Eastman Kodak at the turn of the 19th Century was one of the most important companies in America and for generations millions of people turned to Kodak to see pictures. Kodak made cameras and developed the pictures for countless homes across the US and the world. Then came the smart phone with its ability to take pictures, who needed Kodak? Kodak has tried many things since then most of them unsuccessful. In 2013 it came out of bankruptcy and has been worth about $100 million. In late July it signed an agreement with the US government for production of key pharmaceutical ingredients and the company is now worth about $1 billion.

Along the way, Jim Continenza the Executive Chairman was granted by the Board of Directors options for 1.75 million in shares, 30% which vested immediately. This means due to the government contract the shares traded higher and Mr. Continenza can sell 30% of the 1.75 million shares at a profit. The difference was Mr. Coninenza’s gains were $83 million versus the $53 million if he did not get the additional shares. The Board gave him a $30 million bonus, Mr. Continenza says he has not sold any shares. (what likely has happened is the options are used against bank loans or lines of credit for other activities)

Many Executives receive options, that is not the story. The story is the understanding with the Board had previously never been listed in his employment contract nor made public. Every company has to make filings with the SEC and the understanding was not in the filings. The company says the options were granted to shield Mr. Continenza’s stake in the company or he would not be diluted by a $100 million convertible bond deal which prior to the government contract kept the company in business.

A convertible bond works the company pays interest to bond holders and they have the right, depending on the price of the stock at the end of a set period of time to change the bonds for stock or more shares would be issued. The effect of the issuing of the shares is diluting existing shareholders percentages held. For example if Mr. Continenza held a 10% stake after the bonds being converted he would hold a 9 % share unless he bought more shares or owned some of the bonds. The options keep his shares at 10%. The unusual aspect is why would the shares vest automatically? Why not at the time of conversion? Is Mr. Continenza that valuable to the company? The company was in bankruptcy and came out of it with new strategies why are more options given – what is the risk – reward equation? If the options vested in 5 years, one might understand the rationale better.

On another front, an article by Michael Liedtke of the Associated Press noted the SEC has opened a file examining Kodak’s stock performance, it was trading at the $2 range, the government contract announcement lead to shares trading at $60 and then Kodak issued 30 million additional shares to dilute existing shareholders and in early August the shares traded at $14.

Linking to dividend paying stocks, in the management circular is executive compensation and for most shareholders as long as the company is profitable and if it can pay a dividend, if the options expire in a reasonable length of time or the long term aspects of the company, most shareholders vote yes to increase the shares for executive compensation. When the company does not make money, and it seems options are there to reward executives the decision making process should be why? what is in it for small shareholders and people who work in the company who are not executives? The company should not be a cash register for executives.

There are more questions than answers, till the next time – to raising questions.