Tech Firms May Disclose More Options Data

Intel Corp. and other companies in the computer industry that have resisted treating stock options as an expense are considering disclosing more details about how their options grants affect earnings.

Intel has made a proposal to Silicon Valley lobbying group TechNet that computer companies create a quarterly “equity impact sheet” that will reveal the number of options grants, the timetable for exercise and the potential effect on earnings, said Rick White, president and chief executive of the organization.

Computer, software and Internet-related companies are devising alternatives aimed at staving off treating options as a cost. They contend it would slash profit and hurt recruiting. Their effort comes as companies are moving to account for options as an expense under pressure from investors, lawmakers and regulators who say excluding such grants as a cost allows companies to inflate profit.

“We recognize there has been some abuse of stock options at the senior level, and our main focus is to preserve stock options for rank-and-file employees,” said White, whose organization has formed a working group on stock options. Palo Alto-based TechNet has about 250 company members, including Cisco Systems Inc., Oracle Corp. and Microsoft Corp.

Intel spokesman Bill Calder said the company “is involved in the overall lobbying campaign, of which TechNet is a part.” He said he wasn’t aware of the company’s participation in preparing alternative disclosure methods.

Other ideas being considered include requiring executives to hold options for five years before exercising them and restrictions on their ability to sell stock, White said. None of the proposals call for accounting for options as an expense.

“You don’t want a system where the senior guys have an incentive to pump the stock, sell their own options and leave everyone else holding the bag,” White said. “We will be proposing a plan that makes it clear you can’t manipulate your company’s stock, make a short-term profit and hit the road.”

This month, Intel said it wouldn’t include options as a cost in income statements. The chip maker’s 2001 net income of $1.29 billion would have shrunk to $254 million if options were treated as an expense, the company said in a filing to the Securities and Exchange Commission.

As of June, Intel’s five highest-paid officers held 2.3% of the company’s 750 million options outstanding, Intel said in an SEC filing. Chief Executive Craig Barrett was paid $1.68 million in salary and bonus and was awarded 484,696 stock options in 2001.

As Silicon Valley firms consider ways to increase disclosure, many U.S. companies are accounting for options as an expense to restore investor confidence shattered by abuses at Enron Corp., WorldCom Inc. and other companies. More than 70 companies in the last two months have made the change, including Coca-Cola Co., Computer Associates International Inc., Washington Post Co., Freddie Mac, Wachovia Corp. and General Motors Corp.

Many companies in the computer industry that rely on stock options to pay employees have fought attempts to count stock options as an operating expense. They say such a move would distort earnings and lead to options being concentrated among senior executives.

TechNet--founded in 1997 by former Netscape Communications Corp. CEO Jim Barksdale, Cisco CEO John Chambers and John Doerr, a partner in venture capital firm Kleiner Perkins Caufield & Byers--has lobbied lawmakers on that position. In July, the Senate blocked two amendments that could have required companies to deduct the estimated cost of options from their reported profits.

Opponents of expensing options say it would force companies to recognize costs they may never incur if options aren’t exercised, thereby understating earnings. This group, which includes Princeton University professor Burton Malkiel, agrees with Silicon Valley that there is no precise way to measure the compensation cost associated with options.

The use of stock options “does not result in any reduction in the overall size of the firm’s total earnings pie--it only affects the way in which that pie is sliced and divided up,” wrote Malkiel in an editorial in the Wall Street Journal in April. “This is markedly different from the effect of, say, a rise in wages that results in a net reduction in the firm’s cash.”

Companies that resist expensing options may suffer declines in their stock prices and lose credibility with investors, said Nell Minow, editor of the Corporate Library, a Web site that reports on corporate governance, including executive compensation and board performance.

“In this era of uncertainty of financial reporting, money is going to flow to the companies that create the greatest credibility with the way they issue their numbers,” she said.

Billionaire investor Warren Buffett and other proponents of expensing say companies inflate their reported profits by excluding the cost of options. Some advocates also say the method of including estimated option costs in a footnote to annual financial statements encourages executives to manipulate earnings to boost the stock price.

TechNet’s White said it may take a year before a new standard for expensing options is adopted in the U.S.

“As people try to implement expensing of stock options, I think there’s going to be quite a bit of rethinking about the whole thing because it’s so difficult to value them,” he said. “There’s going to be several more months of turmoil as people figure out what makes sense.”

Companies will be forced to make some additional disclosures next year.

The Financial Accounting Standards Board, which sets U.S. bookkeeping rules, in 2003 will require U.S. companies to disclose an estimate of stock-option costs in footnotes to financial statements quarterly instead of annually.

IBM Corp., the world’s biggest computer maker, has said it wants more debate on how to value options before deciding whether to report them as a cost.

Microsoft, the world’s biggest software maker, has said it will stick to the present method of reporting options in its footnotes.

Microsoft CEO Steve Ballmer has said he disagrees with the view of some other computer-industry executives that the consequence of treating options as an expense would be “very, very gloomy.”