TSRA » Topics » Stock-based Compensation

These excerpts taken from the TSRA 10-K filed Feb 27, 2009.

Stock-based Compensation

On January 1, 2006, the Company adopted SFAS No. 123—revised 2004 (“SFAS No. 123(R)”), “Share-Based Payment” which replaced SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires the measurement and recognition of stock-based compensation expense for all awards made to employees and directors, including employee stock options, restricted stock awards and employee stock purchases under the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. The fair value of the Company’s restricted stock awards are calculated based upon the fair market value of its stock at the date of grant. The fair value of the Company’s stock options and ESPP purchases are estimated using a Black-Scholes option pricing model based on the fair market value on the date of grant or the date of purchase, respectively. The fair value of the Company’s stock awards for non-employees was estimated using a Black-Scholes option pricing model based on the fair market value on each vesting date, accounted for under the variable-accounting method. Based on the modified prospective method, the fair value of equity-based awards is amortized over the requisite service period of the award which is generally the vesting period and the Company has elected to use the straight-line method for awards granted after the adoption of SFAS No. 123(R) and continues to use a graded vesting method for awards granted prior to the adoption of SFAS No. 123(R).

Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on historical exercise patterns, which it believes are representative of future behavior. The Company estimates the volatility of the Company’s common stock on the date of grant based on a market-based implied volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from the

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

estimate, the stock-based compensation expense could be significantly different from what was recorded in the current period. See Note 14—“Stock-based Compensation” for additional detail.

The Company has elected to use the “with and without” approach as described in EITF Topic No. D-32 in determining the order in which tax attributes are utilized. As a result, the Company will only recognize a tax benefit from stock awards in additional paid-in capital if an incremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for the indirect effects of stock awards on other tax attributes, such as the research tax credit, through the income statement.

Stock-based Compensation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">On January 1, 2006, the Company adopted SFAS No. 123—revised 2004 (“SFAS No. 123(R)”), “Share-Based Payment” which
replaced SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS No. 123(R)
requires the measurement and recognition of stock-based compensation expense for all awards made to employees and directors, including employee stock options, restricted stock awards and employee stock purchases under the Employee Stock Purchase
Plan (“ESPP”) based on estimated fair values. The fair value of the Company’s restricted stock awards are calculated based upon the fair market value of its stock at the date of grant. The fair value of the Company’s stock
options and ESPP purchases are estimated using a Black-Scholes option pricing model based on the fair market value on the date of grant or the date of purchase, respectively. The fair value of the Company’s stock awards for non-employees was
estimated using a Black-Scholes option pricing model based on the fair market value on each vesting date, accounted for under the variable-accounting method. Based on the modified prospective method, the fair value of equity-based awards is
amortized over the requisite service period of the award which is generally the vesting period and the Company has elected to use the straight-line method for awards granted after the adoption of SFAS No. 123(R) and continues to use a graded
vesting method for awards granted prior to the adoption of SFAS No. 123(R).

Calculating stock-based compensation expense requires the
input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on historical
exercise patterns, which it believes are representative of future behavior. The Company estimates the volatility of the Company’s common stock on the date of grant based on a market-based implied volatility. The assumptions used in calculating
the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different
assumptions, its stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company
estimates the forfeiture rate based on historical experience of its stock-based awards that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from the

 


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TESSERA TECHNOLOGIES, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

STYLE="margin-top:0px;margin-bottom:0px"> 



estimate, the stock-based compensation expense could be significantly different from what was recorded in the current period. See Note
14—“Stock-based Compensation” for additional detail.

The Company has elected to use the “with and without”
approach as described in EITF Topic No. D-32 in determining the order in which tax attributes are utilized. As a result, the Company will only recognize a tax benefit from stock awards in additional paid-in capital if an incremental tax benefit is
realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for the indirect effects of stock awards on other tax attributes, such as the research tax credit, through
the income statement.

This excerpt taken from the TSRA 10-Q filed Aug 8, 2008.

