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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 25,1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
170 West Tasman Drive
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San Jose, California 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 526-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 23, 1998, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $ 101,827,050,035 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
National Market System of the National Association of Securities Dealers
Automated Quotation System on that date). Shares of Common Stock held by each
officer, director, and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 23, 1998, 1,569,284,000 shares of registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Annual Report to Shareholders for fiscal year ended July 25,
1998 are incorporated by reference into Part I and Part II of this Annual
Report on Form 10-K where indicated.
(2) Portions of the Registrant's Proxy Statement related to the 1998 Annual
Meeting of Shareholders, to be held on November 12, 1998, are incorporated
by reference into Part III of this Annual Report on Form 10-K where
indicated.
The table of exhibits filed appears at page 26.
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PART I
ITEM 1. BUSINESS
GENERAL
Certain Statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import, constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Readers are referred to the "Financial Risk Management" and "Potential
Volatility in Operating Results" sections, of Cisco Systems, Inc.'s 1998 Annual
Report to Shareholders, which is incorporated herein by reference, as well as
the "Acquisitions, Investments and Alliances", "Backlog", "Competition",
"Research and Development", "Manufacturing", "Patents, Intellectual Property and
Licensing", "Future Growth Subject to Risks" and "Other Risk Factors" sections
contained herein, which identify important risk factors that could cause actual
results to differ from those contained in the forward looking statements.
Cisco Systems, Inc. and its subsidiaries ("Cisco", or the "Company") is the
worldwide leader in networking for the Internet. Cisco operates in one industry
segment and creates hardware and software solutions that link computer networks
so that people have easy access to information without regard to differences in
time, place or type of computer system.
Networking is a multi-billion dollar global market whose growth is spurred by
the belief that the Internet is changing the way we all work, live, play and
learn. Over the last year, there has been a key shift in the role of the
Internet and in how the Internet is perceived. What was once a fairly complex
tool used by an elite group of highly technical individuals is now a technology
driving economic change globally by creating new jobs and market opportunities.
The Company markets its products through its direct sales force, single and
two-tier distributors, value-added resellers, service providers and system
integrators. This multiple-channel approach allows customers to select the
channel that addresses their specific needs and provides the Company with broad
coverage of worldwide markets.
Cisco was incorporated in California in December 1984. The Company's executive
offices are located at 170 West Tasman Drive, San Jose, California, 95134, and
its telephone number at that location is (408) 526-4000. Cisco can also be
reached by visiting its website at www.cisco.com.
END-TO-END INTERNET SOLUTIONS
Cisco's strategy is to provide end-to-end networking solutions to help our
customers improve productivity and gain a competitive advantage in today's
global economy. Cisco helps its customers build their own network infrastructure
and gain access to their suppliers or vendors' networks. An end-to-end
networking solution provides a common technical architecture that allows network
services to be consistently provided to all users on the network.
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Cisco's product portfolio offers a broad range of end-to-end networking
solutions. Products are used individually or in combination to connect computing
devices to networks, or computer networks with each other - whether they are
within a building, across a campus or around the world. The Company's breadth of
product offerings enables it to configure hardware and software features to meet
each customer's unique requirements. Many of the Company's products are
expandable, offering customers the option to upgrade their networks as their
needs grow.
Cisco's product offerings fall into several categories:
Routing
Routing is a foundation technology for computer communications. Routers move
information from one network to another, applying intelligence in the process to
ensure that the information reaches its destination securely and in the fastest
way possible. Cisco offers a broad range of routers, including the Cisco 12000
series, or Gigabit Switch Router (GSR), the Cisco 7500 series, the Cisco 4000
series and the Cisco 8500, 3600, 2600, 2500, 1000 and 700 product families.
Switching
Switching is another important networking technology that is used in both
local-area networks (LANs) and wide-area networks (WANs). Cisco's switching
strategy is designed to help users migrate from traditional shared LANs to fully
switched networks by delivering products that support the varying levels of
flexibility and cost-effectiveness required for today's desktop, workgroup, and
backbone applications. Cisco's solutions in this area employ all widely used
switching technologies -- Ethernet, Gigabit Ethernet, Token Ring and
Asynchronous Transfer Mode (ATM). Cisco's LAN switching products include the
Catalyst(TM) families, and Cisco's WAN switching products include the IGX, BPX,
TGX and MGX families as well as the Cisco 3800 series.
Access
Today, people need to access their computers and communicate from the home, from
remote locations and while traveling. Cisco's access solutions give groups and
individuals who are remotely located similar levels of connectivity and
information access as they would have if they were located at the company's head
office. Asynchronous and ISDN remote-access routers, dial-up access servers, and
DSL technologies provide telecommuters and mobile workers with Internet access
and branch-office connectivity. The Company's access products include the AS5000
family of access servers; access routers such as the Cisco 6000, 4000, 3800,
3600, 2600, 2500, 1600, 1000 and 700 families, products, network security and
management software.
SNA/LAN
Most large organizations have existing IBM computing systems that use the System
Network Architecture (SNA) networking method, as well as LANs based on open
network architectures (such as the TCP/IP protocol). Increasingly, network
managers want to combine these two networks into a single network that leverages
existing investments. Cisco provides a broad range of products and solutions for
the IBM marketplace that maximize availability, scalability, performance,
flexibility, and management. Much of this functionality is available through
Cisco IOS software, which provides IBM networks with a clear migration path to
the
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future while protecting investments in existing equipment and applications.
Internet Services
Cisco offers end-to-end Internet services to improve a network manager's ability
to cope with a number of challenges posed by the growing popularity of the
Internet, such as network traffic volume and network address shortages. Cisco's
Internet Service Units (ISUs) drive architectural consistency across the Company
by focusing on standards-based services between clients and servers such as
end-to-end quality of service and end-to-end security. Cisco's Internet Services
products include: the PIX Firewall, which prevents unauthorized access to a
network; NetSonar, which enables a secure network environment for Internet
connectivity and commerce; NetRanger, which terminates unauthorized activity;
Cisco LocalDirector, Cisco Cache Engine, and Cisco DistributedDirector, which
balance the load between multiple servers to enable timely access and to
eliminate redundant Internet content; and the Cisco Server Suite 1000, which
consists of server applications with a graphical user interface (GUI).
Cisco IOS Software
Cisco Internetwork Operating System (Cisco IOS(TM)) is the common platform that
ties all of Cisco's products together by delivering Internet services and
enabling networked applications. Specifically, Cisco IOS software transforms a
network into a strategic asset and a competitive advantage. Cisco IOS
technologies include a wide variety of features that provide the intelligence of
the Internet and private networks. The benefit of Cisco IOS is that it allows
Cisco customers to build an infrastructure that facilitates network growth and
the deployment of new applications, which in turn enhances reliability and
interoperability, and lowers the cost of ownership.
The Cisco IOS software platform provides important network services and enables
networked applications. Cisco IOS network services fall into two categories.
Foundation Network Services are the building blocks of a robust network. They
include connectivity, security, scalability, reliability and management.
Enabling Network Services support the deployment of applications that take
advantage of the underlying network. Enabling Network Services include such
areas as multimedia, quality of service (a network management and optimization
service) and voice.
Network Management
Cisco is extending its leading Internet business practices to its network
management vision and products. For example, Cisco's Assured Network Services
(ANS) is the company's vision and strategy for enterprise network management.
This initiative combines the power of the Internet with access to Cisco's
networking expertise to deliver enterprise-wide network availability,
performance and security. ANS ties together all Cisco network management
applications, online knowledge base and enterprise network infrastructure
devices.
In order for service providers to profit from increasing new business
opportunities, services must be carefully planned, quickly provisioned,
efficiently operated, and accurately billed. The Cisco Service Management (CSM)
system is a network service and delivery management system that delivers a
modular suite of service management products
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integrated within a common and scalable infrastructure. CSM enables service
providers to effectively deploy, monitor, and manage these new network services,
while potentially increasing revenue and reducing cost.
CUSTOMERS AND MARKETS
Networking needs are influenced by a number of factors, including the size of
the organization, number and types of computer systems, geographic locations,
and the applications requiring data communications. Cisco's customer base is not
concentrated in any particular industry and in each of the past five fiscal
years no single customer has accounted for 10 percent or more of the Company's
net sales. For additional information regarding the Company's customers and
markets see Note 11, "Geographic Information and Major Customers," on page 46 of
the Company's 1998 Annual Report to Shareholders, which is incorporated by
reference herein.
Cisco's market strategy addresses three main customer profiles:
Enterprise
Enterprise customers generally are large organizations with complex networking
needs, usually spanning multiple locations and types of computer systems.
Enterprise customers include corporations, government agencies, utilities and
educational institutions.
Service Providers
These customers provide data communication services, including telecommunication
carriers, Internet Service Providers, cable companies, and wireless
communication providers.
Small/Medium Business
These customers have a need for data networks of their own, as well as
connection to the Internet and/or to business partners. However, these customers
generally have limited resources; therefore, the Company attempts to provide
products which are affordable as well as easy to install and use.
Cisco Sales Overview
The Company's worldwide direct sales organization at September 18, 1998
consisted of approximately 5,000 individuals, including managers, sales
representatives, and technical support personnel. The Company has approximately
105 field sales offices providing coverage throughout the United States.
Additionally, the Company's international sales are currently being made through
multiple channels including approximately 108 international distributors and
resellers throughout the world. These international distributors provide system
installation, technical support, and follow-up services to end-customers.
Generally, the Company's international distributors have nonexclusive,
country-wide agreements. International sales through the various channels,
including the Company's subsidiaries, accounted for approximately 40.9% of total
sales in fiscal 1998, 43.5% in fiscal 1997, and 48.2% in fiscal 1996. Sales to
international customers and distributors generally have been made in United
States dollars. Since late fiscal
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1997, substantially all European orders have been fulfilled through the European
Operations Center (EOC).
The Company has sales support subsidiaries worldwide. New subsidiaries formed in
fiscal 1998 include China, Croatia, Denmark, Finland, Hungary, Norway, Puerto
Rico, Romania, Saudi Arabia and Slovakia.
ACQUISITIONS, INVESTMENTS AND ALLIANCES
The end-to-end strategy pursued by Cisco requires a wide variety of
technologies, products and capabilities. Additionally, the pace of change in the
industry is very rapid. The combination of complexity and rapid change make it
difficult for one company, no matter how large, to develop all technological
solutions alone. Acquisitions, investments and alliances are tools used by the
Company to fill gaps in its offerings and enable it to deliver complete
solutions to its customers and prospects in target markets.
Satisfying customers' networking needs requires a constant monitoring of market
and technology trends, plus an ability to act quickly. Cisco has a four-part
approach to satisfying the need for new or enhanced networking products and
solutions. In order of preference, this approach is to: develop new technologies
and products internally; enter into joint-development efforts with other
companies; resell another company's product; and acquire all or part of another
company.
Acquisitions involve numerous risks, which are more fully discussed in the
"Future Growth Subject to Risks" section of this document.
Since 1993, the Company has acquired a number of companies. The Company expects
to make future acquisitions where it believes that it can acquire new products
and channels of distribution or otherwise rapidly enter new or emerging markets.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that the Company's previous or future acquisitions
will be successful and will not adversely affect the Company's financial
condition or results of operations.
Each of the Company's acquisitions has furthered the Company's commitment to
providing an end-to-end solution. The Company now has a broad set of product
offerings and technologies, which include Ethernet, Gigabit Ethernet, Token
Ring, Asynchronous Transfer Mode (ATM) switching, Synchronous Optical
Network/Synchronous Digit Hierarchy (SONET/SDH), Digital Subscriber Line (xDSL),
Dial, converged data, voice and video technologies, network security and also
network management software solutions, among others.
Minority Investments
The Company makes minority investments in companies whose technologies or
expertise appear strategic to Cisco's interests and merit monitoring, but where
there is not yet a compelling need to have those capabilities in house.
Strategic Alliances
Cisco pursues strategic alliances with other industry leaders in areas where
collaboration can produce mutual benefits. The motivation for a strategic
alliance can include: technology exchange, product development, joint marketing
and sales, and new-market creation. This
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year, Cisco expanded its relationships with Microsoft, Hewlett-Packard, EDS, and
Sprint and created new alliances with KPMG, PeopleSoft, and INS. We also
extended our business alliances with Fujitsu and Japan Telecom, while announcing
strategic relationships with US West and NTT, among others.
BACKLOG
The Company's backlog on September 19, 1998 was approximately $693 million
compared with an approximate backlog of $443 million at September 20, 1997. The
Company includes in its backlog only orders confirmed with a purchase order for
products to be shipped within 120 days to customers with approved credit status.
Because of the generally short cycle between order and shipment, and occasional
customer changes in delivery schedules or cancellation of orders (which are made
without significant penalty), the Company does not believe that its backlog, as
of any particular date, is necessarily indicative of actual net sales for any
future period.
COMPETITION
Cisco competes in the telecommunications equipment market, providing solutions
for transporting data, voice and video traffic across intranets, extranets, and
the Internet. The market is characterized by rapid growth, converging
technologies, and a conversion to new solutions that offer superior advantages.
These market factors represent both an opportunity and a competitive threat to
Cisco. The Company competes with numerous vendors in each product category.
Cisco expects that the overall number of competitors providing niche product
solutions will increase due to the market's attractive growth. On the other
hand, the Company expects the number of vendors supplying end-to-end
telecommunications solutions will decrease, due to the rapid pace of
acquisitions in the industry. Ultimately the Company believes only a few large
suppliers of end-to-end telecommunication equipment solutions will become its
primary competitors.
Cisco's competitors include Lucent, Nortel, Ericsson, 3Com, Ascend, Cabletron,
Fore and IBM. Some of the Company's competitors compete across many of Cisco's
product lines, while others do not offer as wide a breadth of solutions. Several
of the Company's current and potential competitors have greater financial,
marketing and technical resources than the Company.
The principal competitive factors in the markets in which the Company presently
competes and may compete in the future are: price; performance; the ability to
provide end-to-end solutions and support; conformance to standards; the ability
to provide added value features such as security, reliability, and investment
protection; and market presence.
The Company also faces competition from customers it licenses technology to and
suppliers from whom it transfers technology. Networking's inherent nature
requires interoperability. As such, the Company must cooperate, and at the same
time compete, with these companies. The Company's inability to effectively
manage these complicated relationships with customers and suppliers could have a
material adverse effect on the Company's business, operating results, and
financial condition.
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RESEARCH AND DEVELOPMENT
The Company is engaged in research and development efforts to develop customer
solutions for each of its three primary lines of business: Enterprise, Service
Provider, and Small/Medium Business. The Company focuses its product development
activities on networking products that are responsive to customer requirements
and that provide end-to-end networking solutions. The Company's research and
development investments are made either internally or through acquisition, and
in addition, the Company makes minority equity investments in early stage
technology development entities.
The Company has recently announced several new products, including the Cisco
8500 family of multiservice routers, and the Company's 6400 Universal Access
Concentrator, which provides value-added DSL services. However, the industry in
which Cisco competes is subject to rapid technological developments, evolving
industry standards, changes in customer requirements and frequent new product
introductions and enhancements. As a result, the Company's success, in part,
depends upon its ability, on a cost-effective and timely basis, to continue to
enhance its existing solutions and to develop and introduce new solutions that
improve performance and reduce total cost of ownership. In order to achieve
these objectives, the Company's management and engineering personnel work
closely with customers, to identify and respond to customer needs, as well as
with other innovators of internetworking products, including universities,
laboratories, and corporations. The Company will also continue to make strategic
acquisitions and equity investments where appropriate. The Company intends to
remain dedicated to industry standards and to continue to support important
protocol standards as they emerge. Still, there can be no assurance that Cisco
will be able to successfully develop new products to address new customer
requirements and technological changes, or that such products will achieve
market acceptance.
In fiscal 1998, 1997, and 1996, the Company's research and development
expenditures were approximately $1,020 million, $698 million, and $399 million,
respectively. All of the Company's expenditures for research and development
costs, and purchased in process research and development of approximately $594
million in fiscal 1998 and $508 million in fiscal 1997, have been expensed as
incurred.
MANUFACTURING
The Company's manufacturing operations consist primarily of quality assurance of
materials, components and subassemblies. Additionally, the Company performs
final assembly and test. The Company presently uses a variety of independent
third-party companies to perform printed circuit board assembly, in circuit
test, and product repair. The Company and its single enterprise partners install
proprietary software on electronically programmable memory chips installed in
its systems in order to configure products to customer needs and to maintain
quality control and security. The manufacturing process enables the Company to
configure the hardware and software in unique combinations to meet a wide
variety of individual customer requirements. The Company and its single
enterprise partners also use automated testing equipment and "burn-in"
procedures, as well as comprehensive inspection, testing, and statistical
process control, to assure the quality and reliability of its products. The
Company's and its partners' manufacturing processes and procedures are ISO 9001
certified. To date, the Company has not experienced significant customer returns
of its products.
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PATENTS, INTELLECTUAL PROPERTY AND LICENSING
Cisco's success is dependent upon its proprietary technology. Cisco generally
relies upon patents, copyrights, trademarks and trade secret laws to establish
and maintain its proprietary rights in its technology and products. Cisco has a
program to file applications for and obtain patents in the United States and in
selected foreign countries where a potential market for Cisco's products exists.
Cisco has been issued a number of patents; other patent applications are
currently pending. There can be no assurance that any of these patents will not
be challenged, invalidated or circumvented, or that any rights granted
thereunder will provide competitive advantages to Cisco. In addition, there can
be no assurance that patents will be issued from pending applications, or that
claims allowed on any future patents will be sufficiently broad to protect
Cisco's technology. In addition, the laws of some foreign countries may not
permit the protection of Cisco's proprietary rights to the same extent as do the
laws of the United States. Although Cisco believes the protection afforded by
its patents, patent applications, copyrights and trademarks has value, the
rapidly changing technology in the networking industry makes Cisco's future
success dependent primarily on the innovative skills, technological expertise
and management abilities of its employees rather than on patent, copyright and
trademark protection.
Many of Cisco's products are designed to include software or other intellectual
property licensed from third parties. While it may be necessary in the future to
seek or renew licenses relating to various aspects of its products, Cisco
believes that based upon past experience and standard industry practice, such
licenses generally could be obtained on commercially reasonable terms. Because
of the existence of a large number of patents in the networking field and the
rapid rate of issuance of new patents, it is not economically practical to
determine in advance whether a product or any of its components infringe patent
rights of others. From time to time, Cisco receives notices from or is sued by
third parties regarding patent claims. If infringement is alleged, Cisco
believes that, based upon industry practice, any necessary license or rights
under such patents may be obtained on terms that would not have a material
adverse effect on Cisco's business, operating results and financial condition.
Nevertheless, there can be no assurance that the necessary licenses would be
available on acceptable terms, if at all, or that Cisco would prevail in any
such challenge. The inability to obtain certain licenses or other rights or to
obtain such licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on Cisco's business, operating
results and financial condition.
FUTURE GROWTH SUBJECT TO RISKS
The Company's business and stock is subject to a number of risks. Some of those
risks are described above and certain additional risks are set forth below.
Other risks are presented in the "Financial Risk Management" and "Potential
Volatility in Operating Results" sections on pages 23-27 of the Company's Annual
Report to Shareholders for the year ended July 25, 1998, which is incorporated
herein by reference.
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Acquisitions
The networking business is highly competitive, and as such, the Company's growth
is dependent upon market growth and its ability to enhance its existing products
and introduce new products on a timely basis. One of the ways the Company has
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including difficulties in integration of the operations, technologies, and
products of the acquired companies; the risk of diverting management attention
from normal daily operations of the business; risks of entering markets in which
the Company has no or limited direct prior experience and where competitors in
such markets have stronger market positions; and the potential loss of key
employees of the acquired company. The Company must also maintain its ability to
manage any such growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions made by the Company could materially
adversely affect the Company's business and operating results.
Regulation of the Internet
There are currently few laws or regulations that apply directly to access or
commerce on the Internet. The Company could be materially adversely affected by
proposed regulation on voice over the Internet, encryption technology and access
charges for Internet service providers, as well as the continuing deregulation
of the telecommunication industry. The adoption of such measures could decrease
demand for the Company's products, and at the same time increase the Company's
cost of selling its products. Changes in laws or regulations governing the
Internet and Internet commerce could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on New Product Development
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions, and
evolving methods of building and operating networks. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely manner, or that products
and technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive.
Entering New or Developing Markets
As the Company focuses on new market opportunities, such as transporting data,
voice and video traffic across the same network, it will increasingly compete
with a number of large telecommunications equipment suppliers, such as Lucent,
Ericsson, and Nortel, among others, and well funded start-up companies. Many of
these companies have substantially greater financial, marketing and technical
resources than the Company. If the Company cannot successfully compete with
these and other potential competitors, it could have a material adverse effect
on the Company's business, operating results and financial condition.
Additionally, as customers in these markets complete infrastructure deployment,
they may require greater levels of service, support and financing than the
Company has experienced in the past. There can be no assurance that the Company
can provide products, service, support and financing to effectively compete for
these market
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opportunities. Further, provision of greater levels of services by the Company
may result in less favorable revenue recognition treatment than has historically
been experienced.
Availability of Product
The Company's growth and ability to meet customer demands also depend in part on
its ability to obtain timely deliveries of parts from its suppliers. The Company
has experienced component shortages in the past that have adversely affected its
operations. Although the Company works closely with its suppliers to avoid these
types of shortages, there can be no assurances that the Company will not
encounter these problems in the future.
Natural Disasters
The Company's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in the
Silicon Valley area of Northern California, a region known for seismic activity,
Additionally, one of the Company's manufacturing facilities is located near a
river that has experienced flooding in the past. A significant natural disaster,
such as an earthquake or a flood, could have a material adverse impact on the
Company's business, financial condition and operating results.
OTHER RISK FACTORS
Potential Fluctuations in Quarterly Results
The Company's operating results have in the past been, and may continue to be,
subject to quarterly fluctuations as a result of a number of factors. These
factors include: the introduction and market acceptance of new technologies,
including Gigabit Switch Routing and Tag Switching (currently also known as
multiprotocol label switching [MPLS]); the timing of orders and manufacturing
lead times; variations in sales channels, product costs or mix of products sold;
increased competition in the networking industry; the overall trend toward
industry consolidation; the integration of people, operations and products from
acquired businesses and technologies; and changes in general economic conditions
and specific economic conditions in the computer and networking industries, any
of which could have a material adverse impact on operations and financial
results. For example, the Company from time to time has made acquisitions that
result in purchased research and development expenses being charged in an
individual quarter. These charges may occur in any particular quarter resulting
in variability in the Company's quarterly earnings. Additionally, the dollar
amounts of large orders for the Company's products have been increasing, and
therefore the operating results for a quarter could be materially adversely
affected if a number of large orders are either not received or are delayed, due
for example, to cancellations, delays or deferrals by customers.
Dependence on New Product Development; Rapid Technological and Market Change
The Company's operating results will depend to a significant extent on its
ability to reduce the costs to produce existing products. In particular, the
Company broadened its product line by introducing network access products. Sales
of these products, which are generally lower priced and carry lower margins than
the Company's core products, have increased more
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rapidly than sales of the Company's core products. The success of these and
other new products is dependent on several factors, including proper new product
definition, product cost, timely completion and introduction of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of these products. The Company has addressed the need to
develop new products through its internal development effort, joint development
with other companies and acquisitions. There can be no assurance that the
Company will successfully identify new product opportunities, develop and bring
new products to market in a timely manner, and achieve market acceptance of its
products, or that products and technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive.
Strategic Alliances
The Company has a number of strategic alliances with companies including
Microsoft, Hewlett-Packard, EDS, and Sprint, among others. These arrangements
are generally limited to specific projects, the goal of which is generally to
facilitate product compatibility and adoption of industry standards. If
successful, these relationships will be mutually beneficial and result in
industry growth. However, these alliances carry an element of risk because, in
most cases, the Company must compete in some business areas with a company with
which it has strategic alliances, and at the same time, cooperate with such
companies in other business areas. Also, if these companies fail to perform, or
if these relationships fail to materialize as expected, Cisco could suffer
delays in product development or other operational difficulties.
Industry Consolidation
There has been a trend toward industry consolidation for several years, which
has continued during fiscal 1998. In September 1998, Northern Telecom completed
its acquisition of Bay Networks. In fiscal 1997, 3Com completed its acquisition
of U.S. Robotics; and, Ascend Communications, Inc. completed its acquisition of
Cascade Communications Corporation. The Company expects this trend toward
industry consolidation to continue as companies attempt to strengthen or hold
their market positions in an evolving industry. The Company believes that
industry consolidation may provide stronger competitors that are better able to
compete as sole-source vendors for customers. This could lead to more
variability in operating results as the Company competes to be a single vendor
solution and could have a material adverse effect on the Company's business,
operating results, and financial condition.
Organizational Changes
The Company has realigned its business around three key customer groups or lines
of business. The Company believes this realignment of resources enables it to
better meet the needs of its customers. There are risks inherent in any business
realignment or reorganization, and the Company can give no assurance that these
organizational changes will meet their intended objectives.
Variability in Service Provider Sales
Although sales to the service provider market have continued to grow, this
market is characterized by large, and often sporadic purchases. Sales activity
in this industry depends upon the stage of completion of
12
<PAGE> 13
expanding network infrastructures, the availability of funding, and the extent
that service providers are affected by regulatory and business conditions in the
country of operations. A decline or delay in sales orders from this industry
could have a material adverse effect on the Company's business, operating
results and financial condition.
Manufacturing Risks
Although the Company generally uses standard parts and components for its
products, certain components are presently available only from a single source
or limited sources. A reduction or interruption in supply or a significant
increase in the price of one or more components would adversely affect the
Company's business, operating results and financial condition and could damage
customer relationships.
Changes in Telecommunications Laws and Tariffs
Changes in domestic and international telecommunication requirements could
affect the Company's sales of its products. In particular, the Company believes
it is possible that there may be significant changes in domestic
telecommunications regulations in the near future that could slow the expansion
of the service providers' network infrastructures and adversely affect the
Company's business, operating results and financial condition. Future changes in
tariffs by regulatory agencies or application of tariff requirements to
currently untariffed services could affect the sales of the Company's products
for certain classes of customers. Additionally, in the U.S. the Company's
products must comply with various Federal Communication Commission requirements
and regulations. In countries outside of the U.S., the Company's products must
meet various requirements of local telecommunications authorities. Changes in
tariffs, or failure by the Company to obtain timely approval of products could
have a material adverse effect on the Company's business, operating results and
financial condition.
International Operations
The Company conducts business globally. Accordingly, the Company's future
results could be adversely affected by a variety of uncontrollable and changing
factors including foreign currency exchange rates; regulatory, political or
economic conditions in a specific country or region; trade protection measures
and other regulatory requirements; government spending patterns; and natural
disasters, among other factors. In fiscal 1998, the Company experienced slower
sales growth in Japan, as well as in certain other parts of Asia. Any or all of
these factors could have a material adverse impact on the Company's future
international business in these or other countries.
Risks Associated With Internet Infrastructure
The Company's management believes that there will be performance problems with
Internet communications in the future which could receive a high degree of
publicity and visibility. As the Company is a large supplier of equipment for
the Internet infrastructure, customers' perceptions of the Company's products
and the marketplace's perception of Cisco as a supplier of networking products,
may be materially adversely affected, regardless of whether or not these
problems are due to the performance of Cisco's products. Such an event could
also result in a material adverse effect on the market price of the Company's
Common Stock and could materially adversely affect Cisco's business operating
results and financial condition.
13
<PAGE> 14
Volatility of Stock Price
The Company's Common Stock has experienced substantial price volatility,
particularly as a result of variations between the Company's actual or
anticipated financial results and the published expectations of analysts and as
a result of announcements by the Company and its competitors. In addition, the
stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies in particular and that
have often been unrelated to the operating performance of these companies. These
factors, as well as general economic and political conditions, may adversely
affect the market price of the Company's Common Stock in the future.
EMPLOYEES
As of September 18, 1998, the Company employed approximately 15,000 persons,
including 3,000 in manufacturing, service and support, 6,300 in sales and
marketing, 4,500 in engineering, and 1,200 in finance and administration.
Approximately 3,000 employees were in international locations.
None of the employees are represented by a labor union, and the Company
considers its relations with its employees to be positive. The Company has
experienced no work stoppages.
Competition for technical personnel in the Company's industry is intense. The
Company believes that its future success depends in part on its continued
ability to hire, assimilate, and retain qualified personnel. To date, the
Company believes that it has been successful in recruiting qualified employees,
but there is no assurance that it will continue to be successful in the future.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at sites in Santa Clara
and San Jose, California. The Company's main headquarters are situated on 448
acres of leased land in San Jose, California. There are 21 buildings located at
this site, one of which is a manufacturing facility. The San Jose headquarters
consist of approximately 2.6 million square feet of leased office space at the
present time. Six buildings have been completed at a site under construction
near its present corporate offices in San Jose, California. The Company expects
that construction at this site will continue through 1999, with the potential to
add approximately 2.2 million square feet of leased office space. Additionally,
two new sites have recently been leased near its present corporate offices in
San Jose, California. Construction has not yet begun at these sites. The Company
has also assumed certain operating leases for 6 buildings as part of the
StrataCom acquisition. These buildings, including an additional manufacturing
facility, are located at various sites in San Jose, California and total
approximately .5 million square feet.
In addition to the California facilities, the Company leases approximately 45
acres of land in Research Triangle Park, North Carolina, where the InterWorks
Business Unit, as well as a Technical Assistance Center, telesales, and various
other support functions, are located. There are four buildings at this site with
a total of approximately 1 million square feet of office space.
14
<PAGE> 15
The Company also leases various small offices throughout the U.S. and on a
worldwide basis. For additional information regarding the Company's obligations
under leases, see Note 7 "Commitments and Contingencies" on page 40 of the
Company's 1998 Annual Report to Shareholders, which is hereby incorporated by
reference.
ITEM 3. LEGAL PROCEEDINGS
In June 1998, Lucent brought suit in Federal District Court in Delaware against
the Company, alleging the Company violated eight of Lucent's patents related to
data networking. Lucent is seeking damages for infringement and an injunction
prohibiting future use of the patents.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
15
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
- ----------------------- ----- -------------------------------------------------------- ----------
<S> <C> <C> <C>
Larry R. Carter 55 Senior Vice President, Finance and Administration, 1997
Chief Financial Officer, and Secretary
Mr. Carter joined the Company in January 1995 as
Vice President for Finance and Administration. In July
1997, he was promoted to his present position of Senior
Vice President. From July 1992 to January
1995, he was Vice President and Corporate Controller
for Advanced Micro Devices. Prior to that, he was
with V.L.S.I. Technology, Inc. for four years where
he held the position of Vice President, Finance and
Chief Financial Officer.
John T. Chambers 49 President, Chief Executive Officer and Director 1995
Mr. Chambers 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 his services at Cisco, he was with Wang
Laboratories for eight years, most recently as
Senior Vice President of U.S. Operations.
Gary Daichendt 48 Executive Vice President, Worldwide Operations 1998
Mr. Daichendt joined the Company in October 1994 as
Vice President for Intercontinental Operations,
Covering Asia, Pacific Rim, Canada, Central and
South America and Mexico. In October 1997,
Mr. Daichendt became Senior Vice President, Worldwide
Operations at Cisco Systems and became Executive Vice
President in August 1998. He is responsible for
managing the sales and distribution operations of
Cisco offices worldwide. Prior to his services at
Cisco, he spent eight years at Wang Laboratories,
most recently as Vice President of Central
Operations and Vice President of Worldwide
Marketing. Mr. Daichendt also spent ten years
with IBM in various sales, marketing, and management
positions.
Judith Estrin 43 Senior Vice President, Business Development, Chief 1998
Technology Officer
Ms. Estrin joined the Company in April 1998 in her
present position. Prior to joining Cisco, Ms. Estrin
was CEO of Precept Software, Inc. which she co-founded
in 1995. Precept was acquired by Cisco in March 1998.
Prior to that, she spent six years at Network Computing
Devices, most recently as President and CEO. Ms. Estrin
currently serves on the Board of Directors of Federal
Express, Rockwell International, Sun Microsystems and
the Walt Disney Company.
Edward R. Kozel 43 Senior Vice President, Corporate Development and Director 1998
Mr. Kozel has been a member of the Board of Directors
since November 1996. He joined the Company as
Director, Program Management in March 1989. In April
1992, Mr. Kozel became Director of Field Operations and
in February 1993, he became Vice President of Business
Development. In January 1996, he became
Chief Technology Officer of the Company and has been
in his current position since April 1998. Mr. Kozel
currently serves on the Board of Directors of
Centigram Communications Corporation.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
- ----------------------- ----- -------------------------------------------------------- ----------
<S> <C> <C> <C>
Donald J. Listwin 39 Executive Vice President, Service Provider and Consumer 1998
Lines of Business
Mr. Listwin joined the Company in 1990 as a Product
Marketing Manager. He held various positions within
the marketing department before being promoted to
Vice President of Marketing in September 1993.
Mr. Listwin was promoted to Vice President and
General Manager of the Access Business Unit in
September of 1995. He became Senior Vice President
of Cisco IOS Development and Marketing in August of
1996 and Senior Vice President of the Service Provider
Line of Business in April 1997. He became Executive
Vice President, Service Provider and Consumer Lines of
Business in May 1998. Mr. Listwin
Currently serves on the Board of Directors of
Software.com.
Mario Mazzola 51 Senior Vice President, Enterprise Line of Business 1997
Mr. Mazzola was the President and CEO of Crescendo
Communications, Inc. which he founded in 1990.
Crescendo was acquired by Cisco Systems in September
1993. At that time, Mr. Mazzola joined Cisco as the
Vice President and General Manager of the
Workgroup Business Unit. Mr. Mazzola became
Senior Vice President of the Enterprise Line of
Business in April 1997. Mr. Mazzola was
the VP of Engineering of David Systems which he
co-founded in June 1982. Mr. Mazzola holds several
patents on high-speed transmission techniques
on unshielded twisted-pair wiring.
Carl Redfield 51 Senior Vice President, Manufacturing and Logistics 1997
Mr. Redfield joined the Company in August 1993 as
Director, Supply/Demand of Manufacturing and became
Vice President of Manufacturing in September 1993. Mr.
Redfield became Senior Vice President, Manufacturing and
Logistics in February 1997. Prior to joining Cisco, he
spent eighteen years at Digital Equipment Company, most
recently as Group Manufacturing and Logistics Manager of
the PC Group.
</TABLE>
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The information required by this Item is incorporated by reference to
page 48 of the Company's 1998 Annual Report to Shareholders.
(b) During the quarter ended July 25, 1998, the Company issued an aggregate
of 241,739 (reflective of the three-for-two stock split effective
September 1998) shares of its Common Stock in connection with the
purchase of the capital stock of C.D.S.I. Ltd., ("CDSI"). The shares
were issued pursuant to an exemption by reason of Section 4(2) of the
Securities Act of 1933. These sales were made without general
solicitation or advertising. Each purchaser was an accredited investor
or a sophisticated investor with access to all relevant information
necessary. The Company has filed a Registration Statement on Form S-3
covering the resale of such securities.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 19 of
the Company's 1998 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages
20-27 of the Company's 1998 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to pages
23-25 of the Company's 1998 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
28-48 of the Company's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information regarding Directors appearing under the
caption "Election of Directors" in the Company's proxy statement to be mailed to
Shareholders on or about September 28, 1998, which information is incorporated
herein by reference; and to the information under the heading "Executive
Officers of the Registrant" in Part I hereof.
18
<PAGE> 19
ITEM 11. EXECUTIVE COMPENSATION
The information appearing at the end of Part I and under the caption "Executive
Compensation and Related Information" in the Company's proxy statement to be
mailed to Shareholders on or about September 28, 1998, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the captions "Election of Directors" and
"Ownership of Securities" in the Company's proxy statement to be mailed to
Shareholders on or about September 28, 1998, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Ownership of Securities" and
"Executive Compensation and Related Information" in the Company's proxy
statement to be mailed to Shareholders on or about September 28, 1998, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in Item 14(a) are filed or incorporated
herein by reference as part of this annual report. See Index to
Financial Statements and Financial Statement Schedule on Page 23.
2. Financial Statement Schedule
The financial statement schedule listed in Item 14(a) is filed as part
of this annual report. See Index to Financial Statements and Financial
Statement Schedule on Page 23.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on pages 26-28
are filed or incorporated by reference as part of this annual report.
(b) Reports on Form 8-K
The Company filed four reports on form 8-K during the fourth quarter
ended July 25, 1998. Information regarding the items reported on is as
follows:
19
<PAGE> 20
<TABLE>
<CAPTION>
Date Item Reported On
- ---- ----------------
<S> <C>
April 29, 1998 Adoption of Statement of Financial Accounting Standard (SFAS)
No. 128 "Earnings Per Share."
May 15, 1998 The March 1998 acquisition of WheelGroup Corporation, and the
April 1998 acquisitions of Precept Software, Inc. and NetSpeed,
Inc.
June 11, 1998 Adoption of Preferred Stock Rights Agreement.
July 9, 1998 Lucent patent suit.
</TABLE>
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California on this 23rd day of September, 1998. Cisco Systems, Inc.
/s/ John T. Chambers
------------------------------------
(John T. Chambers, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Report on Form
10-K has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------- ---------------------------- ------------------
<S> <C> <C>
President and Chief
Executive Officer
/s/ John T. Chambers (Principal Executive September 23, 1998
- --------------------------------- Officer and Director)
John T. Chambers
Senior Vice President,
Finance and Administration,
Chief Financial Officer and
/s/ Larry R. Carter Secretary September 23, 1998
- --------------------------------- (Principal Financial and
Larry R. Carter Accounting Officer)
Chairman of the
- --------------------------------- Board and Director
John P. Morgridge
/s/ Donald T. Valentine Vice Chairman of the September 23, 1998
- --------------------------------- Board and Director
Donald T. Valentine
/s/ Carol A. Bartz Director September 23, 1998
- ---------------------------------
Carol A. Bartz
/s/ Mary Cirillo Director September 23, 1998
- ---------------------------------
Mary Cirillo
/s/ Dr. James F. Gibbons Director September 23, 1998
- ---------------------------------
Dr. James F. Gibbons
/s/ Edward R. Kozel Senior Vice President, September 23, 1998
- --------------------------------- Corporate Development and Director
Edward R. Kozel
/s/ James C. Morgan Director September 23, 1998
- ---------------------------------
James C. Morgan
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ Robert L. Puette Director September 23, 1998
- ---------------------------------
Robert L. Puette
/s/ Masayoshi Son Director September 23, 1998
- ---------------------------------
Masayoshi Son
/s/ Steven M. West Director September 23, 1998
- ---------------------------------
Steven M. West
</TABLE>
22
<PAGE> 23
CISCO SYSTEMS, INC.
-------------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 14(a)
<TABLE>
<CAPTION>
Page
----------------------------
1998 Annual
Report to
Form 10-K Shareholders
<S> <C> <C>
Data incorporated by reference from the 1998
Annual Report to Shareholders of Cisco Systems, Inc.:
Consolidated statements of operations for each
of the three years in the period
ended July 25, 1998 ............................ 28
Consolidated balance sheets at July 25, 1998
and July 26, 1997 ............................... 29
Consolidated statements of shareholders' equity
for each of the three years in the period
ended July 25, 1998.............................. 30-31
Consolidated statements of cash flows for each of
the three years in the period ended July 25, 1998 32
Notes to consolidated financial statements.......... 33-46
Report of Independent Accountants................... 47
Supplementary financial data:
Fiscal years 1998 and 1997 by quarter (unaudited) 48
Data submitted herewith:
Financial Statement Schedule:
Report of Independent Accountants................. 24
II Valuation and qualifying accounts............ 25
</TABLE>
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the consolidated financial statements or
notes thereto.
With the exception of the consolidated financial statements and the independent
accountants' report thereon listed in the above index, the information referred
to in Items 1, 5, 6, 7 and 7A and the supplementary quarterly financial
information referred to in Item 8, all of which is included in the Company's
Annual Report to Shareholders and incorporated by reference into this Form 10-K
Annual Report, the 1998 Annual Report to Shareholders is not to be deemed
"filed" as part of this report.
23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Cisco Systems, Inc.:
Our report on the consolidated financial statements of Cisco Systems, Inc. and
its subsidiaries has been incorporated by reference in this Form 10-K from Page
47 of the 1998 Annual Report to Shareholders of Cisco Systems, Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 25 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 4, 1998
24
<PAGE> 25
CISCO SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charged to End of
of Period Expenses Deductions Period
--------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended July 28, 1996:
Allowance for doubtful accounts 18,427 18,548 15,901 21,074
Allowance for excess and obsolete
Inventory 46,242 53,025 37,481(1) 61,786
Year ended July 26, 1997:
Allowance for doubtful accounts 21,074 13,318 12,052 22,340
Allowance for excess and obsolete
Inventory 61,786 123,431 104,404(1) 80,813
Year ended July 25, 1998:
Allowance for doubtful accounts 22,340 43,463 25,961 39,842
Allowance for excess and obsolete
Inventory 80,813 160,633 97,336(1) 144,110
</TABLE>
(1) Deductions principally relate to charges for standards changes.
25
<PAGE> 26
INDEX TO EXHIBITS
(Item 14 (a))
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
3.1 Cisco Systems, Inc. Restated Articles of Incorporation, as currently
in effect
3.2 Cisco Systems, Inc. Amended and Restated Bylaws, as currently in
effect
10.1 Rights Agreement dated as of June 10, 1998 between Cisco Systems,
Inc. and Bank Boston, N.A.(1)
10.2 Cisco Systems, Inc. 1996 Stock Incentive Plan (including the
following:
Form of Notice of Grant
Form of Stock Option Agreement
Form of Addendum to Stock Option Agreement - Involuntary
Termination Following Corporate Transaction
Form of Addendum to Stock Option Agreement - Limited Stock
Appreciation Rights
Form of Notice of Automatic Stock Option - Initial
Form of Notice of Automatic Stock Option -- Annual
Form of Automatic Stock Option Agreement)
10.3 1997 Supplemental Stock Incentive Plan (including the following:
Stock Option Agreement in connection with the 1997 Supplemental
Stock Incentive Plan)
10.12* Senior Management Incentive Plan-Fiscal Year 1999
10.13 Cisco Systems, Inc. 1989 Employee Stock Purchase Plan(6)
10.14 Master Lease (Cisco Technology, Inc. Trust 1998), dated as of June
2, 1998 between State Street Bank and Trust Company of California,
N.A., not in its individual capacity, but solely as Certificate
Trustee, as Lessor, and Cisco Technology, Inc., as Lessee, and
General Guarantee (Cisco Technology, Inc. Trust 1998) from Cisco
Systems, Inc., dated as of June 2, 1998 and a Participant Guarantee
(Cisco Technology, Inc. Trust 1998) from Cisco Systems, Inc., dated
as of June 2, 1998.
