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CISCO SYSTEMS, INC.
OCTOBER 2, 1995
TO THE SHAREHOLDERS OF CISCO SYSTEMS, INC.:
You are invited to attend the Annual Meeting of Shareholders ("Annual
Meeting") of Cisco Systems, Inc. (the "Company") which will be held at the
Company's headquarters located at 170 W. Tasman Drive, San Jose, California
95134-1706 on Tuesday, November 14, 1995, at 10:00 a.m.
Details of the business to be conducted at the Annual Meeting are given in
the attached Notice of Annual Meeting and Proxy Statement.
If you do not plan to attend the Annual Meeting, please sign, date, and
return the enclosed proxy promptly in the accompanying reply envelope. If you
decide to attend the Annual Meeting and wish to change your proxy vote, you may
do so automatically by voting in person at the Annual Meeting.
We look forward to seeing you at the Annual Meeting.
San Jose, California
LOGO
John T. Chambers
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to
complete, sign, and date the enclosed proxy as promptly as possible and return
it in the enclosed envelope (to which no postage need be affixed if mailed in
the United States).
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CISCO SYSTEMS, INC.
170 W. TASMAN DRIVE
SAN JOSE, CALIFORNIA 95134-1706
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 14, 1995
The Annual Meeting of Shareholders ("Annual Meeting") of Cisco Systems,
Inc. (the "Company") will be held at the Company's headquarters located at 170
W. Tasman Drive, San Jose, California 95134-1706, on Tuesday, November 14, 1995,
at 10:00 a.m. for the following purposes:
1. To elect seven directors of the Board of Directors to serve until the
next Annual Meeting and until their successors have been elected and qualified;
2. To approve an amendment to the Company's 1987 Stock Option Plan that
will (i) increase the number of shares available for issuance by an additional
19,000,000 shares of Common Stock, (ii) eliminate the authority of the plan
administrator to grant stock options with an exercise price per share less than
the fair market value of the Common Stock on the grant date, and (iii) reduce
the maximum option term for all future grants to 9 years;
3. To ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the fiscal year ending July 28, 1996;
4. To approve an amendment to the Company's Restated Articles of
Incorporation to increase the number of authorized shares of Common Stock by an
additional 280,000,000 shares; and
5. To act upon such other matters as may properly come before the meeting
or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. The record date for determining those
shareholders who will be entitled to notice of, and to vote at, the meeting and
at any adjournment thereof is September 22, 1995. The stock transfer books will
not be closed between the record date and the date of the meeting. A list of
shareholders entitled to vote at the Annual Meeting will be available for
inspection at the offices of the Company.
Whether or not you plan to attend the meeting, please complete, date, sign,
and return the enclosed proxy promptly in the accompanying reply envelope. Your
proxy may be revoked at any time prior to the Annual Meeting. If you decide to
attend the Annual Meeting and wish to change your proxy vote, you may do so
automatically by voting in person at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
Larry R. Carter
Secretary
San Jose, California
October 2, 1995
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CISCO SYSTEMS, INC.
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Cisco Systems, Inc., a California
corporation (the "Company"), for the Annual Meeting of the Shareholders (the
"Annual Meeting") to be held at 10:00 a.m. on November 14, 1995, at the
Company's headquarters located at 170 W. Tasman Drive, San Jose, California
95134-1706, and at any adjournment or postponement of the Annual Meeting. These
proxy materials were first mailed to shareholders on or about October 2, 1995.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Shareholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
VOTING
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On September 22, 1995, the record date for determination of
shareholders entitled to vote at the Annual Meeting, there were 273,636,333
shares of Common Stock outstanding. Each shareholder of record on September 22,
1995, is entitled to one vote for each share of Common Stock held by such
shareholder on September 22, 1995. Abstentions and broker non-votes are counted
as present for the purpose of determining the presence of a quorum for the
transaction of business. In the election of directors, the seven candidates
receiving the highest number of affirmative votes will be elected. Proposals 2
and 3 each require for approval (i) the affirmative vote of a majority of those
shares present and entitled to vote, and (ii) the affirmative vote of a majority
of the required quorum. Thus, abstentions and broker non-votes can have the
effect of preventing approval of a proposal where the number of affirmative
votes, though a majority of the votes cast, does not constitute a majority of
the required quorum. Proposal 4 requires for approval the affirmative vote of
the holders of a majority of the outstanding Common Stock. All votes will be
tabulated by the inspector of election appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions, and broker
non-votes.
PROXIES
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your proxy
when properly completed. In the event no directions are specified, such proxies
will be voted FOR the nominees of the Board of Directors (proposal 1) and FOR
proposals 2, 3, and 4 and, in the discretion of the proxy holders, as to other
matters that may properly come before the Annual Meeting. You may revoke or
change your proxy at any time before the Annual Meeting. To do this, send a
written notice of revocation or another signed proxy with a later date to the
Secretary of the Company at the Company's principal executive offices before the
beginning of the Annual Meeting. You may also revoke your proxy by attending the
Annual Meeting and voting in person.
SOLICITATION OF PROXIES
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional soliciting material furnished to shareholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation material to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees, or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
GENERAL
The names of persons who are nominees for director and their positions and
offices with the Company are set forth in the table below. The proxy holders
intend to vote all proxies received by them in the accompanying form for the
nominees listed below unless otherwise instructed. In the event any nominee is
unable or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for any nominee who may be designated by the present Board
of Directors to fill the vacancy. As of the date of this Proxy Statement, the
Board of Directors is not aware of any nominee who is unable or will decline to
serve as a director. The seven (7) nominees receiving the highest number of
affirmative votes of the shares entitled to vote at the Annual Meeting will be
elected directors of the Company to serve until the next Annual Meeting and
until their successors have been elected and qualified. Shareholders may not
cumulate votes in the election of directors pursuant to an amendment of the
Company's Restated Articles of Incorporation, which amendment became effective
in January 1990.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES HELD
NOMINEES WITH THE COMPANY
--------------------------------------- -------------------------------------------------
<S> <C>
John T. Chambers....................... President, Chief Executive Officer, and Director
Michael S. Frankel..................... Director
James F. Gibbons....................... Director
John P. Morgridge...................... Chairman of the Board
Robert L. Puette....................... Director
Masayoshi Son.......................... Director
Donald T. Valentine.................... Vice Chairman of the Board
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS
Mr. Chambers, 46, has been a member of the Board of Directors since
November 1993. He joined the Company as Senior Vice President in January 1991
and became Executive Vice President in June 1994. Mr. Chambers became President
and Chief Executive Officer of the Company as of January 31, 1995. Prior to
that, he was with Wang Laboratories for eight years, most recently as Senior
Vice President of U.S. Operations.
Dr. Frankel, 49, has been a member of the Board of Directors since May
1992. He has been Vice President and Division Director of SRI International
since January 1989 and became Center Director of SRI International in 1986.
Dr. Gibbons, 64, has been a member of the Board of Directors since May
1992. He has been Dean of the Stanford University School of Engineering since
September 1984. Dr. Gibbons also currently serves on the Board of Directors of
Lockheed Martin Corporation, Raychem Corporation, Centigram Corporation, and El
Paso Natural Gas.
Mr. Morgridge, 62, joined the Company as President and Chief Executive
Officer and was elected to the Board of Directors in October 1988. Mr. Morgridge
became Chairman of the Board on January 31, 1995. From 1986 to 1988 he was
President and Chief Operating Officer at GRiD Systems, a manufacturer of laptop
computer systems.
Mr. Puette, 53, has been a member of the Board of Directors since January
1991. He has been President, Chief Executive Officer and on the Board of
Directors of NetFRAME Systems since January 1995. He was a consultant from
November 1993 to December 1994. Prior to that, he was Senior Vice President of
Apple Computer, Inc. and President of Apple USA Division from June 1990 to
October 1993. Mr. Puette also currently serves on the Board of Directors of
Quality Semiconductor.
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Mr. Son, 38, has been a member of the Board of Directors since July 1995.
He has been the President and Chief Executive Officer of SOFTBANK Corporation
for more than fifteen years.
Mr. Valentine, 63, has been a member of the Board of Directors of the
Company since December 1987, and was elected Chairman of the Board of Directors
in December 1988. He became Vice Chairman of the Board on January 31, 1995. He
has been a general partner of Sequoia Capital, a venture capital firm that was
an investor in the Company since 1974. Mr. Valentine currently serves as
Chairman of the Board of Directors of C-Cube Microsystems, Inc., a semiconductor
video compression company and serves on the Board of Directors of Sierra
Semiconductor, Inc., a communications semiconductor company.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended July 30, 1995, the Board of Directors held 10
meetings. During this period, each of the directors attended or participated in
more than 75% of the aggregate of (i) the total number of meetings of the Board
of Directors and (ii) the total number of meetings held by all Committees of the
Board on which each such director served.
The Company has five standing Committees: the Audit Committee, the
Compensation/Stock Option Committee, the Executive Committee, the Acquisition
Committee, and the Nominating Committee.
The Audit Committee is responsible for reviewing the Company's financial
procedures and controls and for selecting and meeting with the independent
auditors. This Committee held several informal meetings during the last fiscal
year. This Committee currently consists of Messrs. Frankel, Puette, and Ring.
The Compensation/Stock Option Committee is responsible for reviewing the
compensation arrangements in effect for the Company's executive officers and for
administering all the Company's employee benefit plans, including the 1987 Stock
Option Plan. This Committee, currently comprising of Messrs. Puette, Frankel,
and Gibbons, held 12 meetings on matters relating to the approval of stock
option grants and 2 meetings relating to executive compensation.
The Executive Committee's duties include anything permitted by law to be
performed by the Board of Directors that does not require the full Board. This
Committee currently consists of Messrs. Morgridge, Chambers, and Valentine. This
Committee held several informal meetings during the last fiscal year.
The Acquisition Committee reviews acquisition strategies and candidates
with the Company's management and makes recommendations to the Board of
Directors. This Committee held several informal meetings during the last fiscal
year. This Committee currently consists of Messrs. Valentine, Frankel, and
Morgridge.
The Nominating Committee is responsible for nominating persons for election
as Directors of the Company. This Committee has no current plans to consider
nominees recommended by security holders. This Committee currently consists of
Messrs. Valentine, Gibbons, and Puette. This Committee held 1 meeting during the
last fiscal year.
DIRECTOR COMPENSATION
For fiscal 1995, the non-employee directors (other than Mr. Valentine) were
each paid a $12,000 retainer for serving on the Board, as well as $1,000 for
each Board meeting they attended. Directors who are also employees of the
Company are eligible to receive options under the Company's 1987 Stock Option
Plan and to participate in the Company's 1989 Employee Stock Purchase Plan, the
401(k) Plan, and the Management Incentive Plan. Non-employee directors (other
than members of the Compensation/Stock Option Plan Committee) are eligible to
participate in the Discretionary Option Grant Program in effect under the 1987
Stock Option Plan, and all non-employee Board members are eligible to receive
periodic option grants under the Automatic Option Grant program in effect under
the 1987 Plan. On October 14, 1994, Mr. Valentine received an option grant under
the Discretionary Option Grant Program to purchase 30,000 shares of Common Stock
at an exercise price of $27.625 per share. The option has a maximum term of 5
years and is immediately exercisable for all the option shares. However, the
shares are subject to a vesting schedule under which they are to vest in a
series of 24 successive equal monthly installments over Mr. Valentine's
continued
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service with the Company, whether as a non-employee Board member or independent
consultant, measured from the grant date. In the event the Company were to be
acquired by merger or asset sale, all the option shares would immediately vest.
For further information concerning the terms of this discretionary option grant,
see the summary of the Discretionary Option Grant Program in Proposal No. 2
below.
Option grants were also made during the 1995 fiscal year to the eligible
non-employee Board members pursuant to the provisions of the Automatic Option
Grant Program. On August 9, 1994, Mr. Valentine received an automatic option
grant for 20,000 shares with an exercise price of $21.9375 per share, and each
of the following non-employee Board members received an automatic option grant
for 10,000 shares of Common Stock on November 15, 1994 at an exercise price of
$33.1875 per share: Ms. Bartz and Messrs. Frankel, Gibbons, Puette and
Valentine. Mr. Son received an automatic option grant for 20,000 shares on July
26, 1995, when he was first appointed to the Board, with an exercise price of
$57.75 per share. For further information concerning the terms of these
automatic grants, see the summary of the Automatic Option Grant Program in
Proposal No. 2 below.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the nominees listed herein.
