NOTE

— 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,

2016,

the total future compensation cost related to unvested stock-based awards that are expected to vest is $

11.3

million, which will be recognized over a weighted average period of

1.4

years.

During the years ended

December

31,

2016,

2015

and

2014,

the Company recorded compensation related to stock-based awards as follows

	Year Ended December 31,
	2016		2015		2014
	(Dollars in thousands, except per share data)
Cost of revenues	$	2,400	$	1,753	$	3,076
Selling and marketing expenses		247		123		261
General and administrative expenses		2,510		2,079		2,234
Total stock-based compensation expense		5,157		3,955		5,571
Tax effect on stock-based compensation expense		617		440		836
Net effect of stock-based compensation expense	$	4,540	$	3,515	$	4,735

During the

fourth

quarters of

2016,

2015

and

2014,

the Company evaluated the trends in the stock-based award forfeiture rate and determined that the actual rates are

10.3%,

9.66%

and

8.02%,

respectively. This represents an increase of

7%,

20%

and

12%,

respectively, from prior estimates. As a result of the change in the estimated forfeiture rate, there was an immaterial impact on stock-based compensation expense in the respective periods.

Valuation assumptions

Prior to

2016,

he fair value of each grant of stock-based awards was estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The Company’s expected term represented the period that the Company’s stock-based awards were 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. In

2016,

The Company estimated the fair value of the stock-based awards using the Excercise Multiple-Based Lattice Model as it enables a degree of accounting for the complexities of option valuation and reduces the probability of a measurement error.

The dividend yield forecast is expected to be

20%

of the Company’s yearly net profit, which is equivalent to a

1.1%

yearly weighted average dividend rate in the year ended

December

31,

2016.

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,
	2016			2015			2014
For stock options issued by the Company:
Risk-free interest rates		1.3	%		1.4	%		1.7	%
Expected lives (in years)		4.5			4.0			5.1
Dividend yield		1.1	%		0.7	%		0.9	%
Expected volatility		30.7	%		29.2	%		35.1	%
Forfeiture rate (weighted average)		8.4	%		0	%		0	%

Stock-based awards

The

2004

Incentive Compensation Plan

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

months,

25%

after

months, and the remaining

50%

after

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. The

2004

Incentive Plan expired in

May

2012

upon adoption of the

2012

Incentive Plan, except as to share based awards outstanding on that date.

The

2012

Incentive Compensation Plan

May

2012,

the Company

’s shareholders adopted the

2012

Incentive Compensation Plan

(“2012

Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, 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

2012

Incentive Plan, a total of

4,000,000

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

2012

Incentive Plan will vest and become exercisable as follows:

25%

vest

months after the grant date, an additional

25%

vest

months after the grant date, and the remaining

50%

vest

months after the grant date. Options granted to non-employee directors under the

2012

Incentive Plan will vest and become exercisable

one

year after the grant date. Vested stock-based awards

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.

The

2012

Incentive Plan empowers our Board of Directors, in its discretion, to amend the

2012

Incentive Plan in certain respects. Consistent with its authority to amend the Incentive Plan, in

February

2014

the Board adopted and approved certain amendments to the

2012

Incentive Plan. The key amendments are as follows:

Increase of per grant limit: Section

15(a)

of the

2012

Incentive Plan was amended to allow the grant of up to

400,000

shares of our common stock with respect to the initial grant of an equity award to newly hired executive officers in any calendar year. This amendment was adopted by our stockholders on

May

31,

2014;

and

Acceleration of vesting: Section

15(l)

of the

2012

Incentive Plan was amended to clarify our ability to provide in the applicable award agreement that part and/or all of the award will be accelerated upon the occurrence of certain pre-determined events and/or conditions, such as a "change in control" (as defined in the

2012

Incentive Plan, as amended).

February

11,

2014,

the Company granted its Chief Financial Officer options to purchase

32,500

shares of common stock

under the

2012

Incentive Plan. The exercise price of each option is

$24.57,

which represented the fair market value of the Company’s common stock on the grant date. Such options will expire

five

years from the date of grant and will vest in equal annual installments over a period of

three

years from the grant date, subject to acceleration upon a change of control.

The fair value of each stock option on the grant date was

$5.78.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	0.81	%
Expected life (in years)	3.375
Dividend yield	0.80	%
Expected volatility	33.50	%
Forfeiture rate	0.00	%

April

2014,

the Company granted its newly appointed Chief Executive Officer options to purchase up to an aggregate of

400,000

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$29.52

per share, which represented the fair market value of the Company

’s common stock on the date of the grant. Options to purchase

300,000

shares of common stock will expire

six

years following the date of grant and will vest in equal annual installments over

four

years from the grant date, subject to acceleration in the event of a change of control. The remaining options to purchase

100,000

shares of common stock will vest on

March

31,

2021,

subject to acceleration associated with a change of control, and will expire

seven

and a half years from the date of grant.

The fair value of each option on the grant date was

$12.88

for grant of options to purchase

300,000

shares of common stock, and

$8.33

for the grant of options to purchase

100,000

shares of common stock. The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

	Grant of options to purchase 300,000 shares of common stock			Grant of options to purchase 100,000 shares of common stock
Risk-free interest rates		2.36	%		1.64	%
Expected life (in years)		7.25			4.75
Dividend yield		0.90	%		0.90	%
Expected volatility		42.80	%		33.10	%

November

2014,

the Company granted its directors options to purchase

52,500

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$28.23,

which represented the fair market value of the Company

’s common stock on the grant date. Such options will expire

seven

years from the date of grant and will fully vest

one

year from the grant date.

