Note 9. Employee Benefit Plans

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (ESPP), employees are granted the right to purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of the shares at (1) the beginning of a rolling two-year offering period or (2) the end of each semi-annual purchase period, subject to a plan limit on the number of shares that may be purchased in a purchase period.

On April 3, 2012, the Company’s stockholders approved an amendment to the ESPP to increase the number of shares of common stock authorized for issuance under the plan by 5.0 million shares. During fiscal 2012, 2011 and 2010, the Company issued 2.0 million, 2.2 million, and 2.5 million shares, respectively, under the ESPP at average per share prices of $21.65, $17.95 and $15.32, respectively. As of October 31, 2012, 5.9 million shares of common stock were reserved for future issuance under the ESPP.

Equity Compensation Plans

2006 Employee Equity Incentive Plan. On April 25, 2006, the Company’s stockholders approved the 2006 Employee Equity Incentive Plan (2006 Employee Plan), which provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and other forms of equity compensation, including performance stock awards and performance cash awards, as determined by the plan administrator. The terms and conditions of each type of award are set forth in the 2006 Employee Plan. Options granted under this plan have a contractual term of seven years and generally vest over 4 years. On April 3, 2012, the Company’s stockholders approved an amendment to increase the number of shares of common stock reserved under the 2006 Employee Plan by 5.0 million shares for future issuance. As of October 31, 2012, an aggregate of 10.2 million stock options, and 3.9 million restricted stock units were outstanding, and 7.4 million shares were available for future issuance under the 2006 Employee Plan.

As a result of the stockholders’ approval of the 2006 Employee Plan, the Company’s 1992 Stock Option Plan, 1998 Non-Statutory Stock Option Plan and 2005 Assumed Stock Option Plan (collectively, the Prior Plans) have been terminated for future grants. Should any options currently outstanding under such Prior Plans and plans assumed by the Company in acquisitions prior to fiscal 2006 (options to purchase 1.2 million shares are outstanding under such plans as of October 31, 2012) be cancelled or expire unexercised, the shares underlying such options shall become available for future grant under the 2006 Employee Plan.

2005 Non-Employee Directors Equity Incentive Plan. On May 23, 2005, the Company’s stockholders approved the 2005 Non-Employee Directors Equity Incentive Plan (the 2005 Directors Plan) and the reservation of 0.3 million shares of common stock for issuance thereunder. The 2005 Directors Plan provides for annual equity awards to non-employee directors in the form of either stock options or restricted stock. On April 25, 2006, the Company’s stockholders approved an increase in the number of shares of common stock reserved under the 2005 Directors Plan by 0.5 million.

As of October 31, 2012, the Company has issued an aggregate of 274,230 shares of restricted stock awards with an aggregate grant date fair value of approximately $6.2 million under the 2005 Directors Plan. Restricted stock awards vest over a period of three years. In addition, the Company granted options to purchase 123,649 shares of common stock, which vest over a period of three to four years, with an aggregate grant date fair value of $3.3 million to non-employee directors during fiscal 2007 and fiscal 2011. As of October 31, 2012, 57,451 shares of restricted stock and 123,649 stock options were outstanding and a total of 365,464 shares of common stock were reserved for future grant under the 2005 Directors Plan.

1994 Non-Employee Directors Stock Option Plan. An aggregate of 280,000 stock options remained outstanding under the Company’s 1994 Non-Employee Directors Stock Option Plan as of October 31, 2012, which expired as to future grants in October 2004.

Other Assumed Stock Plans through Acquisitions. In connection with the Company’s acquisitions in fiscal 2008, fiscal 2010, and fiscal 2012, the Company assumed certain outstanding share-based awards of acquired companies. The total amount of shares of the Company’s common stock subject to such assumed equity awards was 3.5 million. If these equity awards are canceled, forfeited or expire unexercised, they do not become available for future grant. As of October 31, 2012, 0.7 million shares of the Company’s common stock remained subject to such outstanding assumed equity awards.

Restricted Stock Units. Since fiscal 2007, restricted stock units are granted as part of the Company’s new hire and annual incentive compensation program under the 2006 Employee Plan. Restricted stock units are valued based on the closing price of the Company’s common stock on the grant date. In general, for non-executive officers, restricted stock units vest over three to four years and are subject to the employees’ continuing service to the Company. For each restricted stock unit granted under the 2006 Employee Plan, a share reserve ratio is applied for the purpose of determining the remaining number of shares reserved for future grants under the plan. Prior to the second quarter of fiscal 2009, the share reserve ratio was 1.36 for each restricted stock unit granted, and an equivalent of 1.36 shares was deducted from the share reserve for each restricted stock unit issued. Likewise, each forfeited restricted stock unit increased the number of shares available for issuance by the applicable rate at the time of forfeiture. In the second quarter of fiscal 2010, the Company’s stockholders approved an amendment of the 2006 Employee Plan to prospectively change the reserve ratio from 1.36 to 2.18. On March 24, 2011, the stockholders approved an amendment of the 2006 Employee Plan to prospectively change the reserve ratio from 2.18 to 1.25. On April 3, 2012, the stockholders approved amending the share reserve ratio from 1.25 to 1.50.