PROPOSAL NO. 2
AMENDMENT TO 1987 STOCK OPTION PLAN
The shareholders are being asked to vote on a proposal to approve an
amendment to the Company's 1987 Stock Option Plan (the "Option Plan") that will
(i) increase the number of shares of Common Stock available for issuance under
the Option Plan by 19,000,000 shares, (ii) eliminate the authority of the plan
administrator to grant stock options with an exercise price per share less than
the fair market value of the Common Stock on the grant date, and (iii) reduce
the maximum option term for future option grants to 9 years. The Board of
Directors adopted the amendment, subject to shareholder approval at the Annual
Meeting. The Board believes the amendment is necessary in order to provide the
Company with a sufficient reserve of Common Stock for future option grants
needed to attract and retain the services of key individuals essential to the
Company's long-term success and to assure that those option grants will have
value only if the market price of the Common Stock appreciates over the market
price in effect at the time of grant.
The purpose of the Option Plan is to provide a means whereby key employees,
officers, non-employee directors, consultants, and advisors of the Company or
subsidiary corporations may be given an opportunity to purchase shares of the
Company's Common Stock pursuant to options granted under the Option Plan. The
Board of Directors believes that option grants and the stock issuances under the
Option Plan play an important role in the Company's efforts to attract, employ,
and retain employees, directors, and consultants of outstanding ability, and the
Board accordingly recommends the shareholders to vote FOR the amendment.
The principal terms and provisions of the Option Plan as modified by the
recent amendment are summarized below. The summary however, is not intended to
be a complete description of all the terms of the Option Plan. A copy of the
Option Plan as amended will be furnished by the Company to any shareholder upon
written request to the Corporate Secretary.
DESCRIPTION OF THE OPTION PLAN
STRUCTURE. The Option Plan is divided into two separate equity incentive
programs: (i) a Discretionary Option Grant Program, under which key employees,
non-employee directors (other than those serving as members of the
Compensation/Stock Option Committee), and consultants may be granted options to
purchase shares of Common Stock and (ii) an Automatic Option Grant Program,
under which eligible non-employee Board members will automatically receive
special option grants to purchase shares of Common Stock at designated intervals
over their period of Board service.
Options granted under the Discretionary Option Grant Program may be either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or nonstatutory options not intended to satisfy such
requirements. All grants under the Automatic Option Grant Program will be
nonstatutory options.
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ADMINISTRATION. The Discretionary Option Grant Program is administered by
the Compensation/Stock Option Committee (the "Committee") of the Board.
Committee members are appointed by the Board and serve for such period of time
as the Board may determine. No Board member may serve on the Committee if he or
she has received an option grant or stock award under the Option Plan, other
than pursuant to the Automatic Option Grant Program, or under any other stock
plan of the Company or its parent or subsidiary corporations within the twelve
(12) month period preceding his or her appointment to the Committee.
The Committee has full authority (subject to the express provisions of the
Option Plan) to determine the eligible individuals who are to receive grants
under the Discretionary Option Grant Program, the number of shares to be covered
by each granted option, the date or dates on which the option is to become
exercisable, the maximum term for which the option is to remain outstanding, and
the remaining provisions of the option grant.
All grants under the Automatic Option Grant Program will be made in strict
compliance with the express provisions of that program, and no administrative
discretion will be exercised by the Committee with respect to the grants made
under that program.
ELIGIBILITY. Key employees (including officers), non-employee directors
(other than Board members serving on the Committee), and independent consultants
who render services to the Company or its subsidiary corporations (whether now
existing or subsequently established) are eligible to receive option grants
under the Discretionary Option Grant Program. Only non-employee Board members
are eligible to participate in the Automatic Option Grant Program.
As of July 30, 1995, approximately 3,826 persons (including 7 officers and
3 non-employee Board members) were eligible to participate in the Discretionary
Option Grant Program, and 4 non-employee Board members were eligible to
participate in the Automatic Option Grant Program.
SECURITIES SUBJECT TO OPTION PLAN. The maximum number of shares of Common
Stock issuable over the term of the Option Plan, as adjusted for the two-for-one
stock splits effected in March 1991, March 1992, March 1993, and March 1994, may
not exceed 110,640,112 shares1/ (including the 19,000,000 share increase subject
to approval by the shareholders as part of this Proposal). Such share reserve
will be subject to further adjustment in the event of subsequent changes to the
capital structure of the Company. The shares may be made available either from
the Company's authorized but unissued Common Stock or from Common Stock
reacquired by the Company, including shares purchased on the open market.
In no event may any one individual participating in the Option Plan be
granted stock options or separately-exercisable stock appreciation rights for
more than 2,000,000 shares of Common Stock in the aggregate over the remaining
term of the Option Plan, subject to adjustment from time to time in event of
certain changes to the Company's capital structure. For purposes of such
limitation, any options or stock appreciation rights granted prior to August 1,
1994, will not be taken into account.
Should an option expire or terminate for any reason prior to exercise in
full, the shares subject to the portion of the option not so exercised will be
available for subsequent option grants under the Option Plan. Shares subject to
any option surrendered or canceled in accordance with the stock appreciation
right provisions of the Option Plan will not be available for subsequent grants.
DISCRETIONARY OPTION GRANT PROGRAM
PRICE AND EXERCISABILITY. The option exercise price per share may not be
less than one hundred percent (100%) of the fair market value of the Common
Stock on the grant date. Options granted under the Discretionary Option Grant
Program generally become exercisable in periodic installments over the
optionee's period of service and may not have a term in excess of 9 years (10
years for options granted prior to October 1, 1995).
The exercise price may be paid in cash or in shares of Common Stock.
Options may also be exercised through a same-day sale program, pursuant to which
a designated brokerage firm is to effect the immediate sale of the shares
purchased under the option and pay over to the Company, out of the sale proceeds
available
- ---------------
1/From and after July 30, 1995, not more than 41,672,653 shares may be
issued under the Option Plan, assuming approval of the proposed 19,000,000 share
increase by the Company's shareholders.
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on the settlement date, sufficient funds to cover the exercise price for the
purchased shares plus all applicable withholding taxes. The Committee may also
assist any optionee (including an officer or director) in the exercise of his or
her outstanding options by (a) authorizing a Company loan to the optionee, (b)
permitting the optionee to pay the exercise price in installments over a period
of years, or (c) authorizing a guarantee by the Company of a third-party loan to
the optionee. The terms and conditions of any such loan, installment payment, or
guarantee will be established by the Committee in its sole discretion, but in no
event may the maximum credit extended to the optionee exceed the aggregate
exercise price payable for the purchased shares, plus any federal or state
income or employment taxes incurred in connection with the purchase.
No optionee is to have any shareholder rights with respect to the option
shares until the optionee has exercised the option and paid the exercise price.
Options are not assignable or transferable other than by will or the laws of
descent and distribution, and during the optionee's lifetime, the option may be
exercised only by the optionee.
VALUATION. For purposes of establishing the option price and for all other
valuation purposes under the Option Plan, the fair market value of a share of
Common Stock on any relevant date will be the closing selling price per share of
Common Stock on that date, as such price is reported on the Nasdaq National
Market. The closing selling price of the Common Stock on September 22, 1995, was
$70.125 per share.
TERMINATION OF SERVICE. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the limited post-service
period designated by the Committee at the time of the option grant. Under no
circumstances, however, may any option be exercised after the specified
expiration date of the option term. Each such option will normally, during such
limited period, be exercisable only to the extent of the number of shares of
Common Stock in which the optionee is vested at the time of cessation of
service. The optionee will be deemed to continue in service for so long as such
individual performs services for the Company (or any parent or subsidiary
corporation), whether as an employee, a non-employee member of the board of
directors, or an independent consultant or advisor.
The Committee has complete discretion to extend the period following the
optionee's cessation of service during which his or her outstanding options may
be exercised and/or to accelerate the exercisability of such options in whole or
in part. Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.
The shares of Common Stock acquired upon the exercise of one or more
options may be subject to repurchase by the Company at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The Committee has complete discretion in establishing the
vesting schedule to be in effect for any such unvested shares and may cancel the
Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.
STOCK APPRECIATION RIGHTS. Two types of stock appreciation rights are
authorized for issuance under the Discretionary Option Grant Program: (i) tandem
rights, which require the option holder to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of such option
for an appreciation distribution, and (ii) limited rights, which are
automatically exercised upon the occurrence of a hostile take-over.
The appreciation distribution payable by the Company upon the exercise of a
tandem stock appreciation right will be equal in amount to the excess of (i) the
fair market value (on the exercise date) of the shares of Common Stock in which
the optionee is at the time vested under the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation distribution
may, at the Committee's discretion, be made in shares of Common Stock valued at
fair market value on the exercise date, in cash or in a combination of cash and
Common Stock.
One or more officers or directors of the Company subject to the short-swing
profit restrictions of the Federal securities laws may, at the discretion of the
Committee, be granted limited stock appreciation rights in connection with their
option grants under the Discretionary Option Grant Program. Any option with such
a limited stock appreciation right in effect for at least six (6) months will
automatically be canceled, to the extent exercisable for one or more vested
option shares, upon the successful completion of a hostile tender offer for more
than 50% of the Company's outstanding voting stock. In return, the officer will
be entitled to a
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cash distribution from the Company in an amount per canceled option share equal
to the excess of (i) the highest price per share of Common Stock paid in the
tender offer over (ii) the option exercise price.
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon the
occurrence of any of the following transactions (a "Corporate Transaction"):
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the state of the Company's incorporation,
(ii) the sale, transfer, or other disposition of all, or substantially
all, of the Company's assets, or
(iii) any reverse merger in which the Company is the surviving entity,
but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held the
stock immediately prior to such merger,
each outstanding option under the Discretionary Option Grant Program will,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares at the time subject to such option. No
such acceleration will occur, however, if (i) the option is either to be assumed
by the successor corporation or replaced by a comparable option to purchase
shares of the capital stock of the successor corporation or (ii) the
acceleration of the option is subject to other limitations imposed by the
Committee at the time of grant. Immediately following the consummation of the
Corporate Transaction, all outstanding options will terminate and cease to be
exercisable, except to the extent assumed by the successor corporation.
The Company's outstanding repurchase rights under the Discretionary Option
Grant Program will also terminate, and all shares subject to such repurchase
rights will immediately vest, upon the occurrence of any such Corporate
Transaction, except to the extent (i) the repurchase rights are expressly
assigned to the successor corporation or (ii) such accelerated vesting is
subject to other limitations imposed by the Committee at the time the underlying
options were granted.
The acceleration of options in the event of a Corporate Transaction may be
seen as an anti-takeover provision and may have the effect of discouraging a
merger proposal, a takeover attempt, or other efforts to gain control of the
Company.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, each individual who was serving
as a non-employee Board member on August 9, 1994, the effective date of such
program and who had completed at least four (4) years of service in such
capacity was automatically granted on that date a stock option for 20,000 shares
of Common Stock at an exercise price of $21.9375 per share, the closing selling
price per share on that date, as reported on the Nasdaq National Market. A
similar 20,000 share option will be made to each individual who first becomes a
non-employee Board member after the August 9, 1994, effective date of the
Automatic Option Grant Program, whether through election by the shareholders or
appointment by the Board. In addition, on the date of each Annual Shareholders
Meeting, beginning with the 1994 Annual Meeting, each individual re-elected to
serve as a non-employee Board member will automatically be granted a stock
option to purchase 10,000 shares of Common Stock, provided such individual has
served as a non-employee Board member for at least five (5) months. There will
be no limit on the number of such additional 10,000 share option grants any one
non-employee Board member may receive over his or her period of Board service.
In no event, however, will any automatic option grant be made to a non-employee
Board member who has previously been in the Company's employ at any time after
October 1988.
Each option granted under the Automatic Option Grant Program will be
subject to the following terms and conditions:
-- The exercise price per share will be equal to 100% of the fair
market value per share of Common Stock on the automatic grant date.
-- Each option will have a maximum term of five years measured from
the grant date.
-- Each option will be immediately exercisable for all the option
shares, but any purchased shares will be subject to repurchase by the
Company, at the exercise price paid per share, upon the optionee's
cessation of Board service prior to vesting in such shares.
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-- The shares subject to each 20,000 share grant will vest (and the
Company's repurchase rights will lapse) in four equal annual installments
over the optionee's period of Board service, with the first such
installment to vest upon the completion of one year of Board service
measured from the automatic grant date. The shares subject to each 10,000
share grant will vest (and the Company's repurchase rights will lapse) in
two equal annual installments over the optionee's period of Board service,
with the first such installment to vest upon the completion of one year of
Board service measured from the automatic grant date.
