DNAprint Genomics (DNAG)

[johnnyfiber]

While stock option grants generally contain antidilution provisions that explain how the exercise price and number of shares will be adjusted if the employer declares a stock dividend or stock split, most plans do not contain provisions for similar adjustments if an equity restructuring occurs. These special adjustments may include

n Reduction of the exercise price.

n Reduction of the exercise price and an increase in the number of shares under option.

* Cash payments to option holders.

* Issuance of stapled or nonstapled options after a spin-off-.

* Stapled options (options cannot be

separately exercised)-When exercised,

these options entitle the

holder to (1) a share of the continuing

entity and (2) the same number

of shares of the spun-off entity received

by each owner of a continuing

entity.

* Nonstapled options (options can

be separately exercised)-Entitle

the holder to a separately exercisable

option in the spun-off entity in

addition to the option in the continuing

entity.

* Equity restructurings include spin-offs and recapitalizations in the form of special large and nonrecurring dividends. A spin-off can take one of two forms:

* A corporation transfers a portion of its assets to a newly formed corporation in exchange for the latter's capital stock. The new corporation's capital stock then is distributed to the shareholders of the old corporation as a property dividend.

* A parent corporation distributes the stock of an existing subsidiary to the shareholders of the parent.

* Accounting issues. The three issues considered by the task force were

1. Do changes to a stock option plan resulting from an equity restructuring trigger a new measurement date?

2. If so, how would the additional compensation expense be measured?

3. Would an equity restructuring trigger a new measurement date if the fixed stock option grant already contains provisions for adjustments to the option terms in that event?

Arguments: On the issue of whether changes to the plan due to the restructuring would result in a new measurement date, some link the need for a new measurement date with the effect of the plan adjustments on the option holder's economic position.

One view is plan changes following a restructuring do nothing more than restore the option holder to the same economic position held prior to the restructuring. Proponents of this view see no substantive difference between these stock option adjustments and those made for stock dividends and stock splits. In practice, those equity transactions do not create a new measurement date.

Others contend the economic position of the option holder has changed because a restructuring and simultaneous adjustment of existing stock options often create a different economic entity in which the option holder now has the opportunity to invest. For example, in a spin-off, the original option no longer has the economic value it had prior to the restructuring, because the entities have been separated and the sum of the separate economic parts may not equal the original economic whole. The option holder's economic position may be improved or worsened depending on whether the spun-off entity was a poor or profitable performer.

If a new measurement date is appropriate, four different views arise as to how compensation should be measured at that date.

Some advocate a strict reading of Opinion no. 25 that, in their view, measures compensation expense by the difference between the current market value of the stock and the option price as of the new measurement date.

Others contend compensation expense shouldn't be determined based on market value appreciation prior to the restructuring date. T pose measuring the option value before and after the restructuring. The difference is the amount of compensation expense to recognize.

Others disagree and assert that option value is not used under existing guidelines for measuring compensation expense. They believe option valuation techniques are varied and unproven and could result in imprecise values.

Still others argue compensation should be measured as the amount related to the spun-off entity or other distribution made to option holders. The argue any compensation expense resulting from the restructuring comes from the spun-off entity-not from appreciation in value since the original grant date. Consensuses. The consensus reached by the task force links the required accounting to the method used by the employer to restore the option holder's economic position after the equity restructuring. The task force concluded a plan change resulting from an equity restructuring would not trigger a new measurement date, and therefore no additional compensation expense should be recognized, if the following criteria are met:


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