12. EMPLOYEE STOCK PLANS

Employee Stock Plans

In November 2000, VMS adopted the 2000 Stock Option Plan (the “2000 Plan”), under which shares of common stock could be issued to key employees and consultants. The maximum number of shares that could have been issued was limited to 12,000,000 shares. Stock options granted under the 2000 Plan have an exercise price equal to the closing market price of the underlying stock on the grant date (unless the stock market was closed on the grant date, in which case the exercise price was equal to the average of the highest and lowest quoted selling prices on the stock market on the day before and the day after the grant date) and expire no later than ten years from the grant date. Stock options granted under the 2000 Plan are exercisable for the first one-third of the option shares one year from the date of grant, with the remainder vesting monthly during the following two-year period. No further awards may be made under the 2000 Plan.

In February 2005, VMS’s stockholders approved the 2005 Omnibus Stock Plan (the “2005 Plan”), which was last amended and restated in February 2012. The 2005 Plan, as amended and restated to date, is referred to as (the “Third Amended 2005 Plan”). The Third Amended 2005 Plan provides for the grant of equity incentive awards, including stock options, restricted stock, stock appreciation rights, performance units, restricted stock units and performance shares to officers, directors, key employees and consultants. The Third Amended 2005 Plan also provides for the grant of deferred stock units to non-employee directors. The maximum number of shares issuable under the Third Amended 2005 Plan is (a) 24,950,000, plus (b) the number of shares authorized for issuance, but never issued, under previously approved plans, plus (c) the number of shares subject to awards previously granted under previously approved plans that terminate, expire, or lapse, plus (d) amounts granted in substitution of options in connection with certain transactions.

Stock options granted under the Third Amended 2005 Plan generally have an exercise price equal to the closing market price of a share of VMS common stock on the grant date. Except for directors, stock options granted under the Third Amended 2005 Plan generally are exercisable in the following manner: the first one-third one year from the date of grant, with the remainder vesting monthly during the following two-year period. Stock option grants to directors are immediately exercisable. For grants of non-qualified stock options made on or after November 17, 2005 under the Third Amended 2005 Plan to employees who retire from the Company within one year of the grant date, the number of shares subject to the stock option shall be adjusted proportionally by the time during such one-year period that the employee remained an employee of the Company (based upon a 365 day year). The revised number of shares subject to the stock option would continue to vest in accordance with the original vesting schedule, and the remaining shares would be cancelled as of the date of retirement. Under the Third Amended 2005 Plan, stock options granted on or prior to February 16, 2007 generally have a term of ten years and stock options granted after February 16, 2007 generally have a term of seven years. The Third Amended 2005 Plan prohibits the repricing of stock options and stock appreciation rights without the approval of VMS’s stockholders.

Restricted stock awards and restricted stock unit awards generally vest over a period of one to three years from the date of grant. For awards of restricted stock and restricted stock units prior to fiscal year 2010, any unvested awards are generally forfeited at the time of termination. However, restricted stock units granted in fiscal year 2010 and thereafter that are unvested at death become fully vested and unvested restricted stock units will generally continue to vest in accordance with the original vesting schedule if a retirement eligible employee retires one year or more from grant date. If a retirement eligible employee retires within one year of the grant date, the number of restricted stock units shall be adjusted proportionally by the time during such one year period that the employee remained an employee of the Company (based upon a 365 day year). The revised number of restricted stock units would vest in accordance with the original vesting schedule and the remaining restricted stock units would be cancelled as of the date of retirement.

Deferred stock unit awards to non-employee directors vest over a period of not less than one year from the date of grant, unless otherwise provided in the grant agreement as determined by VMS’s Board of Directors, and vesting may be pro rata during the vesting period. Each deferred stock unit is deemed to be the equivalent of one share of VMS common stock. Payment of deferred stock units generally will be made in shares of VMS common stock upon the earlier of the third anniversary of the grant date or the director’s termination.

In fiscal years 2014, 2013 and 2012, the Company granted performance units to certain employees under the Third Amended 2005 Plan (before and after its amendment and restatement). The number of shares of VMS common stock ultimately issued under the performance units at the end of a three-year performance period will depend on the Company’s business performance during the three-year period against specified performance targets set by the Compensation and Management Development Committee of the Board of Directors at the beginning of the period. Any unvested performance unit awards are generally forfeited at the time of termination, except in the case of death, in which case the employee is considered to have been continuously employed through the last day of the performance period. Also, similar to the adjustments discussed above for restricted stock unit awards, the number of performance units that ultimately vest is adjusted in the case of retirement.

The fair value of options granted and the option component of the shares purchased under the Employee Stock Purchase Plan (which is described further below) shares were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:

	Employee Stock Plans									Employee Stock Purchase Plans
	Fiscal Years									Fiscal Years
	2014			2013			2012			2014			2013			2012

Expected term (in years)		4.13			4.76			4.64			0.50			0.50			0.50
Risk-free interest rate		1.2	%		0.6	%		0.8	%		0.1	%		0.1	%		0.1	%
Expected volatility		24.6	%		32.2	%		36.9	%		12.8	%		16.5	%		19.3	%
Expected dividend		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Weighted average fair value at grant date	$	18.24		$	19.73		$	18.75		$	14.20		$	12.95		$	12.17

The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to post-vesting exercise and post-vesting cancellations of stock options by Company employees. The Company determined the expected term of stock options based on the demographic grouping of employees and retirement eligibility. The Company used a combination of historical and implied volatility, or blended volatility, in deriving the expected volatility assumption. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of VMS’s stock options. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts.

As share-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures, based on historical experience. Forfeitures are estimated at the time of grant and revised, in subsequent periods if actual forfeitures differ from those estimates.

