Note 8. Share-based Compensation

Beginning in 2011, our stock-based compensation program consisted of a combination of: time vesting stock options with graduated vesting over a four year period; performance and market vesting common stock units, or PSUs, tied to the achievement of pre-established company performance metrics and market based goals over a three-year performance period; and, time vesting restricted stock awards, or RSUs, granted to our non-employee directors vesting over a one year period. Grants under our former share-based compensation program consisted only of time vesting stock options.

The fair values of our share-based awards are determined as follows:

•

stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model and compensation expense is recognized over the applicable vesting period;

•

PSUs subject to company specific performance metrics, which include both performance and service conditions, are based on the market value of our stock on the date of grant. Compensation expense is based upon the number of shares expected to vest after assessing the probability that the performance criteria will be met. Compensation expense is recognized over the vesting period, adjusted for any changes in our probability assessment;

•

PSUs subject to our total shareholder return, or TSR, market metric relative to a peer group of companies, which includes both market and service conditions, are estimated using a Monte Carlo simulation. Compensation expense is based upon the number and value of shares expected to vest at the date of the grant. Compensation expense is recognized over the applicable vesting period. All compensation cost for the award will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied; and,

•

time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the vesting period.

The vesting period for our stock awards is the requisite service period associated with each grant.

Our share-based compensation expense is comprised of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2012		2011		2012		2011
Stock options	$	4,095	$	3,073	$	7,976	$	6,034
Performance shares		1,047		480		1,837		886
Restricted shares		263		116		444		166
Employee Stock Purchase Plan		52		38		103		77

Total	$	5,457	$	3,707	$	10,360	$	7,163

Our share-based compensation expense is recorded as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2012		2011		2012		2011
Research and development	$	1,152	$	999	$	2,235	$	1,986
Selling, general and administrative		4,305		2,708		8,125		5,177

Total	$	5,457	$	3,707	$	10,360	$	7,163

We currently have three share-based award plans in place: a 1995 Stock Option and Restricted Share Plan (1995 Plan), a 2001 Equity Incentive Plan (2001 Plan) and a 2005 Stock Option and Restricted Share Plan (2005 Plan) (collectively, the “Plans”). In September 2005, the 1995 Plan expired and no additional grants will be issued from this plan. The Plans were adopted by our board of directors to provide eligible individuals with an opportunity to acquire or increase an equity interest in the Company and to encourage such individuals to continue in the employment of the Company.

In May 2008, the 2005 Plan was amended and an additional 5,000,000 shares of common stock was reserved for issuance upon the exercise of stock options or the grant of restricted shares or restricted share units. This amendment was approved by stockholders at our Annual Meeting of Stockholders in May of 2010. In April 2012, the 2005 Plan was amended and an additional 2,500,000 shares of common stock was reserved for issuance upon the exercise of stock options or the grant of restricted shares or restricted share units. This amendment was approved by stockholders at our Annual Meeting of Stockholders in May of 2012.

As of June 30, 2012, there were 4,783,599 shares available for grant under the Plans.

The following table lists information about these equity plans at June 30, 2012:


	1995 Plan		2001 Plan		2005 Plan		Combined
Shares authorized for issuance		4,500,000		500,000		15,350,000		20,350,000
Shares outstanding		4,500,000		500,000		10,566,401		15,566,401

Shares available for grant		—		—		4,783,599		4,783,599

Employee Stock Option Plans

We granted 1,823,899 stock options during the six months ended June 30, 2012. The weighted average fair value of the grants was estimated at $ 14.06 per share using the Black-Scholes option-pricing model using the following assumptions:

We have 9,334,344 option grants outstanding at June 30, 2012 with exercise prices ranging from $1.00 per share to $32.69 per share and a weighted average remaining contractual life of 7.12 years. The following table lists the outstanding and exercisable option grants as of June 30, 2012:


	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value (in thousands)
Outstanding		9,334,344	$	14.67		7.12	$	88,842
Exercisable		5,020,133	$	11.44		5.68	$	61,527

The following table summarizes information regarding our stock option awards at June 30, 2012:


	Shares Under Option			Weighted Average Exercise Price
Balance at December 31, 2011		8,485,241		$	12.03
Granted		1,823,899		$	24.46
Exercised		(797,231	)	$	8.73
Forfeited		(176,315	)	$	15.95
Cancelled		(1,250	)	$	11.55

Balance at June 30, 2012		9,334,344		$	14.67

As of June 30, 2012, there was $41.7 million of total unrecognized compensation cost related to unvested share-based payments (including share options) granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.97 years.

