Share-Based Compensation

As discussed in Note 13, the Company had a three-for-two stock split effective July 2, 2013. All share information herein has been updated to reflect the effect of this stock split.

We have historically maintained a stock option plan for key employees, directors and consultants (“the 1992 Plan”). The 1992 Plan provided for 9.9 million shares to be issued under the plan in the form of stock options. Under the terms of the plan, the exercise price of shares granted may not be less than 85% of the fair market value at the date of the grant. Options granted to directors prior to May 25, 2004, vest one year from the date of grant and are exercisable for nine years thereafter. Options granted to directors on or after May 25, 2004, vest one-third each year, commencing one year after the date of grant. All other options granted vest at a rate of 20% per year, commencing one year after date of grant, and are exercisable during years 2-10.

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provides an additional 1,687,500 shares that can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Since inception of the plan, non-qualified stock options and restricted stock awards have been granted with the same vesting schedule as the previous plan. Under the LTIP, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant.

The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2013 is $2.0 million and is expected to be recognized over a weighted-average period of 2.3 years.

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the nine months ended September 30, 2013 and 2012 using a Black Scholes Model:



	Nine months ended
	September 30, 2013		September 30, 2012
Director and Officers:
Expected dividend yield	1.19	%	1.23	%
Expected volatility	47.08	%	47.54	%
Risk-free interest rate	1.55	%	1.19	%
Expected life (in years)	7		7

Employees:
Expected dividend yield	1.14	%	1.23	%
Expected volatility	45.92	%	46.00	%
Risk-free interest rate	1.40	%	1.19	%
Expected life (in years)	8		8

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.

The following is a summary of stock options vested and exercisable as of September 30, 2013:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.81-$6.47	74,100	2.27	$	5.50	$	1,561
$6.80-$8.65	209,850	4.58	7.18		4,067
$9.13-$13.05	192,183	7.66	11.32		2,929
Total	476,133	5.46	$	8.59	$	8,557

The following is a summary of stock options vested and exercisable as of September 30, 2012:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.81-$6.47	140,025	2.90	$	5.29	$	1,072
$6.80-$8.65	277,125	4.93	7.43		1,527
$9.13-$11.17	73,650	8.14	10.28		196
$12.20-$14.38	2,250	8.18	12.20		2
Total	493,050	4.85	$	7.27	$	2,797

A summary of option activity under the plans is as follows:



Options	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2012	1,115,513		$	10.15
Granted	47,500		17.70
Exercised	(122,345	)	7.93
Forfeited or Expired	(40,575	)	11.80
Outstanding at September 30, 2013	1,000,093		$	10.70
Exercisable at September 30, 2013	476,133		$	8.59

The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was $1.5 million and $2.1 million, respectively. The cash received from options exercised during the nine months ended September 30, 2013 and 2012 was $1.0 million and $1.1 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.

Under the LTIP, the restricted stock award program offers the opportunity to earn shares of AAON Common Stock over time, rather than options that give the right to purchase stock at a set price. Restricted stock awards granted to directors vest one-third each year. All other restricted stock awards vest at a rate of 20% per year. Restricted stock awards are grants that entitle the holder to shares of common stock subject to certain terms. The fair value of restricted stock awards is based on the fair market value of AAON common stock on the respective grant dates, reduced for the present value of dividends.

These awards are recorded at their fair value on the date of grant and compensation cost is recorded using straight-line vesting over the service period. At September 30, 2013, unrecognized compensation cost related to unvested restricted stock awards was approximately $1.2 million, which is expected to be recognized over a weighted average period of 2.1 years.

A summary of the unvested restricted stock awards is as follows:




Restricted stock	Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2012	96,113		$	12.11
Granted	36,304		19.29
Vested	(35,138	)	12.17
Forfeited	(900	)	8.50
Unvested at September 30, 2013	96,379		$	14.83

A summary of share-based compensation is as follows:



	Three months ended				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Grant date fair value of awards during the period:	(in thousands)
Options	$	110	$	104	$	382	$	2,541
Restricted stock	51		353		700		649
Total	$	161	$	457	$	1,082	$	3,190



Share-based compensation expense:
Options	$	186	$	175	$	647	$	384
Restricted stock	173		86		407		241
Total	$	359	$	261	$	1,054	$	625



Income tax benefit related to share-based compensation:
Options	$	84	$	229	$	376	$	247
Restricted stock	33		5		126		20
Total	$	117	$	234	$	502	$	267