12.

STOCKHOLDERS’ EQUITY

(a)

Stock Option Plans

In June 2000, the stockholders approved the 2000 Stock Option and Incentive Plan (the “2000 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. Originally, 250,000 shares of common stock were reserved for issuance under the 2000 Plan. The stockholders of the Company approved an increase in this number to 500,000 shares in June 2001. All options granted under the 2000 Plan expire no later than ten years from the date of grant. The 2000 Plan expired in February 2010, after which date no further options could be granted under the 2000 Plan. However, outstanding options under the 2000 Plan may be exercised in accordance with their terms.

In June 2010, the stockholders approved the 2010 Stock Option and Incentive Plan (the “2010 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. At that time, 300,000 shares of common stock were reserved for issuance under the 2010 Plan. All options granted under the 2010 Plan expire no later than ten years from the date of grant.

Activity under the stock option plans described above was as follows:

	2000 Plan	2010 Plan	Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at December 31, 2010	249,000	24,500	$	3.36		None
Grants	—	25,000	$	5.72
Terminations	(31,500)	—	$	5.05
Exercises	(31,000)	—	$	4.79
Outstanding at December 31, 2011	186,500	49,500	$	3.19	$	344,000
Grants	—	2,000	$	5.93
Terminations	(8,000)	(2,000)	$	4.75
Exercises	(15,000)	—	$	3.39
Outstanding at December 31, 2012	163,500	49,500	$	3.13	$	185,000
Grants	—	26,000	$	4.67
Terminations	—	(1,000)	$	3.15
Exercises	(6,000)	(1,000)	$	3.11
Outstanding at December 31, 2013	157,500	73,500	$	3.30	$	223,000

Exercisable at December 31, 2013	157,500	21,500	$	2.75	$	271,000

Reserved for future grants	—	225,500

During the year ended December 31, 2013, four employees exercised stock options covering the aggregate of 7,000 shares. These options were exercised for cash, resulting in total proceeds of $21,750. During the year ended December 31, 2012, one employee exercised 15,000 stock options. These options were exercised for cash, resulting in total proceeds of $50,800. During the year ended December 31, 2011, eight employees exercised stock options covering the aggregate of 31,000 shares. Of these options, 30,000 were exercised for cash, resulting in total proceeds of $145,295, and 1,000 were exercised by the surrender of 618 shares of common stock with a fair market value of $3,200 at the time of exercise. At December 31, 2013, 231,000 shares of common stock were reserved for future issuance under all outstanding stock options described above, and an additional 225,500 shares of common stock were reserved for the potential issuance of stock options in the future under the 2010 Plan. The weighted average remaining life of the options outstanding under the 2000 Plan and the 2010 Plan as of December 31, 2013 was approximately five years and seven months. The weighted average remaining life of the options exercisable under these plans as of December 31, 2013 was approximately three years and eleven months. The exercise price of the options outstanding as of December 31, 2013 ranged from $1.70 to $7.00 per share. The 26,000 stock options granted during 2013 had exercise prices between $4.15 and $4.69 per share. The 2,000 stock options granted during 2012 had exercise prices between $5.61 and $6.25 per share. The 25,000 stock options granted during 2011 had exercise prices between $4.91 and $5.75 per share. The aggregate intrinsic value of options exercised during 2013, 2012 and 2011 approximated $8,000, $25,000 and $49,000, respectively. The weighted-average grant date fair values of options granted during 2013, 2012 and 2011 were $2.23, $2.86 and $2.40 per share, respectively. As of December 31, 2013, total unrecognized stock-based compensation related to non-vested stock options aggregated $74,763. That cost is expected to be recognized at a declining rate over the remaining vesting period of the outstanding non-vested stock options, including $24,121 during 2014. The fair value of each stock option grant has been estimated on the date of grant by an independent appraiser using the Black-Scholes option pricing model, for the purpose discussed in Note 2(l), with the following weighted-average assumptions:

	2013		2012		2011
Risk-free interest rate	1.6	%	0.97	%	1.1	%
Dividend yield	0	%	0	%	0	%
Expected volatility	49	%	48.7	%	47.6	%
Expected life	6 years		6.5 years		5 years

The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected option term, while the other assumptions are derived from averages of our historical data.

(b)

Common Stock Rights Plan

In September 1995, our Board of Directors adopted a Common Stock Rights Plan (The Rights Plan) and declared a dividend of one common share purchase right (a “Right”) for each of the then outstanding shares of the common stock of the Company. Each Right entitles the registered holder to purchase from the Company one share of common stock at an initial purchase price of $70.00 per share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as Rights Agent.

The Rights (as amended) become exercisable and transferable apart from the common stock upon the earlier of i) 10 days following a public announcement that a person or group (Acquiring Person) has, without the prior consent of the Continuing Directors (as such term is defined in the Rights Agreement), acquired beneficial ownership of 20% or more of the outstanding common stock or ii) 10 days following commencement of a tender offer or exchange offer the consummation of which would result in ownership by a person or group of 20% or more of the outstanding common stock (the earlier of such dates being called the Distribution Date).

Upon the Distribution Date, the holder of each Right not owned by the Acquiring Person would be entitled to purchase common stock at a discount to the initial purchase price of $70.00 per share, effectively equal to one half of the market price of a share of common stock on the date the Acquiring Person becomes an Acquiring Person. If, after the Distribution Date, the Company should consolidate or merge with any other entity and the Company were not the surviving company, or, if the Company were the surviving company, all or part of the Company’s common stock were changed or exchanged into the securities of any other entity, or if more than 50% of the Company’s assets or earning power were sold, each Right would entitle its holder to purchase, at the Rights’ then-current purchase price, a number of shares of the acquiring company’s common stock having a market value at that time equal to twice the Right’s exercise price.

At any time after a person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding common stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject to adjustment). At any time prior to 14 days following the date that any person or group becomes an Acquiring Person (subject to extension by the Board of Directors), the Board of Directors of the Company may redeem the then outstanding Rights in whole, but not in part, at a price of $0.005 per Right, subject to adjustment.

On June 8, 2005, our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2008. As of June 30, 2005, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension. On June 6, 2008 our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2011 and to increase the ownership threshold for determining “Acquiring Person” status from 15% to 18%. As of June 30, 2008, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On August 5, 2011, our Board of Directors voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date by an additional three years to September 19, 2014 and to increase the ownership threshold for determining “Acquiring Person” status from 18% to 20%. As of August 9, 2011, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. No other changes have been made to the terms of the Rights or the Rights Agreement.

Our Board of Directors believes that there is a risk that, given the product development progress we have made to-date, the potential value of the Mast Out^® product development initiative is not fairly reflected in the market price of our common stock, as it fluctuates from time to time, and that opportunistic buyers could take advantage of that disparity to the detriment of our stockholders. If this were to happen and result in a potential threat through an unsolicited acquisition effort or otherwise, our Board of Directors feels that the Rights Plan could enhance stockholder value by providing management with negotiating leverage.