Supercuts 2006 Annual Report Download - page 79

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
during the year which were granted prior to fiscal year 2004 are not recognized as expense in the Consolidated Statement of Operations.
Options granted in fiscal years prior to the adoption of the fair value recognition provisions continued to be accounted for under APB No. 25
for fiscal year 2005 and 2004. The adoption of the fair value recognition provisions for stock options increased the Company’s fiscal year 2005
compensation expense by $0.4 (related to recognizing compensation expense over the vesting period of options after July 1, 2003).
Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), using the modified
prospective method of application. Under this method, compensation expense is recognized both for (i) awards granted, modified or settled
subsequent to July 1, 2003 and (ii) the remaining vesting periods of awards issued prior to July 1, 2003. The impact of adopting SFAS
No. 123R during fiscal year 2006 was an increase in compensation expense of $2.7 million ($2.4 million after tax), and a reduction of $0.05 for
both basic and diluted earnings per share for fiscal year 2006, respectively. Compensation expense recorded during fiscal year 2006 includes
approximately $2.3 million related to awards issued subsequent to July 1, 2003 and $2.7 million related to unvested awards previously being
accounted for on the intrinsic value method of accounting.
Total compensation cost for stock-
based payment arrangements totaled $4.9 and $1.2 million ($4.1million and $0.8 after tax) for the fiscal
years ended June 30, 2006 and 2005, respectively. SFAS No. 123R also requires that the cash retained as a result of the tax deductibility of
increases in the value of stock-based arrangements be presented as a cash inflow from financing activity in the Consolidated Statement of Cash
Flows. The amount presented as a financing activity for fiscal year 2006 was $4.6 million. Prior to fiscal year 2006, and the Company’s
adoption of SFAS No. 123R, the tax benefit realized upon the exercise of stock options was presented as an operating activity (included within
accrued expenses) and totaled $9.0 and $8.3 million for fiscal years 2005 and 2004, respectively.
The Company’s pro forma net income and pro forma earnings per share for fiscal years 2005 and 2004, which include pro forma net
income and earnings per share amounts as if the fair value-based method of accounting had been used on awards granted prior to July 1, 2003,
was as follows:
78
For the Periods Ended June 30,
2005
2004
(Dollars in thousands,
except per share amounts)
Net income, as reported
$
64,631
$
104,218
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
765
61
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects
(4,885
)
(6,600
)
Pro forma net income
$
60,511
$
97,679
Earnings per share:
Basic—as reported
$
1.45
$
2.37
Basic—pro forma
$
1.36
$
2.22
Diluted—as reported
$
1.39
$
2.26
Diluted—pro forma
$
1.31
$
2.13