NOTE 6 – ACCOUNTING FOR STOCK-BASED COMPENSATION

Share Based Compensation Information

The following is a summary of pre-tax equity based compensation expense for the two year period ended December 31, 2012:



(In thousands)		2012		2011
Pre-tax equity compensation expense	$	449	$	430
Income tax benefits related to equity based compensation	$	—	$	120

Pre-tax equity based compensation expense for 2012 includes $354,000 for stock options and restricted stock units, $54,000 for our employee stock purchase plan, and $41,000 for 5,000 shares issued to board members for compensation purposes (weighted average grant date fair value of $8.17). Pre-tax equity based compensation expense for 2011 includes $302,000 for stock options and restricted stock units, $87,000 for our employee stock purchase plan, and $41,000 for 4,000 shares issued to board members for compensation purposes (weighted average grant date fair value of $10.12).

We use historical data to estimate pre-vesting forfeitures. At December 31, 2012, the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $946,000 and the related weighted average period over which it is expected to be recognized is 2.41 years. The total fair value of shares vested was $178,000 in 2012 and $215,000 in 2011.

The fair value of stock options granted to our employees was estimated on the date of grant using the Black-Scholes model. The Black-Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. For options granted in 2012, we estimated the expected term for our graded vesting options, representing the length of time in years that the options are expected to be outstanding, using historical experience. Previously, we used the simplified method for expected term because our historical exercise experience was not expected to be representative of future exercise patterns. Expected volatility was computed based on historical fluctuations in the daily price of our common stock.

There were no stock options granted in 2011. For stock options granted in 2012, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:



		2012
Risk-free interest rates		0.70% - 0.86%
Expected life in years		4.95 - 5.20
Expected volatility		45.81% - 46.47%
Dividend yield		0.00%
Weighted average fair value on grant date		$3.01

Stock Options

We have two stock incentive plans that are administered under the supervision of the Compensation Committee of the board of directors. In May 2012, our shareholders approved an amendment to our active stock incentive plan to increase the number of shares that may be issued under the plan by 350,000 shares. Including the newly approved shares, there are 1,041,745 shares of common stock reserved in the aggregate for issuance of options and other stock based benefits under these plans, including restricted stock units and share grants to employees, officers and others. Reserved shares underlying canceled options are available for future grant under our active plan. Options are granted at an option price per share equal to or greater than the market value of our common stock on the date of grant. Generally, options granted to employees vest over a four-year period and expire seven or ten years after the date of grant. The plans allow for option holders to tender shares of our common stock as consideration for the option price, provided that the tendered shares have been held by the option holder at least six months. As of December 31, 2012, there were 453,037 shares of common stock available under this plan for future issuance to employees, officers and others.

The following is a summary of stock option activity for the year ended December 31, 2012:



	Options Outstanding		Weighted Average Exercise Price Per Share
Outstanding, December 31, 2011	515,987	$	10.07
Granted	182,916		7.38
Exercised	(5,625)		4.99
Expired	(143,188)		12.21
Forfeited	(5,937)		7.54
Outstanding, December 31, 2012	544,153	$	8.68

Exercisable, December 31, 2012	300,029	$	9.44

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. For options outstanding at December 31, 2012, the weighted average remaining contractual term of all outstanding options was 4.26 years and their aggregate intrinsic value was $330,000. At December 31, 2012, the weighted average remaining contractual term of options that were exercisable was 2.91 years and their aggregate intrinsic value was $290,000. The aggregate intrinsic value of stock options exercised was $10,000 in 2012 and $13,000 in 2011. We received proceeds of $27,000 from the exercise of stock options in 2012. No tax benefit was realized from the exercise of these stock options. New shares are issued for all option exercises, upon vesting of restricted stock units, for share issuances to board members and others or for issuances under our Employee Stock Purchase Plan.

Restricted Stock Units

Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted stock units. Restricted stock units are valued at a price equal to the market value of our common stock on the date of grant, vest over a four year period provided the employee is still working for the company and entitle the holders to one share of our common stock for each restricted stock unit. There were 36,528 restricted stock units granted in 2012. The weighted average grant date fair value per restricted stock unit was $7.37 in 2012. No restricted stock units were granted in 2011. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock as of December 31, 2012 was $331,000. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on the vesting date, was $69,000 for the year ended December 31, 2012 and $85,000 for the year ended December 31, 2011.

A summary of activity in non-vested restricted stock units for the year ended December 31, 2012 is as follows:



Non-vested restricted stock units	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2011	19,404	$	7.58
Granted	36,528		7.37
Vested	(9,406)		6.65
Forfeited	(1,971)		7.54
Non-vested at December 31, 2012	44,555	$	7.61

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase of common stock at 85% of the lower of the market value of our common stock on the first or last day of the offering period. There were 19,759 shares issued under this plan in the year ended December 31, 2012 and 25,003 shares issued in the year ended December 31, 2011. As of December 31, 2012, 166,582 shares remain available for future issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Our stock grant plan for non-employee directors provides for automatic grants of 1,000 shares of our common stock to each of our non-employee directors upon their re-election to the Board of Directors. The plan provides for a total of 30,000 shares of our common stock for issuance to directors and will expire on May 19, 2018. Share issuances under the stock grant plan for non-employee directors were 5,000 shares of common stock in the year ended December 31, 2012 and 4,000 shares in the year ended December 31, 2011. The shares issued in 2012 and 2011 had a fair market value on the date of grant each year equal to $41,000. As of December 31, 2012, 11,000 shares of common stock are reserved in the aggregate for future issuance under this plan.