6. Stock-Based Compensation Plans

The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards, restricted stock units and deferred 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):

	2015		2014		2013
Product costs	$	24	$	16	$	22
Research and development		226		175		180
Selling, general and administrative		2,131		3,146		2,350
Total stock-based compensation expense	$	2,381	$	3,337	$	2,552

As of September 30, 2015, approximately $1.9 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.1 years. Such costs include $0.2 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. Weighted average per share fair values of stock options granted during fiscal 2015, 2014 and 2013 were $7.26, $8.72 and $8.69, respectively. The assumptions used as inputs in the model for the years ended September 30 were as follows:

	2015			2014			2013
Risk-free interest rates		1.43	%		1.19	%		0.60	%
Expected life	4.5 years			4.6 years			4.8 years
Expected volatility		43	%		45	%		49	%
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.

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. With respect to members of our Board, non-qualified stock options generally become exercisable on a pro-rata basis over the one-year period following the date of grant. With respect to our employees, non-qualified stock options generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date.

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 to the Company’s employees 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.

The Company modified non-qualified stock option awards granted to Board members in February 2014, which resulted in acceleration of the stock option vesting period. The modification changed the vesting period to a pro-rata basis over a one-year period from a four-year period and resulted in an increase to stock option expense of $0.5 million in fiscal 2014.

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, 2015, there were 938,391 shares available for future awards. As of September 30, 2015, the aggregate intrinsic value of the option shares outstanding and option shares exercisable was $4.5 million and $3.8 million, respectively. At September 30, 2015, the average remaining contractual life of options outstanding and options exercisable was 3.2 and 2.4 years, respectively. The total pre-tax intrinsic value of options exercised during fiscal 2015 and 2014 was $1.7 million and $1.4 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.

The following table summarizes all stock options activity and stock options outstanding and exercisable under the stock option plans during fiscal 2015, 2014 and 2013:

	Number of Shares			Weighted Average Exercise Price
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
Granted		138,837			22.71
Exercised		(190,434	)		14.42
Forfeited		(106,768	)		31.26
Outstanding at September 30, 2014		1,210,619			20.35
Granted		164,401			21.24
Exercised		(166,422	)		14.54
Forfeited		(90,590	)		35.35
Outstanding at September 30, 2015		1,118,008			20.10
Exercisable at September 30, 2015		797,045		$	20.04

The stock-based compensation table 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, 2015, 2014 or 2013.

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 $0.3 million, $0.2 million and $0.1 million during fiscal 2015, 2014 and 2013, respectively.

The following table summarizes all restricted stock awards activity during fiscal 2015, 2014 and 2013:

	Number of Shares			Weighted Average Grant Price
Balance at September 30, 2012		4,000		$	22.11
Vested		5,234			23.88
Forfeited		(4,000	)		22.11
Balance at September 30, 2013		5,234			23.88
Granted		22,155			22.67
Vested		(7,991	)		23.98
Forfeited		(774	)		22.58
Balance at September 30, 2014		18,624			22.45
Granted		18,073			21.84
Vested		(7,606	)		22.28
Forfeited		(1,316	)		22.16
Balance at September 30, 2015		27,775		$	22.12

The stock-based compensation table 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, 2015, 2014 or 2013.

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. The Performance Shares are not issued and outstanding until the performance objectives are met. 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 2012 (2012 – 2014), fiscal 2013 (2013 – 2015), fiscal 2014 (2014 – 2016) and fiscal 2015 (2015 – 2017). 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 expense 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 2015, the Company recognized expense of $0.5 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2015, 2014 and 2013. In fiscal 2014, the Company recognized expense of $0.6 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2014, 2013 and 2012. 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 2012 and 2011. The stock-based compensation table above includes the Performance Shares expenses.

The fair values of the Performance Shares, at target, were $0.9 million, $0.9 million and $0.9 million for grants awarded in fiscal 2015, 2014 and 2013, 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 2013 – 2015		8,551		42,753		85,506
Fiscal 2014 - 2016		7,861		39,303		78,606
Fiscal 2015 – 2017		8,440		42,199		84,398

The Fiscal 2013 – 2015 awards are expected to be finalized in December 2015 at an estimated 41,727 shares based on performance objective results. Based on the Company’s performance through September 30, 2015, it is estimated that approximately 3,930 shares may be earned for the Fiscal 2014 – 2016 performance period and that approximately 10,676 shares may be earned for the Fiscal 2015 – 2017 performance period.

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, 2015 and 2014, 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, $0.1 million and $0.1 million, during fiscal 2015, 2014 and 2013, respectively. The stock-based compensation table above includes the Stock Purchase Plan expenses.

Restricted Stock and Deferred Stock Units

The Company has awarded a total of 23,736 restricted stock units (“RSU”) in fiscal 2015 and 2014 under the 2009 Equity Incentive Plan to non-employee directors with forfeiture of 3,068 RSUs in fiscal 2015. The Company modified the RSU awards granted to Board members in February 2014, which resulted in acceleration of the RSU award vesting period. The modification changed the vesting period to a pro-rata basis over a one-year period from a three-year period and resulted in an increase to RSU award expense of $0.2 million in fiscal 2014. 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 expense 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 RSU expenses recognized related to these awards, which totaled $0.2 million, $0.4 million and $0.1 million for fiscal 2015, 2014 and 2013, respectively.

Directors can also elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). Certain directors elected this option beginning on January 1, 2013 which has resulted in 18,934 units issued with a total value of $0.4 million. These DSUs are fully vested. Stock-based compensation expense related to DSU awards, totaled $0.1 million in both fiscal 2015 and 2014.