<PAGE> 1
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 30, 1999
OR
[ ] 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
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
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 filing requirements
for the past 90 days.
YES X NO
----- -----
As of December 13, 1999, 3,421,222,492 shares of the Registrant's common stock
were outstanding.
1
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. Financial Statements and Supplementary Data
a) Consolidated statements of operations for the three months ended October 30, 1999
and October 24, 1998 3
b) Consolidated balance sheets at October 30, 1999 and July 31, 1999 4
c) Consolidated statements of cash flows for the three months ended October 30, 1999
and October 24, 1998 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure of Market Risk 36
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 37
Item 4. Submission of Matters to a Vote of Shareholders 38
Signature 40
Exhibits Exhibit 3.1.2, Certificate of Amendment of the Restated Articles of Incorporation
Exhibit 3.2, Amended and Restated Bylaws
Exhibit 10.2.2, Amendment to the Cisco Systems, Inc.
1996 Stock Incentive Plan
Exhibit 27, Financial data schedule
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
October 30, October 24,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales $3,877 $2,597
Cost of sales 1,364 897
------ ------
Gross margin 2,513 1,700
Operating expenses:
Research and development 519 333
Sales and marketing 803 518
General and administrative 101 76
Amortization of goodwill and purchased
intangible assets 24 11
Purchased research and development 381 41
------ ------
Total operating expenses 1,828 979
------ ------
Operating income 685 721
Interest and other income, net 106 66
------ ------
Income before provision for income taxes 791 787
Provision for income taxes 353 275
------ ------
Net income $ 438 $ 512
====== ======
Net income per share--basic $ .13 $ .16
====== ======
Net income per share--diluted $ .13 $ .15
====== ======
Shares used in per-share
calculation--basic 3,301 3,179
====== ======
Shares used in per-share
calculation--diluted 3,500 3,351
====== ======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
<TABLE>
<CAPTION>
October 30, July 31,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,251 $ 838
Short-term investments 514 1,215
Accounts receivable, net of allowance for doubtful
accounts of $27 at October 30, 1999 and
$27 at July 31, 1999 1,391 1,242
Inventories, net 655 652
Deferred income taxes 604 545
Prepaid expenses and other current assets 477 168
------- -------
Total current assets 4,892 4,660
Investments 8,884 7,032
Restricted investments 1,079 1,080
Property and equipment, net 898 806
Other assets, net 1,654 1,194
------- -------
Total assets $17,407 $14,772
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 484 $ 363
Income taxes payable 475 630
Accrued payroll and related expenses 576 678
Other accrued liabilities 1,494 1,339
------- -------
Total current liabilities 3,029 3,010
Deferred income taxes 452 -
Minority interest 44 44
Shareholders' equity:
Preferred stock, no par value, 5 shares authorized:
none issued or outstanding at October 30, 1999
and July 31, 1999
Common stock and additional paid-in capital,
$0.001 par value, 10,000 shares authorized: 3,315 shares
issued and outstanding at October 30, 1999 and 3,284 at
July 31, 1999 6,794 5,578
Retained earnings 6,264 5,842
Accumulated comprehensive income 824 298
------- -------
Total shareholders' equity 13,882 11,718
------- -------
Total liabilities and shareholders' equity $17,407 $14,772
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
October 30, October 24,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 438 $ 512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 144 113
Deferred income taxes (21) 38
Tax benefits from employee stock plans 390 116
Adjustment to conform fiscal year ends of pooled acquisitions (3) 1
Purchased research and development from acquisitions 381 41
Change in operating assets and liabilities:
Accounts receivable (148) (36)
Inventories (3) (14)
Prepaid expenses and other current assets 1 (31)
Income taxes payable (155) (7)
Accounts payable 106 33
Accrued payroll and related expenses (107) (10)
Other accrued liabilities 153 90
------- -------
Net cash provided by operating activities 1,176 846
------- -------
Cash flows from investing activities:
Purchases of short-term investments (297) (131)
Proceeds from sales and maturities of short-term
investments 825 462
Purchases of investments (3,104) (1,048)
Proceeds from sales of investments 2,262 427
Purchases of restricted investments (70) (133)
Proceeds from sales and maturities of restricted
investments 69 54
Acquisition of property and equipment (193) (125)
Increase in lease receivables (119) (39)
Other (411) (25)
------- -------
Net cash used in investing activities (1,038) (558)
------- -------
Cash flows from financing activities:
Issuance of common stock 269 129
Other 6 11
------- -------
Net cash provided by financing activities 275 140
------- -------
Net increase in cash and equivalents 413 428
Cash and equivalents, beginning of period 838 598
------- -------
Cash and equivalents, end of period $ 1,251 $ 1,026
======= =======
</TABLE>
See notes to consolidated financial statements.
5
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CISCO SYSTEMS, INC.
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-week period ending on the last
Saturday in July. Fiscal year 2000 is a 52-week year while 1999 was a 53-week
year.
Basis of Presentation
All historical financial information has been restated to reflect the
acquisitions of StratumOne Communications, Inc. ("StratumOne") and TransMedia
Communications, Inc. ("TransMedia") in the first quarter of fiscal 2000 which
were accounted for as poolings of interests. In addition, the historical
financial information has been restated to reflect the acquisition of Fibex
Systems ("Fibex") which was completed in the fourth quarter of 1999 and
accounted for as a pooling of interests.
The accompanying financial data as of October 30, 1999 and July 31, 1999, and
for the three months ended October 30, 1999 and October 24, 1998, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The July 31, 1999 balance sheet was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 31, 1999.
6
<PAGE> 7
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of October 30, 1999 and for the three
months ended October 30, 1999 and October 24, 1998, have been made. The results
of operations for the period ended October 30, 1999 are not necessarily
indicative of the operating results for the full year.
Computation of 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.
Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management does not believe this will have a material effect on
the Company's operations. Implementation of this standard has recently been
delayed by the FASB for a twelve-month period. The Company will now be required
to adopt SFAS 133 for its first quarterly filing of fiscal 2001.
7
<PAGE> 8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATIONS
Purchase Combinations
The Company has 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 aggregate 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.
In September 1999, the Company completed its purchase of Monterey Networks, Inc.
("Monterey"), a developer of infrastructure-class, optical cross-connect
technology that is used to increase network capacity at the core of an optical
network. The Company's acquired technology consists of one product currently
under development which will result in a wavelength router that would
intelligently route signals over long-haul optical pipes created by dense wave
division multiplexing (DWDM). Also in September 1999, the Company completed its
purchase of MaxComm Technologies, Inc. ("MaxComm"), a developer of broadband
Internet technology that brings data and multiple voice lines to consumers. The
Company's acquired technology consists of one product currently under
development which will allow the end user to create an easily adaptable home LAN
(local area network) utilizing their existing in home wiring, to support up to
four separate phone lines with different numbers.
