Share Based Payments

The amounts recorded as share based compensation expense consist of stock option and restricted stock grants, common stock issued to employees and directors in lieu of cash payments, and Preferred Stock contributed to the 2012 Retention Plan.

Stock Option Awards

The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding 10 years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over 3 years (one-third each year for 3 years), or cliff vest at the end of 3 years. The Company issues new shares upon the exercise of stock options.

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the six months ended August 31, 2012 and 2013:



	Six Months Ended August 31,
	2012	2013
Risk-Free Interest Rate:	0.7%	0.6% – 1.3%
Expected Dividend Yield:	0%	0%
Expected Life (Years):	4.2	4.3
Expected Volatility:	129.5% – 131.4%	108.9% – 115.9%

The following table presents a summary of the Company’s stock options outstanding at August 31, 2013, and stock option activity during the six months ended August 31, 2013 (“Price” reflects the weighted average exercise price per share):



	Options	Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of period	7,132,459	$	4.31
Granted	381,219	1.77
Exercised (1)	169,500	0.71
Forfeited	15,000	0.70
Expired	551,220	10.91
Outstanding, end of period	6,777,958	3.71		6.4	$	12,380
Exercisable, end of period	3,658,269	6.04		4.5	$	5,525


(1)	The Company did not record an income tax benefit related to option exercises in the six months ended August 31, 2012 and 2013.

The weighted average grant date fair value of options granted during the six months ended August 31, 2012 and 2013, was $0.71 and $1.36, respectively.

A summary of the Company’s nonvested options at August 31, 2013, and changes during the six months ended August 31, 2013, is presented below:



	Options	Weighted Average Grant Date Fair Value
Nonvested, beginning of period	3,188,104	$	0.76
Granted	381,219	1.36
Vested	434,634	0.98
Forfeited	15,000	0.57
Nonvested, end of period	3,119,689	0.80

There were 3.8 million shares available for future grants under the Company’s various equity plans at August 31, 2013. The vesting dates of outstanding options at August 31, 2013 range from September 2013 to March 2017, and expiration dates range from March 2014 to July 2023.

Restricted Stock Awards

The Company grants restricted stock awards to directors annually, and periodically grants restricted stock to employees in connection with employment agreements. Awards to directors are granted on the date of our annual meeting of shareholders and vest on the earlier of (i) the completion of the director’s 3-year term or (ii) the third anniversary of the date of grant. Restricted stock award grants are granted out of the Company’s 2012 Equity Compensation Plan. The Company may also award, out of the Company’s 2012 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares may be immediately lapsed on the grant date.

The following table presents a summary of the Company’s restricted stock grants outstanding at August 31, 2013, and restricted stock activity during the six months ended August 31, 2013 (“Price” reflects the weighted average share price at the date of grant):



	Awards	Price
Grants outstanding, beginning of period	537,405	$	1.72
Granted	802,711	1.60
Vested (restriction lapsed)	286,126	1.46
Forfeited	181	1.73
Grants outstanding, end of period	1,053,809	1.70

The total grant date fair value of shares vested during the six months ended August 31, 2012 and 2013, was less than $0.1 million and $0.4 million, respectively.

Preferred Stock and the 2012 Retention Plan

On April 2, 2012, the shareholders of the Company approved the 2012 Retention Plan and Trust Agreement (the “Trust” or the “2012 Retention Plan”) at a special meeting of shareholders. The Company contributed 400,000 shares of its Preferred Stock to the Trust in connection with the approval of the 2012 Retention Plan. Awards granted under the 2012 Retention Plan entitle the participants to receive a distribution two years from the date of shareholder approval of the plan, provided the participant is still an employee and was an employee upon inception of the plan. Distributions may be in the form of Class A common stock if the Company elects to convert the Preferred Stock to common stock at the then-current conversion ratio prior to distribution. The initial Trustee of the plan is Jeffrey H. Smulyan, our Chairman of the Board, President and Chief Executive Officer.

As of the Trust’s inception and August 31, 2013, no preferred shares have been allocated to individual employees, nor is any individual entitled to any minimum number of shares. As a result, the service inception date for these awards precedes the grant date, and the Company is accounting for the 2012 Retention Plan as a liability plan, using variable accounting. Prior to establishment of a grant date, the Company will estimate the fair value of the shares at each reporting period, and will recognize the compensation expense over a two-year period that began on April 2, 2012. Upon the second anniversary of the Trust’s inception, the Trust’s governance will allocate the shares to individual employees, at which point fully vested shares will be distributed to employees. The Trust is consolidated by the Company and both the assets and deferred compensation obligation of the Trust are accounted for within the applicable preferred stock classification in the accompanying condensed consolidated balance sheets. The Company recognized approximately $0.5 million and $1.5 million of compensation expense related to the 2012 Retention Plan during the six months ended August 31, 2012 and 2013, respectively.

Recognized Non-Cash Compensation Expense

The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the three and six months ended August 31, 2012 and 2013:



	Three Months Ended August 31,				Six Months Ended August 31,
	2012		2013		2012		2013
Station operating expenses	$	296	$	1,213	$	447	$	1,466
Corporate expenses	269		1,206		507		1,616
Stock-based compensation expense included in operating expenses	565		2,419		954		3,082
Tax benefit	—		—		—		—
Recognized stock-based compensation expense, net of tax	$	565	$	2,419	$	954	$	3,082

As of August 31, 2013, there was $3.0 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 1.2 years.