Western Union 2008 Annual Report Download - page 79

7777
Notes to Consolidated
Financial Statements
As discussed previously, the Company incurred a pretax
charge of $22.3 million during the year ended December 31,
2007 upon the completion of the acquisition of First Data
on September 24, 2007 by an affiliate of KKR. Also included
in stock-based compensation expense above for the year
ended December 31, 2006 is $6.8 million of allocated
stock-based compensation related to employees of First
Data providing administrative services to the Company
prior to the Spin-off. There was no stock-based compen-
sation capitalized during the years ended December 31,
2008, 2007 and 2006.
As of December 31, 2008, there was $33.4 million of
total unrecognized compensation cost, net of assumed
forfeitures, related to non-vested stock options which
is expected to be recognized over a weighted-average
period of 2.6 years, and there was $10.0 million of total
unrecognized compensation cost, net of assumed forfei-
tures, related to non-vested restricted stock awards and
restricted stock units which is expected to be recognized
over a weighted-average period of 1.8 years.
Fair Value Assumptions
The Company used the following assumptions for the
Black-Scholes option pricing model to determine the
value of First Data stock options and ESPP rights granted
to Western Union employees before the Spin-off and the
value of Western Union options granted to such employ-
ees after the Spin-off.
Year Ended December 31, 2008 2007 2006
STOCK OPTIONS GRANTED (POST-SPIN GRANTS):
Weighted-average risk-free interest rate 3.0% 4.5% 4.6%
Weighted-average dividend yield 0.2% 0.2% 0.2%
Volatility 31.8% 23.8% 26.4%
Expected term (in years) 5.9 6.2 6.6
Weighted-average fair value $7.57 $7.35 $ 7.12
STOCK OPTIONS GRANTED (PRE-SPIN GRANTS):
Weighted-average risk-free interest rate — — 4.6%
Weighted-average dividend yield — — 0.6%
Volatility — — 23.5%
Expected term (in years) — — 5
Weighted-average fair value (pre-spin) — — $12.39
ESPP:
Weighted-average risk-free interest rate — — 4.9%
Weighted-average dividend yield — — 0.6%
Volatility — — 23.0%
Expected term (in years) — — 0.25
Weighted-average fair value (pre-spin) — — $ 8.94
For periods presented prior to the spin-off date of
September 29, 2006, all stock-based compensation awards
were made by First Data, and used First Data assumptions
for volatility, dividend yield and term. Western Union
assumptions, which are described in the paragraphs
below, were utilized for grants made by Western Union
on September 29, 2006 and subsequent thereto.
EXPECTED VOLATILITY—Expected volatility varies by group
based on the expected option term. For the Company’s
Board of Directors and executives, the expected volatil-
ity for the 2008, 2007 and 2006 grants was 31.3%, 26.9%
and 28.4%, respectively. The expected volatility for the
Company’s non-executive employees was 31.9%, 22.8%
and 24.7% for the 2008, 2007 and 2006 grants, respec-
tively. Beginning in 2008, Western Union used a blend
of implied volatility and peer group historical volatility.
The Company’s peer group historical volatility was deter-
mined using companies in similar industries and/or mar-
ket capitalization. The Company’s implied volatility was
calculated using the market price of traded options on
Western Union’s common stock. Prior to 2008, Western
Union’s volatility was determined based entirely on the
calculated peer group historical volatility since there
was not sufficient trading history for Western Union’s
common stock or traded options. Beginning in 2006,
First Data used the implied volatility method for estimat-
ing expected volatility for all stock options granted and
ESPP rights. First Data calculated its implied volatility
using the market price of traded options on First Data’s
common stock.
EXPEC TED DIVIDEND YIELD —The Company’s expected
annual dividend yield is the calculation of the annualized
Western Union dividend of $0.04 per common share
divided by a rolling 12 month average Western Union
stock price on each respective grant date. First Data’s
dividend yield was the calculation of the annualized First
Data dividend amount of $0.24 divided by a rolling 12
month average First Data stock price as of the most recent
grant date for which First Data granted options to Western
Union employees.
EXPECTED TERM— Western Union’s expected term is
5.8 years for non-executive employees, and 7.5 years for
the Board of Directors and executives. The Company’s
expected term of options was based upon, among other
things, historical exercises (including the exercise history
of First Data’s awards), the vesting term of the Company’s
options, the cancellation history of the Company’s employ-
ees options in First Data stock and the options’ contractual
term of ten years. First Data has also aggregated stock
option awards into classes. For each class, the expected