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Technology Stocks : America On-Line: will it survive ...?
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To: Keith A Walker who wrote (9932)5/7/1998 4:23:00 PM
From: Raymond   of 13594
 
>Raymond, As I understand the Forbes article and the analysis that was done, the
new EPS diluted numbers provided in earnings statements are not accounting for
dilution due to the effects of companies issuing options to employees. The problem
lies in the fact that the issuance of the options is never counted as a cost. That's
right. This really translates into higher labor expense than is reported, hence,
earnings are being overstated even on a fully diluted basis.

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Keith: This kind of analysis is not new. I've seen similar things three years ago. I don't want to get into too much details because I'm not an expert. I don't know why the Forbes article claimed the way they did but my understanding is that the fully diluted eps does include all in-the-money stock options. The newly created fully-diluted is a standard accounting effort to address the concern of hidden dilution by stock options.

>>The danger here is that current P/E estimates and trailing numbers are not
completely accurate and that if the options were expensed these P/E's would look
higher than they are already. In fact, the article claims the multiple on the S&P 500,
currently around 28, should actually be 35 due to the unreported expense of issuing
options.
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You don't expense what you didn't pay, otherwise the taxguy is going to get you. Stock options are not really cost. Diluted EPS is a very reasonable way to account for it. Full-blown analyst reports typically consider the increase of share count. Go get an old report and you'll find it.

Raymond
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