Note 10: Equity and Compensation Plans

The Company has one active equity award plan: the Material Sciences Corporation 2012 Incentive Compensation Plan (“2012 Plan”). The plan was approved on June 28, 2012, by the Company’s shareowners and replaced the Material Sciences Corporation Amended and Restated 1992 Omnibus Awards Plan for Key Employees (“1992 Plan”) and the Material Sciences Corporation Fiscal year 2006 Long-Term Incentive Plan for Non-Employee Directors (the “Director Plan”).

There are 2,130,789 shares authorized under the 2012 Plan (including 1,130,789 shares previously authorized under the 1992 Plan and either issued or available when that plan ended) to provide stock options, restricted stock and other equity awards under various programs to both employees and non-employee directors. Any shares related to forfeited, terminated or expired awards issued under the 1992 Plan will become available under the 2012 Plan. Non-qualified stock options generally vest over three years from the date of grant and expire between five and 10 years from the date of grant. Restricted stock and cash awards generally vest over three to five years from the date of grant. Shares of restricted stock are awarded in the name of the employee, who has all the rights of a shareowner, subject to certain restrictions or forfeitures. Restricted stock and cash awards have been issued with restrictions based upon time, Company performance, or a combination of both.

There were 150,000 shares authorized under the 2001 Directors Plan. This plan consisted of grants of stock options that provided for all or a portion of each non-employee director’s annual retainer. The 2001 Directors Plan expired on February 29, 2004 and no additional grants will be made under the plan. As of February 28, 2013, options for 3,537 shares were outstanding and exercisable under the 2001 Directors Plan.

The Company recorded $0.6 million, $0.3 million and $0.2 million of compensation expense related to stock options and restricted stock grants in fiscal 2013, 2012 and 2011, respectively.

Stock Option Activity

The Company granted 200,000 stock options during fiscal 2013, with a weighted average Black-Scholes value of $4.24 for each option. The Company granted 200,000 stock options during fiscal 2012 and the weighted average Black-Scholes value of each option granted was $4.13. The Company granted 200,000 stock options during fiscal 2011 and the weighted average Black-Scholes value of each option granted was $0.93. 22,304 options were exercised during fiscal 2012. As of February 28, 2013, there was $1.0 million of total gross compensation expense related to unvested stock option grants which is expected to be recognized ratably over a period ending in the first quarter of fiscal 2016.

The following tables summarize stock option activity for fiscal 2013:


	Options Outstanding
Stock Option Activity	Directors			Key Employees		Weighted Average Exercise Price		Aggregate Intrinsic Value (in $000’s)
Outstanding as of February 29, 2012		18,087			488,138	$	5.84	$	1,472
Granted		—			200,000		8.75
Exercised		—			—		—
Canceled/Forfeited		(14,550	)		—	$	11.00
Outstanding as of February 28, 2013		3,537			688,138	$	6.57	$	2,479
Exercisable as of February 28, 2013		3,537			113,138	$	8.10
Vested or Expected to Vest as of February 28, 2013		3,537			688,138	$	6.57	$	2,479

The total intrinsic value of options exercised in fiscal 2012 was $0.1 million; no options were exercised in fiscal 2013 or fiscal 2011.

The Company has elected to use the Black-Scholes option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. MSC will reconsider use of this pricing model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants in future periods have characteristics that cannot be reasonably estimated using this model. The following weighted average assumptions were used for the option grants in fiscal 2013 and 2012:


	2013			2012
Dividend Yield		0.0	%		0.0	%
Risk-Free Interest Rate		0.7	%		2.5	%
Expected Volatility		58.8	%		58.8	%
Expected Life (in Years)		5.0			6.5

MSC has not paid dividends in the past. As such, the Company uses a dividend yield percentage of zero. It uses a risk-free interest rate consistent with the yield available on a U.S. Treasury Note with a term equal to the expected term of the underlying grant. The expected volatility was estimated based upon the historical volatility of the Company’s share price. The expected life was an average of the initial vesting period and the original contractual term, as the Company does not have sufficient historical exercise data to otherwise estimate the expected life. The following table shows stock options outstanding and stock options exercisable at February 28, 2013:


