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Stockholders' Equity
 6 Months Ended
Oct. 31, 2012
Stockholders' Equity [Abstract]  
Stockholders' Equity

(12) Stockholders’ Equity:

Earnings per Share

The following table provides a reconciliation of the income/(loss) amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three and six months ended October 31, 2012 and 2011 (in thousands, except per share data):

 

                                 
    For the three months ended October 31,     For the six months ended October 31,  
    2012     2011     2012     2011  

Net income/(loss)

                                

Income from continuing operations

   $ 16,401     $ 948     $ 35,272     $ 3,223  

Income/(loss) from discontinued operations, net of tax

     4,784       (2,539 )      3,699       (4,025 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income/(loss)

   $ 21,185     $ (1,591 )    $ 38,971     $ (802 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Weighted average shares outstanding—Basic

     65,871       64,697       65,611       64,613  

Dilutive effect of stock option and award plans

     1,403       413       1,303       517  
   

 

 

    

 

 

    

 

 

    

 

 

  

Diluted shares outstanding

     67,274       65,110       66,914       65,130  
   

 

 

    

 

 

    

 

 

    

 

 

  

Earnings per share—Basic (a)

                                

Income from continuing operations

   $ 0.25     $ 0.01     $ 0.54     $ 0.05  

Income/(loss) from discontinued operations

   $ 0.07     $ (0.04 )    $ 0.06     $ (0.06 ) 

Net income/(loss)

   $ 0.32     $ (0.02 )    $ 0.59     $ (0.01 ) 
         

Earnings per share—Diluted (a)

                                

Income from continuing operations

   $ 0.24     $ 0.01     $ 0.53     $ 0.05  

Income/(loss) from discontinued operations

   $ 0.07     $ (0.04 )    $ 0.06     $ (0.06 ) 

Net income/(loss)

   $ 0.31     $ (0.02 )    $ 0.58     $ (0.01 ) 

 

 

(a) Net income per share may not equal earnings per share from continuing plus discontinued operations due to rounding.

For the three months ended October 31, 2012, 163,542 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the three months ended October 31, 2011, 2,431,906 shares of common stock issuable upon the conversion of Convertible Notes, and 3,077,995 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

For the six months ended October 31, 2012, 229,639 shares of common stock issuable upon exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the six months ended October 31, 2011, 2,431,906 shares of common stock issuable upon conversion of the Convertible Notes, and 2,568,098 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

Stock Option and Employee Stock Purchase Plans

We have two stock option plans (the “SOPs”): the 2001 Stock Option Plan and the 2004 Incentive Stock Plan. New grants under the 2001 Stock Option Plan have not been made since the approval of the 2004 Incentive Stock Plan at our September 13, 2004 annual meeting of stockholders. All new grants covering all participants are issued under the 2004 Incentive Stock Plan.

 

The 2004 Incentive Stock Plan authorizes the issuance of the lesser of (1) 15% of the shares of our common stock outstanding from time to time, or (2) 10,000,000 shares of our common stock. The plan permits the grant of options to acquire common stock, restricted common stock and deferred stock, restricted stock units (“RSUs”), stock appreciation rights, and dividend equivalents. Our board of directors, or a committee established by our board, administers the SOPs, selects recipients to whom awards are granted, and determines the grants to be awarded. Options granted under the SOPs are exercisable at a price determined by our board or committee at the time of grant, but in no event less than fair market value of our common stock on the date granted. Grants of options may be made to employees and directors without regard to any performance measures. All options issued pursuant to the SOPs are nontransferable and subject to forfeiture.

Except in specific circumstances, awards generally vest over a period of three years and are exercisable for a period of 10 years. The plan also permits the grant of awards to non-employees, which the board has granted in the past. A separate option grant, outside of the 2004 Incentive Stock Plan, for 500,000 shares was made, at an exercise price of $1.47 per share, in connection with the hiring of our former President and Chief Executive Officer during the fiscal year ended April 30, 2005. Our former President and Chief Executive Officer resigned during fiscal 2012 and continues his service as a member of our board of directors and was appointed Co-Vice Chairman of the Board. As of October 31, 2012, there were 250,000 options outstanding relating to this grant, which expire on December 6, 2014.

