11.

EMPLOYEE SHARE-BASED COMPENSATION PLANS:

Overview

The total fair value of share-based awards is recognized as a compensation expense, over the requisite employee service period (generally the vesting period of the grant). The Company has used the Black-Scholes option-pricing model to compute the estimated fair value of share-based awards on the date of grant. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. Expected volatility is estimated based upon a combination of historical and implied volatility. The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant.

Share-Based Compensation Plans

The Company has five share-based compensation plans which are described below: the Amended and Restated 1996 Stock Option Plan (“1996 Plan”), the Amended and Restated 2000 Stock Option Plan (“2000 Plan”), the 2003 Equity Incentive Plan (“2003 Plan”), the 2008 Omnibus Incentive Plan (“2008 Plan”), and the 2012 Omnibus Incentive Plan (“2012 Plan”), collectively the “Equity Plans.” Specifics related to each plan are as follows:

1996 Plan: Grants for shares under the 1996 Plan were limited to 15% of the Company’s outstanding common stock. The only grants outstanding under the 1996 Plan are non-qualified stock option grants, with total qualified stock option grants under the 1996 Plan limited to 650,000 shares of the Company’s common stock. No grants of qualified stock options were ever issued under the 1996 Plan. The 1996 Plan expired on June 30, 2006; thus, no further grants have been awarded after June 30, 2006, but options awarded prior to that date remain outstanding subject to the terms of the 1996 Plan and any related option agreements.

2000 Plan: The 2000 Plan provides for grants of non-qualified stock options of the Company’s common stock. The 2000 Plan is limited to grants covering up to 4.0 million shares of the Company’s common stock.

2003 Plan: The 2003 Plan provides for grants of non-qualified stock options and awards of restricted shares of the Company’s common stock. The 2003 Plan is limited to stock option grants and restricted stock awards covering up to 500,000 shares of the Company’s common stock. The 2003 Plan expired on May 22, 2013; thus, no further grants have been awarded after May 22, 2013, but options awarded prior to that date remain outstanding subject to the terms of the 2003 Plan and any related option agreements.

2008 Plan: The 2008 Plan provides for a broad range of awards, including stock options and awards of restricted shares of the Company’s common stock. The 2008 Plan authorizes the issuance of 1.5 million shares of the Company’s common stock. The 2008 Plan became effective on June 11, 2008.

2012 Plan: The 2012 Plan provides for a broad range of awards, including stock options and awards of restricted shares of the Company’s common stock. The 2012 Plan authorizes the issuance of 1.1 million shares of the Company’s common stock. The 2012 Plan became effective on June 6, 2012.

As of December 31, 2013, there are 294,401; 57,469; and 442,441 shares available for future grant under the 2000 Plan, 2008 Plan, and 2012 Plan, respectively. No shares were available for issuance under the 1996 Plan, as it expired on June 30, 2006 or the 2003 Plan, as it expired on May 22, 2013.

The Equity Plans provide that the exercise price of the stock options will be determined based upon the fair market value of the Company’s common stock on the NASDAQ Global Market System as of the date of grant. Options granted to officers and employees generally vest in three-, four- or five-year periods, dependent upon the plan or award, and expire on the seventh anniversary of the grant date. Annual options granted to non-employee members of the Company’s Board of Directors generally vest in equal quarterly increments and expire on the fifth anniversary of the grant date, and option grants issued upon their initial election to the Company’s Board of Directors vest in equal one-third increments as of the date of grant and the first and second anniversary of the date of grant.

During the years ended December 31, 2013 and 2012, the Company granted options to purchase 412,170 and 938,757 shares of common stock, respectively, principally as part of a long-term incentive program and in connection with the Company’s Board of Directors compensation program. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model utilizing the assumptions noted in the following table. Expected volatility is based upon historical volatility of the Company’s common stock. The expected life (period of time the award will be outstanding) was estimated using the historical exercise behavior of the Company’s employees. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company applied an estimated forfeiture rate of 22.5% (in all periods presented) to the calculated fair value of each option. The applied forfeiture rate utilized by the Company was based upon the historical forfeiture experience of the Equity Plans.

The share-based compensation expense and its classification in the statements of comprehensive income were as follows:


	Year Ended December 31,
	2013		2012		2011
	(In Thousands)
Project and personnel costs	$	276	$	366	$	343
Selling, general and administrative		1,193		1,053		858

Total share-based compensation expense	$	1,469	$	1,419	$	1,201

The fair value of each option award granted during 2013, 2012 and 2011, was based upon the following weighted-average assumptions:


	Year Ending December 31,
	2013			2012			2011
Expected volatility		47.5	%		52.4	%		53.8	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		3.75			3.86			3.61
Risk-free interest rate		0.4	%		0.4	%		1.1	%

The weighted-average grant-date fair value of all options granted (excluding restricted share awards) during the year ended December 31, 2013, 2012 and 2011 was $1.51, $1.53 and $1.25 per share, respectively.

