CAPITAL STOCK

Preferred Stock

The Company has authorized up to one million shares of preferred stock, $0.01 par value per share, for issuance. Each series of preferred stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by the Company’s board of directors (the “Board”).

Rights Agreement

On January 6, 2014, the Company’s Board declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, of the Company, to purchase one ten-thousandth of a share of newly designated Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”), at a price of $40.00 per one ten-thousandth of a share of Preferred Stock, subject to adjustment as provided in the Rights Agreement described below. Stockholders of record at the close of business on January 17, 2014 (the “Record Date”) received the dividend. The description and terms of the Rights are set forth in a Rights Agreement, dated as of January 6, 2014, as the same may be amended from time to time (the “Rights Agreement”), between the Company and Computershare Trust Company N.A, as Rights Agent.

The Rights Agreement became effective on January 6, 2014 (the “Effective Date”). Following the Effective Date, Rights will be issued in respect of all shares of the Company’s common stock issued after the Record Date and, subject to the terms described in the Rights Agreement, prior to the earliest of the Distribution Date (as defined in the Rights Agreement), the redemption of the Rights or the expiration of the Rights. A Distribution Date will occur upon the earlier of (i) 10 business days (or such later date as the Board shall determine) following a public announcement by the Company that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 15% or more of the outstanding shares of common stock, other than as a result of repurchases of stock by the Company, certain inadvertent actions by institutional or certain other stockholders or beneficial ownership by certain Exempt Persons or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. An “Exempt Person” is any person or group which beneficially owned 15% or more of the common stock at the time of public announcement of the Rights Agreement unless and until such person or group acquires beneficial ownership of additional shares of common stock representing one percent or more of the Company’s common stock then outstanding.

The Rights will expire at the next annual meeting of the Company’s stockholders, unless the Rights are earlier redeemed or exchanged by the Company, in each case as defined in the Rights Agreement.

Common Stock Repurchases

In April 2007, the Company’s Board approved a stock repurchase program that authorized the Company to repurchase up to $100 million of the Company’s common stock through transactions on the open market, in block trades or otherwise. In February 2008, the Company’s Board of Directors approved a $100 million increase in the authorized funds for the repurchase of the Company’s common stock. At December 31, 2013, there was $80.3 million available for future stock repurchases under the program. This stock repurchase program has no expiration date. During the years ended December 31, 2013, 2012 and 2011, no shares were repurchased under this program.

Under some of the Company’s equity compensation plans, employees have the option or may be required to satisfy minimum withholding tax obligations by tendering to the Company a portion of the common stock received under the award. During the year ended December 31, 2011 (Restated), the Company received approximately 9,802 shares of its common stock in exchange for $0.1 million of minimum employee withholding liabilities paid by the Company. During the years ended December 31, 2013 and 2012, no such shares were repurchased.

Stock Incentive Plans

Under its stock incentive plans, the Company may grant stock awards or options to purchase the Company’s common stock to employees, officers, directors (subject to certain restrictions) and consultants, generally at the market price on the date of grant. Current option grants become exercisable over various periods, typically three to four years for employees and one year for non-employee directors, and have a maximum term of seven years. Restricted stock and restricted stock unit awards with time-based vesting typically vest over three to four years. Restricted stock unit awards with vesting based on performance conditions, market conditions, or a combination of performance or market conditions typically have a maximum term of approximately eleven years. Shares available for issuance under the Company’s Amended and Restated 2005 Stock Incentive Plan totaled 3,333,219 at December 31, 2013, including 523,233 shares that may alternatively be issued as awards of restricted stock or restricted stock units.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The assumed dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends and our current credit agreement precludes us from paying dividends. The expected stock-price volatility assumption is based on recent (six-month trailing) implied volatility calculations. These calculations are performed on exchange traded options of the Company’s common stock, based on the implied volatility of long-term (9- to 39-month term) exchange-traded options. The Company believes that using a forward-looking market-driven volatility assumption will result in the best estimate of expected volatility. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The assumed expected life is based on company-specific historical experience considering the exercise behavior of past grants and models the pattern of aggregate exercises.

The fair value of restricted stock and restricted stock unit awards with time-based vesting is based on the intrinsic value of the awards at the date of grant, as the awards have a purchase price of $0.01 per share.

