Sears 2006 Annual Report Download - page 85

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
The 9% convertible Notes and accrued interest were converted into 6.3 million shares of Kmart common
stock on January 31, 2005.
Kmart’s outstanding treasury shares were retired and cancelled in connection with the Merger.
For purposes of the fiscal 2004 diluted earnings per share calculation, approximately 150,000 stock options
and 51,000 shares of restricted Kmart stock were excluded, as they were anti-dilutive.
NOTE 12—SHAREHOLDERS’ EQUITY
Stock-based Compensation
The Company accounts for stock-based compensation using the fair value method in accordance with SFAS
No. 123(R). The Company recorded $21 million, $26 million, and $6 million in total compensation expense
relative to stock-based compensation arrangements during fiscal 2006, fiscal 2005, and fiscal 2004, respectively.
As of February 3, 2007, the Company had $29 million in total compensation cost related to nonvested awards
which is expected to be recognized over the next approximately 3 years.
The Company does not currently have an employee stock option plan. As of February 3, 2007, all
outstanding options relate to grants made either prior to, or in connection with, the Merger. Changes in employee
stock options for fiscal 2006, fiscal 2005, and fiscal 2004 were as follows:
2006 2005 2004
(Shares in thousands) Shares
Weighted-
Average
Exercise
Price Shares
Weighted-
Average
Exercise
Price Shares
Weighted-
Average
Exercise
Price
Beginning of year balance ...................... 350 $112.90 1,318 $ 21.90 1,557 $13.33
Granted ..................................... — — 200 131.11 150 88.62
Exercised ................................... — — (1,168) 13.33 — —
Cancelled/Forfeited ........................... — — — — (389) 13.33
End of year balance ....................... 350 $112.90 350 $112.90 1,318 $21.90
Exercisable(1) ................................ 275 $119.52 38 $ 88.62 1,168 $13.33
Fair value of options granted during the year ....... $ — $131.11 $88.62
(1) Of the total shares exercisable as of fiscal year end 2006, 275 shares are vested or are expected to vest, with
an aggregate intrinsic value of $16 million and weighted-average remaining contractual life of
approximately four years at February 3, 2007.
The fair value of each stock option is estimated as of the grant date using the Black-Scholes option-pricing
model, with the following assumptions being utilized for each of the periods presented during which shares were
granted:
2005 2004
Dividend yield ............................................. 0% 0%
Expected volatility .......................................... 40% 46%
Risk-free interest rate ........................................ 4.22% 3.18%
Expected life of options ...................................... 5years 5 years
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