12.	STOCK OPTIONS, NON-VESTED SHARES AND PERFORMANCE STOCK UNITS

The Company established the 2003 Stock Option and Stock Incentive Plan (2003 Plan), which provided for issuance of up to 4.7 million options, non-vested shares and performance stock units to directors, employees, and other individuals (whether or not employees) who render services to the Company. In 2007 the Company adopted the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan (2007 Plan) and ceased awarding equity grants under the 2003 plan. As of December 31, 2015, the Company had granted a total of 1.4 million options, 0.3 million non-vested shares and 0.1 million performance stock units that remained outstanding under the 2007 Plan. Awards for 2.1 million shares, representing approximately 6.2% of the Company’s outstanding common stock as of December 31, 2015, remained available for additional grants under the 2007 Plan.

In connection with the 2013 Special Dividend, to compensate holders of outstanding options for the reduction in the Company’s stock price that resulted from the payment of the 2013 Special Dividend, the Company’s Compensation Committee approved (i) an adjustment to the exercise price of outstanding options, subject to the limitations of Section 409A of the Internal Revenue Code, and (ii) the issuance of non-vested shares (available for issuance under the 2007 Plan) to holders of outstanding options with exercise prices that could not be fully adjusted because of the limitations of Section 409A of the Internal Revenue Code. The effect of the exercise price adjustment and the issuance of non-vested shares, taken together, was to provide each optionholder with the same economic value after the time that the Company’s common stock began trading ex-dividend as such optionholder had immediately prior to such time. As a result of these adjustments, the exercise price of the 3.5 million outstanding options under the Plans was reduced by an average of $1.08 per option, and the Company issued 0.1 million non-vested shares under the 2007 Plan to make optionholders whole.

In 2012, the 2003 Plan was amended in connection with the 2012 Special Dividend to provide that, in order to prevent an extraordinary cash dividend like the 2012 Special Dividend from diluting the rights of optionholders, the Company’s Compensation Committee shall have the discretion to reduce the exercise price of outstanding options so long as any such adjustment does not increase the intrinsic value of any such option, as measured prior to the ex-dividend date of such extraordinary cash dividend. As a result of the amendment, the Company recognized $0.3 million of non-cash share-based compensation expense in 2013 in connection with 2013 Special Dividend. The options under the 2007 Plan were modified by the mandated antidilutive provisions contained in the 2007 Plan, and as a result, no additional non-cash share-based compensation expense was required to be recognized.

The Company records share-based compensation expense in connection with any grant of options, non-vested shares and performance stock units. The Company calculates the expense associated with each award by determining the fair value of the options, non-vested shares and performance stock unit as described in Note 2 “Summary of Significant Accounting Policies- Accounting for Share-Based Payments.”

Options

All options granted under the 2003 Plan and the 2007 Plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. During the years ended December 31, 2015 and 2014, the Company granted 0.1 million and less than 0.1 million options at a weighted-average exercise price of $17.02 and $13.86, respectively.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. For the years ended December 31, 2015, 2014 and 2013, fair value of stock options was measured using the following assumptions:

	Years Ended December 31,
	2015		2014		2013
Expected life	7.0 years		7.2 years		7.3 years
Risk-free interest rate		1.9%		2.1%		1.3%
Expected dividends		3.7%		2.1%		0.0%
Volatility		49.6%		60.0%		45.0%

The weighted-average fair value of options granted, as determined by using the Black-Scholes valuation model, during the period was $6.03, $6.90 and $1.64 for the years ended December 31, 2015, 2014 and 2013, respectively. The total grant date fair value of options that vested during years ended December 31, 2015, 2014 and 2013 was approximately $0.6 million, $1.1 million and $2.4 million, respectively. The total intrinsic value (market value of stock less option exercise price) of stock options exercised was $4.3 million, $4.5 million and $0.9 million during the years ended December 31, 2015, 2014 and 2013, respectively.

The following summarizes activity under the Company’s stock option plan:

				Weighted		Aggregate		Weighted
				Average		Intrinsic		Average
	Shares			Exercise		Value		Remaining
	(000)			Price		($000)		Term (yrs)
Options outstanding — December 31, 2013		2,991		$	12.91
Granted		41			13.86
Exercised		(1,096	)		11.43
Cancelled		(221	)		20.08
Options outstanding — December 31, 2014		1,715		$	12.97
Granted		124			17.02
Exercised		(320	)		6.90
Cancelled		(89	)		5.48
Options outstanding — December 31, 2015		1,430		$	15.10	$	5,953		4.04

Vested or expected to vest — December 31, 2015		1,425		$	15.10	$	5,935		4.02

Exercisable — December 31, 2015		1,148		$	16.44	$	3,628		3.12

The unrecognized compensation cost associated with options outstanding at December 31, 2015 is $0.8 million. The weighted average remaining term that the compensation will be recorded is 2.7 years as of December 31, 2015.

