(9) Stock Compensation Plans

In April 2012, our Board of Directors adopted, and in September 2012 our shareholders approved, the Company's 2012 Stock Incentive Plan (the "2012 Plan"). The 2012 Plan permits the issuance of up to 1,000,000 shares of our common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, and performance shares. Officers, directors and executive, managerial, administrative and professional employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. As of the date of this report, no awards have been granted under the 2012 Plan. The 2012 Plan will expire on April 5, 2022.

Our prior stock option plans, adopted in 1998 and 2002, have expired. A total of 817,800 options granted under those plans remain outstanding, as follows:

					Weighted Average		Weighted
	Range of		Outstanding at		Contractual		Average		Exercisable at
	Exercise Price		September 30, 2012		Periods in Years		Exercise Price		September 30, 2012
1998 Plan	$	8.67 - $16.59		78,500		0.97	$	12.73		70,800
2002 Plan	$	2.45 - $18.21		739,300		6.11	$	5.15		335,461

FASB issued guidance requires that when valuing an employee stock option under the Black-Scholes option pricing model, the fair value be based on the option's expected term and expected volatility rather than the contractual term. The estimate of the fair value on the grant date should reflect the assumptions marketplace participants now use on the date of the measurement (i.e. grant date). During 2011, management changed the expected term in the Black–Scholes option pricing model from four years to two years for new options granted. Management believes that share price volatility over the last two years is more indicative of future share price volatility. The change has had an immaterial impact on the financial statements.

Activity in our stock option plans for the period from January 1, 2010 to September 30, 2012 is summarized below.

	1998 Plan					2002 Plan
	Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Weighted Average Option Exercise Price
Outstanding at January 1, 2010		124,599		$	15.88		736,951		$	12.03
Granted		-		$	-		109,500		$	3.59
Exercised		-		$	-		-		$	-
Cancelled		(34,849	)	$	23.74		(271,651	)	$	14.78
Outstanding at January 1, 2011		89,750		$	12.83		574,800		$	9.12
Granted		-		$	-		179,000		$	2.45
Exercised		-		$	-		-		$	-
Cancelled		-		$	-		(129,100	)	$	14.29
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15
Granted		-		$	-		181,500		$	4.40
Exercised		-		$	-		(4,834	)	$	3.29
Cancelled		(11,250	)	$	13.54		(62,066	)	$	13.59
Outstanding at September 30, 2012		78,500		$	12.73		739,300		$	5.11

Options outstanding as of September 30, 2012 are exercisable as follows.

	1998 Plan				2002 Plan
Options Exercisable at:	Number of Shares		Weighted Average Option Exercise Price		Number of Shares		Weighted Average Option Exercise Price

September 30, 2012		70,800	$	12.73		335,461	$	5.11
December 31, 2012		7,000	$	12.73		8,434	$	5.11
December 31, 2013		700	$	12.73		167,724	$	5.11
December 31, 2014		-	$	-		148,381	$	5.11
December 31, 2015		-	$	-		79,300	$	5.11
December 31, 2016		-	$	-		-	$	-
Thereafter		-	$	-		-	$	-
Total options exercisable		78,500				739,300

Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the APB and related Interpretation, as permitted by FASB issued guidance. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Upon the exercise of options, the Company issues authorized shares.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2012 and 2011 include the following.

•

Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

•

Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's income from continuing operations before provision for income tax expense and net income for the three months ended September 30, 2012 are lower by approximately $73,000 and $45,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's income from continuing operations before provision for income tax expense and net income for the three months ended September 30, 2011 are lower by approximately $61,000 and $38,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's income from continuing operations before provision for income tax expense and net income for the nine months ended September 30, 2012 are lower by approximately $201,000 and $125,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company's loss from continuing operations before provision for income tax benefit and net loss for the nine months ended September 30, 2011 are higher by approximately $178,000 and $111,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for the three months ended September 30, 2012 would have been $0.10, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.09.

Basic and diluted earnings per share for the three months ended September 30, 2011 would have remained unchanged at $0.5, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.5.

Basic and diluted earnings per share for the nine months ended September 30, 2012 would have been $0.42, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.40.

Basic loss per share for the nine months ended September 30, 2011 would have been $0.29, if the Company had not adopted FASB issued guidance, compared with reported basic loss per share of $0.30. Diluted earnings per share are not computed on a reported loss.

Because the change in income taxes receivable includes the effect of excess tax benefits, those excess tax benefits also must be shown as a separate operating cash outflow so that operating cash flows exclude the effect of excess tax benefits. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

There were no options granted during the three months ended September 30, 2012, as compared with 178,000 during the three months ended September 30, 2011. There were 181,500 options granted during the three months ended June 30, 2012, as compared with none during the three months ended June 30, 2011. There were no options granted during the three months ended March 31, 2012 or 2011.

The fair value of options granted is estimated on the date of grant using the following assumptions.

	September 30, 2012			September 30, 2011
Dividend yield		N/A			N/A
Expected volatility		39.79	%		39.08	%
Risk-free interest rate		0.28	%		0.20	%
Expected life (in years)		4.45			4.35