Verizon Wireless 2008 Annual Report Download - page 62

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Notes to Consolidated Financial Statements continued
Verizon Wireless’s 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 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 were granted to eligible
employees. As of December 31, 2008, all VARs were fully vested.
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 estimating
the fair value of VARs granted using a Black-Scholes option valuation
model. The following table summarizes the assumptions used in the
model during 2008:
Ranges
Risk-free rate 0.6% – 3.3%
Expected term (in years) 1.2 – 3.0
Expected volatility 33.9% – 58.5%
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 historical
experience, and management judgment. Expected volatility was based
on a blend of the historical and implied volatility of publicly traded peer
companies 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 Value Appreciation Rights activity:
(shares in thousands) VARs
Weighted-
Average
Grant-Date
Fair Value
Outstanding rights, January 1, 2006 108,923 $ 17.12
Exercised (7,448) 13.00
Cancelled/forfeited (7,008) 23.25
Outstanding rights, December 31, 2006 94,467 16.99
Exercised (30,848) 15.07
Cancelled/forfeited (3,207) 24.55
Outstanding rights, December 31, 2007 60,412 17.58
Exercised (31,817) 18.47
Cancelled/forfeited (351) 19.01
Outstanding rights, December 31, 2008 28,244 16.54
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in net income as
reported was $375 million, $750 million and $535 million for 2008, 2007
and 2006, 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.
The following table summarizes Verizon’s stock option activity:
(shares in thousands)
Stock
Options
Weighted-
Average
Exercise
Price
Outstanding, January 1, 2006 259,760 $ 46.01
Exercised (3,371) 32.12
Cancelled/forfeited (27,025) 43.72
Outstanding, December 31, 2006 229,364 46.48
Exercised (33,079) 38.50
Cancelled/forfeited (21,422) 48.26
Outstanding, December 31, 2007 174,863 47.78
Exercised (218) 38.00
Cancelled/forfeited (39,878) 48.13
Options outstanding, December 31, 2008 134,767 47.69
Options exercisable, December 31,
2006 225,067 46.69
2007 174,838 47.78
2008 134,767 47.69
The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2008:
Range of
Exercise Prices
Shares
(in thousands)
Weighted-
Average
Remaining Life
Weighted-
Average
Exercise Price
$ 20.00 – 29.99 24 3.7 years $ 27.86
30.00 – 39.99 19,327 4.6 36.41
40.00 – 49.99 54,190 2.2 44.03
50.00 – 59.99 60,884 1.1 54.46
60.00 - 69.99 342 0.8 60.48
Total 134,767 2.1 47.69
The total intrinsic value for stock options outstanding was not signifi-
cant as of December 31, 2008. The total intrinsic value for stock options
exercised was $147 million in 2007 and not significant in 2008 and 2006.
The amount of cash received from the exercise of stock options was
not significant in 2008, $1,274 million in 2007 and $101 million in 2006,
respectively. The related tax benefits were not significant. The after-tax
compensation expense for stock options was not significant for 2007
and 2006. There was no stock option expense for 2008.