NOTE 15 — STOCK-BASED COMPENSATION

The Company makes an estimate of expected forfeitures and recognizes compensation costs only for those stock-based awards expected to vest. As of December 31, 2011, the total future compensation cost related to unvested stock-based awards that are expected to vest is $9,305,000, which amount will be recognized over a weighted average period of 1.3 years.

During the years ended December 31, 2011, 2010 and 2009, the Company recorded compensation related to stock-based awards as follows:


	Year Ended December 31,
	2011		2010		2009
	(in thousands, except per share data)
Cost of revenues	$	4,325	$	4,403	$	3,296
Selling and marketing expenses		600		780		708
General and administrative expenses		1,747		2,195		1,751

Total stock-based compensation expense		6,672		7,378		5,755
Tax effect on stock-based compensation expense		834		924		701

Net effect of stock-based compensation expense	$	5,838	$	6,454	$	5,054

Effect of stock-based compensation expense on earnings (loss) per share	$	0.13	$	0.14	$	0.11

During the third quarter of 2011, the Company evaluated the trends in the stock-based award forfeiture rate and determined that the actual rate is 7.5%. This change resulted in an immaterial decrease in the stock-based award in the year ended December 31, 2011.

Valuation assumptions

The fair value of each grant of stock-based awards is estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. In the absence of enough historical information, the expected term was determined using the simplified method giving consideration to the contractual term and vesting schedule. Since the Company does not have any traded stock-based award and was listed for trading on the New York Stock Exchange beginning in November 2004, the Company’s expected volatility was calculated based on the Company’s historical volatility and for the period of time prior to the Company’s listing, the historical volatility of the Parent. There is a high correlation between the stock behavior of the Company and its Parent. The dividend yield forecast is expected to be 20% of the Company’s yearly net profit, which is equivalent to a 0.0% yearly weighted average dividend rate in the year ended December 31, 2011. The risk-free interest rate was based on the yield from U.S. constant treasury maturities bonds with an equivalent term. The forfeiture rate is based on trends in actual stock-based awards forfeitures.

The Company calculated the fair value of each stock-based award on the date of grant based on the following assumptions:


	Year Ended December 31,
	2011			2010			2008
For stock options issued by the Company:
Risk-free interest rates		2.2	%		2.5	%		1.6	%
Expected lives (in years)		5.1			5.1			5.1
Dividend yield		0.80	%		0.72	%		0.38	%
Expected volatility		46.4	%		47.6	%		48.6	%
Forfeiture rate		7.5	%		13.0	%		13.0	%

Stock-based awards

The 2004 Incentive Compensation Plan

In 2004, the Company’s Board of Directors adopted the 2004 Incentive Compensation Plan (“2004 Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights (“SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2004 Incentive Plan, a total of 3,750,000 shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2004 Incentive Plan cliff vest and are exercisable from the grant date as follows: 25% after 24 months, 25% after 36 months, and the remaining 50% after 48 months. Options granted to non-employee directors under the 2004 Incentive Plan cliff vest and are exercisable one year after the grant date. Vested shares may be exercised for up to ten years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital.


	Year Ended December 31,
	2011					2010					2009
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year		2,335		$	34.35		1,745		$	36.08		1,233		$	39.14
Granted, at fair value:
Stock Options		30			19.10		37			28.39		30			38.50
SARs*		622			25.65		592			29.95		573			26.84
Exercised		—			—		—			—		(79	)		15.96
Forfeited		(53	)		31.69		(39	)		38.96		(12	)		44.20

Outstanding at end of year		2,934			32.40		2,335			34.35		1,745			36.08

Options exercisable at end of year		1,086			37.46		621			37.65		331			35.23

Weighted-average fair value of options granted during the year				$	9.69				$	12.51				$	11.63

*	Upon exercise, SARs entitle the recipient to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date.

As of December 31, 2011, 641,550 shares of the Company’s common stock are available for future grants.

The following table summarizes information about stock-based awards outstanding at December 31, 2011 (shares in thousands):


	Options Outstanding						Options Exercisable
Exercise Price	Number of Shares Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Shares Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
					(Dollars in thousands)						(Dollars in thousands)
$15.00		33		2.8	$	100		33		2.8	$	100
19.10		30		6.8		—		—		—		—
20.10		8		2.8		—		8		2.8		—
25.65		612		6.3		—		—		—		—
25.74		22		3.8		—		22		3.8		—
26.84		559		4.2		—		140		4.2		—
28.19		30		5.8		—		30		5.8		—
29.21		8		5.3		—		8		5.3		—
29.95		578		5.3		—		—		—		—
34.13		227		4.3		—		227		4.3		—
37.90		15		1.8		—		15		1.8		—
38.50		22		4.8		—		22		4.8		—
38.85		8		2.2		—		8		2.2		—
42.08		343		2.3		—		343		2.3		—
45.78		417		3.3		—		208		3.3		—
52.98		22		2.8		—		22		2.8		—

		2,934		4.5	$	100		1,086		3.3	$	100

The following table summarizes information about stock-based awards outstanding at December 31, 2010 (shares in thousands):


	Options Outstanding						Options Exercisable
Exercise Price	Number of Shares Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Shares Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
					(Dollars in thousands)						(Dollars in thousands)
15.00		34		3.8	$	500		34		3.8	$	500
20.10		8		3.8		71		8		3.8		71
25.74		22		4.8		84		22		4.8		84
26.84		570		5.2		1,562		—		—		—
28.19		30		6.8		42		—		—		—
29.21		7		6.7		3		—		—		—
29.95		592		6.7		—		—		—		—
34.13		232		5.3		—		232		5.3		—
37.90		15		2.8		—		15		2.8		—
38.50		22		5.8		—		—		—		—
38.85		8		3.2		—		8		3.2		—
42.08		350		3.3		—		173		3.3		—
45.78		423		4.3		—		106		4.3		—
52.98		22		3.8		—		22		3.8		—

		2,335		5.1	$	2,262		620		4.3	$	655

The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company’s stock price of $18.03 and $29.58 as of December 31, 2011 and 2010, respectively, which would have potentially been received by the stock-based award holders had all stock-based award holders exercised their stock-based award as of those dates. The total number of in-the-money stock-based awards exercisable as of December 31, 2011 and 2010 was 32,901 and 64,301, respectively.

The total pretax intrinsic value of stock-based awards exercised during the year ended December 31, 2009 was $1,835,000 based on the Company’s average stock price of $35.98 during the year ended December 31, 2009. No options were exercised during the years ended December 31, 2011 and 2010.

The Parent’s Stock Option Plans

The Parent had four stock option plans. Under the Parent’s stock option plans, employees of the Company were granted options in the Parent’s ordinary shares, which are registered and traded on the Tel-Aviv Stock Exchange. None of the options were exercisable or convertible into shares of the Company.

During the year ended December 31, 2009, 284,000 options were exercised at an average exercise price of $3.78 per share. The total pretax intrinsic value of such options was $1,163,000 based on the Parent’s average stock price of $7.88 during such year. No options were exercised during the years ended December 31, 2010 and December 31, 2011.

As of December 31, 2011 and 2010, all the options under the parent stock options plans have been fully exercised or expired, and no shares of the Parent’s ordinary shares are available for future grants.