Note 6 - Share-Based Compensation

9 Months Ended

Jul. 31, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

6. SHARE-BASED COMPENSATION

Share-based award plans.  In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights (none issued) and restricted stock. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Equity granted under the 2004 Plan generally vests in equal increments over four years and stock options expire in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two years.

The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2.7 million of which no more than 1.9 million may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 1.1 million of which no more than 0.8 million may be granted as restricted stock.

In January 2009, our board of directors adopted and, in March 2009, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (as amended and restated on January 28, 2009) (the “Amended 2004 Plan”). The Amended 2004 Plan increased the number of shares available for issuance in addition to other related technical changes. Subject to the Amended 2004 Plan, the aggregate number of shares that may be granted under the Amended 2004 Plan may not exceed 5.2 million shares of which no more than 2.6 million shares may be granted as restricted stock.

As of July 31, 2012, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 1.0 million and 0.2 million shares available for grant, respectively.

A summary of activity related to stock options is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Outstanding at November 1, 2011		4,638		$	14.04
Granted		440			12.20
Exercised		(1,495	)		10.86
Forfeited or expired		(338	)		17.51
Outstanding at July 31, 2012		3,245		$	14.90		5.6	$	12,093
Fully vested and expected to vest at July 31, 2012		3,213		$	14.93		5.5	$	11,991
Exercisable at July 31, 2012		2,165		$	17.29		4.1	$	7,209

For the three and nine months ended July 31, 2012, we granted 0.01 million and 0.4 million stock options with a weighted average grant date fair value of $7.39 and $6.26, respectively. The weighted average grant date fair value of stock options granted during the three and nine months ended July 31, 2011 was $5.53 and $10.86, respectively.

For the three and nine months ended July 31, 2012, 0.2 million and 1.5 million stock options were exercised, respectively. The tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of July 31, 2012, there was approximately $4.1 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 1.8 years.

A summary of activity related to restricted stock is presented below:

	Shares			Weighted Average Grant-Date Fair Value		Remaining Vesting Period		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Nonvested at November 1, 2011		394		$	10.53
Granted		455			12.35
Vested		(136	)		11.40
Forfeited		(50	)		9.23
Nonvested at July 31, 2012		663		$	11.70		1.6	$	9,679
Expected to vest		636		$	11.69		1.6	$	9,297

The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of July 31, 2012, there was approximately $6.0 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 1.9 years.

Recognition of compensation expense.  The following table shows information about compensation costs recognized:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2012			2011			2012			2011
	(In thousands)
Compensation costs:
Stock options	$	363		$	483		$	1,366		$	1,471
Restricted stock		651			223			1,697			713
Total compensation cost	$	1,014		$	706		$	3,063		$	2,184
Related tax benefit	$	(375	)	$	(245	)	$	(1,088	)	$	(761	)

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on a combination of implied and historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. Risk free interest rate is based on U.S. Treasury rates appropriate for the expected term. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:

	Three Months Ended July 31, 2012			Nine Months Ended July 31, 2012
Option valuation assumptions:
Expected dividend yield	None			None
Expected volatility		62.2	%		64.8	%
Risk-free interest rate		0.6	%		0.7	%
Expected term (in years)	4.4			4.5