Note 2 – Equity and Stock-Based Compensation

Stock-Based Compensation

During the nine months ended September 30, 2014 and 2013, we issued 125,209 and 217,890, respectively, Class A Nonvoting shares to an executive employee associated with the vesting of his prior years’ stock grants. During the three and nine months ended September 30, 2014, we accrued $300,000 and $900,000, respectively, in compensation expense associated with the vesting of executive employee stock grants. During the three and nine months ended September 30, 2013, we accrued $188,000 and $564,000, respectively, in compensation expense associated with the vesting of executive employee stock grants.

Employee/Director Stock Option Plan

We have a long-term incentive stock option plan that provides for the grant to eligible employees, directors, and consultants of incentive or nonstatutory options to purchase shares of our Class A Nonvoting Common Stock and Class B Voting Common Stock. Currently we issue options under our 2010 Stock Incentive Plan.

When the Company’s tax deduction from an option exercise exceeds the compensation cost resulting from the option, a tax benefit is created. FASB ASC 718-20 relating to Stock-Based Compensation (“FASB ASC 718-20”), requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. For the three and nine months ended September 30, 2014 and 2013, there was no impact to the unaudited condensed consolidated statement of cash flows because there were no recognized tax benefits from stock option exercises during these periods.

FASB ASC 718-20 requires companies to estimate forfeitures. Unusually, during the nine months ended September 30, 2014, we had forfeitures of 64,000 options for the Class A common stock as a result of employee terminations. It is the company’s policy, unless adjusted by the Compensation Committee, to give the terminated employee three months from their termination date to exercise their options. If the options are not exercised within the three month period, they are considered forfeited.

In accordance with FASB ASC 718-20, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility, and the expected life of the options. As we intend to retain all earnings, we exclude the dividend yield from the calculation. We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

For the 20,000 and 50,000 options granted during the nine months ended September 30, 2014 and 2013, respectively, we estimated the fair value of these options at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:



	2014	2013
Stock option exercise price	$7.40	$5.89
Risk-free interest rate	2.88%	2.26%
Expected dividend yield	--	--
Expected option life in years	10	10
Expected volatility	30.65%	31.89%
Weighted average fair value	$2.46	$1.89

Based on the above calculation and prior years’ assumptions, and, in accordance with the FASB ASC 718-20, we recorded compensation expense for the total estimated grant date fair value of $ 33,000 and $ 102,000 for the three and nine months ended September 30, 2014, respectively, and $77,000 and $130,000 for the three and nine months ended September 30, 2013, respectively. At September 30, 2014, the total unrecognized estimated compensation cost related to non-vested stock options granted was $385,000, which we expect to recognize over a weighted average vesting period of 1.96 years. 141,100 options were exercised, during the nine months ended September 30, 2014 having an intrinsic value of $285,000 for which we received $890,000 of cash, and 62,500 options were exercised during the nine months ended September 30, 2013 having an intrinsic value of $132,000 for which we received $249,000 of cash. The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at September 30, 2014 was $1.1 million of which 66.2% are currently exercisable.

Pursuant to both our 1999 Stock Option Plan and our 2010 Stock Incentive Plan, all stock options expire no later than ten years from their grant date. The aggregate total number of shares of Class A Nonvoting Common Stock and Class B Voting Common Stock authorized for issuance under our 2010 Stock Incentive Plan is 1,250,000. At the discretion of our Compensation and Stock Options Committee, the vesting period of stock options is usually between zero and four years.

We had the following stock options outstanding and exercisable as of September 30, 2014 and December 31, 2013:


			Weighted							Weighted Average
	Common Stock		Average Exercise				Common Stock			Price of
	Options		Price of Options				Exercisable			Exercisable
	Outstanding		Outstanding				Options			Options
	Class A	Class B	Class A		Class B		Class A	Class B	Class A		Class B
Outstanding - December 31, 2013	709,850	185,100	$	6.24	$	9.90	490,350	185,100	$	6.85	$	9.90
Granted	20,000	--	$	--	$	--	--	--		--		--
Exercised	(500)	--	$	--	$	--	--	--		--		--
Outstanding - March 31, 2014	729,350	185,100	$	6.60	$	9.90	510,350	185,100	$	6.87	$	9.90
Granted	--	--	$	--	$	--	--	--		--		--
Exercised	(77,000)	--	$	--	$	--	--	--		--		--
Outstanding - June 30, 2014	652,350	185,100	$	6.71	$	9.90	435,350	185,100	$	6.95	$	9.90
Granted	--	--	$	--	$	--	--	--		--		--
Exercised	(63,600)	--	$	--	$	--	--	--		--		--
Forfeited	(64,000)	--	$	--	$	--	--	--		--		--
Outstanding - September 30, 2014	524,750	185,100	$	6.60	$	9.90	347,250	185,100	$	6.78	$	9.90

The weighted average remaining contractual life of all options outstanding, vested, and expected to vest at September 30, 2014 and December 31, 2013 was approximately 3.51 and 4.70 years, respectively. The weighted average remaining contractual life of the exercisable options outstanding at September 30, 2014 and December 31, 2013 was approximately 3.45 and 3.63 years, respectively.