Note 8 - Stock Compensation Expense

12 Months Ended

Sep. 30, 2011

Pension and Other Postretirement Benefits Disclosure [Text Block]

8.   STOCK 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 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.

For fiscal 2011, 2010 and 2009, the Company recorded into selling and general administrative expenses and into its corporate/other segment $0.8 million, $2.0 million and $3.0 million, respectively, for the cost of employee and director 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. There were no recognized tax benefits during fiscal 2011, 2010 or 2009, as any benefit is offset by the Company's full valuation allowance on its net deferred tax asset. The Company has not recognized the windfall tax benefit as the resulting deduction has not been realized via a reduction of income taxes payable.

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, the Company had outstanding options to purchase 427,087 shares 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. During 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. Also during 2011, Directors were issued options to purchase 37,500 shares at an exercise price of $11.94. Expired shares consisted of 30,000 shares held by a former director and 12,500 shares held by a former executive. There were also 5,000 shares held by an employee that vested during the year. Based on this activity, total options to purchase 414,587 shares were outstanding at September 30, 2011 with an average exercise price of $21.41. Of the total outstanding, options to purchase 403,337 shares were exercisable at a weighted average exercise price of $21.43.

The following table summarizes information for options currently outstanding and exercisable at September 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	2 years	$	5.26		32,000	$	5.26	$	174,744
8.40-8.60		80,087	4 years		8.53		80,087		8.53		218,773
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			$	393,517

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	%		0	%		0%-25	%		0%-30	%

The fair value of the options granted during fiscal 2011, 2010 and 2009 was $0.3 million, $0.2 million and $0.2 million, respectively. As of September 30, 2011, the Company had no total unrecognized compensation expense related to stock option plans. Cash proceeds received from the exercise of stock options were less than $0.1 million, $0.0 million and $0.0 million for fiscal 2011, 2010 and 2009, respectively.

The Company uses historical volatility for a period of time that is comparable to the expected life of the option. However, the Company only calculates the volatility of the Company's stock back to 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. Management believes this is a better measurement of the Company's stock volatility.

Restricted stock awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards with participation rights which are valued based upon the fair market value on the date of the grant. Restricted shares granted to employees in fiscal 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. Restricted shares granted to employees 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, 51,250 shares and 86,250 shares as of September 30, 2011, 2010 and 2009, respectively. The Company has settled by payment in cash, all prior vested restricted share grants, including 21,250 restricted shares which vested during fiscal 2011.

In accordance with ASC 718, the Company determined its practice 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.

The minimum remaining compensation cost to be recognized over the remaining vesting period is $0.1 million and is equal to the amount of unrecognized expense of the original award at grant date fair value. To the extent the fair value of unvested restricted stock at the end of the period exceeds the grant date fair value; any incremental expense is recognized during the period.

During fiscal 2011, the Company continued to recognize compensation cost for the original value of the award as the fair value of the original award is greater than the period-end fair value of unvested restricted shares. The difference between the change in the fair value of the liability and stock compensation recognized during the year of $0.2 million was recorded to additional paid-in capital.