Stock-Based Compensation

1999 Stock Plan

In September 1999, the Company adopted the 1999 Stock Plan (the “1999 Plan”). Under the 1999 Plan, the Company issued shares of common stock and options to purchase common stock to employees, directors and consultants. Options granted under the Plan were incentive stock options or non-qualified stock options. Incentive stock options (“ISO”) were granted only to Company employees, which includes officers and directors of the Company. Non-qualified stock options (“NSO”) and stock purchase rights were able to be granted to employees and consultants. Options under the Plan were to be granted at prices not less than 85% of the deemed fair value of the shares on the date of the grant as determined by the Company’s Board of Directors (“the Board”), provided, however, that (i) the exercise price of an ISO and NSO was not less than 100% and 85% of the deemed fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% stockholder was not less than 110% of the deemed fair value of the shares on the date of grant. The Board determined the period over which options became exercisable. The term of the options was to be no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. Options granted under the 1999 Plan generally vested over four years. The Board of Directors determined that no further grants of awards under the 1999 Plan would be made after the Company’s IPO.

2006 Equity Incentive Plan

In June 2006, the Board adopted, and in September 2006 the Company’s stockholders approved, the 2006 Equity Incentive Plan (the “2006 Plan”), and all shares of common stock available for grant under the 1999 Plan transferred to the 2006 Plan. The 2006 Plan provides for the grant of ISOs to employees (including officers and directors who are also employees) of the Company or of a parent or subsidiary of the Company, and for the grant of all other types of awards to employees, officers, directors, consultants, independent contractors and advisors of the Company or any parent or subsidiary of the Company, provided such consultants, independent contractors and advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction. Other types of awards under the 2006 Plan include NSOs, restricted stock awards, stock bonus awards, restricted stock units, and performance shares.

Options issued under the 2006 Plan are generally for periods not to exceed 10 years and are issued at the fair value of the shares of common stock on the date of grant as determined by the Board. The fair value of the Company’s common stock is determined by the last sale price of such stock on the NASDAQ Global Select Market. Options issued under the 2006 Plan typically vest with respect to 25% of the shares one year after the options’ vesting commencement date, and the remainder ratably on a monthly basis over the following three years.

The 2006 Plan provides for automatic replenishments on January 1 of 2011, 2012, and 2013 of 3.5%, 3.3%, and 3.1%, respectively of the number of shares of the Company’s common stock issued and outstanding on the December 31 immediately prior to the date of increase.

Tiny Prints 2008 Equity Incentive Plan

In April 2011, in connection with the acquisition of Tiny Prints, the Company converted and assumed the equity awards granted under the Tiny Prints 2008 Equity Incentive Plan (the “Tiny Prints Plan”) (See Note 4 – Acquisitions). Awards granted under the Tiny Prints Plan include ISO, NSO, and restricted share awards, all of which generally vest with respect to 25% of the shares one year after the options’ vesting commencement date, and the remainder ratably on a monthly basis over the following three years. Options under this plan will expire if not exercised within 10 years from the date of grant, and options and awards will expire if forfeited due to termination.

Stock Option Activity

A summary of the Company’s stock option activity at December 31, 2012 and changes during the period are presented in the table below (share numbers and aggregate intrinsic values in thousands):



	Number of Options Outstanding		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)	Aggregate Intrinsic Value
Balances, December 31, 2011	2,768		$	15.71
Granted	139		28.72
Exercised	(771	)	13.24
Forfeited, canceled or expired	(102	)	24.72
Balances, December 31, 2012	2,034		$	17.09	5.5	$	28,854
Options vested and expected to vest at December 31, 2012	2,001		$	16.85	5.4	$	28,718
Options vested at December 31, 2012	1,677		$	14.63	4.8	$	26,705

As of December 31, 2011 and 2010, there were 2,188,000 and 2,716,000 options vested, respectively.

