STOCK-BASED COMPENSATION

Stock-based compensation expense consists primarily of expenses for stock options and restricted stock units granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):



	Three months ended				Nine months ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Stock-based compensation in:
Cost of revenue	$	605	$	659	$	1,838	$	2,176
Research and development expense	1,076		1,450		3,400		4,755
Selling, general and administrative expense	2,264		2,388		6,628		6,816
Total stock-based compensation in operating expense	3,340		3,838		10,028		11,571
Total stock-based compensation	$	3,945	$	4,497	$	11,866	$	13,747

Stock Options

The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:



	Three months ended				Nine months ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Expected term (years)	4.70		4.70		4.70		4.70
Volatility	46	%	54	%	51	%	56	%
Risk-free interest rate	1.5	%	0.7	%	0.8	%	0.9	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%

The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the 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 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 was $3.02 and $1.89 for the three months ended September 27, 2013 and September 28, 2012, respectively. The weighted-average fair value per share of options granted was $2.51 and $2.66 for the nine months ended September 27, 2013 and September 28, 2012, respectively.

The fair value of all stock options vested during the three months ended September 27, 2013 and September 28, 2012 was $0.8 million and $0.8 million, respectively. The fair value of all stock options vested during the nine months ended September 27, 2013 and September 28, 2012 was $2.8 million and $3.8 million, respectively.

The total realized tax benefit attributable to stock options exercised during the nine months ended September 28, 2012, in jurisdictions where this expense is deductible for tax purposes, was $80,000. The Company did not recognize any tax benefit attributable to stock options exercised during the nine months ended September 27, 2013.

Restricted Stock Units

The estimated fair value of restricted stock units 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 three months ended September 27, 2013 and September 28, 2012 was $2.8 million and $2.6 million, respectively. The fair value of all restricted stock units issued during the nine months ended September 27, 2013 and September 28, 2012 was $10.2 million and $10.3 million, respectively.

Employee Stock Purchase Plan

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 with the following assumptions:



	Purchase Period Ending		Purchase Period Ending
	June 30, 2013		June 30, 2012		December 31, 2012
Expected term (years)	0.49		0.50		0.50
Volatility	30	%	53	%	46	%
Risk-free interest rate	0.2	%	0.2	%	0.2	%
Expected dividends	0.0	%	0.0	%	0.0	%

The expected term 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 fair value per share of stock purchase rights under the ESPP granted for the purchase period ended June 30, 2013 and June 30, 2012, was $1.23 and $1.51, respectively. The fair value per share of stock purchase rights under the ESPP granted for the purchase period ended December 31, 2012 was $1.19. The ESPP is suspended for the second half of 2013 due to all authorized shares under the plan having been issued through the offering period ended June 30, 2013. The Company’s stockholders approved a 1,000,000 share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP will resume in January 2014. As a result, the Company will not have any stock-based compensation expense in the second half of fiscal 2013 related to the ESPP.

Unrecognized Stock-Based Compensation

As of September 27, 2013, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was $20.7 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average amortization period of 2.0 years.