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  • mawchek mawchek Mar 15, 2001 9:22 PM Flag

    Share dilution

    Having thrown out my 2000 proxy material, I don't have a reference as to how many inissued shares remain from last year's stock option plan, if any. Can anyone help me on this?

    On a related matter, I don't begrudge management a reward for their excellent efforts. Like a few other posters, however, I'd prefer to see cash bonuses being paid rather than dilutive share grants. Am I right in thinking that, all things being equal, a similar plan to last year will be somewhat less dilutive than last year since a greater number of shares are now outstanding?

    Mawchek

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    • [question about the dilutive effects of the stock option plan]

      Well, the proxy (which is located at the link below), stated that there were something like 2,700 shares remaining from the 1996 plan (if I go and read it again, it'll just make me angry). We narrowly voted FOR proposal 2, which authorized 950,000 shares. By my calculations, these shares should last close to 5 years or so. The CEO seems to get about 80,000 shares a year. The other officers get about 30,000 shares a year. Looking forward, I figure about 200,000 shares a year will be granted.

      http://www.sec.gov/Archives/edgar/data/1017712/0000936392-00-000291-index.html

      Let's look at an *extreme* example of stock option economics. What happens if the stock remains far below it's intrinsic value and rises only slightly year-after-year. Let's say there are 1,000,000 shares outstanding and another 1,000,000 options are granted at $5 and exercised+sold at $7, but 5 years later the stock rises to $50. The employees receive $2,000,000 on the options, the company ends up selling $34,000,000 worth of stock (present value) for $5,000,000. Without the options, arguably the shares would have risen to nearly $100 (due to the 50% dilution partially offset by the influx of $5,000,000). The original 1,000,000 shares together end up worth around half as much, a difference of nearly $50 a share. A long term shareholder with 100 shares ended up paying nearly $5,000 for only $200 of incentives to employees five years earlier. This was an extreme example, however.

      Ironically, the overall effect of stock options is to drive the price of shares down by creating more of them which the company sells to the employee at far below market price who then often dumps them on the market at far below intrinsic value.

      All of this hemorrhaging happens because stock options (unlike cash bonuses) don't really show up well on financial statements and (just like the prisoner's dilemma I mentioned before) if one company chooses not to use them, their results look worse than everyone else's. Blame/thank the Financial Accounting Standards Board for this lovely bit of irrationality.

      DeliLama

      • 1 Reply to _DeliLama
      • Deli,

        Forgive the intrusion from this former long-term HOTT shareholder, but finished my purchases of two other stocks this morning and came over to review what has been happening to HOTT these past few weeks.

        I want to STRONGLY second your comments about the share dilution issue. As net income grows going forward, so too will the share dilution of earnings on both an absolute and percentage basis. This, however, contratrends the projected percentage growth in net sales and earnings which (though excellent and praiseworthy) is naturally decelerating from unsustainable heights.

        When your dead-on observations about intrinsic value are factored in, it might benefit current shareholders to start doing the calculus here. My guess would be that the success of the Torrid concept is more integral to long-term shareholder value than previously estimated.

        Again, I have tremendous admiration for HOTT management, and feel they have well-earned their compensation. But, shareholders might revisit the question of cash bonuses versus stock options at the annual meeting.

        All this having been said, I still hope to take a position in HOTT if it hits the 200-day moving average.

        Good wishes to all.

        Ballyconnell

    • Please read "unissued shares" in the first sentence of my last post. Sorry.

      Mawchek

 

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