Performance Awards

Beginning in 2011, employees receive annual grants of performance award units, or PSUs, in addition to stock options which give the recipient the right to receive common stock that is contingent upon achievement of specified pre-established company performance goals over a three year performance period. The performance goals for the PSUs granted, which are accounted for as equity awards, are based upon the following performance measures: (i) our revenue growth over the performance period, (ii) our adjusted net income as a percent of sales at the end of the performance period, and (iii) our relative total shareholder return, or TSR, compared to a peer group of companies at the end of the performance period.

In 2012 and 2011, approximately 186,000 and 155,000 PSUs subject to company specific performance metrics were granted with weighted average grant date fair values of $28.16 and $17.84 per share, respectively. In 2012 and 2011, approximately 21,000 and 17,000 PSUs subject to the TSR metric were granted with weighted average grant date fair values of $45.37 and $24.38 per share, respectively. The number of PSUs reflected as granted represents the target number of shares that are eligible to vest subject to the attainment of the performance goals. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of shares greater or less than their target number of shares granted, ranging from 0% to 200% of the PSUs granted. Shares of our common stock are issued on a one-for-one basis for each PSU earned. Participants vest in their PSUs at the end of the performance period.

The fair value of the PSUs subject to company specific performance metrics is equal to the closing price of our common stock on the grant date.

The fair value of the market condition PSUs was determined using a Monte Carlo simulation and utilized the following inputs and assumptions:


	Six Months Ended June 30,
(in thousands)	2012			2011
Closing stock price on grant date	$	28.16		$	17.84
Performance period starting price	$	24.94		$	16.85
Term of award (in years)		2.99			2.99
Volatility		65.06	%		69.75	%
Risk-free interest rate		0.45	%		1.19	%
Expected dividend yield		0.00	%		0.00	%
Fair value per TSR PSU	$	45.37		$	24.38

The performance period starting price is measured as the average closing price over the last 30 trading days prior to the performance period start. The Monte Carlo simulation model also assumed correlations of returns of the prices of our common stock and the common stocks of the comparator group of companies and stock price volatilities of the comparator group of companies.

At June 30, 2012, there was approximately $ 9.5 million of unrecognized compensation cost related to all PSUs that is expected to be recognized over a weighted-average period of approximately 2.31 years.

The following table summarizes select information regarding our PSUs as of June 30, 2012:


	Share Units (in thousands)			Weighted- average grant date fair value
Balance at December 31, 2011		164,692		$	18.50
Granted		206,900		$	29.88
Forfeited		(12,356	)	$	23.63
Vested		—		$	—

Balance at June 30, 2012		359,236		$	24.88

Restricted Stock Awards

Beginning in 2011, we also grant our non-employee directors restricted stock awards that generally vest after one year of service. In 2012 and 2011, 37,750 and 27,000 RSUs were granted with weighted average grant date fair values of $31.12 and $17.30 per share, respectively. The fair value of a restricted stock award is equal to the closing price of our common stock on the grant date.

The following summarizes select information regarding our restricted stock awards as of June 30, 2012:


	Share Units (in thousands)			Weighted- average grant date fair value
Balance at December 31, 2011		27,000		$	17.30
Granted		37,750		$	31.12
Vested		(27,000	)	$	17.30

Balance at June 30, 2012		37,750		$	31.12

As of June 30, 2012, there was approximately $ 0.80 million of unrecognized compensation cost related to RSUs which is expected to be recognized over a weighted average period of 0.99 years.

Employee Stock Purchase Plan

During the first six months of 2012, no shares were sold to employees. During the year ended December 31, 2011, 29,982 shares were sold to employees. As of June 30, 2012 there are approximately 385,319 shares available for issuance under this plan.

Under this plan, there are two plan periods: January 1 through June 30 (Plan Period One) and July 1 through December 31 (Plan Period Two). For Plan Period One in 2012, the fair value of approximately $103,000 was estimated using the Type B model with a risk free interest rate of 0.06%, volatility of 47.7% and an expected option life of 0.5 years. This fair value was amortized over the six month period ending June 30, 2012.

Expected dividend yield

Range of risk free interest rate

1.15% — 1.61%

Weighted-average volatility

Range of volatility

59.01% — 62.35%

Range of expected option life (in years)

5.50 — 6.25