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Brocade Swaps Swamped Options

Brocade Communications Systems Inc. (Nasdaq: BRCD) is planning to grant approximately 28.5 million new stock options to employees after the close of the market today, in program to replace "underwater" options that are worthless at Brocade's current stock price.

In its most recent 10-Q quarterly filing, Brocade says the new stock options "could have a dilutive effect on the company's future earnings per share to the extent that the future market price of the company's common stock exceeds the exercise price of the new stock options." The 28.5 million new stock options represent about 11 percent of its total shares of common stock outstanding as of April 26, 2003.

However, Wall Street analysts believe the option exchange will have a negligible effect on the company's stock price. Brocade originally announced the program on December 9, 2002 (see Brocade OKs Employee Option Swap).

"My impression is that this is pretty well known out there," says Harry Blount, senior analyst at Lehman Brothers. "There will probably be no effect, to the extent that people have already built their models accounting for the incremental share count."

But Brocade is sidestepping a broader hot-button issue that public companies have been facing lately: Whether to account for stock options as an expense. This week, Microsoft Corp. (Nasdaq: MSFT) announced that it will treat stock-options compensation as an expense on its income statements, and that it will voluntarily restate past years' financial results to reflect that change -- making it the first major technology company to do so.

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