simpler yet, outlaw stocks, then only outlaws will have stocks. Congress is flailing away on Enron and stocks, help is on the way. I am sure you will like what they give you.
You do understand that it has always been illegal for a company to book earnings (you used the word income which I think means earnings)by selling stock. Goes into a different bucket. Enron was booking earnings from selling their stock if I understand it right. Not really paying much attention so do not have a good understanding of what is going on. Seems like Enron coverage is everywhere. All Enron all the time. Skilling is begining to seem like family.
Are you sure you want companies to be their own stock broker? Isn't that like being your own grandpa? Don't options go to some brokerage somewhere?
Oh never mind, here it is. Fido does it.
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Retirement & Savings Plans
QUALCOMM's 401(k) Employee Savings and Retirement Plan and the Employee Stock Purchase Plan (ESPP) allows you the opportunity to save for your future, The 401(k) plan is offered through Fidelity Investments. Employees may contribute up to 50% of their pretax salary to the plan (not to exceed the IRS deferral limit of $11,000). QUALCOMM provides a company match of 100% on the first $1,500 of contribution, 50% on the next $1,500, 33% of the next $7,500, and 10% thereafter. The 401(k) vesting schedule for the company match is 50% after 1 year, and 100% after 2 years.
The ESPP allows employees to purchase company stock at 85% of the fair market value at the beginning or end of the six month period, whichever is lower.
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Well maybe the options go somewhere else, like Hornblower and Weeks. Do any companies do their own stock broking? Seems like more non useful people would be required.
Not sure where I found this or what it means if anything.
Just the old run of the mill P and Moaning, I guess.
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So let's try this: for company X::
In 1989 you are a small company with 350 employees and your stock isn't public. You continue to give your employees options and discover they work like dogs for you. You say to yourself hey this works well and you continue to give out options. Next thing you know it is 1994, you have around 3000 employees, and you still give them options after all the stock isn't moving much so no harm done. You give them the options so years 2,3,4 are at 20% and year 5 is 40%. Then in 1996 you find your stock still isn't moving much so you change your option plan to 20% each year. All this time the option plan had the employees working all kinds of hours and giving their all to the company. You have a history of giving employees options every six months because it works sooo well. You become a title happy company and have more directors, VPs, senior staff employees and other titles then ever. This whole time you are giving out stock options every six months along with almost every promotion. In 1998 we start a new company and move employees. Hell let them keep their options, stock isn't moving. Next thing you know it is January 1999 and you have 10,000 employees. It is clear to you your war with the enemy across the sea is about to end. You start talking about how things will start happening to drive the stock up. You even state this in a sails meeting.
Then sometime you wake up and it becomes clear you have given out too many options to the employees. You start to add up the numbers::
10,000 employees about 80% hold stock and because of all the review and promotions you have given out the average employee has at least 5,000 shares. Lets see 8,000 X 5,000 = 40,000,000 options that could vest for employees.
What to do?? First we will lay off some and keep their options to see what happens and at the same time we will ship out some of the old employees that have 40% vesting this year. Hell we can include a lot of those over 40 years old after all they don't golf or party with their young bosses with less experience but do have suck-up skills or have a bloodline connection within the company. Now lets say this company has a Market cap of 14 billion and a stock price of $216 and the average employee option price is $36. Well this means we have 40,000,000 employ options which could vest with a spread of $180 for a total of $7,200,000,000 OH HELL 7.2 billion to employees we can't have this we MUST get those options back!!. You all know the rest of the story. Now of course this is for company X, not any real company.
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September 7, 2000
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Heard on the Street
Tech Firms Hide Payroll Taxes
On Employees' Stock Options
By ROBERT MCGOUGH and MYLENE MANGALINDAN
Staff Reporters of THE WALL STREET JOURNAL
Nobody likes paying taxes, but some tech companies apparently like reporting them to their shareholders even less.
In their quarterly earnings announcements, businesses such as BEA Systems, Cisco Systems, InfoSpace, Qualcomm and Yahoo! are playing up a net-income figure that ignores the payroll taxes they owe when employees exercise stock options -- as if the taxes had never been incurred.
What a concept! In today's stock market, the companies are under heavy pressure to look as profitable as they can. By stressing an earnings figure that excludes the expense of the payroll taxes, they do look more profitable.
How are the companies able to do this? Thank Silicon Valley's brilliant innovations in the field of pro-forma earnings. At the top of the earnings releases that technology companies publish, they announce their pro-forma earnings. In the pro-forma number, companies get to include -- or exclude -- just about any revenue or expense that they want. The huge body of accounting rules only applies to the dreary official-income figure that shows up later in the news releases. Inevitably, pro-forma earnings are higher than this "generally accepted accounting principles" number reported lower.