10.23 Lease Agreement between the Company and SGA Development Partnership,
Ltd., dated February 19, 1993, for the Company's site in San Jose,
California.(3)
10.24 Lease Agreement between the Company and Sumitomo Bank Leasing and
Finance, Inc., dated May 13, 1993 for the Company's facilities in
San Jose, California(3)
10.25 Lease Agreement between the Company and SGA Development Partnership,
Ltd., dated February 19, 1993, for the Company's site in San Jose,
California(3)
10.26 Lease Agreement between the Company and the State of California
Public Employees' Retirement System dated March 11, 1993, for the
Company's facilities at 3100 Smoketree Court(3)
10.27 Lease Agreement between the Company and Sumitomo Bank Leasing and
Finance, Inc., dated July 11, 1994 for the Company's site in Wake
County, North Carolina(3)
10.28 Lease Agreement between the Company and Sumitomo Bank Leasing and
Finance, Inc., dated August 12, 1994 for the Company's facilities in
Wake County, North Carolina(3)
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.29 Lease (Buildings "I" and "J") by and between Sumitomo Bank of New
York Trust Company ("SBNYTC") as trustee under that certain Trust
Agreement dated May 22, 1995 between Sumitomo Bank Leasing and
Finance, Inc. and SBNYTC ("SB Trust"), as Landlord, and the Company,
as tenant, dated May 22, 1995(3)
10.30 First Amendment to Lease (Buildings "I" and "J") between SB Trust
and the Company, dated July 18, 1995(3)
10.31 Lease (Buildings "K" and "L") by and between SB Trust and the
Company, dated May 22, 1995(3)
10.32 First Amendment to Lease (Buildings "K" and "L") between SB Trust
and the Company, dated July 18, 1995(3)
10.33 Lease (Improvements Phase "C") between SB Trust and the Company,
dated May 22, 1995(3)
10.34 First Amendment to Lease (Improvements Phase "C") between SB Trust
and the Company, dated July 18, 1995(3)
10.35 Ground Lease (Parcel 2 and Lot 54) by and between Irish Leasing
Corporation ("Irish"), as Landlord, and the Company, as Tenant,
dated February 28, 1995 for the Company's site in San Jose,
California(3)
10.36 First Amendment to Lease (Parcel 2 and Lot 54) by and between Irish
and the Company dated as of May 1, 1995(3)
10.37 Second Amendment to Lease (Parcel 2 and Lot 54) by and between Irish
and the Company dated as of May 22, 1995(3)
10.38 Ground Lease (Lots 58 and 59) by and between Irish and the Company
dated February 28, 1995 for the Company's site in San Jose,
California(3)
10.39 First Amendment to Lease (Lots 58 and 59) by and between Irish and
the Company dated as of May 1, 1995(3)
10.40 Second Amendment to Lease (Lots 58 and 59) by and between Irish and
the Company dated as of May 22, 1995(3)
10.41 Ground Lease (Tasman Phase C) by and between Irish and the Company
dated April 12, 1995 for the Company's site in San Jose,
California(3)
10.42 First Amendment to Lease (Tasman Phase C) by and between Irish and
the Company dated as of May 1, 1995(3)
10.43 Second Amendment to Lease (Tasman Phase C) by and between Irish and
the Company dated as of May 22, 1995(3)
10.44 Credit Agreement between the Company, the Banks listed therein, Bank
of America National Trust and Savings Association, as Administrative
Agent, Morgan Guaranty Trust Company of New York, as Documentation
Agent and Bank of America National Trust and Savings Association, as
Issuing Bank dated as of May 22, 1995(3)
10.46 Lease Agreement between the Company and First State Realty of
America, Inc., dated February 7, 1997, for the Company's site in
Santa Clara, California.(5)
10.47 Lease Agreement between the Company and Berg & Berg Enterprises,
Inc., dated December 31, 1996, for the Company's site in Santa
Clara, California(5)
10.48 Lease (Buildings "A" and "C") by and between SBC&D Co., Inc. and the
Company, dated November 26, 1996, located in San Jose, California(5)
10.49 Lease (Buildings "B" and "D") by and between SBC&D Co., Inc. and the
Company, dated November 26, 1996, located in San Jose, California(5)
10.50 Lease agreement between the Company and Lincoln-Whitehall Realty
(West) L.L.C., dated December 12, 1996, for the Company's site in
San Jose, CA(6)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.51 Lease agreement between the Company and Lincoln-Whitehall Realty
(West) L.L.C., dated December 18, 1996, for the Company's site in
San Jose, CA(6)
10.52 Master Lease between the Company, as the Lessee, and UBS MORTGAGE
FINANCE INC. as the Lessor, dated December 27, 1996(6)
10.53 Credit Agreement dated as of July 2, 1997 among Cisco Systems, Inc.,
and Citicorp USA, Inc., as Administrative Agent, Morgan Guaranty
Trust Company of New York, as Documentation Agent, Bank of America
National Trust and Savings Association, the Chase Manhattan Bank, as
Co-Agents, and Citicorp Securities, Inc. and J.P. Morgan Securities
Inc. Arrangers(6)
10.54 Second Amendment to Lease between Cisco Systems, Inc. and Sumitomo
Bank Leasing and Finance, Inc., dated February 24, 1998
10.55 Third Amendment to Lease between SGA Development Partnership, LTD.
and Cisco Systems, Inc., dated February 24, 1998
13.01 Pages 19 through 48 of the Registrant's 1998 Annual Report to
Shareholders
21.01 Subsidiaries of the Company
23.02 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- --------------------
(1) Incorporated by reference for Exhibit 4 of the Company's Form 8-K filed on
June 11, 1998.
(2) Incorporated by reference to the exhibits with the correspondence exhibit
numbers of the Company's registration statement on Form S-1 (File 33-32778).
(3) Incorporated by reference to exhibits with the correspondence exhibit
numbers of the Company's Annual Report on Form 10-K for the fiscal year
ended July 30, 1995.
(4) Incorporated by reference to exhibits with the corresponding exhibit numbers
of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
January 25, 1997.
(5) Incorporated by reference to exhibits with the corresponding exhibit numbers
of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
April 26, 1997.
(6) Incorporated by reference to exhibits with the corresponding exhibit numbers
of the Company's Annual Report on Form 10-K for the fiscal year ended July
26, 1997.
* Management compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
28
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE RESTATED ARTICLES OF INCORPORATION OF
CISCO SYSTEMS, INC.
A CALIFORNIA CORPORATION
The undersigned, John T. Chambers and Larry R. Carter, hereby
certify that:
ONE: They are the duly elected and acting President and
Secretary, respectively, of said corporation.
TWO: The Restated Articles of Incorporation of said corporation,
filed on January 7, 1998, shall be amended as set forth in this Certificate of
Amendment.
THREE: Section A of ARTICLE IV of the Restated Articles of
Incorporation is amended to read in its entirety as follows:
"(A) CLASSES OF STOCK. This corporation is authorized to issue
two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares that the corporation is
authorized to issue is Two Billion Seven Hundred Five Million
(2,705,000,000) shares. Two Billion Seven Hundred Million
(2,700,000,000) shares shall be Common Stock, par value of $0.001, and
Five Million (5,000,000) shares shall be Preferred Stock.
As of September 15, 1998, every two (2) shares of Common Stock
outstanding are split into three (3) shares of Common Stock."
FOUR: The foregoing Certificate of Amendment has been duly
approved by the Board of Directors of the Corporation.
FIVE: The foregoing Certificate of Amendment of the Restated
Articles of Incorporation does not require shareholder approval pursuant to
Section 902(c) of the General Corporation Law of the State of California. No
shares of Preferred Stock are outstanding.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate of Amendment on August 19, 1998.
------------------------------
John T. Chambers
President
------------------------------
Larry R. Carter
Secretary
The undersigned certify under penalty of perjury that they have
read the foregoing Certificate of Amendment and know the contents thereof, and
that the statements therein are true.
Executed at San Jose, California, on August 19, 1998.
------------------------------
John T. Chambers
------------------------------
Larry R. Carter
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<PAGE> 2
RESTATED ARTICLES OF INCORPORATION
OF CISCO SYSTEMS, INC.,
A CALIFORNIA CORPORATION
The undersigned, John T. Chambers and Larry R. Carter, hereby
certifies that:
ONE: They are the duly elected and acting President and
Secretary, respectively, of said corporation.
TWO: The Restated Articles of Incorporation of said corporation
shall be amended and restated in its entirety to read in full as follows:
ARTICLE I
The name of this corporation is Cisco Systems, Inc.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
ARTICLE IV
(A) CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that the corporation is authorized to issue
is Two Billion Four Hundred Five Million (2,405,000,000) shares. Two Billion
Four Hundred Million (2,400,000,000) shares shall be Common Stock, par value of
$0.001 and Five Million (5,000,000) shares shall be Preferred Stock.
(B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by these Restated Articles of Incorporation may be
issued from time to time in series. The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon series of Preferred Stock,
<PAGE> 3
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights that have been or may be granted to the Preferred Stock or any
series thereof in any Certificate of Determination or the corporation's Articles
of Incorporation ("Protective Provisions"), but notwithstanding any other rights
of the Preferred Stock or any series thereof, the rights, privileges,
preferences and restrictions of any such additional series may be subordinated
to, pari passu with (including, without limitation, inclusion in provisions with
respect to liquidation and acquisition preferences, redemption and/or approval
of matters by vote or written consent), or senior to any of those of any present
or future class or series of Preferred Stock or Common Stock. Subject to
compliance with applicable Protective Provisions, the Board of Directors also is
authorized to increase or decrease the number of shares of any series prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
1. REPURCHASE OF SHARES. In connection with repurchases by this
corporation of its Common Stock pursuant to its agreements with certain of the
holders thereof, Sections 502 and 503 of the California General Corporation Law
shall not apply in whole or in part with respect to such repurchases.
(C) COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
liquidation, upon the liquidation, dissolution or winding up of the corporation,
the assets of the corporation shall be distributed to the holders of the Common
Stock.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
<PAGE> 4
ARTICLE V
(A) The liability of the directors of the corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
(B) The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaw provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.
ARTICLE VI
Shareholders of this corporation shall not be entitled to
cumulate their votes at any election of directors of this corporation. The
corporation's common stock is qualified for trading on the Nasdaq National
Market and there were at least 800 holders of its equity securities as of the
record date of the most recent annual shareholders meeting.
THREE: The foregoing restatement of the Restated Articles of
Incorporation, as amended, has been duly approved by the Board of Directors of
said corporation and does not require shareholder approval pursuant to section
910(b) of the California Corporations Code.
IN WITNESS WHEREOF, the undersigned have executed these Restated
Articles of Incorporation on the _____ of December 1997.
------------------------------------
John T. Chambers, President
------------------------------------
Larry R. Carter, Secretary
3.
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The undersigned certifies under penalty of perjury that they have
read the foregoing Restated Articles of Incorporation and know the contents
thereof, and that the statements therein are true.
Executed at San Jose, California, on December ____, 1997.
------------------------------------
John T. Chambers
------------------------------------
Larry R. Carter
4.
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CERTIFICATE OF DETERMINATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
CISCO SYSTEMS, INC.
(Pursuant to Section 401 of the
California General Corporation Law)
----------------------------------
John T. Chambers, President and Chief Executive Officer, and
David Rogan, Vice President, Treasurer and Assistant Secretary of Cisco Systems,
Inc., a corporation organized and existing under the General Corporation Law of
the State of California (hereinafter called the "Corporation"), do hereby
certify that the following resolution was adopted by the Board of Directors of
the Corporation as required by Section 401 of the General Corporation Law at a
meeting duly called and held on June 8, 1998 creating a series of 1,200,000
shares of Preferred Stock designated as Series A Junior Participating Preferred
Stock of which none has been issued:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Articles of
Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, no par value (the "Preferred Stock"), of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be one million two hundred thousand (1,200,000). Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.
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Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, each
holder of a share of Series A Preferred Stock, in preference to the
holders of shares of Common Stock, par value $.001 per share (the
"Common Stock"), of the Corporation, and of any other junior stock,
shall be entitled to receive, when declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
Series A Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to, subject to the provision for adjustment hereinafter set
forth, Ten Thousand (10,000) times the aggregate per share amount of all
cash dividends, and Ten Thousand (10,000) times the aggregate per share
amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of a share or fraction of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
the shares of Series A Preferred Stock as provided in paragraph (A) of
this Section immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided, however, that, in the event no dividend or
distribution shall have been declared on the Common Stock during the
period between any Quarterly Distribution Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $.000001 per share of
Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding
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share of Series A Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such share of Series A
Preferred Stock, unless the date of issue of such share is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such share shall begin to accrue from the date of issue of
such share, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by- share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to Ten Thousand (10,000) votes on all matters submitted to a
vote of the shareholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the number of votes per share to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate
of Determination creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one
class on all matters submitted to a vote of shareholders of the
Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of
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<PAGE> 9
Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except dividends paid ratably
on the shares of Series A Preferred Stock and all such parity
stock on which dividends are payable or in arrears in proportion
to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred
Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A Preferred
Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or
classes.
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<PAGE> 10
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Articles of Incorporation, or in any other Certificate of
Determination creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received Ten Thousand Dollars
($10,000) per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 10,000 times the aggregate amount to
be distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such
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parity shares in proportion to their respective liquidation preferences. In the
event, however, that there are not sufficient assets available to permit payment
in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
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(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to Ten Thousand (10,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Restated Articles of Incorporation of
the Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the holders
of at least a majority of the outstanding shares of Series A Preferred Stock,
voting together as a single class.
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The undersigned certify under penalty of perjury that they have
read the foregoing Certificate of Determination and know the contents thereof,
and that the statements therein are true.
Executed at San Jose, California, on June 10, 1998.
-----------------------------------------
Name:
Title:
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Name:
Title:
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
CISCO SYSTEMS, INC.
(AS AMENDED MARCH 10, 1985, DECEMBER 10, 1987, OCTOBER 11,
1988, DECEMBER 20, 1989, JULY 31, 1996 AND JUNE 8, 1998)
Article 1.
-OFFICES
Section 1.01 The principal executive offices of Cisco Systems, Inc. (the
"Corporation") shall be at such place inside or outside the State of California
as the Board of Directors may determine from time to time.
Section 1.02 The Corporation may also have offices at such other places as the
Board of Directors may from time to time designate, or as the business of the
Corporation may require.
Article 2.
- SHAREHOLDERS' MEETINGS
Section 2.01 Annual Meetings. The annual meeting of the shareholders of the
Corporation for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may properly come before the
meeting shall be held each year on the second Thursday in November at 10:00 a.m.
at the principal office of the Corporation, or at such other time and place as
may be determined by the Board of Directors, if not a legal holiday, and if a
legal holiday, then on the next succeeding business day at the same hour and
place. If the annual meeting of the shareholders be not held as herein
prescribed, the election of directors may be held at any meeting thereafter
called pursuant to these Bylaws.
Section 2.02 Special Meetings. Special meetings of the shareholders, for any
purpose whatsoever, unless otherwise prescribed by statute or the articles of
incorporation or bylaws of the Corporation, may be called at any time by the
Chairman of the Board, the President, by the Board of Directors, or by one or
more shareholders holding not less than ten percent (10%) of the voting power of
the Corporation on the record date established pursuant to Article II, Section 7
of these Bylaws. Upon request in writing sent by registered mail to the Chief
Executive Officer, President or Secretary of the Corporation, or delivered to
any such officer in person, by any person or persons entitled to call a special
meeting of shareholders (such request, if sent by a shareholder or shareholders,
to include the information required by Article II, Section 11 of these Bylaws),
it shall be the duty of such officer, subject to the immediately succeeding
sentence, to cause notice to be given to the shareholders entitled to vote that
a meeting will be requested by the person or persons calling the meeting, the
date of which meeting, which shall be set by such officer,
<PAGE> 2
to be not less than 35 days nor more than 60 days after such request or, if
applicable, determination of the validity of such request pursuant to the
immediately succeeding sentence. Within five business days after receiving such
a request from a shareholder or shareholders of the Corporation, the Board of
Directors shall determine whether shareholders owning not less than ten percent
(10%) of the shares as of the record date established pursuant to Article II,
Section 7 of these Bylaws for such request support the call of a special meeting
and notify the requesting party or parties of its finding.
Section 2.03 Place. All meetings of the shareholders shall be at any place
within or without the State of California designated either by the Board of
Directors or by written consent of the holders of a majority of the shares
entitled to vote thereat, given either before or after the meeting. In the
absence of any such designation, shareholders' meetings shall be held at the
principal executive office of the Corporation.
Section 2.04 Notice. Notice of meetings of the shareholders of the Corporation
shall be given in writing to each shareholder entitled to vote, either
personally or by first-class mail (unless the Corporation has 500 or more
shareholders determined as provided by the California Corporations Code on the
record date for the meeting, in which case notice may be sent by third-class
mail) or other means of written communication, charges prepaid, addressed to the
shareholder at his address appearing on the books of the Corporation or given by
the shareholder to the Corporation for the purpose of notice. Notice of any such
meeting of shareholders shall be sent to each shareholder entitled thereto not
less than ten (10) days (or, if sent by third-class mail, 30 days) nor more than
60 days before the meeting. Said notice shall state the place, date and hour of
the meeting and, (1) in the case of special meetings, the general nature of the
business to be transacted, and no other business may be transacted, or (2) in
the case of annual meetings, those matters which the Board of Directors, at the
time of the mailing of the notice, intends to present for action by the
shareholders, but subject to Section 601(f) of the California Corporations Code
any proper matter may be presented at the meeting for shareholder action, and
(3) in the case of any meeting at which directors are to be elected, the names
of the nominees intended at the time of the mailing of the notice to be
presented by management for election.
Section 2.05 Adjourned Meetings. Any shareholders' meeting may be adjourned from
time to time by (1) the vote of the holders of a majority of the voting shares
present at the meeting either in person or by proxy or (2) the chairman of the
meeting. Notice of any adjourned meeting need not be given unless a meeting is
adjourned for forty-five (45) days or more from the date set for the original
meeting.
Section 2.06 Quorum. The presence in person or by proxy of the persons entitled
to vote a majority of the shares entitled to vote at any meeting constitutes a
quorum for the transaction of business. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
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In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but no other
business may be transacted, except as provided above.
Section 2.07 Consent to Shareholder Action. Any action which may be taken at any
meeting of shareholders may be taken without a meeting and without prior notice,
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares on the record date established pursuant to
Article II, Section 10 of these Bylaws having not less than the minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted; provided,
however, that (1) unless the consents of all shareholders entitled to vote have
been solicited in writing, notice of any shareholder approval without a meeting
by less than unanimous written consent shall be given as required by the
California Corporations Code, and (2) directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors.
Any written consent may be revoked by a writing received by the
Secretary of the Corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.
Section 2.08 Waiver of Notice. The transactions of any meeting of shareholders,
however called and noticed, and whenever held, shall be as valid as though had
at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
of the persons entitled to vote, not present in person or by proxy, signs a
written waiver of notice, or a consent to the holding of the meeting, or an
approval of the minutes thereof. All such waivers, consents, or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Section 2.09 Voting. The voting at all meetings of shareholders need not be by
ballot, but any qualified shareholder before the voting begins may demand a
stock vote whereupon such stock vote shall be taken by ballot, each of which
shall state the name of the shareholder voting and the number of shares voted by
such shareholder, and if such ballot be cast by a proxy, it shall also state the
name of such proxy.
At any meeting of the shareholders, every shareholder having the right
to vote shall be entitled to vote in person, or by proxy appointed in a writing
subscribed by such shareholder and bearing a date not more than eleven (11)
months prior to said meeting, unless the writing states that it is irrevocable
and satisfies Section 705(e) of the California Corporations Code, in which event
it is irrevocable for the period specified in said writing and said Section
705(e).
<PAGE> 4
Section 2.10 Record Dates. In the event the Board of Directors fixes a day for
the determination of shareholders of record entitled to vote as provided in
Section 1 of Article V of these Bylaws, then, subject to the provisions of the
General Corporation Law of the State of California, only persons in whose name
shares entitled to vote stand on the stock records of the Corporation at the
close of business on such day shall be entitled to vote.
If no record date is fixed:
The record date for determining shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;
In order that the Corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting or request a special
meeting of the shareholders, the Board of Directors shall fix a record date,
which record date shall not precede the date upon which the resolution fixing
such record date is adopted by the Board of Directors. Any shareholder of record
seeking to have the shareholders authorize or take corporate action by written
consent or request a special meeting of the shareholders shall, by written
notice to the Secretary, request the Board of Directors to fix a record date.
The Board of Directors shall promptly, but in no event later than 28 days after
the date on which such request is received, adopt a resolution fixing the record
date; and
The record date for determining shareholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto, or the sixtieth (60th) day prior to the date of
such other action, whichever is later.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days.
Section 2.11 Advance Notice of Shareholder Proposals and Director Nominations.
Shareholders may nominate one or more persons for election as directors at a
meeting of shareholder or propose business to be brought before a meeting of
shareholders, or both, only if such shareholder has given timely notice in
proper written form of such shareholder's intent to make a nomination or
nominations or to propose such business. To be timely a shareholder's notice
must be received by the Secretary of the Corporation not later than 60 days
prior to such meeting; provided, however, that in the event less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 10th day following the earlier of the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. To be in proper written form a shareholder's notice to the
Secretary shall set forth: (1) the name
<PAGE> 5
and address of the shareholder who intends to make the nominations or propose
the business and, as the case may be, of the person or persons to be nominated
or of the business to be proposed; (2) a representation that the shareholder is
a holder of record of stock of the Corporation that intends to vote such stock
at such meeting and, if applicable, intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (3) if
applicable, a description of all arrangements or understandings between the
shareholder and each nominee or any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (4) such other information regarding each nominee and each
matter of business to be proposed by such shareholders as would be required to
be included in a proxy statement filed pursuant to the Securities Exchange Act
of 1934 had the nominee been nominated, or intended to be nominated, or the
matter been proposed, or intended to be proposed by the Board of Directors of
the Corporation; and (5) if applicable, the consent of each nominee as director
of the Corporation if so elected. The chairman of a meeting of shareholders may
refuse to acknowledge the nomination of any person or the proposal of any
business not made in compliance with the foregoing procedure.
Article 3.
- BOARD OF DIRECTORS
Section 3.01 Powers. Subject to any limitations in the Restated Articles of
Incorporation or these Amended and Restated Bylaws and to any provision of the
California Corporations Code requiring shareholder authorization or approval for
a particular action, the business and affairs of the Corporation shall be
managed and all corporate powers shall be exercised by, or under the direction
of, the Board of Directors. The Board of Directors may delegate the management
of the day-to-day operation of the business of the Corporation to a management
company or other person provided that the business and affairs of the
Corporation shall be managed and all corporate powers shall be exercised, under
the ultimate direction of the Board of Directors.
Section 3.02 Number and Qualification of Directors. So long as this Corporation
has two (2) or less shareholders, the authorized number of directors of this
Corporation shall be two (2). At such time as this Corporation has three (3) or
more shareholders, the number of authorized directors of this Corporation shall
be not less than seven (7) nor more than thirteen (13), the exact number of
directors to be fixed from time to time within such range by a duly adopted
resolution of the Board of Directors or shareholders.
Directors shall hold office until the next annual meeting of
shareholders and until their respective successors are elected. If any such
annual meeting is not held, or the directors are not elected thereat, the
directors may be elected at any special meeting of shareholders held for that
purpose. Directors need not be shareholders.
<PAGE> 6
Section 3.03 Regular Meetings. A regular annual meeting of the Board of
Directors shall be held without other notice than this Bylaw provision
immediately after, and at the same place as, the annual meeting of shareholders.
The Board of Directors may provide for other regular meetings from time to time
by resolution.
Section 3.04 Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board, or the President or any Vice
President, or the Secretary or any two (2) directors. Written notice of the time
and place of all special meetings of the Board of Directors shall be delivered
personally or by telephone or telegraph to each director at least forty-eight
(48) hours before the meeting, or sent to each director by first-class mail,
postage prepaid, at least four (4) days before the meeting. Such notice need not
specify the purpose of the meeting. Notice of any meeting of the Board of
Directors need not be given to any director who signs a waiver of notice,
whether before or after the meeting, or who attends the meeting without
protesting prior thereto or at its commencement, the lack of notice to such
director.
Section 3.05 Place of Meetings. Meetings of the Board of Directors may be held
at any place within or without the State of California, which has been
designated in the notice, or if not stated in the notice or there is no notice,
the principal executive office of the Corporation or as designated by the
resolution duly adopted by the Board of Directors.
Section 3.06 Participation by Telephone. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another.
Section 3.07 Quorum. A quorum at all meetings of the Board of Directors shall be
a majority of the authorized directors. In the absence of a quorum a majority of
the directors present may adjourn any meeting to another time and place. If a
meeting is adjourned for more than twenty-four (24) hours, notice of any
adjournment to another time or place shall be given prior to the time of the
reconvened meeting to the directors who were not present at the time of
adjournment.
Section 3.08 Action at Meeting. Every act or decision done or made by a majority
of the directors present at a meeting duly held at which a quorum is present is
the act of the Board of Directors. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
Section 3.09 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed or wherever held, are as valid as though
had at a meeting duly held after regular call and notice if a quorum is present
and if, either before or after the meeting, each of the directors not present
signs a written waiver of notice, a consent to holding the meeting, or an
approval of the minutes thereof. All such waivers, consents and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
<PAGE> 7
Section 3.10 Action Without Meeting. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting, if all members
of the Board individually or collectively consent in writing to such action.
Such written consent or consents shall be filed with the minutes of the
proceedings of the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
Section 3.11 Removal. The Board of Directors may declare vacant the office of a
director who has been declared of unsound mind by an order of court or who has
been convicted of a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by a vote of shareholders holding a majority of the
outstanding shares entitled to vote at an election of directors; provided,
however, that unless the entire Board is removed, no individual director may be
removed when the votes cast against removal, or not consenting in writing to
such removal, would be sufficient to elect such director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of the director's most
recent election were then being elected.
In the event an office of a director is so declared vacant or in case
the Board or any one or more directors be so removed, new directors may be
elected at the same meeting.
Section 3.12 Resignations. Any director may resign effective upon giving written
notice to the Chairman of the Board, the President, the Secretary or the Board
of Directors of the Corporation, unless the notice specifies a later time for
the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
Section 3.13 Vacancies. Except for a vacancy created by the removal of a
director, all vacancies in the Board of Directors, whether caused by
resignation, death or otherwise, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and each
director so elected shall hold office until his successor is elected at an
annual, regular or special meeting of the shareholders. Vacancies created by the
removal of a director may be filled only by approval of the shareholders. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent requires the consent of a
majority of the outstanding shares entitled to vote.
Section 3.14 Compensation. No stated salary shall be paid directors, as such,
for their services, but, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of such Board; provided that nothing herein contained
shall be construed to preclude any
<PAGE> 8
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 3.15 Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of directors, designate one or more
committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Corporation, except with
respect to (a) the approval of any action requiring shareholders' approval or
approval of the outstanding shares, (b) the filling of vacancies on the Board or
any committee, (c) the fixing of compensation of directors for serving on the
Board or a committee, (d) the adoption, amendment or repeal of Bylaws, (e) the
amendment or repeal of any resolution of the Board which by its express terms is
not so amendable or repealable, (f) a distribution to shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (g) the appointment of other committees of the Board or the members thereof.
Article 4.
- OFFICERS
Section 4.01 Number and Term. The officers of the Corporation shall be a
President, one or more Vice Presidents, a Secretary and a Chief Financial
Officer, all of which shall be chosen by the Board of Directors. The Corporation
may also have a Chairman of the Board who shall be chosen by the Board of
Directors. In addition, the Board of Directors may appoint such other officers
as may be deemed expedient for the proper conduct of the business of the
Corporation, each of whom shall have such authority and perform such duties as
the Board of Directors may from time to time determine. The officers to be
appointed by the Board of Directors shall be chosen annually at the regular
meeting of the Board of Directors held after the annual meeting of shareholders
and shall serve at the pleasure of the Board of Directors. If officers are not
chosen at such meeting of the Board of Directors, they shall be chosen as soon
thereafter as shall be convenient. Each officer shall hold office until his
successor shall have been duly chosen or until his removal or resignation.
Section 4.02 Inability to Act. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer, or any director or other person
whom it may select.
<PAGE> 9
Section 4.03 Removal and Resignation. Any officer chosen by the Board of
Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of all the members of the Board of
Directors.
Any officer chosen by the Board of Directors may resign at any
time by giving written notice of said resignation to the Corporation.
Unless a different time is specified therein, such resignation shall be
effective upon its receipt by the Chairman of the Board, the President,
the Secretary or the Board of Directors.
Section 4.04 Vacancies. A vacancy in any office because of any cause may
be filled by the Board of Directors for the unexpired portion of the
term.
Section 4.05 Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board.
Section 4.06 President. The President shall be the general manager and
chief executive officer of the Corporation, subject to the control of
the Board of Directors, and as such shall preside at all meetings of
shareholders, shall have general supervision of the affairs of the
Corporation, shall sign or countersign or authorize another officer to
sign all certificates, contracts, and other instruments of the
Corporation as authorized by the Board of Directors, shall make reports
to the Board of Directors and shareholders, and shall perform all such
other duties as are incident to such office or are properly required by
the Board of Directors.
Section 4.07 Vice President. In the absence of the President, or in the
event of such officer's death, disability or refusal to act, the Vice
President, or in the event there be more than one Vice President, the
Vice Presidents in the order designated at the time of their selection,
or in the absence of any such designation, then in the order of their
selection, shall perform the duties of President, and when so acting,
shall have all the powers and be subject to all restrictions upon the
President. Each Vice President shall have such powers and discharge such
duties as may be assigned from time to time by the President or by the
Board of Directors.
Section 4.08 Secretary. The Secretary shall see that notices for all
meetings are given in accordance with the provisions of these Bylaws and
as required by law, shall keep minutes of all meetings, shall have
charge of the seal and the corporate books, and shall make such reports
and perform such other duties as are incident to such office, or as are
properly required by the President or by the Board of Directors.
The Assistant Secretary or the Assistant Secretaries, in the
order of their seniority, shall, in the absence or disability of the Secretary,
or in the event of such officer's refusal to act, perform the duties and
exercise the powers and discharge such duties as may be assigned from time to
time by the President or by the Board of Directors.
Section 4.09 Chief Financial Officer. The Chief Financial Officer may
also be designated by the alternate title of "Treasurer." The Chief
Financial Officer shall have
<PAGE> 10
custody of all moneys and securities of the Corporation and shall keep
regular books of account. Such officer shall disburse the funds of the
Corporation in payment of the just demands against the Corporation, or
as may be ordered by the Board of Directors, taking proper vouchers for
such disbursements, and shall render to the Board of Directors from time
to time as may be required of such officer, an account of all
transactions as Chief Financial Officer and of the financial condition
of the Corporation. Such officer shall perform all duties incident to
such office or which are properly required by the President or by the
Board of Directors.
The Assistant Chief Financial Officer or the Assistant Chief Financial
Officers, in the order of their seniority, shall, in the absence or disability
of the Chief Financial Officer, or in the event of such officer's refusal to
act, perform the duties and exercise the powers of the Chief Financial Officer,
and shall have such powers and discharge such duties as may be assigned from
time to time by the President or by the Board of Directors.
Section 4.10 Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented
from receiving such salary by reason of the fact that such officer is
also a director of the Corporation.
Section 4.11 Officers Holding More than One Office. Any two or more
offices may be held by the same person.
Section 4.12 Approval of Loans to Directors and Officers. The
Corporation may, upon the approval of the Board of Directors alone, make
loans of money or property to, or guarantee the obligations of, any
director or officer of the Corporation or its parent or subsidiary, or
adopt an employee benefit plan or plans authorizing such loans or
guaranties provided that (i) the Board of Directors determines that such
a loan or guaranty or plan may reasonably be expected to benefit the
Corporation, (ii) the Corporation has outstanding shares held of record
by 100 or more persons (determined as provided in Section 605 of the
California Corporations Code) on the date of approval by the Board of
Directors, and (iii) the approval of the Board of Directors is by a vote
sufficient without counting the vote of any interested director or
directors.
Article 5.
- MISCELLANEOUS
Section 5.01 Record Date and Closing of Stock Books. The Board of
Directors may fix a time in the future as a record date for the
determination of the shareholders entitled to notice of and to vote at
any meeting of shareholders or entitled to receive payment of any
dividend or distribution, or any allotment of rights, or to exercise
rights in respect to any other lawful action. The record date so fixed
shall not be more than sixty (60) nor less than ten (10) days prior to
the date of the meeting or event for the purposes of which it is fixed.
When a record date is so fixed, only shareholders of record at the close
of business on that date are entitled to notice of and to vote at the
meeting or to receive the dividend, distribution, or allotment of
rights, or to exercise the rights, as the case may be,
<PAGE> 11
notwithstanding any transfer of any shares on the books of the
Corporation after the record date.
The Board of Directors may close the books of the Corporation
against transfers of shares during the whole or any part of a period of
not more than sixty (60) days prior to the date of a shareholders'
meeting, the date when the right to any dividend, distribution, or
allotment of rights vests, or the effective date of any change,
conversion or exchange of shares.
Section 5.02 Certificates. Certificates of stock shall be issued in
numerical order and each shareholder shall be entitled to a certificate
signed in the name of the Corporation by the Chairman of the Board or
the President or a Vice President, and the Chief Financial Officer, the
Secretary or an Assistant Secretary, certifying to the number of shares
owned by such shareholder. Any or all of the signatures on the
certificate may be facsimile. Prior to the due presentment for
registration of transfer in the stock transfer book of the Corporation,
the registered owner shall be treated as the person exclusively entitled
to vote, to receive notifications and otherwise to exercise all the
rights and powers of an owner, except as expressly provided otherwise by
the laws of the State of California.
Section 5.03 Representation of Shares in Other Corporations. Shares of
other corporations standing in the name of this Corporation may be voted
or represented and all incidents thereto may be exercised on behalf of
the Corporation by the Chairman of the Board, the President or any Vice
President and the Chief Financial Officer or the Secretary or an
Assistant Secretary.
Section 5.04 Fiscal Year. The fiscal year of the Corporation shall end
on the last Saturday of July.
Section 5.05 Annual Reports. The Annual Report to shareholders,
described in the California Corporations Code, is expressly waived and
dispensed with.
Section 5.06 Amendments. Bylaws may be adopted, amended, or repealed by
the vote or the written consent of shareholders entitled to exercise a
majority of the voting power of the Corporation. Subject to the right of
shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted,
amended, or repealed by the Board of Directors, except that a Bylaw
amendment thereof changing the authorized number of directors may be
adopted by the Board of Directors only if these Bylaws permit an
indefinite number of directors and the Bylaw or amendment thereof
adopted by the Board of Directors changes the authorized number of
directors within the limits specified in these Bylaws.
Section 5.07 Indemnification of Corporate Agents.
(a) The Corporation shall indemnify each of its agents against
expenses, judgments, fines, settlements and other amounts,
actually and reasonably incurred by such person by reason of such
person's having been made or having threatened to be made a party
to a proceeding to the fullest extent permissible by the
<PAGE> 12
provisions of Section 317 of the California Corporations Code.
The terms "agent," "proceeding" and "expenses" made in this
Section 7 shall have the same meaning as such terms in said
Section 317.
(b) Expenses reasonably incurred by an agent of the Corporation
in defending a civil or criminal action, suit or proceeding by
reason of the fact that he or she is or was an agent of the
Corporation (or was serving at the Corporation's request as a
director or officer of another corporation) shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf
of such agent to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by
the Corporation as authorized by relevant sections of the General
Corporation Law of California.
(c) Notwithstanding the foregoing, the Corporation shall not be
required to advance such expenses to an agent who is party to an
action, suit or proceeding brought by the Corporation and
approved by a majority of the Board which alleges willful
misappropriation of corporate assets by such agent, wrongful
disclosure of confidential information, or any other willful and
deliberate breach in bad faith of such agent's duty to the
Corporation or its stockholders.
<PAGE> 1
Exhibit 10.2
CISCO SYSTEMS, INC.
1996 STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED EFFECTIVE SEPTEMBER 15, 1998
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Incentive Plan is intended to promote the
interests of Cisco Systems, Inc., a California corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms
in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock, and
(ii) the Automatic Option Grant Program under which
eligible non-employee Board members shall automatically receive option
grants at periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive
authority to administer the Discretionary Option Grant Program with respect to
Section 16 Insiders.
<PAGE> 2
B. Administration of the Discretionary Option Grant Program with
respect to all other persons eligible to participate in that program may, at the
Board's discretion, be vested in the Primary Committee or a Secondary Committee,
or the Board may retain the power to administer that program with respect to all
such persons. The members of the Secondary Committee may be Board members who
are Employees eligible to receive discretionary option grants under the Plan or
any other stock option, stock appreciation, stock bonus or other stock plan of
the Corporation (or any Parent or Subsidiary).
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant
Program and to make such determinations under, and issue such interpretations
of, the provisions of such programs and any outstanding options thereunder as it
may deem necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative functions under the Plan shall be final and binding
on all parties who have an interest in the Discretionary Option Grant Program
under its jurisdiction or any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants under the Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants made under that program.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant Program are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
2.
<PAGE> 3
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine
which eligible persons are to receive option grants under the Discretionary
Option Grant Program, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding.
C. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Plan Effective Date, (ii) those individuals
who first become non-employee Board members on or after the Plan Effective Date,
whether through appointment by the Board or election by the Corporation's
shareholders, and (iii) those individuals who continue to serve as non-employee
Board members at one or more Annual Shareholders Meetings held after the Plan
Effective Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock reserved for issuance over the term of the Plan shall not exceed
297,404,248 shares, subject to the automatic share increases described in
Paragraph V.B. below. Such share reserve consists of the number of shares of
Common Stock transferred from the Predecessor Plan, as of the Plan Effective
Date (154,881,225 shares), plus the number of shares added to the reserve in the
automatic share increases that occurred in December 1996 and December 1997
(142,523,023 shares). These share numbers reflect both (i) the three (3)-for-two
(2) split of Common Stock effected on December 16, 1997 and (ii) the three
(3)-for-two (2) split of Common Stock effected on September 15, 1998.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of fiscal
December each calendar year, beginning with fiscal December in calendar year
1996 and continuing through fiscal December in calendar year 2001, by a number
of shares equal to four and three-quarters percent (4.75%) of the total number
of shares of Common Stock outstanding on the last trading day in the immediately
preceding fiscal November, but in no event shall any such annual increase exceed
120,000,000 shares (as adjusted for both (i) the three (3)-for-two (2) split of
Common Stock effected on December 16, 1997 and (ii) the three (3)-for-two (2)
split of Common Stock effected on September 15, 1998).
3.
<PAGE> 4
C. No one person participating in the Plan may receive stock
options or separately exercisable stock appreciation rights for more than
2,000,000 shares of Common Stock in the aggregate per calendar year.
4.
<PAGE> 5
D. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan) shall
be available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, should the exercise price of an option under the
Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Corporation in satisfaction
of the withholding taxes incurred in connection with the exercise of an option
or the vesting of a stock issuance under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised or which vest under the stock
issuance, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance. Shares of Common Stock underlying one
or more stock appreciation rights exercised under Section IV of Article Two of
the Plan shall NOT be available for subsequent issuance under the Plan.
E. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options or separately exercisable stock appreciation
rights in the aggregate under the Plan per calendar year, (iii) the number
and/or class of securities for which grants are subsequently to be made under
the Automatic Option Grant Program to new and continuing non-employee Board
members, unless the Plan Administrator determines otherwise, (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option under the Plan and (v) the number and/or class of securities
and price per share in effect under each outstanding option incorporated into
this Plan from the Predecessor Plan. Such adjustments to the outstanding options
are to be effected in a manner which shall preclude the enlargement or dilution
of rights and benefits under such options. The adjustments determined by the
Plan Administrator shall be final, binding and conclusive.
5.
<PAGE> 6
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the
Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
6.
<PAGE> 7
B. EXERCISE AND TERM OF OPTIONS. Each option 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
documents evidencing the option. However, no option shall have a term in excess
of nine (9) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised 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.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
D. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service from
the limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
7.
<PAGE> 8
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.
E. SHAREHOLDER RIGHTS. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
F. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
8.
<PAGE> 9
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% SHAREHOLDER. If any Employee to whom an Incentive Option
is granted is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of 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 any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
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 to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
those option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
9.
<PAGE> 10
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options or
separately exercisable stock appreciation rights under the Plan per calendar
year.
E. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do not
otherwise accelerate. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights with
respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation 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.
10.
<PAGE> 11
H. The outstanding options 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.
IV. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority,
exercisable in its sole discretion, to grant to selected Optionees or other
individuals eligible to receive option grants under the Discretionary Option
Grant Program stock appreciation rights.
B. Three types of stock appreciation rights shall be authorized
for issuance under the Plan: (i) tandem stock appreciation rights ("Tandem
Rights"), (ii) stand-alone stock appreciation rights ("Stand-alone Rights") and
(iii) limited stock appreciation rights ("Limited Rights").
C. The following terms and conditions shall govern the grant
and exercise of Tandem Rights under this Article Two.
1. One or more Optionees may be granted a Tandem Right,
exercisable upon such terms and conditions as the Plan Administrator may
establish, to elect between the exercise of the underlying Article Two stock
option for shares of Common Stock or the surrender of that option in exchange
for a distribution from the Corporation in an amount equal to the excess of (i)
the Fair Market Value (on the option surrender date) of the number of shares in
which the Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (ii) the aggregate exercise price payable for
such vested shares.
2. No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. 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 on
the option surrender date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.
3. If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
(i) five (5) business days after the 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 more than nine (9) years after the date of the option grant.
D. The following terms and conditions shall govern the grant
and exercise of Stand-alone Rights under this Article Two:
11.
<PAGE> 12
1. One or more individuals eligible to participate in the
Discretionary Option Grant Program may be granted a Stand-alone Right not tied
to any underlying option under this Discretionary Option Grant Program. The
Stand-alone Right shall cover a specified number of underlying shares of Common
Stock and shall be exercisable upon such terms and conditions as the Plan
Administrator may establish. Upon exercise of the Stand-alone Right, the holder
shall be entitled to receive a distribution from the Corporation in an amount
equal to the excess of (i) the aggregate Fair Market Value (on the exercise
date) of the shares of Common Stock underlying the exercised right over (ii) the
aggregate base price in effect for those shares.
2. The number of shares of Common Stock underlying each
Stand-alone Right and the base price in effect for those shares shall be
determined by the Plan Administrator in its sole discretion at the time the
Stand-alone Right is granted. In no event, however, may the base price per share
be less than the Fair Market Value per underlying share of Common Stock on the
grant date.
3. The distribution with respect to an exercised
Stand-alone Right may be made in shares of Common Stock valued at Fair Market
Value on the exercise date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.
E. The following terms and conditions shall govern the grant
and exercise of Limited Rights under this Article Two:
1. One or more Section 16 Insiders may, in the Plan
Administrator's sole discretion, be granted Limited Rights with respect to their
outstanding options under this Article Two.
2. Upon the occurrence of a Hostile Take-Over, the Section
16 Insider shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each option with such a
Limited Right to the Corporation, to the extent the option is at the time
exercisable for fully vested shares of Common Stock. The Section 16 Insider
shall in return be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the vested shares of
Common Stock at the time subject to each surrendered option (or surrendered
portion of such option) over (ii) the aggregate exercise price payable for such
vested shares. Such cash distribution shall be made within five (5) days
following the option surrender date.
3. The Plan Administrator shall pre-approve, at the time
such Limited Right is granted, the subsequent exercise of that right in
accordance with the terms of the grant and the provisions of this Section IV. No
additional approval of the Plan Administrator or the Board shall be required at
the time of the actual option surrender and cash distribution. Any unsurrendered
portion of the option shall continue to remain outstanding and become
exercisable in accordance with the terms of the instrument evidencing such
grant.
F. The shares of Common Stock underlying any stock appreciation
rights exercised under this Section IV shall NOT be available for subsequent
issuance under the Plan.
12.
<PAGE> 13
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made pursuant to this
September 15, 1998 restatement on the dates specified below:
1. Each individual who is first elected or appointed as a
non-employee Board member on or after the date of the 1998 Annual Shareholders
Meeting shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 20,000 shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of each Annual Shareholders Meeting,
beginning with the 1998 Annual Shareholders Meeting, each individual who is
re-elected to serve as an Eligible Director shall automatically be granted a
Non-Statutory Option to purchase 10,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 10,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive one or
more such annual option grants over their period of continued Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a maximum term equal to
the lesser of (i) nine (9) years measured from the option grant date or (ii)
twelve (12) months following termination of Board service.
13.
<PAGE> 14
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial 20,000-share grant shall
vest, and the Corporation's repurchase right shall lapse in four (4) successive
equal annual installments over the Optionee's period of Board service, with the
first such installment to vest upon the completion of one (1) year of Board
service measured from the automatic grant date. Each annual 10,000-share grant
shall vest, and the Corporation's repurchase right shall lapse, in two (2)
successive equal annual installments over the optionee's period of Board service
measured from the automatic grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee upon his or her
cessation of Board service:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or 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) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of those
shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain
exercisable after the expiration of the option term. Upon the expiration
of the twelve (12)-month exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to
be outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Board service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the
option is not otherwise at that time exercisable for vested shares.
14.
<PAGE> 15
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. This provision of the
Automatic Option Grant Program shall constitute advance approval by the Board of
any subsequent surrender of the option in accordance with the provisions of this
Section II.C, and no additional approval of the Board or any Plan Administrator
shall accordingly be required at the time of the actual option surrender and
cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
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.
15.
<PAGE> 16
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
16.
<PAGE> 17
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee to pay the option
exercise price under the Discretionary Option Grant Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee exceed the sum of (i) the aggregate option exercise price payable for
the purchased shares plus (ii) any Federal, state and local income and
employment tax liability incurred by the Optionee in connection with the option
exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income and employment
tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any
or all holders of Non-Statutory Options under the Discretionary Option Grant
Program with the right to use shares of Common Stock in satisfaction of all or
part of the Taxes incurred by such holders in connection with the exercise of
their options. Such right may be provided to any such holder in either or both
of the following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such Non-Statutory Option, a portion of those
shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation,
at the time the Non-Statutory Option is exercised, one or more
shares of Common Stock previously acquired by such holder (other
than in connection with the option exercise triggering the Taxes)
with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated
by the holder.
