Tyson Foods 2006 Annual Report Download - page 47

The Company issues shares under its stock-based compensation
plans by issuing Class A stock from treasury. The total number of
shares available for future grant under the Tyson Foods, Inc. 2000
Stock Incentive Plan (Incentive Plan) was 11,609,585 at September 30,
2006; however, the Board of Directors has submitted a proposal to
the shareholders, which will be voted on at the 2007 annual meet-
ing, to increase the authorized shares under the Stock Incentive
Plan by 20 million.
S T OCK OPTIONS
Shareholders approved the Incentive Plan in January 2001. The
Incentive Plan is administered by the Compensation Committee of
the Board of Directors (Compensation Committee). The Incentive
Plan includes provisions for granting incentive stock options for
shares of Class A stock at a price not less than the fair market value
at the date of grant. Nonqualified stock options may be granted at
a price equal to, less than or more than the fair market value of
Class A stock on the date the option is granted. Stock options under
the Incentive Plan generally become exercisable ratably over two
to five years from the date of grant and must be exercised within
10 years from the date of grant. The Company’s policy is to recog-
nize compensation expense on a straight-line basis over the
requisite service period for the entire award.
Ty s on Foods, Inc. 2006 Annual Report45
Notes to Consolidated Financial Statements continued
Weighted Weighted
Average Average Aggregate
ExerciseRemaining Intrinsic
Shares Under Price Contractual Value
Option Per ShareLife (in Years) (in millions)
Outstanding, October 1, 2005 17,343,294 $12.93
Exercised (2,259,829) 10.60
Canceled (1,077,275) 14.42
Granted 3,695,728 16.35
Outstanding, September 30, 200617,701,918 13.79 6.0 $43
Exercisable, September 30, 2006 10,054,892 $13.10 4.5 $32
The weighted average grant-date fair value of options granted
during the first quarter of fiscal 2006 was $6.86. No options were
granted during the second, third or fourth quarters of fiscal 2006.
The fair value of each option grant is established on the date of grant
using the Black-Scholes option-pricing model for grants awarded
prior to October 1, 2005, and a binomial lattice method for grants
awarded subsequent to October 1, 2005. The change to the binomial
lattice method was made to better reflect the exercise behavior
of top management. The Company uses historical volatility for a
period of time comparable to the expected life of the option to
determine volatility assumptions. Risk-free interest rates are based
on the five-year Treasury bond rate. Weighted average assumptions
as of September 30, 2006, used in the fair value calculation are
outlined in the following table.
Weighted average expected life 5.9 years
Weighted average risk-free interest rate 3.70%
Range of risk-free interest rates 2.6–4.8%
Weighted average expected volatility 37.83%
Range of expected volatility 35.2–40.1%
Expected dividend yield 1.23%
The Company recognized stock-based compensation expense
related to stock options, net of income taxes, of $9 million during
fiscal 2006, with a $5 million related tax benefit. The Company had
3.3 million options vest in fiscal 2006, with a fair value of $16 million.
In fiscal 2006, the Company received cash of $28 million for the
exercise of stock options. The related tax benefit realized from
stock options exercised during the year ended September 30, 2006,
was $4 million. The total intrinsic value of options exercised in
fiscal 2006, was $10 million. Prior to the adoption of SFAS No. 123R,
the Company classified the tax benefits of deductions resulting
from the exercise of stock options as Cash Flows from Operating
Activities in the Consolidated Statements of Cash Flows. SFAS No. 123R
requires the cash flows resulting from tax deductions in excess of
the compensation cost of those options (excess tax deductions)
to be classified as financing cash flows. The Company realized
$4 million in excess tax deductions during fiscal 2006. As of
September 30, 2006, the Company had $38 million of total unrec-
ognized compensation cost related to stock option plans that will
be recognized over a weighted average period of 2.2 years.