8
<PAGE> 9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of the completed purchase acquisition transactions is further outlined
below:
Summary of purchase transactions (in millions):
<TABLE>
<CAPTION>
Purchased
Research &
Development Form of Consideration and Other
Entity Name Consideration Charge Notes to Acquisition
----------- ------------- ----------- -------------------------------
<S> <C> <C> <C>
Quarter Ended - October 30, 1999
Monterey Networks, Inc. $517 $354 Common stock and options assumed; $14 in
liabilities assumed; goodwill and other
intangibles recorded of $154
MaxComm Technologies, Inc. $ 73 $ 27 Common stock and options assumed; goodwill and
other intangibles recorded of $41
</TABLE>
Total purchased research and development expense for the three months ending
October 30, 1999 and October 24, 1998 was $381 million and $41 million,
respectively. The purchased research and development expense for both periods
was attributable to stock consideration.
Pooling of Interests Combinations
In September 1999, the Company acquired StratumOne, a developer of highly
integrated, high-performance semiconductor technology and TransMedia, a provider
of Media Gateway technology that unites the multiple networks of public voice
communications. Under the terms of the agreements, approximately 12.3 million
shares of common stock were issued to acquire StratumOne and TransMedia, and
options to purchase an additional 1.4 million shares were assumed. Also in
September 1999, the Company acquired Cocom A/S, ("Cocom"), a European developer
of high-speed Internet access solutions over cable, satellite and wireless
networks based on international standards. Under the terms of the agreement,
approximately 1 million shares of common stock were issued to acquire Cocom. All
historical financial information contained herein has been restated to reflect
the acquisitions of StratumOne and TransMedia. The historical operations of
Cocom were not material to the Company's consolidated operations, therefore
prior period statements have not been restated for this acquisition.
9
<PAGE> 10
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisitions Pending or Completed After First Quarter Ended October 30, 1999
In November 1999, the Company acquired Calista, Inc. ("Calista") and Tasmania
Network Systems, Inc. ("Tasmania"). Calista is a developer of Internet
technology that allows different business phone systems to work together over an
open Internet-based infrastructure. Tasmania is a leading developer of network
caching software technology. The total purchase price for these two acquisitions
was approximately $80 million and was paid in common stock. Calista and Tasmania
were both accounted for as purchases. Pro forma results of operations have not
been presented because the effects of these acquisitions were not material on
either an individual or an aggregate basis.
In November 1999, the Company completed the acquisitions of Cerent Corporation
("Cerent") and Webline Communications Corporation ("Webline"). Cerent is a
developer of next-generation optical transport products, and Webline is a
provider of customer interaction management software for Internet customer
service and e-commerce. Under the terms of the agreements, approximately 98.1
million and 3.7 million shares of common stock were issued to acquire Cerent and
Webline, respectively. The Company also assumed outstanding options that were
converted into options to purchase approximately 2.5 million shares of the
Company's stock. As of the announcement date, the purchase prices for Cerent and
Webline were approximately $6.9 billion and $325 million, respectively. The
transactions were accounted for as poolings of interests; all prior periods'
financial information will be restated as a result of these transactions. The
following table shows the pro forma historical results of the Company, Cerent,
and Webline for the periods prior to the consummation of the mergers of the
entities (in millions):
10
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
October 30, October 24,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues:
Cisco $ 3,877 $ 2,597
Cerent 36 -
Webline 1 1
------- -------
Total $ 3,914 $ 2,598
======= =======
Net income:
Cisco $ 438 $ 512
Cerent (15) (2)
Webline (3) (1)
------- -------
Total $ 420 $ 509
======= =======
</TABLE>
In November 1999, the Company announced a definitive agreement to acquire
Aironet Wireless Communications, Inc. ("Aironet") for approximately $799 million
payable in common stock. Aironet is a leading developer of standards-based, high
speed wireless LAN (local area network) products. In December 1999, the Company
acquired V-Bits, Inc. ("V-Bits") for approximately $128 million which was paid
in common stock. V-Bits is a provider of standards-based digital video
processing systems for cable television service providers. Aironet will be
accounted for as a purchase while V-Bits will be accounted for as a pooling of
interests.
4. BALANCE SHEET DETAIL (In millions)
<TABLE>
<CAPTION>
Inventories: October 30, July 31,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
Raw materials $ 79 $143
Work in process 263 198
Finished goods 265 276
Demonstration systems 48 35
---- ----
Total $655 $652
==== ====
</TABLE>
11
<PAGE> 12
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Other Assets: October 30, July 31,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
Goodwill- gross $ 299 $ 157
Other intangible assets- gross 738 395
Less: accumulated amortization (122) (92)
------ ------
Intangibles, net 915 460
Investment in nonpublic companies 277 196
Net investments in leases 310 500
Other assets 152 38
------ ------
Total $1,654 $1,194
====== ======
</TABLE>
Amortization expense for the three month period ended October 30, 1999 and
October 24, 1998 was $30 million and $11 million, respectively.
5. COMPREHENSIVE INCOME
The following table presents the calculation of comprehensive income as required
by SFAS 130. Comprehensive income has no impact on the Company's net income,
balance sheet or shareholders' equity. The components of comprehensive income,
net of tax, are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
October 30, October 24,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Net income $438 $512
Other comprehensive income:
Change in unrealized gain/(loss) on investments, net 520 17
Change in accumulated translation adjustments 6 11
---- ----
Total comprehensive income $964 $540
==== ====
</TABLE>
6. INCOME TAXES
The Company paid income taxes of $135 million in the three months ended October
30, 1999 and $125 million in the three months ended October 24, 1998. The
Company's income taxes currently payable for federal and state purposes have
been reduced by the tax benefits of disqualifying dispositions of stock options.
This benefit totaled $390 million and $116 million in the first three months of
fiscal 2000 and 1999, respectively, and was credited directly to shareholders'
equity.
12
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY
Increase in Authorized Common Stock
On November 10, 1999, the shareholders of the Company approved an increase to
the authorized number of shares of Common Stock from 5.4 billion to 10 billion
shares.
8. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company's operations involve the design, development, manufacture,
marketing, and technical support of networking products and services. The
Company offers end-to-end networking solutions for its customers. Cisco products
include routers, LAN and ATM switches, dialup access servers, and network
management software. These products, integrated by the Cisco IOS(R) software,
link geographically dispersed LANs, WANs, and IBM networks.