The number of shares and weighted average exercise prices of (i) options granted under the SOPs and (ii) the separate option grant to our former President and Chief Executive Officer outside of the SOPs for the six months ended October 31, 2012 and 2011 are as follows:

 

                                 
    For the Six Months Ended October 31,  
    2012     2011  
          Weighted-           Weighted-  
          Average           Average  
    Shares     Exercise Price     Shares     Exercise Price  

Options outstanding, beginning of year

     3,988,164     $ 4.67       3,137,565     $ 4.73  

Granted during year

     3,500       11.02       1,094,100       3.12  

Exercised during year

     (834,508 )      4.10       (123,500 )      1.64  

Canceled/forfeited during year

     (105,496 )      3.91       (205,333 )      4.89  
   

 

 

    

 

 

    

 

 

    

 

 

  

Options outstanding, end of period

     3,051,660     $ 4.86       3,902,832     $ 4.37  
   

 

 

    

 

 

    

 

 

    

 

 

  

Weighted average remaining contractual life

     6.64 years               6.12 years          
   

 

 

            

 

 

          

Options exercisable, end of period

     1,890,540     $ 5.10       2,084,359     $ 5.08  
   

 

 

    

 

 

    

 

 

    

 

 

  

Weighted average remaining contractual life

     5.34 years               5.20 years          
   

 

 

            

 

 

          

The aggregate intrinsic value of outstanding options as of October 31, 2012 and 2011 was $15.8 million and $1.1 million, respectively. The aggregate intrinsic value of outstanding options that were exercisable as of October 31, 2012 and 2011 was $9.8 million and $938,000, respectively. The aggregate intrinsic value of the options exercised for the six months ended October 31, 2012 and 2011 was $5.1 million and $216,000, respectively. At October 31, 2012, the total unamortized fair value of outstanding options was $1.6 million, which will be recognized over the remaining weighted average vesting period of 1.2 years.

On September 26, 2011, our stockholders approved our 2011 Employee Stock Purchase Plan (“ESPP”) to replace our expiring 2001 ESPP. All options and rights to participate in our ESPP are nontransferable and subject to forfeiture in accordance with our ESPP guidelines. In the event of certain corporate transactions, each option outstanding under our ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. During the six months ended October 31, 2012 and 2011, 92,476 and 234,418 shares were purchased under our ESPP, respectively.

We measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. We calculate the fair value of our stock options issued to employees using the Black-Scholes model at the time the options are granted. That amount is then amortized over the vesting period of the option. With our ESPP, fair value is determined at the beginning of the purchase period and amortized over the term of each exercise period.

 

The following assumptions were used in valuing our options and ESPP purchases during the six-month periods ended October 31, 2012 and 2011:

 

                 
    For the Six Months Ended October 31,  
    2012     2011  

Stock option grants:

                

Risk-free interest rate

     0.31 %      0.92 - 2.20 % 

Expected term

     5.84 - 7.84 years       5.30 - 8.18 years  

Expected volatility

     70.0 %      66.9 - 74.6 % 

Dividend yield

     0 %      0 % 

Employee Stock Purchase Plan:

                

Risk-free interest rate

     0.14 %      0.06 % 

Expected term

     6 months       6 months  

Expected volatility

     63.7 %      49.9 % 

Dividend yield

     0 %      0 % 

We estimate expected volatility using historical volatility for the expected term. The fair value of each stock option or ESPP purchase was estimated on the date of the grant using the Black-Scholes option pricing model (using the risk-free interest rate, expected term, expected volatility, and dividend yield variables, as noted in the above table). The total stock-based compensation expense, including stock options, purchases under our ESPP, and RSUs and performance-based RSUs (“PSUs”) awards, was $2.0 million, which included $45,000 of stock-based compensation expense related to the loss on the sale of our discontinued operations, and $1.1 million for the six months ended October 31, 2012 and 2011, respectively.

