Surfing the Net for Index Data

I haven't seen any postal workers on their appointed rounds here for days, but luckily the emails are working fine.

This week's installment is sure to be a humdinger (as we say out here in the frozen hinterlands). And it's not, as you might suspect, because my commentary embodies the ascetic quality of spiritual insight developed over a week of snowbound solitary confinement and fasting. It's just that, like a department-store makeover, this redesigned TSC is sure to make even the homeliest of hacks look princely.

Now that Fundamental Questions is easier to find and the whole site is a joy to navigate, I expect shovelsful of new questions pouring in from investors and budding analysts. So go ahead and bury me with queries.

Where can one find what stocks are in the various indexes, e.g. S&P 500, Russell 2000, mid-cap 400?

-- Leonard Barton

Leonard:

There's no superstore, one-stop answer for this one, but the info is out there. Because each family of indexes is created, maintained and sponsored by a different organization, you're going to have to hit several sites to get all the answers you need.

I'd start out at the new Nasdaq-AMEX site. It has excellent descriptions of all the major indexes and pages of component stock listings for the ones that they sponsor, including all 5,108 issues in the current Nasdaq Composite. The boys at S&P went one step further and posted their index components in your choice of alphabetical order or industry grouping. They even provide a brief description of each company after the name and ticker so you don't confuse SAFECO the insurance company with Safeway the neighborhood grocery chain.

You may also find some valuable info at sites like Frank Russell & Co. and Wilshire. In short, dig around a little, and you'll have more info than you can process in a month of late-night cram sessions.

I am presently holding on to some highly appreciated April calls that I bought a few months back. I plan to sell a few of them to help me finance the others when I exercise them. My question is how do I handle the taxes on the options that I exercise? Do I pay capital gains only when I sell the shares? Thanks in advance.

-- An avid TSC reader

Jeremy Cranford

Dear Avid Reader:

(Had to sneak in a little Ann Landers tribute there.) Sounds like you've got two things going on here, and both are treated differently from a tax standpoint. In a nutshell, if you sell some of your calls at a profit prior to expiration, you'll have to pay taxes on the gains during the current year. If, on the other hand, you simply exercise the options (i.e. buy the stock from the option writer at the strike price and hold the shares), you just add the option premium to the purchase price to raise your cost basis. In other words, under scenario No. 2, you won't have a taxable event on your hands until you sell the actual stock shares and you'll get full credit for the premium paid. For more on this and other pressing tax questions, be sure to check out Tracy Byrnes's Tax Forum on the site.

I was wondering if you could help me understand the term "restructuring charge." Every so often I find this term mentioned in the newspaper and even on the radio when a company is unable to make a profit. What does it mean? How does it come about and what are its benefits to the company? I appreciate your help.

-- Collin Rodriques

Collin:

In the parlance of financial reporting, the term "restructuring" is used to euphemistically describe a variety of messy corporate activities from axing employees in a fit of "right-sizing" to pawning off nonproductive assets at fire-sale prices. Most party-line descriptions of these events include enough creative wording and flowery prose to convince the average investor that the whole affair is actually a good thing for the company. And it may very well be, especially if the company is legitimately streamlining to increase shareholder value.

However, as you've noticed, "restructuring" can often be a smokescreen to hide a last-ditch attempt at survival for a failing enterprise. Too often, these panic moves can degenerate into a series of gory amputations in a misguided attempt to save the patient by sacrificing all the limbs.

Like any surgery, restructurings are generally painful and expensive. First and foremost, you've got to pay off your displaced employees in accordance with contractual obligations to prevent a big legal stink and keep public relations nice and bubbly. In addition, you've probably got to swallow some big losses on hard assets that need to be accounted for. The upshot is, all of these costs are reflected on the income statement as a "one-time" charge -- which affects the bottom line. Some analysts ignore these restructuring charges when doing their earnings forecasts, dismissing them as mere anomalies in overall trends. Be careful, though. A firm with a habit of showing regular one-time charges year after year may be disguising some deeper issues surrounding their fundamental profitability.

Is the item "convertible subordinated notes" in the 10-Q of Level One long-term debt or is LTD always called LTD?

-- M. J. Heiligman

M. J.:

Convertible bonds are actually a kind of half-breed offspring spawned by the unchaperoned commingling of debt and equity in the back offices of investment banks during the wee midnight hours. As a hybrid security, convertibles exhibit characteristics of both stocks and bonds in actual practice but are treated as 100% debt on the balance sheet in accordance with Generally Accepted Accounting Principles, or GAAP.

A more accurate treatment might be to allocate a portion of the issue price to the conversion feature and plug it right into the shareholder equity portion of the balance sheet, reflecting the dual nature of the beast. However, because folks like those at the Financial Accounting Standards Board have, in their infinite wisdom, determined that the value of this conversion feature is just too slippery to get ahold of, we're stuck with treating convertible bonds as straight debt for accounting purposes.

Next week, we'll break out a bottle of St. John's Wort for a fundamentalist's view of the new-age vitamin retailers. We'll field a reader's question about the sector's poor recent market performance in light of solid earnings, and we'll clean up some other pressing issues. Keep sending those questions.

>To order reprints of this article, click here: Reprints