Non-vested Shares

During both the years ended December 31, 2015 and 2014, the Company’s Board of Directors granted approximately 0.2 million non-vested shares. The non-vested shares were issued as part of the 2007 Plan. The shares typically vest over a four-year period. The fair value of the non-vested shares is determined using the Company’s closing stock price on the grant date. Compensation cost, measured using the grant date fair value, is recognized over the requisite service period on a straight-line basis.

A summary of the Company’s non-vested share activity and related information for the years ended December 31, 2015 and 2014 is as follows:

				Weighted		Aggregate
				Average		Intrinsic
	Shares			Grant Date		Value
	(000)			Fair Value		($000)
Non-vested shares outstanding — December 31, 2013		477		$	9.66
Granted		226			13.04
Vested		(307	)		10.59
Cancelled		—			—
Non-vested shares outstanding — December 31, 2014		396		$	10.87
Granted		188			17.19
Vested		(241	)		12.02
Cancelled		(9	)		4.30
Non-vested shares outstanding — December 31, 2015		334		$	13.77	$	5,935

Non-vested shares vested or expected to vest —December 31, 2015		325		$	13.74	$	5,775

The aggregate intrinsic value represents the total pre-tax intrinsic value based on the Company’s closing stock price of $17.77 on December 31, 2015. The amount changes based upon the fair market value of the Company’s common stock.

The unrecognized compensation cost associated with non-vested shares at December 31, 2015 was $3.0 million. The weighted average remaining term that the compensation will be recorded is 2.3 years as of December 31, 2015.

Performance Stock Units

During the year ended December 31, 2015, the Company awarded 0.1 million performance stock units. These performance stock units represent a target number of shares (“Target Award”) of the Company’s common stock that the recipient would receive upon the Company’s attainment of the applicable performance goal. These performance stock units were issued in three tranches under the 2007 Plan. Performance is determined based on total shareholder return (“TSR”) during an 18-month, two- and three-year performance period for each of the three tranches, respectively. At the end of the performance period, the performance stock units will be distributed (to the extent earned and vested) in shares of the Company’s common stock based upon the level of achievement of the Company’s TSR performance targets set for the performance periods. Awards are payable on a graduated basis based on thresholds that measure the Company's performance relative to peers that comprise the applicable index on which each years' awards are measured. Awards can be paid up to 200% of the Target Award or forfeited with no payout if performance is below a minimum established performance threshold. In the event the participant’s employment is terminated without cause and more than half of the performance period has passed, the number of performance stock units issued shall be adjusted proportionately to the number of days of service rendered in the performance period over the total performance period.

A summary of the Company’s performance stock unit activity and related information for the year ended December 31, 2015 is as follows:

	Performance			Weighted
	Stock			Average
	Units			Grant Date
	(000)			Fair Value
Performance stock units outstanding — December 31, 2014		—		$	—
Granted		119			22.94
Vested		(20	)		21.73
Cancelled		—			—
Performance stock units outstanding — December 31, 2015		99		$	23.19

Each vested performance stock unit will be settled by delivery of common stock no later than March 15 of the calendar year following the calendar year in which the performance stock unit becomes vested. On December 31, 2015 the first tranche of performance stock units became vested and on February 8, 2016 these shares were settled as 30 thousand shares of common stock, based on the Company’s actual TSR achievement.

The unrecognized compensation cost associated with performance stock units outstanding at December 31, 2015 was $1.6 million. The weighted average remaining term that the compensation will be recorded is 1.7 years as of December 31, 2015.

Non-cash compensation expense of $5.2 million recorded during the year ended December 31, 2015 included $3.4 million related to non-vested restricted shares, $0.7 million related to options and $1.1 million related to performance stock units. Non-cash compensation expense of $4.3 million recorded during the year ended December 31, 2014 included $3.3 million related non-vested restricted shares and $1.0 million related to options. Non-cash compensation expense of $6.2 million recorded during the year ended December 31, 2013 included $2.4 million related to non-vested restricted shares and $3.8 million related to options.