(3)	Stock-based compensation plans

Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 89,578 shares reserved and available for grant at January 2, 2016. There were 157,557 shares reserved and available for grant at January 3, 2015.

The plan, which is shareholder-approved, permits the grant of Restricted Stock, Restricted Stock Units, Options and Stock Appreciation Rights (“SARs”). SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. The Company believes that such awards better align the interests of the employees with those of its shareholders. Options granted are exercisable at a price not less than fair market value on the date of grant. Recipients of grants of options must execute a standard form of non-competition agreement.

Share options

The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair values of stock options. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much the Company recognizes as stock-based compensation expense. The fair values of the Company’s stock options were estimated at the grant dates. The weighted average input assumptions used and resulting fair values of stock options were as follows for fiscal 2016:

Expected life (in years)		4.02
Risk-free interest rate		1.55	%
Volatility		61.43	%
Dividend yield		0.00	%
Weighted-average fair value per share	$	4.82

Risk-free Interest Rate

The Company bases the risk-free interest rate assumption on zero-coupon U.S. treasury instruments appropriate for the expected term of the stock option grants.

Expected Dividend Yield

The Company bases the expected dividend yield assumption on the fact that there is no present intention to pay cash dividends. Therefore an expected dividend yield of zero has been used.

Expected Volatility

The expected stock price volatility for the Company’s common stock is estimated based on the historic volatility of the Company’s common stock for a period equivalent to the expected term of the stock option grants.

Expected Term

The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical evidence for determining the expected term of the stock option awards granted, the expected life assumption has been determined using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period.

Performance based awards

Stock options:

In December 2015, the Compensation Committee awarded performance-based equity compensation to nine executives and managers, including the principal executive officer and principal financial officer, consisting of 38,460 shares in the form of stock options. The performance options have an exercise price of $9.944 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of grant, December 16, 2015, and the preceding four trading days. The performance options will vest subject to the Company’s meeting an earnings per share target applicable to fiscal year 2018 so long as the employee is then employed by the Company set by the Compensation Committee. The estimated fair value of the stock on the date of the grant was $185,000 based on the fair market value of stock on the date of issue. The unvested compensation is being charged to income over three years. The charge to income for this employee stock option grant will be approximately $15,000 on a quarterly basis.

Restricted stock:

In December 2015, the Company granted 11,540 shares of restricted stock to four employees which will vest subject to the Company’s meeting the same earnings per share target applicable to fiscal year 2018, so long as the employee is then employed by the Company. The estimated fair value of the stock on the date of the grant was $116,000 based on the fair market value of stock on the date of issue. The unvested compensation is being charged to income over three years. The charge to income for this employee stock option grant will be approximately $10,000 on a quarterly basis.

Management has assessed the performance criteria relating to these grants and concluded that are likely to be met. Accordingly the relevant portion of the charge has been taken to income in the quarter ended January 2, 2016.

There were 38,460 options granted during the quarter ended January 2, 2016. The weighted average grant date fair value of these options was $4.82. No options were granted in the quarter ended January 3, 2015.

A summary of option activity under the employee share option plan as of January 2, 2016, and changes during the quarter then ended is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding as of September 30, 2015		-	$	-		-		-
Granted		38,460	$	10.06		5.00	$	11,153
Exercised		-		-		-		-
Forfeited or Expired		-		-		-		-
Outstanding at January 2, 2016		38,460	$	10.06		4.96	$	11,153
Exercisable		-		-		-		-
Vested and expected to vest		35,088	$	10.06		4.96	$	10,176

Time-based awards

The Company awarded no time-based options in the quarter ended January 2, 2016.

Restricted stock:

In December 2014, the Company granted 42,000 shares of restricted stock to eight employees, which will vest in two equal annual installments so long as the employee is then employed by the Company or as determined by the Compensation Committee. The estimated fair value of the stock on the date of grant was $330,000 based on the fair market value of stock on the date of issue. The unvested compensation is being charged to income on a straight line basis over two years. The charge to income for this employee restricted stock grant will be approximately $41,000 on a quarterly basis.

In December 2014, the Company granted 20,000 shares of restricted stock to three employees, which will vest in five equal annual installments so long as the employee is then employed by the Company or as determined by the Compensation Committee. The estimated fair value of the stock on the date of grant was $139,000 based on the fair market value of stock on the date of issue. The unvested compensation is being charged to income on a straight line basis over five years. The charge to income for this employee restricted stock grant will be approximately $7,000 on a quarterly basis.

In February 2015, the Company granted 30,600 shares of restricted stock to nine non-employee directors, which will vest on the day before the 2016 annual meeting providing that the grantee remains a director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of grant was $225,000, based on the closing sale price of the stock on the date of grant. Compensation expense is being charged to income on a straight line basis over the twelve month requisite service period during which the forfeiture conditions lapse. The charge to income for these restricted stock grants in 2015 was $131,000 and the subsequent charge will be approximately $56,000 on a quarterly basis.

For the purposes of calculating average issued shares for basic earnings per share these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest.

A summary of restricted stock activity for the three months ended January 2, 2016 is as follows:

	Number of shares of Restricted Stock			Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2014		196,600		$	5.97
Granted		11,540		$	7.85
Vested		(61,000	)	$	6.41
Non-vested balance as of September 30, 2015		196,600		$	5.97
Granted		11,540		$	7.85
Vested		(61,000	)	$	6.41
Non-vested balance as of January 2, 2016		147,140		$	5.94

	Number of shares of Stock Options		Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2015		-	$	-
Granted		38,460	$	7.85
Vested		-	$	-
Non-vested balance as of January 2, 2016		38,460	$	7.85

Stock-based compensation expense was $152,000 and $113,000 for the three month periods ended January 2, 2016 and January 3, 2015, respectively. At January 2, 2016, there was $925,000 of unrecognized compensation expense related to restricted stock and stock options granted under the Plan. The Company expects to recognize that cost over a weighted average period of 2.3 years.