Stock-Based Employee Benefit Plans

Description of Stock Option and Share Plans

We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we are authorized to issue equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors are eligible to receive awards under the 2012 Plan. We also have two other long-term incentive plans under which awards are currently outstanding: the 1992 Long-term Incentive Plan, which was adopted in February 1992 and expired in February 2012, and the 2003 Employment Inducement Award Plan, which was adopted in November 2003 and terminated in February 2012. Stock option awards granted after September 30, 2005 have a maximum term of seven years, and stock option awards granted prior to October 1, 2005 had a maximum term of ten years. Stock option awards and restricted stock unit awards not subject to market conditions vest ratably over three or four years. Restricted stock unit awards subject to market conditions vest annually over a period of three years based on achievement of specified criteria. At September 30, 2014, there were 4,124,273 shares available for issuance under the 2012 Plan.

Description of Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan (“Purchase Plan”), we are authorized to issue up to 5,062,500 shares of common stock to eligible employees. Employees may have up to 10% of their base salary withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods. The purchase price of the stock is 85% of the fair market value on the exercise date (the last day of each offering period). Offering period means approximately six-month periods commencing (a) on the first trading day on or after January 1 and terminating on the last trading day in the following June, and (b) on the first trading day on or after July 1 and terminating on the last trading day in the following December. The Purchase Plan was suspended effective January 1, 2009 and employees cannot contribute to the Purchase Plan until the suspension is repealed. At September 30, 2014, there were 2,707,966 shares available for issuance.

We satisfy stock option exercises, vesting of restricted stock units and Purchase Plan issuances from treasury shares.

Share-Based Compensation Expense and related income tax benefits

We recorded share-based compensation expense of $36.4 million, $25.9 million and $21.2 million in fiscal years 2014, 2013 and 2012, respectively. The total tax benefit related to this share-based compensation expense was $13.0 million, $9.2 million and $7.8 million in fiscal 2014, 2013 and 2012, respectively. As of September 30, 2014, there was $65.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.32 years.

In fiscal 2014 we received $18.8 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $4.7 million.

Stock-Based Activity

Stock Options

We estimate the fair value of stock options granted using the Black-Scholes option valuation model and we amortize the fair value on a straight-line basis over the vesting period. We used the following assumptions to estimate the fair value of our stock options during fiscal 2014, 2013 and 2012:



	Year Ended September 30,
	2014		2013		2012
Stock Options:
Average expected term (years)	4.04		4.10		4.31
Expected volatility (range)	35-36	%	35-37	%	38-41	%
Weighted average volatility	35	%	37	%	40	%
Risk-free interest rate (range)	0.8 - 1.2	%	0.5 - 1.1	%	0.5 - 1.5	%
Average expected dividend yield	0.2	%	0.2	%	0.3	%
Expected dividend yield (range)	0.2	%	0.2	%	0.2-0.3	%

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate.

Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We estimate the expected term 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.

Dividends. The dividend yield assumption is based on historical dividend payouts.

Risk-Free Interest Rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options.

Forfeitures. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

The following table summarizes option activity during fiscal 2014:



	Shares		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(In years)	(In thousands)
Outstanding at October 1, 2013	2,687		$	35.48
Granted	58		53.82
Exercised	(583	)	33.91
Forfeited	(68	)	41.30
Expired	(5	)	35.37
Outstanding at September 30, 2014	2,089		$	36.24	4.31	$	39,436
Options exercisable at September 30, 2014	998		$	33.28	3.85	$	21,787
Vested and expected to vest at September 30, 2014	1,990		$	35.97	4.28	$	38,090

The weighted average fair value of options granted were $15.50, $12.53 and $12.32 during fiscal 2014, 2013 and 2012, respectively. The aggregate intrinsic value of options outstanding at September 30, 2014 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 2.1 million outstanding shares, which had exercise prices lower than the $55.10 market price of our common stock at September 30, 2014. The total intrinsic value of options exercised was $13.8 million , $19.8 million and $31.2 million during fiscal 2014, 2013 and 2012, respectively, determined as of the date of exercise.

Restricted Stock Units

The fair value of restricted stock units (“RSUs”) granted is the closing market price of our common stock on the date of grant adjusted for the expected dividend yield. We amortize the fair value on a straight-line basis over the vesting period.

The following table summarizes the RSUs activity during fiscal 2014:



	Shares		Weighted-average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2013	1,424		$	38.02
Granted	640		56.23
Released	(480	)	35.56
Forfeited	(144	)	40.54
Outstanding at September 30, 2014	1,440		$	46.68

The weighted average fair value of the RSUs granted were $56.23, $42.41 and $38.13 during fiscal 2014, 2013 and 2012, respectively. The total intrinsic value of the RSUs that vested was $27.6 million, $24.1 million and $15.5 million during fiscal 2014, 2013 and 2012, respectively, determined as of the date of vesting.

Performance Stock Units

Performance share units (“PSUs”) are granted to our senior officers and earned based on pre-established performance goals approved by the Leadership Development and Compensation Committee of our Board of Directors for any given performance period. The range of payout is zero to 200% of the number of granted PSUs, based on the outcome of the performance conditions. The fair value of the PSUs is the closing market price of our common stock on the date of grant adjusted for the expected dividend yield. We amortize the fair value on a straight-line basis over the vesting period, based on the performance condition that is probable of achievement that would result in the vesting of the most shares. The Company reassesses the probability at each reporting period and recognizes the cumulative effect of the change in estimate in the period of change. As of September 30, 2014, the performance condition of the PSUs granted during fiscal year 2014, as determined by the Leadership Development and Compensation Committee, had been achieved at 200% of target value.

The following table summarizes the PSUs activity during fiscal 2014:



	Shares		Weighted- average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2013	292		$	38.96
Granted	176		56.63
Released	(87	)	38.64
Outstanding at September 30, 2014	381		$	47.19

The weighted average fair value of the PSUs granted were $56.63, $41.56 and $36.66 during fiscal 2014, 2013 and 2012, respectively. The total intrinsic value of the PSUs that vested was $4.9 million and $2.6 million during fiscal 2014 and 2013, respectively, determined as of the date of vesting.

Market Stock Units

In November 2013, the Leadership Development and Compensation Committee of our Board of Directors granted 88,000 market share units (“MSUs”), a new performance based equity award, to our senior officers. The MSUs will be earned based on our total shareholder return relative to the Russell 3000 Index over performance periods of one, two and three years. The MSUs had a grant date fair value of $68.47 that was estimated using a Monte Carlo valuation model and the following assumptions: expected volatility of 33.9% and 17.3%, respectively, in FICO’s stock price and the Russell 3000 Index; a correlation of 68% between FICO and the Russell 3000 Index; a dividend yield of 0.16% and a risk-free interest of 0.68%. The expected volatility was determined based on daily historical movements in our stock price and the Russell 3000 index for the three years preceding the grant date. The correlation between FICO and the Russell 3000 Index was determined based on historical daily stock price movements for the three years preceding the grant date. The dividend yield was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. The risk-free rate was determined based on U.S. Treasury zero-coupon yields over the three-year performance period. We attribute the cost separately for each vesting tranche of the award. In addition, we do not reverse the compensation cost solely because the market condition is not satisfied, and the award is therefore not exercisable or retained by the employee, provided the requisite service is rendered. All 88,000 units were outstanding at September 30, 2014.