Stock-Based Compensation

The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units and employee stock purchases related to the Employee Stock Purchase Plan (collectively “Employee Stock Purchases”) based on estimated fair values. The fair value of share-based payment awards is estimated on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 is based on awards expected to vest, it has been reduced for estimated forfeitures. ASC 740 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company's estimated forfeiture rates in 2013, 2012 and 2011 of 11.9%, 7.6%, and 6.3%, respectively, were based on historical forfeiture experience, which the Company believes is the best available information to estimate the future forfeiture rate. Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are required to be separately classified in the consolidated statements of cash flows. The Company recognized $0.1 million, $0.9 million and $3.9 million of excess tax benefit in fiscal years 2013, 2012 and 2011, respectively.

Valuation and Expense Information

The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model, which requires subjective assumptions, including future stock price volatility and expected time to exercise. The expected life of options granted were calculated using the simplified method allowed by the SAB 107. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility were based on the historical volatility of the Company's stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.

The weighted-average fair value of stock-based compensation to employees is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized over the vesting period of the options. The weighted-average fair value calculations are based on the following average assumptions:



	Fiscal Year 2013	Fiscal Year 2012	Fiscal Year 2011
Stock Options:
Expected life	4.5 years	4.5 years	4.5 years
Volatility	69.9%	77.3%	77.0%
Risk free interest rate	1.05%	0.80%	1.82%
Dividends	—	—	—
Employee Stock Purchase Plan:
Expected life	0.5 years	0.5 years	0.5 years
Volatility	26.8%	45.5%	73.4%
Risk free interest rate	0.11%	0.12%	0.19%
Dividends	—	—	—

Stock Options and Restricted Stock Units ("RSUs")

Prior to December 2008, the majority of options granted by the Compensation Committee vested at a rate of 33¹/3 percent over the first three years of the seven-year option term on each of the first, second and third anniversary of such grants. Starting in December 2008, the majority of the options granted to employees employed for less than one year vest one-third ( ¹/3^rd ) of the shares subject to the option on the first anniversary of the grant date, and vest one thirty sixth (¹/36^th ) each month for the following two years, for a total three year vesting period with a seven-year option term. Starting in November 2008, the majority of the options granted for employees employed for more than one year vest one thirty-sixth (¹/36^th ) of the shares subject to the options in equal monthly installments starting on the monthly anniversary of the date of grant with a seven-year option term. On February 22, 2010, the Compensation Committee reviewed best practice with regard to stock option vesting and made the following changes; existing employees generally receive vesting terms of monthly ratable vesting for a total period of four years. New employees, in general, receive vesting terms that are equivalent to 25% vesting on the one year anniversary of the grant with monthly vesting thereafter for a total of four years. All other terms remained the same. Grant of each Restricted Stock Unit (“RSU”) counts against the Company's available for grant pool at a ratio of 2:1 against the 2005 Equity Incentive Plan as depicted below under “RSUs granted.” On May 24, 2013, the Company approved further amendments to the 2005 Equity Incentive Plan including: increasing the number of shares of common stock authorized by 2.6 million shares, changing the multiplier ratio from 2:1 to 1.7:1 against the plan for each award, other than a stock option or stock appreciation right, and providing the maximum term of stock options to be seven years. All other terms remained the same.

The number of RSUs granted during fiscal year 2013 was 348,328, which counted as 664,902 shares against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2013 was 77,952, which counted as 133,418 shares against the 2005 Equity Incentive Plan. Each RSU represents an amount equal to the fair value of one share of the Company's common stock.