Stock-based Compensation

The following table sets forth our stock-based compensation expenses for the periods indicated (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Cost of revenues

   $ 148    $ 747    $ 253    $ 1,297

Research, development & other related costs

     1,703      611      3,114      1,119

Selling, general & administrative

     3,943      3,789      6,920      6,412
                           

Total stock-based compensation

     5,794      5,147      10,287      8,828
                           

 

The stock-based compensation expenses categorized by various equity components for the three and six months ended June 30, 2008 and 2007 is summarized in the table below (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Employee stock options

   $ 3,089    $ 3,576    $ 5,524    $ 6,194

Restricted stock awards

     2,345      1,328      3,999      2,116

Employee stock purchase plan

     360      243      764      518
                           

Total stock-based compensation

   $ 5,794    $ 5,147    $ 10,287    $ 8,828
                           

Stock-based compensation awards included employee stock options, restricted stock and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation for the three months ended June 30, 2008 and 2007 was $5.8 million and $5.1 million, respectively. Stock-based compensation for the six months ended June 30, 2008 and 2007 was $10.3 million and $8.8 million, respectively. The overall increase is primarily related to an increase in grants of stock awards to employees based on our compensation incentive program. Future stock-based compensation expense and unrecognized stock-based compensation will increase as we grant additional stock awards.

This excerpt taken from the TSRA 10-Q filed May 8, 2008.

Stock-based Compensation

The following table sets forth our stock-based compensation expenses for the periods indicated (in thousands):

 

     Three Months Ended
March 31,
     2008    2007

Cost of revenues

   $ 105    $ 550

Research, development and other related costs

     1,411      508

Selling, general and administrative

     2,977      2,623
             

Total stock-based compensation expenses

   $ 4,493    $ 3,681
             

Stock-based compensation awards included employee stock options, restricted stock and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation for the three months ended March 31, 2008, was $4.5 million, of which $2.4 million related to employee stock options, $1.7 million related to issuances of shares of restricted stock and $0.4 million related to employee stock purchases. For the three months ended March 31, 2007, stock-based compensation was $3.7 million, of which $2.6 million related to employee stock options, $0.8 million related to issuances of shares of restricted stock and $0.3 million related to employee stock purchases. The overall increase is primarily related to an increase in grants of stock awards to employees based on our compensation incentive program. Future stock-based compensation expense and unrecognized stock-based compensation will increase as we grant additional stock awards.

This excerpt taken from the TSRA 10-K filed Feb 29, 2008.

NOTE 11 – STOCK-BASED COMPENSATION

The effect of recording stock-based compensation expenses for the year ended December 31, 2007 and 2006 is as follows (in thousands):

 

     December 31,  
     2007     2006  

Cost of revenues

   $ 2,200     $ 2,924  

Research, development and other related costs

     2,629       1,023  

Selling, general & administrative

     13,270       11,421  
                

Total stock-based compensation

   $ 18,099     $ 15,368  

Tax effect on stock-based compensation expenses

     (5,380 )     (4,352 )
                

Net effect on net income

   $ 12,719     $ 11,016  
                

The stock-based compensation expenses categorized by various equity components for the year ended December 31, 2007 and 2006 is summarized in the table below (in thousands):

 

     December 31,
     2007    2006

Employee stock options

   $ 12,764    $ 12,022

Restricted stock awards

     4,618      2,468

Employee stock purchase plan

     717      878
             

Total stock-based compensation expenses

   $ 18,099    $ 15,368
             

During the years ended December 31, 2007, 2006 and 2005, the Company granted 1,142,000, 1,265,000 and 1,112,000 stock options, respectively. The 2007, 2006 and 2005 estimated per share fair value of those grants is $13.49, $15.75 and $17.52, respectively, before estimated forfeitures.

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The total fair value of options vested during the years ended December 31, 2007, 2006 and 2005 was $18.4 million, $12.2 million and zero, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2007, 2006 and 2005 was $3.1 million, $1.1 million and $0.1 million, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $29.1 million, $45.2 million and $85.5 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

As of December 31, 2007, the unrecognized stock-based compensation balance after estimated forfeitures related to stock options was $22.6 million to be recognized over an estimated weighted average amortization period of 2.5 years and $11.8 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 2.7 years. As of December 31, 2006, the unrecognized stock-based compensation balance related to stock options was $20.2 million after estimated forfeitures and $8.9 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 4.0 years.

