Sysco 2007 Annual Report Download - page 83

Effective July 3, 2005, SYSCO adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based
Payment,” (SFAS 123(R)) using the modified-prospective transition method. Under this transition method, compensation
cost recognized in fiscal 2006 includes: a) compensation cost for all share-based payments granted through July 2, 2005,
but for which the requisite service period had not been completed as of July 2, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based payments
granted subsequent to July 2, 2005, based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R). Results for prior periods have not been restated.
As a result of adopting SFAS 123(R) on July 3, 2005, SYSCO’s earnings before income taxes and cumulative effect of
accounting change and net earnings for fiscal 2006 were $118,038,000 and $105,810,000 lower, respectively, than if the
company had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share
before the cumulative effect of the accounting change for fiscal 2006 were both $0.17 lower than if the company had
continued to account for share-based compensation under APB 25.
The adoption of SFAS 123(R) results in lower diluted shares outstanding than would have been calculated had
compensation cost not been recorded for stock options and stock issuances under the Employees’ Stock Purchase Plan.
This is due to a modification required by SFAS 123(R) of the treasury stock method calculation utilized to compute the
dilutive effect of stock options.
Prior to the adoption of SFAS 123(R), the company presented all tax benefits of deductions resulting from the exercise
of options as operating cash flows in the consolidated cash flows. SFAS 123(R) requires the cash flows resulting from
tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. The $6,569,000 excess tax benefit classified as a financing cash inflow for fiscal 2006 would have
been classified as an operating cash inflow if the company had not adopted SFAS 123(R).
SYSCO provides compensation benefits to employees and non-employee directors under several share-based payment
arrangements including various employee stock option plans, the Employees’ Stock Purchase Plan, the Management
Incentive Plan and the 2005 Non-Employee Directors Stock Plan.
Stock Option Plans
SYSCO’s 2004 Stock Option Plan was adopted in fiscal 2005 and reserves 23,500,000 shares of SYSCO common stock for
grants of options and dividend equivalents to directors, officers and other employees of the company and its subsidiaries
at the market price at the date of grant. This plan provides for the issuance of options qualified as incentive stock options
under the Internal Revenue Code of 1986, options which are non-qualified, and dividend equivalents. To date, SYSCO has
only issued options under this plan.
Vesting requirements for awards under this plan will vary by individual grant and may include either time-based vesting or
time-based vesting subject to acceleration based on performance criteria. The contractual life of all options granted under
this plan will be no greater than seven years. As of June 30, 2007, there were 12,523,950 remaining shares authorized and
available for grant under the 2004 Stock Option Plan.
SYSCO has also granted employee options under several previous employee stock option plans for which previously
granted options remain outstanding as of June 30, 2007. No new options will be issued under any of the prior plans,
as future grants to employees will be made through the 2004 Stock Option Plan or subsequently adopted plans. Vesting
requirements for awards under these plans vary by individual grant and include either time-based vesting or time-based
vesting subject to acceleration based on performance criteria. The contractual life of all options granted under these plans
through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years.
SYSCO’s 2005 Non-Employee Directors Stock Plan was adopted in fiscal 2006 and reserves 550,000 shares of common
stock for grants to non-employee directors in the form of options, stock grants, restricted stock units and dividend
equivalents. In addition, options and unvested common shares also remained outstanding as of June 30, 2007 under
previous non-employee director stock plans. No further grants will be made under these previous plans, as all future
grants to non-employee directors will be made through the 2005 Non-Employee Directors Stock Plan or subsequently
adopted plans. Vesting requirements for awards under these plans vary by individual grant and include either time-based
vesting or time-based vesting subject to acceleration based on performance criteria. The contractual life of all options
granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of
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