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

To: Stock Farmer who wrote (118951)	5/19/2002 1:55:55 AM
From: Maurice Winn	Read Replies (2) \| Respond to of 152472

John, thanks for the exposition on share options. I find that very interesting. Tax people tend to cut to the chase and flim-flam gets left out, so I'm inclined to accept their position as the financial facts. Research and development is also an expense, which tax people allow to be deducted from income immediately rather than calling it capital expenditure. But I consider R&D to be investment capital. Some of it is wasted because nothing profitable comes of it, so there's a lot of waste and expense in it. But the good stuff is very profitable. So understanding the long term income from QUALCOMM means having to understand the potential of that as well as the costs of stock options strung out in the future. As well as guessing at market demand - which we have seen is all over the map [meaning delayed by 3 years compared with where I thought we'd be in 2002]. Stock options have been super profitable for employees and I consider the stock option pay rate has been excessive. Because so many people share in the profits of the company, I don't think stock options are individually motivating. I like things clean and simple. You do a good job, we'll pay you this much money a year. If you think the company is doing well, then use some of your salary to buy shares. If you have a lot of confidence, use some of your salary to buy options. That would cut down on paperwork while leaving employees to put their investments where they choose. Stock options also create arbitrary winners and losers and court cases [as when the infrastructure employees got sold down the river to the King of Hagfish]. The company management is not able to judge share market price and the market price for stock options is a pig in a poke. I suspect [I have no idea really] that employees look at their cash in hand as a bird in the hand and devalue the stock options as being two birds in the bush. Therefore, I doubt that stock options are an effective way to pay people. Shareholders have to pay two birds instead of one bird in the hand. And we ended up paying a whole flock of birds because of a very volatile share price - while annoying the unlucky losing stock option holders. Mqurice

To: Stock Farmer who wrote (118951)	5/19/2002 3:11:21 AM
From: Peter J Hudson	Read Replies (3) \| Respond to of 152472

John, I breathed a sigh of relief when Clark countered your earlier post distorting the costs related to employee stock options, but you come right back with your voodoo accounting. <<Did they create a formal debt with all of the problems associated with servicing it? No! You are wrong. In fact they are legally obliged to issue new shares, in consideration for payment that will be less than the fair market value of the shares at the time the options are exercised >> There is NO DEBT, the company GRANTS the employee the right to purchase a specific number of shares at a specific price, given a predetermined set of vestment criteria. These shares have previously been authorized by the board of directors and exist exclusively for this purpose. There is no direct cost to the company, if you want to compute the indirect or opportunity cost, it is the difference between the strike price and market price at the time the shares are granted, pledged as compensation. Any subsequent price appreciation in those shares is not a cost to the company, anymore than appreciation in shares they sold at IPO. <<When the option is issued there is an ESTIMATED cost. When it is exercised, there is an ACTUAL cost. I merely tabulated actual costs looking backwards.>> Again there is no direct cost to the company. The cost to shareholders is dilution. The dilution to existing shareholders, in its simplest form, is the percentage change in outstanding shares. Any appreciation in the granted shares doesn't adversely affect existing shareholders because their shares enjoy the same appreciation, the % dilution stays the same. In reality even the dilution isn't that straight forward because the options are used as compensation for key employees, retention of those employees increases the value of the company. Using option valuation that has increased over a multi year period and calling it a cost to the company in the year and amount of exercise,is ridiculous. Pete

To: Stock Farmer who wrote (118951)	5/19/2002 11:14:20 AM
From: Wyätt Gwyön	Respond to of 152472

great post, John. no wonder the bulls have you on ignore: da trufe hurts!

