The following is a series of three letters related to our request for better stock-based compensation reporting in financials.

Letter 1

March 15, 2007

Mr. Donald T. Nicolaisen
Chief Accountant
U.S. Securities and Exchange Commission
Washington, D.C. 20549

Dear Mr. Nicolaisen:

Re: Stock-Based Compensation Reporting

According to Mr. Holman Jenkins at the Wall Street Journal (A Typical Miscreant - II, January 3, 2007), expensing stock options "creates a junk number, of zero analytical value." A sad commentary, considering it took FASB 23 years to present the investment community with a 285-page document called FAS 123R: Share-Based Payment.

As an investment adviser and equity analyst, I tend to disregard FASB's required disclosures regarding stock-based compensation (SBC), whether in footnotes or on the face of the income statement. The key number for me has always been the actual SBC expense that a company reports on its tax return. Although it has not been a requirement to disclose this number, the dubious practice of reporting a so-called tax benefit through a debit to the tax expense line and a credit to shareholders' equity, comes in handy in calculating the SBC expense as it appears on the tax return. The tax benefit represents the difference between the SBC expense on the tax return and its counterpart in the income statement, multiplied by the tax rate. Prior to FAS 123R, companies did not expense SBC, which meant that the tax benefit dividend by the tax rate provided a decent approximation of the stock-based compensation expense reported for tax purposes. Importantly, this number is equal to the amount that employees report as gains on the exercise of stock options on their tax returns.

The SBC expense on the tax return is ultimately the only number that matters in this debate. It is easy to understand. Even a fifth-grader can comprehend the discount associated with selling a dollar's worth of candy for thirty cents. It is comparable across all companies, sectors and industries. It is neutral, because management bias is conspicuously absent in determining the cost. The number is easily verifiable. Employees, brokers, companies and the IRS verify the number without the help of experts. It faithfully represents economic reality, the true cost of issuing a marketable security below its intrinsic value. Perhaps Holman Jenkins chose to describe its income statement equivalent as a "junk" number because these qualitative characteristics of useful accounting information are absent from the SBC expense reported in accordance with FAS 123R.

There is another important reason why the SBC expense in the tax return is an indispensable number to the equity analyst. I have found a remarkably close correlation between the SBC expense on the tax return and the amount of cash (net of employee contributions paid on the exercise of options) that companies spend on buying back the stock issued to employees in lieu of cash wages. SBC is a circuitous form of cash compensation that results in the overstatement of reported income and cash flows.

Unfortunately with the advent of FAS 123R, it has become very difficult to calculate the tax benefit, which makes it equally difficult to calculate the SBC expense on the tax return. Take the 10Ks of the following randomly chosen companies, Adobe, Apple, Cisco, Cognex, EBay, Google, Lehman Brothers, Microsoft, Qualcom, Time-Warner, and Yahoo. Ask some of your most competent understudies to find the past three years' tax benefits for each of these companies. If their experience is anything like mine, you will land up with frustrated accountants unable to agree on which numbers best represent the tax benefit. This ought not to be so.

I respectfully request that you ask companies to disclose not the tax benefit but the actual SBC expense reported on their tax return, and to do so for all the years shown in the financial review - at least five years, preferably ten. It would be helpful if they could issue a special 8K with this information, rather than wait for the filing of the next 10K. Timeliness is now an issue in the light of the current confusion, as described above.

As an aside, the tax-benefit debit to the tax expense line is misleading. It reports an expense that does not conform to FASB's definition of an expense. It is tantamount to a hybrid deferred tax adjustment but curiously pertaining to a permanent difference. The more one studies FAS 123R, the less faith one has in it, hence the need for the only real number that represents, not a fair representation, but a true and fair view of the cost of paying employees with coupons that are later redeemed through stock buybacks. Cash outflows associated with stock buybacks that merely mop up the dilution caused by option exercises arguably belong in the operating activities section of the cash flow statement - another issue that could consume 23 years of deliberation. In the mean time, we will continue to make the adjustment ourselves.

Respectfully,

Albert J Meyer CA CPA
Bastiat Capital, President


Letter 2

The SEC responded to our letter and suggested that we take this matter up with FASB. Here is our response to the SEC's suggestion:

April 3, 2007

Mr. Conrad Hewitt
Chief Accountant
U.S. Securities and Exchange Commission
Washington, D.C. 20549


Dear Mr. Hewitt:

Re: Stock-Based Compensation Reporting

This is in response to a letter I received from Mark Barrysmith, written March 23, 2007, which was a reply to my letter dated March 12, 2007. I enclose copies of both documents for easy reference.

According to Mr. Barrysmith, it is "unlikely that we [the SEC] will be able to undertake a project that would fulfill your request... you may want to consider sharing your views with the Financial Accounting Standards Board (FASB)…"

As I pointed out in my letter of March 12, 2007, FASB spent 23 years to give us FAS123R - Share-Based Payment - which according to Holman Jenkins of the Wall Street Journal "creates junk number of a zero analytical value (A Typical Miscreant - II, January 3, 2007)." With respect, FASB is a dead-end; and I'm not alone in this opinion.

