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To: Exacctnt who wrote (71159)	11/30/1999 12:19:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

Exacctnt - [[...One reason that the shares don't add up in the Microsoft example, is that you would want to reduce the option shares added to the calculation by whatever cash is received from the exercise and also by the tax credit received. For example, if there were 1000 options granted (in the money for convenience) and the exercise price is $20 then the company will receive $20,000 upon the exercise of the shares. If the market price of the stock is $100 when the calculation is performed, that $20,000 received from the exercise would buy back 200 shares of stock. The EPS calculation would therefore reduce the number of options outstanding by 200 shares, so only 800 shares would go into the calculation of EPS. Likewise, the tax credit received by the company from the employee exercising the shares figures into the calculation by using the amount from the tax credit as an offset to shares outstanding in the EPS calculation. In the above example with 1000 options outstanding, and the exercise price being $20, the company will be able to claim a $7,000 tax credit (assuming a 35% tax rate)upon the exercise of the shares. That $7k credit can be used to buy back 70 shares of stock so the number of shares used in the EPS calculation is further reduced by 70 shares...]] Are you actually saying that the accounting standard allows/requires a phantom buyback of stock with the proceeds of option exercises to reduce the diluted share count? If so, how is the cash received segregated to avoid double counting? Or is this just your own calculation? Regards, Don

To: Exacctnt who wrote (71159)	11/30/1999 12:52:00 PM
From: Exacctnt	Read Replies (1) \| Respond to of 132070

I want to amend my previous post dealing with the tax credit. I wrote:<<<Likewise, the tax credit received by the company from the employee exercising the shares figures into the calculation by using the amount from the tax credit as an offset to shares outstanding in the EPS calculation. In the above example with 1000 options outstanding, and the exercise price being $20, the company will be able to claim a $7,000 tax credit (assuming a 35% tax rate)upon the exercise of the shares. That $7k credit can be used to buy back 70 shares of stock so the number of shares used in the EPS calculation is further reduced by 70 shares.>>> The above statement is not correct. The tax credit received by the company is not calculated based upon the exercise price ($20). Rather, it should be calculated based upon the gains the employee receives on exercise. In the example, if the market price at the time of the calculation is $100 and the exercise price is $20, the gain to the employee is $80. Taking (shares X gain X tax rate of 35%) equals $28k tax credit. This amount reduces the shares used in the EPS calculation by 280 shares not 70. Sorry for the confusion.