NOTE 3 - STOCK-BASED COMPENSATION



Employee Stock Purchase Plan



Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term.  The most recent term ended March 31, 2017.  The ESPP is considered compensatory under current Internal Revenue Service rules.  At March 31, 2017, after giving effect to the shares issued as of that date, 70,709 shares remain available for purchase under the ESPP.



2011 Executive Incentive Compensation Plan



On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).  The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.  The 2011 Incentive Plan, as amended, allows the issuance of up to 2,000,000 shares of common stock. 



During 2017, stock options covering 208,186 shares have been awarded to key executive employees and directors. These options expire seven years from the date of award and generally vest 25% each year beginning one year after the date of award.  The Company also granted deferred stock awards of 90,954 shares to key employees during the first quarter of 2017 under the Company’s long-term incentive plan for performance over the 2017 to 2019 period. The actual number of shares of deferred stock, if any, that are ultimately earned by the respective employees will be determined based on achievement against performance goals at the end of the three-year period ending December 31, 2019 and any shares earned will be issued in the first quarter of 2020 to those key employees still with the Company at that time. 



At March 31, 2017,  146,047 shares have been issued under the 2011 Incentive Plan, 1,270,851 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 583,102 shares are eligible for grant under future awards.





Stock Option Plan for Directors



Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”).  Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings.  Options granted under the Director Plan expire 10 years from date of grant. No options have been granted under the Director Plan since 2011 when the Company amended the Director Plan to prohibit future option grants.  As of March 31, 2017, there were 63,000 shares subject to outstanding options under the Director Plan.



1992 Stock Plan



Under the Company’s 1992 Stock Plan (“the Stock Plan”), shares of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees.  Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant.  Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to limitations in the Stock Plan.  The Company amended the Stock Plan in 2011 to prohibit future equity awards. At March 31, 2017, after reserving for stock options and deferred stock awards granted in prior years and adjusting for forfeitures and issuances during the year, there were 10,230 shares reserved for issuance under the Stock Plan.



Changes in Stock Options Outstanding



The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan, the Director Plan and Stock Plan over the period December 31, 2016 to March 31, 2017:  





The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at March 31, 2017 was $0.  The intrinsic value of all options exercised during the three months ended March 31, 2017 was $0. Net cash proceeds from the exercise of all stock options were $0 in each of the three-month periods ended March 31, 2017 and 2016.



Changes in Deferred Stock Outstanding



The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period December 31, 2016 to March 31, 2017:





Changes in Restricted Stock Units Outstanding



The following table summarizes the changes in the number of restricted stock units under the 2011 Incentive Plan over the period December 31, 2016 to March 31, 2017:





Compensation Expense



Share-based compensation expense recognized for the three-month period ended March 31, 2017 was $93,000 before income taxes and $60,000 after income taxes. Share-based compensation expense recognized for the three-month period ended March 31,  2016 was $280,000 before income taxes and $182,000 after income taxes.  Unrecognized compensation expense for the Company’s plans was $691,000 at March 31, 2017 and is expected to be recognized over a weighted-average period of 2.5 years.  Excess tax benefits from the exercise of stock options and issuance of stock included in financing cash flows for the three-month periods ended March 31, 2017 and 2016 were $ 0 and $ (23,000), respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.