Western Union 2008 Annual Report Download - page 77

7575
Notes to Consolidated
Financial Statements
2006 Director Plan are issued with exercise prices equal
to the fair market value of Western Union common stock
at the grant date, have 10-year terms, and vest immedi-
ately. Since options and stock units under this plan vest
immediately, compensation expense is recognized on
the date of grant based on the fair market value of the
awards when granted. Awards under the plan may be
settled immediately unless the participant elects to defer
the receipt of the common shares under applicable plan
rules. A maximum of 1.5 million shares of common stock
may be awarded under the 2006 Director Plan. As of
December 31, 2008, the Company has issued 0.4 million
options and 0.1 million unrestricted stock units to non-
employee directors of the Company.
First Data Stock Options and Employee Stock
Purchase Plan Rights
Prior to the Spin-off, 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 incre-
ments 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.
During the first quarter of 2006, First Data issued
restricted stock awards or restricted stock units to certain
employees which were contingent upon the achievement
of certain performance criterion which were met on the
date of Distribution. The awards had provisions to vest
at a rate of 33% per year on the anniversary date of the
grant. The fair value of the awards granted in February
2006 were measured based on the fair market value of
the shares on the date of grant.
Prior to the Spin-off, employees of the Company were
able to participate in a First Data instituted 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 provi-
sions 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.
Impact of Spin-Off to Stock–Based Awards
Granted Under First Data Plans
At the time of the Spin-off, First Data converted stock
options, restricted stock awards and restricted stock units
(collectively, “Stock-Based Awards”) of First Data stock held
by Western Union and First Data employees. For Western
Union employees, outstanding First Data Stock-Based
Awards were converted to new Western Union Stock-
Based Awards at a conversion ratio of 2.1955 Western
Union Stock-Based Awards for every First Data Stock-
Based Award held prior to the Spin-off. The conversion
was based on the pre-distribution First Data closing price
with due bills of $42.00 relative to the Western Union
when-issued closing price of $19.13 on September 29,
2006. For First Data employees, each First Data Stock-
Based Award held prior to the Spin-off was converted
into one replacement First Data Stock-Based Award and
one Western Union Stock-Based Award. The new Western
Union and First Data Stock-Based Awards maintained their
pre-conversion aggregate intrinsic values, and, in the case
of stock options, their ratio of the exercise price per share
to their fair market value per share.
All converted Stock-Based Awards, which had not
vested prior to September 24, 2007, were subject to the
terms and conditions applicable to the original First Data
Stock-Based Awards, including change of control provi-
sions which required full vesting upon a change of control
of First Data. Accordingly, upon the completion of the
acquisition of First Data on September 24, 2007 by an
affiliate of Kohlberg Kravis Roberts & Co.’s (“KKR”), all of
these remaining converted unvested Western Union Stock-
Based Awards vested. In connection with this accelerated
vesting, the Company incurred a non-cash pretax charge
of $22.3 million during the year ended December 31,
2007 for such awards held by Western Union employees.
Approximately one-third of this charge was recorded
within “Cost of services” and two-thirds was recorded
within “Selling, general and administrative expense” in
the Consolidated Statements of Income. As a result of this
accelerated vesting, there is no remaining unamortized
compensation expense associated with such converted
Stock-Based Awards.
The conversion of each stock option held by Western
Union employees on the date of the Spin-off constituted
a modification of those stock option awards under the
provisions of SFAS No. 123R resulting in total additional
stock based compensation charges of $3.4 million, of which
$1.5 million and $1.9 million were recognized during the
years ended December 31, 2007 and 2006, respectively.
After the Spin-off, the Company receives all cash pro-
ceeds related to the exercise of all Western Union stock
options, and recognizes all stock compensation expense
and retains the resulting tax benefits relating to Western
Union awards held by Western Union employees. First
Data recognizes all stock-based compensation expense
and retains all associated tax benefits for Western Union
Stock-Based Awards held by First Data employees.