AT&T Wireless 2006 Annual Report Download - page 75

2006 AT&T Annual Report : : 73
In connection with the November 2005 acquisition of ATTC,
all outstanding ATTC stock-based compensation plans were
restructured based on the 0.77942 per share conversion rate
and the special dividend, and subsequently issued in AT&T
shares of stock or stock units. We converted and recorded 86
million stock options.
At December 31, 2006, we had various stock-based
compensation plans, which are described below. The compen-
sation cost recognized for those plans for the years ended
December 31 was $293 in 2006, $143 in 2005 and $153 in
2004 and is included in “Selling, general and administrative”
on our Consolidated Statements of Income. The total income
tax benefit recognized on the Consolidated Statements of
Income for stock-based compensation arrangements for the
years ended December 31, 2006, 2005 and 2004 was $113,
$54 and $58.
Under our various plans, senior and other management
and nonmanagement employees and nonemployee directors
have received stock options, performance stock units and
other nonvested stock units. Stock options issued through
December 31, 2006 carry exercise prices equal to the market
price of our stock at the date of grant. Beginning in 1994
and ending in 1999, certain employees of AT&T Teleholdings,
Inc. (formerly known as Ameritech) were awarded grants of
nonqualified stock options with dividend equivalents. During
2006, we amended our stock option plan to vest upon the
date of grant. Prior to 2006, depending on the grant, stock
options could occur up to five years from the date of grant,
with most options vesting ratably over three years. Perfor-
mance stock units, which are nonvested stock units, are
granted to key employees based upon the stock price at the
date of grant and are awarded in the form of common stock
and cash at the end of a three-year period, subject to the
achievement of certain performance goals. Other nonvested
stock units are valued at the market price of our stock at the
date of grant and vest over a three- to five-year period. As
of December 31, 2006, we were authorized to issue up to
143 million shares of stock (in addition to shares that may
be issued upon exercise of outstanding options or upon
vesting of performance stock units or other nonvested stock
units) to officers, employees and directors pursuant to these
various plans.
The compensation cost that has been charged against
income for our stock-based compensation plans is as follows:
2006 2005 2004
Performance stock units $274 $116 $ 65
Stock option expense 13 19 75
Other 6 8 13
Total $293 $143 $153
The estimated fair value of the options when granted is
amortized to expense over the options’ vesting or required
service period. The fair value for these options was esti-
mated at the date of grant based on the expected life of
the option and historical exercise experience, using a Black-
Scholes option pricing model with the following weighted-
average assumptions:
2006 2005 2004
Risk-free interest rate 4.94% 4.15% 4.21%
Dividend yield 4.75% 5.38% 5.00%
Expected volatility factor 21.79% 22.47% 23.78%
Expected option life in years 8.00 8.00 7.00
A summary of option activity as of December 31, 2006, and
changes during the period then ended, is presented below
(shares in millions):
Weighted-Average
Weighted-Average Remaining Contractual Aggregate
Options Shares Exercise Price Term (Years) Intrinsic Value1
Outstanding at January 1, 2006 277 $39.74
Granted 2 28.01
Converted from BellSouth2 83 30.40
Exercised (24) 24.73
Forfeited or expired (29) 42.79
Outstanding at December 31, 2006 309 $37.96 2.95 $941
Exercisable at December 31, 2006 307 $38.03 2.90 $923
1 Aggregate intrinsic value includes only those options with intrinsic value (options where the exercise price is below the market price).
2 Options converted from BellSouth used the following weighted-average assumptions: risk-free interest rate of 4.84%, dividend yield of 5.20%, expected volatility factor of 19.05% and had
an expected option life of up to 4 years. The weighted-average fair value of each option converted was $2.02.