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To: Les H who wrote (181685)	7/20/2002 8:07:45 PM
From: Les H	Read Replies (3) \| Respond to of 436258

ET TU, DELL? Mauldin First, the indefatigable Dennis Gartman (more on him later) brings this absolutely stunning and deeply disturbing analysis of the earnings of Dell Computer. I quote at length: "APPLAUD BRILLIANCE, BECAUSE IT IS RARE: A year ago, we noted work done by our very good (and very wise friend) Mr. Mike Lyons of ScotiaMcLeod in Toronto which brought to our attention that the options programs in effect really did "steal" wealth from non- employee shareholders. Mike has taken the time to look again at Dell's options program, and we are taking the time to bring it again to our clients' attention, for this is real wisdom, worthy of our time: "... people are just now waking up to the fact that they've been duped for years by the option game. I use Dell as an example only because it is so clear with Dell in that they not only issue massive amounts of stock options but they also repurchase similar amounts of stock in the market to avoid dilution. This gives me the opportunity to quantify the cost of the game. Companies that only issue options but don't repurchase stocks are still, in my opinion, stealing wealth from non-shareholders but it is harder to calculate exactly what this figure is. For the fiscal year ended February 1, 2002, Dell reported total net income of $1.246 billion. They definitely know how to make and sell computers profitably. Unfortunately, they don't know how to husband those profits so that the poor [investors] who own the stock can reap any benefits. We can see this by looking at the statement of cash flows and the statement of stockholders equity to see how the option buy back program worked. For the year, Dell issued to employees 69 million shares and received total benefits of $853 million (this includes the tax benefit U.S. companies receive upon option exercise). "In the same year, they bought back 68 million shares for a total cost of $3.0 billion. On average, they paid $44 per share and received $12 per share for a realized, book and pain in cash loss... of $2.169 billion. For the year, the loss from the options game exceeded the profit from operations!!! Unbelievable... and as far as I can see, unmentioned on Wall Street. "Investors let Dell get away with this, preferring to believe that the company is making money and working on their behalf rather than acknowledging the horrific truth--- they were mere pawns in a management enrichment program. These are strong statements to be sure; however, has Dell ever paid a dividend to its shareholders? No. Has Dell stock appreciated since July of 1998? No. Has Dell at least grown its book value for shareholders, independent of how the market treats its stock? Again, no. "Though it has reported enormous profits over the last four years, Dell has been unable to grow its book value per share. Why? Because options accounting is a difficult and currently quite imperfect matter and companies have taken advantage of that situation to portray themselves in a far more flattering manner than the underlying truth. Most worrisome is that I can make all these statements about Dell, one of the best run companies around. Imagine how much worse it gets at some other companies." As Gartman adds, "This is powerful information. It is brilliant, and sadly it is true. Dell is the best of the lot in our estimation. It tried not to allow for dilution; imagine what has happened to the money in Enron, World Com, etc. If the best is bad, what then of the middle of the pack? What then of the worst?" Let me illustrate how devastating this is to shareholders. Let's say you and I own 10% of a company that makes the ever popular widget. Management comes to us and says, "Mike has been doing an incredible job for us, and we want to give him 10% of the company so he will be happy and keep doing a good job." The part of the company that you and I own is now diluted to 9%. That means we get 10% less profit- sharing at then end of the year. You and I are clearly losers in that game, unless Mike really does something great to increase profits. But under current accounting rules, the fact that these options to Mike have clearly diluted the value of our holdings is of no importance. So companies get to report a profit to shareholders, even as their shares are worth less in terms of book value. Interestingly, when the company reports earnings to the IRS, they deduct the value of these options from profits. But what if, as in the case of Dell, management realizes dilution may not be in the best interest of shareholders, so they go to the shareholders and ask if any of them will sell their stock so they can give 10% to Mike without diluting any shareholders? Now, they take profits that should be distributed to you and me or re-invested in the company and use them to buy stock. I am a big proponent of the principle that "the laborer is worthy of his hire." I believe in incentives and performance based pay. But I also believe that shareholders and investors must be fairly compensated for their risk. The reason those options have value is because investors are willing to buy the shares of a company. It is the responsibility of the board of directors and senior management to return value to shareholders.