Note 15 — Stockholders’ Equity

Stock Award Plans

The Company’s 2005 Equity Incentive Plan (the “2005 Plan”) has reserved 13,600,000 shares of common stock for issuance. The 2005 Plan permits the grant of incentive stock options, nonstatutory stock options, restricted stock units, performance shares and other forms of equity compensation. As of December 31, 2014, approximately 2,241,000 shares of common stock were available for future issuance under the 2005 Plan. Under the 2005 Plan, options are exercisable upon conditions determined by the board of directors and expire ten years from the date of grant. Options are generally granted at fair market value on the date of grant and vest over time, generally four years, or on achievement of certain performance conditions. See Stock-Based Compensation.

The Company’s 2004 Outside Directors Stock Option Plan (the “2004 Director Plan”) had reserved 1,765,000 shares of common stock for issuance. The 2004 Director Plan automatically granted nonqualified stock options to nonemployee directors on their appointment or first election to the Company’s board of directors (“Initial Grant”) and annually on their reelection to the board of directors at the Company’s Annual Meeting of Stockholders (“Annual Grant”). Under the 2004 Director Plan, options were granted at fair market value on the date of grant and expire ten years from the date of grant. Initial Grants become exercisable in three equal annual installments beginning on the first anniversary of the date of grant, and Annual Grants become exercisable in twelve equal monthly installments from the date of grant, subject in each case to the director’s continuous service on the Company’s board of directors. As of December 31, 2014, no shares of common stock were available for future issuance under the 2004 Director Plan. Although the 2004 Director Plan has expired, the outstanding stock options relating to it are fully valid.

Certain stock option awards are subject to accelerated vesting if there is a change in control.

The Company issues new shares on exercise, for release of restricted stock units, and for issuance of stock under its employee stock ownership plan.

Stock-Based Compensation

The following table summarizes the stock-based compensation expenses included in the Company’s consolidated statements of income (in thousands):



	For the Year Ended December 31,

	2014		2013		2012
Sales and marketing	$	1,031	$	1,113	$	1,169
Research and development		104		122		212
General and administrative		2,330		2,772		2,516
	$	3,465	$	4,007	$	3,897

Compensation cost capitalized in inventory was approximately $0.1 million for the years ended December 31, 2014, 2013, and 2012. There has been no income tax benefit recognized in the income statement for share-based compensation arrangements.

Valuation Assumptions

The fair value of awards granted under the Company’s stock option and ESPP plans is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the years ended December 31:



	2014		2013		2012
Risk-free interest rate:
Time-based stock options	1.61	%	1.02	%	0.92	%
Performance-based stock options	N/A		1.22		0.96
ESPP	0.04		0.06		0.09
Volatility factor of the market price of the Company's common stock:
Time-based stock options	57.96	%	64.12	%	63.79	%
Performance-based stock options	N/A		63.20		63.66
ESPP	42.50		37.36		56.79
Weighted-average expected life (years):
Time-based stock options	5.00		5.10		5.21
Performance-based stock options	N/A		5.04		5.22
ESPP	0.25		0.25		0.25
Dividend yield	0.00	%	0.00	%	0.00	%

The risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s history and expectations of no dividend payouts. Expected volatility is based on the historical volatility of the Company’s stock. The expected term of options granted is derived from historical data on employee exercises and terminations.

Stock Options

The following table summarizes stock option activity as of December 31, 2014, 2013 and 2012, and changes during the years then ended are presented below (in thousands, except per share and term amounts):



	Options Outstanding

			Weighted-	Weighted-
			Average	Average
	Number		Exercise	Remaining	Aggregate
	of		Price Per	Contractual	Intrinsic
	Shares		Share	Term (Years)	Value
Balance as of January 1, 2012	6,915	$	3.46	6.98	$	8,130
Options forfeited	(1,536)		5.13
Options granted	1,889		6.14
Options exercised	(1,270)		2.66
Balance as of December 31, 2012	5,998	$	4.05	6.06	$	5,575
Options forfeited	(966)		5.45
Options granted	1,637		4.76
Options exercised	(574)		2.82
Balance as of December 31, 2013	6,095	$	4.14	5.66	$	7,199
Options forfeited	(705)		5.10
Options granted	1,740		4.85
Options exercised	(1,233)		4.43
Balance as of December 31, 2014	5,897	$	4.17	6.08	$	27,066
Vested and expected to vest after December 31, 2014	5,445	$	4.11	5.84	$	25,342
Exercisable as of December 31, 2014	3,397	$	3.60	4.09	$	17,537

During 2013, the Company extended the period in which two of the Company’s board members could exercise their outstanding vested stock options following the cessation of their service to the Company from ninety days to the second anniversary of the date of cessation of service which was on June 27, 2013. The Company recorded expense of approximately $0.2 million for the year ended December 31, 2013 related to these modifications. In addition, the Company extended the period in which two former employees of the Company could exercise their outstanding vested stock options following the cessation of their service to the Company from ninety days to the one year anniversary of the date of cessation of their services. The Company recorded expense of approximately $0.1 million for the year ended December 31, 2013 related to these modifications.

