Note 5 - Stock-based compensation and equity transactions

The Company’s current stock incentive plan provides for the granting of qualified and nonqualified options to the Company’s officers, directors and employees. Incentive stock options granted to the Company’s employees during the three months ended January 31, 2014 vest and are exercisable equally over three years and expire in five years from date of grant. During the three months ended January 31, 2014, the Company granted a total of 99,323 incentive stock options to company employees. The Company satisfies the exercise of options by issuing previously unissued common shares.

The weighted average fair value of employee and non-employee directors stock options granted by the Company during the three months ended January 31, 2014 and 2013 was estimated to be $1.89 and $1.01 per share, respectively, using the Black-Scholes option pricing model with the following assumptions:

	2014		2013
Risk-free interest rate	0.69	%	0.36	%
Dividend yield	4.09	%	4.45	%
Expected life of the option	3.5 years		3.5 years
Volatility factor	49.2	%	42.5	%

Expected volatilities are based on historical volatility of the Company’s stock price and other factors. The Company used the historical method to calculate the expected life of the 2014 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 three months ended January 31, 2014, the Company issued 109,763 shares of common stock and received net proceeds of $341,000 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 8 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2013. A summary of the status of the options granted under the Company’s stock option plans as of January 31, 2014 and the changes in options outstanding during the three months then ended is presented in the table that follows:

		Weighted
		Average
	Shares	Exercise Price
Outstanding at November 1, 2013	988,215	$	2.24
Options granted	122,903	$	6.84
Options exercised	(109,763)	$	3.12
Options canceled or expired	(1,836)	$	4.05
Options outstanding at January 31, 2014	999,519	$	2.70
Options exercisable at January 31, 2014	658,978	$	1.78
Options vested and expected to vest at January 31, 2014	989,331	$	2.67

Weighted average remaining contractual life of options outstanding as of January 31, 2014: 4.83 years

Weighted average remaining contractual life of options exercisable as of January 31, 2014: 4.91 years

Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2014: 4.83 years

Aggregate intrinsic value of options outstanding at January 31, 2014: $3.9 million

Aggregate intrinsic value of options exercisable at January 31, 2014: $3.2 million

Aggregate intrinsic value of options vested and expected to vest at January 31, 2014: $3.2 million

As of January 31, 2014, $380,000 of expense with respect to nonvested share-based arrangements has yet to be recognized which is expected to be recognized over a weighted average period of 2.96 years.

Non-employee directors receive $30,000 annually, which amount is paid one-half in cash and one-half through the grant of non-qualified stock options to purchase shares of the Company’s common stock. During the quarter ended January 31, 2014, the Company granted each of its three non-employee directors 7,860 options. The number of stock options granted to each director was determined by dividing $15,000 by the fair value of a stock option grant using the Black Scholes model ($1.91 per share). These options vest ratably over fiscal year 2014.

Stock option expense

During the three months ended January 31, 2014 and 2013, stock-based compensation expense totaled $47,000 and $33,000, respectively. For the three months ended January 31, 2014 and 2013, stock-based compensation classified in cost of sales amounted to $9,000 and $9,000, respectively, and stock-based compensation classified in selling and general expense amounted to $38,000 and $24,000, respectively.