6.  Stockholder’s Equity

The Company has two stock plans —the 2004 Equity Incentive Plan and the 2014 Equity Incentive Plan (collectively, the “Stock Plans”).

2004 Equity Incentive Plan (the “2004 Plan”)

The Company’s Board of Directors adopted the 2004 Plan in March 2004, and the Company’s stockholders approved it in November 2004. Grants generally vest over two to ten years. The 2004 Plan provides for annual increases in the number of shares available for issuance beginning on January 1, 2005 equal to the least of 5% of the outstanding shares of common stock on the first day of the year, 2,400,000 shares, or a number of shares determined by the Board of Directors. For the year ended December 31, 2013, the Company added 1.8 million shares available for future issuance to the 2004 Plan. As of December 31, 2013, approximately 3.8 million shares were available for future issuance.

The 2004 Plan will expire on November 12, 2014. Once the 2004 Plan expires, the Company will no longer be able to grant equity awards under the 2004 Plan, and any shares otherwise remaining available for future grants under the 2004 Plan will no longer be available for issuance.

2014 Equity Incentive Plan (the “2014 Plan”)

The Company’s Board of Directors adopted the 2014 Plan in April 2013, and the Company’s stockholders approved it in June 2013. The 2014 Plan will become effective on November 13, 2014, the day after the 2004 Plan expires. The 2014 Plan provides for the issuance of up to 5,500,000 shares and will expire on November 13, 2024.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense as follows (in thousands):

Special Cash Dividend

On December 11, 2012, the Company’s Board of Directors declared a special cash dividend of $1.00 per common share, which was paid on December 28, 2012 to all shareholders of record as of the close of business on December 21, 2012, for a total of $35.7 million.  This was the first cash dividend in the Company’s history. Any future dividends will be subject to the approval of the Company’s Board of Directors.

Equity Award Modifications

In connection with the special cash dividend, the Company’s Board of Directors approved an equity award modification whereby the number of shares of each option outstanding as of December 28, 2012 was increased by a ratio of 1.0471 and the exercise price was reduced by the same ratio. Consequently, the Company granted an additional 171,484 shares. This modification was permissible pursuant to the Company’s 2004 Plan and resulted in an incremental compensation cost of $2.9 million, of which $2.8 million was recognized during the fourth quarter of 2012. The remaining $0.1 million is being recognized over the remaining vesting period of the awards. The Company used the Black-Scholes model to determine the fair value of the additional option awards with the following weighted-average assumptions: expected term of 1.9 years, expected volatility of 41.0%, risk-free interest rate of 0.3% and dividend yield of 0.0%.

In addition, in connection with the special cash dividend, the Company’s Board of Directors approved an equity award modification whereby for each unvested RSU as of December 28, 2012, the holder would receive 1.0471 shares upon vesting of the original awards granted. Consequently, the Company granted an additional 73,805 shares. This modification was permissible pursuant to the Company’s 2004 Plan and resulted in an incremental compensation cost of $1.5 million, which is being recognized over the remaining vesting period of the awards. The fair value of the additional RSUs was based on the grant date share price.

RSUs

The Company’s RSUs include time-based RSUs, performance-based RSUs (“PSUs”) and market-based RSUs (“MSUs”). A summary of the RSUs is presented in the table below:

The intrinsic value related to time-based RSUs and PSUs released for the years ended December 31, 2013, 2012 and 2011 was $18.6 million, $10.5 million and $5.8 million, respectively. As of December 31, 2013, the total intrinsic value of outstanding time-based RSUs, PSUs and MSUs was $124.2 million. As of December 31, 2013, unamortized compensation expense related to outstanding time-based RSUs, PSUs and MSUs was approximately $47.7 million with a weighted-average remaining recognition period of approximately seven years.

2013 MSUs:

In December 2013, the Board of Directors granted 360,000 shares to the Company’s executive officers and certain key employees. The MSUs represent the right to receive a maximum of 1.8 million shares that can be earned upon achievement of certain pre-determined MPS stock price hurdles from January 1, 2014 to December 31, 2018 (“2013 MSUs”). The 2013 MSUs that meet the pre-determined stock price hurdles from January 1, 2014 to December 31, 2018 will vest quarterly from January 1, 2019 to December 31, 2023, subject to continued employment with the Company.

