STOCK-BASED COMPENSATION

Stock-based compensation expense - all related to employees - recognized under the authoritative guidance was as follows:



	Years Ended December 31,
	2015		2014		2013
	(In thousands)
Selling, general and administrative	$	14,461	$	13,940	$	9,484
Research and development	714		463		277
Cost of goods sold	275		151		81
Total stock-based compensation expense	15,450		14,554		9,842
Total estimated tax benefit related to stock-based compensation expense	5,792		5,350		3,806
Net effect on net income	$	9,658	$	9,204	$	6,036

EMPLOYEE STOCK PURCHASE PLAN

The purpose of the Employee Stock Purchase Plan (the “ESPP”) is to provide eligible employees of the Company with the opportunity to acquire shares of common stock at periodic intervals by means of accumulated payroll deductions. The ESPP is a non-compensatory plan. Under the ESPP, a total of 1.5 million shares of common stock are reserved for issuance. These shares will be made available either from the Company’s authorized but unissued shares of common stock or from shares of common stock reacquired by the Company as treasury shares. At December 31, 2015, 1.0 million shares remain available for purchase under the ESPP. During the years ended December 31, 2015, 2014 and 2013, the Company issued 6,020 shares, 3,889 shares and 4,855 shares under the ESPP for $0.4 million, $0.2 million and $0.2 million, respectively.

EQUITY AWARD PLANS

As of December 31, 2015, the Company had stock options, restricted stock awards, performance stock awards, contract stock awards and restricted stock unit awards outstanding under three plans, the 2000 Equity Incentive Plan (the “2000 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”), and the 2003 Equity Incentive Plan (the “2003 Plan,” and collectively, (the “Plans”).

In July 2008 and May 2010, the stockholders of the Company approved amendments to the 2003 Plan to increase by 750,000 and 1,750,000, respectively, the number of shares of common stock that may be issued under the 2003 Plan. The Company has reserved 2,000,000 shares under each of the 2000 Plan and the 2001 Plan, and 6,500,000 shares under the 2003 Plan. The Plans permit the Company to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, contract stock, performance stock, or dividend equivalent rights to designated directors, officers, employees and associates of the Company.

Stock options issued under the Plans become exercisable over specified periods, generally within four years from the date of grant for officers, directors and employees, and generally expire six years from the grant date for employees and from six to ten years for directors and certain executive officers. Restricted stock issued under the Plans vests ratably over specified periods, generally three years after the date of grant.

In connection with the separation of SeaSpine on July 1, 2015 and in accordance with the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of share-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Stock options issued in 2015 prior to the separation converted to those of the entity where the employee is working post-separation. Stock options issued prior to 2015 converted to both Integra and SeaSpine options such that the holders received stock options in both companies. The exercise price of these outstanding awards was adjusted to preserve the value of the awards immediately prior to the separation. Performance stock, restricted stock, and contract stock were adjusted for all employees holding outstanding awards to provide holders performance stock, restricted stock, and contract stock in the company that employs such employee following the separation. The adjustments to the Company's stock-based compensation awards resulted in an increase in incremental fair value of $4.4 million, of which $3.3 million was recorded during the year-ended December 31, 2015. The remaining $1.1 million will be recognized prospectively over the remaining term of outstanding awards, adjusted, as applicable, for forfeitures.

Stock Options

The Company values stock option grants using the binomial distribution model. Management believes that the binomial distribution model is preferable to the Black-Scholes model because the binomial distribution model is a more flexible model that considers the impact of non-transferability, and vesting provisions in the valuation of employee stock options.

In determining the value of stock options granted, the Company considered that it has never paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on the historical volatility of the Company’s stock price with forward-looking assumptions. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rates is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.

The following weighted-average assumptions were used in the calculation of fair value:



	Years Ended December 31,
	2015	2014	2013
Dividend yield	0%	0%	0%
Expected volatility	29%	29%	31%
Risk free interest rate	1.96%	2.41%	1.52%
Expected life of option from grant date	8 years	8 years	8 years

The following table summarizes the Company’s stock option activity.



			Weighted Average Exercise Price		Weighted Average Contractual Term in Years	Aggregate Intrinsic Value

	Shares
Stock Options	(In thousands)					(In thousands)
Outstanding at December 31, 2014	1,238		$	39.89
Modification upon spin-off (1)	58		—
Granted	98		62.37
Exercised	(200	)	35.57
Forfeited or Expired	(1	)	53.73
Outstanding at December 31, 2015	1,193		$	37.09	3.26	$	36,614
Vested or expected to vest at December 31, 2015	1,193		$	37.09	3.26	$	36,614
Exercisable at December 31, 2015	1,037		$	35.02	2.69	$	33,980

The intrinsic value of options exercised for the years ended December 31, 2015, 2014 and 2013 were negligible. The weighted average grant date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $17.17, $18.15 and $13.86, respectively. Cash received from option exercises was $7.3 million, $15.2 million and $2.3 million, for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, there was approximately $2.3 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of approximately two years.

Awards of Restricted Stock, Performance Stock and Contract Stock

The following table summarizes the Company’s awards of restricted stock, performance stock and contract stock for the year ended December 31, 2015.



					Performance Stock and Contract Stock Awards
	Restricted Stock Awards				Performance Stock and Contract Stock Awards
	Shares		Weighted Average Grant Date Fair Value Per Share		Shares		Weighted Average Grant Date Fair Value Per Share


	(In thousands)				(In thousands)
Unvested, December 31, 2014	308		$	37.29	283		$	32.74
Modification upon spin-off	42		—		2		—
Surrendered upon spin-off	(3	)	—		—		—
Granted	169		62.32		3		59.52
Cancellations	(56	)	47.79		(1	)	45.46
Released	(166	)	42.48		(121	)	36.51
Unvested, December 31, 2015	294		$	48.20	166		$	33.30

The Company recognized $10.2 million, $13.1 million and $8.6 million in expense related to such awards during the years ended December 31, 2015, 2014 and 2013, respectively. The total fair market value of shares vested in 2015, 2014 and 2013 was $19.9 million, $9.4 million and $6.5 million, respectively.

Performance stock awards have performance features associated with them. Performance stock, restricted stock and contract stock awards generally have requisite service periods of three years. The fair value of these awards is being expensed on a straight-line basis over the vesting period. As of December 31, 2015, there was approximately $13.9 million of total unrecognized compensation costs related to unvested awards. These costs are expected to be recognized over a weighted-average period of approximately two years.

At December 31, 2015, there are approximately 0.3 million additional vested Restricted Units held by various employees for which the related shares have not yet been issued.

At December 31, 2015, there were approximately 1.4 million shares available for grant under the Plans.