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Zions to Register Securities
With SEC That Will Mimic
Stock Awards of Employees

Less than a year after the Securities and Exchange Commission shot down attempts by several companies, including computer-networking giant Cisco Systems Inc., to create "market" values for employee stock options, a bank is preparing to launch a new method of valuing options that it hopes will pass regulatory muster.

Zions Bancorp, of Salt Lake City, plans to register securities with the SEC as soon as today that will mimic the stock options it grants to employees. The bank hopes to sell those securities in a public auction this month, and the price fetched at that auction would become a "market" value for the securities that the bank could use to determine the expense it must book for awarding options to its employees.

Buyers of the securities receive payments from Zions when employees exercise their options. If the options expire worthless or aren't exercised by employees, holders of the securities receive no payments and lose the entire value of their investment. Essentially, Zions is creating what looks and feels like a so-called asset-backed security, with the underlying asset in this case being the options. The bank expects high-net-worth individuals and sophisticated investors to buy the securities. Among other things, these investors would be betting Zions's stock will continue to rise and thus push Zions employees' options "into the money."

The bank hopes the auction will produce a truer -- read: lower -- value for employee stock options than would be derived from valuation methods such as Black-Scholes, the standard formula that has been used for years. That would happen, Zions argues, because investors would take into account factors unique to each company's employee options program that aren't reflected in most pricing models.

A lower value would of course mean a lower corresponding expense on the income statement, and thus less of a hit to profit. The lower price would help to offset the company's cost of issuing the options-linked securities.

The SEC and the Financial Accounting Standards Board, the rule-making body that decreed companies starting this year must expense options, both have said companies can choose to use formulas or market values to value options.

But there haven't been any markets for trading employee stock options, which offer workers the right, but not the obligation, to buy company stock at a preset price at a future date.

There is no guarantee the SEC will approve Zions's method, although the bank says it has learned from earlier concerns raised by the SEC when companies tried to establish market values for their stock options. The key: Zions will sell the securities at the highest, "market-clearing" price it receives at the auction.

Previous attempts to create markets for options-based securities, such as the one considered by Cisco, called for sales through private placements. It created a potential problem in that both the company selling the securities and buyers had an interest in seeing the instruments priced as low as possible.

Accounting observers say the idea of market pricing for options is good in theory but may not work well in practice. "The pitfall is that there just isn't enough of the [securities] out there that are being traded," says Jack Ciesielski, editor of the Analyst's Accounting Observer.

Zions is hoping there will be enough competition between bidders to ensure a real market emerges. "I think having it available to the public in an auction that is completely transparent to the SEC -- that's the only way we can go to them and say this worked," says Evan Hill, a vice president with Zions who helped to develop the product.

Mr. Hill acknowledges that if the auction produces a price that is way below the value that would be derived from Black-Scholes, the SEC is likely to view it skeptically. Conversely, if the auctions result in prices that exceed Black-Scholes values, it is unlikely to be picked up and copied by other companies.

A spokesman for Cisco says the San Jose, Calif., company continues "to look for opportunities to engage in a dialogue with the SEC on an approach that will lead to an objective, market-based valuation" to employee stock options. The company is keeping any eye on others' approach, although last year it began using a pricing formula to value employee options.

Ultimately, Cisco and other companies will need assurances the benefits of creating securities to set a market value for their options is worth the extra hassle compared with the usual formulas.



	June 8, 2006