What is the main reason for Wells Fargo's consent solicitation regarding its convertible debentures?

The main reason is to comply with and mitigate the impact of a new accounting standard, EITF 04-8, which will affect how diluted earnings per share (EPS) is calculated for convertible debt with contingent conversion features. This standard requires these instruments to be included in diluted EPS calculations under certain conditions, which could dilute existing shareholders' EPS.

How will the proposed amendment to the indenture help Wells Fargo?

The amendment will remove a prohibition that prevents Wells Fargo from paying cash upon conversion of the debentures if an event of default has occurred. By removing this restriction, Wells Fargo can then elect to settle conversions with cash (or a mix of cash and stock), which is expected to prevent the shares underlying the debentures from being considered outstanding for EPS calculation purposes under EITF 04-8.

What is EITF 04-8 and when does it become effective?

EITF 04-8 is a consensus reached by the Emerging Issues Task Force of the FASB regarding the effect of contingently convertible instruments on diluted earnings per share. It requires instruments with contingent conversion features based on the market price of the entity's stock to be included in diluted EPS computations, even if the market trigger hasn't been met. It becomes effective for periods ending after December 15, 2004, and requires retroactive application.

What is the expected outcome for Wells Fargo's EPS calculation after these actions?

By amending the indenture and electing to settle conversions with cash, Wells Fargo anticipates that the shares underlying the Floating Rate Convertible Senior Debentures due 2033 will not be considered outstanding for the purpose of calculating diluted earnings per share under the new EITF 04-8 guidance. This should help maintain a less diluted EPS figure.

WELLS FARGO & COMPANY/MN 8-K SEC Disclosure

Summary

Wells Fargo & Company (WFC) filed an 8-K on October 27, 2004, to announce a solicitation of consents from holders of its Floating Rate Convertible Senior Debentures due 2033. The primary driver for this action is a new accounting standard, EITF 04-8, which will impact the calculation of diluted earnings per share (EPS) for contingent convertible instruments. This new standard, effective for periods ending after December 15, 2004, requires that instruments with market-price-based conversion triggers be included in diluted EPS calculations even if the trigger hasn't been met. To mitigate the potential dilutive impact of EITF 04-8 on its EPS, Wells Fargo is seeking to amend the indenture governing these debentures. Specifically, the amendment aims to remove a prohibition on paying cash upon conversion if an event of default has occurred. Following the amendment, Wells Fargo intends to make an irrevocable election to deliver cash (or a combination of cash and stock) for conversions, rather than exclusively common stock. This strategy is designed to ensure that shares underlying the debentures are not considered outstanding for EPS calculations under the new EITF 04-8 guidance.

Key Highlights

1Wells Fargo is soliciting consent to amend the indenture for its Floating Rate Convertible Senior Debentures due 2033.
2The solicitation is driven by the upcoming accounting standard EITF 04-8, which affects diluted EPS for contingent convertible debt.
3EITF 04-8 requires contingent convertible debt to be included in diluted EPS calculations if the market price trigger is met (or would be met under certain conditions).
4The proposed amendment will remove a restriction preventing cash payments upon conversion during an event of default.
5Wells Fargo plans to elect to pay cash (or cash/stock) upon conversion, which is expected to prevent the debenture shares from being counted for EPS under EITF 04-8.
6This move is intended to manage the dilutive impact on reported earnings per share.
7The company will make an irrevocable election before year-end 2004 regarding the conversion settlement method.

WELLS FARGO & COMPANY/MN 8-K Report, Corporate Update (Oct 27, 2004)

Summary

Key Highlights

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