This excerpt taken from the TSRA 10-Q filed Nov 8, 2007.

Stock-based Compensation

The following table sets forth our stock-based compensation for the periods indicated (in thousands):

 

    

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

     2007    2006    2007    2006

Cost of revenues

   $ 425    $ 709    $ 1,722    $ 2,319

Research, development & other related costs

     712      334      1,831      443

Selling, general & administrative

     3,247      2,798      9,659      8,188
                           

Total stock-based compensation

   $ 4,384    $ 3,841    $ 13,212    $ 10,950
                           

Stock-based compensation awards included employee stock options, restricted stock awards and employee stock purchases under our 2003 Employee Stock Purchase Plan. As of September 30, 2007, the amount of unrecognized stock-based compensation after estimated forfeitures estimated to be expensed from the remainder of 2007 to 2011 related to unvested stock options at September 30, 2007 was $23.6 million to be recognized over an estimated weighted average amortization period of 2.5 years and an additional $12.7 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 2.9 years. Stock-based compensation for the three months ended September 30, 2007, was $4.4 million, of which $3.1 million related to employee stock options, $1.2 million related to issuances of shares of restricted stock and $0.1 million related to employee stock purchases. For the nine months ended September 30, 2007, stock-based compensation was $13.2 million, of which $9.3 million related to employee stock options, $3.3 million related to issuances of shares of restricted stock and $0.6 million related to employee stock purchases. For the three months ended September 30, 2006, stock-based compensation was $3.8 million, of which $2.9 million related to employee stock options, $0.7 million related to issuances of shares of restricted stock and $0.3 million related to employee stock purchases. For the nine months ended September 30, 2006, stock-based compensation was $11.0 million, of which $8.8 million related to employee stock options, $1.7 million related to issuances of shares of restricted stock and $0.5 million related to employee stock purchases. The overall increase is primarily related to an increase in grants of stock awards to employees based on our compensation incentive program and an increase in expense related to employee stock purchases and certain stock awards for employees that transitioned to consultants whose awards were accounted for under variable accounting. Future stock-based compensation expense and unrecognized stock-based compensation will increase as we grant additional stock awards.

This excerpt taken from the TSRA 10-Q filed Aug 10, 2007.

Stock-based Compensation

The following table sets forth our stock-based compensation for the periods indicated (in thousands):

 

    

Three Months Ended

June 30, 

  

Six Months Ended

June 30, 

     2007    2006    2007    2006

Cost of revenues

   $ 747    $ 675    $ 1,297    $ 1,611

Research, development & other related costs

     611      59      1,119      108

Selling, general & administrative

     3,789      2,597      6,412      5,390
                           

Total stock-based compensation

     5,147      3,331      8,828      7,109
                           

Stock-based compensation awards included employee stock options, restricted stock awards and employee stock purchases under our 2003 Employee Stock Purchase Plan. As of June 30, 2007, the amount of unearned stock-based compensation after estimated forfeitures estimated to be expensed from the remainder of 2007 to 2011 related to unvested stock options at June 30, 2007 was $18.6 million and an additional $11.6 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 2.26 years. Stock-based compensation for the three months ended June 30, 2007, was $5.1 million, of which $3.6 million related to employee stock options, $1.3 million related to issuances of shares of restricted stock and $0.2 million related to employee stock purchases. For the six months ended June 30, 2007, stock-based compensation was $8.8 million, of which $6.2 million related to employee stock options, $2.1 million related to issuances of shares of restricted stock and $0.5 million related to employee stock purchases. For the three months ended June 30, 2006, stock-based compensation was $3.3 million, of which $2.7 million related to employee stock options, $0.5 million related to issuances of shares of restricted stock and $0.1 million related to employee stock purchases. For the six months ended June 30, 2006, stock-based compensation was $7.1 million, of which $5.9 million related to employee stock options, $1.0 million related to issuances of shares of restricted stock and $0.2 million related to employee stock purchases. The overall increase is primarily related to an increase in grants of stock awards to employees based on our compensation incentive program and an increase in expense related to employee stock purchases and certain stock awards for employees that transitioned to consultants whose awards were accounted for under variable accounting. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock awards.

