Stock-Based Compensation

6 Months Ended

Jun. 30, 2012

9.	Stock-Based Compensation

The Company accounts for stock-based compensation pursuant to FASB ASC Topic 505, Share-Based Payment, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. Share-based compensation expense for the three and six months ended June 30, 2012 and 2011 includes incremental share-based compensation expense as follows:


	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2012		2011		2012		2011
Cost of goods sold	$	74	$	75	$	160	$	166
Marketing and selling		153		129		304		287
General and administrative		495		1,010		915		1,507
Research and development		222		140		472		394

Stock-based compensation	$	944	$	1,354	$	1,851	$	2,354

On April 27, 2012, the Company’s stockholders approved the adoption of the IRIS International, Inc. 2012 Omnibus Incentive Plan (the 2012 Plan) which authorizes the issuance of up to 1,750,000 shares (less the number of shares granted under any of our other equity incentive plans during the year 2012) of common stock pursuant to equity awards granted under the plan. The plan provides for the grant of equity-based awards in the form of stock options, restricted common stock, restricted stock units, stock appreciation rights, performance awards and other stock-based awards. The plan expires on April 27, 2022. The plan is administered by the Compensation Committee of the Company’s Board. After the approval of the 2012 Plan, no awards may be granted under the previous stock option plans described below.

On June 6, 2011, the Company’s board of directors adopted the IRIS International, Inc. 2011 Inducement Incentive Plan (the “2011 Inducement Plan”), which provided for the grant of equity-based awards in the form of stock options, restricted common stock, restricted stock units, stock appreciation rights and other stock-based awards solely to “New Employees” as an inducement material to the New Employee’s entering into employment with the Company or any of its subsidiaries within the meaning of Listing Rule 5635(c)(4) (or any successor thereto) of The NASDAQ Stock Market. For purposes of the 2011 Inducement Plan, a “New Employee” was any prospective employee of IRIS International or any of its subsidiaries who either (i) was not previously an employee or director of IRIS International or any of our subsidiaries or (ii) was previously an employee or director of IRIS International or any of its subsidiaries but for which there has occurred a bona fide period of non-employment. The shares authorized under the plan were 250,000 shares. The 2011 Inducement Plan terminated on April 27, 2012 upon the adoption of the 2012 Plan.

On July 13, 2007, the Company’s stockholders approved the adoption of the IRIS International, Inc. 2007 Stock Incentive Plan (the 2007 Plan), which authorized the issuance of up to 1,750,000 shares of common stock pursuant to equity awards granted under the plan. On May 22, 2009, the Company’s stockholders approved an increase of 1,550,000 shares to the 2007 Plan for a total of 3,300,000 authorized shares. The 2007 Plan authorized the grant of equity-based awards in the form of stock options, restricted common stock, restricted stock units, stock appreciation rights, performance awards and other stock-based awards. The 2007 Plan terminated on April 27, 2012 upon the adoption of the 2012 Plan.

The Company has other expired equity incentive plans, pursuant to which awards were made which remaining outstanding. No stock appreciation rights have been granted under any of the Company’s equity incentive plans.

Stock Options

The following schedule sets forth options authorized, exercised, outstanding and available for grant under the Company’s existing stock option plans as of June 30, 2012:


	Number of Option Shares (in thousands)
Plan	Authorized		Exercised		Outstanding		Available for Grant
1994 Plan		700		700		—		—
1998 Plan		4,100		2,875		103		—
2007 Plan		3,300		18		1,911		—
2011 Plan		250		—		34		—
2012 Plan		1,750		—		66		1,632

		10,100		3,593		2,114		1,632

Stock option activity during the six months ended June 30, 2012 was as follows:


(in thousands, except for per share amounts)	Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2012		2,444		$	11.78		3.9 years	$	283
Granted		88		$	12.26
Exercised		(83	)	$	7.40
Canceled or expired		(335	)	$	11.94

Outstanding at June 30, 2012		2,114		$	11.95		4.2 years	$	1,474

Exercisable at June 30, 2012		1,494		$	12.51		3.7 years	$	836

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on June 30, 2012 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 June 30, 2012. Total intrinsic value of options exercised for the six months ended June 30, 2012 amounted to $342,000. As of June 30, 2012, total unrecognized stock-based compensation expense related to unvested stock options was $2,561,000, which is expected to be recognized over the remaining weighted average period of approximately 2.02 years.

