Annual report pursuant to section 13 and 15(d)

STOCK-BASED COMPENSATION

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STOCK-BASED COMPENSATION
 12 Months Ended
Dec. 31, 2013
STOCK-BASED COMPENSATION [Abstract]  
STOCK-BASED COMPENSATION
NOTE 4
STOCK-BASED COMPENSATION
We follow FASB ASC 718, “Compensation – Stock Compensation” (“ASC 718”) to account for stock-based compensation.  ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.

The Company has certain stock option plans under which it awards incentive and non-qualified stock options to employees, officers, and outside directors.  Stock options granted to employees have either a ten year contractual term with one-fifth yearly vesting over a five year period or a six year contractual term with one-third yearly vesting over a three year period.  Stock options granted to outside directors have a ten year contractual term with vesting period of six months.
On September 12, 2013, we granted an aggregate of 18,000 options from the Company’s 2003 Outside Directors Stock Plan to our five re-elected directors and one new director at our Annual Meeting of Stockholders.  The options granted were for a contractual term of ten years with vesting period of six months.  The exercise price of the options was $2.79 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.

On October 4, 2013, we granted 6,000 options from the Company’s Outside Directors Stock Plan to a new director elected by the Company’s Board of Directors to fill a newly created directorship.  The options granted were for a contractual term of ten years with vesting period of six months. The exercise price of the options was $3.20 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.

The Company estimates fair value of stock options using the Black-Scholes valuation model. The fair value of the director stock options granted (no employees were granted options in 2013 and 2012) and the related assumptions used in the Black-Scholes option pricing model used to value the options granted for fiscal year 2013 and 2012 were as follows after giving effect to the reverse stock split:
 
 
  
Outside Director Stock Options Granted
  
 
  
For Year Ended
  
 
  
2013
    
2012
  
Weighted-average fair value per share
  
$
2.06
    
$
3.55
  
Risk -free interest rate (1)
   
2.66% - 2.92%
 
    
1.75%
 
Expected volatility of stock (2)
   
58.88% - 59.76%
 
    
56.74%
 
Dividend yield
  
 
None
    
 
None
  
Expected option life (in years) (3)
   
10.0
      
10.0
  

(1)  The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.

(2)  The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.

(3)  The expected option life is based on historical exercises and post-vesting data.

As of December 31, 2013, we had an aggregate of 193,600 employee stock options outstanding (from the 2004 and 2010 Stock Option Plans), of which 173,600 are vested.  The weighted average exercise price of the 173,600 outstanding and fully vested employee stock options is $10.07 with a remaining weighted contractual life of 1.3 years.  Additionally, we had an aggregate of 169,200 outstanding director stock options (from the 2003 Outside Directors Stock Plans), of which 145,200 are vested. The weighted average exercise price of the 145,200 outstanding and fully vested director stock options is $10.22 with a remaining weighted contractual life of 4.5 years.

The following table summarizes stock-based compensation recognized for the fiscal year 2013 and 2012.

 
  
Year Ended
  
 
  
2013
    
2012
  
Employee Stock Options
  
$
80,000
    
$
140,000
  
Director Stock Options
    
45,000
      
51,000
  
Total
  
$
125,000
    
$
191,000
  

We recognized stock-based compensation expense using a straight-line amortization method over the requisite service period, which is the vesting period of the stock option grant.  ASC 718 requires that stock-based compensation expense be based on options that are ultimately expected to vest and requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  We have generally estimated forfeiture rates based on historical trends of actual forfeitures.  When actual forfeitures vary from our estimates, we recognize the difference in stock-based compensation expense in the period the actual forfeitures occur or when options vest.  Our stock-based compensation expense for 2013 included a reduction of approximately $23,000 resulting from the forfeiture of a non-qualified stock option (the “Option”) due to the voluntary termination of our SEC President from the Company which became effective May 24, 2013 (see Note 15 – “Related Party Transactions” for further information regarding the SEC President’s voluntary termination from the Company). The Option was granted on October 31, 2011, with a term of 10 years from grant date and provided for the purchase of up to 50,000 shares of our Common Stock at $6.75 per share, with 25% yearly vesting over a four-year period (in accordance with a Non-Qualified Option Agreement). As of December 31, 2013, we have approximately $71,000 of total unrecognized compensation cost related to unvested options, which is expected to be recognized in 2013.