Underwater Stock Options Research Resources

In order to provide our clients with accurate market practices data, Radford maintains a comprehensive database of underwater exchanges executed since 2005. Our researchers use multiple sources of information to populate the database including tender offers and annual statements filed with the US Securities and Exchange Commission as well as news stories and press releases. High-level findings from this research are provided complimentary on Radford's Underwater Option Portal. For more information or to discuss exchange programs in greater detail, please contact us. The market practices outlined here, and their implications for program design, are addressed in our white paper Addressing Underwater Options: Measured Responses to a Contentious Problem.

Contents of Radford Research

• 1. Company Profile
• 2. Prevalence of Underwater Exchange Approaches
• 3. Option Holder Eligibility
• 4. Price Floor for Grant Eligibility
• 5. Exchange Ratios
• 6. Vesting of New Awards
• 7. Program Participation Rates
• 8. Shareholder Friendliness Tests
• 9. List of Companies Studied

Note, some figures may not sum to 100% due to rounding.

1. Company Profile

General information on researched company industry: revenue, employee size and historic total shareholder return (TSR).

2. Prevalence of Underwater Exchange Approaches

Percent of companies studied using each of the three primary exchange types.

3. Option Holder Eligibility

Categories of option holders allowed to participate in the tender offer to exchange underwater options.

4. Price Floor for Grant Eligibility

Predominant practice is to establish an exercise price floor above which outstanding option awards are eligible to be exchanged. Here we summarize where that floor is established relative to the trading price of the company's stock on the day the offer to exchange commences.

5. Exchange Ratios

The first chart illustrates the prevalence of one-for-one exchanges vs. offers with ratios greater than one-for-one (i.e., return fewer new shares than the number of underwater options tendered). For plans greater than one-for-one, ratio size statistics are also provided.

The second chart illustrates the number of ratio buckets according to the type of exchange approach used (options-for-options or options-for-stock).

6. Vesting of New Awards

Summary of vesting requirements attached to the new awards (option-for-option and option-for-stock programs)

Mapped Vesting — transfers the vested position of the underwater award to the new award

Full Vesting Reset — introduces a fresh vesting schedule to the new award based on typical practices (e.g., four years)

Partial Vesting Reset — new award is reset to zero vested at grant, but uses a shorter schedule than is typically used for equity awards (e.g., two years instead of the normal four year requirement).

7. Program Participation Rates

Participation rates are measured as a percent of total eligible underwater option shares tendered (or turned in for exchange) in the program.

The first chart illustrates participation rates by type of underwater exchange offered.

The second chart illustrates participation rates by a subjective assessment by Radford of the "Employee Friendliness" of a plan from the option holder's perspective. In general, our subjective assessments were made as follows:

"Employee Friendly" — reasonable number of exchange rate tiers, seemingly fair ratios, and new award vesting that recognizes some of the vesting already earned on tendered award (usually mapping or partial reset vesting).

"Non-Employee Friendly" — complex exchange rates (large number of tiers or a unique exchange rate offered for each individual outstanding award), relatively high exchange ratios, onerous vesting restrictions on new awards.

8. Shareholder Friendliness Tests

The following charts illustrate the pass rates for what Radford defines as "Shareholder Friendly Tests" broken down by the type of exchange offer used. As would be expected, those that have been shareholder approved have more shareholder friendly terms.

9. List of Companies Studied