Qualcomm Inc (QCOM)

[khemara_qc]

In Palo Alto, Voices Raised Against Options Expensing

By Ronna Abramson
TheStreet.com Staff Reporter
6/25/2004 9:17 AM EDT
Click here for more stories by Ronna Abramson


Long lunches are usually not the norm for Silicon Valley's denizens, but many made an exception Thursday to join the battle over stock options.

Wearing yellow t-shirts with "www.savestockoptions.org" splashed across their backs, hundreds of high tech and biotech employees chanted against expensing stock options at a lunchtime rally in front of City Hall in Palo Alto, Calif.


"You are the face of employee stock options!" Jim Cunneen, president and CEO of the San Jose Silicon Valley Chamber of Commerce, shouted over and over again throughout the one-hour rally. "Yes we are!" replied the crowd, echoing the slogan on the fronts of their shirts.

The rally was organized by TechNet, a network of 200 CEOs and senior executives in the high-tech and biotech industries. Employees from start-ups such as Viosionael as well as more established tech companies such as Sun Microsystems (SUNW:Nasdaq - news - research) and biotech giant Genetech (DNA:NYSE - news - research) talked up options as an important engine for innovation, hard work and entrepreneurialism. And they described dire consequences for the high-tech sector and entire U.S. economy if companies are forced to expense options.

"Innovation is built on stock options," declared Andy Bechtolsheim, the cofounder of Sun Microsystems. Expensing stock options would move Silicon Valley backward to its history of orchards, if not the Stone Age, according to Bechtolsheim, who recently returned to the company as senior vice president and chief architect for volume systems.

The rally coincided with a roundtable meeting held a mile away and called by the Financial Accounting Standards Board (FASB) to discuss its contentious proposal to require companies to expense stock options.

FASB, a quasi-public group that regulates the accounting industry, has proposed that companies begin expensing stock options next year. The organization is expected to adopt a final rule requiring options expensing in the fourth quarter; FASB members were very tight-lipped Thursday about their timeline.

For the high-tech employees holding signs that, for example, read "Silicon Valley: The house that options built," options represent a down payment on their first house, college tuition for their children and a reward for late nights working at a start-up.

"Without it I wouldn't be able to do a lot of things for my family that with stock options I'm able to do," said Suzane Gemme, 34, who has three kids and is one half of a dual-income family.

Like others, Gemme, an executive assistant to the CFO at Ditech Communications (DITC:Nasdaq - news - research), said her main complaint against expensing options centers on the difficulty of valuing them. It's unfair for companies to take a charge on options when some of them are worthless because they're under water, meaning its exercise price is higher than the stock price, she said.

It was this very point, among other technical accounting issues, that was debated among 32 participants at the FASB roundtable discussion nearby at the Palo Alto Sheraton, where the number of people in the audience was roughly the same size as the number of participants in the discussion.

Current accounting rules allow public companies to choose whether to expense options. But the leniency of that rule has come under fire following accounting scandals at Enron and WorldCom, among others.

There was strong agreement among the group that employee stock options are a form of compensation. But the usual suspects -- including Intel (INTC:Nasdaq - news - research) CFO Andy Grove, Cisco (CSCO:Nasdaq - news - research) CFO Dennis Powell, Siebel Systems (SEBL:Nasdaq - news - research) CFO Ken Goldman and Qualcomm (QCOM:Nasdaq - news - research) CFO Richard Grannis -- argued otherwise.

Shareholders incur the cost of that compensation in the form of dilution as the options are exercised, the executives argued. Thus, options should not be included as an expense on the company's income statement.

Grannis noted that Qualcomm, widely viewed as a success story, discovered it would have reduced retained earnings by several billion dollars had it expensed options since its founding. Qualcomm would have been viewed as a "miserable failure," the company probably would have had trouble raising money, and stockholders and employees would not have made money, he said.

When asked about that scenario later in a press conference, FASB member Mike Crooch appeared unimpressed. "OK, that's nice. That would have been a true reflection," he said.

Meanwhile, Intel's Grove noted that he sits on the board of a start-up that pays its lawyer with options. Paying that employee with stock options instead of cash extends the life of the company an extra two weeks, he noted, echoing comments at the rally earlier.

Grove and others also stressed the complexity of estimating the cost, noting the difficulty of forecasting future stock volatility -- one factor in calculating option costs -- and tracking exercise behavior of thousands of employees around the world.

Grove also raised what he called his "civil case issue" of having to sign off every quarter on estimates on stock option costs that he believes are not reliable.

Securities and Exchange Commission chief accountant Don Nicolaisen assured him the agency would establish implementation guidelines and safe harbors.

One proponent for expensing was Jane Adams, a managing director at Maverick Capital, who said dilution alone is an inadequate way to account for stock options. "Get on with it," said Adams, who called for a final standard on expensing by September. Stock option compensation "is an expense," she said. "Put it on the income statement."

Crooch also said an effort in Congress to derail FASB's proposed rule would "set a very bad precedent" that trades good accounting for other public policy goals. "Good accounting is a public policy goal," he said.

Such arguments seemed unlikely to win over the crowd, yellow t-shirts and all.

http://www.thestreet.com/tech/ronnaabramson/10167919.html