Urban Outfitters 2010 Annual Report Download - page 72

URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Share-Based Compensation
The Company’s 2008, 2004 and 2000 Stock Incentive Plans each authorize up to 10,000,000
common shares, which can be granted as restricted shares, unrestricted shares, incentive stock options,
nonqualified stock options, performance shares or as stock appreciation rights. Grants under these
plans generally expire seven or 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
period of three or five years, with options becoming exercisable in installments determined by the
administrator over the vesting period. However, options granted to non-employee directors generally
vest over a period of one year. The Company’s 1997 Stock Option Plan (the “1997 Plan”), which
replaced the previous 1987, 1992 and 1993 Stock Option Plans (the “Superseded Plans”), expired
during the year ended January 31, 2004. Individual grants outstanding under the 1997 Plan and certain
of the Superseded Plans have expiration dates, which extend into fiscal year 2011. Grants under the
1997 Plan and the Superseded Plans generally expire ten years from the date of grant, thirty days after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. As of January 31,
2010 there were 9,628,500, 1,035,150 and 119,900 common shares available for grant under the 2008,
2004 and 2000 Stock Incentive Plans, respectively.
The Company recorded $2,975, $2,481 and $2,124 of stock compensation expense related to
stock option awards as well as related tax benefits of $1,034, $851 and $644 in the Company’s
Consolidated Statements of Income for the fiscal years ended January 31, 2010, 2009 and 2008,
respectively or less than $0.01 for both basic and diluted earnings per share. During fiscal 2010, the
Company granted 826,000 stock options. The estimated fair value of stock option grants was
calculated using a Lattice Binomial option pricing model for the options granted during the fiscal years
ended January 31, 2010 and 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 share-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 and forward is due to
the fact that the majority of the grants issued in fiscal 2009 and 2010 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 fiscal years
that utilize 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 those fiscal
years that utilized 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
2010
Fiscal
2009
Fiscal
2008
Expected life, in years .............................................. 4.2 4.3 6.2
Risk-free interest rate ............................................... 2.0% 2.5% 4.5%
Volatility ......................................................... 51.4% 41.4% 49.8%
Dividend rate ..................................................... — — —
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