Dollar General 2010 Annual Report Download - page 163

10-K
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Share-based payments
The Company accounts for share-based payments in accordance with applicable accounting
standards. Under these standards, 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. Forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting period. The application
of this valuation model involves assumptions that are judgmental and highly sensitive in the
determination of compensation expense.
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, 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 July 6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan for Key
Employees, which plan was subsequently amended (as so amended, the ‘‘Plan’’). The Plan provides for
the granting of stock options, stock appreciation rights, and other stock-based awards or dividend
equivalent rights to key employees, directors, consultants or other persons having a service relationship
with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company
common stock authorized for grant under the Plan is 31,142,858. No more than 4.5 million shares may
be granted to any one Plan participant in the form of stock options and stock appreciation rights in any
given fiscal year of the Company, and no more than 1.5 million shares may be granted to any one Plan
participant in the form of other stock-based awards in any given fiscal year of the Company. As of
January 28, 2011, 17,837,497 of such shares are available for future grants.
Since the Merger, the Company has granted options under the Plan that vest solely upon the
continued employment of the recipient (‘‘Time Options’’) as well as options that vest upon the
achievement of predetermined annual or cumulative financial-based targets (‘‘Performance Options’’).
Through November 2009, 20% of each of the Time Options and Performance Options generally vest
annually over a five-year period. Beginning in December 2009, the Company began granting awards
whereby 25% of each of the Time Options and Performance Options generally vest annually over a
four-year period. Assuming the financial targets are met, the Performance Options vest as of the
Company’s fiscal year end, and as a result the initial and final tranche of each Performance Option
grant is prorated based upon the date of grant. In the event the performance target is not achieved in
any given annual performance period, the Performance Options for that period may still subsequently
vest, provided that a cumulative performance target is achieved. Vesting of the Time Options and
Performance Options is also subject to acceleration in the event of an earlier change in control or
certain public offerings of the Company’s common stock. Each of these options, whether Time Options
or Performance Options have a contractual term of 10 years and an exercise price equal to the fair
value of the underlying common stock on the date of grant.
Both the Time Options and the Performance Options are subject to various provisions set forth in
a management stockholder’s agreement entered into with each option holder by which the Company
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