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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Jacob Snyder who wrote (52977)11/8/2002 7:33:01 PM
From: Stock Farmer  Read Replies (1) of 54805
 
Jacob: Can someone explain to me what this statement from the 2001 annual report means:

"The diluted share base for fiscal 2001 excluded the potential dilutive effect of 51,188,000 incremental shares related to outstanding stock options, calculated using the treasury stock method, due to their anti-dilutive effect as a result of the Company’s loss before accounting change."

How can the effect of employee stock options be anti-dilutive?

These 51,188,000 incremental shares refer to options with strike prices in excess of market price: under-water options.

If employees were to exercise underwater options, existing shareholders would be made BETTER off. So the transaction is anti-dilutive. Think of a company with 100 shares trading at $10.00 each. Total value of the company is $1,000 and presumably this is equal to present assets plus future discounted free cash flows.

Now imagine that there are 100 stock options out there with exercise price $11. What happens if these are exercised? Well, suddenly there are 200 shares out there. But the company is now worth the original $1,000 PLUS the exercise price of the options of $1,100 or $2,100 in total. Each share therefore ends up being worth $10.50 which is more than the $10 that shareholders started with. Antidilutive.

John
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