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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Ali Chen who wrote (145925)	10/24/2001 3:26:03 PM
From: Noel	Respond to of 186894

Ali, RE: Employee stock options The grant of options does not bear any cost for the company until an employee decides to exercise his option. Therefore the cost to fulfill that obligation is incurred only at the moment of option exercise, not at the moment the obligation was assumed. Great!! Then why not grant options? If the stock appreciates everyone wins -- shareholders, employees, the company itself (in terms of reduced tax liability). The only problem would be if the consequent stock dilution does not offset the total increase in market cap. My take on it is that if granting $5 billion worth of options (at the moment of exercise not grant) to employees results in an increase of > $20 billion market cap then I am happy as a shareholder. Its funny how nobody complained about employee options until the Nasdaq tanked. Otherwise, just expense employee options using Black-Sholes as I am suggesting. I am not terminologically confused here. The underlying derivative (employee options vs securities options) may be different but the way they should be valued remains the same. I agree with your assertion that the books do look cooked nowadays to the point of well-done which is why I prefer treating employee options as an expense to be accounted for at the time of grant and not at the time of exercise. I read somewhere, maybe in the same Forbes article you mentioned, that had it not been for the tax writeoff that Cisco got due to exercised employee options they would not have made a dime in the late nineties. I think that happened at Intel too but too a far lesser degree. Intel had genuine income growth until very recently. Microsoft is somewhere in between. --noel

To: Ali Chen who wrote (145925)	10/24/2001 6:38:12 PM
From: BelowTheCrowd	Respond to of 186894

"The grant of options does not bear any cost for the company until an employee decides to exercise his option. Therefore the cost to fulfill that obligation is incurred only at the moment of option exercise, not at the moment the obligation was assumed." One of the tenets of financial accounting has always been conservatism. For example, assets are supposed to be listed on the book at the lesser of actual cost or current market value. If Intel makes a venture investment and the value of that investment tanks, they are supposed to take a charge and reflect the REAL value today. If the opposite happens and the venture investment takes off, they are supposed to leave the value at original cost, and only reflect the gain whenever the asset is sold and the value actually realized. The same is true for expenses, though the waters are somewhat murkier. When you make a commitment that is likely to result in an expense in the future, you are supposed to -- at the very least -- set aside some sort of a reserve to pay for that expense. In some cases, the reserve may be smaller than the commitment itself -- for example to reflect the fact that there's only a 50% chance of something happenning -- but it's rare that an auditor will sign off on a company that makes contingent commitments without immediately expensing and putting aside SOME money. Employee stock options are one of the few types of commitments that a company can make which do not require any reflection in the financial statements. The chorus of supporters has always claimed "no way to assess the value" and therefore called for the value to effectively be set at zero. The reality, of course, is that the market values options and derivatives every day. So do the CFOs of the companies who grant them. Since a mechanism does exist for setting a fair value to each option granted, I see no reason that they should not be treated like anything else a company "spends." Don't get me wrong, I've benefitted nicely from ESOs over the years and would hate to see them go away. But as an investor I find that they terribly distort the real financial statements of many companies, making it often very difficult to find out what a company's financials really are at any given point in time. In many cases these distortions can be intentionally used to mislead investors. I think, at the very least, a clear statement of the market value of all options granted and outstanding, as well as of the dilution that would result if all outstanding, vested options were exercised, should be included with all financial statements. Personally I'd prefer this to go straight to the income statement, but I'd be pretty happy with a note that just described this in detail. mg