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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (57652)	2/18/2002 1:23:10 PM
From: Lizzie Tudor	Read Replies (1) \| Respond to of 77400

Here comes the consolidation.... Ciena-ONI Systems set $866 mln deal Optical networkers see expense saving rd.yahoo.com*http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7B9D272388%2DCEE9%2D4B02%2DAEBA%2D2855979D17B7%7D I have a broker who bought Cisco here, on the premise that they have gained so much mkt share. L

To: Lizzie Tudor who wrote (57652)	2/18/2002 6:34:05 PM
From: RetiredNow	Read Replies (2) \| Respond to of 77400

Hi Lizzie, that post is right on target. Non-qualified stock options exercises benefit everyone but the shareholder and the company in the long term. 1) The company benefits in short term from the tax benefit. When n-q options are exercised the expense is recorded as a reduction of net income for tax purposes, but not for GAAP net income. So SEC income statement looks great and operating cash flows get a nice boost. It was so good at Cisco that during the peak years, Cisco barely paid taxes. 2) Employees benefit because they get equity, although they do have to pay lots of tax (anywhere from 50-60%, when they get caught up in AMT). 3) The government benefits because they get a windfall in tax revenues from options exercises. Now the shareholder loses because the stock gets watered (more shares get distributed, which reduces EPS and the stock price). It's bad for the company in the long term, because the o/s share number grows fairly rapidly. It's so bad now at Cisco that they have 7.3 billion shares outstanding. That alone puts a hard cap on how high this stock can go. IMHO, the best way to curb these abuses is to unify tax and GAAP treatment. Or make non-qualified stock options illegal. Incentive stock options have to be treated as an expense and don't benefit the company as much, so there's less chance for abuse. I don't think getting rid of stock options is the answer either. I think options are a real incentive to attract the best and brightest. Cisco has proven that. But right now, the way they are doing it is enriching the employees at shareholders expense. Just something to think about. Also, don't get me wrong. I think Cisco is one of the greatest companies in existence today. But if they don't figure out how to reduce that o/s share number, while still maintaining a healthy cash flow and cash and investments balance, then I worry that the stock will have very limited upside potential. Some on this thread believe that without this stock options scheme, Cisco would not generate meaningful cash flows. I think that's hogwash, but there was enough truth in that in the past to make me nervous as a shareholder.

To: Lizzie Tudor who wrote (57652)	2/18/2002 11:01:23 PM
From: Stock Farmer	Read Replies (3) \| Respond to of 77400

Jealousy? I think not. More like trying to force something from the shadows into the light of day. All in all, options are poorly understood. Part of the very mysterious and quite misunderstood equity financing toolkit. Here are a few facts from Cisco to sink your teeth into. First, stock options exercised in the last four fiscal years. Source, Cisco 10-K annual reports, except for Market Price calculated as the average weekly closing price of Cisco during the FY. FY Exercised Strike Mkt Price Mkt Value (Millions) (Wtd Avg) (Wtd Avg) ($M) * 2001 133 $7.43 $36.68 $4,878 2000 176 $5.75 $53.66 $9,444 1999 210 $3.09 $23.46 $4,927 1998 168 $2.40 $10.87 $1,826 ---- ------- Total 687 $4.44 $30.68 $21,075 What this shows is that Cisco employees exercised options worth $21 Billion over the last four years. Somewhere along the line, shareholders parted with $21 Billion of cash value. In return, what did they receive? Well, you'll hear a lot about happy, loyal and motivated employees. You'll also see direct financial benefits, as tabulated. "Cash" is the actual cash received from employee exercise (equals weighted average strike price * number of options), "Tax Benefit" is the stock option tax benefit that the IRS give the company (taken directly from 10-K) FY Cash Tax Benefit Total 2000 $ 988 $ 1,755 $ 2,743 2000 $ 1,012 $ 3,077 $ 4,089 1999 $ 649 $ 837 $ 1,486 1998 $ 403 $ 422 $ 825 ----- ----- ----- Total $ 3,052 $ 6,091 $ 9,143 So in summary, it's rather simple really Shareholder Outlay $ (21,075) Company Equity Gain $ 9,143 ---------- Shareholders Net $ (11,932) Employees (pre-tax) $ 11,932 ---------- Economic Value $ - Or in other words, shareholders parted with 21 billions, 9 of which stayed in the company (on which shareholders keep a claim) and the other 12 went to the pockets of employees. Twelve billion makes for a lot of wealthy employees. To say nothing of happy and loyal. But was this cost worth the benefit? The following shows Cisco's dilution, revenue and earnings for the same period Revenue Earnings 1998 $ 8,489 $ 1,331 1999 $ 12,173 $ 2,023 2000 $ 18,928 $ 2,668 2001 $ 22,293 $ (1,014) Total $ 61,883 $ 5,008 Benefit to Shareholders Options $(11,932) Cost to Shareholders --------- Net $( 6,924) Cost to Shareholders Cisco's shareholders paid employees 12 billions over and above their salaries. During a period where the employees' hard work returned five billions to shareholders. Give twelve, get five. This is not exactly a sustainable recipe for 'get rich quick'. Unless one is referring to the employee perspective. See also my response to original author Message 17078966 John