17.
<PAGE> 18
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan and each of the equity incentive programs thereunder
shall become effective immediately upon the approval of the Corporation's
shareholders at the 1996 Annual Meeting. Options may be granted under the Plan
at any time on or after the date of such shareholder approval. If such
shareholder approval is not obtained, then this Plan shall not become effective,
and no options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants shall be made under the Predecessor Plan after this
Plan is approved by the shareholders at the 1996 Annual Meeting. All options
outstanding under the Predecessor Plan at the time of such shareholder approval
shall be incorporated into the Plan at that time and shall be treated as
outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) December 31,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such plan
termination, all outstanding option grants shall thereafter continue to have
force and effect in accordance with the provisions of the documents evidencing
such grants.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to stock options at the time outstanding under the Plan unless the
Optionee consents to such amendment or modification. In addition, certain
amendments may require shareholder approval in accordance with applicable laws
and regulations.
B. The Plan was amended by the Board on July 29, 1998 in order to
extend the automatic share increase provisions of the Plan for an additional
three (3)-year through fiscal December in calendar year 2001. Such amendment,
however, is subject to shareholder approval at the 1998 Annual Meeting and will
not be implemented unless such shareholder approval is obtained.
18.
<PAGE> 19
C. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program that are in excess of the number of
shares then available for issuance under the Plan, provided any excess shares
actually issued under that program shall be held in escrow until there is
obtained shareholder approval of an amendment sufficiently increasing the number
of shares of Common Stock available for issuance under the Plan. If such
shareholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock upon the
exercise of any granted option shall be subject to the Corporation's procurement
of all approvals and permits required by regulatory authorities having
jurisdiction over the Plan, the stock options granted under it and the shares of
Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.
19.
<PAGE> 20
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic
option grant program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or
control of the Corporation effected through either of the following
transactions:
(i) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than thirty-five percent (35%) of the total combined
voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation'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 ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) 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 (A) who were still in office at the time the Board
approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
A-1.
<PAGE> 21
G. CORPORATION shall mean Cisco Systems, Inc., a California
corporation, and its successors.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.
I. ELIGIBLE DIRECTOR shall mean a non-employee Board member
eligible to participate in the Automatic Option Grant Program in accordance with
the eligibility provisions of Article One.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question,
as such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question
on the Stock 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
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
M. HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than thirty-five percent (35%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's shareholders which the Board does not recommend
such shareholders to accept.
A-2.
<PAGE> 22
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected without the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
R. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant or Automatic Option Grant Program.
T. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) 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.
A-3.
<PAGE> 23
U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
However, solely for purposes of the Automatic Option Grant Program, Permanent
Disability or Permanently Disabled shall mean the inability of the non-employee
Board member to perform his or her usual duties as a Board member by reason of
any medically determinable physical or mental impairment expected to result in
death or to be of continuous duration of twelve (12) months or more.
V. PLAN shall mean the Corporation's 1996 Stock Incentive Plan,
as set forth in this document.
W. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant Program with respect to one or more
classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.
X. PREDECESSOR PLAN shall mean the Corporation's pre-existing
1987 Stock Option Plan in effect immediately prior to the Plan Effective Date
hereunder.
Y. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.
Z. SECONDARY COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to administer the Discretionary Option
Grant Program with respect to eligible persons other than Section 16 Insiders.
AA. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
BB. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
CC. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
DD. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each 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.
A-4.
<PAGE> 24
EE. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
FF. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
GG. 10% SHAREHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-5.
<PAGE> 25
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Cisco Systems, Inc. (the
"Corporation"):
Optionee:________________________________________________________
Grant Date:______________________________________________________
Vesting Commencement Date:_______________________________________
Exercise Price: $_____________________________________ per share
Number of Option Shares:__________________________________ shares
Expiration Date: ________________________________________________
Type of Option: ____ Incentive Stock Option
____ Non-Statutory Stock Option
Exercise Schedule: The Option shall become exercisable with
respect to twenty five percent (25%) of the Option Shares upon
Optionee's completion of one (1) year of Service measured from
the Vesting Commencement Date and shall become exercisable for
the balance of the Option Shares in thirty-six (36) successive
equal monthly installments upon Optionee's completion of each
additional month of Service over the thirty-six (36) month period
measured from the first anniversary of the Vesting Commencement
Date. In no event shall the Option become exercisable for any
additional Option Shares after Optionee's cessation of Service.
Should Optionee request a reduction to his or her work commitment
to less than thirty (30) hours per week, then the Corporation
shall have the right, exercisable in connection with the approval
of that reduction, to extend the period over which the Option
shall thereafter vest and become exercisable for the Option
Shares during the remainder of the option term. The decision
whether or not to approve Optionee's request for such reduced
work commitment shall be at the sole discretion of the
Corporation and shall be made by the Corporation on a case by
case basis. In no event shall any extension of the Exercise
Schedule for the Option Shares result in the extension of the
Expiration Date of the Option.
<PAGE> 26
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the Cisco Systems, Inc. 1996
Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.
No Employment or Service Contract. Nothing in this Notice or in
the attached Stock Option Agreement or in the Plan shall confer upon Optionee
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining Optionee) or of Optionee,
which rights are hereby expressly reserved by each, to terminate Optionee's
Service at any time for any reason, with or without cause.
Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
DATED: ____________________________________ , 199__
CISCO SYSTEMS, INC.
By:
-----------------------------------
Title:
--------------------------------
--------------------------------------
OPTIONEE
Address:
-----------------------------
--------------------------------------
ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS
2.
<PAGE> 27
EXHIBIT A
STOCK OPTION AGREEMENT
<PAGE> 28
EXHIBIT B
PLAN SUMMARY AND PROSPECTUS
<PAGE> 29
CISCO SYSTEMS, INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or of the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall have a maximum term of nine (9)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This option shall be neither
transferable or assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised only by
Optionee during his or her lifetime. However, if this option is designated
Non-Statutory Option in the Grant Notice, then this option may, in connection
with the Optionee's estate plan, be assigned in whole or in part during
Optionee's lifetime to one or more members of the Optionee's immediate family or
to a trust established for the exclusive benefit of one or more such family
members. The assigned portion shall be exercisable only by the person or persons
who acquire a proprietary interest in the option pursuant to such assignment.
The terms applicable to the assigned portion shall be the same as those in
effect for this option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Corporation may deem
appropriate.
<PAGE> 30
4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in Paragraph
2 shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(i) Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct) while this
option is outstanding, then the period during which this option may be
exercised shall be limited to the three (3)-month period measured from
the date of such cessation of Service, but in no event shall this option
be exercisable at any time after the Expiration Date.
(ii) If Optionee dies while holding this option, then the
personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in
accordance with the laws of descent and distribution shall have the
right to exercise this option. Such right shall lapse, and this option
shall cease to be outstanding, upon the earlier of (A) the expiration of
the twelve (12)-month period measured from the date of Optionee's death
or (B) the Expiration Date.
(iii) Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then the period during
which this option may be exercised shall be limited to the twelve
(12)-month period measured from the date of such cessation of Service.
In no event shall this option be exercisable at any time after the
Expiration Date.
(iv) During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for
more than the number of Option Shares for which the option is
exercisable at the time of Optionee's cessation of Service. Upon the
expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be outstanding
for any otherwise exercisable Option Shares for which the option has not
been exercised. However, this option shall, immediately upon Optionee's
cessation of Service for any reason, terminate and cease to be
outstanding with respect to any Option Shares for which this option is
not otherwise at that time exercisable.
2.
<PAGE> 31
(v) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain outstanding.
6. SPECIAL ACCELERATION OF OPTION.
(a) This option, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable, shall automatically
accelerate so that this option shall, immediately prior to the effective date of
the Corporate Transaction, become exercisable for all of the Option Shares at
the time subject to this option and may be exercised for any or all of those
Option Shares as fully-vested shares of Common Stock. No such acceleration of
this option, however, shall occur if and to the extent: (i) this option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof) or (ii) this option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any Option Shares for which this option is not
otherwise at that time exercisable (the excess of the Fair Market Value of those
Option Shares over the aggregate Exercise Price payable for such shares) and
provides for subsequent pay-out in accordance with the same exercise/vesting
schedule for those Option Shares set forth in the Grant Notice. The
determination of option comparability under clause (i) shall be made by the Plan
Administrator, and such determination shall be final, binding and conclusive.
(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
(d) This option, to the extent outstanding at the time of a
Change in Control but not otherwise fully exercisable, shall automatically
accelerate so that this option shall, immediately prior to the effective date of
the Change in Control, become exercisable for all of the Option Shares at the
time subject to this option and may be exercised for any or all of those Option
Shares as fully-vested shares of Common Stock. This option shall remain so
exercisable until the Expiration Date or sooner termination of the option term.
3.
<PAGE> 32
(e) This Agreement shall not in any 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.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. SHAREHOLDER RIGHTS. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a
Notice of Exercise for the Option Shares for which the option is
exercised.
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) a promissory note payable to the Corporation,
but only to the extent authorized by the Plan Administrator in
accordance with Paragraph 13;
(C) shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
4.
<PAGE> 33
(D) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions (I) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate Exercise Price payable for the purchased
shares plus all applicable taxes required to be withheld by the
Corporation by reason of such exercise and (II) to the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the Exercise
Price must accompany the Notice of Exercise delivered to the Corporation
in connection with the option exercise.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than Optionee)
have the right to exercise this option.
(iv) Make appropriate arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee) for the satisfaction
of all tax withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto.
(c) In no event may this option be exercised for any fractional
shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
5.
<PAGE> 34
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.
12. SALE OR TRANSFER OF SHARES. Optionee shall provide the
Corporation with notice of any transfer, sale, assignment, pledge or other
disposition of the Option Shares. Such notice shall be furnished the Corporation
within ten (10) business days following the transfer, sale, assignment, pledge
or disposition and shall indicate the nature of the transaction and the number
of Option Shares involved in that transaction.
13. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
14. FINANCING. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, permit Optionee to pay the Exercise Price
for the purchased Option Shares by delivering a full-recourse promissory note
payable to the Corporation. The terms of any such promissory note (including the
interest rate, the requirements for collateral and the terms of repayment) shall
be established by the Plan Administrator in its sole discretion.
15. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
16. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
6.
<PAGE> 35
17. EXCESS SHARES. If the Option Shares covered by this Agreement
exceed, as of the Grant Date, the number of shares of Common Stock which may
without shareholder approval be issued under the Plan, then this option shall be
void with respect to those excess shares, unless shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock issuable
under the Plan is obtained in accordance with the provisions of the Plan.
18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
- This option shall cease to qualify for favorable tax treatment
as an Incentive Option if (and to the extent) this option is exercised for
one or more Option Shares: (A) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or
Permanent Disability or (B) more than twelve (12) months after the date
Optionee ceases to be an Employee by reason of Permanent Disability.
- No installment under this option shall qualify for favorable
tax treatment as an Incentive Option if (and to the extent) the aggregate
Fair Market Value (determined at the Grant Date) of the Common Stock for
which such installment first becomes exercisable hereunder would, when
added to the aggregate value (determined as of the respective date or dates
of grant) of the Common Stock or other securities for which this option or
any other Incentive Options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.
Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded
in any calendar year, this option shall nevertheless become exercisable for
the excess shares in such calendar year as a Non-Statutory Option.
- Should the exercisability of this option be accelerated upon a
Corporate Transaction or a Change in Control, then this option shall
qualify for favorable tax treatment as an Incentive Option only to the
extent the aggregate Fair Market Value (determined at the Grant Date) of
the Common Stock for which this option first becomes exercisable in the
calendar year in which the Corporate Transaction or Change in Control
occurs does not, when added to the aggregate value (determined as of the
respective date or dates of grant) of the Common Stock or other securities
for which this option or one or more other Incentive Options granted to
Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any Parent or Subsidiary) first become
7.
<PAGE> 36
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. Should the applicable One Hundred
Thousand Dollar ($100,000) limitation be exceeded in the calendar year of
such Corporate Transaction or Change in Control, the option may
nevertheless be exercised for the excess shares in such calendar year as a
Non-Statutory Option.
- Should Optionee hold, in addition to this option, one or more
other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options
shall be applied on the basis of the order in which such options are
granted.
19. LEAVE OF ABSENCE. The following provisions shall apply upon the
Optionee's commencement of an authorized leave of absence:
(a) The exercise schedule in effect under the Grant Notice shall
be frozen as of the first day of the authorized leave, and this option
shall not become exercisable for any additional installments of the Option
Shares during the period Optionee remains on such leave.
(b) If the option is designated as an Incentive Option in the
Grant Notice, then the following additional provision shall apply:
- If the leave of absence continues for more than ninety
(90) days, then this option shall automatically convert to a
Non-Statutory Option under the Federal tax laws at the end of the three
(3)-month period measured from the ninety-first (91st) day of such
leave, unless the Optionee's reemployment rights are guaranteed by
statute or by written agreement. Following any such conversion of the
option, all subsequent exercises of such option, whether effected before
or after Optionee's return to active Employee status, shall result in an
immediate taxable event, and the Corporation shall be required to
collect from Optionee all withholding taxes applicable to such exercise.
(c) In no event shall this option become exercisable for any
additional Option Shares or otherwise remain outstanding if Optionee does
not resume Employee status prior to the Expiration Date of the option term.
8.
<PAGE> 37
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Cisco Systems, Inc. (the "Corporation") that I
elect to purchase shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $_____ per share (the "Exercise Price")
pursuant to that certain option (the "Option") granted to me under the
Corporation's 1996 Stock Incentive Plan on______________________, 199__.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
_____________________________, 199__
Date
------------------------------------
Optionee
Address:
----------------------------
------------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
------------------------------------
Address to which certificate
is to be sent, if different
from address above:
------------------------------------
------------------------------------
Social Security Number:
------------------------------------
Employee Number:
------------------------------------
<PAGE> 38
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than thirty-five percent (35%) of the
total combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation'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 ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) 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 (A) who were still in office
at the time the Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Cisco Systems, Inc., a California
corporation.
A-1.
<PAGE> 39
H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.
J. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
K. EXPIRATION DATE shall mean the date on which the option expires
as specified in the Grant Notice.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(iii) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question, as the price is reported by
the National Association of Securities Dealers on the Nasdaq National Market. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iv) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock 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 closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation exists.
M. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.
N. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
A-2.
<PAGE> 40
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
S. NOTICE OF EXERCISE shall mean the notice of exercise in the form
attached hereto as Exhibit I.
T. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.
U. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) 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.
W. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
X. PLAN shall mean the Corporation's 1996 Stock Incentive Plan.
Y. PLAN ADMINISTRATOR shall mean either the Board or a committee of
the Board acting in its administrative capacity under the Plan.
Z. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.
A-3.
<PAGE> 41
AA. STOCK EXCHANGE shall mean the American Stock Exchange or the New
York Stock Exchange.
BB. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each 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.
A-4.
<PAGE> 42
ADDENDUM
TO
STOCK OPTION AGREEMENT
The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Option Agreement dated 2~ (the "Option
Agreement") by and between Cisco Systems, Inc. (the "Corporation") and 1~
("Optionee") evidencing the stock option (the "Option") granted on such date to
Optionee under the terms of the Corporation's 1996 Stock Incentive Plan, and
such provisions shall be effective immediately. All capitalized terms in this
Addendum, to the extent not otherwise defined herein, shall have the meanings
assigned to them in the Option Agreement.
INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION
1. To the extent the Option is, in connection with a Corporate
Transaction, to be assumed or replaced with a comparable option in accordance
with Paragraph 6 of the Option Agreement, the Option shall not accelerate upon
the occurrence of that Corporate Transaction, and the Option shall accordingly
continue, over Optionee's period of Service after the Corporate Transaction, to
become exercisable for the Option Shares in one or more installments in
accordance with the provisions of the Option Agreement. However, immediately
upon an Involuntary Termination of Optionee's Service within eighteen (18)
months following such Corporate Transaction, the Option (or any replacement
grant), to the extent outstanding at the time but not otherwise fully
exercisable, shall automatically accelerate so that the Option shall become
immediately exercisable for all the Option Shares at the time subject to the
Option and may be exercised for any or all of those Option Shares as fully
vested shares. The Option shall remain so exercisable until the earlier of (i)
the Expiration Date or (ii) the expiration of the one (1)-year period measured
from the date of the Involuntary Termination.
2. For purposes of this Addendum, an INVOLUNTARY TERMINATION
shall mean the termination of Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change
in Optionee's position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces Optionee's level of
responsibility, (B) a reduction in Optionee's level of compensation
(including base salary, fringe benefits and participation in any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of Optionee's place of
employment by more than fifty (50) miles, provided and only if such
<PAGE> 43
change, reduction or relocation is effected by the Corporation without
Optionee's consent.
3. The provisions of Paragraph 1 of this Addendum shall govern
the period for which the Option is to remain exercisable following the
Involuntary Termination of Optionee's Service within eighteen (18) months after
the Corporate Transaction and shall supersede any provisions to the contrary in
Paragraph 5 of the Option Agreement.
IN WITNESS WHEREOF, Cisco Systems, Inc. has caused this Addendum
to be executed by its duly-authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
CISCO SYSTEMS, INC.
By:
----------------------------------
Title:
-------------------------------
-------------------------------------
1~, OPTIONEE
EFFECTIVE DATE: __________________, 199__
2.
<PAGE> 44
ADDENDUM
TO
STOCK OPTION AGREEMENT
The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Option Agreement dated 2~ (the "Option
Agreement") by and between Cisco Systems, Inc. (the "Corporation") and 1~
("Optionee") evidencing the stock option (the "Option") granted on such date to
Optionee under the terms of the Corporation's 1996 Stock Incentive Plan, and
such provisions shall be effective immediately. All capitalized terms in this
Addendum, to the extent not otherwise defined herein, shall have the meanings
assigned to them in the Option Agreement.
LIMITED STOCK APPRECIATION RIGHT
1. Optionee is hereby granted a limited stock appreciation right
exercisable upon the following terms and conditions:
- Optionee shall have the unconditional right (exercisable at
any time during the thirty (30)-day period immediately following a Hostile
Take-Over) to surrender the Option to the Corporation, to the extent the Option
is at the time exercisable for vested shares of Common Stock. In return for the
surrendered Option, Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price of the
shares of Common Stock which are at the time vested under the surrendered Option
(or surrendered portion) over (B) the aggregate Exercise Price payable for such
shares.
- To exercise this limited stock appreciation right, Optionee
must, during the applicable thirty (30)-day exercise period, provide the
Corporation with written notice of the option surrender in which there is
specified the number of Option Shares as to which the Option is being
surrendered. Such notice must be accompanied by the return of Optionee's copy of
the Option Agreement, together with any written amendments to such Agreement.
The cash distribution shall be paid to Optionee within five (5) business days
following such delivery date, and 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. Upon receipt of such cash distribution, the
Option shall be cancelled with respect to the Option Shares for which the Option
has been surrendered, and Optionee shall cease to have any further right to
acquire those Option Shares under the Option Agreement. The Option shall,
however, remain outstanding and exercisable for the balance of the Option Shares
(if any) in accordance with the terms of the Option Agreement, and the
Corporation shall issue a new stock option agreement (substantially in the same
form of the surrendered Option Agreement) for those remaining Option Shares.
- In no event may this limited stock appreciation right be
exercised when there is not a positive spread between the Fair Market Value of
the Option Shares and the aggregate Exercise Price payable for such shares. This
limited stock appreciation right shall in
<PAGE> 45
all events terminate upon the expiration or sooner termination of the option
term and may not be assigned or transferred by Optionee.
2. For purposes of this Addendum, the following definitions shall
be in effect:
- A HOSTILE TAKE-OVER shall be deemed to occur in the event
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of securities possessing
more than thirty-five percent (35%) of the total combined voting power
of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's shareholders which the
Board does not recommend such shareholders to accept.
- The TAKE-OVER PRICE per share shall be deemed to be equal
to the greater of (A) the Fair Market Value per Option Share on the
option surrender date or (B) the highest reported price per share of
Common Stock paid by the tender offeror in effecting the Hostile
Take-Over. However, if the surrendered Option is designated as an
Incentive Option in the Grant Notice, then the Take-Over Price shall not
exceed the clause (A) price per share.
IN WITNESS WHEREOF, Cisco Systems, Inc. has caused this Addendum
to be executed by its duly-authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
CISCO SYSTEMS, INC.
By:
-----------------------------------
Title:
--------------------------------
--------------------------------------
1~, OPTIONEE
EFFECTIVE DATE:_____________________, 199__
2.
<PAGE> 46
INITIAL GRANT
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Cisco Systems, Inc. (the
"Corporation"):
Optionee:________________________________________________________
Grant Date:______________________________________________________
Exercise Price: $_____________________________________ per share
Number of Option Shares: 20,000 shares
Expiration Date:_________________________________________________
Type of Option: Non-Statutory Stock Option
Date Exercisable: Immediately Exercisable
Vesting Schedule: The Option Shares shall initially be unvested
and subject to repurchase by the Corporation at the Exercise
Price paid per share. Optionee shall acquire a vested interest
in, and the Corporation's repurchase right shall accordingly
lapse with respect to, the Option Shares in a series of four (4)
successive equal annual installments upon the Optionee's
completion of each year of service as a member of the
Corporation's Board of Directors (the "Board") over the four
(4)-year period measured from the Grant Date. In no event shall
any additional Option Shares vest after Optionee's cessation of
Board service.
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the automatic option grant
program under the Cisco Systems, Inc. 1996 Stock Incentive Plan (the "Plan").
Optionee further agrees to be bound by the terms of the Plan and the terms of
the Option as set forth in the Automatic Stock Option Agreement attached hereto
as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.
<PAGE> 47
REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND
SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID
PER SHARE, UPON OPTIONEE'S TERMINATION OF SERVICE AS A MEMBER OF THE
CORPORATION'S BOARD OF DIRECTORS PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND
CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE
AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY
OPTIONEE AT THE TIME OF THE OPTION EXERCISE.
No Impairment of Rights. Nothing in this Notice or in the
attached Automatic Stock Option Agreement or the Plan shall interfere with or
otherwise restrict in any way the rights of the Corporation or the Corporation's
shareholders to remove Optionee from the Board at any time in accordance with
the provisions of applicable law.
Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Automatic Stock
Option Agreement.
DATED:__________________________, 199__
CISCO SYSTEMS, INC.
By:
------------------------------------
Title:
---------------------------------
---------------------------------
OPTIONEE
Address:
-------------------------------
-------------------------------
ATTACHMENTS
EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS
2.
<PAGE> 48
EXHIBIT A
AUTOMATIC STOCK OPTION AGREEMENT
<PAGE> 49
EXHIBIT B
PLAN SUMMARY AND PROSPECTUS
<PAGE> 50
ANNUAL GRANT
CISCO SYSTEMS, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Cisco Systems, Inc. (the
"Corporation"):
Optionee:________________________________________________________
Grant Date:______________________________________________________
Exercise Price: $_____________________________________ per share
Number of Option Shares: 10,000 shares
Expiration Date:_________________________________________________
Type of Option: Non-Statutory Stock Option
Date Exercisable: Immediately Exercisable
Vesting Schedule: The Option Shares shall initially be unvested
and subject to repurchase by the Corporation at the Exercise
Price paid per share. Optionee shall acquire a vested interest
in, and the Corporation's repurchase right shall accordingly
lapse with respect to, the Option Shares in a series of two (2)
successive equal annual installments upon Optionee's completion
of each year of service as a member of the Corporation's Board of
Directors (the "Board") over the two (2)-year period measured
from the Grant Date. In no event shall any additional Option
Shares vest after Optionee's cessation of Board service.
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the automatic option grant
program under the Cisco Systems, Inc. 1996 Stock Incentive Plan (the "Plan").
Optionee further agrees to be bound by the terms of the Plan and the terms of
the Option as set forth in the Automatic Stock Option Agreement attached hereto
as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.
<PAGE> 51
REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND
SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID
PER SHARE, UPON OPTIONEE'S TERMINATION OF SERVICE AS A MEMBER OF THE
CORPORATION'S BOARD OF DIRECTORS PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND
CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE
AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY
OPTIONEE AT THE TIME OF THE OPTION EXERCISE.
No Impairment of Rights. Nothing in this Notice or in the
attached Automatic Stock Option Agreement or the Plan shall interfere with or
otherwise restrict in any way the rights of the Corporation or the Corporation's
shareholders to remove Optionee from the Board at any time in accordance with
the provisions of applicable law.
Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Automatic Stock
Option Agreement.
DATED:___________________________, 199__
CISCO SYSTEMS, INC.
By:
--------------------------------------
Title:
-----------------------------------
-----------------------------------
OPTIONEE
Address:
------------------------------------
------------------------------------
ATTACHMENTS
EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS
2.
<PAGE> 52
EXHIBIT A
AUTOMATIC STOCK OPTION AGREEMENT
<PAGE> 53
EXHIBIT B
PLAN SUMMARY AND PROSPECTUS
<PAGE> 54
CISCO SYSTEMS, INC.
AUTOMATIC STOCK OPTION AGREEMENT
RECITALS
A. The Corporation has implemented an automatic option grant program
under the Corporation's 1996 Stock Incentive Plan pursuant to which eligible
non-employee members of the Board will automatically receive special option
grants at designated intervals over their period of Board service in order to
provide such individuals with a meaningful incentive to continue to serve as a
member of the Board.
B. Optionee is an eligible non-employee Board member, and this Agreement
is executed pursuant to, and is intended to carry out the purposes of, the Plan
in connection with the automatic grant of a stock option to purchase shares of
the Corporation's Common Stock under the Plan.
C. The granted option is intended to be a non-statutory option which
does not meet the requirements of Section 422 of the Internal Revenue Code.
D. All capitalized terms in this Agreement, to the extent not otherwise
defined in the Agreement, shall have the meaning assigned to them in the
attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, a Non-Statutory Option to purchase up to the number of Option
Shares specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term specified in Paragraph 2 at the
Exercise Price.
2. OPTION TERM. This option shall have a maximum term of nine (9)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 7.
3. LIMITED TRANSFERABILITY. This option may, in connection with the
Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of the Optionee's immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Corporation may deem appropriate. Should
the Optionee die while holding this option, then this option shall be
transferred in accordance with Optionee's will or the laws of descent and
distribution.
<PAGE> 55
4. EXERCISABILITY/VESTING.
(a) This option shall be immediately exercisable for any or all
of the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule set forth in the Grant Notice, and shall remain so
exercisable until the Expiration Date or the sooner termination of the option
term under Paragraph 5, 6 or 7.
(b) Optionee shall, in accordance with the Vesting Schedule set
forth in the Grant Notice, vest in the Option Shares in a series of installments
over his or her period of Board service. Vesting in the Option Shares may be
accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event,
however, shall any additional Option Shares vest following Optionee's cessation
of service as a Board member.
5. CESSATION OF BOARD SERVICE. Should Optionee's service as a Board
member cease while this option remains outstanding, then the option term
specified in Paragraph 2 shall terminate (and this option shall cease to be
outstanding) prior to the Expiration Date in accordance with the following
provisions:
(i) Should Optionee cease to serve as a Board member for any
reason (other than death or Permanent Disability) while holding this
option, then the period for exercising this option shall be reduced to a
twelve (12)-month period commencing with the date of such cessation of
Board service, but in no event shall this option be exercisable at any time
after the Expiration Date. During such limited period of exercisability,
this option may not be exercised in the aggregate for more than the number
of Option Shares (if any) in which Optionee is vested on the date of his or
her cessation of Board service. Upon the earlier of (i) the expiration of
such twelve (12)-month period or (ii) the specified Expiration Date, the
option shall terminate and cease to be exercisable with respect to any
vested Option Shares for which the option has not been exercised.
(ii) Should Optionee die during the twelve (12)-month period
following his or her cessation of Board service, then the personal
representative of Optionee's estate or the person or persons to whom the
option is transferred pursuant to Optionee's will or in accordance with the
laws of descent and distribution shall have the right to exercise this
option for any or all of the Option Shares in which Optionee is vested at
the time of Optionee's cessation of Board service (less any Option Shares
purchased by Optionee after such cessation of Board service but prior to
death). Such right of exercise shall terminate, and this option shall
accordingly cease to be exercisable for such vested Option Shares, upon the
earlier of (i) the expiration of the twelve (12)-month period measured from
the date of Optionee's cessation of Board service or (ii) the specified
Expiration Date of the option term.
(iii) Should Optionee cease service as a Board member by
reason of death or Permanent Disability, then all Option Shares at the time
subject to this option
2.
<PAGE> 56
but not otherwise vested shall immediately vest in full so that Optionee
(or the personal representative of Optionee's estate or the person or
persons to whom the option is transferred upon Optionee's death) shall have
the right to exercise this option for any or all of the Option Shares as
fully-vested shares of Common Stock at any time prior to the earlier of (i)
the expiration of the twelve (12)-month period measured from the date of
Optionee's cessation of Board service or (ii) the specified Expiration
Date.
(iv) Upon Optionee's cessation of Board service for any
reason other than death or Permanent Disability, this option shall
immediately terminate and cease to be outstanding with respect to any and
all Option Shares in which Optionee is not otherwise at that time vested in
accordance with the normal Vesting Schedule set forth in the Grant Notice
or the special vesting acceleration provisions of Paragraph 6 or 7 below.
6. CORPORATE TRANSACTION.
(a) In the event of a Corporate Transaction, all Option Shares at
the time subject to this option but not otherwise vested shall automatically
vest so that this option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable for all of the
Option Shares at the time subject to this 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, this option shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation or its parent company.
(b) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.
(a) All Option Shares subject to this option at the time of a
Change in Control but not otherwise vested shall automatically vest so that this
option shall, immediately prior to the effective date of such Change in Control,
become fully exercisable for all of the Option Shares at the time subject to
this option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. This option shall remain exercisable for
such fully-vested Option Shares until the earliest to occur of (i) the
specified Expiration Date, (ii) the sooner termination of this option in
accordance with Paragraph 5 or 6 or (iii) the surrender of this option under
Paragraph 7(b).
3.
<PAGE> 57
(b) Optionee shall have an unconditional right (exercisable
during the thirty (30)-day period immediately following the consummation of a
Hostile Take-Over) to surrender this option to the Corporation in exchange for a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the Option Shares at the time subject to the surrendered
option (whether or not those Option Shares are otherwise at the time vested)
over (ii) the aggregate Exercise Price payable for such shares. This Paragraph
7(b) limited stock appreciation right shall in all events terminate upon the
expiration or sooner termination of the option term and may not be assigned or
transferred by Optionee.
(c) To exercise the Paragraph 7(b) limited stock appreciation
right, Optionee must, during the applicable thirty (30)-day exercise period,
provide the Corporation with written notice of the option surrender in which
there is specified the number of Option Shares as to which the option is being
surrendered. Such notice must be accompanied by the return of Optionee's copy of
this Agreement, together with any written amendments to such Agreement. The cash
distribution shall be paid to Optionee within five (5) business days following
such delivery date. Such option surrender and cash distribution has been
pre-approved by the Corporation's shareholders in connection with their approval
of the Plan, and no additional approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution. Upon receipt of such cash distribution, this option shall be
cancelled with respect to the shares subject to the surrendered option (or the
surrendered portion), and Optionee shall cease to have any further right to
acquire those Option Shares under this Agreement. The option shall, however,
remain outstanding for the balance of the Option Shares (if any) in accordance
with the terms and provisions of this Agreement, and the Corporation shall
accordingly issue a new stock option agreement (substantially in the same form
as this Agreement) for those remaining Option Shares.
8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the number and/or
class of securities subject to this option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder; provided, however, that the aggregate Exercise Price shall
remain the same.
9. SHAREHOLDER RIGHTS. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
10. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option for all or any part of the
Option Shares for which the option is at the time exercisable, Optionee or, in
the case of exercise after Optionee's death, Optionee's executor, administrator,
heir or legatee, as the case may be, must take the following actions:
4.
<PAGE> 58
(i) To the extent the option is exercised for vested Option
Shares, the Secretary of the Corporation shall be provided with written
notice of the option exercise (the "Exercise Notice") in substantially the
form of Exhibit I attached hereto, in which there is specified the number
of vested Option Shares to be purchased under the exercised option. To the
extent that the option is exercised for one or more unvested Option Shares,
Optionee (or other person exercising the option) shall deliver to the
Secretary of the Corporation a Purchase Agreement for those unvested Option
Shares.
(ii) The Exercise Price for the purchased shares shall be
paid in one or more of the following alternative forms:
- cash or check made payable to the Corporation's order;
or
- shares of Common Stock held by Optionee (or any other
person or persons exercising the option) for the requisite period
necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
- to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
pursuant to which Optionee shall provide irrevocable written
instructions (A) to a Corporation-designated brokerage firm to effect
the immediate sale of the vested shares purchased under the option and
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Exercise
Price payable for those shares plus the applicable Federal, state and
local income taxes required to be withheld by the Corporation by
reason of such exercise and (B) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
(iii) Appropriate documentation evidencing the right to
exercise this option shall be furnished the Corporation if the person or
persons exercising the option is other than Optionee.
(iv) Appropriate arrangement must be made with the
Corporation for the satisfaction of all Federal, state and local income tax
withholding requirements applicable to the option exercise.
(b) Except to the extent the sale and remittance procedure
specified above is utilized in connection with the exercise of the option for
vested Option Shares, payment
5.
<PAGE> 59
of the Exercise Price for the purchased shares must accompany the Exercise
Notice or Purchase Agreement delivered to the Corporation in connection with the
option exercise.
(c) As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate or certificates representing the purchased
Option Shares. To the extent any such Option Shares are unvested, the
certificates for those Option Shares shall be endorsed with an appropriate
legend evidencing the Corporation's repurchase rights and may be held in escrow
with the Corporation until such shares vest.
(d) In no event may this option be exercised for fractional
shares.
11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. In addition, nothing in this Agreement shall in any way be
construed or interpreted so as to affect adversely or otherwise impair the right
of the Corporation or the shareholders to remove Optionee from the Board at any
time in accordance with the provisions of applicable law.
12. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
However, the Corporation shall use its best efforts to obtain all such
applicable approvals.
13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee's assigns and the legal representatives, heirs and legatees
of Optionee's estate.
14. CONSTRUCTION/GOVERNING LAW. This Agreement and the option
evidenced hereby are made and granted pursuant to the automatic option grant
program in effect under the Plan and are in all respects limited by and subject
to the express terms and provisions of that
6.
<PAGE> 60
program. The interpretation, performance, and enforcement of this Agreement
shall be governed by the laws of the State of California without resort to that
State's conflict-of-laws rules.
15. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
7.
<PAGE> 61
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Cisco Systems, Inc. (the "Corporation") that I elect
to purchase ___________shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $___________ per share (the "Exercise
Price") pursuant to that certain option (the "Option") granted to me pursuant to
the automatic option grant program under the Corporation's 1996 Stock Incentive
Plan on ______________________, 199__.
Concurrently with the delivery of this Exercise Notice to the
Secretary of the Corporation, I shall hereby pay to the Corporation the Exercise
Price for the Purchased Shares in accordance with the provisions of my agreement
with the Corporation evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
Alternatively, I may utilize the special broker/dealer sale and remittance
procedure specified in my agreement to effect payment of the Exercise Price for
any Purchased Shares in which I am vested at the time of exercise.
_____________________________, 199__
Date
-------------------------------------------
Optionee
Address:
-----------------------------------
-------------------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
-------------------------------------------
Address to which certificate
is to be sent, if different
from address above:
-------------------------------------------
-------------------------------------------
Social Security Number:
-------------------------------------------
<PAGE> 62
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Automatic Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than thirty-five percent (35%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation'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 ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) 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 (A) who were still in office at the time the Board approved such
election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
A-1.
<PAGE> 63
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Cisco Systems, Inc., a California corporation.
H. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 10 of the Agreement.
I. EXERCISE PRICE shall mean the exercise price payable per share as
specified in the Grant Notice.
J. EXPIRATION DATE shall mean the date on which the option term expires
as specified in the Grant Notice.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as the price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock 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 closing selling price
for the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
L. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.
M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option
accompanying this Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly
A-2.
<PAGE> 64
controls, is controlled by, or is under common control with, the Corporation) 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 Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's shareholders which the Board
does not recommend such shareholders to accept.
O. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
Q. OPTION SHARES shall mean the number of shares of Common Stock subject
to the option.
R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
S. PERMANENT DISABILITY shall mean the inability of Optionee to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
T. PLAN shall mean the Corporation's 1996 Stock Incentive Plan.
U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which must be executed at the
time the option is exercised for unvested Option Shares and which will
accordingly (i) grant the Corporation the right to repurchase, at the Exercise
Price, any and all of those Option Shares in which Optionee is not otherwise
vested at the time of his or her cessation of service as a Board member and (ii)
preclude the sale, transfer or other disposition of any of the Option Shares
purchased under such agreement while those Option Shares remain subject to the
repurchase right.
V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.
W. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting the
Hostile Take-Over.
X. VESTING SCHEDULE shall mean the vesting schedule specified in the
Grant Notice, pursuant to which Optionee will vest in the Option Shares in one
or more installments over his or her period of Board service, subject to
acceleration in accordance with the provisions of the Agreement.
A-3.
<PAGE> 1
Exhibit 10.3
CISCO SYSTEMS, INC.
1997 SUPPLEMENTAL STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL
A. This 1997 Supplemental Stock Incentive Plan is intended to
promote the interests of Cisco Systems, Inc., a California corporation, by
authorizing an additional reserve of shares of the Corporation's common stock
for issuance through long-term option grants or direct stock issuances to
individuals in the employ of the Corporation (or any Parent or Subsidiary) who
are neither officers of the Corporation nor members of the Board and who are not
otherwise Section 16 Insiders.
B. The Plan shall become effective immediately upon adoption by
the Board on July 31, 1997.
C. The Plan shall supplement the authorized share reserve under
the Corporation's 1996 Stock Incentive Plan, and share issuances under this Plan
shall not reduce or otherwise affect the number of shares of the Corporation's
common stock available for issuance under the 1996 Stock Incentive Plan. In
addition, share issuances under the 1996 Stock Incentive Plan shall not reduce
or otherwise affect the number of shares of the Corporation's common stock
available for issuance under this Plan.
Capitalized terms shall have the meanings assigned to such terms
in the attached Appendix.
I. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity
programs:
(i) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any
Parent or Subsidiary) or the attainment of designated performance goals.
<PAGE> 2
II. ADMINISTRATION OF THE PLAN
A. The Plan Administrator shall have full power and discretion
(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 Plan
and to make such determinations under, and issue such interpretations of, the
provisions of the Plan and any outstanding option grants or unvested stock
issuances thereunder as it may deem necessary or advisable. Decisions of the
Plan Administrator shall be final and binding on all parties who have an
interest in the Plan or any outstanding stock option or stock issuance
thereunder.
B. The individuals serving as Plan Administrator shall serve for
such period as the Board may determine and shall be subject to removal by the
Board at any time.
C. Service as Plan Administrator shall constitute service as a
Board member, and each Board member serving as Plan Administrator shall
accordingly be entitled to full indemnification and reimbursement as a Board
member for such service. No individual serving as Plan Administrator shall be
liable for any act or omission made in good faith with respect to the Plan or
any option grant or stock issuance made under the Plan.
III. ELIGIBILITY
A. The persons eligible to participate in the Plan shall be
limited to those Employees who are neither officers of the Corporation nor
members of the Board and who are not otherwise Section 16 Insiders.
B. The Plan Administrator shall have full authority to determine
(i) with respect to the Option Grant Program, which eligible Employees are to
receive option grants under the Plan, the time or times when the grants are to
be made, the number of shares subject to each such grant, the time or times when
each granted option is to become exercisable and the maximum term for which the
option may remain outstanding and (ii) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration for such shares. All options granted under
the Plan shall be Non-Statutory Options.
2.
<PAGE> 3
IV. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under
the Plan and shall be drawn from either the Corporation's authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Corporation on the open market. The maximum
number of shares of Common Stock reserved for issuance over the term of the Plan
shall be limited to 1,000,000 shares, subject to adjustment from time to time in
accordance with the provisions of Section IV.C.
B. Should one or more outstanding options under this Plan expire
or terminate for any reason prior to exercise in full, then the shares subject
to the portion of each option not so exercised shall be available for subsequent
issuance under the Plan. Unvested shares issued under the Plan and subsequently
cancelled or repurchased by the Corporation, at the original issue price paid
per share, pursuant to the Corporation's repurchase rights under the Plan shall
be added back to the number of shares of Common Stock reserved for issuance
under the Plan and shall accordingly be available for reissuance through one or
more subsequent option grants or direct stock issuances under the Plan. Should
the exercise price of an outstanding option under the Plan be paid with shares
of Common Stock, then the number of shares of Common Stock available for
issuance under the Plan shall be reduced by the gross number of shares for which
the option is exercised, and not by the net number of shares of Common Stock
actually issued to the holder of such option.
C. Should any change be made to the Common Stock issuable under
the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, and (ii) the number
and/or class of securities and price per share in effect under each option
outstanding under the Plan. Such adjustments to the outstanding securities are
to be effected in a manner which shall preclude the enlargement or dilution of
rights and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
3.
<PAGE> 4
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
Options granted under the Plan shall be authorized by action of
the Plan Administrator and 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. All such
granted options shall be Non-Statutory Options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the grant date.
2. Full payment of the exercise price shall become
immediately due upon exercise of the option and shall be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) through a special sale and remittance procedure
pursuant to which the Optionee shall concurrently provide irrevocable
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation in
connection with such purchase and to (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in
order to complete the sale transaction.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
4.
<PAGE> 5
B. Term and Exercise of Options. Each option 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
documents evidencing such option. No option shall have a maximum term in excess
of nine (9) years measured from the option grant date. During the lifetime of
the Optionee, the 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 inheritance following the Optionee's death.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised 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.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the
number of shares for which the option is exercisable on the date of
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any otherwise
exercisable shares for which the option has not been exercised. However,
the option shall, immediately upon Optionee's cessation of Service for
any reason, terminate and cease to be outstanding with respect to any
and all option shares for which the option is not otherwise at the time
exercisable.
5.
<PAGE> 6
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following Optionee's cessation of Service or death
from the limited period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect to
one or more additional installments for which the option would have
become exercisable had the Optionee continued in Service.
D. Shareholder Rights. No Optionee shall have any shareholder
rights with respect to any option shares until such person shall have exercised
the option and paid the exercise price for the purchased shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. Each option outstanding under the Plan at the time of a
Corporate Transaction shall automatically accelerate so that each such option
shall, immediately prior to the specified effective date for such Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to that option and may be exercised for all
or any portion of those shares as fully-vested shares. However, an outstanding
option under the Plan shall NOT become exercisable on such an accelerated basis
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, to be assumed by the successor corporation (or parent thereof) or
(ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Corporate Transaction on the shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those shares.
B. The Plan Administrator shall have the discretionary authority
to structure one or more options under the Plan so that those options shall
immediately accelerate upon an Involuntary Termination of the Optionee's Service
within a designated period (not to exceed eighteen (18) months) following the
effective date of a Corporate Transaction in which those options are assumed by
the successor corporation and accordingly do not accelerate at the time of such
Corporate Transaction.
6.
<PAGE> 7
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Plan shall terminate and cease to
remain outstanding, except to the extent assumed by the successor corporation or
its parent company.
D. Each outstanding option which is assumed in connection with
the Corporate Transaction shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issued to the Optionee, in consummation of the
Corporate Transaction, had such person exercised the option immediately prior to
the Corporate Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share, provided the aggregate exercise price payable
for such securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.
E. The Plan Administrator shall also have full power and
authority to grant options under the Plan which will automatically accelerate
upon an Involuntary Termination of Optionee's Service within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
F. The grant of options under the Plan 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.
7.
<PAGE> 8
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below. Shares of Common Stock
may also be issued under the Stock Issuance Program pursuant to share right
awards which entitle the recipients to receive those shares upon the attainment
of designated performance goals.
A. PURCHASE PRICE.
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator, but shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the issuance date.
2. Shares of Common Stock may be issued under the Stock
Issuance Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. Alternatively, the Plan Administrator may issue share right awards
under the Stock Issuance Program which shall entitle the recipient to receive a
specified number of shares of Common Stock upon the attainment of one or more
performance goals established by the Plan Administrator. Upon the attainment of
such performance goals, fully-vested shares of Common Stock shall be issued in
satisfaction of those share right awards.
8.
<PAGE> 9
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for cash consideration, the Corporation shall repay that
consideration to the Participant at the time the shares are surrendered.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the nonattainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares of Common Stock as to which
the waiver applies. Such waiver may be effected at any time, whether before or
after the Participant's cessation of Service or the attainment or non-attainment
of the applicable performance objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
9.
