exercisable at a weighted average exercise price of $22.23. In the first quarter of fiscal 2011, a former director exercised his option on 7,500 shares at an exercise price of $5.47. The Company opted to settle the award in cash in lieu of issuing shares. During the second quarter of fiscal 2011, the Directors were issued options to purchase 37,500 shares of common stock at an exercise price of $11.94. During the third quarter of fiscal 2011, 30,000 shares held by a former director expired and 12,500 shares held by a former executive expired.  Based on this activity, total options outstanding at June 30, 2011, were 414,587 at an average exercise price of $21.41. Of the total outstanding, 403,337 options were exercisable at a weighted average exercise price of $21.43.

The following table summarizes information for options currently outstanding and exercisable at June 30, 2011:

	Options Outstanding					Options Exercisable
Range of Exercise Prices	Number		Wtd. Avg. Remaining Life	Wtd. Avg. Exercise Price		Number		Wtd. Avg. Exercise Price		Intrinsic Value
$ 2.07-5.47		32,000	3 years	$	5.26		32,000	$	5.26	$	190,640
8.40-8.60		80,087	4 years		8.53		80,087		8.53		306,065
11.94-24.12		85,000	5 years		16.24		73,750		15.55		-
26.22-29.70		142,500	6 years		29.09		142,500		29.09		-
31.07-36.73		75,000	4 years		33.33		75,000		33.33		-
$ 2.07-36.73		414,587					403,337			$	496,705

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

Assumptions	Fiscal 2011			Fiscal 2010			Fiscal 2009			Fiscal 2008
Expected life of option	5 years			3.8 years			3.8 & 4 years			4 & 7.5 years
Risk-free interest rate		2.4	%		0.4	%		0.5	%		1.8	%
Volatility of stock		73	%		77	%		79	%		66	%
Forfeiture rate		0%-25	%		0%-25	%		0%-25	%		0%-30	%

As of June 30, 2011, the Company had less than $0.1 million of total unrecognized compensation expense related to stock option plans that will be recognized over the last quarter of fiscal year 2011.

Restricted stock awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards which are valued based upon the fair market value on the date of the grant. Restricted shares granted to employees in fiscal 2008 vested 17% in the first year, 33% in the second year and 50% in the third year from date of grant. Restricted shares granted in fiscal 2009 vest 50% in the second year and 50% in the third year from date of grant. The balance of restricted stock shares outstanding was 30,000 shares at June 30, 2011. There were 10,000 restricted shares that vested during the third quarter of fiscal 2011.  The Company opted to settle the awards in cash.

In accordance with ASC 718, the Company determined its trend of settling vested restricted shares in cash resulted in a modification from equity to liability accounting for the remaining unvested restricted shares. The fair value of the modified liability award is measured each reporting date through settlement and any adjustments to increase or decrease the liability are recorded either as compensation cost or a charge to equity.

As of June 30, 2011, the remaining unamortized compensation cost related to restricted stock awards was $0.1 million which is expected to be recognized over the remaining vesting period of two years.

The Company recorded into selling and general administrative expense for its corporate/other products segment the cost of employee services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of ASC 718, which was less than $0.1 million and $0.7 million for the three and nine months ended June 30, 2011, respectively, and $0.5 million and $2.1 million for the three and nine months ended June 30, 2010, respectively. There were no recognized tax benefits during the nine months ended June 30, 2011 or 2010, as any benefit is offset by the Company's full valuation allowance on its net deferred tax asset.

The Company uses the historical volatility of the Company's stock starting in November 2003, the date the Company received its first large order for carbon fibers, as that is when the Company considers its business to have changed from a research and development company to an operational company.