Share-Based Compensation Plans - Note 12

12 Months Ended

Dec. 31, 2014

Share-Based Compensation Plans

(12) Share-Based Compensation Plans

As of December 31, 2014, the Company has five equity incentive plans: the 1994 Nonemployee Directors' Stock Option Plan (the Directors' Plan), the 1998 Stock Option Plan (the 1998 Plan), the 2005 Omnibus Incentive Plan (the 2005 Plan), the 2014 Omnibus Equity Compensation Plan (the 2014 Plan), and the Employee Stock Purchase Plan ("ESPP"). These plans provide that in the event of certain change in control transactions, including a merger or consolidation in which the Company is not the surviving corporation or a reorganization in which more than fifty-percent (50%) of the shares of the Company's common stock entitled to vote are exchanged, all outstanding, unvested equity awards under these plans will vest, and in the case of stock options, will become immediately exercisable.

As of December 31, 2014, there are no shares reserved for future grant under the Directors' Plan, the 1998 Plan and the 2005 Plan. As of December 31, 2014, there are 6,504,764 shares reserved for future grant under the 2014 Plan. The Company's 2014 Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards, dividend equivalents and other stock-based awards. Under the Company's 2014 Plan, the exercise price of stock options, the grant price of stock appreciation rights and the initial value of performance awards, will not be less than the fair market value of the Company's common stock on the date of award. Stock options generally vest 25% after year one and 6.25% every three months thereafter. Under the Company's 2005 Plan, the exercise price of stock options, the grant price of stock appreciation rights and the initial value of performance awards, must be equal to at least 100% of the fair market value of the Company's common stock on the date of grant. Stock options generally vest 28% after year one and 2% per month thereafter or 25% after year one and 6.25% every three months thereafter. Under the Company's 1998 Plan, the exercise price of options is not less than the fair market value of the Company's common stock on the date of grant. The number of shares, terms, and exercise period are determined by the board of directors on a grant-by-grant basis, and the exercise period does not extend beyond ten years from the date of the grant. Stock options generally vest 28% after one year and 2% or 3% per month thereafter or 25% after year one and 6.25% every three months thereafter.

During the year ended December 31, 2010, the Company's Board of Directors awarded a total of 1,130,700 performance condition options to certain of the Company's employees. Vesting of these options are subject to the Company achieving certain performance criteria established at the grant date and the individuals fulfilling a service condition (continued employment). As of December 31, 2014, the performance criteria of 884,590 of these options had been satisfied and these options will become exercisable based on the following vesting schedule: 25% on each of the first four anniversaries of the date of grant, which was February 20, 2010 (the date of grant). The Company recognized $192,000, $277,000 and $1.1 million of compensation expense during the years ended December 31, 2014, 2013 and 2012, respectively, related to these options. The final performance criteria had not been met and therefore the remaining 246,110 options have been forfeited. The Company utilized the Black-Scholes option pricing model to determine the grant date fair value of the awards.

On May 19, 2010, the shareholders approved an ESPP whereby qualified employees are allowed to purchase limited amounts of the Company's common stock at the lesser of 85% of the market price at the beginning or end of the offering period. The shareholders have authorized 500,000 shares for purchase by employees. During the years ended December 31, 2014, 2013 and 2012, employees purchased 40,120, 72,937 and 45,553 shares, respectively, under the ESPP. The Company has 289,465 shares available for future purchase as of December 31, 2014.

The Company estimates expected volatility considering implied volatility based on market-traded options on the Company's common stock and historical volatility of the Company's common stock over the expected life of the options. In estimating volatility for the years ended December 31, 2014, 2013 and 2012 the Company weighted implied volatility at zero percent and historical volatility at 100%. The Company recognizes compensation cost for awards on a straight-line basis over the requisite service period for the entire award. Additionally, the Company's policy is to issue new shares of common stock to satisfy stock option exercises, ESPP purchases or grants of restricted shares or deferred stock units.

The compensation expense related to stock options, ESPP purchases, restricted shares and deferred stock units are recorded in expense categories based on where other compensation cost is recorded for employees receiving the awards.

