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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (50519)	2/26/2002 3:09:55 PM
From: hueyone	Read Replies (1) \| Respond to of 54805

Well then, can I be audacious too? <grin> I interpret Pirah’s trouble with the tax credit for option exercise appearing in the cash flow from operations section as support for my previous contention that it does not belong there and can severely distort investors perception of the company’s performance as well as investors’ free cash flow calculations. It sounds as though Pirah may agree in principal with my previous contention that SEBL did not produce positive free cash flow from operations in years 1999 and years 2000. With that potentially incorrect paraphrasing of Pirah and the extra dose of audacity out of the way, I will say I agree that this entire options problem is complex with no easy answers on how best to handle it. With regard to JS’s skill testing question, post #50495, I believe the second company will falsely appear to investors to be 7 billion dollars more profitable from operations than the first company, even though the net economic activity was exactly the same. I am not an accountant however, and I could easily be wrong. I would like to hear others' opinions. The impact on many tech companys "earnings" from stock options is not inconsequential and I believe it is important for each investor to devise a consistent way to account for and deal with it. Best, Huey

To: Mike Buckley who wrote (50519)	2/27/2002 10:12:12 AM
From: Stock Farmer	Respond to of 54805

Hardly audatious. Not even audacious. And not complete, either. Normally you are attentive to the details. Please allow me to be so bold as to highlight something that you may have missed in Pirah's response: The company should only show the [option price x number of options exercised] as paid in capital. There is no discernible net cash flow in either direction from the difference between the share price and the option price. If the option price is less than the stock price at the time then yes there is dilution. There is a cost associated with that dilution to the shareholders, as the dilution reduces the size of the future free cash flows accruing to each share. The cost would be the difference in the values of the [pre-dilution and post-dilution] streams of free cash flow. If you compute that cost, in the case of the example you will come to see that Pirah is restating Party 1's position entirely: what goes on the books is 3.1 B$. There is a cost, but it's not on the books. And its size is... ... care to guess? Pirah gave us a hint. Free cash flows of the company's business are unchanged. So shareholders lose the free cash flows going to the dilutive shareholders that they would have had instead. And since the price per share is the market's estimate of free cash flows going to that share, we know precisely what free cash flows are going towards the dilutive shareholders: the total paid to buy the dilutive shares which is 10.6 Billions. In return they get back the increased non-business cash flows of 3.1 Billion dollars, for a total cost of 7.5 Billions. Party 2 held the position that there was no cost to shareholders. Party 1 held the position that there was a cost of 7.5 Billions that wasn't on the books. And you think Pirah's explanation corroborates Party 2? That would be audacious all right. John