Earnings per Share and Stock-Based Compensation

9 Months Ended

Jul. 31, 2011

Earnings per Share and Stock-Based Compensation [Abstract]

Earnings per Share and Stock-Based Compensation

Earnings per Share and Stock-Based Compensation

The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options, warrants and shares of restricted stock computed using the treasury stock method.

The table below sets forth the reconciliation of the denominator of each net income (loss) per share calculation:


	Three months ended				Nine months ended
	July 31,				July 31,
In thousands	2011		2010		2011		2010
Shares used in computing basic net income (loss) per share		162,822		129,756		162,198		128,000
Dilutive effect of stock options and restricted stock⁽¹⁾		5,044		5,318		—		3,617
Dilutive effect of stock warrants⁽¹⁾		15,622		15,114		—		12,006

Shares used in computing diluted net income (loss) per share		183,488		150,188		162,198		143,623


⁽¹⁾		For the three months ended July 31, 2011 and 2010, additional stock options outstanding of 10,493,000 and 10,501,000, respectively, and additional warrant shares outstanding of 10,032,000 and 10,540,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method. For the nine months ended July 31, 2011, the shares used in computing diluted net loss per share do not include 5,185,000 dilutive stock options and shares of restricted stock, nor 15,305,000 dilutive warrant shares as the effect is anti-dilutive given the Company’s loss. For the nine months ended July 31, 2011 and 2010, additional stock options outstanding of 10,679,000 and 11,862,000, respectively, and additional warrant shares outstanding of 10,349,000 and 13,648,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method.

The Company accounts for stock-based compensation under the fair value recognition provisions of ASC 718 “Stock Compensation.” Stock-based compensation expense is included as selling, general and administrative expense for the period.

In June 2011, the Company granted performance based options and performance based restricted stock units to certain key employees and executives. In addition to a required service period, the vesting of the options is contingent upon a combination of the Company’s achievement of specified annual performance targets and specified common stock price thresholds, while the vesting of the restricted stock units is contingent upon a required service period as well as the Company’s achievement of a specified common stock price threshold. The Company believes that the granting of these awards serves to further align the interests of its employees and executives with those of its stockholders. Based on the vesting contingencies in the awards, the Company used a Monte-Carlo simulation in order to determine the grant date fair values of the awards. The assumptions used in the Monte-Carlo simulation for the options and restricted stock units included a risk-free interest rate of 3.0% and 1.7%, respectively, volatility of 67.3% and 82.0%, respectively, and zero dividend yield. Additionally, the options were assumed to be voluntarily exercised, or canceled if underwater, at the midpoint of vesting and the contractual term. The weighted average fair value of the options was $3.21 and the weighted average fair value of the restricted stock units was $3.88.

Activity related to performance based options and performance based restricted stock units for the nine months ended July 31, 2011 is as follows:


			Performance
			Restricted Stock
	Performance Options		Units
Non-vested, October 31, 2010		—		—
Granted		936,000		7,520,000
Vested		—		—
Canceled		—		—


Non-vested, July 31, 2011		936,000		7,520,000

As of July 31, 2011, the Company had approximately $2.8 million and $23.6 million of unrecognized compensation expense, net of estimated forfeitures, related to the performance options and the performance restricted stock units, respectively. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 4.0 years and 1.5 years, respectively.

For non-performance based options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the nine months ended July 31, 2011 and 2010, options were valued assuming a risk-free interest rate of 1.9% and 2.7%, respectively, volatility of 82.4% and 73.9%, respectively, zero dividend yield, and an expected life of 5.3 and 6.4 years, respectively. The weighted average fair value of options granted was $3.39 and $1.03 for the nine months ended July 31, 2011 and 2010, respectively. The Company records stock compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2011, the Company had approximately $6.5 million of unrecognized compensation expense, for non-performance based options, expected to be recognized over a weighted average period of approximately 1.9 years.

Changes in shares under option, excluding performance options, for the nine months ended July 31, 2011 are as follows:


				Weighted		Weighted		Aggregate
Dollar amounts in thousands,				Average		Average		Intrinsic
except per share amounts	Shares			Price		Life		Value
Outstanding, October 31, 2010		12,731,430		$	4.48
Granted		2,315,000			5.01
Exercised		(750,871	)		3.94			$	806
Canceled		(882,512	)		7.66


Outstanding, July 31, 2011		13,413,047		$	4.40		6.3	$	20,263


Options exercisable, July 31, 2011		5,982,373		$	5.68		3.9	$	5,998

Changes in non-vested shares under option, excluding performance options, for the nine months ended July 31, 2011 are as follows:


				Weighted-
				Average Grant
	Shares			Date Fair Value
Non-vested, October 31, 2010		7,838,750		$	1.06
Granted		2,315,000			3.39
Vested		(2,453,067	)		1.02
Canceled		(270,009	)		0.85


Non-vested, July 31, 2011		7,430,674		$	1.80

In March 2006, the Company’s shareholders approved the 2006 Restricted Stock Plan and in March 2007, the Company’s shareholders approved an amendment to the 2000 Stock Incentive Plan whereby restricted stock and restricted stock units can be issued from such plan. Stock issued under these plans generally vests from three to five years. In March 2010, the Company’s shareholders approved a grant of 3 million shares of restricted stock to a Company sponsored athlete, Kelly Slater. In accordance with the terms of the related restricted stock agreement, 1,800,000 shares have already vested, with the remaining 1,200,000 shares to vest in two equal, annual installments in April 2012 and 2013. In March 2011, the Company’s shareholders approved an amendment to the 2000 Stock Incentive Plan that increased the maximum number of total shares and the maximum number of restricted shares issuable under the plan by 10 million shares.

Changes in restricted stock for the nine months ended July 31, 2011 are as follows:


	Shares
Outstanding, October 31, 2010		2,842,004
Granted		120,000
Vested		(840,335	)
Forfeited		—

Outstanding, July 31, 2011		2,121,669

Compensation expense for restricted stock is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria, if any, and will adjust the amortization period as appropriate. As of July 31, 2011, there had been no acceleration of any amortization periods. As of July 31, 2011, the Company had approximately $2.7 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.1 years.