CarMax 2008 Annual Report Download - page 67

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(C) Share-Based Compensation
Effective March 1, 2006, we adopted the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment”
(“SFAS 123 (R)”), which established accounting for share-based awards exchanged for employee services, using the
modified retrospective application method.
In accordance with SFAS 123(R), we are required to base initial compensation cost on the estimated number of
awards expected to vest. Historically, and as permitted under SFAS No. 123, “Accounting for Stock-Based
Compensation,” we chose to reduce pro forma compensation expense in the periods the awards were forfeited. The
cumulative effect on prior periods of the change to an estimated number of awards expected to vest was a $0.6
million reduction of selling, general and administrative expenses recorded in fiscal 2007.
COMPOSITION OF SHARE-BASED COMPENSATION EXPENSE
Years Ended February 29 or 28
(In thousands) 2008 2007 2006
Cost of sales............................................................................... $ 1,945 $ 1,392 $ —
CarMax Auto Finance income................................................... 1,250 917 —
Selling, general and administrative expenses ............................ 31,487 30,379 22,436
Share-based compensation expense, before income taxes......... $ 34,682 $ 32,688 $ 22,436
For periods prior to fiscal 2007, all share-based compensation expense has been presented in selling, general and
administrative expenses, because amounts that would have been presented in cost of sales and CAF were
immaterial. We recognize compensation expense for stock options and restricted stock on a straight-line basis (net
of estimated forfeitures) over the employee’ s requisite service period, which is generally the vesting period of the
award. Our employee stock purchase plan is considered a liability-classified compensatory plan under SFAS
123(R); the associated costs of $1.2 million in fiscal 2008, $0.9 million in fiscal 2007 and $0.8 million in fiscal 2006
are included in share-based compensation expense. There were no capitalized share-based compensation costs as of
February 29, 2008, and February 28, 2007 and 2006.
STOCK OPTION ACTIVITY
(Shares and intrinsic value in thousands)
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
Outstanding as of March 1, 2007...................... 13,775 $ 12.39
Options granted ................................................ 1,882 $ 24.72
Options exercised ............................................. (1,774) $ 8.31
Options forfeited or expired.............................. (235) $ 16.53
Outstanding as of February 29, 2008................ 13,648 $ 14.55 5.6 $ 75,425
Exercisable as of February 29, 2008................. 7,672 $ 12.00 5.1 $ 56,475
We granted to our employees nonqualified options to purchase 1,826,690 shares of common stock in fiscal 2008 and
1,837,200 shares of common stock in fiscal 2007. We granted to our nonemployee directors nonqualified options to
purchase 55,493 shares of common stock in fiscal 2008 and 68,040 shares of common stock in fiscal 2007.
The total cash received from employees as a result of employee stock option exercises was $14.7 million in fiscal
2008, $35.4 million in fiscal 2007 and $5.9 million in fiscal 2006. We settle employee stock option exercises with
authorized but unissued shares of CarMax common stock. The total intrinsic value of options exercised was $26.8
million for fiscal 2008, $74.7 million for fiscal 2007 and $13.0 million for fiscal 2006. We realized related tax
benefits of $10.6 million for fiscal 2008, $28.7 million for fiscal 2007 and $5.2 million for fiscal 2006.