NOTE 5. STOCK-BASED COMPENSATION

At December 27, 2014, the Company has two stock-based compensation programs, which are described below. The Company’s stock-based awards under these plans are classified as equity. The Company did not capitalize any stock-based compensation cost and recorded compensation expense as follows:

Stock-based compensation expense:


	Year Ended
	December 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Cost of revenues	$	966	$	899	$	875
Research and development		9,420		11,095		11,583
Selling, general and administrative		12,795		14,270		13,857
Total	$	23,181	$	26,264	$	26,315

The Company received cash of $29.2 million, $25.2 million and $16.0 million from the exercise of stock-based awards during 2014, 2013 and 2012, respectively. The total intrinsic value of stock awards exercised during 2014 was $21.9 million.

As of December 27, 2014, there was $3.8 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options granted under the Company’s stock option plans, which is expected to be recognized over a period of 2.4 years.

The Company’s estimates of expected volatilities are based on a weighted historical and market-based implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the stock option valuation model and represents the period of time that granted options are expected to be outstanding. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair values of the Company’s stock option and Employee Stock Purchase Plan, awards were estimated using the following weighted average assumptions:

Stock Options:


	December 27,	December 28,	December 29,
	2014	2013	2012
Expected life (years)	5.8	5.9	5.4
Expected volatility	32%	40%	42%
Risk-free interest rate	1.8%	1.6%	0.8%
Forfeiture rate	9.5%	8.5%	12.1%

Employee Stock Purchase Plan:


	December 27,	December 28,	December 29,
	2014	2013	2012
Expected life (years)	0.5	0.5	0.5
Expected volatility	35%	35%	42%
Risk-free interest rate	0.5%	0.1%	0.2%
Forfeiture rate	9.5%	8.5%	12.1%

Stock Option Plans

The Company issues its common stock under the provisions of the 2008 Equity Plan (the “2008 Plan”). Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.

The 2008 Plan was approved by stockholders at the 2008 Annual Meeting. The 2008 Plan became effective on January 1, 2009 (the “Effective Date”). It is a successor to the 1994 Incentive Stock Plan (the “1994 Plan”) and the 2001 Stock Option Plan (the “2001 Plan”). Up to 30,000,000 shares of our common stock have been initially reserved for issuance under the 2008 Plan. At the 2012 Annual Meeting, stockholders approved an increase in shares reserved for issuance under the 2008 plan by 9,500,000 shares which shares were registered on May 14, 2012 on Form S-8 bringing the total number of authorized and registered shares available under the 2008 Plan to 39,500,000. To the extent that a share that is subject to an award that counts as 1.6 shares against the 2008 Plan’s share reserve is added back into the 2008 Plan upon expiration or termination of the award or repurchase or forfeiture of the shares, the number of shares of common stock available for issuance under the 2008 Plan will be credited with 1.6 shares. The implementation of the 2008 Plan did not affect any options or restricted stock units outstanding under the 1994 Plan or the 2001 Plan on the Effective Date. To the extent that any of those options or restricted stock units subsequently terminate unexercised or prior to issuance of shares thereunder, the number of shares of common stock subject to those terminated awards will be added to the share reserve available for issuance under the 2008 Plan, up to an additional 15,000,000 shares. No additional shares may be issued under the 1994 Plan or the 2001 Plan.

Activity under the option plans during the year ended December 27, 2014 was as follows:


				Weighted average
		Weighted average		remaining	Aggregate intrinsic
	Number of	exercise price per		contractual term	value at December 27,
	options	share		(years)	2014
Outstanding, December 28, 2013	23,555,472	$	8.01	4.88	$	6,834,586
Granted	745,237	$	7.07		$	1,530,333
Exercised	(2,941,897)	$	6.23		$	5,042,000
Forfeited	(3,042,092)	$	13.05		$	—
Outstanding, December 27, 2014	18,316,720	$	7.53	4.41	$	32,598,999
Exercisable, December 27, 2014	16,305,889	$	7.65	3.92	$	27,467,565

No adjustment has been recorded for fully vested options that expired during the year ended December 27, 2014. A reversal of $2.3 million was recorded for pre-vesting forfeitures during the year ended December 27, 2014.

The following table summarizes information on options outstanding and exercisable at December 27, 2014:


	Options Outstanding				Options Exercisable
		Weighted	Weighted			Weighted
		Average	Average			Average
		Remaining	Exercise			Exercise
	Options	Contractual	Price per		Options	Price per
Range of Exercise Prices	Outstanding	Life (years)	Share		Exercisable	Share
$0.05 – $6.08	3,758,742	5.23	$	5.15	3,257,572	$	5.09
$6.09 – $7.22	5,235,527	6.16		6.85	3,856,794		6.87
$7.24 – $8.06	4,138,072	2.99		7.87	4,109,945		7.87
$8.15 – $10.97	5,133,779	3.22		9.66	5,030,978		9.69
$11.32 – $12.43	50,600	1.08		11.79	50,600		11.79
$0.05 – $12.43	18,316,720	4.41	$	7.53	16,305,889	$	7.65

The weighted-average estimated fair values of each employee stock options granted during 2014, 2013, and 2012, were $2.33, $2.47, and $2.16, respectively.

