Note 14 – Shareholders’ Equity and Share-Based Compensation

Preferred Stock

As of June 30, 2012 and 2011, we had no shares of preferred stock outstanding. We are authorized to issue 5 million shares of preferred stock, $0.01 par value.

Common Stock

We have 200 million authorized shares of common stock, $0.01 par value. At June 30, 2012 and 2011, we had 96,132,542 and 95,520,068 shares issued; 28,846,226 and 25,599,817 shares in treasury stock and 67,286,316 and 69,920,251 shares outstanding (net of treasury stock), respectively.

Share Buy-Back Program

On October 26, 2011, we announced that our Board of Directors authorized the repurchase of up to $200 million of our common stock. This buyback program allows us to purchase shares of our common stock in accordance with applicable securities laws on the open market, or through privately negotiated transactions, through October 25, 2012. We will determine the timing and the amount of any repurchases based on an evaluation of market conditions, share price and other factors. We entered into an agreement with an external broker, which provides the structure under which the program may be facilitated. This agreement and the buyback program may be suspended or discontinued at any time. As of June 30, 2012, we have repurchased 3,246,409 shares under the buyback program.

Share-Based Compensation

On June 30, 2012, we had one share-based plan with shares available for future grants, the 2012 Stock Option and Incentive Plan (the “2012 Plan”), which is described below. The compensation expense for share-based compensation was $17.4 million, $18.0 million and $21.3 million for the years ended June 30, 2012, 2011 and 2010, respectively. The total income tax benefit recognized in our Consolidated Income Statement for share-based compensation arrangements was $5.6 million, $5.2 million and $5.2 million for the years ended June 30, 2012, 2011 and 2010, respectively. Share-based compensation was slightly lower for the year ended June 30, 2012 compared to the prior fiscal year due to income recognized related to forfeitures in connection with a grant of performance stock options that vested in fiscal year 2012. Share-based compensation was lower for the year ended June 30, 2011 compared to the prior fiscal year due to income recognized related to forfeitures in connection with a grant of performance stock options that vested in fiscal year 2011, as well as fewer stock options outstanding in fiscal year 2011.

2012 Plan

On December 7, 2011 (the “Effective Date”), our shareholders approved the 2012 Stock 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, as amended (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. Shares may be issued as original issuances, treasury shares or a combination of both. Option awards are granted with an exercise price equal to the market price of our stock on the date of the grant. The option awards generally vest over three to five years of continuous service commencing one year from the date of the grant and expire after ten years. During the year ended June 30, 2012, options to purchase 141,100 shares of our common stock and 22,731 restricted stock units were granted under the 2012 Plan. As of June 30, 2012, there were 4,236,169 shares available for grant under the 2012 Plan.

2002 Plan

Prior to the Effective Date, we had one share-based compensation plan with shares available for 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. Under the 2002 Plan, shares were permitted to be issued as original issuances, treasury shares or a combination of both. Option awards were granted with an exercise price equal to the market price of our stock on the date of the grant. The option awards granted under the 2002 Plan generally vest over three to five years of continuous service commencing one year from the date of the grant and expire after ten years. During the year ended June 30, 2012, options to purchase 454,630 shares of our common stock and 645,558 restricted stock units were granted under the 2002 Plan. At June 30, 2012, there were no shares available for grant under the 2002 Plan.

Restricted Stock Awards

A grant of restricted stock involves the immediate transfer of ownership of a specified number of shares of common stock with a “substantial risk of forfeiture” for a period of at least three years. A participant who receives a restricted stock grant is entitled immediately to voting, dividend and certain other share ownership rights associated with the underlying shares of common stock. At June 30, 2012, a total of 3,000 shares of restricted stock were outstanding which were granted outside of the 2002 Plan.

Restricted Stock Units

A grant of restricted stock units involves an agreement by our Company to deliver a specified number of shares of common stock or cash to the participant when the award vests. A participant has no ownership or voting rights associated with the underlying shares of common stock. Our Board of Directors may, at its discretion, authorize the payment of dividend equivalents on the restricted stock units. At June 30, 2012, a total of 1,942,122 restricted stock units were outstanding, of which 1,940,514 restricted stock units were granted under the Plans and 1,608 were granted outside of the Plans.

Stock Appreciation Rights

Stock appreciation rights allow the holders to receive a predetermined percentage of the spread, not to exceed 100 percent, between the option price and the fair market value of the shares on the date of exercise. The performance period will not be less than three years. We granted 10,807 stock appreciation rights in fiscal year 2012 under the 2012 Plan. No stock appreciation right or performance unit grants have been made under the Plans during fiscal years 2011 and 2010. At June 30, 2012, a total of 10,807 stock appreciation rights were outstanding.

1992 Incentive Plan

We also have options outstanding under our 1992 Incentive Plan. Shares under the 1992 Incentive Plan can be issued as original issuances or treasury shares or a combination of both. Options to purchase 45,600 shares with expiration dates through November 8, 2012 are outstanding under our 1992 Incentive Plan. The 1992 Incentive Plan was approved by our stockholders and had no shares available for grant at June 30, 2012.

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.


