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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: David E. Taylor who wrote (114629)	2/27/2002 2:13:30 PM
From: Uncle Frank	Read Replies (2) \| Respond to of 152472

>> I also disagree with <he who shall not be named>'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... I solicited an opinion from the resident bean counter on the G&K thread, and his response seems to support your position. Message 17113332 uf

To: David E. Taylor who wrote (114629)	2/27/2002 6:54:42 PM
From: rkral	Read Replies (2) \| Respond to of 152472

a number of factors such as expected life, stock price volatility, etc. I assume you are talking about placing a value on the employee stock option. The options are granted (sold for free) to the employee. A non-employee must buy an option. The FASB has actually already addressed this with SFAS 123 issued in October 1995. Excerpt from SFAS 123: "Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized [edit: amortized] over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans-the most common type of stock compensation plan-have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized for them." Unfortunately, while the FASB says the "fair value based method" is preferable, it also allows a company to choose between the the "fair value based method" and the "intrinsic value based method". Since the "fair value based method" would cause a charge to income, it does not require a genius to know which method any company would choose. To be fair, I have seen at least one company (either QCOM, CSCO, or MSFT) use the "fair value based method" in their pro-forma accounting .. but I won't go in the pro-forma direction any further. Reference: accounting.rutgers.edu for a summary Regards, Ron

To: David E. Taylor who wrote (114629)	2/27/2002 10:03:18 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 152472

David, thanks for your detailed post here, and for your reference to the Proxy for QCOM's Black-Scholes calculations (it is on pg 62/71 of the web proxy). i still don't see why you claim there is no time value to the options--QCOM itself in the proxy uses time value to compute the options according to Black-Scholes: Stock Option Plans Purchase Plans 2001 2000 1999 2001 2000 1999 Risk-free interest rate 5.0% 6.3% 5.2% 4.4% 5.7% 4.7% Volatility 63.0% 57.0% 51.0% 78.0% 72.0% 51.0% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Expected life (years) 6.0 5.5 6.0 0.5 0.5 0.5 the "Expected life (years)" line contains the values they use to calculate the options' value. in any case i applaud QCOM for including this in their proxy. this is really how the value should be figured (and stated) in my opinion. going on to your analysis here... you note the negative effects on income of these calculations. but you provide only one figure (the difference in EPS). let me put that in context by adding a column to your table to show the percentage reduction in EPS under these assumptions: FY Effect on: Net Income Diluted EPS %decline 2001 $167,124 $0.22 -30% * 2000 $100,167 $0.14 -16.47% 1999 $ 51,779 $0.08 -25.8 1998 $ 50,785 $0.08 ? ** * the figures were negative (-.73 reduced to -.95), so the comparison with positive figures is not linear. * the qcom table i'm looking at doesn't show 98. from my addition to your column, it seems the impact on EPS is fairly significant. it might not matter if it was a one-time deal, but an ongoing headwind of 10 or 20 percent seems more than i would want to ignore. for purposes of my own NPV calculations, i assume only 3% per annum earnings dilution going forward. if i were to assume 10-20%, it would be a lot harder for me to obtain a NPV in the current ball park. i do agree with you that 10-20 percent is not a huge "scandal" or something, but think of it this way: if you had a money manager who took a 10% cut of your money every year, how long would you keep that manager? how likely would he be to outperform the market over a 10 or 20 year period? the problem with this type of dilution, in my opinion, is if it's ongoing. one or two years, OK. but i don't see how a company can dilute EPS 10-20 percent over the long run and hope to outperform. on the one hand, i would like to think this is a one-off affair. however, note that QCOM in its calculations is amortizing these things over their vesting period, so their effects will occur each year of the vesting period (i think). the company writes: "For purposes of pro forma disclosures, the estimated fair value of the options is assumed to be amortized to expense over the options' vesting periods." another thing i find a little curious is that they only show the options as having an expected life of six years. i wonder why they didn't use ten years. just some thoughts...