NOTE

STOCKHOLDERS’ EQUITY

Preferred stock:

The Company

’s Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of up to

5,000,000

shares of preferred stock in

one

or more series with such designations, rights, preferences, and limitations as the Board of Directors

may

determine, including the consideration received, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights.

shares of preferred stock are currently outstanding.

Common stock:

Currently,

50,000,000

shares of common stock are authorized. Holders of common stock are entitled to

one

vote per share on all matters to be voted upon by the Company

’s stockholders. Subject to the rights of holders of preferred stock, if any, in the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of the Company’s assets. The Company’s Board of Directors

may

declare a dividend out of funds legally available therefore and, subject to the rights of holders of preferred stock, if any, the holders of common stock are entitled to receive ratably any such dividends.

Holders of common stock have

preemptive rights or other subscription rights to convert their shares into any other securities. There are

redemption or sinking fund provisions applicable to common stock.

Dividend policy:

December 31, 2017

, the Company had an accumulated deficit of

$104,842.

The Company has never paid cash dividends on the common stock and presently intends to follow a policy of retaining earnings for reinvestment in its business.

Share repurchase program:

The Company

’s board of directors has previously approved a number of share repurchase plans, including those in accordance with Rule

10b5

of the Securities Exchange Act of

1934,

for the repurchase of our common stock. In

August 2017,

the Company’s board authorized a

$10

million dollar buyback program, inclusive of the shares authorized for repurchase from previously authorized share repurchase plans.

2017,

2016

and

2015,

the Company repurchased approximately

389,000,

1,051,000

and

1,295,000

shares, respectively, of common stock at an average purchase price of

1.55,

$10

.15

and

$10

.24

per share, respectively, for an aggregate purchase price of

$4,490,

0,666

and

$13

,268

, respectively. As of

December

31,

2017,

748,010

shares of the Company’s common stock remained authorized for repurchase under the Company’s board-authorized share repurchase program.

201

2016

and

2015,

the Company issued

890,000,

,409,000

and

1,024,000

shares, respectively, of common stock, out of treasury stock, to employees who exercised their equity awards and had vested RSUs under the Company’s equity incentive plans or purchased shares from the Company’s

1993

Employee Stock Purchase Plan (“ESPP”).

Stock purchase plan and equity incentive plans:

The Company has various equity incentive plans under which employees, officers, non-employee directors of the Company and its subsidiaries and others, including consultants,

may

be granted rights to purchase the Company

’s common stock. The plans authorize the administrator, except for the grant of RSUs, to grant equity incentive awards at an exercise price of

not

less than

100%

of the fair market value of the common stock on the date the award is granted. It is the Company’s policy to grant stock options and SARs at an exercise price that equals the fair market value

Equity awards granted under all stock incentive plans that are cancelled or forfeited before expiration become available for future grant.

Until the end of

2012,

the Company granted to employees and executive officers of the Company primarily share appreciation rights (“SARs”), capped with a ceiling, under the various equity incentive plans. The SAR unit confers the holder the right to stock appreciation over a preset price of the Company

’s common stock during a specified period of time. When the unit is exercised, the appreciation amount is paid through the issuance of shares of the Company’s common stock. The ceiling limits the maximum income for each SAR unit and the maximum number of shares to be issued. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling.

Starting in

2013,

the Company granted to employees and executive officers of the Company primarily

restricted stock units (“RSUs”) under the various equity incentive plans. An RSU award is an agreement to issue shares of our common stock at the time the award is vested. RSUs granted to employees and executive officers generally

vest over a

four

year period from the grant date with

25%

of the RSUs granted vesting on the

first

anniversary of the grant date and

6.25%

vesting each quarter thereafter.

A summary of the various plans is as follows:

1993

Director Stock Option Plan (Directors Plan)

Upon the closing of the Company

’s initial public offering, the Company adopted the Directors Plan. Under the Directors Plan, which expired in

January 2014,

the Company was authorized to issue nonqualified stock options to the Company’s outside non-employee directors to purchase up to

1,980,875

shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant. The Directors Plan, as amended, provided that each person who became an outside, non-employee director of the Board of Directors was automatically granted an option to purchase

30,000

shares of common stock (the “First Option”). Thereafter, each outside director was automatically granted an option to purchase

15,000

shares of common stock (a “Subsequent Option”) on

January 1

of each year if, on such date, he had served on the Board of Directors for at least

six

months. In addition, an option to purchase an additional

15,000

shares of common stock (a “Committee Option”) was granted on

January 1

of each year to each outside director for each committee of the Board on which had served as a chairperson for at least

six

months.

