6.	Stock-Based Compensation Plans

The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards and restricted stock units. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period. The Company’s stock-based compensation expenses for the years ended September 30 were allocated to the following expense categories (in thousands):


	2013		2012		2011
Product costs	$	22	$	35	$	79
Research and development		180		511		1,156
Selling, general and administrative		2,350		2,125		2,415

Total continuing operations		2,552		2,671		3,650
Discontinued operations		—		62		602

Total stock-based compensation expense	$	2,552	$	2,733	$	4,252

As of September 30, 2013, approximately $3.4 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.6 years. The unrecognized compensation costs include $1.2 million based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to be met above the minimum levels for each award period.

Stock Option Awards

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair values of stock options granted during fiscal 2013, 2012 and 2011 were $8.69, $5.26 and $3.96, respectively. The assumptions used as inputs in the model for the years ended September 30 were as follows:


	2013			2012			2011
Risk-free interest rates		0.60	%		0.82	%		1.45	%
Expected life		4.8 years			4.8 years			4.8 years
Expected volatility		49	%		50	%		45	%
Dividend yield		0	%		0	%		0	%

The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted is determined based on the Company’s experience. Expected volatility is based on the Company’s stock price movement over a period approximating the expected term. Based on management’s judgment, dividend rates are expected to be zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical experience.

The Company’s Incentive Stock Options (“ISO”) are granted at a price of at least 100% of the fair market value of the common stock of the Company on the date of the grant or 110% with respect to optionees who own more than 10% of the total combined voting power of all classes of stock. ISOs generally expire in seven years or upon termination of employment and generally are exercisable at a rate of 20% per year commencing one year after the date of grant. Non-qualified stock options are granted at fair market value on the grant date. Non-qualified stock options expire in seven to ten years or upon termination of employment or service as a Board member. Non-qualified stock options granted prior to May 2008 generally become exercisable with respect to 20% of the shares on each of the first five anniversaries following the grant date, and non-qualified stock options granted subsequent to April 2008 generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date. Shareholders approved the 2009 Equity Incentive Plan (“2009 Plan”) at the February 8, 2010 Annual Meeting of Shareholders. The 2009 Plan has 1,500,000 shares authorized, plus the number of shares that have not yet been awarded under the 2003 Equity Incentive Plan, or were awarded and subsequently returned to the pool of available shares under the 2003 Equity Incentive Plan pursuant to its terms. At September 30, 2013, there were 1,267,000 shares available for future awards. As of September 30, 2013, the aggregate intrinsic value of the option shares outstanding and option shares exercisable was $6.0 million and $2.5 million, respectively. At September 30, 2013, the average remaining contractual life of options outstanding and options exercisable was 3.9 and 3.1 years, respectively. The total pre-tax intrinsic value of options exercised during fiscal 2013 and 2012 was $0.1 million and $0.1 million, respectively. The intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the last day of the respective fiscal period end. There were no stock options exercised in fiscal 2011.

The following table summarizes all stock options activity and stock options outstanding and exercisable under the stock option plans during fiscal 2013, 2012 and 2011:


	Number of Shares			Weighted Average Exercise Price
Outstanding at September 30, 2010		1,492,321		$	31.22
Granted		551,773			9.96
Exercised		—			—
Forfeited		(528,906	)		25.15

Outstanding at September 30, 2011		1,515,188		$	25.59
Granted		299,832			12.46
Exercised		(11,379	)		10.03
Forfeited		(478,203	)		29.76

Outstanding at September 30, 2012		1,325,438		$	21.25
Granted		178,924			20.85
Exercised		(10,273	)		14.40
Forfeited		(125,105	)		33.47

Outstanding at September 30, 2013		1,368,984		$	20.13

Exercisable at September 30, 2013		771,640		$	24.47

The table above includes stock options activity related to discontinued operations, however, there were no stock options outstanding or exercisable related to discontinued operations as of September 30, 2013 or 2012.

