Lexmark 2009 Annual Report Download - page 104

Under the Company’s stock incentive plans, awards granted to certain employees who meet age and/or
service requirements prescribed in the plan will continue to vest after the employees’ retirement with no
additional service requirements. Prior to the adoption of the FASB share-based payment guidance, the
Company recognized cost, on a pro forma basis, over the stipulated vesting period of these awards. Per
SEC guidance, the Company is continuing to account for these awards in this manner subsequent to the
adoption of the share-based payment guidance. For any awards granted after the adoption of the share-
based payment guidance to employees who meet the age and/or service requirements, the Company is
recognizing the cost of these awards over the period that the employee is required to provide service until
the employee may retire and continue to vest in these awards. The change in method of accounting for
these awards is not material for any periods presented.
On December 31, 2005, Lexmark accelerated the vesting of certain unvested “out-of-the-money” stock
options with exercise prices equal to or greater than $80.00 per share. These options, which were
previously awarded to its employees under the Company’s equity compensation plans, would have
otherwise vested in the years 2006 through 2008. The vesting was effective for approximately 2.4 million
unvested options, or 39% of the Company’s total outstanding unvested options as of December 31, 2005.
Acceleration of options held by non-employee directors and executive officers were not included in the
vesting acceleration. The acceleration of these options eliminated future compensation expense the
Company would otherwise have recognized in its income statement with respect to these accelerated
options upon the adoption of the share-based payment guidance. As a result of the acceleration, the
Company recognized an additional $25 million (pre-tax) of stock-based employee compensation expense
in the 2005 pro forma disclosure information provided in the 2007 10-K filing.
Stock Options
Generally, options expire ten years from the date of grant. Options granted during 2009, 2008 and 2007,
vest in approximately equal annual installments over a three-year period based upon continued
employment or service on the Board of Directors.
During 2009, the Company granted a total of 559,000 performance-based stock options to a small number
of senior managers. The terms of the award require satisfaction of both a performance condition and a
service condition for the award recipient to become vested in the stock option. The performance measure
selected for the award is free operating cash flow over four consecutive quarters. As of December 31, 2009
the performance goal has been achieved and the stock options will become vested and exercisable upon
satisfaction of the service condition 34% at year 2, 33% at year 4 and 33% at year 6.
For the year ended December 31, 2009, 2008 and 2007, the weighted average fair value of options granted
were $6.18, $11.23 and $18.52 respectively. The fair value of each option award on the grant date was
estimated using the Black-Scholes option-pricing model with the following assumptions:
2009 2008 2007
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% 33% 30%
Weighted average risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1% 3.0% 4.7%
Weighted average expected life of options (years) . . . . . . . . . . . . . . . . . . . . . . . 5.6 4.9 4.0
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