<PAGE> 10
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under
the Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
10.
<PAGE> 11
ARTICLE FOUR
MISCELLANEOUS
I. EFFECTIVE DATE AND TERM OF PLAN
A. This Plan became effective upon approval by the Board at the
July 31, 1997 Board meeting and shall not be subject to shareholder approval.
B. The Plan shall terminate upon the earlier of (i) December 31,
2007 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully vested shares pursuant to option exercises or
direct stock issuances under the Plan or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. If the date of
termination is determined under clause (i) above, then all option grants or
unvested stock issuances outstanding on such date shall thereafter continue to
have force and effect in accordance with the provisions of the instruments
evidencing those grants or issuances.
II. AMENDMENT OF THE PLAN
The Board has complete and exclusive power and authority to amend
or modify the Plan in any or all respects whatsoever. However, no such amendment
or modification shall adversely affect rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the
Plan, unless the affected Optionees or Participants consent to such amendment.
III. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants or direct stock issuances under the Plan shall
be used for general corporate purposes.
IV. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option
under the Plan, and the issuance of Common Stock either upon the exercise of the
stock options granted hereunder or pursuant to the Stock Issuance Program shall
be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the Common Stock issued pursuant to it.
11.
<PAGE> 12
B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
the Common Stock is then listed for trading.
V. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation 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
Service for any period of specific duration, and the Corporation (or any Parent
or Subsidiary employing such individual) may terminate such individual's Service
at any time and for any reason, with or without cause.
12.
<PAGE> 13
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), 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
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's shareholders, 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 ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) 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 (A) who were still in office at the time the Board approved such
election or nomination.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
- a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction; or
- the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution
of the Corporation.
A-1.
<PAGE> 14
F. CORPORATION shall mean Cisco Systems, Inc., a California
corporation, and its successors.
G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
- If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price
is reported on the Nasdaq National Market or any successor system. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
- If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on that Stock 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 closing selling price
for the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
J. INVOLUNTARY TERMINATION shall mean the termination of the Service
of any individual which occurs by reason of:
- such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
- such individual's voluntary resignation following (A) a change
in his or her position with the Corporation which materially reduces his
or her duties or responsibilities or the level of management to which he
or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonuses under
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only
A-2.
<PAGE> 15
if such change, reduction or relocation is effected by the Corporation
without the individual's consent.
K. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
L. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
M. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
N. OPTION GRANT PROGRAM shall mean the option grant program in
effect under the Plan.
O. OPTIONEE shall mean any person to whom an option is granted under
the Plan.
P. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) 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.
Q. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
R. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of an individual to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
S. PLAN shall mean the Corporation's 1997 Supplemental Stock
Incentive Plan, as set forth in this document.
T. PLAN ADMINISTRATOR shall mean the committee comprised of one or
more Board members appointed by the Board to administer the Plan.
A-3.
<PAGE> 16
U. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit restrictions of Section 16 of the
1934 Act.
V. SERVICE shall mean the provision of services on a periodic basis
to the Corporation (or any Parent or Subsidiary) in the capacity of an Employee
or an independent consultant or advisor, except to the extent otherwise
specifically provided in the applicable stock option agreement.
W. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
X. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each 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.
A-4.
<PAGE> 17
CISCO SYSTEMS, INC.
1997 SUPPLEMENTAL PLAN STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purpose of providing
additional incentive to selected Employees, consultants and other independent
advisors to continue in the Service of the Corporation (or any Parent or
Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The option is a Non-Statutory Option, and the
Option Shares shall be purchasable under such option from time to time during
the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall have a term of nine (9) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. During the lifetime of the Optionee,
the option shall be exercisable only by the Optionee and shall not be assignable
or transferable other than by will or by the laws of inheritance following the
Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
<PAGE> 18
(a) Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct) while this
option is outstanding, then Optionee shall have a period of three (3)
months (commencing with the date of such cessation of Service) during
which to exercise this option, but in no event shall this option be
exercisable at any time after the Expiration Date.
(b) Should Optionee die while this option is outstanding,
then the personal representative of Optionee's estate or the person or
persons to whom the option is transferred pursuant to Optionee's will or
in accordance with the laws of inheritance shall have the right to
exercise this option. Such right shall lapse, and this option shall
cease to be outstanding, upon the earlier of (i) the expiration of the
twelve (12)-month period measured from the date of Optionee's death or
(ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then Optionee shall have a
period of twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option. In no event shall this
option be exercisable at any time after the Expiration Date.
(d) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain
outstanding.
6. SPECIAL ACCELERATION OF OPTION.
(a) This option, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable, shall automatically
accelerate so that this option shall, immediately prior to the effective date of
the Corporate Transaction, become exercisable with respect to the total number
of shares of Common Stock at the time subject to that option and may be
exercised for all or any portion of those shares as fully-vested shares.
However, an outstanding option under the Plan shall NOT so accelerate if and to
the extent: (i) such option is, in connection with the Corporate Transaction, to
be assumed by the successor corporation or parent thereof or (ii) such option is
to be replaced with a cash incentive program of the successor corporation which
preserves the option spread existing at the time of the Corporate Transaction
(the excess of the Fair Market Value of the Option Shares for which the option
is not otherwise at that time exercisable over the aggregate Exercise Price
payable for those Option Shares) and provides for subsequent payout in
accordance with the same exercise/vesting schedule applicable to such option.
(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
2.
<PAGE> 19
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of the Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
(d) This Agreement shall not in any 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.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude any dilution or enlargement of
benefits hereunder.
8. SHAREHOLDER RIGHTS. The holder of this option shall not have
any shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date; or
3.
<PAGE> 20
(C) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently provide
irrevocable instructions (I) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus
all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (II) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm in order to complete the sale transaction.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Notice of Exercise delivered to
the Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other
than Optionee) have the right to exercise this option.
(iv) Make appropriate arrangements with the Corporation
(or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock may be listed for
trading at the time of such exercise and issuance.
(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such
4.
<PAGE> 21
approval shall not have been obtained. The Corporation, however, shall use its
best efforts to obtain all such approvals.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
12. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
13. CONSTRUCTION. This Agreement and the option evidenced hereby
are made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
14. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
15. LEAVE OF ABSENCE. The following provisions shall apply upon
the Optionee's commencement of an authorized leave of absence:
(a) The exercise schedule in effect under the Grant Notice
shall be frozen as of the first day of the authorized leave, and the
option shall not become exercisable for any additional installments of
the Option Shares during the period Optionee remains on such leave.
(b) Should Optionee resume active Employee status within
sixty (60) days after the start date of the authorized leave, Optionee
shall, for purposes of the exercise schedule set forth in the Grant
Notice, receive Service credit for the entire period of such leave. If
Optionee does not resume active Employee status within such sixty
(60)-day period, then no Service credit shall be given for the period of
the leave.
(c) In no event shall this option become exercisable for any
additional Option Shares or otherwise remain outstanding if Optionee
does not resume Employee status prior to the Expiration Date of the
option term.
5.
<PAGE> 22
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Cisco Systems, Inc. (the "Corporation") that I elect
to purchase ________shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $________ per share (the "Exercise
Price") pursuant to that certain option (the "Option") granted to me under the
Corporation's 1997 Supplemental Stock Incentive Plan on ______________________,
199__.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
_____________________________, 199
Date
--------------------------------------------
Optionee
Address:
------------------------------------
--------------------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
--------------------------------------------
Address to which certificate
is to be sent, if different
from address above:
--------------------------------------------
--------------------------------------------
Social Security Number:
--------------------------------------------
Employee Number:
--------------------------------------------
<PAGE> 23
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this 1997 Supplemental Stock Option
Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. CORPORATION shall mean Cisco Systems, Inc., a California
corporation.
G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.
I. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
J. EXPIRATION DATE shall mean the date on which the option expires
as specified in the Grant Notice.
A-1.
<PAGE> 24
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall determined in accordance with the following provisions:
- If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers on the
Nasdaq National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
- If the Common Stock is at the time listed on any national
securities exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on that
exchange, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
L. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.
M. GRANT NOTICE shall mean the Notice of Grant of 1997 Supplemental
Plan Stock Option accompanying the Agreement, pursuant to which Optionee has
been informed of the basic terms of the option evidenced hereby.
N. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
O. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
P. NOTICE OF EXERCISE shall mean the notice of exercise in the form
attached hereto as Exhibit I.
Q. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.
A-2.
<PAGE> 25
R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
S. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) 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.
T. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of Optionee to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which is expected to
result in death or has lasted or can be expected to last for a continuous period
of twelve (12) months or more.
U. PLAN shall mean the Corporation's 1997 Supplemental Stock
Incentive Plan.
V. PLAN ADMINISTRATOR shall mean the committee of one or more Board
members appointed by the Board to administer the Plan.
W. SERVICE shall mean the Optionee's performance of services on a
periodic basis to the Corporation (or any Parent or Subsidiary) in the capacity
of an Employee or a consultant or other independent advisor.
X. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each 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.
A-3.
<PAGE> 1
EXHIBIT 10.12
CISCO SYSTEMS, INC.
SENIOR MANAGEMENT INCENTIVE PLAN -
EXECUTIVE VICE PRESIDENT, VICE PRESIDENT & DIRECTOR
FY 1999
I. INTRODUCTION
A. THE OBJECTIVE OF THE SENIOR MANAGEMENT INCENTIVE PLAN is to financially
reward Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents, Directors and employees in Grades 13 and 14 for their
contributions to the success and profitability of Cisco Systems, Inc.
B. PARTICIPANTS: This plan applies solely to Vice Presidents and Directors
of Cisco Systems or participating Cisco subsidiaries in the following
positions:
POSITION
Executive Vice President
Senior Vice President
Vice President
Director (excluding Sales Positions)
Employees in Grades 13 and 14
Any exceptions to the above will need to be approved in writing by the
President. The participant must be employed in a bonus eligible position
on or before the first working day of the last fiscal quarter of Fiscal
Year 1999 and must be employed on the last working day of that year to
be eligible for an FY99 bonus. Participants may not be concurrently
enrolled in any other bonus, sales or incentive plan. Participants in
the Plan with less than one year of service will be eligible for a
prorated bonus amount. In no event will any individual accrue any right
or entitlement to a bonus under this Plan unless that individual is
employed by Cisco Systems or a participating Cisco subsidiary on the
last working day of Fiscal Year 1999.
C. EFFECTIVE DATE: The Plan is effective for the Fiscal Year 1999,
beginning July 26, 1998 through July 31, 1999.
D. CHANGES IN PLAN: The Company presently has no plan to change the Senior
Management Incentive Plan during the fiscal year. However, the Company
reserves the right to modify the Senior Management Bonus Plan in total
or in part, at any time. Any such change must be in writing and signed
by the President. The President or plan designers reserve the right to
interpret the plan document as needed.
E. ENTIRE AGREEMENT: This Plan is the entire agreement between Cisco
Systems, Inc. and the employee regarding the subject matter of this Plan
and supersedes all prior compensation or incentive plans or any written
or verbal representations regarding the subject matter of this Plan.
II. BONUS PLAN ELEMENTS
A. BASE SALARY is determined by the participant's manager, on the Focal
review date scheduled for either August 1, April 1, or October 1 of each
year. The annual base salary in effect at the end of the Fiscal Year
1999 represents the basis for the bonus calculation.
<PAGE> 2
B. BONUS TARGET PERCENTAGE is a percentage level of base salary determined
by the position.
<TABLE>
<CAPTION>
POSITION BONUS %
-------- -------
<S> <C>
EXECUTIVE VICE PRESIDENT 60%
SENIOR VICE PRESIDENT 60%
VICE PRESIDENT 50%
DIRECTOR (EXCLUDING SALES POSITIONS) 40%
GRADE 14 40%
GRADE 13 40%
</TABLE>
C. INDIVIDUAL PERFORMANCE MULTIPLIER is based upon the manager's evaluation
of performance and contribution for the fiscal year. This factor may
range from 0.90 - 1.30. The assigned factor may also be a zero resulting
in no bonus based on the manager's evaluation of performance and
contribution. A written performance evaluation is required in
conjunction with any assigned factor of zero.
Employees who were on a Written Warning, Performance Improvement Plan
and/or performing at a level of "Not Satisfactory" (N), at any time
during the fiscal year may receive a lower Individual Performance
Multiplier resulting in a lower bonus. The assigned multiplier may also
be a zero resulting in no bonus based on the manager's evaluation of
performance and contribution. A written performance evaluation is
required in conjunction with any assigned factor of zero.
D. COMPANY PERFORMANCE MULTIPLIER is based upon achieving an established
worldwide Revenue target and a worldwide Profit Before Interest and Tax
(PBIT) target per the current Plan. The PBIT achievement to target is
more heavily weighted relative to the worldwide Revenue target.
Typically, 80% of each objective must be achieved for any bonus to be
paid. Maximum payout under the Plan is 200% or a multiplier of two. The
applicable targets for Fiscal Year 1999 are approved by the Cisco Board
of Directors within the first 90 days of each fiscal year.
COMPANY PERFORMANCE MULTIPLIER
<TABLE>
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120% 0.90 1.10 1.30 1.90 2.00
----------------------------------------------
110% 0.85 1.00 1.10 1.60 1.90
----------------------------------------------
REVENUE AS A 100% 0.80 0.90 1.00 1.30 1.60
----------------------------------------------
% OF GOAL 90% 0.75 0.85 0.95 1.15 1.30
----------------------------------------------
80% 0.70 0.80 0.90 1.00 1.15
----------------------------------------------
80% 90% 100% 110% 120%
</TABLE>
PBIT AS A % OF GOAL
EXAMPLE: COMPANY PERFORMANCE
Actual Revenue Performance is 100% of goal
Actual PBIT Performance is 110% of goal
COMPANY PERFORMANCE MULTIPLIER = 1.30
E. CUSTOMER SATISFACTION MULTIPLIER is based upon achievement of an overall
worldwide customer satisfaction survey score. The multiplier may range
from 0.95 - 1.20 based on the following criteria:
<TABLE>
<CAPTION>
WORLDWIDE SATISFACTION SCORE FACTOR
---------------------------- ------
<S> <C>
< 4.11 0.95
4.11 - 4.16 1.05
4.17 - 4.21 1.10
4.22+ 1.20
</TABLE>
<PAGE> 3
F. COMPANY STRATEGIC PERFORMANCE MULTIPLIER measures Cisco's annual revenue
growth compared to select competitor company annual revenue growth.
(Revenue is measured quarterly and combined to determine annual revenue
growth percentage.) The multiplier is determined based on the revenue
growth difference of Cisco and the selected competitor companies. The
multiplier may range from 0.90 to 1.30.
COMPANY STRATEGIC PERFORMANCE MULTIPLIER
<TABLE>
<CAPTION>
-----------------------------------------------------
Less Than Equal to Exceed Competitors
Competitors Competitors Growth By
--------------------------
<S> <C> <C> <C> <C>
10 pts 20 pts 30 pts
-----------------------------------------------------
0.9 1.0 1.1 1.2 1.3
-----------------------------------------------------
</TABLE>
EXAMPLE: Cisco Annual Revenue Growth is 30%
Select Competitor Company Revenue Growth is 20%
30% - 20% = 10% or 10 points
Multiplier = 1.1
G. PRORATION MULTIPLIER accounts for the number of calendar days or hours
within the day during the fiscal year that the employee was in the
bonus-eligible position. For example, the Proration Multiplier for an
employee who has been on the Plan the entire year will be "1.00". For an
employee who has been on the plan for 6 months, this factor will be
"0.50". Employees in the following situations will have a proration
factor of less than "1.00":
o Participants in the Plan who transferred to a new position not
governed by any incentive plan.
o Employees who transferred from one bonus-eligible position to
another bonus-eligible position. Employees in this situation will
have their bonus prorated based on length of time in each position.
o Employees who have been on the Plan less than 12 months (such as a
new hire).
o Employees who have been on a leave of absence of any length during
the fiscal year.
o Employees who have been on the Plan, terminated their employment,
and returned to a bonus-eligible position all in the same fiscal
year.
o Employees working less than a 40-hour week will receive bonuses
prorated according to the following schedule:
20 - 39 hours/week: prorated according to the average number of
hours worked
<20 hours/week: not bonus eligible
Any modification to the above schedule must be approved by the
next-level Manager and Compensation in advance of the year-end close
date.
H. BONUS FORMULA AND CALCULATION EXAMPLE: Assume a base salary of $185,000
at the 40% level, individual performance multiplier of 1.10, company
performance multiplier of 1.30, a customer satisfaction multiplier of
1.05, a company strategic performance multiplier of 1.10 and a proration
multiplier of 1.00.
<PAGE> 4
SAMPLE CALCULATION:
<TABLE>
<CAPTION>
BONUS INDIVIDUAL COMPANY CUSTOMER COMPANY
BASE TARGET PERFORMANCE PERFORMANCE SATISFACTION STRATEGIC PRORATION TOTAL
SALARY PERCENTAGE MULTIPLIER MULTIPLIER MULTIPLIER MULTIPLIER MULTIPLIER BONUS
------ ---------- ---------- ---------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$185,000 0.40 X 1.10 1.30 X 1.05 1.10 X 1.00 X = $122,222 X
</TABLE>
In this example, the total bonus equals 66.1% of base salary.
I. MIDYEAR BONUS PAYMENTS: If the Company Performance Multiplier is at a
minimum of 1.00 (midyear revenue and PBIT), a partial payment will be
distributed to eligible employees midway through the fiscal year. This
advance will be 50% of the bonus target by level net of any advances,
draws, or prorations and appropriate state and federal withholdings. The
bonuses will be paid to employees who have met job expectations and were
hired on or before the first day of the second quarter of Fiscal Year
1999 and are active on the day of distribution. For example, a Director
would receive an advance equal to 20% of base salary. In no event,
however, will any right or entitlement to such a partial payment accrue
to any eligible participant unless that individual is employed by Cisco
Systems or a participating Cisco subsidiary on the distribution date.
If the Company Performance Multiplier is not at a minimum of 1.00
(mid-year revenue and PBIT), a partial payment may be distributed to
employees midway through the fiscal year. This payment will be 25% of
the bonus target by level. For example, a Director would receive an
advance equal to 10% of base salary. If the company performance fails to
achieve minimum revenue and PBIT targets resulting in no year-end
payout, an additional 25% of the bonus target may be paid.
J. Employees who are on a Written Warning, Performance Improvement Plan
and/or are performing at a level of "Not Satisfactory" (N) at the end of
the second quarter are not eligible to receive a partial payout midway
through the fiscal year. Employees who have entered into a Mutual
Separation Agreement may not be eligible to receive a midyear bonus
payment or year-end bonus based on manager discretion. An employee may
not be eligible to receive a midyear payout based on manager discretion
and subject to Human Resources concurrence.
III. PROCEDURES AND PRACTICES
A. PROCEDURE:
1. A copy of the Plan will be made available to each participant.
2. All bonus payments will be made net of applicable withholding taxes.
B. BUSINESS CONDUCT: It is the established policy of Cisco Systems, Inc. to
conduct business with the highest standards of business ethics. Cisco
employees may not offer, give, solicit or receive any payment that could
appear to be a bribe, kickback or other irregular type of payment from
anyone involved in any way with an actual or potential business
transaction. Gifts, favors and entertainment are allowed such that they
are consistent with our business practice, do not violate any applicable
laws, are of limited value ($50.00 or less) and would not embarrass
Cisco if publicly disclosed.
C. TRANSFERS AND TERMINATIONS: Employees who are participants in the Senior
Management Incentive Plan and who transfer to a new position not
governed by this Plan will be eligible on a pro-rata basis for the
applicable period and paid as defined by the Plan. Any exceptions to the
Plan must be designated in writing and approved by the President.
<PAGE> 5
A participant must be employed as of the last working day of the fiscal
year to be eligible for the bonus and must be employed on the
distribution date in order to be eligible to receive a partial midyear
payment under paragraph II-I. If an employee terminates prior to the
applicable date, the employee will not be eligible for such bonus or
partial payment.
D. EMPLOYMENT AT WILL: The employment of all Plan participants at Cisco
Systems, Inc. or the participating Cisco subsidiaries is for an
indefinite period of time and is terminable at any time by either party,
with or without cause being shown or advance notice by either party.
This Plan shall not be construed to create a contract of employment for
a specified period of time between Cisco Systems, Inc. or a
participating Cisco subsidiary and any Plan participant.
E. PARTICIPATING CISCO SUBSIDIARY: For the 1999 Fiscal Year, the following
Cisco subsidiaries will be participating subsidiaries in the plan:
Cisco Technology, Inc.
Cisco Systems Sales and Services, Inc.
Cisco Systems Finance, Inc.
<PAGE> 1
EXHIBIT 10.14
MASTER LEASE
(Cisco Technology, Inc. Trust 1998)
dated as of June 2, 1998
between
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.,
not in its individual capacity, except as expressly
stated herein, but solely as Certificate Trustee,
as Lessor
and
CISCO TECHNOLOGY, INC.,
as Lessee
- --------------------------------------------------------------------------------
Lease Financing of Real Estate
Located in Milpitas and San Jose, California
- --------------------------------------------------------------------------------
This Lease (which includes two Lease Supplements) is encumbered by a lien in
favor of State Street Bank and Trust Company, as Agent (the "Agent") under a
Loan Agreement dated as of June 2, 1998 among Lessor, the Lenders, and Agent, as
amended or supplemented from time to time. This Lease has been executed in
several counterparts. To the extent, if any, that this Lease constitutes chattel
paper (as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction), no lien on this Lease may be created through the
transfer or possession of any counterpart other than the original counterpart
<PAGE> 2
containing the receipt therefor executed by Agent on the signature page hereof.
<PAGE> 3
MASTER LEASE
This MASTER LEASE dated as of June 2, 1998 (including all Lease
Supplements from time to time executed and delivered, this "Lease"), between
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., not in its individual
capacity, except as expressly stated herein, but solely as Certificate Trustee,
as Lessor, and CISCO TECHNOLOGY, INC., a California corporation, as Lessee.
W I T N E S S E T H:
1. Lessor will, subject to the terms and conditions of the
Participation Agreement, purchase both of the Sites (legally
described in Exhibit A) on the Advance Date and advance funds to
Lessee to construct the Site Improvements on behalf of Lessor.
2. Lessor desires to lease to Lessee, and Lessee desires to lease
from Lessor, both of the Sites.
3. Following the Advance Date, Lessee shall construct the Site
Improvements on the Sites, which Site Improvements will be part
of the Leased Property.
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION; FULL RECOURSE
For all purposes hereof, the capitalized terms used herein and not
otherwise defined shall have the meanings assigned thereto in Appendix 1 to that
certain Participation Agreement dated as of even date herewith, among Lessee,
Cisco Systems, Inc., a California corporation, as Guarantor, Lessor, Agent and
the Participants identified therein (the "Participation Agreement"). The rules
of interpretation set forth in such Appendix 1 shall also apply to this Lease.
All obligations imposed on the "Lessee" in this Lease shall be the full recourse
liability of Lessee.
<PAGE> 4
ARTICLE II
LEASE OF SITES; TERM
II.1 Acceptance and Lease of Sites. On the Advance Date, Lessor, subject
to the satisfaction or waiver of the conditions set forth in Article III of the
Participation Agreement, hereby agrees to accept delivery on such date of fee
title to the Sites pursuant to the terms of the Participation Agreement and the
applicable Lease Supplement and simultaneously to lease to Lessee for the Lease
Term, Lessor's interest in the Sites together with any Alterations (including
the Site Improvements) which thereafter may be constructed thereon pursuant to
this Lease, and Lessee hereby agrees to lease commencing on the Advance Date
from Lessor for the Lease Term, Lessor's interest in the Sites together with
Lessor's interest in any Alterations (including the Site Improvements) which
thereafter may be constructed thereon pursuant to this Lease and the Operative
Documents.
II.2 Acceptance Procedure for Site. Lessor hereby authorizes one or more
employees of Lessee, to be designated by Lessee, as the authorized
representative or representatives of Lessor to accept delivery on behalf of
Lessor of fee title to the Sites. Lessee hereby agrees that such acceptance of
delivery by such authorized representative or representatives and the execution
and delivery by Lessee on the Advance Date of a Lease Supplement (appropriately
completed) for each Site shall, without further act, constitute the irrevocable
acceptance by Lessee of each such Site for all purposes of this Lease and the
other Operative Documents on the terms set forth therein and herein, and that
the Sites, together with any Alterations (including the Site Improvements)
constructed thereon pursuant to this Lease and the other Operative Documents,
shall be deemed to be included in the Leased Property and shall be subject to
the terms and conditions of this Lease commencing on the Advance Date.
II.3 Term.
(a) Lease Term. The term of this Lease (the "Lease Term") shall
begin on the Advance Date and shall end on the date (such date, the "Lease
Expiration Date") which is the earlier of (i) the day preceding the fifth (5th)
anniversary of the Advance Date or, if the Lease Term is renewed in accordance
with Article XX hereof, the day preceding the tenth (10th) anniversary of the
Advance Date, (ii) the date on which this Lease is terminated in accordance with
the provisions hereof, or (iii) the Final Maturity Date.
II.4 Title. Each Site is leased to Lessee without any representation or
warranty, express or implied, by Lessor, Agent, Arranger or any Participant and
subject to the rights of parties in possession, the existing state of title
(including the Permitted Exceptions), and all Applicable Laws. Lessee shall in
no event have any recourse against Lessor for any defect in or exception to
title to any Leased Property other than resulting from Lessor Liens.
2
<PAGE> 5
ARTICLE III
OTHER PROPERTY
Lessee may from time to time own or hold under lease from Persons other
than Lessor, furniture, trade fixtures, equipment and other tangible personal
property (including software) located on or about either Site and which personal
property is not subject to this Lease. Lessor acknowledges Lessee's right to
finance and to secure under the UCC inventory, furnishings, furniture,
equipment, machinery, leasehold improvements and other personal property located
at any of the Sites so long as such UCC filings are not recorded against either
Site and by their terms specifically exclude any interest in the Leased
Property. Lessor shall from time to time, upon the reasonable request, and at
the sole cost and expense of Lessee, which request shall be accompanied by such
supporting information and documents as Lessor may reasonably require, promptly
acknowledge in writing to Lessee or other Persons that the particular items of
furniture, trade fixtures and equipment in question and which are located on a
Site are not part of the Leased Property and that, subject to the rights of
Lessor under any other Operative Documents, Lessor does not own or have any
other right or interest in or to such furniture, trade fixtures and equipment.
Lessor agrees to execute as reasonably requested by Lessee in writing and at the
sole cost of Lessee, such waiver forms and releases from Lessor Liens (which
shall contain customary indemnities for the benefit of Lessor and other
protections including the right to treat such property as abandoned if not
timely removed by Lessee) in favor of any purchase money seller, lessor or
lender which has financed or is in the process of consummating such financing of
such personal property items.
ARTICLE IV
RENT
IV.1 Basic Rent. Lessee shall pay to Lessor Basic Rent (i) on each
Payment Date, (ii) on any date required under Sections 14.1 or 20.1 or Article
XIX and (iii) on any date on which this Lease terminates or upon demand
following a Lease Event of Default pursuant to Section 17.1. At least 10 days
prior to each Payment Date, Lessor shall deliver to Lessee a notice setting
forth the exact amount of Basic Rent due on such date (the "Invoice"). For
purposes of this section, delivery of the Invoice by facsimile transmission,
receipt confirmed, shall be sufficient.
IV.2 Supplemental Rent. Lessee shall pay to Lessor (or if to a Person
other than Lessor, Agent or any of the Participants, to such Person as shall be
entitled thereto as expressly provided herein or in any other Operative
Document, and Lessor hereby directs Lessee, on behalf of Lessor, to so pay any
such other Person), any and all Supplemental Rent promptly as the same shall
become due and payable and, in the event of any failure on the part of Lessee to
pay any Supplemental Rent, Lessor shall have all rights, powers and remedies
provided for herein or by law or in equity or otherwise in the case of
nonpayment of Basic Rent. Lessee hereby reaffirms
3
<PAGE> 6
that its obligation to pay Supplemental Rent shall include (i) the payment of
any and all Additional Costs, (ii) all amounts determined to be due and payable
or otherwise subject to distribution pursuant to Article III of the Loan
Agreement in accordance with its terms. The expiration or other termination of
Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the
obligations of Lessee with respect to Supplemental Rent. Unless expressly
provided otherwise in this Lease, in the event of any failure on the part of
Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall
also promptly pay and discharge any fine, penalty, interest or cost which may be
assessed or added under any agreement with a third party for nonpayment or late
payment of such Supplemental Rent, all of which shall also constitute
Supplemental Rent.
IV.3 Method and Amount of Payment. Basic Rent and Supplemental Rent
shall be paid by a wire transfer to Lessor (or, in the case of Supplemental Rent
due to any Person other than Lessor, Agent or any of the Participants, to such
Person as may be entitled thereto) at such place as Lessor (or such other
Person) shall specify in writing to Lessee pursuant to Schedule II to the
Participation Agreement or Section 9.3 of the Participation Agreement; provided,
however, that, so long as the Notes remain outstanding, Lessor directs Lessee to
pay Rent directly to the Agent. Each payment of Rent shall be made by Lessee
prior to 1:00 p.m. Boston, Massachusetts time (and payments made after such time
shall be deemed to have been made on the next day) at the place of payment in
funds consisting of lawful currency of the United States of America which (in
the case of any amount payable to Lessor, Agent or any Participant or any other
Indemnitee) shall be immediately available on the scheduled date when such
payment shall be due. The provisions of the foregoing sentence of this Section
4.3 shall be applicable only to Basic Rent and to Supplemental Rent payable to,
or on behalf of or for the account of, Lessor, Agent any Participant and any
other Indemnitee.
IV.4 Late Payment. If any Basic Rent shall not be paid when due, Lessee
shall pay to Lessor, or if any Supplemental Rent payable to or on behalf or for
the account of Lessor, Agent, any Participant, or other Indemnitee is not paid
when due, Lessee shall pay to such Person as shall be entitled thereto, in each
case as Supplemental Rent, interest at the Overdue Rate (to the maximum extent
permitted by Applicable Laws) on such overdue amount from and including the due
date thereof (without regard to any applicable grace period) to but excluding
the Business Day of payment thereof.
ARTICLE V
NET LEASE
4
<PAGE> 7
This Lease shall constitute a net lease and, notwithstanding any other
provision of this Lease, it is intended that Basic Rent, Supplemental Rent, the
Lease Balance and all other amounts due and payable under the Operative
Documents shall be paid without counterclaim, setoff, deduction or defense of
any kind and without abatement, suspension, deferment, diminution or reduction
of any kind, and Lessee's obligation to pay all such amounts throughout the
Lease Term is absolute and unconditional. The obligations and liabilities of
Lessee hereunder shall in no way be released, discharged or otherwise affected
for any reason, including, to the maximum extent permitted by Applicable Laws:
(a) any defect in the condition, merchantability, design, construction, quality
or fitness for use of any portion of the Leased Property, or any failure of the
Leased Property to comply with all Applicable Laws, including any inability to
occupy or use the Leased Property by reason of such non-compliance; (b) any
damage to, abandonment, loss, contamination of or Release from or destruction of
or any requisition or taking of the Leased Property or any part thereof,
including eviction; (c) any restriction, prevention or curtailment of or
interference with any use of the Leased Property or any part thereof, including
eviction; (d) any defect in title to or rights to the Leased Property or any
Lien on such title or rights or on the Leased Property; (e) any change, waiver,
extension, indulgence or other action or omission or breach in respect of any
obligation or liability of or by Lessor, Agent or any Participant; (f) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation or other like proceedings relating to Lessee, Lessor, Agent, any
Participant or any other Person, or any action taken with respect to this Lease
by any trustee or receiver of Lessee, Lessor, Agent, any Participant or any
other Person, or by any court, in any such proceeding; (g) any claim that Lessee
has or might have against any Person, including Lessor, Agent, or any
Participant; (h) any failure on the part of Lessor to perform or comply with any
of the terms of this Lease, any other Operative Document or of any other
agreement whether or not related to the Overall Transaction; (i) any invalidity
or unenforceability or disaffirmance against or by Lessee of this Lease or any
provision hereof or any of the other Operative Documents or any provision of any
thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k) any
action by any court, administrative agency or other Authority; any restriction,
prevention or curtailment of or any interference with the construction on or any
use of the Leased Property or any part thereof; (l) the failure of Lessee to
achieve any accounting or tax benefits or the characterization of the
transaction intended by Section 22.19 of this Lease and Section 2.7 of the
Participation Agreement or (m) any other occurrence whatsoever, whether similar
or dissimilar to the foregoing, whether or not Lessee shall have notice or
knowledge of any of the foregoing. Except as specifically set forth in Article
XIV, Article XIX or Section 20.1, this Lease shall be non-terminable and
noncancellable by Lessee for any reason whatsoever, and Lessee, to the extent
permitted by Applicable Laws, waives all rights now or hereafter conferred by
statute or otherwise to quit, terminate or surrender this Lease, or to any
diminution, abatement or reduction of Rent payable by Lessee hereunder. If for
any reason whatsoever this Lease shall be terminated in whole or in part by
operation of law or otherwise, except as expressly provided in Article XIV or
Article XIX, Lessee shall, unless prohibited by Applicable Laws, nonetheless pay
to Lessor (or, in the case of Supplemental Rent due to any Person other than
Lessor, Agent or any of the Participants, to such Person as shall be entitled
thereto) an amount equal to each Rent payment (including the Lease Balance or
any other amount due and payable under any Operative
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Documents) at the time and in the manner that such payment would have become due
and payable under the terms of this Lease if it had not been terminated in whole
or in part. Each payment of Rent and any payment of the Lease Balance made by
Lessee hereunder shall be final and, absent manifest error in the computation of
the amount thereof, Lessee shall not seek or have any right to recover all or
any part of such payment from Lessor, Agent, any Participant or any party to any
agreements related thereto for any reason whatsoever. Lessee assumes the sole
responsibility for the condition, use, operation, maintenance, and management of
the Leased Property and Lessor shall have no responsibility in respect thereof
and shall have no liability for damage to the property of Lessee or any
subtenant of Lessee on any account or for any reason whatsoever other than by
reason of Lessor's willful misconduct or gross negligence or negligence in the
handling of funds; provided, however, any liability of Lessor with respect to
any such willful misconduct or gross negligence or negligence in the handling of
funds shall not limit or affect Lessee's absolute obligations as set forth in
this Article V. Without affecting Lessee's obligation to pay Basic Rent,
Supplemental Rent, the Lease Balance and all other amounts due and payable under
the Operative Documents, or to perform its obligations under the Operative
Documents, Lessee may seek damages or any other remedy at law or equity against
Lessor for a breach by Lessor of its obligations under this Lease or the
Participation Agreement.
ARTICLE VI
UTILITY CHARGES
Lessee shall pay or cause to be paid all charges for electricity, power,
gas, oil, water, telephone, sanitary sewer service and all other rents and
utilities used in or on the Leased Property during the Lease Term. Lessee shall
be entitled to receive any credit or refund with respect to any utility charge
paid by Lessee and the amount of any credit or refund received by Lessor on
account of any utility charges paid by Lessee, net of the costs and expenses
reasonably incurred by Lessor in obtaining such credit or refund, shall be
promptly paid over to Lessee. All charges for utilities imposed with respect to
the Leased Property for a billing period during which this Lease expires or
terminates (except pursuant to Article XIX or Section 20.1(b) hereof, in which
case Lessee shall be solely responsible for all such charges) shall be adjusted
and prorated on a daily basis between Lessee and any purchaser of the Leased
Property, and each party shall pay or reimburse the other for each party's pro
rata share thereof; provided, that in no event shall Lessor have any liability
therefor.
ARTICLE VII
CONDITION OF LEASED PROPERTY
VII.1 Waivers. LESSEE ACKNOWLEDGES AND AGREES THAT, ALTHOUGH LESSOR WILL
OWN AND HOLD RECORD TITLE TO THE LEASED PROPERTY, LESSEE
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IS SOLELY RESPONSIBLE FOR THE LEASED PROPERTY AND ANY ALTERATIONS. The Leased
Property is let by Lessor "AS IS" in its present condition, subject to (a) any
rights of any parties in possession thereof, (b) the state of the title thereto
existing at the time Lessor acquired its interest in the Leased Property, (c)
any state of facts which an accurate survey or physical inspection might show
(including any survey delivered on or prior to the Advance Date), (d) all
Applicable Laws, and (e) any violations of Applicable Laws which may exist at
the commencement of the Lease Term. Lessee has examined the Leased Property and
(insofar as Lessor is concerned) has found the same to be satisfactory. NONE OF
LESSOR, AGENT, ARRANGER NOR ANY PARTICIPANT HAS MADE OR SHALL BE DEEMED TO HAVE
MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR SHALL BE DEEMED TO
HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE TO THE LEASED PROPERTY OR TO THE
VALUE, MERCHANTABILITY, HABITABILITY, CONDITION, OR FITNESS FOR USE OF THE
LEASED PROPERTY, OR ANY PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASED PROPERTY, OR ANY PART
THEREOF, AND NONE OF LESSOR, AGENT, ARRANGER NOR ANY PARTICIPANT SHALL BE LIABLE
FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE LEASED
PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY APPLICABLE LAWS, except that
Lessor hereby represents and warrants that the Leased Property, is and shall be
free of Lessor Liens. Lessee has been afforded full opportunity to inspect the
Leased Property, is satisfied with the results of its inspections and is
entering into this Lease solely on the basis of the results of its own
inspections, and all risks incident to the matters discussed in the preceding
sentence, as between Lessor, Agent, Arranger and the Participants, on the one
hand, and Lessee, on the other, are to be borne by Lessee. The provisions of
this Article VII have been negotiated, and, except to the extent otherwise
expressly stated, the foregoing provisions are intended to be a complete
exclusion and negation of any representations or warranties by any of Lessor,
Agent, Arranger or the Participants, express or implied, with respect to the
Leased Property (or any interest therein), that may arise pursuant to any law
now or hereafter in effect or otherwise.
ARTICLE VIII
NON-INTERFERENCE
VIII.1 Non-Interference. Except as provided for at Article XVIII and so
long as no Lease Event of Default has occurred and is continuing, Lessor
covenants that it will not interfere in Lessee's or any of its permitted
subtenants' use of the Leased Property in accordance with this Lease during the
Lease Term; it being agreed that Lessee's remedies for breach of the foregoing
covenant shall be limited to a claim for damages or the commencement of
proceedings to enjoin such breach. Such right is independent of and shall not
affect Lessee's obligations hereunder and under the other Operative Documents or
Lessor's or any other Person's rights otherwise to initiate legal action to
enforce the obligations of Lessee under this Lease.
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VIII.2 Certain Duties and Responsibilities of Lessor. Lessor undertakes
to perform such duties and only such duties as are specifically set forth herein
and in the other Operative Documents, and no implied covenants or obligations
shall be read into this Lease against Lessor, and Lessor agrees that it shall
not, nor shall it have a duty to, manage, control, use, sell, maintain, insure,
register, lease, operate, modify, dispose of or otherwise deal with the Leased
Property or any other part of the Trust Estate in any manner whatsoever, except
as required by the terms of the Operative Documents and as otherwise provided
herein.
ARTICLE IX
MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS
IX.1 Maintenance and Repair; Compliance With Applicable Laws. Lessee, at
its own expense, shall at all times (a) maintain the Leased Property in at least
its current condition, subject to ordinary wear and tear, and in any event at
least as good as the condition of similar properties owned or leased by Lessee
and its affiliates and in good repair and condition and free from nuisance; (b)
except to the extent Section 9.5 hereof shall apply, maintain, manage and
monitor the Leased Property in accordance with all Applicable Laws, whether or
not such maintenance requires modifications or alterations; (c) comply with the
Insurance Requirements which are in effect at any time with respect to the
Leased Property or any part thereof; (d) maintain, manage and monitor the Leased
Property in accordance with all applicable Contractual Requirements; (e) use the
Leased Property only in accordance with Article X; (f) take all appropriate
steps that may be required to keep the Leased Property in the condition required
by the preceding clauses (a) through (e), ordinary or extraordinary, foreseen or
unforeseen, and including repairs, replacements and renewals that would
constitute capital expenditures under GAAP if incurred by an owner of property;
and (g) procure, maintain and comply in all material respects with all material
Governmental Actions required for the use, development, maintenance and
operation of the Leased Property. Lessee waives any right that it may now have
or hereafter acquire to (x) require Lessor to maintain, repair, replace, alter,
remove or rebuild all or any part of the Leased Property or (y) make repairs at
the expense of Lessor pursuant to any Applicable Laws or other agreements.
IX.2 Improvements and Alterations to Leased Property.
(a) (i) Lessee, at Lessee's own cost and expense, shall make
alterations, improvements and additions to the Leased Property and or any part
thereof and substitutions and replacements therefor (collectively,
"Alterations") which are (A) necessary to repair or maintain the Leased Property
in the condition required by Section 9.1; (B) necessary in order for the Leased
Property to be in compliance with Applicable Laws; or (C) necessary to restore
the Leased Property to its condition existing prior to a Casualty or
Condemnation to the extent required pursuant to Article XIII; and (ii) so long
as no Lease Event of Default or Lease Default
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has occurred and is continuing, Lessee, at Lessee's own cost and expense, may
undertake Alterations on either Site so long as such Alterations comply with
Applicable Laws and with Section 9.1 and subsection (b) of this Section 9.2.
(b) The making of any Alterations must be in compliance with the
following requirements:
(i) Lessee shall not make any Alterations in violation of the
terms of any restriction, easement, condition or covenant or other
matter affecting title to the Leased Property.
(ii) No Alterations shall be undertaken until Lessee shall have
procured and paid for, so far as the same may be required from time to
time, all permits and authorizations relating to such Alterations of all
municipal and other Authorities having jurisdiction over the applicable
Site. Lessor, at Lessee's expense, shall join in the application for any
such permit or authorization and execute and deliver any document in
connection therewith, whenever such joinder is necessary or advisable.
(iii) The Alterations shall be expeditiously completed in a good
and workmanlike manner and in compliance with all Applicable Laws then
in effect and the standards imposed by any insurance policies required
to be maintained hereunder.
(iv) All Alterations shall, when completed, be of such a
character as to not materially adversely affect the fair market value or
residual value of the affected Site from its fair market value or
residual value immediately prior to the making thereof or, in the case
of Alterations being made by virtue of a Casualty or Condemnation,
immediately prior to the occurrence of such Casualty or Condemnation.
(v) Lessee shall have made adequate arrangements for payment of
the cost of all Alterations when due so that the Leased Property shall
at all times be free of Liens, including for labor and materials
supplied or claimed to have been supplied to the Leased Property, other
than Permitted Liens; provided, that Lessee shall have the right to
engage in Permitted Contests in accordance with Section 9.5.
(vi) The Alterations must be located solely on the Leased
Property.
IX.3 Title to Alterations. Title to the following described Alterations
shall without further act vest in Lessor and shall be deemed to constitute a
part of the Leased Property and be subject to this Lease:
(a) Alterations that are Nonseverable and which are not
Development Improvements which have been approved pursuant to Section
6.2 of the Participation Agreement;
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(b) Alterations (including all Site Improvements) that are
financed with any amounts advanced by the Participants on the Advance
Date pursuant to the Participation Agreement; and
(c) Alterations that are required to be made pursuant to the
terms of Section 9.1 or 9.2(a)(i) hereof.
Lessee, at Lessor's request, shall execute and deliver any deeds, bills
of sale, assignments or other documents of conveyance reasonably necessary to
evidence the vesting of title in and to such Alterations to Lessor.
If such Alterations are not within any of the categories set forth in
clauses (a) through (c) of this Section 9.3, then title to such Alterations
shall vest in Lessee and such Alterations shall not be deemed to be Alterations
which are part of the Leased Property.
All Alterations to which Lessee shall have title may, so long as removal
thereof shall not result in the violation of any Applicable Laws and no Lease
Event of Default or Lease Default is continuing, be removed at any time by
Lessee. Lessee agrees to notify Lessor in writing at least 30 days before it
removes any Alterations and Lessee shall at its expense repair any damage to the
Leased Property caused by the removal of such Alterations. Subject to the
provisions of Section 6.2 of the Participation Agreement, title to any
Alterations shall vest in Lessor (or the purchaser of the applicable Leased
Property) if not removed from the Leased Property by Lessee prior to the return
of the Leased Property to Lessor or sale of the Leased Property.