During the year ended December 31, 2012, the Company granted stock options to purchase an aggregate of 139,000 shares of common stock with a weighted average grant-date fair value of $12.93 per share. In fiscal years ended December 31, 2011 and 2010, the Company granted stock options to purchase an aggregate of 197,000 and 257,000 shares of common stock, respectively, with a weighted average grant-date value of $20.32 and $10.62 per share, respectively.

The total intrinsic value of options exercised during the twelve months ended December 31, 2012, 2011 and 2010 was $12,299,000, $78,641,000 and $19,721,000, respectively. Net cash proceeds from the exercise of stock options were $10,211,000 for the twelve months ended December 31, 2012.

Valuation of Stock Options

The Company estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model and the assumptions noted in the following table. In the years ended December 31, 2012 and 2011, the Company calculated volatility using an average of its historical and implied volatilities as it had sufficient public trading history to cover the entire expected term. In all prior years, expected volatility also included historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post vest cancellations and the options contractual term. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity at the time of grant. The assumptions used to value options granted during the twelve months ended December 31, 2012, 2011, and 2010, were as follows:



	Year Ended December 31,
	2012		2011		2010
Dividend yield	—		—		—
Annual risk free rate of return	0.8	%	1.5	%	1.9	%
Expected volatility	56.5	%	53.3	%	51.1	%
Expected term (years)	4.3		4.3		4.5

Employee stock-based compensation expense recognized during the years ended December 31, 2012 and 2011 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Restricted Stock Units

The Company grants restricted stock units (“RSUs”) to its employees under the provisions of the 2006 Equity Incentive Plan and Inducement awards to new employees upon hire in accordance with NASDAQ Listing Rule 5635(c)(4). The cost of RSUs is determined using the fair value of the Company’s common stock on the date of grant. RSUs typically vest and are settled annually, based on a three or four year total vesting term. Compensation cost is amortized on a straight-line basis over the requisite service period.

Restricted Stock Unit Activity

A summary of the Company’s restricted stock unit activity for the twelve months ended December 31, 2012, is as follows (share numbers in thousands):



	Number of Units Outstanding		Weighted Average Grant Date Fair Value
Awarded and unvested, December 31, 2011	1,969		$	31.33
Granted	2,566		28.55
Vested	(885	)	23.18
Forfeited	(398	)	33.40
Awarded and unvested, December 31, 2012	3,252		$	31.10
Restricted stock units expected to vest, December 31, 2012	2,895

The chart below summarizes grant activity during the twelve months ended December 31, 2012 by equity plan (share numbers in thousands):



	Grants in 2012
2006 Equity Incentive Plan
Restricted stock units (1)	1,385
Performance-based restricted stock units (2)	445
Total grants under 2006 Plan	1,830

Inducement Plans
Restricted stock units (3)	635
Performance-based restricted stock units (4)	101
Total grants under Inducement Plans	736

Total awards granted in 2012	2,566

(1) Awards issued under the 2006 Equity Incentive Plan include restricted stock awards granted to new and current employees. Awards issued under this plan typically vest over a three or four year total vesting term.

(2) Includes 445,000 performance-based restricted stock units (PBRSUs) issued under the 2006 Equity Incentive Plan which are tied to the Company’s 2012 financial performance and which have three year service criteria. Compensation cost associated with these PBRSUs is recognized on an accelerated attribution model and ultimately based on whether or not satisfaction of the performance criteria is probable. As of December 31, 2012, the performance criteria for the fiscal year was met and the associated stock-based compensation has been recognized.

(3) Inducement awards are issued to newly hired officers and to new employees from acquired companies. These awards typically vest annually over a three year period based on continued employment. The above includes 366,000 RSUs to certain employees of Photoccino, Penguin Digital, and ThisLife.

(4) Includes PBRSUs issued to certain employees in connection with the acquisitions of Penguin Digital and ThisLife, which have both performance and service vesting criteria and vest annually over a three year term contingent on achieving certain performance milestones and continued employment.

During the years ended December 31, 2012 and 2011, the fair value of awards vested were $20,507,000 and $12,419,000, respectively.

At December 31, 2012, the Company had $76,906,000 of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options and RSUs that will be recognized over a weighted-average period of approximately three years.