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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Kirk © who wrote (64475)	9/11/2003 12:04:57 PM
From: rkral	Read Replies (2) \| Respond to of 77400

OT ... Kirk, re "Options are an expense that is paid by the shareholders in the form of dilution." The old double counting argument. It keeps popping up like a new cork, even though it's quite old. Rather than cite others, let me present the argument that finally convinced me -- that BOTH dilution and expensing are required. You and I each own 50% of a going concern, with 490 shares each. We grant 1 option, with an exercise price of $33 when the stock price is $33, to each of our 20 employees. Let's speed up the entire option life cycle by assuming no vesting requirement -- these options are exercisable immediately -- and that the stock price jumps to $50 the very next day. Let's further assume all employees exercise at that $50 price. We both decide we would still like to own 50% of the company, so we each buy 10 of those shares for $500 out of each of our pockets. Our employees pocket $17 each ($50 - $33) for a total of $340. Before the grant and exercise, there were 980 shares outstanding of which you and I each owned 50%. After, there are 1000 shares outstanding and we each still own 50%. Obviously, net income must be now divided by 1000 shares, instead of 980. That's the dilution -- with which you apparently agree. As a result of the exercise, shareholders' equity has increased by $660 (20 * $33). We're the owners, so we declare a $0.66 per share dividend. You and I both pocket $330 (500 * $0.66), reducing our cost to maintain 50% ownership to $170 each ($500 - $330). In summary, we've got a $340 total less in our pockets, and the employees have a $340 total more in theirs. We each owned 50% of the company before, and we still own 50%. The company is worth exactly the same after as before .. but there's been a $340 transfer of wealth from shareholders to employees. That's the expense. The fact that you and I paid the expense makes no difference. Effectively, we paid that expense on behalf of the company .. and it is compensation income to the employees. This sequence of events does not involve a shell game. It is real .. and hopefully, you now see that both option expensing and dilution are required fairly treat the overall consequences of the events. Regards, Ron

To: Kirk © who wrote (64475)	9/12/2003 9:41:52 PM
From: Boca_PETE	Read Replies (1) \| Respond to of 77400

b) Options are not a business expense ! ------------------------------------------ The politically correct solution to book and report the BLACK SCHOLES MODEL derived "STOCK OPTION GRANT EXPENSE" DOES NOT correspond to company cash flows related to stock options, and, it is not applicable to valuation of non-transferable non-tradable employee stock options - IT IS WRONG, MISLEADS INVESTORS, and it DOUBLE COUNTS DILUTIVE IMPACTS to the extent average shares include potential future dilution from exercisable options. Issuance of shares upon exercise of employee stock options has the following dilution impacts: ·The new shares dilute earnings per share, not absolute earnings itself. They do this by spreading absolute period net income over the greater number of average outstanding shares. ·Also, the new shares dilute dividends per share. They do this by spreading the absolute period dividend amount over the greater number of average outstanding shares. ·Finally, the new shares dilute book value per share. They do this by spreading the absolute net book value amount over the greater number of period ending outstanding shares. Currently, FASB Standard 128 "Computing Earnings Per Share" only requires disclosure of potential FUTURE DILUTION from "in-the-money" outstanding employee stock options. BOTH Standard 128 and APB Opinion No 25 ARE SILENT ABOUT measuring the PAST DILUTION IMPACT FROM SHARES ISSUED for PAST EXERCISED employee STOCK OPTIONS, despite the obvious fact that such share issuances have been caused dilution of earnings, dividends, and book value per share to company shareholders. IMHO, the best solution would require NEW DISCLOSURE RULES THAT WOULD ENABLE analysts and company shareholders TO MEASURE TOTAL DILUTION (Past and Potential Future) from employee stock option plans. The additional information needed to measure such total dilution would be a REQUIRED DISCLOSURE in the footnotes to financial statements. The disclosure would at minimum include the following: ·Average Outstanding Shares and Period Ending Outstanding Shares, EXCLUDING and INCLUDING to date share issuances related to exercised employee stock options. ·Also, there should be required a discussion disclosing the above dilution impacts (item-by-item for each period financial statements are presented) and how dilution calculations for each item were made. However the Financial Accounting Standards Board ultimately decides to rule on accounting and reporting for what they refer to as "stock option expense", and, no matter how such amount is calculated; such "expense" will be put back into "Cash Generated from Operations" on the Cash Flow Statement. That's because the issuance and exercise of stock options by employees DOES NOT RESULT IN CASH OR ASSETS LEAVING THE COMPANY - therefore it can't be an expense of the company just as the amount I pay for my personal home heating oil bill can't be an expense of the company. Instead, shareholders buying company employee shares bought under option plans pay cash directly to the employee at the market price at date of share resale. Those resale proceeds include the enormous profits such employees make on reselling such shares. FOLLOW THE CASH and YOU SHALL BE ENLIGHTENED. Stock options are a direct expense of such shareholders (like their personal Mastercard bill). Companies correctly do not consolidate into their financial statements the personal income and expenses of their employees. IMHO from the corporate executive's viewpoint, issuing stock options is a very devious way to reach directly into the wallets of company shareholders without negatively impacting company cash - especially when such issuances are excessive. -------------------- O.K. - Now send me my free CSCO shares <grn> P