Note 12 – Share-Based Compensation

On December 7, 2011 (the "Effective Date"), our shareholders approved the 2012 Stock Option and Incentive Plan (the "2012 Plan"), which is effective through December 7, 2021. As of the Effective Date, no further grants may be granted under our former plan, the Amended and Restated 2002 Stock Option and Incentive Plan (the "2002 Plan" and together with the 2012 Plan, the "Plans"). There are 4,400,000 shares available for grant under the 2012 Plan. The 2012 Plan provides for two types of awards: (1) a full value grant, as defined in the 2012 Plan, under which one award shall reduce the shares available for grant under the 2012 Plan by 1.71 shares, and (2) an option or stock appreciation right grant, under which one award shall reduce the shares available for grant under the 2012 Plan by one share. During the three and six months ended December 31, 2011, options to purchase 36,125 shares of our common stock and 8,412 restricted stock units were granted under the 2012 Plan.

Prior to the Effective Date, we had one share-based compensation plan with shares available for future grants, the 2002 Plan. On December 8, 2010, we amended the 2002 Plan to increase the number of shares available under the 2002 Plan for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units by 1,100,000 to an aggregate amount not to exceed 7,860,000 shares of our common stock. During the six months ended December 31, 2011, options to purchase 454,630 shares of our common stock and 645,558 restricted stock units were granted under the 2002 Plan.

Share-based compensation expense, net was $5.4 million and $5.0 million for the three months ended December 31, 2011 and 2010, respectively, and was $7.9 million and $9.3 million for the six months ended December 31, 2011 and 2010, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation arrangements was $1.5 million for each of the three months ended December 31, 2011 and 2010 and was $2.2 million and $2.6 million for the six months ended December 31, 2011 and 2010, respectively.

Fair Value Determination

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, which uses the assumptions noted in the following table.


	Six Months Ended December 31,
	2011			2010
Expected volatility		48.8% - 66.2	%		63.1 - 73.1	%
Weighted-average volatility		59.4	%		68.8	%
Expected annual dividend	$	0.30		$	0.00
Expected term (in years)		1.70 - 3.87			1.73 - 3.80
Risk-free rate		0.2% - 0.7	%		0.5 - 1.2	%

Groups of option holders (directors, executives and non-executives) that have similar historical behavior are considered separately for valuation purposes. Expected volatilities are based on historical closing prices of our common stock over the expected option term.

We use historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived using the option valuation model and represents the estimated period of time from the date of grant that the option is expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock Option Activity

A summary of option activity under our stock option plans as of December 31, 2011 and changes during the six months ended December 31, 2011 is presented below:


	Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2011		2,489,998		$	56.39		6.36	$	19,270
Granted		490,775			34.98
Exercised		(63,638	)		27.68
Forfeited or expired		(115,639	)		64.43

Outstanding at December 31, 2011		2,801,476		$	52.96		6.58	$	10,061

Exercisable at December 31, 2011		1,777,831		$	60.46		5.46	$	5,174

The weighted-average grant-date fair value of options granted for the three months ended December 31, 2011 and 2010 was $14.12 and $18.13, respectively, and for the six months ended December 31, 2011 and 2010 was $13.26 and $14.75, respectively. The total intrinsic value of options exercised for the three months ended December 31, 2011 and 2010 was $0.7 million and $0.9 million, respectively, and for the six months ended December 31, 2011 and 2010 was $0.9 million and $1.0 million, respectively.

Modification of Certain Stock Option Awards

Prior to fiscal year 2011, certain of the award agreements under the 2002 Plan stated that vested options not exercised were forfeited upon termination of employment for any reason other than death or disability. However, such award agreements provided that the Compensation and Option Committee of our Board of Directors (the "Compensation and Option Committee") could extend the time period to exercise vested options 90 days beyond the employment termination date for certain employees. During the three and six months ended December 31, 2011 and 2010, the Compensation and Option Committee used this authority. This action represented a modification of the terms or conditions of an equity award and therefore was accounted for as an exchange of the original award for a new award. Incremental share-based compensation cost for the excess of the fair value of the new award over the fair value of the original award was immaterial.

Grant of Stock Options with Market Conditions

We granted 330,470 stock options containing a market condition to employees on March 21, 2008. The options vested on March 21, 2011, which was three years from the date of grant based on a comparison of Harman's total shareholder return ("TSR") to the TSR of a selected peer group of publicly listed multinational companies. TSR was measured as the annualized increase in the aggregate value of a company's stock price plus the value of dividends, assumed to be reinvested into shares of the company's stock at the time of dividend payment. The base price used for the TSR calculation of $42.19 was the 20-day trading average from February 6, 2008 through March 6, 2008. The ending price used for the TSR calculation of $49.81 was the 20-day trading average prior to and through March 6, 2011. The grant date fair value of $4.2 million was calculated using a combination of Monte Carlo simulation and lattice-based models. There was no compensation expense for these awards in the three and six months ended December 31, 2011, since the awards had vested in a prior period. Share-based compensation expense for these awards was $0.4 million and $0.7 million for the three and six months ended December 31, 2010.

