STOCKHOLDERS EQUITY

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan, or ESPP, which allows regular full-time U.S. employees (subject to certain exceptions) to contribute up to 10 percent of base compensation to the semi-annual purchase of shares of the Company's common stock at 95 percent of the fair market value at certain plan-defined dates. The Company reserved a total of 450,000 shares of common stock for issuance under the ESPP of which 27,393 shares remained available for future purchases as of December 31, 2013.

Stock Option Plans

In August 1999, the Company adopted the Non-statutory Option Plan ("1999 Plan") which expired in 2009. Awards that were granted under the 1999 Plan will continue to operate in accordance with the terms of the 1999 Plan until the awards are either exercised or canceled.

In May 2003, the Company adopted the 2003 Incentive Stock Plan ("2003 Plan") under which the Board of Directors is authorized to grant incentive and non-statutory stock option awards, stock settled stock appreciation rights (SARs) and restricted stock awards to employees, directors and consultants. The 2003 Plan has been subsequently amended and currently a total of 5,900,000 shares have been authorized for issuance. As of December 31, 2013, the Company had 1,309,426 shares remaining available for future grant under the 2003 Plan.

Options and SARs granted under the 1999 Plan and the 2003 Plan generally become exercisable over a 48-month period and restricted stock awards generally become exercisable over a three to five year period. Since 2005, all options, SARs and awards granted under each of the Company's plans have a contractual life of seven years. Prior to that, options granted had a contractual life of ten years from the grant date. The Company has historically issued new shares upon exercises of stock options, SARs and vesting of restricted stock. Directors of the Company are eligible to receive deferred restricted stock awards ("DRSA") that vest over a five year period. Delivery of the DRSA occurs upon the director's retirement, resignation or other departure from membership of the Board of Directors.

On January 6, 2012, the Company's Board of Directors (the "Board") approved a Long Term Incentive Program (the "LTIP"), which provides for shares of the Company's Common Stock (the "Performance Shares") to certain senior executives of the Company, under the Company's Amended and Restated 2003 Incentive Stock Plan.

The Board also approved the participants, goals and award levels for the first performance period under the LTIP. Under the 2012-2014 Performance Period, in aggregate the participants may earn up to a maximum of 600,000 shares of Common Stock pursuant to Performance Shares. The final number of shares to be earned under the LTIP will be determined based upon the Company's actual achievement compared to revenue, operating income and free cash flow goals, during the performance period, provided that the Company's stock price is equal to or greater than $35 on December 31, 2014. The number of earned shares, if any, will be determined on the date that the Company files its Form 10-K for the year ended December 31, 2014 (the "Determination Date") and 50 percent of the earned Performance Shares vests on the thirtieth day following the Determination Date and 25 percent of the earned shares vests on each of the next two anniversaries of the Determination Date. During the year ended December 31, 2013 no expense was recorded related to the LTIP awards and the intrinsic value is $0.

The weighted average fair value of each stock option and SARs granted to employees during the years ended December 31, 2013, 2012 and 2011 was estimated at $9.90, $12.71 and $15.70, respectively. The weighted average fair value of restricted stock awards granted in December 31, 2013, 2012 and 2011 was $35.53, $26.30 and $33.35, respectively.

The fair value of each stock option and SAR was estimated on the grant date using the Black Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 2013, 2012 and 2011:



	2013		2012		2011
Expected term (in years)	4.6		4.4		4.3
Expected volatility	32	%	60	%	58	%
Risk-free interest rate	0.7	%	0.7	%	1.7	%
Expected dividends	—		—		—

The fair value of each LTIP award granted on January 6, 2012 was estimated at $17.07 using the Monte Carlo pricing model with the following assumptions:



	2012
Grant date stock price	$	31.30
Expected term (in years)	3
Expected volatility	33.5		%
Risk-free interest rate	0.4		%
Expected dividends	—

Activity for all stock based compensation plans for the year ended December 31, 2013 is as follows:



	Stock Options/SARs Outstanding				Restricted Stock Awards Outstanding
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Grant Date Fair Value
Balance as of December 31, 2012	1,962,008		$	28.99	471,562		$	28.77
Granted	343,558		$	35.78	201,973		$	35.53
Exercised/vested	(357,034	)	$	24.01	(110,987	)	$	28.93
Canceled/forfeited	(374,168	)	$	37.89	(64,120	)	$	30.82
Balance as of December 31, 2013	1,574,364		$	29.48	498,428		$	31.21
Exercisable/Deferred at December 31, 2013	1,154,415		$	28.18	72,473		$	29.92

The weighted average remaining contractual term for stock options and SARs outstanding and exercisable at December 31, 2013, is 3.6 and 2.8 years, respectively. The aggregate intrinsic value for stock options and SARs outstanding and exercisable at December 31, 2013, is $17.2 million and $14.2 million, respectively. The total intrinsic value of options and SARs exercised during the years ended December 31, 2013, 2012, and 2011, was $4.0 million, $3.8 million, and $4.0 million, respectively. As of December 31, 2013 there was $4.1 million of unrecognized compensation expense related options and SARs granted under the Company's stock plans. That unrecognized cost is expected to be recognized over a weighted average period of 2.6 years.

As of December 31, 2013, there was $8.9 million of unrecognized compensation expense related to restricted stock awards granted under the Company's stock plans. That unrecognized cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011, was $3.2 million, $3.6 million, and $1.8 million, respectively.

Valuation and Expense Information

The following table summarizes the reporting of total stock based compensation expense resulting from employee stock options, including SARs, and restricted stock awards for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	Year Ended December 31,
	2013		2012		2011
Cost of product sales	$	502	$	586	$	1,524
Research and development	1,263		1,490		850
Sales and marketing	2,591		3,057		1,828
General and administrative	3,282		3,483		2,024
Stock based compensation expense before income taxes	7,638		8,616		6,226
Income tax benefit	2,753		2,570		1,690
Total stock-based compensation expense, net of income taxes	$	4,885	$	6,046	$	4,536

Stock-based compensation expense recognized has been reduced for estimated forfeitures at a rate of 6.4 percent based on the Company's historical experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.