This excerpt taken from the TSRA 10-Q filed May 11, 2007.

Stock-based Compensation

Stock-based compensation for the three months ended March 31, 2007 was $3.7 million, of which $2.6 million related to employee stock options, $788,000 related to issuances of shares of restricted stock and $275,000 related to employee stock purchases through our 2003 ESPP. For the three months ended March 31, 2006 stock-based compensation was $3.8 million, of which $3.1 million related to employee stock options, $534,000 related to issuances of shares of restricted stock and $98,000 related to employee stock purchases through our 2003 ESPP.

This excerpt taken from the TSRA 10-K filed Mar 21, 2007.

NOTE 8 – STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values was required. SFAS No. 123(R) supersedes the Company’s previous accounting under APB No. 25, “Accounting for Stock Issued to Employees,” for periods beginning in fiscal year 2006. In March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations.

The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). Thus, the Company adopted SFAS No. 123(R) in accordance with the modified prospective transition method on January 1, 2006. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Historically, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 and only disclosed the impact of SFAS No. 123 within the footnote disclosures of the Company’s financial statements. Thus, previously under the rules of APB No. 25, stock-based compensation expense was only recognized and reported in our Consolidated Statement of Operations for grants that had an exercise price that was less than the stock price at the date of grant.

In conjunction with the adoption of SFAS No. 123(R), the Company prospectively amended its method of attributing the value of stock-based compensation to expense. Historically, the Company utilized the provisions of FIN No. 28 to recognize the expense associated with equity awards. This method allows for accelerated amortization of stock based compensation expense over the vesting period of the award. As permitted by SFAS No. 123(R), the Company elected the straight-line method of expensing all stock based compensation awarded subsequent to the adoption of SFAS No. 123(R). Thus, compensation expense for all stock-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated approach under FIN No. 28, while compensation expense for all stock-based payment awards granted on or after January 1, 2006 will be recognized using the straight-line method.

The Company will continue to use the Black-Scholes valuation model to determine the estimated fair value of stock-based awards since this model utilizes the following award attributes to determine the estimated fair value of stock-based awards: fair value at date of grant, exercise price, risk free interest rate, volatility, expected life of the award, forfeiture rate and dividend rate.

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following table summarizes the expenses prior to the adoption of the SFAS No. 123(R) (in thousands, except per share amounts):

 

     Years Ended
December 31,
 
     2005     2004  

Net income—as reported

   $ 31,449     $ 59,063  

Plus: Stock-based employee compensation expense determined under APB Opinion No. 25, included in reported net income, net of tax

     21       58  

Less: Stock-based employee compensation expense determined under fair value based method, net of tax

     (15,048 )     (8,826 )
                

Pro forma net income

     16,422       50,295  
                

Basic net income per share:

    

As reported

   $ 0.71     $ 1.47  

As adjusted

   $ 0.37     $ 1.26  

Diluted net income per share:

    

As reported

   $ 0.66     $ 1.27  

As adjusted

   $ 0.34     $ 1.08  
This excerpt taken from the TSRA 10-K filed Mar 1, 2007.

NOTE 8 – STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values was required. SFAS No. 123(R) supersedes the Company’s previous accounting under APB No. 25, “Accounting for Stock Issued to Employees,” for periods beginning in fiscal year 2006. In March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations.

The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). Thus, the Company adopted SFAS No. 123(R) in accordance with the modified prospective transition method on January 1, 2006. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Historically, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 and only disclosed the impact of SFAS No. 123 within the footnote disclosures of the Company’s financial statements. Thus, previously under the rules of APB No. 25, stock-based compensation expense was only recognized and reported in our Consolidated Statement of Operations for grants that had an exercise price that was less than the stock price at the date of grant.

