NOTE 8 – COMMITMENTS AND CONTINGENCIES

Operating leases:  The Company leases land, buildings and equipment under operating leases with original terms from 1 to 5 years.  Total rent expense was $443,000, $421,000 and $402,000 in 2012,  2011 and 2010 respectively.   Sublease income received was  $0,  $0 and $8,000 in 2012,  2011 and 2010 respectively.   At December 31, 2012, the Company was obligated under noncancelable operating leases to make minimum annual future lease payments as follows:

Long-term debt:  The mortgage on the Company’s headquarters building is payable in monthly installments and carries an interest rate of 6.83%.  The mortgage matures on March 1, 2016.  The outstanding balance on the mortgage was $1,575,000 at December 31, 2012. The mortgage is secured by the building.

The annual requirements for principal payments on the mortgage are as follows:

Line of credit:    The Company has a $10,000,000 line of credit from Wells Fargo Bank.  The Company had no outstanding borrowings against the line of credit at December 31, 2012 and 2011 and the entire credit line is available for use.  Interest on borrowings on the credit line is at LIBOR plus 1.1% (1.4% at December 31, 2012). The credit agreement expires October 31, 2014 and is secured by assets of the Company.  Our credit agreement contains financial covenants including current ratio, net income, and tangible net worth minimums.  The Company was in compliance with all financial covenants as of December 31, 2012.

As of December 31, 2012, the Company had no other material commitments (either cancelable or non-cancelable) for capital expenditures or other purchase commitments related to ongoing operations.

Long-term compensation plans:    The Company has a long term incentive plan.  The plan provides long-term competitive compensation to enable the Company to attract and retain qualified executive talent and to reward employees for achieving goals and improving company performance. The plan provides grants of “performance units” made at the beginning of performance periods and paid at the end of the period if performance goals are met. Awards were previously made every other year and are paid following the end of the cycle with annual vesting.  Payment in the case of retirement, disability or death will be on a pro rata basis.  The Company accrued (income)/expense of $ (16,000), $286,000 and $926,000 in 2012,  2011 and 2010, respectively.  Accrual balances for long-term compensation plans at December 31, 2012 and 2011  were  $350,000 and $2,024,000, respectively. Awards paid were $1,657,000 in 2012, $0 in 2011 and $1,332,000 in 2010.  Awards for the 2010 to 2013 and the 2011 to 2013 cycles will be paid out 50% in cash and 50% in stock and awards for the 2012 to 2014 cycles will be paid out 25% in cash and 75% in stock.  The stock portion of these awards are treated as equity plans and included within the Stock Compensation footnote below.

Other contingencies:  In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against such actions and claims.  Company management is not aware of any outstanding or pending legal actions or claims that would materially affect the Company’s financial position, results of operations, or cash flows.