Banana Republic 2005 Annual Report Download - page 49

G A P I N C . F I N A N C I A L S 2 0 0 5
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We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any point in time, many tax years are subject to or in the
process of audit by various taxing authorities. To the extent that our estimates of probable settlements change or the final tax outcome of these matters
is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made.
Stock-based Awards
During fiscal 2005, 2004, and 2003, we accounted for stock-based awards to employees and directors using the intrinsic value method of accounting
in accordance with Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees.” Under the intrinsic value
method, when the exercise price of the employee stock options equals the market price of the underlying stock on the date of grant, no compensa-
tion expense is recognized in the Consolidated Statements of Operations. Performance units and discounted stock option awards, which are granted
at less than fair market value, are amortized to operating expenses over the vesting period of the stock award. We amortize deferred compensation
for each vesting layer of a stock award using the straight-line method.
SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123” and SFAS 123,
“Accounting for Stock-Based Compensation,” require the disclosure of pro forma net earnings per share as if we had adopted the fair value method.
Under SFAS 123, the fair value of stock-based compensation is calculated through the use of option pricing models. These models require subjective
assumptions, including future stock price volatility and expected life, which affect the calculated values. The following table illustrates the effect on
net earnings and earnings per share had we applied the fair value recognition provisions of SFAS 123:
The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions:
Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2005, 2004 and 2003 was
$7.20, $8.33 and $5.36, respectively.
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
($ in millions) January 28, 2006 January 29, 2005 January 31, 2004
Net earnings, as reported $ 1,113 $ 1,150 $ 1,031
Add: Stock-based employee compensation
expense included in reported net earnings,
net of related tax effects 13 3 1
Less: Total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of related tax effects (a) (93) (80) (53)
Pro forma net earnings $ 1,033 $ 1,073 $ 979
(a) Included in the $93 million stock-based compensation expense in fiscal 2005 is $33 million, net of related tax effects, pertaining to our January 26, 2006 acceleration of certain stock options.
See Note G.
Earnings per share:
As reported – basic $ 1.26 $ 1.29 $ 1.15
Pro forma – basic 1.17 1.20 1.10
As reported – diluted 1.24 1.21 1.09
Pro forma – diluted 1.15 1.13 1.03
January 28, 2006 January 29, 2005 January 31, 2004
Dividend yield 0.88% 0.40% 0.53%
Risk-free interest rate 4.07% 3.16% 2.39%
Volatility 36% 49% 50%
Expected life (in years) 4 4 4