Staples 2005 Annual Report Download - page 95

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STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
C-10
NOTE A Summary of Significant Accounting Policies (Continued)
The fair value of options granted in each year was estimated at the date of grant using the following weighted
average assumptions:
2005 2004 2003
Riskfreeinterestrate....................................................... 3.8% 3.8% 2.6%
Expecteddividendyield..................................................... 0.8% 0.7% 0.0%
Expectedstockvolatility..................................................... 33% 41% 43%
Expected lifeof options..................................................... 5.0 years 5.0 years 5.0 years
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options’ vesting period. For purposes of SFAS No. 148’s disclosure requirements, the Company’s employee stock
purchase plans are considered compensatory plans. The expense was calculated based on the fair value of the employees’
purchase rights. Staples’ pro forma information follows (in thousands, except for per share information):
Fiscal Year Ended
January 28, 2006
Fiscal Year Ended
January 29, 2005
Fiscal Year Ended
January 31, 2004
Net income as reported .................................... $834,409 $708,388 $490,211
Add: Stock based compensation, net of related tax effects,
included in reported net income........................... 32,134 29,122 17,584
Deduct: Stock based compensation determined under the fair
value based method for all awards, net of related tax effects . . (82,425) (72,935 ) (57,584)
Proformanetincome...................................... $784,118 $664,575 $450,211
Basic earnings per common share
Asreported............................................... $ 1.14 $ 0.95 $ 0.68
Proforma................................................ $ 1.07 $ 0.90 $ 0.62
Diluted earnings per common share
Asreported............................................... $ 1.12 $ 0.93 $ 0.66
Proforma................................................ $ 1.05 $ 0.88 $ 0.61
The weighted-average fair values of options granted during fiscal years 2005, 2004 and 2003 were $6.32, $7.25, and
$4.85, respectively.
Foreign Currency Translation: The assets and liabilities of Staples’ foreign subsidiaries are translated into U.S.
dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average
monthly exchange rates. The resulting translation adjustments, and the net exchange gains and losses resulting from the
translation of investments in Staples’ foreign subsidiaries, are recorded as a separate component of stockholders’ equity.
Derivative Instruments and Hedging Activities: The Company recognizes all derivative financial instruments in the
consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify
for hedge accounting are recorded in stockholders’ equity as a component of comprehensive income or as an adjustment
to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are
reported in earnings.
New Accounting Pronouncements: On December 16, 2004, the Financial Accounting Standards Board (“FASB”)
issued Statement No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”), which is a revision SFAS No. 123.
Statement No. 123R supersedes APB No. 25 and amends Statement No. 95, “Statement of Cash Flows”. Under SFAS
No. 123R, companies must calculate and record in the income statement the cost of equity instruments, such as stock
options, awarded to employees for services received; pro forma disclosure is no longer permitted. The cost of the equity
instruments is to be measured based on fair value of the instruments on the date they are granted (with certain
exceptions) and is required to be recognized over the period during which the employees are required to provide services
in exchange for the equity instruments.