Monday, September 22, 2000   6:00 pm Eastern Time
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Note:  Blog Created September 2007 with Updated Comments


Note:  Relationship to Microsoft and Citigroup Watered Stock Reports Explained:  Microsoft erected a financial pyramid scheme, using employee stock options, designed to leverage growth in its stock price.  Cisco Systems competitive response, as detailed in this report, involved using a merger scheme designed to leverage growth in its own share price.  What neither company anticipated was the impact of Citigroup, See Report on Citigroup,  quietly using a merger scheme similar to Cisco's, in addition to a variety of predatory practices designed to generate merger fees through its Salomon Smith Barney subsidiary. While all eyes are on technology,  Citigroup has effectively unplugged the new economy due to excessive mergers and their various peripheral implications, in addition to becoming a watered stock itself.  This may represent the biggest untold story in the financial  media and also the greatest overall risk to the stock market and economy. This situation at Citigroup was enabled by Microsoft's orchestration of a breakdown in financial reporting standards.

No one doubts the remarkable transformation brought about by the Internet.  It has ignited a whole new era of economic prosperity.  With an 85 percent market share in routers Cisco has certainly seized this opportunity and seen its stock market value soar to half a trillion dollars.  The best and brightest students at MIT and Stanford are in awe of the company, making it their destination of choice. Even consumer advocate Ralph Nader, a strong advocate of employees having an ownership stake in their company, has one-third of his entire portfolio invested in Cisco Systems stock.  Leading socially responsible mutual funds and most growth funds are also heavily invested in the company.

Meanwhile, Cisco Systems remarkable market capitalization is supported by only $20 billion in total revenue and represents a mere $2.35 in sales per share. The current share price is $67 and there are 8.5 billion shares of stock outstanding, including options.  It's the 8.5 billion shares outstanding that deserve more attention along with the illusion that Cisco is rewarding employees with stock options when in reality employees are prepaying their own wages while management pilfers the retirement system in a desperate attempt to sustain their financial scheme.  A scheme largely based upon Microsoft like anti-competitive business practices still unknown to the general public.

Cisco claims that "everyone is doing it" yet this report will confirm that this is simply not true.  One notably exemption, however, is Citigroup, which now has 4.5 billion shares outstanding and is the largest bank in the country with a market value of $230 billion.  Citigroup is using a similar merger scheme and the equivalent of a "fee mill" to sustain its stock price.  This includes aggressively selling high priced annuity contracts into pension plans and various other practices, the exact opposite one would expect in a period of increased automation and efficiency. See summary 3 page report on Citigroup.  For the new economy to regain its footing, industry dominating predators like Cisco Systems and Citigroup must first be exposed for what they are doing.  This will allow consumers to instead focus on the many excellent alternatives available, both as consumers of financial services and as investors.

Cisco Systems Key Financial Data for Fiscal 2000 -  $ Billions

Gross Margin                                                                                $12.2
Companies Purchased Using Purchase Accounting                             4.9
Companies Purchased Using Pooling Accounting                              15.9
Charge to Earnings for Cost of Pooling Mergers - Prior Years               0
Charge to Earnings for Cost of Pooling Mergers - Current Year             0
Unrecorded Wage Expense for Options Exercised                             7.1
Unrecorded Remaining Option Wage Debt to Employees                 40.0
Reported Pro Forma Net Income                                                       3.9
Reported Net Income per SEC Rules                                                 2.7
Interest and Other Income (21 Percent of SEC Net Income)                 .6
Federal Income Tax Paid on Reported Profits                                        0
Undisclosed Actual Loss After Options and Pooling                          (8.9)
  (Note that actual loss respresents 75 percent of gross margin)

The above data will be examined in detail later in this report with links to all source material. Included will be a recap of acquisitions by company based on data obtained from Cisco's web site and SEC reports.  While Cisco is including the sales from these companies acquired in their results, they are excluding most of the cost of the acquisitions.  Without this financial deception, Cisco's growth rate would fall sharply and they would no longer represent 3.5 percent of the entire S&P 500 Index.  This is important because now 3.5 cents of every dollar contributed to most public pensions, since the majority of these plans are linked to the S&P 500, is going to the purchase of Cisco stock. The scheme basically enables Cisco to pilfer the public pension system.

Two weeks after receiving this report and calling me to discuss its findings, in a bizarre act of astonishing integrity, Ralph Nader called a special press conference on the steps of Cisco Systems to discuss its findings and denouce these practices, a transcript of which can be obtained from the San Jose Mercury News. His noble response when asked if he would sell the stock and other comments will be discussed later.  Ralph Nader now realizes that we are subsidizing Cisco Systems as the equivalent of a tax exempt entity for federal purposes.

My focus continues to be Cisco Systems impact on the retirement system and its undermining the economy due to predatory business practices.  Although I receive numerous requests to support various initiatives regarding legal actions for financial fraud,  this is of no interest at this time.

Why Anti-Trust Compliance Is Now More Important

This scheme at Cisco Systems has now led to widespread violations of the Hart Scott Rodino anti-trust laws.  Cisco has often boasted about wanting to be the Microsoft of telecom and, while Silicon Valley became obsessed with Microsoft, one of their own was busy creating a more threatening monopoly that could dereail the entire tech based economy. What is unique about Cisco is that customers unable to afford the product can't simply copy the software to get buy or launch a business and then later purchase it, as often occurred with Microsoft.  Also unique to Cisco is their boasting of various billion dollar markets with no apparent interest in reducing costs to enable more users. This is a stark contrast to Intel's sensible strategy from which we have all benefited.

As Microsoft discovered, sustaining a pyramid scheme requires progressively more abusive business practices. One need only examine the recent announcement with Net2Phone, a company with a reported 40 percent market share of Internet based long distance calling service.  Net2Phone's most valuable high margin product, network management software, will be placed in a new company, ADIR, and made a standard feature in Cisco's routers and offerred to other competing telecom companies with similar products, leaving them to compete for the remaining low margin highly competitive calling business. Cisco appears to be the only minority investor in ADIR.

The irony is that Cisco's major telecom cusomers including Sprint, MCI/Worldcom, AT&T and others don't seem to have figured out that, like Microsoft had done, Cisco is not only providing them equipment but also going after their core future customer revenue base.  Many other similar examples exist in other telecom related markets including content delivery and storage services in which Cisco is implementing the same strategy.

Already these leading telecom companies are scaling back expansion because, as a study by Lehman Brothers notes, they must now spend $2 on equipment to generate $1 in revenue on which they may earn 10 cents if they are lucky.  Cisco has effectively boxed out "low cost" more efficient producers such as Intel through a variety of financial techniques, in particular the pooling method of acquisitions, and is now placing the tech sector in particular, in addition to the general economy, at risk.  Cisco summarizes its monopoly position best by highlighting their ability to provide "end to end solutions" based upon using what are called "Ecosystems partners."  These will be explored in great detail yet to begin with let's refer to the following story.

Don't Underestimate Telecom Troubles by Jim Seymour of, September 22, 2000.
Seymour claims that this year phone companies need to invest $3 in equipment, more than the Lehman analysis, to generate $1 in revenue and that this will become $4 next year. He also notes that due to rampant mergers in the industry "With fewer buyers out there, fewer pieces of telecom gear will be bought."  Already equipment makers are financing their customers purchases, some would argue subsidizing, he adds. It is noteworthy that substantially all the mega mergers in telecom have been done using the pooling method, mergers that would not occur without this accounting loophole.

