8. Stockholders' Equity

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

8. Stockholders' Equity

Preferred Stock

On August 13, 2013, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of Preferred Stock from 1,000,000 to 2,500,000.

Common Stock

On August 13, 2013, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock from 10,000,000 to 20,000,000.

Proposed Public Offering

On October 15 2013, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the proposed public offering by the Company of $15,000,000 of its Common Stock. In addition, the Company intends to grant the underwriter a 30-day option to purchase up to an additional 15% of the number of shares offered to cover over-allotments, if any.

The Company intends to use the net proceeds of the offering (i) to contribute capital to its insurance subsidiary, KICO (subject to approval by New York State Department of Financial Services), to support growth, including possible product expansion; (ii) to repay indebtedness; and (iii) for general corporate purposes, which may include acquisitions.

A registration statement relating to these securities has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time that the registration statement becomes effective.

Dividend Declared

Dividends declared and paid on Common Stock were $459,738 and $380,046 for the nine months ended September 30, 2013 and 2012, respectively. Dividends declared and paid on Common Stock were $152,464 and $153,218 for the three months ended September 30, 2013 and 2012, respectively. The Company’s Board of Directors approved a quarterly dividend on November 12, 2013 of $.04 per share payable in cash on December 13, 2013 to stockholders of record as of November 29, 2013.

Stock Options

Pursuant to the Company’s 2005 Equity Participation Plan (the “2005 Plan”), which provides for the issuance of incentive stock options, non-statutory stock options and restricted stock, a maximum of 550,000 shares of Common Stock were permitted to be issued pursuant to options granted and restricted stock issued.  On August 13, 2013, the Company’s stockholders approved an increase in the number of shares authorized to be issued pursuant to the 2005 Plan from 550,000 to 700,000. Incentive stock options granted under the 2005 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Stock Option Committee determines the expiration date with respect to non-statutory options, and the vesting provisions for restricted stock, granted under the 2005 Plan.

The results of operations for the nine months ended September 30, 2013 and 2012 include stock-based stock option compensation expense totaling approximately $40,000 and $39,000, respectively. The results of operations for the three months ended September 30, 2013 and 2012 include stock-based stock option compensation expense totaling approximately $27,000 and $9,000, respectively. Stock-based compensation expense related to stock options is net of estimated forfeitures of 21% for the nine months and three months ended September 30, 2013 and 2012. Such amounts have been included in the condensed consolidated statements of income and comprehensive income within other operating expenses.

Stock-based compensation expense in 2013 and 2012 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The weighted average estimated fair value of stock options granted during the nine months ended September 30, 2013 was $1.38 per share. No stock options were granted during the nine months ended September 30, 2012. The fair value of options at the grant date was estimated using the Black-Scholes option-pricing method. The following weighted average assumptions were used for grants during the nine months ended September 30, 2013:

Dividend Yield		3.14	%
Volatility		46.71	%
Risk-Free Interest Rate		.79	%
Expected Life	3.25 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.

A summary of option activity under the Company’s 2005 Plan for the nine months ended September 30, 2013 is as follows:

Stock Options	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2013		235,115		$	2.58		2.24	$	539,485
Granted		67,500		$	5.09		-	$	12,150
Exercised		(1,250	)	$	2.37		-	$	(2,963	)
Forfeited		-		$	-		-	$	-
Outstanding at September 30, 2013		301,365		$	3.14		2.26	$	642,056
Vested and Exercisable at September 30, 2013		240,740		$	2.66		1.63	$	628,344

The aggregate intrinsic value of options outstanding and options exercisable at September 30, 2013 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Common Stock for the options that had exercise prices that were lower than the $5.27 closing price of the Company’s Common Stock on September 30, 2013.

Participants in the 2005 Plan may exercise their outstanding vested options, in whole or in part, by having the Company reduce the number of shares otherwise issuable by a number of shares having a fair market value equal to the exercise price of the option being exercised (“Net Exercise”). A total of 135,000 options were exercised during the nine months ended September 30, 2012.

As of September 30, 2013, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $60,000. Unamortized compensation cost as of September 30, 2013 is expected to be recognized over a remaining weighted-average vesting period of 1.56 years.