SHARE-BASED COMPENSATION

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, no par value, of which none were issued or outstanding at December 31, 2012. The preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of such preferred stock.

Share Repurchase Program

In February 2010, the Company’s Board of Directors approved a $15.0 million share repurchase program for calendar year 2010. In September 2010, the Company’s Board of Directors approved an increase to the amount authorized for repurchase from $15.0 million to $30.0 million. In November 2010, the Company’s Board of Directors approved an extension of the termination of the authorized repurchase plan from December 31, 2010 to the date on which the total authorized aggregate amount was expended. In May 2011, the Company’s Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock. On July 26, 2012, the Company announced that its Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock which increased the total approval for repurchase since February 2010 to $90.0 million. The total available for repurchase as of December 31, 2012 was $19.1 million

Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and unissued reserve account. Share repurchases are recorded as a reduction to common stock to the extent available. Any amounts repurchased which are in excess of the existing total common stock balance are recorded as a reduction of retained earnings. Share repurchases are intended to reduce the number of outstanding shares of common stock to increase shareholder value and offset dilution from the Company’s stock option plans and the Micrel, Incorporated Employee Stock Purchase Plan (“ESPP”). During the year ended December 31, 2012, the Company repurchased 3,431,548 shares of its common stock for an aggregate price of $34.6 million.

Incentive Award Plans

The Company has in effect incentive stock plans under which incentive stock options have been granted to employees and restricted stock units and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors.

On May 24, 2012, the Company’s shareholders approved the Micrel, Incorporated 2012 Equity Incentive Award Plan (the “2012 Plan”) and the reservation of an aggregate of 6,000,000 shares of Common Stock for issuance pursuant to the 2012 Plan.

The 2012 Plan has replaced in its entirety the Company’s 1994 Stock Option Plan, the Micrel, Incorporated 2000 Non-Qualified Stock Incentive Plan and the Micrel, Incorporated 2003 Incentive Award Plan (the "Prior Plans"). No new award has been made under these plans since May 24, 2012. However, the shares of Common Stock that remained available for issuance under the Prior Plans were added to the shares reserved for issuance under the 2012 Plan. In addition, shares of Common Stock subject to awards already granted under the Micrel, Incorporated 2003 Incentive Award Plan that terminate expire or lapse will become available for issuance under the 2012 Plan, provided that the aggregate number of shares of Common Stock available for issuance under the 2012 Plan is reduced by two (2) shares for each share of Common Stock delivered in settlement of any award other than a stock option or stock appreciation right. On the effective date of the 2012 Plan which was May 24, 2012, the Prior Plans were terminated, provided, that any awards outstanding under the Prior Plans remain outstanding pursuant to their respective terms. At December 31, 2012, there were 5,548,487 shares available for future grants under the 2012 Plan and 14,581,806 total shares reserved for future issuance under all of the Company’s incentive stock plans.

Stock Options

Options granted under the 2012 Plan typically become exercisable in cumulative annual increments of 20% per year from the date of grant. The term of each stock option is no more than ten years from the date of grant.

Option activity under the Company’s incentive stock plans is as follows:



	Number of Shares		Weighted Avg. Exercise Price Per Share
Outstanding, December 31, 2009 (3,170,359 exercisable at a weighted average price of $11.18 per share and a weighted average remaining contractual life of 4.8 years)	7,704,997		$	9.41
Granted	1,528,990		10.36
Exercised	(785,633	)	8.13
Canceled	(564,549	)	10.84
Outstanding, December 31, 2010 (3,430,038 exercisable at a weighted average price of $10.74 per share and a weighted average remaining contractual life of 4.7 years)	7,883,805		9.65
Granted	2,165,056		12.14
Exercised	(1,246,435	)	9.39
Canceled	(842,256	)	10.64
Outstanding, December 31, 2011 (3,366,610 exercisable at a weighted average price of $10.31 per share and a weighted average remaining contractual life of 4.3 years)	7,960,170		10.26
Granted	1,494,250		10.13
Exercised	(415,156	)	7.91
Canceled	(882,995	)	11.22
Outstanding, December 31, 2012 (4,068,071 exercisable at a weighted average price of $9.98 per share and a weighted average remaining contractual life of 4.2 years)	8,156,269		10.25

As of December 31, 2012, the estimated number of options exercisable and expected to vest was 6.9 million shares with a weighted average remaining contractual life of 5.9 years and an estimated aggregate intrinsic value of $4.3 million.

