EQUITY INCENTIVES

9 Months Ended

Sep. 30, 2011

EQUITY INCENTIVES

EQUITY INCENTIVES

NOTE 7 — EQUITY INCENTIVES

In 2006, the Board and shareholders of the Company approved the 2006 Equity Incentive Plan (“2006 Plan”) that replaced the 2003 Equity Incentive Plan (“2003 Plan”).  In May 2010, our shareholders approved an amendment to the 2006 Plan increasing the number of shares that may be issued under the plan by 4,500,000 shares to 9,600,000 shares.  The 2006 Plan authorizes the Board, or a committee of the Board, to issue or transfer up to an aggregate of 9,600,000 shares of common stock, of which 4,116,892 remain available for issuance as of September 30, 2011.  Awards under the 2006 Plan may include incentive stock options, non-statutory stock options, restricted stock units, restricted stock awards, and stock appreciation rights (“SARs”).  At the option of the Board, SARs may be settled with cash, shares, or a combination of cash and shares.  The Company settles the exercise of other stock-based compensation with newly issued common shares.

Stock-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option pricing model and is recognized as compensation ratably on a straight-line basis over the requisite vesting/service period.  As of September 30, 2011, there was $1.7 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.4 years.

Stock Options and Stock Appreciation Rights

All stock options and SARs are approved prior to or on the date of grant.  Stock options and SARs are granted at an exercise price equal to or greater than the Company’s closing stock price on the date of grant.  Both award types vest over a period of zero to three years, or upon achievement of performance measures, with a contractual term of five years after vesting.  The Company estimates the fair value of stock options and SARs using the Black-Scholes valuation model.  Key inputs and assumptions used to estimate the fair value of stock options and SARs include the grant price of the award, expected option term, probability of performance, volatility of the Company’s stock, the risk-free interest rate and the Company’s dividend yield.  The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option or SAR granted:

Stock Option and SAR Valuation Assumptions on Nonvested Awards

Expected Life *	3.5 to 5.5 years
Interest Rate	0.67 – 3.49%	***
Volatility **	86 - 96%	***
Dividend Yields	—
Weighted Average Fair Value of Stock Options Granted During the Three Months Ending September 30, 2011	None
Weighted Average Fair Value of SARs Granted During the Three Months Ended September 30, 2011	None

*   The expected life is the number of years that the Company estimates, based upon history, that options or SARs will be outstanding prior to exercise or forfeiture.

* * The Company’s estimates of expected volatility are principally based on the historic volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options and other relevant factors.

*** The interest rate and volatility used by the Company in calculating stock compensation expense represent the values in effect at the date of grant for all awards.

At September 30, 2011, the aggregate intrinsic value of outstanding and exercisable (fully vested) options and SARs was $0.7 million and had a weighted-average remaining contractual term of 1.9 years.  The total intrinsic value of options and SARs exercised during the nine months ended September 30, 2011 was $0.6 million.

Restricted Stock Units and Stock Awards

Grants of restricted stock units and stock awards (“Stock Awards”) have been made to Board members, officers, and employees.  Stock Awards have been granted as performance based, earned over a required service period, or to Board members and the Company Secretary without any service requirement.  Time based grants for officers and employees generally vest and stock is received without restriction to the extent of one-third of the granted stock for each year following the date of grant.  Also, time based grants were offered to certain employees in connection with the cash conservation plan and vested over a period of approximately 19 months.  Performance based grants are recognized as compensation based on the probable outcome of achieving the performance condition.  Past compensation for Stock Awards issued to members of the Board that vested over time were recognized over the vesting period of one to two years.  Stock Awards issued to Board members and the Company Secretary that are fully vested at the time of issuance are recognized as compensation upon grant of the award.

The compensation expense recognized by the Company for Stock Awards is based on the closing market price of the Company’s common stock on the date of grant.  For the nine months ended September 30, 2011, the weighted average grant-date fair value of Stock Awards was $0.2 million.

Summary of Equity Incentive Awards

The following table summarizes activity under the Plan during the nine months ended September 30, 2011:

	Stock Options				SARs				Stock Awards
	Weighted Average Exercise Price		Number of Shares Under Option		Weighted Average Strike Price		Number of Shares Under Option		Weighted Average Grant Price		Number of Shares
Balance at January 1, 2011	$	5.38	2,658,323		$	3.09	912,461		$	4.24	800,392
Awards Granted	—		—		—		—		5.75		179,768
Awards Exercised or Earned	2.69		(133,333	)	1.80		(79,809	)	3.52		(546,015	)
Awards Forfeited	8.67		(26,667	)	4.34		(35,047	)	3.55		(36,667	)
Awards Expired	11.45		(13,333	)	—		—		—		—
Balance at September 30, 2011	$	5.46	2,484,990		$	3.17	797,605		$	5.92	397,478
Exercisable at September 30, 2011	$	5.40	2,329,990		$	1.78	331,983

A summary of the status of the nonvested awards as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below.

	Stock Options				SARs				Stock Awards
	Weighted Average Fair Value		Number of Shares Under Option		Weighted Average Fair Value		Number of Shares Under Option		Weighted Average Fair Value		Number of Shares
Balance at January 1, 2011	$	4.40	285,002		$	4.06	707,941		$	4.24	800,392
Awards Granted	—		—		—		—		5.75		179,768
Awards Vested or Earned	8.34		(103,335	)	1.63		(207,272	)	3.52		(546,015	)
Awards Forfeited	8.67		(26,667	)	4.34		(35,047	)	8.67		(36,667	)
Balance at September 30, 2011	$	6.25	155,000		$	4.16	465,622		$	5.92	397,478

Compensation Cost Recognized and Capitalized Related to Equity Incentives

Summary of Compensation Cost Recognized and Capitalized related to Equity Incentives for the Nine Months Ended September 30 (in thousands):	2011			2010
Stock Options*	$	(49	)	$	91
SARs				591
Performance based	127			—
Vesting over time	486			—
Stock Awards:
Performance based*	(58		)	—
Vesting over time	405			582
Board and Company Secretary	810			390
Total	$	1,721		$	1,654
Included in:
Capitalized as Development	165			714
Expensed	1,556			940
	$	1,721		$	1,654

* The Company recorded significant forfeitures during the first and third quarter of 2011 related to unvested options of terminated employees and performance-based restricted shares forfeited as a result of the failure to achieve certain associated milestones required for vesting.

Taxes

A portion of the Company’s granted options are intended to qualify as incentive stock options (“ISO”) for income tax purposes.  As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition.  Stock option grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.