STOCK-BASED COMPENSATION

BioScrip Equity Incentive Plans

Under the Company's Amended and Restated 2008 Equity Incentive Plan (as amended and restated, the “2008 Plan”), the Company may issue, among other things, incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), stock appreciation rights ("SARs"), restricted stock, performance shares and performance units to employees and directors. While SARS are authorized under the 2008 Plan, they may also be issued outside of the plan. Under the 2008 Plan, 3,580,000 shares were originally authorized for issuance (subject to adjustment for grants made under the Company's 2001 Incentive Stock Plan (the “2001 Plan”) after January 1, 2008, as well as for forfeitures, expirations or awards that under the 2001 Plan otherwise settled in cash after the adoption thereof). Upon the effective date of the 2008 Plan, the Company ceased making grants under the 2001 Plan. The 2008 Plan is administered by the Company's Management Development and Compensation Committee (the “Compensation Committee”), a standing committee of the Board of Directors. On June 10, 2010, the Company's stockholders approved an amendment to the 2008 Plan to increase the number of authorized shares of common stock available for issuance by 3,275,000 shares to 6,855,000 shares.

As of December 31, 2012, there were 2,028,726 shares that remained available for grant under the 2008 Plan.

BioScrip/CHS Equity Plan

Effective upon closing of the acquisition of CHS, the CHS 2006 Equity Incentive Plan was adopted by the Company and renamed the “BioScrip/CHS 2006 Equity Incentive Plan” (as amended and restated, the “BioScrip/CHS Plan”). There were 13,000,000 shares of CHS common stock originally authorized for issuance under the CHS 2006 Equity Incentive Plan, which were converted into 3,106,315 shares of BioScrip common stock, and adjusted using the exchange ratio defined by the merger agreement. The Board of Directors further amended the BioScrip/CHS Plan to provide for it to have substantially the same terms and provisions as the 2008 Plan.

Of the options authorized and outstanding under the BioScrip/CHS Plan on the date of the acquisition, 716,086 options were designated as “rollover” options. These rollover options were issued to the top five executives of CHS at the time of the acquisition, and otherwise remain subject to the term of the BioScrip/CHS Plan, as amended, and fully vested on the date of conversion. Under the terms of the BioScrip/CHS Plan, any shares of BioScrip common stock subject to rollover options that expire or otherwise terminate before all or any part of the shares subject to such options have been purchased as a result of the exercise of such options shall remain available for issuance under the BioScrip/CHS Plan.

The remaining 2,390,229 shares are authorized for issuance under the BioScrip/CHS Plan. These shares may be used for awards under the BioScrip/CHS Plan, provided that awards using such available shares are not made after the date that awards or grants could have been made under the terms of the pre-existing plan, and are only made to individuals who were not employees or directors of BioScrip or an affiliate or subsidiary of BioScrip prior to such acquisition. As of December 31, 2012, there were 1,719,528 shares that remained available under the Bioscrip/CHS Plan.

Annual Equity Grant

On March 8, 2012 and May 7, 2012 the Compensation Committee approved a grant of approximately 1.7 million NQSO awards and 0.1 million restricted stock awards to key employees, consultants and members of the board of directors consistent with the Compensation Committee's historic grant practices.

Stock Options

Options granted under the plans: (a) typically vest over a three-year period and, in certain instances, fully vest upon a change in control of the Company, (b) have an exercise price that may not be less than 100% of its fair market value on the date of grant (110% for ISOs granted to a stockholder who holds more than 10% of the outstanding stock of the Company), and (c) are generally exercisable for ten years (five years for ISOs granted to a stockholder holding more than 10% of the outstanding stock of the Company) after the date of grant, subject to earlier termination in certain circumstances.

The Company recognized compensation expense related to stock options of $4.6 million, $3.7 million, and $3.3 million, in the years ended December 31, 2012, 2011 and 2010, respectively. Compensation expense related to acceleration of vesting for terminated employees was $0.3 million during the year ended December 31, 2012.

The fair value of each stock option award on the date of the grant was calculated using a binomial option-pricing model. Option expense is amortized on a straight-line basis over the requisite service period with the following weighted average assumptions:



	2012		2011		2010
Expected volatility	64.8	%	64.1	%	63.4	%
Risk-free interest rate	1.98	%	3.23	%	3.35	%
Expected life of options	5.8 years		5.2 years		5.7 years
Dividend rate	—		—		—
Fair value of options	4.00		2.53		4.09

Stock option activity for the 2008 Plan and the BioScrip/CHS Plan through December 31, 2012 was as follows:



	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value (thousands)		Weighted Average Remaining Contractual Life
Balance, December 31, 2011	5,610,361		$	5.94	$	4,747.2	5.4 years
Granted	2,106,500		6.79
Exercised	(1,728,186	)	5.01
Forfeited and expired	(1,103,460	)	8.90
Balance, December 31, 2012	4,885,215		$	5.97	$	23,462.8	7.8 years
Outstanding options less expected forfeitures at December 31, 2012	4,547,982		$	5.96	$	21,890.7	7.7 years
Exercisable at December 31, 2012	1,872,364		$	5.36	$	10,124.1	6.1 years

The weighted-average, grant-date fair value of options granted during the years ending December 31, 2012, 2011 and 2010 was $4.00, $2.53, and $4.09, respectively. The total intrinsic value of options exercised during the years December 31, 2012, 2011 and 2010 was $4.4 million, $2.5 million, and $3.1 million, respectively.

Cash received from option exercises under share-based payment arrangements for the years ended December 31, 2012, 2011, and 2010 was $8.7 million, $3.2 million, and $4.1 million, respectively.

