Jim, there is a problem in how companies report earnings when they are issuing stock options. You see, when a company either buys its own stock or sells its stock those transactions don't run through the income statement. Instead, they are run through the equity section of the balance sheet so there is no effect on earnings. I don't believe that this is a fair accounting of what's going on for many reasons. Dell is guilty of this along with every other company that uses stock options for compensation.
When a company buys its own stock in the open market it retires the stock to "treasury". Thus, you will see a credit to cash and a debit to a special account called treasury stock. Now, if the company issues a like number of shares, it will debit cash for the amount received, and credit "capital stock at par" and "stock in excess of par". Suppose a company buys 100,000 shares of its own stock at $100 per share, we will show a decrease in cash of $10MM and treasury stock will be listed at ($10MM). Now suppose that employees are given options to buy stock at 100,000 shares at $10 each. Now cash will increase by $1MM, and the sum of capital stock at par plus stock in excess of par will increase by $1MM, but "treasury stock" will remain at ($10MM). The net result of all of this is that the company gave employees $9MM in stock, and this transaction never went through the income statement.
From Dell's 1998 10-K you will discover that "other" presumably "treasury stock", went from ($36MM) to ($61MM), while retained earnings decreased from $647MM to $607MM. Common stock increased from $195MM to $747MM. The net effect was that equity increased by $487MM. At the same time, they listed put options as decreasing from $279MM to 0.
To follow these transactions you need to go to the statement of equity, wherein you will find that in spite of wonderful earnings last year, Dell's retained earnings decreased as a result of these shenanigans.
The whole system of accounting for options stinks. It is a shareholder ripoff, because not only do the companies get to slip by significant management compensation without running through the income statement, it is the gift that keeps on giving because of dilution. Dell is not the only company to do this. Virtually all companies engage in this nonsense. Some are much worse than others. Seagate is about the worst, because not only does it issue a significant number of options to management, it "reprices" those options should the price of the stock fall, thus circumventing the entire point of the option. IMO, if you issues options as an incentive, they ought to be for restricted stock.
Jim, this question has pushed one of my hot buttons. This is one of the most outrageous examples of executive greed in American capitalism.
TTFN,
CTC |
