Dollar General 2004 Annual Report Download - page 54

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Notes to Consolidated Financial Statements (continued)
sum distribution of amounts credited to his account in
accordance with the terms of the directors’ deferral plan.
All deferred compensation will be immediately due and
payable upon a “change in control” (as defined in the
directors’ deferral plan) of the Company. Effective
January 1, 2005, account balances deemed to be
invested in the Mutual Fund Options are payable in cash
and account balances deemed to be invested in the
Common Stock Option are payable in shares of Dollar
General common stock and cash in lieu of fractional
shares. Prior to January 1, 2005, all account balances
were payable in cash.
10. Stock-Based Compensation
The Company has a shareholder-approved stock incen-
tive plan under which restricted stock, restricted stock
units, stock options and other equity-based awards may
be granted to officers, directors and key employees.
All stock options granted in 2004, 2003 and 2002 under
the terms of the Company’s stock incentive plan were
non-qualified stock options issued at a price equal to
the fair market value of the Company’s common stock
on the date of grant. Non-qualified options granted under
these plans have expiration dates no later than 10 years
following the date of grant.
Under the plan, stock option grants are made to key
management employees including officers, as well as
other employees, as determined by the Compensation
Committee of the Board of Directors. The number of
options granted is directly linked to the employee’s job
classification. Beginning in 2002, vesting provisions for
options granted under the plan changed from a combina-
tion of Company performance-based vesting and time-
based vesting to time-based vesting only. All options
granted in 2004, 2003 and 2002 under the plan vest
ratably over a four-year period, except for a grant made
to the CEO in 2003, two-thirds of which vested after one
year and one-third of which vests after two years.
Under the plan, restricted stock and restricted stock
units (which represent the right to receive one share
of common stock for each unit upon vesting) may be
granted to employees, including officers, as determined
by the Compensation Committee of the Board of
Directors. In addition, the plan provides for the automatic
annual grant of 4,600 restricted stock units to each
non-employee director. In 2004 and 2003, the Company
awarded a total of 166,300 and 50,000 shares of
restricted stock and restricted stock units to certain plan
participants at a weighted average fair value of $19.26
and $19.37 per share, respectively. The difference
between the market price of the underlying stock on
the date of grant and the purchase price, which was set
at zero for all restricted stock and restricted stock unit
awards in 2004 and 2003, was recorded as unearned
compensation expense, which is a component of Other
shareholders’ equity, and is being amortized to expense
on a straight-line basis over the restriction period.
The restricted stock and restricted stock units granted
to employees in 2004 and 2003 under the plan vest and
become payable ratably over a three-year period. The
restricted stock units granted to outside directors gener-
ally vest one year after the grant date subject to acceler-
ation of vesting upon retirement or other circumstances
set forth in the plan, but no payout shall be made until
the individual has ceased to be a member of the Board
of Directors. Under the stock incentive plan, recipients
of restricted stock are entitled to receive cash dividends
and to vote their respective shares, but are prohibited
from selling or transferring restricted shares prior to
vesting. Recipients of restricted stock units are entitled
to accrue dividend equivalents on the units but are not
entitled to vote, sell or transfer the shares underlying
the units prior to both vesting and payout. The maximum
number of shares of restricted stock or restricted stock
units eligible for issuance under the terms of this plan
has been capped at 4,000,000. At January 28, 2005,
3,763,451 shares of restricted stock or restricted stock
units were available for grant under the plan.
During 2003, the Company also granted stock options
and restricted stock in transactions that were not made
under the stock incentive plan. The Company awarded
78,865 shares of restricted stock as a material induce-
ment to employment to its CEO at a fair value of $12.68
per share. The difference between the market price of
the underlying stock and the purchase price on the date
of grant, which was set as zero for this restricted stock
award, was recorded as unearned compensation
expense, and is being amortized to expense on a
straight-line basis over the restriction period of five
years. The CEO is entitled to receive cash dividends
and to vote these shares, but is prohibited from selling or
transferring shares prior to vesting. Also during the first
quarter of 2003, the Company awarded the CEO, as a
material inducement to employment, an option to pur-
chase 500,000 shares at an exercise price of $12.68
per share. The option generally vests at a rate of 166,666
shares on the second anniversary of the grant date and
333,334 shares on the third anniversary of the grant date,