In conjunction with the adoption of SFAS No. 123(R), the Company prospectively amended its method of attributing the value of stock-based compensation to expense. Historically, the Company utilized the provisions of FIN No. 28 to recognize the expense associated with equity awards. This method allows for accelerated amortization of stock based compensation expense over the vesting period of the award. As permitted by SFAS No. 123(R), the Company elected the straight-line method of expensing all stock based compensation awarded subsequent to the adoption of SFAS No. 123(R). Thus, compensation expense for all stock-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated approach under FIN No. 28, while compensation expense for all stock-based payment awards granted on or after January 1, 2006 will be recognized using the straight-line method.

The Company will continue to use the Black-Scholes valuation model to determine the estimated fair value of stock-based awards since this model utilizes the following award attributes to determine the estimated fair value of stock-based awards: fair value at date of grant, exercise price, risk free interest rate, volatility, expected life of the award, forfeiture rate and dividend rate.

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following table summarizes the expenses prior to the adoption of the SFAS No. 123(R) (in thousands, except per share amounts):

 

     Years Ended
December 31,
 
     2005     2004  

Net income—as reported

   $ 31,449     $ 59,063  

Plus: Stock-based employee compensation expense determined under APB Opinion No. 25, included in reported net income, net of tax

     21       58  

Less: Stock-based employee compensation expense determined under fair value based method, net of tax

     (15,048 )     (8,826 )
                

Pro forma net income

     16,422       50,295  
                

Basic net income per share:

    

As reported

   $ 0.71     $ 1.47  

As adjusted

   $ 0.37     $ 1.26  

Diluted net income per share:

    

As reported

   $ 0.66     $ 1.27  

As adjusted

   $ 0.34     $ 1.08  
This excerpt taken from the TSRA 10-Q filed Nov 13, 2006.

Stock-based Compensation

On January 1, 2006, we adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options and employee stock purchases under our 2003 ESPP based on estimated fair values was required. SFAS No. 123(R) supersedes our previous accounting under APB No. 25, “Accounting for Stock Issued to Employees” for periods beginning in fiscal year 2006. In March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Condensed Consolidated Statement of Operations.

 

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We have applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). Thus, we have adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the company’s fiscal year 2006. In accordance with the modified prospective transition method, our Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Historically, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 and only disclosed the impact of SFAS No. 123 within the footnote disclosures of our financial statements. Thus, previously no stock-based compensation expense had been recognized in our Condensed Consolidated Statement of Operations as permitted under SFAS No. 123.

In connection with our acquisition of Digital Optics Corporation in July 2006, we assumed each outstanding unvested option under the Digital Optics Corporation Employee Stock Option Plan. Each of the assumed options was converted to options to purchase Tessera common stock at an exchange ratio of 0.353 shares of Tessera common stock for each Digital Optics Corporation option. The conversion resulted in the grant of 156,000 options for the purchase of Tessera common stock.

Stock-based compensation for the three months ended September 30, 2006 was $3.8 million, of which $2.9 million related to employee stock options, $661,000 related to issuances of shares of restricted stock and $302,000 related to employee stock purchases through our 2003 ESPP. For the nine months ended September 30, 2006 stock-based compensation was $11.0 million, of which $8.8 million related to employee stock options, $1.7 million related to issuances of shares of restricted stock and $482,000 related to employee stock purchases through our 2003 ESPP. Stock-based compensation for the three and nine months ended September 30, 2005 was $525,000 and $840,000, respectively. The overall increase is primarily related to the application of SFAS No. 123(R), an increase in grants due to an increase in headcount, an increase in the issuance of restricted stock and an increase in expense related to the ESPP. As of September 30, 2006, the unrecorded deferred stock-based compensation balance related to stock options was $23.4 million before estimated forfeitures and an additional $8.9 million related to restricted stock awards will be recognized over an estimated weighted average amortization period of 4 years.

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