Stock, Stock Options and Rights

Preferred Stock

The Company has authorized capital of 5,000 shares of $0.001 par value preferred stock. Holders of the preferred stock are entitled to one thousand votes for each share of preferred stock on all matters submitted to a vote of the Company’s stockholders. At December 31, 2012, the Company had no shares of preferred stock issued or outstanding.

Common Stock

The Company has authorized capital of 600,000 shares of $0.001 par value common stock. Holders of the common stock are entitled to one vote for each share of common stock on all matters submitted to a vote of the Company’s stockholders.

Stock Options

1996 Stock Incentive Program

The 1996 Stock Incentive Program provides for the grant of incentive and non-qualified stock options to officers, outside directors and other employees of the Company or any parent or subsidiary. The plan was amended in 2002 to provide that options granted thereunder must have an exercise price per share no less than 100% of the fair market value of the share price on the grant date. Further, with respect to any participant who owns a quantity of stock representing more than 10% of the voting rights of the Company’s outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date. In 2005, the 1996 plan was further amended to extend the term of the plan to 2015 and permit the award of restricted stock, restricted stock units, stock appreciation rights, performance shares and performance units in addition to the grant of stock options. In addition, the amendment provided specific performance criteria that the plan administrator may use to establish performance objectives, a formula mechanism that provides for automatic grants to the non-employee chairman of the Board and prohibited (i) repricing any outstanding stock option or stock appreciation right after it has been granted (other than pro rata adjustments to reflect stock dividends and other corporate events) and (ii) canceling any outstanding stock option or stock appreciation right and replacing it with a new stock option or stock appreciation right with a lower exercise price, unless approved by the Company’s stockholders. The terms of each grant under the plan may not exceed ten years.

2008 Inducement Award Plan

The 2008 Inducement Award Plan provides for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers and directors employed by the company or any parent or subsidiary. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the plan may not exceed ten years.

2009 Incentive Plan

In May 2009, the 2009 Incentive Plan was approved by the Company’s stockholders. The plan replaced the 1996 Stock Incentive Program and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents advisors and independent contractors of the Company and its subsidiaries and affiliates. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2009 Incentive Plan may not exceed ten years.

2012 Incentive Plan

In May 2012, the 2012 Incentive Plan was approved by the Company’s stockholders. The plan replaces the 2009 Incentive Plan and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents advisors and independent contractors of the Company and its subsidiaries and affiliates. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2012 Incentive Plan may not exceed ten years.

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans at December 31, 2012:



	Authorized	Available	Outstanding
1996 Stock Incentive Program⁽¹⁾	34,815	1,039	12,860
1998 Nonstatutory Stock Option Plan⁽²⁾	37	—	37
2008 Inducement Award Plan	1,800	184	1,316
2009 Incentive Plan⁽¹⁾	19,041	758	18,022
2012 Incentive Plan	4,000	2,994	1,006
Total	59,693	4,975	33,241

______________


(1)	Shares are only available for issuance under the 2012 Incentive Plan after reregistration.


(2)	Shares will be retired upon cancellation.

Subject to the discretion of the Board of Directors and beginning in 2006, outstanding options granted to new employees under the Plans generally vest and become exercisable at the rate of 25% at the end of the first year, and thereafter at a rate of 6.25% per quarter until fully vested after a total of four years. Options granted to current employees generally become exercisable at the rate of 25% per quarter during either the third or fourth year following the grant, quarterly over four years, or as approved by the Compensation Committee. All options granted to employees generally expire ten years after the grant date. Annual option grants to sitting board members generally expire five years after the grant date. Option grants to newly elected board members generally expire ten years after the grant date.

The following summarizes the Company’s stock option transactions for 2012, 2011 and 2010:



	Year ended December 31,
	2012				2011				2010
	Shares		Weighted- average exercise price		Shares		Weighted- average exercise price		Shares		Weighted- average exercise price
Outstanding at beginning of year	29,547		$	6.73	28,436		$	6.03	30,101		$	7.96
Granted	7,293		$	5.82	5,678		$	11.94	7,521		$	7.37
Exercised	(1,189	)	$	3.30	(2,738	)	$	6.43	(6,360	)	$	5.50
Forfeitures	(2,410	)	$	8.02	(1,829	)	$	12.51	(2,826	)	$	31.38
Outstanding at end of year	33,241		$	6.56	29,547		$	6.73	28,436		$	6.03
Exercisable at end of year	19,156		$	5.51	15,963		$	5.34	14,208		$	6.35

The aggregate intrinsic value of options exercised during 2012, 2011 and 2010 was $2,758, $18,263 and $27,539, respectively. Fully vested outstanding options at December 31, 2012 had an aggregate intrinsic value of $10,766, based upon the Company’s closing stock price on that date of $4.83 per share. Fully vested outstanding options at December 31, 2011 had an aggregate intrinsic value of $8,499, based upon the Company’s closing stock price on that date of $4.87 per share. The aggregate intrinsic value of all outstanding options at December 31, 2012, 2011 and 2010 was $11,176, $13,519 and $166,360, respectively. The Company issues new shares of common stock upon exercise of stock options.

