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To: carl a. mehr who wrote (174337)	5/2/2003 1:45:45 PM
From: fingolfen	Read Replies (1) \| Respond to of 186894

In the second Journal article, "'Kind of Right' Isn't Good Enough," Intel's (INTC, news, msgs) CEO Craig Barrett makes a couple of very good points, while leaving out some other very good points. He begins, correctly, by saying, "Employee stock options do not create a cash cost like salaries or rent, and they do not have a market price since they cannot be sold. To record an 'expense,' companies would have to create an estimate for the value of the options." All that is true. So why the massive push to put them as a cash expense? Then he goes on to talk about flaws in the method for estimating the value of the options to be expensed, noting that "Black-Scholes is the only model available." He points out that "this model was not designed for valuing employee options, instruments that are not tradable." That is correct. The Black-Scholes model was not created to help companies value options, and it shouldn't be used for this. (Editor’s note: The model was created by economists Myron Scholes, Robert Merton, and the late Fischer Black to value a call option at any given time. For background on how the Black-Scholes model is derived, click on ”Black-Scholes: the formula that shook the world” at left.) Again, there is a push to enact legislation using this particular method, which even this author indicates is inaccurate... given CEO's are required to sign off on the "accuracy" of the numbers at the end of the quarter - I see a clear cross purpose here. Well, if I might offer a suggestion. Intel has a lot of smart mathematicians and Ph.Ds of all sorts. How about turning some of them loose to come up with a better pricing mechanism? Just because Black-Scholes is bad doesn't mean somebody can't come up with an improved way of estimating the cost of options. If folks were really interested in solving the problem, rather than just stonewalling, a little brainstorming might be a good place to start. This sounds way too much like the old "why don't you come up with something better!?!?!" whine frequently seen when someone has their half-baked idea shot down by superior logic. Too many people are rushing to expense options using a bad formula, and they have the temerity to get upset when someone says "wait just a minute, your model doesn't work". Why is it suddenly Barrett and Intel's responsibility to fix a model that even those who are proposing and advocating it admit is broken?

To: carl a. mehr who wrote (174337)	5/2/2003 2:48:33 PM
From: steve harris	Read Replies (1) \| Respond to of 186894

Andy Bryant was granted 1,332,852 options in 2002 according to the proxy. Andy is definitely in the fold. Steve

To: carl a. mehr who wrote (174337)	5/2/2003 4:56:27 PM
From: kapkan4u	Read Replies (1) \| Respond to of 186894

Carl, Valuing stock options is simpler than Intel would make you to believe. Intel through their brokers can make market in employee stock options. These securities would be traded on the open market just like any other contracts are traded. Then Andy Bryant would buy, sell and expense them without stressing his little brain with tricky business of ESTIMATING the value of employee stock options. Kap

To: carl a. mehr who wrote (174337)	5/2/2003 10:22:00 PM
From: hueyone	Respond to of 186894

Fleckenstein makes a valid point about Barrett wanting to have his cake and eat it too. Companies are taking the stock option expense on their tax returns, as defined by the difference between market price and exercise price at time of exercise, but not reporting this same expense to shareholders. Companies square up the cash flow statement and so called "Cash Flow from Operations" (which has problems itself and is a misnomer when inflated by equity financing) with the report given to shareholders and the tax returns given to the IRS by including a line item below "Net Income" titled "Tax Benefit from Exercise of Stock Options". This obvious, huge contradiction between expenses reported to the IRS and expenses reported to investors was the impetus behind bill S. 1940, titled "Ending the Double Standard for Stock Options Act". This bill was killed last year by special interest lobbies representing the fat cats, but here are some excerpts from the original bill: It's time to end the stock option double standard. The Levin-McCain bill would not legislate accounting standards for stock options or directly require companies to expense stock option pay, but it would require companies to treat stock options on their tax returns the exact same way they treat them on their financial statements. In other words, a company's stock option tax deduction would have to mirror the stock option expense shown on the company's books. If there is no stock option expense on the company books, there can be no expense on the company tax return. If a company declares a stock option expense on its books, then the company can deduct exactly the same amount on its tax return. The bill would require companies to tell Uncle Sam and their stockholders the same thing – whether employee stock options are an expense and, if so, how much of an expense against company earnings. levin.senate.gov Regards, Huey

To: carl a. mehr who wrote (174337)	5/2/2003 11:17:46 PM
From: hueyone	Respond to of 186894

Of course what Fleckenstein is proposing, expensing stock options at time of exercise, is quite different than what the FASB proposed in 1993, which was valuing options at date of grant and then amortizing the expense over the service period (vesting period) of the options. Subsequent changes in stock prices would have made no difference on the expense to be amortized once the initial value was set at date of grant according to the 1993 proposal. In practice, a proposal such as Fleckenstein's (and others have also made this proposal) could have a few drawbacks--- as they all do. Nothing is perfect. IMO, however, it would be useful to amortize the expense to match the employee's service period or vesting period, under the accounting theory that the expense results from utilizing the employee's services and should match up to the employee's service period or vesting period as much as possible. But hypothetically, under Fleckenstein's proposal, a large number of options could all be exercised in one particular year, thus concentrating the impact on earnings in one particular year or quarter, perhaps causing wild gyrations in reported earnings rather than smoothing out the impact, as would be the case when expenses are amortized. As a shareholder, I would find reported net income on the income statements more useful if it included an amortization of the stock option expense rather than occasional big hits causing wild gyrations in reported earnings. An enactment of the 1993 FASB proposal, however, valuing the options at date of grant and then amortizing the expense over the service period, would probably always suffer from a perception of unfairness, (although I have no doubt that the FASB know what they are doing and have sound accounting theory behind their 1993 recommendation) by those looking at worthless, underwater options likely to never be exercised. Hence, I am partial to the combination proposals---valuing the option at date of grant, amortizing the expense over the vesting period, but revaluing the options as stock prices change on a quarterly or annual basis until the option expires worthless or is exercised. The total amount expensed over time would be equal to the difference between market and exercise price at time of exercise (or be zero if the option expires worthless), same as Fleckenstein's proposal and others, and same as the final IRS expense, but the expense would still be amortized over time. Here is another post favoring valuing options at date of grant, but allowing for amortization and subsequent adjustments as stock prices change: #reply-17628600 Of course someone also posted Hussman's similar proposal here a few weeks ago: hussman.net Regards, Huey