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

To: rkral who wrote (62742)	1/21/2003 7:05:27 PM
From: RetiredNow	Respond to of 77400

Well, APIC is defined as the amount over and above par value of the stock that is paid in to the company when the company issues shares to the public. It's really not something that is broken out in the cash flow statement. In the Financing section of the cash flow statement, you'll typically find a line item called sale/purchase of stock. That represents the amount paid out or in to the company in exchange for shares. Within that amount is included both additional paid in capital as well as the par value of stock (APIC+Par=amount paid to company for stock). Now what happens when an employee exercises and sells stock option is that the employee receives an amount equal to the difference between market value and strike price times the number of options they exercised. All of that amount is taxed as ordinary income along with AMT recapture taxes. Cisco on the other hand will get a cash inflow benefit from stock option exercise. It works like this. Cisco gets to deduct the cost of the stock options to the company in their tax report to the IRS, even though they don't have to deduct options expense on the income statement. That tax deduction, lowers their income taxes, the total of which IS reported on the income statement. The bottom line on all this is that net income during the period of the options exercise is then higher than it would have been without the options exercise. As you can see from the calculation of Free Cash Flows below, if net income is higher, that means free cash flows is higher. So during the years when the market was booming and options exercises were happening at a torid pace, Cisco's free cash flows skyrocketed. That was a huge distortion. Had they properly deducted the expense arising from paying out stock options in lieu of cash, then that would have removed the distortion during the bubble years, which would have provided a more accurate view to shareholders of what net income truly was. In turn, that would have given management the proper incentive to NOT be so profligate with their stock option giveaways to employees. The downside is that stock options are a sneaky way to transfer cash from shareholders to employees and back to Cisco. So in effect, employees act as another equity financing channel for Cisco. That's why Cisco has so much cash on the books. The majority of that cash came in the door as a direct result of stock options exercises during the bubble years. So the downside is that dilution occurred at a very rapid rate. The upside is that now Cisco has a huge warchest that has helped them weather this downturn. So hope that answers your questions and illuminates a couple of the other issues that have been a good debating topic on this thread. It gets complicated quick, even for the smart people at the FASB. :) Net Income + Depr & Amort + Amort of In-Process R&D = Subtotal - Purchased PP&E - Business Acquisitions = Free Cash Flow