NOTE 7 - Stock Options

In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company's outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2013, 35,000 stock options were granted, 7,000 stock options were exercisable and 915,000 stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2014 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Risk-free interest rates	2.7%
	Expected lives	10 years
	Expected volatility	57%
	Expected dividend yields	0%

The following table reflects activity under the 2012 Employee Plan for the three months ended September 30,:

	2013
	Options		Weighted average exercise price
Outstanding, beginning of year		--	$	--
Granted		35,000		5.02
Terminated		--		--
Exercised		--		--
Outstanding, end of period		35,000	$	5.02
Exercisable, end of period		7,000	$	5.02
Weighted average fair value at grant date of options granted	$	3.28
Total intrinsic value of options exercised		n/a
Total intrinsic value of options outstanding	$	11,000
Total intrinsic value of options exercisable	$	2,000

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at September 30, 2013:

	Options outstanding						Options exercisable
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
$ 5.00 - $ 6.00		35,000		9.9	$	5.02		7,000	$	5.02
		35,000		9.9	$	5.02		7,000	$	5.02

As of September 30, 2013, there was $114,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. The total fair value of the options vested during the three months ended September 30, 2013 under this plan was $2,000.

In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2013, 25,000 stock options were granted, 5,000 stock options were exercisable and 25,000 stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2014 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Risk-free interest rates	2.7%
	Expected lives	10 years
	Expected volatility	57%
	Expected dividend yields	0%

The following table reflects activity under the 2012 Non-Employee Plan for the three months ended September 30, 2013:

	Options		Weighted average exercise price
Outstanding, beginning of year		--	$	--
Granted		25,000		4.88
Terminated		--		--
Exercised		--		--
Outstanding, end of period		25,000	$	4.88
Exercisable, end of period		5,000	$	4.88
Weighted average fair value at grant date of options granted		n/a
Total intrinsic value of options exercised		n/a
Total intrinsic value of options outstanding	$	11,000
Total intrinsic value of options exercisable	$	2,000

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at September 30, 2013:

	Options outstanding						Options exercisable
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
$ 4.00 - $ 5.00		25,000		9.9	$	4.88		5,000	$	4.88
		25,000		9.9	$	4.88		5,000	$	4.88

In December 2002, the stockholders approved the 2002 Employee Stock Option Plan (the 2002 Employee Plan). This plan expired in October 2012. This plan authorized the granting of awards, the exercise of which would allow up to an aggregate of 1,836,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may have granted stock options, which were intended to qualify as incentive stock options (ISOs), to key employees. Any plan participant who was granted ISOs and possessed more than 10% of the voting rights of the Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2002 Employee Plan, stock options have been granted to key employees with a term of 10 years at an exercise price equal to the fair market value on the date of grant and are exercisable in whole or in part at 20% per year from the date of grant. At September 30, 2013, 1,471,480 stock options were granted, 294,100 stock options were exercisable and no further stock options were available for grant under this plan. No options were granted under this plan during the three months ended September 30, 2012.

The following table reflects activity under the 2002 Employee plan for the three months ended September 30,:

	2013				2012
	Options		Weighted average exercise price		Options		Weighted average exercise price
Outstanding, beginning of year		651,140	$	4.18		1,380,140	$	2.95
Granted		--		--		--		--
Terminated/Lapsed		30,240		1.74		--		--
Exercised		326,800		2.70		27,000		1.76
Outstanding, end of year		294,100	$	6.07		1,353,140	$	2.95
Exercisable, end of year		294,100	$	6.07		1,353,140	$	2.95
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised	$	854,000			$	36,000
Total intrinsic value of options outstanding	$	101,000			$	1,459,000
Total intrinsic value of options exercisable	$	101,000			$	1,459,000

326,800 and 27,000 stock options were exercised during the three months ended September 30, 2013 and 1012, respectively. 324,100 of the 326,800 exercises were paid for with 164,859 shares of the Company’s common stock of which 85,170 was retired upon receipt. The 27,000 exercise was paid for with 13,807 shares of the Company’s common stock, which was retired upon receipt. Cash received from option exercises was $5,103 and $0 for the three months ended September 30, 2013 and 2012, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.

The following table summarizes information about stock options outstanding under the 2002 Employee Plan at September 30, 2013:

	Options outstanding and exerciseable
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price
$ 1.62 - $ 4.00		28,350		0.5	$	1.90
$ 4.01 - $ 7.50		228,250		2.6		5.75
$ 7.51 - $11.16		37,500		2.5		11.16
		294,100		2.4	$	6.07

In September 2000, the stockholders approved a 10 year extension of the already existing 1990 non-employee stock option plan (the 2000 Non-employee Plan) to encourage non-employee directors and consultants of the Company to invest in the Company's stock. This plan expired in September 2010. No further options may be granted under this plan. This plan provided for the granting of non-qualified stock options, the exercise of which would allow up to an aggregate of 270,000 shares of the Company's common stock to be acquired by the holders of the stock options. This plan provided that the option price will not be less than 100% of the fair market value of the stock at the date of grant. Outstanding options are exercisable at 20% per year and expire five years after the date of grant. Compensation cost was recognized for the fair value of the options granted to non-employee directors and consultants as of the date of grant.

The following table reflects activity under the 2000 Non-employee Plan for the three months ended September 30,

	2013				2012
	Options		Weighted average exercise price		Options		Weighted average exercise price
Outstanding, beginning of period		30,000	$	5.03		30,000	$	5.03
Granted		--		--		--		--
Terminated/Lapsed		30,000		5.03		--		--
Exercised		--		--		--		--
Outstanding, end of period		--	$	--		30,000	$	5.03
Exercisable, end of period		--	$	--		30,000	$	5.03
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	0			$	0
Total intrinsic value of options exercisable	$	0			$	0