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To: Clarksterh who wrote (118983)	5/19/2002 8:06:12 PM
From: techlvr	Respond to of 152472

Good and well explained points.

To: Clarksterh who wrote (118983)	5/19/2002 9:38:29 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 152472

no one seems to want to address my two points: Sorry, I've been busy addressing other points, but now that you've stated them so clearly, I'll give it a go. 1) To count options in the earnings and* in the diluted shares in EPS is double booking. How is this good or accurate?* Double counting? You're kidding, right? As if everyone is running around computing Diluted PE ratios and comparatively fair stock prices based on fully, partially or somehow diluted earnings? LOL. A whole bunch of problems with that one. The main one being that they aren't. If we relied only on folks to look at diluted shares in EPS then we'd get never counting! How many times has anybody mentioned a Diluted EPS PE value??? What web sites show diluted PE values? Compute fair prices based on diluted EPS? LOL... you've manufactured a counting that doesn't exist as the reason for not adopting another mechanism that people most certainly will be forced to use!!! But even if we do presume that there are a few people in the corners of the planet who are using Diluted EPS to guage their invetment decisions, surely you'd think these rare individualistic and independent thinkers would have the nimble kind of mind that would also be receptive to directions like "you don't need to use Diluted EPS any more, guys". It's only a problem of double counting if there is actually double counting going on. Nice try. That's the first non-problem out of the way. 2) How will you reconcile the earnings with the cash flow if the ficticious options price is included in the earnings but never shows up in the cash flow? Easy. Ever followed the non-cash writedown of intangible assets from the Income statement through Cash Flow and onto the Balance Sheet? Imagine the same thing, only in this case we would be accumulating a liability which gets offset directly on the balance sheet when options are actually exercised. Very much like deferred revenue, only negative. Very much like a reserve for inventory writedown. And so on and so forth. Some problems (like recording the estimated future cost and reconciling actuals) have been solved many times. Not new. There's not a problem here Clark. So we'd use an old solution. Got any more concerns that you think need to be addressed? John

To: Clarksterh who wrote (118983)	5/19/2002 10:13:49 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 152472

no one seems to want to address my two points: i will be happy to address them... 1) To count options in the earnings and in the diluted shares in EPS is double booking. not at all. if you use the Black-Scholes cost of options as an expense reflecting the value of option at time of issuance, that covers the option expense. what is important to understand here is that the thing being expensed by the co is the market value (according to Black-Scholes) of the options at time of issuance. what they are "giving away" is an option--not a share. double booking would be if you diluted EPS twice. but the dilution happens only once (as share count increases). meanwhile the expense of the option happens only once (when the option is issued). if you still don't agree or understand what i am saying, please describe specifically what you think is double booking, and i will respond specifically. but again, the reason i think it is not double is that you really have two separate elements: the option grant (expense), and the share issuance (dilution). one could of course debate whether to include out of the money options in diluted share count, but i think such options are typically not included. 2) How will you reconcile the earnings with the cash flow if the ficticious options price is included in the earnings but never shows up in the cash flow? this is easy enough (after all, the reason cos report c/f and earnings separately is so we can look at different sides of the same entity, so there is a lot of reconciling going on already). if they are noncash charges, obviously they will not show up in cash flow. depreciation and amortization don't show up in cash flow either (i.e., they are added back to cash flow from the income statement), yet people have been happily reconciling those for ages. instead of EBITDA maybe we can talk about EBITDAF (earnings before taxes, depreciation, amortization, and fleecing) -g-. FWIW, personally i think options should be expensed up front based on Black-Scholes, and subsequently their effects should show up in share dilution (just as it happens in the real world). Hence, if options price has to be in the earnings statement it should be market valuation at time of issue since the whole point of earnings (vs Cash Flow) is to smooth things out, not exacerbate them.) i agree with your conclusion but not with your deduction. the reason i have for reaching the same conclusion as you is that option compensation has real economic value, and therefore this real value should show up as an expense against earnings. it is following this logic that Standard & Poor has now recommended "core earnings" which reflect the true economic value of options issuance. For instance, I think all executive compensation, including options, should be voted on yearly by the shareholders with the ballot showing a wide range of possibilities, not just yes/no well, that is a very nice thought, and it is on my wish list right after peace, love and harmony (oh, very nice, but maybe in the next world). large cos are run for the most part by greedy pigs who stuff their boards with other greedy pigs. they scratch each others' backs and give each other raises, to the point that many of these scumbags are now making well into eight figures and may earn in excess of half a billion over their worthless careers, even as their stocks go nowhere and they fire frontline workers by the ten-thousands. they are NOT a democracy, and they will NEVER let little fish shareholders determine their compensation. if you think you can do something about it, good luck! Warren Buffett hasn't been able to influence the salaries of the CEOs whose boards he sits on! he says it's not possible and he's been on 19 boards so he should know.

To: Clarksterh who wrote (118983)	5/20/2002 9:11:24 AM
From: hueyone	Read Replies (2) \| Respond to of 152472

Double counting. Interesting assertion, but I believe Mucho’s take on the issue is correct. The dilution effect and the cost value of the option are two different items. If two different shareholders were each granted the option to purchase one single share of Q, but one shareholder was granted the right to purchase Q at $25 per share and the second shareholder was granted the right to purchase to purchase Q at $32 per share, the estimated option expense would be different for each case, even while the impact from dilution of adding one more share would be identical in each case. So stock option expense must be calculated separately from dilution effect. By the way, I have never once seen this argument (double counting) asserted in any of the numerous articles I have read regarding expensing stock options, many of which have contained arguments from both sides. Reconciling cash flows. As has been stated, reconciling cash flows with reported net income goes on all the time and should not be a problem. But as a member of society I think this is taking steps away from transparency and thus is bad for capitalism and society. The Financial Accounting Standards Board, the International Accounting Standards Board, the Council of Institutional Investors, Warren Buffet, Alan Greenspan, Paul Volcker, Standard and Poors, 2001 Nobel prize winner Joseph Stiglitz as well as the accounting departments of many Wall Street firms all disagree with you. And I can't figure out where any of these folks stand to line their pocketbooks from taking this position. The fight against expensing stock options is led by local Woodside favorite Larry Ellison. Larry’s profligate use of stock options to enrich himself to the tune of 706 million last year--- even as outside shareholders were losing their ass from a severe decline in Oracle share price, may someday be the stuff of business school legends. The write-up by Stiglitz is not entirely accurate, since with SFAS 123 the FSAB did manage to make sure that Qualcomm et al do have to report Pro Forma results as if the stock options had been bought on the open market. The write up by Nobel prize winner Stiglitz is entirely accurate. The FASB proposed that stock options be expensed in the income statement, but then caved in to Silicon Valley and their paid legislaturers by agreeing to give companies the option to footnote stock options expense once a year in the 10ks. Rule 123 is a greatly watered down version of what FASB originally proposed. Best, Huey