Big Lots 2011 Annual Report Download - page 173

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7 — Share-Based Plans (Continued)
rights. We have not issued incentive stock options, restricted stock units, performance units, or stock
appreciation rights under the 2005 LTIP. The number of common shares available for issuance under the 2005
LTIP consists of: 1) an initial allocation of 1,250,000 common shares; 2) 2,001,142 common shares, the number
of common shares that were available under the predecessor Big Lots, Inc. 1996 Performance Incentive Plan
(“1996 LTIP”) upon its expiration; 3) 2,100,000 common shares approved by our shareholders in May 2008; and
4) an annual increase equal to 0.75% of the total number of issued common shares (including treasury shares) as
of the start of each of our fiscal years during which the 2005 LTIP is in effect. The Compensation Committee of
our Board of Directors (“Committee”), which is charged with administering the 2005 LTIP, has the authority to
determine the terms of each award. Nonqualified stock options granted to employees under the 2005 LTIP, the
exercise price of which may not be less than the fair market value of the underlying common shares on the grant
date, generally expire on the earlier of: 1) the seven year term set by the Committee; or 2) one year following
termination of employment, death, or disability. The nonqualified stock options generally vest ratably over a
four-year period; however, upon a change in control, all awards outstanding automatically vest.
In addition to the 2005 LTIP, we previously maintained the Big Lots Director Stock Option Plan (“Director
Stock Option Plan”) for non-employee directors. The Director Stock Option Plan was administered by the
Committee pursuant to an established formula. Neither the Board of Directors nor the Committee exercised any
discretion in administration of the Director Stock Option Plan. Grants were made annually at an exercise price
equal to the fair market value of the underlying common shares on the date of grant. The annual grants to each
non-employee director of an option to acquire 10,000 of our common shares became fully exercisable over a
three-year period: 20% of the shares on the first anniversary, 60% on the second anniversary, and 100% on the
third anniversary. Stock options granted to non-employee directors expire on the earlier of: 1) 10 years plus one
month; 2) one year following death or disability; or 3) at the end of our next trading window one year following
termination. In connection with the amendment to the 2005 LTIP in May 2008, our Board of Directors amended
the Director Stock Option Plan so that no additional awards may be made under that plan. Our non-employee
directors did not receive any stock options in 2011, 2010, and 2009, but did, as discussed below, receive
restricted stock awards under the 2005 LTIP.
Share-based compensation expense was $25.0 million, $24.6 million and $20.3 million in 2011, 2010, and
2009, respectively. We use a binomial model to estimate the fair value of stock options on the grant date. The
binomial model takes into account variables such as volatility, dividend yield rate, risk-free rate, contractual
term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the
probability of retirement of the option holder in computing the value of the option. Expected volatility is based
on historical and current implied volatilities from traded options on our common shares. The dividend yield on
our common shares is assumed to be zero since we have not paid dividends and have no current plans to do so
in the future. The risk-free rate is based on U.S. Treasury security yields at the time of the grant. The expected
life is determined from the binomial model, which incorporates exercise and post-vesting forfeiture assumptions
based on analysis of historical data.
The weighted-average fair value of stock options granted and assumptions used in the stock option pricing
model for each of the respective periods were as follows:
2011 2010 2009
Weighted-average fair value of stock options granted .................. $14.43 $13.64 $7.89
Risk-free interest rates .......................................... 1.8% 2.2% 1.7%
Expected life (years) ............................................ 4.2 4.2 4.3
Expected volatility ............................................. 41.7% 45.6% 56.0%
Expected annual forfeiture rate .................................... 1.5% 1.5% 1.5%