Stock Based Incentive Compensation

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. The 2003 plan expired in 2013. Because the 2003 Plan has expired, no further awards will be issued under this 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, 2016, there were 36,217 shares available to be granted under the 2007 Plan. In 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”) and authorized 300,000 shares of common stock to be reserved for issuance pursuant to the 2015 Plan. As of September 30, 2016, there were 233,248 shares available to be granted under the 2015 Plan. 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 269,465 as of September 30, 2016.

Awards 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 years 2014 through 2016, the Company granted certain officers including its Chief Executive Officer and non-employee directors, and key employees 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. The vesting period for the key employees' awards is four years.

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, 2016 and 2015 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 $414 thousand and $375 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, 2016		September 30, 2015
	(Amounts in thousands)
Cost of sales	$	2	$	2
Engineering and development	6		22
Selling, general and administrative	406		351
Total	$	414	$	375

For the year ended September 30, 2016, the Company granted 28,000 nonvested shares to certain key employees, 57,000 nonvested shares to certain officers including 40,000 shares granted to the Chief Executive Officer, and 20,395 nonvested shares to its non-employee directors. For the year ended September 30, 2015, the Company granted 11,000 nonvested shares to certain key employees, 30,500 nonvested shares to certain officers including 12,000 to its Chief Executive Officer and 16,000 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 used 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 years ended September 30, 2016 and September 30, 2015 were nonvested stock awards.

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, 2016 and 2015 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, 2016.

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, 2014	92,126		$	7.66	—	—
Granted	—		—		—	—
Expired	(35,125	)	$	9.72	—	—
Forfeited	—		—		—	—
Exercised	(1,875	)	5.26		—	—
Outstanding at September 30, 2015	55,126		$	6.43	—	—
Granted	—		—		—	—
Expired	(17,500	)	$	6.61	—	—
Forfeited	—		—		—	—
Exercised	(14,000	)	6.20		—	—
Outstanding at September 30, 2016	23,626		$	5.76	1.53 Years	$	106
Exercisable at September 30, 2016	23,626		$	5.76	1.53 Years	$	106
Vested and expected to vest at September 30, 2016	23,626		$	5.76	1.53 Years	$	106

There were no stock options granted in the years ended September 30, 2016 and 2015. The aggregate intrinsic value of stock options exercised during the years ended September 30, 2016 and 2015 was $51 thousand and $3 thousand, respectively.

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, 2014	149,375		$	6.92	2.45 years	$	1,191
Activity in 2015:
Granted	57,500		$	5.05	—	—
Vested	(58,296	)	$	6.82	—	—
Forfeited	(18,122	)	7.38		—	—
Nonvested shares outstanding at September 30, 2015	130,457		$	6.08	2.12 Years	$	714
Activity in 2016:
Granted	105,395		$	6.47	—	—
Vested	(48,444	)	$	6.33	—	—
Forfeited	(21,700	)	7.38		—	—
Nonvested shares outstanding at September 30, 2016	165,708		$	6.38	2.20 Years	$	1,695
Vested at September 30, 2016	179,277		$	5.57	0.36 Years	$	1,834
Vested and expected to vest at September 30, 2016	344,985		$	5.96	1.24 Years	$	3,529

As of September 30, 2016 there was $718 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 2.51 years. The total fair value of shares vested during the years ended September 30, 2016 and 2015 was $307 thousand and $399 thousand, respectively.