Banana Republic 2005 Annual Report Download - page 57

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and only those shares then outstanding would continue to be subject to the terms of the 2002 Plan under which they were granted. The 2002 Plan
empowered the Committee to award nonqualified stock options to non-officer employees. The stock options generally expired 10 years from the
grant date, three months after termination, or one year after the date of retirement or death, if earlier. In addition, the stock options generally vested
over a four-year period, with shares becoming exercisable in equal annual installments of 25 percent.
Beginning in fiscal 2005, the Compensation and Management Development Committee of the Board of Directors (the “Committee”) began granting
stock awards in the form of performance units under our 1996 Stock Option and Award Plan. One share of common stock is issued for each performance
unit upon time-based vesting of the awards. During the year ended January 28, 2006, we awarded approximately 2 million performance units (net of
cancellations) subject to time-based vesting. We recognize compensation expense for these performance units based on the fair market value of the
underlying common stock on the date of grant. The award is presented as an increase to shareholders’ equity as it is amortized over the vesting period of
the performance unit. During fiscal 2005, $18 million of compensation expense related to these performance units was recognized.
In December 2005, we finalized our Tender Offer (the “Offer”) to provide eligible employees, including certain executives, a voluntary opportunity to exchange
outstanding, eligible options for new options and, if applicable, cash payments. Each eligible option granted had been granted with a per share exercise price that
was below the fair market value on that option’s original date of grant. Due to Section 409A of the Internal Revenue Code and recently proposed regulations
under Section 409A, neither of which were in effect or anticipated at the time these options were granted, these options likely would have resulted in income
recognition by the optionee prior to exercise, an additional twenty percent (20%) income tax, and potential interest charges if they had remained outstanding. The
Offer was instituted to allow employees holding eligible options the opportunity to avoid these unfavorable tax consequences by exchanging them for new op-
tions and preserve as closely as practicable the economic characteristics that were contemplated when the grants were originally made. In total, eligible options
to purchase 1,968,525 shares of common stock were exchanged for new options with exercise prices greater than or equal to the original exercise price and with
similar vesting periods. Compensation expense of $4 million was recognized in fiscal 2005 representing the incremental intrinsic value of the new award and, for
certain new options, the cash consideration. Compensation expense for those stock options issued at less than fair market value under the 1996 Plan, the 2002
Plan, and the Deferred Compensation Plan (no options were granted in fiscal 2005) for non-employee members of the Board of Directors was approximately $4
million, $5 million and $1 million in fiscal 2005, 2004 and 2003, respectively, representing the original intrinsic value of these discounted stock options.
On January 26, 2006, we accelerated the vesting of all stock options with an exercise price equal to or greater than $21 per share except options held
by non-employee directors and performance-based options to purchase 1,000,000 shares granted to our Chief Executive Officer. Options to purchase
approximately 15 million shares of common stock that were scheduled to vest from fiscal 2006 to 2009 were impacted by this action.
Although these options became immediately exercisable, the exercise price did not change. The primary purpose of the accelerated vesting was to
enable the Company to reduce compensation expense by approximately $45 million associated with these options on our Consolidated Statements of
Operations for future periods upon the adoption of SFAS 123(R), “Share-Based Payment,” in the first quarter of fiscal 2006. There was no impact to our
Consolidated Statement of Operations in fiscal 2005.
Under our stock option plans, nonqualified options to purchase common stock are granted to officers, directors, eligible employees and consultants at
exercise prices equal to the fair market value of the stock at the date of grant or as determined by the Compensation and Management Development
Committee of the Board of Directors.
The following table summarizes stock option activity for all employee stock option plans:
Shares Weighted-Average Exercise Price
Balance at February 1, 2003 80,492,169 $ 20.12
Granted 26,782,766 14.13
Exercised (8,229,703) 11.24
Canceled (16,354,458) 22.04
Balance at January 31, 2004 82,690,774 18.68
Granted 23,757,358 21.10
Exercised (9,275,770) 13.77
Canceled (10,017,064) 21.63
Balance at January 29, 2005 87,155,298 19.53
Granted 10,644,588 20.28
Exercised (8,115,351) 13.61
Canceled (13,702,035) 20.83
Balance at January 28, 2006 75,982,500 $ 20.03