Stock Option and Grant Plan

The Company has a stock option and grant plan—the Fourth Amended and Restated 1996 Stock Option and Grant Plan (“Stock Plan”). The Stock Plan, as amended, authorizes the grant of up to 30,400,000 shares of the Company’s common stock in the form of: (i) incentive stock options (“ISOs”), (ii) nonqualified stock options or (iii) the issuance or sale of common stock with or without vesting or other restrictions. Additionally, the Stock Plan permits (a) the grant of common stock upon the attainment of specified performance goals, (b) the grant of the right to receive cash dividends with the holders of the common stock as if the recipient held a specified number of shares of the common stock, (c) the grant of deferred stock awards, (d) the grant of stock appreciation rights and (e) the grant of cash-based awards.

The Stock Plan provides that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant. The Compensation Committee of the Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criteria), payment terms and other provisions for each grant. The majority of options granted have a four year vesting period. Shares associated with unexercised options or reacquired shares of common stock (except those shares withheld as a result of tax withholding or net issuance) become available for options or issuances under the Stock Plan. The Compensation Committee of the Board of Directors may, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the Stock Plan may vest or be exercised.

In the event of a “sale event” as defined in the Stock Plan, all outstanding awards will be assumed or continued by the successor entity, with appropriate adjustment in the awards to reflect the transaction. In such event, except as the Compensation Committee may otherwise specify with respect to particular awards in the award agreements, if the service relationship of the holder of an award is terminated without cause within 18 months after the sale event, then all awards held by such holder will become fully vested and exercisable at that time. If there is a sale event in which the successor entity refuses to assume or continue outstanding awards, then subject to the consummation of the sale event, all awards with time-based vesting conditions will become fully vested and exercisable at the effective time of the sale event and all awards with performance-based vesting conditions may become vested and exercisable in accordance with the award agreements at the discretion of the Compensation Committee. If awards are not assumed or continued after a sale event, then all such awards will terminate at the time of the sale event. In the event of the termination of stock options or stock appreciation rights in connection with a sale event, the Compensation Committee may either make or provide for a cash payment to the holders of such awards equal to the difference between the per share transaction consideration and the exercise price of such awards or permit each holder to have at least a 15 day period to exercise such awards prior to their termination. In addition, options granted to Independent Directors and certain key executives prior to February 17, 2011 vest automatically upon a sale event.

The Company grants deferred stock units to non-affiliate Independent Directors, which are rights to receive shares of common stock upon termination of service as a Director. The deferred stock units are issued in arrears and vest immediately. As of December 31, 2012, 95,227 deferred stock units have been earned with the underlying shares remaining unissued until the service termination of the respective Director owners. Of this amount, 28,523 units were earned during the year ended December 31, 2012.

The Company currently issues shares related to exercised stock options from its existing pool of treasury shares and has no specific policy to repurchase treasury shares as stock options are exercised. If the treasury pool is depleted, the Company will issue new shares.

Information regarding stock option transactions is summarized below:



	Year Ended December 31,
	2012				2011				2010
(options in thousands)	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, beginning of year	7,545		$	35.10	7,319		$	29.92	8,110		$	22.94
Granted	1,109		$	67.53	1,104		$	58.50	1,204		$	48.35
Issued pursuant to Apache acquisition	—		$	—	418		$	18.66	—		$	—
Exercised	(1,464	)	$	21.85	(1,179	)	$	19.33	(1,924	)	$	11.92
Forfeited	(68	)	$	36.90	(117	)	$	33.27	(71	)	$	32.40
Outstanding, end of year	7,122		$	42.85	7,545		$	35.10	7,319		$	29.92
Vested and Exercisable, end of year	4,094		$	33.91	4,251		$	27.98	4,214		$	23.11



	2012		2011		2010
Weighted Average Remaining Contractual Term (in years)
Outstanding	6.78		6.66		6.54
Vested and Exercisable	5.48		5.20		5.16
Aggregate Intrinsic Value (in thousands)
Outstanding	$	174,383	$	168,837	$	162,099
Vested and Exercisable	$	136,851	$	124,550	$	122,022

Historical and future expected forfeitures have not been significant and, as a result, the outstanding option amounts reflected in the tables above approximate the options expected to vest.

Total stock-based compensation expense recognized for the years ended December 31, 2012, 2011 and 2010 is as follows:



	Year Ended December 31,
(in thousands, except per share amounts)	2012			2011			2010
Cost of sales:
Software licenses	$	1,478		$	556		$	135
Maintenance and service	2,232			1,897			1,541
Operating expenses:
Selling, general and administrative	15,278			12,501			11,755
Research and development	13,427			8,134			5,588
Stock-based compensation expense before taxes	32,415			23,088			19,019
Related income tax benefits	(8,509		)	(5,552		)	(4,254		)
Stock-based compensation expense, net of taxes	$	23,906		$	17,536		$	14,765
Net impact on earnings per share:
Basic earnings per share	$	(0.26	)	$	(0.19	)	$	(0.16	)
Diluted earnings per share	$	(0.25	)	$	(0.19	)	$	(0.16	)

The fair value of each option grant is estimated on the date of grant or date of acquisition for options issued in a business combination using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates. The interest rates used were determined by using the five-year Treasury Note yield at the date of grant or date of acquisition for options issued in a business combination. The volatility was determined based on the historic volatility of the Company’s stock during the preceding six years for 2012, 2011 and 2010.

