Note 11 — Stockholders’ Equity

In March 2013, the Company’s stockholders approved the Company’s 2013 Performance Incentive Plan (the “2013 Plan”), which generally replaced the Company’s 2000 Stock Incentive Plan (the “2000 Plan”). Under the 2013 Plan, 7,224,657 shares are reserved for issuance over its term, consisting of 2,764,657 shares previously authorized under the 2000 Plan, and not subject to outstanding awards under such plan, plus an additional 4,460,000 shares. At the time the 2013 Plan was approved, there were 20,080,029 shares subject to outstanding awards under the 2000 Plan. These shares remain reserved for issuance pursuant to their original terms and, if they expire, are canceled, or otherwise terminate, will also be available for issuance under the 2013 Plan. No additional awards may be granted under the 2000 Plan. Under the 2013 Plan, stock options may be granted to officers and employees selected by the plan’s administrative committee at an exercise price not less than the fair market value of the underlying shares on the date of grant. Options vest over a period of time, generally three years, as designated by the committee and are subject to such other terms and conditions as the committee determines. The Company issues new shares for stock option exercises and restricted stock grants.

For non-performance based options, the Company uses the Black-Scholes option-pricing model to value stock-based 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. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model for each of fiscal 2013, 2012 and 2011, assuming risk-free interest rates of 1.7%, 1.1%, and 1.9%, respectively; volatility of 78.3%, 76.5%, and 82.4%, respectively; zero dividend yield; and expected lives of 7.1 years, 7.1 years, and 5.3 years, respectively. The weighted average fair value of options granted was $4.81, $2.58, and $3.39 for fiscal 2013, 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 October 31, 2013, the Company had approximately $4 million of unrecognized compensation expense, for non-performance based options, expected to be recognized over a weighted average period of approximately 2.1 years. Compensation expense was included as selling, general and administrative expense for fiscal 2013, 2012 and 2011.

Changes in shares under option, excluding performance based options, are summarized as follows:


	Year Ended October 31,
	2013					2012					2011
In thousands	Shares			Weighted Average Price		Shares			Weighted Average Price		Shares			Weighted Average Price
Outstanding, beg. of year		12,325,499		$	4.49		13,399,381		$	4.40		12,731,430		$	4.48
Granted		1,045,000			6.68		375,000			3.66		2,315,000			5.01
Exercised		(2,985,792	)		2.94		(506,329	)		2.23		(757,538	)		3.92
Canceled/Forfeited		(1,555,089	)		7.02		(942,553	)		4.08		(889,511	)		7.63

Outstanding, end of year		8,829,618			4.83		12,325,499			4.49		13,399,381			4.40


Exercisable, end of year		6,044,792			4.72		7,903,327			4.94		6,042,873			5.64

The aggregate intrinsic value of options exercised, outstanding and exercisable as of October 31, 2013 is $10 million, $33 million and $23 million, respectively. The weighted average life of options outstanding and exercisable as of October 31, 2013 is 5.4 years and 4.5 years, respectively.

Outstanding stock options, excluding performance based options, at October 31, 2013 consist of the following:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted Average Remaining Life		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
			(Years)

$ 1.04 - $ 2.34		1,921,001		5.6	$	2.05		1,921,001	$	2.05
$ 2.35 - $ 4.60		1,996,750		6.4		3.19		1,341,748		3.43
$ 4.61 - $ 6.64		3,152,867		5.5		5.35		1,548,043		5.26
$ 6.65 - $ 8.70		645,000		7.9		6.96		120,000		7.58
$ 8.71 - $10.75		859,500		1.1		8.85		859,500		8.85
$10.76 - $16.36		254,500		1.4		13.16		254,500		13.16

		8,829,618		5.4	$	4.83		6,044,792	$	4.72

Changes in non-vested shares under option, excluding performance based options, for the year ended October 31, 2013 are as follows:


	Shares			Wtd. Avg. Grant Date Fair Value
Non-vested, beginning of year		4,422,172		$	1.92
Granted		1,045,000			4.81
Vested		(2,428,844	)		1.97
Canceled		(253,502	)		2.00

Non-vested, end of year		2,784,826		$	2.95

Of the 2.8 million non-vested shares under option as of October 31, 2013, approximately 2.7 million are expected to vest over their respective lives.