The table below summarizes the effect of recording share-based compensation expense:

	Fiscal Years
(In thousands)	2014			2013			2012
Cost of revenues - Product	$	3,323		$	4,088		$	4,419
Cost of revenues - Service		4,658			3,460			1,472
Research and development		6,194			5,993			6,378
Selling, general and administrative		25,461			29,096			35,606
Total share-based compensation expense		39,636			42,637			47,875
Taxes on earnings		(12,062	)		(12,989	)		(15,406	)
Net share-based compensation expense	$	27,574		$	29,648		$	32,469

The table below summarizes the effect of recording pre-tax share-based compensation expense for equity incentive awards:

	Fiscal Years
(In thousands)	2014		2013		2012
Stock options	$	9,489	$	10,577	$	12,169
Restricted stock units and restricted stock awards⁽¹⁾		26,576		28,229		32,527
Employee stock purchase plan		3,571		3,831		3,179
Total share-based compensation expense	$	39,636	$	42,637	$	47,875

(1)	Restricted stock units and restricted stock awards include performance units and deferred stock units.

A summary of share-based awards available for grant is as follows:

(In thousands)	Shares Available for Grant
Balance at September 30, 2011		8,424
Authorized		6,000
Granted		(2,680	)
Cancelled or expired		124
Balance at September 28, 2012		11,868
Granted		(2,045	)
Cancelled or expired		102
Balance at September 27, 2013		9,925
Granted		(1,934	)
Cancelled or expired		177
Balance at September 26, 2014		8,168

For purposes of the total number of shares available for grant under the Third Amended 2005 Plan, any shares subject to awards of stock options are counted against the available-for-grant limit as one share for every one share subject to the award. Awards other than stock options are counted against the available-for-grant limit as three shares for every one share awarded before February 16, 2007, as 2.5 shares for every one share awarded between February 16, 2007 and February 8, 2012 and as 2.6 shares for every one share awarded on or after February 9, 2012. In addition, the shares available for grant limit was further adjusted to reflect a maximum payout of 1.5 shares that could be issued for each performance unit granted. All awards may be subject to restrictions on transferability and continued employment as determined by the Compensation and Management Development Committee.

Activity under the Company’s employee stock plans related to stock options is presented below:

	Options Outstanding
(In thousands, except per share amounts)	Number of Shares			Weighted Average Exercise Price
Balance at September 30, 2011		6,917		$	45.90
Granted		743			58.50
Canceled, expired or forfeited		(30	)		55.73
Exercised		(1,171	)		40.18
Balance at September 28, 2012		6,459			48.34
Granted		613			68.93
Canceled, expired or forfeited		(20	)		60.81
Exercised		(2,567	)		44.97
Balance at September 27, 2013 (3,655 options exercisable at a weighted average exercise price of $50.18)		4,485			53.02
Granted		625			83.50
Canceled, expired or forfeited		(46	)		72.35
Exercised		(1,721	)		49.01
Balance at September 26, 2014		3,343		$	60.53

The total pre-tax intrinsic value of stock options exercised was $54.4 million, $66.3 million and $29.8 million in fiscal years 2014, 2013, and 2012, respectively.

The following table summarizes information related to stock options outstanding and exercisable under the Company’s employee stock plans at September 26, 2014:

	Options Outstanding								Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
(In thousands, except years and per-share amounts)
$37.06 – $39.85		129		1.01	$	37.94	$	5,537		129		1.01	$	37.94	$	5,537
$45.22 – $52.07		880		1.74		50.30		26,907		880		1.74		50.30		26,907
$52.61 – $72.26		1,722		3.10		59.28		37,237		1,477		2.83		57.95		33,901
$74.28 – $84.23		612		6.41		83.49		91		-		-		-		-
Total		3,343		3.27	$	60.53	$	69,772		2,486		2.35	$	54.21	$	66,345

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of VMS common stock of $80.90 as of September 26, 2014, the last trading date of fiscal year 2014, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.

As of September 26, 2014, there was $10.5 million of total unrecognized compensation expense related to stock options granted under the Company’s employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.7 years.

The activity for restricted stock, restricted stock units, deferred stock units and performance units is summarized as follows:

(In thousands, except per share amounts)	Number of Shares			Weighted Average Grant-Date Fair Value
Balance at September 30, 2011		735		$	47.36
Granted		716			59.06
Vested		(469	)		44.68
Cancelled or expired		(37	)		53.94
Balance at September 28, 2012		945			57.30
Granted		516			70.37
Vested		(396	)		55.67
Cancelled or expired		(30	)		61.82
Balance at September 27, 2013		1,035			64.36
Granted		470			82.51
Vested		(335	)		63.70
Cancelled or expired		(44	)		70.69
Balance at September 26, 2014		1,126		$	72.08

As of September 26, 2014, unrecognized compensation expense totaling $35.8 million was related to restricted stock, restricted stock units, deferred stock units and performance units granted under the Company’s employee stock plans. This unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 1.8 years. The 335,032 shares that vested in fiscal year 2014 represented deferred stock units, restricted stock units and restricted common stock, and the total fair value of these shares upon vesting was $25.4 million. The Company withheld 115,987 shares with a fair value of $8.8 million for employees’ minimum withholding taxes at vesting of such awards in fiscal year 2014.

Employee Stock Purchase Plan

In February 2010, VMS’s stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 ESPP”). The 2010 ESPP provides eligible employees with an opportunity to purchase shares of VMS common stock at 85% of the lower of its fair market value at the start and end of a six-month purchase period. The 2010 ESPP provides for the purchase of up to 7 million shares of VMS common stock.

VMS issued 261,230 shares for $15.3 million in fiscal year 2014 and 262,455 shares for $14.2 million in fiscal year 2013. At September 26, 2014, 6.1 million shares were available for issuance under the 2010 ESPP.