Hi John:
One problem with my original post declaring that Siebel lost money for the last three years aggregated together, was that it failed to separate out the most recent year---2001. The most recent year, 2001, may possibly be a more meaningful year to look at than including the years 1999 or 2000, because those years had an excessive amount of stock option exercise. For year 2001 to present, we have not seen stock option exercise at nearly the same rate.
Below I looked at year 2001 separately using both Black Scholes and actual stock option exercise. The second exercise yielded a positive 162.97 M in net income for the year 2001, but the Black Scholes analysis still yields the considerably worse negative 467.22 M.
Regarding attempts to work backwards into an actual stock option compensation expense (as opposed to using the Black Scholes estimates in the 10k), upon further thought, I came to a different conclusion than I did in my last post. I don’t think we need to either subtract or add the income coming to the company from strike price, because the strike price is already subtracted from the market price when determining the actual stock option compensation expense. But I do think we need to subtract the tax benefit from exercise of stock options to determine the after tax impact on net income, because this tax “credit” is not included in the net income figure as reported to shareholders.
So let’s walk through the exercise for just the fiscal year ending December 31, 2001, as opposed to confusing the issues more by aggregating three years together. We see a tax benefit from exercise of stock options in the cash flows from operating activities in the amount of $53.8 Million (M). From the income statement we see Seibel paid taxes, (not including the tax credit) of 149.5 M on 404.1 M in net income, giving us a tax rate of 37%. Now we can take the $53.8 M tax credit and divide by 37% to get the pre tax stock option compensation expense of $145.405 million dollars. The difference between the pre tax 145.4 M actual stock option compensation expense and the tax credit of 53.8 M, gives us the after tax impact on net income, or 91.6 M. Net income after taxes was reported as 254.57 M. So subtracting the actual after tax impact from stock options of 91.6 M, Siebel’s after tax net income for the year is reduced from 254.57 M to 162.97 M. Hope this makes sense. By the way Mike, I am happy to be getting a positive rather than a negative result here!
Now let’s contrast this to Black Scholes. I believe Black Scholes assigns a value to all options as they are granted and amortizes this value over the life of the option, but I am still trying to verify this. Using Black Scholes, the after tax net income for the year is reduced from 254.57 M to a negative (467.22 M). The difference between the two numbers, 254.57 M and (467.22M), is 721.79 M. Now, dividing that after tax number by the 37% tax rate again, we get a pre tax stock option expense of 1.95 Billion dollars!!(721.79M/37%).
So if my numbers are correct, on the one hand we have an actual pre tax stock option expense, as determined by exercise of options, at 145.5 M, and a Black Scholes pre tax option expense at 1.95 Billion dollars. The difference between the two numbers is astronomical. What I need to get a better handle on now, is exactly what this pre tax 1.95 billion dollar Black Scholes stock option compensation expense represents. It seems like it may be giving us some long term picture of stock options overhang, but again, I don’t understand the Black Sholes numbers well enough yet to be certain.
Best, Huey |
