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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: Biomaven who wrote (120)	6/26/2002 9:15:47 AM
From: rkral	Read Replies (2) \| Respond to of 786

The one you showed in your example is by far the less commonly used - most companies just use a modified straight line approach. I thought my example was the straight line approach. Am I correct? Two other vesting schedule examples are: (1) 50% after the first year, and then an additional 25% per year for the next two years, or (2) 25% per year for the first two years, and then the remaining 50% after the third year. Wouldn't the "modified straight line" approach be applied to both of these? Would (1) use a straight line over 2 years (to get 50% coverage after the 1st year)? Would (2) use a straight line over 3 years (to get 100% coverage after 3 years)? ... because options expire shortly after an optionee leaves the company ... I think employees, vested in many option shares which are underwater, will be staying with their company longer than they did when their options were profitable. BTW, I exercised my last option on the very last day of the 10th year .. partly because they were underwater a large part of the time. FAS 123 allows for true-up for forfeitures prior to vest ... Other than something like SEBL's "Forfeiture of stock options issued below fair value", I have not seen "forfeitures" in a company's 10-K. Is forfeitures the same as "canceled" options, or is it more complicated than that? If you use an exercise-date approach (presumably estimated and trued-up each quarter as is done with variable accounting), then the numbers will be "correct" but ... Are you assuming "trued-up" here to mean re forfeitures, AND stock price, AND volatility? I don't understand this need to "true-up" in corporate accounting. For example, as a naked call writer, the option value becomes cash inflow to me when I write the call. Should the option be exercised, I must buy the stock in the market place. My net cash outflow upon exercise is the intrinsic value (stock price minus strike price) value of the option. Simple. Do we complicate things by going back and modifying the accounting for the call-write, based on the results of the exercise? Not AFAIK. The employee stock option scenario differs in only two, although important, respects. First, the employee does not "buy" the option at grant. Secondly, the company does not "buy" the stock .. it merely prints stock certificates. So why complicate things by "truing-up"? Thanks for your reply. Ron P.S. For example (1) vesting schedule the amortization would be $72 = $24(1 + 1 + 1/2 + 1/2) for the 1st year, and $24 = $24(1/2 + 1/2) for the 2nd. For example (2) the amortization would be $58.67 = $24(1 + 1/2 + 1/3)4/3 for the 1st year, and $26.67 = $24(1/2 + 1/3)4/3 for the 2nd, and $10.67 = $24(1/3)*4/3 for the 3rd. Do these numbers make sense to you?

To: Biomaven who wrote (120)	6/30/2002 8:40:23 PM
From: hueyone	Read Replies (1) \| Respond to of 786

Would you really want to see companies with collapsing stock prices consequently reporting dramatically improved earnings? Biomaven, thanks for explaining some of the details regarding current accounting for stock options. In my opinion, taking a Black Scholes charge against earnings, followed by some sort of truing up as options are actually exercised, would be far preferable to what we have now. Yes, there could be some dramatic, short term dislocations to reported earnings early on in such a program, but in the long run the change in accounting would serve to curb excessive stock options grants (so clearly not in outside shareholders interests) and then the truing up processes would not provide such dramatic and volatile impacts on earnings. For example, if companies were required to begin charging Black Scholes estimates for the value of stock options against earnings beginning in January, 2003 ---for options granted after January 1, 2003 and beyond --followed with some mechanism for truing up for unexercised options granted in 2003 and beyond, I think we would see today’s massive excesses in stock option grants curbed dramatically and immediately as of Janury 1,2003. Hence, there would be far fewer, underwater options around (in the event of a collapsing stock price) to come back and potentially goose earnings in a positive direction later on during the truing up process. I would much rather take the chance that we might overstate earnings a little bit in the future by some small amount (because Black Scholes got the estimate wrong and we need to true up) than know for certain that we are consistently overstating earnings by a very large amount year after year by recording stock option compensation as a zero charge against earnings like we are now. By starting in 2003, we would also eliminate the problem of going backwards to account for and expense all those underwater options left over from the bubble that exist today. As with any problem, the solution is not pain free and the transition to new reporting requirements would ential special challenges of its own, but practically any solution is preferable to simply letting this problem continue spiraling out of control to the detriment of both outside shareholder’s as well as to the detriment of the United States economy. With people beginning to suspect that CEO is an acronym for Chief Embezzlement Officer, confidence in our public markets is rapidly waning and our entire economy is at risk. Best, Huey P.S. If we were to start new accounting requirements on January 1, 2003, it would also likely be necessary to require companies to disclose stock option grants publicly beween now and then as they are made (even if they are not expensed) to curb a potential massive granting of options prior to the new law going into effect.