Notes to Consolidated Financial Statements

Shipping and Handling

Shipping and handling costs are included in the selling, general and administrative expense caption in the consolidated statement of income. Shipping and handling expense was $80.8 million, $75.3 million and $60.9 million for the years ended November 30, 2005, 2004 and 2003, respectively.

Research and Development

Research and development costs are expensed as incurred and are included in the selling, general and administrative expense caption in the consolidated statement of income. Research and development expense was $42.1 million, $39.3 million and $33.2 million for the years ended November 30, 2005, 2004 and 2003, respectively.

Advertising

Advertising costs, which include the development and production of advertising materials and the communication of this material through various forms of media, are expensed in the period the advertising first takes place. Advertising expense is included in the selling, general and administrative expense caption in the consolidated statement of income. Advertising expense was $45.2 million, $49.2 million and $34.5 million for the years ended November 30, 2005, 2004 and 2003, respectively.

Stock-Based Compensation

We use the intrinsic value method as defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock options issued to employees and directors. Accordingly, no compensation expense is recognized for these stock options since all options granted have an exercise price equal to the market value of the underlying stock on the grant date. During 2003, we recorded $1.2 million (net of income taxes of $0.5 million) of stock compensation expense in discontinued operations as a result of accelerated vesting of certain options related to the employees of the discontinued operations. The following table illustrates the effect on net income and earnings per common share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.

The per share weighted-average fair value of stock options and options under our employee stock purchase plan (ESPP) granted was $7.05, $6.79 and $4.70 in 2005, 2004 and 2003, respectively. In the first quarter of 2005, we changed the valuation model used for estimating the fair value of options granted from a Black-Scholes option pricing model to a lattice option pricing model. This change was made because we believe that the lattice option pricing model provides a better estimate of fair value of options granted. The lattice model can incorporate a range of possible outcomes over an option's term and can be adjusted for changes in certain assumptions over time. The Black-Scholes model assumptions are more constant over time, which is not always consistent with an employee's exercise behavior. In accordance with APB 20, "Accounting Changes," this change was made for options granted to employees and directors beginning in the first quarter of 2005. A total of 2.4 million stock options were granted in 2005 at a weighted average fair value of $7.47 per share. The Black-Scholes model would have produced a value that was approximately 15% higher. The 2005 decrease in pro forma stock based employee compensation expense as a result of this change was approximately $0.6 million ($0.4 million after-tax) and is reflected in the preceding table. The ESPP continues to be valued using the Black-Scholes model as employee exercise patterns are not relevant to this plan. The fair values were computed using the following range of assumptions for our various stock compensation plans:

Recently Issued Accounting Pronouncements

In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations." The Interpretation clarifies the accounting for a conditional asset retirement obligation as identified in SFAS No. 143, "Accounting for Asset Retirement Obligations." Interpretation No. 47 is effective for our 2006 fiscal year. We believe there will be no material effect upon adoption of this Interpretation. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires us to expense grants made under our stock compensation plans. That cost will be recognized over the vesting period of the plans. Pro forma compensation expense related to stock options subject to accelerated vesting upon retirement is currently recognized over the entire period of actual employment (up to the date of actual retirement). Upon adoption of SFAS No. 123R, compensation expense related to accelerated vesting will be recognized up to the date on which the employee becomes eligible to retire, regardless of the date on which the employee actually retires. If there are no changes made to our stock option plan, we believe this change will have a material effect upon adoption of this statement. SFAS No. 123R allows for adoption using either the modified prospective or modified retrospective methods. We anticipate using the modified prospective method when we adopt this statement in the first quarter of 2006. The FASB has recently issued interpretations of certain aspects of SFAS 123R and is still considering additional interpretations. The result of these interpretations could have a material effect on our adoption of this standard. We will review interpretations as issued, and accordingly make changes prior to adoption.