The fair value of each stock option on the grant date was

$7.01.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	1.30	%
Expected life (in years)	4.0
Dividend yield	0.70	%
Expected volatility	32.40	%
Forfeiture rate	0.00	%

November

2015,

the Company granted its directors options to purchase

45,000

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$38.24,

which represented the fair market value of the Company

’s common stock on the grant date. Such options will expire

seven

years from the date of grant and will fully vest

one

year from the grant date.

The fair value of each stock option on the grant date was

$8.68.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	1.35	%
Expected life (in years)	4.0
Dividend yield	0.70	%
Expected volatility	29.20	%
Forfeiture rate	0.00	%

June

13,

2016,

the Company granted its employees, in aggregated

1,080,000

SAR under the Company

’s

2012

Incentive Plan. The exercise price of each SAR is

$42.87,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs will expire

six

years from the date of the grant and will vest over

years as follows:

50%

after

two

years; an additional

25%

after

three

years and the remaining

25%

after

four

years from the grant date.

The fair value of each SAR on the grant date was

$11.98

for senior management and

$11.42

for other employees. The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	1.29	%
Expected life (in years)	6
Dividend yield	1.14
Expected volatility	30.7	%
Forfeiture rate:
Senior management	0.0	%
Other employees	10.5	%
Sub-Optimal Exercise Factor:
Senior management	2.5
Other employees	2.0

November

2016,

the Company granted its directors, in aggregated

60,000

SAR

’s under the Company’s

2012

Incentive Plan. The exercise price of each SAR is

$47.46,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs will expire

seven

years from the date of the grant and will vest at the end of the

first

year from the grant date.

The fair value of each SAR on the grant date was

$14.51.

The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	1.65	%
Expected life (in years)	7
Dividend yield	1.1
Expected volatility	30.6	%
Forfeiture rate:	0.0	%
Sub-Optimal Exercise Factor:	2.5

	Year Ended December 31,
	2016					2015					2014
	Shares (in thousands)			Weighted Average Exercise Price		Shares (in thousands)			Weighted Average Exercise Price		Shares (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,438		$	25.38		4,477		$	27.48		4,710		$	28.23
Granted, at fair value:
Stock Options		1,155			43.01		45			38.24		485			29.05
SARs*		—			—		—			—		—			—
Exercised		(967	)		25.33		(1,589	)		26.77		(243	)		24.10
Forfeited		(57	)		24.12		(125	)		27.33		(116	)		23.20
Expired		(4	)		26.84		(370	)		45.78		(359	)		42.70
Outstanding at end of year		2,565			33.36		2,438			25.38		4,477			27.48
Options and SARs exercisable at end of year		557			25.22		858			26.75		2,106			31.25
Weighted-average fair value of options and SARs granted during the year				$	11.61				$	8.68				$	9.00

__________

*	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,

2016,

1,058,150

shares of the Company’s common stock are available for future grants under the

2012

Incentive Plan. No shares of the Company’s common stock are available for future grants under the

2004

Incentive Plan as of such date.

The following table summarizes information about stock-based awards outstanding at

December

31,

2016

(shares in thousands):

		Options Outstanding						Options Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
$	18.56		15		2.8	$	526		15		2.8	$	526
	19.69		15		2.6		509		15		2.6		509
	20.13		108		2.3		3,608		108		2.3		3,608
	20.54		53		2.3		1,761		28		2.3		934
	23.34		635		2.4		19,226		140		2.4		4,247
	24.57		9		2.1		269		1		2.1		33
	25.65		68		1.3		1,905		68		1.3		1,905
	26.70		15		3.8		404		15		3.8		404
	28.23		30		4.8		762		30		4.8		762
	29.52		400		3.6		9,640		75		3.6		1,807
	29.95		17		0.3		400		17		0.3		400
	35.15		15		6.1		277		-		-		-
	38.24		45		5.8		692		45		5.8		692
	42.87		1,080		5.5		11,610		-		-		-
	47.46		60		6.9		370		-		-		-


			2,565		4.1	$	51,959		557		2.7	$	15,827

The following table summarizes information about stock-based awards outstanding at

December

31,

2015

(shares in thousands):

		Options Outstanding						Options Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
$	18.56		15		3.8	$	269		15		3.8	$	269
	19.69		15		3.6		252		15		3.6		252
	20.13		326		3.3		5,327		69		3.3		1,135
	20.54		100		3.3		1,593		50		3.3		797
	23.34		938		3.4		12,315		126		3.4		1,655
	24.57		33		3.1		387		16		3.1		193
	25.65		135		2.3		1,462		135		2.3		1,462
	26.70		45		4.8		440		45		4.8		440
	26.84		64		0.2		618		64		0.2		618
	28.19		15		1.8		124		15		1.8		124
	28.23		45		5.8		371		45		5.8		371
	29.21		3		1.3		22		3		1.3		22
	29.52		400		4.6		2,780		-		-		-
	29.95		148		1.3		963		148		1.3		963
	34.13		96		0.3		225		96		0.3		225
	38.24		15		6.8		-		-		-		-
	38.50		15		0.8		-		15		0.8		-


			2,438		3.3	$	27,148		857		2.4	$	8,526

The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company

’s stock price of

$53.62

and

$36.47

as of

December

31,

2016

and

2015,

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,

2016

and

2015

was

557,350

and

842,911,

respectively.

The total pretax intrinsic value of options exercised during the year ended

December

31,

2016

and

2015

was $

18.0

million and

$14.1

million, respectively, based on the average stock price of

$43.99

and

$35.64

during the years ended

December

31,

2016

and

2015,

respectively.