E-Z-GO 2006 Annual Report Download - page 79

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58
The net impact of the adoption of SFAS No. 123-R was as follows for the year ended December 31, 2005:
Upon If Not
(In millions, except per share data)
Adoption Adopted
Income from continuing operations before income taxes $ 739 $ 755
Net income $ 203 $ 214
Cash flows from operating activities of continuing operations $ 952 $ 966
Cash flows from financing activities of continuing operations $ 284 $ 270
Basic earnings per share $ 1.52 $ 1.60
Diluted earnings per share $ 1.49 $ 1.57
Impact of SFAS No. 123-R Adoption on Prior Periods
For the year ended January 1, 2005, no compensation expense related to stock option grants has been recorded in the consolidated statements of
operations as the options granted had an exercise price equal to the market value of the underlying stock on the date of grant. Results for prior
periods have not been restated.
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions required by
SFAS No. 123-R prior to January 2, 2005:
(In millions, except per share data)
2004
Net income, as reported $ 365
Add back: Share-based employee compensation expense included in reported net income* 20
Deduct: Total share-based employee compensation expense
determined under fair value based method for all awards* (26)
Pro forma net income $ 359
Income per share:
Basic - as reported $ 2.66
Basic - pro forma $ 2.61
Diluted - as reported $ 2.61
Diluted - pro forma $ 2.56
* Amounts are net of related taxes and hedge income or expense.
Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The
weighted-average fair value of options granted per share was $25, $20 and $14 for 2006, 2005 and 2004, respectively. We estimate the fair value
of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from
traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted
to reflect anticipated increases in expected life.
The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are
as follows:
2006 2005 2004
Dividend yield 2% 2% 2%
Expected volatility 25% 25% 37%
Risk-free interest rate 4% 4% 3%
Expected term (In years) 6.0 6.0 3.7
Notes to the Consolidated Financial Statements