Express 2011 Annual Report Download - page 87

Marketability discount—A measure of the amount by which the value of the underlying equity shares is reduced
as the value of privately-held shares is not directly comparable to the value of publicly-traded shares of similar
common stock. An increase in the marketability discount will decrease compensation expense.
The Finnerty Model was utilized to calculate a discount on the underlying equity shares. The Finnerty Model
provides for a valuation discount reflecting the holding period restriction embedded in a restricted shares
preventing its sale over a certain period of time.
The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by
using an option pricing theory. This model has gained recognition through its ability to address the magnitude of
the discount by considering the volatility of a company’s stock price and the length of restriction. The concept
underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Further
simplified, a restricted share of equity in a company can be viewed as having forfeited a put on the average price
of the marketable equity over the restriction period (also known as an “Asian Put Option”). If an Asian Put
Option is priced and compared to that of the assumed fully marketable underlying stock, the marketability
discount can be effectively estimated.
The assumptions utilized in the model included (i) length of holding period of 7 months, (ii) equity volatility of
80%, (iii) dividend yield of 0, and (iv) risk free rate of 0.20%.
The restricted shares vest over 4 years in equal 25% increments each year and have pro-rata vesting for each
quarter elapsed since the prior annual vesting date.
12. Earnings Per Share
The weighted-average shares used to calculate basic and diluted net income per share has been retroactively
adjusted based on the Reorganization (see Note 1).
The following table provides reconciliation between basic and diluted shares used to calculate basic and diluted
earnings per share:
2011 2010 2009
(in thousands)
Weighted-average shares—basic ............................. 88,596 85,369 74,566
Dilutive effect of stock options, restricted stock units, and restricted
shares ................................................ 300 681 1,038
Weighted-average shares—diluted ........................... 88,896 86,050 75,604
Stock options to purchase 2.3 million and 1.3 million shares of common stock were excluded from the
computation of diluted earnings per share for 2011 and 2010, respectively, as the options would be anti-dilutive.
No potentially dilutive shares were excluded from the computation of diluted earnings per share in 2009.
13. Pro forma Information (unaudited)
The pro forma net income applied in computing the pro forma earnings per share for 2010 and 2009 is based on
the Company’s historical net income as adjusted to reflect the Company’s conversion to a corporation as if it has
occurred as of the beginning of the respective periods. In connection with the conversion, effective May 2, 2010,
the Company became taxed as a corporation. The Company was previously treated as a partnership for tax
purposes, and therefore generally not subject to federal income tax. The pro forma net income includes
adjustments for income tax expense as if the Company had been a corporation at an assumed combined federal,
state, and local income tax rate of 40.9% for the first thirteen weeks of 2010 and 38.7% for 2009.
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