EMPLOYEE STOCK PLANS

The table below summarizes the net share-based compensation expense recognized for employee stock awards and for the option component of the employee stock purchase plan shares:



	Three Months Ended						Nine Months Ended
(In thousands)	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Cost of revenues - Product	$	1,033		$	1,263		$	3,141		$	3,578
Cost of revenues - Service	1,114			1,066			3,063			3,004
Research and development	1,723			1,717			5,046			5,109
Selling, general and administrative	8,346			7,310			24,771			24,903
Total share-based compensation expense	$	12,216		$	11,356		$	36,021		$	36,594
Income tax benefit for share-based compensation	$	(3,701	)	$	(3,455	)	$	(10,958	)	$	(11,371	)

During the nine months ended July 1, 2016 and July 3, 2015, the Company granted performance units to certain employees under the Third Amended 2005 Plan. The number of shares of VMS common stock ultimately issued under the performance units at vesting depends on the Company’s business performance during the performance period, against specified performance targets, both of which are set by the Compensation and Management Development Committee of the Board of Directors. The performance units vest at the end of a three-year service period. Performance units granted prior to fiscal year 2015 have one three-year performance period for both the Company's performance and total shareholder return, performance units granted in fiscal year 2015 have a one year Company performance period and a three year total shareholder return, and performance units awarded in fiscal year 2016 have three separate one-year Company performance periods and a three year total shareholder return. Subject to certain exceptions, any unvested performance unit awards are forfeited at the time of termination.

The fair value of options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:



	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Employee Stock Option Plans
Expected term (in years)	4.13			4.13			4.13			4.15
Risk-free interest rate	1.2		%	1.3		%	1.1		%	1.3		%
Expected volatility	20.5		%	21.6		%	20.1		%	22.1		%
Expected dividend	—		%	—		%	—		%	—		%
Weighted average fair value at grant date	$	15.29		$	17.16		$	13.71		$	18.52

The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:



	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Employee Stock Purchase Plan
Expected term (in years)	0.50			0.50			0.50			0.50
Risk-free interest rate	0.4		%	0.1		%	0.3		%	0.1		%
Expected volatility	18.3		%	17.2		%	17.6		%	12.7		%
Expected dividend	—		%	—		%	—		%	—		%
Weighted average fair value at grant date	$	16.60		$	17.56		$	16.09		$	15.87

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



(In thousands)	Shares Available for Grant
Balance at October 2, 2015	6,661
Granted	(2,327	)
Cancelled or expired	277
Balance at July 1, 2016	4,611

Awards other than stock options set forth in the table were calculated under the Third Amended 2005 Plan as 2.6 shares for every one share awarded. The shares available for grant is further adjusted to reflect a maximum payout that could be issued for each performance unit granted. The maximum payouts that could be issued for each performance unit granted are 1.75 shares beginning in fiscal year 2016, 2.0 shares in fiscal year 2015 and 1.5 shares prior to fiscal year 2015.

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



	Options Outstanding
(In thousands, except per share amounts)	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (1)
Balance at October 2, 2015	2,537		$	72.58
Granted	828		75.97
Cancelled or expired	(23	)	85.95
Exercised	(377	)	52.02
Balance at July 1, 2016	2,965		$	76.03	4.6	$	26,060

Exercisable at July 1, 2016	1,664		$	72.13	3.4	$	20,556

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value of options, which is computed based on the difference between the exercise price and VMS’s closing common stock price of $82.60 as of July 1, 2016, the last trading date of the third quarter of fiscal year 2016, and which would have been received by the option holders had all option holders exercised and sold their options as of that date.

As of July 1, 2016, there was $13.5 million of total unrecognized compensation expense related to outstanding stock options. 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 October 2, 2015	950		$	84.11
Granted	485		77.89
Vested	(389	)	80.98
Cancelled or expired	(75	)	81.86
Balance at April 1, 2016	971		$	82.36

As of July 1, 2016, unrecognized compensation expense totaling $45.3 million was related to awards of restricted stock, restricted stock units, deferred stock units and performance units. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 years.