Ron, you are not alone.. Here is another NTAP 'tale of woe' that I pulled from an article on stock options in today's WSJ...
Regards,
John
There is a more basic problem for many employees: Their options currently are worthless. At 40% of companies that issued stock options in 1999, those options were underwater in January, according to TIAA-CREF, the huge pension fund. And woe to those employees who borrowed money to exercise their options or didn't set aside enough money to pay their taxes and have seen their riches evaporate.
Kathleen Shannon, a former senior marketing manager for Network Appliance Inc., said in an interview that her brush with stock options left her with a house she can't afford and more than $400,000 in debt.
Ms. Shannon, 33 years old, saw roughly $2 million in option-related gains evaporate after she followed a financial strategy recommended by an investment professional that soured, according to a suit she filed Thursday in Santa Clara County Superior Court in California.
Ms. Shannon had never owned any stock until she exercised options to buy a split-adjusted 13,332 shares of the data-storage company in February 2000, the suit says. Ms. Shannon says she paid a split-adjusted $5.11 a share for the stock. At the time of the exercise, the suit says, the market value of the stock was $126 a share, or roughly $1.3 million. (The company had a 2-for-1 stock split after she exercised her options.)
For advice she turned to Rick Voytek of Lincoln Financial Advisors in San Ramon, Calif., a unit of Lincoln National Corp. The suit alleges that Mr. Voytek advised her to exercise her stock options, hold onto the shares, which were worth more than $1 million at the time, and to borrow against her portfolio to pay the exercise costs, borrowings that Ms. Shannon says totaled $68,000. He told her she would slice her tax bill if she held onto the shares for a year, long enough to qualify for the lower long-term capital gains rate on any increase in the stock above the exercise price, according to the suit, which was filed against Mr. Voytek and Lincoln National.
Ms. Shannon, who was earning about $90,000 a year, said she told Mr. Voytek she would like to own a house one day. He said that Ms. Shannon could use the mortgage-interest tax deduction, according to the suit. On his advice, she said in the interview, she bought a $589,000 townhouse in Redwood Shores, Calif., using a $125,000 margin loan to cover the down payment and additional borrowing to pay part of her $3,500-a-month mortgage payment. After technology shares soared, the value of Ms. Shannon's portfolio climbed to roughly $2 million by September 2000, according to the suit. When the stock started heading south later that autumn, Mr. Voytek told Ms. Shannon not to worry, according to her lawyer, James Rummonds.
But the strategy backfired. Network Appliance shares tumbled more than 60% from their peak, and in February, Ms. Shannon said in the interview, she began receiving margin calls -- demands that she put additional cash or stock to back up her loans -- which totaled as much as $290,000. About the same time, her accountant told her she had an alternative minimum tax liability of roughly $430,000, the suit says. Ms. Shannon said she never realized she would have to pay taxes on profits she hadn't even taken. But by exercising the stock options and holding onto the shares, she triggered an AMT liability that was based on the total of her normal taxable income plus the unrealized gains.
In the interview, Ms. Shannon said she had to sell off all her stock to pay off her margin debt, a move that triggered another $100,000 in taxes, on the difference between the exercise price and the stock's value, which was still above her split-adjusted $5.11 a share cost. Because of the quirks of the tax law, only a small portion of the bill can be offset by her alternative minimum tax payments. She said she has been looking for a job for three months, but with the collapse of the tech boom she isn't getting any offers. Her house is on the market because she can't afford the monthly mortgage payment. She added: "It's very devastating."
Darcy Rudnay, a spokeswoman for Lincoln National, declined to comment on the suit, saying the company hadn't seen it yet.
Mr. Voytek's attorney, Paul Rice, said, "We fully expect to win this case when it goes to trial, and it is a trial where we will present our evidence, not in comments to the press."
For years, companies benefited from issuing stock options. For one thing, they didn't have to pay as much in salaries and bonuses. And the cost of stock options was typically relegated to a footnote in companies' earnings statements.
Many companies have reaped hefty tax deductions -- equal to the difference between the exercise price and the stock's current value -- when employees exercised their stock options. According to TIAA-CREF, 162 large companies that reported options-related tax deductions in 1999 (the most recent year for which data are available) reported a total of $15.3 billion in options-related tax savings. Cisco reduced its taxes payable by $2.49 billion in fiscal 2000 because of option exercises and will carry forward another $590 million that can be used to offset reported income taxes in the future, according to University of Washington accounting professor Terry Shevlin.
But this tax-related earnings boost could boomerang as fewer employees exercise stock options because of sinking share prices. Yahoo! Inc.'s options-related tax deduction dropped to just $2.1 million in this year's first quarter from $47.6 million in the year-earlier period. The decline "looks like a big part" of why net cash provided by operations dropped to $71.1 million from $129.8 million during this period, Prof. Shevlin says. Yahoo declined to comment.
So, what can be done to clean up the mess caused by excesses?
Some academics suggest replacing upfront megagrants with smaller blocks of stock options that are issued each quarter. Such plans would be more cumbersome to administer, but could take some of the sting out of falling share prices. Some consultants also are urging companies to sell employees restricted stock -- shares that can't be sold for three or four years -- at a discount. Though often decried as a giveaway, restricted stock provides incentives to work hard even if share prices fall, supporters say. |
