- The Washington Times - Sunday, May 15, 2005

NEW YORK (Dow Jones/AP) — Cisco Systems Inc., a leading maker of computer networking equipment, is seeking regulatory approval to let the market determine the value of its employee stock options.

The effort could reduce the effect of stock-option expensing on Cisco’s bottom line and have a broad impact across the technology sector, if successful.

“In order to get an accurate valuation for stock option expensing, Cisco is working on a market instrument that would match the same attributes of an employee stock option,” said John Earnhardt, a Cisco spokesman. “We are awaiting guidance from regulators on this instrument.”

Securities and Exchange Commission Chairman William Donaldson left open the prospect that the agency would approve Cisco’s plans.

“I think it’s a very interesting approach,” he told reporters after a speech Thursday.

A person familiar with the matter, who spoke to Dow Jones Newswires on the condition of anonymity, said Cisco wants to enlist an investment bank that would turn to several sophisticated investors like hedge funds, perhaps as many as 15, which would bid on a small portion of the options and buy them, thus putting a value on them.

The investors would be bidding on the options as if they were employee stock options — taking into account that they are not able to be traded or hedged and that they require time to vest.

The method would provide an alternative to pricing the options based on a theoretical model such as the Black-Scholes formula, which factors in volatility and time to expiration, among other factors.

Cisco’s effort comes after the Financial Accounting Standards Board (FASB) introduced a rule in December requiring companies to treat employee stock options as an expense. This means that many companies, particularly technology companies that most often pay employees using stock options, will see earnings reduced by these new expenses when the new rule comes into effect later this year.

In response to the accounting change, some companies have accelerated option-vesting before the new rules kick in so they won’t have to report it as an expense. Companies also have cut back on issuing stock options. Software giant Microsoft Corp. is replacing employee stock options with other stock incentives.

The SEC last month pushed back the start date for the stock-option accounting rule to fiscal years starting after June 15, rather than fiscal quarters starting after June 15. The delay was a rare instance in which the SEC overruled FASB on the details of an accounting standard. SEC officials said companies needed more time to understand the new rules considering all the other recent accounting changes.

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