Pottery Barn 2005 Annual Report Download - page 59

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The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value
recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to all of our stock-based compensation
arrangements.
Fiscal Year Ended
Dollars in thousands, except per share amounts Jan. 29, 2006 Jan. 30, 2005 Feb. 1, 2004
Net earnings, as reported $214,866 $191,234 $157,211
Add: Stock-based employee compensation expense included in
reported net earnings, net of related tax effect 273 — 154
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of related
tax effect (16,788) (17,059) (16,780)
Pro forma net earnings $198,351 $174,175 $140,585
Basic earnings per share
As reported $ 1.86 $ 1.65 $ 1.36
Pro forma 1.72 1.50 1.22
Diluted earnings per share
As reported $ 1.81 $ 1.60 $ 1.32
Pro forma 1.69 1.47 1.16
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Fiscal Year Ended
Jan. 29, 2006 Jan. 30, 2005 Feb. 1, 2004
Dividend yield — — —
Volatility 59.2% 60.1% 63.9%
Risk-free interest rate 4.3% 3.9% 3.4%
Expected term (years) 6.5 6.8 6.7
In January 2006, we issued 840,000 restricted stock units of our common stock to certain employees. Fifty
percent of the restricted stock units will vest on January 31, 2010, and the remaining fifty percent will vest on
January 31, 2011 based upon the employees’ continued employment throughout the vesting period. Accordingly,
total compensation expense (based upon the fair market value of $42.18 on the issue date) of $35,431,000 will be
recognized on a straight-line basis over the vesting period. In fiscal 2005, we recognized approximately $440,000
of compensation expense related to these restricted stock units.
During fiscal 2001, we entered into employment agreements with certain executive officers. All stock-based
compensation expense related to these agreements was fully recognized as of our first quarter ended May 4,
2003. We recognized approximately zero, zero and $250,000 of stock-based compensation expense related to
these employment agreements in fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share Based Payment.” SFAS No. 123R will require us
to measure and record compensation expense in our consolidated financial statements for all employee share-
based compensation awards using a fair value method. In addition, the adoption of SFAS No. 123R requires
additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based
payment arrangements. We expect to adopt this Statement using the modified prospective application transition
method beginning in the first quarter of fiscal 2006. We anticipate the adoption of this Statement to result in a
reduction to our diluted earnings per share of approximately $0.19 for fiscal 2006.
47
Form 10-K