(10) SHARE-BASED COMPENSATION

Share-Based Compensation Plan

We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of ten years. Once options become exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation.

As of December 31, 2013, there were 1.1 million shares available for future grants under the plan from the 16.0 million shares previously approved by the stockholders.

Determining Fair Value of Stock Compensation

Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The expected life represents the weighted-average period the stock options are expected to be outstanding based primarily on the options’ vesting terms, remaining contractual life and the employees’ expected exercise based on historical patterns.

Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

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

The following weighted average assumptions were used for options granted:


	Years ended December 31,
	2013			2012			2011
Expected life (in years)		6.4			6.7			6.7
Expected volatility		32.4	%		32.6	%		33.1	%
Risk-free interest rate		1.4	%		1.0	%		1.7	%
Expected forfeiture rate		3	%		3	%		3	%

The following table summarizes share-based compensation expense related to share-based awards which is recorded in the statements of comprehensive income:


	Years ended December 31,
	2013			2012			2011
Cost of software services, maintenance and subscriptions	$	1,509		$	1,084		$	871
Selling, general and administrative expense		10,144			6,327			5,382

Total share-based compensation expense		11,653			7,411			6,253
Tax benefit		(3,363	)		(2,040	)		(1,545	)

Net decrease in net income	$	8,290		$	5,371		$	4,708

Stock Option Activity

Options granted, exercised, forfeited and expired are summarized as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		5,836		$	12.74
Granted		831			26.83
Exercised		(582	)		6.10
Forfeited		(26	)		15.78

Outstanding at December 31, 2011		6,059			15.31
Granted		930			43.53
Exercised		(1,218	)		10.22
Forfeited		(60	)		28.07

Outstanding at December 31, 2012		5,711			20.86
Granted		1,453			67.08
Exercised		(1,443	)		12.68
Forfeited		(1	)		68.17

Outstanding at December 31, 2013		5,720			34.66		7	$	385,868
Exercisable at December 31, 2013		1,971		$	15.41		5	$	170,956

We had unvested options to purchase 3.5 million shares with a weighted average grant date exercise price of $44.55 as of December 31, 2013 and unvested options to purchase 2.8 million shares with a weighted average grant date exercise price of $27.20 as of December 31, 2012. As of December 31, 2013, we had $48.3 million of total unrecognized compensation cost related to unvested options, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of four years.

Other information pertaining to option activity was as follows during the twelve months ended December 31:


	2013		2012		2011
Weighted average grant-date fair value of stock options granted	$	23.27	$	15.24	$	9.91
Total intrinsic value of stock options exercised		99,393		40,589		12,289

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. As of December 31, 2013, there were 1.0 million shares available for future grants under the ESPP from the 2.0 million shares previously approved by the stockholders.