Ross 2006 Annual Report Download - page 54

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Note C: Stock-based compensation
The Company adopted the provisions of SFAS No. 123(R) on January 29, 2006, the beginning of fiscal 2006, using the modified
prospective method. Under SFAS No. 123(R), compensation expense is recognized based on the grant date fair value of stock-
based compensation awards granted in fiscal 2006 and later, and based on the unvested portion of awards from prior year grants
that were outstanding as of January 28, 2006. Stock-based awards are valued using the Black-Scholes option pricing model,
consistent with the Company’s prior pro forma disclosures under SFAS No. 123. Compensation expense for unvested awards
outstanding at the date of adoption is recognized over the remaining vesting period using the compensation cost calculated
for purposes of the prior pro forma disclosures. For awards granted after the adoption date, the Company recognizes expense
based on the fair value of the award on a straight-line basis over the applicable vesting period.
For fiscal 2006, 2005 and 2004 the Company recognized stock-based compensation expense as follows (in $000):
2006 2005 2004
Stock options and ESPP $ 13,221 $ − $ −
Restricted stock 13,459 16,668 14,045
Total $ 26,680 $ 16,668 $ 14,045
Capitalized stock-based compensation cost was not significant.
The determination of the fair value of stock options and ESPP shares, using the Black-Scholes model, is affected by the
Company’s stock price as well as assumptions as to the Company’s expected stock price volatility over the term of the awards,
actual and projected employee stock option exercise behavior, the risk-free interest rate, and expected dividends.
The Company estimates the expected term of options granted taking into account historical and expected future exercise,
cancellation and forfeiture behavior. The Company estimates the volatility of the common stock by using historical volatility over
a period equal to the award’s expected term. The risk-free interest rates that are used in the valuation models are based upon
yields of U.S. Treasury issues with remaining terms similar to the expected term on the options. Dividend yield has been esti-
mated based on the Company’s expectation as to future dividend payouts.
SFAS No. 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. In previous fiscal years, the Company had recognized the
impact of forfeitures as they occurred. Now, the Company uses historical data to estimate pre-vesting forfeiture rates in deter-
mining the amount of stock-based compensation expense to recognize. All stock-based compensation awards are amortized on
a straight-line basis over the requisite service periods of the awards.
At February 3, 2007, the Company had two stock-based compensation plans, which are further described in Note H. The fair
value of stock options and ESPP rights granted during the respective periods under these plans were estimated using the Black-
Scholes option pricing model and the following weighted average assumptions:
Stock Options 2006 2005 2004
Expected life from grant date (years) 4.2 3.5 3.0
Expected volatility 32.5% 33.7% 36.3%
Risk-free interest rate 4.6% 3.9% 2.9%
Dividend yield 0.8% 0.7% 0.6%
Employee Stock Purchase Plan 2006 2005 2004
Expected life from grant date (years) 1.0 1.0 1.0
Expected volatility 26.7% 32.9% 31.7%
Risk-free interest rate 4.5% 4.5% 2.9%
Dividend yield 0.8% 0.8% 0.7%