STOCK-BASED COMPENSATION

The Company currently has one active plan, the Third Amended and Restated Tree.com 2008 Stock and Annual Incentive Plan (the "Equity Award Plan"), under which future awards may be granted, which currently covers outstanding stock options to acquire shares of the Company's common stock and RSUs, and provides for the future grants of these and other equity awards. Under the Equity Award Plan, the Company is authorized to grant stock options, RSUs and other equity-based awards for up to 3.35 million shares of Tree.com common stock to employees, officers and directors. This Equity Award Plan also governs certain equity awards of IAC that were converted into equity awards of Tree.com in connection with the spin-off.

The Equity Award Plan has a stated term of ten years and provides that the exercise price of stock options granted will not be less than the market price of the common stock on the grant date. The Equity Award Plan itself does not specify grant dates or vesting schedules, as those determinations are delegated to the Compensation Committee of the board of directors. Each grant agreement reflects the vesting schedule for that particular grant, as determined by the Compensation Committee.

Prior to the 2008 spin-off from IAC, employees received equity awards that were granted under various IAC stock and annual incentive plans. Upon spin-off, these IAC awards were converted into awards of both Tree.com and other former IAC companies, which vested in 2012.

Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations (in thousands):



	Year Ended December 31,
	2013			2012
Cost of revenue	$	13		$	6
Selling and marketing expense	931			750
General and administrative expense	3,841			3,205
Product development	842			626
Total non-cash compensation expense before income taxes	$	5,627		$	4,587
Income tax benefit	(2,223		)	(1,812		)
Total non-cash compensation expense after income taxes	$	3,404		$	2,775

As of December 31, 2013, there was approximately $0.2 million, $5.6 million, $2.3 million and $0.1 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, RSUs, restricted stock, and restricted stock with a market condition, respectively. These costs are expected to be recognized over a weighted-average period of approximately 1.0 year for stock options, 1.9 years for RSUs, 2.6 years for restricted stock and 0.1 years for restricted stock with a market condition.

Stock Options

A summary of the changes in outstanding stock options is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
			(per option)		(in years)	(in thousands)
Outstanding at December 31, 2012	1,072,503		$	8.97
Granted	—		—
Exercised ^(b)	(31,642	)	8.38
Forfeited	—		—
Expired	(1,862	)	11.53
Outstanding at December 31, 2013	1,038,999		$	8.98	4.8	$	24,788
Options exercisable	887,707		$	9.34	4.2	$	20,865

(a)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $32.84 on the last trading day of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2013. The intrinsic value changes based on the fair market value of the Company's common stock.

(b)

Upon exercise, the intrinsic value represents the pre-tax difference between the Company's closing stock price on the exercise date and the exercise price, multiplied by the number of stock options exercised. During the years ended December 31, 2013 and 2012, the total intrinsic value of stock options that were exercised was $0.4 million and $0.3 million, respectively. Cash received from stock option exercises and the related actual tax benefit realized were $0.3 million and $0.2 million for the year ended December 31, 2013 and $0.7 million and $0.1 million for the year ended December 31, 2012.

All stock options granted during 2012 were granted to the Chairman and CEO with a weighted average grant date fair value per share of $3.63 and vest over a period of three years from their respective grant date. For purposes of determining stock-based compensation expense, the grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model, which requires the use of various key assumptions, including the following:



Expected term ⁽¹⁾	7.0 years
Expected dividend ⁽²⁾	—
Expected volatility ⁽³⁾	45	%
Risk-free interest rate ⁽⁴⁾	2.0	%


(1)	The expected term of stock options granted is based on analyses of historical employee termination rates and option exercise patterns, giving consideration to expectations of future employee behavior.


(2)	For all stock options granted in 2012, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of common stock of a peer group over the expected term.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

Substantially all options outstanding at December 31, 2013 are vested or are expected to vest over a weighted-average period of approximately 1.0 year. During the years ended December 31, 2013 and 2012, the total fair value of options vested was $3.2 million and $0.3 million, respectively.

A summary of the information about stock options outstanding and exercisable is as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Exercisable	Weighted Average Exercise Price
		(in years)	(per option)			(per option)
$0.01 to $4.99	164	0.2	$	2.61	164	$	2.61
$5.00 to $7.45	304,183	7.7	6.65		152,891	6.39
$7.46 to $9.99	601,783	4.0	8.46		601,783	8.46
$10.00 to $14.99	6,081	0.7	12.24		6,081	12.24
$15.00 to $19.99	80,125	1.4	15.00		80,125	15.00
$20.00 to $20.19	46,663	1.4	20.19		46,663	20.19
Options at December 31, 2013	1,038,999	4.8	$	8.98	887,707	$	9.34

Restricted Stock Units and Restricted Stock

A summary of the changes in outstanding nonvested RSUs and restricted stock is as follows:



	RSUs				Restricted Stock				Restricted Stock Market Condition
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value
			(per share)				(per share)			(per share)
Nonvested at December 31, 2012	757,111		$	9.09	187,501		$	7.44	—	—
Granted ^(a)(b)	310,445		18.75		119,500		22.47		62,500	13.93
Vested ^(c)(d)	(357,078	)	8.76		(187,501	)	7.44		—	—
Forfeited	(111,356	)	10.66		—		—		—	—
Nonvested at December 31, 2013	599,122		$	14.15	119,500		$	22.47	62,500	13.93


(a)	The grant date fair value per share of the RSUs and restricted stock is calculated as the closing market price of Tree.com's common stock the day preceding the grant date.


(b)	The grant date fair value per share of the restricted stock with an underlying market condition was calculated using a Monte Carlo simulation model. These shares vest based on the achievement of a market-based performance target within three years, but not earlier than one year from the grant date. The fair value on grant date is recognized over the requisite service period.


(c)	The total fair value of RSUs that vested during the years ended December 31, 2013 and 2012 was $7.5 million and $4.3 million, respectively.


(d)	The total fair value of restricted stock that vested during the years ended December 31, 2013 and 2012 was $3.2 million and $0.8 million, respectively.