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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: Lucretius who started this subject	4/15/2001 12:37:50 PM
From: Just_Observing	Read Replies (1) of 436258

The Games Companies Play with Options Options in the past: Options had become a painless way for Corporations to improve their earnings while paying their employees handsomely. Here is how the game worked: Companies pays employee $80,000 and two thousand shares worth of options with a strike price of $40. The current price of the stock is $80. Employee exercises options and makes an extra $80,000 per year (on paper). He may sell some portion of his stock, say 1000 shares (50%) and keep the remaining 1000. He intends to sell them when the stock hits $100 to make an extra $20,000. The company gets a tax credit of $80,000 ( 2000 X ($80 – $40)) which is exempt from AMT The company wins. The employee wins. The shareholder loses to the extent of the dilution of the shares. It’s not too severe. Besides, shareholders are busy watching CNBS. Significant employee selling only at $100. Shareholders have a decent chance of making money in relation to insiders and employees. Current Situation: Average high-tech company stock down 60 to 70%. Many employee options worthless. Companies desperately need the tax benefit since profits are hard to come by. Solution: Reprice old options. Issue twice as many new options. Employee still gets salary of $80,000. Now he gets options on 4000 shares with a strike of $5. Current stock price is $22. Employee exercises options and makes $68,000 (on paper). Now he sells 2000 to 3000 shares. And he keeps 1000 to 2000 shares intending to sell them when the stock hits $30 (making an extra $8,000 to $16,000 from the current price).. The company gets a tax credit of $68,000 which is exempt from AMT. The company wins. The employee wins. The shareholder begins to lose big time from considerable share dilution. And the repricing of old employee options. And because of the significant employee selling at $30. All in all now, the options game is still a very big win for corporations, Their employees don’t do so badly (unless they are too stupid or greedy). Dilution of shares increases by a factor of 2 (at least) to 5 (if old options are repriced) Significant selling by insiders and employees at much lower prices. The shareholder gets screwed. He’s in direct competition to sell before insiders and employees. His chances of making significant money are drastically reduced.

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