On March 9, 2007, Arthur Levitt, former SEC chairman, in the Wall Street Journal, argues that FASB has "fallen captive to constituent groups... As a result, standards fail to provide investors with transparent, comprehensive and understandable measures of resources or performance... It is now clear that the entire standard-setting structure needs to be reconstituted... intense interest-group lobbying has delayed action and severely compromised stock-option expensing... When the FASB falls prey to these compromises, the resulting standards can end up being overly complex and confusing."

It makes no sense for me, as an individual, to approach FASB about the matter, as outlined in my letter of March 12, 2007. I am up against the political influences that dominate the standard-setting process. FASB, to quote Arthur Levitt again, "still relies on donations from those for whom they write standards. Various constituencies in practice have board seats set aside for them: at the FASB, three from public accounting, two from corporations, one from academia and one financial analyst. Those who fill them, in turn, at times have lobbied for the groups that put them there. Exceptions are then thrown into the rule-making mix in order to create a compromise that pleases each and every constituent group. The result is a regulatory sausage that is hard for companies and investors to swallow... Over, time, vested corporate and other special interests have chipped away at that independence and undermine these organizations' commitment to meeting the needs of investors and the public."

As a registered financial adviser representing the interests of many investors and the public at large, I am making a reasonable request. Would the SEC mandate that companies disclose, in the annual proxy statement, the stock-based compensation expense that they report to the IRS?

With respect, Mr. Barrysmith mischaracterizes my request as the "undertaking of a project." There are no rules to be written, no definitions to be considered, no opinions to be debated, etc. The number is readily available on a company's tax return. The source of the information is not open to interpretation. It corresponds with the stock option gains on which employees were taxed for the year in question, and this is backed by documents supplied by independent parties, namely, brokerage firms. As explained in my letter of March 12, 2007, it is a number that even a fifth-grader readily comprehends.

In my first letter, I outlined the reason why the stock-based compensation expense reported to the IRS is so important to investors, and why the revised FAS123R has made it more difficult, if not impossible, for investors to derive this information from the revised disclosures.

There is no need to involve FASB. For example, if the SEC had relied on FASB to provide investors with information about executive compensation, as disclosed in the proxy statement, we would still be debating the issue. Instead, the SEC called for mandatory disclosures of executive compensation in the proxy statement, without any interference from FASB.

The way I interpret Mr. Barrysmith's usage of the word "unlikely" is that the door is still open for the SEC to act on this matter, but what would it take? I would appreciate a straightforward answer: No, we will not consider your request, or we will consider the matter but only under certain conditions, in which case, please provide the details and conditions.

Respectfully,

Albert J Meyer CA CPA
Bastiat Capital, President


Letter 3

June 11, 2007

The Honorable Carl Levin
Permanent Subcommittee on Investigations
340 Senate Dirksen Building
Washington, D.C. 20510

Dear Senator Levin,

Re: Permanent Subcommittee on Investigations on Executive Stock Options: Should
the IRS and Stockholders be given Different Information? - June 5, 2007

I want to thank you for initiating the above hearing with Senator Norm Coleman.

The following statement summarizes for me the written testimonies provided by corporate
finance: GAAP made me do it, and the IRS added the icing on the top.

I was particularly interested in your efforts to obtain information from companies with
regard to the stock-based compensation expense as reported to the IRS. You also solicited
this information for all US companies from the IRS.

Earlier this year, I wrote two letters to the SEC in which I pointed out that since the change
in the rules relating to stock-based compensation (SFAS123R), it has become more difficult
for investors to calculate how much a company reports as stock-based compensation on its
tax return.

Under the old regime (SFAS123), the so-called "tax benefit" number in the operating section
of the cash flow statement represented 35% of the amount that a company claimed as a tax
deduction for stock-based compensation. Under the new rules, a portion of the tax benefit is
now transferred to the financing section of the cash flow statement. The portion that
remains in the operating section of the cash flow statement, more often than not, is
aggregated with other numbers, thus making it impossible to arrive at a reasonable estimate
of the stock-based compensation expense in the tax return. I am enclosing copies of my
letters to the SEC and their response.

I asked the SEC to make it a requirement for companies to disclose in the annual proxy
statement how much they claimed as stock-based compensation for tax purposes in any
given year. If this had been in place, your task of gathering the required information for the
above-mentioned hearing would have been much easier.

The SEC argued (see copy of letter enclosed, dated April 6, 2007): "Had your request that
registrants disclose the share-based compensation cost reported in their tax return been
more widely shared among the investment community, the SEC and the SEC and its staff
would have further considered the matter."

One could hardly ask for a more influential user of this information than a US Senator, as
illustrated by this hearing. I have received support from various sources, including
investment advisors, mutual and hedge fund managers, academicians, and individual
investors for my efforts to gain access to this vital piece of financial information through the
proxy statement. However, as an individual petitioning the SEC, even with a band of
supporters, some prominent in the world of finance, I have no hope of making any progress,
no matter how much time and energy I devote to the matter.

I am providing you with copies of my correspondence with the SEC to date, hoping that you
will raise the issue with the SEC and explain to them how important it was for you to have
had access to this information; how much more then for the investment community at large.

Sincerely,


Albert Meyer
President