Travelers 2004 Annual Report Download - page 186

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. INCENTIVE PLANS, Continued
In connection with SPC options assumed in the merger, the estimated fair value of all the outstanding SPC
stock options at April 1, 2004 was $186 million and was included in the determination of the purchase price
based upon the announcement date market price per share of SPC common stock, using an option-pricing model.
The unvested stock option awards require the holder to render service during the vesting period and are therefore
considered unearned compensation. At April 1, 2004, the estimated fair values of the unvested awards were $35
million and have been included in unearned compensation as a separate component of equity. The unearned
compensation expense is being recognized as a charge to income over the remaining vesting period.
In connection with the Citigroup Distribution, the exchange of options in conjunction with a spinoff is
considered a modification and therefore the modification guidance of FAS 123 was applied to the replacement
awards issued on August 20, 2002. For vested replacement options, any excess of the fair value of the modified
options issued over the fair value of the original options at the date of exchange was recognized as additional
compensation cost. For nonvested replacement options, any excess of the fair value of the modified options
issued over the fair value of the original options at the date of exchange is added to the remaining unrecognized
compensation cost of the original option and recognized over the remaining vesting period.
Also, CIRI had equity-based compensation plans in which awards were granted in CIRI’s privately held
common stock. In connection with Indemnity’s purchase of the minority interest of CIRI (see note 2) the
Company converted CIRI’s outstanding equity based-awards into awards in the Company’s common stock. The
converted awards retained the same terms and conditions that were applicable prior to the conversion. The
conversion of CIRI outstanding nonvested options into options to purchase the Company’s common stock is
considered a modification and therefore the modification guidance of FAS 123 was applied to the converted
awards. For these converted options, the excess of the fair value of the modified options issued over the fair
value of the original options at the date of exchange is added to the remaining unrecognized compensation cost of
the original option and recognized over the remaining vesting period.
Under FAS 123, reload options are treated as separate grants from the original grants and as a result are
separately valued when granted. Reload options are exercisable for the remaining term of the related original
option and therefore would generally have a shorter estimated life. Shares received through option exercises
under the reload program are subject to restriction on sale. Discounts (as measured by the estimated cost of
protection) have been applied to the fair value of reload options granted to reflect these sales restrictions.
Restricted Stock and Deferred Stock Programs
2004 Incentive Plan
The Company may issue awards of restricted stock and deferred stock to eligible officers and key
employees pursuant to the 2004 Incentive Plan. Such awards include restricted stock grants under the Capital
Accumulation Program (CAP) and Equity Awards program established pursuant to the 2004 Incentive Plan.
Awards issued under the CAP program are in the form of restricted stock and the number of shares included in
the restricted stock award is calculated at a 10% discount from the market price on the date of the award and
generally vest in full after a two-year period from the date of grant. Other restricted stock awards issued under
the Equity Awards program generally vest in full after a three-year period from the date of grant. Except under
limited circumstances, during this period the stock cannot be sold or transferred by the participant, who is
required to render service to the Company during the restricted period. Awards granted to non-U.S. participants
are in the form of deferred stock awards. These deferred stock awards are granted at market price and generally
vest after three years from the date of grant and are subject to the same conditions as the restricted stock awards
except that the shares are not issued until the vesting criteria are satisfied.
174