STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

At December 31, 2012 and 2011, the Company had two stock-based compensation plans and a 401(k) plan. These plans are described below.

(a) Stock Option Plan

The Company maintains stock option plans that provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights. The plans provide that incentive stock options may be granted with exercise prices not less than the fair market value at the date of grant. Options granted through December 31, 2012 generally vest over four years and expire ten years from the date of grant. Restricted stock awards granted to non-employee members of the Board of Directors vest over one year. Restricted stock units granted to certain officers of the Company vest over four years. On May 31, 2012, at the Company’s 2012 annual meeting of stockholders, stockholders approved an increase of 1.7 million shares in the maximum number of shares available under The Spectranetics Corporation 2006 Incentive Award Plan. At December 31, 2012, there were 1.9 million shares available for future issuance under these plans.

In December 2008, the Company issued options to purchase shares of common stock to certain of the Company’s officers and employees subject to a market condition performance target, which would be achieved if and when the average of the closing market prices of the Company’s common stock equaled or exceeded $9.00 per share for a period of ten consecutive trading days. In August 2011, the Company issued options to purchase 400,000 shares of common stock to the Company’s chief executive officer, subject to a market condition performance target, which would be achieved if and when the average of the closing market prices of the Company’s common stock equaled or exceeded $10.00 per share for a period of ten consecutive trading days. The $9.00 and $10.00 performance targets were achieved in March 2012 and, in each case, as of the day the target was achieved, a pro-rata number of options became immediately vested based on a four-year vesting period from the original grant date. The remaining unvested options will continue to vest over the remainder of the four-year period. The achievement of the performance target resulted in the acceleration of expense related to the options granted in 2008, which caused additional stock-based compensation expense of approximately $154,000 for the year ended December 31, 2012.

Valuation and Expense Information

The Company recognized stock-based compensation expense of $3.1 million, $2.5 million and $3.0 million for the years ended December 31, 2012, 2011 and 2010, respectively, which consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards that is ultimately expected to vest during the period, (2) restricted stock awards issued to certain of the Company’s directors, (3) restricted stock units issued to certain of the Company’s officers, and (4) the fair value of shares issued under the Company’s employee stock purchase plan. In 2010, stock-based compensation expense also included $0.4 million related to the accelerated vesting of certain options of the Company’s former chairman and chief executive officer in accordance with his employment agreement. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for these awards on a straight-line basis over the service period. An income tax benefit of $0.7 million, $0.5 million and $0.8 million related to the exercise of stock options during the years ended December 31, 2012, 2011 and 2010, respectively, will be added to other paid-in capital if, and when, the tax benefit is realized.

For all options which are not subject to a market condition, the fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant.

The following is a summary of the assumptions used for the stock options granted during the years ended December 31, 2012, 2011 and 2010 using the Black-Scholes pricing model:



	Year Ended December 31,
	2012		2011		2010
Expected life (years)	5.9		5.9		6.0
Risk-free interest rate	0.75	%	1.33	%	1.79	%
Expected volatility	66.35	%	66.10	%	66.20	%
Expected dividend yield	—		—		—

The weighted average grant date fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was $6.17, $2.39 and $3.46, respectively.

The following table summarizes stock option activity during the year ended December 31, 2012:



	Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2012	3,491,561		$	5.75
Granted	776,575		10.48
Exercised	(714,777	)	4.59
Canceled	(289,529	)	6.94
Options outstanding at December 31, 2012	3,263,830		$	7.02	6.98	$	25,287,567
Options exercisable at December 31, 2012	1,806,787		$	6.19	5.52	$	15,504,683

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $14.77 on December 31, 2012, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares underlying in-the-money options exercisable as of December 31, 2012 was approximately 1.8 million. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $5.1 million, $2.3 million and $0.3 million, respectively.

The following table summarizes restricted stock award activity during the year ended December 31, 2012:



	Shares			Weighted Average Grant-Date Fair Value
Restricted stock awards outstanding at January 1, 2012	$	74,030		$	5.84
Awarded	48,632			9.87
Vested	(74,030		)	5.84
Awards outstanding at December 31, 2012	$	48,632		$	9.87

The following table summarizes restricted stock unit activity during the year ended December 31, 2012:



	Shares		Weighted Average Purchase Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Restricted stock units outstanding at January 1, 2012	206,800		$	—
Awarded	—		—
Vested/Released	(54,200	)	—
Forfeited	(26,250	)	—
Restricted stock units outstanding at December 31, 2012	126,350		$	—	1.3	$	1,866,190

As of December 31, 2012, there was $5.1 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. This expense is based on an assumed future forfeiture rate of approximately 13.4% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 2.7 years.

(b) Stock Purchase Plan

In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (ESPP). On May 31, 2012, at the Company’s 2012 annual meeting of stockholders, stockholders approved an increase from 300,000 shares to 700,000 shares in the maximum number of shares available under the ESPP. As a result, the ESPP provides for the sale of up to 700,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP is restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period. The purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period. This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP is compensatory for financial reporting purposes.

The fair value of the shares offered for the six-month periods beginning January and July 2012 under the ESPP was determined on the date of grant using the Black-Scholes option-pricing model. The expected term of six months was based upon the offering period of the ESPP. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate is based on the six-month U.S. Treasury daily yield rate. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the years ended December 31, 2012, 2011 and 2010, the Company recognized $0.3 million, $0.2 million and $0.1 million of compensation expense, respectively, related to its ESPP.

The Company maintains a salary reduction savings plan under Section 401(k) of the Internal Revenue Code, which the Company administers for participating employees’ contributions. All full-time employees are covered under the plan after meeting minimum service requirements. The Company accrued and paid contributions of $0.8 million, $0.7 million and $0.7 million to the plan for the years ended December 31, 2012, 2011 and 2010, respectively. For all periods presented, Company contributions were based on a match of 50% of each employee’s contribution, with the match-eligible contribution being limited to 6% of the employee’s eligible compensation.