Pier 1 2007 Annual Report Download - page 70

On February 26, 2006, the Company adopted the provisions of SFAS 123R. SFAS 123R requires all
companies to measure and recognize compensation expense at an amount equal to the fair value of share-
based payments granted under compensation arrangements. Prior to February 26, 2006, the Company
accounted for stock option grants using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and recognized no compensation expense
for stock option grants since all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The fair value of the stock options is amortized on a straight-
line basis as compensation expense over the vesting periods of the options. The fair values for options granted
during the respective period were estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
2007 2006 2005
Weighted average fair value of options granted ............... $ 3.33 $ 4.75 $ 6.16
Risk-free interest rates ................................. 4.95% 3.84% 3.95%
Expected stock price volatility ........................... 47.15% 40.00% 40.00%
Expected dividend yields ............................... 0.4% 2.2% 1.5%
Weighted average expected lives ......................... 5years 5 years 5 years
Option valuation models are used in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and the average life of options. The
Company uses expected volatilities and risk-free interest rates that correlate with the expected term of the
option when estimating an option’s fair value. To determine the expected term of the option, the Company
bases its estimates on historical exercise activity of grants with similar vesting periods. Expected volatility is
based on the historical volatility of the common stock of the Company for a period approximating the
expected life. The risk free interest rate utilized is the United States Treasury rate that most closely matches
the weighted average expected life at the time of the grant. The expected dividend yield is based on the annual
dividend rate at the time of grant.
At March 3, 2007, there was approximately $9,414,000 of total unrecognized compensation expense
related to unvested stock option awards. This expense is expected to be recognized over a weighted average
period of 1.56 years. The Company recorded stock-based compensation expense related to stock options of
approximately $4,494,000, or $0.05 per share in fiscal 2007. The Company recognized no net tax benefit
related to stock-based compensation during fiscal 2007 as a result of the Company’s valuation allowance on
all deferred tax assets. See Note 12 of the Notes to Consolidated Financial Statements for additional discussion
of income taxes.
A summary of the Company’s nonvested options as of March 3, 2007 is as follows:
Options
Weighted Average
Grant Date Fair
Value
Nonvested at beginning of period............................ 1,300,000 $4.75
Granted .............................................. 2,745,500 3.33
Vested ............................................... (889,500) 4.24
Cancelled ............................................. (285,500) 4.12
Nonvested at end of period ................................ 2,870,500 $3.61
Restricted stock grants — As of March 3, 2007 and February 25, 2006, the Company had 323,070 and
203,000 unvested shares of restricted stock awards outstanding, respectively. During fiscal 2007, 260,100 shares
of restricted stock were granted, 65,340 shares of restricted stock vested, and 74,690 shares of restricted stock
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)