The following table contains information concerning activities related to restricted stock units:


	Restricted Stock Units			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (In Years)		Aggregate Fair Value
	(in thousands, except per share and life amounts)
Balance at October 31, 2009		3,133		$	22.63		1.41
Granted		1,228		$	22.00
Assumed(1)		713		$	23.69
Vested(2)		(1,221	)	$	22.40			$	27,345
Forfeited		(123	)	$	22.51

Balance at October 31, 2010		3,730		$	22.71		1.41
Granted		1,483		$	26.89
Vested(2)		(1,522	)	$	23.11			$	35,164
Forfeited		(237	)	$	23.49

Balance at October 31, 2011		3,454		$	24.28		1.48
Granted		1,813		$	29.52
Assumed(1)		353		$	30.33
Vested(2)		(1,508	)	$	24.14			$	36,402
Forfeited		(192	)	$	26.70

Balance at October 31, 2012		3,920		$	27.18		1.52

(1)	The Company assumed restricted stock units outstanding under various plans through acquisitions.

(2)	The number of vested restricted stock units includes shares that were withheld on behalf of employees to satisfy the statutory tax withholding requirements.

The following table contains additional information concerning activities related to stock options and restricted stock units under all equity plans, other than shares available for grant under the 2005 Directors Plan:


	Available for Grant(3)			Options(2)
	Available for Grant(3)			Options Outstanding			Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
	(in thousands, except per share and life amounts)
Balance at October 31, 2009		6,703			25,818		$	21.22		2.89	$	58,267
Options Granted		(1,995	)		1,995		$	21.30
Options Assumed(2)					456		$	18.10
Options Exercised					(6,465	)	$	18.16
Options Canceled/forfeited/expired		372			(620	)	$	23.19
Restricted stock units granted(1)		(2,677	)
Restricted stock units forfeited(1)		203
Additional shares reserved		—

Balance at October 31, 2010		2,606			21,184		$	21.83		2.80	$	90,013
Options Granted		(2,228	)		2,270		$	26.07
Options Exercised					(6,800	)	$	20.53
Options Canceled/forfeited/expired		550			(694	)	$	27.24
Restricted stock units granted(1)		(2,182	)
Restricted stock units forfeited(1)		165
Additional shares reserved		7,000

Balance at October 31, 2011		5,911			15,960		$	22.76		2.97	$	74,068
Options Granted		(1,719	)		1,719		$	28.86
Options Assumed(2)					382		$	19.15
Options Exercised					(7,103	)	$	21.09
Options Canceled/forfeited/expired		631			(739	)	$	25.07
Restricted stock units granted(1)		(2,638	)
Restricted stock units forfeited(1)		167
Additional shares reserved		5,000

Balance at October 31, 2012		7,352			10,219		$	24.64		3.71	$	80,950
Vested and expected to vest as of October 31, 2012					10,135		$	24.62		3.69	$	80,526

Exercisable at October 31, 2012					6,337		$	23.87		2.61	$	55,118

(1)

These amounts do not reflect the actual number of restricted stock units granted or forfeited but rather the effect on the total remaining shares available for future grants after the application of the share reserve ratio. For more information about the share reserve ratio, please see Restricted Stock Units above.

(2)	The Company assumed options and stock appreciation rights (SARs) outstanding under various plans through acquisitions.

(3)	Excluding shares reserved for future issuance under the 2005 Directors Plan.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on stock options with an exercise price less than the Company’s closing stock price of $32.55 as of October 31, 2012. The pretax intrinsic value of options exercised and their average exercise prices were:


	Year Ended October 31,
	2012		2011		2010
	(in thousands, except per share price)
Exercise value	$	63,048	$	42,388	$	29,788
Average exercise price per share	$	21.09	$	20.53	$	18.16

The following table summarizes information about stock options outstanding as of October 31, 2012:


	Options Outstanding						Exercisable Options
Range of Exercise Prices	Number Outstanding		Weighted-Average Remaining Contractual Life (In Years)		Weighted-Average Exercise Price		Number Exercisable		Weighted-Average Exercise Price
	(in thousands)						(in thousands)
$ 3.60 - $19.28		1,289		2.89	$	16.58		1,147	$	16.63
$19.32 - $21.10		1,055		2.66	$	20.82		790	$	20.76
$21.18 - $23.39		1,391		4.68	$	22.03		599	$	21.76
$23.45 - $26.09		1,219		2.17	$	24.71		1,131	$	24.68
$26.17 - $26.56		1,232		3.53	$	26.40		792	$	26.32
$26.66 - $27.14		1,505		4.05	$	27.04		869	$	27.05
$27.43 - $29.62		1,033		5.22	$	27.88		340	$	28.29
$29.80 - $40.56		1,495		4.28	$	30.54		669	$	31.16

