Qualcomm 2006 Annual Report Download - page 78

64 qualcomm 2006
Notes to Consolidated Financial Statements continued
Total estimated share-based compensation expense, related to all
of the Company’s share-based awards, recognized for scal 2006
was comprised as follows (in millions, except per share data):
Year Ended
Sept. 24,
2006
Cost of equipment and services revenues $ 41
Research and development 216
Selling, general and administrative 238
Share-based compensation expense before taxes 495
Related income tax benets (175)
Share-based compensation expense, net of taxes $ 320
Net share-based compensation expense, per common share:
Basic $ 0.19
Diluted $ 0.19
The Company recorded $86 million in share-based compensation
expense during scal 2006 related to share-based awards granted
during scal 2006. In addition, for scal 2006, the adoption of
FAS 123R resulted in a reclassication to reduce net cash provided
by operating activities by $403 million, with an offsetting increase
in net cash provided by nancing activities, related to incremental
tax benets from stock options exercised in the period.
Pro Forma Information under FAS 123 for Periods Prior to
Fiscal 2006. Prior to adopting the provisions of FAS 123R,
the Company recorded estimated compensation expense for
employee stock options based upon their intrinsic value on the
date of grant pursuant to Accounting Principles Board Opinion
25 (APB 25), “Accounting for Stock Issued to Employees” and
provided the required pro forma disclosures of FAS 123. Because
the Company established the exercise price based on the fair
market value of the Company’s stock at the date of grant, the
stock options had no intrinsic value upon grant, and therefore
no estimated expense was recorded prior to adopting FAS 123R.
Each accounting period, the Company reported the potential
dilutive impact of stock options in its diluted earnings per common
share using the treasury-stock method. Out-of-the-money stock
options (i.e. the average stock price during the period was below
the strike price of the stock option) were not included in diluted
earnings per common share as their effect was anti-dilutive.
The weighted-average estimated fair value of employee stock options
granted during scal 2005 and 2004 was $14.80 and $13.92 per
share, respectively, using the Black-Scholes model with the following
weighted-average assumptions (annualized percentages) for the
same periods:
2005 2004
Risk-free interest rate 3.9% 3.8%
Volatility 36.5% 53.2%
Dividend yield 0.8% 0.6%
Expected life (years) 6.0 6.0
The Company used the implied volatility of market-traded options
in the Company’s stock for the expected volatility assumption,
consistent with the guidance in FAS 123R and the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107. The
Company utilized the term structure of volatility up to approxi-
mately two years, and the implied volatility of the option with the
longest time to maturity was used for the expected volatility esti-
mates for periods beyond two years. Prior to scal 2006, the
Company had used a combination of its historical stock price and
implied volatility in accordance with FAS 123 for purposes of its
pro forma information. The selection of implied volatility data to
estimate expected volatility was based upon the availability of
actively traded options on the Company’s stock and the Company’s
assessment that implied volatility is more representative of
future stock price trends than historical volatility.
The risk-free interest rate assumption is based upon observed
interest rates appropriate for the terms of the Company’s employee
stock options. The Company does not target a specic dividend
yield for its dividend payments but is required to assume a dividend
yield as an input to the binomial model. The dividend yield assump-
tion is based on the Company’s history and expectation of future
dividend payouts and may be subject to substantial change in the
future. The post-vesting forfeiture rate and suboptimal exercise
factor are based on the Company’s historical option cancellation
and employee exercise information, respectively. The suboptimal
exercise factor is the ratio by which the stock price must increase
before employees are expected to exercise their stock options.
The expected life of employee stock options represents the weighted-
average period the stock options are expected to remain outstanding
and is a derived output of the binomial model. The expected life of
employee stock options is impacted by all of the underlying assump-
tions used in the Company’s model. The binomial model assumes that
employees’ exercise behavior is a function of the options’ remaining
contractual life and the extent to which the option is in-the-money
(i.e. the average stock price during the period is above the strike
price of the stock option). The binomial model estimates the prob-
ability of exercise as a function of these two variables based on the
history of exercises and cancellations of past grants made by the
Company. The expected life of employee stock options granted
during scal 2006 derived from the binomial model was 5.8 years.
As share-based compensation expense recognized in the consoli-
dated statement of operations for scal 2006 is based on awards
ultimately expected to vest, it should be reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Pre-vesting forfei-
tures were estimated to be approximately 0% in the year ended
September 24, 2006 based on historical experience. The effect
of pre-vesting forfeitures on the Company’s recorded expense
has historically been negligible due to the predominantly monthly
vesting of option grants. If pre-vesting forfeitures occur in the
future, the Company will record the effect of such forfeitures as
the forfeitures occur. The Company will continue to evaluate the
appropriateness of this assumption. In the Company’s pro forma
information required under FAS 123 for the periods prior to scal
2006, the Company accounted for forfeitures as they occurred.