As of October 31, 2013, there were 3,672,955 shares of common stock that were available for future grant. Of these shares, 2,776,555 were available for issuance of restricted stock.

In June 2011, the Company granted performance based options and performance based restricted stock units to certain key employees and executives. Vesting of these awards is contingent upon a required service period and the Company’s achievement of specified common stock price thresholds. In addition, the vesting of a portion of the options can be accelerated based upon the Company’s achievement of specified annual performance targets. 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. The exercise price of the performance based options is $4.65. 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.

In 2013 and 2012, the Company granted additional performance based restricted stock units. The Company used a Monte-Carlo simulation to determine the grant date fair values of the awards. The assumptions used in the Monte-Carlo simulation for the 2013 restricted stock units included a risk free interest rate ranging from 0.5% to 0.8%, volatility from 56.4% to 88.6%, and zero dividend yield. The weighted average fair value of all restricted stock units granted during 2013 was $4.21. The assumptions used for the 2012 restricted stock units included a risk-free interest rates of 0.6% and 0.7%, volatility of 91.4% and 93.1%, and zero dividend yield. The weighted average fair value of all restricted stock units granted during 2012 was $2.27.

Activity related to performance based options and performance based restricted stock units for the fiscal year ended October 31, 2013 is as follows:


	Performance Options			Performance Restricted Stock Units
Non-vested, October 31, 2012		856,000			7,929,375
Granted		—			6,450,000
Vested		—			—
Canceled		(168,000	)		(2,703,593	)

Non-vested, October 31, 2013		688,000			11,675,782

As of October 31, 2013, the Company had approximately $1 million and $10 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 2.2 years and 0.6 years, respectively.

The Company may also grant restricted stock and restricted stock units under its 2013 Plan. Prior to March 2013, the Company issued restricted stock and restricted stock units under its 2000 Plan. Restricted stock issued under both plans generally vests in three years, while restricted stock units generally vest upon the Company’s achievement of a specified common stock price threshold. In March 2010, the Company’s stockholders approved a grant of three million shares of restricted stock to a Company sponsored athlete, Kelly Slater. In accordance with the terms of the related restricted stock agreement, all shares have vested as of October 31, 2013.

Changes in restricted stock are as follows:


	Year Ended October 31,
	2013			2012			2011
Outstanding, beginning of year		801,667			1,911,669			2,842,004
Granted		105,000			105,000			120,000
Vested		(685,000	)		(1,155,002	)		(1,050,335	)
Forfeited		(26,667	)		(60,000	)		—

Outstanding, end of year		195,000			801,667			1,911,669

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

The Company began the Quiksilver Employee Stock Purchase Plan (the “ESPP”) in fiscal 2001, which provides a method for employees of the Company to purchase common stock at a 15% discount from fair market value as of the beginning or end of each purchasing period of six months, whichever is lower. The ESPP covers substantially all full-time domestic and Australian employees who have at least five months of service with the Company. Since the adoption of guidance within ASC 718, “Stock Compensation,” compensation expense has been recognized for shares issued under the ESPP. During fiscal 2013, 2012 and 2011, 448,896, 461,088, and 310,700 shares of stock, respectively, were issued under the plan with proceeds to the Company of approximately $1 million per year.

During fiscal 2013, 2012 and 2011, the Company recognized total compensation expense related to options, restricted stock, performance based options, performance based restricted stock units and ESPP shares of approximately $22 million, $23 million, and $14 million, respectively.

In addition to the equity instruments noted above, certain affiliates of Rhône Capital LLC hold common stock warrants that entitle such affiliates to purchase approximately 25.7 million shares of the Company’s common stock at an exercise price of $1.86 per share.