Avis 2010 Annual Report Download - page 100

Table of Contents
The Company may grant stock options, stock appreciation rights (“SARs”), restricted shares and restricted stock units (“RSUs”) to its
directors, officers, other employees and affiliates. As of December 31, 2010, the Company’s active stock-based compensation plan consists
of the amended 2007 Equity and Incentive Plan, under which the Company is authorized to grant up to 12.5 million shares of its common
stock and approximately 5 million shares were available for future grants. The Company may settle employee stock option exercises with
either treasury shares or shares purchased on the open market. The Company typically issues shares related to vested RSUs from treasury
shares.
The Company applies the direct method and tax law ordering approach to calculate the tax effects of stock-based compensation. In
jurisdictions with net operating loss carryforwards, tax deductions for exercises of stock-based awards did not generate a cash benefit.
Approximately $32 million of tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.
Stock Options
Following the spin-offs of Realogy and Wyndham, all previously outstanding and unvested stock options vested and converted into stock
options of Avis Budget, Realogy and Wyndham. During first quarter 2010, the Company granted 160,000 stock options under the
Company’s amended 2007 Equity and Incentive Plan. The stock options (i) vest ratably over a five year term, (ii) expire ten years from the
date of grant and (iii) have an exercise price that was set at the closing price of the Company’s common stock on the date of the grant.
The Company granted approximately 4 million stock options under the 2007 Equity and Incentive Plan in 2009 that vest based on
performance, market and/or time vesting criteria. The 2009 grant consisted of approximately 2.7 million time-vesting stock options,
approximately 0.9 million performance-vesting stock options and approximately 0.4 million market-vesting stock options. The performance-
vesting and market-vesting stock options also contain a time-vesting component. The time-based awards cliff vest on the two-year
anniversary of the date of grant while the performance-based awards vested on the one-year anniversary of the date of grant following
attainment of minimum Adjusted EBITDA levels. The market-based awards were granted to the Company’s CEO and President and vest on
the two-year anniversary of the date of grant. The vesting of the market-
based awards is conditional on the average closing stock price of the
Company’s common stock equaling or exceeding a certain price for a 20 consecutive trading day period, which was achieved during 2009.
The option exercise price was set at the closing price of the Company’s common stock on the date of the grant and the options expire 10
years from the date of the grant. The terms of the performance-vesting stock options provide for immediate expiration if vesting criteria was
not met by the end of the applicable performance period.
The Company used the Black-Scholes option pricing model to calculate the fair value of the time-vesting stock options granted first quarter
2010 and the time-vesting and performance-vesting stock option awards granted in 2009. The Company determined the fair value of its
market-vesting awards using a Monte Carlo simulation model with assumptions including, but not limited to, the options’ expected life and
the expected volatility of the underlying stock. Based on facts and circumstances at the time of the grant, the Company used the implied
volatility of its publicly traded, near-the-money stock options with a remaining maturity of at least one year in 2010 and a blended volatility
rate that combines market-based measures of implied volatility with historical volatility as the most appropriate indicator of the Company’s
expected volatility in 2009, when publicly traded stock options with a remaining maturity of at least one year were not available. The
Company considered several factors in estimating the life of the options granted, including the historical option exercise behavior of
employees and the option vesting periods. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of
grant and, since the Company does not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero.
Based on
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