IX.4 Maintenance and Repair Reports. Lessee shall keep reports in
sufficient detail, and as customary for owners of commercial real estate, to
indicate the nature and date of major work done. Such reports shall be made
available at Lessee's office to Lessor upon reasonable request. Lessee shall
give notice to Lessor of any Condemnation, the cost to repair which is
reasonably expected by Lessee to exceed $10,000,000, promptly after Lessee has
knowledge thereof.
IX.5 Permitted Contests. If, to the extent and for so long as (a) a
test, challenge, appeal or proceeding for review of any Applicable Laws or any
Governmental Action relating to the Leased Property or to the operation or
maintenance thereof shall be prosecuted diligently and in good faith in
appropriate proceedings by Lessee or (b) compliance with such Applicable Laws or
such Governmental Action shall have been excused or exempted by a valid
nonconforming use permit, waiver, extension or forbearance, Lessee shall not be
required to comply with such Applicable Laws or such Governmental Action but
only if and so long as any such test, challenge, appeal, proceeding or
noncompliance shall constitute a Permitted Contest.
Lessor will not be required to join in any Permitted Contest pursuant to
this Section 9.5 unless a provision of any Applicable Laws requires, or, in the
good faith opinion of Lessee, it is helpful to Lessee, that such proceedings be
brought by or in the name of Lessor; and in that event, Lessor will join in the
proceedings or permit them or any part thereof to be brought in its
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name if and so long as no Lease Event of Default is continuing and Lessee pays
all related out-of-pocket expenses and reasonable allocated internal costs of
Lessor and provides to Lessor adequate indemnification.
IX.6 Warrant of Title.
(a) Lessee agrees that, except as otherwise provided herein and
subject to the terms of Section 9.5 relating to Permitted Contests, Lessee shall
not directly or indirectly create or allow to remain, and shall promptly
discharge at its sole cost and expense, any Lien, defect, attachment, levy,
title retention agreement or claim upon any Leased Property or any Alterations
to a Site, or any Lien, attachment, levy or claim with respect to the Rent or
with respect to any amounts held by Agent pursuant to the Loan Agreement or the
other Loan Documents, other than Permitted Liens and Lessor Liens.
(b) Nothing contained in this Lease shall be construed as
constituting the consent or request of Lessor, expressed or implied, to or for
the performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to either Site or
any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER LESSOR, NOR ANY
PARTICIPANT NOR AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS
FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A SITE OR ANY PART
OR PORTION THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER
LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE
INTEREST OF LESSOR, AGENT OR ANY PARTICIPANT IN AND TO ANY LEASED PROPERTY.
IX.7 Grants and Releases of Easements on the Sites. Provided that no
Lease Event of Default shall have occurred and be continuing and subject to the
provisions of Articles VIII, IX, X and XI, Lessor hereby consents in each
instance to the following actions by Lessee, in the name and stead of Lessor,
but at Lessee's sole cost and expense (a) the granting of easements, licenses,
rights-of-way and other rights and privileges in the nature of easements
reasonably necessary or desirable for the use, repair, or maintenance of a Site
as herein provided; (b) the release of existing easements or other rights in the
nature of easements which are for the benefit of a Site; (c) the dedication or
transfer of unimproved portions of a Site for road, highway or other public
purposes; (d) the execution of petitions to have a Site annexed to any municipal
corporation or utility district; (e) the execution of amendments to any
covenants and restrictions affecting a Site; and (f) the execution of such
plats, lot splits, lot line adjustments, parcel maps and dedications as may be
necessary or desirable in connection with the re-parcelization of the Sites;
provided, however, that in each case (i) such grant, release, dedication,
transfer, annexation, amendment or re-parcelization does not materially impair
the value, utility or remaining useful life of the applicable Site, (ii) such
grant, release, dedication, transfer, annexation, amendment or re-parcelization
is reasonably necessary or desirable in connection with the use, maintenance,
alteration or improvement of the applicable Site, (iii) such grant,
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release, dedication, transfer, annexation, amendment or re-parcelization will
not cause the applicable Site or any portion thereof to fail to comply in any
material respect with the provisions of this Lease or any other Operative
Documents or in any material respect with any Applicable Laws (including all
applicable zoning, planning, building and subdivision ordinances, all applicable
restrictive covenants and all applicable architectural approval requirements);
(iv) all governmental consents or approvals required prior to such grant,
release, dedication, transfer, annexation, amendment or re-parcelization have
been obtained, and all filings required prior to such action have been made; (v)
such grant, release, dedication, transfer, annexation, amendment or
re-parcelization will not result in any material down-zoning of the applicable
Site or any portion thereof or a material reduction in the maximum density or
development rights available to the applicable Site under all Applicable Laws;
(vi) Lessee shall remain obligated under this Lease and under any instrument
executed by Lessee consenting to the assignment of Lessor's interest in this
Lease as security for indebtedness, in each such case in accordance with their
terms, as though such grant, release, dedication, transfer, annexation,
amendment or re-parcelization had not been effected; and (vii) Lessee shall pay
and perform, and fully indemnify Lessor from and against any Claims arising
from, any obligations of Lessor under such grant, release, dedication, transfer,
annexation, amendment, or re-parcelization. Without limiting the effectiveness
of the foregoing, provided that no Lease Event of Default shall have occurred
and be continuing, Lessor shall, upon the request of Lessee, and at Lessee's
sole cost and expense, execute and deliver any instruments necessary or
appropriate to confirm any such grant, release, dedication, transfer,
annexation, amendment, or re-parcelization to any Person permitted under this
Section. Notwithstanding anything to the contrary contained in this Section, as
a condition to executing and delivering any plats, lot splits, lot line
adjustments, parcel maps and dedications as may be necessary or desirable in
connection with the re-parcelization of the Sites, Lessee shall deliver to
Lessor and Agent such documentation as Lessor or Agent reasonably deem necessary
or desirable to document or evidence the continued effectiveness, perfection and
priority of this Lease, the Lease Supplements, the Deed of Trust and the other
Operative Documents including new or revised surveys, new, updated or endorsed
Title Policies and opinions of counsel for Lessee, all in such form and
substance reasonably satisfactory to Lessor and Agent.
IX.8 Inspection. Upon five (5) Business Days prior notice to Lessee,
Lessor or its authorized representatives (the "Inspecting Parties") may inspect
(a) the Leased Property and (b) the books and records of Lessee relating to the
Leased Property and make copies and abstracts therefrom. All such inspections
shall be at the expense of the Inspecting Parties, except that if a Lease Event
of Default or Lease Default has occurred and is continuing, Lessee shall
reimburse the Inspecting Parties for the reasonable costs of such inspections.
Lessee shall furnish to the Inspecting Parties statements accurate in all
material respects regarding the condition and state of repair of the Leased
Property, at such times and as may be reasonably requested. No inspection shall
unreasonably interfere with Lessee's operations or the operations of any
permitted sublessee of the Leased Property. None of the Inspecting Parties shall
have any duty to make any such inspection or inquiry. None of the Inspecting
Parties shall incur any liability or obligation by reason of making any such
inspection or inquiry unless and to the extent, such Inspecting Party
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causes damage to the Leased Property or any property of Lessee or any other
Person during the course of such inspection.
IX.9 Reports. To the extent permissible under Applicable Laws, Lessee
shall prepare and file in timely fashion, or, where Lessor shall be required to
file, Lessee shall prepare and make available to Lessor within a reasonable time
prior to the date for filing and Lessor shall file, any reports with respect to
the condition or operation of the Leased Property that shall be required to be
filed with any Authority.
ARTICLE X
USE
Subject to the requirements of this Article X, each Site may be used for
any Permitted Use. Lessee shall not use the Leased Property or any part thereof
for any purpose or in any manner that would materially adversely affect the Fair
Market Value, utility, remaining useful life or residual value of either Site or
that would create a materially increased risk of environmental liability or that
would violate or conflict with, or constitute or result in a violation or
default under (a) any Applicable Laws whether now existing or hereafter in
effect, foreseen or unforeseen, except to the extent permitted by Section 9.5,
(b) the Insurance Requirements, or (c) any Operative Document. Lessee shall pay,
or cause to be paid, all charges and costs required in connection with the use
of the Leased Property as contemplated by this Lease and the Participation
Agreement. Lessee shall not, and shall not permit any other Person to, use or
develop the Leased Property or any portion thereof for residential uses. Lessee
shall not commit or permit any waste of the Leased Property or any part thereof
or take any act or fail to take any act which would cause or permit a nuisance
to exist or occur upon the Leased Property.
ARTICLE XI
INSURANCE
XI.1 Required Coverages. Subject in all respects to Lessee's rights
under Section 11.2, Lessee shall maintain:
(a) Comprehensive General Liability Insurance. Combined single
limit insurance against claims for third-party bodily injury, including death
and third-party property damage occurring on, in or about the Leased Property
(including adjoining streets and sidewalks) at least equal to $1,000,000 per
occurrence and a minimum of $5,000,000 excess of such coverage.
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(b) Property Insurance. Insurance against loss or damage covering
the Improvements or any portion thereof by reason of any Peril (as defined
below) in an amount (subject to such deductibles in such minimum amounts as is
carried by corporations owning and/or operating similar properties) otherwise
acceptable to the Required Participants; provided, however, that at no time
shall the amount of such coverage be less than the replacement cost of the
Improvements, including any costs that may be required to cause the Improvements
to be reconstructed to then current Applicable Laws. The term "Peril" shall mean
all perils covered by the standard policy with "all risk endorsement" then in
use in the State of California. Alternatively, at Lessee's election, such
insurance shall be on a coverage form reasonably available in the commercial
insurance market at the time of the most recent policy reviewed.
(c) Workers' Compensation Insurance. Lessee shall, in the
construction of any Alterations and the operation of the Leased Property, comply
with the Applicable Laws regarding workers' compensation and protect Lessor,
Agent and the Participants against any liability under such Applicable Laws
arising out of injury to employees of Lessee or its construction contractors.
Lessee is not hereby obligated to insure or indemnify against such liability as
described in this Section 11.1(c) for injury to employees of Lessor, Agent or
the Participants.
(d) General Requirements. Such insurance shall be written by
reputable insurance companies that are financially sound and solvent and
otherwise reasonably appropriate considering the amount and type of insurance
being provided by such companies. Any insurance company selected by Lessee shall
be rated in A.M. Best's Insurance Guide or any successor thereto (or if there be
none, an organization having a similar national reputation) and shall have a
general policyholder rating of "A" (or comparable rating for a rating by an
organization other than A.M. Best) and a financial rating of at least "X" (or
comparable rating for a rating by an organization other than A.M. Best) or be
otherwise acceptable to the Required Participants. In the case of liability
insurance maintained by Lessee, it shall name Lessor (both in its individual
capacity and as trustee), Agent, and each of the Participants, as additional
insureds and, in the case of property insurance maintained by Lessee, it shall
name Lessor, Agent, and the Participants, as mortgagee and loss payee as their
interests may appear. The insurance coverages required under this Section may be
obtained under one or more blanket policies covering Guarantor and its
Subsidiaries and/or covering properties of Guarantor and its Subsidiaries in
addition to the Sites and may be provided by a combination of primary insurance
policies and excess liability ("umbrella") insurance policies otherwise in
compliance with this Section 11.1. Each policy referred to in this Section 11.1
shall provide that: (i) it will not be canceled, materially modified or its
limits reduced, or allowed to lapse without renewal, except after not less than
30 days' prior written notice to Lessor; (ii) the interests of Lessor, Agent and
any Participant shall not be invalidated by any act or negligence of or breach
of warranty or representation by Lessee or any Person having an interest in the
Leased Property; (iii) such insurance is primary with respect to any other
insurance carried by or available to Lessor, Agent, or any Participant; (iv) the
insurer shall waive any right of subrogation, setoff, counterclaim, or other
deduction, whether by attachment or otherwise, against Lessor; and (v) such
policy shall contain a cross-liability clause providing for coverage of Lessor,
Agent and each Participant, as if
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separate policies had been issued to each of them. Lessee will notify Lessor
promptly of any policy cancellation, reduction in policy limits, modification or
amendment.
XI.2. Self-Insurance Rights. Lessee shall have the right to self-insure
through a self-insurance program maintained by Guarantor with respect to any of
the insurance required under this Lease so long as (i) Guarantor is a publicly
traded domestic corporation whose stock is traded on a nationally recognized
exchange; (ii) Lessee has not assigned this Lease; (iii) Guarantor maintains a
Consolidated Tangible Net Worth of at least $1,800,000,000 according to its most
recent audited financial statement; and (iv) Guarantor governs and manages its
self-insurance program in a manner consistent with programs managed by prudent
businesses whose stock is publicly traded on nationally recognized exchanges;
provided that if Lessee maintains or is required to maintain for the benefit of
any Person (other than pursuant to the Operative Documents) insurance written by
a third party insurance company with respect to any Leased Property or the
Improvements or activities conducted thereon, then Lessee shall maintain for the
benefit of Lessor, (in its individual capacity and as trustee), Agent and each
of the Participants, insurance written by a third party insurance company
satisfying the requirements of Section 11.21(d) against such casualties and
contingencies and of such types and in such amounts as Lessee maintains or is
required to maintain for such other Person. Upon request, Lessee shall supply or
cause Guarantor to supply Lessor from time to time with evidence reasonably
satisfactory to Lessor of Guarantor's net worth and the satisfaction of the
conditions set forth above. If Lessee elects to self-insure, Lessee shall be
responsible for losses or liabilities which would have been assumed by the
insurance companies which would have issued the insurance required of Lessee
under the Lease. Lessee will notify Lessor in advance of any period for which
Lessee intends to self-insure and shall provide Lessor with satisfactory
evidence that Lessee complies with these requirements in order to give Lessor an
opportunity to confirm the satisfaction of the conditions set forth above. For
so long as Lessee self-insures, Lessee, for applicable periods, shall and does
hereby indemnify and hold harmless Lessor, Agent and the Participants, and their
respective officers, directors, agents, employees, trustees, beneficiaries, and
representatives from and against all Claims (including reasonable attorneys'
fees) incurred or paid by Lessor, Agent or the Participants as a result of any
Claim customarily covered by a broad-form policy of commercial general liability
insurance, including a contractual liability endorsement.
XI.3 Delivery of Insurance Certificates. Promptly at any date Lessee is
not entitled to self-insure under Section 11.2 (and in no event later than ten
(10) business days after the occurrence of the event or condition which causes
such right to self-insure to cease or the date Lessee voluntarily decides to
cease participation in such self-insurance program) and thereafter in no event
less frequently than once each year on or before June 1 or upon written request
by Lessor following a Lease Event of Default, Lessee shall deliver to Lessor
certificates of insurance satisfactory to Lessor evidencing the existence of all
insurance required to be maintained hereunder and setting forth the respective
coverages, limits of liability, carrier, policy number and period of coverage
required at Section 11.1.
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ARTICLE XII
ASSIGNMENT AND SUBLEASING
XII.1 Assignment by Lessee. Lessee may not assign this Lease or any of
its rights or transfer or delegate any of its obligations hereunder in whole or
in part to any Person, except that Lessee may sublease either Site or any
portion thereof as permitted under Section 12.2. Notwithstanding the foregoing
sentence, Lessee may, so long as no Lease Event of Default has occurred and is
continuing, or would result therefrom, upon prior written notice to each of
Lessor and Agent, (i) delegate any of its obligations hereunder to any
Affiliate, provided that no delegation shall in any way discharge or diminish
any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly
and primarily liable under this Lease and (ii) assign this Lease and all of
Lessee's rights and transfer or delegate any of its obligations hereunder to an
Affiliate of Lessee pursuant to an assignment and assumption agreement and such
other documentation, including opinions of counsel, all in form and substance
reasonably satisfactory to Lessor and the Required Participants; provided, that,
in any event of such assignment, Lessee shall (a) cause Guarantor to deliver a
reaffirmation of the Guarantees in form and substance and in all respects
satisfactory to Lessor and Agent that the Guarantees remain in full force and
effect with respect to such Affiliate as "Lessee" hereunder and under the other
Operative Documents, and (b) provide to Lessor reasonably satisfactory evidence
that such transferee Affiliate complies with the requirements of Section 11.2
(or alternatively, maintains the insurance coverages required under Section
11.1).
XII.2 Subletting. Lessee may from time to time, sublease either Site or
any portion thereof to any Person and to extend, modify or renew any sublease
without the approval of Lessor or Agent; provided, however, that (a) no sublease
or other relinquishment of possession of the Leased Property shall in any way
discharge or diminish any of Lessee's obligations to Lessor hereunder, nor
affect or impair the Guarantees with respect to such obligation, nor release or
discharge, in whole or in part, Guarantor from any such obligations, and Lessee
shall remain directly and primarily liable under this Lease as to the Leased
Property, or portion thereof, so sublet; (b) each sublease shall expressly be
made subject to and subordinated to this Lease and to the rights of Lessor
hereunder; (c) each sublease shall expressly provide for the surrender of the
applicable Leased Property or portion thereof by the applicable sublessee at the
election of the Required Participants or Lessor (as applicable) after the
occurrence of a Lease Event of Default or upon the expiration or termination of
this Lease; and (d) if a sublessee is not a Subsidiary, such sublease shall
contain a provision whereby such sublessee agrees in writing not to assert a
claim or to challenge the intended character and treatment of the Overall
Transaction described in Section 2.7 of the Participation Agreement and such
sublessee irrevocably waives and relinquishes any such rights to assert such
claim or otherwise make such challenge.
ARTICLE XIII
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CASUALTY AND CONDEMNATION; ENVIRONMENTAL MATTERS
XIII.1 Casualty and Condemnation.
(a) Subject to the provisions of this Article XIII, if all or a
portion of the Site Improvements on a Site are damaged or destroyed in whole or
in part by a Casualty or if the use, access, occupancy, easement rights or title
to either Site or any part thereof, is the subject of a Condemnation, then
(i) any insurance proceeds payable with respect to such Site
Improvements affected by such Casualty (or if Lessee is participating in
Guarantor's self-insurance program, any amounts payable in connection
with such program) shall be paid directly to Lessee (or if received by
Lessor, shall be paid over to Lessee), which amounts shall be used by
Lessee for the sole purpose of reconstruction, refurbishment and repair
of such Improvements; provided, that such reconstruction, refurbishment
or repair can be completed prior to the end of the Lease Term; provided,
further, that in the event that either (i) such reconstruction,
refurbishment or repair cannot be completed prior to the end of the
Lease Term or (ii) Lessee shall elect not to use all such proceeds for
the reconstruction, refurbishment or repair of such Site Improvements,
then all such proceeds payable with respect to such Casualty shall be
paid to Lessor to be applied towards the payment of the Lease Balance in
accordance with Article III of the Loan Agreement, and
(ii) (x) in the case of a Condemnation (that is not a Significant
Condemnation) of any part of either Site, any award or compensation
relating thereto shall be paid to Lessee for the sole purpose of
restoration of such Site (provided, that such restoration can be
completed prior to the end of the Lease Term) or else the portion of
such award or compensation attributable to the Site and the Site
Improvements shall be paid to Lessor to be applied in the Required
Participants' reasonable discretion to the partial restoration of such
Site or towards the payment of the applicable Lease Balance, and (y) in
the case of a Significant Condemnation, the portion of such award or
compensation attributable to the Site and the Site Improvements shall be
paid to Lessor to be applied in the reasonable discretion of the
Required Participants to the restoration of such Site or toward the
payment of the applicable Lease Balance in accordance with Article III
of the Loan Agreement.
provided, however, that, in each case, if a Lease Event of Default shall have
occurred and be continuing, such award, compensation or insurance proceeds shall
be subject to Section 22.17 and shall be paid directly to Lessor or, if received
by Lessee, Lessee shall promptly pay over such amount to Lessor, and pending
such payment such amounts shall be deemed to be held in trust for the
Participants.
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(b) If pursuant to this Section 13.1 and Section 14.1 this Lease
shall continue in full force and effect following a Casualty to Improvements or
a Condemnation with respect to a Site, Lessee shall, at its sole cost and
expense (and, without limitation, if any award, compensation or insurance
payment is not sufficient to restore such Site Improvements or Site in
accordance with this Section 13.1, Lessee shall pay the shortfall), promptly and
diligently repair any damage to such Site caused by such Casualty or
Condemnation in conformity with the requirements of Article IX, to restore such
Site and the Site Improvements thereon to at least the same condition, operative
value and useful life as existed immediately prior to such Casualty or
Condemnation. Lessee's obligation to restore the Improvements other than the
Site Improvements shall be limited to (i) eliminating any condition or hazard
which might pose a threat to human health or safety, or create a nuisance at any
Site or securing the Sites during the period of restoration so as to mitigate
against such risk and (ii) restoring or otherwise putting such Improvements in a
condition so that the Improvements will not materially adversely affect the Fair
Market Value of the affected Site or the Site Improvements thereon. In such
event, title to such Site shall remain with Lessor subject to the terms of this
Lease. Upon completion of such restoration, Lessee shall furnish to Lessor and
Agent an architect's certificate of substantial completion and a Responsible
Officer's Certificate confirming that such restoration has been completed
pursuant to this Lease.
(c) In no event shall a Casualty or Condemnation affect Lessee's
obligations to pay Rent pursuant to Article IV or to perform its obligations and
pay any amounts due on the Lease Expiration Date or pursuant to Articles XIX and
XX.
(d) Any Excess Casualty/Condemnation Proceeds received by Lessor
in respect of a Casualty or Condemnation shall be turned over to Lessee.
XIII.2 Negotiations. In the event any part of the Leased Property
becomes subject to condemnation or requisition proceedings, Lessee shall give
notice thereof to Lessor promptly after Lessee has knowledge thereof and, to the
extent permitted by any Applicable Laws, Lessee shall control the negotiations
with the relevant Authority unless a Lease Event of Default exists, in which
case Lessor may control such negotiations; provided, that in any event Lessor
may participate at Lessor's expense (or if a Lease Event of Default exists, at
Lessee's expense) in such negotiations; and provided in all cases, that no
settlement will be made without Lessor's prior written consent, not to be
unreasonably withheld. At no cost to Lessor, Lessee shall give to Lessor such
information, and copies of such documents, which relate to such proceedings, or
which relate to the settlement of amounts due under insurance policies required
by Section 11.1, and are in the possession of Lessee, as are reasonably
requested by Lessor. Nothing contained in this Section 13.2 shall diminish
Lessor's rights with respect to Net Condemnation Proceeds under Section 14.2.
XIII.3 Environmental Matters. Promptly upon Lessee's knowledge of the
existence of an Environmental Violation with respect to any Site, Lessee shall
notify Lessor in writing of such Environmental Violation. If Lessor elects not
to terminate this Lease with respect to such Site
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pursuant to Section 14.1, at Lessee's sole cost and expense, Lessee shall
promptly and diligently commence any response, clean up, remedial or other
action necessary to remove, clean up or remediate the Environmental Violation in
accordance with the terms of Article IX. Lessee shall, upon completion of
remedial action by the Lessee, cause to be prepared by an environmental
consultant reasonably acceptable to Lessor a report describing the Environmental
Violation and the actions taken by Lessee (or its agents) in response to such
Environmental Violation, and a statement by the consultant that the
Environmental Violation has been remedied in compliance in all material respects
with applicable Environmental Laws. Each such Environmental Violation shall be
remedied prior to the Lease Expiration Date unless each Site with respect to
which an Environmental Violation has occurred but has not been remedied has been
purchased by Lessee in accordance with Article XIX or Section 20.1(b). Nothing
in this Article XIII shall reduce or limit Lessee's obligations under Article
VII of the Participation Agreement.
XIII.4 Notice of Environmental Matters. Promptly, but in any event
within sixty (60) days from the date Lessee has Actual Knowledge thereof, Lessee
shall provide to Lessor written notice of any pending or threatened claim,
action or proceeding involving any Environmental Laws or any Release on or in
connection with any Site. All such notices shall describe in reasonable detail
the nature of the claim, action or proceeding and Lessee's proposed response
thereto. In addition, Lessee shall provide to Lessor, promptly following
receipt, copies of all written communications with any Authority relating to any
Environmental Violation in connection with any Site. Lessee shall also promptly
provide such detailed reports of any such material environmental claims as may
reasonably be requested by Lessor or Agent. In the event that Lessor receives
written notice of any pending or threatened claim, action or proceeding
involving any Environmental Laws or any Release on or in connection with either
Site, Lessor shall promptly give notice thereof to Lessee. For purposes of this
paragraph, "Actual Knowledge" of Lessee shall mean the actual knowledge of
Lessee's Director of Planning and Development, who is responsible for the day to
day operations of the Sites.
ARTICLE XIV
PARTIAL TERMINATIONS
XIV.1 Partial Termination upon Certain Events. If any of the following
occurs with respect to either Site:
(a) a Significant Condemnation occurs; or
(b) an Environmental Violation occurs or is discovered the cost
of remediation of which would exceed either (i) $15,000,000 with respect
to either Site or (ii) with respect to either Site, if such Site is
comprised of one or more legal parcels, $5,000,000 for any portion of
either Site constituting a legal parcel and (x) such violation has not
been remediated within 180 days after the occurrence or discovery
thereof, or (y) Lessee has
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notified Lessor prior to the expiration of such 180 day period that the
violation will not be remediated within such period;
and Lessor shall have given written notice (a "Termination Notice") to Lessee
that, as a consequence of such event (x) the Lease Supplement relating to such
Site is to be terminated and (y) this Lease is to be terminated with respect to
such Site, then Lessee shall be obligated to purchase Lessor's interest in such
affected Site on the next Payment Date after Lessee's receipt of the Termination
Notice, by paying to Lessor an amount equal to the Purchase Amount for such
affected Site.
XIV.2 Termination Procedures. On the date of the payment by Lessee of
the Purchase Amount for the affected Site in accordance with Section 14.1(a) or
(b) or for the affected parcel in accordance with Section 14.1(b) (such date,
the "Termination Date"), the Lease Supplement relating to each such affected
Site or such affected parcel, as the case may be, shall terminate and this Lease
shall terminate with respect to each such Site or each affected parcel, as the
case may be, and, concurrent with Lessor's receipt of such payment,
(a) Lessor shall convey such Site to Lessee (or to Lessee's
designee) "AS IS" and in its then present physical condition pursuant to
Section 22.15 or, in the case of an affected parcel, Lessee shall
purchase such parcel in accordance with Section 19.2; and
(b) in the case of a termination pursuant to Section 14.1(a),
Lessor shall convey to Lessee any Net Condemnation Proceeds with respect
to the Condemnation giving rise to the termination of this Lease with
respect to such Site theretofore received by Lessor or at the request of
Lessee, provided however, if Lessee has not previously paid the Purchase
Amount to Lessor, other such amounts shall be applied against sums due
hereunder.
ARTICLE XV
OWNERSHIP, GRANT OF LIEN AND FURTHER ASSURANCES
XV.1 Grant of Lien and Security Interest. Title to the Leased Property
is held by and shall remain in Lessor, as security for the obligations of Lessee
hereunder and under each of the other Operative Documents to which it is a party
until such time as Lessee shall have fulfilled all of its obligations hereunder
and under such other Operative Documents. Lessee hereby mortgages, grants,
conveys, assigns, warrants, transfers, sets over and pledges to Lessor for the
benefit of the Participants a mortgage and Lien against all of Lessee's right,
title and interest, whether now or hereafter existing or acquired, in the Leased
Property and the other Lease Collateral to secure the payment and performance of
all obligations of Lessee now or hereafter existing under this Lease or any
other Operative Document, TO HAVE AND TO HOLD the Lease Collateral and the
rights and privileges hereby mortgaged unto Lessor, its successors and assigns
for the uses and purposes set forth, until all the obligations hereunder and
under such other Operative Documents are paid, performed and satisfied in full.
Lessee shall, at its expense,
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do any further act and execute, acknowledge, deliver, file, register and record
any further documents (including the Deed of Trust) which Lessor or Agent may
reasonably request in order to protect its title to and perfected Lien in the
Leased Property and the other Lease Collateral, subject to no Liens other than
Permitted Liens, and Lessor's rights and benefits under this Lease. Lessee shall
promptly and duly execute and deliver to Lessor such documents and assurances
(including the Deed of Trust) and take such further actions as Lessor or Agent
may from time to time reasonably request in order to carry out more effectively
the intent and purpose of this Lease and the other Operative Documents, to
establish and protect the rights and remedies created or intended to be created
in favor of Lessor hereunder and thereunder, and to establish, perfect and
maintain the right, title and interest of Lessor in and to the Leased Property
and the other Lease Collateral, subject to no Lien other than Permitted Liens,
or of such Deed of Trust, financing statements or fixture filings or other
documents with respect hereto as Lessor or Agent may from time to time
reasonably request, and Lessee agrees to execute and deliver promptly such of
the foregoing Deed of Trust, financing statements and fixture filings or other
documents as may require execution by Lessee. To the extent permitted by
Applicable Laws, Lessee hereby authorizes any such Deed of Trust, financing
statements and fixture filings to be filed without the necessity of the
signature of Lessee, and Lessor agrees to provide Lessee with copies of any such
documents so filed. Lessor shall at such time as all of the obligations of
Lessee under this Lease or any other Operative Documents have been paid or
performed in full (other than Lessee's contingent obligations, if any, under
Article VII of the Participation Agreement) execute and deliver termination
statements, cancellations of lease or memoranda, quit claim deeds and other
appropriate documentation reasonably requested by Lessee, all at Lessee's
expense, to evidence Lessor's release of its Lien against the Lease Collateral.
ARTICLE XVI
LEASE EVENTS OF DEFAULT
The occurrence of any one or more of the following events, whether any
such event shall be voluntary or involuntary or come about or be effected by
operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body, shall constitute a "Lease Event of Default":
(a) Lessee shall fail to make any payment of (i) Base Rent when
due and such failure shall continue for ten (10) days, (ii) any
Supplemental Rent when due and such failure shall continue for ten (10)
days after written demand therefor, or (iii) amounts payable pursuant to
the exercise of the Sale Option when due, or (iv) amounts payable
pursuant to Article XIV, Article XIX, Section 20.1(b) or Section 21.3
when due; or
(b) [intentionally omitted];
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(c) Lessee or Guarantor shall default in the performance or
observance of any term, covenant, condition or agreement on its part to
be performed or observed under Sections 11.1 or 12.1 hereof or Sections
5.11, 5.13, or 5.14 of the Participation Agreement; or
(d) Subject to Lessee's rights under Section 21.4, Lessee shall
fail to offer the Leased Property for sale in accordance with and
satisfy each of the terms, covenants, conditions and agreements set
forth at Articles XX and XXI in connection with and following its
exercise of the Sale Option, including each of Lessee's obligations at
Sections 21.1 and 21.2;
(e) any representation or warranty by Lessee or Guarantor in any
Operative Document or in any certificate or document delivered to
Lessor, or any Participant pursuant to any Operative Document shall have
been incorrect in any material respect when made, deemed made or
reaffirmed, as the case may be;
(f) (i) Guarantor shall fail to observe or perform any term,
covenant or condition of Guarantor (not included in any other clause of
this Article XVI) under (x) either Guarantee or (y) with respect to any
other Operative Document, within ten (10) days after written notice
thereof, or (ii) a Loan Event of Default shall have occurred;
(g) Lessee shall fail in any material respect to timely perform
or observe any covenant, condition or agreement (not included in any
other clause of this Article XVI) to be performed or observed by Lessee
hereunder or under any other Operative Document and such failure shall
continue for a period of 30 days (but in no event later than the Lease
Expiration Date) after the earlier to occur of (i) written notice
thereof from Lessor, Agent or any Participant or (ii) a Responsible
Officer of Lessee has knowledge thereof, provided, however, in the case
of a failure to comply with the requirements of Section 9.1(a), (b),
(d), (e), or (f) or Section 9.2 of this Lease, if such failure cannot in
Lessor's reasonably exercised judgment be cured in 30 days but can in
Lessor's reasonably exercised judgment be cured in 90 days, Lessee may
have an additional 60 days in which to cure such failure provided that
Lessee begins to cure such failure within 30 days following notice or
knowledge thereof as provided above and thereafter continues diligent
efforts to cure such failure;
(h) (i) Lessee, Guarantor or any Material Subsidiary shall
generally fail to pay, or admit in writing its general inability to pay,
its debts as they become due, or shall voluntarily commence any case or
proceeding or file any petition under any bankruptcy, insolvency or
similar law or seeking dissolution, liquidation or reorganization or the
appointment of a receiver, trustee, custodian or liquidator for itself
or a substantial portion of its property, assets or business or to
effect a plan or other arrangement with its creditors, or shall file any
answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition filed against it in any
bankruptcy, insolvency or
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similar case or proceeding, or shall be adjudicated bankrupt, or shall
make a general assignment for the benefit or creditors, or shall consent
to, or acquiesce in the appointment of, a receiver, trustee, custodian
or liquidator for itself or a substantial portion of its property,
assets or business, or (ii) corporate action shall be taken by Lessee,
Guarantor or any Material Subsidiary for the purpose of effectuating any
of the foregoing;
(i) involuntary proceedings or an involuntary petition shall be
commenced or filed against Lessee, Guarantor or any Material Subsidiary
under any bankruptcy, insolvency or similar law or seeking the
dissolution, liquidation or reorganization of any such Person or the
appointment of a receiver, trustee, custodian or liquidator for Lessee,
Guarantor or any Material Subsidiary or of a substantial part of the
property, assets or business of any such Person, or any writ, judgment,
warrant of attachment, execution or similar process shall be issued or
levied against a substantial part of the property, assets or business of
Lessee, Guarantor or any Material Subsidiary and such proceedings or
petition shall not be dismissed, or such writ, judgment, warrant of
attachment, execution or similar process shall not be released, vacated
or fully bonded, within 60 days after commencement, filing or levy, as
the case may be;
(j) any one or more judgments, writs or warrants of attachment,
executions or similar processes involving an aggregate amount in excess
of $50,000,000 (after taking into account the actual amounts of third
party insurance recoveries, offsets and contributions received, and
amounts thereof not yet received but which the insurer thereon has
acknowledged in writing its obligation to pay, without material
conditions) shall be entered or filed against Lessee, Guarantor or any
Material Subsidiary, and all such judgments and processes shall not be
dismissed, vacated, stayed, discharged or bonded for a period of
forty-five (45) days;
(k) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $50,000,000 which it shall
have become liable to pay under Title IV of ERISA; or notice of intent
to terminate a Material Plan shall be filed under Title IV of ERISA by
any member of the ERISA Group, any plan administrator or any combination
of the foregoing; or the PBGC shall institute proceedings under Title IV
of ERISA to terminate, to impose liability (other than for premiums
under Section 4007 of ERISA) in respect of, or to cause a trustee to be
appointed to administer any Material Plan; or a condition shall exist by
reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there shall
occur a complete or partial withdrawal from, or a default, within the
meaning of Section 4219(c)(5) of ERISA, with respect to, one or more
Multiemployer Plans which could cause one or more members of the ERISA
Group to incur a current payment obligation in excess of $50,000,000;
(l) any Operative Document to which Lessee or Guarantor is a
party or the security interest and lien granted under this Lease (except
in accordance with its terms),
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in whole or in part, terminates, ceases to be effective or ceases to be
the legal, valid and binding enforceable obligation of Lessee or
Guarantor, as applicable, or the security interest or lien securing
Lessee's obligations under the Operative Documents, in whole or in part,
ceases to be a perfected first priority security interest and lien, in
each case unless due to any act or failure to act on the part of Lessor
or Agent or (ii) Lessee or Guarantor shall directly or indirectly
contest the effectiveness, validity, binding nature or enforceability of
any Operative Document or any Lien granted under any Operative Document;
(m) Guarantor or any Subsidiary shall fail to make any payment in
respect of any Material Obligation when due or within any applicable
grace period;
(n) any event or condition shall occur which results in the
acceleration of the maturity of, or the early termination, payment or
satisfaction of, any Material Obligation;
(o) any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3
promulgated by the Securities and Exchange Commission under said Act) of
35% or more of the outstanding shares of common stock of Guarantor; or
during any period of 12 consecutive calendar months, individuals who
were directors of Guarantor on the first day of such period cease to
constitute a majority of the board of directors of Guarantor (other than
as a result of death or disability).
ARTICLE XVII
ENFORCEMENT
XVII.1 Remedies. Upon the occurrence of any Lease Event of Default and
the declaration thereof (but a Lease Event of Default shall be automatically
deemed to occur, and no declaration thereof shall be required, upon the
occurrence of a Lease Event of Default pursuant to clause (h) or (i) of Article
XVI), the Lease Balance due hereunder without further act shall be accelerated
and be deemed to be due and payable hereunder, and at any time thereafter, the
Lessor may, subject to Lessee's right to purchase the Leased Property pursuant
to Section 19.1 and so long as such Lease Event of Default is continuing, do one
or more of the following as Lessor in its sole discretion shall determine,
without limiting any other right or remedy Lessor may have on account of such
Lease Event of Default.
(a) By notice to Lessee, Lessor may terminate Lessee's right to
possession of the Leased Property subject to Lessee's right to purchase
the Site under Section 19.1 of this Lease; provided, however (i) no
reletting, reentry or taking of possession of any Leased Property (or
any portion thereof) by Lessor will be construed as an election on
Lessor's part to terminate this Lease unless a written notice of such
intention is given to Lessee,
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(ii) notwithstanding any reletting, reentry or taking of possession,
Lessor may at any time thereafter elect to terminate this Lease for a
continuing Lease Event of Default and (iii) no act or thing done by
Lessor or any of its agents, representatives or employees and no
agreement accepting a surrender of the Leased Property shall be valid
unless the same be made in writing and executed by Lessor. A notice
given in connection with unlawful detainer proceedings specifying a time
within which to cure a default shall terminate Lessee's right to
possession if Lessee fails to cure the default within the time specified
in the notice. Upon termination of Lessee's right to possession and
without further demand or notice, Lessee shall surrender possession and
vacate the Leased Property and deliver possession thereof, and Lessor
may re-enter the Leased Property and remove any persons in possession
thereof. Upon such termination of Lessee's right to possession, the
Lease shall terminate and Lessor may recover from Lessee:
(i) The worth at the time of award of the unpaid Rent
under the Lease (including Basic Rent and Supplemental Rent)
which had been earned at the time of termination;
(ii) The worth at the time of award of the amount by which
the unpaid Rent under the Lease (including Basic Rent and
Supplemental Rent) which would have been earned after termination
until the time of award exceeds the amount of such rental loss
that Lessee proves could have been reasonably avoided;
(iii) The worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time
of award exceeds the amount of such rental loss that Lessee
proves could be reasonably avoided;
(iv) Any other amount necessary to compensate Lessor for
all the detriment proximately caused by Lessee's failure to
perform Lessee's obligation under the Lease or which in the
ordinary course of things would be likely to result therefrom,
including the costs and expenses (including reasonable attorneys'
fees, advertising costs and brokers' commissions) of recovering
possession of the Leased Property, removing persons or property
therefrom, placing the Leased Property in good order, condition,
and repair, preparing and altering the Leased Property for
reletting, and all other costs and expenses of reletting; and
(v) Such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable
California law.
The "worth at the time of award" of the amounts referred to in clauses
(i) and (ii) above, is computed by allowing interest at the Overdue
Rate. The "worth at the time of award" of the amount referred to in
clause (iii) above is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time
of award plus one percent (1%);
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(b) Subject to Lessee's rights under Section 19.1, as more fully
set forth in each Lease Supplement, Lessor may sell all or any portion
of the Leased Properties at public or private sale, as Lessor may
determine;
(c) Lessor may, at its option, elect not to terminate this Lease
with respect to any Site or all of the Leased Property and continue to
collect all Basic Rent, Supplemental Rent, and all other amounts due to
Lessor (together with all costs of collection) and enforce Lessee's
obligations under this Lease as and when the same become due, or are to
be performed, and at the option of Lessor, upon any abandonment of any
Leased Property by Lessee or re-entry of same by Lessor, Lessor may
enforce, by suit or otherwise, all other covenants and conditions hereof
to be performed or complied with by Lessee hereunder and to exercise all
other remedies permitted by Section 1951.4 of the California Civil Code
or any amendments thereof or any successor laws which replace such
Section 1951.4;
(d) Unless all of the Leased Property has been sold in its
entirety, Lessor may, whether or not Lessor shall have exercised or
shall thereafter at any time exercise any of its rights under clause
(b), (c) or (d) of this Section 17.1 with respect to the Leased Property
or any portion thereof, demand, by written notice to Lessee specifying a
date (a "Termination Date") not earlier than five (5) days after the
date of such notice, that Lessee purchase, on such Termination Date for
a price equal to the Purchase Amount, the Leased Property subject to
this Lease, in accordance with the provisions of Section 19.3;
(e) Lessor may exercise any other right or remedy that may be
available to it under Applicable Laws, including any and all rights or
remedies under any other Operative Document, or proceed by appropriate
court action (legal or equitable) to enforce the terms hereof or to
recover damages for the breach hereof. Separate suits may be brought to
collect any such damages for any period(s), and such suits shall not in
any manner prejudice Lessor's right to collect any such damages for any
subsequent period(s), or Lessor may defer any such suit until after the
expiration of the Lease Term, in which event such suit shall be deemed
not to have accrued until the expiration of the Lease Term;
(f) Lessor may retain and apply against the Lease Balance or any
other amounts payable under the Operative Documents all sums which
Lessor would, absent such Lease Event of Default, be required to pay to,
or turn over to, Lessee pursuant to the terms of this Lease; or
(g) If a Lease Event of Default shall have occurred and be
continuing, Lessor, to the extent permitted by Applicable Laws, as a
matter of right and with notice to Lessee, shall have the right to apply
to any court having jurisdiction to appoint a receiver or receivers of
the Leased Property or any portion thereof, and Lessee hereby
irrevocably consents to any such appointment. Any such receiver(s) shall
have all of the usual
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powers and duties of receivers in like or similar cases and all of the
powers and duties of Lessor in case of entry, and shall continue as such
and exercise such powers until the date of confirmation of the sale of
such Property unless such receivership is sooner terminated.
(h) To the maximum extent permitted by Applicable Laws, Lessee
hereby waives the benefit of any appraisement, valuation, stay,
extension, reinstatement and redemption laws now or hereafter in force
and all rights of marshaling in the event of any sale of the Leased
Property, any portion thereof or any interest therein.
(i) Lessor shall be entitled to enforce payment of the
indebtedness and performance of the obligations secured hereby and to
exercise all rights and powers under this instrument or under any of the
other Operative Documents or other agreement or any Applicable Laws now
or hereafter in force, notwithstanding some or all of the obligations
secured hereby may now or hereafter be otherwise secured, whether by
mortgage, security agreement, pledge, lien, assignment or otherwise.
Neither the acceptance of this instrument nor its enforcement, shall
prejudice or in any manner affect Lessor's right to realize upon or
enforce any other security now or hereafter held by Lessor, it being
agreed that Lessor shall be entitled to enforce this instrument and any
other security now or hereafter held by Lessor in such order and manner
as Lessor may determine in its absolute discretion. No remedy herein
conferred upon or reserved to Lessor is intended to be exclusive of any
other remedy herein or by law provided or permitted, but each shall be
cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by
statute. Every power or remedy given by any of the Operative Documents
to Lessor or to which Lessor may otherwise be entitled, may be
exercised, concurrently or independently, from time to time and as often
as may be deemed expedient by Lessor. In no event shall Lessor, in the
exercise of the remedies provided in this Lease (including in connection
with the assignment of rents to Lessor, or the appointment of a receiver
and the entry of such receiver onto the Sites or any portion thereof),
be deemed a "mortgagee in possession", and the Lessor shall not in any
way be made liable for any act, either of commission or omission, in
connection with the exercise of such remedies, except for the exercise
of the remedies set forth Sections 17.1(c) and (j), within thirty (30)
days after the declaration of the occurrence of a Lease Event of Default
in contravention of Lessee's purchase right set forth in Section 19.1.
(j) Foreclosure; Power of Sale. Lessee hereby grants to Chicago
Title Company, as trustee (together with all successor trustees, the
"Trustee"), IN TRUST for the benefit of Lessor as security for the
obligations hereunder A SECURITY INTEREST AND LIEN against the Leased
Property WITH POWER OF SALE, and that, upon the occurrence of any Lease
Event of Default, Lessor shall have the power and authority, to the
extent provided by Applicable Laws, after proper notice and lapse of
such time as may be required by Applicable Laws, to cause the Trustee to
sell the Leased Property, or any portion thereof, at the time and place
of sale fixed by Lessor in said notice of sale, either as a whole, or in
separate lots or parcels or items and in such order as Lessor may elect,
at
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auction to the highest bidder for cash in lawful money of the United
States payable at the time of sale; accordingly, it is acknowledged that
A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY
ALLOW LESSOR TO TAKE THE APPLICABLE LEASED PROPERTY AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY LESSEE UNDER THIS
INSTRUMENT, and (ii) upon the occurrence of a Lease Event of Default,
Lessor, in lieu of or in addition to exercising any power of sale
hereinabove given, may proceed by a suit or suits in equity or at law,
whether for a foreclosure hereunder, or for the sale of the Leased
Property, or against Lessee on a recourse basis for the Lease Balance
and all accrued and unpaid interest on the Loans, all accrued and unpaid
Yield on the Certificate Amounts, and all other amounts owing by Lessee
under the Operative Documents with respect to such Leased Property, or
for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted, or for
the appointment of a receiver pending any foreclosure hereunder or the
sale of the Leased Property, or for the enforcement of any other
appropriate legal or equitable remedy.
