EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION

The Company’s stock benefit plans include the employee stock purchase plan and current active stock plans adopted in 1995 and 2002 as well as one stock plan assumed through an acquisition in 2010. Other than the employee stock purchase plan, the 1995 stock plan and the 2002 director plan described below, the other inactive plans have no shares available for future grant. The Company also assumed two existing TVN employee equity benefit plans in connection with the TVN acquisition. As of December 31, 2016, for the stock plan assumed through an acquisition, 121,043 shares were reserved for issuance.

Employee Stock Plans

1995 Stock Plan

The 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and restricted stock units (“RSUs”). Incentive stock options may be granted only to employees. All other awards may be granted to employees and consultants. Under the terms of the 1995 Stock Plan, incentive stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grant and non-statutory stock options may be granted at prices not less than 85% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Company’s Board of Directors (the “Board”), generally two to four years, and expire seven years from date of grant. Options granted prior to February 2006 expire 10 years from the date of grant. Grants of RSUs and any non-statutory stock options issued at prices less than the fair market value on the date of grant decrease the plan reserve 1.5 shares for every unit or share granted and any forfeitures of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit or share forfeited. In connection with the Company’s acquisition of TVN, the Company agreed to make grants of RSUs with respect to a total of up to 1,750,000 shares (taking into account the share count provision for RSUs in the Company’s 1995 Stock Plan). The Company’s stockholders approved an amendment to the 1995 Stock Plan at the Company’s 2016 annual meeting of stockholders (“2016 Annual Meeting”) which increased the number of shares of common stock reserved for issuance under the 1995 Stock Plan by 2,000,000 shares. As of December 31, 2016, an aggregate of 12,029,588 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 3,501,498 shares remained available for grant.

In August 2016, the Company granted 898,533 shares of performance-based RSUs (“PRSUs”) under the 1995 Stock Plan to fund a portion of its 2016 incentive bonus payment obligations to its key executives and other eligible employees. The vesting of the PRSUs is based on the achievement of certain financial and non-financial operating goals of the Company and occurs within the next three to six months from the grant date.

2002 Director Plan

The 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company. Under the terms of the 2002 Director Plan, non-statutory stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Board, generally three years for the initial grant and one year for subsequent grants to a non-employee director, and expire seven years from date of grant. Grants of RSUs decrease the plan reserve 1.5 shares for every unit granted and any forfeiture of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit forfeited. In November 2015, the authorized number of shares under the 2002 Director Plan was increased from 2,000,000 to 2,350,000. As of December 31, 2016, an aggregate of 643,244 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 409,244 shares remained available for grant.

Employee Stock Purchase Plan

The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share purchase rights to employees of the Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period. Under the ESPP, 1,265,458, 888,152 and 440,040 shares were issued during fiscal 2016, 2015 and 2014, respectively, representing $3.7 million, $5.2 million and $2.7 million in contributions. As of December 31, 2016, 906,390 shares were reserved for future purchases by eligible employees.

Stock Options, RSUs and PRSUs

The following table summarizes the Company’s stock option, RSU and PRSU activities during the year ended December 31, 2016 (in thousands, except per share amounts):



			Stock Options Outstanding				Restricted Stock Units * Outstanding
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price		Number of Units		Weighted Average Grant Date Fair Value
Balance at December 31, 2015	6,150		5,674		$	6.56	2,182		$	6.99
Authorized	2,000		—		—		—		—
Granted	(6,201	)	946		3.19		3,503		3.78
Options exercised	—		(150	)	4.77		—		—
Shares released	—		—		—		(1,480	)	6.57
Forfeited or canceled	1,963		(1,451	)	6.46		(341	)	5.56
Balance at December 31, 2016	3,912		5,019		$	6.01	3,864		$	4.26

* The preceding table includes PRSUs activities during the year ended December 31, 2016.

The following table summarizes information about stock options outstanding as of December 31, 2016 (in thousands, except per share amounts and term):



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Vested and expected to vest	4,839	$	6.05	3.8	$	1,930
Exercisable	3,240	6.61		3.0	388

The intrinsic value of options vested and expected to vest and exercisable as of December 31, 2016 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of December 31, 2016. The intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $0.1 million, $1.7 million and $0.8 million, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.

