Dollar General 2006 Annual Report Download - page 81

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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 above, 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 the vesting of these stock options resulted in compensation expense of $0.9
million, before income taxes, recognized during the fourth quarter of 2005, and was made
primarily to reduce non-cash compensation expense to be recorded in future periods under the
provisions of SFAS 123(R). The future expense eliminated as a result of the decision to
accelerate the vesting of these options was 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 believed this decision benefited employees.
Effective February 4, 2006, the Company adopted SFAS 123(R) and began recognizing
compensation expense for stock options based on the fair value of the awards on the grant date.
The Company adopted SFAS 123(R) under the modified-prospective-transition method and,
therefore, results from prior periods have not been restated. The following table illustrates the
effect on net income and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to options granted under the Company’ s stock plans for the
years ended February 3, 2006 and January 28, 2005. For purposes of this pro forma disclosure,
the value of the options is estimated using the Black-Scholes-Merton option pricing model for all
option grants.
(In thousands except per share data)
Year Ended
February 3,
2006
Year Ended
January 28,
2005
Net income – as reported $ 350,155 $ 344,190
Deduct: Total pro forma stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects per SFAS 123 32,621
10,724
Net income – pro forma $ 317,534 $ 333,466
Earnings per share – as reported
Basic $ 1.09 $ 1.04
Diluted $ 1.08 $ 1.04
Earnings per share – pro forma
Basic $ 0.99 $ 1.01
Diluted $ 0.98 $ 1.00
Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. Under SFAS 123, the Company elected to account for
forfeitures when awards were actually forfeited, at which time all previous pro forma expense
(which, after-tax, approximated $5.5 million and $8.5 million in the years ended February 3,
2006 and January 28, 2005, respectively) was reversed to reduce pro forma expense for those
years.
For the year ended February 2, 2007, the adoption of the fair value method of
SFAS 123(R) resulted in additional share-based compensation expense (a component of SG&A
expenses) and a corresponding reduction in net income before income taxes in the amount of
79