Employee Benefits and Stock-based Compensation

401(k) Plan

The Company maintains a defined contribution 401(k) plan (the “401(k) Plan”) for substantially all of its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 20% of their pre-tax salary, subject to the Internal Revenue Service (“IRS”) annual contribution limits. In 2012, 2011 and 2010, the Company matched 50% of the employee’s contribution up to a total of 6% of the employee’s annual salary. The Company contributed $2.8 million in 2012, $2.9 million in 2011, and $4.1 million in 2010 under the 401(k) Plan. The Company can terminate matching contributions at its discretion at any time.

Stock Option and Restricted Stock Plans

The majority of Verisign’s stock-based compensation relates to RSUs. Stock options granted in prior years were granted only to upper management level employees. As of December 31, 2012, a total of 15.4 million shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards under Verisign’s stock option and restricted stock plans.

On May 26, 2006, the stockholders of Verisign approved the 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan replaces Verisign’s previous 1998 Directors Plan, 1998 Equity Incentive Plan, and 2001 Stock Incentive Plan. The 2006 Plan authorizes the award of incentive stock options to employees and non-qualified stock options, restricted stock awards, RSUs, stock bonus awards, stock appreciation rights and performance shares to eligible employees, officers, directors, consultants, independent contractors and advisors. Options may be granted at an exercise price not less than 100% of the fair market value of Verisign’s common stock on the date of grant. The 2006 Plan is administered by the Compensation Committee which may delegate to a committee of one or more members of the Board or Verisign’s officers the ability to grant certain awards and take certain other actions with respect to participants who are not executive officers or non-employee directors. All outstanding options under the 2006 Plan have a term of not greater than 7 years from the date of grant. Options granted generally vest 25% on the first anniversary date of the grant and the remainder ratably over the following 12 quarters. RSUs are awards covering a specified number of shares of Verisign common stock that may be settled by issuance of those shares (which may be restricted shares). RSUs generally vest in four installments with 25% of the shares vesting on each anniversary of the first four anniversaries of the grant date. However, the Compensation Committee may authorize grants with a different vesting schedule in the future. A total of 27.0 million common shares were authorized and reserved for issuance under the 2006 Plan. The 2006 Plan was amended by shareholder approval in 2011 to allow for equitable adjustment of stock options outstanding under the plan in the event of any future special dividends paid by the Company. This amendment to the 2006 Plan was approved after the Company declared the May 2011 special dividend. The modification of the plan did not result in any additional stock-based compensation.

In connection with certain acquisitions, Verisign assumed some of the acquired companies’ stock options. Options assumed generally have terms of seven to ten years and generally vested over a four-year period, as set forth in the applicable option agreement.

2007 Employee Stock Purchase Plan

On August 30, 2007, the Company’s stockholders approved the 2007 Employee Stock Purchase Plan which replaced the previous 1998 Employee Stock Purchase Plan. A total of 6.0 million common shares were authorized and reserved for issuance under the ESPP. Eligible employees may purchase common stock through payroll deductions by electing to have between2% and 25% of their compensation withheld to cover the purchase price. Each participant is granted an option to purchase common stock on the first day of each 24-month offering period and this option is automatically exercised on the last day of each six-month purchase period during the offering period. The purchase price for the common stock under the ESPP is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period. Offering periods begin on the first business day of February and August of each year. As of December 31, 2012, 2.6 million shares of the Company’s common stock are reserved for issuance under this plan.

Stock-based Compensation

Stock-based compensation is classified in the Consolidated Statements of Operations and Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:



	Year Ended December 31,
	2012		2011		2010
	(In thousands)
Stock-based compensation:
Cost of revenues	$	5,754	$	6,655	$	4,473
Sales and marketing	6,091		6,062		4,419
Research and development	6,023		4,926		4,989
General and administrative	15,494		19,928		20,136
Restructuring charges	—		5,701		2,321
Stock-based compensation for continuing operations	$	33,362	$	43,272	$	36,338
Discontinued operations	—		—		15,840
Total stock-based compensation	$	33,362	$	43,272	$	52,178

The following table presents the nature of the Company’s total stock-based compensation:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
RSUs	$	30,807		$	33,305		$	26,175
ESPP	4,436			3,904			9,287
Stock options	956			3,528			7,741
RSUs/Stock options acceleration	—			5,701			11,023
Capitalization (Included in Property and equipment, net)	(2,837		)	(3,166		)	(2,048		)
Total stock-based compensation expense	$	33,362		$	43,272		$	52,178

The income tax benefit recognized on stock-based compensation within Income tax expense for 2012, 2011, and 2010 was $9.4 million, $13.1 million, and $9.7 million, respectively. The income tax benefit recognized on stock-based compensation included within Income from discontinued operations, net of tax for 2010 was $4.5 million.

