Re. options:
OK I'll take a stab at this while I wait to see which direction softee's going to head this a.m.
When an employee excercises a stock option, there is no actual cash effect on the company. The company simply pulls a few more shares off the printing press and that's it (I'm neglecting the inconsequential processing costs). When an employee exercises and sells stock options, there is still no cash effect on the company; the "market" gives the employee money in exchange for the shares.
From a revenue point of view there is no effect whatsoever. How could there be? Even when the company itself sold stock at the IPO it wasn't "revenue". From a cash point of view there is also no effect. From a shareholder point of view, there is an effect, and here's where we get to the truth of the matter - after the company issues the new shares from treasury, the ownership of all other shareholders has been diluted slightly. This has the main effect of lowering EPS going forward. There is no slight of hand here; MSFT's EPS today reflect the cumulative effects of all stock options exercised over the years since its IPO, and its EPS in coming years will reflect any further shares created by the process.
There is a complication on the expense side, however, that may be a source of confusion to some. As things stand now there are actually two different types of stock options, Incentive Stock Options (ISOs) and Non-Qualifying Stock Options (NQs).
In the old days, everyone got ISOs. These were great for the employee because if you exercised an ISO, you did not have to pay any tax until you actually sold the shares received. If you held them long enough, you could thus get long-term cap gains treatment on the difference between the exercise price and the sale price (albeit at the risk that the stock might drop in the interim, but that's the same risk any shareholder takes). The main complication was the infamous Alternative Minimum Tax (AMT), which attempted to tax you on the "gain" immediately, even if you lacked any actual cash proceeds, and even if, thanks to a decline in the stock price, you lost money later.
Companies eventually started to issue NQs exclusively. NQs do not get the favourable tax treatment; employees are taxed immediately on the difference between the exercise price and the share price, and it's taxed as ordinary income to boot! Not such a great deal for the employee, but the company gets a bizarre tax break because now the amount of money the employee received (from the market) is deductable by the company just like the rest of the employee's salary! There is some logic to this; after all, the owners of the company in effect did pay out this money because, as shareholders, their claim on future income was diluted by an amount equal (in market value) to the amount the employee received by exercising. But from the company's perspective, it's another non-cash expense, like depreciation, that it can deduct from it's taxes. So, net net, there is an effect after all, not on revenue, but on income: the company's income for tax purposes goes down, lowering the effective tax rate, and so the company's stated income for EPS reporting purposes goes up by the amount of the tax saved (which is not a phoney savings at all, it's real money the company did not have to pay to the government).
Everyone confused now? There's be a quiz later! |