The Company conducts business globally and is managed geographically. The
Company's management relies on an internal management accounting system. This
system includes sales and standard cost information by geographic theater. Sales
are attributed to a theater based on the ordering location of the customer. The
Company's management makes financial decisions and allocates resources based on
the information it receives from this internal system. Information from this
internal management system differs from the amounts reported under generally
accepted accounting principles due to certain corporate level adjustments. These
corporate level adjustments are primarily sales related reserves, credit memos,
and returns. Based on the criteria set forth in SFAS No. 131, the Company has
four reportable segments: the Americas, EMEA, Asia/Pacific, and Japan.
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information by segment for the first quarter of fiscal
years 2000 and 1999, as taken from the internal management information system
discussed above, is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
October 30, October 24,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales:
U.S./Americas $ 2,621 $ 1,787
EMEA 1,020 665
Asia/Pacific 284 163
Japan 157 127
Corporate adjustments (205) (145)
------- -------
Total $ 3,877 $ 2,597
======= =======
Standard Margin:
U.S./Americas $ 1,924 $ 1,304
EMEA 765 485
Asia/Pacific 207 123
Japan 125 94
Corporate adjustments (508) (306)
------- -------
Total $ 2,513 $ 1,700
======= =======
</TABLE>
The standard margins above differ from the amounts recognized under generally
accepted accounting principles because the Company does not allocate certain
production overhead, manufacturing variances, and other production related costs
to the theaters.
14
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per
share as required under SFAS 128 (in millions except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
October 30, October 24,
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Numerator:
Net income $ 438 $ 512
------ ------
Denominator:
Denominator for basic earnings per
share -- weighted-average shares 3,301 3,179
Effect of dilutive securities:
Employee stock options 199 172
------ ------
Denominator for diluted earnings per share 3,500 3,351
====== ======
Net income per share--Basic $ .13 $ .16
====== ======
Net income per share--Diluted $ .13 $ .15
====== ======
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All historical financial information has been restated to reflect the
acquisitions of StratumOne Communications, Inc. and TransMedia Communications,
Inc. in the first quarter of fiscal 2000 which were accounted for as poolings of
interests. In addition, the historical financial information has been restated
to reflect the acquisition of Fibex Systems which was completed in the fourth
quarter of 1999 and accounted for as a pooling of interests.
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import, constitute "forward-looking
statements." You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us described below and elsewhere in this Quarterly Report, and in other
documents we file with the SEC.
Net sales grew to $3.9 billion in the first quarter of fiscal 2000 from $2.6
billion in the first quarter of 1999. The 49.3% increase in net sales between
the two three-month periods was primarily a result of increasing unit sales of
LAN switching products such as the Catalyst(R) 6000 family and the Catalyst 2900
series of switches for smaller enterprise networks, the Cisco 12000 gigabit
switch router (GSR), access servers such as the Cisco 2600 and 3600 families,
growth in the sales of add-on boards that provide increased functionality, and
increased maintenance 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 our high-end core
router products. Additionally, sales of some of our more established product
lines such as the Catalyst 5000, Cisco 2500 and Cisco 4000 product families have
decreased as a percentage of total revenue. Sales in the first quarter of fiscal
2000 grew 46.7% in the Americas, 53.4% in EMEA, 74.2% in Asia and 23.6% in Japan
compared to the first quarter of fiscal 1999 (See Note 8). Market demand and
deployment of Internet technologies and business solutions, as well as the
overall economic health within these regions, are primarily driving the strong
growth in the Americas, EMEA and Asia/Pacific.
16
<PAGE> 17
The slower growth in Japan can be attributed to weaker economic conditions,
delayed government spending, and a stronger dollar versus the Yen.
Gross margins decreased to 64.8% in the first quarter of 2000 from 65.5% in the
first quarter of 1999. The decrease in the quarterly period was due principally
to our continued shift in revenue mix towards our lower-margin products and the
continued pricing pressure seen from competitors in certain product areas. The
prices of component parts have fluctuated in the recent past, and we expect that
this trend may continue. An increase in the price of component parts may have a
material adverse impact on gross margins. We expect that gross margins will
continue to decrease in the future, because we believe 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 our
higher-margin router and high-performance switching products. Additionally, as
we focus on new market opportunities, we face increasing competitive pressure
from large telecommunications equipment suppliers and well funded start-up
companies, which may materially adversely affect gross margins. We are
attempting to mitigate this trend through various means, such as increasing the
functionality of our products, continued value engineering, controlling royalty
costs, and improving manufacturing efficiencies. There can be no assurance that
any efforts made by us in these and other areas will successfully offset
decreasing margins.
Research and development expenses increased by $186 million in the first quarter
of 2000 over the first quarter of 1999, an increase to 13.4% from 12.8% of net
sales. The increase reflects our ongoing research and development efforts in a
wide variety of areas such as voice, video, and data integration, Digital
Subscriber Line (DSL) technologies, cable modem technology, wireless access,
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, 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 rate similar to or slightly greater than the sales growth rate, as we
invest in technology to address potential market opportunities. We also continue
to purchase technology in order to bring a broad range of products to the market
in a timely fashion. If we believe that we are unable to enter a particular
market in a timely manner, with internally developed products, we may license
technology from other businesses or acquire other businesses as an alternative
to internal research and development. All of our research and development costs
are expensed as incurred.
17
<PAGE> 18
Sales and marketing expenses increased by $285 million in the first quarter of
2000 over the first quarter of 1999. This represents an increase from 19.9% to
20.7% of net sales for the quarter to quarter period. The increase is due
principally to an increase in the size of our direct sales force and its
commissions, additional marketing and advertising costs associated with the
introduction of new products and the expansion of distribution channels. The
increase also reflects our efforts to invest in certain key areas such as
expansion of our end-to-end strategy and service provider coverage in order to
position ourselves to take advantage of future market opportunities.
General and administrative expenses rose $25 million between the first quarters
of 2000 and 1999, a decrease to 2.6% from 2.9% of net sales. The decrease in
general and administrative expenses as a percentage of sales primarily relates
to the increase in sales. It is management's intent to keep general and
administrative costs relatively constant as a percentage of net sales; however,
this is dependent upon the level of acquisition activity and growth of the
Company, among other factors.
Amortization of goodwill and purchased intangible assets increased by $13
million. Amortization of goodwill and purchased intangible assets includes the
amortization of goodwill and other purchased intangible assets relating to
various purchase acquisitions (See Note 4).
The amount expensed to purchased research and development in the first three
months of fiscal 2000 arose from the completed acquisitions of Monterey and
MaxComm (See also Note 4).
The fair value of the existing products and patents as well as the technology
currently under development was determined by using the income approach, which
discounts expected future cash flows to present value. The discount rates used
in the present value calculations were typically derived from a weighted average
cost of capital analysis, adjusted upward to reflect additional risks inherent
in the development life cycle. These risk factors have increased the overall
discount rate between 5% and 10% for acquisitions in the current quarter. We
expect that the pricing model for products related to these acquisitions will be
considered standard within the high-technology communications industry. However,
we do not expect to achieve a material amount of expense reductions or synergies
as a result of integrating the acquired in-process technology.
