Stock-based Compensation and Stockholders’ Equity

Treasury Stock

In November 2008, the Board of Directors approved a program to repurchase, from time to time, at management’s discretion, shares of the Company’s common stock. Under the plan, the Company was authorized to repurchase up to 2,000,000 of its outstanding shares of common stock in the open market or in private transactions during the period ended June 30, 2009 at prevailing market prices in compliance with applicable securities laws and other legal requirements. Repurchases were made under the program using the Company’s own cash resources. The plan did not obligate the Company to acquire any particular amount of common stock and the plan could be suspended or discontinued at any time. In fiscal year 2009, the Company repurchased 445,028 shares of the Company’s common stock at a weighted average price of $4.56 per share for $2,030,000.

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, if the proceeds from the sale are more than the average price the Company paid to acquire the shares, the Company records an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.

Equity Incentive Plan

In January 2011, the Board of Directors approved an amendment to the 2006 Equity Incentive Plan (the “2006 Plan”) that increased by 2,000,000 the aggregate maximum number of shares that may be issued under the 2006 Plan. The amendment to the 2006 Plan was approved by the Company’s stockholders in February 2011. The authorized number of shares that may be issued under the 2006 Plan automatically increases on July 1 each year through 2016, by an amount equal to (a) 3.0% of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at the time of grant cannot be less than 110% of the fair value. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant and options vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. The 2006 Plan is the successor equity incentive plan to the Company's 1998 Stock Option Plan.

In fiscal years 2012, 2011 and 2010, the Company granted 2,381,700, 2,172,920 and 1,581,230 options under the 2006 Plan, respectively. As of June 30, 2012, the Company had 899,288 authorized shares available for future issuance under all of its equity incentive plans.

Restricted Stock Awards

Restricted stock awards are share awards that provide the rights to a set number of shares of the Company’s stock on the grant date. In August 2008, the Compensation Committee of the Board of Directors of the Company (the “Committee”) approved the terms of an agreement (the “Option Exercise Agreement”) with Charles Liang, a director and President and Chief Executive Officer of the Company, pursuant to which Mr. Liang exercised a fully vested option previously granted to him for the purchase of 925,000 shares. The option was exercised using a “net-exercise” procedure in which he was issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (898,205 shares based upon the market value as of the date of exercise). The shares issued upon exercise of the option are subject to vesting over five years. Vesting of the shares subject to the award may accelerate in certain circumstances pursuant to the terms of the Option Exercise Agreement. The Company determined that there is no incremental fair value of the option exchanged for the award. 538,923 and 359,282 shares were vested as of June 30, 2012 and 2011, respectively.

In November 2008, the Committee approved the terms of an Option Exercise Agreement with Chiu-Chu Liang, a director and Vice President of Operations & Treasurer of the Company and Shiow-Meei Liaw, Senior Warehouse Manager of the Company, pursuant to which they exercised fully vested options previously granted to them for the purchase of 185,263 and 92,631 shares, respectively. They exercised the options using a “net-exercise” procedure in which they were issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (182,611 and 91,305 shares, respectively, based upon the market value as of the date of exercise). The shares issued upon exercise of the options are subject to vesting over two years. Vesting of the shares subject to the awards may accelerate in certain circumstances pursuant to the terms of the applicable Option Exercise Agreement. The Company determined that there is no incremental fair value of the option exchanged for the awards. The awards were fully vested as of June 30, 2012 and 2011.

Determining Fair Value

Valuation and amortization method—The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on an analysis of the relevant peer companies’ post-vest termination rates and the exercise factors for the stock options granted prior to June 30, 2011. For stock options granted after June 30, 2011, the expected term is based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility—Expected volatility is based on a combination of the implied and historical volatility for its peer group and the Company’s historical volatility for the stock options granted prior to September 30, 2009. For stock options granted after September 30, 2009, expected volatility is based solely on the Company’s historical volatility.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the years ended June 30, 2012, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Years Ended June 30,
	2012			2011			2010
Risk-free interest rate	0.83% - 1.32%			1.01% - 2.12%			1.88% - 2.28%
Expected life	5.01 - 5.04 years			4.33 - 4.45 years			4.06 - 4.32 years
Dividend yield	—		%	—		%	—		%
Volatility	45.62% - 53.72%			54.50% - 57.02%			51.88% - 55.01%
Weighted-average fair value	$	7.15		$	6.43		$	5.34

The following table shows total stock-based compensation expense included in the consolidated statements of operations for the years ended June 30, 2012, 2011 and 2010 (in thousands).



	Years Ended June 30,
	2012			2011			2010
Cost of sales	$	783		$	812		$	573
Research and development	5,542			4,077			3,106
Sales and marketing	1,469			1,077			880
General and administrative	2,458			2,090			1,898
Stock-based compensation expense before taxes	10,252			8,056			6,457
Income tax impact	(1,582		)	(1,412		)	(1,052		)
Stock-based compensation expense, net	$	8,670		$	6,644		$	5,405

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash from financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash from operating activities. The Company had $3,421,000, $12,440,000 and $5,759,000 of excess tax benefits accounted in the Company’s additional paid-in capital in the year ended June 30, 2012, 2011 and 2010, respectively. The Company had excess tax benefits that are classified as cash from financing activities of $2,047,000, $2,401,000 and $1,484,000 in the year ended June 30, 2012, 2011 and 2010, respectively, for options issued since July 1, 2006. Excess tax benefits for stock options issued prior to July 1, 2006 continue to be classified as cash from operating activities.

