Stock-based Compensation and Stockholders’ Equity

Equity Incentive Plan

In January 2011, the Board of Directors approved an amendment to the 2006 Equity Incentive Plan (the “2006 Plan”) that increased by 2,000,000 the aggregate maximum number of shares that may be issued under the 2006 Plan. The amendment to the 2006 Plan was approved by the Company’s stockholders in February 2011. The authorized number of shares that may be issued under the 2006 Plan automatically increases on July 1 each year through 2016, by an amount equal to (a) 3% of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at the time of grant cannot be less than 110% of the fair value. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant and options vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter.

In the three months ended September 30, 2012 and 2011, the Company granted options for the purchase of 561,780 and 452,900 shares under the 2006 Plan, respectively. As of September 30, 2012, the Company had 1,672,924 authorized shares available for future issuance under all of its equity incentive plans.

Restricted Stock Awards

Restricted stock awards are share awards that provide the rights to a set number of shares of the Company’s stock on the grant date. In August 2008, the Compensation Committee of the Board of Directors of the Company (the “Committee”) approved the terms of an agreement (the “Option Exercise Agreement”) with Charles Liang, a director and President and Chief Executive Officer of the Company, pursuant to which Mr. Liang exercised a fully vested option previously granted to him for the purchase of 925,000 shares. The option was exercised using a “net-exercise” procedure in which he was issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (898,205 shares based upon the market value as of the date of exercise). The shares issued upon exercise of the option are subject to vesting over five years. Vesting of the shares subject to the award may accelerate in certain circumstances pursuant to the terms of the Option Exercise Agreement. The Company determined that there was no incremental fair value of the option exchanged for the award. 718,564 and 538,923 shares were vested as of September 30, 2012 and June 30, 2012, respectively.

Determining Fair Value

Valuation and amortization method—The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on an analysis of the relevant peer companies’ post-vest termination rates and the exercise factors for the stock options granted prior to June 30, 2011. For stock options granted after June 30, 2011, the expected term is based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility—Expected volatility is based on a combination of the implied and historical volatility for its peer group and the Company’s historical volatility for the stock options granted prior to September 30, 2009. For stock options granted after September 30, 2009, expected volatility is based solely on the Company’s historical volatility.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the three months ended September 30, 2012 and 2011 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Three Months Ended September 30,
	2012			2011
Risk-free interest rate	0.65		%	1.32		%
Expected life	5.03 years			5.01 years
Dividend yield	—		%	—		%
Volatility	51.29		%	53.72		%
Weighted-average fair value	$	5.55		$	6.43

The following table shows total stock-based compensation expense included in the consolidated statements of operations for the three months ended September 30, 2012 and 2011 (in thousands).



	Three Months Ended September 30,
	2012			2011
Cost of sales	$	240		$	208
Research and development	1,630			1,272
Sales and marketing	404			278
General and administrative	629			572
Stock-based compensation expense before taxes	2,903			2,330
Income tax impact	(228		)	(231		)
Stock-based compensation expense, net	$	2,675		$	2,099

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash from financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash from operating activities. The Company had $815,000 and $899,000 of excess tax benefits accounted in the Company’s additional paid-in capital in the three months ended September 30, 2012 and 2011, respectively. The Company had excess tax benefits that are classified as cash from financing activities of $784,000 and $937,000 in the three months ended September 30, 2012 and 2011, respectively, for options issued since July 1, 2006. Excess tax benefits for stock options issued prior to July 1, 2006 continue to be classified as cash from operating activities.

Stock Option Activity

The following table summarizes stock option activity during the three months ended September 30, 2012 under all stock option plans:



	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at July 1, 2012	11,302,228		$	10.36	6.50	$	66,062
Granted	561,780		12.50
Exercised	(98,794	)	3.64
Forfeited or cancelled	(74,386	)	15.96
Outstanding at September 30, 2012	11,690,828		10.49		6.45	34,446
Options vested and expected to vest at September 30, 2012	11,265,255		10.31		6.34	34,418
Options vested and exercisable at September 30, 2012	7,880,282		8.62		5.33	32,648

The total pretax intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $878,000 and $425,000, respectively. As of September 30, 2012, the Company’s total unrecognized compensation cost related to non-vested stock-based awards granted since July 1, 2006 to employees and non-employee directors was $22,951,000, which will be recognized over a weighted-average vesting period of approximately 2.35 years.

Restricted Stock Award Activity

The following table summarizes the Company’s restricted stock award activity for the three months ended September 30, 2012:



	Restricted Stock Awards
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested stock at July 1, 2012	362,782		$	10.72
Granted	—		—
Vested	(179,641	)	10.66
Forfeited	—		—
Nonvested stock at September 30, 2012	183,141		$	10.79

The total pretax intrinsic value of restricted stock awards vested was $2,190,000 and $2,375,000 for the three months ended September 30, 2012 and 2011, respectively. In the three months ended September 30, 2012 and 2011, upon vesting, 179,641 shares of restricted stock awards were net share-settled such that the Company withheld 83,857 shares with value equivalent to an officer's minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the restricted stock awards on the vesting date as determined by the Company’s closing stock price. Total payments for an officer's tax obligations to the taxing authorities were $1,022,000 and $1,109,000 in three months ended September 30, 2012 and 2011, respectively, and are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

The total intrinsic value of the outstanding restricted stock awards was $2,203,000 as of September 30, 2012. There is no incremental fair value to be recognized as compensation expense in connection with the unvested restricted stock awards of 179,641 shares as of September 30, 2012.