In the event of a change in control, as generally defined in the 2004 Plan, in which the effective price per share paid by the acquiror meets or exceeds the stock price hurdles associated with the 2013 MSUs, all stock price hurdles at or below that price per share will be deemed met. All shares associated with the stock price hurdles that have been met (or deemed met based upon the price per share to be paid by the acquiror) prior to the closing of such transaction will be immediately and fully vested as they are deemed to have satisfied the time-based vesting requirement as of the closing of such transaction.

The Company determined the grant date fair value of the 2013 MSUs using a Monte Carlo simulation model with the following assumptions: grant date stock price of $31.73; expected volatility of 38.69%, risk-free interest rate of 1.6% and dividend yield of 0.0%. Stock-based compensation expense for the 2013 MSUs is not reversed if the pre-determined stock price hurdles are not satisfied.

2013 Time-Based RSUs and PSUs:

In February 2013, the Board of Directors granted 294,000 shares to the Company’s executive officers. These grants included 25% time-based RSUs which vest over two years on a quarterly basis, and 75% PSUs which represent a target number of RSUs to be awarded upon achievement of certain pre-determined revenue targets in 2014 (“2013 Executive PSUs”). The maximum number of 2013 Executive PSUs that an executive officer can receive is 300% of the target shares granted. Half of the 2013 Executive PSUs will vest in February 2015 if the pre-determined revenue goals are met and approved by the Compensation Committee and the employee is employed by the Company. The remaining shares will vest over the following two years on a quarterly basis.

In February 2013, the Board of Directors granted 215,000 shares to its non-executive employees. These grants included 124,000 time-based RSUs which vest over four years on a quarterly or annual basis, and 91,000 PSUs which represent a target number of RSUs to be awarded upon achievement of certain pre-determined revenue targets for the Company as a whole, certain regions or product-line divisions in 2014 (“2013 Non-Executive PSUs”). The maximum number of shares an employee can receive is either 200% or 300% of the target shares granted, depending on the job classification of the employee. Half of the 2013 Non-Executive PSUs will vest in the first quarter of 2015 if the pre-determined performance goals are met and approved by the Compensation Committee and the employee is employed by the Company.  The remaining shares will vest over the following two years on a quarterly or annual basis. 

Based on the Company’s 2014 revenue forecast as of December 31, 2013, the Company has determined that it is probable that it will be able to achieve or exceed the pre-determined revenue targets set for both the 2013 Executive PSUs and the 2013 Non-Executive PSUs. The Company continues to evaluate the expected performance against the pre-determined goals and will adjust stock-based compensation expense based on this assessment accordingly.

2012 Time-Based RSUs and PSUs:

In February 2012, the Board of Directors granted 413,000 shares to the Company’s executive officers. These grants included 50% time-based RSUs which vest over two years on a quarterly basis, and 50% PSUs which represent a target number of RSUs to be awarded upon achievement of certain pre-determined revenue targets in 2013 (“2012 Executive PSUs”). The maximum number of 2012 Executive PSUs that an executive officer can receive was 300% of the target shares granted. Half of the 2012 Executive PSUs will vest in February 2014 if the pre-determined revenue goals are met and approved by the Compensation Committee and the executive officer is employed by the Company. The remaining shares will vest over the following two years on a quarterly basis. In February 2014, the Compensation Committee approved the revenue goals achieved for the 2012 Executive PSUs and an additional 139,000 shares were awarded to the executive officers in February 2014.

