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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: Boca_PETE who wrote (30655)	2/17/2002 7:20:06 PM
From: ChrisJP	Read Replies (1) \| Respond to of 99280

Thanks for posting that Pete, I was trying to write a simplified version of your post, but punted. The whole "accounting for stock options used as compensation thing" issue doesn't make much sense to me. Now "pro-forma" nonsense ..... don't get me started ! Thanks, Chris

To: Boca_PETE who wrote (30655)	2/17/2002 7:23:11 PM
From: Lizzie Tudor	Respond to of 99280

thanks for that excellent post. Lizzie

To: Boca_PETE who wrote (30655)	2/17/2002 7:46:39 PM
From: LTK007	Read Replies (1) \| Respond to of 99280

<The fact is that the income statements of companies do reflect stock option expense in the form of dilution of earnings per share resulting from the greater number of shares outstanding from stock options divided into the company's net income.> problem here , in a good many cases, this dilution is for the explicit purpose of making abundantly rich members of upper management at the expense of the stock-holder. Company stock options have just been another boondoggle for insiders and to hell with outsider shareholders and the dilution they get reamed with. i am not an accountant:)

To: Boca_PETE who wrote (30655)	2/17/2002 9:57:37 PM
From: Night Trader	Read Replies (2) \| Respond to of 99280

Consider the case of two companies: company A pays its compensation in the usual way and has a loss while company B, identical in every other way, pays its staff’s compensation partly with options and so has a profit. Options have thus turned an undiluted loss into a diluted gain. Company B is thus awarded a higher valuation than A even though its operations are the same. So how can their effect already be accounted for?

To: Boca_PETE who wrote (30655)	2/17/2002 11:17:44 PM
From: Night Trader	Respond to of 99280

The reason I think that the true cost of options is hard to calculate is that dilution is thought of as a one time event rather than the ongoing process that a substitute for compensation must be. For example a company that dilutes its stock by 2% a year will with compounding have 80% more shares after 30 years. In other words a slice of the company now will only be 55% as large at that time. Or consider the extreme example of a company that pays all of its expenses with options so that all its revenue goes to the bottom line even if its only the interest on its cash balance. Is this really a profitable company in any meaningful way? It’s this ability to mask the true cost to shareholders that makes them so attractive to management - truly a free lunch.

To: Boca_PETE who wrote (30655)	2/18/2002 11:05:12 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 99280

Good post. I was in full agreement until you began to draw conclusions. We diverged in opinion here at this line: This is mumbo jumbo accounting. It accomplishes nothing. IMHO, it's not about cash flow or presentation of assets. It's about what shareholders are paying and what they are receiving in return. Take a look at Cisco. Merely as an exemplary example. Not that it is alone, just that its books are easier to descipher than some! Details here: Message 17078954 Bottom line: Over the past four years, net of equity gains, shareholders "paid" 12 Billions for employee stock option exercise, in a period where Cisco earned five billions. Give twelve, get five back... that's not what you think of when it comes to investing in the mighty Cisco. Particularly when you look at the income statement. 4 year Cumulative EPS of $0.70 ($0.83 if all dilution is ignored). So it's hardly within a few miles of fair to assume that dilution accounts for the "cost". Actual loss of seven billions to shareholders works out to $(0.96) !!! That's a difference in EPS perspective of 1.66 in the wrong direction. The amount of forensics necessary to unearth the fact that Cisco (of all companies!) has generated serious net negative wealth for shareholders is the real issue here. For everyone, except perhaps employees and insiders and other beneficiaries. IMHO, the question at hand is "from whose perspective" are we accounting things. I happen to believe it should be from the point of view of the shareholder, and in such a way as to be able to assess the comparative merits of one investment versus another. So if there are two accounting presentations with equivalent economic basis from the company's perspective, I would prefer the one that clarifies the shareholder's perspective. Showing the cost of stock option exercise as a charge to earnings and a credit to paid in capital is brilliant. Just as you pointed out there is no economic shift in presentation of the company's net assets. But it sure would present who's earning how much and for whom in a much clearer light! Seems to me that all those non-accountants who don't get it, actually do. John.