SEC Requires More Disclosure About Stock-Based Compensation Plans

The Securities and Exchange Commission has expanded the information that public companies must disclose regarding stock option and other stock-based compensation plans in their annual reports on Form 10-K or 10-KSB and in their proxy statements relating to annual meetings at which shareholders are to vote on such plans.

Public companies must comply with the new disclosure requirements in their annual reports on Forms 10-K and 10-KSB for fiscal years ending on or after March 15, 2002 and in their proxy statements for meetings occurring on or after June 15, 2002 (if shareholders are voting on a plan at the meeting). SEC Release No. 33-8048 (December 21, 2001).

Stock-based compensation of public company officers, directors, employees and consultants has grown dramatically in recent years. Institutional investors have become increasingly concerned about the potential dilution that compensatory issuances may cause and increasingly active in monitoring plan reserves, developing guidelines for acceptable dilution and campaigning against shareholder approval of plan adoptions or expansions that exceed such guidelines.

Investor groups have become especially concerned about their inability to monitor and exercise control over broad-based compensatory plans that do not require shareholder approval for adoption or expansion under current exchange and Nasdaq rules. Investor groups have therefore pressured the SEC to require clearer and more extensive disclosure about outstanding grants and reserves under such plans.

The expanded disclosure rules require public companies to include a new table in each annual report on Form 10-K or 10-KSB showing:

• the number of shares issuable upon exercise of outstanding options, warrants and rights;

• the weighted-average exercise price of outstanding options, warrants and rights; and

• the number of shares remaining available for future issuance under stock-based compensation plans (other than those already subject to outstanding options, warrants and rights).

The table must set this information out separately for those plans approved by shareholders and for those not approved by shareholders. Information for individual plans in each category may, however, be aggregated; separate disclosure for each individual plan is not required.

The new rules also require a brief, narrative description of the material features of all stock-based compensation plans in effect as of the fiscal year-end that were adopted without shareholder approval. This requirement may be met by cross-referencing equivalent disclosure (pursuant to Statement on Financial Accounting Standards No. 123) in the footnotes to the company's financial statements. In addition, the revisions expand exhibit filing requirements to include all plans not approved by shareholders (even those in which there is no officer or director participation) unless immaterial in amount or significance.

If a public company is submitting a stock-based compensation plan for shareholder action at an annual meeting, the new disclosures must also be included in the proxy statement for such meeting. In such cases, the company may incorporate the proxy disclosure by reference into its Form 10-K or 10-KSB (under existing incorporation rules) in order to avoid duplicative disclosure.

In light of somewhat less extensive reliance by foreign issuers on stock-based compensation, the expanded disclosure requirements do not apply to foreign issuers subject to SEC reporting.

Although calendar-year companies will not generally be subject to the expanded disclosure requirements in the upcoming 2002 reporting and proxy season, they may comply voluntarily. Institutional investor groups will undoubtedly be on the lookout for companies that do not implement these new disclosures as soon as possible.

January 7, 2002