Quarterly report pursuant to sections 13 or 15(d)

Stock Based Compensation

v2.4.0.6
Stock Based Compensation
 9 Months Ended
Sep. 30, 2012
Stock Based Compensation [Abstract]  
Stock Based Compensation
5.
Stock Based Compensation

FASB ASC 718, "Compensation – Stock Compensation" ("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.

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 13, 2012, we granted an aggregate of 60,000 options from the Company's 2003 Outside Directors Stock Plan to our five re-elected directors 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 $1.10 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.  Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term, and the expected annual dividend yield.  The fair value of the options granted during the nine months ended September 30, 2012 and 2011 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows:
 
Outside Director Stock Options Granted
 
 
September 30, 2012
 
 
September 30, 2011
 
Weighted-average fair value per share
 
$
.71
 
 
$
.94
 
Risk -free interest rate (1)
 
 
1.75
 %
 
 
2.29
 %
Expected volatility of stock (2)
 
 
56.74
 %
 
 
57.48
 %
Dividend yield
 
None
 
 
None
 
Expected option life (3)
 
10.0 years
 
 
10.0 years
 
 
 
Employee Stock Options Granted
 
 
During Nine Months Ended September 30, 2011
 
Weighted-average fair value per share
 
$
.89
 
Risk -free interest rate (1)
 
 
1.92
 %
Expected volatility of stock (2)
 
 
60.02
 %
Dividend yield
 
None
 
Expected option life (3)
 
6.0 years
 

(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 September 30, 2012, we had an aggregate of 1,818,500 employee stock options outstanding (from the 1993 Non-Qualified Stock Option Plan, 2004 and 2010 Stock Option Plans, and a Non-Qualified Stock Option Agreement), of which 1,368,500 are vested.  The weighted average exercise price of the 1,368,500 outstanding and fully vested employee stock options is $2.09 with a remaining weighted contractual life of 1.78 years.  Additionally, we had an aggregate of 856,000 outstanding director stock options (from the 1992 and 2003 Outside Directors Stock Plans), of which 796,000 are vested.  The weighted average exercise price of the 796,000 outstanding and fully vested director stock options is $2.13 with a remaining weighted contractual life of 4.64 years.

The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2012 and 2011 for our employee and director stock options.
 
Three Months Ended
 
 
Nine Months Ended
 
Stock Options
 
September 30,
 
 
September 30,
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Employee Stock Options
 
$
34,000
 
 
$
53,000
 
 
$
106,000
 
 
$
205,000
 
Director Stock Options
 
 
4,000
 
 
 
17,000
 
 
 
29,000
 
 
 
57,000
 
Total
 
$
38,000
 
 
$
70,000
 
 
$
135,000
 
 
$
262,000
 

We recognize stock-based compensation expense using a straight-line amortization method over the requisite 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.  ASC 718 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 compensation expense in the period the actual forfeitures occur or when options vest.  As of September 30, 2012, we have approximately $341,000 of total unrecognized compensation cost related to unvested options, of which $55,000 is expected to be recognized in the remainder of 2012, $152,000 in 2013, $96,000 in 2014, with the remaining $38,000 in 2015.