STOCK-BASED COMPENSATION

At the 2016 Annual Meeting of Stockholders held on May 24, 2016, the Company’s stockholders approved the Company’s 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the granting of stock options, shares of restricted stock, restricted stock units, stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers. The 2016 Plan supplements the Company’s existing 2009 and 2011 Stock Incentive Plans, as amended.

In connection with the Spin-off, under the provisions of the Company’s stock incentive plans, employee stock option, restricted stock awards, and restricted stock unit awards were adjusted to preserve the fair value of the awards immediately before and after the Spin-off. As such, the Company did not record any modification expense related to the conversion of the awards. Certain awards granted to employees who transferred to Nuvectra in connection with the Spin-off were canceled. As required, the Company accelerated the remaining expense related to these canceled awards of $0.5 million during the first quarter of 2016, which was classified as Other Operating Expenses, Net. The stock awards held as of March 14, 2016 were modified as follows:

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Stock options: Holders of Integer stock option awards continued to hold stock options to purchase the same number of shares of Integer common stock at an adjusted exercise price and one new Nuvectra stock option for every three Integer stock options held as of the Record Date, which, in the aggregate, preserved the fair value of the overall awards granted. The adjusted exercise price for Integer stock options was equal to approximately 93% of the original exercise price. The stock option awards will continue to vest over their original vesting period.

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Restricted stock and restricted stock units: Holders of Integer restricted stock and restricted stock unit awards received one new share of Nuvectra restricted stock and restricted stock unit awards for every three Integer restricted stock and restricted stock unit awards held as of the Record Date. Integer restricted stock and restricted stock unit awards will continue to vest in accordance with their original performance metrics and over their original vesting period.

The components and classification of stock-based compensation expense were as follows (in thousands):



	Three Months Ended				Six Months Ended
	July 1, 2016		July 3, 2015		July 1, 2016		July 3, 2015
Stock options	$	585	$	663	$	1,194	$	1,282
Restricted stock and restricted stock units	1,542		1,746		3,768		3,380
401(k) Plan stock contribution	—		1,310		—		1,310
Total stock-based compensation expense	$	2,127	$	3,719	$	4,962	$	5,972

Cost of sales	$	150	$	1,094	$	347	$	1,354
Selling, general and administrative expenses	1,528		2,148		3,183		3,909
Research, development and engineering costs, net	116		477		293		709
Other operating expenses, net	333		—		1,139		—
Total stock-based compensation expense	$	2,127	$	3,719	$	4,962	$	5,972

The weighted average fair value and assumptions used to value options granted are as follows:



	Six Months Ended
	July 1, 2016			July 3, 2015
Weighted average fair value	$	9.41		$	12.18
Risk-free interest rate	1.58		%	1.55		%
Expected volatility	26		%	26		%
Expected life (in years)	5			5
Expected dividend yield	—		%	—		%


8.	STOCK-BASED COMPENSATION (Continued)

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



	Number of Stock Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at January 1, 2016	1,678,900		$	28.32
Granted	235,856		50.69
Exercised	(27,540	)	22.13
Forfeited or expired	(37,708	)	45.04
Adjustment due to Spin-off	—		(2.02		)
Outstanding at July 1, 2016	1,849,508		$	28.91		6.1	$	14.3
Exercisable at July 1, 2016	1,443,941		$	23.91		5.3	$	14.3

The following table summarizes time-vested restricted stock and restricted stock unit activity:



	Time-Vested Activity		Weighted Average Fair Value
Nonvested at January 1, 2016	39,235		$	47.40
Granted	46,474		51.48
Vested	(11,422	)	51.21
Forfeited	(8,165	)	48.92
Nonvested at July 1, 2016	66,122		$	49.42

The following table summarizes performance-vested restricted stock unit activity:



	Performance- Vested Activity		Weighted Average Fair Value
Nonvested at January 1, 2016	577,825		$	25.11
Granted	156,730		31.59
Vested	(249,153	)	15.86
Forfeited	(68,237	)	32.33
Nonvested at July 1, 2016	417,165		$	31.87