The following table summarizes information concerning stock options outstanding and exercisable at December 31, 2012:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted- Average Remaining Contractual Life-Years	Weighted- Average Exercise Price		Number Exercisable (in thousands)	Weighted- Average Exercise Price
$ 1.69 – $ 4.00	4,863	4.96	$	2.60	4,716	$	2.61
$ 4.01 – $ 5.50	6,333	4.65	$	5.04	5,419	$	5.04
$ 5.51 – $ 6.75	10,534	7.73	$	6.14	4,266	$	6.39
$ 6.76 – $10.00	6,645	6.96	$	7.18	3,895	$	7.18
$10.01 – $13.99	4,866	8.20	$	12.54	860	$	12.54
$ 1.69 – $13.99	33,241	6.65	$	6.56	19,156	$	5.51

The following table summarizes the average estimates the Company used in the Black-Scholes option-pricing model during 2012, 2011 and 2010, to determine the fair value of employee stock options and employee ESPP rights granted during each period:



Stock Options	2012		2011		2010
Risk free interest rates	1.0	%	2.2	%	2.6	%
Expected life in years	5.00 years		4.99 years		4.79 years
Expected dividend yield	—	%	—	%	—	%
Expected volatility	63.4	%	60.2	%	60.6	%
Estimated annualized forfeiture rate	5.5	%	6.8	%	7.5	%

ESPP	2012		2011		2010
Risk free interest rates	0.1	%	0.1	%	0.2	%
Expected life in years	0.50 years		0.50 years		0.50 years
Expected dividend yield	—	%	—	%	—	%
Expected volatility	58.5	%	57.4	%	56.3	%
Estimated annualized forfeiture rate	4.0	%	4.0	%	4.0	%

The Company determines its risk-free rate assumption based upon the U.S. Treasury yield for obligations with contractual lives similar to the expected lives of the Company’s option grants and ESPP subscription periods. The expected life represents the weighted average period the options are expected to remain outstanding, based upon historical experience. The dividend yield assumption is based on the Company’s historical and anticipated dividend distributions. The expected volatility is based upon a blend of the Company’s historical volatility of its stock price and its exchange traded options for the expected life of the award. Forfeitures are estimated based upon historical and anticipated future experience for the expected life of the award. Based upon these assumptions, the Company has estimated the per share weighted-average grant fair value of its options granted during 2012, 2011, and 2010 as follows:



	Year ended December 31,
	2012		2011		2010
Weighted-average grant fair value	$	3.10	$	6.27	$	3.86

Stock-based compensation expense recognized in 2012, 2011 and 2010 consisted of stock-based compensation expense related to unvested grants of employee stock options and the Company’s ESPP. The table below summarizes the stock-based compensation expense for 2012, 2011 and 2010:



	Year ended December 31,
	2012		2011		2010
Stock-based compensation expense included in cost of goods sold	$	9,021	$	6,918	$	4,652
Operating expenses:
Research, development and engineering	9,261		8,492		6,337
Selling, general and administrative	10,943		9,672		6,571
Stock-based compensation expense included in operating expenses	20,204		18,164		12,908
Total stock-based compensation expense included in income from operations	$	29,225	$	25,082	$	17,560

As of December 31, 2012, the total future compensation expense related to the current unvested stock options and the ESPP, net of estimated forfeitures, is expected to be approximately $39,022. This expense is expected to be recognized over a weighted average period of approximately twenty-six months.

Employee Stock Purchase Plan ("ESPP")

Pursuant to the ESPP, participating employees authorize the Company to withhold compensation and to use the withheld amounts to purchase shares of the Company’s common stock at a discount. Offerings allow shares to be purchased at 85% of the lower of the fair market value on the first or last day of the six month offering period. The offering period dates are the first business days of May and November of each year.

The Company issues new shares of common stock for purchases through the ESPP. Approximately 2,000 shares were initially reserved for issuance under the ESPP, subject to annual increases at the lesser of (i) 3,000 shares, (ii) 1.5% of the number of shares outstanding on the last day of the immediately preceding fiscal year or (iii) an amount determined by the board of directors. As of December 31, 2012, 2,654 shares were reserved for issuance under the ESPP. The ESPP will expire in February 2017.

During 2012, 2011 and 2010, the approximate number of shares of the Company’s common stock that was purchased under the ESPP was as follows:



	Year ended December 31,
	2012	2011	2010
Shares purchased	3,506	1,924	1,824

Stock Repurchase Program

On May 2, 2012, the Company's Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of up to $50,000 of the Company's outstanding common stock. Common stock repurchases were made in the open market at prevailing market prices. The timing of the purchases was based upon market conditions and other corporate considerations, including price, corporate and regulatory requirements and alternative investment opportunities. During 2012, the Company repurchased 10,209 shares for $50,000. Shares of common stock repurchased by the Company through the repurchase program were retired and had no impact on total shares authorized.