NOTE 9: SHARE-BASED COMPENSATION

We account for our share-based compensation by recognizing the grant date fair value of share-based awards, net of estimated forfeitures, as compensation expense over the underlying requisite service periods of the related awards. The following table presents total share-based compensation expense, which is a non-cash charge, included in the Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Direct cost of services	$	676	$	19	$	2,053	$	66
Selling, general and administrative expense	2,881		684		8,430		4,913

Total share-based compensation expense	$	3,557	$	703	$	10,483	$	4,979

Included in pretax share-based compensation expense for the three and nine months ended September 30, 2015, is $2.0 million and $6.2 million of expense, respectively, related to fiscal year 2015 executive officer and employee incentive compensation awards that we plan to settle in Epiq common stock. The accrual is recorded in “Accrued compensation” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2015.

Nonvested Share Awards

During the first quarter of 2015, we granted an aggregate of 340,000 shares of performance-based restricted stock awards (“2015 Performance RSAs”) to executive officers and senior management of the Company, with a weighted-average grant date fair value of $18.17 per share. The vesting of the executive officer 2015 Performance RSAs requires certification by the compensation committee of the Board (the “Compensation Committee”) of the achievement of certain company financial performance criteria for the calendar year ending December 31, 2015. If achievement is certified by the Compensation Committee, the 2015 Performance RSAs will vest over the service period, which generally ranges from one to three years from the grant date. The vesting of the 2015 Performance RSAs is contingent upon continued employment by the participant through vesting date. As of September 30, 2015, we have assessed the likelihood that the performance criteria related to the 2015 Performance RSAs will be met and accordingly have recorded the related expense based on the estimated outcome.

On January 28, 2014, we granted an aggregate of 225,000 shares of performance-based restricted stock awards (“2014 Performance RSAs”) to executive officers of the Company, with a weighted-average grant date fair value of $15.02. On February 20, 2015, the Compensation Committee certified that the performance condition was achieved and the 2014 Performance RSAs vested as of that date.

On February 20, 2015, the Committee approved the grant of 314,869 shares of fully vested common stock, with a weighted-average grant date fair value of $18.28, as payment of 2014 annual incentive compensation to executive officers and employees, which was accrued as a liability and included in “Accrued compensation” on the Condensed Consolidated Balance Sheet as of December 31, 2014.

Additionally, during the nine months ended September 30, 2015, we granted an aggregate of 150,000 shares of service-based restricted stock awards (“Service RSAs”), with a weighted-average grant date fair value of $17.01 per share. Of the 150,000 Service RSAs, 50,000 vested immediately, the remaining 100,000 Service RSAs have vesting periods of one to three years from the grant date.

Stock Options

During the nine months ended September 30, 2015, we granted an aggregate of 175,000 stock options, with a weighted-average exercise price of $17.77. The following table presents the weighted-average assumptions used and the weighted-average fair value per option granted.

		Nine Months Ended September 30, 2015
Expected life of stock option in years		7
Expected volatility		37%
Risk-free interest rate		1.85%
Dividend yield		2.3%
Weighted average grant-date fair value		$5.57

Stock options exercised during the nine months ended September 30, 2015 were 261,548 and had an intrinsic value $0.8 million on the date of exercise. Proceeds from stock options exercised were $3.3 million during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, 1,889 shares of common stock were surrendered to Epiq to satisfy the exercise price of stock options and are included in “Stock option exercises” in the Condensed Consolidated Statements of Changes in Equity. Tax benefits from stock options exercised were $0.3 million during the nine months ended September 30, 2015.

As of September 30, 2015, unrecognized compensation cost related to nonvested share-based awards and stock options was $8.7 million and $1.9 million, respectively, which will be recognized over a weighted-average period of approximately 2.2 years and 2.6 years, respectively.

As of September 30, 2015, there are 517,494 remaining shares available for issuance under the amended and restated Epiq Systems, Inc. 2004 Equity Incentive Plan.

2015 Inducement Plan

On September 3, 2015, the Board adopted the Epiq Systems, Inc. 2015 Inducement Award Plan (the “Inducement Plan”). The Inducement Plan provides for the grant of equity-based awards in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards and shares of Epiq common stock. The Board has reserved 200,000 shares of Epiq common stock for issuance pursuant to equity awards granted under the Inducement Plan to individuals who were not previously employees or non-employee directors of Epiq. The Inducement Plan may be amended or terminated by the Board or the Compensation Committee at any time. The Inducement Plan was adopted in reliance on Nasdaq Listing Rule 5635(c)(4) and did not require shareholder approval. As of September 30, 2015, there have been no stock awards issued under the Inducement Plan.