A summary of activity under the Company’s stock option plans including options and RSUs during fiscal year 2013, and shares available for grant at December 28, 2013, is as follows:



	Shares Available for Grant (Options and RSUs)
Shares available for grant at December 29, 2012	1,093,565
Increase in shares authorized	2,600,000
Options - granted	(430,800	)
Options - cancelled	150,459
Options - expired plan shares	(53,607	)
RSUs - granted	(664,902	)
RSUs - canceled	133,418
RSUs - shares issued to satisfy tax withholding obligations	108,868
Shares available for grant at December 28, 2013	2,937,001

Options

The weighted average fair value per share of the stock options awarded in fiscal years 2013, 2012, and 2011 was $8.58, $10.00 and $9.98, respectively. A summary of activity of stock options in 2013 is as follows:



	Number of Shares Outstanding (Options)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at December 29, 2012	2,020,319		$	12.01	4.44	—
Exercised	(391,621	)	8.71		—	—
Granted	430,800		15.49		—	—
Cancelled	(150,459	)	15.22		—	—
Outstanding at December 28, 2013	1,909,039		$	13.22	4.02	$	10,341
Exercisable at December 28, 2013	1,189,895		$	11.84	3.25	$	8,089

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $18.61 as of December 28, 2013, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during 2013, 2012 and 2011 was $2.9 million, $4.9 million and $11.6 million, respectively. The fair value of options vested during 2013, 2012 and 2011 was $3.7 million, $3.6 million and $2.9 million, respectively.

The following table summarizes ranges of outstanding and exercisable options as of December 28, 2013.



Exercise Prices	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.93-$7.35	235,358	1.41	$	3.75	235,358	$	3.75
$7.47-$10.46	265,654	3.01	$	9.44	235,063	$	9.35
$10.83-$13.08	233,446	3.52	$	11.81	185,568	$	11.88
$13.16-$14.88	192,792	5.33	$	14.24	53,756	$	14.32
$14.95-$15.85	289,732	5.93	$	15.61	67,376	$	15.64
$15.88-$16.59	148,238	3.09	$	16.05	122,554	$	16.03
$16.70-$16.70	285,419	4.03	$	16.70	189,472	$	16.70
$16.89-$19.03	245,900	5.34	$	18.02	92,209	$	18.19
$19.77-$19.77	3,000	4.52	$	19.77	1,812	$	19.77
$19.84-$19.84	9,500	4.14	$	19.84	6,727	$	19.84
$0.93-$19.84	1,909,039	4.02	$	13.22	1,189,895	$	11.84

As of December 28, 2013, the total unrecognized compensation costs related to unvested stock options was $5.3 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 2.46 years.

In August 2011, the Company added an additional 2.0 million shares of common stock to the Company's 2005 Equity Incentive Plan available for grant.

Restricted Stock Units ("RSUs")

Each RSU counts against the Company's “2005 Equity Incentive Plan” at a ratio of one and seven tenths shares for each unit granted but represents an amount equal to the fair value of one share of the Company's common stock. The Company granted 348,328 and 51,777 RSUs during the years ended December 28, 2013 and December 29, 2012, respectively, to key employees with vesting periods spanning from one to three years. The Company granted 286,180 RSUs on November 21, 2011 as part of employment agreements with personnel hired by the Company subsequent to the acquisition of Nanda. The RSU's granted to these newly hired employees generally vest as follows: 10% on date of grant; the remaining vest one-third per year over each of the three years from date of grant, provided that the participant continues to be employed at the Company.

A summary of activity for RSUs is as follows:



RSU	Number of RSU		Weighted Average Fair Value as of December 29, 2012
Outstanding RSU as of December 29, 2012	235,162		$	16.32
Granted	348,328		15.51
Released	(171,094	)	16.69
Cancelled	(77,952	)	18.29
Outstanding RSU as of December 28, 2013	334,444		$	18.61

As of December 28, 2013, the total unrecognized compensation costs related to RSU's was $3.1 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 1.83 years.

Stock-based Compensation Expense

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):



	Fiscal Year 2013		Fiscal Year 2012		Fiscal Year 2011
Cost of products	$	207	$	164	$	176
Cost of service	278		230		218
Research and development	1,478		1,220		984
Selling	1,894		1,791		1,366
General and administrative	2,919		2,485		1,729
Restructuring	898		—		—
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	7,674	$	5,890	$	4,473