The weighted average fair value (computed using the Black-Scholes option pricing model) of options granted under the stock option plans during the years ended December 31, 2012, 2011 and 2010 was $2.96, $4.36 and $4.07 per share, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the years ended December 31, 2012, 2011 and 2010 was $1.0 million, $4.6 million and $2.4 million, respectively. During the years ended December 31, 2012, 2011 and 2010, the amount of cash received from the exercise of stock options was $3.3 million, $11.7 million and $6.5 million, respectively. The net tax benefit realized from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options was $218,000, $477,000 and $211,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

As of December 31, 2012, the aggregate pre-tax intrinsic value (which was the amount by which the $9.50 closing price of the Company's common stock at December 31, 2012 exceeded the exercise price of the in the money options) of options outstanding and options exercisable was approximately $4.7 million and $3.3 million, respectively.

Restricted Stock Units

The 2012 Plan and 2003 Plan also provide for the use of incentive awards other than stock options. In October 2007, the Company’s Compensation Committee approved a plan to begin granting restricted stock units ("RSUs") to employees in accordance with the provisions of the 2003 Plan. As of December 31, 2012, approximately 16% and 43% of the RSUs would vest in three and four equal installments annually over three years and four years, respectively. Approximately 41% of the RSUs would vest one third on each of the third, fourth and fifth annual anniversaries of the grant date. Information with respect to outstanding RSU activity is as follows:



	Number of Shares		Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2009	91,423		$	7.40
Granted	54,670		10.33
Vested	—
Forfeited	(333	)	9.46
Outstanding, December 31, 2010	145,760		8.36
Granted	589,638		10.09
Vested	(14,750	)	7.72
Forfeited	(53,371	)	10.44
Outstanding, December 31, 2011	667,277		9.73
Granted	417,531		9.67
Vested	(146,327	)	9.49
Forfeited	(61,431	)	9.65
Outstanding, December 31, 2012	877,050		9.83

As of December 31, 2012, the estimated number of RSUs expected to vest was 614,000 shares with a weighted average remaining contractual life of 3.1 years and an estimated aggregate intrinsic value of $5.8 million.

Accounting for Share-based Compensation

Share-based compensation costs for stock option grants are based on the fair value calculated from a stock option pricing model on the date of grant. The Company has utilized the Black-Scholes option pricing model to determine the fair value for stock option grants. The fair value of stock option grants is recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the consolidated statements of cash flows. Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) is shown in the financing activities section of the consolidated statements of cash flows.

The fair value of the stock options granted under the Company's option plans was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:



	Years Ended December 31,
	2012		2011		2010
Expected term (years)	5.8		5.7		5.9
Stock volatility	36.6	%	40.4	%	40.9	%
Risk free interest rates	1.0	%	1.7	%	2.2	%
Dividends during expected terms	1.6	%	1.4	%	1.3	%

Expected term is based on an analysis of historical exercises and the remaining contractual life of options.

Stock volatility is based upon a combination of both historical stock price volatility and implied volatility derived from traded options on the Company’s stock in the marketplace.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company estimates potential forfeitures of stock grants and accordingly adjusts compensation cost recorded. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

The following table shows total share-based compensation expense recognized in the Consolidated Statement of Operations for 2012, 2011 and 2010 (in thousands):



	Years Ended December 31,
	2012			2011			2010
Cost of revenues	$	1,178		$	1,009		$	798
Research and development	3,132			2,401			1,808
Selling, general and administrative	3,282			2,444			2,119
Pre-tax share-based compensation expense	7,592			5,854			4,725
Less income tax effect	(2,583		)	(2,104		)	(1,863		)
Net share-based compensation expense	$	5,009		$	3,750		$	2,862

Total share-based compensation capitalized as part of inventory as of December 31, 2012 and 2011 was $139,000 and $174,000, respectively. As of December 31, 2012, there was $14.7 million of total unrecognized share-based compensation related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 3.1 years.

Employee Stock Purchase Plan

Under the Company’s ESPP, eligible employees are permitted to have salary withholdings to purchase shares of Common Stock at a price equal to 95% of the market value of the stock at the end of each three-month offer period, subject to an annual limitation. The ESPP is considered non-compensatory per current share-based compensation accounting guidelines. The aggregate number of shares of common stock which may be issued under the plan shall be no more than 2,000,000 shares. Shares of Common Stock issued under the ESPP during 2012, 2011 and 2010 were, 38,497, 32,386, and 30,688 and , respectively, at weighted average prices of $9.40, $10.21 and $10.35 respectively.