Stock-based compensation and equity transactions

9 Months Ended

Jul. 31, 2011

Stock-based compensation and equity transactions

Note 7 - Stock-based compensation and equity transactions

The stock incentive plans provide for the granting of qualified and nonqualified options to the Company’s officers, directors and employees.  Non-qualified stock options granted during the nine months ended July 31, 2011 vest and are exercisable immediately and expire in five years from date of grant. During the nine months ended July 31, 2011, the Company granted a total of 28,000 non-qualified stock options to its directors. Qualified incentive stock options granted during the nine months ended July 31, 2011 vest equally over a three year period commencing on the date of grant and expire in five years from date of grant. During the nine months ended July 31, 2011, the Company granted a total of 25,000 incentive stock options to a current employee of CUI. The Company satisfies the exercise of options by issuing previously unissued common shares.

The weighted average fair value of employee stock options granted by the Company in the nine months ended July 31, 2011 and 2010 was estimated to be $1.08 and $0.82 per share, respectively, using the Black-Scholes option pricing model with the following assumptions:

	2011			2010
Risk-free interest rate		0.68	%		1.41	%
Dividend yield		2.7	%		0.00	%
Expected life of the option	3.5 years			2.5 years
Volatility factor		51.68	%		57.67	%

Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company used the simplified method to calculate the expected life of the 2011 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

Issuances of common stock by the Company

During the nine months ended July 31, 2011, the Company issued 762,738 shares of common stock valued at approximately $2,800,000 to the former owner of Cables Unlimited, Inc. as part of the purchase price of the Cables Unlimited, Inc. acquisition. The Cables Unlimited, Inc. acquisition is more fully described in Note 2 of this report.  During the nine months ended July 31, 2011, the Company issued 424,608 shares of common stock and received net proceeds of $814,697 in connection with the exercise of employee stock options.

 

Company Stock Option Plans

Descriptions of the Company’s stock option plans are included in Note 7 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2010. A summary of the status of the options granted under the Company’s stock option plans as of July 31, 2011 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

	Shares			Weighted Average Exercise Price
Outstanding at November 1, 2010		2,454,952		$	2.00
Options granted		53,000		$	3.39
Options exercised		(424,608	)	$	1.92
Options canceled or expired		(11,470	)	$	2.64
Options outstanding at July 31, 2011		2,071,874		$	2.05
Options exercisable at July 31, 2011		1,490,932		$	1.92
Options vested and expected to vest at July 31, 2011		2,047,174			2.03

Weighted average remaining contractual life of options outstanding as of July 31, 2011: 4.63 years

Weighted average remaining contractual life of options exercisable as of July 31, 2011: 4.58 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2011: 4.57 years

Aggregate intrinsic value of options outstanding at July 31, 2011: $3,830,279

Aggregate intrinsic value of options exercisable at July 31, 2011: $2,949,403

Aggregate intrinsic value of options vested and expected to vest at July 31, 2011: $3,784,605

As of July 31, 2011, $385,993 of expense with respect to non-vested stock-based arrangements has yet to be recognized which is expected to be recognized over a weighted average period of 4.4 years.

Stock Option Expense

During the nine-months ended July 31, 2011 and 2010, stock-based compensation expense totaled $165,368 and $157,522, respectively. For the three-months ended July 31, 2011 and July 31, 2010, stock-based compensation expense totaled $23,000 and $43,605, respectively. For the nine months ended July 31, 2011 and 2010, stock-based compensation classified in cost of sales amounted to $30,547 and $26,247 and stock-based compensation classified in selling and general expense amounted to $134,821 and $131,275, respectively. For the three months ended July 31, 2011 and 2010, stock-based compensation classified in cost of sales amounted to $5,686 and $9,004 and stock-based compensation classified in selling and general expense amounted to $17,314 and $34,601, respectively.