Key Factors Leading To "Watered Stock" At Cisco Systems
billparish.com
1) Excessive use of the pooling method to account for acquisitions, thereby hiding the true cost of acquisition activity. JDS
Uniphase, a top Cisco competitor, does not use pooling.
2) Paying employee wages mostly in non-qualified stock options. This removes the cost of labor from the financial statements
and overstates earnings because these wages for options exercised, unlike cash wages, are not included as a charge to earnings.
What Ralph Nader clearly does not understand is that these non-qualified options are not meant to reward employees but are
rather a scheme to generate cash through non-payment of federal income tax.
Incentive stock options, ISO's, are the genuine way to reward employees because they are taxed at the capital gains rate when
the stock is sold yet ISO's do not provide the company with a tax deduction. Cisco Systems and Microsoft led the conversion
from incentive to non-qualified options because they wanted to generate cash from the tax deductions, thereby selling out their
very own employees, and offloading their entire corporate tax burden. Employees at times pay a combined rate of 60 percent
when they exercise non-qualified options, even if they do not sell the stock. Neither Microsoft nor Cisco Systems now pay any
federal income tax.
3) Sales adjustments now represent a large component of gross revenues and investors should begin to ask questions. The first
question should be, are gross revenues being manipulated by management? A second question might be whether leases are
properly accounted for.
4) Cisco's auditors, Pricewaterhouse Coopers, are not independent and are helping disguise the scheme. This firm also
audits Fidelity, Janus, AXA and Vanguard in addition to co-marketing Cisco's products through its consulting division.
5) A quiet, aggressive and highly successful public relations effort is lobbying hard to prevent reform. Microsoft could
learn a lot from this approach used by Cisco Systems. A key focus is Phil Gramm of the Senate Banking Committee, which
oversees the SEC, in an attempt to lobby Congress to overrule SEC mandated reforms.. |
