Stock-Based Compensation

As of June 29, 2014, the Company had three stock-based plans for employees and directors that are open for future awards and are described below. In addition, the Company had nine stock-based plans, including seven plans assumed in connection with acquisitions, each of which is closed for future grants but has options outstanding.

Amounts recognized in the financial statements with respect to these plans for fiscal 2014, 2013 and 2012 are as follows:



	2014			2013			2012
	(in thousands)
Cost of stock-based payment plans during the period⁽¹⁾⁽²⁾	$	15,226		$	21,844		$	22,084
Amounts capitalized in inventory during the period	(427		)	(549		)	(527		)
Amounts recognized in income for amounts previously capitalized in inventory	458			507			612
Amounts charged against income, before income tax benefit	$	15,257		$	21,802		$	22,169
Amount of related income tax benefit recognized in income⁽³⁾	$	—		$	—		$	—


(1)	Includes approximately $4.8 million and $4.1 million of stock-based compensation related to the ServerEngines contingent consideration tied to future employment and related 2012 modification in fiscal 2013 and 2012, respectively.


(2)	Includes Cash-Settled Unit Awards of approximately $1.1 million and $1.3 million in fiscal 2014 and 2013, respectively classified as a liability since these awards are settled in cash and do not impact shareholders’ equity.


(3)	There was no tax benefit recognized in income in fiscal 2014, 2013 or 2012 due to the Company’s valuation allowance for deferred tax assets (see Note 14).

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the ESPP) was adopted by the Board of Directors and approved by the stockholders in 2000 and became effective on January 1, 2001. The ESPP was further amended in 2007 (effective on November 15, 2007) and in 2014 (effective November 21, 2013) (Amended ESPP). The Compensation Committee of the Board of Directors administers the Amended ESPP. Under the Amended ESPP, employees of the Company who elect to participate have the right to purchase common stock at a 15% discount from the lower of the market value of the common stock at the beginning or the end of each six month offering period. The six month offering periods are May 1 to October 31 and November 1 to April 30 of each year. In August 2014, the Board of Directors approved a change to the participation periods for the Amended ESPP. The six month offering periods are now May 8 to November 7 and November 8 to May 7 (other than with respect to 2014, during which the period is May 1 to November 7). Employees purchase common stock using payroll deductions, which may not exceed 10% of their eligible compensation (the amount may be increased from time to time by the Company but may not exceed 15% of eligible compensation). In addition, the maximum number of shares that an employee may purchase in each six month period is 1,000 shares with the maximum dollar amount of $25,000 in any calendar year. On February 6, 2014, the Company’s stockholders approved an amendment to increase the number of shares authorized for issuance under the Amended ESPP by 3,250,000 shares and extend the termination date of the Amended ESPP to October 23, 2018. The Company reserved a total of 9,700,000 shares of common stock for issuance under the Amended ESPP. As of June 29, 2014, 3,648,423 shares were available for future award grants under the Amended ESPP.

2005 Equity Incentive Plans

On December 1, 2005, the Company’s shareholders ratified and approved the Emulex Corporation 2005 Equity Incentive Plan (the Equity Incentive Plan). The Company’s Equity Incentive Plan permits the grant of stock options, restricted stock awards and restricted stock units (collectively, unvested stock awards), and stock appreciation rights to its domestic and international employees. The aggregate number of shares that may be granted under the Equity Incentive Plan consists of 2,937,475 shares of common stock, plus the number of shares underlying options that were outstanding on the effective date of the Equity Incentive Plan (October 24, 2005) that expire, are forfeited, cancelled or terminate for any reason under the Employee Stock Option Plan and the 2004 Employee Stock Incentive Plan without having been exercised in full. From fiscal 2007 to fiscal 2014, the Company’s stockholders approved an aggregate of 6,500,000 in shares authorized for issuance under the Equity Incentive Plan.

The Equity Incentive Plan is administered by the Board of Directors, or at the discretion of the Board, by a committee consisting of two or more independent directors of the Company (the Committee). As of June 29, 2014, 4,338,234 shares were available for future award grants under the Equity Incentive Plan, including the shares available for grant under the Employee Stock Option Plan, 2004 Employee Stock Incentive Plan, Aarohi Communications, Inc. 2001 Stock Option Plan (the Aarohi Plan), the Sierra Logic, Inc. 2001 Stock Option Plan (the Sierra Plan), and the ServerEngines Corporation Amended and Restated 2008 Stock Option Plan (the ServerEngines Plan).

Stock option awards are granted with an exercise price not less than fair market value of the Company’s stock at the date of grant; these awards generally vest over three years of continuous service and have a six year contractual term. Certain stock option awards provide for accelerated vesting if there is a change in control (as defined in the Equity Incentive Plan) or achieving certain performance targets within the meaning of Section 162(m) of the Internal Revenue Code and the regulations thereunder.

