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## Note 1 – Summary of Operations and Significant Accounting Policies (continued) 

Stock-based compensation – The Company maintains stock-based compensation plans for its board of direc- tors, officers, and key employees, which provide for non-qualified and incentive stock options. The plans are described more fully in Note 9. With the issuance in mid-December 2004 by FASB of SFAS No. 123(R), “Share-Based Payments,”  which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” which was issued in 1995, the Company will begin reporting the fair value of stock-based compensation as an expense in its financial statements beginning in 2005 (see discus- sion in “Recently Issued Accounting Pronouncements and Proposed Accounting Changes” below). Prior to 

implementation of this new standard, the Company accounted for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”  and related Interpretations. No compensation cost was reflected in net income for stock options, as all options granted under those plans have an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. As required by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,”  the following table illus- trates the effect on net income and earnings per com- mon share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for each period presented: 

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The pro forma information recognizes as compensa- tion the value of stock options granted using the Black- Scholes option pricing model which takes into account as of the grant date, the exercise price and expected life of the option, the current price of underlying stock and its 

expected volatility, expected dividends on the stock, expected forfeitures and the risk-free interest rate for the term of the option. The following is the weighted average of the data used to calculate the estimated fair value: 

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The Company’s valuations are based upon a single option valuation approach using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable and negotiable in a free trading market. In addition, option valuation models require the 

input of highly subjective assumptions, including the expected stock price volatility and expected life of the option. Because the Company’s stock options have charac- teristics significantly different from those of freely traded options, and changes in the subjective input assumptions can materially affect the Company’s fair value estimate 

