Urban Outfitters 2009 Annual Report Download - page 72

URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Plan and the Superseded Plans generally expire ten years from the date of grant, thirty days after
termination, or six months after the date of death or termination due to disability. Stock options
generally vest over a five year period, with options becoming exercisable in equal installments of
twenty percent per year. As of January 31, 2009 there were 10,000,000, 1,194,700 and 24,450 common
shares available for grant under the 2008, 2004 and 2000 Stock Incentive Plans, respectively.
Under the provisions of SFAS No. 123R, the Company recorded $2,481, $2,124 and $2,344 of
stock compensation related to stock option awards as well as related tax benefits of $851, $644 and
$499 in the Company’s Consolidated Statements of Income for the fiscal years ended January 31,
2009, 2008 and 2007, respectively or less than $0.01 for both basic and diluted earnings per share.
During fiscal 2009, the Company granted 1,235,800 stock options. The estimated fair value of the
grants was calculated using a Lattice Binomial option pricing model for the options granted during the
fiscal year ended January 31, 2009. For stock options granted during the fiscal year ended January 31,
2008, the fair value of these grants was calculated using the Black Scholes option pricing model. Both
the Lattice Binomial and Black Scholes option pricing models incorporate certain economic
assumptions to value these stock-based awards. The prevailing difference between the two models is
the Lattice Binomial model’s ability to enhance the simple assumptions that underlie the Black
Scholes model. The Lattice Binomial model allows for assumptions such as the risk-free rate of
interest, volatility and exercise rate to vary over time reflecting a more realistic pattern of economic
and behavioral occurrences. The Company uses historical data on exercise timing to determine the
expected life assumption. The decrease in the expected life in fiscal year 2009 is due to the fact that
the majority of the grants issued in fiscal 2009 expire in seven years. The risk-free rate of interest for
periods within the contractual life of the option is based on U.S. Government Securities Treasury
Constant Maturities over the expected term of the equity instrument. In the current fiscal year, utilizing
the Lattice Binomial option pricing model, the expected volatility is based on a weighted average of
the implied volatility and the Company’s most recent historical volatility. In previous fiscal years
under the Black Scholes option pricing model, the expected volatility was based on the historical
volatility of the Company’s stock. The table below outlines the weighted average assumptions for
these grants:
Fiscal
2009
Fiscal
2008
Fiscal
2007
Expected life, in years .............................................. 4.3 6.2 6.8
Risk-free interest rate ............................................... 2.5% 4.5% 4.8%
Volatility ......................................................... 41.4% 49.8% 54.4%
Dividend rate ..................................................... — — —
Based on the Company’s historical experience, the Company has assumed an annualized
forfeiture rate of 2% for its unvested options. Under the true-up provisions of SFAS No. 123R, the
Company will record additional expense if the actual forfeiture rate is lower than it estimated, and will
record a recovery of prior expense if the actual forfeiture is higher than estimated.
Total compensation cost of stock options granted but not yet vested, as of January 31, 2009, was
$11,627, which is expected to be recognized over the weighted average period of 2.71 years.
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