These high telecom prices are already having a crushing impact on the proliferation of the Internet.  One might ask, what if Cisco were to drop its prices 50 percent? They certainly claim to be profitable enought to do so but sadly they have become slave to a financial pyramid scheme. A good example of this dilemna involves ICG Communications, a key Cisco customer,  whose stock has dropped from a high of $39 to .75 on September 22, 2000.  ICG handles 10 percent of the nations dial-up Internet traffic, serving more than 700 cities.

Milberg Weiss Announces Class Action Suit Against ICG, Business Wire September 22, 2000
The suit claims that management failed to disclose that "the Company was experiencing significant and severe customer-service issues which had arison from network outages, equipment failures and technical problems."  According to an August 1, 2000 Cisco press release ICG uses an "end to end Cisco Powered Network" and according to a January 27, 2000 ICG press release the company may have received $240 million in funding from Cisco Capital.

It is most unfortunate that since my initial report Lucent and others have been severely criticized for making loans to customers.  The truth is that this generally makes good long term business sense and breeds loyalty, a good thing.  What does not make sense is financing equipment that does not work and thereby impairing your customer's business.  Later AMC, another telecom company that is now suing Cisco after having gone bankrupt over similar service and equipment problems, will be examined. This company owes Cisco Capital more than $50 milllion.

Together these two companies alone, ICG and AMC, could possibly owe Cisco Capital almost $300 million, and both have interestingly experienced what they call severe customer service and equipment failure issues associated with their networks, both of which according to Cisco are "end to end" Cisco solutions.  If true, this is probably not unlike Microsoft issuing NT before it was ready and many companies inappropriately using it for critical tasks.

The Big Players and a Historical Perspective

Cisco Systems is using techniques no different than those used by Charles Keating.  Many forget that Keating was a hero in his day, not unlike John Chambers today, with even Alan Greenspan referring to his bank as "an outstanding success."  Sadly, Keating was the catalyst in destroying a great industry that allowed many consumers to purchase their first home.  Since this report was first published in late August numerous major news stories have been published outlining these practices.

You might ask, how does a company become worth half a trillion dollars with gross revenues of only $20 billion? And why do leading pension funds including Fidelity, Janus, AXA and Vanguard, which alone own more than $50 billion worth of Cisco shares, invest in the company?  If $300 billion worth of Cisco shares are in equity mutual funds and other managed investment accounts, it is likely that more than $4.5 billion in management and brokerage fees, 1.5 percent, are being siphoned from its equity base each year.  Cisco is often now the most actively traded security on both the Nasdaq and Instinet.

We will soon see the remarkable answer but first let's examine a chart and some of the key factors contributing to this situation. It is important to note that many small and medium size companies are also very creative on the financial side, a strategy to ignite and grow the business.  Generally, these companies can grow out of these issues.  Cisco, on the other hand, is a giant company that has placed its employees, shareholders and customers in a mathematical vice resulting from a collapse of ethics and integrity by management. While they will note that "everyone is doing it," we will see what is simply false.

This chart summarizes the impact of stock options for the 5 year period ending July 31, 1999.  It will be updated when Cisco releases its 10K SEC filing for the year ending July 31, 2000. For an extended analysis of this chart, its assumptions and a downloadable version see the Microsoft Analysis Cisco has effectively copied Microsoft's financial practices in addition to adding innovations of its own that combine to make it a shining example of financial deception.

Perhaps more interesting is that this chart does not include the impact of pooling which, if included, would result in a negative taxable income exceeding $13 billion for fiscal 1999 even though Cisco reported a gross margin of more than $7 billion.
Other leading companies including Intel, Sun Microsystems and even Microsoft rarely use pooling and this report will often reference why this situation is unique to Cisco Systems. This month Sun purchased Cobalt networks for $2 billion and is using the purchase method.  Even Sun is scrambling to reposition itself and has not figured out that its greatest future competitor will not be Microsoft but rather Cisco Systems.

Accounting for Cisco and JDS Uniphase, by Richard McAffery, The Motley Fool, August 23, 2000
This excellent article dispels the myth that "everyone is doing it."  JDS, a key Cisco competitor, does not use pooling for acquisitions.  "It's easier to see," said Steve Moore, vice president of finance at JDS, in a phone interview. "You get to see the full impact of the deal on the balance sheet.

Cisco outsources most production, purchases most of its research and is more focused on integrating others products.  For this reason gross margin was used in the chart rather than total revenues.  It is also noteworthy that Cisco's stock option debt to employees for unexercised options, according to the Wall Street Journal, now exceeds $40 billion and this leveraged debt increases more than $800 million with each $1 increase in the stock price.

Key Factors Leading To "Watered Stock" At Cisco Systems

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)   Anti-competitive business practices similar to those used by Microsoft.  Cisco is aggressively using what anti-trust lawyers call a "tie-in" strategy to build and extend its monopoly.  A key focus of the Hart Scott Rodino anti-trust act is to address exactly this strategy.  The act will be explored in detail.
6)   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.

Cisco Systems Becomes a Financial Pyramid

The basic problem is that Cisco Systems tried to emulate and thereby hold back Microsoft as they both migrate toward aggressively competing more and more for the same network software management space.  Clearly, Microsoft would like to reduce Cisco to a more hardware focused vendor.  Cisco's response has been to unleash a competitive fury. Cisco boasts that it will acquire 25 companies this year, many software related, by simply issuing more shares of stock that are never accounted for in the financial statements.

This is done by using what accountants call the pooling technique for acquisitions.  As with the excessive issuance of stock options to cover wage costs, no cash is required and such costs are not reflected in the financial statements. The only direct cost for pooling and options is a small amount of ink toner and paper used to print up new stock certificates on the equivalent of a photo copy machine.

Even Microsoft rarely uses pooling because using it temporarily prevents a company from being able to do share buybacks to reduce dilution from its stock option programs. Such buybacks are an important part of Microsoft's scheme yet the SEC prohibits Cisco from doing buybacks due to Cisco's use of pooling for acquisitions.

Pooling, already outlawed in most countries, was scheduled to be repealed by the Securities and Exchange Commission in December. Cisco has since mounted a quiet and furious lobbying effort and already pushed the repeal back 6 months to June 2001.  John Chambers himself, as reported in the Washington Post, recently gave $210,000  to a small group of Congressmen just before they wrote a letter to the Financial Accounting Standards Board of FASB criticizing the proposed change. A Cisco spokesman said the timing was a coincidence according to the Washington Post. Some are now even speculating that either a Bush or Gore presidency would prevent a repeal of pooling. Joe Lieberman, Democratic Vice Presidential candidate, has also been a strong defender of pooling as has George W. Bush..

In addition to pooling, Cisco Systems is also simultaneously issuing a large number of employee stock options instead of paying cash wages.  The wage expense for the options exercised is not shown as a charge against the company's earnings even though the company gets a full tax deduction for such wages.  This explains why Cisco Systems no longer pays federal income tax, even though they report billions in profits, as reported in a front page NY Times story on June 13, 2000. The company has offloaded its entire tax burden to employees who, along with the retirement system, are being left with inflated shares.

In addition to the options exercised and not charged to earnings as wages, Cisco also owes its employees more than $40 billion in unexercised options still outstanding that are similarly not reflected anywhere in the financial statements. While employees sincerely believe that these options are designed to reward them for hard work done they are really part of a scheme for management to generate cash via non-payment of federal income tax and pocketing the exercise price paid by employees.

Older employees may not be concerned as they tell younger recruits to Cisco's scheme of their significant gains.  Some may even comment, look at the parking lot, does it look like we are being taken advantage of?  Newer recruits would of course benefit greatly if the exercise price on their options were $10 rather than $60 yet this would greatly impact the existing participants in the scheme.  Old participants therefore aggressively promote the stock's merits on a product level yet ignore the financial implications.

