ADT 2006 Annual Report Download - page 208

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Share Plans (Continued)
When common shares are issued pursuant to a grant of restricted stock and restricted units
(collectively, ‘‘restricted share awards’’), deferred stock units, promissory stock, and performance units
or as payment of an annual performance bonus or other stock-based award, the total number of
common shares remaining available for grant will be decreased by a margin of at least 1.8 per common
share issued. At September 29, 2006, there were approximately 162 million shares available for future
grant under the 2004 Plan (including shares available under both the LTIP I and LTIP II Plans that are
now assumable under the 2004 Plan).
The 1994 Plan provided for the issuance of restricted stock grants to officers and non-officer
employees. The 1994 Plan expired in November 2004; thus no additional grants of restricted stock have
been made under this plan since November 2004 and no shares are available for future grant. At
September 29, 2006, 30 million shares had been granted, of which 14 million were granted under the
2004 Plan and 16 million were granted under the 1994 Plan.
The LTIP I Plan reserved common shares for issuance to Tyco’s directors, executives and managers
as share options. This plan is administered by the Compensation and Human Resources Committee of
the Board of Directors of the Company, which consists exclusively of independent directors of the
Company. Tyco had reserved 140 million common shares for issuance under the LTIP I Plan. At
September 29, 2006, there were approximately 29 million shares originally reserved for issuance under
this plan but now available for future grant under the 2004 Plan.
The LTIP II Plan was a broad-based option plan for non-officer employees. Tyco had reserved
100 million common shares for issuance under the LTIP II Plan. The terms and conditions of this plan
are similar to the LTIP I Plan. At September 29, 2006, there were approximately 35 million shares
originally reserved for issuance under this plan that are now available for future grant under the 2004
Plan.
Share Options—Options are granted to purchase common shares at prices which are equal to or
greater than the market price of the common shares on the date the option is granted. Conditions of
vesting are determined at the time of grant under the 2004 Plan. Options are generally exercisable in
equal annual installments over a period of three years and will generally expire 10 years after the date
of grant. Options assumed as part of business combination transactions are administered under Tyco’s
plan but do not reduce the available shares and retain all the rights, terms and conditions of the
respective plans under which they were originally issued.
At September 29, 2006, approximately 401 million share options had been granted, of which
230 million, 124 million and 47 million were granted under the LTIP I, LTIP II and 2004 Plans,
respectively.
The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing
model. The fair value is then amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period. Use of a valuation model requires management to make
certain assumptions with respect to selected model inputs. Expected volatility was calculated based on
the historical volatility of the Company’s stock and implied volatility derived from exchange traded
options. The average expected life was based on the contractual term of the option and expected
employee exercise and post-vesting employment termination behavior. The risk-free interest rate is
based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at
the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are
146 2006 Financials