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To: DanZ who wrote (47504)	4/4/2003 10:38:52 AM
From: BWAC	Read Replies (1) \| Respond to of 53068

Some CY bashing. Note the bolded.From Forbes.com Cypress Has Too Many Options You won't find a more ardent defender of stock options as pay for the rank and file than T.J. Rodgers. Nor anyone more colorful in objecting to the idea of treating these incentives as an employment expense. The chief executive of chipmaker Cypress Semiconductor says those who want to expense options suffer from "recto-cranial insertion." Perhaps the fellow protests too much. Our theory: Cypress (nyse: CY - news - people ) has too darn many options floating around. It's a reason to dump the stock. So big is the option plan at Cypress that if all options were exercised, employees would own a fourth of the company (called, in options parlance, the "overhang"). For now the options are not dilutive. Many are underwater, so no one is exercising. In any event, Cypress is in the red. Last year it lost $249 million, or $2.02 a share. If the options are so far out of the money, why do we object to them? Two reasons. One is that Cypress has a history of resetting option strike prices lower; it has done just that four times since 1996. The other is that, even without a reset, these options represent a large claim on the potential payoff from a speculative company like this. Since it doesn't pay a dividend, the whole reason for investing is the long-shot chance that the company will return to its former glory (shares peaked at $58 in 2000). Why share your lottery ticket with the workers? It's easy to see why Rodgers would squawk about the proposal to expense options. Had Cypress expensed its options and its employee stock purchase plan in 2000, its last good year, earnings per share would have shriveled from $2.03 to $1.51. There's another incentive plan at Cypress that should give investors pause. The company has lent $107 million to 2,100 employees to buy and hold its stock--workers use their shares as collateral for the loans, along with other assets, according to its government filings. As the stock has cratered since the plan debuted, the market value of the stock collateral was $78 million shy of the debt as of the end of last year. To reserve against the possibility that the company will simply have to forgive a chunk of these loans, Cypress has set aside a meager $16 million. Chief Financial Officer Emmanuel Hernandez says Cypress isn't planning to write off the loans and doesn't plan to call them either, because that "would ruin morale over here." Cypress takes exception, of course, to our reasoning. First, the options in question are real morale-boosters for workers, not an insider enrichment scheme. Rodgers says options held by him and his board members were not reset and that Cypress plans to cut its options overhang to 20%. He also says Cypress will offset dilution via stock buybacks, although doing so would shrink the number of shares outstanding and thus worsen the EPS hit from losses. Besides, where's the company going to get the cash for this purpose? Last year it scorched through $136 million ($22.5 million in cash from operations minus $158.5 million in capital expenditures).There are plans to cut cap-ex this year, but with $469 million in debt the balance sheet is none too strong. Short the low-riding shares, cover at $3.

To: DanZ who wrote (47504)	4/4/2003 10:57:32 AM
From: BWAC	Read Replies (2) \| Respond to of 53068

Dan, Expense? Not expense? From 10K on CY. Current stock price $7.50, Weighted average option exercise almost $14. 42 Million options granted. 19 Million vested of which 2 Million in the money. edgar-online.com Go to page 63

To: DanZ who wrote (47504)	4/4/2003 6:07:27 PM
From: E.J. Neitz Jr	Read Replies (1) \| Respond to of 53068

