Stock-Based Compensation

Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands) (Unaudited)
General and administrative expense	$	510	$	317	$	1,808	$	1,546
	$	510	$	317	$	1,808	$	1,546

The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected term of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility measured using weekly price observations of the Company’s common stock for a period equal to the stock option’s expected term.

At September 30, 2013, the Company had outstanding options that vest based on three different types of vesting schedules:



1)	market–based;
2)	performance-based; and
3)	service-based.

Market-based awards entitle participants to vest in a number of options determined by achievement by the Company of certain target market capitalization increases (measured by reference to stock price increases on a specified number of outstanding shares) over an eight-year period. The requisite service periods for the market-based awards are based on the Company’s estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if market capitalization targets are achieved earlier than estimated. During the nine months ended September 30, 2013 and 2012, respectively, the Company did not issue any market-based option awards to employees. During the nine months ended September 30, 2013 and 2012, respectively, no options vested based on achievement of market capitalization targets. During the three months ended September 30, 2013, 499 thousand unvested market-based awards expired by their terms. The Company recorded compensation expense related to market-based option awards of $0.0 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at September 30, 2013 attainable under these grants was 457 thousand shares.

Performance-based awards entitle participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies. Vesting may occur, if at all, once per year. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. During the nine months ended September 30, 2013 and 2012, respectively, the Company did not issue any performance-based awards to employees. During the nine months ended September 30, 2013 and 2012, respectively, 0 and 14 thousand performance-based awards vested. During the nine months ended September 30, 2013 and 2012, respectively, 16 thousand and 0 performance-based awards were canceled or forfeited. The Company recorded compensation expense related to performance-based option awards of $0.1 million and $0.0 million for the three months ended September 30, 2013 and 2012, respectively, and $0.3 million and $0.1 million for the nine months ended September 30, 2013 and 2012, respectively. The maximum number of unvested shares at September 30, 2013 attainable under these option grants was 795 thousand shares.

All other outstanding options are service-based awards that generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. During the nine months ended September 30, 2013 and 2012, respectively, the Company issued 39 thousand and 46 thousand service-based option awards to employees. The Company recorded compensation expense related to service-based option awards of $0.2 million and $0.1 million for the three months ended September 30, 2013 and 2012, and $0.4 million and $0.5 million for the nine months ended September 30, 2013 and 2012, respectively.

During the nine months ended September 30, 2013 and 2012, respectively, the Company issued 46 thousand and 23 thousand deferred stock units to non-employee directors for annual service grants or fees earned during the preceding quarter. Deferred stock units issued to directors in lieu of directors fees are 100% vested at the grant date; matching deferred stock units equal to 25% of directors’ fees deferred vest one year following the grant date or, if earlier, upon reaching age 65. Deferred stock units are payable in stock on a one-for-one basis. Payments related to the deferred stock units are generally distributable following termination of employment or service, death or permanent disability.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was approximately $0.3 million and $0.1 million for the three months ended September 30, 2013 and 2012, and $1.0 million and $0.6 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2012, the Company issued five thousand unrestricted shares to members of its advisory board, and recorded expense of $0.1 million related to these awards.