Annual report pursuant to section 13 and 15(d)

CAPITAL STOCK, STOCK PLANS, WARRANTS AND INCENTIVE COMPENSATION

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CAPITAL STOCK, STOCK PLANS, WARRANTS AND INCENTIVE COMPENSATION
 12 Months Ended
Dec. 31, 2012
CAPITAL STOCK, STOCK PLANS, WARRANTS AND INCENTIVE COMPENSATION [Abstract]  
Capital Stock and Stock Options
NOTE 6
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. The Plan, as amended, authorized 500,000 shares to be issued under the Plan. 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 re-election. The plan also provides for the grant of options to purchase up to 15,000 shares of Common Stock to each outside director upon initial election to the Board. The Plan provides 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. 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 re-election. 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 our Annual Meeting of Stockholders 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. During our Annual Meeting of Stockholders held on September 13, 2012, the stockholders approved the Second Amendment to our 2003 Outside Director Stock Plan which increased from 2,000,000 to 3,000,000 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, which was approved by our stockholders at the Company's Annual Meeting of Stockholders on September 29, 2010. The 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 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 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. See Note 5 – "Stock-Based Compensation" for further discussion on ASC 718.

No employees exercised options during 2012 and 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.

Pursuant to the terms of the Purchase Agreement between the Company, TNC, and SEHC dated July 15, 2011, upon closing of the Purchase Agreement which occurred on October 31, 2011, certain security holders of TNC ("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 170,277, 149,061, and 127,276 shares of our Common Stock in 2012, 2011, and 2010, respectively, under our 2003 Outside Directors Stock Plan to our outside directors as compensation for serving on our Board of Directors. Effective April 1, 2012, we increased the quarterly fees paid to each of our outside directors from $6,500 to $8,000 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, our Research and Development Committee Chairman 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 and a Non-Qualified Stock Option Agreement, as of December 31, 2012, 2009, and 2010, 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 Directors Stock Plans:
 
   
2012
    
2011
    
2010
  
   
Shares
    
Weighted
Average
Exercise
Price
    
Intrinsic
Value (a)
   
Shares
    
Weighted
Average
Exercise
Price
    
Intrinsic
Value (a)
   
Shares
    
Weighted
Average
Exercise
Price
    
Intrinsic
Value (a)
 
1993 Non-qualified Stock Option Plan
                                                      
Balance at beginning of year
     358,000     $ 2.18             630,359     $ 2.00             991,359     $ 1.89        
Exercised
     —       —     $ —       —       —     $ —       (350,000 )     1.70     $ 227,000  
Forfeited
     (5,500 )     2.19               (272,359 )     1.76               (11,000 )     1.45          
Balance at end of year
     352,500       2.18     $ —       358,000       2.18     $ —       630,359       2.00     $ —  
Options exercisable at year end
     352,500       2.18     $ —       358,000       2.18     $ —       630,359       2.00     $ —  
1992 Outside Directors Stock Plan
                                                                        
Balance at beginning of year
     55,000     $ 2.54               85,000     $ 2.50               100,000     $ 2.38          
Forfeited
     (40,000 )     2.73               (30,000 )     2.59               (15,000 )     1.69          
Balance at end of year
     15,000       2.02     $ —       55,000       2.54     $ —       85,000       2.50     $ —  
Options exercisable at year end
     15,000       2.02     $ —       55,000       2.54     $ —       85,000       2.50     $ —  
2003 Outside Directors Stock Plan
                                                                        
Balance at beginning of year
     756,000     $ 2.11               666,000     $ 2.21               594,000     $ 2.27          
Granted
     60,000       1.10               90,000       1.41               72,000       1.68          
Balance at end of year
     816,000       2.04     $ —       756,000       2.11     $ 12,600       666,000       2.21     $ —  
Options exercisable at year end
     756,000       2.11     $ —       666,000       2.21     $ —       594,000       2.27     $ —  
2004 Stock Option Plan
                                                                        
Balance at beginning of year
     1,320,833     $ 2.03               1,374,166     $ 2.04               1,424,166     $ 2.05          
Forfeited
     (410,333 )     1.87               (53,333 )     2.25               (50,000 )     2.26          
Balance at end of year
     910,500       2.11     $ —       1,320,833       2.03     $ 18,900       1,374,166       2.04     $ 30,900  
Options exercisable at year end
     910,500       2.11     $ —       1,280,833       2.05     $ 13,700       1,022,333       2.04     $ 14,100  
2010 Stock Option Plan(b)
                                                                     
Balance at beginning of year
     300,000     $ 1.57               —     $ —               —     $ —          
Granted
     —       —               300,000       1.57               —       —          
Balance at end of year
     300,000     1.57     $ —       300,000       1.57     $ —       —       —     $ —  
Options exercisable at year end
     100,000       1.57     $ —       —       —     $ —       —       —     $ —  
Non-Qualified Stock Option Agreement(c)
                                                                       
Balance at beginning of year
     250,000     $ 1.35               —     $ —               —     $ —          
Granted
     —       —               250,000       1.35               —       —          
Balance at end of year
     250,000       1.35     $ —       250,000       1.35     $ 50,000       —       —     $ —  
Options exercisable at year end
     62,500       1.35     $ —       —       —     $ —       —       —     $ —  
 
(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.

(c)
Option agreement entered into between Christopher Leichtweis, President of SEC and the Company on October 31, 2011. See Note 5 – "Stock Based Compensation" for further information on this agreement.

The summary of the Company's total Plans and a Non-Qualified Stock Option Agreement as of December 31, 2012, 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, 2012
     3,039,833     $ 1.98              
Granted
     60,000       1.10              
Exercised
 ─   ─           $ ─  
Forfeited/Expired
     (455,833 )     1.94             ─  
Options outstanding End of Period (1)
    2,644,000       1.96       3.5     $ ─  
Options Exercisable at December 31, 2012(2)
    2,196,500     $ 2.08       2.8     $ ─  
Options Vested and expected to be vested at December 31, 2012
     2,644,000     $ 1.96       3.5     $ ─  
 
(1)
Options with exercise prices ranging from $1.10 to $2.95
(2)
Options with exercise prices ranging from $1.41 to $2.95
 
Warrants
As of December 31, 2012, we have no Warrants outstanding. On May 8, 2012, the three Warrants outstanding which provided for the purchase of up to an aggregate 150,000 shares of the Company's Common Stock at $1.50 per share expired. See Note 9 – "Long-Term Debt – Promissory Note and Installment Agreement" for further information regarding the Warrants which expired.
 
Shares Reserved
At December 31, 2012, we have reserved approximately 2,644,000 shares of Common Stock for future issuance under all of the option arrangements.