		10,219		3.71	$	24.64		6,337	$	23.87

Restricted stock award activities during fiscal 2012 under the 2005 Director Plan are summarized as follows:


	Restricted Shares			Weighted-Average Grant Date Fair Value
	(in thousands)
Unvested at October 31, 2011		54		$	24.73
Granted		28		$	31.04
Vested		(25	)	$	23.66
Forfeited		—		$	—

Unvested at October 31, 2012		57		$	28.28

Valuation and Expense of Stock Compensation. The Company estimates the fair value of stock based awards in the form of stock options, employee stock purchases under employee stock purchase plans, restricted stock, and restricted stock units on the grant date. The value of awards expected to vest is recognized as expense over the applicable service periods. The Company uses the straight-line attribution method to recognize stock compensation costs over the service period of the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options, stock appreciation rights and employee stock purchase plans awards under ASC 718, Compensation —Stock Compensation. The Black-Scholes option-pricing model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The expected volatility for both stock options and stock purchase rights under the ESPP is estimated by a combination of implied volatility for publicly traded options of the Company’s common stock with a term of six months or longer and the historical stock price volatility over the estimated expected term of the Company’s stock-based awards. The expected term of the Company’s stock-based awards is based on historical experience.

The assumptions presented in the following table were used to estimate the fair value of stock options and employee stock purchase rights granted under the Company’s stock plans or stock plans assumed from acquisitions:


	Year Ended October 31,
	2012	2011	2010
Stock Options
Expected life (in years)	1.0 - 4.9	4.8	3.65 - 5.73
Risk-free interest rate	0.22% - 0.95%	0.96% - 2.28%	1.08% - 2.57%
Volatility	22.65% - 29.76%	26.96% - 30.30%	26.92% - 30.76%
Weighted average estimated fair value	$8.46	$7.04	$7.10
ESPP
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Risk-free interest rate	0.16% - 0.34%	0.09% - 0.68%	0.18% - 0.78%
Volatility	21.95% - 23.20%	19.48% - 27.08%	22.4% - 31.27%
Weighted average estimated fair value	$8.02	$6.82	$6.16

The following table presents stock compensation expense for fiscal 2012, 2011 and 2010, respectively:


	Year Ended October 31,
	2012			2011			2010
	(in thousands)
Cost of license	$	6,927		$	5,658		$	6,497
Cost of maintenance and service		1,727			1,416			1,908
Research and development expense		32,767			26,747			26,551
Sales and marketing expense		13,566			11,068			12,372
General and administrative expense		16,427			11,525			12,660

Stock compensation expense before taxes		71,414			56,414			59,988
Income tax benefit		(15,989	)		(14,798	)		(14,525	)

Stock compensation expense after taxes	$	55,425		$	41,616		$	45,463

As of October 31, 2012, the Company had $107.1 million of total unrecognized stock compensation expense relating to options and restricted stock units and awards, which is expected to be recognized over a weighted average period of 2.5 years.

The cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for the options (excess tax benefits) are classified as cash flows from financing activities. The Company has not recorded any excess tax benefits in fiscal periods 2012, 2011 and 2010.

Deferred Compensation Plan. The Company maintains the Synopsys Deferred Compensation Plan (the Deferred Plan), which permits eligible employees to defer up to 50% of their annual cash base compensation and up to 100% of their eligible cash variable compensation. Amounts may be withdrawn from the Deferred Plan pursuant to elections made by the employees in accordance with the terms of the plan. Since the inception of the Deferred Plan, the Company has not made any matching or discretionary contributions to the Deferred Plan. There are no Deferred Plan provisions that provide for any guarantees or minimum return on investments. Undistributed amounts under the Deferred Plan are subject to the claims of the Company’s creditors. The securities held by the Deferred Plan are classified as trading securities.

Deferred Plan Assets and Liabilities are as follows:


	As of October 31, 2012		As of October 31, 2011
	(In thousands)
Plan assets recorded in other long-term assets	$	100,645	$	90,060
Plan liabilities recorded in other long-term liabilities(1)	$	100,645	$	90,060

(1)

For undistributed deferred compensation due to participants.

Income or loss from the change in fair value of the Deferred Plan assets is recorded in other income (expense), net. The increase or decrease in the fair value of the undistributed Deferred Plan obligation is recorded in total cost of revenue and operating expense. The following table summarizes the impact of the Deferred Plan:


	Year Ended October 31,
	2012		2011		2010
	(in thousands)
Increase (reduction) to cost of revenue and operating expense	$	7,498	$	2,449	$	9,426
Other income (expense), net		7,498		2,449		8,810

Net increase (decrease) to net income	$	—	$	—	$	(616	)

Other Retirement Plans. The Company sponsors various retirement plans for its eligible U.S. and non-U.S. employees. Total contributions to these plans were $23.2 million, $21.4 million and $14.7 million in fiscal 2012, 2011 and 2010, respectively. For employees in the United States and Canada, the Company matches pretax employee contributions up to a maximum of US $1,500 and Canadian $4,000, respectively, per participant per year.