Barnes and Noble 2004 Annual Report Download - page 41

stock options have characteristics significantly different
from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the Black-
Scholes model does not necessarily provide a reliable
measure of the fair value of the companies’ stock options.
The pro forma effect on earnings from continuing
operations and earnings per share, had the Company
applied the fair-value-recognition provisions of SFAS No.
123, is shown in Note 1 to the Notes to Consolidated
Financial Statements.
BKS Stock-Based Incentive Plans
The Company currently has three incentive plans under
which stock options and restricted stock have been
granted to officers, directors and key employees of the
Company, the 1991 Employee Incentive Plan (the 1991
Plan), the 1996 Incentive Plan (the 1996 Plan) and the
2004 Incentive Plan (the 2004 Plan). Additionally,
options and restricted stock may continue to be granted
in the future under the 1996 Plan and the 2004 Plan.
The options to purchase common shares generally are
issued at fair market value on the date of the grant,
begin vesting after one year in 33-1/3 percent or 25
percent increments per year, expire 10 years from
issuance and are conditioned upon continual
employment during the vesting period.
The 2004 Plan, the 1996 Plan and the 1991 Plan allow
the Company to grant options to purchase up to
8,376,562, 17,667,737 and 4,754,464 shares of
common stock, respectively, (7,300,000, 14,500,000
and 4,732,704, respectively, before adjustments to
reflect the impact of the GameStop spin-off on shares
available for grant, as noted below). Restricted stock
awards are counted against this limit as two shares for
every one share granted.
In addition to the three incentive plans, the Company
has granted stock options to certain key executives and
directors. The vesting terms and contractual lives of
these grants are similar to that of the incentive plans.
Leonard Riggio, the Company’s chairman, exercised
1,318,750 stock options in September 2003, by
tendering in payment of the exercise price of the stock
options 606,277 shares that he held in the Company’s
stock. Mr. Riggio elected to defer receipt of the balance
of the shares (712,473) due from the exercise pursuant
to the Company’s Executive Deferred Compensation
Plan. In accordance therewith, the Company
established a rabbi trust for the benefit of Mr. Riggio
which holds 712,473 shares of the Company’s common
stock. The shares held by the rabbi trust are treated as
treasury stock. Due to the deferred compensation
arrangement these shares are included in the
denominator of the EPS calculation in accordance with
SFAS No. 128, “Earnings per share” when the impact is
not antidilutive.
The weighted-average fair value of the options granted
during fiscal 2004, 2003 and 2002 were estimated at
$11.68, $8.02 and $8.96, respectively, using the Black-
Scholes option-pricing model with the following
assumptions:
Fiscal Year 2004 2003 2002
Volatility 31% 40% 40%
Risk-free interest rate 3.73% 2.71% 3.51%
Expected life 6 years 6 years 6 years
A summary of the status of the Company’s BKS stock
options is presented below:
Shares Weighted-Average
(000s) Exercise Price
Balance, February 2, 2002 11,695 $ 18.04
Granted 2,182 20.09
Exercised (385 ) 18.52
Forfeited (924 ) 20.22
Balance, February 1, 2003 12,568 18.22
Granted 1,967 18.78
Exercised (5,063 ) 13.04
Forfeited (573 ) 20.98
Balance, January 31, 2004 8,899 21.12
Granted 3,049 30.97
Exercised (1,256 ) 19.42
Forfeited (414 ) 23.48
Balance, November 12, 2004 10,278 24.16
Adjustment for GameStop
spin-off(a)
4,266 (7.11 )
Adjusted balance,
November 12, 2004
14,544 17.05
Exercised (619 ) 14.75
Forfeited (65 ) 16.51
Balance, January 29, 2005 13,860 $ 17.16
(a) In conjunction with the spin-off of GameStop, and the
consequent reduction in the market price of the
Company’s shares, the Company reduced the exercise
price of its outstanding options and increased the number
of such options, so that option holders would have the
same intrinsic value before and after the spin-off.
[NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS continued ]
39 2004 Annual Report Barnes & Noble, Inc.