The Company also issues stock option grants or restricted stock unit awards with vesting based on market conditions, specifically the Company’s stock price; performance conditions, generally the Company’s return on equity or operating margin; or a combination of performance or market conditions. The fair values and derived service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo valuation method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the fair values are estimated based on the intrinsic values of the awards at the date of grant, as the awards have a purchase price of $0.01 per share. For stock option grants and restricted stock unit awards with vesting based on a combination of performance or market conditions, compensation costs are recorded based on the higher estimated grant-date fair value for each vesting tranche and factored for the estimated probability of achieving the performance goals. For each stock option grant and restricted stock award with vesting based on a combination of performance or market conditions where vesting will occur if either condition is met, the related compensation costs are recognized over the shorter of the derived service period or implicit service period.

Information with respect to options granted under all stock option plans for the year ended December 31, 2013 was as follows:



	Time-Based Shares		Performance-Based Shares		Total Shares		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding at January 1, 2013	4,099,144		1,300,155		5,399,299		$17.68
Granted	208,000		1,088,000		1,296,000		$7.85
Exercised	—		—		—		$—
Forfeited or canceled	(1,069,229	)	(899,655	)	(1,968,884	)	$19.60
Options outstanding at December 31, 2013	3,237,915		1,488,500		4,726,415		$14.18	3.67	$411
Options vested at December 31, 2013 or expected to vest					4,626,329		$14.24	3.66	$402
Options exercisable at December 31, 2013					2,488,278		$17.36	2.44	$31

The performance-based stock options outstanding at December 31, 2013 will vest either upon the earlier of certain performance conditions being met or upon the Company’s stock price reaching certain amounts as defined in the agreements, or solely upon the achievement of a performance condition. The performance conditions are based upon the achievement of specified return on equity or operating margins, and the options are probable of vesting as of December 31, 2013. The stock options, however, will not become exercisable until the Company’s Board votes that the established performance conditions have been met. As of December 31, 2013, none of these performance-based options are exercisable.

The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the years ended December 31, 2013, 2012 and 2011 (Restated):



	Year Ended December 31,
			2011
	2013	2012	(Restated)
Expected dividend yield	0.00%	0.00%	0.00%
Risk-free interest rate	0.87%	0.94%	2.03%
Expected volatility	50.1%	52.8%	41.4%
Expected life (in years)	4.68	4.56	4.48
Weighted-average fair value of options granted (per share)	$3.33	$4.89	$7.54

During the years ended December 31, 2013 and 2012, the cash received from and the aggregate intrinsic value of stock options exercised was not material. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2011 (Restated) was approximately $1.1 million, and the cash received from such exercises was approximately $2.2 million. The Company did not realize a material tax benefit from the tax deductions for stock option exercises during the years ended December 31, 2013, 2012 or 2011 (Restated).

The fair value of restricted stock unit awards with time-based vesting is based on the intrinsic value of the awards at the date of grant.

Information with respect to non-vested restricted stock units for the year ended December 31, 2013 was as follows:



	Non-Vested Restricted Stock Units
	Time-Based Shares		Performance-Based Shares		Total Shares		Weighted- Average Grant-Date Fair Value	Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Non-vested at January 1, 2013	261,406		401,750		663,156		$15.73
Granted	175,000		10,000		185,000		$7.84
Vested	(155,286	)	—		(155,286	)	$14.04
Forfeited	(75,887	)	(294,250	)	(370,137	)	$16.36
Non-vested at December 31, 2013	205,233		117,500		322,733		$11.30	3.91	$2,627
Expected to vest					297,751		$11.53	4.07	$2,424

The performance-based restricted stock units outstanding at December 31, 2013 will vest either upon the earlier of certain performance conditions being met or upon the Company’s stock price reaching certain amounts as defined in the agreements, or solely upon the achievement of a performance condition. The performance conditions are based upon the achievement of specified return on equity or operating margins, and the restricted stock units are probable of vesting as of December 31, 2013. The restricted stock units, however, will not become exercisable until the Company’s Board votes that the established performance conditions have been met. As of December 31, 2013, none of these performance-based restricted stock units are vested.

The following table sets forth the weighted-average key assumptions for restricted stock units with vesting based on market conditions or a combination of performance or market conditions granted during the year ended December 31, 2011 (Restated). There were no grants of restricted stock units with vesting based on market conditions or a combination of performance or market conditions during the years ended December 31, 2013 and 2012.



	Year Ended
	December 31, 2011
	(Restated)
Expected dividend yield	0.00%
Risk-free interest rate	3.90%
Expected volatility	41.5%
Expected life (in years)	3.04

The weighted-average grant date fair value of restricted stock units granted during the years ended December 31, 2012 and 2011 (Restated) was $10.95 and $21.36, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2013, 2012, and 2011 (Restated) was $1.1 million, $2.3 million, and $4.2 million, respectively.

