Dollar General 2007 Annual Report Download - page 95

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9. Share-based payments
The Company accounts for share-based payments in accordance with SFAS 123(R).
Under SFAS 123(R), the fair value of each award is separately estimated and amortized into
compensation expense over the service period. The fair value of the Company’ s stock option
grants are estimated on the grant date using the Black-Scholes-Merton valuation model. The
application of this valuation model involves assumptions that are judgmental and highly sensitive
in the determination of compensation expense.
The Successor statement of operations for the period from July 7, 2007 to February 1,
2008 reflect share-based compensation expense (a component of SG&A expenses) under the fair
value method of SFAS 123(R) for outstanding share-based awards and a corresponding reduction
of pre-tax income in the amount of $3.8 million ($2.4 million net of tax).
The Company recognized $45.4 million of share-based compensation expense in the
Predecessor statements of operations in 2007 ($28.5 million net of tax), including $6.0 million of
compensation expense prior to the Merger included in SG&A expenses comprised of $2.3
million and $3.7 million, respectively, for stock options and restricted stock and restricted stock
units. The remaining $39.4 million of such expense related directly to the Merger is reflected in
Transaction and related costs in the consolidated statement of operations for the Predecessor
period ended July 6, 2007, consisting of $18.7 million and $20.7 million, respectively, for the
accelerated vesting of stock options and restricted stock and restricted stock units.
For the year ended February 2, 2007, the fair value method of SFAS 123(R) resulted in
additional share-based compensation expense and a corresponding reduction in net income
before income taxes in the amount of $3.6 million ($2.2 million net of tax).
Prior to the Merger, the Company maintained various share-based compensation
programs which included options, restricted stock and restricted stock units. In connection with
the Merger, the Company’ s outstanding stock options, restricted stock and restricted stock units
became fully vested immediately prior to the closing of the Merger and were settled in cash,
canceled or, in limited circumstances, exchanged for new options of the Company, as described
below. Unless exchanged for new options, each option holder received an amount in cash,
without interest and less applicable withholding taxes, equal to $22.00 less the exercise price of
each in-the-money option. Additionally, each restricted stock and restricted stock unit holder
received $22.00 in cash, without interest and less applicable withholding taxes. Certain stock
options held by Company management were exchanged for new options to purchase common
stock in the Company (the “Rollover Options”). The exercise price of the Rollover Options and
the number of shares of Company common stock underlying the Rollover Options were adjusted
as a result of the Merger. The Rollover Options otherwise continue under the terms of the equity
plan under which the original options were issued.
On February 3, 2006, the vesting of all outstanding options granted prior to August 2,
2005, other than options previously granted to the Company’ s then CEO and options granted in
2005 to the officers of the Company at the level of Executive Vice President or above,
accelerated pursuant to a January 24, 2006 action of the Compensation Committee of the