-- The option will remain exercisable for a six-month period
following the optionee's cessation of Board service for any reason other
than death or permanent disability. Should the optionee die within such
six-month period, then each such option will remain exercisable for a
twelve-month period following such optionee's death and may be exercised by
the personal representative of the optionee's estate or the person to whom
the grant is transferred by the optionee's will or the laws of inheritance.
In no event, however, may the option be exercised after the expiration date
of the option term. During the applicable exercise period, the option may
not be exercised for more than the number of shares (if any) in which the
optionee is vested at the time of cessation of Board service.
-- Should the optionee die or become permanently disabled while
serving as a Board member, then the shares of Common Stock subject to each
automatic option grant held by that individual optionee will immediately
vest in full, and those vested shares may be purchased at any time within
the twelve-month period following the date of the optionee's cessation of
Board service.
-- The shares subject to each automatic option grant will immediately
vest upon a Corporate Transaction (as such term is defined above) or a
hostile take-over of the Company effected through a tender offer for more
than 50% of the Company's outstanding voting stock or one or more contested
elections for Board membership.
-- Upon the successful completion of a hostile tender offer for
securities possessing more than 50% of the Company's outstanding voting
stock, each automatic option grant which has been outstanding for at least
six months may be surrendered to the Company for a cash distribution per
surrendered option share in an amount equal to the excess of (i) the
highest price per share of Common Stock paid in such hostile tender offer
over (ii) the exercise price payable for such share.
-- The remaining terms and conditions of the option will in general
conform to the terms described above for option grants made under the
Discretionary Option Grant Program and will be incorporated into the option
agreement evidencing the automatic grant.
GENERAL PROVISIONS
CHANGES IN CAPITALIZATION. In the event any change is made to the Common
Stock issuable under the Option Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change affecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one individual may be granted
stock options and separately exercisable stock appreciation rights under the
Option Plan after July 31, 1994, (iii) the number and/or class of securities for
which option grants will subsequently be made under the Automatic Option Grant
Program to each newly-elected or continuing non-employee Board member, and (iv)
the class and/or number of securities and exercise price per share in effect
under each outstanding option.
Each outstanding option which is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities which would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the Option
Plan on both an aggregate and a per-participant basis.
OPTION PLAN AMENDMENTS. The Board may amend or modify the Option Plan in
any or all respects whatsoever. However, the Board may not, without the approval
of the Company's shareholders, (i) materially
8
<PAGE> 11
increase the maximum number of shares issuable under the Option Plan (except in
connection with certain changes in capitalization), (ii) materially modify the
eligibility requirements for option grants, or (iii) otherwise materially
increase the benefits accruing to participants under the Option Plan.
Unless sooner terminated by the Board, the Option Plan will in all events
terminate on September 10, 1997. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
OPTION GRANTS
The table below shows, as to each of the executive officers named in the
Summary Compensation Table and the various indicated groups, the following
information with respect to stock option grants effected during the period from
August 1, 1994 to July 30, 1995: (i) the number of shares of Common Stock
subject to options granted under the Option Plan during that period and (ii) the
weighted average exercise price payable per share under such options.
<TABLE>
<S> <C> <C>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE OF
OF OPTION GRANTED
NAME AND POSITION SHARES OPTIONS
</TABLE>
<TABLE>
<S> <C> <C>
John T. Chambers
President and Chief Executive Officer 200,000 $33.2500
John P. Morgridge
Chairman of the Board 0 0
Donald A. LeBeau
Senior Vice President, Worldwide Operations 175,000 $30.8036
Frank J. Marshall
Vice President, Engineering 90,000 $33.5139
Edward R. Kozel
Vice President, Business Development 100,000 $39.8750
Carl Redfield
Vice President, Manufacturing 100,000 $33.5250
All current executive officers as a group (7
persons) 940,000 $34.1090
All current directors (other than executive
officers)
as a group (5 persons) 120,000 $34.0156
All employees, including current officers who are
not executive officers, as a group (3,816
persons) 12,621,625 $41.1537
</TABLE>
As of July 30, 1995, options covering 26,272,548 shares were outstanding
under the Option Plan, 15,400,105 shares remained available for future option
grant assuming approval of the 19,000,000 share increase by the Company's
shareholders, and 68,967,459 shares have been issued under the Option Plan.
However, the 15,400,105 shares currently available for option grant under the
Option Plan requires shareholder approval of both the 19,000,000-share increase
which forms part of this Proposal No. 2 and the Amendment to the Company's
Restated Articles of Incorporation which is set forth in Proposal No. 4 below.
The expiration dates for all such options range from July 31, 1995 to November
12, 2000.
NEW PLAN BENEFITS
The table below shows, as to each of the executive officers named in the
Summary Compensation Table and the various indicated groups, (i) the number of
shares of Common Stock for which options have been granted, as of July 30, 1995,
on the basis of the 19,000,000 share increase to the Option Plan for which
shareholder approval is sought as part of this Proposal No. 2 and (ii) the
weighted average exercise price per
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<PAGE> 12
share. These grants have also been included in the Option Grant table above. In
addition, each of the following non-employee Board members will, upon
re-election to the Board at the Annual Meeting, receive at that time an
automatic option grant for 10,000 shares based upon the 19,000,000 share
increase: Messrs. Frankel, Gibbons, Puette, and Valentine. Each of these
automatic grants will have an exercise price per share equal to the closing
selling price per share of Common Stock on the grant date.
<TABLE>
<S> <C> <C>
WEIGHTED
AVERAGE
EXERCISE
PRICE OF
NUMBER GRANTED
OF OPTION OPTIONS
NAME AND POSITION SHARES ($)
</TABLE>
<TABLE>
<S> <C> <C>
John T. Chambers
President and Chief Executive Officer 0 0
John P. Morgridge
Chairman of the Board 0 0
Donald A. LeBeau
Senior Vice President, Worldwide Operations 0 0
Frank J. Marshall
Vice President, Engineering 0 0
Edward R. Kozel
Vice President, Business Development 0 0
Carl Redfield
Vice President, Manufacturing 0 0
All current executive officers as a group (7
persons) 0 0
All current directors (other than executive
officers)
as a group (5 persons) 0 0
All employees, including current officers who are
not executive officers, as a group (3,816
persons) 4,517,995 $56.0625
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE OPTION PLAN
Options granted under the Option Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options that are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
INCENTIVE STOCK OPTIONS. No taxable income is recognized by the optionee
at the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. The optionee will, however, recognize
taxable income in the year in which the purchased shares are sold or otherwise
made the subject of disposition.
For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (i) the fair market value of those shares on
the date the option was exercised over (ii) the
10
<PAGE> 13
exercise price paid for the shares will be taxable as ordinary income. Any
additional gain recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the excess of (i) the fair market
value of such shares on the date the option was exercised over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
The Company anticipates that any compensation deemed paid by the Company upon
one or more disqualifying dispositions of incentive stock option shares by the
Company's executive officers will remain deductible by the Company and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a non-statutory option.
The optionee will in general recognize ordinary income in the year in which
the option is exercised equal to the excess of the fair market value of the
purchased shares on the exercise date over the exercise price paid for the
shares, and the optionee will be required to satisfy the tax withholding
requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the acquisition of
Common Stock under a non-statutory option if the purchased shares are subject to
repurchase by the Company. These special provisions may be summarized as
follows:
(i) If the shares acquired upon exercise of the non-statutory option
are subject to repurchase by the Company at the original exercise
price in the event of the optionee's termination of service prior
to vesting in such shares, the optionee will not recognize any
taxable income at the time of exercise but will have to report as
ordinary income, as and when the Company's repurchase right
lapses, an amount equal to the excess of (a) the fair market value
of the shares on the date such repurchase right lapses with
respect to such shares over (b) the exercise price paid for the
shares.
(ii) The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year
of exercise of the non-statutory option an amount equal to the
excess of (a) the fair market value of the purchased shares on
the exercise date (determined as if the shares were not subject
to the Company's repurchase right) over (b) the exercise price
paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the
repurchase right lapses.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of non-statutory options with exercise prices equal to
the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.
STOCK APPRECIATION RIGHTS. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
11
<PAGE> 14
ACCOUNTING TREATMENT
Under present accounting principles, neither the grant nor the exercise of
options issued with an exercise price equal to the fair market value of the
option shares on the grant date will result in any charge to the Company's
earnings. However, the number of outstanding options may be a factor in
determining the Company's reported earnings per share.
Should one or more optionees be granted stock appreciation rights that have
no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to be
charged periodically against the Company's earnings. Accordingly, at the end of
each fiscal quarter, the amount (if any) by which the fair market value of the
shares of Common Stock subject to such outstanding stock appreciation rights has
increased from prior quarter-end will be accrued as compensation expense to the
extent such fair market value is in excess of the aggregate exercise price in
effect for such rights.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the shares of the Company's voting
stock present or represented by proxy at the 1995 Annual Meeting and entitled to
vote on Proposal No. 2, together with the affirmative vote of a majority of the
required quorum, is required for approval of the amendment to the Option Plan.
If such shareholder approval is not obtained, then any options granted on the
basis of the 19,000,000 share increase that forms part of the amendment will
terminate without becoming exercisable for any of the shares of Common Stock
subject to those options, no additional option grants will be made on the basis
of such share increase, and the Option Plan will terminate once the balance of
the share reserve as last approved by the shareholders has been issued pursuant
to option grants made under the Option Plan.
The Board of Directors recommends a vote FOR the approval of the amendment
to the 1987 Stock Option Plan.
PROPOSAL NO. 3
RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the shareholders to ratify the selection of Coopers &
Lybrand L.L.P. as the Company's independent auditors for the fiscal year ending
July 28, 1996. The affirmative vote of the holders of a majority of shares
represented and voting at the Annual Meeting will be required to ratify the
selection of Coopers & Lybrand L.L.P.
In the event the shareholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board of Directors, in its discretion, may direct the appointment of a different
independent accounting firm at any time during the year if the Board of
Directors feels that such a change would be in the Company's and its
shareholders' best interests.
Coopers & Lybrand L.L.P. has audited the Company's financial statements
annually since fiscal 1988. Its representatives are expected to be present at
the Annual Meeting, will have the opportunity to make a statement if they desire
to do so, and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote FOR the
ratification of the selection of Coopers & Lybrand L.L.P. to serve as the
Company's independent auditors for the fiscal year ending July 28, 1996.
12
<PAGE> 15
PROPOSAL NO. 4
AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION
The shareholders are being asked to approve a Certificate of Amendment to
the Company's Restated Articles of Incorporation (the "Articles") to increase
the authorized number of shares of Common Stock from 320,000,000 to 600,000,000
shares. The Board authorized the amendment on August 22, 1995. The affirmative
vote of the holders of a majority of the outstanding Common Stock is required to
approve the Certificate of Amendment.
The Articles presently provide that the Company is authorized to issue two
classes of stock, consisting of 320,000,000 shares of Common Stock and 5,000,000
shares of preferred stock. On September 22, 1995, 273,636,333 shares of Common
Stock were issued and outstanding, and 35,762,413 shares of Common Stock were
reserved for issuance pursuant to option plans, purchase rights and for other
other purposes. The remaining 10,601,254 shares of authorized but unissued
Common Stock are not reserved for any specific use and are available for future
issuance.
PURPOSE AND EFFECT OF AMENDMENT
The proposed amendment will authorize sufficient additional shares of
Common Stock to cover the full 19,000,000 share increase in the Option Plan set
forth in Proposal No. 2, and to provide the Company with the flexibility to make
such issuances as may be necessary in order for the Company to complete
acquisitions or other corporate transactions. The proposed amendment to the
Articles, authorizing an additional 280,000,000 shares of Common Stock, would
facilitate the Company's ability to accomplish these goals and other business
and financial purposes in the future without the necessity of delaying such
activities for further shareholder approval except as may be required in a
particular case by the Company's charter documents, applicable law, or the rules
of any stock exchange or other system on which the Company's securities may then
be listed. During the last fiscal year the Company completed three acquisitions,
one for cash and two pursuant to which an aggregate of approximately 11,655,939
shares were issued. The Company has recently announced three new acquisitions
which are in the process of closing and which involve the issuance of an
aggregate of approximately 7,081,000 shares. The increase in the authorized
number of shares of Common Stock which the shareholders are currently being
asked to approve is not necessary to complete the pending acquisitions. While
the Company expects to complete acquisitions in the future and is continuously
reviewing potential acquisition candidates, as of the date of this proxy
statement, the Company has no current understandings, arrangements, commitments,
or intentions to issue or sell any additional shares of Common Stock or
securities convertible into Common Stock, except pursuant to its Option Plan,
which issuances would require approval of the proposed increase in the Company's
authorized Common Stock. In addition, the Company is not currently actively
reviewing any potential acquisition candidate that, in order to complete an
acquisition, would require approval of the proposed authorized share increase.