In April 2012, the Board granted 345,000 shares to its non-executive employees. These grants included 220,000 shares of time-based RSUs which vest over four years on a quarterly or annual basis, and 125,000 shares of PSUs which represent a target number of shares to be awarded upon achievement of certain pre-determined revenue targets for the Company as a whole, certain regions or product-line divisions in 2013 (“2012 Non-Executive PSUs”). The maximum number of shares an employee can receive was either 200% or 300% of the target shares granted, depending on the job classification of the employee. Half of the 2012 Non-Executive PSUs will vest in the second quarter of 2014 if the pre-determined performance goals are met and approved by the Compensation Committee and the employee is employed by the Company. The remaining shares will vest over the following two years on a quarterly or annual basis.

2011 and 2012 CEO Awards:

In February 2011, the Company granted 153,000 time-based RSUs to its CEO. In February 2012, the Board of Directors approved the modification of half of the time-based RSUs to PSUs (“2012 CEO PSUs”). The time-based RSUs that were not modified vested over two years on a quarterly basis from February 2011 to February 2013. The 2012 CEO PSUs would vest upon achievement of the pre-determined performance goals based on the Company’s 2012 revenue and the CEO’s continued employment. The maximum number of 2012 CEO PSUs that could be released was 100% of the target shares granted. In February 2013, the Compensation Committee determined that the pre-determined performance goals were met and the 2012 CEO PSUs were released in February 2013.  

2010 PSUs:

In February 2010, the Board granted 416,000 shares of PSUs to the Company’s executive officers (“2010 Executive PSUs”), which would vest over four years, with a graded acceleration feature that allowed all or a portion of these awards to be accelerated if certain performance conditions were satisfied. The number of shares that would be accelerated was based on achieving certain performance targets as set forth in the Company’s annual operating plan, as determined by the Compensation Committee in its sole discretion.  In February 2013, the Compensation Committee determined that the pre-determined performance goals for the 2010 Executive PSUs were met and accelerated the vesting of the remaining unvested awards in February 2013.  

Stock Options 

A summary of the stock options activities is presented in the table below:

(1) Includes 171,484 options granted as a result of the equity award modification discussed above.

The following table summarizes certain information related to outstanding and exercisable options as of December 31, 2013:

Total intrinsic value of options exercised was $27.8 million, $10.0 million and $5.8 million, respectively, for the years ended December 31, 2013, 2012 and 2011. The net cash proceeds from the exercise of stock options were $37.9 million, $13.4 million and $4.7 million, respectively, for the years ended December 31, 2013, 2012 and 2011. At December 31, 2013, unamortized compensation expense related to unvested options was approximately $0.5 million. The weighted-average period over which compensation expense related to these unvested options will be recognized is approximately one year.

The grant date fair value of stock options was determined using the Black-Scholes model with the following assumptions (excluding the options modification discussed above): 

In estimating the expected term, the Company considers its historical stock option exercise experience, post-vesting cancellations and remaining contractual term of the options outstanding. In estimating the expected volatility, the Company uses its own historical data to determine the estimated expected volatility. The Company uses the U.S. Treasury yield for the risk-free interest rate and a dividend yield of zero, as the Company generally has not paid dividends. The cash dividend paid in December 2012 was a special dividend. The Company applies a forfeiture rate that is based on options that have been forfeited historically.

 2004 Employee Stock Purchase Plan

Under the 2004 Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase common stock through payroll deductions. Participants may not purchase more than 2,000 shares in a six-month offering period or stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations.  The ESPP provides for an automatic annual increase beginning on January 1, 2005 by an amount equal to the least of 1,000,000 shares, 2% of the outstanding shares of common stock on the first day of the year, or a number of shares as determined by the Board of Directors. For the years ended December 31, 2013, 2012 and 2011, 111,000 shares, 152,000 shares and 150,000 shares, respectively, were issued under the ESPP. As of December 31, 2013, approximately 4.8 million shares were available for future issuance.

The intrinsic value for stock purchased was $0.8 million, $1.0 million and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. The unamortized expense as of December 31, 2013 was $66,000, which will be recognized over two months. The Black-Scholes model was used to value the employee stock purchase rights with the following assumptions:

Cash proceeds from employee stock purchases for the years ended December 31, 2013, 2012 and 2011 was $2.1 million, $1.9 million and $1.8 million, respectively.