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Earnings per Share and Stock-Based Compensation

9 Months Ended

Jul. 31, 2012

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 July 31,				Nine months ended July 31,
In thousands	2012		2011		2012		2011
Shares used in computing basic net income (loss) per share		164,518		162,822		163,930		162,198
Dilutive effect of stock options and restricted stock⁽¹⁾		1,918		5,044		—		—
Dilutive effect of stock warrants⁽¹⁾		7,463		15,622		—		—

Shares used in computing diluted net income (loss) per share		173,899		183,488		163,930		162,198

⁽¹⁾ For the three months ended July 31, 2012 and 2011, additional stock options outstanding of 11,958,000 and 10,493,000, respectively, and additional warrant shares outstanding of 18,191,000 and 10,032,000, 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, 2012 and 2011, the shares used in computing diluted net loss per share do not include 3,345,000 and 5,185,000, respectively, of dilutive stock options and shares of restricted stock, nor 11,826,000 and 15,305,000, respectively, of dilutive warrant shares as the effect is anti-dilutive given the Company’s loss. For the nine months ended July 31, 2012 and 2011, additional stock options outstanding of 10,995,000 and 10,679,000, respectively, and additional warrant shares outstanding of 13,828,000 and 10,349,000, 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. In May 2012, the Company granted additional performance based restricted stock units. 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. For the June 2011 grant, 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. The exercise price of the performance based options is $4.65. For the May 2012 grant, the assumptions used in the Monte-Carlo simulation for the restricted stock units included a risk-free interest rate of 0.7%, volatility of 91.4%, 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 expected life assumption). 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 for the June 2011 grant and $2.27 for the May 2012 grant.

Activity related to performance based options and performance based restricted stock units for the nine months ended July 31, 2012 is as follows:


	Performance Options		Performance Restricted Stock Units
Non-vested, October 31, 2011		936,000		7,520,000
Granted		—		700,000
Vested		—		—
Canceled		—		(590,625	)

Non-vested, July 31, 2012		936,000		7,629,375

As of July 31, 2012, the Company had approximately $2.0 million and $8.3 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 3.1 years and 0.7 years, respectively.

For non-performance based options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Expected 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, 2012 and 2011, options were valued assuming a risk-free interest rate of 1.1% and 1.9%, respectively, volatility of 76.5% and 82.4%, respectively, zero dividend yield, and an expected life of 7.1 and 5.3 years, respectively. The weighted average fair value of options granted was $2.58 and $3.39 for the nine months ended July 31, 2012 and 2011, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2012, the Company had approximately $3.0 million of unrecognized compensation expense, for non-performance based options, expected to be recognized over a weighted average period of approximately 1.6 years.

Changes in shares under option, excluding performance options, for the nine months ended July 31, 2012 are as follows:


Dollar amounts in thousands, except per share amounts	Shares			Weighted Average Price		Weighted Average Life		Aggregate Intrinsic Value
Outstanding, October 31, 2011		13,399,381		$	4.40
Granted		375,000			3.66
Exercised		(104,664	)		2.17			$	153
Canceled		(834,302	)		3.98

Outstanding, July 31, 2012		12,835,415		$	4.42		5.4	$	4,286

Options exercisable, July 31, 2012		7,199,073		$	5.23		3.9	$	2,072

Changes in non-vested shares under option, excluding performance options, for the nine months ended July 31, 2012 are as follows:


	Shares			Weighted- Average Grant Date Fair Value
Non-vested, October 31, 2011		7,356,508		$	1.81
Granted		375,000			2.58
Vested		(2,022,824	)		2.06
Canceled		(72,342	)		1.78

Non-vested, July 31, 2012		5,636,342		$	1.77

In March 2007, the Company’s stockholders 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 stockholders approved a grant of 3,000,000 shares of restricted stock to a Company sponsored athlete, Kelly Slater. In accordance with the terms of the related restricted stock agreement, 2,400,000 shares have already vested, with the remaining 600,000 shares to vest in April 2013. In March 2011 and 2010, the Company’s stockholders 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 10,000,000 shares and 300,000 shares, respectively.

Changes in restricted stock for the nine months ended July 31, 2012 are as follows:


	Shares
Outstanding, October 31, 2011		1,911,669
Granted		105,000
Vested		(875,002	)
Forfeited		(60,000	)

Outstanding, July 31, 2012		1,081,667

Compensation expense for restricted stock is determined using the intrinsic value method and expected forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. As of July 31, 2012, the Company had approximately $0.7 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.1 years.