Options granted under the Directors Plan generally had a term of

years. One-

third

of the shares were exercisable after the

first

year and thereafter

one

third

at the end of each

twelve

-month period.

The Directors Plan expired in

January

2014

and therefore

further awards

may

be granted thereunder. As of

December

31,

2017,

2,464,933

shares of common stock had been granted under the plan and stock options to acquire

260,000

shares remained outstanding out of grants made prior to its expiration.

1998

Non-Officer Employee Stock Option Plan (

1998

Plan)

1998,

the Company adopted the

1998

Plan. Under the

1998

Plan, employees

may

be granted non-qualified stock options for the purchase of common stock. The

1998

Plan currently provides for the purchase of up to

5,062,881

shares of common stock. As of

December 31, 2017,

14,681

shares of common stock remained available for grant under the

1998

Plan.

The exercise price of options under the

1998

Plan shall

not

be less than the fair market value of common stock for nonqualified stock options, as determined by the Company

’s Board of Directors or a committee appointed by the Company’s Board of Directors.

Options under the

1998

Plan are generally exercisable over a

-month period beginning

months after issuance, or as determined by the Company

’s Board of Directors or a committee appointed by the Company’s Board of Directors. Options under the

1998

Plan expire up to

seven

years after the date of grant.

2003

Israeli Share Incentive Plan (

2003

Plan)

2003,

the Company adopted the

2003

Plan, which complied with the Israeli tax reforms. The

2003

Plan terminated in

2012

upon approval of the Company

’s

2012

Equity Incentive Plan (the

“2012

Plan”). As of

December

31,

2017,

10,700,543

shares of common stock had been granted under the plan and stock option and SARs to acquire

56,186

shares of common stock remained outstanding under the plan. As the

2003

Plan expired in

May 2012,

further awards

may

be granted thereunder.

Equity awards under the

2003

Plan were generally exercisable over a

-month period beginning

months after issuance, or as determined by the Company

’s Board of Directors or a committee appointed by the Company’s Board of Directors. Equity awards under the

2003

Plan expired up to

seven

years after the date of grant.

2012

Equity Incentive Plan (

2012

Plan)

2012,

the Company adopted the

2012

Plan, which also complies with the Israeli tax reforms. Under the

2012

Plan, employees, directors and consultants

may

be granted incentive or non-qualified stock options, SARs, RSUs and other awards under the plan. The exercise price for stock options under the

2012

Plan shall

not

be less

than the fair market value of common stock at the time of grant, unless otherwise determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. The

2012

Plan currently provides for the purchase of up to

3,100,000

shares of common stock. As of

December 31, 2017,

682,059

shares of common stock remained available for grant under the

2012

Plan.

Stock options, SARs and RSUs awarded under the

2012

Plan to employees and executive officers are generally exercisable over a

-month period beginning

months after issuance, or as determined by the Company

’s Board of Directors or a committee appointed by the Company’s Board of Directors Equity awards under the

2012

Plan expire up to

seven

years after the date of grant.

A director subplan was established under the

2012

Plan to provide for the grant of equity awards to the Company

’s non-employee directors. The director subplan is designed to work automatically; however, to the extent administration is necessary, it would be provided by the Company’s board of directors. Starting in

2014,

non-employee directors are granted automatically under the director subplan, on

January 1

of each year,

8,000

stock options and

4,000

restricted stock units, all of which would fully vest at the end of

one

year from the grant date. If a director is appointed for a term commencing during a calendar year, the director would be granted stock options and restricted stock units on the date of appointment and the number of stock options and restricted stock units granted would be based upon the number of days remaining in the in the calendar year following the date such person was nominated as a director.