Employee Stock Purchase Plan

The Company’s Second Amended and Restated 1996 Employee Stock Purchase Plan (the “ESPP”) offers the Company’s shares for purchase at a price equal to 85% of the closing price on the applicable offering period termination date. Shares issued under the ESPP are considered compensatory. Accordingly, the Company is required to measure fair value and record compensation expense for share purchase rights granted under the ESPP. The Company last issued shares under the ESPP on January 31, 2013. On March 8, 2013, participation in the ESPP was suspended as a result of the restatement of the Company’s financial statements and its delays in financial reporting.

The Company uses the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the years ended December 31, 2013, 2012 and 2011 (Restated):



	Year Ended December 31,
			2011
	2013	2012	(Restated)
Expected dividend yield	0.00%	0.00%	0.00%
Risk-free interest rate	0.09%	0.08%	0.24%
Expected volatility	51.0%	51.5%	47.2%
Expected life (in years)	0.25	0.25	0.25
Weighted-average fair value of shares issued (per share)	$1.00	$1.30	$1.88

The following table sets forth the quantities and average prices of shares issued under the ESPP for the years ended December 31, 2013, 2012 and 2011 (Restated):



	Year Ended December 31,
			2011
	2013	2012	(Restated)
Shares issued under the ESPP	27,936	142,658	124,219
Average price of shares issued	$6.29	$6.96	$9.71

A total of 441,913 shares remained available for issuance under the ESPP at December 31, 2013.

Stock-Based Compensation Expense

The Company estimates forfeiture rates at the time awards are made based on historical and estimated future turnover rates and applies these rates in the calculation of estimated compensation cost. The estimation of forfeiture rates includes a quarterly review of historical turnover rates and an update of the estimated forfeiture rates to be applied to employee classes for the calculation of stock-based compensation. Forfeiture rates for the calculation of stock-based compensation were estimated and applied based on three classes, non-employee directors, executive management staff and other employees. At December 31, 2013 and 2012, the Company’s annualized estimated forfeiture rates were 0% for non-employee director awards, 10% for executive management staff and 15% for other employee awards. Then-current estimated forfeiture rates are applied quarterly to all outstanding stock options and non-vested restricted stock awards, which may result in a revised estimate of compensation costs related to these stock-based grants.

Stock-based compensation was included in the following captions in the Company’s consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011 (Restated), respectively (in thousands):



	Year Ended December 31,
					2011
	2013		2012		(Restated)
Cost of products revenues	$	360	$	410	$	487
Cost of services revenues	436		582		714
Research and development expenses	582		986		1,638
Marketing and selling expenses	1,778		3,754		4,306
General and administrative expenses	3,761		5,700		5,464
Total	$	6,917	$	11,432	$	12,609

Included in stock-based compensation expense for the years ended December 31, 2013, 2012, and 2011 (Restated) was compensation related to performance-based stock options and restricted stock units totaling $0.9 million, $2.7 million and $2.1 million, respectively, for awards that are probable of vesting.

As a result of the 2012 restructuring plan, the vesting of 121,875 stock option shares and 33,438 restricted stock unit shares were accelerated as set forth in the employment agreements for two of the Company’s former executives, resulting in $1.1 million in additional stock-based compensation recorded as marketing and selling expense during the year ended December 31, 2012. Similarly, as a result of our 2013 management transition, the vesting of 303,229 stock option shares and 72,267 restricted stock unit shares were accelerated as set forth in the employment agreements for four of the Company’s former executives, resulting in $2.2 million in additional stock-based compensation recorded primarily as general and administrative expense during the first quarter of the year ended December 31, 2013.

At December 31, 2013, there was $6.8 million of total unrecognized compensation cost, before forfeitures, related to non-vested stock-based compensation awards granted under the Company’s stock-based compensation plans. The Company expects this amount to be amortized approximately as follows: $4.5 million in 2014, $1.6 million in 2015 and $0.7 million in 2016. At December 31, 2013, the weighted-average recognition period of the unrecognized compensation cost was approximately 1.05 years.

If factors change and the Company employs different assumptions to estimate stock-based compensation expense in future periods, including changes in the probability of achieving performance conditions, or the Company decides to use a different valuation model, the stock-based compensation expense recognized in future periods may differ significantly from what has been recorded in the current period and could materially affect the Company’s operating income, net income and earnings per share. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.