Stock Option Activity

The following table summarizes stock option activity during the years ended June 30, 2012, 2011 and 2010 under all stock option plans:



	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Balance as of July 1, 2009 (8,297,505 shares exercisable at weighted average exercise price of $3.86 per share)	12,672,645		$	5.17
Granted (weighted average fair value of $5.34)	1,581,230		12.23
Exercised	(1,958,652	)	3.24
Forfeited	(170,278	)	9.13
Balance as of June 30, 2010 (8,264,920 shares exercisable at weighted average exercise price of $5.00 per share)	12,124,945		6.34
Granted (weighted average fair value of $6.43)	2,172,920		14.02
Exercised	(3,560,570	)	3.27
Forfeited	(256,510	)	10.85
Balance as of June 30, 2011 (6,617,414 shares exercisable at weighted average exercise price of $7.18 per share)	10,480,785		8.86
Granted (weighted average fair value of $7.15)	2,381,700		15.89
Exercised	(1,211,070	)	7.06
Forfeited	(349,187	)	14.60
Balance as of June 30, 2012	11,302,228		$	10.36	6.50	$	66,062
Options vested and expected to vest at June 30, 2012	10,868,515		$	10.15	6.39	$	65,650
Options vested and exercisable at June 30, 2012	7,410,152		$	8.25	5.34	$	57,524

The total pretax intrinsic value of options exercised during the years ended June 30, 2012, 2011 and 2010 was $11,589,000, $42,630,000 and $17,018,000, respectively. In fiscal year 2011, 961,000 shares of non-qualified expiring stock options were net-share exercised such that the Company withheld 413,906 shares with value equivalent to the officers’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld for taxes were based on the value of the option exercised as determined by the Company’s closing stock price. The payments for the employees’ tax obligations to the taxing authorities were $6,990,000 in fiscal year 2011 and 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 been issued as a result of the exercising and did not represent an expense to the Company.

As of June 30, 2012, the Company’s total unrecognized compensation cost related to non-vested stock-based awards granted since July 1, 2006 to employees and non-employee directors was $22,959,000, which will be recognized over a weighted-average vesting period of approximately 2.45 years.

Additional information regarding options outstanding as of June 30, 2012, is as follows:



	Options Outstanding				Options Vested and Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Term (Years)	Weighted- Average Exercise Price Per Share		Number Exercisable	Weighted- Average Exercise Price Per Share
$1.25 - 3.08	1,550,139	1.84	$	2.43	1,550,139	$	2.43
3.25 - 6.14	1,632,235	5.91	5.25		1,391,652	5.19
6.21 - 8.36	1,483,663	6.05	7.97		1,303,036	7.93
8.47 - 10.66	1,376,610	6.00	10.04		1,286,610	10.00
10.68 - 12.92	1,259,774	8.18	11.94		570,859	11.90
13.61 - 13.89	1,327,292	6.87	13.73		816,381	13.78
15.22 - 17.09	1,155,630	9.31	15.91		113,758	15.99
17.12 - 17.69	660,380	9.80	17.30		—	—
18.59	486,018	8.76	18.59		158,727	18.59
18.89	370,487	7.69	18.89		218,990	18.89
$1.25 - $18.89	11,302,228	6.50	$	10.36	7,410,152	$	8.25

Restricted Stock Award Activity

The following table summarizes the Company’s restricted stock award activity for the year ended June 30, 2012, 2011 and 2010:



	Restricted Stock Awards
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested stock at July 1, 2009	1,172,121		$	9.39
Granted	—		—
Vested	(316,598	)	8.32
Forfeited	—		—
Nonvested stock at June 30, 2010	855,523		9.79
Granted	—		—
Vested	(316,600	)	8.32
Forfeited	—		—
Nonvested stock at June 30, 2011	538,923		10.66
Granted	3,500		17.29
Vested	(179,641	)	10.66
Forfeited	—		—
Nonvested stock at June 30, 2012	362,782		$	10.72

The total pretax intrinsic value of restricted stock awards vested was $2,375,000, $3,066,000 and $2,633,000 for the years ended June 30, 2012, 2011 and 2010, respectively. In fiscal year 2012 and 2011, upon vesting, 179,641 and 316,600 shares of restricted stock awards were net share-settled such that the Company withheld 83,857 and 147,977 shares with value equivalent to the officers’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. The total shares withheld were based on the value of the restricted stock awards on their vesting date as determined by the Company’s closing stock price. Total payments for the officers’ tax obligations to the taxing authorities were $1,109,000 and $1,434,000 in fiscal year 2012 and 2011, respectively, and 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 been issued as a result of the vesting and did not represent an expense to the Company.

The total intrinsic value of the outstanding restricted stock awards was $5,754,000 as of June 30, 2012. There is no incremental fair value to be recognized as compensation expense in connection with the unvested restricted stock awards of 359,282 shares.