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Therefore, the valuation assumptions do not include significant anticipated cost
savings. We expect that products incorporating the acquired technology from
these acquisitions will be completed and begin to generate cash flows over the 6
to 9 months after integration. However, development of these technologies
remains a significant risk to us due to the remaining effort to achieve
technical viability, rapidly changing customer markets, uncertain standards for
new products and significant competitive threats from numerous companies. The
nature of the efforts to develop the acquired technology into commercially
viable products consists principally of planning, designing and testing
activities necessary to determine that the product can meet market expectations,
including functionality and technical requirements. Failure to bring these
products to market in a timely manner could result in a loss of market share, or
a lost opportunity to capitalize on emerging markets, and could have a material
adverse impact on our business and operating results.
Regarding our purchase acquisitions completed in fiscal 1999, actual results to
date have been consistent, in all material respects, with the assumptions of the
Company at the time of the acquisitions as they relate to the value of purchased
in process research and development. The assumptions primarily consist of an
expected completion date for the in-process projects, estimated costs to
complete the projects and revenue and expense projections once the products have
entered the market. Products from these acquisitions are being introduced to the
market 6 to 9 months after the acquisition. Shipment volumes of products from
acquired technologies are not material to our overall position at the present
time, therefore, it is difficult to determine the accuracy of overall revenue
projections early in the technology or product lifecycle. Failure to achieve the
expected levels of revenues and net income from these products will negatively
impact the return on investment expected at the time that the acquisition was
completed and potentially result in impairment of any other assets related to
the development activities.
The following table summarizes the significant assumptions underlying the
valuations in 1999 and 2000 and the development costs incurred by us in the
periods after the respective acquisition date (in millions, except percentages):
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<TABLE>
<CAPTION>
Acquisition Assumptions
----------------------------------
Approximate
Estimated Cost Development Costs
to Complete Risk Adjusted Incurred to Date
Technology at Discount After Acquisition on
Time of Rate In- Acquired In-Process
Entity Name Acquisition Process R&D Technology
----------- ------------- ------------- --------------------
<S> <C> <C> <C>
1999 Purchase Acquisitions
American Internet Corp. $ 1 25% $ 1
Summa Four, Inc. $ 5 25% $12
Clarity Wireless, Inc. $42 32% $14
Selsius Systems, Inc. $15 31% $ 8
PipeLinks, Inc. $ 5 31% $15
Amteva Technologies, Inc. $ 4 35% $ 2
2000 Purchase Acquisitions
Monterey Networks, Inc. $ 4 30% $ 1
MaxComm Technologies, Inc. $ 2 25% $ 1
</TABLE>
Liquidity and Capital Resources
Cash and equivalents, short-term investments, and investments were $10.6 billion
at October 30, 1999, an increase of $1.6 billion from July 31, 1999. The
increase is primarily a result of unrealized gains on publicly held investments,
cash generated by operations and the exercise of employee stock options.
These cash flows were partially offset by cash outflows from operating
activities including tax payments of approximately $135 million, and cash
outflows from investing activities including capital expenditures of
approximately $193 million.
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Accounts receivable increased 12.0% from July 31, 1999 to October 30, 1999. Days
sales outstanding in receivables increased to 33 days at October 30, 1999 from
32 days at July 31, 1999. Inventories increased 0.5% between July 31, 1999 and
October 30, 1999. Inventory level remained relatively constant between the two
periods; however, inventory management remains an area of focus as we balance
the need to maintain strategic inventory levels to ensure competitive lead times
versus the risk of inventory obsolescence because of rapidly changing technology
and customer requirements.
At October 30, 1999, we had a line of credit totaling $500 million, which
expires July 2002. There have been no borrowings under this facility.
We have entered into certain lease arrangements in San Jose, California, and
Research Triangle Park, North Carolina, where we have established our
headquarters operations and certain research and development and customer
support activities. In connection with these transactions, we pledged $1.1
billion of our investments as collateral for certain obligations of the leases.
We anticipate that we will occupy more leased property in the future that will
require similar pledged securities; however, we do not expect the impact of this
activity to be material to liquidity.
We believe that our current cash and equivalents, short-term investments, line
of credit, and cash generated from operations will satisfy our expected working
capital and capital expenditure requirements through fiscal 2000.
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Quarterly Report.
CISCO IS EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY
As a global concern, we face 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 our financial results.
Historically, our primary exposures related to nondollar-denominated sales in
Japan, Canada, and Australia and nondollar-denominated operating expenses in
Europe, Latin America, and Asia where we sell primarily in U.S. dollars.
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Additionally, we have recently seen our exposures to emerging market currencies,
such as the Brazilian real, Korean won, and Russian ruble, among others,
increase because of our expanding presence in these markets and the extreme
currency volatility. We currently do not hedge against these or any other
emerging market currencies and could suffer unanticipated gains or losses as a
result.
The increasing use of the euro as a common currency for members of the European
Union could impact our foreign exchange exposure. We are currently hedging
against fluctuations with the euro and will continue to evaluate the impact of
the euro on our future foreign exchange exposure as well as on our internal
systems.
At the present time, we hedge only those currency exposures associated with
certain assets and liabilities denominated in nonfunctional currencies, and do
not hedge anticipated foreign currency cash flows. The hedging activity
undertaken by us is intended to offset the impact of currency fluctuations on
certain nonfunctional currency assets and liabilities. The success of this
activity depends upon estimations of intercompany balances denominated in
various currencies, primarily the euro, Japanese yen, Canadian dollar,
Australian dollar, and certain other European currencies. To the extent that
these forecasts are over-or understated during periods of currency volatility,
we could experience unanticipated currency gains or losses.
CISCO IS EXPOSED TO THE CREDIT RISK OF SOME OF ITS CUSTOMERS AND TO CREDIT
EXPOSURES IN WEAKENED MARKETS
We are experiencing a greater proportion of our sales activity through our
partners in two-tier distribution channels. These customers are generally given
privileges to return inventory, receive credits for changes in selling prices,
and participate in cooperative marketing programs. We maintain appropriate
accruals 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. We
are experiencing increased demands for customer financing and leasing solutions,
particularly to competitive local exchange carriers ("CLECs"). CLECs typically
finance significant networking infrastructure deployments through alternative
forms of financing, including leasing, through Cisco. Although we have programs
in place to monitor and mitigate the associated risk, there can be no assurance
that such programs will alleviate all of our credit risk.
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<PAGE> 23
We also continue to monitor increased credit exposures because of the weakened
financial conditions in Asia, and other emerging market regions, and the impact
that such conditions may have on the worldwide economy. Although we have not
experienced significant losses due to customers failing to meet their
obligations to date, such losses, if incurred, could harm our business and
financial position.
