De-mystifying Stock Holdings and Key Terms: Part II

When a company is taken private:

All outstanding shares of a publicly held company are bought by an investor group which runs the company privately (often, senior management is part of the buyout).

-This is similar to a merger, but you need to find whether your prospect was a seller or a buyer.

-Prior to the shareholder vote, several “TOs” (tender offers) may be filed, describing the proposed deal (same with hostile buyouts.)

If your prospect was a seller, treat their stock as in any other buyout.

Check previous annual proxy for “change of control” benefits.

If your prospect was part of the buyout group:

Where did the buyout money come from?

What happened to your prospect’s stock?

Did your prospect get a bonus or other payment?

Restricted Stock:

Restricted stock is awarded to directors of a company as an incentive that can be realized only if certain conditions are met.

-Time based: vests on X day if they’re still with the company. Value these separately from actual holdings.

-Performance based:  awarded if you achieve X, do not value unless requirements are almost all met.

-Termination benefit tables will show what happens to restricted stock if the awardee dies, retires, becomes disabled or leaves for “good cause” before vesting.

-If they’re fired, quit, or take another job before vesting occurs, assume the restricted stock is forfeited unless you see an agreement.

Deferred Stock (a.k.a. “phantom shares”):

The executive or director does not have these shares, they have credit for them on paper that will be paid out at the plan exit date.

-Executive long term incentive plan: usually three years and paid out in year four, the amount credited depends on company performance.

-Executives may defer all or part of their salary/bonus until retirement.

-Director’s deferral:  paid out when they leave the board.

Normal dividends are credited on the “paper” shares as reinvestment.

When the time comes to collect, they can take either stock or cash (value of the shares at the time of the payout).

Stock Options:

It’s the right to buy X shares from the comp any at exercise price (also called strike price).

                -Unlike restricted stock, the awardee must pay to get the shares.

                -Exercise price is normally the average market price on the day it’s granted.

                -Options have a vesting schedule and an expiration date.

                -For basic valuation of stock options: current market price minus exercise price.

As always, we welcome your questions or comments!

De-mystifying Stock Holdings and Key Terms: Part I

It’s always helpful to have a refresher course on different topics within the field of research. Here are a few terms regarding stock that we’ve broken down into smaller chunks. Hopefully it will be very easy to digest!  This is part one of a two-part series on stock.

Key filings:

·         Official Annual Report: 10-K, 10-K405, 10-KSB

·         Quarterly Report: 10-Q

·         Report of a “material event”:  8-K

·         The proxy statement:

                -Stockholdings

                -Options and restricted stock

                -Directors’ Fees

                -Executive compensation

                -Retirement plan summary

                -Employment agreements and special agreements

Where to find these filings:

·         The SEC, EDGAR

·         Web sources such as Yahoo, Google Finance, WSJ MarketWatch, the company’s website

·         Paid sources such as 10K Wizard

Key Terms:

Insider: Directors, top policy setting officers, owners of 5% or more of the stock

Common Stock:

·         The majority of stock is issued in this form. Common shares represent ownership in a company and a claim on a portion of the profits.

·         Some companies have more than one class of common stock (Typically Class A and Class B).

·         The purpose of different classes is to keep controlling voting power of a public company within original investors, founding family, or current insiders.

·         One class isn’t offered to the public and is available only to those in the controlling group, but the insider class is convertible to the public class.

Preferred Stock:

·         Preferred stock represents some degree of ownership in a company but doesn’t come with the same voting rights (varies depending on the company). Investors are usually guaranteed a fixed dividend forever. This is different from common stock, which has variable dividends that aren’t guaranteed. In the event of liquidation, preferred shareholders are paid off before the common share holder.

Valuing Current Stockholdings:

·         Check Yahoo Finance or other sources for transactions since record date.

·         Look up the previous closing stock price online.

·         Value directly held shares and indirect shares separately.

·         Quoting 52-week high and low gives perspective; explain sharp rises or declines by checking news reports.

Valuing Historical Holdings:

·         If your prospect is no longer a reporting insider, start with their last report (proxy or Form 4).

                -Check for stock splits or stock dividends since they left.

                -If they made no subsequent transaction, the stock would now be worth $___.

·         If the company was acquired or merged, find the final terms and apply to their last known holdings.

Feel free to post your comments or questions.  Don’t forget to check out the sources listed at the top of the post.  Stay tuned for part two, and happy researching!