STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

At December 31, 2014 and 2013, the Company had two stock-based compensation plans and a 401(k) plan. These plans are described below.

(a) Stock Option Plan

The Company maintains stock option plans that provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, performance stock units (PSUs) and stock appreciation rights. The plans provide that incentive stock options may be granted with exercise prices not less than the fair market value at the date of grant. Options granted through December 31, 2014 generally vest over four years and expire ten years from the date of grant. Restricted stock awards granted to non-employee members of the Board of Directors vest over one year. Restricted stock units granted to certain officers of the Company vest over four years. In June 2014, the Company’s stockholders approved an amendment and restatement of the Company’s 2006 Incentive Award Plan that, among other matters, increased the number of shares available for future issuance by 2.9 million shares. At December 31, 2014, there were 3.5 million shares available for future issuance under these plans.

In June 2014, the Compensation Committee of the Board of Directors approved a grant of PSUs to certain of the Company’s officers. PSUs vest based on achieving specified performance measurements over a three-year “cliff” performance period plus an additional year “cliff” time vesting. The PSUs have payout opportunities of between 0% and 250%. The performance measurements include a compounded annual growth rate for revenue over a three-year period and Adjusted EBITDA for the year ended December 31, 2016.

Valuation and Expense Information

The Company recognized stock-based compensation expense of $8.3 million, $4.1 million and $3.1 million for the years ended December 31, 2014, 2013 and 2012, respectively, which consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards that are ultimately expected to vest during the period, (2) restricted stock awards issued to certain of the Company’s directors, (3) restricted stock units and PSUs issued to certain of the Company’s officers, and (4) the fair value of shares issued under the Company’s employee stock purchase plan. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for these awards on a straight-line basis over the service period. An income tax benefit of $3.0 million, $1.4 million, and $0.7 million related to the exercise of stock options during the years ended December 31, 2014, 2013 and 2012, respectively, will be added to other paid-in capital if, and when, the tax benefit is realized.

With respect to the PSUs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against the specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee that performance targets will be achieved, the Company estimates the fair value of the PSUs based on its closing stock price at the time of grant and its estimates of achieving such performance targets and records compensation expense on a graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted based upon the Company’s estimate of achieving such performance targets. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement.

The fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant.

The following is a summary of the assumptions used for the stock options granted during the years ended December 31, 2014, 2013 and 2012 using the Black-Scholes pricing model:



	Year Ended December 31,
	2014		2013		2012
Expected life (years)	5.8		5.8		5.9
Risk-free interest rate	1.65	%	1.37	%	0.75	%
Expected volatility	61.44	%	65.54	%	66.35	%
Expected dividend yield	—		—		—

The weighted average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $13.59, $10.80 and $6.17, respectively.

The following table summarizes stock option activity during the year ended December 31, 2014:



	Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2014	3,153,234		$	9.72
Granted	321,397		24.29
Exercised	(672,739	)	6.81
Canceled	(102,981	)	17.56
Options outstanding at December 31, 2014	2,698,911		$	11.88	6.81	$	61,265,166
Options exercisable at December 31, 2014	1,607,979		$	8.47	5.76	$	41,983,321

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value based on the Company’s closing stock price of $34.58 on December 31, 2014 that would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares underlying in-the-money options exercisable as of December 31, 2014 was approximately 1.6 million. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $14.8 million, $9.2 million and $5.1 million, respectively.

The following table summarizes restricted stock award activity during the year ended December 31, 2014:



	Shares		Weighted Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2014	22,190		$	18.93
Awarded	26,802		22.39
Vested	(22,190	)	18.93
Awards outstanding at December 31, 2014	26,802		$	22.39

The following table summarizes restricted stock unit activity during the year ended December 31, 2014:



	Shares		Weighted Average Grant Date Fair Value
Restricted stock units outstanding at January 1, 2014	158,622		$	12.56
Awarded	93,331		23.89
Vested/Released	(58,824	)	9.98
Forfeited	(11,113	)	10.27
Restricted stock units outstanding at December 31, 2014	182,016		$	19.35

The following table summarizes PSU activity during the year ended December 31, 2014:



	Shares		Weighted Average Grant Date Fair Value
Performance stock units outstanding at January 1, 2014	—		$	—
Awarded (at target performance)	500,985		23.43
Forfeited	(13,827	)	—
Performance stock units outstanding at December 31, 2014	487,158		$	23.43

As of December 31, 2014, there was $24.0 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans, using our current estimates of performance for the PSUs. Assuming the minimum of 0% and maximum of 250% payout opportunities for the PSUs, the range of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s equity plans was between $10.5 million and $36.8 million as of December 31, 2014. This expense is based on an assumed future forfeiture rate of approximately 11.3% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 2.7 years.

(b) Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (ESPP). The ESPP provides for the sale of up to 700,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP is restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period. The purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period. This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP is compensatory for financial reporting purposes. At December 31, 2014, there were approximately 200,000 shares available for future issuance under this plan.

The fair value of the shares offered for the six-month periods beginning January and July 2014 under the ESPP was determined on the date of grant using the Black-Scholes option-pricing model. The expected term of six months was based upon the offering period of the ESPP. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate is based on the six-month U.S. Treasury daily yield rate. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the years ended December 31, 2014, 2013 and 2012, the Company recognized $0.8 million, $0.4 million and $0.3 million of compensation expense, respectively, related to its ESPP.

The Company maintains a salary reduction savings plan under Section 401(k) of the Internal Revenue Code (401(k) Plan) that the Company administers for participating employees’ contributions. All full-time employees are covered under the 401(k) Plan after meeting minimum service requirements. The Company accrued and paid matching contributions of $1.3 million, $0.9 million, and $0.8 million to the 401(k) Plan for the years ended December 31, 2014, 2013 and 2012, respectively. For all years presented, Company contributions were based on a match of 50% of each employee’s contribution, with the match-eligible contribution being limited to 6% of the employee’s eligible compensation.