1993

Employee Stock Purchase Plan (ESPP)

Upon the closing of the Company

’s initial public offering, the Company adopted the ESPP. The Company has reserved an aggregate of

4,800,000

shares of common stock for issuance under the ESPP. The ESPP provides that substantially all employees of the Company

may

purchase Company common stock at

85%

of its fair market value on specified dates via payroll deductions. There were approximately

227,000,

233,000

and

233,000

shares of common stock issued at a weighted average purchase price of

$8.34,

$7.62

and

$7.59

per share under the ESPP in

2017,

2016

and

2015,

respectively. As of

December 31, 2017,

715,000

shares of common stock were reserved under the ESPP.

Stock Reserved for Future Issuance

The following table summarizes the number of shares available for future issuance at

December

31,

2017

(after giving effect to the above increases in the equity incentive plans):

ESPP			715,000
Equity awards			697,000
Undesignated preferred stock			5,000,000

			6,412,000

The following is a summary of activities relating to the Company

’s stock options, SARs and RSUs granted among the Company’s various plans:

	Year ended December 31,
	2017							201 6							2015
	Amount of options/ SARs/RSUs			Weighted average exercise price		Aggregate intrinsic value (4)		Amount of options/ SARs/RSUs			Weighted average exercise price		Aggregate intrinsic value (4)		Amount of options/ SARs/RSUs			Weighted average exercise price		Aggregate intrinsic value (4)
	in thousands							in thousands							in thousands

Options outstanding at beginning of year		2,152		$	5.12	$	-		3,740		$	6.22	$	-		4,644		$	6.52	$	-
Changes during the year:
Options granted		78		$	11.93	$	-		64		$	9.44	$	-		179		$	11.2	$	-
SAR s granted		190		$	10.40	$	-
RSUs granted		476		$	-	$	-		573		$	-	$	-		405		$	-	$	-
Exercised (4)		(818	)	$	3.77	$	6,699		(1,905	)	$	5.55	$	10,344		(1,403	)	$	5.68	$	7,302

Forfeited and cancelled		(86	)	$	9.85	$	-		(320	)	$	7.16	$	-		(85	)	$	12.21	$	-

Options/SARs/RSUs outstanding at end of year (1,2,4)		1,992		$	5.02	$	14,931		2,152		$	5.12	$	17,347		3,740		$	6.22	$	13,364

Options/SARs/RSUs exercisable at end of year (1,3,4)		813		$	8.20	$	3,499		1,132		$	8.27	$	5,703		2,552		$	7.47	$	6,031

(

)

SAR grants made prior to

January 1, 2009

are convertible for a maximum number of shares of the Company’s common stock equal to

50%

of the SAR units subject to the grant. SAR grants made on or after

January 1, 2009

and before

January 1, 2010

are convertible for a maximum number of shares of the Company’s common stock equal to

75%

of the SAR units subject to the grant. SAR grants made on or after

January 1, 2010

are convertible for a maximum number of shares of the Company’s common stock equal to

66.67%

of the SAR units subject to the grant. SAR grants made on or after

January 1, 2012

are convertible for a maximum number of shares of the Company’s common stock equal to

50%

of the SAR units subject to the grant.

(

)

Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of

1,871

thousand shares of the Company’s common stock as of

December

31,

2017.

(

)

Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of

785

thousand shares of the Company’s common stock as of

December

31,

2017.

(

)

Calculation of aggregate intrinsic value for options, RSUs and SARs outstanding and exercisable is based on the share price of the Company’s common stock as of

December 31, 2017,

2016

and

2015

which was

$12.50,

$13.05

and

$9.44

per share, respectively. The intrinsic value for options and SARs exercised and RSUs vested during those years represents the difference between the fair market value of the Company’s common stock on the date of exercise and vesting for RSUs and the exercise price of each option, RSU or SAR, as applicable.

The stock options and SARs outstanding as of

December 31,

201

have been separated into ranges of exercise price as follows:

Range of exercise price			Outstanding		Remaining contractual life (years) ( 1 )		Weighted average exercise price		Exercisable		Remaining contractual life (years)		Weighted average exercise price
$			thousands				$		thousands				$

0 (RSUs)				872		-		-		-		-		-
5.21	-	7.26		231		3.03		5.89		231		3.03		5.89
7.49	-	9.71		458		3.68		8.50		451		3.68		8.50
10.15	-	15.79		431		5.95		11.01		131		5.03		11.22


				1,992		4.42		5.02		813		3.72		8.20

(

)

Calculation of weighted average remaining contractual term does

not

include the RSUs that were granted, which have an indefinite contractual term.

