Big Lots 2007 Annual Report Download - page 147

59
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7 — Share-Based Plans (Continued)
Committee did not, however, accelerate the vesting of stock options granted after February 21, 2005, including
those granted to our current Chief Executive Officer, Steven S. Fishman, or the vesting of stock options granted
to our former Chief Executive Officer. The decision to accelerate vesting of stock options was made primarily
to reduce non-cash compensation expense that would have been recorded by us beginning in 2006 following
the adoption of SFAS No. 123(R) in the first quarter of 2006. This action resulted in an insignificant amount
of expense recorded in the fourth quarter of 2005 for the impact of the shares estimated to be modified and
was expected to enable us to eliminate pretax expense of approximately $11.7 million over the five year period
during which the stock options would have vested, subject to the impact of any additional adjustments related to
cancelled stock options. The acceleration resulted in additional proforma stock-based employee compensation
expense in 2005 as disclosed in note 1 to these consolidated financial statements. Additionally, the Committee
imposed a holding period that requires all directors, executive vice presidents, and senior vice presidents
(including our named executive officers other than Mr. Fishman whose stock options were not accelerated) to
refrain from selling shares acquired upon the exercise of the accelerated stock options until the date on which
the exercise would have been permitted under the stock option’s original vesting terms or, if earlier, the director
or officer’s death, permanent and total disability, or termination of employment.
We use a binomial model to estimate the fair value of stock options on the grant date. The binomial model
takes into account variables such as volatility, dividend yield rate, risk-free rate, contractual term of the option,
the probability that the option will be exercised prior to the end of its contractual life, and the probability of
retirement of the option holder in computing the value of the option. Expected volatility is based in part on
historical and current implied volatilities from traded options on our common shares. The risk-free rate is based
on U.S. Treasury security yields at the time of the grant. The dividend yield on our common shares is assumed
to be zero since we have not paid dividends and have no current plans to do so in the future. The expected life is
determined from the binomial model. The model incorporates exercise and post-vesting forfeiture assumptions
based on analysis of historical data.
The assumptions used in the option pricing model for each of the respective periods were as follows:
2007 2006 2005
Weighted-average fair value of options granted. . . . . . . . . . . . . . . . . . . . . . . . . . $11.59 $5.56 $4.74
Risk-free interest rates ............................................. 4.4 % 4.6 % 3.9 %
Expected life (years) ............................................... 4.4 4.6 5.5
Expected volatility ................................................ 42.6 % 42.4 % 42.4 %
Expected annual forfeiture .......................................... 3.0 % 3.0 % 3.0 %
The following table summarizes information about our stock options outstanding and exercisable at February 2, 2008:
Range of Prices Options Outstanding Options Exercisable
Greater
Than
Less
Than or
Equal to
Options
Outstanding
Weighted-
Average
Remaining
Life
(Years)
Weighted-
Average
Exercise
Price
Options
Exercisable
Weighted-
Average
Exercise
Price
$ — $ 10.00 17,500 3.3 $ 9.34 17,500 $ 9.34
10.01 20.00 2,660,080 5.5 13.14 1,544,405 13.43
20.01 30.00 1,126,500 6.4 28.59 5,500 21.84
30.01 40.00 311,890 0.3 37.01 301,890 37.20
$40.01 $ 50.00 8,500 0.3 40.62 8,500 40.62
4,124,470 5.3 $19.20 1,877,795 $17.36