Costco 2007 Annual Report Download - page 69

the expected term was calculated as the average term between grant and exercise dates for those
options where at least 40% of the original grant was exercised. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of the grant with an equivalent remaining term. The
expected dividend yield is based on the annual dividend rate at the time of the grant.
The following is a summary of stock options outstanding as of September 2, 2007 (number of options
in thousands):
Options Outstanding Options Exercisable
Range of Prices Number
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price Number
Weighted-
Average
Exercise Price
$9.00–$34.28 ...... 6,482 4.49 $32.01 4,894 $31.66
$34.74–$37.35 ..... 7,755 5.04 36.91 5,101 36.67
$37.44–$43.00 ..... 5,295 3.91 40.53 5,222 40.57
$43.79–$43.79 ..... 7,493 7.58 43.79 2,341 43.79
$44.97–$52.50 ..... 3,063 5.17 47.33 1,725 48.21
30,088 5.37 $39.26 19,283 $38.35
At September 3, 2006 and August 28, 2005, there were 22,289 and 25,987 options exercisable at
weighted average exercise prices of $35.92 and $33.66, respectively.
Tax benefits and intrinsic value related to total stock options exercised during fiscal years 2007, 2006
and 2005 are provided in the following table:
2007 2006 2005
Actual tax benefit realized for stock options
exercised .............................. $ 65,778 $ 80,417 $ 50,298
Intrinsic value of stock options exercised ....... $212,678 $240,211 $145,223
Employee Tax Consequences on Certain Stock Options
As previously disclosed, in fiscal 2006, the Company initiated an internal review of its historical stock
option grant practices to determine whether the stated grant dates of options were supported by the
Company’s books and records. As a result of this preliminary review, a special committee of
independent directors was formed. In connection with this review, and guidance issued by the U.S.
Internal Revenue Service on November 30, 2006, the Compensation Committee of the Board of
Directors approved a program intended to protect approximately 1,000 Company employees who are
United States taxpayers from certain adverse tax consequences resulting from their options having
been granted originally at prices lower than the market value. The program involved increasing the
exercise prices on certain stock options granted from 2000 to 2003 and, in turn, the Company making
payments to employees in an amount approximately equal to the increase in the exercise price.
As a result of this program, the Company made cash payments totaling $18,735 to approximately
1,000 employees in the second quarter of fiscal 2007, which resulted in a pre-tax stock compensation
charge of $8,072 (“incremental fair value”). The difference between the cash payment and the
incremental fair value of $10,663 was recognized as a reduction to additional paid-in capital, as it
represented a partial cash settlement of the original award because no future service was required to
earn the cash payment.
While the Company is still examining the availability of similar alternatives for employees outside the
United States, the Company recorded $37,923 in selling, general and administrative (SG&A) expense
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