Future issuances of additional shares of Common Stock or securities convertible
into Common Stock, whether pursuant to an acquisition or other corporate
transaction, would have the effect of diluting the voting rights and could have
the effect of diluting earnings per share and book value per share of existing
shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board believes that the amendment of the Articles is necessary to
provide the Company with agility and flexibility over the upcoming year.
The Board recommends that the shareholders vote FOR the approval of the
Certificate of Amendment to the Company's Articles.
13
<PAGE> 16
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of July
30, 1995, of all persons who are beneficial owners of five percent or more of
the Company's Common Stock and by each director and nominee, each of the
Company's Chief Executive Officers, and the four other highest-paid executive
officers named in the Summary Compensation Table below, and all current officers
and directors as a group as of July 30, 1995:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENT
NAME OWNED(1) OWNED(2)
----------------------------------------------------------------- ------------ --------
<S> <C> <C>
John T. Chambers................................................. 488,749 *
Michael S. Frankel............................................... 76,667 *
James F. Gibbons................................................. 56,667 *
Edward R. Kozel.................................................. 139,827 *
Donald A. LeBeau................................................. 98,750 *
Frank J. Marshall................................................ 365,000 *
John P. Morgridge(3)............................................. 5,155,059 1.89
Robert L. Puette................................................. 12,800 *
Carl Redfield.................................................... 83,071 *
David H. Ring.................................................... 34,529 *
Masayoshi Son.................................................... 20,000 *
Donald T. Valentine(4)........................................... 186,286 *
All current officers and directors
as a group (13 persons)(5)..................................... 6,718,405 2.45
</TABLE>
- ---------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock. The
number of shares beneficially owned includes Common Stock of which such
individual has the right to acquire beneficial ownership either currently or
within 60 days after July 30, 1995, including, but not limited to, upon the
exercise of an option.
(2) Percentage of beneficial ownership is based upon 272,245,809 shares of
Common Stock, all of which were outstanding on July 30, 1995. For each
individual, this percentage includes Common Stock of which such individual
has the right to acquire beneficial ownership either currently or within 60
days of July 30, 1995, including, but not limited to, upon the exercise of
an option; however, such Common Stock shall not be deemed outstanding for
the purpose of computing the percentage owned by any other individual. Such
calculation is required by General Rule 13d-3(d)(1)(i) under the Securities
Exchange Act of 1934. Based upon a review of 13G filings made with the
Securities and Exchange Commission during 1995, there were no 5%
shareholders.
(3) Includes 4,809,915 shares held by John P. Morgridge and Tashia F. Morgridge
as Trustees of the Morgridge Family Trust (UTA DTD June 30, 1988). Includes
10,760 shares held by Tashia F. Morgridge. Includes 150,000 shares in the
Morgridge Family Foundation.
(4) Includes 95,540 shares held by the Donald T. Valentine Family Trust Under
Agreement dated April 29, 1967. Also includes 11,996 shares held by Sequoia
XXII. Mr. Valentine disclaims beneficial ownership of the shares held by the
Sequoia XXII, except to the extent of his pecuniary interest therein.
(5) Includes outstanding options to purchase 1,596,882 shares of Common Stock
held by 6 officers and 6 directors of the Company to the extent such options
are either currently exercisable or will become exercisable within 60 days
after July 30, 1995. See Note 2 with respect to shares that have been
included herein.
14
<PAGE> 17
COMPLIANCE WITH SEC REPORTING REQUIREMENTS
Under the securities laws of the United States, the Company's directors,
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report initial ownership of the Company's
Common Stock and any subsequent changes in ownership to the Securities and
Exchange Commission ("SEC"). Specific due dates have been established by the
SEC, and the Company is required to disclose in this Proxy Statement any failure
to file by these dates. Based upon (i) the copies of Section 16(a) reports that
the Company received from such persons for their 1995 fiscal year transactions
and (ii) the written representations received from one or more of such persons
that no annual Form 5 reports were required to be filed for them for the 1995
fiscal year, the Company believes that there has been compliance with all
Section 16(a) filing requirements applicable to such officers, directors, and
ten-percent beneficial owners.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
The Compensation/Stock Option Committee ("the Compensation Committee") of
the Cisco Systems, Inc. Board of Directors has the exclusive authority to
establish the level of base salary payable to the Chief Executive Officer and
certain other executive officers of the Company and to administer the Company's
1987 Stock Option Plan, under which grants may be made to such officers and
other key employees. In addition, the Committee has the responsibility for
approving the individual bonus programs to be in effect for the Chief Executive
Officer and certain other executive officers and other key employees each fiscal
year. The Committee serves pursuant to a charter adopted by the Board of
Directors. The Committee is composed entirely of outside directors who have
never served as officers of the Company.
For the 1995 fiscal year, the process utilized by the Committee in
determining executive officer compensation levels was based upon the Committee's
subjective judgment and took into account both qualitative and quantitative
factors. Among the factors considered by the Committee were the recommendations
of the chief executive officer with respect to the compensation of the Company's
key executive officers. However, the Committee made the final compensation
decisions concerning such officers. The Committee established the compensation
payable for Mr. John P. Morgridge, President and Chief Executive Officer. Mr.
Morgridge then recommended, subject to the Committee's review and the Board's
approval, the compensation payable to Mr. John T. Chambers, Executive Vice
President; Mr. Donald A. LeBeau, Senior Vice President, Worldwide Operations;
Mr. Frank J. Marshall, Vice President, Engineering; Mr. Carl Redfield, Vice
President, Manufacturing; and Mr. John M. Russell, Vice President, Finance and
Administration, Chief Financial Officer and Secretary. In January 1995, Mr.
Larry R. Carter became Vice President, Finance and Administration, Chief
Financial Officer and Secretary, at which time Mr. Carter's compensation was
established by Mr. Chambers (following his appointment as Chief Executive
Officer) and was subsequently approved by the Board of Directors.
GENERAL COMPENSATION POLICY. The Committee's fundamental policy is to
offer the Company's executive officers competitive compensation opportunities
based upon overall Company performance, their individual contribution to the
financial success of the Company, and their personal performance. It is the
Committee's objective to have a substantial portion of each officer's
compensation contingent upon the Company's performance, as well as upon his or
her own level of performance. Accordingly, each executive officer's compensation
package comprises three elements: (i) base salary, which is established
primarily on the basis of individual performance and market considerations; (ii)
annual variable performance awards payable in cash and tied to the Company's
achievement of financial performance goals, the executive's contribution, and a
measure of customer satisfaction; and, (iii) long-term stock-based incentive
awards, which strengthen the mutuality of interests between the executive
officers and the shareholders.
COMPETITIVE FRAME OF REFERENCE. The Company's Human Resources Department,
working with an independent outside consulting firm, has compiled for the
Committee executive compensation data drawn from a nationally recognized survey
of a select group of similarly sized technology companies (the "Peer
15
<PAGE> 18
Companies"). The Company's executive officers, including the CEO, were matched
with their counterparts at the surveyed Peer Companies, and the market
compensation levels for those comparable positions were examined to determine
base salary, target incentive, and total cash compensation. It is the Company's
policy to target total cash compensation levels (base salary and incentive) to
be between the 25th and 50th percentile of the compensation levels in effect for
the Peer Companies. The practices of the Peer Companies with respect to stock
option grants were also reviewed and compared.
In preparing the performance graph for this Proxy Statement, the Company
has selected the Hambrecht & Quist Technology Index. This Index is used by the
Company, because 80% of the Peer Companies in the survey are contained in the
H&Q Index. Certain companies were included among the Peer Companies, because the
Company competes for executive talent with those companies even though they are
not included in the H&Q Index. In addition, certain companies in the H&Q Index
were excluded from the group of Peer Companies, because they were determined not
to be competitive with the Company for executive talent or because compensation
information was not available.
BASE SALARY. The base salary for each executive officer is set on the
basis of personal performance and the salary level in effect for comparable
positions at the Peer Companies. The level of base salary for such executive
officers is between the 25th and 50th percentile of the surveyed compensation
data for the Peer Companies.
ANNUAL INCENTIVE COMPENSATION. Each executive officer has an established
target based on competitive market levels for comparable positions at the Peer
Companies. The annual pool of bonuses for executive officers is determined on
the basis of the Company's achievement of the financial performance targets
established at the start of the fiscal year, a range for the executive's
contribution, and a measure of customer satisfaction. The bonus plan has a
threshold level of Company performance based on both revenue and profit before
interest and taxes that must be achieved before any bonuses are awarded. Once
the threshold is achieved, specific formulas are in place to calculate the
actual incentive payment for each officer. For the 1995 fiscal year, the Company
exceeded its performance targets. Actual bonuses paid reflect an individual's
accomplishment of both corporate and functional objectives, with greater weight
being given to achievement of corporate rather than functional objectives.
LONG-TERM INCENTIVE COMPENSATION. During fiscal 1995, the Committee, in
its discretion, made option grants to Messrs. Carter, Chambers, Kozel, LeBeau,
Marshall, and Redfield under the 1987 Stock Option Plan. Generally, the size of
each grant is set at a level which the Committee deems appropriate to create a
meaningful opportunity for stock ownership based upon the individual's current
position with the Company, but there is also taken into account comparable
awards made to individuals in similar positions with the Peer Companies, the
individual's potential for future responsibility and promotion, the individual's
performance in the recent period, and the number of unvested options held by the
individual at the time of the new grant. The relative weight given to each of
these factors will vary from individual to individual at the Committee's
discretion.
The grants are designed to align the interests of the executive officer
with those of the shareholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an equity
stake in the business. Each grant allows the officer to acquire shares of the
Company's common stock at a fixed price per share (the market price on the grant
date) over a specified period of time. The option vests in periodic installments
over a four-year period, contingent upon the executive officer's continued
employment with the Company. Accordingly, the option will provide a return to
the executive officer only if he or she remains in the Company's employ, and
then only if the market price of the Company's Common Stock appreciates over the
option term.
CEO COMPENSATION. The annual base salary for Mr. Morgridge, who was the
Company's President and Chief Executive Officer until January 31, 1995, was
established by the Committee on August 9, 1994 for the period August 1, 1994
through January 31, 1995. The Committee's decision was made primarily on the
basis of Mr. Morgridge's personal performance of his duties and the rate of base
salary paid to the chief executive officers of the Company's competitors based
on the surveyed compensation data for the Peer Companies. The level of base
salary for Mr. Morgridge was set below the 25th percentile of the surveyed data.
On February 1,
16
<PAGE> 19
1995, Mr. Morgridge's salary was reduced 25% to take account of the fact that
Mr. Morgridge was no longer to serve as the Company's President and Chief
Executive Officer. The base salary for Mr. Chambers, who became the Company's
President and Chief Executive Officer on January 31, 1995, was established by
the Committee on August 9, 1994 primarily on the basis of his personal
performance and his duties as an executive vice president. The salary was
increased on February 1, 1995, upon his appointment as the chief executive
officer, and is based upon the salary paid to the chief executive officers of
the Peer Companies, but below the 25th percentile of the surveyed data.
The remaining components of each chief executive officer's 1995 fiscal year
incentive compensation were entirely dependent upon financial performance and a
measure of customer satisfaction and provided no dollar guarantees. The bonus
paid to each officer for the fiscal year was based on the same incentive plan
for all other officers. Specifically, a target incentive was established at the
beginning of the year using an agreed-upon formula based on Company revenue and
profit before interest and taxes. Each and every year, the annual incentive plan
is reevaluated with a new achievement threshold and new targets for revenue and
profit before interest and taxes. The option grant made to each chief executive
officer during the 1995 fiscal year was intended to reflect his years of service
with the Company and to place a significant portion of his total compensation at
risk, because the options will have no value unless there is appreciation in the
value of the Company's common stock over the option term.
TAX LIMITATION. As a result of federal tax legislation enacted in 1993, a
publicly held company such as the Company will not be allowed a federal income
tax deduction for compensation paid to certain executive officers to the extent
that compensation exceeds $1 million per officer in any year. This limitation
will be in effect for all fiscal years of the Company beginning after July 31,
1994, but it is not expected that the compensation to be paid to the Company's
executive officers for the 1996 fiscal year will exceed the $1 million limit per
officer. In addition, the shareholders approved at the 1994 Annual Meeting an
amendment to the Company's 1987 Stock Option Plan that imposes a limit on the
maximum number of shares of Common Stock for which any one participant may be
granted stock options over the remaining term of the plan. Accordingly, any
compensation deemed paid to an executive officer when he exercises an
outstanding option under the 1987 Stock Option Plan with an exercise price equal
to the fair market value of the option shares on the grant date will qualify as
performance-based compensation that will not be subject to the $1 million
limitation. Until final Treasury Regulations are issued with respect to the new
limitation, the Committee will defer any decision on whether or not to limit the
dollar amount of all other compensation payable to the Company's executive
officers to the $1 million cap, should the individual compensation of any
executive officer ever approach that level.
