13. Stock-Based Compensation

The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income:


	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Cost of revenue	$	410	$	660	$	1,873	$	2,058
General and administrative expenses		985		1,142		3,285		3,958
Selling and marketing expenses		981		1,165		3,360		3,456

Total	$	2,376	$	2,967	$	8,518	$	9,472

Stock Options

The fair value of each stock option granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Nine months ended September 30,
	2014			2013
Dividend yield		0	%		0	%
Expected life (years)		5.50			5.50
Risk free interest rate		1.84	%		0.87	%
Volatility		35	%		40	%

The estimated expected term of options granted has been based on historical experience, which is representative of the expected term of the options. Volatility has been calculated based on the volatility of the Company’s common stock and the volatility of stock of comparative companies. The risk-free interest rate that the Company uses in the option valuation model is based on U.S. treasury zero-coupon bonds with a remaining term similar to the expected term of the options.

The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock option activity under the Company’s stock plans is shown below:


	Number of Options			Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Contractual Life (Years)
Outstanding at December 31, 2013		1,956,515		$	16.25	$	22,255		5.55
Granted		9,794			27.62
Exercised		(324,534	)		15.32
Forfeited/Expired		(77,750	)		24.73

Outstanding at September 30, 2014		1,564,025		$	16.09	$	13,210		4.65

Vested and exercisable at September 30, 2014		1,320,872		$	14.74	$	12,872		4.26

Available for grant at September 30, 2014		1,380,540

The unrecognized compensation cost for unvested options as of September 30, 2014 was $1,178 which is expected to be expensed over a weighted average period of 1.13 years. The Company did not issue any stock options during the three months ended September 30, 2014 and 2013. The weighted-average fair value of options granted during the nine months ended September 30, 2014 and 2013 was $9.77 and $10.07, respectively. The total grant date fair value of options vested during the three months ended September 30, 2014 and 2013 was $693 and $541, respectively. The total grant date fair value of options vested during the nine months ended September 30, 2014 and 2013 was $1,917 and $2,865, respectively.

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock units activity under the Company’s stock plans is shown below:


	Restricted Stock				Restricted Stock Units
	Number		Weighted- Average Fair Value		Number			Weighted- Average Fair Value
Outstanding at December 31, 2013		—	$	—		1,144,442		$	24.95
Granted		46,950		29.29		498,595			26.23
Vested		—		—		(417,010	)		21.91
Forfeited		—		—		(129,430	)		26.27

Outstanding at September 30, 2014*		46,950	$	29.29		1,096,597		$	26.53

*	Excludes 120,000 and 112,000 vested restricted stock units as of September 30, 2014 and December 31, 2013, respectively, for which the underlying common stock is yet to be issued.

As of September 30, 2014, unrecognized compensation cost of $23,720 is expected to be expensed over a weighted average period of 2.57 years.

Performance Based Stock Awards

On February 13, 2014, the Compensation Committee of the Board of Directors of the Company approved the program of performance based grant of restricted stock units (“PRSUs”) for executive officers and other specified employees under its existing 2006 Omnibus Award Plan.

Under this program, the PRSUs will cliff vest at the end of a three-year period based on satisfaction of dual performance criteria: 50% of the PRSUs shall be based on a total revenue performance condition (“PUs”) measured on a cumulative basis over a three-year performance period and the other 50% shall be based on a market condition (“MUs”) that is contingent on meeting or exceeding the total shareholder return relative to a group of peer companies specified under the program, measured over a three-year performance period. In addition, up to one-third of the PUs may be earned based on the Company’s revenue performance in each of 2014 and 2015 against revenue targets in those years. The ultimate amount of PUs that the recipient earns, will be the greater of (x) the PUs earned in 2016 and (y) the sum of the earned PUs in 2014 and 2015. The award recipient may earn up to two hundred percent (200%) of the target based on the actual performance for both kinds of PRSUs.

The fair value of each PU was determined based on the market price of one common share of the Company on the date of grant, and assumes that performance targets will be achieved. The compensation expense for the PUs is recognized on a straight-line basis over the vesting terms. Over the performance period, the number of shares that will be issued will be adjusted upward or downward based upon the probability of achievement of the performance targets. The ultimate number of shares issued and the related compensation cost recognized as an expense will be based on a comparison of the final performance metrics to the specified targets.

The grant date fair value for the MUs was determined using a Monte Carlo simulation model and will be expensed on a straight-line basis over the vesting period. All compensation expense related to the MUs will be recognized if the requisite performance period is fulfilled, even if the market condition is not achieved.

The Monte-Carlo simulation model simulates a range of possible future stock prices and estimates the probabilities of the potential payouts. This model also incorporates the following ranges of assumptions:

•

The historical volatilities are used over the most recent three-year period for the components of the peer group.

•

The risk-free interest rate is based on the U.S. Treasury rate assumption commensurate with the three-year performance period.

•

Since the plan stipulates that the awards are based upon the TSR of the Company and the components of the peer group, it is assumed that the dividends get reinvested in the issuing entity on a continuous basis.

•

The correlation coefficients are used to model the way in which each entity tends to move in relation to each other are based upon the price data used to calculate the historical volatilities.

Performance restricted stock unit activity under the Company’s stock plans is shown below:


	Revenue Based PRSU’s					Market Condition Based PRSU’s
	Number			Weighted Avg Fair Value		Number			Weighted Avg Fair Value
Outstanding at Dec 31, 2013		—		$	—		—		$	—
Granted		55,475			25.63		55,475			33.60
Vested		—			—		—			—
Forfeited		(7,750	)		25.63		(7,750	)		33.60

Outstanding at September 30, 2014		47,725		$	25.63		47,725		$	33.60

As of September 30, 2014, unrecognized compensation cost of $2,298 is expected to be expensed over a weighted average period of 2.25 years.