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Author: howardroark Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3916  
Subject: Re: expedia options help Date: 9/3/2001 8:25 PM
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I still cant figure out expedia options , would somone be kind enough to tell me about the arithemetic done in calculating " stock based compensation" for the year 2000 for expedia,please see expedia income statement for the year 2000 and tell me how " stock based compensation" is calculated PLEASE DO THE MATH IN YOUR REPLY . I will be very grateful.

I get the sense this is important to you. Okay, in the interests of finality, here we go. First of all, note that Expedia operates on a fiscal year ending in June. Thus, the fiscal year 2000 actually goes from July 1999 to June 2000. I'm going to work with both fiscal 2000 and the most recent fiscal year - as in fiscal year 2001 - which ended in June, 2001.

Expedia recognized stock-based compensation expense on the income statement in fiscal 2000 and 2001, respectively as follows (in thousands):

F2000 F2001
Stock-Based Compensation $60,689 $31,183

In other words, they company recognized costs related to stock payments (in some form) as a cost in those amounts, and subtracted the amount from revenue along with other costs before coming to net income. Note that these same amounts were added back to net income on the cash flow statement to determine operating cash flow, because the payments were based in stock and not cash.

F2000 F2001
Cash Flow Add-Back $60,689 $31,183

So far, so good. Okay, here's where it all came from. As mentioned, when Microsoft spun off Expedia, it gave Expedia employees in-the-money options in exchange for Microsoft's outstanding options. Because the options were in-the-money (the exercise prices were below Expedia's stock price), and because they were deemed new grants, Expedia had to expense the cost of the options on the income statement rather than hide them in the footnotes as is allowed with most at-the-money options under APB 25.

The total value of the options granted at the time of the Expedia IPO was deterimined to be $111.6 million (this is in Expedia's footnotes and its supplemental disclosures). This amount was computed by taking the difference between the fair market value of Expedia stock at IPO and the exercise price on the options. Note that this is not the best way to actually value the options, because it ignores their time value, but it is the GAAP imperative. Specifically, we know from the Expedia filings that 13,668,525 options were issued in exchange for Microsoft options. Thus, the average difference between the replacement options' strike price and the Expedia stock price was $8.17 (computed by taking the total charge of $111.63 and dividing by the number of exchanged options: ~13.668 million). You can confirm this calculation by noting that the Microsoft replacement options had a weighted average strike price (exercise price) of $5.83 (also in the footnotes). Expedia IPO'd at $14 per share, which is the price it would use as the fair value of the underlying stock. So, $14.00 - $5.83 = $8.17, so you can see the logic of the calculation.

So how did $111.6 million become the two numbers listed above as the stock based compensation expense in 1999 and 2000? Amortization. The $111.6 million computed above represents Expedia's and GAAP's attempts to value the total expense of the option payments, but Expedia does not have to recognized the entire expense all at once. Instead, it recognizes the expense over the vesting periods of the individual options. The options have varying vesting periods, up to 54 months, and the entire amount will be completely amortized (will no longer be an expense) by 2004. Actually, most of it is gone already. To calculate the exact annual charge, you need to know the vesting date of all the options, which you don't. The $60.7 million in 2000 represented 54% of the total charge, so most of the options vested immediately or within the year. Also, any of those replacement options that are cancelled before vesting are wiped out (thus reducing the original $111.6 million needed to be amortized).

After two years of charges and cancellations, there was only $16.172 million of the $111.6 million charge left to be taken as of June 2001 (this is found on the financial statements under stockholders' equity as "Unearned stock-based compensation"). Some part of that will be reduced by cancellations, so the charges will shrink dramatically and then stop completely in the near future. Obviously, the maximum possible charge for fiscal 2002 is $16.172 million, and that's only if the entire charge completed and there are no cancellations. Look for a charge closer to $10 million for the year.

I need info on " TREASURY method " for accounting stock options , i know how they work , an example would be great.

Okay, so you are aware that the treasury stock method computes the number of shares that would be outstanding if all of the in-the-money options were exercised, and proceeds from the exercise along with the hypothetical tax benefit realized were used to repurchase common stock. Note that this method ignores the time value of options, including ignoring all options that are not currently in the money, but this is how it's done. Here's an example.

Say a company earned $10 million in net income last year (2000). Its weighted average shares outstanding were 5 million. So it's basic earnings per share was $2.00 (10m / 5m). Now say it also has total options outstanding underlying another 500K shares, with a weighted average exercise price of $20, while the average stock price during 2000 was $50 per share (some are out of the money and some are in the money, but $20 is the weighted average). Now you have to compute diluted shares outstanding.

You do this by starting with the 500K in options out. Since they are on average in the money, you are prepared to add this entire 500K to your 5 million basic shares out. First, though, you figure out the proceeds the company would get from that full exercise, along with the tax benefit. The proceeds would be $20 (strike price) * 500K = $10 million. The tax benefit is computed as $50 (stock price) - $20 (strike price) * $500K * 35% (tax rate) = $5.25 million. So the total inflow to the company would be $10 million plus $5.25 million = $15.25 million. Assume that inflow was used to repurchase shares, and calculate that $15.25 / $50 (share price) = 305K shares are repurchased. Thus, the actual dilution is the original 500K minus the 305K hypothetical repurchase, for a total of 195K. Add those 195K shares to the original 5 million shares out and calculated diluted EPS: $10 million / 5.195 = $1.92. Voila.





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