Rayovac 2004 Annual Report Download - page 79

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RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
(w) Stock Compensation
The Company has elected to apply Accounting Principles Board (“APB”) Opinion No. 25 and related
Interpretations in accounting for stock-based compensation plans, instead of applying the optional cost
recognition requirements of SFAS 123, Accounting for Stock-Based Compensation. The Company elected to
apply only the disclosure provisions of SFAS 123. The Company recognized $5,291, $3,426 and $1,331
respectively, of compensation cost, before tax, related to restricted stock in 2004, 2003 and 2002, respectively,
and no compensation cost related to stock options. If the Company had elected to recognize compensation cost
for all of the plans based upon the fair value at the grant dates for awards under those plans, consistent with an
alternative method prescribed by SFAS 123, net income per common share would have been reduced to the pro
forma amounts indicated below:
2004 2003 2002
Reported net income ...................................... $55,780 $15,482 $29,237
Add: Stock-based compensation expense included in reported net
income, net of tax ...................................... 3,228 2,090 812
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of tax ............. (6,522) (6,739) (4,778)
Pro forma net income ..................................... $52,486 $10,833 $25,271
Basic earnings per share:
As reported ......................................... $ 1.67 $ 0.49 $ 0.92
Pro forma .......................................... $ 1.57 $ 0.34 $ 0.80
Diluted earnings per share:
As reported ......................................... $ 1.61 $ 0.48 $ 0.90
Pro forma .......................................... $ 1.50 $ 0.34 $ 0.78
The fair value of the Company’s stock options used to compute pro forma net income and basic and diluted
net income per common share disclosures is the estimated fair value at grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
2004 2003 2002
Assumptions used:
Volatility .......................................... 41.4% 40.3% 37.6%
Risk-free interest rate ................................ 3.79% 3.36% 3.40%
Expected life ....................................... 6years 8 years 8 years
Dividend yield ...................................... — — —
Weighted-average grant-date fair value of options granted
during period ..................................... $ 7.79 $ 5.99 $ 6.89
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options
have characteristics significantly different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do
not necessarily provide a reliable single value of its options and may not be representative of the future effects on
reported net income or the future stock price of the Company. For purposes of proforma disclosure, the estimated
fair value of the options is amortized to expense over the option’s vesting period.
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