Netgear 2006 Annual Report Download - page 67

Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
underlying the restricted stock units are not considered issued and outstanding. The Company expenses the cost of
the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably
over the period during which the restrictions lapse.
Performance awards may be in the form of performance shares or performance units. A performance share
means an award denominated in shares of Company common stock and a performance unit means an award
denominated in units having a dollar value or other currency, as determined by the Committee. The plan
administrator will determine the number of performance awards that will be granted and will establish the
performance goals and other conditions for payment of such performance awards. The period of measuring the
achievement of performance goals will be a minimum of twelve (12) months.
Other stock-based awards may be granted under the 2006 Plan subject to the terms specified by the plan
administrator. Other stock-based awards may include dividend equivalents, restricted stock awards, or amounts
which are equivalent to all or a portion of any federal, state, local, domestic or foreign taxes relating to an award, and
may be payable in shares, cash, other securities or any other form of property as the plan administrator may
determine.
In the event of a change in control of the Company, all awards under the 2006 Plan vest in full and all
outstanding performance shares and performance units will be paid out upon transfer.
2006 Stand-Alone Stock Option Agreement
In August 2006, the Company reserved for and granted a 300,000 share nonqualified stock option in connection
with the hiring of a key executive. In the event of a change in control of the Company, this option vests in full.
Employee Stock Purchase Plan
The Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees
may contribute up to 10% of compensation, subject to certain income limits, to purchase shares of the Company’s
common stock. Prior to January 1, 2006, employees were able to purchase stock semi-annually at a price equal to
85% of the fair market value at certain plan-defined dates. As of January 1, 2006, the Company changed the ESPP
such that employees will purchase stock semi-annually at a price equal to 85% of the fair market value on the
purchase date. Since the price of the shares is now determined at the purchase date and there is no longer a look-
back
period, the Company recognizes the expense based on the 15% discount at purchase. For the year ended
December 31, 2006, ESPP compensation expense was $206,000.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option
valuation model and the weighted average assumptions in the following table. The expected term of options granted
is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk
free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent
remaining term. Expected volatility is based on a combination of the historical volatility of the Company’s stock as
well as the historical volatility of certain of the Company’s industry peers’ stock.
63
Stock Options
Year Ended
ESPP
December 31,
Year Ended December 31,
2004 2005 2006 2004 2005
Expected life (in years)
4.0
4.0
4.9
0.5
0.5
Risk
-
free interest rate
2.81
%
3.85
%
4.74
%
1.39
%
2.93
%
Expected volatility
52
%
56
%
59
%
52
%
55
%
Dividend yield
—
—
—
—
—
Weighted average fair value of grants
$
5.47
$
8.01
$
12.05
$
4.11
$
5.21