Famous Footwear 2004 Annual Report Download - page 70

Table of Contents
Notes to Consolidated Financial Statements (continued)
BROWN SHOE COMPANY, INC. 2003 FORM 10-K
16. STOCK OPTION AND SHARE-BASED PLANS
The Company has stock option, stock appreciation, restricted stock and stock performance plans under which certain officers, employees and
members of the Board of Directors are participants.
Stock Options and Stock Appreciation Units
All stock options are granted with an exercise price equal to the quoted market value of the Company’s common stock on the date of grant.
Stock appreciation units also have been granted in tandem with certain options. Such units entitle the participant to receive an amount, in
cash and/or stock, equal to the difference between the current market value of a share of stock at the exercise date and the option price of such
share of stock. The options and appreciation units generally become exercisable one year from the date of grant at a rate of 25% per year and
are exercisable for up to ten years from the date of grant. Since the stock appreciation rights are issued in tandem with stock options, the
exercise of either cancels the other. Variable plan accounting is used to determine compensation expense related to stock appreciation units.
Such expense is recorded over the period the units vest and is remeasured at the end of each reporting period based on the current market
price of the Company’s stock on that date and the expected number of such units to be exercised. The ultimate measure of compensation
expense will be based on the market price of the Company’s stock on the date the stock appreciation unit is exercised. As of January 31,
2004, 1,136,958 additional shares of common stock were available to be granted in the form of options, restricted stock or stock performance
units.
The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its
employee stock options instead of the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB No. 25, because the exercise price of the Company’s employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002
and 2001, respectively: risk-free interest rates of 3.3%, 4.9% and 5.1%; dividend yields of 1.3%, 2.2% and 2.4%; volatility factors of the
expected market price of the Company’s common stock of 0.46, 0.47 and 0.45; and a weighted average expected life of the option of seven
years. The weighted average fair value of options granted during 2003, 2002 and 2001 was $13.70, $8.13 and $7.04 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The
Company’s pro forma information is presented in Note 1.
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