The most ingenious aspect of Cisco's scheme, however, is that by using a combination of pooling and stock options to understate costs, it can then focus on manipulations of gross revenues and undercut competitors with self financed leases to sustain its pyramid.  This is where leasing may indeed play a key role in manipulating what analysts call top line revenue growth.

Analysts at leading mutual fund companies such as Janus and Fidelity are highly focused on this area but  need to sharpen their pencils, especially given the arrival of tax loss selling season for major mutual funds, many of which have an October 31 year end.

Janus alone has incurred dramatic losses on certain stocks including Nokia and WebMD.  These losses will allow Janus to reduce holdings of Cisco Systems without having to pass capital gains taxes through to its mutual fund shareholders.  Clearly, Janus does not want to give investors negative returns for the year in addition to a bill for capital gains tax. It is unfortunate that Janus doesn't seem to make much of an effort with respect to tax planning, even though such an effort could greatly benefit its mutual fund shareholders.

Let's now examine the following trend per Cisco's SEC filings.  Note that sales adjustments relative to the prior period sales are increasing and look to be progressively overstated in what could be an undisclosed "shell game."

                                                                                                                            Quarter End
Fiscal Year                                          1997             1998             1999                 4/30/2000
Net Sales                                           $6,452          $8,488         $12,154                    $4,919
Sales Adjustments                              $   107          $   351         $     522                         412
% of Current Year Net Sales                  1.7%            4.1%              4.3%                       8.4%
% of Prior Year Net Sales                      N/A            5.4%              6.2%                      12.9%

In an era in which missing earnings projections by a penny can cause a company's stock to drop 30 percent, these are very sizable adjustments.  It is also likely that they pertain to prior periods sales. Cisco's 10Q describes these as being attributed to "credit memos and returns," a reference best found by doing a browser search for "sales adjustments."  Later we will see why learning what percent of these adjustments pertain to operating leases is so important.

Helpful links to Cisco Systems Financial Related Reports:

Cisco Systems 10Q SEC Filing for Quarter Ending April 30, 2000
One would also expect Cisco Systems auditor, Pricewaterhouse Coopers,  to more adequately disclose leasing and the nature of the sales adjustments in the SEC filings, in addition to their own auditor independence issues.  Not only does Pricewaterhouse audit some of the largest pension funds and owners of Cisco Systems stock in the nation, including Fidelity Investments (Magellan), Janus (Stilwell Financial), AXA Financial and the Vanguard Group (Index 500) yet the company also co-markets Cisco's products through its consulting division along with auditing Goldman Sachs, Cisco's key investment banking partner. These are serious conflicts of interest.
List of top 10 institutional holders of Cisco Systems stock per
Also note that a large block of Cisco Systems stock is held by various public and private pension systems not listed.  These holdings often result from indexing and many of these pensions are also audited by Pricewaterhouse Coopers.
Summary of Insider Stock Holdings of Cisco Systems stock per
Insider holdings amount to only 2 percent.  At Microsoft, Oracle and Intel the percents are 26, 25 and 7 percent respectively.
Fidelity's Top Holdings on June 30, 2000 by Ian McDonald of
This article confirms that Cisco Systems is Fidelity Investments top holding.  This is important because Fidelity has greatly increased its position, even after receiving my research materials outlining this "watered stock scheme."
Janus Top Holdings on June 30, 2000 by Ian McDonald of
This article indicates that Cisco Systems was the number 2 overall holding at Janus on June 30, 2000.  Number one was Nokia which has declined sharply, resulting in a multi-billion dollar loss for Janus.  Another large decline for Janus occurred with WebMD in which they lost more than 75 percent of their investment in 6 months.  A good question is whether Janus will reduce its Cisco stake and offset these gains with losses on Nokia and WebMD, thereby not sticking investors with both negative returns and a tax bill at year end given Janus poor performance this year in certain funds.

1)  Cisco Systems Uses Pooling To Remove The Cost of Acquisitions From Its Financial Statements, Thereby Grossly Overstating Future Earnings

If you poll ten people on the street and ask them what they know about pooling you are likely to get a blank stare.  Most mutual fund managers might attempt an educated response but they too are generally in the dark.  The irony is that this technique used for acquisitions is quickly destabilizing the stock market and underlying economy in what will undoubtedly be looked back upon as a ridiculous fraud.  It should indeed be a primary issue in the upcoming Presidential campaign.

Meanwhile, Cisco Systems has orchestrated an aggressive lobbying effort designed to lobby Congress to overrule the SEC in its attempt to repeal pooling.  The SEC is overseen by the House Banking and Senate Finance Committees and Phil Gramm, Chairman of the Senate banking committee, has been a key focus of Cisco's lobbying efforts.

Pooling allows one company to purchase another by simply printing up more stock certificates with no cost for this activity being reflected on the financial statements, hard to believe but true. This greatly dilutes existing shares and creates enormous future pressure on the acquiring company to meet future earnings per share expectations, usually resulting in large staff and benefit reductions, except at Cisco Systems.

Pooling is not unlike someone taking your beloved cup of morning coffee, pouring it into a 15 gallon barrell full of water and then refilling your cup from the same barrell.  Your coffee, and in Cisco's case its stock, has been watered down.

Have you ever wondered why so many mega mergers are occurring and why so many quality jobs are being lost and underemployment created?  We can’t hardly blame NAFTA or the WTO for the Verizon strike because these workers are service technicians mostly based in the U.S.  The answer might be pooling because it gives management a blue print for large future layoffs and benefit reductions, supposedly based upon market conditions, when in reality many of these workers may be highly productive and cost effective.  The problem with pooling is that too many shares become outstanding, thereby forcing job and benefit reductions to meet earnings expectations.

Later their jobs may be replaced with new workers at lower wages as the value of top executive stock options is leveraged upward followed by widespread executive retirements and ultimately a collapsing stock price.  Pooling is also a root cause of conversions from defined benefit to cash balance pension plans at Cisco's competitors as they skim off pension assets to inflate earnings and try and compete with Cisco's scheme for investment capital. Leading financial publications such as the Wall Street Journal, Barron’s and Bloomberg are calling pooling a massive deception.  These publications have still, however, failed to link the impact of pooling to excessive stock options grants and Cisco's manipulation of gross revenues not fully disclosed by their auditors and the resulting impact on competitors.

Cisco Systems Acquisition Summary for Fiscal Year 2000:

Click Here to See Summary of Key Details by Company
The above link accessed a simple table summarizing key details for each acquisition.

$ Millions
Fiscal 2000         Purchase    Pooling      Transactions
4th Quarter            1,390        6,801               8
3rd Quarter            2,850          922                5
2nd Quarter              135        7,353               6
1st  Quarter               590          907               5
  Total                   $4,965    $15,983             24

The total value of the 24 companies acquired is  $20,948  with pooling based mergers  representing 76 percent of the total. This amount itself exceeded gross annual revenues and represents almost two times Cisco's gross margin. Of those companies acquired, $4,965 were paid for using the purchase method for mergers on which Cisco Systems took an immediate R&D write-off of $1,373 or 27 percent of the purchase price.

This purchased R&D write-off represents approximately 25 percent of the pro forma income before taxes of $5,589.  Clearly, Cisco is using the purchase method for acquisitions and large R&D write-downs to suppress its current earnings in order to make future periods look more favorable and thereby manipulate its stock price.  Since these write-downs are not included in "pro forma" earnings, they then boast of record profit growth at the same time.