A summary of stock option activity under the Equity Plans (excluding restricted share awards) is presented below:


Stock Options:	Shares Under Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
								(In Thousands)
Outstanding at January 1, 2012		3,730,573		$	3.88
Granted		938,757			3.85
Exercised		(99,541	)		2.69
Forfeited or expired		(460,252	)		4.35

Outstanding at December 31, 2012		4,109,537		$	3.85		4.42	$	2,019
Granted		412,170			4.18
Exercised		(250,123	)		3.39
Forfeited or expired		(262,556	)		4.30

Outstanding at December 31, 2013		4,009,028		$	3.89		3.87	$	12,933

Vested and expected to vest at December 31, 2013		3,737,491		$	3.90		3.75	$	12,058

Exercisable at December 31, 2013		2,802,198		$	3.94		3.18	$	9,043

The total intrinsic value of stock options exercised during 2013 and 2012 was approximately $639 thousand and $103 thousand, respectively. No stock options were exercised during 2011.

2003 Equity Incentive Plan,2008 Omnibus Incentive Plan, and 2012 Omnibus Incentive Plan – Restricted Share Awards

The 2003 Plan, the 2008 Plan, and 2012 Plan also authorize the granting of restricted share awards to officers, employees and certain non-employee members of the Board of Directors (the “Restricted Share Plans”). Restricted share awards are made at prices determined by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) and are compensatory in nature. Employees granted restricted share awards are required to provide consideration for the shares at the share price set by the Compensation Committee, which historically has equaled the par value per share the Company’s common stock ($0.01 per share). Shares of restricted stock generally vest over a 5-year period, during which time the Company has the right to repurchase any unvested shares at the amount paid if the relationship between the employee and the Company ceases. As of December 31, 2013, 126 thousand restricted share awards were subject to repurchase by the Company under the restricted stock agreements. The Company records compensation expense related to restricted share awards on a straight-line basis over the vesting term of the award.

During the year ended December 31, 2013, the Company issued 131,380 restricted share awards to employees at a purchase price of $0.01 per share. No restricted share awards were issued to employees during the years ended December 31, 2012 or 2011. Additionally, the Company recognized share-based compensation expense of $178 thousand, $18 thousand and $56 thousand during the years ended December 31, 2013, 2012 and 2011, respectively related to restricted share awards.

A summary of non-vested restricted share activity under the Restricted Share Plans is presented below:


Restricted Share Awards:	Non-vested Restricted Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2012		15,460		$	4.33
Granted		-			-
Vested		(6,460	)		6.23
Forfeited or expired		-			-

Non-vested at December 31, 2012		9,000		$	2.97
Granted		131,380			4.16
Vested		(14,190	)		(2.97	)
Forfeited or expired		-			-

Non-vested at December 31, 2013		126,190		$	4.13

Expected to vest at December 31, 2013		126,190		$	4.13

The total fair value of stock awards vested during the years ended December 31, 2013, 2012 and 2011 was $55 thousand, $24 thousand and $72 thousand, respectively.

Employee Stock Purchase Plan

In June 2008, in connection with the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved, and the Company adopted, the Edgewater Technology, Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP Plan”). The 2008 ESPP Plan became effective on October 1, 2008. The 2008 ESPP Plan, which was amended in June 2011, allows a maximum of 1,200,000 shares of the Company’s common stock to be purchased by Edgewater employees.

The 2008 ESPP Plan offers eligible employees the option to purchase the Company’s common stock at 85% of the lower of the closing price, as quoted on NASDAQ, on either the first trading day or the last trading day of the quarterly purchase period. Enrollment periods occur on January 1 and July 1. Purchases occur every three months. The 2008 ESPP Plan is designed to qualify for certain tax benefits for employees under section 423 of the Internal Revenue Code.

During the year ended December 31, 2013, 2012 and 2011, the Company issued 135,100; 176,375 and 231,004 shares, respectively, to employees under the 2008 ESPP Plan.

The fair value of each 2008 ESPP Plan offering was estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was based on historical volatility.


	Year Ended December 31,
	2013			2012			2011
Expected volatility		42.7	%		52.5	%		53.4	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		0.25			0.25			0.25
Risk-free interest rate		0.1	%		0.1	%		0.1	%

The weighted-average fair value of the shares issued under the 2008 ESPP Plan in 2013, 2012 and 2011, based upon the assumptions in the preceding table, was $1.05, $0.78 and $0.69, respectively.

Compensation Expense

As of December 31, 2013, unrecognized compensation expense, net of estimated forfeitures, related to the unvested portion of all share-based compensation arrangements was approximately $1.6 million and is expected to be recognized over a weighted average period of 1.08 years.

The Company is using previously purchased treasury shares for all shares issued for options, restricted share awards and 2008 ESPP Plan issuances. Shares may also be issued from unissued share reserves.