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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs

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To: Clarksterh who wrote (32)	6/13/2002 3:20:42 PM
From: hueyone	Read Replies (2) of 786

cash flow should never be adjusted There are lots of items that impact earnings (net income) that do not involve a direct cash outlay in the same amount that they are charged to earnings (net income). To adjust net income to net cash flow from operations, cash flow statements purposely have that section titled "Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities" as the location to make these adjustments. The most obvious charge against earnings that everyone knows about that cannot directly be tied back to a cash outlay of the same amount, is the depreciation charge. This non cash charge is deducted from earnings (net income) and then added back in at the adjustment section to reconcile net income to net cash provided by operating activities. On Sebl's cash flow statement in the 10K, you will also see many other items listed in the "Adjustments" section. Siebel even has an item in the cash flow "Adjustments" section that arguably is identical in nature to Siebel compensating employees with stock options and then taking a charge against earnings (net income) for the difference between market price and strike price at the time of exercise. This line item is titled "Charitable contribution of Marketable Equity Securities", which is reported as approximately 29M in year 2000. In this instance, I would be willing to bet good money that Siebel donated Siebel shares to charity and then took a charge against earnings (net income) for 29M---the market value of the shares on the date the shares were donated. Same as is the case with issuance of stock options, there is no traceable cash charge of 29M connected with the shares given to charity, but Siebel has no trouble in assigning a market value to the donated shares and charging that value against earnings (net income). Then to reconcile net income to net cash provided by operating activities, this item is added back in the adjustment/reconciliation section. The logic is no different when giving employees stock options as compensation. Similar to when donating shares that have value to charity, there should be a charge against net income followed by an adjustment of the same amount in the adjustments section of the cash flow statement. Best, Huey P.S. It is also Warren Buffet's opinion that stock option compensation should result in a charge against earnings (net income), and Buffet never misses a thing when it comes to analyzing financial statements in a useful and productive manner.

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