Some expenses excluded from pro-forma earnings, such as costs associated with acquisitions, seem reasonable to exclude. They arguably aren't recurring, so their exclusion gives investors a better idea of how the day-to-day business is faring. But payroll taxes? Aren't they a cost of doing business?
To be sure, the payroll tax represents only a small portion of income for the companies that exclude it from the pro-forma figure. Still, nowadays, a penny in per-share income can have a big effect on a stock price. And some accounting experts and investors say the disappearing payroll tax is yet another example of the kind of wacky accounting that shows up in pro -forma income.
"When you're talking about e-businesses, they all come up with their own cookbook for what the earnings should be," complains Jack Ciesielski, publisher of the Analyst's Accounting Observer, a Baltimore newsletter. "It's kind of ludicrous."
Not at all, the companies insist. They argue that leaving out the payroll taxes on options actually makes their business returns clearer to investors. "We're just trying to give people a better idea of our operating results," says Dick Grannis, vice president and treasurer of Qualcomm, a wireless-phone-technology firm. "That's what any pro-forma earnings tries to do."
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Look Ma, No Payroll Taxes!
Pro-forma income is usually higher than net income per generally accepted accounting principles. One reason is the exclusion of options-related payroll taxes. Data are in millions.
Company Quarterly
'Pro Forma'
Net Income Options-Related
Payroll Tax
Excluded Quarterly
GAAP
Net Income*
BEA Systems $21.9 $3.2 $2.3
Cisco Systems 1,200.0 51.0 796.0
InfoSpace -3.3 0.6 -31.2
Qualcomm 218.1 7.0 154.7
Yahoo 74.0 1.9 65.5
*Also includes other expenses excluded from pro-forma income, such as acquisition-related charges, goodwill and amortization.
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Mr. Grannis emphasizes that, separate from the payroll tax, companies get a tax benefit from options gains, one that boosts cash flow but doesn't show up in earnings. "By backing out the costs, investors can see more accurately what our ongoing operations are," he says.
BEA Systems, which makes software for e-commerce transactions, says excluding the payroll tax on options gives research analysts a better idea of how the company is performing without getting into the business of predicting when employees will exercise options. Moreover, there are heftier taxes on employee-stock options in Europe, which would further muddy the waters, the company says.
Joni Hansen, InfoSpace's vice president of investor relations, says, "The tax is not a proper reflection of our true operating expenses." Similarly, Cisco says that its pro-forma income figure gives a clearer picture of how the company is doing because it avoids swings in expenses related just to options exercises.
The regulation of pro-forma income is up to the Securities and Exchange Commission. Robert Bayless, chief accountant in the division of corporation finance, says the SEC doesn't "have specific rules that go to presentation of alternative measures of performance," but that rules against "presenting misleading or unbalanced information applies to these sorts of things." He didn't specifically address the exclusion of payroll taxes.
Curiously, technology companies, which are often quick to claim credit for technological advances, hasten to give others credit for this accounting innovation. "Cisco, Yahoo and others are doing the same thing. We weren't the first," says Mr. Grannis of Qualcomm. At InfoSpace, which joined the no-payroll-tax parade during this year's second quarter, Ms. Hansen echoes: "Other tech companies have done this as well."
Here's an example of how it works. Yahoo, in the second quarter ended June 30, incurred a payroll-tax bill of $1.94 million when employees cashed in their profitable stock options. In Yahoo's official reported earnings, that $1.94 million is an operating expense that decreases earnings. The expense amounted to 3% of net income, or 1.8% of income before income taxes. But the $74 million that Yahoo trumpeted as pro-forma income didn't deduct that $1.94 million expense.
Yahoo says that while option-related employer payroll taxes are a recurring charge, they are hard to estimate. The size of the expense depends on the stock price, option price and number of shares exercised in any given quarter. Since analysts can't model that expense in their earnings projections, the company excludes it, Yahoo says.
Companies owe the same type of tax on employee-stock options that they owe on your paycheck. In the eyes of the Internal Revenue Service, a stock option is compensation. The employee owes taxes on the gain -- and the employer also owes payroll taxes, specifically FICA (i.e., Social Security) and Medicare taxes, just as if the company had paid the employee cash instead of stock options. (It is a great irony that stock options are considered compensation for tax purposes, but not when reporting to shareholders. Some critics say the cost of stock options ought to show up in reports to shareholders as well as the IRS. But that's another story.)
