Stockholders' Equity and Stock-based Compensation Arrangements

3 Months Ended

Mar. 31, 2013

Stockholders' Equity and Stock-based Compensation Arrangements

Stockholders' Equity and Stock-based Compensation Arrangements

(10) Stockholders’ Equity and Stock-based Compensation Arrangements

We have a Stockholder Rights Plan, an Employee Stock Purchase Plan, and Stock Plans, all of which are discussed fully in our Annual Report on Form 10-K for the period ended December 31, 2012.

The compensation cost and the income tax benefit recognized for these plans are as follows:

	Three Months Ended March 31,
	2013		2012
Compensation cost included in:
Basic income per share	$	0.01	$	0.01
Diluted income per share	$	0.01	$	0.01
Stock-based compensation expense	96		111
Income tax benefit	21		26

We measure the fair value of options on their grant date, including the valuation of the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricing model. The risk-free interest rate is based on the weighted-average of U.S. Treasury rates over the expected life of the stock option or the contractual life of the option feature in the Purchase Plan.

The expected life of a stock option is based on historical data of similar option holders. We have segregated our employees into two groups based on historical exercise and termination behavior. The expected life of the option feature in the Purchase Plan is the same as its contractual life. Expected volatility is based on historical volatility of our stock over the expected life of the option, as our options are not readily tradable.

There were no options granted during the three months ended March 31, 2013 or 2012. The following table sets forth information regarding the Stock Plans:

	Number of Options	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2013	641,050	$	22.12
Outstanding, March 31, 2013	641,050	$	22.12	4.8	$	2,799

Exercisable, March 31, 2013	589,050	$	22.76	4.7	$	2,291

There was no option activity during the three month period ended March 31, 2013. The total intrinsic value of the options exercised during the three month period ended March 31, 2012 was $0.1 million. As of March 31, 2013, there was $0.2 million of unrecognized compensation cost related to nonvested share-based compensation arrangements. This compensation is expected to be recognized over a weighted-average period of approximately one year. Cash received from option exercises under the Stock Plans for the three month period ended March 31, 2012 was $0.1 million.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended March 31,
	2013	2012
Risk-free interest rate	0.2%	0.2%
Weighted-average expected life of option feature (in years)	1.0	1.0
Expected volatility of underlying stock	28.7%	28.6%
Expected dividends	n/a	n/a
Weighted-average fair value of option feature	$5.98	$7.19

	Number of Options		Weighted- Average Exercise Price		Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2013	12,641		$	20.56
Shares subscribed	7,389		20.56
Exercised	—		—
Forfeited	(664	)	20.56
Outstanding, March 31, 2013	19,366		$	20.56	0.3	$	65

STEINWAY MUSICAL INSTRUMENTS INC 10-Q