Computer Associates 2007 Annual Report Download - page 134

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Excluding options granted as part of the employee option exchange offer as described below, the weighted average estimated
values of employee stock option grants, as well as the weighted average assumptions that were used in calculating such
values during fiscal years 2007, 2006 and 2005 were based on estimates at the date of grant as follows:
2007 2006 2005
YEAR ENDED MARCH 31,
Weighted average fair value $ 8.40 $ 15.06 $ 15.44
Dividend yield .73% .57% .28%
Expected volatility factor
1
.41 .56 .65
Risk-free interest rate
2
4.9% 4.1% 3.6%
Expected life (in years)
3
4.5 6.0 4.5
1 Measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s
options traded by third parties.
2 The risk-free rate for periods within the contractual term of the share options is based on the U.S. Treasury yield curve in effect at the time of grant.
3 The expected life is the number of years that the Company estimates, based primarily on historical experience, that options will be outstanding prior to exercise. The decrease in the expected life in
fiscal year 2007 as compared with fiscal year 2006 was primarily due to the exclusion of employee exercise behavior related to grants authorized prior to fiscal year 1997, which expired prior to fiscal
year 2007, in estimating the expected term in fiscal year 2007.
The following table summarizes information on shares exercised and shares vested for the periods indicated:
2007 2006 2005
YEAR ENDED MARCH 31,
Cash received from options exercised $39 $97 $73
Intrinsic value of options exercised 17 41 36
Tax benefit from options exercised 510 14
The Company settles employee stock option exercises with stock held in treasury.
Employee Option Exchange Offer
Under Section 409A of the U.S. Internal Revenue Code of 1986, as amended (Section 409A), as interpreted in the then
proposed regulations issued by the U.S. Internal Revenue Service, options granted with a below market exercise price, to the
extent they were not vested as of December 31, 2004, may be subject to regular income tax, a 20% additional tax and other
penalties before (and regardless of whether) they were exercised. The Company determined that due to delays in
communicating a July 20, 2000 option grant to employees after they were approved for grant, the fair market value on
the Company’s common stock on the measurement date was higher than the exercise price. This grant may be considered to
have been granted with an exercise price below the fair market value of the Company’s common stock for the purposes of
Section 409A. This grant vested in five installments, and only the last installment — covering 30% of the grant — vested after
2004 (on July 20, 2005) and was possibly subject to adverse tax consequences under Section 409A. On November 7, 2006,
the Company extended an offer to holders of this grant who were U.S. taxpayers in 2005 to exchange the last vesting
installment of each July 20, 2000 grant, to the extent not exercised and outstanding (the Eligible Option), for a new option (the
New Option) to be granted under the 2002 Plan with, among other things, an exercise price equal to the higher of $27 (the
exercise price of the Eligible Option) or the closing price of the Company’s common stock on the date of grant of the New
Option.
In connection with the exchange offer, the Company issued New Options covering approximately 0.9 million shares in
exchange for Eligible Options. The number of shares underlying the New Options were the same as the number of shares
underlying the Eligible Options cancelled in connection with the exchange offer. The New Options were granted on
December 8, 2006 at an exercise price of $27. The New Options will vest on June 8, 2007 (six months from the grant
date) and will expire on July 10, 2010.
In accordance with SFAS No. 123(R), the compensation cost associated with the New Options is calculated as the difference
between the fair value of the New Option and the fair value of the Eligible Option measured immediately before its terms or
conditions were considered modified.The Company is recognizing $0.2 million of share-based compensation expense related
to the exchange offer, which is being amortized over the requisite six-month service period of the awards.
122