NOTE 6 INCENTIVE PLANS

Employee Profit Sharing

During 1993, we adopted an employee profit sharing plan (the "Plan"). The purpose of the Plan is to provide a bonus for increased output, improved quality and productivity and reduced costs. We have authorized 50,000 common shares to be available under this Plan. In accordance with the terms of the Plan, employees could acquire newly issued shares of common stock for 90% of the current market value. During 2014 and 2013 no common shares were issued in connection with this plan. Through December 31, 2014, 22,118 common shares had been issued under this Plan.

Stock Options

On May 3, 2005, the shareholders approved the 2005 Incentive Compensation Plan (the "2005 Plan") and eliminated the remaining 172,500 option shares available for grant under the prior 2003 Plan effective February 23, 2005. The total number of shares of common stock that may be granted under the 2005 Plan is 200,000, of which 19,000 remain available for grant at December 31, 2014. The 2005 Plan provides that option shares granted come from our authorized but unissued common stock. The price of the option shares granted under the plan will not be less than 100% of the fair market value of the common shares on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant.

We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables as noted in the following table. These variables include, but are not limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. There were no grants during the year ended December 31, 2014. The variables used for the grants for the year ended December 31, 2013 are below.

		2013
Expected volatility		49.67% - 53.06%
Expected dividends		None
Expected term (in years)		5.5 - 7
Risk-free rate		1.43% - 1.50%

Total compensation expense related to stock options for the years ended December 31, 2014 and 2013 was $29,927 and $12,841, respectively. As of December 31, 2014 there was approximately $17,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 1.12 years.

A summary of option activity as of December 31, 2014, and changes during the year then ended is presented below.

	Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding—January 1, 2014		216,000		$	6.46
Granted		—			—
Cancelled		(35,000	)		6.99

Outstanding—December 31, 2014		181,000		$	6.36		2.92	$	75,250


Exercisable on December 31, 2014		163,168		$	6.70		2.35	$	31,027

There were no options exercised during the years ended December 31, 2014 and 2013. The weighted average fair value of options granted during the year ended December 31, 2013 was $1.84 per share. There were no grants during the year ended December 31, 2014.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the "2010 Plan"). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units. There are no units available to be issued at December 31, 2014. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

During the year ended December 31, 2010, 100,000 Units were issued with a vesting date of December 31, 2012. On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016. On February 13, 2013, we granted an additional 350,000 Units with vesting dates ranging from December 31, 2015 through December 31, 2019. On January 1, 2014, we granted an additional 50,000 Units with vesting dates ranging from December 31, 2016 to December 31, 2017.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $178,000 and $67,000 for the years ended December 31, 2014 and 2013, respectively.

A summary of the liability as of December 31 and changes during the years then ended, is presented below.

	2014		2013
Beginning Balance	$	81,000	$	101,000
Additions		178,000		67,000
Payments		—		(87,000	)

Ending Balance	$	259,000	$	81,000

As of December 31, 2013, approximately $29,000 of this balance was included in Other Accrued Liabilities and the remaining $52,000 balance was included in Other Long-term Liabilities. As of December 31, 2014, approximately $47,000 of this balance was included in Other Accrued Liabilities and the remaining $212,000 balance was included in Other Long-term Liabilities.