The following table summarizes information about RSUs and PRSUs outstanding as of December 31, 2016 (in thousands, except term):



	Number of Shares Underlying Restricted Stock Units	Weighted Average Remaining Vesting Period (Years)	Aggregate Fair Value
Vested and expected to vest	3,606	0.6	$	18,031

The fair value of RSUs and PRSUs vested and expected to vest as of December 31, 2016 is calculated based on the fair value of the Company’s common stock as of December 31, 2016.

TVN Employee Equity Benefit Plan

TVN’s existing employee equity benefit plans consist of the French Employee Incentive plan and the Overseas Long Term Incentive plan. The Company’s acquisition of TVN gave rise to a change-in-control event which causes both plans to become fully vested and the settlement of both plans have to be made in cash according to the agreements. The payment was made in full in the second quarter of 2016 in the amount of approximately $2.9 million upon finalizing the closing adjustments to the TVN purchase price.

TVN Retirement Benefit Plan

As part of the TVN acquisition the Company assumed obligations under defined benefit pension plans which were unfunded as of the acquisition date. Under French law, the TVN French Subsidiary is required to make certain payments to employees upon their retirement from the Company. These payments are based on the retiring employee’s salary for a number of months that varies according to the employee’s period of service and position. Salary used in the calculation is the employee’s average monthly salary for the twelve months prior to retirement. The payments are made in one lump-sum at the time of retirement.

The company’s pension obligations are measured as of December 31. The present value of these lump-sum payments is determined on an actuarial basis and the actuarial valuation takes into account the employees’ age and period of service with the company; projected mortality rates, mobility rates and increases in salaries; and a discount rate. The table below shows the present value of the Company’s pension obligations as of December 31, 2016 and changes to the Company’s pension obligations (in thousands):



	December 31, 2016
Projected benefit obligation:
Acquired from TVN acquisition	$	5,907
Service cost	217
Interest cost	87
Actuarial losses	279
Curtailment	(1,955		)
Foreign currency translation adjustment	(271		)
As of December 31, 2016	$	4,264

Presented on the Consolidated Balance Sheets under:
Current portion (presented under “Accrued and other current liabilities”)	$	27
Long-term portion (presented under “Other non-current liabilities”)	$	4,237

The plan was unfunded as of December 31, 2016. There are no contributions to the plan required by any laws or funding regulations, discretionary contributions or non-cash contributions expected to be made.

Net periodic costs for the year ended December 31, 2016 were $304,000 and the accumulated benefit obligation as of December 31, 2016 was $3.3 million. During the year ended December 31, 2016, the Company recorded an actuarial loss of $0.3 million as a component of accumulated other comprehensive Income (loss) (“AOCI”). The Company accounts for the actuarial loss in accordance with ASC 715, “Compensation - Retirement Benefits”. If the net accumulated gain or loss exceeds 10% of the projected plan benefit obligation or the market-related value of plan assets, a portion of the net gain or loss is amortized and included in expense for the following year based upon the average remaining service period of active plan participants, unless the Company’s policy is to recognize all actuarial gains (losses) when they occur. The Company elected to defer actuarial gains (losses) in AOCI. As of December 31, 2016, the Company did not meet the 10% requirement, and therefore no amortization of 2016 actuarial loss would be recorded in fiscal 2017.

As indicated in Note 11, “Restructuring and related charges”, the Company finalized the terms of the TVN VDP and 83 employee applications were approved by the Company in the fourth quarter of 2016. The Company settled its retirement obligations under the TVN defined benefit pension plan for the terminating employees through payment of voluntary termination benefits. The Company accounts for these settlements in accordance with ASC 715, “Compensation - Retirement Benefits”, which requires that the settlement be accounted for when an employee accepts the offer of voluntary termination. As a result of the TVN VDP, the defined benefit pension plan was remeasured, which resulted in a non-cash curtailment gain of approximately $2.0 million. The curtailment gain was recognized in the Consolidated Statement of Operations during the fourth quarter of 2016 and the Company’s pension liability was reduced by the same amount. Of the $2.0 million pension curtailment gain, $0.6 million is included in product cost of revenue and the remaining $1.4 million is included in operating expenses-restructuring and related charges in the Consolidated Statement of Operations. The remeasurement did not have a material effect on other components of net periodic pension expense for the year ended December 31, 2016.