Cisco must purchase its research because it has the same problem as Microsoft.  Although good at integrating other peoples products, Cisco Systems has a very poor current record for internal product development compared to other leading technology companies such as Lucent, Intel and Sun.

Helpful links to understand the pooling method for acquisitions:
Firms resist effort to unveil true costs of doing business," USA Today July 3, 2000;
This link is to the archive at USA Today from which the above article can be purchased. The article noted that "But a recent study by McKinsey & Company, a consulting firm, labels Cisco's argument a myth. According to McKinsey, rules banning "pooling" wouldn't damage profits or shareholder value. Rather they would require companies to look more closely at deals and communicate more with stockholders."
A Tech Push to Keep 'Pooling' on Books, By Albert Crenshaw, The Wash Post, June 25, 2000
CEO John Chambers gave $210,000 to a few Congressmen just before they wrote a letter to the FASB criticizing the proposed change. A Cisco spokesman said the timing was a coincidence.  The article also notes that Barron's estimates that Cisco Systems would have had its $2 billion in earnings last year wiped out if it hadn't been able to use the pooling loophole as it acquired several smaller companies.
Cisco's Genius, by Thomas Donlan, Barron's cover story, May 8, 2000
Donlan notes that "Cisco Systems is a great company.  But its success in part reflects its prowess in financial engineering. And therein lies a host of dangers ignored by investors." He adds that "Cisco is a modern house of cards, in which the cards are Cisco stock and the companies acquired for Cisco stock."
"Cooking the Books," the Public Broadcasting Service (PBS) by R. Cringely, May 27, 1999
This article notes that "... there remains in the telecommunications and data communications industries another clever use of accounting to build sales. It's frightening to think of how much of the Internet, for example, has been built with this technique that is commonly used by companies like Cisco Systems..."

2)  Cisco Systems Removes Wage Expense From The Income Statement Via An Employee Stock Options Loophole, Thereby Further Inflating Earnings

Cisco now reports billions in profits and pays no federal income tax, as reported in a NY Times front-page story on June 13, 2000.  This part of the scheme is so successful that Cisco has even recognized a special asset titled Deferred Tax Credits which represents accumulated tax credits from this activity that can be used to offset future income tax obligations.

Cisco pays most of its wages in stock options because by doing so they get a tax deduction for wages yet these wages do not require a cash outlay nor are they recognized as a charge to earnings due to an accounting loophole.  At the same employees must also pay an exercise price to take ownership of the shares which is effectively a means in which Cisco is having its employees pre-pay their own wages as part of the scheme, generating even more cash.  Remarkably, employees are taxed at ordinary income rates when they exercise options even if they do not sell the stock.

Wages paid in cash not only deplete cash but are also shown as a charge to earnings and thereby lower profits and interest in a company’s stock.  Can you see the picture now? If your employer is paying you cash wages and benefits, your company is being progressively destabilized by this scheme because you will be rendered non-competitive, whether you have a traded stock or are a private company because all companies compete for the same pool of investment capital.

Since Cisco owes more than 800 million shares in stock options to employees, this debt is leveraged and increases $800 million for every $1 increase in Cisco's stock price.  Clearly, the only winners in this scheme are now mutual fund companies such as Janus and Fidelity that earn management fees off this pyramid scheme. In the future, however, as this scheme unravels, either company could be saddled with crippling losses and legal judgments for failure to meet their obligation to mutual fund holders.  Somehow they have forgotten that their customer is the mutual fund holder, not the companies like Cisco they are invested in.

This is why the overall stock market has been relatively stable on a historical basis yet within the overall indexes dramatic variations are occurring from company to company.  Capital is moving into this pyramid scheme as Cisco Systems, emulating Microsoft, destabilizes not only the U.S. stock market but also the global economy.

On September 23, 2000 Intel declined 23 percent in one day upon announcing that its earnings would be less than forecast.  If Intel were using all of Cisco's financial techniques they would instead be reporting record profits. We should all be concerned about this stock market volatility because, although trading firms can post record profits, it can also undermine investor confidence.

The Sea is Calm. The Pond is Choppy by Mark Hulbert, NY Times, August 20, 2000
This story highlights this pattern of stock market volatility but does not link it to the Microsoft/Cisco Systems pyramid scheme

Communications Workers of America Home Page and Contact Information, Including Email Addresses
The CWA is the most important and powerful union in the communications industry.  It now has a good opportunity to stand up and help the telecom companies its workers serve including Sprint, AT&T and MCIWorldcom to challenge Cisco's monopoly and financial practices in order to bring prices down and preserve jobs. The irony is that the key unions in the communications industry, most notably the Communication Workers of America, have not made a big issue of pooling and stock options.  What this means are dramatic future reductions in union jobs as traditional phone companies and equipment providers become non-competitive with this scheme?
Some try to play the game, including Lucent, but with 150,000 employees receiving mostly real cash wages and benefits, compared to Cisco’s 30,000 employees receiving mostly stock wages, Lucent can’t compete and already has a cash flow problem even though Lucent's annual revenues of $36 billion are almost twice those of Cisco Systems.

What Real People Say About Inflation by J. Crudele of the New York Post, September 11, 2000
Crudele properly highlights that the government's statistics on inflation need updating.  The sad fact is that since stock option wages are not included in the wage inflation statistics reflected by the Employment Cost Index (ECI), workers negotiating with management are at a severe disadvantage in getting increases that keep pace with inflation. They have to compete with stock option wages for education, housing and other products and services yet the effort is rigged against them.

Mutual Funds Thrive Even If Funds Don't by John Waggoner, USA Today, August 8, 2000
This article confirms the situation noted above. By Cisco Systems inflating its market value $200 billion the investment industry is able to extract combined management fees and trading commissions of at least $3 billion annually.

Also noteworthy is that large public pension fund providers such as State Street, even though they may charge low fees to pension plans, also have significant Cisco holdings in other funds with much higher expenses, including load fees. Public pensions large holdings in Cisco stock are effectively enabling State Street to gouge mutual fund holders outside of the pension plans in a tacit form of price control.

Helpful Links To Understand The Impact Of Stock Option Programs:
"The Tangled Web of Stock Option Grants" by Graef Crystal of Bloomberg, August 8, 2000
Crystal provides an excellent history, new research summarizing the impact of excessive options and also notes that the British are now considering reforming these practices.
"The misleading reporting of stock options." by Thomas G. Donlan of Barron's, August 7, 2000
Excellent background and interpretation.  Donlan notes that options "deserve to go under the inquisitor's hot lamp as another dubious tax subsidy that perverts good sense and harms the owners of the corporation that issues them."
Nokia Rocks Janus by Michael Santoli of Barron's, July 31, 2000
In this article Scott Schoelzel, manager of Janus 20, is quoted as saying "In retrospect, I may have skewed the fund a little more toward emerging growth opportunities."  This validates my theory that the excessive concentration of capital in a few companies, i.e. the pyramid scheme, had destabilized and undervalued emerging markets.  The irony for Janus is that they missed the emerging market opportunity and are now left sitting on inflated shares of Cisco Systems and likely to inflict multi-billion dollar losses on pension plans invested in Janus funds..
"Options May Swamp Tech Investors" by R McGough, Wall Street Journal, July 28, 2000
McGough notes that issuing millions of shares to employees and then using ever higher levels of earnings to buy back shares so they can go out and issue millions more shares to employees sounds more like "a gerbil running on an exercise wheel than a recipe for business growth." The article focuses on Microsoft and Cisco Systems.  My theory, of course, is that this is more indicative of a pyramid scheme in which employees are prepaying their wages and the retirement system is being pilfered.