Restricted Stock Awards

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Under accounting guidance these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed by the Company at the end of the vesting period. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. The stock-based compensation table above includes Restricted Stock expenses recognized related to these awards, which totaled $0.1 million, $0.2 million and $0.6 million during fiscal 2013, 2012 and 2011, respectively.

The following table summarizes all restricted stock awards activity during fiscal 2013, 2012 and 2011:


	Number of Shares			Weighted Average Grant Price
Balance at September 30, 2010		41,072		$	22.33
Granted		66,533			10.01
Vested		(23,978	)		19.38
Forfeited		(11,000	)		20.79

Balance at September 30, 2011		72,627		$	12.25
Vested		(67,627	)		11.52
Forfeited		(1,000	)		22.35

Balance at September 30, 2012		4,000		$	22.11
Granted		5,234			23.88
Vested		(4,000	)		22.11

Balance at September 30, 2013		5,234		$	23.88

The table above includes restricted stock awards activity related to discontinued operations, however, there were no restricted stock awards outstanding related to discontinued operations as of September 30, 2013 or 2012.

Performance Share Awards

The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (“Performance Shares”). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. Performance objectives selected by the Organization and Compensation Committee of the Board of Directors (the “Committee”) were cumulative earnings per share and cumulative revenue for the three-year performance periods for fiscal 2011 (2011 — 2013), fiscal 2012 (2012 — 2014) and fiscal 2013 (2013 — 2015). Assuming that the minimum performance level is attained, the number of shares that may actually vest will vary based on performance from 20% (minimum) to 200% (maximum). Shares will be issued to participants as soon as practicable following the end of the performance periods subject to Committee approval and verification of results. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins. Compensation is recognized in each period based on management’s best estimate of the achievement level of the specified performance objectives for Performance Shares. In fiscal 2013, the Company recognized expense of $1.2 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2013, fiscal 2012 and fiscal 2011. In fiscal 2012, the Company recognized expense of $1.0 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2012 and fiscal 2011. In fiscal 2011, the Company recognized expense of $0.2 million related to 68,533 three-year Performance Shares awarded in fiscal 2011. The Company did not recognize any expense in fiscal 2012 or 2011 related to three-year Performance Shares granted in fiscal 2010 (4,373 shares) as the performance objectives were not met. The stock-based compensation table above includes the Performance Shares expenses.

The fair values of the Performance Shares, at target, were $0.9 million, $0.8 million and $0.7 million for grants awarded in fiscal 2013, 2012 and 2011, respectively.

The aggregate number of shares that could be awarded to key employees if the minimum, target and maximum performance goals are met, based upon the fair value at the date of grant is as follows:


Performance Period	Minimum Shares		Target Shares		Maximum Shares
Fiscal 2011 — 2013		13,707		68,533		122,053
Fiscal 2012 — 2014		12,499		62,497		124,994
Fiscal 2013 — 2015		8,551		42,753		85,506

The Fiscal 2011 — 2013 awards were finalized in November 2013 at 122,053 shares based on performance objectives results.

1999 Employee Stock Purchase Plan

Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 400,000 shares of common stock. All full-time and part-time employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of September 30, 2013 and 2012, there were less than $0.1 million of employee contributions in each period included in accrued liabilities in the consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan totaled $0.1 million, less than $0.1 million and $0.1 million, during fiscal 2013, 2012 and 2011, respectively. The stock-based compensation table above includes the Stock Purchase Plan expenses.

Restricted Stock Units

On December 12, 2012, the Company awarded 11,776 restricted stock units (“RSU”) under the 2009 Equity Incentive Plan to directors. The RSU awards vest annually at a rate of 33%. RSU awards are not considered issued or outstanding common stock of the Company until they vest. The estimated fair value of the RSU awards was calculated based on the closing market price of SurModics’ common stock on the date of grant. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. Directors can also elect to receive their annual fees for services to the Board in RSUs. Certain directors elected this option beginning on January 1, 2013 which has resulted in 5,932 units issued with a total value of $138,000. These RSUs are fully vested. The stock-based compensation table above includes RSU expenses recognized related to these awards, which totaled $0.2 million for fiscal 2013.