Lessor acknowledges and agrees that upon the declaration of a Lease
Event of Default the amount due and owing by it to Lessor hereunder shall be the
Lease Balance and that to the maximum extent permitted by Applicable Laws,
Lessee waives any right to contest the Lease Balance as the liquidated sum due
upon acceleration of this Lease.
XVII.2 Proceeds of Sale; Deficiency. All payments received and amounts
held or realized by Lessor at any time when a Lease Event of Default shall exist
and after the Lease Balance shall have been accelerated pursuant to this Article
XVII as well as all payments or amounts then held or thereafter received by
Lessor and the proceeds of sale pursuant to Section 17.1(j) or pursuant to
either Lease Supplement shall be distributed forthwith upon receipt by Lessor in
accordance with Article III of the Loan Agreement.
XVII.3 Deed of Trust Remedies. Without limiting any other remedies set
forth in this Lease, Lessor and Lessee agree that upon the occurrence of a Lease
Event of Default (irrespective of whether a Loan Event of Default has occurred
or is occurring), Lessor and Agent shall have all the rights and may pursue any
of the remedies provided to Agent in the Deed of Trust, the terms and provisions
of which Deed of Trust are incorporated herein by this reference.
XVII.4 Remedies Cumulative; No Waiver; Consents. To the extent permitted
by, and subject to the mandatory requirements of, Applicable Laws, each and
every right, power and remedy herein specifically given to Lessor or otherwise
in this Lease shall be cumulative and shall be in addition to every other right,
power and remedy herein specifically given or now or hereafter existing at law,
in equity or by statute, and each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and as often and in such order as may be deemed expedient by Lessor, and
the exercise or the beginning of the exercise of any power or remedy shall not
be construed to be a waiver of the
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right to exercise at the same time or thereafter any other right, power or
remedy. Without limiting the foregoing, Lessee acknowledges that Lessor may
proceed against all or any part of the Leased Property in exercising any
remedies in respect of real property or personal property, or both. No delay or
omission by Lessor in the exercise of any right, power or remedy or in the
pursuit of any remedy shall impair any such right, power or remedy or be
construed to be a waiver of any default on the part of Lessee or be an
acquiescence therein. Lessor's consent to any request made by Lessee shall not
be deemed to constitute or preclude the necessity for obtaining Lessor's
consent, in the future, to all similar requests. No express or implied waiver by
Lessor of any Lease Event of Default shall in any way be, or be construed to be,
a waiver of any future or subsequent Lease Default or Lease Event of Default. To
the extent permitted by Applicable Laws and subject to the provisions of Section
17.1, Lessee hereby waives any rights now or hereafter conferred by statute or
otherwise that may require Lessor to sell, lease or otherwise use the Leased
Property, the other Lease Collateral or any part thereof in mitigation of
Lessor's damages upon the occurrence of a Lease Event of Default or that may
otherwise limit or modify any of Lessor's rights or remedies under this Article
XVII.
ARTICLE XVIII
RIGHT TO PERFORM FOR LESSEE
If Lessee shall fail to perform or comply with any of its agreements
contained herein and in Lessor's reasonably exercised judgment Lessee is not
acting diligently and appropriately to perform or comply with such agreements,
Lessor may, but shall not be obligated to, on five (5) Business Days' prior
notice to Lessee (except that in the case of an Emergency, Lessee shall permit
Lessor so to perform or comply on less than five (5) Business Days' notice
unless Lessee has a good faith reason not to permit Lessor to do so), perform or
comply with such agreement, and Lessor shall not thereby be deemed to have
waived any default caused by such failure, and the amount of such payment and
the amount of the out-of-pocket and reasonably allocated internal expenses of
Lessor (including reasonable attorneys' fees and expenses) incurred in
connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest thereon at the Overdue
Rate, shall be deemed Supplemental Rent, payable by Lessee to Lessor upon
demand.
ARTICLE XIX
EARLY TERMINATION OPTION AND OBLIGATION TO PURCHASE
XIX.1 Early Termination Option. Without limitation of Lessee's purchase
obligation pursuant to Section 19.3, on any Business Day, Lessee may, at its
option, purchase one or both Sites or, in the case of Section 19.2 below, a
portion of a Site (the "Early Termination Option") at a price equal to the
Purchase Amount; Lessee's right to purchase all or a portion of the Leased
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Property pursuant to this Section 19.1 or Section 19.2 below shall terminate
automatically upon (i) occurrence of a Lease Event of Default pursuant to
clauses (h) or (i) of Article XVI or (ii) the occurrence of any other Lease
Event of Default, unless in the case of a Lease Event of Default described in
this Section 19.1(ii) Lessee delivers a written notice of its election to
exercise this option to purchase all of the Leased Property not less than five
(5) days prior to the date of the purchase and consummates the purchase within
thirty (30) days following the occurrence and declaration of such Lease Event of
Default described in this Section 19.1(ii) (except that if a Lease Event of
Default pursuant to clause (h) or (i) of Article XVI has also occurred, then
such 30-day period shall be deemed to commence on the earlier of (x) the date of
the entry of order for relief or (y) the date of such declaration). In order to
exercise its option to purchase all or a portion of the Leased Property pursuant
to this Section 19.1 or Section 19.2 below and except as provided for in item
(ii) of the foregoing sentence, Lessee shall give to Lessor not less than sixty
(60) days' prior written notice of such election to exercise, which election
shall become irrevocable if not revoked or extended by written notice to Lessor
not later than ten (10) days prior to the end of such sixty (60) day period.
Upon receipt of the Purchase Amount, Lessor shall transfer the Leased Property
to Lessee, or its assigns, pursuant to Section 22.15, on the date set forth in
the written notice delivered by Lessee pursuant to this Section 19.1.
XIX.2 Partial Site Purchases. In addition to Lessee's option to purchase
one or both Sites as provided above, Lessee also shall have the option to
purchase a portion of a Site upon satisfaction of the following conditions: (i)
Lessee shall deliver to Lessor, Agent and the Participants an Appraisal setting
forth the Fair Market Value (as separate and independent pieces of property) of
the portion being purchased by Lessee as of the date of purchase and the
remaining portion of the applicable Site, (ii) the purchase price for the
portion of a Site being purchased shall be equal to the product of (A) a
fraction the numerator of which is the Fair Market Value of the portion being
purchased as determined in such Appraisal, and the denominator of which is the
sum of the Fair Market Values of the portion being purchased and remaining
portion of the Site as determined in such Appraisal and (B) the Site Balance for
such Site, (iii) the portion of the Site being purchased by Lessee and the
remaining portion shall each constitute a legal parcel under Applicable Laws
regarding subdivision, (iv) the remaining portion of the Site shall not be
dependent upon the portion being sold for services, utilities, parking or access
unless perpetual easements have been granted for the benefit of the remaining
portion of the Site in form satisfactory to the Required Participants and
otherwise in accordance with Applicable Laws regarding subdivision and zoning,
(v) any improvements situated on the remaining portion of the Site shall be
situated entirely on the remaining portion of the Site and no portion of the
improvements situated on the remaining portion of the Site shall be situated on
the portion of the Site being purchased by Lessee, (vi) Lessee shall deliver to
Lessor, Agent and the Participants a Title Policy complying with the
requirements of Section 3.1(l) of the Participation Agreement in an amount equal
to the Site Balance for such Site less the purchase price received for the
portion of the Site being sold, with such endorsements as reasonably requested
by Lessor or Agent, including endorsements with respect to the subdivision map
act and zoning, (vii) Lessee shall execute and deliver such modifications,
amendments or supplements to the Operative Documents to reflect the sale of such
real property and the payment of the purchase
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price thereof as reasonably requested by Lessor or Agent. In the event either
Site is re-parcelized, and in connection with or after the re-parcelization
Lessee obtains an Appraisal of each parcel comprising the Site, then Lessee may
designate such post-re-parcelization Appraisal as the appraisal to be used in
connection with any subsequent purchase by Lessee of any of such parcels for the
purpose of determining the purchase price for such parcel being purchased, and
no new Appraisal need be obtained so long as the configuration of the parcels
does not change.
XIX.3 Required Purchase. Lessee shall be obligated to purchase for the
Purchase Amount all of Lessor's interest in the Leased Property (a)
automatically and without notice upon the occurrence of any Lease Event of
Default specified in clauses(h) or (i) of Article XVI, or (b) immediately upon
written demand of Lessor upon the occurrence of any other Lease Event of Default
pursuant to and for the amount described in Section 17.1(d).
ARTICLE XX
END OF TERM OPTIONS
XX.1 End of Term Options. At least 180 days but not more than 360 days
before the last day of the Base Term and the Renewal Term, if effective, Lessee
shall, by delivery of written notice to Lessor and Agent, exercise one of the
following options:
(a) Renew this Lease with respect to all of the Leased Property
then subject to the Lease for one additional five-year period (the "Renewal
Option") on the terms and conditions set forth herein; provided, however, such
Renewal Option shall be available only at the end of the Base Term; or
(b) Purchase for cash for the Purchase Amount all, but not less
than all, of the Leased Property then subject to the Lease on the Lease
Expiration Date (the "Purchase Option"); and if Lessee shall have elected to
purchase the Leased Property, Lessor shall, upon the payment to Lessor of the
Purchase Amount then due and payable by Lessee under the Operative Documents,
transfer all of Lessor's right, title and interest in and to the Leased Property
pursuant to Section 22.15; or
(c) Sell on behalf of Lessor for cash to a purchaser all, but not
less than all, of the Leased Property then subject to the Lease (the "Sale
Option"). Lessee's right to sell the Leased Property pursuant to the Sale Option
shall be conditioned upon and subject to the fulfillment by Lessee of each of
the terms and conditions set forth in Article XXI.
XX.2 Election of Options. If Lessee fails to make a timely election
pursuant to Section 20.1 at the end of the Base Term; or, if effective, the
Renewal Term, or if as of the end of the Base Term Lessee has elected the
Renewal Term pursuant to Section 20.1(a) but fails to satisfy the conditions to
renewal set forth at Section 20.3, Lessee shall be deemed to have elected the
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Purchase Option. In addition, the Sale Option shall automatically be revoked
if there exists a Lease Event of Default or Significant Condemnation at any time
after the Sale Option is properly elected or Lessee fails to comply with any of
the terms and conditions set forth at Article XXI and Lessor shall be entitled
to exercise all rights and remedies provided in Article XVII. Lessee may not
elect the Sale Option if there exists on the date the election is made a Lease
Default, Lease Event of Default or a Significant Condemnation.
XX.3 Lease Renewal. Subject to the conditions set forth herein, Lessee
may, by written notice to Lessor, each Participant and Agent given not earlier
than 360 days and not later than 180 days prior to the fifth (5th) anniversary
of the Advance Date, request (a "Renewal Request") that the Lease Term be
extended to the day immediately preceding the tenth (10th) anniversary of the
Advance Date (the "Renewal Option"). Such renewal shall be subject to and
conditioned upon the following:
(a) on both the date of the Renewal Request and the date of the
commencement of the Renewal Term, no Lease Default or Lease Event of
Default shall have occurred and be continuing, and Lessee shall be
deemed to have represented the same to Lessor;
(b) Lessee shall not have exercised the Sale Option;
(c) the Final Maturity Date shall have been extended pursuant to
Section 2.13 of the Participation Agreement such that the Renewal Term
will expire on or before the extended Final Maturity Date; and
(d) on both the date of the Renewal Request and the date such
renewal becomes effective, either:
(i Guarantor shall have a senior unsecured debt rating (or
if no public debt is outstanding, a private letter rating) of at
least BBB by S&P (or Ba3 by Moody's) after giving effect to such
renewal and the extension of the Final Maturity Date, and
Guarantor's rating shall not be on credit watch with negative
implications; or
(ii) prior to the date such renewal becomes effective,
Lessee shall have provided to Agent for the sole benefit of the
Certificate Purchasers a valid and perfected first Lien in cash
or cash equivalents in an aggregate amount equal to the
Certificate Amounts to secure Certificate Trustee's obligations
to repay the Certificate Amounts, accrued Yield and all other
amounts owing to the Certificate Purchasers. The documentation
securing such security arrangement shall be in form and substance
reasonably satisfactory to the Certificate Purchasers and be
accompanied by opinions of counsel of Lessee regarding the
validity, perfection and priority of such interests.
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ARTICLE XXI
SALE OPTION
XXI.1 Sale Option Procedures. If Lessee elects the Sale Option, Lessee
shall use its best commercial efforts as nonexclusive agent for Lessor to obtain
the highest all cash purchase price for the purchase of all of the Leased
Property then subject to the Lease, and in the event Lessee receives any bid,
Lessee shall, within five (5) Business Days after receipt thereof, certify to
Lessor in writing the amount and terms of such bid and the name and address of
the party submitting such bid. Lessee shall bear all costs and expenses in
connection with any such bidding and sale process pursuant to this Section 21.1
as well as all costs and expenses incurred by any party (including a buyer or
potential buyer) to place the Leased Property in the condition required by
Section 9.1. None of the foregoing costs or expenses shall be deducted from the
Sale Proceeds or serve to reduce the purchase price to be paid for the Leased
Property. With respect to any sale made pursuant to this Article XXI and so long
as no Lease Event of Default shall have occurred and be continuing: (i) Lessee
shall transfer all of Lessee's right, title and interest in the Leased Property,
or cause the Leased Property to be transferred, to the bidder, if any, which
shall have submitted the highest all cash bid therefor in the same manner and in
the same condition and otherwise in accordance with all of the terms of this
Lease; (ii) subject to the prior or current payment by Lessee of all amounts due
under clause (iii) of this sentence, Lessor shall comply with any conditions to
transfer set forth in Section 21.2 and the transfer provisions of Section 22.15
in order to transfer Lessor's right, title and interest in and to the Leased
Property for cash to such bidder, such transfer to be made on the Lease
Expiration Date with respect to any bid accepted prior to such date or on the
date provided for at Section 21.4; and (iii) Lessee shall pay to Lessor on the
earlier of the Lease Expiration Date or immediately prior to such sale all of
the amounts required pursuant to Section 21.3. All costs related to a sale and
delivery pursuant to this Section 21.1, including the cost of sales agents
retained by Lessee, delivery of documents, filing and documentary transfer fees,
Taxes relating to or arising as a result of such transfer, title insurance,
certification and testing of the Leased Property, environmental audits, legal
costs, costs of notices, any advertisement or other similar costs shall be borne
entirely by Lessee, without regard to whether such costs were incurred by
Lessor, Lessee or any potentially qualified buyer. Neither Lessor nor any
Participant shall have any responsibility for procuring or financing any
purchaser.
XXI.2 Sale. Upon a sale of the Leased Property on the Lease Expiration
Date pursuant to Section 21.1 or following the Lease Expiration Date pursuant to
Section 21.4, Lessee shall, at Lessee's own expense, transfer the Leased
Property to the independent purchaser thereof free and clear of all Liens other
than Permitted Exceptions, in as good condition as it was on the Advance Date,
ordinary wear and tear excepted, and in compliance with all Applicable Laws (and
in any event without (x) any asbestos installed or maintained in any part of the
Leased Property, (y) any polychlorinated biphenyls (PCBs) in, on or used, stored
or located at the Leased Property, and (z) any other Hazardous Material). As a
condition to Lessee's rights hereunder, Lessee shall
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obtain and make all necessary Governmental Actions required by Lessee or Lessor
in connection with any third party sale and satisfy the requirements of Section
5.16 of the Participation Agreement with respect to the Site Improvements.
Lessee shall cooperate with the independent purchaser of the Leased Property in
order to facilitate the ownership and operation of the Leased Property by such
purchaser after the date of the sale or transfer. Prior to the Lease Expiration
Date, Lessee shall furnish to Certificate Trustee, Agent, the Participants and
the independent purchaser hereunder a reasonably current Environmental Audit
dated no earlier than 45 days prior to the Lease Expiration Date and addressed
to each such party in form and substance satisfactory to such parties. The
Environmental Audit shall be prepared by environmental consultants selected by
the Lessor at the direction of and in the reasonable discretion of the Required
Participants. If the Leased Property is sold during the Extended Remarketing
Period, such Environmental Audit shall be updated by Lessee to a date not later
than forty-five (45) days prior to the date of such sale and shall be subject to
the reevaluation of the Certificate Trustee, the Agent, the Participants and, if
applicable, the independent purchaser, on the same basis as provided for in the
previous sentences. If any such Environmental Audit indicates any exceptions,
Lessee also shall deliver prior to the Lease Expiration Date a Phase II
environmental assessment by such environmental consultant and a written
statement by such environmental consultant indicating that all such exceptions
have been remedied in compliance with Applicable Laws. If Lessee exercises the
Sale Option, Lessor shall at Lessee's expense be entitled to perform such
investigation, including obtaining reports of engineers and other experts as to
the condition and state of repair and maintenance of the Leased Property and as
to the compliance of the Leased Property with Applicable Laws including
Environmental Laws. The obligations of Lessee under this Section 21.2 shall
survive the expiration or termination of this Lease.
XXI.3 Application of Sale Proceeds and Recourse Payments.
(a On the Lease Expiration Date in connection with an exercise of
the Sale Option, Lessee shall pay to Lessor all Rent then due together with all
other amounts due and payable by Lessee to Lessor, Agent, any Participant or any
Indemnitee. If a sale of the Leased Property is completed on the Lease
Expiration Date, Lessee also shall pay to Lessor, as Supplemental Rent, from the
Sale Proceeds the aggregate outstanding Lease Balance as of the Lease Expiration
Date (as determined after the payment of all Rent due on such date). If the Sale
Proceeds exceed the Lease Balance as of the Lease Expiration Date, Lessee shall
retain the portion of the Sale Proceeds in excess thereof. If the Sale Proceeds
are less than the aggregate outstanding Lease Balance, Lessee shall pay or shall
cause to be paid to Lessor, as Supplemental Rent, on the Lease Expiration Date,
in addition to the Sale Proceeds, an additional amount equal to the amount that
the Lease Balance exceeds the Sale Proceeds.
(b The obligation of Lessee to pay the amounts determined
pursuant to Section 21.3(a) shall be recourse obligation of Lessee, and such
payments by Lessee shall not limit any other obligation of Lessee under the
Operative Documents, including pursuant to Article VII of the Participation
Agreement.
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XXI.4 Failure to Sell Premises. If Lessee shall exercise the Sale Option
and shall fail to sell all of the Leased Property on the Lease Expiration Date
in accordance with and subject to the provisions of Section 21.1, then Lessee
and Lessor hereby agree as follows:
(a In addition to the amounts required to be paid by Lessee
pursuant to the first sentence of Section 21.3(a), Lessee also shall pay to
Lessor on the Lease Expiration Date an amount equal to the Lease Balance and
Lessor shall apply such amount to a reduction of the amounts outstanding under
the Notes and Certificates.
(b Lessee shall continue to use its best commercial efforts as
non-exclusive agent for Lessor to sell the Leased Property on behalf of Lessor
in accordance with this Article XXI for the period (the "Extended Remarketing
Period") commencing on the Lease Expiration Date and ending on the earlier of
(i) the sale of all of the Leased Property in accordance with the provisions of
this Article XXI, (ii) the delivery of a written notice from Lessee to Lessor
pursuant to which Lessee notifies Lessor of its election to terminate its
remarketing rights hereunder, or (iii) the first anniversary of the Lease
Expiration Date. During the Extended Remarketing Period, Lessee shall have the
right to continue to occupy the Leased Property and this Lease shall remain in
full force and effect in accordance with all of its terms other than Lessee's
obligations to pay Basic Rent. Lessee shall remain bound by all of the
obligations and duties of Lessee under this Lease. On the last day of the
Extended Remarketing Period, Lessee shall pay to Lessor an amount equal to all
accrued and unpaid Supplemental Rent, and if Lessee has not sold all of the
Leased Property, Lessor shall transfer any remaining Leased Property to Lessee
pursuant to Section 22.15. During the Extended Remarketing Period, Lessee may
sell the Leased Property to one or more Persons pursuant to one or more sale
transactions, provided that each such sale must be for one or more legal
parcels. Each such sale must also comply with each of the requirements under
this Article XXI with respect to each such parcel sold. Notwithstanding the
foregoing, all such sales shall be consummated and Lessor shall transfer its
interest pursuant to Section 22.15 on one date during the Extended Remarketing
Period. Lessee shall give written notice to Lessor not less than thirty (30)
days prior to the date of such sale. Following Lessee's payment of all
Supplemental Rent as provided for in the preceding sentence, the Sales Proceeds
resulting from such sale or sales shall be retained by and be the property of
Lessee. All costs and expenses incurred by any Person, including Lessor, Agent
or any Participant in connection with any sale or transfer of the Leased
Property to Lessee or any third party, shall be borne by and be the sole
responsibility of Lessee.
(c Lessor reserves all rights under this Lease and the other
Operative Documents arising out of Lessee's breach of any provisions of this
Lease (including this Article XXI), whether occurring prior to, on or after the
Lease Expiration Date, including Lessee's breach of any of its obligations under
this Article XXI, including the right to sue Lessee for damages.
(d To the greatest extent permitted by Applicable Laws, Lessee
hereby unconditionally and irrevocably waives, and releases Lessor from, any
right to require Lessor during or following the Extended Remarketing Period to
assist in or cause a sale of the Leased
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Property or from any Claims that Lessee was unable to sell the Leased Property
at all or for any minimum purchase price or on any particular terms and
conditions, Lessee hereby agreeing that if Lessee shall elect the Sale Option,
its ability to sell the Leased Property on or prior to the Lease Expiration Date
and to cause any Person to submit a bid to Lessor pursuant to Section 21.1 shall
constitute full and complete protection of Lessee's interest hereunder.
ARTICLE XXII
MISCELLANEOUS
XXII.1 Binding Effect; Successors and Assigns; Survival. The terms and
provisions of this Lease, and the respective rights and obligations hereunder of
Lessor, Lessee, Agent, Arranger and the Participants shall be binding upon them
and their respective successors, legal representatives and assigns (including,
in the case of Lessor, any Person to whom Lessor may transfer the Leased
Property or any interest therein in accordance with the provisions of the
Operative Documents), and inure to their benefit and the benefit of their
respective permitted successors, legal representatives and assigns.
XXII.2 Severability. Any provision of this Lease that shall be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction, and Lessee shall remain
liable to perform its obligations hereunder except to the extent of such
unenforceability. To the extent permitted by Applicable Laws, Lessee hereby
waives any provision of law that renders any provision hereof prohibited or
unenforceable in any respect.
XXII.3 Notices. Unless otherwise specified herein, all consents,
notices, requests, demands or other communications to or upon the respective
parties hereto shall be in writing and shall be delivered and shall be deemed to
have been given in accordance with Section 9.3 of the Participation Agreement.
XXII.4 Amendment; Complete Agreements. Neither this Lease nor any of the
terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party against which
the enforcement of the termination, amendment, supplement, waiver or
modification shall be sought. This Lease, together with the other Operative
Documents, is intended by the parties as a final expression of their agreement
and as a complete and exclusive statement of the terms thereof, all
negotiations, considerations and representations between the parties having been
incorporated herein and therein. No course of prior dealings between the parties
or their officers, employees, agents or Affiliates shall be relevant or
admissible to supplement, explain, or vary any of the terms of this Lease or any
other Operative Document. Acceptance of, or acquiescence in, a course of
performance rendered
36
<PAGE> 39
under this or any prior agreement between the parties or their Affiliates shall
not be relevant or admissible to determine the meaning of any of the terms of
this Lease or any other Operative Document. No representations, undertakings, or
agreements have been made or relied upon in the making of this Lease other than
those specifically set forth in the Operative Documents.
XXII.5 Headings. The Table of Contents and headings of the various
Articles and Sections of this Lease are for convenience of reference only and
shall not modify, define or limit any of the terms or provisions hereof.
XXII.6 GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF,
THE STATE OF CALIFORNIA.
XXII.7 Discharge of Lessee's Obligations by its Affiliates. Lessor
agrees that performance of any of Lessee's obligations hereunder by one or more
of its Affiliates or one or more sublessees of the Leased Property or any part
thereof shall constitute performance by Lessee of such obligations to the same
extent and with the same effect hereunder as if such obligations were performed
by Lessee, but no such performance shall excuse Lessee from any obligation not
performed by it or on its behalf under the Operative Documents.
XXII.8 Liability of Lessor Limited. The parties hereto agree that Bank
shall have no personal liability whatsoever to Lessee or its respective
successors and assigns for any Claim based on or in respect of this Lease or any
of the other Operative Documents or arising in any way from the transactions
contemplated hereby or thereby; provided, however, that Bank shall be liable in
its individual capacity XXII.8.1 for its own willful misconduct or gross
negligence (or negligence in the handling of funds), XXII.8.2 for liabilities
that may result from the incorrectness of any representation or warranty
expressly made by Bank in its individual capacity in Section 4.3 of the
Participation Agreement or from the failure of Bank to perform Bank's covenants
and agreements set forth in Section 6.5 of the Participation Agreement, or
XXII.8.3 for any Tax based on or measured by any fees, commission or
compensation received by Bank for acting as Lessor as contemplated by the
Operative Documents. It is understood and agreed that, except as provided in the
preceding proviso: (a) Bank shall have no personal liability under any of the
Operative Documents as a result of acting pursuant to and consistent with any of
the Operative Documents; (b all obligations of Bank to Lessee are solely
nonrecourse obligations except to the extent that Bank has received payment from
others; (c) all such personal liability of Bank is expressly waived and released
as a condition of, and as consideration for, the execution and delivery of the
Operative Documents by Bank; and (d) this Lease is executed and delivered by
Bank solely in the exercise of the powers expressly conferred upon Bank as
Lessor under the Trust Agreement.
XXII.9 Estoppel Certificates. Each party hereto agrees that at any time
and from time to time during the Lease Term, it will promptly, but in no event
later than thirty (30) days after request by the other party hereto, execute,
acknowledge and deliver to such other party or to any
37
<PAGE> 40
prospective purchaser (if such prospective purchaser has signed a commitment
letter or letter of intent to purchase the Leased Property or any part thereof
or to purchase any Note or Certificate), assignee or mortgagee or third party
designated by such other party, a certificate stating (a) that this Lease is
unmodified and in force and effect (or if there have been modifications, that
this Lease is in force and effect as modified, and identifying the modification
agreements); (b) the date to which Basic Rent has been paid; (c) in the case of
an estoppel certificate to be given by Lessee, whether or not there is any
existing default by Lessee in the payment of Basic Rent or any other sum of
money hereunder, and whether or not there is any other existing Lease Default or
Lease Event of Default with respect to which a notice of default has been
served, and, if there is any such default, specifying the nature and extent
thereof; (d) in the case of an estoppel certificate to be given by Lessee,
whether or not, to the knowledge of Lessee after due inquiry and investigation,
there are any purported setoffs, defenses or counterclaims against enforcement
of the obligations to be performed hereunder existing in favor of Lessee; and
(e) other items that may be reasonably requested; provided, that no such
certificate may be requested unless the requesting party has a good faith reason
for such request. In addition, Lessee, promptly, but in no event later than
thirty (30) days after request by any other party hereto, shall obtain and
deliver to such other party or to any prospective purchaser (if such prospective
purchaser has signed a commitment letter or letter of intent to purchase the
Leased Property or any part thereof or to purchase any Note or Certificate),
assignee, mortgagee or third party designated by such other party, an estoppel
certificate from each subtenant under each sublease containing such items as
reasonably requested by the party requesting the same; provided, that no such
certificate may be requested unless the requesting party has a good faith reason
for such request.
XXII.10 No Joint Venture. Any intention to create a joint venture or
partnership relation hereunder or pursuant to any other Operative Document
between Lessor and Lessee is hereby expressly disclaimed.
XXII.11 No Accord and Satisfaction. The acceptance by Lessor of any sums
from Lessee (whether as Basic Rent or otherwise) in amounts which are less than
the amounts due and payable by Lessee hereunder is not intended, nor shall be
construed, to constitute an accord and satisfaction of any dispute between
Lessor and Lessee regarding sums due and payable by Lessee hereunder, unless the
Required Participants specifically deem it as such in writing.
XXII.12 No Merger. In no event shall the leasehold estate of Lessee
hereunder or the rights and interests of the holder of any Notes or certificates
secured by a Lien in this Lease, merge with any interests, estates or rights of
Lessor in or to the Leased Property, it being understood that such leasehold
estate of Lessee hereunder and, the rights and interests of the holder of any
Notes or certificates secured by a Lien in this Lease, shall be deemed to be
separate and distinct from Lessor's interests, estates and rights in or to the
Leased Property, notwithstanding that any such interests, estates or rights
shall at any time or times be held by or vested in the same Person.
38
<PAGE> 41
XXII.13 Successor Lessor. Lessee agrees that, in the case of the
appointment of any successor certificate trustee pursuant to the Trust
Agreement, such successor certificate trustee shall, upon written notice by such
successor certificate trustee to Lessee, succeed to all the rights, powers and
title of Lessor hereunder and shall be deemed to be Lessor for all purposes
hereof and without in any way altering the terms of this Lease or Lessee's
obligations hereunder.
XXII.14 Survival. The obligations of Lessee to be performed under this
Lease prior to the Lease Expiration Date and the obligations of Lessee pursuant
to Sections 4.1, 4.2, 4.4, Article V, Article VI (the last sentence thereof),
Article XVII, Article XVIII, Article XX, Article XXI and Article XXII hereof and
the obligations of Lessee under the other Operative Documents which by their
terms survive shall survive the expiration or termination of this Lease. The
extension of any applicable statute of limitations by Lessor, Lessee, any
Participant or any other Indemnitee shall not affect such survival.
XXII.15 Transfer of Leased Property.
(a Whenever pursuant to any provision of this Lease Lessor is
required to transfer the Leased Property to Lessee or to an independent third
party, such transfer shall be made at Lessee's expense by the transfer by a deed
without covenants or warranties of title, except for matters arising by, through
or under Lessor, of all of Lessor's interest in and to the Leased Property on an
"as is, where is, with all faults" basis free and clear of all Lessor Liens and
otherwise without recourse, representation or warranty of any kind, and together
with the due assumption by Lessee (or such third party) of, and due release of
Lessor from, all obligations relating to the Leased Property or any of the
Operative Documents. In connection with any transfer to an independent third
party, Lessee shall execute and deliver such customary and reasonable documents,
certificates and estoppels as may be required to facilitate the transfer of the
Leased Property. Any provision in this Lease or any other Operative Document to
the contrary notwithstanding, Lessor shall not be obligated to make any such
transfer until Lessor and the Participants have received all Rent and other
amounts due and owing hereunder and under the other Operative Documents
including any Break Funding Amount. At or subsequent to the transfer or return
of the Leased Property, Lessee will provide Lessor with such lien and title
searches as Lessor may reasonably request to demonstrate to Lessor's
satisfaction that the Leased Property is subject to no Liens for which Lessor
would be liable under any warranties of title.
(b Lessee may assign to another Person its right, upon a purchase
by Lessee, to take title to the Leased Property pursuant to Section 20.1(b);
provided, that (i) Lessee shall exercise any option, (ii) such assignee shall be
bound by the provisions of Section 20.1(b), (iii) Lessee shall have represented
by an instrument in writing and delivered to Lessor that all necessary
Governmental Actions with respect to such transfer, including the purchase of
the Leased Property by any other Person as contemplated herein, have been
obtained or made, as applicable, and (iv) no such assignment shall release
Lessee or Guarantor from its obligations under the Operative Documents, and
Lessee shall remain personally liable to Lessor for the payment of all amounts
due under any such Section and this Section 22.15.
39
<PAGE> 42
XXII.16 Enforcement of Certain Warranties.
(a Unless a Lease Event of Default shall have occurred and be
continuing, Lessor authorizes Lessee (directly or through agents), at Lessee's
expense, to assert, during the Lease Term, all of Lessor's rights (if any) under
any applicable warranty and any other claim that Lessee or Lessor may have under
the warranties provided to Lessor in connection with the Leased Property and
Lessor agrees to cooperate, at Lessee's expense, with Lessee and its agents in
asserting such rights. Any amount recovered by Lessee under any such warranties
shall be paid to Lessee, subject to Section 22.17.
(b Notwithstanding the foregoing provisions of this Section
22.16, so long as a Lease Event of Default or Lease Default shall have occurred
and be continuing, any amount that would otherwise be retained by Lessee
pursuant to Section 22.16(a), shall be paid to Lessor as security for the
obligations of Lessee under this Lease, shall be invested by Lessor in
accordance with Section 23.17 in Permitted Investments and, if a Lease Event of
Default is continuing, may be applied to the obligations of Lessee hereunder,
and, at such time thereafter as no Lease Event of Default or Lease Default shall
be continuing, such amount and gain thereon shall be paid promptly to Lessee to
the extent not previously applied in accordance with the terms of this Lease.
XXII.17 Security Interest in Funds. As long as a Lease Event of Default
or Lease Default shall have occurred and be continuing, any amount that would
otherwise be payable to Lessee under the Operative Documents shall be paid to or
retained by Lessor (including amounts to be paid to Lessee pursuant to Article
XIII or Section 22.16) as security for the performance by Lessee in full of its
obligations under this Lease and the other Operative Documents and, if a Lease
Event of Default is continuing, it may be applied to the obligations of Lessee
hereunder and under the other Operative Documents. At such time as no Lease
Event of Default or Lease Default shall be continuing, such amounts, net of any
amounts previously applied to Lessee's obligations hereunder or under any other
Operative Documents, shall be paid to Lessee. Any such amounts which are held
pending payment to Lessee or application hereunder shall be invested by Lessor
as directed from time to time in writing by Lessee (provided, however, that if a
Lease Event of Default has occurred and is continuing, it will be directed by
Lessor), and at the expense and risk of Lessee, in Permitted Investments. Any
gain (including interest received) realized as the result of any such investment
(net of any fees, commissions and other expenses, if any, incurred in connection
with such investment) shall be applied from time to time in the same manner as
the principal invested. Lessee will promptly pay to Lessor on demand, the amount
of any loss realized as the result of any such investment (together with any
fees, commissions and other expenses, if any, incurred in connection with such
investment), such amount to be held, paid and applied in the same manner as
other amounts subject to this Section 22.17.
XXII.18 Recording of Deed of Trust and Memorandum of Lease. Concurrently
with the execution and delivery of this Lease, Lessor and Lessee shall execute,
acknowledge and cause to be recorded a Lease Supplement and Deed of Trust for
each Site in the official records of the
40
<PAGE> 43
County where each such Site is located and in such other places as Lessor deems
necessary to perfect the Liens granted pursuant to this Lease and the other
Operative Documents.
XXII.19 Nature of Transaction. Lessor and Lessee acknowledge and agree
that the intent of the parties with respect to the nature of the transaction is
as set forth in Section 2.7 of the Participation Agreement.
[ Signatures on next page ]
41
<PAGE> 44
IN WITNESS WHEREOF, the undersigned have each caused this Lease to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the day and year first above written.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., not in its
individual capacity except as
expressly stated herein, but solely
as Certificate Trustee
By: _____________________________
Name Printed: ____________________
Title: ___________________________
CISCO TECHNOLOGY, INC., a California
corporation, as Lessee
By: _____________________________
Name Printed: ____________________
Title: ___________________________
S-1
<PAGE> 45
ACKNOWLEDGMENT- CERTIFICATE TRUSTEE
STATE OF CALIFORNIA )
)
COUNTY OF ___________ )
On _______________, 1998, before me, ______________________, a Notary
Public in and for said State, personally appeared _________________________ and
___________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature ________________________________ (Seal)
<PAGE> 46
ACKNOWLEDGMENT-CISCO
STATE OF CALIFORNIA )
)
COUNTY OF ___________ )
On _______________, 1998, before me, ______________________, a Notary
Public in and for said State, personally appeared _________________________ and
___________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature ________________________________ (Seal)
<PAGE> 47
RECEIPT FOR COUNTERPART NO. 1
STATE STREET BANK AND TRUST COMPANY, not in its individual capacity
except as expressly stated herein, but solely as Paying and Collateral Agent.
By: ______________________________________
Name Printed: ________
Title: ________
<PAGE> 48
EXHIBIT A
Legal Description of the Sites
A-1
<PAGE> 49
EXHIBIT B
Form of Lease Supplement
B-1
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS; INTERPRETATION; FULL RECOURSE..................................-1-
ARTICLE II LEASE OF SITES; TERM........................................................-2-
2.1. Acceptance and Lease of Sites................................................-2-
2.2. Acceptance Procedure for Site................................................-2-
2.3. Term.........................................................................-2-
2.4. Title........................................................................-2-
ARTICLE III OTHER PROPERTY..............................................................-3-
ARTICLE IV RENT........................................................................-3-
4.1. Basic Rent...................................................................-3-
4.2. Supplemental Rent............................................................-4-
4.3. Method and Amount of Payment.................................................-4-
4.4. Late Payment.................................................................-5-
ARTICLE V NET LEASE...................................................................-5-
ARTICLE VI UTILITY CHARGES.............................................................-7-
ARTICLE VII CONDITION OF LEASED PROPERTY................................................-7-
7.1. Waivers......................................................................-7-
ARTICLE VIII NON-INTERFERENCE............................................................-8-
8.1. Non-Interference.............................................................-8-
8.2. Certain Duties and Responsibilities of Lessor................................-8-
ARTICLE IX MAINTENANCE AND REPAIR; ALTERATIONS
AND ADDITIONS.............................................................-9-
9.1. Maintenance and Repair; Compliance With
Applicable Law.............................................................-9-
9.2. Improvements and Alterations to Leased Property..............................-9-
9.3. Title to Alterations........................................................-11-
9.4. Maintenance and Repair Reports..............................................-11-
9.5. Permitted Contests..........................................................-12-
9.6. Warrant of Title............................................................-12-
9.7. Grants and Releases of Easements on the Sites...............................-13-
9.8. Inspection..................................................................-14-
9.9. Reports.....................................................................-14-
ARTICLE X USE........................................................................-15-
</TABLE>
<PAGE> 51
<TABLE>
<S> <C> <C>
ARTICLE XI INSURANCE..................................................................-15-
11.1. Required Coverages.........................................................-15-
11.2. Self-Insurance Rights......................................................-17-
11.3. Delivery of Insurance Certificates.........................................-18-
ARTICLE XII ASSIGNMENT AND SUBLEASING..................................................-18-
12.1. Assignment by Lessee.......................................................-18-
12.2. Subletting.................................................................-18-
ARTICLE XIII CASUALTY AND CONDEMNATION; ENVIRONMENTAL
MATTERS..................................................................-19-
13.1. Casualty and Condemnation..................................................-19-
13.2. Negotiations...............................................................-21-
13.3. Environmental Matters......................................................-21-
13.4. Notice of Environmental Matters............................................-22-
ARTICLE XIV PARTIAL TERMINATIONS.......................................................-22-
14.1. Partial Termination upon Certain Events....................................-22-
14.2. Termination Procedures.....................................................-23-
ARTICLE XV OWNERSHIP, GRANT OF LIEN AND FURTHER
ASSURANCES...............................................................-23-
15.1. Grant of Lien and Security Interest........................................-23-
ARTICLE XVI LEASE EVENTS OF DEFAULT....................................................-24-
ARTICLE XVII ENFORCEMENT................................................................-28-
17.1. Remedies...................................................................-28-
17.2. Proceeds of Sale; Deficiency...............................................-33-
17.3. Deed of Trust Remedies.....................................................-33-
17.4. Remedies Cumulative; No Waiver; Consents...................................-33-
ARTICLE XVIII RIGHT TO PERFORM FOR LESSEE................................................-34-
ARTICLE XIX EARLY TERMINATION OPTION AND OBLIGATION TO PURCHASE........................-34-
19.1. Early Termination Option...................................................-34-
19.2. Partial Site Purchases.....................................................-35-
19.3. Required Purchase..........................................................-36-
ARTICLE XX END OF TERM OPTIONS........................................................-36-
20.1. End of Term Options........................................................-36-
</TABLE>
<PAGE> 52
<TABLE>
<S> <C> <C>
20.2. Election of Options........................................................-37-
20.3 Lease Renewal..............................................................-37-
ARTICLE XXI SALE OPTION................................................................-38-
21.1. Sale Option Procedures.....................................................-38-
21.2. Sale.......................................................................-39-
21.3. Application of Sale Proceeds and Recourse
Payments.................................................................-40-
21.4. Failure to Sell Premises...................................................-40-
ARTICLE XXII MISCELLANEOUS..............................................................-42-
22.1. Binding Effect; Successors and Assigns;
Survival.................................................................-42-
22.2. Severability...............................................................-42-
22.3. Notices....................................................................-42-
22.4. Amendment; Complete Agreements.............................................-42-
22.5. Headings...................................................................-43-
22.6. GOVERNING LAW..............................................................-43-
22.7. Discharge of Lessee's Obligations by its
Affiliates...............................................................-43-
22.8. Liability of Lessor Limited................................................-43-
22.9. Estoppel Certificates......................................................-44-
22.10. No Joint Venture..........................................................-45-
22.11. No Accord and Satisfaction................................................-45-
22.12. No Merger.................................................................-45-
22.13. Successor Lessor..........................................................-45-
22.14. Survival..................................................................-45-
22.15. Transfer of Leased Property...............................................-46-
22.16. Enforcement of Certain Warranties.........................................-46-
22.17. Security Interest in Funds................................................-47-
22.18. Recording of Deed of Trust and Memorandum
of Lease................................................................-48-
22.19. Nature of Transaction.....................................................-48-
</TABLE>
<PAGE> 1
EXHIBIT: 10.54
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered
into effective as of February 24, 1998, by and between SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation ("Landlord"), and CISCO SYSTEMS, INC., a
California corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Lease dated May 20,
1993, as amended by that certain First Amendment to Lease dated May 19, 1994
(the "Lease"), pursuant to which Landlord leased to Tenant those certain
buildings to be constructed on land located in San Jose, California, as more
particularly described in the Lease and on Exhibit "A" attached hereto and
incorporated herein by this reference ("Premises"). Any capitalized terms used
but not defined in this Second Amendment which are defined in the Lease shall
have the meaning ascribed in the Lease.
B. Landlord and Tenant now desire too amend the terms of the Lease, as
more particularly described in this Second Amendment.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereby agree as follows:
1. Term. The Term of the Lease is hereby extended for an additional
period of five (5) years and shall expire on February 24, 2003.
2. Addresses for Notices.
(a) The address for copies of all Notices to the Landlord set
forth in Section 1.9 of the Lease is hereby deleted and replaced with
the following:
"Graham & James, LLP
One Maritime Plaza, Suite 300
San Francisco, CA 94111
Attn: Bruce W. Hyman, Esq."
(b) The address for Notices to Tenant set forth in Section 1.9
of the Lease is hereby deleted and replaced with the following:
"Tenant: Cisco Systems, Inc.
170 West Tasman Drive
San Jose, CA 95134-1706
Attn: Vice President Worldwide Real Estate
and Workplace Resources
-1-
<PAGE> 2
with a copy to: Cisco Systems, Inc.
170 West Tasman Drive
San Jose, CA 95134-1706
Attn: Treasurer
and a copy to: Brobeck, Phleger & Harrison
550 West C Street, Suite 1200
San Diego, CA 92101
Attn: Ellen E. Jamason"
3. Address for Rent Payments. The address for Rent Payments set forth in
Section 1.10 of the Lease is hereby deleted and replaced with the following:
"Sumitomo Bank Leasing and Finance, Inc.
277 Park Avenue
New York, NY 10172
Attn: Chief Credit Officer"
4. Definitions. Article 2 of the Lease is hereby amended as follows:
(a) Security Deposit. The following defined term is hereby added
to Article 2 of the Lease:
"2.52(a) Security Deposit. "Security Deposit" shall have
the meaning set forth in Section 5.8:
5. Security Deposit. Article 5 of the Lease is hereby amended to add the
following Section 5.8:
5.8 Security Deposit.
(a) On or before 12:00 p.m. New York time on February 24, 1998,
Tenant shall deliver to SBNYTC a security deposit payment (the "Security
Deposit") in an amount equal to the Guaranteed Residual Value, which
amount is approximately between eighty-six percent (86%) and
eighty-seven percent (87%) of the Advances, not to exceed Fifty-Nine
Million, Nine Hundred Sixty-Seven Thousand, Five Hundred Thirty-Eight
and 1/100 Dollars ($59,967,538.01). Landlord shall notify Tenant of the
amount of the Security Deposit payment due from Tenant. Tenant hereby
grants to Landlord a security interest in the Security Deposit and
Landlord may use and commingle the Security Deposit with other funds of
Landlord.