CISCO IS EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF ITS PORTFOLIO
INVESTMENTS AND IN INTEREST RATES
We maintain 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 accumulated other
comprehensive income, net of tax. Part of this portfolio includes minority
equity investments in several publicly traded companies, the values of which are
subject to market price volatility. We have also invested in numerous privately
held companies, many of which can still be considered in the startup or
development stages. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial investment in
these companies. We also have 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 our
investment portfolio while increasing the costs associated with our lease
commitments. Conversely, declines in interest rates could have a material impact
on interest earnings for our investment portfolio. We do not currently hedge
these interest rate exposures.
Readers are referred to pages 28-29 of our 1999 Annual Report to Shareholders
for a more detailed discussion of quantitative and qualitative disclosures about
market risk. The following analysis presents the hypothetical change in fair
values of public equity investments we held 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.
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<PAGE> 24
This table estimates the fair value of the publicly traded corporate equities at
a twelve-month time horizon (in millions):
<TABLE>
<CAPTION>
Fair value
Valuation of security as of Valuation of security
given X% decrease in each October 31, given X% increase in
stock's price 1999 each stock's price
---------------------------------- ------------ ----------------------------------
(50%) (35%) (15%) 15% 35% 50%
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate Equities $ 924 $1,201 $1,571 $1,848 $2,125 $2,495 $2,772
</TABLE>
Our equity portfolio consists of securities with characteristics that most
closely match the S&P Index or companies traded on the NASDAQ Exchange. The
NASDAQ Composite Index has occurrence of a 15% movement in all of the last three
years, a 35% movement in one of the last three years, and a 50% movement in none
of the last three years.
WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS
The networking business is highly competitive, and as such, our growth is
dependent upon market growth and our ability to enhance our existing products
and introduce new products on a timely basis. One of the ways we have addressed
and will continue to address the need to develop new products is through
acquisitions of other companies. Acquisitions involve numerous risks, including
the following:
- - difficulties in integration of the operations, technologies, and products of
the acquired companies;
- - the risk of diverting management's attention from normal daily operations of
the business;
- - potential difficulties in completing projects associated with purchased
in-process research and development;
- - risks of entering markets in which we have 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.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition.
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<PAGE> 25
We must also maintain our ability to manage any such growth effectively. Failure
to manage growth effectively and successfully integrate acquisitions made by us
could harm our business and operating results.
SINCE CISCO'S GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER
ARE DIFFICULT TO PREDICT
We expect that in the future, our net sales may grow at a slower rate than
experienced in previous periods, and that on a quarter-to-quarter basis, our
growth in net sales may be significantly lower than our historical quarterly
growth rate. As a consequence, operating results for a particular quarter are
extremely difficult to predict. Our ability to meet financial expectations could
be hampered if the nonlinear sales pattern seen in past quarters reoccurs in
future periods. We generally have 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, we continue to attempt to
reduce our 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 our quarter-to-quarter net sales and
operating results going forward. On the other hand, for certain products, lead
times are longer than our goal. If we cannot reduce manufacturing lead times for
such products, our customers may cancel orders or not place further orders if
shorter lead times are available from other manufacturers, thus creating
additional variability.
CISCO IS EXPOSED TO UNFAVORABLE ECONOMIC CONDITIONS WORLDWIDE
As a result of recent unfavorable economic conditions, sales to certain
countries in the Pacific Rim, Eastern Europe, and Latin America have declined as
a percentage of our total revenue. If the economic conditions in these markets,
or other markets that recently experienced unfavorable conditions worsen, or if
these unfavorable conditions result in a wider regional or global economic
slowdown, this decline may have a material adverse impact on our business,
operations, and financial condition.
CISCO CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC
Recent actions and comments from the Securities and Exchange Commission have
indicated they are reviewing the current valuation methodology of purchased
in-process research and development related to business combinations.
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<PAGE> 26
The Commission is concerned that some companies are writing off more of the
value of an acquisition than is appropriate. We believe we are in compliance
with all of the rules and related guidance as they currently exist. However,
there can be no assurance that the Commission will not seek to reduce the amount
of purchased in-process research and development previously expensed by us. This
would result in the restatement of our previously filed financial statements and
could have a material negative impact on financial results for the periods
subsequent to acquisitions. Additionally, the Financial Accounting Standards
Board ("FASB") has announced that it plans to rescind the pooling of interests
method of acquisition accounting. If this occurs, it could alter our acquisition
strategy and potentially impair our ability to acquire companies. The FASB has
also announced that it is reviewing the current accounting rules associated with
stock options. The FASB is concerned that current practice, as outlined in
Accounting Principles Board No. 25 (APB25), does not accurately reflect
appropriate compensation expense under a variety of scenarios, including the
assumption of option plans from acquired companies. The changes proposed could
make it more difficult to attract and retain qualified personnel and could
unfavorably impact operating results.
CISCO EXPECTS GROSS MARGINS TO DECLINE OVER TIME
We expect 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, we believe 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 our higher-margin router and
high-performance switching products targeted toward enterprise and service
provider customers. We have recently introduced several new products, with
additional new products scheduled to be released in the near future. If warranty
costs associated with these new products are greater than we have experienced
historically, gross margins may be adversely affected. Our gross margins may
also be impacted by geographic mix, as well as the mix of configurations within
each product group. We continue 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 our products, and to a
certain degree, the timing of its orders.
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We also expect that our operating margins may decrease as we continue to hire
additional personnel and increases other operating expenses to support our
business. We plan our 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.
YOU SHOULD EXPECT THAT CISCO'S OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have in the past
been, and will continue to be, subject to quarterly fluctuations as a result of
a number of 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 data, voice and video
capabilities
- - Variations in sales channels, product costs, or mix of products sold
- - The timing of orders and manufacturing lead times
- - The trend toward sales of integrated network solutions
- - Changes in general economic conditions and specific economic conditions in the
computer and networking industries
Any of these above factors could have a material adverse impact on our
operations and financial results. For example, we from time to time have 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 our quarterly earnings. Additionally, the
dollar amounts of large orders for our 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, for
example, due to cancellations, delays, or deferrals by customers.
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THE YEAR 2000 PROBLEM MAY HAVE AN ADVERSE EFFECT ON CISCO'S OPERATIONS AND
ABILITY TO OFFER PRODUCTS AND SERVICES WITHOUT INTERRUPTION
We are continuing to assess the impact of the year 2000 issue on our current and
future products, internal information systems, and noninformation technology
systems (equipment and systems) and have begun, and in many cases completed,
corrective efforts in these areas. We are using a four-phased approach to
address the issue:
- - The first phase consists of the inventorying of all potential business
disruption problems, including those with products and systems, as well as
potential disruption from suppliers and other third parties.
