(7)Capital Transactions

 

Dividends

 

The declaration of future dividends is subject to the discretion of the Company’s Board of Directors and will depend upon various factors, including the Company’s earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its Board of Directors.

 

On March 17, 2014, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,618 that was paid on April 7, 2014, to shareholders of record on March 28, 2014. On May 7, 2014, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,619 that was paid on June 2, 2014, to shareholders of record on May 21, 2014.

 

Share Repurchase Program

 

On August 8, 2013, the Board of Directors authorized a $10,000 share repurchase program to be implemented over two years. Such purchases may be made in the open market, through block trades, in privately negotiated transactions or otherwise. The timing and amount of any shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors and the program may be discontinued or suspended at any time. Due to a blackout period beginning in mid-December 2013 and the subsequent negotiations with Fosun Pharma for a strategic alliance, the Company has not repurchased any shares of its common stock under the share repurchase program in 2014. At June 30, 2014, the remaining balance available for repurchases under the program was $7,454.

 

Share-Based Compensation

 

Stock option activity for the six months ended June 30, 2014, is as follows:

 

 

The Company’s outstanding stock options include time-based stock options, which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date; performance-based stock options, which have already vested upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options; performance-based stock options, which vest upon achieving cumulative annual net sales revenue growth targets over a rolling two-year period, subject to the Company maintaining at least an eight percent operating income margin during the applicable period; and performance-based stock options, which vest upon achieving annual net sales targets over a rolling one-year period.

 

During the six-month period ended June 30, 2014, the Company issued options to purchase 258 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of time-based stock options. These options were issued with a weighted-average exercise price of $15.38 per share and a weighted-average grant date fair value of $6.53 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the six-month period ended June 30, 2014:

 

 

Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average U.S. Treasury bill rate that corresponds with the option life.  The dividend yield is based on the Company’s historical and expected amount of dividend payouts, at the time of grant. On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. The Company has excluded this special one-time cash dividend from the dividend yield used in the Black-Scholes option-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from time-based stock options for the three-month periods ended June 30, 2014 and 2013, was approximately $719 and $729, respectively; the related tax benefit was approximately $284 and $288, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 2014 and 2013, was approximately $1,616 and $1,803, respectively; the related tax benefit was approximately $638 and $712, respectively. As of June 30, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $3,293 and $3,294, respectively. As of June 30, 2014, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 1.9 years.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the six-month period ended June 30, 2014.  Should the Company attain all of the net sales revenue metrics related to the net sales revenue performance-based stock option grants, the Company would recognize up to $800 of potential share-based compensation expense.

 

At June 30, 2014, the aggregate intrinsic value of outstanding stock options to purchase 2,144 shares of common stock, exercisable stock options to purchase 1,096 shares of common stock and stock options to purchase 869 shares of common stock that are expected to vest was $8,975, $6,498 and $2,353, respectively. At December 31, 2013, the aggregate intrinsic value of outstanding options to purchase 1,926 shares of common stock, the exercisable options to purchase 838 shares of common stock, and options to purchase 905 shares of common stock expected to vest was $9,415, $6,069 and $3,179, respectively.

 

Restricted stock unit activity for the period ended June 30, 2014 is as follows:

 

 

During the six-month period ended June 30, 2014, the Company issued 140 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Company’s Board, executive officers and other employees. The RSUs were issued with a weighted average grant date fair value of $13.85 per share and vest in annual installments over a four year period from the grant date.

 

RSUs are valued at the market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period.  For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 17.5 percent for a common share.

 

Share-based compensation expense from RSUs for the three-month periods ended June 30, 2014 and 2013, was approximately $269 and $52, respectively; the related tax benefit was approximately $106 and $18, respectively. Share-based compensation expense from RSUs for the six-month periods ended June 30, 2014 and 2013, was approximately $466 and $127, respectively; the related tax benefit was approximately $184 and $44, respectively. As of June 30, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $1,533 and $62, respectively. As of June 30, 2014, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.1 years.