Note 6 - Share-Based Compensation

3 Months Ended

Jan. 31, 2013

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 January 31, 2013, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 0.6 million and 0.2 million shares available for grant, respectively.  In December 2012 our board of directors adopted the 2012 Stock Incentive Plan (the “2012 Plan”), which is subject to and effective upon shareholder approval at the meeting of shareholders to be held on March 14, 2013.  Assuming shareholders approve the 2012 Plan, the 2012 Plan will be effective as of March 14, 2013 and the Amended 2004 Plan and the 2004 Directors’ Plan will terminate on that date (except with respect to awards previously granted under the Amended 2004 Plan and the 2004 Directors’ Plan that remain outstanding).  The 2012 Plan will serve as the successor to our plans described above and includes 6.7 million new awards available for grant as well as the shares available for grant or subject to outstanding awards under the Amended 2004 Plan and the 2004 Directors’ Plan.

The 2012 Plan includes a variety of forms of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents.  Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant.  Each share issued in connection with an award granted on or after the effective date other than stock options and stock appreciation rights will be counted against the 2012 Plan's share reserve as 1.67 shares for every one share issued in connection with such award (and shall be counted as 1.67 shares for each one share that is returned or deemed not to have been issued from the 2012 Plan). Any shares covered by an award which is forfeited, canceled or expires shall be deemed not to have been issued for purposes of determining the maximum number of shares which may be issued under the 2012 Plan.

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, 2012		3,010		$	14.68
Granted		522			13.13
Exercised		(87	)		6.13
Forfeited		(5	)		15.09
Expired		(329	)		26.21
Outstanding at January 31, 2013		3,111		$	13.44		6.3	$	11,922
Fully vested and expected to vest at Janaury 31, 2013		3,051		$	13.46		6.2	$	11,794
Exercisable at January 31, 2013		1,935		$	14.45		4.6	$	8,385

For the three months ended January 31, 2013 and 2012, we issued 0.5 and 0.4 million stock options, respectively, with an aggregate fair market value of $3.4 million and $2.7 million, respectively. For the three months ended January 31, 2013, 0.1 million stock options were exercised, 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 January 31, 2013, there was approximately $6.6 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 2.0 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, 2012		652		$	11.79
Granted		304			13.13
Vested		(176	)		11.20
Forfeited		-			-
Nonvested at January 31, 2013		780		$	12.45		1.9	$	11,545
Expected to vest		742		$	12.44		1.8	$	10,977

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 January 31, 2013, there was approximately $8.7 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.0 years.

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

	Three Months Ended January 31,
	2013			2012
	(In thousands)
Compensation costs:
Stock options	$	564		$	491
Restricted stock		845			441
Total compensation cost	$	1,409		$	932
Related tax benefit	$	(494	)	$	(324	)

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 the historical volatility of 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 January 31, 2013
Option valuation assumptions:
Expected dividend yield	None
Expected volatility		63.1	%
Risk-free interest rate		0.6	%
Expected term (in years)	4.4