This Is The Week That Was

My apologies for going dark there for a while -- it's been crazy busy, and it's all good.

Last Tuesday, while Sun rocked Wall Street with the best products, services and solutions for demanding customers, I was a few hundred miles south, trying to talk some sense into the Senate as FASB's plans to require the expensing of stock options move forward.

What FASB is proposing to do is wrong, for three reasons.

First, they're purportedly going after stock options because they want to crack down on robber baron CEO's who pillage their shareholders and employees and walk away rich. In fact, requiring the expensing of stock options will hurt rank-and-file employees, who in Sun's case, get 87% of the options granted (data from FY98-02). Not to mention hurting the economy, as mucho taxes are paid and proceeds are spent when the options are eventually cashed in.

Second, the valuation models FASB is offering up produce bogus results. If you can predict the value of a share of stock five years into the future... call me! Neither of us will need options, and FASB can do what it wills. Otherwise, it's a S.W.A.G. In fact, because low-priced stock options are more likely to make money than high-priced stock options -- my Sun options at $40/share are likely to expire before they're ever worth a dime, whereas the ones at $4/share are looking pretty good -- S.W.A.G. doesn't even begin to cover it. I'm thinking of a compound adjective that ends in -backwards.

Finally, and this is pretty basic accounting -- kind of amazing FASB doesn't get it -- stock options represent diluted shareholder equity. The company is worth X dollars, divided by Y shares: so the equity represented by each share is X/Y. As you give out more shares, the equity in each share is reduced. That's why our shareholders are required to approve stock option plans, and are making the informed business decision that incenting the workforce in this way -- making us shareholders with them, in the same boat -- will ultimately provide better returns for all. According to FASB, however, stock option grants are operating expenses which must be applied to the balance sheet on the date they're given. As if the company paid them out in cash.

Trust me, those options at $40/share -- I'd a rather been paid out in cash. But I wasn't. And they didn't cost the company a dime to give out, and will never cost the company a dime. Charging our balance sheet hundreds of thousands of dollars for them -- back in 2000, when I first got them and no one knew where they'd go -- is just crazy. Crazy.

Anyway, that was the message -- I'll be back shortly to tell you how it went!

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