- - The second phase consists of the prioritization of all the potential
problems to allocate the appropriate level of resources to the most
critical areas.
- - The third phase addresses the remediation programs to solve or mitigate any
identified year 2000 problems.
- - The fourth phase consists of the development of contingency plans to
address potential year 2000 problems that may arise with Cisco, our
customers, and our suppliers.
We have largely completed the implementation of year 2000-compliant internal
computer applications for our main financial, manufacturing, and order
processing systems. The systems are being tested for compliance, and we do not
currently expect any significant issues to be identified during this review.
However, the failure of any internal system to achieve year 2000 readiness could
result in material disruption to our operations.
We have also conducted extensive work regarding the status of our currently
available, developing, and installed base of products. We believe that our
current products are largely year 2000-compliant. There can be no assurance that
certain previous releases of our products that are no longer under support will
prove to be year 2000 compliant with customers' systems or within an existing
network. Further information about our products is available on our Year 2000
Internet Web site. We have developed programs for customers who have indicated a
need to upgrade components of their systems. However, the inability of any of
our products to properly manage and manipulate data in the year 2000 could
result in increased warranty costs, customer satisfaction issues, potential
lawsuits, and other material costs and liabilities.
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We have completed our review of our supplier base. This exercise included
compliance inquiries and reviews that will continue throughout calendar 1999.
Where issues were identified with a particular supplier, contingency plans have
been developed as discussed below. Even where assurances are received from third
parties, there remains a risk that failure of systems and products of other
companies on which we rely could have a material adverse effect on us. Further,
if these suppliers fail to adequately address the year 2000 issue for the
products they provide to us, critical materials, products, and services may not
be delivered in a timely manner and we may not be able to manufacture sufficient
product to meet sales demand.
Based on the work done to date, we have not incurred material costs and do not
expect to incur future material costs in the work to address the year 2000
problem for our systems (as a result of relatively new legacy information
systems) and products.
We have taken and will continue to take corrective action to mitigate any
significant year 2000 problems with our systems and products and believe that
the year 2000 issue for information systems will not have a material impact on
our operations or financial results. However, there can be no assurance that we
will not experience significant business disruptions or loss of business due to
an inability to adequately address the year 2000 issue. We are concerned that
many enterprises will be devoting a substantial portion of their information
systems spending to addressing the year 2000 issue. This expense may result in
spending being diverted from networking solutions in the near future. This
diversion of information technology spending could have a material adverse
impact on our future sales volume.
Contingency plans have been developed in certain key areas, in particular
surrounding third-party manufacturers and other suppliers, to ensure that any
potential business interruptions caused by the year 2000 issue are mitigated.
Such contingency plans include identification of alternative sources of supply
and test exercises to ensure that such alternatives are able to provide us with
an adequate level of support.
The foregoing statements are based upon our best estimates at the present time,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans,
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to:
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- - The availability and cost of personnel trained in this area
- - The ability to locate and correct all relevant computer codes
- - The nature and amount of programming required to upgrade or replace each of
the affected programs
- - The rate and magnitude of related labor and consulting costs and the success
of Cisco's external customers and suppliers in addressing the year 2000 issue
Our evaluation is ongoing and we expect that new and different information will
become available to us as that evaluation continues. Consequently, there is no
guarantee that all material elements will be year 2000-ready in time.
CISCO COMPETES IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET
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. Cisco 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, Cisco
expects the number of vendors supplying end-to-end telecommunications solutions
will decrease, due to the rapid pace of acquisitions in the industry. Ultimately
Cisco believes only a few larger suppliers of end-to-end telecommunication
equipment solutions will become its primary competitors.
Cisco's competitors include Lucent, Nortel, Ericsson, 3Com, Cabletron and IBM.
Some of Cisco's competitors compete across many of Cisco's product lines, while
others do not offer as wide a breadth of solutions. Several of Cisco's current
and potential competitors have greater financial, marketing and technical
resources than Cisco.
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The principal competitive factors in the markets in which Cisco 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.
Cisco also faces competition from customers it licenses technology to and
suppliers from whom it transfers technology. Networking's inherent nature
requires interoperability. As such, Cisco must cooperate, and at the same time
compete, with these companies. Cisco's inability to effectively manage these
complicated relationships with customers and suppliers could have a material
adverse effect on Cisco's business, operating results, and financial condition.
CISCO'S BUSINESS DEPENDS UPON ITS PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT
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.
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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.
WE FACE RISKS FROM THE UNCERTAINTIES OF REGULATION OF THE INTERNET
There are currently few laws or regulations that apply directly to access or
commerce on the Internet. We could be materially adversely affected by
regulation in any country where we operate, on such technology as 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 our products,
and at the same time increase our cost of selling our products. Changes in laws
or regulations governing the Internet and Internet commerce could have a
material adverse effect on our business, operating results and financial
condition.
THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS
TO RISKS
As we focus on new market opportunities, such as transporting data, voice, and
video traffic across the same network, we will increasingly compete with large
telecommunications equipment suppliers such as Lucent, Ericsson and Nortel,
among others, and several well-funded start-up companies.
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Several of our current and potential competitors have greater financial,
marketing and technical resources than we do. Additionally, as customers in
these markets complete infrastructure deployments, they may require greater
levels of service, support and financing than we have experienced in the past.
We have not entered into a material amount of labor intensive service contracts
which require significant production or customization. However, we expect that
demand for these types of service contracts will increase in the future. There
can be no assurance that we can provide products, service, support and financing
to effectively compete for these market opportunities. Further, provision of
greater levels of services by us may result in less favorable timing of revenue
recognition than we have historically experienced.
WE ARE DEPENDENT UPON THE ABILITY OF SUPPLIERS TO DELIVER PARTS ON TIME
Our growth and ability to meet customer demands also depend in part on our
ability to obtain timely deliveries of parts from our suppliers. We have
experienced component shortages in the past that have adversely affected our
operations. Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurances that we will not encounter these problems
in the future.
THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND FLOODS
Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
one of our 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 our business, financial condition
and operating results.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ARE SUBJECT TO RAPID CHANGES
IN TECHNOLOGY AND THE MARKET
Our operating results will depend to a significant extent on our ability to
reduce the costs to produce existing products. In particular, we broadened our
product line by introducing network access products. Sales of these products,
which are generally lower priced and carry lower margins than our core products,
have increased more rapidly than sales of our core products.
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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 our
competitors and market acceptance of these products. The markets for our
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 we will successfully
identify new product opportunities, develop and bring new products to market in
a timely manner, and achieve market acceptance of our products or that products
and technologies developed by others will not render our products or
technologies obsolete or noncompetitive.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES
We have a number of strategic alliances with companies including Microsoft,
Hewlett-Packard, EDS, Sprint and Motorola, 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, we must compete in some business areas with a company with which we
have strategic alliances and, at the same time, cooperate with such company in
other business areas. Also, if these companies fail to perform, or if these
relationships fail to materialize as expected, we could suffer delays in product
development or other operational difficulties.
THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION
There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
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 we compete to be a single vendor solution
and could have a material adverse effect on our business, operating results and
financial condition.
SALES IN THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION
Although sales to the service provider market have grown historically, this
market is characterized by large, and often sporadic purchases.
34
<PAGE> 35
Sales activity in this industry depends upon the stage of completion of
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 our business, operating results and
financial condition.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE MANUFACTURE OF PARTS AND COMPONENTS
OF OUR PRODUCTS
Although we generally use standard parts and components for our 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 our business, operating
results and financial condition and could materially damage customer
relationships.
WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATION REGULATION AND
TARIFFS
Changes in domestic and international telecommunication requirements could
affect the sales of our products. In particular, we believe it is possible that
there may be significant changes in domestic telecommunications regulation in
the near future that could slow the expansion of the service providers' network
infrastructures and materially adversely affect our 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 our products for certain classes of customers. Additionally, in the
U.S. our products must comply with various Federal Communication Commission
requirements and regulations. In countries outside of the U.S., our products
must meet various requirements of local telecommunications authorities. Changes
in tariffs, or failure by us to obtain timely approval of products could have a
material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS
We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, 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.
35
<PAGE> 36
In the first quarter of fiscal 2000, the sales growth rate in Japan, as well as
in certain other parts of Asia continued to be slower than that in other areas.
Any or all of these factors could have a material adverse impact on our future
international business in these or other countries.
OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET-BASED SYSTEMS
We believe that there will be performance problems with Internet communications
in the future which could receive a high degree of publicity and visibility. As
we are a large supplier of equipment for the Internet infrastructure, customers'
perceptions of our products and the marketplace's perception of us as a supplier
of networking products, may be materially adversely affected, regardless of
whether or not these problems are due to the performance of our products. Such
an event could also result in a material adverse effect on the market price of
our Common Stock and could materially adversely affect our business, operating
results and financial condition.
OUR STOCK PRICE MAY BE VOLATILE
Our Common Stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results and the
published expectations of analysts and as a result of announcements by our
competitors and us. 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 materially adversely affect the market price of
Cisco's Common Stock in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption "Cisco Is
Exposed To Fluctuations In The Market Values Of Its Portfolio Investments And In
Interest Rates" under Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations.
36
<PAGE> 37
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) The Company amended its Restated Articles of Incorporation to increase the
authorized shares of Common Stock from 5.4 billion to 10 billion.
(c) During the quarter, the Company issued an aggregate of approximately 13.7
million shares of its Common Stock in exchange for the outstanding capital stock
of MaxComm Technologies, Inc., StratumOne Communications, Inc., Monterey
Networks, Inc. and Cocom A/S. 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 Registration Statements on Form S-3 covering
the resales of such securities.
During the quarter, the Company issued an aggregate of approximately 6.6
million shares of its Common Stock in exchange for the outstanding capital stock
of TransMedia Communications, Inc. The shares were issued pursuant to an
exemption by reason of Section 3(a)(10) of the Securities Act of 1933. The terms
and conditions of such issuance were approved after a hearing upon the fairness
of such terms and conditions by a government authority expressly authorized by
the law to grant such approval.
37
<PAGE> 38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Company held its annual meeting of shareholders on November 10, 1999. At
such meeting the following actions were voted upon:
a. Election of Directors
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstentions Non-Votes
------------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Carol A. Bartz 2,784,401,164 14,134,947
John T. Chambers 2,785,001,861 13,534,250
Mary Cirillo 2,784,733,642 13,802,469
James F. Gibbons 2,784,703,073 13,833,038
Edward R. Kozel 2,784,976,461 13,559,650
James Morgan 2,784,940,356 13,595,755
John P. Morgridge 2,784,894,715 13,641,396
Arun Sarin 2,784,860,481 13,675,630
Donald T. Valentine 2,784,776,916 13,759,195
Steven M. West 2,784,956,120 13,579,991
</TABLE>
b. Approval of Amendment to the Automatic Option Grant Program for non-employee
Board Members under the 1996 Stock Incentive Plan.
<TABLE>
<CAPTION>
For Against Withheld Abstentions Broker Non-Votes
- --- ------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
2,122,051,454 661,282,532 15,202,125
</TABLE>
c. Approval of an Amendment to the Company's Bylaws to change the number of
authorized number of directors to not less than 8 nor more than 15, with the
exact number to be fixed from time to time by resolution of the Board of
Directors or Shareholders.
<TABLE>
<CAPTION>
For Against Withheld Abstentions Broker Non-Votes
- --- ------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
2,740,221,304 46,861,350 11,453,457
</TABLE>
d. Approval of a Certificate of Amendment to the Company's Restated Articles of
Incorporation to increase the authorized number of shares of Common Stock to
10,000,000,000.
<TABLE>
<CAPTION>
For Against Withheld Abstentions Broker Non-Votes
- --- ------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
2,618,828,414 168,607,105 11,100,592
</TABLE>
e. Ratification of PricewaterhouseCoopers as the Company's independent
accountants for the fiscal year ending July 29, 2000.
<TABLE>
<CAPTION>
For Against Withheld Abstentions Broker Non-Votes
- --- ------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
2,786,615,313 3,022,633 8,898,165
</TABLE>
38
<PAGE> 39
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
3.1.2 Certificate of Amendment of the Restated Articles of
Incorporation
3.2 Amended and Restated Bylaws
10.2.2 Amendment to the Cisco Systems, Inc. 1996 Stock Incentive Plan
27 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed four reports on reports on form 8-K during the first quarter
ended October 30, 1999. Information regarding the items reported on is as
follows:
<TABLE>
<CAPTION>
Date Item Reported On
- ---- ----------------
<S> <C>
August 13, 1999 The Company announced that it planned to invest more than $1.0 billion in
KPMG's Internet Service Business.
August 26, 1999 The Company announced the acquisition of Cerent Corporation and Monterey
Networks, Inc.
September 27, 1999 The Company announced the completion of the acquisitions of TransMedia
Communications, Inc., StratumOne Communications, Inc. and MaxComm
Technologies, Inc.
October 20, 1999 The Company announced the completion of the Acquisition of Monterey
Networks, Inc. and Cocom A/S.
</TABLE>
39
<PAGE> 40
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cisco Systems, Inc.
