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Incentive Stock Plans

9 Months Ended

Sep. 30, 2011

NOTE 11– INCENTIVE STOCK PLANS AND STOCK BASED COMPENSATION

The Company’s 1999 Omnibus Stock Plan that covered 500,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders on June 4, 1999. This plan terminated in accordance with its terms in March 2009. As of September 30, 2011, options to purchase up to 32,396 shares of common stock were outstanding.

The Unico American Corporation 2011 Incentive Stock Plan covers 200,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) and was approved by shareholders on May 26, 2011. During the three and nine months ended September 30, 2011, options to purchase 91,240 shares of common stock were granted under the 2011 plan to one non-executive employee.

As of September 30, 2011, options to purchase an aggregate of 123,636 shares of common stock were outstanding under the 1999 and 2011 Plans, of which 41,520 were vested and exercisable.

The exercise price, term and other conditions applicable to each stock option granted under the 2011 Plan are determined by the Company’s compensation committee of the Board of Directors. The exercise price of the stock options is set on the grant date and may not be less than the fair market value per share of the Company’s stock on that date (at market close). Options granted under the 2011 Plan are vested 10% as of the grant date and 10% annually on the anniversary date thereafter and expire ten years after the date of the grant.

The Company recognized stock-based compensation expense in the amount of $23,103 and $0 for all awards issued under the Company’s 2011 Stock Option plan in the salaries and employee benefits line item in the consolidated statements of operations in the three and nine months ended September 30, 2011 and 2010, respectively. No options were granted during the three and nine months ended September 30, 2010.

The fair value of each option award is estimated on the date of the grant using the Black-Scholes option-pricing model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and expected dividends.

Expected dividend yield is based on the historical dividend behavior as well as the expected dividend behavior of the Company. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve for a ten-year treasury in effect at the time of grant. The expected term represents an estimate of time the options are expected to remain outstanding. In accordance with ASC Topic 718, Compensation – Stock Compensation, the Company estimates forfeitures at the time of the grant and revises those estimates in subsequent periods if the actual forfeitures differ from those estimates. The average assumptions used to value each option award in the three and nine months ended September 30, 2011 are as follows.

	Three Months Ended September 30			Nine Months Ended September 30
	2011			2011

Expected dividend yield		3.12	%		3.12	%
Expected volatility		28.74	%		28.74	%
Risk-free interest rate		2.02	%		2.02	%
Expected term (years)		10			10
Expected forfeiture		0.00	%		0.00	%

The following table summarizes stock option activity for the nine months ended September 30, 2011:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms		Average Intrinsic Value
Outstanding at December 31, 2010		36,773	$	3.11		1.96	$	221,741
Granted		94,240	$	10.96		—		—
Forfeited		—		—		—		—
Exercised		4,377	$	3.11		—		—
Outstanding at September 30, 2011		123,636	$	8.90		8.98	$	231,631
Exercisable at September 30, 2011		41,520	$	4.84		8.98	$	231,631

The weighted average fair value per option granted during the three and nine months ended September 30, 2011, was $2.53. The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the nine months ended September 30, 2011 and 2010 was $29,461 and $69,130, respectively. During the nine months ended September 30, 2011 and 2010, the amount of cash received from the exercise of stock options was $1,871 and $33,744, respectively.

The Company granted no options to non-employees during the three and nine months ended September 30, 2011 and 2010.

As of September 30, 2011, there was $207,929 of total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based payments which are expected to be recognized over a weighted average remaining period of 8.92 years.