Note 8. Common Stock Options and Stock Purchase Plan

Stock options

The 1997 Stock Option Plan (the “1997 Plan”) and 2013 Equity Incentive Plan (the “2013 Plan”) authorize the issuance of both nonqualified and incentive stock options. Payment for the shares may be made in cash, shares of the Company’s Common Stock or a combination thereof. Under the terms of the plans, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms of the option. All existing options expire 10 years from the date of grant or one year from the date of death.

Stock-based compensation

Pursuant to the 2013 Plan, the Company is authorized to grant options to purchase up to 300,000 shares of its Common Stock. As of December 31, 2013, options to purchase an aggregate of 225,000 shares were outstanding and 85,000 shares were exercisable under the 2013 Plan, and 75,000 shares were available for issuance pursuant to awards that may be granted under the plan in the future.

Pursuant to the 1997 Plan, the Company is authorized to grant options to purchase up to 450,000 shares of its Common Stock. As of December 31, 2013, options to purchase an aggregate of 21,980 shares were outstanding and exercisable under the 1997 Plan, and 250 shares were available for issuance pursuant to awards that may be granted under the 1997 Plan in the future. The board terminated the plan in 2014. The existing grants may be exercised according to the terms of the grant agreements but no additional options will be granted under the 1997 Plan.

During the third quarter of 2013, the Company granted to its Chief Executive Officer options to purchase 50,000 shares of common stock. The options were granted at a strike price equal to the fair market value, vested immediately, and expire ten years from the date of the grant.

The following table summarizes the activity for outstanding incentive stock options to employees of the company:


	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)

Balance at January 1, 2012		11,980	$	4.16	2.6
Granted		0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2012		11,980		4.16	1.6
Granted		50,000		4.21	10.0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2013		61,980	$	4.20	9.7
Vested and exercisable as of December 31, 2013		61,980				$	0

(1)

The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2013.

During the third quarter of 2013, the Company granted to three of its outside directors options to each purchase 50,000 shares of common stock and granted options to a fourth director to purchase 25,000 shares of common stock. The options granted to outside directors had a strike price above fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date thereafter. All of the stock option grants expire ten years from the date of the grant.

On July 18, 2012, the Company granted each of its four outside directors options to purchase 2,500 shares of common stock. The options were granted at fair market value, vested immediately, and expire ten years from the date of the grant.

During the year ended December 31, 2012, one former outside director forfeited options to purchase 5,000 shares of common stock.

The following table summarizes the activity for outstanding director stock options:


	Options Outstanding
	Number of		Weighted-		Weighted-	Aggregate
	Shares		Average		Average	Intrinsic Value
			Exercise		Remaining	(1)
			Price		Contractual
					Term
					(in years)

Balance at January 1, 2012		5,000	$	5.36	5.3
Granted		10,000		4.15	10.0
Exercised		0
Canceled/forfeited/expired		5,000		5.36
Balance at December 31, 2012		10,000		4.15	9.5
Granted		175,000		4.67	10.0
Exercised		0
Canceled/forfeited/expired		0
Balance at December 31, 2013		185,000	$	4.64	9.5
Vested and exercisable as of December 31, 2013		35,000				$	0

(1)

The Company recognized compensation expense of approximately $162 and $6 during the years ended December 31, 2013 and 2012, respectively, in connection with the issuance of the options.

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model are as follows:

Year Ended December 31,


	2013	2012
Dividend yield	0.00%	0.00%
Expected volatility	44.27-45.00%	22.98%
Risk free interest rate	1.33-1.92%	2.21%
Expected life	5.5-6 Years	5 Years

The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.

There were no options exercised during the years ended December 31, 2013 and 2012.

As of December 31, 2013, there was approximately $204 of unrecognized compensation expense under the 2013 Plan. The Company expects to recognize this expense over the next four years. To the extent the forfeiture rate is different than we have anticipated, stock-based compensation related to these awards will be different from our expectations.

Stock purchase plan

The 1996 Employee Stock Purchase Plan (the “ESPP”) allows employees to set aside up to 10% of their earnings for the purchase of shares of the Company’s Common Stock. The purchase price is the lower of 85% of the market value at the date of the grant or the exercise date, which is six months from the date of the grant. Under the ESPP, the Company is authorized to sell and issue up to 150,000 shares of its Common Stock to its full-time employees. During 2013 and 2012, 2,795 shares and 2,335 shares, respectively, were issued under the ESPP. At December 31, 2013, 69,161 shares were available for future issuance pursuant to the ESPP. The plan was terminated effective January 1, 2014.