The Company has granted certain performance-based options to purchase shares of the Company’s common stock at an exercise price equal to the closing price of a share of the Company’s common stock as of the grant date. The options will fully vest on meeting a performance goal within an established time frame. If the performance goal is met for the option within the established time frame, the option generally has a ten-year term measured from the date of grant. If the performance goal is not met within the established time frame, the option expires in its entirety. The Company recognizes expense related to a performance-based option over the period of time the Company determines that it is probable that the performance goal will be achieved. If it is subsequently determined that the performance goal is not probable of achievement, the expense related to the performance-based option is reversed. For years ended December 31, 2014, 2013, and 2012, the Company recognized approximately $0.1 million, $39,000, and $36,000, respectively, of expense related to performance-based options.

The weighted-average fair value of stock options granted for the years ended December 31, 2014, 2013, and 2012 was $2.43, $2.56, and $3.36, respectively. The intrinsic value of options at time of exercise was $2.4 million, $1.3 million, and $4.5 million, for the years ended December 31, 2014, 2013, and 2012, respectively. The estimated fair value of options vested for the years ended December 31, 2014, 2013, and 2012 was $3.2 million, $3.8 million, and $4.1 million, respectively. As of December 31, 2014, unamortized compensation expense related to unvested options was approximately $4.4 million, net of forfeitures. The weighted average period over which compensation expense related to these options will be recognized is approximately 2.58 years. Cash received from stock option exercises was $5.5 million, $1.6 million, and $3.4 million, for the years ended December 31, 2014, 2013, and 2012, respectively.

RSUs

The following table summarizes RSU activity as of December 31, 2014, 2013 and 2012 and changes during the years then ended are presented below (in thousands):



	Restricted Stock Units
	Outstanding

	Number	Aggregate
	of	Intrinsic
	Shares	Value
Balance as of January 1, 2012	177	$	758
Awarded	190
Vested/Released	(47)
Forfeited	(60)
Balance as of December 31, 2012	260	$	1,121
Awarded	170
Vested/Released	(39)
Forfeited	(23)
Balance as of December 31, 2013	368	$	1,857
Awarded	7
Vested/Released	(212)
Forfeited	(4)
Balance as of December 31, 2014	159	$	1,393
Vested and expected to vest after December 31, 2014	140	$	1,222
Exercisable as of December 31, 2014 (Vested and deferred)	—		—

The RSUs generally vest 25% approximately one year after grant date with the remaining shares vesting either approximately annually or quarterly in equal installments over a three-year period, depending on the terms of the grant. The weighted average fair value at grant date of the RSUs was $4.52, $4.98, and $6.49 for the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, there was approximately $0.3 million of unrecognized compensation cost, net of forfeitures, related to non-vested RSUs, which is expected to be recognized over a weighted average remaining period of approximately 1.28 years.

Employee Stock Purchase Plan

As of December 31, 2014, 1,300,000 shares of the Company’s common stock are reserved for issuance under the Company’s Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP, eligible employees may choose to have up to 15% of their salary withheld to purchase the Company's common stock and may purchase up to 1,000 shares per offering period. Each offering under the ESPP is for a three-month period. The purchase price of the stock issued under the ESPP will be equal to 85% of the lower of the fair market value of a share of common stock on the first day of the offering or on the final day of the offering period. As of December 31, 2014, 456,819 shares of common stock were available for issuance under the ESPP.

Repurchase of Common Stock

In July 2014, the Company’s Board of Directors approved an increase of $15.0 million to the existing $50.5 million share repurchase program initiated in October 2011, bringing the total authorized under the program since inception to approximately $65.5 million. In addition, the Board of Directors approved extending the repurchase program through December 31, 2015. The Company repurchased and retired 3,822,434, 2,404,034, and 4,709,651 shares at a cost of $24.4 million, $12.5 million, and $24.8 million during the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, $0.3 million of the $65.5 million share repurchase program authorized by the Board was available for future share repurchases.

Repurchased shares have been retired and constitute authorized but unissued shares. Upon repurchase, the Company eliminates the par value associated with the retired shares, and the excess price of the repurchase above par value is charged to retained earnings (accumulated deficit).

Stockholder Rights Agreement

On December 18, 2006, the Company’s Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the “Rights”) for each outstanding share of the Company’s Common Stock, each Right which entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series D Preferred Stock, $0.001 par value, at a price of $25.00 pursuant to a Rights Agreement dated as of December 19, 2006, between the Company and Mellon Investor Services LLC (the “Rights Agreement”). The Rights, which will initially trade with the Common Stock, become exercisable when a person or group acquires 15% or more of the Company’s Common Stock without prior board approval. In that event, the Rights permit the Company’s stockholders, other than the acquirer, to purchase the Company’s Common Stock having a market value of twice the exercise price of the Rights, in lieu of the Preferred Stock. Alternatively, when the Rights become exercisable, the Company’s Board of Directors may authorize the issuance of one share of the Company’s Common Stock in exchange for each Right that is then exercisable. In addition, in the event of certain business combinations, the Rights permit the purchase of the Common Stock of an acquirer at a 50% discount. Rights held by the acquirer will become null and void in each case. Prior to a person or group acquiring 15%, the Rights can be redeemed for $0.001 each by action of the Board. The Rights Agreement contains an exception to the 15% ownership threshold for shares currently beneficially owned by Sigma-Tau Finanziaria S.p.A. The Rights expire on December 19, 2016. The Rights Agreement includes a requirement that a committee of independent directors evaluate the Rights Agreement at least every three years.