Annual report pursuant to section 13 and 15(d)

CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION

v2.3.0.11
CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION
 12 Months Ended
Dec. 31, 2011
CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION [Abstract]  
CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION
NOTE 4
CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION

Stock Option Plans
Effective September 13, 1993, we adopted a Non-qualified Stock Option Plan pursuant to which officers and key employees can receive long-term performance-based equity interests in the Company. The option grants under the plan are exercisable for a period of up to ten years from the date of grant at an exercise price, which is not less than the market price of the Common Stock at date of grant.  On September 13, 2003, the plan expired.  No new options will be issued under this plan, but the options issued under the Plan prior to the expiration date will remain in effect until their respective maturity dates.

Effective December 12, 1993, we adopted the 1992 Outside Directors Stock Option Plan, pursuant to which options to purchase an aggregate of 100,000 shares of Common Stock had been authorized.  This plan provides for the grant of options to purchase up to 5,000 shares of Common Stock for each of our outside directors upon initial election and each re-election.  The plan also provides for the grant of additional options to purchase up to 10,000 shares of Common Stock on the foregoing terms to each outside director upon initial election to the Board.  The options have an exercise price equal to the closing trading price on the date of grant.  As amended and approved at the December 1996 Annual Meeting, the plan provided that each eligible director shall receive, at such eligible director's option, either 65% or 100% of the fee payable to such director for services rendered to us as a member of the Board in Common Stock.  The number of shares of our Common Stock issuable to the eligible director shall be determined by valuing our Common Stock at 75% of its fair market value as defined by the Outside Directors Plan.  As amended and approved at the May 1998 Annual Meeting, the Plan authorized 500,000 shares to be issued under the Plan. On December 12, 2003, the plan expired.  No new options will be issued under this plan, but the options issued under the Plan prior to the expiration date will remain in effect until their respective maturity dates.

Effective July 29, 2003, we adopted the 2003 Outside Directors Stock Plan, which was approved by our stockholders at the Annual Meeting of Stockholders on such date.  A maximum of 1,000,000 shares of our Common Stock are authorized for issuance under this plan.  The plan provides for the grant of an option to purchase up to 30,000 shares of Common Stock for each outside director upon initial election to the Board of Directors, and the grant of an option to purchase up to 12,000 shares of Common Stock upon each reelection.  The options granted generally have vesting period of six months from the date of grant, with exercise price equal to the closing trade price on the date prior to grant date.  The plan also provides for the issuance to each outside director a number of shares of Common Stock in lieu of 65% or 100% of the fee payable to the eligible director for services rendered as a member of the Board of Directors.  The number of shares issued is determined at 75% of the market value as defined in the plan.  During the annual meeting held on August 5, 2008, the stockholders approved the First Amendment to our 2003 Outside Director Stock Plan which increased from 1,000,000 to 2,000,000 the number of shares reserved for issuance under the plan.

Effective July 28, 2004, we adopted the 2004 Stock Option Plan, which was approved by our stockholders at the Annual Meeting of Stockholders on such date.  The plan provides for the grants of options to selected officers and employees, including any employee who is also a member of the Board of Directors of the Company.  A maximum of 2,000,000 shares of our Common Stock are authorized for issuance under this plan in the form of either Incentive or Non-Qualified Stock Options.  The option grants under the plan are exercisable for a period of up to 10 years from the date of grant at an exercise price of not less than market price of the Common Stock at grant date.

On April 28, 2010, we adopted the 2010 Stock Option Plan (the “2010 Plan”), which was approved by our stockholders at the Company's Annual Meeting of Stockholders on September 29, 2010. The 2010 Plan authorizes an aggregate grant of 1,000,000 non-qualified and incentive stock options to officers and employees (including an employee who is a member of the Board of Directors) of the Company for the purchase of up to 1,000,000 shares of the Company's Common Stock.  The term of each stock option granted will be fixed by the Compensation Committee, but no stock option will be exercisable more than ten years after the grant date, or in the case of an incentive stock option granted to a 10% stockholder, five years after the grant date.  The exercise price of any incentive stock option granted under the 2010 Option Plan to an individual who is not a 10% stockholder at the time of the grant will not be less than the fair market value of the shares at the time of the grant, and the exercise price of any incentive stock option granted to a 10% stockholder shall not be less than 110% of the fair market value at the time of grant.  The exercise price of any non-qualified stock options granted under the 2010 Stock Plan will not be less than the fair market value of the shares at the time of grant.

We follow FASB ASC 718 to account for employee and director stock options. ASC 718 establishes accounting standards for entity exchanges of equity instruments for goods or services.  It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  See “Note 3 – Stock-Based Compensation” for further discussion on ASC 718.

