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February 23, 2010
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After attending our ShareComp presentation, view our previous webcast on mergers and acquisitions, Caution! Dangerous Merge Ahead: M&A Must-knows for Stock Plans.
Webcast Reminder: Opting for Outstanding Outsourcing: Best Practices for Outsourced Stock Plan Success: Februrary 24th, 11am PST
A recorded demo of "Employee Elect", the SOS website solution for option exchange programs, is now available:
Ideas or Questions:
Do you have ideas for our next newsletter or webcast? Topics you're dying to see addressed but haven't yet? Please send us an e-mail with your ideas to: email@example.com.
Spring AheadSpring is around the corner! Soon we will see more evidence of the renewal of life. The hills here in California and around the country will turn from gold to green, and trees and flowers will bud and bloom. For many, Spring is a time of fresh starts and new beginnings. For me, it also symbolically represents momentum; of life, growth, and endless opportunities.
Lately, I've been working closely with many of SOS's key partners and clients. Our conversations often reflect on the overall momentum of our industry, new projects, and the many opportunities we have directly ahead of us. This not only creates a renewed sense of optimism, but also an appreciation of the driving force and creation of a plan to sustain this momentum.
I came across the following 10 Tips on How to Sustain Momentum posted by a Samuel B. Bacharach on a Proactive Leadership Magazine website.
Sean Lembree, President & CEO
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You Never Step into the Same River Twice:
Please join us for our next free webcast on Tuesday, March 23rd at 11am Pacific Time, 2pm Eastern TimeDescription:
Are you granting equity to employees in non-US locations? Are you up-to-date on all the latest changes and what other companies are doing to comply? You won't want to miss our FREE webcast on Tuesday, March 23rd. This timely and informative session will educate you on:
(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)
Market Research Survey: Section 6039Periodically, SOS will ask for issuing companies' participation in a market research survey to enhance our understanding of current practices and trends in the industry and to provide our clients insight into the practices of other issuing firms. Our surveys are brief, taking no more than 5 to 12 minutes to complete. Complete the survey today!
Please note that only issuing companies, not vendors or consultants, should complete the survey. Thank you for your cooperation!
Diluted Earnings Per Share: Reconciling Weighted Shares OutstandingRecently, after helping a client with her diluted earnings per share calculations after an option exchange followed (six weeks later!) by a spin off, the client asked for help in reconciling the dilutive and anti-dilutive shares back to the original weighted shares outstanding.
On first glance, this may seem simple, since weighted shares outstanding should be neatly divided between dilutive and anti-dilutive buckets, right? Not so fast, grasshopper! As usual, there's more to these calculations than meets the eye...the total weighted shares outstanding are very unlikely to equal the sum of dilutive and anti-dilutive shares.
(This article assumes a thorough knowledge of the calculations for diluted EPS under the Treasury Stock method prescribed by ASC Topic 260 [formerly FAS 128]. If you need a better understanding of these basics, please email us and we'll be happy to write another article for Xtra.)
We'll now go through a series of four examples to illustrate some of the various reasons that this may be the case, and one way to reconcile the numbers despite this challenge.
Imagine for a moment that your life is much simpler than it really is and that you have a total 400 weighted shares outstanding, consisting of four grants of 100 shares each. The average market value of the stock during the period was $10.
Regular Dilutive Grant
Grant A is our simplest example: an in-the-money NQ, where the buyback shares are less than the weighted shares outstanding. To determine the dilutive shares, you simply subtract the buyback shares from the weighted shares outstanding to determine the dilutive shares.
Anti-dilutive: Underwater Option
Grant B has a price of $12, so it is automatically excluded from the calculation as anti-dilutive. Most systems will not calculate any buyback shares for this grant. However, whether your system shows zero buyback shares for underwater options or does calculate buyback shares for these underwater grants, the ultimate result is the same: all the weighted share outstanding in the grant are anti-dilutive.
Anti-dilutive: Buyback Shares Exceed Weighted Shares Outstanding
Grant C is an in-the-money NQ, where the buyback shares are greater than the weighted shares outstanding. The grant is therefore anti-dilutive and again all the weighted shares outstanding are part of the anti-dilutive shares.
Negative Buyback Shares
This is a common situation for RSUs where the market value has dropped between the grant date and the current period.
