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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (83101)	8/19/2000 3:18:34 AM
From: Bilow	Read Replies (1) \| Respond to of 132070

Hi Don Lloyd; Good that we agree that the SEC doesn't need to have any interest in the value of employee stock options. But your other points, I still vehemently disagree with: Re: "The option grant is made by the shareholders and is an offer of partnership/ownership. If the shareholders did not believe that even their diluted stake would be enhanced by the grants, the offers would not be made. " Whether the option grant was thought to be an enhancing action by the "shareholders" (actually management) or not doesn't matter. It still needs to be shown as a compensation expense. The presumption is that everything a company does is to help earn money. That doesn't give an excuse to not show the expense of those actions. Re: "The loss to the existing shareholders either is, or should be entirely captured by the increase in share count. Any additional depredation would be adding insult to injury." The first sentence is not true, consequently the second sentence, (which actually is a bit humorous, as it is not the purpose of P&L statements to depredate share holders) does not apply. I will type in a complete example showing this fact after I get done posting this note. Re: "If I, as a non-owner, want to buy the entire company, the total value will depend entirely on the accounting dollar entries. If the existing shareholders decide to dilute their shares in any way, in any amount, it will not affect the total company value." This is correct, in that the total value of the company doesn't depend on how many shares are outstanding, but it is misleading. The issue is how much is a share worth, not how much is the company as a whole valued in the market at. The purpose of P&L statements is to estimate how well a company is returning profit to the shareholders, not to give an estimate of "the total company value." -- Carl

To: Don Lloyd who wrote (83101)	8/19/2000 3:31:20 AM
From: Bilow	Respond to of 132070

Hi Lloyd; AMZN's pro forma earnings, after adjustment for the (initial) value of employee stock options. I've included these to show that I am talking about substantial changes to earnings, but not monstrous ones. The papers you see where they show how much money the Microsoft millionaires made in a year, and impute that to Microsoft's 1999 earnings have nothing to do with the SEC's accounting guidelines for employee stock option compensation, and don't make any sense, at least to me. They pay a substantial percentage of employee compensation through options. Note that these numbers are Black Scholes calculated at the time of grant, not at the time of vesting or exercise. They are then prorated over the period of vesting. For that reason, they match your requirement that the accounting not care whether the employee made money or not from the option. From AMZN's annual report, the reported losses for '99, '98, and '97, along with the losses they would have reported had they had to use the Black Scholes option pricing technique. (I have added results from several places around the 10-K to the same table for convenience.) Pro Forma Disclosure The Company follows the intrinsic value method in accounting for its stock options. Had compensation cost been recognized based on the fair value at the date of grant for options granted in 1999, 1998 and 1997, the pro forma amounts of the Company's net loss and net loss per share for the years ended December 31, 1999, 1998 and 1997 would have been as follows: FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ------------ ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Stockholders' equity............................ 266,278 138,745 28,591 Shares used in computation of basic and diluted loss per share........................ 326,753 296,344 260,682 ------- ------- ------- Book value per share (equity/#shares)::::::::::: $0.81 $0.47 $0.11 Net loss -- as reported......................... $ (719,968) $(124,546) $(31,020) Net loss -- pro forma........................... (1,031,925) (194,269) (35,983) Basic and diluted loss per share -- as reported...................................... $ (2.20) $ (0.84) $ (0.24) Basic and diluted loss per share -- pro forma... (3.16) (1.31) (0.28) -- Carl P.S. I threw the book value numbers in there to show how cool it is that Amazon.com's management has managed to keep the company's head above water despite losing money left and right.