Compensation/Stock Option Committee
ROBERT L. PUETTE, CHAIRMAN
JAMES F. GIBBONS
MICHAEL S. FRANKEL
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation/Stock Option Committee of the Company's
Board of Directors are as named above in the Compensation/Stock Option Committee
Report. No member of such Committee was at any time during the 1995 fiscal year
or at any other time an officer or employee of the Company.
No executive officer of Cisco Systems, Inc. served on the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Cisco Systems, Inc. Board of Directors or
Compensation/Stock Option Committee.
17
<PAGE> 20
STOCK PERFORMANCE GRAPH
The graph depicted below shows the Company's stock price as an index
assuming $100 invested on July 29, 1990, along with the composite prices of
companies listed in the S&P 500 and the Hambrecht & Quist Technology Index.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH]
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings made by the Company under those
statutes, the preceding Compensation/Stock Option Committee Report on Executive
Compensation and the Company Stock Performance Graph will not be incorporated by
reference into any of those prior filings, nor will such report or graph be
incorporated by reference into any future filings made by the Company under
those statutes.
- ---------------
Notes
1) The Company's fiscal year ended on July 30, 1995.
2) No cash dividends have been declared on the Company's Common Stock.
Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns.
18
<PAGE> 21
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by each of the
Company's Chief Executive Officers and the four other highest-paid executive
officers whose compensation for the 1995 fiscal year was in excess of $100,000
for services rendered in all capacities to the Company and its subsidiaries for
each of the last three fiscal years. Mr. Morgridge is included in the table
because he served as the Company's Chief Executive Officer from the start of the
1995 fiscal year until January 31, 1995. No other executive officer who would
have otherwise been includable in such table on the basis of salary and bonus
earned for the 1995 fiscal year has been excluded by reason of his or her
termination of employment during that fiscal year. The individuals included in
the table will be collectively referred to as the "Named Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
------------------------------ OTHER ANNUAL ------------ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION(3) OPTIONS(#) ($)(1)
- ---------------------------- ---- --------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers............ 1995 230,468 163,806 0 200,000 1,500
President, CEO, Director 1994 202,987 142,548 0 130,000 2,000
1993 172,792 140,591 0 0 0
John P. Morgridge(4)........ 1995 183,160 111,639 0 0 1,500
Chairman of the Board 1994 218,980 166,812 0 150,000 1,000
1993 187,212 172,092 0 40,000 1,000
Donald A. LeBeau............ 1995 198,203 147,520 0 175,000 0
Senior Vice President, 1994 171,913 118,556 128,467 0 0
Worldwide Operations 1993 141,354 115,320 25,000 0 0
Frank J. Marshall........... 1995 198,374 123,085 0 90,000 1,500
Vice President, Engineering 1994 182,516 124,648 0 0 1,000
1993 145,971 124,819 0 0 1,000
Edward R. Kozel............. 1995 167,996 106,512 0 100,000 1,500
Vice President, Business 1994 145,577 102,342 0 130,000 1,000
Development 1993 106,385 75,916 0 140,000 1,000
Carl Redfield............... 1995 158,547 101,132 0 100,000 1,500
Vice President,
Manufacturing 1994 134,242 93,901 80,000 200,000 1,000
1993 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Represents the Company's 401(k) matching contributions.
(2) The amounts shown under the Bonus column represent cash bonuses earned for
the indicated fiscal years.
(3) Represents $153,467 in relocation payments for Mr. LeBeau and $80,000 in
relocation payments for Mr. Redfield.
(4) During fiscal 1995, Mr. Morgridge served as Chief Executive Officer of the
Company from August 1, 1994 to January 31, 1995.
19
<PAGE> 22
STOCK OPTIONS
The following table provides information with respect to the stock option
grants made during the 1995 fiscal year under the Company's 1987 Stock Option
Plan to the Named Officers. No stock appreciation rights were granted to the
Named Officers during such fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE OF ASSUMED ANNUAL
NUMBER OF % OF TOTAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION -----------------------
NAME (1) YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------- ---------- ----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers...... 200,000 1.4739 33.25 12/16/99 1,837,272 4,059,891
John P. Morgridge..... 0 0 0 -- 0 0
Donald A. LeBeau...... 100,000 .7369 24.00 08/17/99 663,076 1,465,224
75,000 .5527 39.87 04/11/00 826,255 1,825,806
Frank J. Marshall..... 40,000 .2947 24.00 08/17/99 265,230 586,090
30,000 .2210 39.87 04/11/00 330,502 730,323
20,000 .1473 43.00 05/08/00 237,602 525,039
Edward R. Kozel....... 100,000 .7369 39.87 04/11/00 1,101,673 2,434,409
Carl Redfield......... 40,000 .2947 24.00 08/17/99 265,230 586,090
60,000 .4421 39.87 04/11/00 661,004 1,460,645
</TABLE>
- ---------------
(1) Options were granted on August 17, 1994, December 16, 1994, April 11, 1995,
and May 8, 1995, and have a maximum term of 5 years measured from the grant
date, subject to earlier termination in the event of the optionee's
cessation of service with the Company. Each option will become exercisable
for 25% of the option shares upon the completion of one year of service
measured from the grant date and will become exercisable for the remaining
shares in equal monthly installments over the next 36 months of service
thereafter. However, the option will immediately become exercisable for all
of the option shares in the event the Company is acquired by a merger or
asset sale, unless the options are assumed by the acquiring entity.
(2) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the 5-year option term will be at the assumed 5% and 10% annual rates of
compounded stock price appreciation or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
20
<PAGE> 23
OPTION EXERCISES AND HOLDINGS
The table below sets forth information with respect to the Named Officers
concerning their exercise of options during the 1995 fiscal year and the
unexercised options held by them as of the end of such year. No stock
appreciation rights were exercised during such fiscal year, and no stock
appreciation rights were outstanding at the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT JULY 30, 1995 AT JULY 30, 1995($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers.......... 200,000 8,489,375 483,333 288,333 24,858,698 7,202,907
John P. Morgridge......... 0 0 160,417 149,583 6,352,327 4,912,048
Donald A. LeBeau.......... 150,000 3,941,875 48,334 315,000 2,123,675 10,571,562
Frank J. Marshall......... 250,000 7,395,625 312,500 277,500 14,414,062 10,677,812
Edward R. Kozel........... 0 0 136,458 248,542 4,633,292 6,412,958
Carl Redfield............. 30,000 496,250 62,208 207,792 1,908,926 5,601,699
</TABLE>
- ---------------
(1) Based upon the market price of $56.0625 per share, which was the closing
selling price per share of Common Stock on the Nasdaq National Market on the
last day of the 1995 fiscal year less the option exercise price payable per
share.
(2) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
None of the Company's executive officers have employment or severance
agreements with the Company, and their employment may be terminated at any time
at the discretion of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1993, the Company loaned Donald A. LeBeau, Senior Vice President
Worldwide Operations of the Company, $400,000. The loan is due in full on August
9, 1997. The loan is interest free and is collateralized by a deed of trust on
real property.
In February 1994, the Company loaned Carl Redfield, Vice President of
Manufacturing of the Company, $200,000. The loan is due in full on March 1,
1998. The loan is interest free and is collateralized by a deed of trust on real
property.
In February 1995, the Company loaned Larry R. Carter, Vice President
Finance and Administration, Chief Financial Officer and Secretary, $400,000 as
part of the sign-on incentive package to induce him to join the Company's
employ. The loan is due in full on February 13, 1999. The loan is interest free
and is collateralized by a deed of trust on real property.
SHAREHOLDER PROPOSALS FOR 1995 PROXY STATEMENT
Shareholder proposals that are intended to be presented at the Company's
annual meeting of shareholders to be held in 1996 must be received by the
Company no later than June 4, 1996, in order to be included in the proxy
statement and related proxy materials.
21
<PAGE> 24
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES, AND
LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO CISCO SYSTEMS, INC., 170 W. TASMAN
DRIVE, SAN JOSE, CALIFORNIA 95134-1706, ATTN: INVESTOR RELATIONS.
OTHER MATTERS
The Board knows of no other matters to be presented for shareholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
Larry R. Carter
Secretary
22
<PAGE> 25
CISCO SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS, NOVEMBER 14, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CISCO SYSTEMS,
INC.
The undersigned revokes all previous proxies, acknowledges receipt of the notice
of shareholders meeting to be held November 14, 1994 and the proxy statement,
and appoints John T. Chambers and Larry R. Carter or either of them the proxy of
the undersigned, with full power of substitution, to vote all shares of Common
Stock of Cisco Systems, Inc. that the undersigned is entitled to vote, either on
his or her own behalf or on behalf of an entity or entities, at the Annual
Meeting of Shareholders of the Company to be held at the Company's headquarters
located at 170 W. Tasman Drive, San Jose, California 95134-1706, on Tuesday,
November 14, 1995 at 10:00 a.m., and at any adjournment or postponement thereof,
with the same force and effect as the undersigned might or could do if
personally present thereat. The shares represented by this proxy shall be voted
in the manner set forth on the reverse side.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
PLEASE MARK VOTES AS IN THIS EXAMPLE. / x /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE MATTERS LISTED BELOW.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BELOW. THIS PROXY
WILL BE VOTED FOR PROPOSALS NO. 1, 2, 3, 4, AND 5 IF NO SPECIFICATION IS MADE.
1. Election of all nominees listed below to the Board of Directors to serve
until the next Annual Meeting and until their successors have been duly elected
and qualified, except as noted (write the names, if any, of nominees for whom
you withhold authority to vote.)
Nominees: John T. Chambers, Michael S. Frankel, James F. Gibbons, John P.
Morgridge, Robert L. Puette, Masayoshi Son, Donald T. Valentine
For / / Withheld / /
/ /
- -----------------------------------------------------
For all nominee except as noted above
2. Proposal to amend the Company's 1987 Stock Option Plan that will (i)
increase the number of shares available for issuance by an additional 19,000,000
shares of Common Stock, (ii) eliminate the authority of the plan administrator
to grant stock options with an exercise price per share less than the fair
market value of the Common Stock on the grant date, and (iii) reduce the maximum
options term for all future grants to 9 years.
<PAGE> 26
For / / Withheld / / Abstain / /
3) Proposal to ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the fiscal year ending July 28, 1996.
For / / Withheld / / Abstain / /
4) Proposal to amend the Company's Restated Articles of Incorporation to
increase the number of shares of Common Stock by an additional 280,000,000
shares.
For / / Withheld / / Abstain / /
5) Proposal to transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please sign your name exactly as it appears hereon. If acting as attorney,
executor, trustee, or in their representative capacity, sign name and title.
Signature: Date:
------------------------------------- -------
Signature: Date:
------------------------------------- -------
<PAGE> 27
EXHIBIT A
AUTOMATIC STOCK OPTION AGREEMENT
<PAGE> 28
CISCO SYSTEMS, INC.
1987 STOCK OPTION PLAN
(AS AMENDED THROUGH OCTOBER 17, 1995)
ARTICLE ONE
GENERAL
I. PURPOSES OF THE PLAN
(a) This Stock Option Plan (the "Plan") is intended to promote
the interests of Cisco Systems, Inc. (the "Company") by providing a method
whereby (i) key employees (including officers and directors) of the Company (or
its parent or subsidiary corporations) responsible for the management, growth
and financial success of the Company (or its parent or subsidiary corporations),
(ii) non-employee members of the Company's Board of Directors (or of the board
of directors of any parent or subsidiary corporations) and (iii) consultants and
independent contractors who provide valuable services to the Company (or its
parent or subsidiary corporations) may be offered incentives and rewards which
will encourage them to acquire a proprietary interest, or otherwise increase
their proprietary interest, in the Company and continue to render services to
the Company (or its parent or subsidiary corporations).
(b) For purposes of the Plan, the following provisions shall be
applicable in determining the parent and subsidiary corporations of the Company:
(i) Any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company shall be considered to be a parent
corporation of the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(ii) Each corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company shall be considered to
be a subsidiary of the Company, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
<PAGE> 29
II. PLAN STRUCTURE
(a) The Plan shall be divided into two separate components:
- The Discretionary Option Grant Program, under which eligible
individuals may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock in accordance with
the provisions of Article Two.
