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

To: Stock Farmer who wrote (118963)	5/19/2002 2:46:53 PM
From: Peter J Hudson	Read Replies (2) \| Respond to of 152472

John, <<I never said that the COMPANY incurs a cost. I said that SHAREHOLDERS incur the cost. You seem fixated, like others, on the fact that since the Company doesn't incur the cost that it doesn't exist. >> I believe you have said the company incurs a cost, but you certainly have said the company has a debt. You will have to explain a debt with no associated cost, and the wave theory won't cut it. I'm glad we agree that employee stock options are not a direct cost to the company. Now let's use your hypothetical to demonstrate dilution to shareholders. <<Now, our make believe shareholder doesn't actually get any wealthier when the market bids up the price of shares (he still owns the same asset, Qualcomm). He also doesn't get any poorer either when the stock price plummets. Mq will appreciate this idea. His wealth only changes when Qualcomm's assets actually increase or decrease. Now, if Qualcomm issues a share and he buys it directly from the company, he isn't any richer or poorer. Money flowed out of his Cash pocket and becomes a Cash asset of the company. Which he owns all of. He loses some dollars of cash, gets the same dollars of asset. And thus is no richer or poorer. If however Qualcomm issues a share to an insider for $1.00, and our Shareholder then buys it from the employee for the market price of $32.00 then the employee ends up with $31. Our Shareholder is poorer by $32 but richer by the $1 that the company gets. So our Shareholder is poorer by $31. >> When the company issues a share to an employee ( love your reference to insider, sounds ominous) the existing shareholder suffers dilution in ownership equal to 1/(shares outstanding) and he is no longer the only shareholder. The value the company receives for the issued share = strike price + ( % of the employees services attributable to that compensation), When our hypothetical shareholder purchases the share from the employee the dilution has already taken place and should be reflected in the stock price, he is buying a diluted share. My problem is with you taking appreciation after the stock option grant and calling it a cost to shareholders. The potential cost to shareholders happens at the time of grant and is equal the discount in strike price to the value of the stock. <<Just because the cost doesn't accrue to the company doesn't mean that it doesn't accrue to the shareholders.>> The cost doesn't accrue. The cost is determined at grant and is delineated in shares. <<It may be completely foreign to you. But just because you don't understand something doesn't make it incorrect.>> By the same token, just because I think something is incorrect doesn't mean I don't understand. I'm going fishing! Pete

To: Stock Farmer who wrote (118963)	5/19/2002 4:07:27 PM
From: rkral	Read Replies (3) \| Respond to of 152472

OT ... "Semantics are such simple things. There is no debt by the company in the strict sense of the company owes no money to the employee, pays no interest and records no liability on the asset sheet. Sure. But promising someone to pay them money in the future is a debt. And stock options are many things, amongst which the promise of future money of indeterminate amount ranks fairly highly." John, Why don't you describe the company grant of an employee stock option as what-it-is? Don't try to sell this "debt" nonsense to us. The option grant is the sale of a call option for a $0.000000 premium. (Or so it would appear. I will amend this later.) The company is the seller of the call option (call writer). The employee is the buyer. The sale of the employee stock option does not result in a company debt. It results in the obligation to deliver partial ownership of the company to the employee, according to the terms of the option agreement. The employee stock option is not a standard option to be sure. The employee's option cannot be sold on the open market. It may have a "vesting schedule" dictating that it cannot be exercised for some time. And the option usually doesn't expire until 10 years after the grant, well in excess of the longest LEAPS available on the open market. But the employee stock option is a call option nonetheless. The value of the call option on the grant date is not $0.000000. The value can be determined using a variant of the Black-Scholes option model. A 3-year call option on one share of QCOM stock at $32, with an exercise price of $32, an interest rate of 5%, and an annual stock price volatility of 75% is $16.60 (using CBOE option calculator). Let's call it $16. The value of a 10-year option would be considerably higher. (The CBOE apparently "improved" their calculator so 3-years is now the max time.) If a company grants a 1-share employee stock option (per the above), the employee receives a $16 compensation .. and the company receives a $16 option premium .. for a net cash flow of $0 (I know you're tired of seeing the $0.000000 by now. <g>) The grant cost has already been addressed by an FASB statement .. which I'm too lazy to go look up right now. Unfortunately, the FASB gave a company the option (pun intended) of applying their guideline or not. However, some companies do include the grant cost in their pro-forma statements. You and I been here before. Ron P.S. QCOM, like many other companies, is a naked-call-writer since they do not buy their own company stock to "cover" the potential obligation of the call options they have written. I am intentionally not commenting on the cost of the exercise for now.

To: Stock Farmer who wrote (118963)	5/19/2002 6:27:51 PM
From: KyrosL	Respond to of 152472

Excellent post that demonstrates very clearly how exercised options affect the wealth of LTBH shareholders. All LTBH shareholders of companies that issue lots of options ought to read and understand it. Kyros

To: Stock Farmer who wrote (118963)	5/20/2002 9:48:14 AM
From: carranza2	Read Replies (1) \| Respond to of 152472

If however Qualcomm issues a share to an insider for $1.00, and our Shareholder then buys it from the employee for the market price of $32.00 then the employee ends up with $31. Our Shareholder is poorer by $32 but richer by the $1 that the company gets. So our Shareholder is poorer by $31. John, this is wrong. When the shareholder buys a share from any source, he is not "poorer" by $32. He simply exchanged one asset, cash, for the market value of another asset, a share of stock.