Dollar General 2005 Annual Report Download - page 56

52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company. Effective January 1, 2005, account balances
deemed to be invested in the Mutual Funds Option are
payable in cash and account balances deemed to be
invested in the Common Stock Option are payable in
shares of Dollar General common stock and cash in lieu
of fractional shares. Prior to January 1, 2005, all account
balances were payable in cash.
9. Stock-based compensation
The Company has a shareholder-approved stock
incentive plan under which restricted stock, restricted
stock units (which represent the right to receive one share
of common stock for each unit upon vesting), stock
options and other equity-based awards may be granted to
officers, directors and key employees.
All stock options granted in 2005, 2004 and 2003
under the terms of the Company’s stock incentive plan
were non-qualified stock options issued at a price equal to
the fair market value of the Company’s common stock on
the date of grant. Non-qualified options granted under
these plans have expiration dates no later than 10 years
following the date of grant.
Under the plan, stock option grants are made to key
management employees including officers, as well as
other employees, as determined by the Compensation
Committee of the Board of Directors. The number of
options granted is directly linked to the employee’s job
classification. Beginning in 2002, vesting provisions for
options granted under the plan changed from a combina-
tion of Company performance-based vesting and time-
based vesting to time-based vesting only. All options
granted in 2005, 2004 and 2003 under the plan were
originally scheduled to vest ratably over a four-year
period, except for a grant made to the CEO in 2003, two-
thirds of which vested after one year and one-third of
which vested after two years.
On February 3, 2006, the vesting of all outstanding
options granted prior to August 2, 2005, other than
options previously granted to the CEO and other than
options granted in 2005 to the officers of the Company at
the level of Executive Vice President or higher, accelerated
pursuant to a January 24, 2006 action of the
Compensation Committee of the Company’s Board of
Directors. In addition, pursuant to that Compensation
Committee action, the vesting of all outstanding options
granted on or after August 2, 2005 but prior to January 24,
2006, other than options granted during that time period
to the officers of the Company at the level of Executive
Vice President or higher, accelerated effective as of the
date that is six months after the applicable grant date.
Certain options granted on January 24, 2006 to certain
newly hired officers below the level of Executive Vice
President were granted with a six-month vesting period.
The decision to accelerate stock options resulted in 2005
compensation expense of $0.9 million, before income
taxes, and was made primarily to reduce non-cash com-
pensation expense to be recorded in future periods under
the provisions of SFAS No. 123(R), to be adopted by the
Company during 2006. The future expense eliminated as a
result of the decision to accelerate the vesting of options
is approximately $28 million, or $17 million net of income
taxes, over the four year period during which the stock
options would have vested, subject to the impact of
additional adjustments related to certain stock option
forfeitures.The Company also believes this decision
benefits employees.
Under the plan, restricted stock and restricted stock
units may be granted to employees, including officers, as
determined by the Compensation Committee of the Board
of Directors. In addition, the plan provides for the auto-
matic annual grant of 4,600 restricted stock units to each
non-employee director. In 2005, 2004 and 2003, the
Company awarded a total of 273,600, 166,300 and 50,000
shares of restricted stock and restricted stock units to cer-
tain plan participants at weighted average fair values of
$21.14, $19.26 and $19.37 per share, respectively. The
difference between the market price of the underlying
stock on the date of grant and the purchase price, which
was set at zero for all restricted stock and restricted stock
unit awards in 2005, 2004 and 2003, was recorded as
unearned compensation expense, which is a component
of Other shareholders’ equity, and is being amortized to
expense on a straight-line basis over the restriction period.
The restricted stock and restricted stock units granted to
employees in 2005, 2004 and 2003 under the plan general-
ly vest and become payable ratably over a three-year peri-
od. The restricted stock units granted to outside directors
generally vest one year after the grant date subject to
acceleration of vesting upon retirement or other circum-
stances set forth in the plan, but no payout shall be made
until the individual has ceased to be a member of the
Board of Directors. Under the stock incentive plan, recipi-
ents of restricted stock are entitled to receive cash divi-
dends and to vote their respective shares, but are prohibit-
ed from selling or transferring restricted shares prior to
vesting. Recipients of restricted stock units are entitled to
accrue dividend equivalents on the units but are not enti-
tled to vote, sell or transfer the shares underlying the units
prior to both vesting and payout. The maximum number