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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 73.87

-0.1%

Jan 9 3:59 PM EST

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To: Techplayer who wrote (34622)	5/5/2000 7:46:00 AM
From: GVTucker	Read Replies (1) of 77400

Techplayer, RE: bambs, read the statements provided by Dan. the first clearly shows that the 2.096 billion is a true representation of net earnings and shows separately the provision for the 837 million dollar credit in the cash flow statement as an entirely separate entity. The tax benefit from the options is not what the bears are referring to when then examine the options effect. Where the confusion here is arising is that bambs is using this number to calculate the forgone compensation expense. The tax benefit of $837mm is NOT this number. The forgone compensation expense that is the true hidden expense here is not a cut and dried number. Companies try to calculate this by using a Black-Scholes model as a proxy, but that certainly is not an exact science. In short, bambs is right in that there are hidden expenses due to employee options compensation that are not reflected in the income statement. bambs is wrong in using $837mm as this number. I'll scan the 10-K some time today to find CSCO's calculation of the number. EDIT: OK, it was pretty easy to find: Net income--as reported under APB 25: $2,096 Net income--pro forma under SFAS 123: $1,598 Diluted net income per common share (APB 25): $0.62 Diluted net income per common share (SFAS 123): $0.47 APB 25 mandates no expense shown for employee options. SFAS 123 values each option grant under the Black-Scholes model and expenses those options. The assumptions that CSCO uses in the model are a 0% dividend yield, 5.1% risk free rate, 40.2% expected volatility, and a 3.1 year expected life on the optins. The number is still pretty bad (a 15½ hit to earnings) but it isn't quite as bad as bambs makes it out to be.

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