The following table sets forth the weighted-average assumptions used to estimate the fair value of the stock options and ESPP awards:



	Year Ended December 31,
	2012		2011		2010
Stock options:
Volatility	N/A		N/A		36	%
Risk-free interest rate	N/A		N/A		1.85	%
Expected term	N/A		N/A		3.6 years
Dividend yield	N/A		N/A		Zero
ESPP awards:
Volatility	26	%	26	%	35	%
Risk-free interest rate	0.16	%	0.30	%	0.40	%
Expected term	1.25 years		1.25 years		1.25 years
Dividend yield	Zero		Zero		Zero

The Company’s expected volatility is based on the average of the historical volatility over the period commensurate with the expected term of the options and the mean historical implied volatility of traded options. The risk-free interest rates are derived from the average U.S. Treasury constant maturity rates during the respective periods commensurate with the expected term. The expected terms are based on an analysis of the observed and expected time to post-vesting exercise and/or cancellation of options. When the stock options were granted and on the ESPP offering dates, the Company did not anticipate paying any cash dividends and therefore used an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation only for those options and awards that are expected to vest.

RSUs Information

The following table summarizes unvested RSUs activity:



	Year Ended December 31,
	2012				2011				2010
	Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value
	(Shares in thousands)
Unvested at beginning of period	2,345		$	27.33	2,719		$	23.50	3,087		$	25.39
Granted	1,341		38.20		1,860		34.29		2,037		25.67
Vested and settled	(881	)	27.57		(1,411	)	27.00		(1,349	)	26.34
Forfeited	(327	)	32.34		(1,025	)	24.94		(1,283	)	25.34
Dividend equivalents	—		—		202		—		227		—
	2,478		$	32.07	2,345		$	27.33	2,719		$	23.50

All RSU agreements have anti-dilution provisions, in the event a dividend is declared, that require the Company to issue additional dividend equivalent RSUs (“dividend equivalents”) calculated based on the number of unvested RSUs, the per share dividend declared, and the stock price on the dividend payment date. The dividend equivalents are subject to the same vesting requirements as applicable to unvested RSUs in respect of which such additional dividend equivalents are issued.

At the time the December 2010 and May 2011 special dividends were declared, the 2006 Plan did not have the same anti-dilution provisions for outstanding stock options. Because the option holders did not participate in the special dividends, the Company granted option holders additional RSUs equivalent to the amount of the dividend. The RSUs granted were either fully vested or on a two year cliff vesting, depending on whether the corresponding stock options were vested or unvested. The Company recognized $9.2 million of stock-based compensation expense related to the fully vested RSUs granted in 2011.

As of December 31, 2012, the aggregate intrinsic value of unvested RSUs was $96.2 million. The fair values of RSUs that vested during 2012, 2011, and 2010 were $31.7 million, $44.2 million, and $38.1 million, respectively. As of December 31, 2012, total unrecognized compensation cost related to unvested RSUs was $48.1 million which is expected to be recognized over a weighted-average period of 2.5 years.

Stock Options Information

The following table summarizes stock options activity:



	Year Ended December 31,
	2012				2011				2010
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
	(In thousands, except average price amounts)
Outstanding at beginning of period	1,120		$	28.04	3,387		$	27.36	6,920		$	26.64
Granted	—		—		—		—		788		24.53
Exercised	(660	)	27.34		(1,473	)	26.34		(3,094	)	23.69
Forfeited	(38	)	23.99		(749	)	26.53		(1,188	)	28.88
Expired	(1	)	8.07		(45	)	48.33		(39	)	87.00
Outstanding at end of period	421		$	29.49	1,120		$	28.04	3,387		$	27.36
Exercisable at end of period	387		$	30.17	910		$	28.83	1,812		$	28.98
Expected to vest at end of period	32		$	21.66
Weighted-average fair value of options granted during the period			$	—			$	—			$	7.14
Total intrinsic value of options exercised during the period			$	9,157			$	12,599			$	22,125

The closing price of Verisign’s stock was $38.82 on December 31, 2012. The aggregate intrinsic value of stock options outstanding, stock options exercisable and stock options expected to vest as of December 31, 2012 was $4.0 million, $3.4 million and $0.6 million, respectively. Intrinsic value is calculated as the difference between the exercise price of the shares and the market value as of December 31, 2012. As of December 31, 2012, the weighted-average remaining contractual life for stock options exercisable and stock options expected to vest was 2.2 years and 3.7 years , respectively. The remaining unrecognized compensation cost related to unvested stock options is not material.

Modifications

In 2011, and 2010, the Company modified certain stock-based awards held by employees affected by divestitures and workforce reductions to accelerate the vesting of twenty-five percent (25%) of each such individual’s unvested “in-the-money” stock options and 25% of each such individual’s unvested RSUs on the termination dates of such individual’s employment. The Company remeasured the fair value of these modified awards and recorded the charges over the requisite future service periods, if any. The modification charges are included as restructuring costs for continuing operations as well as for discontinued operations. 217 and 1,054 employees were affected by these modifications and the Company recognized $5.7 million and $11.0 million of acceleration cost in Restructuring charges during 2011 and 2010, respectively.

Under the ESPP, if the market price of the stock at the end of any six-month purchase period is lower than the stock price at the offering date, the plan is immediately cancelled after that purchase date and a new two-year plan is established using the then-current stock price as the base purchase price. The Company also allows its employees to increase their payroll withholdings during the offering period. The Company accounts for these increases in employee payroll withholdings and the plan rollover as modifications. The Company recognized $5.5 million of such modification expenses in 2010. Modification expenses in 2012 and 2011 were not significant.