Date: December 14, 1999 By /s/ Larry R. Carter
---------------------- -------------------------
Larry R. Carter,
Senior Vice President,
Finance and Administration,
Chief Financial Officer, and
Secretary
40
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1.2 Certificate of Amendment of the Restated Articles of
Incorporation
3.2 Amended and Restated Bylaws
10.2 Amended and Restated 1996 Stock Incentive Plan
27 Financial data schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1.2
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 Ten Billion Five Million (10,005,000,000)
shares. Ten Billion (10,000,000,000) shares shall be Common Stock, par
value of $0.001, and Five Million (5,000,000) shares shall be Preferred
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 has been duly approved by
the requisite number of shares of the Corporation in accordance with Sections
902 and 903 of the California Corporation Code. The total number of shares
entitled to vote with respect to the foregoing amendment was 3,290,189,804
shares of Common Stock. The number of shares voting in favor of the foregoing
amendment equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares of Common Stock. No shares of Preferred Stock
are outstanding.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment on November 10, 1999.
/s/ JOHN T. CHAMBERS
---------------------------------
John T. Chambers
President
/s/ LARRY R. CARTER
---------------------------------
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 November 10, 1999.
/s/ JOHN T. CHAMBERS
---------------------------------
John T. Chambers
/s/ LARRY R. CARTER
---------------------------------
Larry R. Carter
<PAGE> 1
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, JUNE 8, 1998 and NOVEMBER 10, 1999)
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 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
<PAGE> 2
(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, 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
<PAGE> 3
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.
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
<PAGE> 4
Code, in which event it is irrevocable for the period specified in said writing
and said Section 705(e).
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
<PAGE> 5
Secretary shall set forth: (1) the name 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. The number of
authorized directors of this Corporation shall be not less than eight (8) nor
more than fifteen (15), 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 there at, the
directors may be elected at any special meeting of shareholders held for that
purpose. Directors need not be shareholders.
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
<PAGE> 6
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 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.
<PAGE> 8
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.
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.
<PAGE> 9
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 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
<PAGE> 10
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, notwithstanding any transfer of any
shares on the books of the Corporation after the record date.
<PAGE> 11
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.
<PAGE> 12
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 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 NOVEMBER 10, 1999
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.
All share numbers in this July 8, 1999 restatement reflect all
splits of the Common Stock effected through June 21, 1999, including (i) the
three (3)-for-two (2) split of Common Stock effected on December 16, 1997, (ii)
the three (3)-for-two (2) split of Common Stock effected on September 15, 1998
and (iii) the two (2)-for-one (1) spilt of Common Stock effected on June 21,
1999.
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 745,113,564
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
(309,762,450), plus the number of shares added to the reserve in the automatic
share increases that occurred in December 1996, December 1997 and December 1998
(435,351,114 shares).
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
240,000,000 shares.
C. No one person participating in the Plan may receive stock options
or separately exercisable stock appreciation rights for more than 9,000,000
shares of Common Stock in the aggregate per calendar year.
3.
<PAGE> 4
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 maximum 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.
4.
<PAGE> 5
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 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.
5.
<PAGE> 6
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
6.
<PAGE> 7
(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
inheritance following the Optionee's death. However, a Non-Statutory Option may
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 or to one or more individuals, to the extent
such assignment is in connection with the Optionee's estate plan or pursuant to
a domestic relations order. 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.
7.
<PAGE> 8
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
exercisable for all of the 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).
8.
<PAGE> 9
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 expiration or sooner termination of the option
term. 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 expiration or sooner termination of the option term. 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.
9.
<PAGE> 10
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:
10.
<PAGE> 11
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.
11.
<PAGE> 12
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
The following terms and provisions reflect the amendment to the
Automatic Option Grant Program authorized by the Board on July 8, 1999 and
approved by the shareholders at the 1999 Annual Meeting.
I. OPTION TERMS
A. GRANT DATES. Option grants under this Article Three shall be made
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 1999 Annual Shareholders
Meeting shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 30,000 shares of Common
Stock(1), 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 1999 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 15,000 shares of Common Stock(2), 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 30,000-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.
- --------------------------
(1) Prior to this July 8, 1999 restatement, the number of shares of Common
Stock for which an initial option grant was to be made to each newly
elected or appointed non-employee Board member was set at 20,000 shares.
(2) Prior to this July 8, 1999 restatement, the number of shares of Common
Stock for which a continuing non-employee Board member was to be granted an
option at each annual shareholders meeting at which he or she was
re-elected to the Board was set at 10,000 shares.
12.
<PAGE> 13
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.
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 30,000-share grant shall vest,
and the Corporation's repurchase right with respect to those shares 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 15,000-share grant shall vest, and the Corporation's repurchase right
with respect to those shares 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 the laws of inheritance) 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
13.
<PAGE> 14
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.
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 exercisable for
all of the 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.
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 exercisable for all
of the 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.
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. Shareholder approval
of this July 8, 1999 restatement shall also constitute pre-approval of each
option grant with such a cash surrender right made under the Automatic Option
Grant Program on or after the date of the 1999 Annual Meeting and the subsequent
exercise of that right 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.
14.
<PAGE> 15
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.
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.
15.
<PAGE> 16
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 Withholding Taxes to which such holders may become subject 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 Withholding 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
Withholding Taxes) with an aggregate Fair Market Value equal to the
percentage of the Withholding Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
16.
<PAGE> 17
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 and approved
by the Shareholders at the 1998 Annual Shareholders Meeting, 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. The Automatic Option
Grant Program in effect under the Plan was amended by the Board on July 8, 1999
in order to increase the number of shares of Common Stock for
17.
<PAGE> 18
which newly elected or appointed non-employee Board members and continuing
non-employee Board members may be granted stock options under such program. Such
amendment, was approved by the shareholders at the 1999 Annual Meeting.
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.
18.
<PAGE> 19
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 Article Three of 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> 20
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 Article Two of 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. 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> 21
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> 22
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> 23
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. 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).
GG. WITHHOLDING TAXES shall mean the Federal, state and local income
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN
THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED OCTOBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-29-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 1,251
<SECURITIES> 10,477
<RECEIVABLES> 1,418
<ALLOWANCES> 27
<INVENTORY> 655
<CURRENT-ASSETS> 4,892
<PP&E> 2,030
<DEPRECIATION> 1,132
<TOTAL-ASSETS> 17,407
<CURRENT-LIABILITIES> 3,029
<BONDS> 0
0
0
<COMMON> 6,794
<OTHER-SE> 7,088
<TOTAL-LIABILITY-AND-EQUITY> 17,407
<SALES> 3,877
<TOTAL-REVENUES> 3,877
<CGS> 1,364
<TOTAL-COSTS> 3,192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 791
<INCOME-TAX> 353
<INCOME-CONTINUING> 438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438
<EPS-BASIC> 0.13<F1>
<EPS-DILUTED> 0.13
<FN>
<F1>For purposes of this statement, primary means basic.
</FN>
</TABLE>