	Options Outstanding as of February 28, 2013								Exercisable Options as of February 28, 2013
Range of Exercise Prices	Shares		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)		Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)
$ 2.00 - $ 5.00		175,000		4.0	$	2.00				—	$	0.00
$ 5.01 - $ 8.00		313,138		5.0	$	7.68				113,138	$	8.00
$ 8.01 - $11.00		200,000		6.0	$	8.75				—	$	0.00
$11.01 - $14.05		3,537		1.0	$	11.31				3,537	$	11.31
$ 2.00 - $14.05		691,675		5.0	$	6.57	$	2,479		116,675	$	8.10	$	243

Restricted Stock Activity

The following table summarizes restricted stock transactions for fiscal 2012 and 2013:


Unvested as of February 28, 2011	30,000
Granted	—
Vested	—
Canceled	—
Unvested as of February 29, 2012	30,000
Granted	17,330
Vested	(10,554	)
Canceled	(146	)
Unvested as of February 28, 2013	36,630

Beginning in September 2012, MSC began making quarterly grants of restricted stock to the non-employee directors of the company. Each grant represents the number of shares of our common stock equal to the quotient of $8,500 divided by the closing sale price of our common stock on the day preceding the grant date. Each non-employee director received 959 restricted shares in September 2012 and 946 restricted shares in December 2012. The shares will vest on the third anniversary of the grant date.

In March 2012, MSC granted 5,900 shares of restricted stock, which vested over one year, to certain members of management who elected to receive restricted stock in lieu of their annual compensation increase.

As of February 28, 2013, there was less than $0.1 million of total gross compensation expense related to unvested restricted stock grants which is expected to be recognized over a period ending in the first quarter of fiscal 2015, and less than $0.1 million of total gross expense related to unvested restricted stock granted to our non-employee directors which is expected to be recognized ratably over a period ending in the second quarter of fiscal 2016.

Employee Stock Purchase Plan

MSC has an Employee Stock Purchase Plan that permits eligible employees to buy shares of common stock on the last day of two six-month purchase periods (February 28 or 29 and August 31 of each year) at 85% of the fair market value of the stock on these dates. Shares of common stock sold to employees under this plan were 756 in fiscal 2013, 4,787 in fiscal 2012, and 4,096 in fiscal 2011. The amount the Company recorded as compensation expense related to this plan was less than $10 thousand in each period presented.

Treasury Stock

Our Board of Directors authorized the repurchase of 1,000,000 shares of the Company’s common stock on September 14, 2011, and again on September 27, 2012. The shares may be repurchased from time-to-time on the open market, subject to market conditions and other factors, and generally will be funded with internally generated cash. The Company repurchased 283,388 shares under the September 2011 authorization during the twelve months ended February 28, 2013. At February 28, 2013, there were 364,476 shares available for purchase under the September 2011 authorization and 1,000,000 shares available for purchase under the September 2012 authorization.

The following table provides information about Company purchases of common stock (in thousands).


Period	Total Number of Shares Purchased		Total Cost		Total Number of Shares Purchased as Part of a Written Trading Plan⁽¹⁾		Maximum Number of Shares that May Yet Be Purchased
March 1, 2010 – February 28, 2011		16		111		16		1,098
March 1, 2011 – February 29, 2012		2,450		17,538		2,450		648
March 1, 2012 – February 28, 2013		283		2,233		283		364
Total		2,749	$	19,882		2,749

(1)

On February 25, 2011, the Company entered into a written trading plan as part of the existing share repurchase program. The plan expired on May 26, 2011, when all of the shares authorized in the plan had been purchased. On May 27, 2011, the Company entered into a written trading plan to purchase up to 1,000,000 shares as part of the existing share repurchase program. The plan commenced on June 1, 2011, and expired on September 22, 2011, when 1,000,000 shares had been repurchased. On October 10, 2011, MSC entered into a new written trading plan to purchase up to 1,000,000 shares. 448,147 shares were purchased under this plan before it was replaced on July 16, 2012, by a new written trading plan to purchase up to 551,853 shares. 187,377 shares were purchased under the July 2012 plan before it expired on February 15, 2013. On February 15, 2013, MSC entered into a new written trading plan to purchase up to 364,476 shares. All of the trading plans were written under Rule 10b5-1 of the Exchange Act. As of February 28, 2013, all 364,476 shares remained to be purchased under this trading plan.