The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2012 expire on various dates ranging from April 2013 through November 2022. The following table outlines our outstanding and exercisable stock options as of December 31, 2012:



	Options Outstanding				Options Exercisable
Range of Option Exercise Price	Outstanding Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Options Exercisable	Weighted Average Exercise Price
$1.71 - $4.24	671,960	$	2.81	5.99 years	608,629	$	2.66
$4.42 - $6.00	902,111	4.48		8.03 years	313,151	4.60
$6.04 - $6.62	1,958,751	6.60		8.53 years	272,420	6.52
$6.65 - $7.73	944,000	7.06		8.00 years	389,769	6.83
$7.95 - $9.56	408,393	8.90		6.21 years	288,395	8.82
	4,885,215	$	5.97	7.79 years	1,872,364	$	5.36

As of December 31, 2011 and 2010 the exercisable portion of outstanding options was approximately 3.3 million shares and 4.0 million shares, respectively.

As of December 31, 2012 there was $7.0 million of unrecognized compensation expense related to unvested option grants. That expense is expected to be recognized over a weighted-average period of 2.0 years.

As compensation expense for options granted is recorded over the requisite service period of options, future stock-based compensation expense may be greater as additional options are granted.

Restricted Stock

Under the 2008 Plan, stock grants subject solely to an employee’s or director’s continued service with the Company will not become fully vested less than (a) three years from the date of grant to employees and, in certain instances, may fully vest upon a change in control of the Company, and (b) one year from the date of grant for directors. Stock grants subject to the achievement of performance conditions will not vest less than one year from the date of grant where the vesting of stock grants is subject to performance measures. Such performance shares may vest after one year from grant. No such time restrictions applied to stock grants made under the Company’s prior equity compensation plans.

The Company recognized compensation expense related to restricted stock awards of $0.4 million, $0.5 million, and $0.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Since the Company records compensation expense for restricted stock awards based on the vesting requirements, which generally includes time elapsed, market conditions and/or performance conditions, the weighted average period over which the expense is recognized varies. Also, future equity-based compensation expense may be greater if additional restricted stock awards are made.

Restricted stock award activity through December 31, 2012 was as follows:



	Restricted Stock		Weighted Average Award Date Fair Value		Weighted Average Remaining Recognition Period
Balance December 31, 2011	225,232		$	3.82	0.3 years
Granted	70,000		$	7.52
Awards Vested	(215,232	)	$	3.79
Canceled	(10,000	)	$	4.42
Balance December 31, 2012	70,000		$	7.52	0.4 years

As of December 31, 2012, there was $0.2 million of unrecognized compensation expense related to unvested restricted stock awards. That expense is expected to be recognized over a weighted average period of 0.4 years. The total grant date fair market value of awards vested during the years ended December 31, 2012, 2011 and 2010 was $0.8 million, $0.6 million, and $0.5 million, respectively. The total intrinsic value of restricted stock awards vested during the years December 31, 2012, 2011 and 2010 was $2.3 million, $0.5 million, and $1.5 million, respectively.

Performance Units

Under the 2008 Plan, the Compensation Committee may grant performance units to key employees. The Compensation Committee will establish the terms and conditions of any performance units granted, including the performance goals, the performance period and the value for each performance unit. If the performance goals are satisfied, the Company would pay the key employee an amount in cash equal to the value of each performance unit at the time of payment. In no event may a key employee receive an amount in excess of $1.0 million with respect to performance units for any given year. To date, no performance units have been granted under the 2008 Plan.

Stock Appreciation Rights

The Company has granted cash-based phantom stock appreciation rights, or SARs, which are independent of the Company's 2008 Equity Incentive Plan, with respect to 380,000 shares of the Company's common stock, par value $.0001 per share. The SARs will vest in three equal annual installments and will fully vest in connection with a Change of Control (as defined in the grantee's employment agreement). These SARs may be exercised, in whole or in part, to the extent each SAR has been vested and will receive in cash the amount, if any, by which the closing stock price on the exercise date exceeds the Grant Price. Upon the exercise of any SARs, as soon as practicable under the applicable Federal and state securities laws, the grantee may be required to use the net after-tax proceeds of such exercise to purchase shares of the Common Stock from the Company at the closing stock price of the Common Stock on that date and hold such shares of Common Stock for a period of not less than one year from the date of purchase, except that the grantee will not be required to purchase any shares of Common Stock if the SAR is exercised on or after a Change of Control of the Company. The grantee's right to exercise the SAR will expire on the earliest of (1) the tenth anniversary of the grant date, (2) under certain conditions as a result of termination of the grantee's employment, or (3) the date that the SAR is exercised in full.

SAR activity through December 31, 2012 was as follows:



	Stock Appreciation Right		Weighted Average Exercise Price	Weighted Average Remaining Recognition Period
Balance, December 31, 2011	300,000		5.27	2.1 years
Granted	180,000		7.85
Exercised	(66,667	)	4.42
Canceled	(33,333	)	4.42
Balance, December 31, 2012	380,000		6.72	1.8 years

The SARs are recorded as a liability in other non-current liabilities in the accompanying Consolidated Balance Sheets. Compensation expense related to the SARS for the year ended December 31, 2012 was $1.1 million. Compensation expense recorded in the year ended December 31, 2011 related to the SARs was $0.3 million. As of December 31, 2012 there was $1.5 million of unrecognized compensation expense related to the SARs. That expense is expected to be recognized over a weighted-average period of 1.8 years. In addition, because they are settled with cash, the fair value of the SAR awards are revalued on a quarterly basis. During the year ended December 31, 2012 the Company paid $0.3 million related to the exercise of SAR awards.