To: Stock Farmer who wrote (118951)	5/19/2002 11:52:28 AM
From: Clarksterh	Read Replies (1) \| Respond to of 152472

John - And so far, nobody has offered up a comparable way to value stock options in dollars and cents. Except at Zero. You are dead wrong. I advise you to look in Qualcomm's 10-k. Or the Intel, Microsoft, ... 10-ks. Amazingly they all do what you say "nobody has done". Probably because it is a GAAP rule! They have to report Pro Forma the cost of options issued at the time of issue. I still have some problems with this, but it is vastly more reasonable than your bizzarre method of accounting which - to be honest - I would love to see institutionalized since then I could get some great investment opportunities (the companies which were the best performers would all get hammered since generally their stocks have gone up the most since the options were issued). Wrong again. Yes, cash flow did get hit. Or does get hit. Or will get hit. After the fact, in all three tenses. Positively. Due to the stock option tax benefit. The IRS calculates the cost to shareholders IN EXACTLY THE SAME WAY I DO and applies this tax credit to avoid double taxation. Ok, I concede that the IRS does allow a tax break (on a non-existent cost) and thus the company's cash flow is positively effected! This hardly seems to favor your argument since there is no corresponding line in the formal statements which shows a negative impact in cash flow from stock options. The closest thing is the pro forma earnings (! not cash flow!) mentioned above. . "Perhaps" implies doubt. You should be more emphatic: yes. Ok, I'll be more emphatic. Neither you nor I know since we do not have the average strike price of the exercised options since that isn't reported in a 10-Q! But it is very close to break even since the average equity per share is $7-8 per share and so was the strike price you assumed for the options exercised in the last 2 quarters. I never claimed this. I claimed that the dilution is equal to the number of shares times the DIFFERENCE between strike and market price at exercise. I concede that I made an error in what I wrote. Doesn't change the argument since the options do not have that cost. Period! You are assuming that the company is buying the shares on the open market, which they are definitively are not doing. When the option is issued there is an ESTIMATED cost. When it is exercised, there is an ACTUAL cost. Should be easy enough for you to show me where it shows up in the cash flow statement- something notoriously difficult to gimmick. So where is it? Thus we know that the dilution is EXACTLY equal to the difference between strike price and market price. No, we definitively do not know this. Depends on what is being diluted. We were talking about equity, and it depends on the equity per share vs the strike price of the option. Bottom line, I will happily invest in a company that increases earnings and cash flow by, say, 15% per year while diluting the stock via stock options at a rate of 2% per year with a strike price equal to the issue date share price. You welcome not to, although it is a mystery why. A simple calculation shows that in 10 years the earnings will be up more than 200% while the number of shares will be up less than 30%. Still a very good deal for the shareholder. Clark

To: Stock Farmer who wrote (118951)	5/22/2002 9:41:27 AM
From: rkral	Read Replies (2) \| Respond to of 152472

OT .. The IRS calculates the cost to shareholders IN EXACTLY THE SAME WAY I DO and applies this tax credit to avoid double taxation Let's test the phrase "to avoid double taxation". First, assume the phrase is correct. If we have double taxation without the "tax credit" ("Tax benefit from exercise of stock" in QCOM 10-Ks), then we should have normal (single) taxation with the "tax credit". The employee's monetary gain (per share) upon exercising a stock option is the intrinsic value of the option on the exercise date. The employee pays ordinary income taxes on the gain on NQSOs .. and is paying his/her fair share of federal taxes (ignoring other taxes here), imho. The company receives a "tax credit" on the same amount on which the employee pays taxes. Assume the federal tax rates for the company and the employee are identical, e.g., 33% .. very plausible rates for both. So now the tax amounts are identical, e.g., $20 (per share) of exercised stock. Now let's examine what happened in Uncle Sam's pockets. The employee put $20 in the left pocket. The company took $20 from the right pocket. Sam is no richer or poorer than before. As far as Uncle Sam is concerned, the $20 may just have well gone directly from the employee to the company. (Of course, paying 'taxes' to the company wouldn't fly, so someone had to involve Sam as the middle man.) Since the taxes paid by the employee didn't end up in Uncles Sam's pocket .. we can conclude that we really don't have single taxation with the tax credit. Therefore , the original premise, "to avoid double taxation" without the tax credit, is false. But now some people will be doubly pissed off. First, as shareholders, they see themselves being fleeced by the earnings dilution caused by stock options. Second, as taxpayers, they see that the compensation tax (on option income) the employee is presumably paying Uncle Sam, is actually ending up in the coffers of the company. Come to think of it, I'm pissed off too! What benefit(s) to the general public, due to employee stock options, justifies my paying part of someone else's taxes? Mostly JMHO, but based on fact to the best of my knowledge. Ron