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April 26, 2001 Taking
Stock of Your Options The
Guild's guide to this dubious new "benefit" The brave new AOL Time Warner world has raised a lot of
questions about many subjects. One of the most confusing areas for
Guild-covered employees, many of whom have limited experience with Wall
Street, is that of stock options. Employees have already received "Founders
Grants" of options. And management has announced that going forward
there will be no more Profit Sharing and that there will be, probably in
June, a one-time grant of "stock options in lieu of Profit
Sharing." The Guild believes that the abolition of Profit Sharing,
which is a retirement benefit, is a violation of the Guild contract, and
we have filed an arbitration on this issue. The Time Traveler website has a fairly comprehensive
discussion of options, which can be reached from the Human Resources
home page on Time Traveler. However,
some important questions aren’t covered, especially ones that might
put AOLTW and its program in a less-than-favorable light. The Guild
would like to fill that void. Here's our own FAQ. Q: Should I sign and return my Founders Grant form? A: Yes. The Founders Grant was given out in January, and
accepting it doesn't jeopardize the Guild's challenge to the company's
unilateral ending of Profit Sharing (see next question). The deadline
for returning the form is May 21. Q: There is an arbitration scheduled for mid-June to hear
the Guild's challenge to the ending of Profit Sharing. The company has
written the Guild and informed it that Guild-covered employees will not
get stock options as long as the arbitration is pending. Why is the
company taking this position? A: It seems that the company wants to punish
Guild-covered employees for the Guild's standing up to management on the
Profit Sharing issue. The more diplomatic answer might be that the
company doesn't want to be responsible for both Profit Sharing and stock
options for the same employees. If the options were granted and then the
Guild wins the arbitration, Guild-covered employees would get both for
2001. Q: What is "option overhang"? In a recent New
York Times article, it was written that options increase the amount of
shares and therefore dilute earnings per share. Are all options counted
as shares for this purpose, or only a percentage of them? At what point
is an option share counted as a share? A: The company has failed thus far to respond to repeated
inquiries from the Guild regarding these points. Obviously options must
be counted as shares at some point, and therefore the number of shares
will increase, thus diluting earnings per share. Lower
earnings-per-share numbers can be disastrous for stock price, and the
option-overhang problem has devastated many high-tech companies. The
company says the number of option shares as a percentage of total shares
is small, but it hasn't given any numbers. Q: How many stock-option shares do the directors of AOLTW
get? A: According to the AOLTW Notice of Annual Meeting of
Stockholders just mailed out, in 2001 directors, each of whom is the CEO
of an outside company or a very high-ranked AOLTW executive, will get
52,000 stock-option shares. In each year following, each director will
get 40,000 more shares. By contrast, the range of 2001 Founders Grant
options for regular workers--those who actually work for the company
every day rather than showing up once a month or so for a meeting--was
50 to 1,000. This is an extraordinary difference, and is typical of the
attitude of the new company: those that already have, get a lot; those
that don't, get a little. Q: What are the tax implications for the company? In a
December 2000 Fortune article, Carol Loomis explained that she and her
husband paid more taxes than Cisco Systems because of Cisco's great
amount of stock options exercised. The company had $4.3 billion in
pretax profits and paid $0 in taxes. A: AOL Time Warner is going to be in a similar position:
Warren Christie, vice president of taxes for Time Warner, said that
"AOL Time Warner will be in a net operating loss position for many
years stemming from large stock option deductions." So while you
will be paying Uncle Sam, the AOLTW octopus will not be paying a dime
despite making billions a year in profits. Q: The Founders Grant options were made according to a
salary grid that didn't account for overtime pay, night work bonus pay,
or hours above guarantee for part-timers. Will the new stock options be
based on gross pay rather than one's guarantee? A: There has been no answer from the company yet, and
since the new options haven't been awarded to Guild-covered employees,
the Guild can't know the answer anecdotally. Q: Something for everyone to figure out for themselves:
What is the difference between the worth of Profit Sharing and the
likely worth of stock options? A: For someone making $40,000, last year's 8.4% Profit
Sharing equaled $3,360, and it was tax-free because it's in a 401(k).
That person was given 100 stock-option shares, at a price of $48.96, but
she can exercise only 25 next year because they vest only 25% per year.
In order to make $3,360 (and, of course, unlike Profit Sharing, it would
be taxable) next year from the 25 shares, the stock would have to go up
$134.40 a share, to $183.66. Q: Would stock options be granted every year, as profit
sharing was? A: When the Guild asked management this question, we were
told that the "stock options in lieu of Profit Sharing"
scheduled for June would be a one-time grant. Of course, management
could hand options out annually, but as far as we know, they have not
committed to doing so. Profit Sharing or stock options? Stock options are a
clear winner for the company and a loser for all employees who aren't on
the Board of Directors.
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