3)  Cisco Systems and Significant "Sales Adjustments" To Gross Revenues

In order to understand the impact here, let's begin by asking a few questions based upon Cisco's summary of net sales for the period ending 4/30/2000.  All we can do is speculate because Cisco provides almost no disclosure in its 10K SEC filing regarding the activities of Cisco Capital, its wholly owned leasing subsidiary.  We will therefore reconstruct the significance of Cisco Capital utilizing various external sources.

To achieve this we will need to maintain a laser focus on two numbers that appear on Cisco's balance sheet.  The first is deferred taxes receivable, an asset, and the second is deferred taxes payable, a liability.  This is the same technique used to discover that neither Microsoft nor Cisco Systems now pay any federal income tax.  Any additional external sources you may have to support this study would be much appreciated.  Many of you many still wonder how I reconstructed Microsoft and Cisco's tax returns yet it is as simple as this.

My intial belief, unconfirmed, is that the asset deferred taxes receivable are credits Cisco is taking on stock option deductions that are yet to be used since they already pay no federal income tax.  The offset would be to equity, meaning that return on equity is being affected by significant unrealized tax credits.  Other companies such as also have these credits yet since they don't forsee the profits to be able to use them, the credits are not booked as an asset.

This is how the federal budget has been balanced on the backs of Microsoft and Cisco Systems competitors. These unprofitable firms have paid massive federal income tax via employees exercising options yet haven't been able to offset these taxes with a corporate tax deduction.  Microsoft and Cisco have come close to a complete offset and thereby print cash in the form of lower taxes.

The second deferred tax amount shown as a liability on the balance sheet  is most likely related to a timing difference on lease accounting, not unlike depreciation.  Even though Cisco may amortize an operating lease over 3 years for book purposes, on the tax return they may be using accelerated MACRS amortization.

Cisco Capital focuses on operating lease sales and these are generally recognized using the installment method. For example, if I sign a 3 year lease for a Cisco router that costs $300K my annual expense is $100K and Cisco's income booked is $100K.  What this means is that a significant amount of Cisco's current sales may indeed be for equipment sold 1-2 years ago, equipment that can at times be obsolete in less than one year.  This makes Cisco's sales non comparable to other competitors such as who do almost no leasing because Juniper's sales are for newer products. Even though Cisco has future lease payments receivable not yet booked as sales, we'll see why this is less of an advantage than one would think.

In addition, any non-payment of receivables at Juniper must be recognized as a write down to receivables and a charge to earnings. In the mid-1990's when Intel announced that a major customer, Packard Bell,  was having difficulty and that their account receivable would be reclassified to a loan receivable, Intel's stock dropped sharply.  The point is that the quality of receivables is very important in evaluating any company.  Auditors failure to adequately examine receivables has resulted in numerous successful lawsuits from investor groups.

Cisco Faces Lawsuit Over Gear, Business Practices, Cnet, June 12, 2000."
Other questions that might be asked, alluded to in this article, include whether or not Cisco's lease customers are paying a finders fee to those who arrange for financing through Cisco Capital and whether or not these people have a direct relationship with Cisco. This article highlights a few of these issues involving a customer owing Cisco $50 million who filed for bankrupcy in August 2000.

Cisco Capital is A Wholly Owned Subsidiary of Cisco Systems

Cisco Capital implies that most of its leasing activities involve self financed operating leases, meaning that they do not generally rely on banks and other external sources for funding.  Meanwhile, most competitors are unable to self finance leases because they have wages and material costs that require cash outlays.  Companies that attempt to compete in the leasing area, most notably Lucent, often run into a cash flow problem.

This could be one of the more ingenious aspects of Cisco's scheme, that is, generating cash via non-payment of federal income tax and preserving cash by paying for acquisitions and employee wages with mostly stock.  Other top technology companies regularly purchase companies for cash, including Intel, yet Cisco is mostly focused on paying for such acquisitions with stock. This cash can later be used to finance leased sales, providing a significant competitive advantage and allow Cisco to use leasing as a competitive weapon.

It is also speculated that Cisco Capital often takes stock options from companies to which it sells equipment as part of the deal. This could be very important because Cisco could thereby eliminate taxes on any such investment gains by offsetting the gains with its own stock option program deductions.  They would have effectively created a mechanism, especially with pre-ipo options in which gains can be significant, in which large gains could be incurred with no tax consequence.  Since Cisco personnel are often on the technical boards of such customers it would seem possible that they could also influence the stock price and resulting gains.

Even if Cisco's equipment were overpriced and lagged technologically, many organizations may choose it due to the lease program and cause a "dumbing down" in quality with respect to the basic Internet infrastructure. More importantly, this can stifle innovation and result in foreign competitors gaining markets that could have been led by U.S. based firms. It could also lead to government inefficiency as officials opt for Cisco's 3.9 percent lease rate.

It is important to note that collapsing Cisco's pyramid scheme should cause prices to plummet for Internet infrastructure and thereby allow many companies in a variety of industries to expand and add more jobs.  The exact opposite is now occurring as large layoffs and union conflicts have been ignited by this scheme as other companies are unable to effectively compete for capital to upgrade equipment and respond by merging using pooling, laying off large numbers of workers, converting pensions to cash balance plans and instituting other wage and benefit reductions designed to increase earnings.

Useful Links In Examining The Activities of Cisco Capital:

"You Can Bank on Cisco--Literally" by Scott Moritz of, September 19, 2000
Moritz quotes Cisco's Michael Volpi that roughly 10 percent of Cisco's sales involve vendor financing or lending customers money to buy equipment.  Volpi added that less than 1 percent of the financing deals have gone sour. This is a surprising statistic given that one customer alone, AMC, has gone bankrupt and left significant losses.  It is also noteworthy that Cisco's auditors, Pricewaterhouse Coopers, consider this activity not significant enough to more adequately disclose in the financial statements.
"End Game for Cisco?" by Luciano Siracusano of Invididual, September 15, 2000
This article identifies four pillars Cisco has stood on that have become unstable.  One such pillar identified is that Cisco reports billions in profits and now pays no federal income tax.  Luciano was also featured on a video version of Yahoo Finance the same day.
"Telecomm equipment provides may regret loans"  Barrons, September 3, 2000
This article highlights the risk in lending to customers and speculates on where many service providers will find the financing to build out their networks.
Link to Cisco Systems SEC 10K Filing
A search using the term "customer financing" will reveal the only mention with respect to Cisco's leasing activities.  In this brief description with no supporting financial details Cisco notes "We are experiencing increased demands for customer financing and leasing solutions, particularly to competitive local exchange carriers ("CLECs")."
Cisco's customer files for bankruptcy by Wylie Wong of CNET news, August 17, 2000
AMC is suing Cisco for $62 million, claiming faulty equipment and conflicts of interest among Cisco employees.  AMC leased its equipment from Cisco Capital for $50 million and now refuses to pay because "the products don't work."
Fiancing Solutions Available - United States
This page shows the various lease programs available in the United States. Note the 3.9 % finance program for government and education.
Cisco Capital Business Directory - Europe
Note that similar directories are available for Asia and other regions, again highlighting the global reach of Cisco Capital
Technology Migration Lease Program
Cisco describes this as "An operating lease with a unique upgrade option that allows you to return leased Cisco equipment before the lease term is up with generous exchange terms."  It is possible, but can not be proven due to inadequate disclosure, that this area is being used to manipulate gross revenues.
US Court Rules Cisco Not Required to Give Bid Information to Competitors Who Lost Govt Contract Bid
A search using the term Cisco Systems will locate the pertinent paragraph.  Cisco, as with Microsoft, goes to great lengths to keep its pricing policies secret.