The following table summarizes the effect of compensation cost arising from share-based payment arrangements in the Company's Statements of Operations for the years ended December 31, 2014, 2013 and 2012 for the Company's stock option plans, the ESPP and other share-based awards (in thousands):

	Years ended December 31,
	2014		2013		2012
Research and development	$	5,657	$	4,107	$	3,343
Selling, general and administrative		9,346		5,330		4,205
Amounts charged against income, before
income tax expense	$	15,003	$	9,437	$	7,548

The fair value of each option award is estimated, on the date of grant using the Black-Scholes option-pricing valuation model, which incorporates ranges of assumptions for inputs as shown in the following table. The assumptions are as follows:

• The expected volatility is a blend of implied volatility based on market-traded options on the Company's common stock and historical volatility of the Company's stock over the expected term of the options.
• The Company uses historical data to estimate the expected term of the option; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time the options are expected to be outstanding.
• The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the option.
• The expected dividend yield is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the option.

	Years ended December 31,
	2014	2013	2012
Dividend yield	—	—	—
Expected volatility	57.98% — 60.69%	59.15% — 60.69%	61.22% — 67.58%
Risk-free interest rate	1.4% — 1.8%	0.7% — 3.7%	0.6% — 1.1%
Expected term (in years)	5.2 — 5.6	5.2 — 6.0	5.1 — 5.9

A summary of activity related to aggregate stock options under all plans is indicated in the following table (in thousands, except per share amounts):

	Year ended December 31, 2014
			Weighted	Weighted
	Number		average	average remaining		Aggregate
	of		exercise	contractual		intrinsic
	options		price	term		value
	(in thousands)			(in years)		(in thousands)
Options outstanding at beginning
of year	6,656	$	8.03
Options granted	1,269		32.80
Options exercised	1,245		7.48
Options forfeited/expired	559		11.56
Options outstanding at end of year	6,121		12.96	7.21	$	141,011
Vested and expected to vest	5,838		12.53	7.14	$	136,909
Options exercisable at end of year	3,246	$	7.16	6.11	$	92,865

The weighted-average grant-date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $17.54, $5.66 and $4.46, respectively. The intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of stock options exercised during the years ended December 31, 2014, 2013 and 2012 was $31.5 million, $33.4 million and $2.0 million, respectively.

Restricted stock, restricted stock units and deferred stock unit grants consist of the Company's common stock. The fair value of each restricted stock grant, restricted stock unit and deferred stock unit is equal to the market price of the Company's stock at the date of grant. Restricted stock and restricted stock unit grants are time vested. During the years ended December 31, 2014, 2013 and 2012, the Company granted 7,136, 35,097 and 20,334 deferred stock units, respectively, to directors for services, which did not contain any vesting restrictions. During the years ended December 31, 2014, 2013 and 2012, the Company granted 27,432, 75,940 and 106,575 restricted stock units, respectively, to directors for services, which vest over one year. At December 31, 2014, there are 649,642 deferred stock units outstanding. During the years ended December 31, 2014, 2013 and 2012 the Company granted to employees 328,916, 317,212 and 307,720 shares of restricted stock, respectively, which will vest over a period of one to three years. During the years ended December 31, 2014, 2013 and 2012 the Company granted to employees 30,412, 141,507 and 0 shares of restricted stock, respectively, which have certain performance criteria that is set by the Compensation Committee. If the performance criteria is met, the awards will vest over a period of one to three years.

A summary of activity related to aggregate restricted stock, restricted stock units and deferred stock units as of December 31, 2014, is indicated in the following table (shares in thousands, except per share amounts):

	Number of	Weighted-average
	shares	grant date fair value
Nonvested at beginning of year	752	$	8.89
Granted	394		31.07
Vested	(229)		9.19
Forfeited	(59)		12.40
Nonvested at December 31, 2014	858	$	18.75

As of December 31, 2014, there was $23.2 million of total unrecognized compensation cost related to all unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.82 years.