Stock Plans

Equity Incentive Plans

The Company has two active share-based compensation plans as of December 31, 2012: the 2004 Employee Stock Purchase Plan (“ESPP”) and the 2005 Omnibus Equity Incentive Plan, as amended (the “Incentive Plan”). Under the Incentive Plan, incentive stock options, non-qualified stock options, restricted stock and restricted stock units have been granted to employees and non-employee directors. Generally, these awards vest over periods of one to four years. In addition, equity awards are issued to senior management where vesting of the award is tied to Company performance conditions. The Company’s policy is to issue new shares of its common stock upon the exercise of stock options or granting of stock awards to employees.

The Company’s Incentive Plan currently provides for an equity incentive pool of 2,750,000 shares. Shares reserved for issuance are replenished by forfeited shares. Additionally, equity awards forfeited under the Company’s 1995 stock option plan are added to the total shares available for issuance under the Incentive Plan. The Incentive Plan provides for accelerated vesting if there is a change of control.

For the year ended December 31, 2012, the tax benefit associated with stock option exercises, restricted stock grants, and disqualifying dispositions of both incentive stock options and stock issued under the Company’s ESPP, was approximately $2.6 million. No tax benefit was recognized in 2012, 2011 or 2010, because excess tax benefits were not realized by the Company.

Stock Options

In the first quarter of 2011, the Company ceased granting stock options to its employees as part of its annual equity incentive award program, and began granting restricted stock awards to employees. The last year in which the Company made any stock option grants was 2010. The Company may determine to grant stock options in the future under the Incentive Plan.

The fair value of stock options was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:



	Year Ended December 31, 2010
Expected dividends	—
Expected volatility range	69.5	%
Risk-free interest rate range	2.4	%
Expected term/life (in years)	4.8

The expected dividend yield is zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. In addition, over the remaining term of the Credit Facility, which is scheduled to expire in April 2015, the Company is not permitted to declare or pay dividends. The expected term is based on the Company’s historical experience from previous stock option grants. Expected volatility is based on the historical volatility of the Company’s stock measured over a period commensurate with the expected option term. The Company does not consider implied volatility due to the low volume of publicly traded options in the Company's stock. The risk-free interest rate is derived from the zero coupon rate on U.S. Treasury instruments with a term comparable to the option’s expected term.

The following table summarizes total aggregate stock option activity for the period December 31, 2011 through December 31, 2012:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Balance at December 31, 2011	1,183,659		$	11.45
Exercised	(145,703	)	7.85
Canceled	(114,200	)	14.34
Balance at December 31, 2012	923,756		$	11.67	4.62	$	261,981
Vested or expected to vest at December 31, 2012	915,451		$	11.64	4.60	$	261,049
Exercisable at December 31, 2012	807,146		$	11.53	4.31	$	221,133

The number of shares exercisable at December 31, 2012, 2011 and 2010 was 807,146, 884,959 and 928,380, respectively, with weighted average exercise prices of $11.53, $11.14 and $10.44, respectively.

The weighted-average grant date fair value of stock options granted during the year ended December 31, 2010 was $9.27. No stock options were granted during the years ended December 31, 2012 and 2011. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $1.5 million, $2.4 million and $2.3 million, respectively. Cash proceeds from option exercises for the year ended December 31, 2012 was $1.1 million.

As of December 31, 2012, there was $774,000, or $551,000 adjusted for estimated forfeitures, of total unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 0.8 year.

Restricted Stock Awards

In the first quarter of 2011, the Company began granting restricted stock awards to its employees as part of its annual equity incentive award program, in replacement of stock options which had historically been broadly granted to employees. Generally, vesting of restricted stock awards is contingent upon a period of service, typically four years. In addition, the Company grants restricted stock awards to executive management with vesting contingent upon specified Company performance conditions. Historically, non-employee directors of the Company were compensated with restricted stock awards as part of their annual retainer; in 2011, non-employee directors began receiving restricted stock units instead (see below).

The following table summarizes restricted stock award activity for the period December 31, 2011 through December 31, 2012 (in thousands, except for per share amounts):



Nonvested Shares	Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011	262		$	17.17
Granted	255		20.60
Vested	(58	)	15.04
Forfeited	(62	)	16.61
Nonvested at December 31, 2012	397		$	19.78

The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2012, 2011 and 2010 was $20.60, $15.90 and $15.71, respectively. For the year ended December 31, 2012, the total grant date fair value of service-based restricted stock awards granted was $4.4 million and the total grant date fair value of performance-based restricted stock awards granted was $817,000.

