Pier 1 2007 Annual Report Download - page 48

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expense is recognized for any unvested stock option awards outstanding as of the date of adoption on a
straight-line basis over the remaining vesting period. The fair values of the options are calculated using a
Black-Scholes option pricing model. The Company records compensation expense for stock-based awards with
a performance condition when it is probable that the condition will be achieved. The compensation expense
ultimately recognized, if any, related to these awards will equal the grant date fair value for the number of
shares for which the performance condition has been satisfied.
SFAS 123R requires that forfeitures be estimated at the time of grant. The Company estimates forfeitures
based on its historical forfeiture experience. For periods prior to fiscal 2007, the Company recognized
forfeitures as they occurred in its pro forma disclosures. In accordance with SFAS 123R, the Company adjusts
forfeiture estimates based on actual forfeiture experience for all awards with service conditions. The effect of
forfeiture adjustments for the year was insignificant.
During fiscal 2006, the Company’s Board of Directors approved the accelerated vesting of approximately
3,800,000 stock options where the exercise price was in excess of the market price. This acceleration resulted
in pro forma expense of approximately $16,300,000, net of tax, for options that would have vested in future
periods. See Note 11 of the Notes to Consolidated Financial Statements for additional discussion related to the
accounting for stock-based employee compensation.
SFAS 123R requires disclosure of pro forma information for periods prior to adoption. The following
table details the effect on net income (loss) and earnings (loss) per share from continuing operations,
illustrating the effect of applying the fair value recognition provisions of SFAS 123R for fiscal 2006 and 2005,
respectively (in thousands except per share amounts):
Pro Forma
2006
Pro Forma
2005
Income (loss) from continuing operations, as reported ................. $(27,471) $ 62,765
Stock-based employee compensation expense included in reported net
income (loss), net of related tax effects . ......................... 417 —
Less total stock-based employee compensation expense determined under
fair value-based method, net of related tax effects .................. (25,519) (11,645)
Income (loss) from continuing operations . ......................... $(52,573) $ 51,120
Earnings (loss) per share from continuing operations:
Basic — as reported ........................................ $ (.32) $ .72
Basic — pro forma ......................................... $ (.61) $ .59
Diluted — as reported ....................................... $ (.32) $ .71
Diluted — pro forma ........................................ $ (.61) $ .57
Adoption of new accounting standards — In July 2006, the Financial Accounting Standards Board (the
“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48
prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for
the Company as of the beginning of fiscal 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company is currently analyzing the
cumulative effect adjustment to retained earnings that will be recorded upon adoption.
46
Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)