Companies have long found this payroll tax on options annoying. Last September, accounting regulators at the Financial Accounting Standards Board insisted that companies had to report the payroll tax as an operating expense on their income statements. Before then, some companies didn't run the payroll tax through their income statement (instead, they directly deducted it from shareholders' equity). In this camp at the time: Microsoft.
Not all tech concerns play down option-related payroll taxes, and Microsoft is now in this camp. The software behemoth doesn't report pro-forma income in its earnings releases, and "believes that payroll taxes should be included on the income statement as an expense," a spokeswoman says.
Looked at another way, not reporting payroll taxes as an expense is a little like recording a bigger deposit in your bank account than your actual paycheck. Hey, you didn't want to pay those FICA and Medicare taxes, so why don't you just pretend you didn't?
Unfortunately, most of us don't have that option. Amazingly, Wall Street technology firms do, because Wall Street, unlike your bank, doesn't protest the practice.
-- Scott Thurm contributed to this article.
Write to Robert McGough at bob.mcgough@wsj.com and Mylene Mangalindan at mylene.magalindan@wsj.com
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Historians may one day argue that a defining moment for San Diego's 21st century economy took place on a fall day in 1988 at a giant truck lot in Green Bay, Wis. It was then and there that Qualcomm's chief executive, Irwin Jacobs, met with Don Schneider of Schneider National Inc., and essentially closed the first large OmniTracs contract. The deal, signed on Oct. 12, ensured both a steady stream of revenue and valuable tool for selling other trucking contractors on using Qualcomm's system to track their rigs in "real time" as they carried their loads near and far. As was, and is, its business strategy, Qualcomm used this fresh money to explore a new line of business -- digital wireless communication. "Once we completed that contract, then it was possible to switch our attention over to CDMA," Jacobs recalls. Today, while OmniTracs dominates the truck-tracking industry worldwide with 230,000 units sold and provides a fat chunk of Qualcomm's profit, CDMA (Code Division Multiple Access) has bloomed into an industry standard for digital wireless telephone and data systems. The youngest of the three digital standards -- the other two are GSM (Global System for Mobile communications) and TDMA (Time Division Multiple Access) -- CDMA is being enthusiastically embraced by a diverse lineup of service providers that include Sprint PCS in the United States and African Telecommunications Inc. in the Democratic Republic of Congo, formerly Zaire. Allied Business Intelligence, an industry analyst, predicts that by the year 2002, CDMA-based devices will have 125 million to 283 million subscribers.
Of course the "defining moment" reality is more complicated. Jacobs might point to a June 1989 day in Chicago when he presented his system at a conference of ranking telecom engineers. "When I went to do that presentation, I thought there was maybe a 10 or 20 percent probability that somebody would find the weak point that we had missed and would raise an issue that would make CDMA much less desirable," he recalls. "Luckily, that did not occur." Lucky for San Diego. Technology Directory Publishing, which gathers data for the acclaimed Technology Directory, reports that since 1994, San Diego companies that count telecom as one of their top four business categories have tripled their number of employees, adding 16,600 workers to their payrolls and growing to more than 25,000 strong. The number of companies in telecom itself has grown from 60 in 1994 to 88 in 1998.
From The Beginning
Yet no matter how the San Diego telecom story is told -- the Cold War's end, two telecommunications acts and a telecom hungry third world all certainly play major roles -- it is Jacobs and a handful of other early players who remain the stars.
Going back to the beginning means recounting Jacob's decision to leave MIT and, in 1966, take a teaching job at the University of California, San Diego. By 1968 he and UCLA professor Andrew Viterbi had a consulting business going out of Jacobs' home. When Jacobs in 1971 took a year sabbatical from UCSD to be the firm's second employee, it turned out to be his farewell to the academic payroll. The company the two founded, Linkabit, is the stuff of local legend. By the time it was bought in 1980 by MA/COM and later busted up -- both through sales of product lines and staff defections -- the Linkabit entrepreneurial environment had created in San Diego a critical mass of engineers who, although they didn't know the terminology at the time, excelled at thinking "out of the box." And they also had a different long-term approach than past generations of San Diegans whose business acumen had similarly made them wealthy.
"The general mind-set in San Diego had been for entrepreneurs to develop a concept, bring it to fruition, raise some money, make the company palatable and become fairly wealthy," says Bruce Ahern, the founder of the Technology Directory and now an executive with Imaging Technologies Corp. "They would hang around the company for a while, then move to the Ranch (Rancho Santa Fe) and go sailing. The founders of Linkabit, and its people, for some reason spawned hundreds of companies. People walked out the door not just with money but with ideas in their heads to start new companies. So Linkabit was the ultimate incubator."
