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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 73.87

-0.1%

Jan 9 9:30 AM EST

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To: Jorj X Mckie who wrote (48895)	2/12/2001 11:27:07 PM
From: Wyätt Gwyön	Read Replies (1) of 77400

the effects of dramatic decrease in stock price in the context of employee stock option tax benefits (to Cisco) should have been visible in the very short term. There is visibility, but perhaps in a different way than you'd expect. Perhaps counterintuitively, the rapid fall in Cisco's share price has boosted their cash flow. For example, Cisco's tax credit in the most recent fiscal year was 2.5 billion, several times greater than the year before. This implies that employees exercised a lot of options as they saw the share price start to tank. This presumably applies mainly to those with deep-in-the-money options. Eventually there won't be any of these options left, so their contribution to cash flows will be of limited duration (if the stock does not go back up). if proceeds from investments in companies were based on the bloated stock prices, the decrease in those stock prices should also have an immediate effect. If you are talking about an effect on "earnings" or "cash flows", remember that paper gains do not show up there. It is the realized gains from minority investments one would look for on the C/F statement. A drop in paper gains would only be found, if they in fact break it out, on the balance sheet or the notes to it (or maybe in management's discussion). I'm not sure how Cisco handles this. Wasn't the argument that these things were positively impacting the earnings statement? The question is (in relation to cash flow again), how much does Cisco have left in the hoppers. Those would be the hoppers of Unrealized Gains and Unrealized Options Exercises (and the Attendant Tax Credits). The other, indirect way the earning statement is affected is the extent (perhaps not measurable) to which employee cash payments are reduced by options grants. The other other way the earnings statement benefits is that Cisco writes off all those M&A costs on a regular basis in the pro forma number (the one Maria tells you about), even though M&A seems a core part of their business. Their pro forma number would be a lot lower if they did not add back these expenses.

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