Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation [Abstract]

Stock-Based Compensation

4. Stock-Based Compensation

Stock Plans

On July 28, 2005, our Shareholders approved the 2005 Stock Option / Stock Issuance Plan (“2005 Plan”). The 2005 Plan, which became effective the same date, replaced the 1995 Stock Option / Stock Issuance Plan (“1995 Plan”), which expired on May 24, 2005. All outstanding options under the 1995 Plan remained outstanding, but no further grants will be made under that Plan.

The 2005 Plan provides for the issuance of non-qualified or incentive stock options and restricted stock to employees, non-employee members of the board and consultants. The exercise price per share for options is not to be less than the fair market value per share of the Company’s common stock on the date of grant. The Board of Directors has the discretion to determine the vesting schedule. Options may be exercisable immediately or in installments, but generally vest over a four-year period from the date of grant. In the event the holder ceases to be employed by the Company, all unvested options terminate and all vested options may be exercised within a period following termination. In general, options expire ten years from the date of grant. Restricted stock is valued using the closing stock price on the date of the grant. The total value is expensed over the vesting period of 12 to 48 months. The maximum number of shares of the Company’s common stock that were available for issuance over the term of the original 2005 Plan could not exceed 5,000,000 shares, plus that number of additional shares equal to 2.5% of the number of shares of common stock outstanding on the last trading day of the calendar year commencing with calendar year 2006 (but not in excess of 750,000 shares). On October 11, 2007, our shareholders voted to approve an amendment to the 2005 Plan to increase the maximum number of shares of common stock that may be issued under the 2005 Plan from 5,000,000 shares (plus an annual increase) to 7,000,000 shares (plus an annual increase).

Employee Stock Purchase Plan

The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning and end of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 10% of the employee’s compensation and employees may not purchase more than the lesser of $25,000 of stock, or 1,000 shares, for any calendar year. Additionally, no more than 1,000,000 shares may be purchased under the plan.

Stock Compensation Expense

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation.

Stock-based non-cash compensation expenses related to stock options, restricted stock grants and the employee stock purchase plan were recorded in the financial statements as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(unaudited)				(unaudited)
Cost of revenues	$	5	$	23	$	27	$	76
Selling and marketing		336		627		1,431		1,890
Research and development		153		615		1,003		1,817
General and administrative		661		1,079		2,670		3,229
Total non-cash stock compensation expense	$	1,155	$	2,344	$	5,131	$	7,012

Total stock-based compensation for each quarter includes cash payment of income taxes related to grants of restricted stock in the amount of $0.1 million and $0.4 million in the three months ended September 30, 2011 and 2010, respectively. The cash payment of income taxes related to grants of restricted stock totaled $1.4 million and $1.5 million for the nine months ended September 30, 2011 and 2010, respectively.

Valuation of ESPP

The Company’s first offering period began October 1, 2010 and ended March 31, 2011 and a total of 43,335 shares were purchased on March 31, 2011 with a fair value of $3.98 per share. The Company’s latest six-month offering period began on April 1, 2011 and ended on September 30, 2011 and a total of 52,425 shares were purchased in the offering period with a fair value of $3.61 per share. The fair values are estimated at the beginning of each offering period using a Black-Scholes valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. Expected volatility was based on the historical volatility on the day of grant.

Assumptions	Offering Period Ended March 31, 2011			Offering Period Ended September 30, 2011
Risk-free interest rate (average)		0.18	%		0.12	%
Expected dividend yield		—			—
Weighted average expected life (years)		0.5			0.5
Volatility (average)		72.0	%		72.0	%

Stock Options

There were no stock options granted during the three months ended September 30, 2011 and 2010. There were stock options to purchase 25,000 shares granted during the nine months ended September 30, 2011 with a weighted average grant-date fair value of $1.16. There were stock options to purchase 20,000 shares granted during the nine months ended September 30, 2010 with a weighted average grant-date fair value of $2.97. The assumptions used to compute the stock-based compensation costs for the stock options granted during the nine months ended September 30, 2011 and 2010, using the Black-Scholes option pricing model, were as follows:

	Nine Months Ended September 30,
Assumptions	2011			2010
	(unaudited)
Risk-free interest rate (average)		0.19	%		0.32	%
Expected dividend yield		—			—
Weighted average expected life (years)		1.0			1.0
Volatility (average)		73.0	%		72.0	%
Forfeiture rate		—			—

A summary of the Company’s stock options outstanding under the 2005 Plan as of September 30, 2011, and the activity during the nine months then ended, are as follows:

	Shares			Weighted Ave. Exercise Price		Aggregate Intrinsic Value
	(in thousands except per share amounts)
Outstanding as of December 31, 2010		2,706		$	11.69
Granted (unaudited)		25		$	4.07
Exercised (unaudited)		(7	)	$	1.84
Cancelled (unaudited)		(331	)	$	14.07
Outstanding as of September 30, 2011 (unaudited)		2,393		$	11.31	$	—
Exercisable as of September 30, 2011 (unaudited)		2,388		$	11.31	$	—

During the nine months ended September 30, 2011, options to acquire 6,688 shares were exercised with an intrinsic value of zero, resulting in cash proceeds to the Company of $12,000. As of September 30, 2011, all compensation costs related to stock options granted under the Plan have been recognized. At September 30, 2011, there were 1.8 million shares available for future grants under the 2005 Stock Issuance / Stock Option Plan.

Additional information regarding options outstanding as of September 30, 2011 is as follows:

			Options outstanding			Options exercisable
Range of exercise prices	Number outstanding (in thousands)		Weighted average remaining contractual life (years)	Weighted average exercise price		Number exercisable (in thousands)		Weighted average exercise price
$0.24 - $4.00		157	2.5	$	1.62		157	$	1.62
$4.01 - $6.00		470	4.0	$	4.93		470	$	4.93
$6.01 - $12.00		179	6.0	$	8.81		174	$	8.85
$12.01 - $14.00		785	5.4	$	12.65		785	$	12.65
$14.01 - $16.00		515	5.5	$	15.17		515	$	15.17
$16.01 - $19.00		287	5.6	$	17.95		287	$	17.95
		2,393	5.0	$	11.31		2,388	$	11.31

Restricted Stock Awards

Grants of restricted stock are valued using the closing stock price on the date of grant. In the nine months ended September 30, 2011, a total of 0.9 million shares of restricted stock, with a total value of $8.4 million, were granted to key officers and employees of the Company. This cost will be amortized over a period of 48 months. In addition, 70,000 shares of restricted stock, with a total value of $0.4 million, were granted to members of the Board of Directors. This cost will be amortized over a period of 12 months.

A summary of the Company’s restricted stock awards outstanding under the 2005 Plan as of September 30, 2011, and the activity during the nine months then ended, are as follows (in thousands):

	Shares
Unvested at December 31, 2010		1,604
Granted (unaudited)		985
Cancelled/forfeited (unaudited)		(266	)
Vested (unaudited)		(638	)
Unvested at September 30, 2011 (unaudited)		1,685