- The Automatic Option Grant Program, under which non-employee
Board members shall automatically receive special option grants at
periodic intervals to purchase shares of Common Stock in accordance
with the provisions of Article Three.
(b) Unless the context clearly indicates otherwise, the
provisions of Articles One and Four shall apply to both the Discretionary Option
Grant and Automatic Option Grant Programs and shall accordingly govern the
interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by a committee ("Committee")
of two (2) or more non-employee Board members appointed by the Board. No Board
member shall be eligible to serve on the Committee if such individual has,
within the twelve (12)- month period immediately preceding the date he or she is
to be appointed to the Committee, received an option grant or stock issuance
under this Plan or any other stock plan of the Company (or any parent or
subsidiary corporation), other than pursuant to the Automatic Option Program.
Members of the Committee shall serve for such period of time as the Board may
determine and shall be subject to removal by the Board at any time.
(b) The Committee as Plan Administrator shall have full power and
authority (subject to the express provisions of the Plan) to establish such
rules and regulations as it may deem appropriate for the proper administration
of the Discretionary Option Grant Program and to make such determinations under,
and to issue such interpretations of, such program and any outstanding option
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties with an interest in the
Discretionary Option Grant Program or any outstanding option thereunder.
(c) The Plan Administrator shall have full authority to determine
which eligible individuals are to receive option grants under the Discretionary
Option Grant Program, the number of shares to be covered by each such grant, the
status of the granted option as either an incentive stock option ("Incentive
Option") which satisfies the requirements of Section 422 of the Internal Revenue
Code or a non-statutory option not intended to meet such requirements,
2.
<PAGE> 30
the time or times at which each such option is to become exercisable, and the
maximum term for which the option is to be outstanding.
(d) Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and the Plan Administrator shall not exercise any discretionary functions
with respect to the option grants made pursuant to that program.
IV. ELIGIBILITY FOR OPTION GRANTS
(a) The persons eligible to receive option grants under the Plan
are as follows:
(i) key employees (including officers and directors) of the
Company (or its parent or subsidiary corporations) who render services
which contribute to the success and growth of the Company (or its
parent or subsidiary corporations) or which may reasonably be
anticipated to contribute to the future success and growth of the
Company (or its parent or subsidiary corporations);
(ii) the non-employee members of the Board;
(iii) the non-employee members of the board of directors of
any parent or subsidiary corporation; and
(iv) those consultants or independent contractors who provide
valuable services to the Company (or its parent or subsidiary
corporations).
(b) Members of the Committee while serving as the Plan
Administrator shall not be eligible to receive any stock options, stock
appreciation rights, direct stock issuances or other stock awards under this
Plan or any other stock plan of the Company or its parent or subsidiary
corporations, other than pursuant to the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
(a) The stock issuable under the Plan shall be shares of the
Company's authorized but unissued or reacquired Common Stock. The aggregate
number of shares which may be issued over the term of the Plan as adjusted for
the four 2-for-1 stock splits effected in March 1991, March 1992, March 1993 and
March 1994 respectively, shall not exceed 110,640,112 shares.(*/) The total
number of shares issuable under the Plan shall be subject to
- -----------------------
(*/) Reflects (i) the two-for-one stock splits effected March 1991, March 1992,
March 1993 and March 1994, (ii) the 500,000-share increase authorized by the
Board on October 8, 1991 and approved by the shareholders at the 1991 Annual
Meeting, (iii) the 1,000,000-share increase authorized by the Board on October
5, 1992 and approved by the shareholders at the 1992
3.
<PAGE> 31
further adjustment from time to time in accordance with Section IV(d) of this
Article One.
(b) In no event may which any one individual participating in the
Plan be granted stock options or separately exercisable stock appreciation
rights for more than 2,000,000 shares of Common Stock in the aggregate over the
remaining term of the Plan, subject to periodic adjustment in accordance with
the provisions of Section IV (d) of this Article One. For purposes of such
limitation, any stock options or stock appreciation rights granted prior to
August 1, 1994 shall not be taken into account.
(c) Should an option terminate or expire for any reason prior to
exercise in full, the shares subject to the portion of the option not so
exercised shall be available for subsequent option grants under the Plan. Shares
subject to any option surrendered or cancelled in accordance with Section IV of
Article Two or Section III of Article Three and all share issuances under the
Plan, whether or not the shares are subsequently repurchased by the Company
pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Common Stock available for
subsequent option grants under the Plan. If the exercise price of an outstanding
option under the Plan is paid with shares of Common Stock, the number of shares
available for subsequent option grant shall be reduced by the gross number of
shares for which the option is exercised, and not by the net number of shares
actually issued.
(d) In the event any change is made to the Common Stock issuable
under the Plan by reason of any stock split, stock dividend, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
will be made to (i) the maximum number and/or class of securities issuable under
the Plan, (ii) the maximum number and/or class of securities for which any one
individual may be granted stock options and separately exercisable stock
appreciation rights under the Option Plan after July 31, 1994, (iii) the number
and/or class of securities for which option grants are to be subsequently made
to each newly elected or continuing non-employee Board member under the
Automatic Option Grant Program and (iv) the number and/or class of securities
and price per share in effect under each outstanding option.
- -----------------------
Annual Meeting on November 10, 1992, (iv) the 2,000,000-share increase
authorized by the Board on August 10, 1993 and approved by the shareholders at
the 1993 Annual Meeting on November 12, 1993, (v) the 4,000,000-share increase
authorized by the Board on August 9, 1994 and approved by the shareholders at
the 1994 Annual Meeting on November 15, 1994, and (vi) the 19,000,000-share
increase authorized by the Board on August 22, 1995, subject to shareholder
approval at the 1995 Annual Meeting on November 14, 1995. Assuming approval of
the proposed 19,000,000 share increase by the Company's shareholders, not more
than 41,672,653 shares may be issued under the Plan from and after July 30,
1995, subject, however, to adjustment under Section IV(d) of Article One.
4.
<PAGE> 32
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF DISCRETIONARY GRANTS
Options granted pursuant to the Discretionary Option Grant
Program shall be authorized by action of the Plan Administrator and may, at the
Plan Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not employees of the Company or its parent or
subsidiary corporations may only be granted non-statutory options. Each option
granted under the Discretionary Option Grant Program shall be evidenced by one
or more instruments in the form approved by the Plan Administrator; provided,
however, that each such instrument shall comply with the terms and conditions
specified below. Each instrument evidencing an Incentive Option shall, in
addition, be subject to the applicable provisions of Section II of this Article
Two.
A. Option Price.
1. The option price per share shall be fixed by the Plan
Administrator, provided the option price per share for any option granted prior
to October 1, 1995 shall not be less than eighty-five percent (100%) of the fair
market value of a share of Common Stock on the date of the option grant and the
option price per share for any option granted on or after October 1, 1995 shall
not be less than one hundred percent (100%) of the fair market value of a share
of Common Stock on the date of the option grant.
2. The option price shall, subject to the provisions of Section I
of Article Four and the instrument evidencing the grant, be payable in one of
the alternative forms specified below:
(i) full payment in cash or cash equivalents;
(ii) full payment in shares of Common Stock held by the
optionee for at least six (6) months and valued at fair market value on
the Exercise Date (as such term is defined below);
(iii) full payment through a combination of shares of Common
Stock held by the optionee for at least six (6) months and valued at
fair market value on the Exercise Date (as such term is defined below)
and cash or cash equivalents; or
(iv) to the extent the option is exercised for fully-vested
shares of Common Stock, full payment effected through a broker-dealer
sale and remittance procedure pursuant to which the optionee (I) shall
provide irrevocable
5.
<PAGE> 33
written instructions to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate option price payable for the
purchased shares plus all applicable Federal and State income and
employment taxes required to be withheld by the Company by reason of
such purchase and (II) shall provide written directives to the Company
to deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
For purposes of this subparagraph 2, the Exercise Date shall be
the first date on which the Company shall have received written notice of the
exercise of the option. Except to the extent the sale and remittance procedure
under clause (iv) above is utilized by the optionee, payment of the option price
for the purchased shares shall accompany the notice.
3. The fair market value of a share of Common Stock on any
relevant date under subparagraph 1 or 2 above (and for all other valuation
purposes under the Plan) shall be determined in accordance with the following
provisions:
(i) If the Common Stock is not at the time listed or admitted
to trading on any stock exchange but is traded on the National Market,
the fair market value shall be the closing selling price per share of
Common Stock on the date in question, as such prices are reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no reported closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation
exists shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or admitted to
trading on any national securities exchange, then the fair market value
shall be the closing selling price of one share of Common Stock on the
date in question on the securities exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on
such exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the fair market value shall be
the closing selling price on the exchange on the last preceding date
for which such quotation exists.
B. Term and Exercise of Options. Each option granted under this
Article Two shall be exercisable at such time or times, during such period, and
for such number of shares as shall be determined by the Plan Administrator and
set forth in the instrument evidencing such option; provided, however, that no
such option granted prior to October 1, 1995 shall have a term in excess of ten
(10) years measured from the grant date and no such option granted on or after
October 1, 1995 shall have a term in excess of nine (9) years measured from the
grant date. During the lifetime of the optionee, the option shall be exercisable
only by the
6.
<PAGE> 34
optionee and shall not be assignable or transferable by the optionee otherwise
than by will or by the laws of descent and distribution following the optionee's
death.
C. Effect of Termination of Service.
1. Should an optionee cease to remain in Employee status for any
reason (including death or permanent disability as defined in Section 22(e)(3)
of the Internal Revenue Code) while the holder of one or more outstanding
options under this Article Two, then such option or options shall not (except to
the extent otherwise provided pursuant to subparagraph C.4 below) remain
exercisable for more than a twelve (12)-month period (or such shorter period
determined by the Plan Administrator and specified in the instrument evidencing
the grant) following the date of such cessation of Employee status; provided,
however, that under no circumstances shall such options be exercisable after the
specified expiration date of the option term. Each such option shall, during
such twelve (12)-month or shorter period, be exercisable only to the extent of
the number of shares (if any) for which the option is exercisable on the date of
such cessation of Employee status. Upon the expiration of such twelve (12)-month
or shorter period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be exercisable. However, each such option
shall, immediately upon optionee's cessation of Employee status, terminate and
cease to remain outstanding with respect to any option shares for which the
option is not otherwise at that time exercisable.
2. Any outstanding option under this Article Two held by an
optionee at the time of his or her death may be subsequently exercised, but only
to the extent of the number of shares (if any) for which the option is
exercisable on the date of the optionee's cessation of Employee status (less any
shares subsequently purchased by optionee prior to death), by the personal
representative of the optionee's estate or by the person or persons to whom the
option is transferred pursuant to the optionee's will or in accordance with the
laws of descent and distribution, provided and only if such exercise occurs
prior to the earlier of (i) the first anniversary of the date of the optionee's
death or (ii) the specified expiration date of the option term. Upon the
occurrence of the earlier event, the option shall terminate and cease to be
exercisable for any and all of the option shares for which the option is
exercisable at the time of optionee's cessation of Employee status but for which
the option is not subsequently exercised.
3. If (i) the optionee's Employee status is terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement or any unauthorized disclosure or use of
confidential information or trade secrets) or (ii) the optionee makes or
attempts to make any unauthorized use or disclosure of confidential information
or trade secrets of the Company or its parent or subsidiary corporations, then
in any such event all outstanding options held by the optionee under this
Article Two shall immediately terminate and cease to be exercisable.
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<PAGE> 35
4. Notwithstanding subparagraphs C.1 and C.2 above, the Plan
Administrator shall have complete discretion, exercisable either at the time the
option is granted or at any time while the option remains outstanding,
- to extend the period of time for which the option is to remain
exercisable following the optionee's cessation of Employee status from
the twelve (12) month or shorter period set forth in the option
agreement to such greater period of time as the Plan Administrator
shall deem appropriate. Such extension may in the Plan Administrator's
sole discretion be conditioned upon the optionee's performance of
services as a consultant to the Company during all or any portion of
the extension period. In no event, however, shall such option be
exercisable after the specified expiration date of the option term.
- to permit one or more options held by the optionee under the
Plan to be exercised during the limited period of exercisability
following his or cessation of Employee status, not only with respect to
the number of shares for which it is exercisable at the time of such
cessation of Employee status but also with respect to one or more
subsequent installments of purchasable shares for which the option
would otherwise become exercisable were such cessation of Employee
status not to occur. Such additional vesting may in the Plan
Administrator's sole discretion be conditioned upon the optionee's
performance of services as a consultant to the Company following such
cessation of Employee status.