For Grant D, the grant is an RSU so is always in-the-money, but when the buyback shares are calculated, the total buyback shares are a negative number. This can result from situations where the fair value of the grant exceeds the "in-the-moneyness" of the grant. For Grant B, let's say that the fair value of the grant is $12 (granted when the stock price was higher than it is today). The Tax Benefit Shares would be calculated as the gain per share of $10 ($10 market value less $0 price) less the $12 fair value. The result is a negative $2 per share (before being multiplied by the applicable tax rate). The exercise proceeds are zero because the grant is an RSU, so unless the grant has enough proceeds from the average unamortized expense during the period, the tax benefit shares would be negative. (Total negative buyback shares may also occur in other, less common scenarios.)
This grant is dilutive since the weighted shares outstanding are greater than the buyback shares. However, if you were to subtract the buyback shares from the weighted shares outstanding, as for a "normally" dilutive grant, you'd end up with 140 dilutive shares. But dilutive shares cannot exceed weighted shares outstanding, so you would not subtract, and the entire 100 shares would be part of the dilutive shares.
To compute the total dilutive or anti-dilutive shares, first compute the impact that the buyback shares would have on the dilutive shares grant-by-grant. If the grant is underwater or the buyback shares are greater than the weighted shares outstanding, the impact is equal to the total weighted shares outstanding (all are anti-dilutive). If the total buyback shares are negative, the impact is 0. Otherwise the impact to dilutives shares is equal to the buyback shares. So your formula might look something like this:
Impact of Buyback Shares on Dilutive Shares
IF Price >Average Market Value
In our examples above the results would be as follows:
Now you can sum the weighted shares outstanding (400), sum the Impact on Dilutive shares (270) and subtract the totals of those amounts to reconcile to the total Dilutive Shares (130).
To reconcile the anti-dilutive shares, simply sum the weighted shares column only if the Price is greater than the Average Market Value OR if the Buyback Shares are greater than the Weighted Shares Outstanding.
Please contact me with questions on the calculations or this article.
Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, speaking at industry events and helping to define the product roadmap for SOS.
Elizabeth regularly speaks on industry trends and product development at client and industry events including NASPP and NCEO webcasts, GEO and NASPP Chapter meetings, User Groups, and the NASPP Annual Conference. She was also selected to speak at the West Coast FASB Roundtable on FAS 123(R) and has recently co-authored the chapter on accounting for equity compensation in The Stock Options Book, 11th edition, by Alisa Baker. She became a Certified Equity Professional in 1999 and continues to volunteer for the Certified Equity Professional Institute. She also volunteers for the Silicon Valley Chapter of the NASPP and the NCEO.
Over the next couple months, our Product Spotlight will focus on a few of the services we provide to our clients considering a change in stock plan vendor. We will also be hosting a sales webcast on March 31st discussing these services, and offering insight into the challenges faced by companies going through a change in vendor (Click here to register). Below is an overview of the ways we work can work with you.
Product Spotlight: Stock Plan Vendor Transition ServicesThe first step to recovery is to admit you have a problem!
In equity comp today, there are more choices than ever before - software systems, brokers, transfer agents, comp consultants, tax consultants, accounting consultants, and the list goes on! All this competition has helped to make everyone better, but it also makes it an (almost) insurmountable task when you need to change. Where do you start? The easy answer is with SOS!
SOS has been helping companies through these transitions for more than ten years, and can help your company with everything from analyzing the different providers to updating your processes to reflect your new vendor(s). Below are a few of the ways we can help.
Analysis & Recommendations
The decision to change vendors is a big one, and can be very costly; therefore, it is important to make sure that changing vendors is the right decision. SOS can sit down to understand your challenges and help you decide if there are ways to fix the issues that are occurring by changing process, educating internal staff, working directly with your current vendor, creating custom applications and reports, etc. Avoiding a transition, if possible, through targeted adjustments to processes and technology you are utilizing is the first recommendation we offer to companies frustrated by their existing system.
SOS has the experience to help you analyze the different providers out there and ensure you are asking the RIGHT questions and getting answers so you are comparing "apples to apples". We start by sitting down with you to understand your company and culture and determine what is important to you in your new vendor (and what is not so important).
We can help with creating or reviewing your RFI or RFP. We will help to sort through the many pages of responses you receive and identify the points that matter to you. We have a vendor scorecard analysis that we have developed to help analyze vendors side-by-side on key areas that you select. We also have you rate the relative importance of each area so we can come up with a total "weighted" score for each vendor.
In the end, SOS will not make the decision for you. Rather, our vendor evaluations are systematic processes through which our experienced consultants provide you with the organization and information you need to make a highly-informed investment in your program's future. Read our white paper on stock plan vendor evaluations for more information.
Every vendor is different in the support they provide to new clients during implementation. This is another factor to consider when choosing your vendor. Often times, they will help you get set up in the new system, but you will be responsible for the data migration..