Unvested stock awards may be awarded (or sold at a purchase price determined by the Board or Committee) upon terms established by the Board or Committee at its sole discretion. The vesting provisions of unvested stock awards will be determined individually by the Board or Committee for each grant, but generally vest 30%, 30%, and 40% on the first, second and third anniversaries of the date of grant, respectively. As of June 29, 2014, 3,477,565 shares of unvested stock awards were outstanding.

Performance-based stock awards are subject to the attainment of performance goals established by the Board or Committee, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded shares. Performance goals are based on a pre-established objective formula or standard that specifies the manner of determining the number of performance awards that will be granted if the performance goal is attained. The Company started granting performance-based stock awards to certain employees in August 2010 under the Equity Incentive Plan. As of June 29, 2014, 121,569 shares of performance awards were outstanding.

During fiscal 2014 and 2013, the Company granted unvested stock awards that will be settled in cash upon vesting (Cash-Settled Unit Awards). Such awards are liability classified as they will be settled in cash. The Cash-Settled Unit Awards vest 30%, 30%, and 40% on the first, second and third anniversaries of the date of grant, respectively. Some of these awards are tied to the achievement of certain performance goals established by the Board of Directors. As of June 29, 2014, the liability related to Cash-Settled Unit Awards was approximately $1.0 million and will continue to be remeasured at each reporting date until the awards vest. As of June 29, 2014, 322,870 shares of Cash-Settled Unit Awards were outstanding.

Unrestricted stock awards are free of any vesting provisions. As of June 29, 2014, there were no unrestricted stock awards outstanding.

Stock appreciation rights entitle the holder to receive the appreciation in the value of common stock underlying the stock appreciation right. The Board or Committee may grant a stock appreciation right either as a standalone right, or if such right does not provide for the deferral of compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, in tandem with all or any part of the shares of common stock that may be purchased by the exercise of a stock option. As of June 29, 2014, there were no stock appreciation rights outstanding.

Non-Employee Director Plan

The Company’s Stock Award Plan for Non-Employee Directors (the Director Plan) was amended and approved by the stockholders on November 30, 2006 to allow for a maximum of 1,880,000 shares of common stock to be issued. Non-employee directors receive two annual grants. Beginning in fiscal 2011, the first annual grant is an unvested stock award with an aggregate market value on the date of grant equal to $200,000. In addition, on December 2 of each year, each non-employee director receives a second annual unvested stock award with an aggregate market value on the date of grant equal to $125,000; provided, however, that the first annual grant will be reduced pro rata (based on the percentage of a year served as a director prior to the date of the first annual grant) if the annual unvested stock award is granted within less than one year after the grant of the $200,000 initial unvested stock award described above. The annual unvested stock award grants to non-employee directors vest 50% on the date of grant and 50% six months thereafter. No options granted under the Director Plan shall be exercisable after the expiration of the earlier of (i) ten years following the date the option is granted or (ii) one year following the date the optionee ceases to be a director of the Company for any reason. The administrator of the Director Plan has the discretion to grant additional awards in the form of unvested stock awards or stock appreciation rights or to substitute unvested stock awards or stock appreciation rights for the formula grants described above. Options granted under the Director Plan are non-qualified stock awards. On November 20, 2012, the Company’s stockholders approved an amendment to increase the number of shares authorized for issuance under the plan by 500,000 shares. As of June 29, 2014, 639,608 shares were available for future award grants under the Director Plan.

Employee Stock Option Plan and 2004 Employee Stock Incentive Plan

The Company’s shareholder-approved Employee Stock Option Plan (the Plan) permitted the grant of stock options and unvested stock to its domestic and international employees for up to approximately 33.7 million shares of common stock. Stock option awards were granted under the plan with an exercise price not less than the fair market value of the Company’s stock at the date of grant. With the approval and adoption of the Equity Incentive Plan on December 1, 2005, the Plan became closed for future grants of options.

The Company’s shareholder-approved 2004 Employee Stock Incentive Plan (the 2004 Plan) permitted the grant of stock options and unvested or unrestricted shares to its employees for up to 2,000,000 shares of common stock. The purchase price for the shares subject to any option granted under the 2004 Plan was not permitted to be less than 100% of the fair market value of the shares of common stock of the Company on the date the option was granted. With the approval and adoption of the Equity Incentive Plan on December 1, 2005, the 2004 Plan became closed for future award grants.

Options granted under the Plan and the 2004 Plan prior to August 2005 had a 10 year contractual term and vested 25% on the first anniversary of the date of grant with an additional 6.25% vesting after the end of each consecutive calendar quarter thereafter with continuous service, except when otherwise provided by the Board of Directors or the Compensation Committee. Beginning with awards granted in August 2005, each option granted generally has a six year contractual term and vests 30% on the first anniversary of the grant date, 7.5% vesting at the end of each of the next four consecutive calendar quarters and 10% vesting at the end of each of the next four consecutive quarters thereafter with continuous service, except when otherwise provided by the Board of Directors or the Compensation Committee.

