Share-Based Payment

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation—Stock Compensation,” in the fiscal year beginning January 1, 2006, using the modified prospective application transition method. Under ASC 718, the Company records in its consolidated statements of operations (i) compensation cost for options granted, modified, repurchased or cancelled on or after January 1, 2006 under the provisions of ASC 718 and (ii) compensation cost for the unvested portion of options granted prior to January 1, 2006 over their remaining vesting periods using the amounts previously measured under ASC 718 for pro forma disclosure purposes.

The Company has elected to follow the alternative transition method as described in ASC 718 for computing its beginning additional paid-in capital pool. In addition, the Company treats the tax deductions from stock options as being realized when they reduce taxes payable in accordance with the principles and timing under the relevant tax law.

Stock Option Plans and Awards

In November 1999, the Company adopted an employee stock option plan (as amended and restated, the “1999 Equity Plan”) pursuant to which options and awards with respect to a total of 2,205,000 shares have become available for grant. As of June 30, 2013, a total of 556,124 shares remained available for grant under the 1999 Equity Plan. Options are granted with exercise prices equal to the fair value of the Company’s common stock at the date of grant, except as noted below. All options have 10-year terms. Options granted after January 1, 2008 are time options, typically vesting 25% each year, over four years. For options granted prior to January 1, 2008, initial stock option grants were comprised 50% of “time options” and 50% of “performance options.” The time options have a five-year vesting schedule, vesting 20% per year. The performance options cliff vest after eight years; however, in the event certain operating performance targets are met, up to 20% of the performance options may vest each year, accelerating the vesting period up to five years. During the year ended December 31, 2012, there were no options in which vesting was accelerated. During the quarter and six months ended June 30, 2013, there were no options in which vesting was accelerated. Prior to January 1, 2008, subsequent stock options granted under the 1999 Equity Plan to employees were always time options which vest 5% in the first year, 20% in the second year and 25% in years three through five.

The Company uses the Black-Scholes option pricing model to value the compensation expense associated with share-based payment awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the table below. In addition, forfeitures are estimated when recognizing compensation expense and the estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The Company records share-based payments for stock options granted with exercise prices below the fair value of the Company’s common stock at the date of grant and for certain stock options subject to amended performance targets under the 1999 Equity Plan, as discussed below.

The following weighted average assumptions were used in the estimated grant date fair value calculations for stock option awards:



	Quarter Ended June30,
	2012		2013
Risk free interest rate	0.97	%	1.06	%
Expected dividend yield	—	%	—	%
Expected stock price volatility	62.3	%	65.7	%
Average expected life (in years)	6.02		5.99

Through March 31, 2012, the expected stock price volatility rates are based on the historical volatility of the Company’s common stock and peer implied volatility. The average expected life, representing the weighted-average period of time that options or awards granted are expected to be outstanding, is calculated using the simplified method described in ASC 718, as the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected terms and experienced a change in the types of employees that receive share grants. Beginning with the second quarter of 2012, the Company changed its calculation methodology for its stock price volatility and average expected life, which are now based on its own historical data. The risk free interest rates have been, and continue to be, based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or award.

The following table summarizes the Company’s stock option activity:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012	772,496		$	18.57
Granted	48,350		12.53
Exercised	(3,665	)	6.20
Canceled	(53,330	)	33.37
Outstanding at June 30, 2013	763,851		$	17.22	7.11	$	4,486
Vested and expected to vest in the future at June 30, 2013	740,226		$	17.29	7.10	$	4,344
Exercisable at June 30, 2013	467,486		$	22.75	6.08	$	2,074

The weighted average grant date fair value of options granted during the six months ended June 30, 2012 and 2013 was $3.15 per share and $7.42 per share, respectively. Total stock options exercised was 3,665 during the six months ended June 30, 2013. There were no options exercised during the six months ended June 30, 2012.

