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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (59804)	7/13/2001 9:59:12 AM
From: Exacctnt	Read Replies (1) \| Respond to of 74651

<<<I believe that it qualifies under SFAS 133 as a hedging activity. And they obtain a nifty tax deduction in exchange. But someone please feel free to correct me about SFAS 133. This is just what I've understood.>>> Writing put warrants does not qualify as a SFAS 133 activity. If you would have performed a little due diligence, and read MSFT's Form 10-Q, you would have known that. Exerpts from 10-Q: Effective July 1, 2000, Microsoft adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.... The Company uses derivative instruments to manage exposures to foreign currency, securities price, and interest rate risks. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures... Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors its foreign currency exposures daily to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the Euro, Japanese yen, British pound, and Canadian dollar. Options used to hedge a portion of forecasted international revenue for up to two years in the future are designated as cash flow hedging instruments. Options and forwards not designated as hedging instruments under SFAS 133 are also used to hedge the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies... Strategic equity investments are subject to market price risk. From time to time, the Company uses and designates options to hedge fair values and cash flows on certain equity securities. The security, or forecasted sale thereof, selected for hedging is determined by market conditions, up-front costs, and other relevant factors. Once established, the hedges are not dynamically managed or traded, and are generally not removed until maturity... Fixed-income securities are subject to interest rate risk. The fixed-income portfolio is diversified and consists primarily of investment grade securities to minimize credit risk. The Company routinely uses options, not designated as hedging instruments, to hedge its exposure to interest rate risk in the event of a catastrophic increase in interest rates... Put Warrants: To enhance its stock repurchase program, Microsoft sells put warrants to independent third parties. These put warrants entitle the holders to sell shares of Microsoft common stock to the Company on certain dates at specified prices. During the March quarter of fiscal 2001, the Company issued 2.8 million shares to settle a portion of the outstanding put warrants. On March 31, 2001, warrants to put 94 million shares were outstanding with strike prices ranging from $70 to $78 per share. The put warrants expire between June 2001 and March 2003. The outstanding put warrants permit a net-share settlement at the Company's option and do not result in a put warrant liability on the balance sheet.

To: Hawkmoon who wrote (59804)	7/13/2001 1:15:53 PM
From: David Howe	Respond to of 74651

<< I believe that it qualifies under SFAS 133 as a hedging activity. And they obtain a nifty tax deduction in exchange. >> I don't believe that to be the case. And, that would not effect their revenue numbers as you originally suggested. The revenue numbers stand on their own. Lot's of demand for MSFT products. That's undeniable. IMO, Dave

To: Hawkmoon who wrote (59804)	7/13/2001 1:18:33 PM
From: David Howe	Respond to of 74651

<< But there is a limit, imo, to the extent that MSFT can continue such an aggressive ISO program without eventually finding themselves going cash flow negative from having to repurchase their own stock >> This is totally incorrect. No reason for me to expand on it. Do the simple math yourself. It's not even close. Besides, if the stock does as poorly as you think it will, nobody will ever be excercising options that are in the money. In that case, MSFT would never have to repurchase a single share of stock. Your logic doesn't work. IMO, Dave