4.	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 loss per share calculation for the first quarter of fiscal 2013 and 2012:


In thousands	2013		2012
Shares used in computing basic net loss per share		165,767		163,363
Dilutive effect of stock options and restricted stock⁽¹⁾		—		—
Dilutive effect of stock warrants⁽¹⁾		—		—

Shares used in computing diluted net loss per share		165,767		163,363


⁽¹⁾ For the first quarter of fiscal 2013 and 2012, the shares used in computing diluted net loss per share do not include 3,391,000 and 3,755,000, respectively, of dilutive stock options and shares of restricted stock, nor 15,140,000 and 12,195,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss. For the first quarter of fiscal 2013 and 2012, additional stock options outstanding of 7,932,000 and 10,774,000, respectively, and additional warrant shares outstanding of 10,514,000 and 13,459,000, 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 in selling, general and administrative expense.

The Company has previously granted performance based restricted stock units and options to certain key employees and executives. 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 vesting of the options is contingent upon a required service period as well as a combination of the Company’s achievement of specified annual performance targets and specified common stock price thresholds. 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 uses a Monte-Carlo simulation in order to determine the grant date fair values of the awards. For the first quarter of fiscal 2013, the assumptions used in the Monte-Carlo simulations for the restricted stock units granted included a risk-free interest rate of 0.5%, volatility of 73% to 89%, and zero dividend yield. The weighted average fair value of the restricted stock units granted in the first quarter of fiscal 2013 was $3.39. There were no restricted stock unit grants in the first quarter of fiscal 2012. There were no performance options granted in the first quarter of fiscal 2013 or 2012.

Activity related to these performance based equity instruments for the first quarter of fiscal 2013 was as follows:


	Performance Options			Performance Restricted Stock Units
Non-vested, October 31, 2012		856,000			7,929,375
Granted		—			2,800,000
Vested		—			—
Canceled		(56,000	)		(2,050,312	)

Non-vested, January 31, 2013		800,000			8,679,063

As of January 31, 2013, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $2 million related to the performance based options and approximately $4 million related to restricted stock units. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 2.7 years and 1.1 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 first quarter of fiscal 2013 and 2012, there were no options granted. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2013, the Company had approximately $2 million of unrecognized compensation expense for non-performance based options expected to be recognized over a weighted average period of approximately 1.5 years.

Changes in shares under option, excluding performance based options, for the first quarter of fiscal 2013 were as follows:


Dollar amounts in thousands, except per share amounts	Shares			Weighted Average Price		Weighted Average Life		Aggregate Intrinsic Value
Outstanding, October 31, 2012		12,325,499		$	4.49
Granted		—			—
Exercised		(826,294	)		3.34			$	1,396
Canceled		(977,572	)		6.48

Outstanding, January 31, 2013		10,521,633		$	4.39		5.5	$	27,842

Options exercisable, January 31, 2013		7,366,037		$	4.70		5.0	$	18,829

Changes in non-vested shares under option, excluding performance based options, for the first quarter of fiscal 2013 were as follows:


	Shares			Weighted- Average Grant Date Fair Value
Non-vested, October 31, 2012		4,422,172		$	1.92
Granted		—			—
Vested		(1,189,675	)		2.30
Canceled		(76,901	)		1.55

Non-vested, January 31, 2013		3,155,596		$	1.87

The Company also grants restricted stock and restricted stock units under its 2000 Stock Incentive Plan. Stock issued under this plan generally vests in three years. In March 2010, the Company’s stockholders 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, 2,400,000 shares have already vested, with the remaining 600,000 shares to vest in April 2013. Changes in restricted stock for the first quarter of fiscal 2013 were as follows:


	Restricted Stock
Outstanding, October 31, 2012		801,667
Granted		—
Vested		—
Forfeited		—

Outstanding, January 31, 2013		801,667

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 adjusts the amortization period as appropriate. As of January 31, 2013, there had been no acceleration of amortization periods and the Company had approximately $0.4 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately one year.