Memorex 2007 Annual Report Download - page 101

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The 2005 Incentive Plan was approved and adopted by our shareholders on May 4, 2005, and became effective
immediately. The 2005 Incentive Plan permits the granting of incentive and non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units, dividend equivalents, performance awards and other stock and stock-based
awards. The total number of shares of common stock that may be issued or awarded under the 2005 Incentive Plan may
not exceed 2.5 million, of which the maximum number of shares that may be awarded pursuant to grants of restricted
stock, restricted stock units and stock awards is 1.5 million. The outstanding options are non-qualified and normally have a
term of ten years. For employees, the options generally become exercisable 25 percent per year beginning on the first
anniversary of the grant date. For directors, the options generally become exercisable in full on the first anniversary of the
grant date. Exercise prices are equal to the fair market value of our common stock on the date of grant. As of
December 31, 2007, there were 1,094,372 shares available for grant under the 2005 Incentive Plan.
Stock Options
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified-
prospective transition method. Prior to our January 1, 2006 adoption of SFAS 123(R), we accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly, no compensation expense was recognized for stock
options granted prior to January 1, 2006, for options granted that had no intrinsic value at the time of grant. Compensation
expense was recorded for restricted stock issued under our Stock Plans. As required by SFAS 123, we included pro forma
disclosure in the Notes to the Consolidated Financial Statements.
The table below illustrates the effect on net income and earnings per share if the fair value of options granted had
been recognized as compensation expense on a straight-line basis over the vesting periods in accordance with the
provisions of SFAS 123 during the year ended December 31, 2005:
Year Ended
December 31,
2005
(In millions, except
per share amounts)
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87.9
Add: Stock-based employee compensation expense included in net income,
net of income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9
Deduct: Total stock-based employee compensation expense determined under
fair value based method of accounting, net of income tax . . . . . . . . . . . . . . . . . . . . . . . (5.8)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83.0
Earnings per share:
Basic — as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.59
Basic — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.45
Diluted — as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.54
Diluted — pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.37
The following table summarizes our weighted average assumptions used in the valuation of options for the years
ended December 31, 2007, 2006 and 2005:
2007 2006 2005
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29% 33% 42%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.60% 4.99% 3.89%
Expected life (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 58 60
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7% 1.3% 1.2%
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)