Currently, as with most public companies, Brocade does not account for stock-based compensation as an expense, but under SEC rules it's required to disclose the value of stock options as if it had. For the quarter that ended April 26, 2003, Brocade said it would have had $34.4 million in stock-based compensation expenses under the fair-value method of accounting.
Steve Berg, senior analyst at Punk Ziegel & Co., says Brocade has long been recognized as a company that has relatively high options exposure.
"Certainly, options are a valuable tool for hiring and retaining creative and valuable people," Berg says. "However, because of the focus on pro forma results rather than GAAP [Generally Accepted Accounting Principles] for technology companies, investors have not punished those companies that have issued an excessive amount of options."
Under Brocade's stock option exchange program, the exercise price per share of the new stock options will be equal to the share price at the close of trading today. In morning trading, Brocade's stock was at $6.57, down 3.7 percent. Employees that held options with exercise prices equal to or greater than $12.00 per share were given the opportunity to receive new stock options in exchange for their eligible outstanding stock options at an exchange ratio of either 1 for 1, 1 for 2, or 1 for 3, depending on the grant date of the original stock option.
Meanwhile, Brocade CEO Greg Reyes is receiving new stock options in exchange for his eligible outstanding stock options at an exchange ratio of 1 for 10 -- a self-imposed penalty, analysts say, designed to show investors that Reyes will not unduly benefit from the program. "It would not be good form to improve your personal lot in this situation," says RBC Capital Markets analyst Robert Montague. "It's mostly to make it more palatable to the shareholders."
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