Verizon Wireless 2006 Annual Report Download - page 65

Notes to Consolidated Financial Statements continued
63
As of December 31, 2006, unrecognized compensation expense
related to the unvested portion of the MRSP restricted stock was
approximately $9 million and is expected to be recognized over the
next year.
Verizon Wireless Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the “Wireless
Plan”) provides compensation opportunities to eligible employees
and other participating affiliates of the Cellco Partnership, d.b.a.
Verizon Wireless (the “Partnership”). The Wireless Plan provides
rewards that are tied to the long-term performance of the
Partnership. Under the Wireless Plan, VARs are granted to eligible
employees. The aggregate number of VARs that may be issued
under the Wireless Plan is approximately 343 million.
VARs reflect the change in the value of the Partnership, as defined
in the Wireless Plan, similar to stock options. Once VARs become
vested, employees can exercise their VARs and receive a payment
that is equal to the difference between the VAR price on the date of
grant and the VAR price on the date of exercise, less applicable
taxes. VARs are fully exercisable three years from the date of grant
with a maximum term of 10 years. All VARs are granted at a price
equal to the estimated fair value of the Partnership, as defined in
the Wireless Plan, at the date of the grant.
With the adoption of SFAS No. 123(R), the Partnership began esti-
mating the fair value of VARs granted using a Black-Scholes option
valuation model. The following table summarizes the assumptions
used in the model during 2006:
Ranges
Risk-free interest rate 4.6% - 5.2%
Expected term (in years) 1.0 - 3.5
Expected volatility 17.6% - 22.3%
Expected dividend yield n/a
The risk-free rate is based on the U.S. Treasury yield curve in effect
at the time of the measurement date. The expected term of the
VARs granted was estimated using a combination of the simplified
method as prescribed in Staff Accounting Bulletin (SAB) No. 107,
“Share Based Payments,” (SAB No. 107) historical experience, and
management judgment. Expected volatility was based on a blend of
the historical and implied volatility of publicly traded peer compa-
nies for a period equal to the VARs expected life, ending on the
measurement date, and calculated on a monthly basis.
The following table summarizes the VARs activity:
Weighted
Average
Grant-Date
(Shares in thousands) VARs Fair Value
Outstanding rights, January 1, 2004 119,809 $ 16.31
Granted 48,999 13.89
Exercised (2,144) 16.39
Cancelled/Forfeited (6,003) 14.65
Outstanding rights, December 31, 2004 160,661 15.63
Granted 10 14.85
Exercised (47,964) 12.27
Cancelled/Forfeited (3,784) 15.17
Outstanding rights, December 31, 2005 108,923 17.12
Exercised (7,448) 13.00
Cancelled/Forfeited (7,008) 23.25
Outstanding rights, December 31, 2006 94,467 16.99
As of December 31, 2006, unrecognized compensation expense
related to the unvested portion of the VARs was approximately $50
million and is expected to be recognized within one year.
Stock-Based Compensation Expense
After-tax compensation expense for stock based compensation
related to RSUs, PSUs, MRSPs and VARs described above
included in net income as reported was $535 million, $359 million
and $248 million for 2006, 2005 and 2004, respectively.
Stock Options
The Verizon Long Term Incentive Plan provides for grants of stock
options to employees at an option price per share of 100% of the
fair market value of Verizon Stock on the date of grant. Each grant
has a 10 year life, vesting equally over a three year period, starting
at the date of the grant. We have not granted new stock options
since 2004.
We determined stock-option related employee compensation
expense for the 2004 grant using the Black-Scholes option-pricing
model based on the following weighted-average assumptions:
2004
Dividend yield 4.2%
Expected volatility 31.3%
Risk-free interest rate 3.3%
Expected lives (in years) 6
Weighted average value of options granted $ 7.61
The following table summarizes Verizon’s stock option activity.
Weighted
Average
Stock Exercise
(Shares in thousands) Options Price
Outstanding, January 1, 2004 280,581 $ 46.24
Granted 17,413 35.51
Exercised (10,519) 28.89
Cancelled/forfeited (6,586) 48.01
Outstanding, December 31, 2004 280,889 46.18
Exercised (1,133) 28.73
Cancelled/forfeited (19,996) 49.62
Outstanding, December 31, 2005 259,760 46.01
Exercised (3,371) 32.12
Cancelled/forfeited (27,025) 43.72
Options outstanding,
December 31, 2006 229,364 46.48
Options exercisable, December 31,
2004 247,461 47.26
2005 244,424 46.64
2006 225,067 46.69