Notes to Consolidated Financial Statements
9. Equity-Based Compensation
The Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan provides for the grant of short-term and long-term incentives, including stock options, stock appreciation rights (SARs), restricted stock and performance stock units (PSUs). Stockholders approved 53,889,977 shares for grant under the plan, of which 33,744,112 remain available for grant at January 2, 2009. Under the 2004 plan and predecessor plans, we granted awards at market value on the date of grant. On April 24, 2008, stockholders approved the Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan, which authorized 14,750,000 shares for issuance.
At the beginning of our first quarter of 2006, we adopted the provisions of SFAS 123(R), which require us to recognize expense related to the fair value of our equity-based compensation awards. We elected to use the modified prospective transition method, and therefore did not restate prior periods. Therefore, we eliminated the balance of deferred compensation in Stockholders' Equity against Additional paid-in capital as of December 31, 2005, as required by this statement.
Stock Options
Stock options granted in 2008, 2007 and 2006 generally vest over three years from the date of the
grant. We recognize compensation expense on a straight-line basis over the service period based on
the fair value of the stock options on the grant date. Compensation expense for stock options was
$11.0 million in 2008, $21.9 million in 2007 and $38.3 million in 2006. Options granted but
unexercised expire 10 years from the grant date.
We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of assumptions that will have a significant impact on the fair value estimate. The following table summarizes the assumptions used to compute the weighted average fair value of current period grants:
We based our calculation of expected volatility on a combination of historical and implied volatility for options granted. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options using their vesting period, post-vesting employment termination behavior and historical exercise patterns.
The following is a summary of stock option activity during 2008, and status at January 2, 2009:
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price as of January 2, 2009, that the option holders would have received had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock options was $0.9 million in 2008, $13.2 million in 2007 and $50.3 million in 2006.
As of January 2, 2009, we had $7.4 million of unrecognized compensation cost related to stock options that we expect to recognize over a weighted average period of 1.8 years. The weighted average fair value of stock options granted was $4.21 in 2007 and $5.70 in 2006.
Cash-Settled Stock Appreciation Rights
The Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan also provides for the
granting of cash-settled SARs in conjunction with, or independent of, the stock options under the
plans. These SARs allow the holder to receive in cash the difference between the cash-settled SARs'
grant price (the market value of our stock on the grant date) and the market value of our stock on
the date the holder exercises the SAR. These cash payments were negligible in 2008 and 2007 and $0.1
million in 2006. The cash-settled SARs are generally assigned 10-year terms and typically vest over
three years from the grant date. At January 2, 2009, there were 264,463 cash-settled SARs
outstanding with exercise prices that ranged from $3.83 to $70.06. The weighted average price of the
78,400 cash-settled SARs granted in 2008 was $5.29. The weighted average price of the 151,243
cash-settled SARs granted in 2007 was $10.24. The weighted average price of the 71,300 cash-settled
SARs granted in 2006 was $11.62.
Restricted Stock
We granted 2,205,603 restricted shares in 2008, 2,903,869 restricted shares in 2007 and 1,114,227
restricted shares in 2006. Of the shares granted in 2008, 2,065,603 shares vest over a three-year
period, 100,000 shares vest over a two-year period and 40,000 shares vest over a one-year period. Of
the shares granted in 2007, 1,448,723 shares vest over a three-year period, 1,415,146 shares vest
over a two-year period and 40,000 shares vest over a one-year period. Of the shares granted in 2006,
1,047,621 shares vest over a two-year period and 66,606 shares vest over a one-year period. We
recognize compensation expense on a straight-line basis over the vesting periods based on the market
price of our stock on the grant date. Compensation expense was $15.3 million in 2008, $10.2 million
in 2007 and $7.9 million in 2006. The weighted average issuance price of restricted stock granted in
2008 was $5.46 per share. The weighted average issuance price of restricted stock granted in 2007
was $9.84 per share. The weighted average issuance price of restricted stock granted in 2006 was
$12.98 per share. Non-vested stock award activity for 2008 follows:
As of January 2, 2009, we had $17.0 million of unrecognized compensation cost related to restricted stock that we expect to recognize over a weighted average period of 1.8 years.
Performance Stock Units
We granted 777,000 PSUs in 2008, 375,000 PSUs in 2007 and 270,000 PSUs in 2006. The PSUs granted in
2008 would have entitled the recipients to receive shares of our common stock commencing in March
2009, contingent on the achievement of our operating income and revenue-based targets for the 2008
fiscal year. Following achievement of these financial measures and subject to continued employment,
one-third of such shares would have been issued in annual installments in March 2009, March 2010 and
March 2011. At minimum target performance, we would have issued one-half share for each PSU granted,
and at maximum target performance, we would have issued two shares for each PSU granted. The
weighted average price of PSUs granted in 2008 was $5.40 per share. Since 2008 performance fell
below threshold performance, none of the PSUs were earned, no expense was incurred, and no amounts
will be paid out with respect to them.
The PSUs granted in 2007 would have entitled the recipients to receive shares of our common stock commencing in March 2008, contingent on the achievement of company operating income and revenue-based targets for the 2007 fiscal year. None of the 2007 grants were earned, since 2007 performance fell below threshold performance. The weighted average issuance price of the PSUs granted in 2007 was $12.53 per share.
The PSUs granted in 2006 entitle the recipients to receive shares of our common stock in March 2008, contingent on the achievement of cumulative company operating income and revenue-based targets for the 2006 and 2007 fiscal years. Based on cumulative actual performance in 2006 and 2007, we issued 44,000 shares of the total PSUs based on attainment tied to the revenue objective in the first quarter of 2008. The weighted average issuance price of the PSUs granted in 2006 was $11.37 per share. Compensation expense for PSUs was $0.1 million in 2008, a credit of $0.3 million in 2007 and expense of $0.8 million in 2006. PSU activity for 2008 follows:
Employee Stock Purchase Plan
Under the 2005 Tellabs, Inc. Employee Stock Purchase Plan, employees were able to elect to withhold
a portion of their compensation to purchase our common stock at 85% of the fair market value on the
date of purchase. In 2007, 384,893 shares of common stock were purchased under the plan, with
8,845,990 remaining available for purchase under the plan at January 2, 2009. Compensation expense
for the plan was $0.4 million in 2007 and $1.0 million in 2006. The weighted average purchase price
of shares purchased under the plan in 2007 was $9.03. Effective April 25, 2007, we suspended the
2005 plan. The final purchase for employees enrolled through the date of suspension occurred on
April 30, 2007.
Equity-Based Compensation Expense
The following table sets forth the total equity-based
compensation expense resulting from stock options, stock appreciation rights, restricted stock,
performance stock units and the employee stock purchase plan (suspended effective April 25, 2007):
