NOTE 13 – STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION PLANS

At June 30, 2014, the Company had authorized common stock of 40,000,000 shares (December 31, 2013 – 40,000,000). Issued shares at June 30, 2014, were 29,554,500 (December 31, 2013 – 29,554,500) and treasury stock amounted to 5,141,057 shares (December 31, 2013 – 5,207,947).

The Company grants stock options and stock equivalent units (“SEUs”) from time to time as a long-term performance incentive. In certain cases the grants are subject to performance conditions such as the Company’s stock price. Where performance conditions apply the Monte Carlo simulation model is used to determine the fair values. Otherwise the Black-Scholes model is used to determine the fair values.

Stock option plans

The Company has four active stock option plans, two of which provide for the grant of stock options to employees and one provides for the grant of stock options to non-employee directors. The fourth plan is a savings plan which provides for the grant of stock options to all Company employees provided they commit to make regular savings over a pre-defined period which can then be used to purchase common stock upon vesting of the options. The stock options have discrete vesting periods which range from 24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at market value or at a premium or discount (including at no cost). The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.

The following table summarizes the transactions of the Company’s stock option plans for the six months ended June 30, 2014:


		Number of Options			Weighted Average Exercise Price		Weighted Average Grant- Date Fair Value
Outstanding at December 31, 2013			447,390		$	7.33
Granted	– at discount		55,176		$	0.00	$	33.44
	– at market value		21,542		$	46.03	$	14.18
Exercised			(85,642	)	$	5.01
Forfeited			(8,420	)	$	6.99

Outstanding at June 30, 2014			430,046		$	8.80

At June 30, 2014, there were 146,861 stock options that were exercisable, of which 59,001 had performance conditions attached.

The Company’s policy is to issue shares from treasury stock to holders of stock options who exercise those options, but if sufficient treasury stock is not available, the Company will issue previously unissued shares of stock to holders of stock options who exercise options.

The total compensation cost for the first six months of 2014 was $1.2 million (2013 – $1.4 million). The total intrinsic value of options exercised in the first six months of 2014 was $0.7 million (2013 – $2.4 million).

The total compensation cost related to non-vested stock options not yet recognized at June 30, 2014 was $3.2 million and this cost is expected to be recognized over the weighted-average period of 2.12 years.

Stock equivalent units

SEUs have discrete vesting periods which range from 11 months to 4 years and in all cases SEUs granted expire within 10 years of the date of grant. Grants may be priced at market value or at a premium or discount (including at no cost). There is no limit to the number of SEUs that can be granted. The liability for SEUs is located in accrued liabilities in the consolidated balance sheets until they are cash settled.

The following table summarizes the transactions of the Company’s SEUs for the six months ended June 30, 2014:


		Number of SEUs			Weighted Average Exercise Price		Weighted Average Grant- Date Fair Value
Outstanding at December 31, 2013			403,262		$	3.64
Granted	– at discount		48,213		$	0.00	$	33.04
	– at market value		7,147		$	46.03	$	14.18
Exercised			(143,850	)	$	5.44
Forfeited			(5,597	)	$	6.60

Outstanding at June 30, 2014			309,175		$	3.25

At June 30, 2014 there were 97,593 SEUs that are exercisable, of which 85,645 had performance conditions attached.

The charges for SEUs are spread over the life of the award subject to a revaluation to fair value each quarter. The revaluation may result in a charge or a credit to the income statement in the quarter dependent upon our share price and other performance criteria.

The total compensation cost for the first six months of 2014 was $1.0 million (2013 – $3.9 million). The total intrinsic value of SEUs exercised in the first six months of 2014 was $3.0 million (2013 – $1.8 million).

The weighted-average remaining vesting period of non-vested SEUs is 1.47 years.

Long-term incentive plan

In the first quarter of 2014, Innospec granted a long-term incentive plan to reward selected executives with a cash bonus for delivering exceptional performance. One of the elements of the plan is payable only if the Innospec share performance matches or out-performs that of competitors, as measured by the Russell 2000 Index, over the performance period January 1, 2014 to December 31, 2016. The maximum cash bonus payable under this element of the plan is $3 million and is accounted for as share-based compensation. As such, the fair value of these liability cash-settled long-term incentives is calculated on a quarterly basis. The fair value is calculated using a Monte Carlo model and is summarized as follows:


(in millions)	2014
Balance at January 1	$	0.0
Compensation charge for the period		0.1

Balance at June 30	$	0.1

The following assumptions were used in the Monte Carlo model at June 30, 2014:


	2014
Dividend yield		1.20	%
Volatility of Innospec’s share price		34.26	%
Risk free interest rate		0.88	%