Note 9—Stock Activity and Stock Plans

2011 Shelf Registration Statement

In April 2011, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to, from time to time, sell up to an aggregate of $125 million of its common stock, warrants or debt securities. On August 19, 2011, the registration statement was declared effective by the SEC, which will allow the Company to access the capital markets for the three year period following this effective date. Through December 31, 2011, no instruments were issued under this registration statement.

Stock Sale and Equity Distribution Agreement

In November 2006, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to, from time to time, sell up to an aggregate of $125 million of the Company's common stock, warrants or debt securities. On August 8, 2008, the Company entered into an Equity Distribution Agreement ("EDA") with UBS Securities, LLC ("UBS"). The EDA provided that the Company could sell up to an aggregate of $15 million of the Company's common stock from time to time through UBS. In exchange for its services as sales agent, the Company paid UBS a commission equal to 3.5% of the gross sales price of the shares sold. In April 2009, the Company suspended the EDA program. As of January 2010, the shelf registration statement is no longer effective.

In May 2009, the Company issued two million shares of common stock, par value $0.10 per share, through a public offering underwritten by Roth Capital Partners ("Roth"), with an over-allotment option to purchase an additional 300,000 shares. In exchange for its services as underwriter, the Company paid Roth a commission of 7% of the gross sales price of the shares sold.

During the year ended December 31, 2009, the Company raised $21.0 million through the shelf registration statement and the EDA. This $21.0 million consists of $18.6 million in cash from the sale of 2.3 million shares, net of offering costs and $2.4 million from the sale of 473,000 shares under the EDA, net of offering costs.

Equity Incentive Plans

The Company has two active share-based compensation plans as of December 31, 2011: the 2004 Employee Stock Purchase Plan ("ESPP") and the 2005 Omnibus Equity Incentive Plan, as amended (the "Incentive Plan"). Under the Incentive Plan, incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units are granted to employees and non-employee directors. Generally, these awards vest over periods of one to four years. In addition, equity awards are issued to senior management where vesting of the award is tied to Company performance conditions. The Company's policy is to issue new shares of its common stock upon the exercise of stock options or granting of stock awards to employees.

The Company's Incentive Plan provides for an equity incentive pool of 2,750,000 shares. Shares reserved for issuance are replenished by forfeited shares. Additionally, equity awards forfeited under the Company's 1995 stock option plan are added to the total shares available for issuance under the Incentive Plan. The Incentive Plan provides for accelerated vesting if there is a change of control.

Stock-based compensation expense recorded in the consolidated statement of operations for the years ended December 31, 2011, 2010 and 2009 was $2.2 million, $2.6 million and $2.7 million, respectively. For the year ended December 31, 2011, the tax benefit associated with the exercise of non-qualified stock options, restricted stock grants, and disqualifying dispositions of both incentive stock options and stock issued under the Company's ESPP, was approximately $2.3 million. No tax benefit was recognized in 2011, 2010 or 2009, because excess tax benefits were not realized by the Company.

Stock-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods with a cumulative catch up adjustment if actual forfeitures differ from those estimates.

Stock Options

In the first quarter of 2011, the Company ceased granting stock options to its employees as part of its annual equity incentive award program, and began granting restricted stock awards to employees. The Company may grant stock options in the future under the Incentive Plan.

The fair value of stock options is estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:


	Year Ended December 31, 2010			Year Ended December 31, 2009
Expected dividends		—			—
Expected volatility range		69.5	%		68.9	%
Risk-free interest rate range		2.4	%		2.0	%
Expected term/life (in years)		4.8			4.6

The dividend yield is zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. In addition, over the remaining term of the Credit Facility, which is scheduled to expire in April 2015, the Company is not permitted to declare or pay dividends. The expected term is based on the Company's historical experience from previous stock option grants. Expected volatility is based on the historical volatility of the Company's stock measured over a period commensurate with the expected option term. The Company does not consider implied volatility due to the low volume of publicly traded stock options. The risk-free interest rate is derived from the zero coupon rate on U.S. Treasury instruments with terms comparable to the option's expected term.

The following table summarizes total aggregate stock option activity for the period December 31, 2010 through December 31, 2011:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Balance at December 31, 2010		1,514,760		$	11.16
Granted		—			—
Exercised		(260,047	)		8.99
Cancelled		(71,054	)		14.13

Balance at December 31, 2011		1,183,659		$	11.45		5.38	$	5,800,849

Vested or expected to vest at December 31, 2011		1,157,315		$	11.39		5.33	$	5,739,882

Exercisable at December 31, 2011		884,959		$	11.14		4.63	$	4,628,039

The number of shares exercisable at December 31, 2011, 2010 and 2009 was 884,959, 928,380 and 998,097, respectively, with weighted average exercise prices of $11.14, $10.44 and $9.87, respectively.

The weighted-average grant date fair value of stock options granted during the years ended December 31, 2010 and 2009 was $9.27 and $5.17 per share, respectively. No stock options were granted during the year ended December 31, 2011. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $2.4 million, $2.3 million and $2.6 million, respectively. Cash proceeds from option exercises for the year ended December 31, 2011 was $2.3 million.

As of December 31, 2011, there was $1.8 million, or $1.1 million adjusted for estimated forfeitures, of total unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.6 years.

Restricted Stock Awards

In the first quarter of 2011, the Company began granting restricted stock awards to its employees as part of its annual equity incentive award program, in replacement of stock options which had historically been broadly granted to employees. Generally, vesting of restricted stock awards is contingent upon a period of service, typically four years. In addition, the Company grants restricted stock awards to senior management with vesting contingent upon specified Company performance conditions. Historically, non-employee directors of the Company were compensated with restricted stock awards as part of their annual retainer; in 2011, non-employee directors received restricted stock units instead (see below).

