(9) Stock Compensation Plans

We implemented a stock option plan in 1998 (the "1998 Plan"), which expired in September 2008. Under this plan, we were authorized to grant options to purchase up to 900,000 common shares, and as of June 30, 2014 and December 31, 2013, we had outstanding exercisable options to purchase zero and 3,000 shares, respectively.

We implemented a stock option plan in 2002 (the "2002 Plan"), which expired in April 2012. Under this plan, we were authorized to grant options to purchase up to 1,800,000 common shares, and as of June 30, 2014 and December 31, 2013, we had outstanding exercisable options to purchase 316,476 and 523,521 shares, respectively.

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. The 2012 Plan was amended and restated in March 2013 to clarify the plan administrator's authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. The 2012 Plan will expire on April 5, 2022.

On March 4, 2013, a total of 100,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 25,000 shares were granted to the Company's Chief Executive Officer and President and 15,000 shares were granted to the Company's Chief Financial Officer. An aggregate of 20,000 shares were granted to the Company's directors and the remaining 40,000 shares were granted to other employees of the Company.

On August 5, 2013, a total of 150,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 100,000 shares were granted to the Company's Chief Executive Officer and President and 50,000 shares were granted to the Company's Chief Financial Officer.

On March 4, 2014, a total of 88,648 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 43,997 shares were granted to the Company's Chief Executive Officer and President and 16,341 shares were granted to the Company's Chief Financial Officer. An aggregate of 15,710 shares were granted to the Company's directors and the remaining 12,600 shares were granted to other employees of the Company.

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 and incentive plans for the period from January 1, 2012 to June 30, 2014 is as follows.

	1998 Plan					2002 Plan					2012 Plan
				Weighted					Weighted
				Average					Average
	Number of			Option		Number of			Option		Number of			Fair Market
	Shares			Exercise Price		Shares			Exercise Price		Shares			Value at Grant
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15		-		$	-
Granted		-		$	-		181,500		$	4.40		-		$	-
Exercised		-		$	-		(33,104	)	$	3.86		-		$	-
Cancelled		(11,250	)	$	13.54		(70,499	)	$	12.45		-		$	-
Outstanding at January 1, 2013		78,500		$	12.73		702,597		$	5.17		-		$	-
Granted		-		$	-		-		$	-		250,000		$	5.54
Exercised		(500	)	$	8.67		(165,577	)	$	7.15		-		$	-
Cancelled		(75,000	)	$	12.92		(13,499	)	$	5.41		(500	)	$	5.54
Outstanding at January 1, 2014		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54
Granted		-		$	-		-		$	-		88,648		$	5.54
Exercised		(3,000	)	$	8.67		(204,144	)	$	5.71		(33,180	)	$	5.54
Cancelled		-		$	-		(2,901	)	$	3.09		(846	)	$	5.54
Outstanding at June 30, 2014		-		$	-		316,476		$	3.80		304,122		$	5.54

Options outstanding as of June 30, 2014 are exercisable as follows.

	1998 Plan				2002 Plan
			Weighted				Weighted
			Average				Average
	Number of		Option		Number of		Option
Options Exercisable at:	Shares		Exercise Price		Shares		Exercise Price
June 30, 2014		-	$	-		181,159		$	3.80
December 31, 2014		-	$	-		61,284		$	3.80
December 31, 2015		-	$	-		74,033		$	3.80
December 31, 2016		-	$	-		-		$	3.80
December 31, 2017		-	$	-		-		$	3.80
December 31, 2018		-	$	-		-		$	3.80
Thereafter		-	$	-		-		$	3.80
Total options exercisable		-				316,476

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

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.

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 2014 and 2013 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 June 30, 2014 are lower by approximately $273,000 and $170,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company's income from continuing operations before provision for income tax expense and net income for the three months ended June 30, 2013 are lower by approximately $88,000 and $55,000, 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 six months ended June 30, 2014 are lower by approximately $465,000 and $290,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company's income from continuing operations before provision for income tax expense and net income for the six months ended June 30, 2013 are lower by approximately $155,000 and $96,000, 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 June 30, 2014 would have been $1.06 and $1.02, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $1.04 and $1.01, respectively. Basic and diluted earnings per share for the three months ended June 30, 2013 would have been $0.33 and $0.32, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.32 and $0.31, respectively.

Basic and diluted earnings per share for the six months ended June 30, 2014 would have been $1.84 and $1.78, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $1.81 and $1.75, respectively. Basic and diluted earnings per share for the six months ended June 30, 2013 would have been $0.62 and $0.61, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.61 and $0.60, respectively.

Because the change in income taxes payable 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.

Summary information about the Company's stock option plans at June 30, 2014 is as follows.

					Weighted Average			Weighted
	Range of		Outstanding at		Contractual			Average		Exercisable at
	Exercise Price		June 30, 2014		Periods in Years		Exercise Price			June 30, 2014
1998 Plan	$	-		-		-		$	-		-
2002 Plan	$	2.45 - $4.73		316,476		6.18		$	3.80		181,159