This can be a very complex process and, therefore, significantly delay your implementation. SOS has helped with scores of data migration projects from several source and destination systems. We have also created automated tools to map the common data files from one vendor to another.
As challenging as that may sound, getting the data to your new vendor can be the easy part. The bulk of your time will likely be spent reconciling the data. You need to go through to check, double check, and triple check the data to make sure it was converted correctly and makes sense in the new system. SOS includes this as part of our data conversion services.
Custom Interfaces and Data Feeds
We can create the ongoing file feeds to relay information to and from your new vendor. Data flow automation is critical in order to eliminate the error-prone manual processes. SOS can also help to create a customized interface between your HRIS system or payroll system and your vendor.
Education and Training
Changing vendors can be a confusing time for BOTH your equity plan participants AND your internal support staff. SOS provides education and training for both sides to ease the transition. We can develop materials for you or look over materials you have already created. We can deliver the material ourselves onsite, or remotely via a web meeting. We can also record the presentation so you can provide it to your employees that were not able to attend the live session.
As you can see, there are a lot of different moving parts to keep track of AND this is not something you go through every day. SOS does go through it every day. We can provide project management resources to establish project timelines and assign responsibilities, make sure all the moving parts stay on schedule and work with your internal teams to communicate progress.
Interim Stock Administration Assistance
You may have the expertise and resources already in place to handle everything and that is great! The remaining challenge is now there isn't anybody left to handle the day-to-day activities while you are spending all your time on the vendor transition project. SOS has many different levels of consultants available to assist with the ongoing function of your department, ranging from entry level stock admin resources all the way to experience global stock plan managers.
A vendor transition is usually a 6+ month endeavor, so you need to make sure you have the right resources in place to help in all aspects of this process. SOS is flexible to your needs and most importantly, your budget. We will work with you to understand the areas where you need help and craft our solution according to YOUR NEEDS.
For more information, please feel free to contact us at firstname.lastname@example.org
ShareComp 2010 is Happening TODAY
SOS Hosts Presentation/Discussion on Managing Mergers & Acquisitions for Global Equity Plans at 10am PST, Moderates Forum on ESPP Design and Administrative Developments at 11:30am PST
Have you taken advantage of FREE registration for today's ShareComp 2010 conference, courtesy of SOS?
As a founding sponsor, SOS is able to offer you a free registration. Register now using our sponsor pass "SOS" to secure your free attendance at this exciting, market-leading event. Feel free to share this sponsor pass with others within your company...And up to 16 hours of CEP credit will be available for attending sessions!
(click image for video)
Elizabeth Dodge and Marianne Snook preview today's presentation, Managing Mergers and Acquisitions for Global Equity Plans
SOS Across Our Desk: Equity Compensation in the News...ESPP
A nice explanation of ESPP qualifying dispositions taxation targeted at participants...More on ESPP Operational Errors from the NASPP blog...IRS rule changes affecting ESPP and ISOs.
Juniper Networks to pay $169M in stock backdating suit...Brocade's ex-CFO fined $425,000 in options case...A Missouri backdating case is dismissed.
IFRS in India
IFRS is likely to be rolled out only partially in India in 2011.
No Need for Further Explantion
SOS Xposé...tender tidbits about people and players in our industry...
Xposé Clarification... Last month we told you about Jim Lecher of Radford Consulting, and his new gig teaching a derivitives course at his alma mater, Arcadia University. Just to be clear, Jim's professorial duties will be in addition to his continuing responsibilities at Radford. We are sorry for any confusion this item caused.
Published... SOSer Elizabeth Dodge recently co-authored the chapter on accounting for equity compensation in The Stock Options Book, 11th edition, by Alisa Baker. The book is a truly comprehensive guide to stock option plans, and it is a great achievement to be included within its pages. Great Job, Elizabeth (and don't forget to purchase your copy today)...Speaking (of)...Elizabeth has been selected to give THREE presentations at The Source, Transcentive's annual conference taking place in Miami from May 11th-14th. She will present "Staying Ahead of the Curve: Emerging Best Practices in Equity Compensation", "Crystalizing Your Stock Plan Data", and "Refining Restricted: Cleaning up Restricted Stock Awards and Restricted Stock Units". Good luck, and have fun down there...
On The Move...Joanne Norgart has joined Charles Schwab as Client Services Team manager in Denver. Congratulations Joanne!
Fond Farewell...Pam Ellis, after nine years of exemplary service to SOS, has decided to join the U.S. leadership team of Solium Capital. We are excited for Pam, but of course we will all miss her and her stellar contributions to our organization on so many levels over the years.
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|Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.|
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