Argus Research--(Circuit City) Downgrade to SELL: (Sold shares-Out) CIRCUIT CITY (NYSE: CC, $5.22) ................................................................................................................... SELL n We are downgrading our rating on CC shares to SELL in tandem with our lowered profit outlook, negative nearterm credit trends, and the company’s competitive positioning longer term vis-à-vis Wal-Mart and Best Buy. n CC reported 4Q EPS from continuing operations of $0.36 versus $0.67 as comps declined 6% and credit profits fell 77%. n Sales of digital satellite systems and wireless communications (higher margined products) remain soft. n Full year EPS of $0.37 compare with our estimate of $0.50. We are lowering our EPS estimate for this year to $0.50 from $0.80. ANALYSIS INVESTMENT THESIS: We are downgrading the shares of Circuit City (NYSE: CC) to SELL. When we approach any retailer, one of our most fundamental questions is, “What competitive advantage does the organization have and is it sustainable in light of the growing competitive pressure emanating from retail leader, BUY-rated Wal-Mart (NYSE: WMT)?” As a retailer hits any mass (in terms of size), this question becomes more fecund. A small niche player that specializes in inventory too esoteric for Wal-Mart can garner success. By employing a niche strategy (à la Michael Porter) of entering a market to fill a niche need, and from that base to expand into the mass market, the more likely one will enter Wal-Mart’s sphere. Moreover, Wal-Mart, as gargantuan as it is, must continually broaden its merchandise categories to achieve the double-digit sales growth (and low to midsingle digit comps) that are its goal. With its incredible IT, supply chain, and buying power Wal-Mart is slowly (and steadily) assorting its stores to meet local needs. Last year Wal-Mart increased sales $26.7 billion, an amount larger than the annual sales of all but a handful of US retailers. Over the past decade, industry observers have witnessed Wal-Mart’s prowess as it entered food retailing, and the subsequent damage to multiple supermarket operators, the maturing of department stores and that sector’s contraction, and more than a few mass merchant and discounter bankruptcies and/or industry exits. Destination category killers such as Circuit City and Best Buy beat Wal-Mart on selection and service, but Wal-Mart usually holds the price card. Wal-Mart’s merchandising strategy simply put is the 80/20 rule: stock the 20% of the merchandise that fills the need for 80% of the public, and leave the complexity for others (thus niche opportunities remain). When the technology requires explanation, Wal-Mart cedes the business to others, as assisted selling is not its forte. Over the past few years, the bulk of new CE products have been digitized versions of merchandise the consumer already understands. Thus the digital cameras and plasma screen TVs at Wal-Mart. Obviously this has hurt the specialists. Additionally, the CE category is an obvious fit for online retailers. Given Wal-Mart’s appetite and acumen and Best Buy’s plans for new store expansion, we think the longer-term prospects for Circuit City are maturity, at best. The recent compensation changes among the CC sales force are likely to alienate the best and create confusion among the rest, making near-term prospects questionable. The company’s reliance on credit is another cause for alarm and confirms the increased competitive waters for the CE category. In the recent year, credit income declined $44 million to $62.4 million, and represented 93% of pre-tax earnings from continuing operations (versus 51% in the previous year). The nearterm credit outlook is murky. The CC shares are at the low end of their 52-week range ($4 to $25). Nonetheless, in light of our lowered profit outlook, the negative near-term credit trends, and the company’s competitive positioning longer term vis-à-vis Wal-Mart and Best Buy, we are downgrading the CC shares to SELL An improved economy with improved consumer sentiment and increased spending will benefit Circuit City. Meanwhile, the tasks ahead of CC management are substantial, and we remain on the sidelines regarding the CC shares until we see traction on strategic initiatives. 4Q FINANCIALS: 4Q sales declined 5% (6% on a comp store basis), to $3.2 billion. Gross profit declined 6% to $763 million, or 23.9% of sales. Finance income declined 77%, to $7.7 million, and SG&A expense rose 3.9%, representing 20.3% of sales. Net earnings from continuing operations declined 46.5%, to $75.3 million. On February 6, management implemented a compensation change that penalized net results by $10 million, or $0.03 per share. Remodel and relocation expenses were $2.7 million ($0.01 per share) in the quarter and $47.9 million ($0.14 per share) for the fiscal year. Full year sales of $9.5 billion rose 5% (4% on a comp store basis), and EPS of $0.37 compares with $0.71 a year ago. At market close on Friday, the SELL-rated CC shares traded at $5.22, down 0.05. (Marie Driscoll, CFA)