Netgear 2006 Annual Report Download - page 64

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Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
only when it granted options with a discounted exercise price. Any resulting compensation expense was recognized
ratably over the associated service period, which was generally the option vesting term.
Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with
SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), as if the
fair value method defined by SFAS 123 had been applied to its stock-based compensation.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the
modified prospective transition method and therefore has not restated prior periods’ results. Under this transition
method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense
for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation
expense for the year ended December 31, 2006 also includes stock-based compensation awards granted after
January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The
valuation provisions of SFAS 123R also apply to grants that are modified after January 1, 2006.
The Company recognizes these compensation costs net of the estimated forfeitures on a straight-line basis over
the requisite service period of the award, which is generally the option vesting term of four years. The Company
estimated the forfeiture rate for the year ended December 31, 2006 based on its historical experience.
As a result of adopting SFAS 123R, the Company’s income before income taxes and net income for the year
ended December 31, 2006 was $4.0 million and $3.0 million lower, respectively, than if the Company had continued
to account for stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for
the year ended December 31, 2006 was $0.09. Total stock-based compensation cost capitalized in inventory was less
than $0.1 million for the year ended December 31, 2006.
Prior to the adoption of SFAS 123R, the Company presented the excess tax benefit of stock option exercises as
operating cash flows. Upon the adoption of SFAS 123R, “as if” windfall tax benefits (the tax deductions in excess of
the compensation cost that would increase the pool of windfall tax benefits) are classified as financing cash flows,
with the remaining excess tax benefit classified as operating cash flows. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. Prior period cash flows are not
reclassified to reflect this new requirement. In addition, total cash flow is not impacted as a result of this new
requirement.
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