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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 76.93

+1.1%

Nov 28 12:59 PM EST

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To: PerryA who wrote (64566)	9/15/2003 8:43:19 AM
From: Boca_PETE	Read Replies (2) of 77400

PerryA: re: ("A company can only give what is theirs to give.") The cash flow realities of employee stock options prove this statement is FALSE. - Company grants employees options to buy their stock at the stock market value on date of grant. - Stock price rises as a result of employee successful efforts. - Employee buys the shares under option at the agreed option price. Capital (cash) flows into the company from the sale of that company stock to the employee. Company invests that cash to generate future company profits shared by all shareholders. - Employee sells those shares to other shareholders in exchange for cash (probably through a brokerage firm). Cash received in this transaction directly from other company shareholders represents collection of what some seek to report as COMPANY WAGE EXPENSE, but such cash transfer is shareholder-to-shareholder and has nothing to do with the company. So apparently, COMPANIES CAN reach directly into the pockets of shareholders and get them to pay their "wage expense" directly to its' employees without impacting company assets - In other words THEY CAN GIVE AWAY WHAT IS NOT THEIRS. Pretty neat trick - no wonder so many companies took advantage of this option. re: ("Have you ever purchased an at-the-money option?") YES. However Employee Stock Options are NO MARKETABLE BY THEIR TERMS and therefore are a completely different animal. Accordingly, all of the valuation models used to value traded options are not applicable for valuation of Employee Stock Options when you compare the cash flows related to each of these types of options. An employee NEVER GETS PAID what is referred to as "Option Compensation Expense" determined under the Black Scholes Model - it just never happens. He gets paid the market price from the sale of company shares to other company shareholders independent of the company. Such employee bought those share from the company at the agreed option price - the difference is the employee profit - what the employee gets paid from other company shareholders, not the company. OH THE TANGLED WEBS WE WEAVE FOR OURSELVES <grin>, RE: ("You are confusing cash with expense and financing activity with operating activity.") NO. Actually those who want to book "option expense" on the books of companies are confusing the raising of capital through the sale of company stock to employees (a financing activity) with company cash outflows of assets (ie. cash) which are company expenses (an "operating activity"). The fact that any company booked "option expense" on the income statement must be backed out on the statement of cash flows proves the point that NO ASSETS (in the amount of the "option expense" WILL EVER LEAVE THE COMPANY AND BE PAID BY THE COMPANY TO THE EMPLOYEE. re:("If the company sold the options (as a public offering) and gave the cash proceeds to the employees instead of the options,") BUT THE COMPANY NEVER WILL SELL EMPLOYEE STOCK OPTIONS IN A PUBLIC OFFERING because Employee Stock Options are not marketable - employees receiving them cannot sell or transfer them. They are a completely different animal than publicly traded options. You may also be interested in my comments to Mr. Shannon at this link Message 19305387

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