Starbucks 2005 Annual Report Download - page 52

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If compensation cost for the Company's stock options had been recognized based upon the estimated fair
value on the grant date under the fair value methodology allowed by SFAS No. 123 ""Accounting for Stock-
Based Compensation'' (""SFAS 123''), as amended, the Company's net earnings and earnings per share would
have been as follows (in thousands, except earnings per share):
Fiscal Year Ended Oct 2, 2005 Oct 3, 2004 Sept 28, 2003
Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $494,467 $388,973 $265,355
Deduct: stock-based compensation expense, net of taxÏÏÏÏ (58,742) (45,056) (37,436)
Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $435,725 $343,917 $227,919
Net earnings per common share Ì basic:
As reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.63 $ 0.49 $ 0.34
Deduct: stock-based compensation expense, net of taxÏÏ (0.08) (0.06) (0.05)
Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.55 $ 0.43 $ 0.29
Net earnings per common share Ì diluted:
As reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.61 $ 0.47 $ 0.33
Deduct: stock-based compensation expense, net of taxÏÏ (0.08) (0.05) (0.04)
Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.53 $ 0.42 $ 0.29
The above pro forma information regarding net income and earnings per share has been determined as if the
Company had accounted for its employee stock options under the fair value method. The fair value for these
stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions:
Employee Stock Options
Fiscal Year Ended 2005 2004 2003
Expected life (years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 - 6 1 - 6 2 - 5
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23% - 43% 22% - 50% 37% - 55%
Risk-free interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.4% - 4.2% 1.1% - 4.5% 0.9% - 4.0%
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00% 0.00% 0.00%
Employee Stock Purchase Plans
Fiscal Year Ended 2005 2004 2003
Expected life (years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.25 - 3 0.25 - 3 0.25 - 3
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20% - 40% 19% - 43% 30% - 50%
Risk-free interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9% - 3.5% 0.9% - 2.3% 0.9% - 2.3%
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.00% 0.00% 0.00%
The Company's valuations are based upon a multiple option valuation approach, and forfeitures are recognized
as they occur. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the expected stock-price volatility. The
Company's employee stock options have characteristics significantly different from those of traded options,
and changes in the subjective input assumptions can materially affect the fair value estimate. Because
Company stock options do not trade on a secondary exchange, employees do not derive a benefit from holding
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