One of those former Linkabit execs is Mark Dankberg, president of ViaSat, a satellite communications firm. Aside from Qualcomm, ViaSat is probably the most profitable first-generation Linkabit spin-off. When Jacobs and Viterbi exited Linkabit in 1986, Dankberg was running about $35 million of satellite communications and networking business. "When Irwin and Andy left, things definitely changed at Linkabit," says Dankberg. "It didn't have quite the same appeal. It wasn't growing." So Dankberg moved on, along with Steven Hart and Mark Miller. The three self-funded ViaSat, lost money the first year but made good contacts. They attracted $300,000 in venture capital money the following year and have been profitable since. Today $52.5-million, 300-employee ViaSat is making a push to be a player in the commercial satellite networking market, as opposed to depending essentially on defense contracts for 90 percent of its business. "The big issue on the defense side is the (slow) rate at which you can grow," Dankberg says. As to the explosive growth of telecom in San Diego, Dankberg points to many factors, including Linkabit's being ahead of the curve in working with digital telecommunications systems, the free-fall in silicon chip prices and the "Jacobs" philosophy of gathering smart people in a good environment. "I'll bet that of the 1,500 employees there when I left, there can't be more than 100 still at Titan/Linkabit. They have all gone off and created new companies. And then those companies have the same mind-set as the old Linkabit. It is a mini version of what happened in Silicon Valley."
The CD-3000, Qualcomm's first mobile, was manufactured in 1992.
Another Linkabit veteran is Rick Kornfeld, president of Dot Wireless Inc., a year-old company looking to build and manufacture the "heart" of the next generation CDMA device, then sell that chip to product manufacturers. After five years with Linkabit, Kornfeld in 1986 became Qualcomm employee No. 20 and helped lead development of the first generation CDMA handset, a device that saw limited production since there was no commercial network on which it could be used. Among his clearest memories is a lecture by Klein Gilhousen, Qualcomm's senior vice president of technology, that laid out the CDMA challenge. "One of the things that struck me was that, at that time, CDMA was not possible. The complexity of it all made it not possible." What Kornfeld learned from that experience is to develop products that depend on technological achievements that are logical but have not yet been attained.
In 1989, the first version of a CDMA phone was driven around in a van.
Kornfeld arrived at Dot Wireless in a circuitous route. He left Qualcomm in 1996 to help NextWave start its consumer products division. That company's ongoing negotiations with the government over licensing revenue resulted in Kornfeld's division being spun off a year ago as its own company.
Linkabit's technology also influences other larger companies. For example, General Instrument's 500-employee satellite division in San Diego was built in large part from the VideoCipher system developed by Jacobs, Gilhousen and Jerry Heller at Linkabit. (Jacobs came up with the name.) Born of work done for NASA, the digital -- there's that word again -- technology was embraced by HBO as a way to get its scrambled programming feeds to far-flung cable operators and apartment buildings which would then unscramble the signals before delivering them to viewers. At the proverbial last minute, Linkabit was forced to modify the technology so the burgeoning number of backyard satellite dish owners would not be left out. "Just before we were about to enter into the manufacturing, it became clear there were efforts in Congress to block it unless the opportunity was there for people to buy a descrambler for their own dishes," Jacobs recalls. "So we stopped and developed a consumer grade of equipment that would do that."
The technology used had just been developed by universities. It allowed Linkabit to put complex circuitry on silicon chips. "There were three chips we had to make," Jacobs says. "Essentially those three chips worked the first time."
Telecom And Convergence
As circuitry gets smaller, more powerful and its costs shrink, the buzz word in telecom has become convergence --
merging communications features into existing products like cars or into products yet to be conceived. Consumer electronics powerhouse Sony recognizes that trend and has chosen San Diego as the headquarters for its Wireless Telecommunications Co. Headed by Yutaka Sato, the man who brought the Walkman to the U.S. market, Sony Wireless partnered with Qualcomm on the first mass production of CDMA telephone handsets. Earlier this year Sony sparked industry attention when it unveiled its flip phone-sized "Cosm," a prototype device with more features -- Web page viewing and photo taking are just two -- than commercial services exist to support. The Cosm was designed in San Diego, as were Sony's D-WAVE (Digital Wireless Audio Visual Entertainment) phones and pagers now just hitting the market.
