NOTE 4 — SHARE-BASED COMPENSATION

We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees and directors, and record compensation cost for all stock awards granted after January 1, 2006 and awards modified, repurchased, or cancelled after that date, using the modified prospective method. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. We recognized $0.1 million and $0.1 million of compensation expense in the consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended March 31, 2013 and 2012, respectively. The following table summarizes stock-based compensation expenses recorded in the consolidated statement of operations (in thousands):


	For the Three Months Ended March 31,
		2013		2012
Cost of license fees and services, excluding
depreciation and amortization	$	7	$	5
Cost of customer support, excluding
depreciation and amortization		1		1
Sales and marketing		5		6
General and administrative		57		53
Product development		5		6
Total share based compensation	$	75	$	71

Stock Incentive Plans

In January 1996, our stockholders approved an Amended and Restated Stock Option Plan (the “Option Plan”). Under the Option Plan, as amended, 4,175,000 shares were reserved for issuance. Options issued under the Option Plan were at the discretion of the Board of Directors, including the vesting provisions of each stock option granted. Options were granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years and expire no more than ten years from the date of grant. The Option Plan terminated on January 18, 2006; options granted before that date were not affected by the plan termination. At March 31, 2013 and December 31, 2012, 0.3 and 0.3 million options remained outstanding under the Option Plan, respectively.

In June 2007, our stockholders approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) with a maximum of 1,000,000 shares reserved for issuance. In June 2010, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1,250,000. Awards permitted under the 2007 Stock Plan include: Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and Other Stock-Based Awards. Awards issued under the 2007 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years for employees and one year for directors and expire no more than ten years from the date of grant. At March 31, 2013, there were approximately 0.1 million shares available for grant under the 2007 Stock Plan, as amended. At March 31, 2013 and December 31, 2012, 0.4 million options were issued and outstanding under the 2007 Stock Plan as amended, respectively.

During the three months ended March 31, 2013 and 2012, we awarded 16,000 and 0 grants of restricted stock to members of our senior management. During the three months ended March 31, 2013 and 2012, 6,000 and 2,000 shares of restricted stock vested, respectively. Approximately 1,250 and 1,875 shares of restricted stock were forfeited during the three months ended March 31, 2013 and 2012, respectively. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. Stock-based compensation expense includes $40,000 and $9,000 for the three months ended March 31, 2013 and 2012, respectively, of expense related to restricted stock grants. The restrictions on the stock awards are released quarterly, generally over four years for senior management and over one year for board members.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model. The Black-Scholes model uses four assumptions to calculate the fair value of each option grant. The expected term of share options granted is derived using the simplified method, which we adopted in January 2008. The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the stock options. The expected volatility is based upon historical volatility of our common stock over a period equal to the expected term of the stock options. The expected dividend yield is based upon historical and anticipated payment of dividends. The weighted-average assumptions used in the fair value calculations are as follows:


	For the Three Months Ended March 31,
	2013		2012
Expected term (years)	6.1		5.8
Risk-free interest rate	0.76	%	0.86	%
Expected volatility	61.48	%	65.50	%
Expected dividend yield	3.10	%	3.50	%

The following is a summary of stock option activity under the plans for the nine months ended March 31, 2013:


				Weighted-
				Average
			Weighted-	Remaining		Aggregate
	Number of		Average	Contractual		Intrinsic
	Shares		Exercise	Term		Value
	(in thousands)		Price	(Years)		(in thousands)
Options outstanding at December 31, 2012	704	$	4.86	4.60	$	1,757
Options granted	33	$	6.45
Less options forfeited	(3)	$	5.05
Less options exercised	(11)	$	3.30
Options outstanding at March 31, 2013	723	$	4.95	4.59	$	1,947

Options exercisable at March 31, 2013	636	$	4.96	4.04	$	1,815

There were 33,000 and 52,800 stock options granted during the three months ended March 31, 2013 and 2012. The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2013 and 2012 was $2.78 and $2.60.

As of March 31, 2013, there was approximately $0.4 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted average period of 2.0 years. The total fair value of stock options vested during the three months ended March 31, 2013 and 2012 was approximately $44,000 and $0.1 million, respectively.

The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $4,000 for the three months ended March 31, 2013 and 2012.

Cash received from stock option exercises for the three months ended March 31, 2013 and 2012 was $34,000 and $0.2 million, respectively.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 550,000 shares. Employees may elect to have up to 15% of their gross compensation withheld through payroll deduction to purchase our common stock, capped at $25,000 annually and no more than 10,000 shares per offering period. The purchase price of the stock is 85% of the lower of the market price at the beginning or end of each three-month participation period. As of March 31, 2013, there were approximately 71,000 shares available for purchase. For the three months ended March 31, 2013 and 2012, we recorded compensation expense of $700 and $300, respectively, associated with grants under the ESPP which includes the fair value of the look-back feature of each grant as well as the 15% discount on the purchase price. This expense fluctuates each period primarily based on the level of employee participation.

The fair value of each purchase made under our ESPP is estimated on the date of purchase using the Black-Scholes model. The Black-Scholes model uses four assumptions to calculate the fair value of each purchase. The expected term of each purchase is based upon the three-month participation period of each offering. The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of each offering. The expected volatility is based upon historical volatility of our common stock. The expected dividend yield is based upon historical and anticipated payment of dividends. The weighted average assumptions used in the fair value calculations are as follows:


	For the Three Months Ended March 31,
	2013		2012
Expected term (years)	0.25		0.25
Risk-free interest rate	0.1	%	0.1	%
Expected volatility	46.34	%	35.22	%
Expected dividend yield	3.63	%	3.58	%

Cash received from employee stock plan purchases for the three months ended March 31, 2013 and 2012 was $2,000.

We issued shares related to the ESPP of approximately 500 and 300 for the three months ended March 31, 2013 and 2012, respectively.