Note H: Stock Options and Restricted Stock

The Company’s outstanding stock options are exercisable for its Common Stock. The Company estimates the fair value for the options on the grant date using a Black-Scholes option-pricing model. The expected volatility is based on the historical volatility of the Company’s Common Stock over the most recent period generally commensurate with the expected estimated life of each respective grant. The expected lives of options are based on the Company’s historical option exercise experience. Forfeiture assumptions are based on the Company’s historical forfeiture experience. The Company believes that the historical experience method is the best estimate of future exercise and forfeiture patterns. The risk-free interest rates are determined using the implied yield available for zero-coupon United States government issues with a remaining term equal to the expected life of the grant. The expected dividend yields are based on the approved annual dividend rate in effect and market price of the underlying Common Stock at the time of grant. No assumption for a future dividend rate increase has been included unless there is an approved plan to increase the dividend in the near term. Shares are issued from the Company’s treasury shares upon share option exercises.

Under the Aaron’s Management Performance Plan (“AMP Plan”) RSUs are granted quarterly upon achievement of certain pre-tax profit levels during the prior quarter by the employees’ operating units or the overall Company. The RSUs granted under the AMP Plan vest over four to five years from the date of grant. The AMP Plan participants include certain vice presidents, director level employees and other key personnel in the Company’s home office, divisional vice presidents and regional managers.

The results of operations for the year endeds December 31, 2011, 2010 and 2009 include $2.6 million, $3.2 million and $2.4 million, respectively, in compensation expense related to unvested grants. At December 31, 2011, there was $2.7 million of total unrecognized compensation expense related to non-vested stock options which is expected to be recognized over a period of 2.2 years. Excess tax benefits of $1.3 million, $321,000 and $3.9 million are included in cash provided by financing activities for the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award.

Under the Company’s stock option plans, options granted to date become exercisable after a period of two to five years and unexercised options lapse ten years after the date of the grant. Options are subject to forfeiture upon termination of service. The aggregate number of shares of common stock that may be issued or transferred under the incentive stock awards plan is 14,700,556 at December 31, 2011.

The Company granted 347,000 stock options during 2010. The Company did not grant any stock options in 2011 and 2009. The weighted average fair value of options granted was $10.31 in 2010. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2010, respectively: risk-free interest rate 3.59%; a dividend yield of .25%; a volatility factor of the expected market price of the Company’s Common Stock of .41; weighted average assumptions of forfeiture rate of 3.89%; and weighted average expected life of the option of nine years. The aggregate intrinsic value of options exercised was $5.5 million, $848,000 and $13.1 million in 2011, 2010 and 2009, respectively. The total fair value of options vested was $2.7 million and $3.2 million in 2011 and 2010, respectively.

Income tax benefits resulting from stock option exercises credited to additional paid-in capital totaled $2.1 million, $1.4 million, and $4.8 million, in 2011, 2010 and 2009, respectively.

The following table summarizes information about stock options outstanding at December 31, 2011:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding December 31, 2011	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable December 31, 2011	Weighted Average Exercise Price
$ 5.92-10.00	460,661	1.62	$	8.80	460,661	$	8.80
10.01-15.00	2,068,006	5.19		13.97	1,281,506		13.89
15.01-19.92	320,453	7.84		19.70	21,203		16.61

$ 5.92-19.92	2,849,120	4.91	$	13.78	1,763,370	$	12.59

The table below summarizes option activity for the year ended December 31, 2011:


	Options (In Thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in Thousands)			Weighted Average Fair Value
Outstanding at January 1, 2011		3,374		$	13.80			$	43,460		$	6.26
Granted		—			—				—			—
Exercised		(447	)		13.68				(5,469	)		5.45
Forfeited		(78	)		15.21				(886	)		6.18

Outstanding at December 31, 2011		2,849		$	13.78		4.91 years	$	36,760		$	6.38

Exercisable at December 31, 2011		1,763		$	12.59		3.52 years	$	24,848		$	5.93

The weighted average fair value of unvested options was $7.12, $6.66 and $6.08 as of December 31, 2011, 2010 and 2009, respectively. The weighted average fair value of options that vested during 2011, 2010 and 2009 was $5.93, $5.87 and $5.35, respectively.

The Company granted 246,000 and 300,000 RSUs in 2011 and 2010, respectively, and there were no RSUs granted in 2009. The Company granted 20,000 RSAs in 2011. The Company did not grant RSAs in 2010 and 2009. Of the 246,000 RSUs granted in 2011, 225,000 were related to executive grants and 21,000 were granted as part of the AMP plan. The weighted average grant date fair value for RSUs not part of the AMP plan was $23.08 in 2011 and $16.20 in 2010. The weighted average grant date fair value for RSUs granted as part of the AMP plan was $26.19 in 2011. The weighted average grant date fair value for RSAs was $26.34 in 2011.

Shares of restricted stock or restricted stock units may be granted to employees and directors and typically vest over approximately two to five year periods. Restricted stock grants may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. Any shares of restricted stock that are forfeited may again become available for issuance. Compensation cost for restricted stock is equal to the fair market value of the shares at the date of the award and is amortized to compensation expense over the vesting period. Total compensation expense related to restricted stock was $5.7 million, $1.5 million and $1.3 million in 2011, 2010 and 2009, respectively. At December 31, 2011 there was $5.4 million of total unrecognized compensation expense related to non-vested restricted stock which is expected to be recognized over a period of 2.4 years.

During the year 287,000 restricted shares vested, 150,000 of these shares were restricted stock units attributed to an immediate vest modification related to the separation of a key executive, and 137,000 of these shares were restricted stock awards granted in 2006. The total value of shares vesting during the year was $4.0 million for restricted stock units and $3.2 million for restricted stock awards. There were no shares vested under the AMP Plan.

During 2011, the Company recorded a $3.5 million charge for separation costs primarily related to the accelerated vesting of the aforementioned 150,000 restricted stock units and 50,000 stock option previously granted to a former key executive. The total incremental compensation cost resulting from the modification was $1.3 million.

The following table summarizes information about restricted stock activity:


	Restricted Stock (In Thousands)			Weighted Average Grant Price
Outstanding at January 1, 2011		438		$	17.01
Granted		266			23.57
Vested		(287	)		25.24
Forfeited		(2	)		22.84

Outstanding at December 31, 2011		415		$	19.64