<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement*
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Cisco Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date of
its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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*The Registrant expects to release definitive proxy statements
to securityholders on or about September 27, 1999.
<PAGE> 2
CISCO SYSTEMS, INC.
September 27, 1999
DEAR CISCO SYSTEMS SHAREHOLDER:
You are cordially invited to attend the Annual Meeting of Shareholders
("Annual Meeting") of Cisco Systems, Inc. (the "Company") which will be held at
Paramount's Great America in the Paramount Pavilion, located at 1 Great America
Parkway, Santa Clara, California 95054 on Wednesday, November 10, 1999, at 10:00
a.m. You will find a map with directions to the meeting on the outside back
cover of the Proxy Statement.
Details of the business to be conducted at the Annual Meeting are given in
the attached Notice of Annual Meeting and Proxy Statement.
If you do not plan to attend the Annual Meeting, please complete, sign,
date, and return the enclosed proxy promptly in the accompanying reply envelope.
Shareholders who elected to access the 1999 Proxy Statement and Annual Report
over the Internet and vote their proxy online will not be receiving a paper
proxy card. If you decide to attend the Annual Meeting and wish to change your
proxy vote, you may do so automatically by voting in person at the Annual
Meeting.
We look forward to seeing you at the Annual Meeting.
/s/ JOHN T. CHAMBERS
John T. Chambers
President and Chief Executive Officer
San Jose, California
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to
complete, sign, and date the enclosed proxy as promptly as possible and return
it in the enclosed envelope (to which no postage need be affixed if mailed in
the United States). Please reference the Voting Electronically via the Internet
or by Telephone section on page 1 for alternative voting methods.
<PAGE> 3
CISCO SYSTEMS, INC.
170 W. TASMAN DRIVE
SAN JOSE, CALIFORNIA 95134-1706
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 10, 1999
The Annual Meeting of Shareholders ("Annual Meeting") of Cisco Systems,
Inc. (the "Company") will be held at Paramount's Great America in the Paramount
Pavilion, located at 1 Great America Parkway, Santa Clara, California 95054, on
Wednesday, November 10, 1999, at 10:00 a.m. for the following purposes:
1. To elect ten members of the Board of Directors to serve until the
next Annual Meeting and until their successors have been elected and
qualified;
2. To approve an amendment to the Automatic Option Grant Program for
non-employee Board members under the Company's 1996 Stock Incentive Plan;
3. To approve an amendment to the Company's Bylaws to increase the
authorized number of directors to a maximum of fifteen (15);
4. To approve a Certificate of Amendment to the Company's Restated
Articles of Incorporation to increase the authorized number of shares of
Common Stock from 5,400,000,000 to 10,000,000,000;
5. To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending July 29, 2000;
and
6. To act upon such other matters as may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. The record date for determining those
shareholders who will be entitled to notice of, and to vote at, the Annual
Meeting and at any adjournment thereof is September 13, 1999. The stock transfer
books will not be closed between the record date and the date of the Annual
Meeting. A list of shareholders entitled to vote at the Annual Meeting will be
available for inspection at the offices of the Company.
Whether or not you plan to attend the Annual Meeting, please complete,
sign, date and return the enclosed proxy promptly in the accompanying reply
envelope. If you elected to receive the 1999 Proxy Statement and Annual Report
electronically over the Internet you will not receive a paper proxy card and
should vote online, unless you cancel your enrollment. If your shares are held
in a bank or brokerage account and you did not elect to receive the materials
through the Internet, you may be eligible to vote your proxy electronically or
by telephone. Please refer to the enclosed voting form for instructions. Your
proxy may be revoked at any time prior to the Annual Meeting. If you decide to
attend the Annual Meeting and wish to change your proxy vote, you may do so
automatically by voting in person at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ LARRY R. CARTER
Larry R. Carter
Secretary
San Jose, California
September 27, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VOTING RIGHTS AND SOLICITATION.............................. 1
Voting.................................................... 1
Voting Electronically via the Internet or Telephone....... 1
Proxies................................................... 2
Solicitation of Proxies................................... 2
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS..................... 3
General................................................... 3
Business Experience of Directors.......................... 3
Board Committees and Meetings............................. 4
Director Compensation..................................... 5
Recommendation of the Board of Directors.................. 6
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT TO THE 1996 STOCK
INCENTIVE PLAN............................................ 6
Description of the 1996 Plan.............................. 6
Discretionary Option Grant Program........................ 7
Automatic Option Grant Program............................ 8
General Provisions........................................ 10
Option Grants............................................. 11
New Plan Benefits......................................... 11
Federal Income Tax Consequences of Options Granted under
the Option Plan........................................ 12
Stock Appreciation Rights................................. 12
Deductibility of Executive Compensation................... 13
Accounting Treatment...................................... 13
Shareholder Approval...................................... 13
Recommendation of the Board of Directors.................. 14
PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT TO BYLAWS........... 14
General................................................... 14
Amendment to Bylaws....................................... 14
Shareholder Approval...................................... 14
Recommendation of the Board of Directors.................. 14
PROPOSAL NO. 4 -- APPROVAL OF AMENDMENT TO RESTATED ARTICLES
OF INCORPORATION.......................................... 14
General................................................... 14
Purpose and Effect of Amendment........................... 15
Amendment to Restated Articles............................ 15
Shareholder Approval...................................... 15
Recommendation of the Board of Directors.................. 15
PROPOSAL NO. 5 -- RATIFICATION OF INDEPENDENT ACCOUNTANTS... 15
General................................................... 15
Recommendation of the Board of Directors.................. 16
OWNERSHIP OF SECURITIES..................................... 16
Compliance with SEC Reporting Requirements................ 17
EXECUTIVE COMPENSATION AND RELATED INFORMATION.............. 17
Compensation Committee Report............................. 17
Compensation Philosophy and Objectives.................... 17
Compensation Components and Process....................... 18
Compensation Committee Interlocks and Insider
Participation.......................................... 20
Summary of Cash and Certain Other Compensation............ 21
Stock Options............................................. 22
Option Exercises and Holdings............................. 23
Employment Contracts and Change in Control Agreements..... 23
Certain Relationships and Related Transactions............ 23
STOCK PERFORMANCE GRAPH..................................... 24
SHAREHOLDER PROPOSALS FOR 2000 PROXY STATEMENT.............. 25
FORM 10-K................................................... 25
OTHER MATTERS............................................... 25
DIRECTIONS TO PARAMOUNT'S GREAT AMERICA.....See Outside Back Cover
</TABLE>
i
<PAGE> 5
CISCO SYSTEMS, INC.
