Microsoft is "clearly unprofitable" according to a US financial advisory company which warned that share prices will tumble as employee stock options are accounted more clearly.
The analysts, Parish & Company, took on the big guns when it issued a press release yesterday, claiming that Microsoft and Cisco,both involved in discussions with US financial and regulatory authorities, have created financial pyramids, "where employees are prepaying their own wages".
Parish said: "After accounting for employee stock options, both Microsoft and Cisco Systems are clearly unprofitable and it is noteworthy that Cisco Systems did not buy back any stock in fiscal 1998. Due to the overall size of this liability to employees, even spending half the available cash on a share repurchase programme would not solve the challenge."
It stated that as of 30 September: "The stock option liability made to employees was $40 billion for Microsoft and $15 billion for Cisco Systems. In Cisco's case this represented more than 10 times annual net income even before making the above adjustments."
The release continues: "As knowledge of the financial pyramid becomes more widely publicised the stock prices will adjust accordingly [and] this pyramid will clearly collapse and take away Microsoft's primary competitive weapon, the ability to issue employee shares in lieu of cash compensation, the cost of which is recognised on the internal tax books but not recorded on the externally published income statement. This unrecorded expense was $4.4 billion or $2.9 billion after tax for fiscal 1998 per a review of the recently filed 10K report."
The firm warned: "This overstates net income and even after assuming an optimistic price earnings ratio of 60 for both firms, if this commitment made to employees were accurately reflected on the financial statements, would imply a decline in both stocks of more than 60 per cent."
Parish said it takes no official position on the SEC's ongoing investigation of Cisco's accounting practices with respect to acquisitions, but it "strongly encourages all investors to support the SEC's efforts to improve corporate accounting practices and restore confidence to the financial markets".
Neither company was prepared to comment before we went to press.
Cisco also declined to comment on a separate report in the French newspaper, 'Le Figaro', that its partnership with Alcatel is in trouble.
The paper quoted Cisco's senior vice president, Mike Volpi, as saying: "It will be difficult to maintain our cooperation with Alcatel between now and two years. Alcatel is a company with which a partnership is delicate [and] everybody is a small supplier for Alcatel. That is okay when you are small but it becomes difficult when you have grown."
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