The following table summarizes the Company’s unvested stock option activity:



	Shares		Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2012	430,915		$	4.90
Granted	48,350		7.42
Vested	(181,899	)	5.65
Canceled	(1,001	)	3.53
Unvested at June 30, 2013	296,365		$	4.83

At June 30, 2013, the total unrecognized fair value share-based payment related to unvested stock options granted to both employees and non-employees was $1,025, which is expected to be recognized over a remaining weighted-average period of 1.89 years. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected forfeiture rate and performance targets. Therefore, the amount of unrecognized share-based payment noted above does not necessarily represent the value that will ultimately be realized by the Company in the consolidated statements of operations and comprehensive income (loss). The total fair value of shares vested during the six months ended June 30, 2012 and 2013 was $1,376 and $1,029, respectively.

Restricted Stock Awards

The 1999 Equity Plan, as amended and restated, permits the award of restricted stock, restricted stock units, stock bonus awards and performance-based awards. During 2011, the Company granted 57,887 awards to certain employees of the Company. Of the awards granted in 2011, 4,887 cliff vest after one year provided that the employee remains continuously employed through the issuance date, 52,000 cliff vest after three years provided that the employee remains continuously employed through the issuance date and 1,000 cliff vest after one year provided that the employee meets certain performance criteria and remains continuously employed through the issuance date. During 2012, 57,544 shares of restricted stock were granted to employees and non-employee directors. Of the 57,544 shares granted in 2012, 38,075 were granted to employees, which either cliff vest after one year, or vest annually in 33.3% increments over three years. Non-employee directors were granted 19,469 shares of restricted stock for their services in 2012. The Company grants restricted stock awards to non-employee directors of the Company who are unaffiliated with Oaktree Capital Management, LLC (“Oaktree”) and MTS Health Investors, LLC (“MTS”) (“unaffiliated directors”). These awards to unaffiliated directors cliff vest after one year based on the unaffiliated directors’ continued service with the Company through that date. During 2011, the Company granted 44,310 restricted stock awards to unaffiliated directors. There have been no grants of restricted stock awards made to independent directors in 2013. For the six months ended June 30, 2012 and 2013, the Company recorded share-based payment related to restricted stock awards of $(724) and $251, respectively. The expense reversal in 2012 was due to the forfeiture of 325,000 unvested shares granted in 2010 to the Company's now-former Chief Executive Officer. Total historical expense recorded through March 31, 2012 in connection with this grant was $1,376, which all reversed during the quarter ended June 30, 2012. The weighted-average grant-date fair value of restricted stock awards granted during the six months ended June 30, 2012 was $5.00 per share. The weighted-average grant-date fair value of restricted stock awards granted during the six months ended June 30, 2013 was $6.38 per share.

The following table summarizes the Company’s unvested restricted stock activity:



	Shares		Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2012	104,544		$	4.65
Granted	11,999		6.38
Vested	(11,107	)	5.20
Canceled	(2,000	)	20.70
Unvested at June 30, 2013	103,436		$	4.48

At June 30, 2013, the total unrecognized fair value share-based payment related to restricted stock awards granted to employees was $326, which is expected to be recognized over a remaining weighted-average period of 1.05 years. At June 30, 2013, the total unrecognized fair value share-based payment related to the restricted stock awards granted to unaffiliated directors was $80, which is expected to be recognized over a remaining weighted-average period of 0.50 years. The unaffiliated directors will each receive a restricted stock award on December 31, 2013 and each December 31 thereafter (the “Grant Date”) of the number of shares of common stock having a value equal to $40, rounded down to the nearest whole share, and calculated using the average share price of the Company’s stock over the 15-day period preceding the Grant Date. Such restricted stock awards will fully vest one year after the Grant Date based on the continued service of the non-employee director through the vesting date. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized share-based payment noted above does not necessarily represent the amount that will ultimately be realized by the Company in the statements of operations and comprehensive income (loss).