Western Union 2006 Annual Report Download - page 93

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Notes to Consolidated Financial Statements 91
The conversion of each First Data stock option
to 2.1955 Western Union stock options constituted
a modification of those stock option awards under the
provisions of SFAS No. 123R. Stock-based compensation
relating to the incremental fair value between First Data
awards held prior to the spin-off and Western Union awards
subsequent to the modification resulted in additional stock
based compensation charges of $3.4 million of which
$1.8 million was recognized on September 29, 2006 related
to previously vested options, and $1.6 million is being
recognized over the remaining vesting period of the
associated modified unvested options.
The substitute stock options, representing those stock
options held by Western Union employees that were
converted from First Data stock options to Western Union
options at a conversion ratio of 2.1955, have exercise prices
equal to the fair market value of a share of common stock
on the grant date, as adjusted by the conversion ratio, and
substantially all have a term of 10 years. The substitute
stock options maintained their original vesting schedules.
Generally, these stock options had an original vesting
schedule of four years and vested ratably in four equal
annual increments. A similar conversion process was
completed to determine the number of the Company’s
restricted stock awards and restricted stock units
substituted on September 29, 2006 to replace First Data
restricted stock awards and restricted stock units held
prior to the spin-off. The restricted stock awards and
restricted stock units have also maintained their original
vesting schedules.
After the spin-off, the Company is receiving all cash
proceeds related to the exercise of Western Union stock
options held by First Data employees; however, First Data
is recognizing all associated expense and resulting
tax benefit relating to such stock options. The Company
recognizes compensation expense, receives all cash
proceeds and retains all tax benefits relating to Western
Union awards held by Western Union employees.
The Company realized total tax benefits during the
year ended December 31, 2006 from stock option exercises
of $1.9 million. The Company’s calculated pool of excess
tax benefits available to absorb write-offs of deferred
tax assets in subsequent periods was approximately
$9.5 million as of December 31, 2006.
The Company received $80.8 million in cash proceeds
related to the exercise of stock options during the year
ended December 31, 2006. Upon the exercise of stock
options, shares of common stock are issued from authorized
common shares or treasury stock. The Company maintains
a share repurchase program with its purchasing agent
(Note 13).
First Data Stock Options and
Employee Stock Purchase Plan Rights
Prior to the Distribution, Western Union participated in the
First Data plans that provided for the granting of stock
options to employees and other key individuals who
performed services for the Company. Options granted
under the First Data plans were issued with exercise prices
equivalent to the fair market value of First Data common
stock on the dates of grant, substantially all had 10-year
terms and became exercisable in four equal annual
increments beginning 12 months after the dates of grant.
The requisite service period for stock options was the
same as the vesting period, with the exception of retirement
eligible employees who have shorter requisite service
periods ending when the employees become retirement
eligible. Compensation expense related to stock options
was recognized over the requisite service period, except
as discussed further under “Stock-Based Compensation”
below for certain options granted prior to the adoption of
SFAS No. 123R.
In October 1996, First Data instituted an employee
stock purchase plan (“ESPP”). Amounts accumulated
through payroll deductions elected by eligible employees
were used to make quarterly purchases of First Data
common stock at a 15% discount from the lower of the
market price at the beginning or end of the quarter. The
fair value of these awards was recognized as compensation
expense in the Consolidated Statements of Income for
the year ended December 31, 2006 in accordance with
the provisions of SFAS No. 123R. Western Union has not
adopted an employee stock purchase plan.
First Data received all cash proceeds related to the
exercise of stock options and ESPP shares sold by Western
Union employees during all periods prior to the spin-off.