Nike 2006 Annual Report Download - page 54

NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
If the Company had accounted for these stock options and ESPP purchase rights issued to employees in
accordance with FAS 123, the Company’s pro forma net income and pro forma earnings per share (“EPS”)
would have been reported as follows:
Year Ended May 31,
2006 2005 2004
(In millions, except per share data)
Net income as reported .................................... $1,392.0 $1,211.6 $945.6
Add: Stock-based compensation expense included in reported net
income, net of tax ...................................... 0.2 0.6 —
Deduct: Total stock-based employee compensation expense under
fair value based method for all awards, net of tax ............. (76.8) (64.1) (48.7)
Pro forma net income ..................................... $1,315.4 $1,148.1 $896.9
Earnings per share:
Basic — as reported .................................. $ 5.37 $ 4.61 $ 3.59
Basic — pro forma ................................... $ 5.08 $ 4.37 $ 3.41
Diluted — as reported ................................ $ 5.28 $ 4.48 $ 3.51
Diluted — pro forma ................................. $ 5.01 $ 4.28 $ 3.35
The pro forma effects of applying FAS 123 may not be representative of the effects on reported net income
and earnings per share for future years since options vest over several years and additional awards are made each
year.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) finalized SFAS No. 123R
“Share-Based Payment” (“FAS 123R”) which, after the Securities and Exchange Commission (“SEC”) amended
the compliance dates on April 15, 2005, is effective for the Company’s fiscal year beginning June 1, 2006. The
new standard will require the Company to record compensation expense for stock options using a fair value
method. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the
Staff’s views regarding interactions between FAS 123R and certain SEC rules and regulations and provides
interpretations of the valuation of share-based payments for public companies.
The Company plans to adopt the new requirements under FAS 123R and SAB 107 beginning in its quarter
ending August 31, 2006 using the modified prospective transition method and the Black-Scholes fair value
model. As a result of the adoption of FAS 123R the Company will recognize additional compensation expense of
approximately $0.36 per diluted share in the fiscal year ending May 31, 2007. The amount of expense that will be
recognized is largely dependent on several variables, including the level of share-based payments that will be
granted during the fiscal year in addition to the assumptions used in the valuation model. Accordingly, the actual
effect per diluted share could differ from this estimate. The effect on the Company’s results of operations of
expensing stock options for the years ending May 31, 2006, 2005 and 2004 using the Black-Scholes model is
presented in the table above.
Under certain conditions, stock options granted by the Company are eligible for accelerated vesting upon
the retirement of the employee. The FASB clarified in FAS 123R that the fair value of such stock options should
be expensed based on the applicable accelerated vesting schedule, rather than ratably over the vesting period
stated in the grant. The Company’s pro forma disclosure above currently reflects the expense of such options
ratably over the stated vesting period, expensing all unvested shares upon actual retirement. The SEC clarified
that companies should continue to follow the vesting method they have been using until adoption of FAS 123R,
then apply the accelerated vesting schedule to all subsequent grants to those employees eligible for accelerated
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