12. STOCK-BASED COMPENSATION

Stock Plans

On June 7, 2006, the stockholders approved the QAD Inc. 2006 Stock Incentive Program ("2006 Program"). The 2006 Program replaced the QAD 1997 Stock Incentive Program ("1997 Program"). The 2006 Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted shares, rights to purchase stock, stock appreciation rights ("SARs") and other stock rights. In connection with the Recapitalization and pursuant to the terms of the 2006 Program, the maximum number of authorized shares of stock to be issued or granted as equity awards under the 2006 Program was proportionately reduced by 50% to account for the effective reverse stock split ratio, of which 80% consisted of Class A Common Stock and 20% consisted of Class B Common Stock. All references to the number of shares, stock options, restricted shares, stock appreciation rights and related per-share amounts of the Company's common stock have been restated to reflect the effect of the Recapitalization for all periods presented. The stockholders authorized a maximum of 4,150,000 shares to be issued under the 2006 Program, of which 3,320,000 are reserved for issuance as Class A Common Stock and 830,000 are reserved for issuance as Class B Common Stock. On June 12, 2012, the Company's stockholders approved an amendment to the 2006 Stock Incentive Program to provide for an increase in the number of shares of Class A Common Stock reserved for issuance by 2,000,000 shares. As of January 31, 2013, 2,145,000 Class A Common Shares and 301,000 Class B Common Shares were available for issuance.

After the 2006 Program was adopted, the Company began issuing the majority of equity awards in the form of stock-settled SARs. A SAR is a contractual right to receive value tied to the post-grant appreciation of the underlying stock. Although the Company has the ability to grant stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting, a holder of a stock-settled SAR receives shares in the Company's common stock equal to the intrinsic value of the SAR at time of exercise. Economically, a stock-settled SAR provides the same compensation value as a stock option, but the employee is not required to pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC 718, is the same for stock-settled SARs and stock options. The Company also issues restricted stock units ("RSUs") beginning in fiscal 2008.

Under the 1997 Program and the 2006 Program, non-statutory stock options and SARs have generally been granted for a term of eight years, they generally vest 25% after each year of service for four years and are contingent upon employment with the Company on the vesting date. Since February 1, 2006, there have been no grants of non-statutory stock options. RSUs granted to employees under the 2006 Program are generally released 25% after each year of service for four years and are contingent upon employment with the Company on the release date. Under the 2006 Program and 1997 Program, non-statutory stock options, SARs and RSUs granted to non-employee directors generally vest over one to four years and are contingent upon providing services to the Company. Stock based compensation is typically issued out of treasury shares.

Under both programs, officers, directors, employees, consultants and other independent contractors or agents of the Company or subsidiaries of the Company who are responsible for or contribute to the management, growth or profitability of its business are eligible for selection by the program administrators to participate. However, incentive stock options granted under the programs may only be granted to a person who is an employee of the Company or one of its subsidiaries.

Impact of Recapitalization

In connection with the Recapitalization, the Company's outstanding stock options, RSUs and SARs were adjusted to conform their terms to the Company's capital structure following implementation of the Recapitalization as follows: (i) each ten shares of stock covered by an outstanding option agreement, RSU or SAR agreement was converted, as nearly as possible, into equivalent rights to receive one share of Class B Common Stock and four shares of Class A Common Stock; and (ii) the exercise price per share of stock covered by an outstanding option agreement, RSU and SAR agreement shall be proportionately increased by 100% to account for the effective reverse stock split ratio of the Recapitalization. At January 31, 2013, outstanding under the 1997 Program, there were 175,000 non-statutory stock options to purchase Class A Common Stock and 44,000 non-statutory stock options to purchase Class B Common Stock. Effective with the adoption of the 2006 Program, no further awards were granted using the 1997 Program. At January 31, 2013, outstanding under the 2006 Program, there were 2,301,000 SARs to purchase Class A Common Stock and 400,000 SARs to purchase Class B Common Stock. In addition, at January 31, 2013, outstanding under the 2006 Program, there were 366,000 RSUs of Class A Common Stock and 19,000 RSUs of Class B Common Stock.

Stock- Based Compensation

The following table sets forth reported stock compensation expense included in the Company's Consolidated Statements of Income and Comprehensive Income for the fiscal years ended January 31, 2013, 2012 and 2011.