Links to Recent Leasing Transactions with Cisco Capital:
Note that these few recent publicly disclosed transactions alone amount to more than $750 million.  Also noteworthy is that Cisco often announces vendor financing rather than product sales, again highlighting the importance of financing for products that are grossly overpriced.  It is quite remarkable that Pricewaterhouse Coopers, Cisco's auditor, does not more adequately disclose this activity. Some might consider this lack of disclosure grounds for a legal action.

A common question is, doesn't Intel also have Intel Capital and do the same thing.  The answer is no.  Intel Capital is aimed at making strategic investments in other companies that will help spur demand for its core microprocessor products.  This at times includes helping a key supplier, for example Micron, through a difficult time.

Korea Thrunet Announces Vendor Financing from Cisco, by Adam Creed, Newsbytes, July 26, 2000
This article is available for purchase in the archive and notes that "Broadband Internet access provider Korea Thrunet has obtained $120 million in financing from Cisco Systems Capital Corp.
Cisco sees South Korea Sales, by Reuters, June 14, 2000
Cisco signed a letter of intent today with local telephone and Internet service provider Hanaro Telecom, under which Cisco would provide $200 million in "supplier financing" over three years.
DSL Provider secures $120 million from Cisco Systems Capital, Press Release, April 12, 2000
Cisco provided $120 million in financing to Harvardnet, noting that 95 percent of the company's network infrastructure is Cisco Equipment.
Cisco Capital Provides Hong Kong Start-Up $129 Million in Vendor Financing, March 2, 2000
This is a link to the press release archive at is a Hong Kong start-up.
Advanced Radio Telecom Receives $175 Million from Cisco Capital,
In the Advanced Radio Telecom SEC 10k filing the following is noted "In November 1999, ART entered into an agreement with Cisco Systems Capital Corporation to provide up to $175 million to cover ART's purchase of Cisco equipment and for other network installation and integration costs."  Pricewaterhouse Coopers is also the auditor of record for Advanced Radio Telecom.

4)  Cisco Systems Auditor, Pricewaterhouse Coopers,  Is Deceiving Investors And Could Suffer Multi-Billion Dollar Losses Due To Legal Judgments As Cisco's Scheme Collapses.

Somehow along the way the average person has discounted the value of audited financial statements.  We can do that as individuals yet Pricewaterhouse Coopers, along with other CPA firms, have been awarded a monopoly over the ability to express an opinion on financial statements.  The catch is that they must conform to SAS auditing rules.

The most important SAS rules are those regarding auditor independence.  One need only check the index in a current review manual for the CPA exam at your local bookstore under the topic independence.  You will see that independence must be established in both fact and appearance and any failure to do so should result in a "disclaimer" opinion.  This alone should be grounds for a significant and successful legal action against Pricewaterhouse Coopers for it is an egregious violation.

Less discussed are potential conflicts of interest among board members themselves. At Cisco one director, James Gibbons, is also on the Lockheed board, a key Cisco customer.  That is fine yet at Cisco he receives significant stock options and at Lockheed he is on the audit and ethics committee responsible for overseeing the external auditors. Lockheed is audited by Ernst & Young who, together with Pricewaterhouse Coopers, are two key distributors of Cisco's products and services.

Links to Pricewaterhouse Coopers Clients and Other Audit Related Topics:

Search these SEC filings and other reports using the term Pricewaterhouse Coopers and you can verify they are the auditor of record for any of the following organizations.
Cisco Systems
Goldman Sachs
Janus - Part of Stilwell Financial
Fidelity Magellan-Largest Fidelity Mutual Fund
AXA Financial
Vanguard Index Trust 500 - Largest Vanguard Mutual Fund

"The Investors Champion" by Mike McNamee of Business Week, September 20, 2000
This cover story features a large photo of Arthur Levitt and is titled " SEC Chairman Arthur Levitt wants to bust up the accounting giants and clean up bad audits.  The stakes are huge."  Pricewaterhouse Coopers, Cisco Systems auditor, is leading an effort to undermine Levitt, the article notes.
"Cisco Systems", Grant's Interest Rate Observer, September 15, 2000
Grant's is a high quality subscription only newsletter widely read in the financial community. This story notes that Cisco Systems seems to see generally accepted accounting principles as "pedestrian and inexpressive.  To tell its own story in its own voice, a voice it knows Wall Street always longs to hear, Cisco has evolved its own reporting conventions."
AICPA Lobbies to Prevent New SEC Independence Guidelines, August 10, 2000
Remarkably, the accounting community via the American Institute of Certified Public Accountants (AICPA) is aggressively lobbying its members to undermine the SEC's efforts toward reform.  Pricewaterhouse Coopers is a leader in this effort.
Independence Standards Board, August 2000
This specially commissioned organization has 9 board members, six of which are from accounting firms that include the CEO's of KPMG, Ernst & Young and Pricewaterhouse Coopers.  All three of these accounting firms have significant agreements with Cisco Systems and co-market Cisco's products and services. Clearly, this board has some severe independence issues of its own.  The only investor rights member on the group is John Bogle of the Vanguard Group and SEC Chairman Arthur Levitt considered boycotting the first meeting according to Business Week.
"SEC Probe of MicroStrategy Focuses on Auditor Independence," Michael Schroeder, Wall Street Journal, July 18, 2000.  One area being probed, according to the journal, is "whether audit partners encouraged MicroStrategy to ask its customers and joint venture partners to hire Pricewaterhouse Coopers consulting arm. The enforcement division also is gathering information about the practice of audit partners receiving incentive compensation for cross selling consulting services and whether such a system could cause a breach of independence standards."
"Auditor's Entangled in Complex Dealings" by David. S. Hilzenrath, Wash Post, June 18, 2000
This link is to the post archive, from which the article can be ordered for a fee.  The article examines Pricewaterhouse Coopers relationship with Microstrategy and confirms that the accounting firm directly sold licenses for MicroStrategy software to various clients in addition to providing consulting services associated with such sales.
Lockheed & Cisco Form Alliance For US Government Market, Press Release, May 31, 2000
Cisco will join Lockheed's team in competing for the contract regarding the next generation of Naval Destroyers.  This should be as disturbing as Microsoft's involvement with the defense department, its top customer,  because in both cases we are likely to end up with inferior products.
Juniper is one example of a router product that greatly exceeds Cisco's ability and similar comparisons occur in other product lines.  The point is that we need the best defense products, not one that leverages its way into key contracts, including this Naval Destroyer bid, through financial engineering.
Lockheed Board of Directors and Audit Committee Listing
James Gibbons, a Cisco Systems board member, for which he receives substantial stock options, is also on Lockheed's board and a member of the Lockheed audit and ethics committee.  Lockheed sells more than 75 percent of its products and services to the governement with 50 percent of their sales going directly to the Pentagon. It is interesting to also note that Lynne Cheney, wife of Dick Cheney, is also on the Lockheed board.
Lockheed 10K Filing Indicating Ernst & Young Is The Auditor of Record
Ernst & Young is a key distributor and integrator of Cisco systems products and services.
SEC Appoints Charles Niemeier To Head New Financial Fraud Task Force, May 25, 2000
"With investor protection as its chief goal, this group will work on complex and novel accounting issues, and increase the speed at which cases are brought."
Cisco Announces Strategies for the Delivery of Software Solutions and Services, May 23, 2000
This press release from Cisco Systems website highlights a clear conflict of interest with its auditor Pricewaterhouse Coopers and announces "Comprehensive Strategies for the Delivery of Software Solutions and Services Relationships with Leading Consultant and Systems Integrators."  These include Pricewaterhouse Coopers. Cisco adds that "The ICSG consultant integrator program includes a focus on collaborative sales engagement models." As part of this program, "ICSG is also collaborating with its consultant integrators to build, pre-integrate and pre-test business solutions and services replicable across multiple clients and to transfer critical knowledge that enable consultant integrators to deliver Cisco-enabled solutions and scale the number of consultants trained on ICSG software."
SEC Charges Pricewaterhouse with Auditor Independence Violations, January 14, 1999
On January 14, 1999, the Securities and Exchange Commission brought charges against PricewaterhouseCoopers for widespread auditor independence violations.
Accountants in Bank of Credit and Commerce (BCCI), The Guardian Observer, January 8, 1999
This article notes that many consider this the greatest financial fraud in history which "rendered a bank supposedly worth $20 billion and operating in 60 countries entirely worthless." Pricewaterhouse audited BCCI for four years before it failed.
Microsoft Auditor Alleges Fraud and Is Given Option to Resign or be Fired, ABC News, January 22, 1999
Charles Pancerzewski, a respected industry veteran and former partner with Deloitte and Touche, was awarded $4 million under the Federal Whistleblowers Act in a wrongful dismissal suit. He had told Microsoft that what they were doing constituted securities fraud.
SEC Chairman Levitt Speaks on the Breakdown In The Quality of Financial Reporting, September 28, 1998
This summarizes Chairman Levitt's landmark September 28, 1998 speech on the breakdown in the quality of financial reporting, what he referred to as the "numbers game."

