Shareholders' Equity

12 Months Ended

Sep. 30, 2011

Shareholders' Equity [Abstract]

Shareholders' Equity

6. SHAREHOLDERS' EQUITY

Stock Option Plans

     The Company provides its employees, officers, consultants, and directors stock options, restricted stock units and other stock rights to purchase common stock of the Company on a discretionary basis pursuant to four stock compensation plans described more fully below. All option grants are subject to the terms and conditions determined by the Compensation and Stock Committee of the Board of Directors, and generally vest over a three-year period beginning three months from the date of grant and expire either seven or ten years from the date of grant depending on the plan. Generally, options, restricted shares and other stock rights are granted at exercise prices not less than the fair market value at the date of grant.

     On October 4, 1996, the Company established the 1996 International Employee Non-Qualified Stock Option Plan. Pursuant to this plan, non-qualified options were available to be granted to any employee or consultant of any of the Company's foreign subsidiaries through October 4, 2006. This plan expired on October 4, 2006.

     On December 10, 1996, the Company established the Datawatch Corporation 1996 Stock Plan, which provides for the granting of both incentive stock options and non-qualified options, the award of Company common stock, and opportunities to make direct purchases of Company common stock (collectively, "Stock Rights"), as determined by a committee appointed by the Board of Directors. Options pursuant to this plan were available to be granted through December 9, 2006 and shall vest as specified by this committee. This plan expired on December 9, 2006.

On January 20, 2006, the Company established the Datawatch Corporation 2006 Equity Compensation and Incentive Plan (the "2006 Plan") which provides for the granting of both incentive stock options and non-qualified options, the award of Company common stock and opportunities to make direct purchases of Company common stock (collectively, "Stock Rights"), as determined by a committee appointed by the Board of Directors. Options pursuant to this plan were available to be granted through April 26, 2011 and shall vest as specified by the committee.

     On April 26, 2011, the Company established the Datawatch Corporation 2011 Equity Compensation and Incentive Plan (the "2011 Plan") which provides for the granting of both incentive stock options and non-qualified options, the award of restricted stock, restricted stock units, and any other equity-based interests (collectively, "Stock Rights"), as determined by a committee appointed by the Board of Directors. Options pursuant to this plan may be granted through April 25, 2021 and shall vest as specified by the committee.

     The Company recognizes share-based compensation expense in accordance with generally accepted accounting principles which require that all share-based awards, including grants of employee stock options, be recognized in the financial statements based on their fair value.

     The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company's stock compensation awards are accounted for as equity instruments and there have been no liability awards granted.

     Share-based compensation expense for the fiscal years ended September 30, 2011 and 2010 was $264,000 and $192,000, respectively, which was included in the following expense categories:

	Years Ended September 30,
	2011		2010
	(in thousands)
Sales and marketing	$	100	$	43
Engineering and product development		8		14
General and administrative		156		135
Total	$	264	$	192

     The Company uses the Black-Scholes option-pricing model to calculate the fair value of options. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. The weighted-average fair values of options granted under the stock options plans were $2.37 and $1.43 for the years ended September 30, 2011 and 2010, respectively. The total intrinsic value of options exercised during the year ended September 30, 2011 was approximately $663,000. No options were exercised during the year ended September 30, 2010. Total cash received from option exercises during the year ended September 30, 2011 was $388,000. The tax benefit realized from stock options exercised during the year ended September 30, 2011 was $296,000. As of September 30, 2011, there was $410,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 2.6 years.

     The table below indicates the key assumptions used in the option valuation calculations for options granted for the years ended September 30, 2011 and 2010:

	2011		2010
Expected life	5 years		5 years
Expected volatility	66.26 – 67.32	%	75.33	%
Weighted-average volatility	66.56	%	75.33	%
Risk-free interest rate	1.49 – 2.38	%	1.28	%
Dividend yield	0.0	%	0.0	%

     The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company's historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

     At September 30, 2011, 782,658 shares were authorized and 474,658 shares were available for future issuance under the 2011 Plan.

The following table is a summary of combined activity for all of the Company's stock option plans:

			Weighted-	Weighted - Average
	Number of		Average	Remaining		Aggregate
	Options		Exercise	Contractual		Intrinsic
	Outstanding		Price	Term		Value $(000)
Outstanding, October 1, 2009	548,800		3.05
Granted	30,500		2.35
Canceled	(34,290	)	5.08
Exercised	-		-
Outstanding, September 30, 2010	545,010		2.89
Granted	241,500		3.80
Canceled	(129,600	)	3.95
Exercised	(197,248	)	1.97
Outstanding, September 30, 2011	459,662	$	3.46	4.55	$	872
Vested or expected to vest, September 30, 2011	439,850	$	3.44	4.47	$	842
Exercisable, September 30, 2011	261,546	$	3.16	3.40	$	573
Exercisable, September 30, 2010	499,119	$	2.90

     The following table presents weighted-average price and life information regarding options outstanding and exercisable at September 30, 2011:

		Outstanding				Exercisable
			Weighted-Average		Weighted-			Weighted-
			Remaining		Average			Average
	Exercise	Number of	Contractual		Exercise			Exercise
	Prices	Shares	Life (Years)		Price	Shares		Price
$	0.74 – $2.98	136,163	2.61	$	1.89	120,343	$	1.81
$	3.22 – $4.55	212,999	5.61		3.63	87,996		3.88
$	4.88 – $5.62	110,500	4.92		5.06	53,207		5.02
		459,662	4.55	$	3.46	261,546	$	3.16

Restricted Stock Units

     The Company periodically grants awards of restricted stock units ("RSU") to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company's common stock. The total number of RSUs unvested at September 30, 2011 was 294,344. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting scheduled to occur in September 2014. Included in the total number of RSUs unvested at September 30, 2011 are 255,500 RSUs which are subject to a further vesting condition that the Company's common stock must trade at a price greater than $10 per share on a national securities exchange for a period of twenty consecutive days prior to the fifth anniversary of the grant date. For such RSUs, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company's common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in fiscal years 2011 and 2010 was approximately $1.2 million (or $4.18 weighted average fair value per share) and $65,000 (or $2.40 weighted average fair value per share). The Company recorded compensation expense related to the RSUs of $147,000 and $51,000 during the years ended September 30, 2011 and 2010, respectively, which is included in the total stock-based compensation expense disclosed above. As of September 30, 2011, there was approximately $1.3 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.7 years.

The following table presents RSU information for the fiscal year ended September 30, 2011:

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2009	39,494
Granted	27,000
Canceled	(2,501	)
Vested	(18,152	)
Outstanding, September 30, 2010	45,841
Granted	282,500
Canceled	(13,504	)
Vested	(20,493	)
Outstanding, September 30, 2011	294,344