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To: rkral who wrote (114616)	2/27/2002 1:26:53 PM
From: shoe	Read Replies (1) \| Respond to of 152472

The one point I have to make is that in the first case the $14,000 in taxes was paid on phantom income because the stock was acquired and not sold. So when the stock is ultimately sold, that $14,000 has to be figured into (hopefully subtracted from) the long term capital gains taxes due because it is an amount that has been actually prepaid in anticipation of the ultimate gain. What's bad is when people have a huge phantom gain to pay a tax on and then the stock value drops below the tax owed. I would never exercise options to hold a stock when the disparity between the option price and the market price is so large, e.g. $50,000-$10,000 = too much phantom income. I might exercise if the market price was $12, not $50! Regards.

To: rkral who wrote (114616)	2/27/2002 1:42:11 PM
From: Peter J Hudson	Respond to of 152472

Ron, I can definitely stand more on the cost of options to the shareholder. I believe John has consistently misrepresented those costs. For example. << Yes. The lower the difference between strike and exercise price, the lower the difference between what the company reports as cost and shareholders bear as cost. The limit is when the employee exercises at par. At which point it is indistinguishable from buying a share at market value. I haven't met anyone who has exercised an underwater option, but that would also have a nondilutive effect and benefit all shareholders <ggg>>> The cost of employee stock options is represented by the percent dilution at grant assuming they will all be exercised. Any price rise above the strike price is not an additional cost to shareholders. The shareholders enjoy the same increase in share price as the option holder and their percent stake in the company remains the same. No further cost or dilution because of an increase in share price. If John is right that the company accounts for the cost as the difference between strike and exercise price, a higher exercise price is actually good for existing shareholders because it creates a tax advantage for the company. Pete

To: rkral who wrote (114616)	2/27/2002 2:01:26 PM
From: David E. Taylor	Read Replies (3) \| Respond to of 152472

Ron: I also disagree with John's valuation of the cost to the company's shareholders of employee stock options, particularly the $10.656 billion "fair market value" and the "vanished" $7.544 billion he arrived at for 2000/2001 in this post: Message 17104914 If the current climate actually leads to changes in GAAP or IRS rules for charging the "fair value" of employee stock options as an operating expense, thereby reducing reported operating profits and EPS, it's a reasonable certainty (unless JS holds some position of authority that will allow him to write the rules <g>) that any new rules adopted will not use John's simplistic "fair value" method, which produces numbers inflated by more than an order of magnitude. Using a more appropriate (IMO) approach - one coincidentally similar to an approach suggested by Mucho here - that reflects the fact that employee options have varying vesting periods and exercise prices, and that their value is affected by a number of factors such as expected life, stock price volatility, etc., the company provides the following (negative) impact on GAAP net income and EPS: FY Effect on: Net Income Diluted EPS 2001 $167,124 $0.22 2000 $100,167 $0.14 1999 $ 51,779 $0.08 1998 $ 50,785 $0.08 Not insignificant numbers to be sure, but far less than John's results - the impact for 2000/2001 combined would have been $267 million, versus John's estimate of $7.544 billion, which inflates that number by a factor of over 28. Do you think the thread can stand any more of this topic? Let me know if you would rather use PM. I'd be glad to add my two cents worth on this (particularly the FY2000 numbers), though I don't know how a 3-way would work via PM. From the sounds of things, it looks like those who have had enough of this subject already have John on "ignore", so maybe it wouldn't be that much of a distraction (<g>) David T.