5)  Cisco Systems uses sophisticated anti-competitive "tie-in" merger techniques, a clear violation of the Hart Scott Rodino Anti-Trust Act, in order to build and extend its monopoly.

Under the act, the acquiring company must make a Hart Rodino filing prior to consumating the acquisition with both the Federal Trade Commission (FTC) and Department of Justice (FTC) if three conditions are met. Once the filing is made, the public has 30 days in which to comment yet is unable to review the filing.

i)   One of the parties involved must have $100 million in sales or assets in excess of this amount.
ii)  The other party must have $10 million in sales or assets.
iii)  The acquiring party must be acquiring more than $15 million in assets or voting securities.

Clearly, the act should apply to Cisco's recent investment in Net2Phone.

Anti-Trust's Future by Jim McTague of Barrons, September 25, 2000
McTague notes that "Bush would not initiate any cases resembling the current Microsoft litigation.  Under Gore, dominant Internet players like Cisco Systems would have to keep a constant watch over their shoulders."  Even today it strikes me as ridiculous that George W. Bush, while in Redmond and prior to Judge Penfield Jackson's ruling, would say that if President the Microsoft case would be dismissed.  Both Bill Gates of Microsoft and John Chambers of Cisco Systems are strong supporters of the Bush campaign and Bush should stand them both down rather than pander to their financial schemes that are pilfering the retirement system.
Net2Phone, Cisco Expand Internet Ecosystem by N. Detourn of the Motley Fool, September 18, 2000
Detourn notes that Net2Phone will spin off its network management software into a new subsidiary called Adir in which Cisco will be  minority shareholder.  Net2Phone claims a 40 percent market share for Internet based long distance phone traffic yet, as with traditional carriers such as AT&T, has found the activity highly competitive with low profit margins.
Net2Phone will market its "hidden jewel" software via this new subsidiary and joint venture with Cisco by integrating it into Cisco's product line, a clear "tie-in" anti-trust violation based upon Cisco's existing monopoly.  It is truly ironic that, as with Microsoft, Cisco is now going after the core revenues of customers to which it sells its equipment including AT&T, Sprint and Worldcom.  Meawhile, these phone companies are trying to pay wages and build out networks while long distance revenues plummet.
"More Evidence of Telecom Slowdown" by Scott Moritz of, September 6, 2000
This article cites a Lehman Brothers study that telecom providers will need to spend one dollar on capital equipment for every two dollars in revenue generated. This marks a dramatic increase, the study notes. The industry clearly suffers from not having a lot cost efficient producer.
Qwest to Increase Capital Spending, Cut 12,800 Jobs by D. Cimiluca of Bloomberg, Sept 7, 2000
Qwest., which bought local-phone company U S West Inc., raised its forecasts for capital spending and plans to cut 12,800 jobs as it invests more in high-growth businesses.  This furthur highlights the potential that many jobs are being as resources are instead dedicated to overpriced telecom equipment due to Cisco's monopoly.  The link here is to the archive where the article may be purchased for $2.50.

6)  Cisco Systems Legal, Public Relations and Governmental Affairs Staff, Awash in Cash, Are Corrupting Key Financial and Governmental Institutions and Destabilizing both the Stock Market and Underlying Economy.

The following links provide useful background in understanding the primary forces that have developed this scheme and are working to prevent it from being disclosed to the investing public.  It is quite remarkable that even Ralph Nader would have one third of his entire investments in Cisco Systems stock given the ruinous effect the company is having on the capital markets.  This scheme directly effects many of Nader's key concerns including corporate welfare and environmental related issues as other corporations are forced to take short cuts in order to compete with the scheme for capital.

Larry Carter, Cisco's Chief Financial Officer, Background Summary
Mr. Carter has a distinguished background which includes 19 years at Motorola and he was recently added to the Cisco board of directors. One need only closely examine Cisco Systems recent earnings release on August 8, 2000 to see the remarkable deception being practiced by Mr. Carter.  Key to this is presenting "pro forma" earnings first and de-emphasizing the second version of earnings that classifies expenses on the income statement as required in their SEC 10Q filings.
The second paragraph boasts that pro forma earnings increased more than 60 percent when in reality Cisco is loosing billions as explained in this report. The consolidated statement of operations does also clearly indicate that operating income decreased in relation to the same quarter in the prior year. Remarkably, obvious expenses such as employee benefit costs associated with stock option wages and purchased research and development were excluded from these pro forma results in which Cisco boasts a 60 percent increase in earnings.
CFO to sell $31.7 million, Gibbons, director, to sell $2.5 million, by Reuters, August 23, 2000
Larry Carter, CFO, filed to sell shares as did James Gibbons, who sits on Cisco's board of directors. Gibbons is also on the board of a key Cisco customer, Lockheed Martin, where he also serves on the audit and ethics committee.  Lockheed is audited by Ernst & Young who, along with Cisco's auditor Pricewaterhouse Coopers, are key distributors of Cisco's products and services.
Cisco Systems Government Affairs Staff
This is the listing for Cisco Systems governmental lobbying staff. They are highly successful and have already pushed the repeal of pooling back from December 2000 to June 2001.
Cisco Systems Public Relations Contacts
This is a directory for Corporate Relations, Investor Relations, Marketing and various other areas.
Brobeck, Phleger & Harrison, Cisco Systems Outside Legal Counsel
Brobeck handles many of Cisco's merger transactions and also lists Goldman Sachs as a client. Therese A. Mrozek is the primary counsel for Cisco Systems and a search under her name will display a background summary indicating a reference to the work for Cisco Systems.  The chairman of the firms business and technology practice is Carmelo M. Gordian.
FTC ends Cisco inquiry, by Melanie Austria Farmer, CNET News, June 2, 1999
The FTC ended its inquiry with no action against Cisco Systems
FTC Looks Into Cisco Meeting, the Associated Press, January 26,1999
The article notes that "Cisco, based in San Jose, Calif., controls roughly 85% of the world's market for routers, which control the flow of electronic messages."  This is an important statistic for those that are not familiar with Cisco's market position in this key industry.  The article notes that the FTC was studying Cisco's business practices.

