Stock-based Compensation and Stockholders’ Equity

Equity Incentive Plan

In January 2011, the Board of Directors approved an amendment to the 2006 Equity Incentive Plan (the “2006 Plan”) that increased by 2,000,000 the aggregate maximum number of shares that may be issued under the 2006 Plan. The amendment to the 2006 Plan was approved by the Company’s stockholders in February 2011. The authorized number of shares that may be issued under the 2006 Plan automatically increases on July 1 each year through 2016, by an amount equal to (a) 3.0% of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at the time of grant cannot be less than 110% of the fair value. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant and options vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. The 2006 Plan is the successor equity incentive plan to the Company's 1998 Stock Option Plan. As of June 30, 2014, the Company had 341,617 authorized shares available for future issuance under the 2006 plan.

Restricted Stock Awards

Restricted stock awards are share awards that provide the rights to a set number of shares of the Company’s stock on the grant date. In August 2008, the Compensation Committee of the Board of Directors of the Company (the “Committee”) approved the terms of an agreement (the “Option Exercise Agreement”) with Charles Liang, a director and President and Chief Executive Officer of the Company, pursuant to which Mr. Liang exercised a fully vested option previously granted to him for the purchase of 925,000 shares. The option was exercised using a “net-exercise” procedure in which he was issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (898,205 shares based upon the market value as of the date of exercise). The shares issued upon exercise of the option are subject to vesting over five years. Vesting of the shares subject to the award may accelerate in certain circumstances pursuant to the terms of the Option Exercise Agreement. The Company determined that there is no incremental fair value of the option exchanged for the award. 898,205 and 718,564 shares were vested as of June 30, 2014 and 2013, respectively.

In November 2008, the Committee approved the terms of an Option Exercise Agreement with Chiu-Chu Liang, a director and Vice President of Operations & Treasurer of the Company and Shiow-Meei Liaw, Senior Warehouse Manager of the Company, pursuant to which they exercised fully vested options previously granted to them for the purchase of 185,263 and 92,631 shares, respectively. They exercised the options using a “net-exercise” procedure in which they were issued a number of shares representing the spread between the option exercise price and the then current market value of the shares subject to the option (182,611 and 91,305 shares, respectively, based upon the market value as of the date of exercise). The shares issued upon exercise of the options are subject to vesting over two years. Vesting of the shares subject to the awards may accelerate in certain circumstances pursuant to the terms of the applicable Option Exercise Agreement. The Company determined that there is no incremental fair value of the option exchanged for the awards. The awards were fully vested as of June 30, 2012.

Determining Fair Value

Valuation and amortization method—The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on an analysis of the relevant peer companies’ post-vest termination rates and the exercise factors for the stock options granted prior to June 30, 2011. For stock options granted after June 30, 2011, the expected term is based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility—Expected volatility is based on a combination of the Company's implied and historical volatility.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the years ended June 30, 2014, 2013 and 2012 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Years Ended June 30,
	2014			2013			2012
Risk-free interest rate	1.53% - 1.90%			0.65% - 0.90%			0.83% - 1.32%
Expected life	5.49 - 5.58 years			5.03 - 5.15 years			5.01 - 5.04 years
Dividend yield	—		%	—		%	—		%
Volatility	43.48% - 50.07%			51.27% - 51.76%			45.62% - 53.72%
Weighted-average fair value	$	7.23		$	4.53		$	7.15

The following table shows total stock-based compensation expense included in the consolidated statements of operations for the years ended June 30, 2014, 2013 and 2012 (in thousands):



	Years Ended June 30,
	2014			2013			2012
Cost of sales	$	941		$	953		$	783
Research and development	6,783			6,527			5,542
Sales and marketing	1,260			1,541			1,469
General and administrative	2,078			2,340			2,458
Stock-based compensation expense before taxes	11,062			11,361			10,252
Income tax impact	(2,426		)	(548		)	(1,582		)
Stock-based compensation expense, net	$	8,636		$	10,813		$	8,670

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash from financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash from operating activities. The Company had $7,041,000, $1,734,000 and $3,421,000 of excess tax benefits accounted in the Company’s additional paid-in capital in the year ended June 30, 2014, 2013 and 2012, respectively. The Company had excess tax benefits that are classified as cash from financing activities of $2,992,000, $865,000 and $2,047,000 in the year ended June 30, 2014, 2013 and 2012, respectively, for options issued since July 1, 2006. Excess tax benefits for stock options issued prior to July 1, 2006 continue to be classified as cash from operating activities.