The fair value of each restricted stock award is determined on the date of grant based on the closing stock price. For restricted stock awards with vesting contingent on Company performance conditions, compensation expense is recognized ratably over the estimate requisite service period, which is based on the estimated achievement date of the performance condition, but not less than the minimum 12-month vesting period. This requisite service period is determined based on an analysis of the terms and conditions of each grant. The Company uses the requisite service period that is most likely to occur, including the likelihood that the restricted stock award will not be earned. The initial requisite service period may be adjusted for changes in the expected outcomes of the related performance conditions, with such changes recognized as a true-up adjustment in the consolidated statement of operations. If actual forfeitures differ from this estimate, a true-up adjustment will be recorded to reflect expense only for those awards that ultimately vest.

The following table summarizes restricted stock award activity for the period December 31, 2010 through December 31, 2011 (in thousands, except for per share amounts):


Nonvested Shares	Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2010		96		$	13.76
Granted		232			15.90
Vested/Released		(56	)		14.53
Forfeited		(10	)		18.97

Nonvested at December 31, 2011		262		$	15.29

The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2011, 2010 and 2009 was $15.90, $15.71 and $10.91, respectively. For the year ended December 31, 2011, the total grant date fair value of service-based restricted stock awards granted was $3.7 million and the total grant date fair value of performance-based restricted stock awards granted was $695,000.

Share awards released during the years ended December 31, 2011 and 2010 were 56,000 and 170,000, respectively. Service-based share awards vested in 2011, 2010 and 2009 had a vest date fair value of $1.0 million, $434,000 and $502,000, respectively. No performance-based share awards vested in 2011. Performance-based share awards vested in 2010 and 2009 had a vest date fair value of $2.2 million and $2.0 million, respectively. As of December 31, 2011, there was $3.4 million of unrecognized compensation cost, or $2.0 million net of estimated forfeitures, related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2.6 years.

Restricted Stock Units

In 2011, the Company granted non-employee directors of the Company restricted stock unit ("RSU") awards as partial consideration for their annual retainer compensation. In addition, historically, non-employee directors were paid a quarterly retainer in RSU awards. This quarterly retainer has been replaced by an annual compensation plan.

In the first quarter of each fiscal year, each non-employee director of the Company receives an RSU award for a number of shares determined by dividing $60,000 by the closing price of the Company's common stock on the date of grant. These awards vest in full one year from the date of grant. Each RSU award granted pursuant to this retainer program will be settled and shares issued thereunder on the earliest to occur of (i) the one year anniversary from the date of grant, (ii) 60 days after the director's service terminates or (iii) the occurrence of a change of control.

The Company determines the fair value on the grant date and expenses that amount over the requisite service period. The fair value is based on the closing market price of the Company's stock on the date of grant. The total grant date fair value of service-based restricted stock unit awards granted during the year ended December 31, 2011 was $420,000. The weighted average grant date fair value of restricted stock unit awards granted during the years ended December 31, 2011, 2010 and 2009 was $19.06, $13.65 and $12.25, respectively. As of December 31, 2011, there was $46,000 of unrecognized compensation cost, or $38,000 net of estimated forfeitures, related to nonvested restricted stock unit awards. The cost is expected to be recognized over a weighted average period of 0.1 year.

Employee Stock Purchase Plan

In 2004, the Company established the 2004 Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, the aggregate number of shares of common stock which may be purchased shall not exceed five hundred thousand (500,000) shares of common stock of the Company. As of December 31, 2011, the Company has issued a total of 294,210 shares of common stock from the current ESPP. For the years ended December 31, 2011 and 2010, the Company issued 44,542 and 44,664 shares, respectively, under the ESPP.

The ESPP permits substantially all employees to purchase common stock through payroll deductions, at 85% of the lower of the trading price of the stock at the beginning or at the end of each six-month offering period commencing on January 1 and July 1. The number of shares purchased is based on participants' contributions made during the offering period.

The fair value of the "look back" option for ESPP shares issued during the offering period is estimated using the Black-Scholes valuation model for a call and a put option. The share price used for the model is a 15% discount on the stock price on the first day of the offering period; the number of shares to be purchased is calculated based on employee contributions, and by using the following weighted-average assumptions:


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Expected dividends	$	—		$	—		$	—
Stock price on valuation date		17.54			14.03			7.22
Expected volatility		41	%		54	%		113	%
Average risk-free interest rate		0.15	%		0.21	%		0.29	%
Expected life (in years)		.5			.5			.5
Fair value per share	$	4.73		$	4.78		$	3.04

The intrinsic value of shares of the Company's stock purchased pursuant to the ESPP for offering periods within the years ended December 31, 2011, 2010 and 2009 was $109,000, $251,000 and $681,000, respectively.

Stock-based Compensation Expense

Compensation cost for stock options, restricted stock, restricted stock units and the ESPP is as follows (in thousands):


	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Stock options	$	1,317	$	1,496	$	1,399
Restricted stock		1,014		752		863
Restricted stock units		57		188		200
ESPP		194		191		238

Total stock-based compensation expense	$	2,582	$	2,627	$	2,700

Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):


	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Cost of revenue	$	355	$	304	$	342
Selling, general and administrative		1,769		2,096		1,921
Research and development		458		227		437

Total stock-based compensation expense	$	2,582	$	2,627	$	2,700

Share Reservations

The following table summarizes the reservation of shares for issuance upon exercise, vesting or release of share-based compensation awards as of December 31, 2011:


2005 Omnibus Equity Incentive Plan			1,926,724
2004 Employee Stock Purchase Plan			205,790
1999 Director Stock Option Plan			6,000
1995 Stock Option Plan			260,439

Total			2,398,953