Stock-based Compensation Plans

2013 Performance Incentive Plan

The 2013 Performance Incentive Plan ("2013 PIP") was approved by the Board of Directors and subsequently by the stockholders on February 19, 2013. The 2013 PIP provides for the grant of annual cash incentive awards to all employees (including the Company’s executive officers), and stock options, restricted stock or stock unit awards, stock appreciation rights and other stock-based awards to all employees (including the Company’s executive officers), any consultants of the Company and its subsidiaries, and all non-employee directors serving on the Company’s Board of Directors. The awards granted under the 2013 PIP are established by our Board of Directors or a committee thereof at the time of issuance.

The 2013 PIP replaced on a prospective basis, our 2004 Performance Incentive Plan, and will expire in February 2023. A total of 3,665,500 shares of common stock were reserved for awards under the 2013 Plan. The number of shares authorized and available for issuance under the 2013 PIP will be increased by shares of stock subject to an option or award under the 2013 PIP, or under the Company’s 2004 Performance Incentive Plan, the Navistar 1994 Performance Incentive Plan, the Navistar 1998 Supplemental Stock Plan, or our 1998 Non-Employee Director Stock Option Plan (collectively, the "Existing Plans"), that is cancelled, expired, forfeited, settled in cash, or otherwise terminated after February 19, 2013 without a delivery of shares to the participant of such plan, including shares used to satisfy the exercise price of a stock option or a tax withholding obligation arising in connection with an award. As of October 31, 2013, 997,887 shares remain available for issuance under the 2013 PIP.

Other Plans and Grants

The following plans were approved by our Board of Directors but were not approved and were not required to be approved by our stockholders: the Executive Stock Ownership Program (the "Ownership Program") and the Non-Employee Directors Deferred Fee Plan (the "Deferred Fee Plan").

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Ownership Program—In June 1997, our Board of Directors approved the terms of the Ownership Program, and has since amended it from time to time. In general, the Ownership Program requires all officers and senior managers to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the Company by acquiring a designated amount of our common stock at specified timelines. Participants are required to hold such stock for the entire period in which they are employed by the Company. Participants may defer their cash bonus into deferred share units ("DSUs"), which vest immediately. There were 11,819 DSUs outstanding as of October 31, 2013. Premium share units ("PSUs") may also be awarded to participants who complete their ownership requirement on an accelerated basis. PSUs vest annually, pro rata over three years. There were 76,698 PSUs outstanding as of October 31, 2013. Each vested DSU and PSU will be settled by delivery of one share of common stock within ten days after a participant's termination of employment or at such later date as required by Internal Revenue Code Section Rule 409A. Beginning in February 2013, PSUs and DSUs awarded under this program were issued under the 2013 PIP. The Ownership Program was amended and restated effective November 1, 2013 on a going forward basis.

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Deferred Fee Plan—Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a portion of their retainer fees and meeting fees in cash (with interest) or in stock units. Deferrals in the deferred stock account are valued as if each deferral was vested in NIC common stock as of the deferral date. As of October 31, 2013, 40,555 deferred shares were outstanding under the Deferred Fee Plan. The Deferred Fee Plan was amended and restated effective November 1, 2013 on a going forward basis.

In August 2012, we also granted 500,000 non-qualified stock options to Lewis B. Campbell upon his appointment as Executive Chairman and CEO of the Company. These stock options were awarded pursuant to NYSE inducement grant rules.

Stock Options

A stock option is the right to purchase a specified number of shares of common stock at a specified exercise price. Primarily, stock options are awarded with an exercise price equal to the fair market value of our common stock on the date of grant. The stock options granted prior to December 2009 generally have a ten-year contractual life. Starting with the December 2009 stock option grants, the Company granted awards with a seven-year contractual life. Stock Options are valued using the Black-Scholes option pricing model and vest over a three-year period.

The following table summarizes stock option activity for the years ended October 31:



	2013				2012				2011
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)				(in thousands)
Options outstanding, at beginning of year	5,636		$	37.89	4,500		$	39.65	4,911		$	33.81
Granted	926		31.64		1,289		31.69		1,069		60.32
Exercised	(451	)	26.16		(71	)	27.66		(1,440	)	34.87
Forfeited/expired	(1,111	)	37.24		(82	)	44.66		(40	)	47.06
Options outstanding, at end of year	5,000		37.94		5,636		37.89		4,500		39.65
Options exercisable, at end of year	3,468		38.22		3,672		36.96		3,064		36.07

