14.

STOCK COMPENSATION

The following costs related to the Company’s stock compensation plans are included in the consolidated statements of income and comprehensive income:


	2012		2011		2010
Cost of revenues	$	2,809	$	1,365	$	1,314
Selling, general and administrative		4,017		1,501		1,625

Total	$	6,826	$	2,866	$	2,939

On January 16, 2012, the Company issued 194,800 shares of non-vested (“restricted”) common stock to Mr. Robb, President of EU Operations and Executive Vice President. These restricted shares vested 25% on January 16, 2012, and are scheduled to vest 25% on each of January 1, 2013, 2014, and 2015. On termination of Mr. Robb’s service to the Company with Cause or without Good Reason (in each case, as defined in the award agreement), any unvested restricted shares will be forfeited. In addition, under the restricted stock award agreement, Mr. Robb is subject to perpetual confidentiality and non-disclosure obligations as well as non- competition and employee and customer non-solicitation obligations that survive for a period of 12 months after the termination of his service to the Company. Fair market value of these restricted shares on the date of grant was $2,338. The stock-based compensation charge related to the shares granted for the year ended December 31, 2012, was $1,169.

On May 25, 2012, the Company issued 217,272 shares of non-vested stock (“restricted”) common stock in connection with the acquisition of Thoughtcorp (Note 2). The shares vest 50% on each of the first and second anniversaries of the Closing Date. Upon termination of the Sellers’ services to the Company with Cause or without Good Reason (in each case, as defined in the escrow agreement), any unvested shares will be forfeited. Fair value of these shares on the date of grant was $3,607. The stock-based compensation charge related to the shares granted for the year ended December 31, 2012, was $1,096.

On December 18, 2012, the Company issued 326,344 shares of non-vested (“restricted”) common stock in connection with the acquisition of Empathy Lab (Note 2). The shares vest 33.33% on each of the first, second and third anniversaries of the Closing Date. Upon termination of the recipients’ services to the Company with Cause or without Good Reason (in each case, as defined in the escrow agreement), any unvested shares will be forfeited. Fair value of these shares on the date of grant was $6,755. The stock-based compensation charge related to the shares granted for the year ended December 31, 2012, was $79.

2012 Non-Employee Directors Compensation Plan — On January 11, 2012 the Company approved the 2012 Non-Employee Directors Compensation Plan (“2012 Directors Plan”), which will be used to issue equity grants to its non-employee directors. The Company authorized 600,000 shares of common stock to be reserved for issuance under the plan. The 2012 Directors Plan will expire after ten years and will be administered by the Company’s board of directors.

On January 18, 2012, the Company issued 11,764 shares of non-vested (“restricted”) common stock to its non-employee directors under the 2012 Directors Plan. The shares will vest and become non-forfeitable 25% on each of the first four anniversaries of the grant date. On termination of service from the Board at any time, a portion of restricted shares shall vest as of the date of such termination on a pro rata basis, determined by the number of days that the participant served on the Board from the grant date through the date of such termination. Fair market value of these restricted shares on the date of grant was $141. The stock-based compensation charge related to the shares granted for the year ended December 31, 2012, was $34.

On April 5, 2012, the Company granted 7,092 shares of non-vested (“restricted”) stock to its non-employee directors under the 2012 Non-Employee Director Compensation Plan. The restricted stock vests and becomes 100% non-forfeitable on the first anniversary of the grant date. Upon termination of service from the Board at any time, a portion of the restricted stock shall vest as of the date of such termination on a pro rata basis for the number of days that the participant served on the Board from the grant date through the date of such termination. The fair market value of the restricted stock on date of grant was $150. The stock-based compensation charge related to the shares granted for the year ended December 31, 2012, was $111.

2012 Long-Term Incentive Plan — On January 11, 2012 the Company approved the 2012 Long-Term Incentive Plan (“2012 Plan”), which will be used to issue equity grants to employees. The Company authorized 9,246,800 shares of common stock to be reserved for issuance under the plan. This is in addition to 733,808 shares that remained available for issuance under the 2006 Plan as of January 11, 2012 and which are available for issuance under the 2012 Plan. In addition, up to 4,916,394 shares that are subject to outstanding awards as of December 31, 2012, under the 2006 Plan and that expire or terminate for any reason prior to exercise or that would otherwise return to the 2006 Plan’s share reserve will be available for awards to be granted under the 2012 Plan.

