E-Z-GO 2007 Annual Report Download - page 81

Notes to the Consolidated Financial Statements
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We adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123-R”), which replaces SFAS No. 123, “Accounting for Stock-
Based Compensation,” in the fi rst quarter of 2005 using the modifi ed prospective transition method. SFAS No. 123-R requires companies to
measure compensation costs for share-based payments to employees, including stock options, at fair value and to expense such compensation
over the service period. Under the transition method, compensation expense recognized in 2005 includes: a) compensation cost for all stock
options and restricted stock granted units payable in shares prior to but not yet vested as of January 1, 2005, based on the grant date fair value
estimated and recognized in accordance with the provisions of SFAS No. 123 and b) compensation cost for all stock options and restricted stock
units payable in shares granted subsequent to January 1, 2005 and all share-based compensation awards accounted for as liabilities, based upon
the measurement and recognition provisions of SFAS No. 123-R. For awards granted or modifi ed in 2005 and prospectively, compensation costs
for awards with only service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each
separately vesting portion of the award. Compensation costs for awards granted prior to 2005 are recognized using the attribution methods
required under SFAS No. 123.
The compensation expense that has been recorded in net income for our share-based compensation plans is as follows:
(In millions) 2007 2006 2005
Compensation expense, net of hedge income or expense $ 97 $ 71 $ 64
Income tax benefi t (51) (28) (24)
Total net compensation cost included in net income $ 46 $ 43 $ 40
Net compensation costs included in discontinued operations — (2) 2
Net compensation costs included in continuing operations $ 46 $ 45 $ 38
Share-based compensation costs are refl ected primarily in selling and administrative expenses. Compensation expense includes approximately
$23 million, $16 million and $17 million in 2007, 2006 and 2005, respectively, representing the attribution of the fair value of options issued and
the portion of previously granted options for which the requisite service has been rendered. During 2006, we recorded approximately $4 million
of share-based award forfeitures related to discontinued operations.
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 $14, $12 and $10 for 2007, 2006 and 2005, 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 refl ect 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:
2007 2006 2005
Dividend yield 2% 2% 2%
Expected volatility 30% 25% 25%
Risk-free interest rate 5% 4% 4%
Expected term (In years) 5.5 6.0 6.0
The following table summarizes information related to stock option activity for the respective periods:
(In millions) 2007 2006 2005
Intrinsic value of options exercised $ 85 $ 120 $ 59
Cash received from option exercises 103 173 106
Actual tax benefi t realized for tax deductions from option exercises 27 38 18