Note 8. Stock Options

9 Months Ended

Sep. 30, 2013

Notes

Note 8. Stock Options

Note 8.            Stock Options

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes valuation model.  The Company uses historical data among other factors to estimate the expected price volatility, the expected option term and the expected forfeiture rate.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the option.

In addition to its first stock option plan approved in 1993, the Company has a stock option plan approved in May 2004, amended in June 2008 and again in August 2009 (the “2004 Plan”), for directors and key employees under which 2,500,000 shares of common stock may be issued.  The Company also has a stock option plan approved in July 2010 (the “2010 Plan”), for directors and key employees under which 5,000,000 shares of common stock may be issued.  Unless otherwise stated in the stock option agreement, options are 20% vested on the date of grant, with the balance vesting 20% per year over the next four years, except for directors whose options vest six months from the date of grant.  Options were granted in 2012 and 2013 from both the 2004 and 2010 Plans at the approximate market value of the stock at date of grant, as defined in each of the plans.

Pursuant to their respective five-year employment agreements, in March 2010 a total of 890,000 stock options were granted to the three executive officers of the Company.  Twenty percent of the options vested immediately on the date of grant, with the balance of the options to vest in equal annual installments over the next four years on the anniversary date of the original grant.  These options were granted pursuant to the 2004 Plan, are for a period of ten years and are intended as Incentive Stock Options.  To reflect the value of the stock options granted for the employment services provided, the Company was taking a charge to earnings totaling approximately $2,358,000 through March 2014.  For the nine months ended September 30, 2013 and 2012 this charge was $176,800 and $353,700, respectively.  For the three months ended September 30, 2013 and 2012 this charge was $0 and $117,900, respectively.

In May 2013, in connection and effective with their respective Amendment to employment agreement, the Board approved a grant of stock options to Messrs. Kasmoch, Bohmer and McHugh, which are immediately exercisable for shares of the Company's common stock.  The grants were made pursuant to both the 2004 Plan and the 2010 Plan.  The following table sets forth information about the stock option grants:

	2004 Plan			2010 Plan
Officer	Grants returned	Grants received - May 2013	Grants to receive - May 2014	Grants returned	Grants received - May 2013	Grants to receive - May 2014	Grants to receive - May 2015	Total Change
Timothy Kasmoch	(395,000)	25,000	25,000	(400,000)	100,000	100,000	100,000	(445,000)
Robert Bohmer	(245,000)	25,000	25,000	-	100,000	50,000	-	(45,000)
James McHugh	(40,000)	20,000	20,000	-	25,000	25,000	-	50,000

All grants awarded were priced at $1.25, in accordance with both the 2004 Plan and 2010 Plan.  Future grants required under each officer’s Amendment will be priced at the time of grant.  The Company took a non-cash charge to earnings of approximately $6,500 in the second quarter of 2013 to reflect the grant awarded to Mr. McHugh only, to reflect the net increase to him of 5,000 options granted currently.  However, for all of the officers the Company will no longer record a non-cash charge to earnings of approximately $118,000 each quarter for the balance of 2013 and 2014, or a total of $315,000 and $98,000, respectively.  Additional information is available in the Form 8-K filed by the Company on May 22, 2013.

In May 2013, the Company appointed Michael Burton-Prateley as a special advisor to the Board of Directors for a term of one year.  For his services, the Company issued Mr. Burton-Prateley 25,000 stock options under the Company’s 2004 Plan at a price of $1.28 per option that vested immediately.  To reflect the entire value of the options issued, the Company recorded a non-cash charge to earnings of $31,240 during the second quarter of 2013.

In May 2013, the Company also granted stock options totaling 25,000 options to five directors.  All of the options granted are for a period of ten years, are pursuant to the 2004 Plan, are exercisable at $1.30 and do not vest until November 2013.  To reflect the value of the stock options granted, the Company is taking a charge to earnings totaling approximately $33,200 ratably over the subsequent six-month period.  For the nine months and three months ended September 30, 2013, the Company recorded an expense of approximately $25,900 and $16,600, respectively.

In May 2013, the Company granted 25,000 stock options to one employee.  The options granted are for a period of ten years, are exercisable at $1.28 per share and vested immediately at the date of grant.  These options were granted pursuant to the 2004 Plan and are intended as Incentive Stock Options.  To reflect the entire value of the stock options granted, the Company recorded a charge to earnings of approximately $32,500 in the second quarter of 2013.