No employees exercised options during 2011.  During 2010, we issued an aggregate of 350,000 shares of our Common Stock upon exercise of 350,000 employee stock options, at exercise prices ranging from $1.25 to $2.19.  An employee used 38,210 shares of personally held Company Common Stock as payment for the exercise of 70,000 options to purchase 70,000 shares of the Company's Common Stock at $1.25 per share, as permitted under the 1993 Non-Qualified Stock Option Plan. The 38,210 shares are held as treasury stock. The cost of the 38,210 shares was determined to be approximately $88,000 in accordance with the Plan. Total proceeds received during 2010 for option exercises was approximately $509,000.  During 2009, we issued an aggregate of 357,822 shares of our Common Stock upon exercise of 347,822 employee stock options, at exercise prices ranging from $1.25 to $1.86 and 10,000 outside director options, at an exercise price of $1.25.  Total proceeds received during 2009 for option exercises totaled approximately $631,000.

Pursuant to the terms of the Purchase Agreement between the Company, Homeland, and SEHC dated July 15, 2011, upon closing of the Purchase Agreement which occurred on October 31, 2011, certain security holders of Homeland (“Management Investors”) purchased 813,007 restricted shares of the Company's Common Stock for a total consideration of approximately $1,000,000, or $1.23 a share, which was the average of the closing prices of the Company's Common Stock as quoted on the Nasdaq during the 30 trading days ending on the trading day immediately prior to the closing of the acquisition.  The purchase of the Company's Common Stock was pursuant to a private placement under Section 4(2) of the Securities Act of 1933, as amended (the “Act”) or Rule 506 of Regulation D promulgated under the Act.

We issued a total of 149,061, 127,276, and 136,522 shares of our Common Stock in 2011, 2010, and 2009, respectively, under our 2003 Outside Directors Stock Plan to our outside directors as compensation for serving on our Board of Directors.  During 2011, we paid each of our outside directors $6,500 in fees quarterly for serving as a member of our Board of Directors.  The Audit Committee Chairman receives an additional quarterly fee of $5,500 due to the position's additional responsibility.  In addition, effective August 24, 2011, our Research and Development Committee Chairman (a newly formed Committee) receives an additional quarterly fee of $1,000 due to the additional time commitment to the position.   Each board member is also paid $1,000 for each board meeting attendance as well as $500 for each telephonic conference call.  As a member of the Board of Directors, each director elects to receive either 65% or 100% of the director's fee in shares of our Common Stock.  The number of shares received is calculated based on 75% of the fair market value of our Common Stock determined on the business day immediately preceding the date that the quarterly fee is due.  The balance of each director's fee, if any, is payable in cash.
 
Summary of the status of options under the Company's total Plans as of December 31, 2011, 2010, and 2009 and changes during the years ending on those dates is presented below.  The Company's Plans consist of the 1993 Non-Qualified Stock Option plan, the 2004 and 2010 Stock Option Plans, and the 1992 and 2003 Outside Director Plans:

   
2011
  
2010
  
2009
 
   
Shares
  
Weighted Average Exercise Price
  
Intrinsic Value (a)
  
Shares
  
Weighted Average Exercise Price
  
Intrinsic Value (a)
  
Shares
  
Weighted Average Exercise Price
  
Intrinsic Value (a)
 
Non-qualified Stock Option Plan:
                           
Balance at beginning of year
  630,359  $2.00      991,359  $1.89      1,084,848  $1.86    
Granted
  -   -      -   -      -   -    
Exercised
  -   -  $-   (350,000)  1.70  $227,000   (89,489)  1.54  $68,526 
Forfeited
  (272,359)  1.76       (11,000)  1.45       (4,000)  1.97     
Balance at end of year
  358,000   2.18  $-   630,359   2.00  $-   991,359   1.89  $374,939 
Options exercisable at year end
  358,000   2.18  $-   630,359   2.00  $-   991,359   1.89  $374,939 
1992 Outside Directors Stock Plan:
                                    
Balance at beginning of year
  85,000  $2.50       100,000  $2.38       135,000  $2.08     
Granted
  -   -       -   -       -   -     
Exercised
  -   -  $-   -   -  $-   (10,000)  1.25  $10,300 
Forfeited
  (30,000)  2.59       (15,000)  1.69       (25,000)  1.25     
Balance at end of year
  55,000   2.45  $-   85,000   2.50  $-   100,000   2.38  $12,488 
Options exercisable at year end
  55,000   2.45  $-   85,000   2.50  $-   100,000   2.38  $12,488 
2003 Outside Directors Stock Plan:
                                    
