SBUX » Topics » Implementation of the Option Exchange Program

This excerpt taken from the SBUX DEF 14A filed Jan 22, 2009.
Implementation of the Option Exchange Program
We also considered implementing a program to exchange underwater options for replacement options and settled on this approach. We determined that a program under which our partners could exchange stock options with higher exercise prices for a lesser number of stock options with a lower exercise price was the most attractive alternative for a number of reasons, including the following:
  •  The exchange program offers a reasonable, balanced and meaningful incentive for our eligible partners.  Under the exchange program, participating partners will surrender eligible underwater options for replacement options covering fewer shares with a lower exercise price and that will vest in two equal annual installments beginning 12 months after the replacement option grant date.
  •  The exchange ratio will be calculated to return value to our shareholders.  We will calculate the exchange ratios to result in a fair value, for accounting purposes, of the replacement options that will be approximately equal to the fair value of the eligible options that are exchanged, which we believe will have no significant adverse impact on our reported earnings. We believe this combination of fewer shares subject to options with lower exercise prices, granted with no expected significant adverse impact on our reported earnings, together with a new 24-month minimum vesting requirement, represents a reasonable and balanced exchange program with the potential for a significant positive impact on partner retention, motivation and performance. Additionally, stock options will provide value to partners only if the Company’s share price increases over time thereby aligning partner and shareholder interests.
  •  The exchange program will reduce our equity award overhang.  Not only do the underwater options have little or no retention value, they cannot be removed from our equity award overhang until they are exercised, expire or the partner who holds them leaves our employment. An exchange, such as the exchange program, will reduce our overhang while eliminating the ineffective options that are currently outstanding. Because partners who participate in the exchange program will receive the lesser number of replacement options in exchange for their surrendered eligible options, the number of shares of stock subject to all outstanding equity awards will be reduced, thereby reducing our overhang. Based on the assumptions described below, if all eligible options are exchanged, options to purchase approximately 26.9 million shares will be surrendered and cancelled, while replacement options covering approximately 3.7 million shares will be granted, resulting in a net reduction in the equity award overhang by approximately 23.2 million shares. The total number of shares subject to outstanding equity awards as of December 5, 2008 would have been approximately 66.3 million shares, including the approximately 3.7 million replacement options. As of December 5, 2008, the total number of shares of Starbucks common stock outstanding was 733.4 million. All eligible options that are not exchanged will remain outstanding and in effect in accordance with their existing terms.
  •  The reduced number of shares subject to the replacement options will conserve our equity pool.  Under the exchange program, shares subject to eligible options that are surrendered in exchange for a lesser number of replacement options will return to the pool of shares available for future grant under our 2005 Plan. This return of shares will constitute an efficient use of the shares available for future issuance.
  •  Members of our board and the senior leadership team will not be eligible to participate in the exchange program.  Although our directors and members of the senior leadership team, which includes our named executive officers and certain other designated senior officers, also hold options that are significantly underwater, these individuals are not eligible to participate in the exchange program because we believe that their compensation should remain at greater risk based on our stock price.
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