Sally Beauty Supply 2006 Annual Report Download - page 77

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Table of Contents
Sally Holdings, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Alberto-Culver Company)
Notes to Consolidated Financial Statements
with the terms of Alberto-Culver’ s certificate of incorporation. The conversion became effective after the close of business on
November 5, 2003. Following the conversion, all outstanding options to purchase shares of Alberto-Culver Class A common stock
became options to purchase an equal number of shares of Alberto-Culver Class B common stock. On January 22, 2004, Alberto-
Culver redesignated its Class B common stock to “common stock.”
Prior to the adoption of SFAS No. 123(R), as discussed in “Note 2,” Alberto-Culver and the Company accounted for stock
compensation expense in accordance with APB Opinion No. 25, which required the Company to recognize a non-cash charge from the
remeasurement of the intrinsic value of all Alberto-Culver Class A stock options outstanding on the conversion date that were issued
to employees of the Company. A portion of the non-cash charge was recognized on the conversion date for vested stock options and
the remaining non-cash charge related to unvested stock options and restricted shares was being recognized over the remaining vesting
periods. As a result, the Company recorded non-cash charges against pre tax earnings of $31.1 million, of which $27.0 million
($17.6 million after taxes) was recognized in fiscal year 2004 and $4.1 million ($2.6 million after taxes) was recognized in fiscal year
2005. The non-cash charges reduced earnings before provision for income taxes, provision for income taxes and net earnings. No
portion of the non-cash charges related to cost of products sold and distribution expenses. The net balance sheet effects of the options
remeasurement increased total stockholder’ s equity by $9.4 million in fiscal year 2004 and $1.5 million in fiscal year 2005, and
resulted in the recognition of deferred tax assets of the same amounts. The amount of the non-cash charge impacting fiscal year 2006
was calculated in accordance with SFAS No. 123(R) and was nearly zero.
12. Profit Sharing Plan
The Company participates in Alberto-Culver’ s profit sharing plan. The Company’ s contributions to the plan are determined at the
discretion of the Alberto-Culver board of directors. The Company recognized expense of $8.6 million, $9.0 million and $8.7 million in
fiscal years 2006, 2005 and 2004, respectively, related to the plan. These amounts are included in selling, general and administrative
expenses.
13. Stock Option and Restricted Stock Plans
As a subsidiary of Alberto-Culver, the Company has no employee stock option plans; however, certain employees of the Company
have been granted stock options under stock option plans of Alberto-Culver. Under the current plan, Alberto-Culver is authorized to
issue non-qualified stock options to employees to purchase a limited number of shares of Alberto-Culver’ s common stock at a price
not less than the fair market value of the stock on the date of grant. Generally, options under the plan expire ten years from the date of
grant and are exercisable on a cumulative basis in four equal annual increments commencing one year after the date of grant. A total
of 9.0 million shares have been authorized to be issued under the current plan, of which 2.9 million shares remain available for future
grants by Alberto-Culver at September 30, 2006. There are Alberto-Culver stock options outstanding for the Company employees
under a previous stock option plan of Alberto-Culver, which upon the adoption of the current plan, can no longer issue new grants.
Alberto-Culver used treasury shares for all stock option exercises prior to the closing of the transaction separating its consumer
products and beauty supply distribution businesses involving Clayton, Dubilier & Rice Fund VII, L.P. (CDRS). Following the closing
of the transaction and for the foreseeable future, the Company expects to issue new shares upon the exercise of stock options subject
to future board of directors and shareholder approval of the related plans.
The weighted average fair value of Alberto-Culver stock options issued to the Company employees at the date of grant in fiscal years
2006, 2005 and 2004 was $9.48, $9.41 and $9.95 per option, respectively. The fair value of each
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