11. Stockholders' Equity

Capital Structure

The Company maintains three equity incentive plans the 2000 Stock Plan, the 2002 Stock Plan and 2010 Equity Incentive Plan (together, the "Plans"). These plans were approved by the stockholders and are described in the Company's Form 10-K filed with the SEC on February 24, 2011. In connection with the acquisition of Occam, the Company issued 6.4 million shares of the Company's common stock, a value of $117.2 million. For more information regarding the acquisition, of Occam see Note 3 "Acquisition of Occam Networks" in the notes to these condensed consolidated financial statements. In connection with the Company's Employee Stock Purchase Plan or the ESPP, 176,665 shares were issued on May 31, 2011. The Company issued 423,000 restricted stock awards to certain executives during the quarter ended September 24, 2011, which are included in common stock outstanding.

Preferred Stock

The board of directors has the authority, without action by its stockholders with the exception of stockholders who hold board positions, to designate and issue up to 5 million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company's preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. Subsequent to the Company's initial public offering and the conversion of all preferred stock outstanding at that date, the board of directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock have been issued.

Stock Based Compensation

Stock-based compensation expense associated with stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs") and ESPP is measured at the grant date, based on the fair value of the award, and is recognized as expense over the remaining requisite service period. During the three and nine months ended September 24, 2011, the Company recorded stock-based compensation expense of $3.8 million and $17.2 million, respectively and for the three and nine months ended, September 25, 2010, the Company recorded stock-based compensation expense of $7.5 million and $17.5 million, respectively.

On February 22, 2011, in connection with the acquisition of Occam (see Note 3 "Acquisition of Occam Networks" in the notes to these condensed consolidated financial statements), the Company issued 536,190 stock options and 42,654 RSUs to certain Occam employees. The grants were in exchange for certain options and RSUs that were held by Occam employees prior to the acquisition which retained the original vesting schedule of the initial Occam grants, except for certain equity awards held by Occam executives that were accelerated in association with their severance agreements. The Company estimated the fair value of $5.9 million of the options and RSUs in accordance with ASC Topic 718. In accordance with ASC Topic 805 the Company allocated the value of $1.4 million of certain options and RSUs to consideration in the business combination with the remaining value of $4.5 million allocated to post-combination expense to be recognized over the remaining service period of the grants.

 

Stock Options

The Company estimates the fair value of stock options in accordance with ASC Topic 718. The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

		Three Months Ended								Nine Months Ended
		September 24, 2011				September 25, 2010				September 24, 2011				September 25, 2010
Expected volatility			52	%			60	%			52	%			51	%
Expected life (years)			6.25				6.25				6.25				6.25
Expected dividend yield			—				—				—				—
Risk free interest rate			1.41	%			1.91	%			2.2	%			2.60	%

The Company's computation of expected volatility for the three and nine months ended September 24, 2011 and September 25, 2010 is based on the Company's peer-group of similar companies. The Company's computation of expected term in the three and nine months ended September 24, 2011 and September 25, 2010 utilizes the simplified method in accordance with SAB 110. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant with maturities equal to the grant's expected life. In addition, ASC Topic 718 requires the Company to estimate the number of options that are expected to vest. Thus, the Company applies an estimated forfeiture rate based on actual forfeiture experience. The Company recognizes stock-based compensation expense for the fair values of these awards on a straight-line basis over the requisite service period of each of these awards.

As of September 24, 2011, unrecognized stock-based compensation expense related to stock options of $8.8 million, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 3.1 years.

Restricted Stock Units

In September 2009, the Company began to grant RSUs to eligible employees, executives and outside directors. Each RSU represents a right to receive one share of the Company's common stock (subject to adjustment for certain specified changes in the capital structure of the Company) upon the completion of a specific period of continued service.

Upon vesting of RSUs during the period ended September 24, 2011, the RSUs were net share-settled to cover the required withholding tax and the remaining amount was converted into an equivalent number of shares of common stock. The Company withheld shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 486,000, which was based on the value of the RSUs on their vesting date as determined by the Company's closing stock price. Total payments for the employees' tax obligations to the taxing authorities were approximately $10.4 million, and these are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise have been issued as a result of the vesting and did not represent an expense to the Company.

The Company values the RSUs at fair value or the market price of the Company's common stock on the date of grant. The Company recognizes non-cash compensation expense for the fair values of these RSUs on a straight-line basis over the requisite service period of these awards.

The weighted-average grant date fair value of RSUs granted during the nine months ended September 24, 2011 was $21.47 per share. As of September 24, 2011, unrecognized stock-based compensation expense related to RSUs of $22.1 million, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 3.1 years.

Restricted Stock Awards

In July 2011, the Company granted 423,000 RSAs to executives. The Company values the RSAs at fair value or the market price of the Company's common stock on the date of grant. The Company recognizes non-cash compensation expense for the fair values of these RSAs on a straight-line basis over the requisite service period of these awards. The weighted-average grant date fair value of RSAs granted during the quarter was $21.67 per share. As of September 24, 2011, unrecognized stock-based compensation expense related to RSAs of $7.7 million, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 3.8 years.

 

Employee Stock Purchase Plan.

The Company's 2010 Employee Stock Purchase Plan, as amended, (the "Employee Stock Purchase Plan") allows employees to purchase shares of the Company's common stock through payroll deductions of up to 15 percent of their annual compensation subject to certain Internal Revenue Code limitations. The price of common stock purchased under the plan is equal to 85 percent of the lower of the fair market value of the common stock on the commencement date and exercise date of each of the six month offering period.

The Employee Stock Purchase Plan provides for the issuance of a maximum of 1.0 million shares of common stock of which 0.8 million shares were available for issuance as of September 24, 2011. For the three and nine months ended September 24, 2011, stock-based compensation expense was $0.5 million and $1.1 million respectively.

As of September 24, 2011, unrecognized stock-based compensation expense related to employee stock purchase plan of $0.3 million was expected to be recognized over a remaining service period of 2 months.