PALO ALTO: Adobe Systems Inc. will ask shareholders in April to approve a plan to exchange devalued employee stock options for a smaller number of options with lower strike prices.

Adobe's board of directors in February approved its plan to allow employees to swap options with exercise prices greater than $40 a share for fewer new options to be granted at least six months and one day after the cancellation of old options.

Adobe, which makes PhotoShop editing and Acrobat document-sharing software, saw its stock close at $32.18 on the Nasdaq on Monday. The Silicon Valley software maker's shares have not traded above $40 since May 2002.

High-tech companies like Adobe, Cisco Systems Inc and Siebel Systems Inc. have used employee stock options to attract and keep employees.

However, the decline of the stock market has left employees with "out-of-the-money" or "under water" stock options that often have exercise prices far above current trading levels. Siebel Systems, which had been under fire for being one of Silicon Valley's heaviest users of employee stock options, last year allowed employees to swap 28 million devalued share options for cash or shares. It took a $55 million charge related to the program.

Under Adobe's proposed plan, new employee options would have an exercise price equal to the company's closing stock price on the day the new options are granted. Most employees will trade eligible options for new options at exchange ratios of 1.5-to-1 or 2-to-1.

Adobe said it expected to issue the new options in late December, and that it did not expect the exchange program to trigger any compensation expense under current generally accepted accounting principles.

The company also said that if all eligible options were exchanged and new options were granted according to the plan, the number of shares underlying outstanding options would be cut by about 5.7 million shares, or about 10 percent of all outstanding options.

© Reuters