The following table summarizes information about stock options outstanding at October 31, 2013:



	Options Outstanding
	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
Range of Exercise Prices:	(in thousands)	(in years)			(in millions)
$ 21.02 - $ 31.81	1,727	4.2	$	23.24	$	18.4
$ 31.82 - $ 40.92	1,788	3.8	37.68		0.2
$ 40.93 - $ 69.91	1,485	2.2	52.24		—

The following table summarizes information about stock options exercisable at October 31, 2013:



	Options Exercisable
	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
Range of Exercise Prices:	(in thousands)	(in years)			(in millions)
$ 21.02 - $ 31.81	1,122	3.8	$	23.59	$	14.1
$ 31.82 - $ 40.92	1,086	2.6	38.48		0.1
$ 40.93 - $ 69.91	1,260	1.9	51.02		—

The weighted average grant date fair value of options granted during the years ended October 31, 2013, 2012, and 2011 was $14.01, $14.73, and $24.54, respectively. The total intrinsic value of stock options exercised during the years ended October 31, 2013, 2012, and 2011 was $4 million, $1 million, and $38 million, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model. The following table summarizes the annual weighted average assumptions:



	2013		2012		2011
Risk-free interest rate	0.8	%	0.8	%	2.0	%
Dividend yield	—	%	—	%	—	%
Expected volatility	54.7	%	55.6	%	45.9	%
Expected life (in years)	5.1		4.8		4.8

The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on the Company's history of not paying a dividend to any class of stock and future expectations. Expected volatility is based on a blend of our historical stock prices and implied volatilities from traded options in our stock. The weighted average expected life in years for all grants as a group is then calculated for each year.

Restricted Stock

Restricted stock is common stock that is subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock is issued and valued based on the fair value of the common stock at grant date. Restricted stock generally vests over a three-year period. The following table summarizes restricted stock activity for the years ended October 31:



	2013				2012				2011
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
	(in thousands)				(in thousands)				(in thousands)
Nonvested, at beginning of year	41		$	24.13	—		$	—	10		$	35.81
Granted	2		34.19		44		25.06		1		69.75
Vested	(2	)	34.19		(3	)	40.76		(10	)	39.76
Forfeited	—		—				—		(1	)	35.81
Nonvested, at end of year	41		24.13		41		24.13		—		—

The aggregate grant date fair value of restricted stock vested during the years ended October 31, 2013, 2012, and 2011 was $0.1 million, $0.1 million, and $0.4 million, respectively.

Restricted Stock Units

Restricted stock units ("RSUs") represent the right to receive shares of common stock ("share-settled RSUs") or cash ("cash-settled RSUs") in the future, with the right to future delivery of the shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Share and cash-settled RSUs are valued based on the fair value of the common stock at grant date. There are 48,500 RSUs that can be settled either by cash or shares at the Company's discretion. The cash or share-settled RSUs have been classified as share-settled RSUs below. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settlement and vest over a three-year period.

The following table summarizes RSU activity for the years ended October 31:



	Share-Settled Restricted Stock Units
	2013				2012				2011
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
	(in thousands)				(in thousands)				(in thousands)
Nonvested, at beginning of year	77		$	45.93	162		$	35.54	449		$	45.42
Granted	316		28.13		6		42.19		42		53.72
Vested	(26	)	35.84		(90	)	27.22		(323	)	51.33
Forfeited	(68	)	39.13		(1	)	33.97		(6	)	48.35
Nonvested, at end of year	299		29.54		77		45.93		162		35.54

	Cash-Settled Restricted Stock Units
	2013				2012				2011
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
	(in thousands)				(in thousands)				(in thousands)
Nonvested, at beginning of year	463		$	43.20	393		$	48.80	275		$	35.81
Granted	3		27.24		285		37.10		225		59.25
Vested	(215	)	42.71		(158	)	46.18		(90	)	35.81
Forfeited	(57	)	42.46		(57	)	43.58		(17	)	46.53
Nonvested, at end of year	194		43.74		463		43.20		393		48.80

The aggregate grant date fair value of restricted stock units vested during the years ended October 31, 2013, 2012, and 2011 was $10 million, $10 million, and $20 million, respectively.