5. For purposes of the foregoing provisions of this Section C
(and all other purposes of the Plan), the optionee shall be deemed to remain in
EMPLOYEE status for so long as the optionee renders services while in the employ
of the Company or one or more of its parent or subsidiary corporations, subject
to the control and direction of the employer entity not only as to the work to
be performed but also as to the manner and method of performance. The Plan
Administrator shall have complete discretion to determine the extent to which an
optionee may be deemed to be an Employee while on a leave of absence.
6. If the option is to be granted to an individual who is not an
Employee of the Company, then the option agreement evidencing the granted option
shall include provisions comparable to subparagraphs C.1, C.2 and C.3 above, and
may include provisions comparable to subparagraph C.4 above, with respect to the
optionee's termination of service with the Company or its parent or subsidiary
corporations.
D. Shareholder Rights. An optionee shall have none of the rights
of a shareholder with respect to any shares covered by the option until such
individual shall have exercised the option and paid the option price.
E. Repurchase Rights. The shares of Common Stock acquired upon
the exercise of options granted under this Article Two may be subject to
repurchase by the Company
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<PAGE> 36
in accordance with the following provisions:
1. The Plan Administrator may in its discretion determine that it
shall be a term and condition of one or more options exercised under this
Article Two that the Company (or its assignees) shall have the right,
exercisable upon the optionee's cessation of Employee or other service status,
to repurchase at the option price any or all of the shares of Common Stock
previously acquired by the optionee upon the exercise of such option. Any such
repurchase right shall be exercisable by the Company (or its assignees) upon
such terms and conditions (including the establishment of the appropriate
vesting schedule and other provision for the expiration of such right in one or
more installments over the optionee's period of Employee or service status) as
the Plan Administrator may specify in the instrument evidencing such right.
2. All of the Corporation's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated repurchase
rights shall immediately vest in full, upon the occurrence of any Corporate
Transaction under Section IV of this Article Two, except to the extent such
repurchase rights are expressly assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction.
3. The Plan Administrator shall have the discretionary authority,
exercisable either before or after the optionee's cessation of Employee status,
to cancel the Company's outstanding repurchase rights with respect to one or
more shares purchased or purchasable by the optionee under the granted option
and thereby accelerate the vesting of such shares in connection with the
optionee's cessation of Employee status.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to
all Incentive Options granted under this Article Two. Incentive Options may only
be granted to individuals who are Employees of the Company. Options which are
specifically designated as "non-statutory" options when issued under this
Article Two shall not be subject to such terms and conditions.
(a) Option Price. The option price per share of the Common Stock
subject to an Incentive Option shall in no event be less than one hundred
percent (100%) of the fair market value of a share of Common Stock on the date
of grant.
(b) Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more options granted to any Employee after December 31, 1986 under
this Plan (or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the federal tax laws during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two or more such options which become exercisable for the first time in
the same calendar year, the
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<PAGE> 37
foregoing limitation on the exercisability thereof as incentive stock options
under the federal tax laws shall be applied on the basis of the order in which
such options are granted.
(c) 10% Shareholder. If any individual to whom the Incentive
Option is granted is the owner of stock (as determined under Section 424(d) of
the Internal Revenue Code) possessing 10% or more of the total combined voting
power of all classes of stock of the Company or any one of its parent or
subsidiary corporations, then the option price per share shall not be less than
one hundred and ten percent (110%) of the fair market value per share of Common
Stock on the grant date, and the option term shall not exceed five (5) years,
measured from such grant date.
Except as modified by this Section II, all the provisions of the
Plan shall be applicable to the Incentive Options granted hereunder.
III . CORPORATE TRANSACTIONS
(a) In the event of any of the following transactions (a
"Corporate Transaction"):
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company, or
(iii) any reverse merger in which the Company is the
surviving entity but in which fifty percent (50%) or more of the
Company's outstanding voting stock is transferred to holders different
from those who held the stock immediately prior to such merger,
the exercisability of each option outstanding under this Article
Two shall automatically accelerate so that each such option shall, immediately
prior to the specified effective date for the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for all or any portion of
such shares. However, an outstanding option under this Article Two shall not so
accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation or parent thereof or (ii) the
acceleration of such option is subject to other applicable limitations imposed
by the Plan Administrator at the time of grant. The determination of such
comparability shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
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<PAGE> 38
(b) The portion of any Incentive Option accelerated under this
Section III in connection with a Corporate Transaction shall remain exercisable
as an incentive stock option under the federal tax laws only to the extent the
dollar limitation of Section II of Article Two is not exceeded. To the extent
such dollar limitation is exceeded, the accelerated portion of such option shall
be exercisable as a non-statutory option under the federal tax laws.
(c) Immediately following the consummation of the Corporate
Transaction, all outstanding options under this Article Two shall, to the extent
not previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be outstanding.
(d) Each outstanding option under this Article Two which is to be
assumed in connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issuable, in consummation of such Corporate Transaction, to an
actual holder of the same number of shares of Common Stock as are subject to
such option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the option price payable per share, provided
the aggregate option price payable for such option shall remain the same. In
addition, appropriate adjustments shall also be made to the class and number of
securities available for issuance under the Plan on both an aggregate and
individual basis following the consummation of such Corporate Transaction.
(e) The grant of options under this Plan shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. SURRENDER OF OPTIONS FOR CASH OR STOCK
(a) Provided and only if the Plan Administrator determines in its
discretion to implement the stock appreciation right provisions of this Section
V, one or more optionees may be granted the right, exercisable upon such terms
and conditions as the Plan Administrator may establish, to surrender all or part
of an unexercised option under this Article Two in exchange for a distribution
from the Company equal in amount to the excess of (i) the fair market value (at
date of surrender) of the number of shares in which the optionee is at the time
vested under the surrendered option or portion thereof over (ii) the aggregate
option price payable for such vested shares.
(b) No surrender of an option shall be effective hereunder unless
it is approved by the Plan Administrator. If the surrender is so approved, then
the distribution to which the optionee shall accordingly become entitled under
this Section V may be made in shares of Common Stock valued at fair market value
at date of surrender, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
11.
<PAGE> 39
(c) If the surrender of an option is rejected by the Plan
Administrator, then the optionee shall retain whatever rights the optionee had
under the surrendered option (or surrendered portion thereof) on the date of
surrender and may exercise such rights at any time prior to the later of (i) the
end of the five (5) business day period following receipt of the rejection
notice or (ii) the last day on which the option is otherwise exercisable in
accordance with the terms of the instrument evidencing such option, but in no
event may such rights be exercised at any time after ten (10) years after the
date of the option grant.
(d) One or more directors or officers of the Company subject to
the short-swing profit restrictions of the federal securities laws may, in the
Plan Administrator's sole discretion, be granted limited stock appreciation
rights in tandem with their outstanding options under this Article Two. Upon the
occurrence of a Hostile Take-Over at a time when one or more classes of the
Company's equity securities are registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), each outstanding option with
such a limited stock appreciation right in effect for at least six (6) months
shall automatically be cancelled, to the extent such option is at the time
exercisable for vested shares of Common Stock, and the optionee shall in return
be entitled to a cash distribution from the Company in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock which are at the
time vested under the cancelled option over (ii) the aggregate exercise price
payable for such vested shares. The cash distribution payable upon such
cancellation shall be made within five (5) days following the consummation of
the Hostile Take-Over. Neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option
cancellation and cash distribution. Any uncancelled portion of the option shall
continue to remain outstanding and become exercisable in accordance with the
terms of the agreement evidencing the grant.
(e) For purposes of this Section V and Section III of Article
Three, the following definitions shall be in effect:
A Hostile Take-Over shall be deemed to occur in the event
(i) any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act)
of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant
to a tender or exchange offer made directly to the Company's
shareholders which the Board does not recommend such shareholders to
accept and (ii) more than fifty percent (50%) of the securities so
acquired in such tender or exchange offer are accepted from holders
other than officers and directors of the Company.
The Take-Over Price per share shall be deemed to be equal
to the greater of (a) the fair market value per share of Common Stock
on the date of the option cancellation, as determined pursuant to the
valuation provisions of
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<PAGE> 40
Section I.A.3 of Article Two, or (b) the highest reported price per
share paid in effecting such Hostile Take-Over. However, if the
cancelled option is an Incentive Option, the Take-Over Price shall not
exceed the clause (a) price per share.
(f) The shares of Common Stock subject to any option surrendered
or cancelled for an appreciation distribution pursuant to this Section VI shall
NOT be available for subsequent option grant under the Plan.
13.
<PAGE> 41
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
A. Eligible Board Members. The individuals eligible to receive
automatic option grants pursuant to the provisions of this Article Three shall
be limited to (i) those individuals who are serving as non-employee Board
members on the August 9, 1994 effective date of this Automatic Option Grant
Program and who have otherwise completed at least four (4) years of service in
such capacity, (ii) those individuals who are first elected or appointed as
non-employee Board members after such effective date, whether through
appointment by the Board or election by the Company's shareholders, and (iii)
those individuals who are re-elected to serve as non-employee Board members at
one or more Annual Stockholder Meetings beginning with the 1994 Annual Meeting.
A non-employee Board member shall not be eligible to receive any automatic
option grants under this Article Three if such individual renders (or has
rendered) services as an Employee at any time on or after October 1, 1988. Each
non-employee Board member eligible to participate in the Automatic Option Grant
Program pursuant to the foregoing criteria shall be designated an Eligible
Director for purposes of this Article Three.
B. Limitation. The non-employee Board members serving as Plan
Administrator shall not, during such period of service, be eligible to receive
any stock options, stock appreciation rights, direct stock issuances or other
stock award under this Plan or any other stock plan of the Company (or any
parent or subsidiary), other than pursuant to the provisions of this Automatic
Option Grant Program.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article
Three on the dates specified below:
1. Each individual who is serving as an Eligible Director on the
August 9, 1994 effective date of the Automatic Option Grant Program and who has
otherwise completed at least four (4) years of service in such capacity shall
automatically be granted on such effective date a non-statutory option to
purchase 20,000 shares of Common Stock upon the terms and conditions of this
Article Three.
2. Each individual who first becomes an Eligible Director after
the August 9, 1994 effective date, whether through election by the Company's
shareholders or appointment by the Board, shall automatically be granted, at the
time of such initial election or appointment, a non-statutory option to purchase
20,000 shares of Common Stock upon the terms and conditions of this Article
Three.
14.
<PAGE> 42
3. On the date of each Annual Shareholders Meeting, beginning
with the 1994 Annual Meeting, each individual who is at that time re-elected as
an Eligible Director shall automatically be granted a non-statutory option to
purchase an additional 10,000 shares of Common Stock upon the terms and
conditions of this Article Three, provided such individual has served as a Board
member for at least five (5) months.
B. No Limitation. There shall be no limit on the number of such
10,000-share annual option grants any one Eligible Director may receive over his
or her period of Board service. The number of shares for which the automatic
option grants are to be made to newly elected or continuing Eligible Directors
shall be subject to periodic adjustment pursuant to the applicable provisions of
Section IV of Article One.
C. Option Price. The option price per share of Common Stock of
each automatic option grant made under this Article Three shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
automatic grant date.
D. Option Term. Each automatic grant under this Article Three
shall have a maximum term of five (5) years measured from the automatic grant
date.
E. Exercisability/Vesting. Each automatic grant shall be
immediately exercisable for any or all of the option shares; provided, however,
that no such grant shall become exercisable in whole or in part unless the
shareholders approve this Automatic Option Grant Program at the 1994 Annual
Meeting. Any shares purchased under the option shall be subject to repurchase by
the Company, at the option price paid per share, upon the optionee's cessation
of Board service prior to vesting in those shares in accordance with the
applicable schedule below.
- The initial automatic grant for 20,000 shares shall vest, and
the Company's repurchase right shall lapse, in a series of four (4)
equal and successive annual installments over the optionee's period of
continued service as a Board member, measured from the automatic grant
date.
- Each annual 10,000-share automatic grant shall vest, and the
Company's repurchase right shall lapse, in two (2) equal and successive
annual installments over the optionee's period of continued service as
a Board member, measured from the automatic grant date.
Vesting of the option shares shall be subject to acceleration as
provided in Section II.H.3 and Section III of this Article Three. In no event
shall any additional option shares vest after the optionee's cessation of Board
service, except as otherwise provided in Section II.H.3 of this Article Three.
