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To: Allen Benn who wrote (3430)	7/20/1998 10:51:00 AM
From: Mark Brophy	Respond to of 10309

Re: Cash hoard and perfect execution Frankly, I don't know if WIND bestows too little or too many options on employees, since I'm not intimately knowledgeable of executive pay scales in Silicon Valley. However, when Dick Kraber's options package is dissected and judged unilaterally to be excessive, I keep thinking: "WIND has over $200 million in cash and is executing to perfection. That's worth a great deal more than the numbers bandied about on the thread." The company also has a $140m liability from the bond offering, so the $200m hoard is reduced to $60m. They raised $50m in the 1996 secondary offering, so only $10m could've come from profitable operations. Another $30m was raised in the 1994 IPO, so they're $20m in the hole from operations. Add in another $56m for assets other than cash such as land and buildings, and the total excess cash flow accumulated in the last 14 years is $36m (not including capital invested before the IPO). Is $36m of profit in 14 years "perfect execution" when you take into account the massive dilution from stock options and pooling acquisitions in the amount of hundreds of millions of dollars? It seems like Pirah Naman's suggestion to examine the cash flow statements would be more useful than reading earnings statements that grossly overstate earnings.

To: Allen Benn who wrote (3430)	7/20/1998 2:22:00 PM
From: Kevin Melia	Read Replies (1) \| Respond to of 10309

In this whole discussion on stock option valuation and how it should be accounted for, there are a few things that I can't grasp. Hopefully, someone can fill in the gaps. The literature in the press seems to indicate that some companies are losing money because the intrinsic value of their employee options exceeds the annual earnings of that company and thus is diluting the value of the stockholders' investment. 1. The value of stock options is determined using Black-Scholes, which assumes perfect markets. 2. If the markets are perfect, then the value of the outstanding options has already been factored into the current valuation of the company as the information on the outstanding options has been made public. Therefore, even if a company is losing money now, their expected future cash flows must at some point turn positive in excess of the stock option valuation in order to justify the current valuation. Furthermore, the current valuation must be accurate or else their would be an opportunity for short-sellers to make some money. So what I don't get is why everyone is arguing over the EPS figure. What matters to me is that a company provides enough additional information so that I can recalculate the EPS if I don't agree with the method that they used to arrive at their number (e.g. I can subtract out what I think the charge should be for outstanding options). Am I missing something here? Kevin

To: Allen Benn who wrote (3430)	7/20/1998 6:33:00 PM
From: Pirah Naman	Read Replies (2) \| Respond to of 10309

I think we all agree that employee stock options cost current investors something. Good. Then we shouldn't have any more suggestions to the effect that there are no costs borne by current investors, or that ex-investors somehow foot the bill. The issue is whether investors make more money by providing incentives to employees through options, or not. No, that was never the issue. I have no idea where people are getting the impression that this was even an issue of discussion, much less the issue of debate. If options are appropriate...then how much is too much? That was the issue. As you have written, WIND's resources are its people. What is the cost of those resources? What will be the future cost of those resources? Profits are a function of (among other things) costs. Why does software company A have higher SG&A expenses than software company B? Why does company A spend so much more on R&D? Why does one company seem to offer a more generous option package than another? Examining the cost structure of a software firm, where personnel costs are critical, is no more inappropriate than examining the cost structure of an airline, where fuel costs are critical, or the cost structure of a semiconductor manufacturer, where fab costs are critical. Of course we want the people to be rewarded, which we don't feel for fuel or fabs. But that doesn't mean we don't examine the cost structure. That doesn't mean that no cost is too high. these are legitimate questions to debate, but not by holding WIND hostage to loaded verbal attacks... It is wrong to be cavalier in suggesting management might be nefarious in their handling of options If anybody is reading such things into the discussion here, then that would seem to be more reflective of that person's relative objectivity than of the discussion. Even if such an accusatory posture was assumed, WIND does not need a knight in shining armor. A simple discussion of the economics of the business is quite sufficient to address the issue. Countering perceived "attacks" with implications that those who wish to discuss business costs are somehow being unfair is behaving in the same manner as the perceived manner to which the objection is made. Politicizing a discussion of the costs of business, turning it into an emotionally charged subject, dilutes (pun intended) the discussion. no one mentioned the APB Opinion 16 when challenging WIND's stock buyback for stated purposes of offsetting dilution from options. Citing examples of incompleteness in a discussion does not point to "cavalier" behavior on the part of the participants, any more than a slow response from a company points to any malfeasance on its part. And let's get this straight. WIND (for whatever reason) has a "stock buyback for stated purposes of offsetting dilution from options" and then somebody finds it objectionable that on this thread it could be written that the buyback has the purpose of offsetting dilution from options? No one questioned the validity of charging the Black-Scholes value for options at the date of granted. While these specifics were not discussed, even a cursory review of the thread should reveal that we were attempting to discern what the actual costs were. The very legitimacy of Black-Scholes was being questioned! particularly when the facts and underlying economics are poorly presented or understood. Hence the need for such discussion. Hence the desirability of input from WIND. Ron referred to FAS 123 as "theoretical" and the thread took that as a sign he was being defensive. You are reading something in that simply isn't there. The intrinsic value of the company is a function of current free cash and future EPS growth with expected dilution. I agree 100% with what I think you are saying. I would have said that the intrinsic value of the company is a function of future free cash flow growth with expected dilution. It seems to me that the chief protagonist against employee stock options is Warren Buffett, America's most admired investor. This is the same guy who took over Salomon's and instigated a major reduction in their bonus program that succeeded on the cost side, but mainly by driving out most of the key staff, almost crashing the company. Any "key staff" would have been key in developing Salomon's problems. And even if your perception is correct - that Buffett was responsible for almost crashing the company - that doesn't mean that he is wrong on options. People are cogs in Warren's companies, and no doubt he is proud of paying his cogs a fair wage for a hard day's work. Cogs are not given stock options. From what Mr. Buffett writes, and has written about him, I would infer that he places a much higher value on people than you seem to imply. Further I note that he pays bonuses tied to operational performances. Even though I benefit from options, I am sympathetic to Mr. Buffett's views. When investing I prefer to think in terms of business performance (which includes costs!) and not in terms of stock price. In that respect I think that using operational performance as a basis for compensation is quite legitimate. Share count has stabilized, even reduced lately....FY 1998 showed negative share growth three out of four quarters. Thank you. I admit that I have not saved quarterly reports and have relied on annual reports. Still, the trend is subtle and given the "lumpiness" we might expect in exercising options, I think it may be premature to lable the decreasing share count as a trend. But I'd be delighted if it continues. Pirah