7. Stock Options and Restricted Shares

Stock Option and Stock Award Plan

The Company has a stock option and stock award plan (the Stock Option Plan) that provides for the granting of stock options, restricted shares and stock appreciation rights to employees, directors, and consultants. Incentive stock options may be granted only to employees of the Company. Options that do not qualify as incentive stock options and awards of restricted shares may be granted to both employees and to non-employee directors and consultants. As of December 31, 2015, the Company had reserved 5,500,000 shares of common stock under the Stock Option Plan. Under the Stock Option Plan, stock options must be granted at an exercise price not less than the fair market value of the Company’s common stock on the grant date. Vesting requirements of all awards under this plan are time based and vary by individual grant. The options expire on the date determined by the Board of Directors, but may not extend more than 10 years from the grant date. The incentive stock options generally become exercisable over a four-year period and the nonqualified stock options generally become exercisable over a one-year period. Vested and unexercised options are canceled three-months after termination, and unvested awards are canceled on the date of termination of employment and become available under the Stock Option Plan for future grants.

Prior to 2013, the Company granted annual stock options to its directors under the Stock Option Plan. The ten-year options issued to the Company’s directors vested over a one-year period based on the continuation of service as a director of the Company. The Company used a 0% forfeiture rate for all director options granted.

In January 2012, the Company granted stock options to the chief executive officer under the Stock Option Plan. The ten-year options issued to the Company’s chief executive officer vest over five successive one-year periods based on the continuation of service with the Company and contain a $1 per share escalation in the exercise price each year. The Company used a 0% forfeiture rate for this option grant.

Option activity is summarized as follows:

Available

for Grant

(less restricted

Plan Options

Exercise

Weighted Average Exercise

Aggregate

Intrinsic

shares issued)

Outstanding

Price

Value

Balance at December 31, 2012

1,927,000

1,143,000

0.78–$15.03

10.38

Shares reserved

500,000

–

Granted

–

Exercised

–

(354,000

)

0.78– 11.72

7.86

Forfeited

–

Expired

1,000

(1,000

)

0.84– 5.74

5.38

Balance at December 31, 2013

2,428,000

788,000

6.36–$15.03

11.52

Shares reserved

–

Granted

–

Exercised

–

(102,000

)

6.74– 10.89

9.52

Forfeited

–

Expired

4,000

(4,000

)

6.74– 10.10

8.61

Balance at December 31, 2014

2,432,000

682,000

6.36–$15.03

11.84

Shares reserved

–

Granted

–

Exercised

–

(52,000

)

6.36– 9.88

8.04

Forfeited

–

Expired

7,000

(7,000

)

8.90– 10.28

9.45

Balance at December 31, 2015

2,439,000

623,000

6.36–$15.03

12.18

$ 13,823,000

Exercisable at December 31, 2015

443,000

11.22

$ 10,248,000

The shares available for grant number disclosed in the table above includes 1,698,000 common shares that have been issued in the form of restricted shares. The restricted shares issued reduce the number of common shares available for the grant of future stock awards, which is limited to 741,000 common shares.

The weighted average remaining contractual term of options exercisable at December 31, 2015, was 5.4 years. The total intrinsic value of options exercised during fiscal 2015, 2014 and 2013, was $1,249,000, $1,595,000 and $3,057,000, respectively.

The following table summarizes information about stock options outstanding at December 31, 2015:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Outstanding as of December 31, 2015		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of December 31, 2015		Weighted Average Exercise Price

$	6.36–$ 9.58		53,000		2.1	$	7.40		53,000	$	7.40
	9.59– 10.98		40,000		4.3		9.95		40,000		9.95
	10.99– 11.72		170,000		5.9		11.33		170,000		11.33
	11.73– 12.03		90,000		6.1		12.03		90,000		12.03
	12.04– 13.03		90,000		6.1		13.03		90,000		13.03
	13.04– 15.03		180,000		6.1		14.53		–		–
			623,000		5.6	$	12.18		443,000	$	11.22

As of December 31, 2015, there was $445,000 of total unrecognized compensation costs related to the outstanding stock options, which is expected to be recognized over a weighted average period of 0.6 years.

The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. These shareholders do not have the ability to sell, transfer or otherwise encumber the restricted share awards until they fully vest. During 2015, 2014 and 2013, the Company granted restricted shares to directors and employees under the Stock Option Plan. The restricted shares granted to employees of the Company vest over a four-year or nine-year period based on the continuation of employment. The restricted shares granted to the Company’s director’s vest over a one-year period based on the continuation of service as a director.

Restricted share activity is summarized as follows:

	Shares Outstanding			Weighted Average Grant Date Fair Value

Balance at December 31, 2012		613,000		$	10.39
Granted		199,000			16.31
Vested		(208,000	)		9.96
Forfeited		(16,000	)		11.22
Balance at December 31, 2013		588,000		$	12.52
Granted		175,000			24.24
Vested		(247,000	)		11.00
Forfeited		(9,000	)		17.23
Balance at December 31, 2014		507,000		$	17.24
Granted		134,000			28.38
Vested		(216,000	)		14.01
Forfeited		(9,000	)		23.41
Balance at December 31, 2015		416,000		$	22.37

As of December 31, 2015, there was $2,701,000 of total unrecognized compensation costs related to the outstanding restricted shares, which is expected to be recognized over a weighted average period of 1.6 years.

The Company estimates the forfeiture rate for restricted stock using 0% for directors, 10% for key employees and 15% for non-key employees.