9. SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

PREFERRED STOCK

The Company’s shareholders have authorized the Board of Directors to issue 5,000,000 shares of currently undesignated preferred stock from time to time in one or more series and to fix the rights, privileges and restrictions of each series. As of September 26, 2015, the Company has issued no shares of preferred stock.

STOCK OPTION PLANS

As of September 26, 2015 the Company had three stock incentive plans and one employee stock purchase plan, including the 2001 Stock Option Plan, 2004 Stock Incentive Plan, 2014 Stock Award and Incentive Compensation Plan (collectively, the “Plans”) and the 2010 Employee Stock Purchase Plan (“ESPP”).

Under the Plans, the Company has reserved an aggregate of 6.2 million shares of common stock as of September 26, 2015 for issuance to employees, officers, directors, independent contractors and consultants of the Company in the form of incentive or nonqualified stock options, or grants of restricted or performance stock units.

The Company may grant stock options at the fair value on the grant date for incentive stock options and nonqualified stock options. Options vest over periods of generally 48 months as determined by the Board of Directors. Options granted under the Plans expire 10 years from the grant date.

The Company estimates the fair value of each employee stock option on the date of grant using the Black-Scholes option valuation model and expenses that value as compensation using a straight-line method over the option’s vesting period, which corresponds to the requisite employee service period. The Company estimates expected stock price volatility based on actual historical volatility for periods that the Company believes represent predictors of future volatility. The Company uses historical data to estimate option exercises, expected option holding periods and option forfeitures. The Company bases the risk-free interest rate for periods within the contractual life of the option on the U.S. Treasury yield corresponding to the expected life of the underlying option.

The Company’s did not grant any stock options under its Plans during the three month periods ended September 26, 2015 or September 27, 2014.

The following table summarizes the Company’s stock option activity for the three months ended September 26, 2015:

					Weighted
					Average
			Weighted		Remaining	Aggregate
			Average		Contractual	Intrinsic
	Shares		Exercise		Term	Value
	(in thousands)		Price		(years)	(in thousand)
Options outstanding as of June 27, 2015	1,249		$	10.92	4.67	$	4,501

Granted	-			-
Exercised	(14	)		11.19
Cancelled or expired	-			-
Options outstanding as of September 26, 2015	1,235		$	10.92	4.44	$	7,872

Options vested and expected to vest as of September 26, 2015	1,222		$	10.95	4.40	$	7,759
Options exercisable as of September 26, 2015	1,050		$	11.29	3.76	$	6,302

As of September 26, 2015, 2.9 million shares were available for future grants under the incentive plans. The aggregate intrinsic value of options exercised during the three months ended September 26, 2015 was $78,000.

As of September 26, 2015, expected future compensation expense relating to options outstanding is $626,000, which will be amortized to expense over a weighted average period of 2.0 years.

Additional information regarding options outstanding and exercisable as of September 26, 2015 is as follows:

				Options Outstanding				Exercisable Options
					Weighted
				Number	Average	Weighted		Number	Weighted
				Outstanding as	Remaining	Average		Exercisable as	Average
Range of Exercise				of September	Contractual	Exercise		of September	Exercise
Prices				26, 2015	Term	Price		26, 2015	Price
$	5.48	$	8.10	249,000	6.77	$	7.65	158,000	$	7.62
	8.11		8.85	261,000	4.50		8.56	231,000		8.54
	8.86		10.25	254,000	4.84		9.83	211,000		9.96
	10.26		15.45	305,000	3.39		13.56	284,000		13.61
	15.46		18.10	166,000	2.14		16.36	166,000		16.36
$	5.48	$	18.10	1,235,000	4.44	$	10.92	1,050,000	$	11.29

Restricted Stock Units and Performance Stock Units

Restricted stock units (“RSUs”) and performance stock units (“PSUs”) are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs and PSUs is subject to the employee’s continuing service to the Company. RSUs generally vest over a period of 4 years and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures. PSUs are granted to executives of the Company and will vest in approximately 12 months subject to the achievement of certain financial metrics of the Company as well as each participant’s performance goals established at the beginning of the fiscal year. The fair value of RSUs and PSUs granted pursuant to the Company’s 2014 Stock Incentive Plan is the product of the number of shares granted and the grant date fair value of the common stock. A summary of activity of RSUs and PSUs for the three months ended September 26, 2015 is presented below:

					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
			Award		Contractual	Value
	Shares		Date Fair		Term	(in
	(in thousands)		Value		(years)	thousands)
RSUs and PSUs outstanding as of June 27, 2015	769		$	9.76	1.33	$	10,792

Awarded	334			14.64
Released	(174	)		9.17
Forfeited	(3	)		10.66
RSUs and PSUs outstanding as of September 26, 2015	926		$	11.63	1.54	$	15,990

RSUs and PSUs expected to vest after September 26, 2015	790		$	11.41	1.40	$	13,653

Of the 334,000 shares awarded during the three months ended September 26, 2015, 235,000 shares were RSUs while the remaining shares awarded were PSUs. As of September 26, 2015, expected future compensation expense relating to RSUs and PSUs is $7.2 million, which will be amortized to expense over a weighted average remaining recognition period of 2.6 years.

2010 EMPLOYEE STOCK PURCHASE PLAN

The Company’s ESPP allows eligible employees of the Company to purchase shares of common stock through payroll deductions. The Company reserved 2.0 million shares of the Company’s common stock for issuance under this Plan, of which 1.5 million remain available at September 26, 2015. The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during six-month purchase periods. The six-month periods come to an end on or about May 1 and November 1 and the purchases are then made. Thus there were no purchases under the ESPP for the three month periods ended September 26, 2015 and September 27, 2014. Participants in the ESPP may purchase stock at 85% of the lower of the stock’s fair market value on the first day and last day of the offering period. The maximum number of shares of Common Stock that any employee may purchase during any offering period under the plan is 1,500 shares, and an employee may not accrue more than $15,000 for share purchases in any offering period.

The Company estimates the fair value of stock purchase rights granted under the Company’s ESPP on the date of grant using the Black-Scholes option valuation model. Accounting Standards Codification (“ASC“) Topic 718, Compensation – Stock Compensation, states that a “lookback” pricing provision with a share limit should be considered a combination of stock and a call option. The valuation results for these elements have been combined to value the specific features of the stock purchase rights. The Company bases volatility on the expected volatility of the Company’s stock during the offering period. The expected term is determined by the time from enrollment until purchase, and the Company uses the U.S. Treasury yield for the risk-free interest rate for the offering period.

At September 26, 2015, the Company had $19,000 in unamortized share-based compensation related to its ESPP which will be amortized and recognized in the consolidated statement of operations over the next month.

SHARE-BASED COMPENSATION

The following table shows total share-based compensation expense classified by Consolidated Statements of Operations reporting caption for the three month periods ended September 26, 2015 and September 27, 2014 generated from the plans described above:

	Three Months Ended
	September 26,		September 27,
(in thousands)	2015		2014
Cost of goods sold	$	63	$	33
Research and development		287		218
Selling, general and administrative		610		458
Pre-tax share-based compensation expense		960		709
Income tax impact		321		230
Net share-based compensation expense	$	639	$	479

The amount of share-based compensation expense capitalized in inventory as of September 26, 2015 and June 27, 2015 is immaterial.