STOCK-BASED COMPENSATION

Stock-based compensation expense consists primarily of expenses for stock options and restricted stock units granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):



	Three months ended				Nine months ended
	September 26, 2014		September 27, 2013		September 26, 2014		September 27, 2013
Stock-based compensation in:
Cost of revenue	$	612	$	605	$	1,751	$	1,838
Research and development expense	1,219		1,076		3,589		3,400
Selling, general and administrative expense	2,521		2,264		7,380		6,628
Total stock-based compensation in operating expense	3,740		3,340		10,969		10,028
Total stock-based compensation	$	4,352	$	3,945	$	12,720	$	11,866

Stock Options

The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:



	Three months ended				Nine months ended
	September 26, 2014		September 27, 2013		September 26, 2014		September 27, 2013
Expected term (years)	4.70		4.70		4.70		4.70
Volatility	40	%	46	%	40	%	51	%
Risk-free interest rate	1.8	%	1.5	%	1.7	%	0.8	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%

The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The weighted-average fair value per share of options granted was $2.48 and $3.02 for the three months ended September 26, 2014 and September 27, 2013, respectively. The weighted-average fair value per share of options granted was $2.36 and $2.51 for the nine months ended September 26, 2014 and September 27, 2013, respectively.

The fair value of all stock options vested during the three months ended September 26, 2014 and September 27, 2013 was $0.6 million and $0.8 million respectively. The fair value of all stock options vested during the nine months ended September 26, 2014 and September 27, 2013 was $2.6 million and $2.8 million respectively.

The total realized tax benefit attributable to stock options exercised during the nine months ended September 26, 2014, in jurisdictions where this expense is deductible for tax purposes, was $194,000. The Company did not recognize any tax benefit attributable to stock options exercised during the nine months ended September 27, 2013.

Restricted Stock Units

The aggregate fair value of all restricted stock units issued during the three months ended September 26, 2014 and September 27, 2013 was $2.7 million and $2.8 million respectively. The estimated fair value of all restricted stock units issued during the nine months ended September 26, 2014 and September 27, 2013 were $10.0 million and $10.2 million respectively.

Employee Stock Purchase Plan

The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. The weighted average fair value of the Company's ESPP shares at purchase dates was estimated using the following weighted average assumptions during the nine months ended September 26, 2014 and September 27, 2013:



	Purchase Period Ending
	December 31, 2014		June 30, 2014		June 30, 2013
Expected term (years)	0.50		0.50		0.49
Volatility	33	%	28	%	30	%
Risk-free interest rate	0.1	%	0.1	%	0.2	%
Expected dividends	0.0	%	0.0	%	0.0	%
Estimated weighted average fair value per share at purchase date	$1.84		$1.70		$1.23

The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

The ESPP was suspended for the second half of 2013 due to all authorized shares under the plan having been issued through the offering period ended June 30, 2013. The Company’s stockholders approved a 1,000,000 share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP resumed in January 2014. As a result, the Company did not have any stock-based compensation expense in the second half of fiscal 2013 related to the ESPP.

Unrecognized Stock-Based Compensation

As of September 26, 2014, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was $17.1 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average vesting period of 1.7 years.