Two Orange County companies have tweaked their stock option plans to avoid costs under new accounting rules set to take effect Jan. 1, signaling what could become a trend.
The rules, which were opposed by some technology companies that rely heavily on options to recruit workers, require publicly traded companies to expense the cost of issuing stock options starting next year.
If companies vest some options before Jan. 1, they can mitigate at least some of the costs stemming from the new rules.
Irvine-based chipmaker Microsemi Corp. and Aliso Viejo-based staffing company RemedyTemp Inc. have vested some stock options granted to workers. Both companies entered their 2006 fiscal years at the start of the month.
“I would expect there would be more companies before the year is out,” said Wayne Pinnell, managing partner at Irvine accounting firm Haskell & White LLP.
Microsemi and RemedyTemp allowed workers to exercise all stock options that are “underwater,” or priced more than the current stock price.
Those shares can’t be cashed in for a gain until the stock price goes up.
Vesting underwater options lets companies avoid some costs under the new rules with little risk of seeing workers cash in options and bolt to another company, according to Anne-Marie Vitale, a partner at PricewaterhouseCoopers LLP in Irvine.
Most options vest in three years or more as a way of keeping workers around. But few are likely to exercise underwater options and are more likely to wait and see if the stock price goes up.
The companies would have to take a charge for vesting underwater stock options next year under the new rules.
Microsemi’s Case
Microsemi said it “accelerated” nearly 5.2 million stock options. The company didn’t say what it might save by doing so now instead of in 2006.
“Microsemi believes that completion of this offer will benefit all Microsemi stockholders by substantially reducing future compensation expense,” the company said in a statement.
RemedyTemp said it “eliminated the need to recognize future compensation expense of approximately $560,000” with its vesting move.
The underwater vested options made up 18% of the company’s outstanding options, RemedyTemp said.
Other companies around the country have moved to head off options costs under the new rules.
“There is a general surge out there for companies to accelerate vesting periods for options,” Pinnell said.
Irvine-based chipmaker Broadcom Corp., probably the biggest user of options locally, hasn’t made a decision on whether to fully vest some of its options, spokesman Bill Blanning said.
Broadcom also is working on exactly how it will estimate the cost of stock options under the new rules, he said.
The Securities and Exchange Commission addressed the issue of accounting for accelerated underwater options late last year.
If companies vest underwater options next year, a formula is used to figure out their value and the cost to the company.
Companies aren’t likely to vest all options, including those priced below current share prices, in coming weeks.
Under current rules, accelerated “in the money” options have to be counted as expense.