Balance at beginning of year
  666,000  $2.21       594,000  $2.27       510,000  $2.21     
Granted
  90,000   1.41       72,000   1.68       84,000   2.67     
Balance at end of year
  756,000   2.11  $12,600   666,000   2.21  $-   594,000   2.27  $108,000 
Options exercisable at year end
  666,000   2.21  $-   594,000   2.27  $-   510,000   2.21  $108,000 
2004 Stock Option Plan:
                                    
Balance at beginning of year
  1,374,166  $2.04       1,424,166  $2.05       1,687,499  $2.08     
Granted
  -   -       -   -       170,000   1.57     
Exercised
  -   -  $-   -   -  $-   (258,333)  1.86  $152,750 
Forfeited
  (53,333)  2.25       (50,000)  2.26       (175,000)  2.16     
Balance at end of year
  1,320,833   2.03  $18,900   1,374,166   2.04  $30,900   1,424,166   2.05  $324,153 
Options exercisable at year end
  1,280,833   2.05  $13,700   1,022,333   2.04  $14,100   718,833   1.99  $202,353 
2010 Stock Option Plan:(b)
                                    
Balance at beginning of year
  -  $-       -  $-       -  $-     
Granted
  300,000   1.57       -   -       -   -     
Exercised
  -   -  $-   -   -  $-   -   -  $- 
Forfeited
  -   -       -   -       -   -     
Balance at end of year
  300,000   1.57  $-   -   -  $-   -   -  $- 
Options exercisable at year end
  -   -  $-   -   -  $-   -   -  $- 
 
(a)
Represents the difference between the market price at the date of exercise or the end of the year, as applicable, and the exercise price.

(b)
Plan was approved in September 2010 which authorizes grants of up to an aggregate of 1,000,000 non-qualified and incentive stock options.

The summary of the Company's total Plans as of December 31, 2011, and changes during the period then ended are presented as follows:

   
Shares
  
Weighted Average Exercise Price
  
Weighted Average Remaining Contractual Term
  
Aggregate Intrinsic Value
 
Options outstanding January 1, 2010
  2,755,525  $2.09       
Granted
  390,000   1.53       
Exercised
  -   -     $- 
Forfeited
  (355,692)  1.90        
Options outstanding end of Period (1)
  2,789,833   2.03   3.2  $31,500 
Options exercisable at December 31, 2011 (1)
  2,359,833  $2.13   2.7  $13,700 
Options vested and expected to vest at December 31, 2011
  2,789,833  $2.03   3.2  $31,500 

(1)
Options with exercise price ranging from $1.42 to $2.98

Warrants and Capital Stock Issuance for Debt
We have issued various Warrants pursuant to acquisitions, private placements, debt and debt conversion to facilitate certain financing arrangements.  The Warrants principally are for a term of two to five years and entitle the holder to purchase one share of Common Stock for each warrant at the stated exercise price.

As of December 31, 2011, we have three Warrants outstanding to purchase up to an aggregate 150,000 shares of the Company's Common Stock at $1.50 per share.  The purchases of up to 150,000 shares of the Company's Stock were originally covered under two Warrants issued on May 8, 2009 as consideration of a $3,000,000 loan received by the Company from Mr. William N. Lampson and Mr. Diehl Rettig (collectively, “the Lender”).  On April 18, 2011, the loan was amended. As consideration of the amended loan, the original Warrants issued to Mr. Lampson (for purchase up to 135,000 shares of the Company's Common Stock) and to Mr. Rettig (for purchase up to 15,000 shares of the Company's Common Stock) which were to expire on May 8, 2011, were amended and extended to May 8, 2012 at the same exercise price under the original Warrants ($1.50 per share - Mr. Rettig is now deceased; accordingly, the amended Warrant is now held by Mr. Rettig's personal representative or estate).  During August 2011, Mr. Robert L. Ferguson (a member of our Board of Directors) acquired from Mr. William Lampson one-half of Mr. Lampson's Warrant (the “Lampson Warrant”).  As a result of the acquisition of one-half of the Lampson Warrant by Mr. Ferguson, Mr. Ferguson and Mr. Lampson each hold a Warrant for the purchase of up to 67,500 shares of Common Stock at $1.50 per share and with an expiration date of May 8, 2012.

As consideration of receiving the $3,000,000 from the Lender, we also issued, pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and/or Rule 506 of Regulation D promulgated under the Act, an aggregate of 200,000 shares of the Company's Common Stock to the Lenders in 2009 (See “Note 10 – Long Term Debt – Promissory Note and Installment Agreement” for further information regarding the Common Stock and Warrant issuances.  Also see “Note 16 – Related Party Transactions – Robert L. Ferguson” for the Mr. Ferguson's acquisition of the Warrant).
 
Shares Reserved
At December 31, 2011, we have reserved approximately 3,189,833 shares of Common Stock for future issuance under all of the option and warrant arrangements.