Restricted Stock Awards

A summary of the status of our nonvested restricted stock as of December 31, 2011 and changes during the six months ended December 31, 2011, is presented below:


	Shares	Weighted Average Grant-Date Fair Value
Nonvested at June 30, 2011	26,000	$	42.71
Vested	(8,000)		64.26

Nonvested at December 31, 2011	18,000	$	33.13

As of December 31, 2011, there was less than $0.1 million of total unrecognized compensation cost related to nonvested restricted stock-based compensation arrangements granted under the 2002 Plan. The weighted average recognition period was 0.2 years. At December 31, 2011, a total of 18,000 shares of restricted stock were outstanding of which 15,000 were granted under the 2002 Plan and 3,000 were granted outside of the 2002 Plan.

Restricted Stock Units

In the six months ended December 31, 2011, we granted 118,546 restricted stock units with earnings per share ("EPS") performance conditions, 118,546 restricted stock units with return on invested capital ("ROIC") performance conditions and 118,546 restricted stock units with market conditions, under the 2002 Plan. The restricted stock units with EPS performance conditions cliff vest three years from the date of grant based on the achievement of certain cumulative EPS levels from fiscal years 2012 through 2014. The restricted stock units with ROIC conditions cliff vest three years from the date of grant based on the achievement of a certain ROIC level in fiscal year 2014. The restricted stock units with market conditions cliff vest three years from the date of grant based on a comparison of our TSR to the TSR of a selected peer group of publicly listed multinational companies. The grant date fair value of the restricted stock units with market conditions of $3.3 million was calculated using a Monte Carlo simulation model. Compensation expense, for both the restricted stock units with performance conditions and the restricted stock units with market conditions, is recognized ratably over the three-year vesting period based on the grant date fair value and our assessment of the probability that the applicable targets will be met, which is reassessed each reporting period.

In the six months ended December 31, 2010, we granted 191,721 restricted stock units with EPS performance conditions and 191,715 restricted stock units with market conditions, under the 2002 Plan. The restricted stock units with EPS performance conditions cliff vest three years from the date of grant based on the attainment of a certain EPS level in fiscal year 2013. The restricted stock units with market conditions cliff vest three years from the date of grant based on a comparison of our TSR to the TSR of a selected peer group of publicly listed multinational companies. The grant date fair value of the restricted stock units with market conditions of $5.2 million was calculated using a Monte Carlo simulation model. Compensation expense, for both the restricted stock units with performance conditions and the restricted stock units with market conditions, is recognized ratably over the three-year vesting period based on the grant date fair value and our assessment of the probability that the applicable targets will be met, which is reassessed each reporting period.

In the six months ended December 31, 2009, we granted 380,400 restricted stock units with performance conditions, under the 2002 Plan. The restricted stock units cliff vest three years from the date of grant based on the attainment of certain performance targets in fiscal year 2012. Compensation expense is recognized ratably over the three-year vesting period, on a straight-line basis, based on the grant date fair value and our assessment of the probability that the performance targets will be met. We have recognized compensation expense based on our estimate of the probability of achieving the targets, which is reassessed each reporting period.

In the six months ended December 31, 2008, we granted 133,507 restricted stock units with performance conditions under the 2002 Plan. These restricted stock units vested in September 2011, based on the attainment of certain performance targets in fiscal year 2011. Compensation expense was recognized ratably over the three-year vesting period, on a straight-line basis, based on the grant date fair value and our assessment of the probability that the performance targets would be met. We recognized compensation expense based on our estimate of the probability of achieving the targets. Approximately 50 percent of the restricted stock units vested based on actual attainment of certain targets.

In the six months ended December 31, 2011 and 2010, we also granted 298,332 and 328,788 restricted stock units, without performance or market conditions, respectively, under the Plans that vest three years from the date of grant.

In January and September 2008, we granted 34,608 and 28,344 cash-settled restricted stock units, respectively, outside the 2002 Plan. These restricted stock units are accounted for as liability awards and are recorded at the fair value at the end of the reporting period in accordance with their vesting schedules. During the three months ended December 31, 2011 and 2010, none of these restricted stock units were settled. During the six months ended December 31, 2011 and 2010, 1,608 and 9,647 of these restricted stock units were settled, respectively, at a cost of $0.1 million and $0.3 million, respectively. At December 31, 2011, and June 30, 2011, 1,608 and 3,216 cash-settled restricted stock units were outstanding, respectively.

A summary of equity classified restricted stock unit activity as of December 31, 2011 and changes during the six months ended December 31, 2011 is presented below:


	Shares
Nonvested at June 30, 2011		1,665,873
Granted		653,970
Vested		(246,456	)
Forfeited		(120,149	)

Nonvested at December 31, 2011		1,953,238

At December 31, 2011, the aggregate intrinsic value of equity classified restricted stock units was $10.0 million and there was $30.8 million of total unrecognized compensation cost related to restricted stock unit compensation arrangements. The weighted average recognition period was 1.7 years.