Share awards released during the years ended December 31, 2012, 2011 and 2010 were 77,000, 56,000 and 170,000 respectively. Service-based share awards vested in 2012, 2011 and 2010 had a vest date fair value of $1.1 million, $1.0 million and $434,000, respectively. No performance-based share awards vested in 2012 or 2011. Performance-based share awards vested in 2010 had a vest date fair value of $2.2 million. As of December 31, 2012, there was $6.9 million of unrecognized compensation cost, or $3.7 million net of estimated forfeitures, related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2.5 years.

Restricted Stock Units

In 2011, the Company began granting non-employee directors of the Company restricted stock unit (“RSU”) awards as partial consideration for their annual retainer compensation. In the first quarter of each fiscal year, each non-employee director of the Company receives an RSU award for a number of shares determined by dividing the value to be delivered under the RSU award by the closing price of the Company’s common stock on the date of grant. These awards vest in full one year from the date of grant. In addition, in 2010 and prior years, non-employee directors were paid a quarterly retainer in RSU awards. This quarterly retainer was replaced by an annual compensation plan in 2011.

The total grant date fair value of service-based restricted stock unit awards granted during the year ended December 31, 2012 was $420,000. The weighted average grant date fair value of restricted stock unit awards granted during the years ended December 31, 2012, 2011 and 2010 was $20.65, $19.06 and $13.65, respectively. As of December 31, 2012, there was $44,760 of unrecognized compensation cost related to nonvested restricted stock unit awards. The Company estimates that none of these outstanding RSU awards will be forfeited. The cost is expected to be recognized over a weighted average period of 0.1 year.

Employee Stock Purchase Plan

In 2004, the Company established the 2004 Employee Stock Purchase Plan (“ESPP”). Pursuant to the ESPP, the aggregate number of shares of common stock which may be purchased shall not exceed five hundred thousand (500,000) shares of common stock of the Company. As of December 31, 2012, the Company has issued a total of 403,200 shares of common stock from the current ESPP. For the years ended December 31, 2012 and 2011, the Company issued 108,990 and 44,542 shares, respectively, under the ESPP.

The ESPP permits substantially all employees to purchase common stock through payroll deductions, at 85% of the lower of the trading price of the stock at the beginning or at the end of each six-month offering period commencing on January 1 and July 1. The number of shares purchased is based on participants’ contributions made during the offering period.

The fair value of the “look back” option for ESPP shares issued during the offering period is estimated using the Black-Scholes valuation model for a call and a put option. The share price used for the model is a 15% discount on the stock price on the first day of the offering period; the number of shares to be purchased is calculated based on employee contributions, and by using the following weighted-average assumptions:



	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Expected dividends	$	—		$	—		$	—
Stock price on valuation date	11.96			17.54			14.03
Expected volatility	71		%	41		%	54		%
Risk-free interest rate	0.10		%	0.15		%	0.21		%
Expected life (in years)	0.5			0.5			0.5
Fair value per share	$	4.16		$	4.73		$	4.78

The intrinsic value of shares of the Company’s stock purchased pursuant to the ESPP for offering periods within the years ended December 31, 2012, 2011 and 2010 was $191,000, $109,000 and $251,000, respectively.

Stock-based Compensation Expense

Compensation cost for stock options, restricted stock, restricted stock units and the ESPP is as follows (in thousands):



	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Stock options	$	978	$	1,317	$	1,496
Restricted stock	1,427		1,014		752
Restricted stock units	421		57		188
ESPP	262		194		191
Total stock-based compensation expense	$	3,088	$	2,582	$	2,627

Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):



	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Cost of revenue	$	701	$	355	$	304
Selling, general and administrative	1,835		1,769		2,096
Research and development	552		458		227
Total stock-based compensation expense	$	3,088	$	2,582	$	2,627

Share Reservations

The following table summarizes the reservation of shares under the Company's stock-based compensation plans as of December 31, 2012:



2005 Omnibus Equity Incentive Plan	1,686,687
2004 Employee Stock Purchase Plan	96,800
1999 Director Stock Option Plan	3,000
1995 Stock Option Plan	158,756
Total	1,945,243