iRobot 2008 Annual Report Download - page 39

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Exchange Ratios. The Option Exchange Program is not a one-for-one exchange. The exchange ratios
will be designed to result in a fair value, for accounting purposes, of the New Options that will be
approximately equal to the fair value of the Eligible Options (based on valuation assumptions made when the
Option Exchange Program commences). The exchange ratios will be designed to make the grant of the New
Options approximately accounting expense neutral. The actual exchange ratios will be determined by the
compensation committee prior to the commencement of the Option Exchange Program.
The exchange ratios will be established by grouping together Eligible Options with certain exercise prices
and assigning an appropriate exchange ratio to each grouping, and will be based on the fair value of the
Eligible Options (calculated using a binomial option pricing model) within the relevant grouping. Setting the
exchange ratios in this manner is intended to result in the issuance of New Options that have a fair value (also
calculated using a binomial option pricing model) approximately equal to or less than the fair value of the
exchanged Eligible Options. This should minimize any additional compensation cost that we must recognize
upon granting the New Options, other than some incremental compensation expense that might result from
fluctuations in the fair market value of our common stock after the exchange ratios have been set but before
the Grant Date.
Although the exchange ratios cannot be currently determined, we can provide an example based on
certain assumptions regarding the Trailing Average Price, the fair value of the Eligible Options, and the fair
market value of our common stock. For illustration purposes, assuming a Trailing Average Price of $13.00 and
a fair market value of our common stock of $8.40 per share (the closing price of our common stock as
reported by NASDAQ on March 20, 2009), then based on the above method of determining the exchange
ratios, the following exchange ratios would apply:
If the Exercise Price of an Eligible Option is:
The Exchange Ratio
would be (Eligible
Options to New
Options):
$13.00 to $16.00 ................................................ 1.50 for 1
$16.01 to $18.00 ................................................ 1.75 for 1
$18.01 to $20.00 ................................................ 2.00 for 1
$20.01 to $22.00 ................................................ 2.50 for 1
Above $22.00................................................... 3.00 for 1
The foregoing exchange ratios are provided merely as an example of how we would determine the
exchange ratios if we were commencing the exchange offer based on fair market value of $8.40 per share. We
will apply the same methodology once these factors are decided closer to the time of commencement of the
Option Exchange Program. The total number of shares of our common stock underlying a New Option that an
Eligible Participant will receive with respect to an exchanged Eligible Option will be determined by dividing
the number of shares of our common stock underlying the exchanged Eligible Option by the applicable
exchange ratio and rounding to the nearest whole number. The exchange ratios will be applied on a
grant-by-grant basis.
For example, if an Eligible Participant exchanges an Eligible Option to purchase 1,000 shares with an
exercise price of $17.40 per share, that Eligible Participant would receive a New Option to purchase 571 shares
(that is, 1,000 divided by 1.75, with the result rounded to the nearest whole number, equals 571).
37
Proxy Statement