As of

December

31,

2017,

the outstanding number of SARs was

270,000

and based on the share price of the Company’s common stock as of

December

31,

2017

(

$12.50

per share), all of those SARs were in the money as of

December

31,

2017.

The weighted average estimated fair value of employee RSUs granted during

2017,

2016

and

2015

was

$9.63,

$8.33

and

$10.43

per share, respectively, (using the weighted average pre vest cancellation rate of

3.64%,

3.78%

and

3.49%

during

2017,

2016

and

2015,

respectively, on an annual basis).

The weighted-average estimated fair value of employee stock options

and SARs granted during the years ended

December 31, 2017,

2016

and

2015

was

$2.95,

$3.97

and

$3.80

,respectively, per stock option and SAR. The Company selected the binomial model as the most appropriate model for determining the fair value for its stock options awards and SARs. The fair value of options and SARs granted in

2017,

2016

and

2015

is estimated at the date of grant using the following weighted average assumptions. (annualized percentages):

	Year ended December 31,
	2017			2016			2015

Volatility		37.47	%		46.02	%		49.04	%
Risk-free interest rate		2.23	%		2.29	%		1.96	%
Dividend yield		0	%		0	%		0	%
Pre-vest cancellation rate *)		4.06	%		1.87	%		3.95	%
Post-vest cancellation rate **)		3.45	%		3.44	%		3.86	%
Suboptimal exercise factor ***)		1.31			1.69			1.46
Expected life (in years)		4.22			5.50			4.43

The pre-vest cancellation rate was calculated on an annual basis and is presented here on an annual basis.

**)

The post-vest cancellation rate was calculated on a monthly basis and is presented here on an annual basis.

***)

The ratio of the stock price to strike price at the time of exercise of the option.

The computation of volatility uses a combination of historical volatility and implied volatility derived from the Company

’s exchange traded options with similar characteristics.

The risk-free interest rate assumption is based on U.S. treasury bill interest rates appropriate for the term of the Company

’s employee equity-based awards.

The dividend yield assumption is based on the Company

’s historical and expectation of future dividend payouts and

may

be subject to substantial change in the future.

The expected term of employee equity-based awards represents the weighted-average period the awards are expected to remain outstanding and is a derived output of the binomial model. The expected life of employee equity-based awards is impacted by all of the underlying assumptions used in the Company

’s model. The binomial model assumes that employees’ exercise behavior is a function of the award’s remaining contractual life and the extent to which the award is in-the-money (i.e., the average stock price during the period is above the strike price of the award). The binomial model estimates the probability of exercise as a function of these

two

variables based on the history of exercises and cancellations on past award grants made by the Company.

As equity-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. The forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures

differ from those estimates.

Pre and post-vesting forfeitures were estimated based on historical experience.

The Company selected the Monte Carlo model as the most appropriate model for determining the fair value of its ESPP plan . The fair value for rights to purchase shares of common stock under the Company

’s ESPP was estimated on each enrollment date using the risk free interest rate and the share price for those dates. In addition, the expected life was assumed to be between

six

months based on the contractual life of the plan, and the expected volatility was assumed to be in a range of

27.42%

34.92%

2017,

29.60%

41.21%

2016

and

22.83%

34.53%

2015.

The Company

’s aggregate equity compensation expenses for the years ended

December

31,

2017,

2016

and

2015

totaled

$5,861,

$5,088

and

$5,092,

respectively.

A summary of the status of the Company

’s non-vested stock options, SARs and RSUs as of

December 31, 2017,

and changes during the year ended

December 31, 2017,

is presented below:

Non-vested	Units			Weighted average grant date fair value
	(In thousands)			$

Non-vested at December 31, 2016		1,019			7.69

Granted		744			7.22
Vested		(539	)		7.46
Forfeited		(46	)		7.69

Non-vested at December 31, 2017		1,179			7.50

As of

December

31,

2017,

equity-based compensation arrangements to purchase a maximum of approximately

1,721,000

shares of common stock were vested and expected to vest (the calculation takes into consideration the average forfeiture rate).

As of

December

31,

2017,

there was a total unrecognized compensation expense of

$3,782

related to non-vested equity-based compensation arrangements granted under the Company’s various equity incentive plans. That expense is expected to be recognized during the period from

2017

through

2021.