NOTE 5 - 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 September 30, 2019.  The ESPP is considered compensatory under current Internal Revenue Service rules.  At September 30, 2019, after giving effect to the shares issued as of that date, 93,905 shares remain available for future issuance 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 2,500,000 shares of common stock. 



During 2019, stock options covering 100,769 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 157,907 shares to key employees during the first quarter of 2019 under the Company’s long-term incentive plan. These awards vest over three years with the first vesting date being March 28, 2020. 



At September 30, 2019,  235,630 shares have been issued under the 2011 Incentive Plan, 1,651,801 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 612,569 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 September 30, 2019, there were 18,000 shares subject to outstanding options under the Director Plan.



Changes in Stock Options Outstanding



The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan and the Director Plan over the period December 31, 2018 to September 30, 2019:  





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 September 30, 2019 was $539,000.  The intrinsic value of all options exercised during the nine months ended September 30, 2019 was $33,000. Net cash proceeds from the exercise of all stock options were $0 in each of the nine-month periods ended September 30, 2019 and 2018.



Changes in Deferred Stock Outstanding



The following table summarizes the changes in the number of deferred stock shares under the 2011 Incentive Plan over the period December 31, 2018 to September 30, 2019:





Compensation Expense



Share-based compensation expense recognized for the nine months ended September 30, 2019 was $276,000 before income taxes and $218,000 after income taxes. Share-based compensation expense recognized for the nine months ended September 30,  2018 was $156,000 before income taxes and $123,000 after income taxes.  Unrecognized compensation expense for the Company’s plans was $427,000 at September 30, 2019 and is expected to be recognized over a weighted-average period of 2.3 years.  Share-based compensation expense is recorded as a part of selling, general and administrative expenses.