F. Payment. The option price shall be payable in any of the
alternative forms authorized under Section I.A.2 of Article Two. To the extent
the option is exercised for any
15.
<PAGE> 43
unvested shares, the optionee must execute and deliver to the Company a stock
purchase agreement for those unvested shares which provides the Company with the
right to repurchase, at the option price paid per share, any unvested shares
held by the optionee at the time of cessation of Board service and which
precludes the sale, transfer or other disposition of the purchased shares at any
time while those shares remain subject to the Company's repurchase right.
G. Non-Transferability. During the optionee's lifetime the
automatic option grant, together with the limited stock appreciation right
pertaining to such option, shall be exercisable only by the optionee and shall
not be assignable or transferable except for a transfer of the option effected
by will or by the laws of descent and distribution following the optionee's
death.
H. Termination of Board Service.
1. Should the optionee cease to serve as a Board member for any
reason (other than death or permanent disability, as defined in Section I.C.1 of
Article Two) while holding one or more automatic option grants under this
Article Three, then such individual shall have a six (6)-month period following
the date of such cessation of Board service in which to exercise each such
option for any or all of the option shares in which the optionee is vested at
the time of such cessation of Board service. However, each such option shall
immediately terminate and cease to remain outstanding, at the time of such
cessation of Board service, with respect to any option shares in which the
optionee is not otherwise at that time vested under such option.
2. Should the optionee die within six (6) months after cessation
of Board service, then any automatic option grant held by the optionee at the
time of death may subsequently be exercised, for any or all of the option shares
in which the optionee is vested at the time of his or her cessation of Board
service (less any option shares subsequently purchased by the optionee prior to
death), by the personal representative of the optionee's estate or by the person
or persons to whom the option is transferred pursuant to the optionee's will or
in accordance with the laws of descent and distribution. The right to exercise
each such option shall lapse upon the expiration of the twelve (12)-month period
measured from the date of the optionee's death.
3. Should the optionee die or become permanently disabled while
serving as a Board member, then the shares of Common Stock at the time subject
to each automatic option grant held by the optionee shall immediately vest in
full (and the Company's repurchase right with respect to such shares shall
terminate), and the optionee (or the representative of the optionee's estate or
the person or persons to whom the option is transferred upon the optionee's
death) shall have a twelve (12)-month period following the date of the
optionee's cessation of Board service in which to exercise such option for any
or all of those vested shares of Common Stock.
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<PAGE> 44
4. In no event shall any automatic grant under this Article Three
remain exercisable after the expiration date of the five (5)-year option term.
Upon the expiration of the applicable post-service exercise period under
subparagraphs 1 through 3 above or (if earlier) upon the expiration of the five
(5)-year option term, the automatic grant shall terminate and cease to be
outstanding for any option shares in which the optionee was vested at the time
of his or her cessation of Board service but for which such option was not
subsequently exercised.
I. Shareholder Rights. The holder of an automatic option grant
under this Article Three shall have none of the rights of a shareholder with
respect to any shares subject to that option until such individual shall have
exercised the option and paid the option price for the purchased shares.
J. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the form Automatic Stock Option
Agreement attached as Exhibit A to the Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction (as defined in
Section III of Article Two), the shares of Common Stock at the time subject to
each outstanding option under this Article Three but not otherwise vested shall
automatically vest in full and the Company's repurchase right with respect to
those shares shall terminate, so that each such option shall, immediately prior
to the specified effective date for the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to that
option and may be exercised for all or any portion of such shares as fully
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, all option grants under this Article Three shall
terminate and cease to remain outstanding, except to the extent one or more such
grants are assumed by the successor entity or its parent corporation.
B. In connection with any Change in Control (as defined below) or
Hostile Take-Over (as defined in Section V of Article Two), the shares of Common
Stock at the time subject to each outstanding option under this Article Three
but not otherwise vested shall automatically vest in full and the Company's
repurchase right with respect to those shares shall terminate, so that each such
option shall, immediately prior to the specified effective date for the Change
in Control or Hostile Take-Over, become fully exercisable for all of the shares
of Common Stock at the time subject to that option and may be exercised for all
or any portion of such shares as fully vested shares of Common Stock. Each
option shall remain so exercisable for all the option shares following the
Change in Control or Hostile Take-Over until the expiration or sooner
termination of the option term.
C. Upon the occurrence of a Hostile Take-Over, the optionee shall
also have a thirty (30)-day period in which to surrender to the Corporation each
option held by him or her under this Article Three for a period of at least six
(6) months. The optionee shall in return be
17.
<PAGE> 45
entitled to a cash distribution from the Company in an amount equal to the
excess of (i) the Take-Over Price (as defined in Section V of Article Two) of
the shares of Common Stock at the time subject to the surrendered option over
(ii) the aggregate option price payable for such shares. Such cash distribution
shall be paid within five (5) days following the surrender of the option to the
Company. Neither the approval of the Plan Administrator nor the consent of the
Board shall be required in connection with such option surrender and cash
distribution. The shares of Common Stock subject to each option surrendered in
connection with the Hostile Take-Over shall NOT be available for subsequent
issuance under the Plan.
D. The automatic option grants outstanding under this Article
Three shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
E. For purposes of this Article Three, a Change in Control shall
be deemed to occur upon a change in ownership or control of the Company effected
through either of the following transactions:
(i) the direct or indirect acquisition by any person or
related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made
directly to the Company's shareholders which the Board does not
recommend such shareholders to accept; or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members (rounded up to the next whole number) ceases, by reason
of one or more contested elections for Board membership, to be
comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been
elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (i) who
were still in office at the time such election or nomination was
approved by the Board.
IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS
The provisions of this Automatic Option Grant Program, together
with the automatic option grants outstanding under this Article Three, may not
be amended at intervals more frequently than once every six (6) months, other
than to the extent necessary to comply with applicable federal income tax laws
and regulations.
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ARTICLE FOUR
MISCELLANEOUS
I. LOANS OR GUARANTEE OF LOANS
The Plan Administrator may assist any optionee (including any
officer or director) in the exercise of one or more options held by such
optionee under the Discretionary Option Grant Program by (a) authorizing the
extension of a loan to such optionee from the Company, (b) permitting the
optionee to pay the option price for the purchased Common Stock in installments
over a period of years or (c) authorizing a guarantee by the Company of a third
party loan to the optionee. The terms of any loan, installment method of payment
or guarantee (including the interest rate and terms of repayment) will be
established by the Plan Administrator in its sole discretion. Loans, installment
payments and guarantees may be granted without security or collateral (other
than to optionees who are consultants or independent contractors, in which event
the loan must be adequately secured by collateral other than the purchased
shares), but the maximum credit available to the optionee shall not exceed the
sum of (i) the aggregate option price payable for the purchased shares plus (ii)
any federal and state income and employment tax liability incurred by the
optionee in connection with the exercise of the option.
II. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects whatsoever. However, (i) no
such amendment or modification shall, without the consent of the holders,
adversely affect rights and obligations with respect to options at the time
outstanding under the Plan and (ii) any amendment made to the Automatic Option
Grant Program (or any options outstanding thereunder) shall be in compliance
with the limitation of Section IV of Article Three. In addition, the Board shall
not, without the approval of the shareholders of the Company (i) materially
increase the maximum number of shares issuable under the Plan or the number of
shares for which options may be granted to newly elected or continuing
non-employee Board members under Article Three of the Plan or the maximum number
of shares for which any one individual participating in the Plan may be granted
stock options and separately exercisable stock appreciation rights in the
aggregate after July 31, 1994, except for permissible adjustments under Section
IV(d) of Article One, (ii) materially modify the eligibility requirements for
the grant of options under the Plan or (iii) otherwise materially increase the
benefits accruing to participants under the Plan.
III. EFFECTIVE DATE AND TERM OF PLAN
(a) The Plan was initially adopted by the Board in September 1987
and approved by the Company's shareholders in October 1987. The Plan was
subsequently amended by the Board in August 1988, July 1989, August 1990,
October 1991 and October 1992 to
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<PAGE> 47
increase the number of shares of Common Stock issuable thereunder. The
shareholders approved such amendments in December 1988, December 1989, December
1990, November 1991, and November 1992 respectively. The Plan was restated by
the Board, effective April 10, 1992, to bring the Plan into compliance with
applicable requirements of SEC Rule 16b-3, as amended May 1, 1991, under the
1934 Act. The Plan was subsequently amended on August 10, 1993 to increase the
number of shares issuable over the term of the Plan by 2,000,000 shares, and
such increase was approved by the shareholders at the 1993 Annual Meeting. The
Plan was amended on August 9, 1994 to (i) increase the number of shares issuable
over the term of the Plan by 4,000,000 shares, (ii) impose a limitation of
2,000,000 shares on the total number of shares of Common Stock for which any one
individual may be granted stock options and separately exercisable stock
appreciation rights after July 31, 1994 and (iii) establish the Automatic Option
Grant for non-employee Board members. The Plan was further amended on August 22,
1995 to increase the number of shares issuable over the term of the Plan from
91,640,112 to 110,640,112 shares, subject to shareholder approval of the
19,000,000-share increase at the 1995 Annual Shareholders Meeting. The Plan was
most recently amended on October 17, 1995 to (i) eliminate the authority of the
Plan Administrator to grant options with an exercise price per share less than
the fair market value per share of Common Stock on the grant date and (ii)
reduce the maximum term for which an option granted on or after October 1, 1995
may remain outstanding to nine (9) years.
(b) The provisions of the August 9, 1994 amendment shall apply
only to options granted under the Plan from and after the August 9, 1994
effective date. Each option issued and outstanding under the Plan immediately
prior to such effective date shall continue to be governed by the terms and
conditions of the Plan as in effect on the grant date, and nothing in the August
9, 1994 amendment shall be deemed to affect or otherwise modify the rights or
obligations of the holders of such options with respect to the acquisition of
shares of Common Stock thereunder. The provisions of the October 17, 1995
amendment are effective October 1, 1995 and shall apply only to options granted
under the Plan on or after such effective date. Each option issued and
outstanding under the Plan immediately prior to such effective date shall
continue to be governed by the terms and conditions of the Plan as in effect on
the grant date, and nothing in the October 17, 1995 amendment shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to the acquisition of shares of Common Stock thereunder.
(c) The sale and remittance procedure authorized for the exercise
of outstanding options shall be available for (i) all options granted under the
Plan on or after October 8, 1991, including options granted to officers and
directors, and (ii) all non-statutory options outstanding on such date,
including non-statutory options held by officers and directors. The Plan
Administrator may also allow such procedure to be utilized in connection with
the exercise of designated incentive stock options outstanding on such date,
including those held by officers and directors.
(d) No option granted on the basis of the 19,000,000-share
increase authorized by the Board on August 22, 1995 shall become exercisable in
whole or in part at any time prior
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<PAGE> 48
to shareholder approval of such 19,000,000-share increase. If such shareholder
approval is not obtained at the 1995 Annual Meeting, then all options granted on
the basis of such increase shall immediately terminate and cease to be
outstanding without ever becoming exercisable for any of the option shares, and
no further options shall be granted on the basis of such share increase. Subject
to such limitations, the Plan Administrator may grant options under the Plan at
any time after the date of adoption and prior to the date of termination under
paragraph (e) below.
(e) Unless sooner terminated in accordance with Section VII, the
Plan shall terminate upon the earlier of (i) the expiration of the ten (10) year
period measured from the date of the Board's initial adoption of the Plan or
(ii) the date on which all shares available for issuance under the Plan shall
have been issued or cancelled pursuant to the exercise, surrender or cash-out of
the options granted hereunder. If the date of termination is determined under
clause (i) above, then options outstanding on such date shall thereafter
continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
(f) Options may be granted under this Plan to purchase shares of
Common Stock in excess of the number of shares then available for issuance under
the Plan, provided (i) an amendment to increase the maximum number of shares
issuable under the Plan is adopted by the Board prior to the initial grant of
any such option and within one year thereafter such amendment is approved by the
shareholders of the Company and (ii) each option granted is not to become
exercisable, in whole or in part, at any time prior to the obtaining of such
shareholder approval.
IV. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares
pursuant to options granted under the Plan shall be used for general corporate
purposes.
V. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option
hereunder, and the issuance of stock upon the exercise or surrender of any such
option shall be subject to the procurement by the Company of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it and the stock issued pursuant to it.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Company in establishing the Plan, nor
any action taken by the Plan Administrator hereunder, nor any provision of the
Plan shall be construed so as to grant any individual the right to remain in the
employ or service of the Company (or any parent or subsidiary) for any period of
specific duration, and the Company (or any parent or subsidiary corporation
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
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