Cash-settled Performance-based Stock Units

Cash settled performance-based stock units represent the right to receive the cash value of one share of common stock provided that performance measures are achieved. A stock unit will be determined by comparing the Company's total shareholder return for a pre-determined period to the Company's percentile ranking when compared to its peer group. Cash-settled performance-based stock units are valued using a Monte Carlo simulation. Cash-settled performance-based stock units are classified as liabilities and are remeasured at each reporting date until settlement and vest over a three or five-year period, if performance measures are met. The following table summarizes cash-settled performance-based stock unit activity for the years ended October 31:



	2013				2012			2011
	Shares		Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
	(in thousands)				(in thousands)			(in thousands)
Nonvested, at beginning of year	314		$	68.03	161	$	84.75	—	$	—
Granted	—		—		153	50.52		161	84.75
Vested	—		—		—	—		—	—
Forfeited	(142	)	66.09		—	—		—	—
Nonvested, at end of year	172		69.64		314	68.03		161	84.75

The following table summarizes the annual assumptions used in the calculation of the fair value:



	2012		2011
Risk-free interest rate	0.8	%	2.0	%
Dividend yield	—	%	—	%
Expected volatility	52.3	%	47.3	%

The risk-free rate is based on the rate on zero-coupon governmental bonds with a term commensurate with the remaining performance period at grant date. A dividend yield assumption of 0% is used based on the Company's history of not paying dividends to any class of stock and future expectations. Expected volatility is based on a blend of the implied volatility of traded call options in our stock and the historical volatility of our daily stock prices.

No cash-settled performance-based stock units were granted during the year ended October 31, 2013. No cash-settled performance shares vested during the years ended October 31, 2013, 2012, and 2011.

Performance-based Stock Options

Performance-based stock options represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following conditions: service, market and performance conditions. Performance-based stock options with service and performance conditions are valued using the Black-Scholes option pricing model and vest over a three-year period. Performance -based stock options with service and market conditions are valued using a Monte Carlo simulation and vest over a three-year period. Performance-based stock options have a seven-year contractual life, if conditions are met.

The following table summarizes the performance-based stock options activity for the year ended October 31, 2013:



	Service and Performance			Service and Market
	Shares	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	(in thousands)			(in thousands)
Options outstanding, at October 31, 2012	—	$	—	—		$	—
Granted	299	34.47		917		27.24
Exercised	—	—		—		—
Forfeited	—	—		(158	)	27.24
Options outstanding, at October 31, 2013	299	34.47		759		27.24
Options exercisable, at October 31, 2013	—	—		—		—

The performance-based stock options subject to service and performance conditions have a weighted average grant date fair value per share of $14.01. We estimated the fair value of each performance-based stock option granted on the date of grant using a Black-Scholes option pricing model. The 0.70% risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on the Company's history of not paying a dividend to any class of stock and future expectations. Expected volatility of 54.05% was based on a blend of our historical stock prices and implied volatilities from traded options in our stock. The weighted average expected life for all grants as a group was calculated at 5.1 years.

The following table summarizes the assumptions used in the calculation of the fair value using a Monte Carlo simulation for the performance-based stock options with service and market conditions:



	2013
Risk-free interest rate	0.90		%
Dividend yield	—		%
Expected volatility	55.39		%
Expected life (in years)	5
Monte Carlo Simulation Fair Value	$	12.41

Performance-based Stock Units

Performance-based stock units represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to forfeiture or other restrictions that will lapse upon satisfaction of service and performance conditions. Performance-based stock units with service and performance conditions are valued based on the fair value of the common stock at grant date and vest over a three-year period, if conditions are met.

The following table summarizes performance-based stock units activity for the year ended October 31, 2013:



	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at October 31, 2012	—		$	—
Granted	762		28.19
Vested	—		—
Forfeited	(110	)	27.24
Nonvested at October 31, 2013	652		28.35

No performance-based stock units vested during the year ended October 31, 2013.

Total Share-Based Compensation Expense

Total share-based compensation expense for the years ended October 31, 2013, 2012, and 2011 was $24 million, $19 million and $36 million, respectively. The Company records share-based compensation expense on a straight-line basis over the required service period which is equal to the vesting period. Share-based compensation expense is included in Selling, general, and administrative expenses in the Consolidated Statements of Operations. As of October 31, 2013, there was $49 million of total unrecognized compensation expense related to non-vested share-based awards which is expected to be recognized over a weighted average period of approximately 2.2 years.

The Company received cash of $12 million, $2 million, and $40 million during the years ended October 31, 2013, 2012, and 2011, respectively, related to stock awards exercised. The Company used cash of $5 million, $6 million and $5 million during the years ended October 31, 2013, 2012, and 2011, respectively, to settle cash-settled RSUs. The Company did not realize any tax benefit from stock awards exercised for 2013, 2012, or 2011.