Stock Option Activity

The following table summarizes stock option activity during the years ended June 30, 2014, 2013 and 2012 under all stock option plans:



	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2011 (6,617,414 shares exercisable at weighted average exercise price of $7.18 per share)	10,480,785		$	8.86
Granted (weighted average fair value of $7.15)	2,381,700		15.89
Exercised	(1,211,070	)	7.06
Forfeited	(349,187	)	14.60
Balance as of June 30, 2012 (7,410,152 shares exercisable at weighted average exercise price of $8.25 per share)	11,302,228		10.36
Granted (weighted average fair value of $4.53)	1,952,270		11.83
Exercised	(612,034	)	3.01
Forfeited	(436,286	)	14.01
Balance as of June 30, 2013 (8,731,818 shares exercisable at weighted average exercise price of $9.66 per share)	12,206,178		10.83
Granted (weighted average fair value of $7.23)	1,808,006		15.87
Exercised	(2,863,878	)	8.36
Forfeited	(244,704	)	14.25
Balance as of June 30, 2014	10,905,602		$	12.24	6.28	$	142,053
Options vested and expected to vest at June 30, 2014	10,633,458		$	12.16	6.20	$	139,430
Options vested and exercisable at June 30, 2014	7,558,631		$	11.05	5.21	$	107,481

The total pretax intrinsic value of options exercised during the years ended June 30, 2014, 2013 and 2012 was $30,165,000, $4,614,000 and $11,589,000, respectively. As of June 30, 2014, the Company’s total unrecognized compensation cost related to non-vested stock-based awards granted since July 1, 2006 to employees and non-employee directors was $19,236,000, which will be recognized over a weighted-average vesting period of approximately 2.4 years.

Additional information regarding options outstanding as of June 30, 2014, is as follows:



	Options Outstanding				Options Vested and Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Term (Years)	Weighted- Average Exercise Price Per Share		Number Exercisable	Weighted- Average Exercise Price Per Share
$2.60 - 6.14	1,373,230	3.37	$	4.87	1,373,230	$	4.87
6.21 - 8.36	1,149,959	4.08	7.97		1,149,959	7.97
8.47 - 10.35	1,355,173	6.76	9.62		761,809	9.55
10.66 - 11.76	1,259,691	6.02	10.92		1,025,009	10.74
11.81 - 13.61	1,313,886	6.73	12.70		1,037,201	12.72
13.67 - 14.23	1,333,831	6.53	13.98		677,016	13.81
15.22 - 17.29	1,369,860	7.54	16.41		839,991	16.31
17.69 - 18.93	1,496,712	8.24	18.58		607,694	18.67
20.70	231,260	8.56	20.70		86,722	20.70
21.86	22,000	9.62	21.86		—	—
$2.60 - $21.86	10,905,602	6.28	$	12.24	7,558,631	$	11.05

Restricted Stock Award Activity

The following table summarizes the Company’s restricted stock award activity for the year ended June 30, 2014, 2013 and 2012:



	Restricted Stock Awards
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested stock at June 30, 2011	538,923		$	10.66
Granted	3,500		17.29
Vested	(179,641	)	10.66
Forfeited	—		—
Nonvested stock at June 30, 2012	362,782		10.72
Granted	—		—
Vested	(183,141	)	10.79
Forfeited	—		—
Nonvested stock at June 30, 2013	179,641		10.66
Granted	3,500		14.23
Vested	(183,141	)	10.73
Forfeited	—		—
Nonvested stock at June 30, 2014	—		$	—

The total pretax intrinsic value of restricted stock awards vested was $1,965,000, $2,225,000 and $2,375,000 for the years ended June 30, 2014, 2013 and 2012, respectively. In fiscal year 2014, 2013 and 2012, upon vesting, 183,141, 183,141 and 179,641 shares of restricted stock awards were partially net share-settled such that the Company withheld 51,583, 85,091 and 83,857 shares, respectively, with value equivalent to an officer's minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the restricted stock awards on their vesting date as determined by the Company’s closing stock price. Total payments for an officer's tax obligations to the taxing authorities were $681,000, $1,034,000 and $1,109,000 in fiscal year 2014, 2013 and 2012, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. There is no unvested restricted stock awards at June 30, 2014.