7—STOCK-BASED COMPENSATION

Stock Compensation Plans

Penford maintains a long-term incentive plan known as the 2006 Long-Term Incentive Plan (which, as amended, is referred to herein as the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. As of May 31, 2014, the aggregate number of shares of the Company’s common stock that were available to be issued as awards under the 2006 Incentive Plan was 186,542. In addition, any shares previously granted under the 1994 Stock Option Plan that are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan. Non-qualified stock options and restricted stock awards granted under the 2006 Incentive Plan generally vest ratably over one to four years and expire seven years from the date of grant.

 

General Option Information

A summary of the stock option activity for the nine months ended May 31, 2014 was as follows:

 

		Number of Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Term (in years)				Aggregate Intrinsic Value
Outstanding balance, August 31, 2013			1,517,588			$	10.30
Granted			71,000				13.53
Exercised			(52,500	)			6.62
Cancelled			(84,817	)			15.20
Outstanding balance, May 31, 2014			1,451,271				10.30				3.41			$	4,985,200
Options exercisable at May 31, 2014			1,104,773			$	11.11				2.84			$	3,397,600

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $11.98 as of May 31, 2014 that would have been received by the option holders had all option holders exercised on that date. The intrinsic value of options exercised during the first nine months of fiscal 2014 was $327,200.

The Company granted 26,000 stock options under the 2006 Incentive Plan during the first nine months of fiscal 2014. The Company estimated the fair value of these stock options using the following weighted-average assumptions that resulted in the following weighted-average grant-date fair values:

 

Expected volatility			56	%
Expected life (years)			5.0
Interest rate			1.1-2.1	%
Weighted-average fair values		$	6.53

On March 25, 2014, in connection with the acquisition of the net assets of Gum Technology discussed in Note 13, the Company entered into compensatory stock option agreements outside of the Company’s 2006 Incentive Plan with three key employees of Gum Technology. Pursuant to these agreements, the Company granted options to purchase an aggregate of 45,000 shares of the Company’s common stock at an exercise price equal to the closing price as of the close of business on March 25, 2014. These options have a term of seven years and, subject to certain conditions, vest ratably over three years.

As of May 31, 2014, the Company had $0.7 million of unrecognized compensation cost related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock Awards

The following table summarizes the restricted stock award activity for the nine months ended May 31, 2014 as follows:

 

		Number of Shares				Weighted- Average Grant-Date Fair Value
Nonvested at August 31, 2013			24,489			$	7.35
Granted			173,060				12.64
Vested			(24,489	)			7.35
Cancelled			—				—
Nonvested at May 31, 2014			173,060			$	12.64

The grant-date fair value of each share of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The Company recognizes compensation cost for restricted stock ratably over the vesting period. As of May 31, 2014, the Company had $2.0 million of unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted-average period of 1.5 years.

 

On January 1, 2014, each non-employee director received an award of 1,556 shares of restricted stock under the 2006 Incentive Plan at the closing stock price on December 31, 2013. The shares, totaling 15,560, vest one year from the grant date of the award.

In the third quarter of fiscal 2014, certain key employees of the Company received awards of restricted stock aggregating 157,500 shares under the 2006 Incentive Plan at the closing stock price on the date of the grant. These shares vest ratably over three years.

Compensation Expense

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. The following table summarizes the total stock-based compensation cost and the effect on the Company’s Condensed Consolidated Statements of Operations:

 

		Three Months Ended May 31,								Nine Months Ended May 31,
(In thousands)		2014				2013				2014				2013
Cost of sales		$	4			$	—			$	4			$	—
Operating expenses			320				290				835				1,102
Research and development expenses			2				—				2				—
Total stock-based compensation expense		$	326			$	290			$	841			$	1,102
Income tax benefit			125				110				323				419
Total stock-based compensation expense, net of tax		$	201			$	180			$	518			$	683