Note 10 - Share-Based Payments and Other Compensation

The Amended and Restated 1997 Incentive and Capital Accumulation Plan (2011 Restatement), as amended (“Incentive Plan”) and the 2015 Incentive Compensation Plan (the “2015 Plan”) provide for the grant of stock options, stock appreciation rights, stock awards, performance awards, and stock units to officers, employees and directors of AV Homes. The exercise prices of stock options granted under the Incentive Plan or the 2015 Plan may not be less than the stock exchange closing price of our common stock on the date of grant. Stock option awards under the Incentive Plan and 2015 Plan generally expire 10 years after the date of grant.

As of December 31, 2016, there were an aggregate of 654,591 shares available for grant under the 2015 Plan and 37,546 shares reserved for future issuance relating to restricted stock units previously awarded and currently outstanding under the 2015 Plan. Additionally, as of December 31, 2016, an aggregate of 490,483 shares of our common stock were reserved for future issuance in connection with options and restricted stock units previously awarded under the Incentive Plan.

During 2016, we granted 132,138 service-based shares of restricted stock, which vests ratably over four years, and 198,174 shares of performance-based restricted stock, which will vest, if at all, upon the attainment of certain performance conditions in future periods. Additionally, we granted 22,038 restricted stock units to non-employee directors for service on our Board for the term beginning at the 2016 annual meeting of stockholders, which will vest and be converted into an equivalent number of shares of common stock upon the earlier of the first anniversary of the date of the award and the date immediately preceding the date of AV Homes’ 2017 annual meeting of stockholders, provided that the director is a member of the Board of Directors on such vesting date.

Compensation expense related to the stock option, restricted stock, and restricted stock unit awards during the years ended December 31, 2016, 2015 and 2014 was $2.4 million, $3.1 million and $2.8 million, respectively. During 2016, we did not grant any stock options.

As of December 31, 2016, there was $1.7 million of unrecognized compensation expense related to unvested restricted stock and restricted stock units. That expense is expected to be recognized over a weighted average period of 1.9 years.

As of December 31, 2016, there was $0.7 million of unrecognized compensation expense related to unvested stock options. That expense is expected to be recognized over a weighted average period of 0.7 years.

Under ASC 718, Stock Compensation (“ASC 718”), the fair value of awards of restricted stock and units that do not contain a specified hurdle price condition is based on the market price of our common stock on the date of grant. The fair value of restricted stock awards that contain a specified hurdle price condition is estimated on the grant date using the Monte-Carlo option valuation model. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model. The valuation models require assumptions and estimates to determine expected volatility, expected life, expected dividend yield and expected risk-free interest rates. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. The risk-free interest rate assumption was based on the yield on zero-coupon U.S. Treasury bonds at the award grant date. We also used historical data to estimate forfeiture experience.

The significant weighted average assumptions used for the years ended December 31, 2016, 2015 and 2014 were as follows:


	2016			2015			2014
Dividend yield		—	%		—	%		—	%
Volatility rate		40.5	%		38.0	%		42.6	%
Risk-free interest rate		0.91	%		1.10	%		0.66	%
Expected life (years)		2.91			2.95			2.91
Weighted average fair value of units granted	$	3.37		$	5.95		$	9.30

The stock option activity for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:


	For the Years Ended December 31,
	2016			2015			2014
		Weighted			Weighted			Weighted
		Average			Average			Average
	Stock	Exercise Price		Stock	Exercise Price		Stock	Exercise Price
	Options	Per Share		Options	Per Share		Options	Per Share
Outstanding as of beginning of year	545,036	$	17.01	555,036	$	17.00	585,036	$	16.99
Granted	—		—	—		—	—		—
Exercised	—		—	—		—	—		—
Forfeited	(100,000)		16.80	(10,000)		16.80	(30,000)		16.80
Outstanding as of end of year	445,036	$	17.05	545,036	$	17.01	555,036	$	17.00
Exercisable as of end of year	333,777	$	17.05	272,518	$	17.01	146,259	$	16.99

The weighted average remaining contractual life of stock options outstanding as of December 31, 2016 was 6.8 years.

The performance-based restricted stock, restricted stock and restricted stock units activity for the year ended December 31, 2016 is summarized as follows:


	Performance-Based Restricted Stock			Restricted Stock and Restricted Stock Units
	Performance	Weighted		Restricted		Weighted
	Based	Average		Stock and		Average
	Restricted	Grant Date		Restricted		Grant Date
	Stock	Fair Value		Stock Units	(1)	Fair Value
Outstanding as of beginning of year	235,746	$	8.55	116,592		$	15.57
Granted	198,174		3.37	154,176			10.43
Vested	(10,821)		15.80	(74,571)			13.26
Expired/forfeited/cancelled	(117,556)		7.38	(38,933)			11.95
Outstanding as of end of year	305,543		4.78	157,264			11.75

(1)

Restricted stock shares are considered legally outstanding but are not considered outstanding for accounting purposes until the vesting conditions are satisfied in accordance with authoritative accounting guidance. Additionally, the balances do not include the restricted stock units deferred under our director deferral program discussed below.

Under our director deferral program, non-management directors may elect to defer up to 50% of annual retainer fees, committee fees and chairperson fees, for which the director is credited with a number of stock units based upon the closing price of our common stock on the due date of each payment. Beginning in 2017, non-management directors may defer up to 100% of annual retainer fees and chairperson fees. The number of stock units become distributable as shares of common stock upon the earlier of a date designated by the individual director or the date of the individual’s separation from service as a director. No stock units were distributed as shares to non-management directors during the years ended December 31, 2016, 2015 and 2014. The outstanding balance of restricted stock units under the deferral plan as of December 31, 2016, 2015 and 2014 was 60,955, 50,376 and 42,659, respectively.