Big Lots 2008 Annual Report Download - page 126

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The 1996 Incentive Plan and 2005 Incentive Plan authorize the issuance of incentive and nonqualified stock
options, restricted stock, restricted stock units, performance units, and stock appreciation rights. We have not
issued restricted stock units, performance units, or stock appreciation rights. As a result of its expiration, no
common shares are available for issuance under the 1996 Incentive Plan. The number of common shares available
for issuance under the 2005 Incentive Plan consists of: 1) an initial allocation of 1,250,000 common shares; 2)
2,001,142 common shares, the number of common shares that were available under the 1996 Incentive Plan upon
its expiration; 3) 2,100,000 common shares approved by our shareholders in May 2008; and 4) an annual increase
equal to 0.75% of the total number of issued common shares (including treasury shares) as of the start of each of
our fiscal years during which the 2005 Incentive Plan is in effect. The Compensation Committee of our Board
of Directors (“Committee”), which is charged with administering the 2005 Incentive Plan, has the authority to
determine the terms of each award. Stock options granted to employees generally expire on the earlier of: 1) the
term set by the Committee, which has historically been 7 to 10 years from the grant date; or 2) one year following
termination of employment, death, or disability. Stock options granted under the 1996 Incentive Plan and 2005
Incentive Plan may be either nonqualified or incentive stock options, and the exercise price may not be less than
the fair market value of the underlying common shares on the grant date. The stock options generally vest ratably
over a four-year or five-year period; however, upon a change in control, all awards outstanding automatically vest.
In addition to the 1996 Incentive Plan and the 2005 Incentive Plan, we have previously maintained the Big
Lots Director Stock Option Plan (“Director Stock Option Plan”) for non-employee directors. The Director
Stock Option Plan was administered by the Committee pursuant to an established formula. Neither the Board
of Directors nor the Committee exercised any discretion in administration of the Director Stock Option Plan.
Grants were made annually, approximately 90 days following the Annual Meeting of Shareholders, at an
exercise price equal to the fair market value of the underlying common shares (i.e. 100% of the final trading
price) on the date of grant. The annual grants to each outside director of an option to acquire 10,000 of our
common shares became fully exercisable over a three-year period: 20% of the shares on the first anniversary,
60% on the second anniversary, and 100% on the third anniversary. Stock options granted to non-employee
directors expire on the earlier of: 1) 10 years plus one month; 2) one year following death or disability; or 3) at
the end of our next trading window one year following termination. In connection with the amendment to the
2005 Incentive Plan in May 2008, our Board of Directors amended the Director Stock Option Plan so that no
additional awards may be made under that plan. Our non-employee directors did not receive any stock options
in 2008, but did, as discussed below, receive restricted stock awards under the 2005 Incentive Plan.
On November 21, 2005, we announced that the Committee, after discussion with our Board of Directors, approved
accelerating the vesting of stock options representing approximately 3.8 million of our common shares awarded
on or before February 21, 2005, under the 1996 Incentive Plan and the Director Stock Option Plan. The 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. 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). 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 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 on historical and current implied volatilities
Note 7 — Share-Based Plans (Continued)