The following assumptions were used in determining the Company’s pension obligation:



	December 31, 2016
Discount rate	1.5	%
Mobility rate	3.0	%
Salary progression rate	2.0	%

The Company evaluates the discount rate assumption annually. The discount rate used for the Company’s valuation study was based on the rate of long-term Euro zone AA rated 10 year corporate bonds as of December 31, 2016, which yielded 1.5%.

The Company also evaluates other assumptions related to demographic factors, such as retirement age, mortality rates and turnover periodically, updating them to reflect experience and expectations for the future. The mortality assumption related to the Company’s defined benefit pension plan used mortality tables published in January 2017 by the French National Institute of Statistics and Economic Studies.

Future benefits expected to be paid in each of the next five years, and in the aggregate for the five year period thereafter are as follows (in thousands):



Years ending December 31,
2017	$	29
2018	29
2019	46
2020	—
2021	66
2022 - 2026	2,015
	$	2,185

401(k) Plan

The Company has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company can make discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The Company’s contributions to the plan was $0.4 million for each of the fiscal years from 2014 through 2016.

Stock-based Compensation

The following table summarizes stock-based compensation expense for all plans (in thousands):



	Year ended December 31,
	2016		2015		2014
Stock-based compensation in:
Cost of revenue	$	1,554	$	1,862	$	2,359
Research and development expense	3,711		4,435		4,844
Selling, general and administrative expense	7,795		9,285		10,084
Total stock-based compensation in operating expense	11,506		13,720		14,928
Total stock-based compensation recognized in net loss	$	13,060	$	15,582	$	17,287

As of December 31, 2016, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock options, RSUs and PRSUs was $11.8 million and is expected to be recognized over a weighted-average period of 1.6 years.

As part of its equity incentive program, the Company grants PRSUs, the vesting of which depends on the achievement of certain financial and non-financial goals of the Company. The Company assesses the expected achievement levels of the performance goals at the end of each reporting period. The grant date fair value of the PRSUs expected to vest based on the Company’s best estimate of its performance against the performance goals is recognized as compensation expense. During the years ended December 31, 2016 and 2015, the Company recorded approximately $2.8 million and $0.6 million of stock-based compensation expenses related to PRSUs, respectively. There were no stock-based compensation expenses related to PRSUs recorded in the year ended December 31, 2014.

Valuation Assumptions

The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. At the date of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weighted average assumptions:



	Employee Stock Options						ESPP
	2016		2015		2014		2016		2015		2014
Expected term (in years)	4.30		4.65		4.70		0.50		0.50		0.50
Volatility	36	%	38	%	40	%	70	%	34	%	32	%
Risk-free interest rate	1.4	%	1.5	%	1.7	%	0.6	%	0.3	%	0.1	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

The expected term of the employee stock option represents the weighted-average period that the stock options are expected to remain outstanding. The computation of expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected term of the stock purchase right under ESPP represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The weighted-average fair value per share of options granted for the years ended December 31, 2016, 2015 and 2014 was $0.99, $2.51 and $2.36, respectively. The fair value of all stock options vested during the years ended December 31, 2016, 2015 and 2014 was $2.3 million, $3.0 million and $3.2 million, respectively.

The estimated weighted-average fair value per share of stock purchase rights granted for the years ended December 31, 2016, 2015 and 2014 was $1.04, $1.69 and $1.79, respectively.

The Company realized no income tax benefit from stock option exercises for the year ended December 31, 2016 and 2015 due to recurring losses and valuation allowances. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows. The total realized tax benefit attributable to stock options exercised during the year ended December 31, 2014 was $15,000.

The estimated fair value of RSUs is based on the market price of the Company’s common stock on the grant date. The fair value of all restricted stock units issued during the years ended December 31, 2016, 2015 and 2014 was $9.7 million, $11.1 million and $12.0 million, respectively.