During the year ended December 31, 2012, the Company issued 1,443,810 options to purchase common stock under the 2012 Plan with an aggregate grant date fair value of $10,870.

As of December 31, 2012, a total of 8,726,293 shares remained available for issuance under the 2012 Plan.

2006 Stock Option Plan — Effective May 31, 2006, the Board of Directors of the Company adopted the 2006 Stock Option Plan (the “2006 Plan”). The Company’s stock option plan permitted the granting of options to directors, employees, and certain independent contractors. The Compensation Committee of the Board of Directors generally had the authority to select individuals who were to receive options and to specify the terms and conditions of each option so granted, including the number of shares covered by the option, the exercise price, vesting provisions, and the overall option term. In January 2012, the 2006 Plan was discontinued; however, a total of 859,808 shares remain available for issuance under the 2012 Plan as of December 31, 2012. All of the options issued pursuant to the 2006 Plan expire ten years from the date of grant.

Stock option activity under the Company’s plans is set forth below:


	Number of Options			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2010		3,827,312		$	2.30	$	13,277
Options granted		2,774,952			5.77		3,064
Options exercised		(5,600	)		4.63		(13	)
Options forfeited/cancelled		(218,080	)		2.98		(850	)

Options outstanding at December 31, 2010		6,378,584		$	3.79	$	19,708

Options granted		600,000			14.00		1,200
Options exercised		(47,600	)		1.52		(499	)
Options forfeited/cancelled		(335,848	)		5.30		(2,250	)

Options outstanding at December 31, 2011		6,595,136		$	4.65	$	48,447

Options granted		1,443,810			16.80		1,877
Options exercised		(1,552,742	)		3.53		(22,623	)
Options forfeited/cancelled		(189,495	)		11.35		(1,279	)

Options outstanding at December 31, 2012		6,296,709		$	7.51	$	66,682

Options vested and exercisable at December 31, 2012		3,708,466		$	3.72	$	53,328
Options expected to vest		2,432,143		$	12.84	$	12,793

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions:

a. Expected volatility — the Company estimated the volatility of its common stock at the date of grant using historical volatility of peer public companies for the years ended December 31, 2011 and December 31, 2010. In order to compare volatilities for different interval lengths, the Company expresses volatility in annual terms. The Company applied the same approach regarding the stock options issued in 2012 due to insufficiency of historical volatility data of its stock prices at the time of grant. The expected volatility was 46%, 43% and 43% in 2012, 2011 and 2010, respectively.

b. Expected term — the Company estimates the expected term of options granted using the simplified method of determining expected term as outlined in SEC Staff Accounting Bulletin 107 as used for grants. The expected term was 6.25 years in 2012, 2011 and 2010.

c. Risk-free interest rate — the Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. The risk-free rate was approximately 1.13%, 2.05% and 1.78% in 2012, 2011 and 2010.

d. Dividends — the Company uses an expected dividend yield of zero since it has never declared or paid any dividends on its common stock. The Company intends to retain any earnings to fund future growth and the operation of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

Additionally, the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. It uses a combination of historical data and other factors to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

As of December 31, 2012 there was $23,449 of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over the next two years using the weighted average method.

During the fourth quarter of 2010, the Company modified certain parameters pertaining to the stock option award issued on August 13, 2010. Summary of the key terms of the modification follows:


	After modification		Before modification
Number of grantees		20		20
Number of options granted		604,960		552,000
Strike price	$	6.88	$	4.63

The modification had no impact on the estimated costs related to the stock options issued on August 13, 2010.

Summary of restricted stock activity as of December 31, 2012, and changes during the years ended December 31 is presented below:


	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Unvested restricted stock outstanding at January 1, 2010		—		$	—
Restricted stock granted		—			—
Restricted stock vested		—			—

Unvested restricted stock outstanding at December 31, 2010		—		$	—
Restricted stock granted		—			—
Restricted stock vested		—			—

Unvested restricted stock outstanding at December 31, 2011		—		$	—
Restricted stock granted		757,272			17.15
Restricted stock vested		(97,400	)		12.00

Unvested restricted stock outstanding at December 31, 2012		659,872		$	17.92