The table below presents the weighted average input assumptions used and resulting fair values for options granted or issued in business combinations during each respective year:



	Year Ended December 31,
	2012	2011	2010
Risk-free interest rate	0.59% to 1.04%	0.91% to 2.11%	1.27% to 2.34%
Expected dividend yield	0%	0%	0%
Expected volatility	38%	39%	39%
Expected term	6.0 years	5.8 years	6.1 years
Weighted average fair value per share	$24.82	$25.84	$19.41

As stock-based compensation expense recognized in the consolidated statements of income is based on awards ultimately expected to vest, it must be reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The effect of pre-vesting forfeitures on the Company’s recorded expense has historically been negligible due to the relatively low turnover of stock option holders.

The Company’s determination of fair value of share-based payment awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of variables. The total estimated grant date fair values of stock options that vested during the years ended December 31, 2012, 2011 and 2010 were $23.3 million, $20.2 million and $16.7 million, respectively. At December 31, 2012, total unrecognized estimated compensation cost related to unvested stock options granted prior to that date was $61.9 million, which is expected to be recognized over a weighted average period of 2.0 years. The total intrinsic values of stock options exercised during the years ended December 31, 2012, 2011 and 2010 were $64.7 million, $42.6 million and $88.0 million, respectively. At December 31, 2012, 3.0 million unvested options with an aggregate intrinsic value of $37.9 million are expected to vest and have a weighted average exercise price of $54.94 and a weighted average remaining contractual term of 8.5 years. The Company recorded cash received from the exercise of stock options of $32.0 million and related tax benefits of $18.6 million (including an excess tax benefit of $13.9 million) for the year ended December 31, 2012.

Information regarding stock options outstanding as of December 31, 2012 is summarized below:



(options in thousands)	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Options	Weighted Average Exercise Price
$ 3.77 - $24.01	1,530	4.15	$	19.71	1,264	$	19.75
$ 25.32 - $40.87	1,425	5.16	$	33.36	1,406	$	33.34
$ 40.89 - $48.97	1,962	7.25	$	45.13	1,153	$	44.38
$ 51.52 - $67.34	1,139	8.67	$	58.69	271	$	58.43
$ 67.44 - $69.70	1,066	9.82	$	67.66	—	$	—

Under the terms of the ANSYS, Inc. Long-Term Incentive Plan, in the first quarter of 2012, 2011 and 2010, the Company granted 100,000, 92,500 and 80,500 performance-based restricted stock units, respectively. Vesting of the full award or a portion thereof is based on the Company’s performance as measured by total shareholder return relative to the median percentage appreciation of the NASDAQ Composite Index over a specified measurement period, subject to each participant’s continued employment with the Company through the conclusion of the measurement period. The measurement period for the restricted stock units granted pursuant to the Long-Term Incentive Plan is a three-year period beginning January 1 of the year of the grant. Each restricted stock unit relates to one share of the Company’s common stock. The value of each restricted stock unit granted in 2012, 2011 and 2010 was estimated on the grant date to be $33.16, $32.05 and $25.00, respectively. The estimate of the grant-date value of the restricted stock units was made using a Monte Carlo simulation model. The determination of the fair value of the awards was affected by the grant date and a number of variables, each of which has been identified in the chart below. Share-based compensation expense based on the fair value of the award is being recorded from the grant date through the conclusion of the three-year measurement period. On December 31, 2012, employees earned 76,500 restricted stock units, which will be issued in the first quarter of 2013. Total compensation expense associated with the awards recorded for the years ended December 31, 2012, 2011 and 2010 was $2.6 million, $1.6 million and $590,000, respectively. Total compensation expense associated with the awards granted for the years ending December 31, 2013 and 2014 is expected to be $2.2 million and $1.2 million, respectively.



	Year Ended December 31,
Assumption used in Monte Carlo lattice pricing model	2012	2011 and 2010
Risk-free interest rate	0.16%	1.35%
Expected dividend yield	0%	0%
Expected volatility—ANSYS Stock Price	28%	40%
Expected volatility—NASDAQ Composite Index	20%	25%
Expected term	2.80	2.90
Correlation factor	0.75	0.70

In accordance with the merger agreement, the Company granted performance-based restricted stock units to key members of Apache management and employees, with a maximum value of $13.0 million to be earned annually over a three-fiscal-year period beginning January 1, 2012. Additional details regarding these awards are provided within Note 3.