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, 2013
CAPITAL STOCK, STOCK PLANS, WARRANTS AND INCENTIVE COMPENSATION [Abstract]  
CAPITAL STOCK, STOCK PLANS, WARRANTS AND INCENTIVE COMPENSATION
NOTE 5
CAPITAL STOCK, STOCK PLANS, WARRANTS, AND INCENTIVE COMPENSATION

Stock Option Plans
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.  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 a vesting period of six months from the date of grant, with an 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.  A maximum of 3,000,000 shares of our Common Stock are authorized for issuance under this plan, as amended.

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 4 – “Stock-Based Compensation” for further discussion on ASC 718.

No employees exercised options during 2013 and 2012.
 
We issued, after giving effect to the reverse stock split, a total of 69,041 and 34,055 shares of our Common Stock in 2013 and 2012, respectively, under our 2003 Outside Directors Stock Plan to our outside directors as compensation for serving on our Board of Directors.  Each member of our outside directors is paid a quarterly fee of $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. 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 (which was forfeited in the second quarter of 2013), as of December 31, 2013 and 2012, and changes during the years ending on those dates is presented below, giving the effect to the reverse stock split:
 
 
  
2013
    
2012
 
  
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
    
70,500
    
$
10.95
    
     
71,600
    
$
10.95
    
 
Exercised
    
—
      
—
    
$
—
      
—
      
—
    
$
—
  
Forfeited
    
(70,500
)
    
10.95
              
(1,100
)
    
10.95
          
Balance at end of year
    
—
      
—
    
$
—
      
70,500
      
10.95
    
$
—
  
Options exercisable at year end
    
—
      
—
    
$
—
      
70,500
      
10.95
    
$
—
  
1992 Outside Directors Stock Plan
                                                
Balance at beginning of year
    
3,000
    
$
10.10
              
11,000
    
$
12.23
          
Forfeited
    
(3,000
)
    
10.10
              
(8,000
)
    
13.65
          
Balance at end of year
    
—
      
—
    
$
—
      
3,000
      
10.10
    
$
—
  
Options exercisable at year end
    
—
      
—
    
$
—
      
3,000
      
10.10
    
$
—
  
2003 Outside Directors Stock Plan
                                                
Balance at beginning of year
    
163,200
    
$
10.19
              
151,200
    
$
10.56
          
Granted
    
24,000
      
2.89
              
12,000
      
5.50
          
Forfeited
    
(18,000
)
    
9.95
              
—
      
—
          
Balance at end of year
    
169,200
      
9.18
    
$
5,850
      
163,200
      
10.19
    
$
—
  
Options exercisable at year end
    
145,200
      
10.22
    
$
—
      
151,200
      
10.56
    
$
—
  
2004 Stock Option Plan
                                                
Balance at beginning of year
    
182,100
    
$
10.55
              
264,167
    
$
10.17
          
Forfeited
    
(48,500
)
    
10.05
              
(82,067
)
    
9.33
          
Balance at end of year
    
133,600
      
10.73
    
$
—
      
182,100
      
10.55
    
$
—
  
Options exercisable at year end
    
133,600
      
10.73
    
$
—
      
182,100
      
10.55
    
$
—
  
2010 Stock Option Plan
                                                
Balance at beginning of year
    
60,000
    
$
7.85
              
60,000
    
$
7.85
          
Granted
    
—
      
—
              
—
      
—
          
Balance at end of year
    
60,000
      
7.85
    
$
—
      
60,000
      
7.85
    
$
—
  
Options exercisable at year end
    
40,000
      
7.85
    
$
—
      
20,000
      
7.85
    
$
—
  
Non-Qualified Stock Option Agreement
                                          
Balance at beginning of year
    
50,000
    
$
6.75
              
50,000
    
$
6.75
          
Forfeited
    
(50,000
)
  
$
6.75
              
—
      
—
          
Balance at end of year
    
—
      
—
    
$
—
      
50,000
      
6.75
    
$
—
  
Options exercisable at year end
    
—
      
—
    
$
—
      
12,500
      
6.75
    
$
—
  

(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.
The summary of the Company’s total Plans (as noted above) as of December 31, 2013, and changes during the period then ended are presented as follows (giving effect of the reverse stock split):

 
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Options outstanding January 1, 2013
    
528,800
    
$
9.82
  
 
 
Granted
    
24,000
      
2.89
  
 
 
Exercised
─
  
─
  
 
 
─
  
Forfeited/Expired
    
(190,000
)
    
9.51
  
 
 
Options outstanding End of Period (1)
   
362,800
    
$
9.53
      
3.3
    
$
5,850
  
Options Exercisable at December 31, 2013(2)
   
318,800
    
$
10.14
      
2.8
  
─
  
Options Vested and expected to be vested at December 31, 2013
    
362,800
    
$
9.53
      
3.3
    
$
5,850
  
 
(1) Options with exercise prices ranging from $2.79 to $14.75
(2) Options with exercise prices ranging from $5.50 to $14.75

Warrants and Capital Stock Issuance for Debt
As of December 31, 2013, we have two Warrants outstanding which provide for the purchase of up to an aggregate of 70,000 shares of the Company’s Common Stock at $2.23 per share.  The two Warrants were issued on August 2, 2013, as consideration of a $3,000,000 loan received by the Company from Messrs. William N. Lampson and Robert L. Ferguson (the “Lenders”).  Each Warrant provides for the Lender to purchase up to 35,000 shares of the Company’s Common Stock at an exercise price based on the closing price of the Company’s Common Stock at the closing of the transaction which was determined to be $2.23. The Warrants are exercisable six months from August 2, 2013 and expire on August 2, 2016.  We estimated the fair value of the Warrants to be approximately $59,000 using the Black-Scholes option pricing model with the following assumptions:  55.54% volatility, risk free interest rate of .59%, an expected life of three years and no dividends. We also issued 90,000 shares of the Company’s Common Stock to the Lenders.  See Note 8 – “Long-Term Debt – Promissory Note and Installment Agreement” for further information regarding the Warrants and Common Stock.

Shares Reserved
At December 31, 2013, we have reserved approximately 432,800 shares of Common Stock for future issuance under all of the option and warrant arrangements.