Companies vest options early to avoid new expenses
Thu Jan 6, 2005 01:46 PM ET
By Joel Rothstein
WASHINGTON, Jan 6 (Reuters) - Companies are cutting expected stock option expenses in advance of new accounting rules by reducing the time executives and employees must wait before exercising options and cashing out, recent regulatory filings show.
Hospital operator HCA Inc. (HCA.N: Quote, Profile, Research) , for example, says it will save $83 million in stock option expenses over the next four years by immediately vesting 19.1 million employee stock options far ahead of their original vest dates, according to a filing with the U.S. Securities and Exchange Commission.
On July 1, U.S. companies will be required to start treating employee stock options as routine business expenses like salaries and bonuses, even when options have strike prices lower than the current trading price.
At present, companies need merely mention the value of the options in the footnotes of financial filings.
"Analysts and large institutional investors and those in the know were not surprised" by the move, said HCA spokesman Jeff Prescott.
Options -- which are rights allowing the holder to buy stock at a preset price in the future -- became a key part of many executives' pay in the 1990s.
The Financial Accounting Standards Board, which writes U.S. accounting rules, issued the rule requiring expensing of options with an eye toward giving investors a clearer view of their true cost.
But by vesting options in advance of the FASB rule change, companies have found a way to eliminate or reduce any potential charges to net income that might result from the change.
MILLIONS IN SAVINGS
HCA is not alone in its approach to the new rule.
Wisconsin Energy Corp. (WEC.N: Quote, Profile, Research) , technology company UTStarcom Inc. (UTSI.O: Quote, Profile, Research) and software company Brooks Automation Inc. (BRKS.O: Quote, Profile, Research) have vested 3.4 million, 6.4 million and 1.3 million options, respectively.
These companies have not disclosed the amount of expected savings, but Wisconsin Energy and Brooks Automation spokesmen have said it will be millions of dollars. All four companies cite the accounting rule as the reason for the action.
"It is an obvious move to anyone who analyzes the accounting change -- this was a no brainer," said Mark Chung, director of investor relations at Chelmsford, Massachusetts-based Brooks. "We are not going out of our way to do anything extraordinary."
"We have not gotten any negative response from shareholders," said Wisconsin Energy spokesman Rick White, adding he expects other companies to handle the accounting change the same way.
"Based on my conversations with others in this industry and around the country, I suspect a lot of companies will come to the same conclusion and go ahead and just do it," White said.
FASB Board Member Michael Crooch said they considered the possibility that companies may accelerate option vesting ahead of the rule change. But, he said, "The majority view of the board was that we did not want to put something that might be deemed abuse prevention in the transition."
Crooch also said that the acceleration of vesting of stock options is allowed within current accounting rules, adding that he would be "very surprised" if the board reconsidered its decision and that "no one has asked." |
