Rim Semiconductor Company (fka RSMI)

[34Simmons]

OPTIONS
28 Jul 2002,

The 'real' options problem The earnings hit from
expensing is only the half of it......
By Adam Lashinsky, CNN/Money Contributing Columnist

PALO ALTO, Calif. (CNN/Money) - The great stock-option
debate consumes Congress, maddens the media and irritates the
individual investor.

The salaries companies pay employees are accounted for as expenses
and detract from earnings. But employee stock options -- merely
another form of compensation -- don't.

So should stock options be treated as normal compensation and
expensed accordingly? Of course they should. That was easy. But it's
also missing the point.

Expensing stock options, as Coca-Cola and a small group of other
companies now say they will do, will lower reported earnings. That,
however, amounts to just a bookkeeping change.

Where options absolutely do matter is in their dilutive effect. To
understand what I'm talking about, consider the impact of options
first on reported earnings and then on potential dilution at two huge
companies, Coke and Microsoft.

Coke grabbed headlines for announcing it'll expense employee
options going forward, a move that would have eliminated about 5
percent of Coke's 2001 earnings. Microsoft, which merely states the
fair value of its options, but doesn't expense them, would have seen
an earnings hit of about 30 percent. (See what the expense hit would
be for other big companies.)http://money.cnn.com/2002/07/11/news/options/index.htm

Fine, but that's just a matter of accounting. The more interesting
figure is the so-called options overhang, or the potential dilution if all
a company's outstanding employee stock options were exercised and
sold. When that happens the shares outstanding increase, and all
things being equal, the value of each previously held share goes down.

And you can find this information in every company's 10-K annual
report by searching for the expression "stock options." In Coke's
case the number is puny, just 6 percent. In Microsoft's case, its
outstanding options represent 17 percent of the total shares
outstanding. (The numbers look even worse if you include shares set
aside for future options grants, an exercise Money magazine went
through for 50 of the largest companies -- you can see the results
here.)http://money.cnn.com/pf/investing/features/idealstock/option.html

Why is this such a big deal? Microsoft's market cap is $281 billion
and there are roughly 5.4 billion shares outstanding, for a price per
share on Wednesday of $52. In Microsoft's annual report from last
year, you can learn that there are 898 million stock options
outstanding. Assuming no variable changes in the business, the
addition of all those shares will make each one worth less -- just $45.

The exercise gets scarier when you stray from the top of the heap.
At Broadcom, a semiconductor maker, the ratio of options
outstanding to shares outstanding is 40 percent. At Yahoo, it's 23
percent.

According to Yahoo's 10-K, however, the average weighted value of
each option is $39.22, well above Wednesday's close of $14.26. Ah,
you must be thinking, then there's no reason to be too concerned
about dilution. Sorry. Fifty-four million of Yahoo's 137 million options
outstanding have an average weighted exercise value of less than
$13.08. That means it's a near certainty that all those shares -- 9
percent of Yahoo's total -- have been or will be exercised and added
to the share count.

So remember, it's the dilution, not the bookkeeping, that really
matters.

http://money.cnn.com/2002/07/17/commentary/bottomline/lashinsky/index.htm#