NOTE 10: STOCK OPTIONS AND RESTRICTED STOCK

The Company grants stock options, restricted stock units and restricted stock awards to certain employees and directors of the Company. Total stock-based compensation expense was $6.5 million, $8.4 million and $4.8 million in 2012, 2011 and 2010, respectively, and was included as a component of operating expenses in the consolidated statements of earnings. Excess tax benefits of $6.0 million, $1.3 million and $0.3 million are included in cash provided by financing activities for the years ended 2012, 2011 and 2010, respectively.

As of December 31, 2012, there was $12.2 million of total unrecognized compensation expense related to non-vested stock-based compensation which is expected to be recognized over a period of 2.5 years.

The aggregate number of shares of Common Stock that may be issued or transferred under the incentive stock awards plan is 14,492,585 at December 31, 2012.

Stock Options

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 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. The Company determines the fair value of stock options using a Black-Scholes option pricing model that incorporates expected volatility, expected option life, estimated forfeiture rates, risk-free interest rates, and expected dividend yields.

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.

The Company granted 347,000 stock options during 2010. No stock options were granted in 2012 and 2011. 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 of 3.59%; a dividend yield of .25%; a volatility factor of the expected market price of the Company’s common stock of .41; forfeiture rate of 3.89%; and weighted-average expected life of the option of nine years.

The following table summarizes information about stock options outstanding at December 31, 2012:


	Options Outstanding
			Weighted Average				Options Exercisable
Range of Exercise Prices	Number Outstanding December 31, 2012		Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Exercisable December 31, 2012		Weighted Average Exercise Price
$5.92-10.00		112,968		0.83	$	9.72		112,968	$	9.72
10.01-15.00		1,110,451		4.81		14.05		749,451		14.02
15.01-19.92		289,328		6.89		19.74		30,578		18.23

$5.92-19.92		1,512,747		4.91		14.81		892,997		13.62

The table below summarizes option activity for the year ended December 31, 2012:


	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, 2012		2,849		$	13.78			$	41,252		$	6.38
Granted		—			—				—			—
Exercised		(1,268	)		12.43				(20,033	)		5.91
Forfeited		(68	)		16.21				(783	)		7.38

Outstanding at December 31, 2012		1,513			14.81		4.91 years		20,373			6.74

Expected to Vest at December 31, 2012		1,307			14.79		4.74 years		17,632			6.80

Exercisable at December 31, 2012		893			13.62		3.90 years		13,093			5.93

The aggregate intrinsic value of options exercised was $20.0 million, $5.5 million and $848,000 in 2012, 2011 and 2010, respectively. The total fair value of options vested was $2.2 million, $2.7 million and $3.2 million in 2012, 2011 and 2010, respectively. Income tax benefits resulting from stock option exercises totaled $8.4 million, $2.1 million, and $1.4 million in 2012, 2011 and 2010, respectively.

Restricted Stock

Shares of restricted stock or restricted stock units (collectively, “restricted stock”) 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. As of December 31, 2012, 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.

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 on a straight-line basis over the vesting period. The Company granted 368,000, 266,000 and 300,000 shares of restricted stock at weighted-average fair values of $26.08, $23.57 and $16.20 in 2012, 2011 and 2010, respectively.

The following table summarizes information about restricted stock activity:


	Restricted Stock (In Thousands)			Weighted Average Fair Value
Non-vested at January 1, 2012		415		$	19.64
Granted ¹		368			26.08
Vested		(75	)		16.20
Forfeited		(12	)		27.84

Non-vested at December 31, 2012		696			23.28

Includes 250,000 RSUs granted to certain executive officers that will be eligible to vest on March 31, 2015 assuming certain performance conditions are achieved over three annual performance periods. The Company recognizes compensation cost for its performance-based RSUs over the vesting period based on the probability that the performance condition will be satisfied.

The total fair value of restricted stock vesting during the year was $4.4 million, $5.7 million and $1.5 million in 2012, 2011 and 2010, respectively.

Retirement and Separation-Related Modifications

In connection with the retirement of the Company’s founder and Chairman of the Board, the Company recorded a $10.4 million charge to operating expenses, of which $1.7 million related to the accelerated vesting of 75,000 shares of restricted stock and 25,000 stock options. During 2011, the Company recorded a $3.5 million charge for separation costs primarily related to the immediate vest modification of 150,000 shares of restricted stock and 50,000 stock options related to the separation of the Company’s Chief Executive Officer. The total incremental cost resulting from the modifications, due primarily to increases in the Company’s stock price as of the modification date compared to the grant date, was $1.2 million and $1.3 million in 2012 and 2011, respectively.