We grant service-based RSUs to employees, consultants, and directors. The grants are made at no cost to the recipient. An RSU represents one share of our common stock but does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees generally vest over a period of three years with one-third of the units vesting on each anniversary date of the grant date. The aggregate fair value of our RSU grants is being amortized to compensation expense over the vesting period.

We grant PSUs with market conditions to our executive officers. We grant PSUs without market conditions to our employees who are not executive officers, including for the successful implementation of our new enterprise resource planning (“ERP”) system. At the time of grant, we calculate the fair value of our market condition PSUs using Monte-Carlo simulation. We incorporate the following variables into the valuation model:

 

                 
    For the Six Months Ended October 31,  
    2012 (e)     2011  

Grant date fair market value

                

Smith & Wesson Holding Corporation

   $ —       $ 3.57  

NASDAQ Composite Index

   $ —       $ 2,781.91  

Volatility (a)

                

Smith & Wesson Holding Corporation

     —         67.67 % 

NASDAQ Composite Index

     —         29.97 % 

Correlation coefficient (b)

     —         0.46  

Risk-free interest rate (c)

     —         0.63 % 

Dividend yield (d)

     —         0 % 

 

(a) Volatility is calculated over the most recent period that represents the remaining term of the performance period as of the valuation date, or three years.
(b) The correlation coefficient utilizes the same historical price data used to develop the volatility assumptions.
(c) The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bill, commensurate with the three-year performance period.
(d) We do not expect to pay dividends in the foreseeable future.
(e) There were no PSUs with market conditions granted during the six months ended October 31, 2012.

The market-condition PSUs vest and the fair value of such PSUs will be recognized, over the corresponding three-year performance period. Our market-condition PSUs have a maximum aggregate award equal to 200% of the target amount granted. The number of market-condition PSUs that may be earned depends upon the total shareholder return (“TSR”) of our common stock compared to the TSR of the Russell 2000 Index (the “RUT”) or the NASDAQ Composite Index (the “IXIC”), as applicable, over the three-year performance period. Our stock must outperform the RUT or the IXIC, as appropriate, by 10% in order for the target award to be earned.

During the six months ended October 31, 2012, we granted 55,250 service-based RSUs and 34,800 PSUs without market conditions to employees and cancelled 12,331 service-based RSUs and 35,000 market-condition PSUs due to the service period condition not being met. Compensation expense recognized related to grants of RSUs and PSUs was $643,000 for the six months ended October 31, 2012. During the six months ended October 31, 2012, we delivered 7,667 shares of common stock to consultants and a former employee under vested RSUs with a total market value of $51,000.

During the six months ended October 31, 2011, we granted 95,200 market-condition PSUs to certain of our executive officers. During the six months ended October 31, 2011, we cancelled 88,700 market-condition PSUs previously granted to our former President and CEO. We delivered 1,000 shares of common stock to an employee under vested RSUs with a total market value of $3,000 during the six months ended October 31, 2011. Compensation expense recognized related to grants of RSUs and PSUs, excluding the $180,000 impact of the 88,700 cancelled PSUs, was $143,000 for the six months ended October 31, 2011.

A summary of activity in unvested RSUs and PSUs for the six months ended October 31, 2012 and 2011 are as follows:

 

                                 
    For the Six Months Ended October 31,  
    2012     2011  
    Total # of     Weighted
Average		     Total # of     Weighted
Average		  
    Restricted     Grant Date     Restricted     Grant Date  
    Stock Units     Fair Value     Stock Units     Fair Value  

RSUs and PSUs outstanding, beginning of year

     384,140     $ 7.91       123,600     $ 5.27  

Awarded

     90,050       9.67       95,200       4.76  

Vested

     (7,667 )      8.11       (1,000 )      5.21  

Forfeited

     (47,331 )      5.84       (88,700 )      5.30  
   

 

 

    

 

 

    

 

 

    

 

 

  

RSUs and PSUs outstanding, end of period

     419,192     $ 8.06       129,100     $ 6.00  
   

 

 

    

 

 

    

 

 

    

 

 

  

As of October 31, 2012, there was $2.0 million of unrecognized compensation cost related to unvested RSUs and PSUs. This cost is expected to be recognized over a weighted average remaining contractual term of 1.7 years.