Note 8. Stock Award Plans and Stock-Based Compensation

Stock Award Plans

The Company grants stock options and restricted stock awards to employees and others. Virtually all outstanding stock options of the Company as of March 31, 2012 were granted with an exercise price equal to the fair market value on the date of grant. Outstanding stock options, if not exercised, expire 10 years from the date of grant.

The Company’s 2008 Stock Incentive Plan (the “Plan”) authorizes the grant of a variety of equity awards to the Company’s officers, directors, employees, consultants and advisers, including awards of unrestricted and restricted stock, incentive and nonqualified stock options to purchase shares of common stock, performance share awards and stock appreciation rights. The Plan provides that options may only be granted at the current market value on the date of grant. Each share of stock issued pursuant to a stock option or stock appreciation right counts as one share against the maximum number of shares issuable under the Plan, while each share of stock issued pursuant to any other type of award counts as 1.58 shares against the maximum number of shares issuable under the Plan for grants made on or after August 11, 2010 (and as 1.5 shares for grants made prior to that date). The Company’s policy for issuing shares upon exercise of stock options or the vesting of its restricted stock awards and restricted stock units is to issue new shares of common stock at the time of exercise or conversion. At March 31, 2012, a total of approximately 2,332,600 shares were available for future issuance under the Plan.

Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations for the fiscal years ended March 31, 2012, 2011 and 2010 (in thousands):


	March 31,
	2012		2011		2010
	(in $000’s)
Cost of product revenue	$	282	$	214	$	452
Research and development		1,719		1,001		744
Selling, general and administrative		5,772		4,206		4,169

	$	7,773	$	5,421	$	5,365

The components of stock-based compensation for the fiscal years ended March 31, 2012, 2011 and 2010 were as follows (in thousands):


	March 31,
	2012		2011		2010
	(in $000’s)
Stock options	$	2,722	$	3,837	$	5,477
Restricted stock		2,095		1,480		(227	)
Restricted stock units		2,808		—		—
Employee stock purchase plan		148		104		115

	$	7,773	$	5,421	$	5,365

Stock Options

The following table summarized stock option activity for the year ended March 31, 2012:


	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at beginning of year		5,945		$	10.27		6.30
Granted		72			17.53
Exercised		(1,516	)		9.40
Cancelled and expired		(233	)		15.45

Outstanding at end of year		4,268		$	10.42		6.03	$	50,341

Exercisable at end of year		3,017		$	10.85		5.34	$	34,230

Options vested and expected to vest at end of year		3,946		$	10.49		5.90	$	46,161

The remaining unrecognized stock-based compensation expense for unvested stock option awards at March 31, 2012 was approximately $2.9 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.0 years.

The aggregate intrinsic value of options exercised for fiscal years 2012, 2011, and 2010 was $13.4 million, $0.4 million and $0.1 million, respectively. The total cash received as a result of employee stock option exercises during the years ended March 31, 2012, 2011, and 2010 was approximately $14.3 million, $1.0 million and $0.6 million, respectively. The total fair value of options vested in fiscal years 2012, 2011, and 2010 was $3.8 million, $4.5 million and $5.4 million, respectively.

The weighted average grant-date fair value for options granted during the years ended March 31, 2012, 2011, and 2010 was $8.35, $4.72 and $3.02 per share, respectively.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The fair value of options granted during the years ended March 31, 2012, 2011, and 2010 were calculated using the following weighted average assumptions:


	2012			2011			2010
Risk-free interest rate		1.47	%		2.04	%		2.45	%
Expected option life (years)		5.19			5.30			5.24
Expected volatility		53.1	%		50.9	%		53.9	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock and adjustments for factors not reflected in historical volatility that may be more indicative of future volatility. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options.

The calculation of the fair value of the options is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future. In addition, an expected dividend yield of zero is used in the option valuation model, because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit activity for the fiscal year ended March 31, 2012:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Restricted stock and restricted stock units at beginning of year		407		$	9.84
Granted		607			18.13
Vested		(134	)		10.88
Forfeited		(9	)		13.72

Restricted stock and restricted stock units at end of year		871		$	15.76

The remaining unrecognized compensation expense for outstanding restricted stock and restricted stock units, including performance-based awards, as of March 31, 2012 was $7.1 million and the weighted-average period over which this cost will be recognized is 2.2 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the years ended March 31, 2012, 2011, and 2010 was $18.13, $10.00 and $7.67 per share, respectively. The total fair value of restricted stock and restricted stock units vested in fiscal years 2012, 2011, and 2010 was $1.5 million, $1.0 million and $0.4 million, respectively.

Performance-Based Awards

Included in the restricted stock and restricted stock units activity discussed above are certain awards granted in fiscal years 2012, 2011 and 2010 that vest subject to certain performance-based criteria.

In June 2010, 311,000 shares of restricted stock and a performance-based award for the potential issuance of 45,000 shares of common stock were issued to certain executive officers and members of senior management of the Company, all of which would vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. During the year ended March 31, 2011, the Company determined that it met the prescribed performance targets and a portion of these shares and stock options vested. The remaining shares will vest upon satisfaction of prescribed service conditions by the award recipients.

During the three months ended June 30, 2011, the Company determined that it should have been using the graded vesting method instead of the straight-line method to expense stock-based compensation for the performance-based awards issued in June 2010. This resulted in additional stock based compensation expense of approximately $0.6 million being recorded during the three months ended June 30, 2011 that should have been recorded during the year ended March 31, 2011. The Company believes that the amount is not material to its March 31, 2011 consolidated financial statements and therefore recorded the adjustment in the quarter ended June 30, 2011.

During the three months ended June 30, 2011, performance-based awards of restricted stock units for the potential issuance of 284,000 shares of common stock were issued to certain executive officers and members of the senior management, all of which would vest upon achievement of prescribed service milestones by the award recipients and revenue performance milestones by the Company. As of March 31, 2012, the Company determined that it met the prescribed targets for 184,000 shares underlying these awards and it believes it is probable that the prescribed performance targets will be met for the remaining 100,000 shares, and the compensation expense is being recognized accordingly.

During the year ended March 31, 2012, the Company has recorded $3.3 million in stock-based compensation expense for equity awards in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these equity awards at March 31, 2012 is $3.6 million based on the Company’s current assessment of probability of achieving the performance milestones. The weighted-average period over which this cost will be recognized is 2.1 years.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan, or ESPP. Under the ESPP, eligible employees, including officers and directors, who have completed at least three months of employment with the Company or its subsidiaries who elect to participate in the Purchase plan instruct the Company to withhold a specified amount of the employee’s income each payroll period during a six-month payment period (the periods April 1—September 30 and October 1—March 31). On the last business day of each six-month payment period, the amount withheld is used to purchase shares of the Company’s common stock at an exercise price equal to 85% of the lower of its market price on the first business day or the last business day of the payment period. The Company recognized compensation expense of $0.1 million for each of the fiscal years ended March 31, 2012, 2011 and 2010, respectively, related to the ESPP.