Stockholders' Equity:

Employee and Director Stock Options, Restricted Stock and ESPP

The Company's employee stock option plans include principal plans adopted in 2013 and 2001 (“Principal Option Plans”). We have authorized an aggregate of 7,237,702 and 9,000,000 shares of common stock for issuance to officers and employees under the 2013 plan and 2001 plan, respectively. The Principal Option Plans provide for grants of options to employees to purchase common stock at the fair market value of such shares on the grant date. The options generally vest quarterly over a four-year period beginning on the grant date. Options granted under the Principal Option Plans are generally non-qualified stock options but the Principal Option Plans permit some options granted to qualify as “incentive stock options” under the U.S. Internal Revenue Code. The contractual term of options granted prior to January 31, 2006 was generally ten years, while the contractual term of options granted subsequent to January 31, 2006 is generally seven years.

Restricted stock unit (“RSUs”) grants are part of the Company's equity compensation practices for employees who receive equity grants. RSUs granted to employees generally vest quarterly over a four-year period beginning on the grant date.

In May 2011, the shareholders of the Company approved the 2011 Non-Employee Director Equity Incentive Plan. The Plan provides that non-employee members of our Board of Directors receive non-qualified option grants and restricted stock units in set amounts and at set times, at option prices equal to the fair market value on the date of grant. Originally 750,000 shares of common stock were authorized for issuance under the plan. In May 2013, the shareholders of the Company approved an amendment to the plan authorizing an additional 360,000 shares available for issuance, aggregating 1,110,000 shares available in total. Vesting periods for options and RSUs granted to Directors is over three years and one year respectively. The contractual term of all non-employee director options is ten years.

In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("2012 ESPP"). The Plan authorizes the issuance of 3,000,000 shares of common stock to eligible employees to purchase shares of common stock through payroll deduction. Payroll deductions are not to exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period. Employees are required to hold purchased shares for six months. We have treated the 2012 ESPP as a compensatory plan, and recorded compensation expense related to the 2012 ESPP of $0.2 million and less than $0.1 million for fiscal 2013 and fiscal 2012, respectively.

The Company's ESPP, which was amended and approved by our stockholders in May 2007 ("2007 ESPP"), permits eligible employees to purchase shares of common stock through payroll deductions, not to exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period, but in no event less than the book value per share at the mid-point of each offering period. An aggregate of 5,500,000 shares of common stock have been authorized for issuance under the plan. We have treated the 2007 ESPP as a compensatory plan and recorded compensation expense related to the 2007 ESPP of $0.1 million and $0.5 million for fiscal 2012 and fiscal 2011, respectively. The 2007 ESPP was replaced with the 2012 ESPP in May 2012.

Stock-Based Compensation

Total stock-based compensation expense included in our Consolidated Statements of Operations was as follows (in thousands):



	Year Ended
	December 28, 2013		December 29, 2012		December 31, 2011
Line item:
Cost of products sold	$	627	$	525	$	461
Research and development	3,916		3,009		2,697
Selling, general and administrative	4,979		3,976		3,095
Restructuring charges	—		—		103
Total stock-based compensation	$	9,522	$	7,510	$	6,356

ASC 718, “Compensation-Stock Compensation (“ASC 718”),” requires that we recognize compensation expense for only the portion of employee and director options and ESPP rights that are expected to vest.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. Beginning January 1, 2006, in connection with the adoption of ASC 718, the Company examined the historical pattern of option exercises in an effort to determine if there were any discernible activity patterns based on certain employee populations. From this analysis, the Company identified two employee populations. Prior to January 3, 2009, the Company used the simplified method as prescribed by the SEC's Staff Accounting Bulletin No. 107. The Company now believes that it has sufficient internal historical data to refine the expected term assumption. As such, the expected term computation is based on historical vested option exercises and includes an estimate of the expected term for options that were fully vested and outstanding at January 3, 2009 for each of the two populations identified. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.



	Year Ended
	December 28, 2013	December 29, 2012	December 31, 2011
Employee and Director Stock Options
Expected volatility (%)	51.4 to 54.3	58.1 to 59.5	57.4 to 61.9
Risk-free interest rate (%)	.007 to .01	.006 to .01	.003 to .02
Expected term (in years)	4.09 to 4.53	4.09 to 4.47	4.05 to 4.37
Dividend yield	—%	—%	—%
Employee Stock Purchase Plan
Weighted average expected volatility (%)	48.0	50.0	48.1
Weighted average risk-free interest rate (%)	0.11	0.12	0.14
Expected term (in years)	0.50	0.50	0.50
Dividend yield	—%	—%	—%

At December 28, 2013, there was $10.9 million of total unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 4.8 years. Our current practice is to issue new shares to satisfy option exercises. Compensation expense for all stock-based compensation awards is recognized using the straight-line method.

The following table summarizes our stock option activity and related information for the year ended December 28, 2013 (shares and aggregate intrinsic value in thousands):



	Shares		Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate Intrinsic Value
Balance, December 29, 2012	9,528		$	4.74
Granted	3,167		5.01
Exercised	(990	)	2.38
Forfeited or expired	(1,264	)	6.09
Balance, December 28, 2013	10,441		$	4.88
Vested and expected to vest at December 28, 2013	10,441		$	4.88	4.80	$	8,220
Exercisable, December 28, 2013	5,323		$	4.46	3.81	$	6,450

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2013, 2012 and 2011, and was $2.5 million, $3.4 million and $6.6 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2013, 2012 and 2011 and was $9.3 million, $7.4 million and $6.0 million, respectively.

The resultant grant date weighted-average fair values calculated using the Black-Scholes option pricing model and the noted assumptions for stock options granted were $2.10, $2.74 and $2.92 for fiscal years 2013, 2012 and 2011, respectively. The weighted average fair values calculated using the Black-Scholes option pricing model for the ESPP were $1.29, $1.35, $1.80 for fiscal years 2013, 2012 and 2011, respectively.

The following table summarizes our RSU activity for the year ended December 28, 2013 (shares in thousands):



	Shares		Weighted average grant date fair value
Balance at December 29, 2012	1,078		$	6.15
Granted	1,735		5.22
Vested	(524	)	5.91
Forfeited	(99	)	5.68
Balance at December 28, 2013	2,190		$	5.49

At December 28, 2013, there was $9.5 million of total unrecognized compensation cost related to unvested RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.

At December 28, 2013, a total of 6.8 million shares of our common stock were available for future grants under our stock option plans. Shares subject to stock option grants that expire or are canceled without delivery of such shares generally become available for re-issuance under these plans. At December 28, 2013, a total of 2.8 million shares of our common stock were available for future purchases under our ESPP.