The Compensation Committee of the board of directors determines the total value of the stock-based compensation grants. The exercise price of options is the closing price on the date the options are granted. Payment of the exercise price may be made either in cash or with shares of common stock. The options generally vest over four years and expire five to ten years from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	For the three months ended June 30,
	2012		2011
Risk free interest rate		0.6%		1.7%
Expected lives (years)		4.06		3.96
Expected volatility		49.4%		50.5%
Expected dividend yield		0%		0%

The expected volatilities are based on the historical volatility of the Company’s stock. The observation is made on a weekly basis. The expected terms of the stock options are based on the average vesting period on a basis consistent with the historical experience for similar option grants. The risk-free interest rate is consistent with the expected terms of the stock options and based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeiture rates based on historical data.

A summary of the Company’s non-vested stock options during the six months ended June 30, 2012 is as follows:


(in thousands except for fair value per share)	Shares			Weighted Average Grant Date Fair Value Per Share
Non-vested options at January 1, 2012		760		$	4.55
Granted		88		$	4.82
Vested		(217	)	$	4.52
Forfeited		(11	)	$	4.63

Non-vested options at June 30, 2012		620		$	4.61

Restricted Shares

The Company began awarding restricted shares of its common stock in 2006. In March 2009, the Company began to grant restricted stock units to its non-employee directors and to certain employees. Such awards generally require that certain performance conditions and service conditions be met before the awards vest. Restricted shares currently vest 25% after one year and 6¹/₄ % quarterly thereafter. However, non-employee directors are immediately vested on the grant date. Unvested restricted shares are forfeited if the recipient’s employment terminates for any reason other than death, disability or special circumstances as determined by the Compensation Committee of the Company’s board of directors. Restricted share activity during the six months ended June 30, 2012 was as follows:


(in thousands, except for fair value per share)	Shares			Weighted Average Grant Date Fair Value Per Share
Non-vested shares at January 1, 2012		265		$	10.33
Granted		387		$	11.83
Vested		(77	)	$	10.46
Forfeited		(8	)	$	10.99

Non-vested shares at June 30, 2012		567		$	11.33

Fair value of the Company’s restricted shares is based on the Company’s closing stock price on the date of grant. As of June 30, 2012, total unrecognized stock-based compensation expense related to non-vested restricted share grants was $5,982,000 which is expected to be recognized over the remaining weighted average period of approximately 2.75 years.

Performance-based Awards

Included in the restricted stock activity discussed above are certain awards granted in 2012 that contain performance based vesting.

On February 27, 2012, the Company granted executive officers and other senior level employees, performance-based restricted stock unit awards (“PRSU”) for the potential issuance of 122,500 shares of common stock in lieu of equity awards that vest over time, which historically have comprised 100% of the long-term equity incentives granted by the Company. The PRSUs will vest only if the Company achieves certain two-year revenue and operating income growth objectives over the two-year performance period between January 1, 2012 through December 31, 2013. The PRSUs, to the extent earned, vest at a rate of two-thirds of the total award on the attainment of the performance objectives and the remaining shares in four equal quarterly installments thereafter. As of June 30, 2012, the Company believes it is probable that the prescribed performance targets will be met for these awards, and the compensation expense is being recognized accordingly. For the six months ended June 30, 2012, the compensation expense recognized for the above PRSUs was $165,000 and the unrecognized compensation expense totaled $1.27 million.

Concurrently with the grant of the 2012 PRSUs, the Company amended the Chief Executive Officer’s 2011 equity awards to convert 50% of the 2011 RSUs that were scheduled to vest after March 2012 (18,750 RSUs) and 50% of the unvested portion of his 2011 stock options (18,750 Options) to performance-based awards, with vesting contingent on the same two-year revenue and operating income growth goals as were used for the 2012 PRSU awards. His performance awards will fully vest, if at all, upon achieving the same performance objectives except that he will not be entitled to earn more than 100% of the target amount of his performance-based awards.

The amendment altered and shortened the vesting term of the modified award and added the performance criteria required for them to become fully vested. The Company accounted for the change in terms as an equity award modification, which requires the unrecognized stock compensation expense associated with the previous grant to be added to the incremental compensation cost of the new grants. The calculation of the incremental fair value was determined to be zero and consequently, no additional compensation expense was incurred on the modification date.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Staff Accounting Bulletin (SAB)

-Number Topic 14

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 50

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher AICPA

-Name Statement of Position (SOP)

-Number 93-6

-Paragraph 53

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 40

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 123R

-Paragraph 64, 65, A240

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 718

-SubTopic 10

-Section 50

-Paragraph 4

-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901

+ Details

IRIS INTERNATIONAL INC 10-Q