Share-Based Payments

The Company’s share-based compensation primarily consists of two share-based compensation plans, one which was replaced on November 20, 2007, and one which became active on the same date. The plans are described below.

The Company’s 1998 Incentive Plan (the “1998 Plan”) had shares of common stock available for issuance to employees and directors. Through December 1999, 1,066,000 options were granted that would cliff vest after 9.8 years; however, such vesting was accelerated for 637,089 of these options upon meeting certain earnings per share goals through the fiscal year ended June 30, 2003. Subsequent to December 1999 and through June 2002, 1,248,250 options were granted that would cliff vest after 6.0 years; however, such vesting was accelerated for 300,494 of these options upon meeting certain earnings per share goals through the fiscal year ended June 30, 2005.

The Company also has a 2007 Equity Incentive Plan (the “2007 Plan”). Provisions of the 2007 Plan include the granting of up to 1,000,000 incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Options may be granted to employees, officers, non-employee directors and other service providers and may be granted upon such terms as the Compensation Committee of the Board of Directors determines in their sole discretion. Under both plans, one new share is issued for each stock option exercised.

Of the options granted subsequent to June 2002, all vesting schedules are based on 3 or 4-year vesting schedules, with either one-third or one-fourth vesting on the first anniversary and the remaining options vesting ratably over the remainder of the vesting term. Generally, directors and officers have 3-year vesting schedules and all other employees have 4-year vesting schedules. Additionally, in the event of a change in control or the occurrence of a corporate transaction, the Company’s Board of Directors has the authority to elect that all unvested options shall vest and become exercisable immediately prior to the event or closing of the transaction. All options outstanding as of December 31, 2012 had contractual lives of ten years. Under the 1998 Plan, 2,500,000 shares were authorized for grant. As of December 31, 2012, there were 578,615 options outstanding under the 1998 Plan, which includes the cliff vesting and 3 or 4-year vesting options discussed above. As of December 31, 2012, there were 558,668 options outstanding under the 2007 Plan. As of December 31, 2012, the 2007 Plan had 357,410 authorized unissued options, while there were no options remaining that could be granted under the 1998 Plan.

The Company also has an Employee Stock Purchase Plan (“ESPP”). Employees can purchase common stock through payroll deductions of up to 10 percent of their base pay. Amounts deducted and accumulated by the employees are used to purchase shares of common stock on or about the first day of each month. The Company contributes to the account of the employee one share of common stock for every nine shares purchased by the employee under the ESPP.

The Company uses judgment in determining the fair value of the share-based payments on the date of grant using an option-pricing model with assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the risk-free interest rate of the awards, the expected life of the awards, the expected volatility over the term of the awards, and the expected dividends of the awards. The Company uses the Black-Scholes option pricing model to determine the fair value of share-based payments granted under the guidelines of ASC Topic 718.

In applying the Black-Scholes methodology to the options granted, the Company used the following assumptions:



	Year ended December 31,
	2012	2011
Risk-free interest rate, average	1.3%	1.6%
Expected option life, average	7.2 years	7.15 years
Expected price volatility, average	51.4%	51.9%
Expected dividend yield	—%	—%

The risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of the grant, based on the expected life of the stock option. The expected life of the stock option is determined using historical data.

The expected price volatility is determined using a weighted average of daily historical volatility of the Company’s stock price over the corresponding expected option life. The Company does not currently intend to distribute any dividend payments to shareholders.

Under guidelines of ASC Topic 718, the Company recognizes compensation cost net of an expected forfeiture rate and recognized the associated compensation cost for only those awards expected to vest on a straight-line basis over the underlying requisite service period. The Company estimated the forfeiture rates based on its historical experience and expectations about future forfeitures.

The following table shows the stock option activity:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2011	1,160,933		$	4.50
Granted	187,000		4.06
Expired and canceled	(12,440	)	4.93
Forfeited prior to vesting	(38,341	)	4.23
Exercised	(159,869	)	3.07
Outstanding at December 31, 2012	1,137,283		$	4.63	5.47	$	256
Vested and expected to vest at December 31, 2012	1,137,283		$	4.63	5.47	$	256
Vested at December 31, 2012	853,350		$	4.71	4.26	$	232

The weighted average per share fair value of options granted during the years ending December 31, 2012 and 2011 was $2.16 and $2.85 respectively. The total intrinsic value of options exercised during the years ended December 31, 2012 and 2011 was $152 and $411, respectively.

The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2012 and 2011 was $241 and $187, respectively. Tax benefit from compensation cost related to stock options during the years ended December 31, 2012 and 2011 was $18 and $27, respectively. As of December 31, 2012, the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $593, which is expected to be recognized over approximately the next 2.8 years on a straight-line basis.

Stock Repurchase Program

In May 2012, our Board of Directors authorized a stock repurchase program to purchase the Company's common stock in the open market. A total of 94,744 shares costing $384 have been purchased under this program during the year ended December 31, 2012. No shares were purchased during the year ended December 31, 2011. The cost of shares purchased is recorded as a reduction to shareholders' equity. As of December 31, 2012, the Company was authorized to purchase additional $2,616 worth of shares in the open market.