(b) From and after the date of the Security Deposit by Tenant,
the Security Deposit shall earn interest at the one (1) month LIBOR
Rate. Landlord shall pay such interest to Tenant on each Rent Payment
Date thereafter by wire transfer to such account as Tenant shall specify
from time to time by written notice to Landlord; provided,
-2-
<PAGE> 3
however, that (i) Landlord shall not be required to pay such interest
amount so long as any Base Rent is due but unpaid, and (ii) if the Base
Rent due on any Rent Payment Date is not received by 12:00 p.m. New York
time, any such interest payment on the Security Deposit shall not be due
from Landlord to Tenant until the next Business Day. Any such interest
payment that is not paid by Landlord when due shall bear interest at the
federal funds rate for the first three (3) days of delinquency and
thereafter at the Lease Rate.
(c) The Security Deposit shall be held by Landlord as security
for the payment of Base Rent and Additional Rent by Tenant pursuant to
this Lease. If at any time during the Term any Base Rent or Additional
Rent shall be overdue, then Landlord may at its election (but shall not
be required to) appropriate and apply any portion of the Security
Deposit to the payment of any such overdue Base Rent or Additional Rent.
Should the entire Security Deposit, or any portion thereof, be
appropriated and applied by Landlord as provided herein, then Tenant
shall immediately, after receipt of written demand by Landlord, pay to
Landlord a sufficient sum in cash to restore the Security Deposit to the
amount required hereunder.
(d) In addition, the Security Deposit shall also be held by
Landlord as security for the payment of any amount due Landlord under
Section 17.4(b) or Section 19.1(a) or for the payment of the Purchase
Price in the event Tenant exercises the Purchase Option pursuant to
Section 19.1. At the end of the Term, any portion of the Security
Deposit then held by Landlord and not applied as provided in Section
5.8(c) above or in the preceding sentence shall be returned to Tenant;
provided, however, that Landlord and Tenant shall apply and set off the
Security Deposit or any portion thereof against any amounts owed by
Tenant to Landlord at the end of the Term (whether pursuant to Section
19.1, Section 19.2 or otherwise). Any and all portions of the Security
Deposit not applied to amounts owed by Tenant to Landlord shall be
returned to Tenant within ten (10) days after the end of the Term."
6. Liability Insurance. Section 7.1 of the Lease is hereby amended by
deleting the last three lines on page 20 and substituting the following:
"than the following: (1) Two Million Dollars ($2,000,000.00) per person;
and (2) One Million Dollars ($1,000,000.00) for property damage."
7. All-Risk Insurance. Section 7.3 is hereby amended by deleting clauses
(b) and (c), and replacing them with the following:
"(b) a policy or policies of difference in conditions insurance
covering the Improvements, providing coverage against loss or damage by
earthquake and flood as, under good insurance practice, from time to
time are insured against under earthquake coverage for properties of
similar character, age and location in an amount or amounts not less
than the lesser of (i) one hundred percent (100%) of the then actual
replacement cost (exclusive of land, foundation, excavations, grading,
landscaping, architectural and development fees and other items
customarily excluded from such coverage and without an deduction for
depreciation) or (ii) the amount of the Equity Funded Amount."
-3-
<PAGE> 4
8. Self Insurance. Article 7 is further amended by adding the following
Section 7.7:
"The Tenant shall have the right to self-insure with respect to
any of the insurance required under this Lease so long as (i) the Tenant
is a publicly traded domestic corporation whose stock is traded on a
nationally recognized exchange; (ii) the Tenant has not assigned this
Lease; (iii) the Tenant maintains a Consolidated Tangible Net Worth of
at least $1,000,000,000 according to its most recent audited financial
statement; (iv) the Tenant has a senior unsecured credit rating of BBB
or better from a nationally recognized rating agency; and (v) the Tenant
governs and manages its self-insurance program in a manner consistent
with programs managed by prudent businesses whose stock is publicly
traded on nationally recognized exchanges. Upon request the Tenant shall
supply the Landlord from time to time with evidence reasonably
satisfactory to the Landlord of the Tenant's net worth and the
satisfaction of the condition set forth above. If the Tenant elects to
self-insure, the Tenant shall be responsible for losses or liabilities
which would have been assumed by the insurance companies which would
have issued the insurance required of the Tenant under the Lease. The
Tenant will notify the Landlord in advance of any period for which it
intends to self-insure and shall provide Landlord with satisfactory
evidence that it complies with these requirements in order to give the
Tenant an opportunity to confirm the satisfaction of the conditions set
forth above. For so long as the Tenant self-insures, the tenant, for
applicable periods, shall and does hereby indemnify and hold harmless
the Landlord, its officers, directors, agents, employees and
representatives from and against all costs, damages or expenses
(including reasonable attorneys' fees) incurred or paid by the Tenant as
a result of any claim customarily covered by a broad-form policy of
commercial general liability insurance, including a contractual
liability endorsement."
9. Landlord's Right to Sell. Section 13.2 of the Lease is hereby amended
by adding the following sentence:
"In the event of any sale or other transfer by Landlord of its
interest in this Lease, Landlord, concurrently with the effective date
of the transfer, shall deliver the Security Deposit to the transferee,
and shall give notice thereof to Tenant."
10. Events of Major Default. Section 17.2(d) shall be amended to provide
that Tenant shall not be in default so long as it is fully complying with the
self-insurance provision of Section 7.7 above.
11. Failure to Replenish Under Pledge Agreement. Section 17.2(f) of the
Lease is hereby deleted in its entirety and replaced with the following:
"(f) Failure to Replenish Under Pledge Agreement. Tenant's
failure to replenish the collateral in 'Collateral Accounts A and B' as
defined in and under the Pledge Agreement (as defined in Section 13.1
(b)) after notice and cure periods provided in the Pledge Agreement or
to deliver the Security Deposit."
-4-
<PAGE> 5
12. Default Under other Facility. Section 17.2(g) is hereby modified to
read as follows:
"A payment default (after applicable notice and cure periods)
under any credit facility of Tenant which equals or exceed Twenty
Million Dollars ($20,000,000.00)."
13. Interest Coverage Ratio and Minimum Tangible Net Worth. Section
17.2(h) of the Lease is hereby deleted and replaced with the following:
"(h) Interest Coverage Ratio and Minimum Tangible Net Worth. The
Earnings Before Interest and Taxes divided by Interest Expense (as such
terms are defined in accordance with generally accepted accounting
principles promulgated by the American Institute of Certified Public
Accountants consistently applied and as in effect from time to time)
falls below 6.00 times, then Tenant shall be required to maintain a
Minimum Consolidated Tangible Net Worth, defined as the sum of (i)
$2,800,000,000.00, and (ii) 25% of net income (without subtracting for
losses) earned in each of Tenant's fiscal quarters during the Term,
commencing with Tenant's fourth fiscal quarter for 1997."
14. Landlord's & Default. The following Section 17.9 shall be added:
"In addition to Tenant's Rights set forth in Section 17.8 above,
in the event of a default by Landlord under Section 20.5, Tenant
shall have the right to cure such default on behalf of and at
Landlord's expense, without prior notice to Landlord. In
addition, in the event of any default by Landlord under Section
20.3, 20.4 or 20.5, Tenant shall have the right to exercise its
Purchase Option pursuant to Section 19.1 hereof."
15. Mandatory Purchase/Sale of Premises. The second to the last sentence
of Section 19.2 of the Lease is hereby deleted and replaced with the following:
"In the event of default, breach or violation by Tenant of any
of Tenant's obligations under this Section 19.2, Tenant shall
have no liability to Landlord or any other party in excess of an
amount equal to the then-existing Guaranteed Residual Value less
a credit equal to any of the Collateral or the Security Deposit,
as the case may be, which Sumitomo or any other Fee Mortgagee
has used, applied, or otherwise come into possession of, and
Landlord shall have no recourse, claim or counterclaim
whatsoever against Tenant in excess of such amount on account of
such default, breach or violation."
16. Additional Covenants of Landlord. The following Sections 20.4 and
20.5 shall be deleted and the following substitution in place thereof:
" 20.4 Landlord Equity. Landlord covenants and agrees that
during the Term of the Lease, Landlord shall maintain a residual
equity capital investment so that Landlord will not be deemed to
be a Special Purpose Entity.
-5-
<PAGE> 6
20.5 Default Under Authorized Loan. Landlord shall not, without
Tenant's express prior written consent, default under any
Authorized Loan, or any loan documents relating to such
Authorized Loan, where such default does not arise from an Event
of Major Default by Tenant under this Lease."
17. Collateral. The following sentence is hereby added to Section 21.18
of the Lease:
"Upon delivery of the Security Deposit by Tenant, the Collateral
shall be released from the lien created by the Pledge Agreement
to Tenant."
18. Financial Reporting. The language beginning with the word
"quarterly" in the fifth line of Section 21.24 of the Lease and ending with the
word "Term" is hereby deleted and replaced with the following:
"quarterly, within fifty (50) days after the end of each of
Tenant's first three (3) fiscal quarters of the fiscal year
during the Term"
19. Annual Negotiations. Article 21 of the Lease is hereby amended to
add the following Section 21.26:
"21.26 Annual Negotiations. The parties acknowledge that
Tenant's agreement to this Second Amendment on the terms and conditions
contained herein is made in recognition of the current financial crises
in the Japanese banking industry. Because market conditions involving
the Japanese banking industry may improve with time, the parties hereby
agree that, commencing on December 24, 1998 and each anniversary
thereof, the parties shall review the economic terms of the Lease as
hereby modified, to determine in good faith: (a) if the market
conditions involving the Japanese banking industry have materially
improved since the date of this Second Amendment, and if so, (b) the
fair market Lease Rate, Lessor Contribution Rate and other economic
terms of the Lease which should be made available to Tenant under such
improved market conditions. Tenant's acceptance of this Second Amendment
is further conditioned on Landlord's agreement to thereafter amend the
Lease without any restructuring fee or Tenant obligation to pay for any
of Landlord's transaction costs or legal fees to reflect the fair market
Lease Rate, Lessor Contribution Rate and other economic terms of the
Lease under the improved market conditions for the Japanese banking
industry."
20. Tenant Deed of Trust. Concurrently with the effective date of this
Second Amendment, Landlord shall execute, acknowledge and cause to be recorded
in the official record a deed of trust in form acceptable to Tenant ("Tenant
Deed of Trust"), which Tenant Deed of Trust shall secure Landlord's obligations
under this Lease (i) to return the Security Deposit pursuant to the terms of
this Lease and (ii) to convey the Premises to Tenant as required pursuant to
Article 19 hereof. The Tenant Deed of Trust shall be junior only to the Sumitomo
Deed of Trust, and the SBLF Deed of Trust.
21. Counterparts. This Second Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall comprise but a single instrument.
-6-
<PAGE> 7
22. Existing Lease. Except to the extent specifically amended hereby,
all terms and conditions of the Lease remain in full force and effect.
[Signatures begin on next page.]
-7-
<PAGE> 8
IN WITNESS WHEREOF, Landlord and Tenant have executed this Second
Amendment effective as of the date and year first written above.
"TENANT"
CISCO SYSTEMS, INC.,
a California corporation
By:
------------------------------------
Name:
----------------------------------
Its:
-----------------------------------
By:
------------------------------------
Name:
----------------------------------
Its:
-----------------------------------
[Signatures continued on next page.]
-8-
<PAGE> 9
"LANDLORD"
SUMITOMO BANK LEASING AND FINANCE, INC.,
a Delaware corporation
By:
------------------------------------
Name:
----------------------------------
Its:
-----------------------------------
By:
------------------------------------
Name:
----------------------------------
Its:
-----------------------------------
-9-
<PAGE> 10
Exhibit A
Real Property in the City of San Jose, County of Santa Clara, State of
California, described as follows:
Parcels 1 through 8 inclusive, as shown on that certain Parcel Map,
which Map was filed for record in the office of the Recorder of the County of
Santa Clara, State of California, on February 24, 1993 in Book 644 of Maps,
pages 40, 41, 42 and 43.
APN: 97-54-006, 007, 008, 009, 010, 011, 012, 013, 014
ARB: High Tract Lots 79, 80, 81, 82, 83, 84, 85, 86 at 535/32
A-1
<PAGE> 1
EXHIBIT: 10.55
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE ("Third Amendment") is made and entered
into as of February 24, 1998, by and between SGA Development Partnership, Ltd.,
a Texas limited partnership ("Landlord") and Cisco Systems, Inc., a California
corporation ("Tenant"),
This Third Amendment is entered into upon the basis of the following
facts, understandings and intentions.
A. Landlord and Tenant have entered into that certain Lease dated
February 25, 1993 (the "Lease") as amended by that certain First Amendment to
Lease dated May 20, 1993 (the "First Amendment") and that certain Second
Amendment to Lease (the "Second Amendment") dated May 19, 1994 (hereinafter
collectively referred to as the "Lease"), pursuant to which Landlord leased to
Tenant certain land located in San Jose, California as more particularly
described in the Lease and on Exhibit A attached hereto and incorporated herein
by this reference ("Premises"). Any capitalized terms used but not defined in
this Third Amendment which are defined in the Lease shall have the meanings
described in the Lease.
B. Landlord and Tenant now desire to amend the terms of the Lease as
more particularly described in herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. Term. Section 1.6 of the Lease shall be amended to provide that (a) the Term
is extended until February 24, 2003, and (b) Tenant shall have no rights to
extend the Term of the Lease beyond February 24, 2003. For all purposes of the
Lease, the period from the date of this Third Amendment until February 24, 2003,
shall be the "Extension Term."
2. Addresses for Notices. Section 1.9 is hereby amended by changing the
addresses for notice to Tenant to the following:
Tenant: Cisco Systems, Inc.
170 West Tasman Drive
San Jose, CA 95134-1706
Attn: Vice President Worldwide Real
Estate and Workplace Resources
copy to: Cisco Systems, Inc.
170 West Tasman Drive
San Jose, CA 95134-1706
Attn: Treasurer
<PAGE> 2
copy to: Brobeck, Phleger & Harrison
550 West C Street, Suite 1200
San Diego, CA 92101
Attn: Ellen E. Jamason, Esq.
and to change the address for copies of notices to Landlord to
the following:
Lorne O. Liechty, Esq.
Liechty & McGinnis, P.C.
10440 North Central Expressway, Suite 1100
Dallas, Texas 75231
3. Second Amendment to Promissory Note. Tenant hereby consents to the
Second Amendment to Promissory Note to be executed by Landlord and HKS effective
concurrently herewith. As used in the Lease, the term "HKS Note" shall mean the
HKS Note as the same has been previously amended and as amended by the Second
Amendment to Promissory Note.
4. Liability Insurance. Section 7.1 of the Lease is hereby amended by
deleting Section 7.1 and substituting the following therefore:
7.1 Public Liability Insurance. During the Term, the Tenant shall
procure and carry, at the Tenant's sole cost and expense, commercial
general liability insurance for claims for injuries or death sustained
by persons or damage to property while on the Properties and such other
public liability coverages as are ordinarily procured by the Tenant or
its Affiliates who own or operate similar properties, but in any case
shall provide liability coverage of at least $2,000,000 per person and
$1,000,000 for property damage per occurrence. Such insurance shall be
on terms and in amounts that are no less favorable than insurance
maintained by the Tenant or such Affiliates with respect to similar
properties that they own and that are in accordance with normal industry
practice. The policy shall be endorsed to include the Landlord as an
additional insured. The policy shall also specifically provide that the
policy shall be considered primary insurance which shall apply to any
loss or claim before any contribution by any insurance which the
Landlord may have in force.
5. Self-Insurance. Article 7 is further amended by adding the following
new Section 7.4:
"The Tenant shall have the right to self-insure with respect to any of
the insurance required under this Lease so long as (i) the Tenant is a
publicly traded domestic corporation whose stock is traded on a
nationally recognized exchange; (ii) the Tenant has not assigned
<PAGE> 3
this Lease; (iii) the Tenant maintains a Consolidated Tangible Net Worth
of at least $1,000,000,000 according to its most recent audited
financial statement; and (iv) the Tenant governs and manages its
self-insurance program in a manner consistent with programs managed by
prudent businesses whose stock is publicly traded on nationally
recognized exchanges. Upon request, the Tenant shall supply the Landlord
from time to time with evidence reasonably satisfactory to the Landlord
of the Tenant's net worth and the satisfaction of the condition set
forth above. If the Tenant elects to self-insure, the Tenant shall be
responsible for losses or liabilities which would have been assumed by
the insurance companies which would have issued the insurance required
of the Tenant under the Lease. The Tenant will notify the Landlord in
advance of any period for which it intends to self-insure and shall
provide Landlord with satisfactory evidence that it complies with these
requirements in order to give the Tenant an opportunity to confirm the
satisfaction of the conditions set forth above. For so long as the
Tenant self-insures, the Tenant, for applicable periods, shall and does
hereby indemnify and hold harmless the Landlord, its officers,
directors, agents, employees and representatives from and against all
costs, damages or expenses (including reasonable attorneys' fees)
incurred or paid by the Tenant as a result of any claim customarily
covered by a broad-form policy of commercial general liability
insurance, including a contractual liability endorsement.
6. Tenant Deed of Trust. Concurrently with the effective date of this
Third Amendment, Landlord shall execute, acknowledge and cause to be recorded in
the Official Records of Santa Clara County, California a Deed of Trust in form
acceptable to Tenant ("Tenant Deed of Trust"), which Tenant Deed of Trust shall
secure Landlord's obligations under this Lease to convey the Premises to Tenant
as required pursuant to Article 19 of the Lease. The Tenant Deed of Trust shall
be junior only to the Sumitomo/HKS Deed of Trust and subject to the Permitted
Exceptions.
7. Landlord's Default. Section 17.8 shall be amended by adding the
following sentence:
"In addition, in the event of a default by Landlord under Section 20.7,
Tenant shall have the right to cure such default on behalf of and at
Tenant's expense (unless such default is due to Landlord's gross
negligence or willful misconduct, in which case such cure shall be at
Landlord's expense), without prior notice to Landlord.
8. Additional Covenants of Landlord. The following Section 20.7 shall be
added as follows:
"20.7 Default Under Authorized Loan. Landlord shall not,
<PAGE> 4
without Tenant's express prior written consent, default under any
Authorized Loan, or any loan document relating to such Authorized Loan,
where such default is not caused, directly or indirectly by a breach of
any of Tenant's obligations under this Lease, under the Pledge Agreement
securing the HKS Note or under any other documents relating to any
Authorized Loan.
9. Continuing Obligations. Except as modified by this Third Amendment,
the terms of the Lease remain in full force and effect. To the extent of any
conflict between the terms of the Lease and the terms of this Third Amendment,
the terms of this Third Amendment shall control.
10. Authority. Each party represents to the other that the execution,
delivery and performance of this Third Amendment has been duly authorized by all
necessary corporate or partnership action and has been duly executed and
delivered. Each individual executing this Third Amendment on behalf of a party
represents that he or she has been duly authorized to so execute this Third
Amendment for such party.
11. Counterparts. This Third Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
taken together shall comprise but a single instrument.
<PAGE> 5
IN WITNESS WHEREOF, Landlord and Tenant have executed this Third
Amendment as of the date and year first above written.
"LANDLORD"
SGA DEVELOPMENT PARTNERSHIP, LTD.,
a Texas limited partnership
By: Papita, Inc.,
a Texas limited partnership
Its: General Partner
By:
---------------------------------
By: Wolverine Holding Company,
a Texas corporation
Its: General Partner
By:
---------------------------------
By:
---------------------------------
"TENANT"
CISCO SYSTEMS, INC., a California corporation
By:
---------------------------------
By:
---------------------------------
<PAGE> 1
EXHIBIT 13.01
SELECTED FINANCIAL DATA
Five Years Ended July 25, 1998 (in thousands, except per-share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $8,458,777 $6,440,171 $4,096,007 $2,232,652 $1,334,436
Net income $1,350,072(1) $1,048,679(2) $ 913,324 $ 456,489(3) $ 322,981
Net income per common share--basic(*) $ 0.88 $ 0.71 $ 0.64 $ 0.33 $ 0.25
Net income per common share--diluted(*) $ 0.84(1) $ 0.68(2) $ 0.61 $ 0.32(3) $ 0.24
Shares used in per-share
calculation--basic(*) 1,533,869 1,485,986 1,437,030 1,367,453 1,296,023
Shares used in per-share
calculation--diluted(*) 1,608,173 1,551,039 1,490,078 1,425,247 1,342,213
Total assets $8,916,705 $5,451,984 $3,630,232 $1,991,949 $1,129,034
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Reflects the three-for-two stock split effective September 1998.
(1) Net income and net income per share include purchased research and
development expenses of $594 million and realized gains on the sale of a
minority stock investment of $5 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $1,878,988 and $1.17, respectively.
(2) Net income and net income per share include purchased research and
development expenses of $508 million and realized gains on the sale of a
minority stock investment of $153 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $1,413,893 and $0.91, respectively.
(3) Net income and net income per share include purchased research and
development expenses of $96 million. Pro forma net income and diluted
net income per share, excluding these nonrecurring items net of tax,
would have been $515,723 and $0.36, respectively.
19
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Financial Risk Management" and "Potential
Volatility in Operating Results" sections contained herein, as well as the
"Future Growth Subject to Risks" and "Other Risk Factors" sections, among
others, included in the Form 10-K for the fiscal year ended July 25, 1998, which
identify important risk factors that could cause actual results to differ from
those contained in the forward-looking statements.
COMPARISON OF 1998 AND 1997
Net sales grew to $8.5 billion in 1998 from $6.4 billion in 1997. The 31.3%
increase in net sales during the year was primarily a result of increasing unit
sales of high-end switches such as the Catalyst(R) 5500, access servers such as
the Cisco 3600 family, Internet and intranet access products for small offices
such as the Cisco 1600 series router, and increased service contract sales. The
sales growth rate for lower-priced access and switching products targeted toward
small and medium-sized businesses has increased faster than that of the
Company's high-end core router products. However, these products typically carry
lower average selling prices, and thus have slowed the Company's growth rate
compared with last year. Additionally, some of the Company's more established
product lines, such as the Cisco 2500 product family and the Catalyst 1400,
experienced decelerating growth rates. Sales to international customers
decreased to 40.9% of net sales in 1998 from 43.5% in 1997. The decrease
reflects slower sales growth in certain Asian countries, particularly Japan and
Korea. The Company anticipates that sales in Asia will remain weak for the near
future, with the exception of the Greater China markets. Sales growth in these
markets has been impacted by certain factors including weaker economic
conditions, delayed government spending, a stronger dollar versus the local
currencies, and slower adoption of networking technologies.
Gross margins increased slightly to 65.5% during 1998 from 65.2% in 1997.
This increase is due principally to the Company's improvements in
value-engineering efforts and material cost reductions, partially offset by a
continued shift in product mix to the Company's lower-margin products. The
prices of component parts have fluctuated in the recent past, and the Company
expects that this trend may continue. An increase in the price of component
parts may have a material adverse impact on gross margins. The Company continues
to expect that gross margins will decrease in the future, because it believes
that the market for lower-margin remote access and switching products for small
to medium-sized businesses will continue to increase at a faster rate than the
market for the Company's higher-margin router and high-performance switching
products. Additionally, as the Company focuses on new market opportunities, it
faces increasing competitive pressure from large telecommunications equipment
suppliers and well-funded startup companies, which may materially adversely
affect gross margins. The Company is attempting to mitigate this trend through
various means, such as increasing the functionality of its products, continued
value engineering, controlling royalty costs, and improving manufacturing
efficiencies. There can be no assurance that any efforts made by the Company in
these and other areas will successfully offset decreasing margins.
Research and development expenses increased by $322 million in 1998 compared
with 1997 expenditures, an increase to 12.1% of net sales from 10.8% in 1997.
The increase reflects the Company's ongoing research and development efforts in
a wide variety of areas such as voice, video, and data integration, Digital
Subscriber Line (DSL) technologies, dial access, enterprise switch routers,
security, network management, and high-end routing technologies, among others. A
significant portion
20
<PAGE> 3
of the increase was due to the addition of new personnel, partly through
acquisitions, as well as higher expenditures on prototypes and depreciation on
additional lab equipment. For the near future, research and development expenses
are expected to increase at a greater rate than the sales growth rate as the
Company invests in technology to address potential market opportunities. The
Company also continues to purchase technology in order to bring a broad range of
products to the market in a timely fashion. If the Company believes that it is
unable to enter a particular market in a timely manner, it may license
technology from other businesses or acquire other businesses as an alternative
to internal research and development. All of the Company's research and
development costs are expensed as incurred.
Sales and marketing expenses increased by $404 million in fiscal 1998 over
fiscal 1997, an increase to 18.5% of net sales in 1998 from 18.0% in fiscal
1997. The increase is due principally to an increase in the size of the
Company's direct sales force and related commissions, additional marketing and
advertising costs associated with the introduction of new products, and the
expansion of distribution channels. The increase also reflects the Company's
efforts to invest in certain key areas such as expansion of its end-to-end
strategy and service provider coverage in order to position itself to take
advantage of future market opportunities.
General and administrative expenses rose by $54 million in fiscal 1998 over
fiscal 1997, a decrease to 3.1% from 3.2% of net sales. The dollar increase
reflects increased personnel costs necessary to support the Company's business
infrastructure, including those associated with its European Logistics Center,
the further development of its information systems, as well as increased levels
of amortization for acquisition-related intangible assets. It is management's
intent to keep general and administrative costs relatively constant as a
percentage of net sales; however, this goal depends upon the level of
acquisition activity and amortization of the resulting intangible assets, among
other factors.
The amount expensed to purchased research and development in fiscal 1998
arose from the purchase acquisitions of DAGAZ Technologies, LightSpeed
International, Inc., WheelGroup Corporation, NetSpeed Inc., and CLASS Data
Systems (see Note 3).
Interest and other income, net, was $193 million in 1998 and $109 million in
1997. Interest income rose as a result of additional investment income on the
Company's increasing investment balances. In fiscal 1997, the Company began
selling its holdings in a publicly traded company at amounts significantly above
the cost basis of the investment. Also in 1997, the Company established the
Cisco Systems Foundation ("the Foundation"). As part of this initiative, the
Company donated a portion of this investment, along with other equity
securities, to the Foundation, with a combined cost basis of approximately $2
million and an approximate market value of $72 million at July 26, 1997. The
realized gains on the sale of this investment, net of the amounts donated to the
Foundation, were $153 million in fiscal 1997 (see Note 5).
COMPARISON OF 1997 AND 1996
Net sales grew to $6.4 billion in 1997 from $4.1 billion in 1996. The 57.2%
increase in net sales during the year was primarily the result of increasing
unit sales of LAN switching products such as the Catalyst 5000, high-end routers
such as the Cisco 7500 product family, modular access routers such as the Cisco
4700, and growth in the sales of add-on boards that provide increased
functionality. These increases were partially offset by decreasing unit sales of
the Company's older product lines, consisting of the Cisco 7000 and Cisco 4000.
The sales growth rate for lower-priced access and switching products targeted
toward small and medium-sized businesses increased faster than that of the
Company's high-end core router products. These products typically carry lower
average selling prices, thereby contributing to the slowdown in the Company's
overall growth rate in 1997 versus 1996. Additionally, some of the Company's
21
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
more established product lines, such as the Cisco 2500 series, experienced
decelerating growth rates. Sales to international customers decreased to 43.5%
of net sales in 1997 from 48.2% for 1996. The decrease was attributed to slower
sales growth in certain international markets, particularly Japan, France, and
Germany. Sales growth in these markets was impacted by certain factors including
weaker economic conditions, delayed government spending, a stronger dollar
versus the local currencies, and slower adoption of networking technologies.
Gross margins decreased slightly to 65.2% during 1997 from 65.6% in 1996.
This decrease was due to several factors, including the continued shift in
revenue mix to the Company's lower-margin products consisting primarily of
access and workgroup products for small to medium-sized businesses. These
products traditionally have fewer features and less software functionality than
the Company's service provider and enterprise offerings.
Research and development expenses increased by $299 million in 1997 compared
with 1996 expenditures, an increase to 10.8% of net sales from 9.7% in 1996. The
increase reflected the Company's ongoing research and development efforts in a
wide variety of areas such as voice, video, and data integration, Digital
Subscriber Line (DSL) technologies, dial access, enterprise switching, security,
network management, and high-end routing technologies, among others. A
significant portion of the increase was due to the addition of new personnel, as
well as higher expenditures on prototypes and depreciation on new equipment.
Sales and marketing expenses increased by $434 million in fiscal 1997 over
fiscal 1996, an increase to 18.0% of net sales in 1997 from 17.7% in fiscal
1996. The increase in these expenses resulted from an increase in the size of
the Company's direct sales force and related commissions, additional marketing
programs to support the launch of new products, the entry into new markets, and
expanding distribution channels.
General and administrative expenses rose by $45 million in fiscal 1997 over
fiscal 1996, a decrease to 3.2% from 3.9% of net sales. The dollar increase
reflected increased personnel costs necessary to support the Company's business
infrastructure, including those associated with its new European Logistics
Center, as well as the further development of its information systems. The
percentage decrease reflects management's continued efforts to control
discretionary spending.
The amount expensed to purchased research and development in fiscal 1997
arose from the purchase acquisitions of Telebit Corporation, Netsys
Technologies, Skystone Systems Corporation, Ardent Communications, and Global
Internet Software Group (see Note 3).
Interest and other income, net, was $109 million in 1997 and $64 million in
1996. Interest income rose as a result of additional investment income on the
Company's increasing investment balances.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components (revenue, expenses,
gains, and losses) in a full set of general-purpose financial statements. The
Company will adopt SFAS No. 130 as required for its first quarterly filing of
fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management is in the process
of evaluating the effects of this change on its reporting of segment
information.
22
<PAGE> 5
The Company will adopt SFAS No. 131 as required for its annual report on fiscal
year 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its operations.
The Company will adopt SFAS No. 133 as required for its first quarterly filing
of fiscal year 2000.
Financial Risk Management
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
related to nondollar-denominated sales in Japan, Canada, and Australia and
nondollar-denominated operating expenses in Europe, Latin America, and Asia
where the Company sells primarily in U.S. dollars. The introduction of the Euro
as a common currency for members of the European Monetary Union is scheduled to
take place in the Company's fiscal year 1999. The Company has not determined
what impact, if any, the Euro will have on foreign exchange exposure. The
Company is prepared to hedge against fluctuations in the Euro if this exposure
becomes material. At the present time, the Company hedges only those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and does not generally hedge anticipated foreign
currency cash flows. The hedging activity undertaken by the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities. The success of this activity depends upon estimation of
intercompany balances denominated in various currencies, primarily the Japanese
yen, Canadian dollar, Australian dollar, and certain European currencies. To the
extent that these forecasts are over- or understated during periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
The Company is experiencing a greater proportion of its sales activity
through its partners in two-tier distribution channels. These customers are
generally given privileges to return inventory, receive credits for changes in
the Company's selling prices, and participate in cooperative marketing programs.
The Company maintains appropriate reserves and allowances for such exposures.
However, such partners tend to have access to more limited financial resources
than other resellers and end-user customers and therefore represent potential
sources of increased credit risk. Additionally, the Company is experiencing
increased demands for customer financing and leasing solutions. The Company also
continues to monitor increased credit exposures because of the weakened
financial conditions in Asia and the impact that such conditions may have on the
worldwide economy. Although the Company has not experienced significant losses
because of customers failing to meet their obligations to date, such losses, if
incurred, could have a material adverse impact on the Company's business,
operating results, and financial position.
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. These securities are generally classified as available
for sale, and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of shareholders'
equity, net of tax. Part of this portfolio includes minority equity investments
in several publicly traded companies, the values of which are subject
23
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
to market price volatility. The Company also has certain real estate lease
commitments with payments tied to short-term interest rates. At any time, a
sharp rise in interest rates could have a material adverse impact on the fair
value of the Company's investment portfolio while increasing the costs
associated with its lease commitments. Conversely, declines in interest rates
could have a material impact on interest earnings for the Company's investment
portfolio. The Company does not currently hedge these interest rate exposures.
The following table presents the hypothetical changes in fair values in the
financial instruments held by the Company at July 25, 1998 that are sensitive to
changes in interest rates. These instruments are not leveraged and are held for
purposes other than trading. The modeling technique used measures the change in
fair values arising from selected potential changes in interest rates. Market
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS over a twelve-month
time horizon. Beginning fair values represent the market principal plus accrued
interest, dividends, and certain interest rate-sensitive securities considered
cash and equivalents for financial reporting purposes at July 25, 1998. Ending
fair values comprise the market principal plus accrued interest, dividends, and
reinvestment income at a twelve-month time horizon. This table estimates the
fair value of the portfolio at a twelve-month time horizon (in millions):
<TABLE>
<CAPTION>
VALUATION OF SECURITIES NO CHANGE VALUATION OF SECURITIES
GIVEN AN INTEREST RATE IN INTEREST GIVEN AN INTEREST RATE
ISSUER DECREASE OF X BASIS POINTS RATES INCREASE OF X BASIS POINTS
- -----------------------------------------------------------------------------------------------------------------------------
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government notes and bonds $1,052 $1,050 $1,047 $1,045 $1,043 $1,040 $1,038
State, municipal, and county
government notes and bonds 3,530 3,488 3,448 3,409 3,369 3,330 3,292
Foreign government notes and bonds 33 33 33 33 33 33 33
Corporate notes and bonds 810 809 808 807 806 805 804
- -----------------------------------------------------------------------------------------------------------------------------
Total $5,425 $5,380 $5,336 $5,294 $5,251 $5,208 $5,167
=============================================================================================================================
</TABLE>
A 50-BPS move in the Federal Funds Rate has occurred in 9 of the last 10 years;
a 100-BPS move in the Federal Funds Rate has occurred in 6 of the last 10 years;
and a 150-BPS move in the Federal Funds Rate has occurred in 4 of the last 10
years.
The following analysis presents the hypothetical change in fair values of
public equity investments held by the Company that are sensitive to changes in
the stock market. These equity securities are held for purposes other than
trading. The modeling technique used measures the hypothetical change in fair
values arising from selected hypothetical changes in each stock's price. Stock
price fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus
50% were selected based on the probability of their occurrence.
This table estimates the fair value of the publicly traded corporate
equities at a twelve-month time horizon (in millions):
<TABLE>
<CAPTION>
VALUATION OF SECURITY FAIR VALUE VALUATION OF SECURITY
GIVEN X% DECREASE IN EACH AS OF GIVEN X% INCREASE IN EACH
STOCK'S PRICE JULY 25, 1998 STOCK'S PRICE
- -----------------------------------------------------------------------------------------------
(50%) (35%) (15%) 15% 35% 50%
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate equities $ 86 $111 $146 $171 $197 $231 $257
===============================================================================================
</TABLE>
24
<PAGE> 7
Within the Company's public equity investment portfolio, a 15% movement in
the stock price has occurred in 82% of the annual periods since the shares were
initially offered or in the last three years; a 35% movement in the stock price
has occurred in 36% of the annual periods since the shares were initially
offered or in the last three years; and a 50% movement in the stock price has
occurred in 36% of the annual periods since the shares were initially offered or
in the last three years.
The Company also is exposed to interest rate risk associated with leases on
its facilities whose payments are tied to the London Interbank Offered Rate
(LIBOR), and has evaluated the hypothetical change in lease obligations held at
July 25, 1998 due to changes in the LIBOR rate. The modeling technique used for
analysis measured hypothetical changes in lease obligations arising from
selected hypothetical changes in the LIBOR rate. Market changes reflected
immediate hypothetical parallel shifts in the LIBOR curve of plus or minus 50
BPS, 100 BPS, and 150 BPS over a twelve-month period. The results of this
analysis were not material to the Company's financial results.
The Company enters into forward foreign exchange contracts to offset the
impact of currency fluctuations on certain nonfunctional currency assets and
liabilities, primarily denominated in Japanese, Canadian, Australian, and
certain European currencies.
The Company generally enters into forward currency contracts that have
original maturities of one to three months, with none having a maturity greater
than one year in length. The total notional values of forward contracts
purchased and forward contracts sold were $166 million and $153 million,
respectively. The net unrealized gain on forward exchange contracts was $0.1
million. Management does not expect gains or losses on these contracts to have a
material impact on the Company's financial results (see Note 7).
POTENTIAL VOLATILITY IN OPERATING RESULTS
The Company expects that in the future, its net sales may grow at a slower rate
than was experienced in previous periods, and that on a quarter-to-quarter
basis, the Company's growth in net sales may be significantly lower than its
historical quarterly growth rate. As a consequence, operating results for any
particular quarter are extremely difficult to predict. The Company's ability to
meet financial expectations could be hampered if the nonlinear sales pattern
seen in recent quarters continues in future periods. The Company generally has
had one quarter of the fiscal year when backlog has been reduced. Although such
reductions have not occurred consistently in recent years, they are difficult to
predict and may occur in the future. In addition, in response to customer
demand, the Company continues to attempt to reduce its product manufacturing
lead times, which may result in corresponding reductions in order backlog. A
decline in backlog levels could result in more variability and less
predictability in the Company's quarter-to-quarter net sales and operating
results going forward. On the other hand, for certain products, lead times are
longer than the Company's goal. If the Company cannot reduce manufacturing lead
times for such products, the Company's customers may cancel orders or not place
further orders if shorter lead times are available from other manufacturers,
thus creating additional variability.
As a result of recent unfavorable economic conditions, sales to certain
countries in Asia and the Pacific Rim have declined as a percentage of the
Company's total revenue. If the economic conditions in these markets worsen, or
if these unfavorable conditions result in a wider regional or global
economic slowdown, this decline may have a material adverse impact on the
Company's business, operations, and financial condition.
Many computer systems were not designed to handle any dates beyond the year
1999, and therefore, computer hardware and software will need to be modified
prior to the year 2000 in order to remain
25
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
functional. The Company is concerned that many enterprises will be devoting a
substantial portion of their information systems spending to resolving this
upcoming Year 2000 problem. This expense may result in spending being diverted
from networking solutions in the near future. The Company is still assessing the
impact of the Year 2000 issue on its products and internal information systems
and has begun, and in many cases completed, corrective efforts in these areas.
The Company does not anticipate that addressing the Year 2000 problem for its
internal information systems and current and future products will have a
material impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's financial
results.
The Company has certain key relationships with suppliers. If these suppliers
fail to adequately address the Year 2000 issue for the products they provide to
the Company, this could have a material adverse impact on the Company's
operations and financial results. The Company is still assessing the effect the
Year 2000 issue will have on its suppliers and at this time, cannot determine
the impact it will have.
Contingency plans will be developed if it appears the Company or its key
suppliers will not be Year 2000 compliant, and such noncompliance is expected to
have a material adverse impact on the Company's operations.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. For example, the
Company believes that gross margins may decline over time, because the markets
for lower-margin access products targeted toward small to medium-sized customers
have continued to grow at a faster rate than the markets for the Company's
higher-margin router and high-performance switching products targeted toward
enterprise and service provider customers. The Company recently introduced new
products, and several additional new products are scheduled to be released in
the near future. If warranty costs associated with these new products are
greater than the Company has experienced historically, gross margins may be
adversely affected. The Company's gross margins may also be impacted by
geographic mix, as well as the mix of configurations within each product group.
The Company continues to expand into third-party or indirect distribution
channels, which generally results in lower gross margins. In addition,
increasing third-party and indirect distribution channels generally results in
greater difficulty in forecasting the mix of the Company's products, and to a
certain degree, the timing of its orders.
The Company also expects that its operating margins may decrease as it
continues to hire additional personnel and increases other operating expenses to
support its business. The Company plans its operating expense levels based
primarily on forecasted revenue levels. Because these expenses are relatively
fixed in the short term, a shortfall in revenue could lead to operating results
being below expectations. The results of operations for 1998 are not necessarily
indicative of results to be expected in future periods, and the Company's
operating results may be subject to quarterly fluctuations as a result of
several factors. These factors include the integration of people, operations,
and products from acquired businesses and technologies; increased competition in
the networking industry; the overall trend toward industry consolidation; the
introduction and market acceptance of new technologies and standards, including
switch routers, Gigabit Ethernet switching, Tag Switching (currently also known
as multiprotocol label switching [MPLS]), and voice, video, and data
capabilities; variations in sales channels, product costs,
26
<PAGE> 9
or mix of products sold; the timing of orders and manufacturing lead times; and
changes in general economic conditions, any of which could have a material
adverse impact on operations and financial results.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents, short-term investments, and investments were $5.2 billion
at July 25, 1998, an increase of $2.6 billion from 1997. The increase is
primarily a result of cash generated by operations, and to a lesser extent,
through financing activities, mainly the exercise of employee stock options,
which generated $488 million in cash. These cash flows were partially offset by
cash outflows from operating activities, including tax payments of approximately
$438 million; cash flows from investing activities including capital
expenditures of approximately $415 million; and cash payments of $108 million
and $38 million related to the acquisitions of DAGAZ Technologies and CLASS Data
Systems, respectively.
Accounts receivable increased 10.9% during 1998, while sales grew by 31.3%.
Days sales outstanding in receivables decreased to 49 days as of July 25, 1998
from 60 days at July 26,1997. Inventories increased 42.1% during 1998. The
increase in inventories was primarily because of the shift toward a two-tier
distribution model and the need to maintain shorter lead times on certain
products. Inventory management remains an area of focus as the Company balances
the need to maintain strategic inventory levels to ensure competitive lead times
with the risk of inventory obsolescence due to rapidly changing technology and
customer requirements.
Accounts payable increased by 20.1% during 1998 because of material
purchases to support the growth in net sales. Other accrued liabilities
increased by 82.3%, primarily because of higher deferred revenue on service
contracts.
At July 25, 1998, the Company had a line of credit totaling $500 million,
which expires in July 2002. There have been no borrowings under this agreement
(see Note 6).
The Company has entered into certain lease arrangements in San Jose,
California, and Research Triangle Park, North Carolina, where it has established
its headquarters operations and certain research and development and customer
support activities, respectively. In connection with these transactions, the
Company restricted $554 million of its investments as collateral for certain
obligations of the leases. The Company anticipates that it will occupy more
leased property in the future that will require similar restricted securities;
however, the Company does not expect the impact of this activity to be material
to liquidity.
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements
through fiscal 1999.