Other San Diego high techs are preparing to take advantage of convergence and incorporate telecom functions into their services. One example is Daou Systems, which builds computer networks for hospital systems. "You can't ignore the infrastructure part of any computer system today," says Georges Daou, CEO of the $42 million company. "The reason is, we believe the convergence of voice, video and data is imminent. And one of the first industries that will start using that is health care." Daou already is building telecom capabilities into the systems of some clients and is waiting to see what the service providers will offer, and at what cost, before broadening its offerings. Another sign of San Diego's telecom stature was February's merger of CommQuest into IBM. Run by Hussein El-Ghoroury, president and CEO, CommQuest provides all the parts necessary to build a wireless telephone. In addition, the 200-employee firm has come up with a way of having a single chip work with signals from three frequencies of GSM.
The achievement is a big step toward production of a true global telephone. IBM's purchase is expected to bring hundreds of jobs to San Diego this year.
A very big "if" on the San Diego telecommunications scene's future is NextWave Telecom Inc., a reseller of digital wireless service that, by some accounts, will have to grow into a $4 billion a year firm to cover the licensing fees it owes as a result of its bids when the federal government was auctioning off bandwidth in 1996. The company, headed by former Qualcomm executive Allen Salmasi, remains engaged in complicated discussions with the Federal Communications Commission and others as to the ultimate price of those licenses. Salmasi's telecom prowess is legend in industry circles. Among his accomplishments at Qualcomm was convincing Korea to adopt CDMA as the country's national wireless standard.
NextWave's predicament also illustrates that even with a hot telecom product, in this case the rights to sell digital wireless service in some of the nation's largest markets, it's money that makes the data flow around. Good venture capitalists smell opportunity, so it's no surprise that investment in San Diego's telecoms is soaring. In the last three years, Coopers & Lybrand reports, telecom venture capital investment went from $5.3 million in 1995, to $32.1 million in 1996 and $103 million in 1997.
A veteran venture capital firm with deep San Diego telecom experience is Enterprise Partners. Among its investments were Applied Digital Access, which grew to 236 employees and $34 million in revenue; and Primary Access, a Linkabit spin-off that when sold three years ago to 3Com had 130 employees and $100 million in revenue. Bill Stensrud is among San Diego's newest venture capitalists, having come here from Silicon Valley to run Primary Access and then staying on a year after it was sold. Early last year, Stensrud, who sits on four local telecom boards, signed on as chief executive of Enterprise Partners.
"The difference between the (telecom) market when I first saw it six years ago, is that we were really on the very first generation of companies spun out of Linkabit," he says. "We are now well into the second generation and it has a multiplicative effect. Each generation spins off another factor of 'N' companies. The number of companies you see in San Diego today is six or seven times what it was six years ago, which in turn was six or seven times what it was six years before that. We are now a very solid and enduring center of communications excellence. Certainly the heart of it is wireless communications. But there are many other niches that we are developing considerable expertise in. Particularly niches that have to deal with digital signal processing in communications."
Among the factors driving the industry in San Diego is the $300 billion worth of obsolete equipment in the United States that needs to be replaced to keep up with the voracious "need for speed" and bandwidth in all aspects of telecommunications. Also, second and third world countries are not looking at wireless systems as a novelty, perk or business accessory. Instead, these systems are going in where no land lines exist, so they are a necessity. That's why Qualcomm is down in South America, over in Africa, building networks in India and partnering with a Chinese university.
"The developing and undeveloped countries have realized that building communications networks is key," Stensrud says. "They have to have that infrastructure. They are making huge investments in the development of that infrastructure. That is uniquely important for San Diego because the build out of that infrastructure is wireless."
The Growing Support Industry
The jobs with a direct hardware or software tie to telecommunications are only part of the story in San Diego. Entire industry sectors have sprung up to support these efforts, especially in the legal, accounting and banking industries. For example, the Silicon Valley-based Cooley Godward Castro Huddleson & Tatum sent five attorneys to San Diego six years ago to check out the area's high-tech growth. Today Cooley's office here employs 106. Similarly, Silicon Valley Bank came to town and grew by showing small technology companies it understood their business and could make them a loan. On the public relations/marketing sides of the business, two early telecom insiders, Jacqueline Townsend Konstanturos and Greg McQuerter, built thriving businesses, primarily by serving technology firms and mainly the telecoms. Of the 18 accounts McQuerter Group's 23 employees are working, 11 are in telecom. At the 40-employee Townsend Agency, about 45 percent of the business is telecom-related. A pivotal role in growing the telecom and other high-tech firms is being played by UCSD Connect, a technology nurturing program that has gained international acclaim. Since its founding in 1985, Connect has brought together thousands of like-minded individuals, allowing them to meet and learn from each other. And UCSD itself has grown into a leading institution for training telecommunications engineers, in particular its Center for Wireless Communications.
Meanwhile, San Diego State University is developing programs that train engineers and scientists to be good managers and executives.
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to be cont next post |
