Staples 2004 Annual Report Download - page 101

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STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options’ vesting period. For purposes of SFAS No. 148’s disclosure requirements, the Company’s employee stock
purchase plans are considered compensatory plans. The expense was calculated based on the fair value of the employees’
purchase rights. Staples’ pro forma information follows (in thousands, except for per share information):
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
January 29, 2005 January 31, 2004 February 1, 2003
Net income as reported ............................... $708,388 $ 490,211 $ 446,100
Add: Stock based compensation, net of related tax effects,
included in reported net income ....................... 29,466 17,715 16,402
Deduct: Stock based compensation determined under the fair
value based method for all awards, net of related tax effects . . . (71,002) (57,715) (49,718)
Pro forma net income ................................ $666,852 $ 450,211 $ 412,784
Basic earnings per common share
As reported ....................................... $ 1.43 $ 1.01 $ 0.96
Pro forma ......................................... $ 1.35 $ 0.93 $ 0.88
Diluted earnings per common share
As reported ....................................... $ 1.40 $ 0.99 $ 0.94
Pro forma ......................................... $ 1.32 $ 0.91 $ 0.87
The weighted-average fair values of options granted during fiscal years 2004, 2003 and 2002 were $10.88, $7.28 and
$6.84, respectively.
Foreign Currency Translation: The assets and liabilities of Staples’ foreign subsidiaries are translated into U.S.
dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average
monthly exchange rates. The resulting translation adjustments, and the net exchange gains and losses resulting from the
translation of investments in Staples’ foreign subsidiaries, are recorded as a separate component of stockholders’ equity.
Derivative Instruments and Hedging Activities: The Company recognizes all derivative financial instruments in the
consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify
for hedge accounting are recorded in stockholders’ equity as a component of comprehensive income or as an adjustment
to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are
reported in earnings.
New Accounting Pronouncements: On December 16, 2004, the Financial Accounting Standards Board (‘‘FASB’’)
issued Statement No. 123 (revised 2004), ‘‘Share Based Payment’’ (‘‘SFAS No. 123R’’), which is a revision of SFAS
No. 123. Statement No. 123R supersedes APB No. 25 and amends Statement No. 95, ‘‘Statement of Cash Flows.’’ Under
SFAS No. 123R, companies must calculate and record in the income statement the cost of equity instruments, such as
stock options, awarded to employees for services received; pro forma disclosure is no longer permitted. The cost of the
equity instruments is to be measured based on fair value of the instruments on the date they are granted (with certain
exceptions) and is required to be recognized over the period during which the employees are required to provide services
in exchange for the equity instruments. The statement is effective in the first interim or annual reporting period
beginning after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a ‘‘modified prospective’’ method in which compensation
cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested
portion of awards outstanding as of the effective date; or (2) a ‘‘modified retrospective’’ method which follows the
approach in the ‘‘modified prospective’’ method, but also permits entities to restate prior periods to record compensation
cost calculated under SFAS No. 123 for the pro forma disclosure. The Company plans to adopt SFAS No. 123R using the
modified retrospective method. Since the Company currently accounts for stock options granted to employees and shares
issued under our employee stock purchase plans in accordance with the intrinsic value method permitted under APB
No. 25, no compensation expense is recognized. The adoption of SFAS No. 123R is expected to have a significant impact
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