27
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
YEARS ENDED JULY 25, 1998 JULY 26, 1997 JULY 28, 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $8,458,777 $6,440,171 $4,096,007
Cost of sales 2,917,617 2,241,378 1,409,862
- --------------------------------------------------------------------------------------------------
Gross margin 5,541,160 4,198,793 2,686,145
- --------------------------------------------------------------------------------------------------
Expenses:
Research and development 1,020,446 698,172 399,291
Sales and marketing 1,564,419 1,160,269 726,278
General and administrative 258,246 204,661 159,770
Purchased research and development 593,695 508,397
- --------------------------------------------------------------------------------------------------
Total operating expenses 3,436,806 2,571,499 1,285,339
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 2,104,354 1,627,294 1,400,806
Realized gains on sale of investment 5,411 152,689
Interest and other income, net 192,701 108,889 64,019
- --------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,302,466 1,888,872 1,464,825
Provision for income taxes 952,394 840,193 551,501
- --------------------------------------------------------------------------------------------------
NET INCOME $1,350,072 $1,048,679 $ 913,324
=================================================================================================
Net income per share--basic $ 0.88 $ 0.71 $ 0.64
- --------------------------------------------------------------------------------------------------
NET INCOME PER SHARE--DILUTED $ 0.84 $ 0.68 $ 0.61
- --------------------------------------------------------------------------------------------------
Shares used in per-share calculation--basic 1,533,869 1,485,986 1,437,030
=================================================================================================
Shares used in per-share calculation--diluted 1,608,173 1,551,039 1,490,078
=================================================================================================
</TABLE>
See notes to consolidated financial statements
28
<PAGE> 11
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
JULY 25, 1998 JULY 26, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 534,652 $ 269,608
Short-term investments 1,156,849 1,005,977
Accounts receivable, net of allowances for doubtful
accounts of $39,842 in 1998 and $22,340 in 1997 1,297,867 1,170,401
Inventories, net 361,986 254,677
Deferred income taxes 344,905 312,132
Prepaid expenses and other current assets 65,665 88,471
- --------------------------------------------------------------------------------------------------
Total current assets 3,761,924 3,101,266
Investments 3,463,279 1,267,174
Restricted investments 553,780 363,216
Property and equipment, net 595,349 466,352
Other assets 542,373 253,976
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,916,705 $5,451,984
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 248,872 $ 207,178
Income taxes payable 410,363 256,224
Accrued payroll and related expenses 390,542 263,269
Other accrued liabilities 717,203 393,438
- --------------------------------------------------------------------------------------------------
Total current liabilities 1,766,980 1,120,109
Commitments and contingencies (Note 7)
Minority interest 43,107 42,253
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding in 1998 and 1997 (Note 8)
Common stock and additional paid-in capital,
$0.001 par value (no par value--July 26, 1997)
2,700,000 shares authorized: 1,562,582 shares issued
and outstanding in 1998 and 1,509,252 shares in 1997 3,220,205 1,763,200
Retained earnings 3,828,223 2,487,058
Unrealized gain on investments 78,314 49,628
Cumulative translation adjustments (20,124) (10,264)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 7,106,618 4,289,622
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,916,705 $5,451,984
=================================================================================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION> COMMON STOCK AND
ADDITIONAL PAID-IN CAPITAL
--------------------------
COMMON STOCK
------------ UNREALIZED CUMULATIVE TOTAL
NUMBER RETAINED GAIN ON TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT EARNINGS INVESTMENTS ADJUSTMENTS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES JULY 30, 1995 1,388,646 $ 508,674 $ 996,805 $ 50,948 $ 5,849 $1,562,276
Issuance of common stock under stock option
and purchase plans 42,913 116,554 116,554
Tax benefits from employee stock plans 198,468 198,468
Common stock repurchases (6,885) (3,876) (111,745) (115,621)
Acquisitions 36,217 68,247 (21,015) 47,232
Change in unrealized gain on investments 107,900 107,900
Net income 913,324 913,324
Translation adjustments (10,511) (10,511)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 28, 1996 1,460,891 888,067 1,777,369 158,848 (4,662) 2,819,622
Issuance of common stock under stock option
and purchase plans 42,390 280,212 280,212
Tax benefits from employee stock plans 274,341 274,341
Common stock repurchases (11,250) (9,590) (313,222) (322,812)
Pooling of interests acquisitions 8,582 6,504 (14,748) (8,244)
Purchase acquisitions 8,639 323,666 323,666
Change in unrealized gain on investments (109,220) (109,220)
Adjustment to conform StrataCom, Inc. fiscal year (11,020) (11,020)
Net income 1,048,679 1,048,679
Translation adjustments (5,602) (5,602)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 26, 1997 1,509,252 1,763,200 2,487,058 49,628 (10,264) 4,289,622
Issuance of common stock under stock option
and purchase plans 41,266 488,494 488,494
Tax benefits from employee stock plans 420,574 420,574
Pooling of interests acquisitions 1,450 11,557 (8,907) 2,650
Purchase acquisitions 10,614 536,380 536,380
Change in unrealized gain on investments 28,686 28,686
Net income 1,350,072 1,350,072
Translation adjustments (9,860) (9,860)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 25, 1998 1,562,582 $3,220,205 $3,828,223 $ 78,314 $(20,124) $7,106,618
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 13
(This Page Intentionally Left Blank)
31
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JULY 25, 1998 JULY 26, 1997 JULY 28, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,350,072 $1,048,679 $ 913,324
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 327,333 212,200 132,594
Provision for doubtful accounts 43,463 13,318 18,548
Provision for inventory allowances 160,633 123,431 53,025
Deferred income taxes (60,115) (185,944) (74,292)
Tax benefits from employee stock plans 420,574 274,341 198,468
Adjustment to conform StrataCom, Inc. fiscal year (11,020)
Purchased research and development from acquisitions 436,171 273,532
Change in operating assets and liabilities:
Accounts receivable (162,752) (558,664) (219,628)
Inventories (266,450) (74,374) (272,408)
Prepaid expenses and other current assets 23,102 7,332 (67,154)
Accounts payable 27,576 52,225 93,773
Income taxes payable 154,139 86,230 97,924
Accrued payroll and related expenses 125,991 66,375 101,221
Other accrued liabilities 300,778 114,462 87,331
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,880,515 1,442,123 1,062,726
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (1,611,478) (1,430,556) (786,197)
Proceeds from sales and maturities of
short-term investments 1,750,547 1,276,379 641,974
Purchases of investments (3,561,382) (1,761,952) (809,098)
Proceeds from sales and maturities of investments 1,106,957 1,052,363 219,178
Purchases of restricted investments (527,322) (351,168) (164,624)
Proceeds from sales and maturities of
restricted investments 336,930 218,948 115,429
Acquisition of property and equipment (414,843) (330,297) (282,840)
Acquisition of businesses, net of cash acquired
and purchased research and development (18,642)
Increase in lease receivables (170,539) (19,668)
Other (2,975) (39,415) 8,337
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,094,105) (1,404,008) (1,057,841)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 488,494 280,212 116,554
Common stock repurchases (322,812) (115,621)
Other (9,860) (5,602) (10,511)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 478,634 (48,202) (9,578)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 265,044 (10,087) (4,693)
Cash and equivalents, beginning of year 269,608 279,695 284,388
- -------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 534,652 $ 269,608 $ 279,695
===============================================================================================================================
JULY 25, 1998 JULY 26, 1997 JULY 28, 1996
Non-cash investing and financing activities:
Transfers of securities to restricted investments $ - $ - $ 3,586
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. (the "Company") provides networking solutions that connect
computing devices and computer networks, allowing people to access or transfer
information without regard to differences in time, place, or type of computer
system. The Company sells its products in approximately 105 countries through a
combination of direct sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year The Company's fiscal year is the 52 or 53 weeks ending on the last
Saturday in July. The fiscal years ended July 25, 1998, July 26, 1997, and July
28, 1996 all comprised 52-week years. Prior to fiscal year 1997, the Company's
fiscal year was the 52- or 53-week period ending on the last Sunday in July.
Fiscal year 1999 will be a 53-week year.
Principles of Consolidation The consolidated financial statements include the
accounts of Cisco Systems, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Equivalents The Company considers cash and all highly liquid
investments purchased with an original or remaining maturity of less than three
months at the date of purchase to be cash equivalents. Substantially all of its
cash and equivalents are custodied with three major financial institutions.
Investments The Company's investments comprise U.S., state, and municipal
government obligations and foreign and corporate securities. Investments with
maturities of less than one year are considered short term and are carried at
fair value. Nearly all investments are held in the Company's name and custodied
with two major financial institutions. The specific identification method is
used to determine the cost of securities disposed of, with realized gains and
losses reflected in other income and expense. At July 25, 1998 and July 26,
1997, substantially all of the Company's investments were classified as
available for sale. Unrealized gains and losses on these investments are
included as a separate component of shareholders' equity, net of any related tax
effect.
Inventories Inventories are stated at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on a first-in,
first-out basis.
Restricted Investments Restricted investments consist of U.S. governmental
obligations with maturities of more than one year. These investments are carried
at fair value and are restricted as to withdrawal (see Note 7). Restricted
investments are held in the Company's name and custodied with two major
financial institutions.
Fair Value of Financial Instruments Carrying amounts of certain of the Company's
financial instruments, including cash and equivalents, accrued payroll, and
other accrued liabilities, approximate fair value because of their short
maturities. The fair values of investments are determined using quoted market
prices for those securities or similar financial instruments (see Note 5).
Concentrations Cash and equivalents are, for the most part, maintained with
several major financial institutions in the United States. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally
these deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers.
The Company receives certain of its custom semi-conductor chips for some of
its products from sole suppliers. Additionally, the Company relies on a limited
number of hardware manufacturers. The inability of any supplier or manufacturer
to fulfill supply requirements of the Company could impact future results.
33
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition The Company generally recognizes product revenue upon
shipment of product. Revenue from service obligations is deferred and recognized
over the lives of the contracts. The Company accrues for warranty costs, sales
returns, and other allowances at the time of shipment based on its experience.
Depreciation and Amortization Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Such lives vary from two and one-half to five years. Goodwill and other
intangible assets are included in other assets and are carried at cost less
accumulated amortization, which is being provided on a straight-line basis over
the economic lives of the respective assets, generally three to five years. The
Company applies the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in evaluating
its fixed and intangible assets.
Income Taxes Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Computation of Net Income per Common Share The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128 in 1998. This statement requires
the presentation of basic and diluted net income per share. Basic net income per
common share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options (see Note 12). The Company has restated all prior period per-share
data presented as required by SFAS No. 128.
Restated numbers as computed using the diluted method under SFAS No. 128
approximate those computed using the primary method as defined in Accounting
Principals Board Opinion No. 15.
Share and per-share data presented reflect the three-for-two stock splits
effective September 1998 and December 1997 and the two-for-one stock split
effective February 1996.
Foreign Currency Translation Substantially all of the Company's international
subsidiaries use their local currency as their functional currency. For those
subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet
date, and income and expense accounts at average exchange rates during the year.
Resulting translation adjustments are recorded directly to a separate component
of shareholders' equity. Where the U.S. dollar is the functional currency,
translation adjustments are recorded in income.
Derivatives The Company enters into forward exchange contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward contracts are designated as and effective
as a hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles.
Gains and losses on the contracts are included in other income and offset
foreign exchange gains or losses from the revaluation of intercompany balances
or other current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity. Fair values of exchange contracts
are determined using published rates. If a derivative contract terminates prior
to maturity, the investment is shown at its fair value with the resulting gain
or loss reflected in operating results.
34
<PAGE> 17
Minority Interest Minority interest represents the preferred stockholders'
proportionate share of the equity of Nihon Cisco Systems, K.K. At July 25, 1998,
the Company owned all issued and outstanding common stock, amounting to 73.2% of
the voting rights. Each share of preferred stock is convertible into one share
of common stock at any time at the option of the holder.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Estimates are used for, but not limited to, the accounting for doubtful
accounts, depreciation and amortization, sales returns, warranty costs, taxes,
and contingencies. Actual results could differ from these estimates.
Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains,
and losses) in a full set of general-purpose financial statements. The Company
will adopt SFAS No. 130 as required for its first quarterly filing of fiscal
year 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management is in the process
of evaluating the effects of this change on its reporting of segment
information. The Company will adopt SFAS No. 131 as required for its annual
report on fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its operations.
The Company will adopt SFAS No. 133 as required for its first quarterly filing
of fiscal year 2000.
3. BUSINESS COMBINATIONS
Pooling of Interests Combinations On July 9, 1996, the Company acquired
StrataCom, Inc. ("StrataCom"). Under the terms of the agreement, one share of
the Company's common stock was exchanged for each outstanding share of
StrataCom. Approximately 171.9 million shares of common stock were issued to
acquire StrataCom. The Company also assumed remaining outstanding StrataCom
stock options that were converted to options to purchase approximately 25.9
million shares of the Company's common stock. The transaction was accounted for
as a pooling of interests in fiscal year 1996; therefore, all prior periods
presented were restated. In order for both companies to operate on the same
fiscal year for 1997, StrataCom's operations for the one-month period ended July
28, 1996, which are not material to the Company, have been reflected as an
adjustment to retained earnings in the first quarter of fiscal 1997.
The Company has also completed a number of other pooling transactions. The
historical operations of these entities are not material to the Company's
consolidated
35
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operations on either an individual or an aggregated basis; therefore, prior
period statements have not been restated for these acquisitions. These
transactions are summarized as follows (in millions of shares):
<TABLE>
<CAPTION>
TOTAL SHARES OF
FISCAL YEAR ACQUIRED COMPANIES CISCO STOCK ISSUED
- -----------------------------------------------------------------------
<S> <C> <C>
1996 Combinet, Inc. 7.9
Grand Junction Networks, Inc. 20.6
TGV Software, Inc. 5.5
1997 Nashoba Networks 3.6
Granite Systems, Inc. 5.0
1998 Precept Software, Inc. 1.5
</TABLE>
In conjunction with these poolings, the Company also assumed the outstanding
options of these companies, which were converted to options to purchase
approximately 8.5 million shares of the Company's common stock.
PURCHASE COMBINATIONS During the three years ended July 25, 1998, the Company
made a number of purchase acquisitions. The consolidated financial statements
include the operating results of each business from the date of acquisition. Pro
forma results of operations have not been presented, because the effects of
these acquisitions were not material on either an individual or an aggregated
basis.
The amounts allocated to purchased research and development were determined
through established valuation techniques in the high-technology communications
industry and were expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. Research and
development costs to bring the products from the acquired companies to
technological feasibility are not expected to have a material impact on the
Company's future results of operations or cash flows. Amounts allocated to
goodwill and other intangibles are amortized on a straight-line basis over
periods not exceeding five years. Each transaction is outlined on the following
page.
36
<PAGE> 19
Summary of purchase transactions (in millions):
<TABLE>
<CAPTION>
PURCHASED
RESEARCH AND FORM OF CONSIDERATION
ENTITY NAME CONSIDERATION DATE DEVELOPMENT CHARGE AND OTHER NOTES TO ACQUISITION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997
Telebit Corp. $200 Oct. 1996 $174 Cash
Netsys Technologies $ 85 Nov. 1996 $ 43 $81 in common stock and $4 in liabilities
assumed; goodwill and other intangibles
recorded of $42
Skystone Systems Corp. $ 92 July 1997 $ 89 $69 in common stock and $23 in cash
Ardent Communications $165 July 1997 $164 Common stock
Global Internet Software Group $ 40 July 1997 $ 38 Cash
FISCAL 1998
DAGAZ Technologies, Inc. $130 Aug. 1997 $127 $108 in cash, $18 in common stock, and
assumed liabilities of $4
LightSpeed International, Inc. $161 Feb. 1998 $143 Common stock and options assumed; other
intangibles recorded of $15
WheelGroup Corp. $124 Mar. 1998 $ 97 Common stock and options assumed; goodwill
and other intangibles recorded of $38
NetSpeed International, Inc. $252 Apr. 1998 $179 $222 in common stock and options assumed,
$12 cash, and $18 in liabilities assumed;
goodwill and other intangibles recorded
of $76
CLASS Data Systems $ 51 June 1998 $ 48 Cash and options assumed
</TABLE>
PENDING BUSINESS COMBINATIONS In July 1998, the Company signed a definitive
agreement to purchase publicly held Summa Four, Inc. (Summa Four), a provider of
programmable switches. Under the terms of the agreement, between 1.6 and 2.0
million shares of the Company's common stock will be exchanged for all of the
outstanding shares and options of Summa Four. The agreement is subject to the
receipt of certain government approvals and the approval of Summa Four
shareholders. The deal is expected to be consummated in the first or second
quarter of fiscal 1999. The historical operations of Summa Four are not expected
to be material to the financial position or results of operations of the
Company.
37
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BALANCE SHEET DETAIL (in thousands):
<TABLE>
<CAPTION>
JULY 25, 1998 JULY 26,1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Inventories, net:
Raw materials $ 75,937 $ 89,226
Work in process 143,383 114,724
Finished goods 110,646 21,733
Demonstration systems 32,020 28,994
- -------------------------------------------------------------------------------------------
Total $ 361,986 $254,677
===========================================================================================
Property and equipment, net:
Leasehold improvements $ 152,570 $ 88,801
Computer equipment and related software 533,930 394,735
Production and engineering equipment 137,676 108,520
Office equipment, furniture, fixtures, and other 440,475 290,129
- -------------------------------------------------------------------------------------------
1,264,651 882,185
Less accumulated depreciation and amortization (669,302) (415,833)
- -------------------------------------------------------------------------------------------
Total $ 595,349 $466,352
===========================================================================================
Accrued payroll and related expenses:
Accrued wages, paid time off, and related expenses $ 170,446 $127,779
Accrued commissions 82,767 66,851
Accrued bonuses 137,329 68,639
- -------------------------------------------------------------------------------------------
Total $ 390,542 $263,269
===========================================================================================
Other accrued liabilities:
Deferred revenue $ 330,000 $183,268
Accrued warranties 48,109 41,526
Other liabilities 339,094 168,644
- -------------------------------------------------------------------------------------------
Total $ 717,203 $393,438
===========================================================================================
</TABLE>
38
<PAGE> 21
5. INVESTMENTS
The following tables summarize the Company's investment in securities (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JULY 25, 1998 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government notes and bonds $ 978,308 $ 2,596 $ (447) $ 980,457
State, municipal, and county
government notes and bonds 3,215,316 11,319 (2,870) 3,223,765
Foreign government notes and bonds 30,848 - (71) 30,777
Corporate notes and bonds 767,877 545 (972) 767,450
Corporate equity securities 55,252 137,117 (20,910) 171,459
- ----------------------------------------------------------------------------------------------------------------
Total $5,047,601 $151,577 $(25,270) $5,173,908
================================================================================================================
Reported as:
Short-term investments $1,156,849
Investments 3,463,279
Restricted investments 553,780
- ----------------------------------------------------------------------------------------------------------------
Total $5,173,908
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JULY 26, 1997 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government notes and bonds $ 609,580 $ 1,407 $ (960) $ 610,027
State, municipal, and county
government notes and bonds 1,313,652 6,214 (755) 1,319,111
Foreign government notes and bonds 31,565 29 (111) 31,483
Corporate notes and bonds 562,039 594 (589) 562,044
Corporate equity securities 40,759 89,390 (16,447) 113,702
- ------------------------------------------------------------------------------------------------------------
Total $2,557,595 $ 97,634 $(18,862) $2,636,367
============================================================================================================
Reported as:
Short-term investments $1,005,977
Investments 1,267,174
Restricted investments 363,216
- ------------------------------------------------------------------------------------------------------------
Total $2,636,367
============================================================================================================
</TABLE>
The following table summarizes debt maturities (including restricted
investments) at July 25,1998 (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $1,415,707 $1,414,444
Due in 1-2 years 857,306 887,140
Due in 2-5 years 2,505,377 2,508,387
Due after 5 years 213,959 192,478
- ------------------------------------------------------------------------------------
Total $4,992,349 $5,002,449
====================================================================================
</TABLE>
39
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 1997, the Company began to sell its minority equity
position in a publicly traded company which was completed in fiscal year 1998.
Also, in fiscal 1997, the Company established the Cisco Systems Foundation ("the
Foundation"). As part of this initiative, the Company donated a portion of the
equity investment, along with other equity securities, to the Foundation, with a
combined cost basis of approximately $2 million and an approximate fair value of
$72 million at July 26, 1997. The realized gains reported on the sale of this
investment, net of the 1997 donation to the Foundation, were $153 million in
fiscal 1997 and $5 million in fiscal 1998.
6. LINE OF CREDIT
As of July 25, 1998, the Company had a syndicated credit agreement under the
terms of which a group of banks committed a maximum of $500 million on an
unsecured, revolving basis for cash borrowings of various maturities. The
commitments made under this agreement expire on July 1, 2002. Under the terms of
the agreement, borrowings bear interest at a spread over the London Interbank
Offered Rate based on certain financial criteria and third-party rating
assessments. As of July 25, 1998, this spread was 20 basis points. A commitment
fee of 7 basis points is assessed against any undrawn amounts. The agreement
includes a single financial covenant that places a variable floor on tangible
net worth, as defined, if certain leverage ratios are exceeded. There have been
no borrowings under this agreement.
7. COMMITMENTS AND CONTINGENCIES
Leases The Company has entered into several agreements to lease 448 acres of
land located in San Jose, California, where it has established its headquarters
operations, and 45 acres of land located in Research Triangle Park, North
Carolina, where it has expanded certain research and development and customer
support activities. All of the leases have initial terms of five to seven years
and options to renew for an additional three to five years, subject to certain
conditions. At any time during the terms of these land leases, the Company may
purchase the land. If the Company elects not to purchase the land at the end of
each of the leases, the Company has guaranteed a residual value of $560 million.
The Company has also entered into agreements to lease certain buildings to
be constructed on the land described above. The lessors of the buildings have
committed to fund up to a maximum of $706 million (subject to reductions based
on certain conditions in the respective leases) for the construction of the
buildings, with the portion of the committed amount actually used to be
determined by the Company. Rent obligations for the buildings commence on
various dates and will expire at the same time as the land leases.
The Company has an option to renew the building leases for an additional
three to five years, subject to certain conditions. The Company may, at its
option, purchase the buildings during or at the ends of the terms of the leases
at approximately the amount expended by the lessors to construct the buildings.
If the Company does not exercise the purchase options by the ends of the leases,
the Company will guarantee a residual value of the buildings as determined at
the lease inception date of each agreement (approximately $323 million at July
25, 1998).
As part of the above lease transactions, the Company restricted $554 million
of its investment securities as collateral for specified obligations of the
lessor under the leases. These investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations under
the Company's investment policy. In addition, the Company must maintain a
minimum consolidated tangible net worth, as defined, of $2.8 billion.
The Company also leases office space in Santa Clara, California; Chelmsford,
Massachusetts; and for its various U.S. and international sales offices.
40
<PAGE> 23
Future annual minimum lease payments under all noncancelable operating
leases as of July 25, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------
<S> <C>
1999 $ 95,855
2000 84,475
2001 64,473
2002 50,209
2003 41,193
Thereafter 82,199
- -----------------------------------------------------
Total minimum lease payments $418,404
=====================================================
</TABLE>
Rent expense totaled $87 million, $64 million, and $37 million for 1998, 1997,
and 1996, respectively.
Forward Exchange Contracts The Company conducts business on a global basis in
several major international currencies. As such, it is exposed to adverse
movements in foreign currency exchange rates. The Company enters into forward
foreign exchange contracts to reduce certain currency exposures. These contracts
hedge exposures associated with nonfunctional currency assets and liabilities
denominated in Japanese, Canadian, Australian, and several European currencies.
At the present time, the Company hedges only those currency exposures associated
with certain nonfunctional currency assets and liabilities and does not
generally hedge anticipated foreign currency cash flows.
The Company does not enter into forward exchange contracts for trading
purposes. Gains and losses on the contracts are included in other income and
offset foreign exchange gains or losses from the revaluation of intercompany
balances or other current assets and liabilities denominated in currencies other
than the functional currency of the reporting entity. The Company's forward
currency contracts generally range from one to three months in original
maturity. Forward exchange contracts outstanding and their unrealized gains and
(losses) as of July 25, 1998, which are recorded in other assets, are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
NOTIONAL
VALUE NOTIONAL UNREALIZED
PURCHASED VALUE SOLD GAIN/(LOSS)
- --------------------------------------------------------------
<S> <C> <C> <C>
Japanese yen $ - $ (30,490) $(11)
Australian dollar - (36,184) 32
Canadian dollar 6,008 (66,900) 22
European currencies 160,119 (19,647) 53
- --------------------------------------------------------------
Total $166,127 $(153,221) $ 96
==============================================================
</TABLE>
The Company's forward exchange contracts contain credit risk in that its banking
counterparties may be unable to meet the terms of the agreements. The Company
minimizes such risk by limiting its counter-parties to major financial
institutions. In addition, the potential risk of loss with any one party
resulting from this type of credit risk is monitored. Management does not expect
any material losses as a result of default by other parties.
Legal Proceedings Lucent Technologies, Inc. ("Lucent") brought suit in Federal
District Court in Delaware in June 1998, alleging that the Company violated
eight of Lucent's patents related to data networking. Lucent is seeking damages
for infringement and an injunction prohibiting future use of the patents. This
case is in the preliminary stages of discovery; however, management believes
that the Company has meritorious defenses and intends to defend its position
vigorously. Management of the Company is currently unable to predict the final
outcome of this matter and the ultimate effect, if any, on the Company's
consolidated financial position, results of operations, or cash flows.
The Company and its subsidiaries are subject to other legal proceedings,
claims, and litigation arising in the ordinary course of business. The Company's
management does not expect that the ultimate costs to resolve these matters will
have a material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
41
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY
Stock Splits In August 1998, the Company's Board of Directors approved a
three-for-two split of the Company's common stock that was applicable to
shareholders of record on August 14, 1998 and effective on September 15, 1998.
All references to share and per-share data for all periods presented have been
adjusted to give effect to this three-for-two stock split, the three-for-two
stock split effective December 1997, as well as the two-for-one stock split
effective February 1996.
Par Value At the Annual Meeting of Shareholders held on November 13, 1997, the
shareholders approved an amendment to the Articles of Incorporation changing the
par value of the Company's Common Stock from zero to $0.001 per share. As a
result, the Company has transferred the additional paid-in capital to a separate
account; however, for financial statement purposes, the additional paid-in
capital account has been combined with the common stock account and reflected on
the balance sheet as "Common stock and additional paid-in capital."
Shareholder Rights Plan In June 1998, the Company's Board of Directors approved
a Shareholders' Rights Plan. This plan is intended to protect shareholders'
rights in the event of an unsolicited takeover attempt. It is not intended to
prevent a takeover of the Company on terms that are favorable and fair to all
shareholders and will not interfere with a merger approved by the Board of
Directors. Each right entitles shareholders to buy a "unit" equal to one
fifteen-thousandth of a new share of Series A Preferred Stock of the Company.
The rights will be exercisable only if a person or a group acquires or announces
a tender or exchange offer to acquire 15% or more of the Company's common stock.
In the event the rights become exercisable, the rights plan allows for Cisco
shareholders to acquire, at an exercise price of $433 per right owned, stock of
the surviving corporation having a market value of $867, whether or not Cisco is
the surviving corporation. The dividend was distributed to shareholders of
record in June 1998. The rights, which expire June 2008, are redeemable for
$0.00067 per right at the approval of the Company's Board of Directors.
Preferred Stock Under the terms of the Company's Articles of Incorporation, the
Board of Directors may determine the rights, preferences, and terms of the
Company's authorized but unissued shares of preferred stock.
9. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan
("the Purchase Plan") under which 55.7 million shares of common stock have been
reserved for issuance. Eligible employees may purchase a limited number of
shares of the Company's stock at 85% of the market value at certain plan-defined
dates.
In November 1997, the shareholders approved an amendment to the Purchase
Plan which, among other changes, increased the maximum number of shares of
Common Stock authorized for issuance over the term of the Purchase Plan by 33.8
million common shares, which is reflected in the number above, and extended the
term of the Plan from January 3, 2000 to January 3, 2005. In fiscal 1998, 1997,
and 1996, 3.3 million, 3.1 million, and 2.9 million shares, respectively, were
issued under the Purchase Plan. At July 25, 1998, 34.9 million shares were
available for issuance under the Purchase Plan.
Stock Option Plans In November 1996, the Company's shareholders approved the
1996 Stock Incentive Plan (the "1996 Plan"). This plan was the successor to the
Company's 1987 Stock Option Plan (the "Predecessor Plan"). All outstanding
options under the Predecessor Plan were transferred to the 1996 Plan. However,
all outstanding options under the Predecessor Plan continue to be governed by
the terms and conditions of the existing option agreements for those grants. The
maximum number of shares under the 1996 Plan was initially limited to the 154.9
million shares transferred
42
<PAGE> 25
from the Predecessor Plan. Under the terms of the 1996 Plan, the share reserve
will increase each December for the next three fiscal years, beginning with
fiscal 1997, by an amount equal to 4.75% of the outstanding shares on the last
trading day of the immediately preceding November. Although the Board has the
authority to set other terms, the options are generally 25% exercisable one year
from the date of grant and then ratably over the following 36 months. Options
issued under the Predecessor Plan generally had terms of five years. New options
granted under the 1996 Plan expire no later than nine years from the grant date.
A summary of option activity follows (in thousands, except per-share
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE EXERCISE
FOR GRANT OPTIONS PRICE
- -------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES, JULY 30, 1995 (6,559) 121,187 $ 6.80
Granted and assumed (79,133) 79,133 11.26
Exercised (39,985) 2.10
Canceled 4,885 (4,885) 9.03
Additional shares reserved 117,383
- -------------------------------------------------------------------------
BALANCES, JULY 28, 1996 36,576 155,450 10.20
Granted and assumed (95,405) 95,405 21.74
Exercised (39,338) 5.67
Canceled 10,514 (10,514) 15.28
Additional shares reserved 71,584
- -------------------------------------------------------------------------
BALANCES, JULY 26, 1997 23,269 201,003 16.30
Granted and assumed (63,447) 63,447 43.85
Exercised (37,931) 10.62
Canceled 10,867 (10,867) 19.73
Additional shares reserved 72,482
- -------------------------------------------------------------------------
BALANCES, JULY 25, 1998 43,171 215,652 $25.23
=========================================================================
</TABLE>
The Company has, in connection with the acquisition of various companies,
assumed the stock option plans of each acquired company. A total of 13.5 million
shares of the Company's common stock have been reserved for issuance under the
assumed plans, and the related options are included in the preceding table.
The following tables summarize information concerning outstanding and
exercisable options at July 25, 1998 (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE PER SHARE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01-12.46 50,651 3.4 $ 7.39 37,726 $ 7.24
12.83-20.67 48,095 7.0 19.16 18,230 18.34
21.06-23.22 36,454 7.1 22.44 14,358 22.42
23.72-43.96 36,590 7.7 31.65 7,369 27.24
46.00-61.96 43,862 8.7 49.47 13 49.74
- ------------------------------------------------------------------------------------------------------------
Total 215,652 6.6 $25.23 77,696 $14.55
============================================================================================================
</TABLE>
At July 26, 1997 and July 28, 1996, approximately 55.9 million, and 48.9 million
outstanding options, respectively, were exercisable. The weighted average
exercise prices for options were $9.18 and $5.08 at July 26, 1997, and July 28,
1996, respectively.
43
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro forma results below.
These amounts have not been reflected in the Company's Statements of Operations,
because APB 25, "Accounting for Stock Issued to Employees," specifies that no
compensation charge arises when the price of the employees' stock options equal
the market value of the underlying stock at the grant date, as in the case of
options granted to the Company's employees.
SFAS No. 123 pro forma numbers are as follows (in thousands, except
per-share amounts and percentages):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported under APB 25 $1,350,072 $1,048,679 $913,324
Net income pro forma under SFAS 123 $1,108,809 $ 897,939 $872,263
Basic net income per common share--as reported under APB 25 $ 0.88 $ 0.71 $ 0.64
Diluted net income per common share--as reported under APB 25 $ 0.84 $ 0.68 $ 0.61
Basic net income per common share--pro forma under SFAS 123 $ 0.72 $ 0.60 $ 0.61
Diluted net income per common share--pro forma under SFAS 123 $ 0.70 $ 0.59 $ 0.59
</TABLE>
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 5.7% 6.4% 5.9% 5.4% 5.3% 5.4%
Expected volatility 35.6% 32.8% 32.9% 44.8% 44.4% 44.9%
Expected life (in years) 3.1 3.1 3.1 0.5 0.5 0.5
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options. The weighted average estimated fair
values of employee stock options granted during fiscal 1998, 1997, and 1996 were
$14.27, $6.93, and $5.93 per share, respectively.
The above pro forma disclosures are also not likely to be representative of
the effects on net income and net income per common share in future years,
because they do not take into consideration pro forma compensation expense
related to grants made prior to the Company's fiscal year 1996.
Employee 401(k) Plans The Company has adopted a plan known as the Cisco Systems,
Inc. 401(k) Plan ("the Plan") to provide retirement and incidental benefits for
its employees. As allowed under Section 401(k) of the Internal Revenue Code, the
Plan provides tax-deferred salary deductions for eligible employees.
Employees may contribute from 1% to 15% of their annual compensation to the
Plan, limited to a maximum annual amount as set periodically by the Internal
Revenue Service. The Company matches employee contributions dollar for dollar up
to a maximum of $1,500 per year per person. All matching contributions vest
immediately. In addition, the Plan provides for discretionary contributions as
determined by the Board of Directors. Such contributions to the Plan are
allocated among eligible participants in the proportion of their salaries to the
total salaries of all participants.
44
<PAGE> 27
Company matching contributions to the Plan totaled $15 million in 1998, $13
million in 1997, and $7 million in 1996. No discretionary contributions were
made in 1998, 1997, or 1996.
10. INCOME TAXES
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 851,916 $ 845,254 $ 514,050
Deferred (39,088) (171,571) (64,133)
- ---------------------------------------------------------------------
812,828 673,683 449,917
=====================================================================
State:
Current 86,428 153,110 92,291
Deferred (7,466) (15,043) (6,907)
- ---------------------------------------------------------------------
78,962 138,067 85,384
=====================================================================
Foreign:
Current 74,165 27,773 19,452
Deferred (13,561) 670 (3,252)
- ---------------------------------------------------------------------
60,604 28,443 16,200
- ---------------------------------------------------------------------
Total provision $ 952,394 $ 840,193 $ 551,501
=====================================================================
</TABLE>
Income (loss) before provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 1,981,585 $ 2,009,118 $ 1,433,315
Foreign 320,881 (120,246) 31,510
- --------------------------------------------------------------
$ 2,302,466 $ 1,888,872 $ 1,464,825
==============================================================
</TABLE>
The Company paid income taxes of $438 million, $659 million, and $335 million in
fiscal 1998, 1997, and 1996, respectively. The items accounting for the
difference between income taxes computed at the federal statutory rate and the
provision for income taxes follow:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefits 2.2 4.5 3.6
Foreign sales corporation (2.4) (3.3) (2.9)
Nondeductible purchased R&D 6.4 7.1
Tax-exempt interest (1.6) (1.0) (1.0)
Tax credits (1.4) (1.3) (0.3)
Other, net 3.2 3.5 3.2
- ---------------------------------------------------------------------------------
41.4% 44.5% 37.6%
=================================================================================
</TABLE>
The components of the deferred income tax assets (liabilities) follow (in
thousands):
<TABLE>
<CAPTION>
JULY 25, 1998 JULY 26, 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Allowance for doubtful accounts and returns $ 133,818 $ 38,008
Other nondeductible accruals 130,617 141,300
Purchased research and development 92,271 81,115
Inventory allowances and capitalization 67,620 89,984
Accrued state franchise tax 27,697 29,231
Depreciation 23,417 11,031
Deferred revenue 16,629
- ----------------------------------------------------------------------------
Total deferred tax assets 475,440 407,298
- ----------------------------------------------------------------------------
Liabilities:
Deferred revenue (26,472)
Unrealized gain on investments (47,996) (29,146)
- ----------------------------------------------------------------------------
Total deferred tax liabilities (74,468) (29,146)
- ----------------------------------------------------------------------------
$ 400,972 $ 378,152
============================================================================
</TABLE>
45
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The noncurrent portion of the deferred income tax assets, which totaled $56
million at July 25, 1998 and $66 million at July 26, 1997, is included in other
assets.
The Company's income taxes payable for federal, state, and foreign purposes
have been reduced by the tax benefits of disqualifying dispositions of stock
options. The benefit is the difference between the market value of the stock
issued at the time of exercise and the option price tax effected.
11. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the design,
development, manufacture, marketing, and technical support of networking
products and services.
In 1998, 1997, and 1996, no single customer accounted for 10% or more of the
Company's net sales. International sales, primarily in Europe, the Pacific
region, and Canada, were $3,463 million in 1998, $2,803 million in 1997, and
$1,976 million in 1996. Export sales, primarily to these regions, were $660
million in 1998, $1,939 million in 1997, and $1,530 million in 1996.
Summarized financial information by geographic region for 1998, 1997, and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
United States $ 7,903,326 $ 6,328,720 $ 4,024,482
Europe 2,281,423 396,276 75,721
Other 521,178 467,579 370,716
Eliminations (2,247,150) (752,404) (374,912)
- ---------------------------------------------------------------------------
Total $ 8,458,777 $ 6,440,171 $ 4,096,007
===========================================================================
Operating income:
United States $ 1,374,358 $ 1,581,622 $ 1,379,994
Europe 705,640 25,495 5,563
Other 24,757 23,255 17,141
Eliminations (401) (3,078) (1,892)
- ---------------------------------------------------------------------------
Total $ 2,104,354 $ 1,627,294 $ 1,400,806
===========================================================================
Identifiable assets:
United States $ 8,103,629 $ 5,041,225
Europe 716,623 352,928
Other 189,388 152,187
Eliminations (92,935) (94,356)
- ---------------------------------------------------------------------------
Total $ 8,916,705 $ 5,451,984
===========================================================================
</TABLE>
12. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per
share as required under SFAS 128 (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,350,072 $1,048,679 $ 913,324
===================================================================================
Weighted average shares--basic 1,533,869 1,485,986 1,437,030
Effect of dilutive securities:
Employee stock options 74,304 65,053 53,048
- -----------------------------------------------------------------------------------
Weighted average shares--diluted 1,608,173 1,551,039 1,490,078
===================================================================================
Net income per share--basic $ 0.88 $ 0.71 $ 0.64
===================================================================================
Net income per share--diluted $ 0.84 $ 0.68 $ 0.61
===================================================================================
</TABLE>
46
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Cisco Systems, Inc.
San Jose, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Cisco
Systems, Inc. and its subsidiaries at July 25, 1998 and July 26, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended July 25, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 4, 1998
47
<PAGE> 30
SUPPLEMENTARY FINANCIAL DATA
(unaudited) (in thousands, except per-share amounts)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -------------------------------------------------------
JULY 25, APR. 25, JAN. 24, OCT. 25, JULY 26, APR. 26, JAN. 25, OCT. 26,
1998 1998 1998 1997 1997 1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $2,389,989 $2,183,756 $2,016,315 $1,868,717 $1,765,097 $1,647,871 $1,592,377 $1,434,826
Gross margin 1,571,054 1,434,029 1,319,541 1,216,536 1,149,057 1,076,532 1,039,858 933,346
Operating income 696,646 272,736 659,693 475,279 286,453 539,130 488,551 313,160
Income before provision
for income taxes 756,426 324,783 703,511 517,746 335,701 600,511 562,914 389,746
Net income $ 491,677(1) $ 64,578(2) $ 457,282 $ 336,535(3) $ 150,957(4) $ 378,321(5) $ 338,459(6) $ 180,942(7)
Net income per common
share--basic(*) $ .32 $ .04 $ .30 $ .22 $ .10 $ .25 $ .23 $ .13
Net income per common
share--diluted(*) $ .30(1) $ .04(2) $ .29 $ .21(3) $ .10(4) $ .24(5) $ .22(6) $ .12(7)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Reflects the three-for-two stock split effective September 1998.
(1) Net income and net income per share include purchased research and
development expenses of $47.8 million. Pro forma net income and diluted
net income per share, excluding this nonrecurring item net of tax, would
have been $522.8 million and $0.32, respectively.
(2) Net income and net income per share include purchased research and
development expenses of $418.7 million. Pro forma net income and diluted
net income per share, excluding this nonrecurring item net of tax, would
have been $483.2 million and $0.30, respectively.
(3) Net income and net income per share include purchased research and
development expenses of $127.2 million and realized gains on the sale of
a minority stock investment of $5.4 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $415.7 million and $0.26, respectively.
(4) Net income and net income per share include purchased research and
development expenses of $290.6 million and realized gains on the sale of
a minority stock investment of $18.0 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $383.2 million and $0.24, respectively.
(5) Net income and net income per share include realized gains on the sale
of a minority stock investment of $32.3 million. Pro forma net income
and diluted net income per share, excluding this nonrecurring item net
of tax, would have been $358.0 million and $0.23, respectively.
(6) Net income and net income per share include purchased research and
development expenses of $43.2 million and realized gains on the sale of
a minority stock investment of $47.3 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $351.9 million and $0.23, respectively.
(7) Net income and net income per share include purchased research and
development expenses of $174.6 million and realized gains on the sale of
a minority stock investment of $55.1 million. Pro forma net income and
diluted net income per share, excluding these nonrecurring items net of
tax, would have been $320.8 million and $0.21, respectively.
STOCK MARKET INFORMATION
Cisco Systems' common stock (Nasdaq symbol CSCO) is traded on the Nasdaq
National Market. The following table sets forth the range of high and low
closing prices for each period indicated, adjusted to reflect the three-for-two
splits effective September 1998 and December 1997, and the two-for-one split
effective February 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $37.47 $31.00 $29.78 $22.22 $17.17 $11.61
Second quarter 40.19 32.39 33.28 25.61 19.53 14.53
Third quarter 49.25 37.75 31.00 20.61 23.28 18.03
Fourth quarter 68.79 46.96 35.72 20.67 26.11 20.94
- --------------------------------------------------------------------------------
</TABLE>
The Company has never paid cash dividends on the common stock and has no present
plans to do so. There were approximately 16,950 shareholders of record on July
25, 1998.
48
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
Cisco Systems Canada Limited
Cisco Systems Europe, S.A.R.L. (France)
Cisco Systems Import/Export Corporation (U.S. Virgin Islands)
Cisco Systems Belgium, S.A.
Cisco Systems Limited (U.K.)
Cisco Systems Australia PTY. Limited
Nihon Cisco Systems, K.K. (Japan)
Cisco Systems de Mexico, S.A. de C.V.
Cisco Systems New Zealand Limited
Cisco Systems (HK) Limited (Hong Kong)
Cisco Systems GmbH (Germany)
Cisco Systems (Italy) Srl
Cisco Systems GesmbH (Austria)
Cisco do Brasil Ltda. (Brazil)
Cisco Systems (Korea) Ltd.
VZ, Cisco Systems, C.A. (Venezuela)
Cisco Systems South Africa (Pty) Ltd.
Cisco Systems Sweden Aktiebolag
Cisco Systems (Switzerland) AG
Cisco Systems Netherlands, B.V.
Cisco Systems International Netherlands, B.V.
Cisco Systems Czech Republic, s.r.o.
Cisco Systems Spain, S.L.
Cisco Systems Argentina S.A.
Cisco Systems Chile, S.A.
Cisco Sistemas de Redes S.A., (Costa Rica)
Cisco Systems Malaysia, Sdn. Bhd.
Cisco Systems (USA) Pte. Ltd., Singapore
Cisco Systems Thailand, Ltd.
Cisco Systems Peru, S.A.
Cisco Systems Greece, S.A.
Cisco Systems Poland, Sp.zo.o
Cisco Systems Israel, Ltd.
Cisco Systems Internetworking Iletsim Hizmetlieri Ltd.Sirketi
(Turkey)
Cisco Systems (India), Ltd. (DE,USA)
Cisco Systems Capital Corp. (USA)
Cisco Systems (Taiwan),Ltd.
Cisco Systems (Colombia), Ltda
Cisco Technology, Inc.
Cisco Systems Sales & Service, Inc.
Skystone Systems Company (Canada)
Telebit, Corporation (CA,USA)
Cisco Systems Danmark AS
Cisco Systems Norway AS
Cisco Systems Hungary, Ltd.
Cisco Systems Management B.V.
Cisco Systems (Puerto Rico) Corp.
Cisco Systems Finland Oy
Cisco Systems (China) Networking Technologies Ltd.
Cisco Systems Romania SRL
Cisco Systems Croatia Ltd. for Trade
Cisco Systems Slovakia, spol. sr.o
29
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cisco Systems, Inc. on Form S-3 (File Numbers: 333-17839, 333-20127, 333-24559,
333-33093, 333-33663, 333-36197) and on Form S-8 (File Numbers: 33-34849,
33-40509, 33-44221, 33-70644, 33-71860, 33-83268, 33-87100, 33-87096, 33-63331,
33-64283, 33-64283[Post Eff.], 33-01069, 333-02101, 333-05447, 333-09903,
333-14383, 333-14679, 333-14661, 333-16577, 333-17287, 333-24741, 333-33619,
333-33613, 333-35805) of our reports dated August 4, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Cisco
Systems, Inc. as of July 25, 1998 and July 26, 1997, and for the three years
ended July 25, 1998 which reports are incorporated by reference in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 23, 1998
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE
PERIOD ENDING JULY 25, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-26-1997
<PERIOD-END> JUL-25-1998
<CASH> 534,652
<SECURITIES> 5,173,908
<RECEIVABLES> 1,337,709
<ALLOWANCES> 39,842
<INVENTORY> 361,986
<CURRENT-ASSETS> 3,761,924
<PP&E> 1,264,651
<DEPRECIATION> 669,302
<TOTAL-ASSETS> 8,916,705
<CURRENT-LIABILITIES> 1,766,980
<BONDS> 0
0
0
<COMMON> 3,220,205
<OTHER-SE> 3,886,413
<TOTAL-LIABILITY-AND-EQUITY> 8,916,705
<SALES> 8,458,777
<TOTAL-REVENUES> 8,458,777
<CGS> 2,917,617
<TOTAL-COSTS> 6,354,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,302,466
<INCOME-TAX> 952,394
<INCOME-CONTINUING> 1,350,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,350,072
<EPS-PRIMARY> 0.88<F1>
<EPS-DILUTED> 0.84
<FN>
<F1>FOR PURPOSES OF THIS STATEMENT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
