Sally Beauty Supply 2006 Annual Report Download - page 41

Download and view the complete annual report

Please find page 41 of the 2006 Sally Beauty Supply annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 135

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135

Table of Contents
under plans of Alberto-Culver. Prior to fiscal year 2006, SFAS No. 123, Accounting for Stock-Based Compensation, required either
the adoption of a fair value based method of accounting for stock-based compensation or the continuance of the intrinsic value method
with pro-forma disclosures as if the fair value method was adopted. Sally Holdings elected to measure stock-based compensation
expense using the intrinsic value method prescribed by APB Opinion No. 25, and, accordingly, no compensation cost related to stock
options had been recognized in the consolidated statements of earnings, except for the non-cash charge related to Alberto-Culver’ s
conversion to one class of common stock.
Effective October 1, 2005, Sally Holdings adopted SFAS No. 123 (R) using the modified prospective method. Under this method,
compensation expense related to Alberto-Culver stock options granted to employees of our business is recognized for new stock
option grants beginning in fiscal year 2006 and for the unvested portion of outstanding stock options that were granted prior to the
adoption of SFAS No. 123 (R). We recognize compensation expense on a straight-line basis over the vesting period or to the date a
participant becomes eligible for retirement, if earlier. In accordance with the modified prospective method, the financial statements for
prior periods have not been restated.
For fiscal year 2006, we recorded stock option expense that reduced earnings before provision for income taxes by $5.2 million,
provision for income taxes by $1.8 million and net earnings by $3.4 million. The expense recorded in the first quarter of fiscal year
2006 included the immediate expensing of the fair value of stock options granted during the quarter to employees of our business who
had already met the definition of retirement under the Alberto-Culver stock option plan. Stock option expense is included in selling,
general and administrative expenses in the consolidated statement of earnings. The net balance sheet effect of recognizing stock option
expense increased total stockholder’ s equity by $1.8 million for fiscal year 2006 and resulted in the recognition of deferred tax assets
of the same amount. Our consolidated statement of cash flows for fiscal year 2006 reflects $0.6 million of excess tax benefits from
employee exercises of Alberto-Culver stock options as financing cash inflow in accordance with the provisions of SFAS No. 123 (R)
which became effective October 1, 2005. For fiscal years 2005 and 2004, our consolidated statements of cash flows reflect
$1.2 million and $10.8 million, respectively, of excess tax benefits from employee exercises of Alberto-Culver stock options as
operating cash inflows. As of September 30, 2006, we had $4.6 million of unrecognized compensation cost related to Alberto-Culver
stock options issued to employees of our business that was expected to be recognized over a weighted average period of 2.0 years, and
$1.0 million of unearned compensation related to restricted shares that was expected to be amortized to expense over a weighted
average period of 3.8 years. In connection with the closing of the transactions separating us from Alberto-Culver, we will record a
charge in the first quarter of fiscal year 2007 equal to the amount of future compensation expense that would have been recognized in
subsequent periods as the stock options vested over the original vesting periods, of approximately $4.3 million and $0.9 million,
respectively, and $0.1 million related to a restricted stock bonus.
For the fiscal years in the three-year period ended September 30, 2005 and for the quarter ended December 31, 2006, we reported
translation gains of approximately $3.5 million in the aggregate on an intercompany note to an affiliated company as a component of
other comprehensive income. We have subsequently determined that, for our Company on a stand-alone basis, this amount is properly
reported as a transaction gain within operating earnings. As a result, in this report and the financial statements included herein we have
increased pre-tax earnings for the fiscal year ended September 30, 2006 by approximately $3.5 million ($2.3 million after taxes).
35