4. Equity Incentive Plan and Stock-Based Compensation

Equity Incentive Plan

The Company’s 2010 Equity Incentive Award Plan (2010 Plan) provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, performance awards, and deferred stock to its employees, consultants and non-employee members of its Board of Directors.

The annual restricted stock unit (RSU) awards granted in fiscal 2010 and fiscal 2011 for employees vest in four substantially equal annual installments on the anniversary date of the grant. Beginning the first quarter of fiscal 2012, the Company issued three-year RSU awards which vest in three substantially equal annual installments on the anniversary date of the grant.

The key executive RSU awards granted in fiscal 2010 and fiscal 2011 have a four-year performance period, with 50 percent of each target award (base shares) subject to performance goals in each of the four fiscal

years following the date of grant. In the first quarter of fiscal 2012, the Company issued three-year key executive RSU awards with a three year performance period with one-third of each target award (base shares) subject to performance goals in each of the three fiscal years following the date of grant. A minimum of 50 percent and a maximum of 150 percent of base shares may vest over a three-year period, subject to the Company’s financial performance. If the performance goals are not met in a particular year, the unvested shares will be carried forward but will be forfeited if not earned by the last performance year. If performance is above target in a particular year, base shares earned will be accelerated after shares carried forward from prior years are used.

In the first quarter of fiscal 2012, the Company issued additional two-year key executive RSU awards to certain executives in lieu of participation in the Company’s annual cash bonus plan, with 100 percent of each award (base shares) subject to performance goals in each of the two fiscal years following the date of grant. Vesting of 25 percent of these awards were accelerated on July 31, 2012 based on achievement of the first six month’s performance targets in fiscal 2012. The annual performance goals for these awards are the same as those for the three and four-year key executive RSU awards. A minimum of 0% and maximum of 100% of base shares vest each year, subject to performance. Unvested shares will not be carried forward and will be forfeited if not earned in any particular year.

The numbers of shares of common stock available for grant under the 2010 Plan are shown in the following table:

 

		Shares Available For Grant
Balance as of December 25, 2011			2,150,354
Additional shares issuable under 2010 Plan (annual increase for 2012)			3,560,245
Stock options granted, net of forfeitures/cancellations			(2,472,723	)
RSU awards granted, net of forfeitures/cancellations			(1,021,790	)
Key Executive RSU awards granted, net of forfeitures/cancellations			(902,771	)
Balance as of July 1, 2012			1,313,315

 

Stock-Based Compensation

The following table sets forth the total recorded stock-based compensation expense by financial statement caption resulting from the Company’s stock options and RSU awards:

 

		Three Months Ended								Six Months Ended
		July 1, 2012				June 26, 2011				July 1, 2012				June 26, 2011
						(in thousands)
Cost of sales		$	1,738			$	831			$	3,034			$	1,447
Research and development			2,109				1,160				3,695				1,974
Sales, general and administrative			5,121				3,057				8,686				6,175
Stock-based compensation expense before income taxes			8,968				5,048				15,415				9,596
Stock-based compensation expense after income taxes(1)		$	8,968			$	5,048			$	15,415			$	9,596

 

(1)	There was no income tax benefit related to stock-based compensation because all of the Company’s U.S. deferred tax assets, net of U.S. deferred tax liabilities, continue to be subject to a full valuation allowance.

The weighted average fair value of the Company’s stock options granted are as follows:

 

		Three Months Ended								Six Months Ended
		July 1, 2012				June 26, 2011				July 1, 2012				June 26, 2011
Fair value of stock options granted		$	4.96			$	8.24			$	4.17			$	8.73

The fair value of each stock option was estimated at the date of grant using a Black-Scholes option pricing model, with the following assumptions for grants:

 

		Three Months Ended								Six Months Ended
		July 1, 2012				June 26, 2011				July 1, 2012				June 26, 2011
Expected volatility			51.11	%			56.43	%			51.23	%			56.08	%
Risk-free interest rate			0.63	%			1.12	%			0.76	%			1.55	%
Expected term (in years)			4.35				4.35				4.35				4.35
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%

As of July 1, 2012, the total unrecognized compensation cost related to unvested stock options and RSU awards was approximately $54.5 million after reduction for estimated forfeitures, and such stock options and RSU awards will generally vest ratably through 2015.

 

Stock Option and Restricted Stock Unit Activity

The following table summarizes stock option activities and related information under the 2010 Plan for the periods presented:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)				Aggregate Intrinsic Value
														(in thousands)
Outstanding stock options as of December 25, 2011			4,295,794			$	14.97				5.65			$	—
Granted			2,629,900			$	9.96				—			$	—
Canceled/Forfeited			(157,177	)		$	14.38				—			$	—
Exercised			(107,506	)		$	10.51				—			$	—
Outstanding stock options as of July 1, 2012			6,661,011			$	13.08				5.82			$	3,921
Total vested and exercisable as of July 1, 2012			2,119,287			$	14.22				5.19			$	564

No income tax benefit was realized from stock option exercises for the three and six months ended July 1, 2012.

The following table summarizes RSU and key executive RSU award activities and related information for the six months ended July 1, 2012:

 

		RSU								Key Executive RSU
		Number of Shares				Weighted Average Grant-date Fair Value				Number of Shares				Weighted Average Grant-date Fair Value
Outstanding as of December 25, 2011			2,143,035			$	14.94				969,956			$	13.71
Granted			1,212,473			$	10.36				1,050,222			$	10.03
Canceled/Forfeited			(190,683	)		$	14.12				(147,451	)		$	13.06
Vested			(554,884	)		$	11.09				(147,451	)		$	10.03
Outstanding as of July 1, 2012			2,609,941			$	13.69				1,725,276			$	11.84

As described above, key executive RSUs granted during the six months ended July 1, 2012 have both service and performance conditions for vesting.