Ralph Nader Related Links:

It seems especially ironic that Ralph Nader would be, unknowingly, a great enabler of an astonishing financial pyramid scheme.  Many socially responsible mutual funds, like Nader, are heavily invested in Cisco Systems and fail to see the disastrous consequences the company is unleashing on the stock market in particular and economy in general.

"Criticism of Cisco Widens" by Laura Kurtzman of San Jose Mercury News, September 14, 2000
On the steps of Cisco Systems in a special press conference called based upon receiving this report, Ralph Nader called for more corporate resonsiblity from Cisco Systems and an end to corporate welfare. Not noted in the article is that Nader also disclosed that Cisco Systems now pays no federal income tax on current earnings and that they should pay their fair share.  Taxes paid now are from prior periods.
When asked if he would sell the stock Nader replied, "No, I am not a quitter."  Nader sincerely believes that he has more power to make positive changes at Cisco while being a shareholder, a nobel and admirable yet also naive position given Cisco's concurrent efforts to undermine the SEC's efforts toward reform.  My advice to Ralph is to buy the products and boycott the stock.  Only then will Cisco respond.

Nader Walks Picket Line at Verizon by the Associated Press, August 10, 2000
This article confirms that Ralph Nader joined the Communication Workers of America on their Picket Line.
Nader Testifies Before House Budget Committee on Corporate Welfare, June 30, 1999
Mr. Nader testifies at length regarding abusive corporate tax shelters.  This is a transcript of his testimony.
Nader Acceptance Speech for Green Party, June 25, 2000
By typing in General Electric in your browser word search you can read the text of his speech in which Mr. Nader uses an example from 1983, highlighting that the average worker paid more federal income tax than GE in 1983, which paid none during this time.  This is significant because one third of Mr. Nader's investment portfolio is in Cisco Systems stock, a company which now earns billions and also pays no federal income tax, as reported in the NY Times on June 13, 2000 in a front page story.  It is also significant because GE paid mostly cash wages to its employees while Cisco is using the equivalent of a photo copy machine to pay its employees, thereby pilfering the retirement system since Cisco now represents 3.5 percent of the S&P 500 and many large funds index off this benchmark.
Nader said to profit from technology stocks, by USA Today, June 18, 2000
This article confirms that one third of Mr. Nader's total investments are in Cisco System shares.
Parish & Company informs Nader of Cisco Systems Financial Practices,  September 30, 1998
This press release was issued on PR Newswire and followed with a phone call and fax to Mr. Nader's organization in October of 1998.  Three weeks later PR Newswire told me that due to objections from Microsoft, even though my press releases were high quality and newsworthy, they would no longer be able to issue the releases.

Conclusion and Practical Financial Planning:

As the disclosure of this pyramid scheme at Cisco Systems begins to be fully covered in the media, it is important to recognize, as with Microsoft, that Cisco hires a lot of great people.  This is perhaps the irony, that so many gifted people would be so grossly manipulated by Cisco's management. 

We are fortunate, however, that the economy is very strong and that the stock market is beginning to respond to these situations involving accounting irregularities. Given the ingenious nature of this watered stock scheme at Cisco, and difficulty for even top investment professionals to digest its nature and implications, I have tried to carefully reference all substantive facts in the section titled "special resources for journalists."

For Cisco employees it might be especially important to note that many of you have already paid the tax on your options when you exercised and can therefore diversify at almost no tax cost.  Rather than try and time AMT tax credits and other matters that look attractive on paper, see the forest.  You work for a great innovative company that has provided remarkable financial rewards to many of you.  What is less obvious, however, is that you have also prepaid your future wages and 80 percent of your stock gains have been effectively pilfered from the retirement system.  This occurs for reasons outlined in the Microsoft Financial Pyramid summary, located in my archive, which is an excellent supplemental report for any Cisco shareholder.

In addition, there is also a growing realization that Cisco has become a Microsoft like predatory monopoly.  This is a natural evolution for any organization trying to sustain a pyramid scheme. Already many struggling telecom firms are seeing declining sales due to competition yet have not figured out that their back office costs, more specifically Cisco Systems overpriced products, may put them out of business.

Perhaps most startling to me is that the average Cisco Systems employee has no idea regarding the level of deception applied to the company's financial statements, upon which rest many employees financial future.

For those of you Cisco employees that judge me harshly for exposing this astonishing fraud, please recognize that I did make a strong effort to inform you first and within two weeks of seeing this report Ralph Nader himself called a special press conference on the steps of Cisco Systems to discuss its findings.  Your subsequent actions are your own yet at least, true to the glory of the information age you have helped create, you are certainly informed.

You can review my background qualifications and overall goals in this effort by referring to the following page. This is not meant as a sales pitch but rather as a means to discredit those who try and discredit my background which you will see is perfectly suited for making such an analysis.

I first contacted Cisco management in early May and have made several efforts to compromise with them regarding their support of needed reforms to the retirment system yet with no success.

Practical Steps You Can Do to Support This Effort Include The Following:

1)  Learn more about the impacts of and support the SEC in ending the pooling method for acquisitions.
2)  Try and create a dialogue on Cisco Systems and anti-trust issues.  This could include writing articles, posting to Internet political, economic and investment forums and adding this topic to general speeches and other business activities. The stakes are huge given the importance of telecom in the new economy.
3)  Ask to have Cisco systems stock removed from your pension plan, including all indexed funds based upon the S&P 500.  Use the products if you must but boycott the stock based upon the premise of removing financial corruption from your pension and thereby avoiding large losses.
4)  Convene a conference to discuss the implications of Cisco's monopoly resulting in excessively high telecom equipment prices that is creating significant job losses and putting the eonomy at risk.
5)  Ask that Gore, Bush, Nader and Buchannon all take a stand on both pooling and the need to examine the anti-competitive business activities of Cisco Systems. With the proximity of the election, this could be an ideal topic in the upcoming debates.

Any comments, suggestions or criticisms are most appreciated and, if appropriate, will be incorporated into future updates.

Corrections Made to Date to the Original Report.  My sincere apologies for any confusion.
1)  Lucent's sales were incorrectly noted as $60 billion. They are $36 billion and are therefore twice, rather than three times, the sales of Cisco.

Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, including The New York Times, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate and The Independent, a major British newspaper. He has been interviewed by Infoworld, ZD Net, Wall Street Journal, Newsweek, Upside Today, Computerworld, Computer Reseller News and USA Today in addition to appearing on ABC news and various radio stations including KUIK in Portland,  KIRO in Seattle and Aspen Public Radio in Colorado.

Parish & Company has three principal goals associated with reform in the capital markets.  These include repeal of the pooling method for acquisitions, including stock option wages reflected on employees W-2's as taxable wages as a charge to earnings and finally including these same W-2 stock option wages in the Employment Cost Index or ECI.

Mr. Parish is a Registered Investment Advisor, formerly a CPA, providing fee based investment management services in addition to assisting companies structure their 401k plans to meet their fiduciary obligations and provide top quality well diversified investment choices at the lowest cost. Please consider hiring Bill to be a permanent member of your 401K committee and thereby utilize the services of a top investment professional in order to clearly communicate your commitment to managing your employees’ 401K plan or what can now be called there "Mutual Savings Bank."

Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR  97223
Tel:  503-643-6999  Fax: 503-221-3161

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