is there a book-cooker on this board?
interesting how 3 of the top 5 have imploded, but am i missing something here? i mean, besides an MBA.
we earned $0.52 (basic) and $0.46 (diluted) for FY99. and according to the 10-k:
Our calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
awards issued beginning in fiscal 1996 had been amortized to expense over the
vesting period of the awards, pro forma net income (loss) and net income (loss)
per share would have been as follows:
YEARS ENDED APRIL 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss) $ 12,163 $ 8,677 $ (4,661)
Net income (loss) per share, basic 0.18 0.13 (0.08)
Net income (loss) per share, diluted 0.16 0.12 (0.07)
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The Hidden Costs of Stock Options
By Laura Cohn in Washington
12/06/1999
Business Week
Page 44
Companies may be reporting pay increases that are astonishingly low, given the tightness of labor markets. But that doesn't tell the full story about how much they are really paying to hire and retain good help. More than ever, employees of all ranks are getting a little bit of equity in their pay packets. A recent study of 1,300 companies by Watson Wyatt Worldwide shows that almost 19% of employees are eligible for stock option grants, up from 12% last year--although being eligible and getting options aren't the same thing. "There's no question it continues to be the perk of choice," says John A. Challenger, president of outplacement firm Challenger, Gray & Christmas Inc. Best of all, from an accounting perspective, regulators don't require companies to include stock option grants in their compensation costs. Translation: There are no footprints at the bottom line.
But what do these options packages really cost? A team of accounting pros at Bear, Stearns & Co. recently set out to discover just that. The group, consisting of Bear Stearns analysts Pat McConnell, Janet Pegg, and David Zion, studied earnings reports of companies in the Standard & Poor's 500-stock index to come up with an estimate. Although companies don't have to report option grants as an overhead cost, there is a price: When employees exercise their options, companies must either buy shares in the market or issue new stock, diluting the value of existing shares. The more options, the greater the dilution of per-share earnings and the greater the downward pressure on the stock price. To prevent dilution, companies such as Microsoft regularly buy back shares. But that can be costly, too, since they have to pay whatever the market price is at the moment.
It all adds up. Using the footnotes disclosing the impact of options obligations upon earnings per share found in Securities & Exchange Commission filings, the Bear Stearns team compared reported earnings to what earnings would have been if the cost of options had been included. The results: Earnings at S&P 500 companies would have been a "material" 4% lower in 1998 if they had included stock options as a labor cost, says Pegg. In 1997, they would have been 3% lower than reported.
Not surprisingly, the bigger the options grant, the bigger the impact on earnings. For example, profits at computer-networking companies would have been 20% lower if stock options were on the books. Semiconductor equipment makers' earnings would have been 18% lower (chart). Although the Bear Stearns report did not estimate the total value of outstanding options, Baltimore-based accounting specialist Jack Ciesielski estimates the value of options awarded by S&P 500 companies nearly doubled to $128.5 billion in 1998, from $65.3 billion in 1996.
Faced with the tightest labor market in a generation and a long-running economic expansion, the increasing use of options to lure hard-to-get workers seems like a no-brainer. And, says Diane Lerner, a senior consultant in the compensation practice of Watson Wyatt, the dilution of earnings is an acceptable price--and a smart long-term investment: "Keeping key talent improves overall productivity, which leads to a better performance."
But what will happen if stock prices sag and options no longer pay so well? "If we go into a bear market, companies may have to rethink this," says Peter T. Chingos, head of the executive compensation practice at compensation consultant William M. Mercer Cos. Rethinking options programs may mean going back to offering even higher salaries, which do show up on corporate balance sheets. On the other hand, employee demands for higher compensation during a slow economy will also sag.
They Do Have a Price
Greatest 1998 earnings impact of employee stock options on S&P 500 companies
REPORTED PRO FORMA % DIFFERENCE
DILUTED EPS DILUTED EPS
CENDANT $0.18 $0.01 -92%
McKESSON HBOC* 0.31 0.06 -81%
NETWORK APPLIANCE * 0.46 0.16 -65%
AUTODESK* 1.85 1.03 -44%
PEOPLESOFT 0.55 0.31 -44%
LUCENT TECHNOLOGIES 0.73 0.58 -21%
HEALTHSOUTH 0.55 0.46 -16%
COMPUWARE* 0.87 0.74 -15%
STAPLES* 0.41 0.35 -15%
SCIENTIFIC-ATLANTA 1.02 0.91 -11%
DATA: BEAR, STEARNS & CO.
*Data for company fiscal year ending in `99. |