Acquisition Plans

In connection with the acquisition of ServerEngines on August 25, 2010, the Company assumed the ServerEngines Plan. The ServerEngines options were replaced with Emulex options based on the acquisition exchange ratio and continue to be subject to the terms of the ServerEngines Plan. The options have lives of up to 10 years and generally vest over a 4 or 5 year period. The ServerEngines Plan is closed for future grants. There were 472,732 options issued in exchange for the options assumed. The Company also assumed the Sierra Plan and the Aarohi Plan (collectively, the Acquisition Plans). Shares previously authorized for issuance under the Acquisition Plans are no longer available for future grants, but options previously granted under these plans remain outstanding. Shares that expired, forfeited, cancelled or terminated for any reason under the ServerEngines Plan, the Sierra Plan and the Aarohi Plan may be granted under the Equity Incentive Plan.

Adequacy of Available Shares for All Plans

As of June 29, 2014, we anticipate that the number of shares authorized under the Equity Incentive Plan, the Director Plan, and the Amended ESPP are sufficient to cover future stock option exercises and shares that will be purchased during the next six month plan period from May 1, 2014 to October 31, 2014 under the Amended ESPP.

Valuation of Stock-Based Compensation

The assumptions used to compute the fair value of the compensatory element related to the Amended ESPP for fiscal 2014, 2013 and 2012 were:



	2014	2013	2012
Expected volatility	24% - 30%	35% - 45%	45%
Weighted average expected volatility	27%	39%	45%
Expected dividends	—%	—	—
Expected term (in years)	0.5	0.5	0.5
Weighted average expected term (in years)	0.5	0.5	0.5
Risk-free interest rate	0.05% - 0.08%	0.08% - 0.16%	0.06% - 0.14%

The assumptions used to compute the fair value of stock option grants under the Equity Incentive Plan for fiscal 2014, 2013 and 2012 were:



	2014	2013	2012
Expected volatility	37% - 42%	40% - 47%	45% - 47%
Weighted average expected volatility	39%	45%	46%
Expected dividends	—	—	—
Expected term (in years)	3.8 - 5.9	3.8 - 5.8	3.6 - 5.6
Weighted average expected term (in years)	4.6	4.6	4.4
Risk-free interest rate	1.07% - 2.04%	0.53% - 1.48%	0.67% - 1.22%

Stock-Based Awards Activity

A summary of stock option activity under the plans for fiscal 2014 is presented below:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
						(in millions)
Options outstanding at June 30, 2013	4,220,262		$	12.28	2.47	$	0.6
Options granted	525,374		7.35
Options exercised	(94,898	)	4.35
Options expired	(1,721,281	)	15.37
Options forfeited	(117,538	)	7.65
Options outstanding at June 29, 2014	2,811,919		$	9.95	2.47	$	0.2
Options vested and expected to vest at June 29, 2014	2,785,309		$	9.99	2.43	$	0.2
Options exercisable at June 29, 2014	2,122,022		$	10.80	1.77	$	0.2

A summary of outstanding and unvested stock award activity for fiscal 2014 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Awards outstanding and unvested at June 30, 2013	3,413,522		$	7.74
Awards granted	2,562,867		7.45
Awards vested	(1,696,243	)	8.29
Awards forfeited	(681,012	)	7.63
Awards outstanding and unvested at June 29, 2014	3,599,134		$	7.29
Awards vested and expected to vest at June 29, 2014	3,158,034

A summary of Cash-Settled Unit Award activity for fiscal 2014 is as follows:



	Number of Shares		Weighted Average Grant Date Fair Value
Awards outstanding and unvested at June 30, 2013	552,723		$	7.41
Awards granted	29,359		6.43
Awards vested	(190,301	)	7.47
Awards forfeited	(68,911	)	7.58
Awards outstanding and unvested at June 29, 2014	322,870		$	7.25
Awards vested and expected to vest at June 29, 2014	295,611

As of June 29, 2014, there was approximately $13.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. This cost is expected to be recognized over a weighted-average service period of approximately 1.2 years.

The weighted average grant date fair value of options granted in fiscal 2014, 2013 and 2012 was $2.60, $2.80 and $2.95, respectively. The weighted average grant date fair value of unvested stock awards granted in fiscal 2014, 2013 and 2012 was $7.45, $6.87 and $7.59, respectively. The total intrinsic value of stock options exercised in fiscal 2014, 2013 and 2012 was approximately $0.3 million, $0.1 million and $0.5 million, respectively. The total fair value of unvested stock awards that vested in fiscal 2014, 2013 and 2012 was approximately $12.2 million, $12.3 million and $13.3 million, respectively. Cash received from stock option exercises under stock-based plans and shares purchased under the Purchase Plan in fiscal 2014, 2013 and 2012 was approximately $5.0 million, $4.9 million and $7.7 million, respectively. The actual tax benefit realized for the tax deductions from option exercises and vested stock awards was approximately $5.0 million, $4.4 million and $5.2 million in fiscal 2014, 2013 and 2012, respectively.