	Years Ended January 31,
	2013		2012		2011
	(in thousands)
Stock-based compensation expense:
Cost of maintenance, subscription and other revenue	$	197	$	221	$	276
Cost of professional services		482		526		664
Sales and marketing		835		813		1,076
Research and development		658		667		846
General and administrative		2,436		2,280		2,441
Total stock-based compensation expense	$	4,608	$	4,507	$	5,303

The Company presents any benefits of realized tax deductions in excess of recognized compensation expense as cash flow from financing activities in the accompanying Consolidated Statement of Cash Flows. There were $462,000, $33,000 and $384,000 excess tax benefits recorded for equity awards exercised in the fiscal years ended January 31, 2013, 2012 and 2011, respectively.

Option/SAR Information

The weighted average assumptions used to value SARs are shown in the following table.

	Years Ended January 31,
	2013			2012			2011
Expected life in years		4.61			4.52			5.79
Risk free interest rate		0.69	%		0.98	%		2.27	%
Volatility		61	%		67	%		61	%
Dividend rate		2.25	%		2.59	%		2.23	%

The following table summarizes the activity for outstanding options and SARs for the fiscal years ended January 31, 2013, 2012 and 2011:

	Options/ SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2010		2,214		$	11.76
Granted		683			8.95
Exercised		(88	)		6.44
Expired		(58	)		10.42
Forfeited		(98	)		8.93
Outstanding at January 31, 2011		2,653		$	11.33
Granted		502			10.28
Exercised		(164	)		8.08
Expired		(46	)		14.28
Forfeited		(74	)		9.26
Outstanding at January 31, 2012		2,871		$	11.34
Granted		570			12.90
Exercised		(272	)		8.34
Expired		(222	)		22.26
Forfeited		(27	)		9.49
Outstanding at January 31, 2013		2,920		$	11.11		4.7	$	8,576
Vested and expected to vest at January 31, 2013 (1)		2,872		$	11.11		4.7	$	8,440
Vested and exercisable at January 31, 2013		1,524		$	11.28		3.2	$	4,566

____________

(1)	The expected-to-vest options and SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options and SARs.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company's common stock based on the last trading day as of January 31, 2013 and the exercise price for in-the-money stock options and SARs) that would have been received by the holders if all stock options and SARs had been exercised on January 31, 2013. The total intrinsic value of stock options or SARs exercised in the years ended January 31, 2013, 2012 and 2011 was $1.4 million, $0.5 million and $0.3 million, respectively. The weighted average grant date fair value per share of SARs granted in the years ended January 31, 2013, 2012 and 2011 was $5.37, $4.51 and $4.10, respectively.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended January 31, 2013, 2012 and 2011, the Company withheld 35,000 shares, 13,000 shares and 1,000 shares for payment of these taxes. The value of the withheld shares for the fiscal years ended January 31, 2013, 2012 and 2011 were $475,000, $144,000 and $10,000, respectively.

At January 31, 2013, there was approximately $5.3 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted average period of approximately 2.6 years.

RSU Information

The following table summarizes the activity for RSUs for the fiscal years ended January 31, 2013, 2012 and 2011:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2010		475		$	10.74
Granted		128			8.81
Released (1)		(165	)		11.37
Forfeited		(3	)		8.75
Restricted stock at January 31, 2011		435		$	10.02
Granted		174			9.32
Released (1)		(178	)		11.02
Forfeited		(17	)		9.35
Restricted stock at January 31, 2012		414		$	9.32
Granted		200			12.20
Released (1)		(223	)		9.84
Forfeited		(6	)		10.99
Restricted stock at January 31, 2013		385		$	10.49

____________

(1)

The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended January 31, 2013, 2012 and 2011, the Company withheld 57,000 shares, 58,000 shares and 53,000 shares, respectively, for payment of these taxes. The value of the withheld shares for the fiscal years ended January 31, 2013, 2012 and 2011 were $0.7 million, $0.6 million and $0.5 million, respectively.

Total unrecognized compensation cost related to RSUs was approximately $3.0 million as of January 31, 2013. This cost is expected to be recognized over a period of approximately 2.7 years.