Restricted Stock Units

On February 1, 2007, the Company amended its stock award plans to allow for the issuance of RSUs to employees and directors. The first grant of RSUs occurred on May 25, 2007. The grants vest over varying terms, to a maximum of four years from the date of grant. On May 10, 2012, PMC stockholders approved the business criteria on which performance goals may be based so that awards granted may constitute performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). On August 27, 2012 the Compensation Committee awarded the CEO the first performance RSU grant with a performance goal of the revenue target in the Company’s 2012 internal operating plan. On January 22, 2013, the Compensation Committee certified the degree of achievement of the Company’s 2012 revenue target and the number of earned RSUs to be released to the CEO; 50% of the earned RSUs were released on May 25, 2013, 25% of the earned RSUs were released on May 25, 2014 and 25% of the earned RSUs will be released on May 25, 2015. The total estimated $0.2 million fair value of this 2012 grant based on the achievement of performance against target was and will be recognized as compensation expense over the grant’s vesting terms, with 50% vesting on May 25, 2013, 25% vesting on May 25, 2014, and 25% vesting on May 25, 2015.

On August 26, 2013, performance RSUs were granted to the CEO and other Executives (“Executive(s)”) with a performance goal of the degree of achievement of Total Shareholder Return (“TSR”) relative to Global Industry Classification Standards (“GICS”) Semiconductor Companies (8-Digit) for the performance period (July 1, 2013 - June 30, 2015). Performance against the performance goal is anticipated to be reviewed on or about August 25, 2015 and earned RSUs will release 50% upon certification and 50% on August 25, 2016. The total estimated $1.7 million fair value of these 2013 grants was and will be recognized as compensation expense over the grant’s vesting terms, with 50% vesting on August 25, 2015 and 50% vesting on August 25, 2016.

In June 2014, the Compensation Committee adopted a second performance-based equity program as part of the Company’s equity compensation program applicable to the Executives. The addition of the second program increases the performance-based equity portion as a percentage of the annual equity award to our Executives as follows:


			Executives
	CEO		other than CEO
	2014	2013	2014	2013
Options	25%	50%	25%	25%
Time-based RSUs	25%	25%	25%	50%
Performance RSUs	50%	25%	50%	25%

The performance goal of the new performance-based equity program is based on either revenue or Non-GAAP operating income target for each year in the Company’s internal 3-year operating plan treated as three distinct, one-year performance periods.

On August 25, 2014, the Company made its annual grant of RSU awards to Executives. The goal of the performance-based RSU award under one program is the degree of achievement of TSR relative to GICS Semiconductor Companies (8-Digit) for the performance period (July 1, 2014 - June 30, 2016). The total estimated $1.9 million fair value of these 2014 awards was and will be recognized as compensation expense over the award’s vesting terms, with 50% vesting on August 25, 2016 and 50% vesting on August 25, 2017. The goal of the performance-based RSU award under the second program is based on revenue or the Non-GAAP operating income target for each year in the Company’s internal 2014-2016 operating plan. The total fair value of the awards under the second program’s performance target estimated at $2.0 million was and will be recognized as compensation expense over the award’s vesting and certification terms: for the first tranche (34% of the total grant) the 2014 performance against target will be certified on or about February 25, 2015 at which time earned shares will vest and release; for the second tranche (33% of the total grant) the 2015 performance against target will be certified on or about February 25, 2016 at which time earned shares will vest and release; and for the third tranche (33% of the total grant) the 2016 performance against target will be certified on or about February 25, 2017 at which time earned shares will vest and release.

A summary of RSU activity during the year ended December 27, 2014 is as follows:


		Weighted Average
	Restricted	Remaining	Aggregate
	Stock Units	Contractual Term	intrinsic value
Unvested units at December 28, 2013	6,179,037	1.74	$	39,545,837
Awarded	4,063,220	—	$	—
Released	(1,985,007)	—	$	—
Forfeited	(888,721)	—	$	—
Unvested units at December 27, 2014	7,368,529	1.73	$	67,200,984
Restricted Stock Units expected to vest December 27, 2014	6,396,998	1.63	$	58,340,617

The weighted-average estimated fair values of each RSU award during 2014, 2013, and 2012 were $7.49, $6.45, and $5.95, respectively. The intrinsic value of RSUs vested during year ended December 27, 2014 was $14.6 million. As of December 27, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $38.5 million, which is expected to be recognized over the next 2.71 years.

Employee Stock Purchase Plan

The 2011 Employee Stock Purchase Plan (the “2011 Plan”) was approved by stockholders at the 2010 Annual Meeting. The 2011 Plan became effective on February 11, 2011. The 2011 Plan consists of consecutive offering periods, generally of a duration of 6 months, and allows eligible employees to purchase shares of the Company’s common stock at the end of each such offering period, generally February and August of any year, at a price per share equal to 85% of the lower of the fair market value of a share of Common Stock on the start date or the fair market value of a share of Common Stock on the exercise date of the offering period. Employees purchase such shares through payroll deductions which may not exceed 10% of their total cash compensation. The 2011 Plan imposes certain limitations upon an employee’s right to acquire Common Stock, including the following: (i) no employee may purchase more than 7,500 shares of Common Stock on any one purchase date and (ii) no employee may be granted rights to purchase more than $25,000 worth of Common Stock for each calendar year that such rights are at any time outstanding. Up to 12,000,000 shares of our Common Stock have been initially reserved for issuance under the 2011 Plan.

During 2014, 1,916,727 shares were issued under the 2011 Plan at a weighted-average price of $5.66 per share. As of December 27, 2014, 4,380,208 shares were available for future issuance under the 2011 Plan (2013 - 6,296,935 shares available for issuance).

The weighted-average estimated fair values of Employee Stock Purchase Plan awards during years 2014, 2013, and 2012 were $1.74, $1.61, and $1.69, respectively.