Share-Based Payment Arrangements

6 Months Ended

Jun. 30, 2011

Share-Based Payment Arrangements

8. Share-Based Payment Arrangements

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was approved by the shareholders on May 26, 2005.  There are 2,000,000 shares authorized for issuance under the 2005 LTIP.  As of June 30, 2011, there were incentive stock options to purchase 1,301,666 shares of our common stock outstanding, non-qualified stock options to purchase 305,000 shares of our common stock outstanding and 377,501 shares reserved for future issuance under the 2005 LTIP.  The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Incentive stock options granted under the 2005 LTIP prior to 2009  vest 10%, 20%, 30% and 40% on the first, second, third and fourth anniversary dates of the grant, respectively, and terminate five to ten years from the date of grant.  Incentive stock options granted in 2009 and one grant of 5,000 incentive stock options in 2011 vest in equal annual increments on each of the first seven anniversary dates and terminate ten years from the date of grant.  One grant of 25,000 incentive stock options in 2010 and one grant of 10,000 incentive stock options in 2011 vest in equal annual increments on each of the first three anniversary dates and terminate ten years from the date of grant.  Non-qualified stock options granted under the 2005 LTIP generally vest 100% six months after the date of grant and terminate ten years from the date of grant.  One grant of 200,000 non-qualified stock options in 2009 vests in equal annual increments on each of the first seven anniversary dates and terminates ten years from the date of grant.

A summary of the status of our stock options as of and changes during the six months ended June 30, 2011 is presented below:

				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)			($000)
Outstanding at January 1, 2011		1,627,500		$	9.66
Granted		15,000		$	8.34
Exercised		(15,000	)	$	6.61
Forfeited or expired		(20,834	)	$	4.13
Outstanding at June 30, 2011		1,606,666		$	9.75		6.6	$	791
Exercisable at June 30, 2011		1,084,858		$	10.70		6.2	$	309

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Intrinsic value of options exercised	$	4	$	3	$	4	$	47
Cost of share-based payments (non-cash)	$	228	$	291	$	490	$	589
Income tax benefit of share-based payments recognized in income	$	7	$	7	$	15	$	15

As of June 30, 2011 there was $1.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our plans, of which $0.3 million is expected to be recognized during the remainder of 2011, $0.4 million is expected to be recognized in 2012, $0.3 million is expected to be recognized in 2013, $0.2 million is expected to be recognized each year from 2014 through 2015 and $0.1 million is expected to be recognized in 2016.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model.  Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected term.  The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant.  Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term.

The following table details the weighted average grant date fair value and related assumptions for the periods indicated.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Grant date fair value per share	$	3.50		$	3.62		$	3.50		$	3.62
Expected term (in years)		6.3			6.0			6.3			6.0
Expected volatility		38.0	%		35.0	%		38.0	%		35.0	%
Risk free interest rate		2.6	%		3.2	%		2.6	%		3.2	%