	Year Ended June 30,
	2012			2011			2010
Expected volatility		48.8 – 66.2	%		60.4 – 73.2	%		59.9 – 79.0	%
Weighted-average volatility		59.1	%		68.8	%		68.9	%
Expected annual dividend	$	0.30		$	0.10			0
Expected term (in years)		1.70 – 5.54			1.71 – 3.80			1.86 – 3.98
Risk-free rate		0.2 – 1.0	%		0.5% – 1.7	%		0.61% – 2.19	%

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. The expected annual dividend was only applicable for grants in the third and fourth quarters of fiscal year 2011, as these were the quarters when dividends were declared. The expected annual dividend was applicable for grants in fiscal year 2012, as dividends were declared in all fiscal year 2012 quarters.

Stock Option Activity

A summary of option activity under our stock option plans for the fiscal year ended June 30, 2012 and changes during the year are presented below:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2011		2,489,998		$	56.39		6.36	$	19,270
Granted		584,923			36.71
Exercised		(422,949	)		31.52
Forfeited or expired		(241,254	)		77.35

Outstanding at June 30, 2012		2,410,718			54.71		6.42	$	9,359

Exercisable at June 30, 2012		1,421,730		$	66.53		5.04	$	3,826

The weighted-average grant-date fair value of options granted during the years ended June 30, 2012, 2011 and 2010 was $14.34, $14.76 and $12.82, respectively. The total intrinsic value of options exercised during the years ended June 30, 2012, 2011 and 2010 was $7.0 million, $6.0 million and $2.4 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 each of the fiscal years ended June 30, 2012, 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. The value of the options was based on a comparison of our total shareholder return (“TSR”) to 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 was $42.19 which was the 20-day trading average from February 6, 2008 through March 6, 2008. The ending price used for the TSR calculation 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 expense recognized for these awards in fiscal year 2012, since the awards vested in fiscal year 2011. Share-based compensation expense for this grant was income of $1.5 million and expense of $1.4 million for the fiscal years ended June 30, 2011 and 2010, respectively. A net benefit was recognized in the fiscal year ended June 30, 2011 due to forfeitures for employees who did not meet the service requirements and therefore did not vest in the options. No expense was recognized for these awards in the fiscal year ended June 30, 2012.

Restricted Stock Awards

A summary of the status of our nonvested restricted stock awards as of June 30, 2012 and changes during the fiscal year ended June 30, 2012 is presented below:


	Shares			Weighted Average Grant-date Fair Value
Nonvested at June 30, 2011		26,000		$	42.71
Vested		(23,000	)		33.07

Nonvested at June 30, 2012		3,000		$	116.65

As of June 30, 2012, there was $0.1 million of total unrecognized compensation cost related to nonvested restricted stock-based compensation arrangements granted under the Plans. The weighted average recognition period is less than 0.1 years.

Restricted Stock Units

In the fiscal year ended June 30, 2012, 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 fiscal year ended June 30, 2011, 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.

We granted 380,400 and 133,507 restricted stock units with performance conditions in the fiscal years ended June 30, 2010 and 2009, respectively, under the 2002 Plan. The restricted stock units vest three years from the date of grant based on attainment of certain performance targets in fiscal year 2012 and 2011, respectively. Compensation expense is recognized ratably over the three-year vesting period based on 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. The restricted stock units granted in fiscal year 2009 vested in fiscal year 2012.

In the fiscal years ended June 30, 2012, 2011 and 2010 we also granted 312,651, 329,112 and 388,856 time vesting restricted stock units, respectively, without performance or market conditions, respectively, under the Plans that vest three years from the date of grant, of which 311,500 are to be settled in our common stock and 1,150 are to be settled in cash.

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 fiscal years ended June 30, 2012, 2011 and 2010, 1,608 , 9,647 and 19,213 of these restricted stock units were settled, respectively, at a cost of $0.1 million, $0.3 million and $0.8 million, respectively. At June 30, 2012 and 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 and for the fiscal year ended June 30, 2012 is presented below:


	Restricted Stock Units
Non-vested at June 30, 2011		1,665,873
Granted		668,289
Vested		(246,448	)
Forfeited		(147,200	)

Non-vested at June 30, 2012		1,940,514

At June 30, 2012 the aggregate intrinsic value of equity classified restricted stock units was $76.6 million. As of June 30, 2012, there was $34.8 million of total unrecognized compensation cost related to equity classified restricted stock unit compensation arrangements. The weighted average recognition period was 1.2 years.

Chief Executive Officer Special Enterprise Value Bonus

Our Chief Executive Officer (“CEO”) was granted a special bonus award in November 2007 (the “Special Bonus Award”). The award was to be settled in cash based on a comparison of Harman’s enterprise value at November 2012 to the enterprise value at the grant date in November 2007. This award was originally classified as a liability in our Consolidated Balance Sheet. The fair value of the Special Bonus Award was required to be measured each quarter using a Monte Carlo simulation model.

On September 1, 2009, pursuant to the terms of an amendment to the CEO’s employment letter agreement, the Special Bonus Award was cancelled and replaced with the right to an annual equity award for fiscal years 2011 through 2013 (the “Annual Equity Grant”). On September 1, 2009, both time-based vesting and performance-based vesting restricted stock units were granted to the CEO pursuant to the terms of the Annual Equity Grant. The replacement of the Special Bonus Award with the awards granted pursuant to the Annual Equity Grant was accounted for as a modification of an existing award. As a result of this modification, during the first quarter of fiscal year 2010, approximately $0.5 million was reclassified from a liability to Additional paid-in capital in our Consolidated Balance Sheet and $0.5 million was recognized as compensation expense within SG&A in our Consolidated Statement of Income in the same reporting period and is therefore included in our results for the fiscal year ended June 30, 2010.