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Cisco Systems, Inc., a California
corporation (the "Company"), for the Annual Meeting of the Shareholders (the
"Annual Meeting") to be held at 10:00 a.m. on November 10, 1999, at Paramount's
Great America in the Paramount Pavilion, located at 1 Great America Parkway,
Santa Clara, California 95054, and at any adjournments or postponements of the
Annual Meeting. These proxy materials were first mailed to shareholders on or
about September 27, 1999.
ALL SHARE NUMBERS AND SHARE PRICES PROVIDED IN THIS PROXY STATEMENT HAVE
BEEN ADJUSTED TO REFLECT THE THREE (3)-FOR-TWO (2) SPLIT OF COMMON STOCK
EFFECTED ON SEPTEMBER 15, 1998 AND THE TWO (2)-FOR-ONE (1) SPLIT OF COMMON STOCK
EFFECTED ON JUNE 21, 1999.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Shareholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
VOTING
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On September 13, 1999, the record date for determination of
shareholders entitled to vote at the Annual Meeting, there were 3,290,189,804
shares of Common Stock outstanding. Each shareholder of record on September 13,
1999 is entitled to one vote for each share of Common Stock held by such
shareholder on that date. A majority of the outstanding shares of Common Stock
must be present or represented at the Annual Meeting in order to have a quorum.
Abstentions and broker non-votes are counted as present for the purpose of
determining the presence of a quorum for the transaction of business. In the
election of directors, the ten candidates receiving the highest number of
affirmative votes will be elected. Proposals 2 and 5 each require the approval
of the affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting
together with the affirmative vote of a majority of the required quorum.
Proposals 3 and 4 each require the affirmative vote of a majority of the
outstanding voting shares of the Company, together with the affirmative vote of
a majority of the required quorum. Abstentions and broker non-votes can have the
effect of preventing approval of a proposal where the number of affirmative
votes, though a majority of the votes cast, does not constitute a majority of
the required quorum.
VOTING ELECTRONICALLY VIA THE INTERNET OR TELEPHONE
Shareholders whose shares are registered directly with EquiServe may vote
either via the Internet or by calling EquiServe. Specific instructions to be
followed by any registered shareholder interested in voting via Internet or
telephone are set forth on the enclosed proxy card. The Internet and telephone
voting procedures are designed to authenticate the shareholder's identity and to
allow shareholders to vote their shares and confirm that their instructions have
been properly recorded.
If your shares are registered in the name of a bank or brokerage firm and
you have not elected to receive your Annual Report and Proxy Statement over the
Internet, you may be eligible to vote your shares electronically over the
Internet or by telephone. A large number of banks and brokerage firms are
participating in the ADP Investor Communication Services online program. This
program provides eligible shareholders
<PAGE> 6
who receive a paper copy of the annual report and proxy statement the
opportunity to vote via the Internet or by telephone. If your bank or brokerage
firm is participating in ADP's program, your voting form will provide
instructions. If your voting form does not reference Internet or telephone
information, please complete and return the paper proxy card in the
self-addressed, postage paid envelope provided. Shareholders who elected to
receive the Annual Report and Proxy Statement over the Internet will be
receiving an e-mail by September 27, 1999 with information on how to access
shareholder information and instructions for voting.
PROXIES
Whether or not you are able to attend the Annual Meeting, you are urged to
vote your proxy, which is solicited by the Company's Board of Directors and
which will be voted as you direct on your proxy when properly completed. In the
event no directions are specified, such proxies will be voted FOR the nominees
of the Board of Directors (proposal 1), FOR proposals 2, 3, 4 and 5 and, in the
discretion of the proxy holders, as to other matters that may properly come
before the Annual Meeting. You may revoke or change your proxy at any time
before the Annual Meeting. To do this, send a written notice of revocation or
another signed proxy with a later date to the Secretary of the Company at the
Company's principal executive offices before the beginning of the Annual
Meeting. You may also revoke your proxy by attending the Annual Meeting and
voting in person.
SOLICITATION OF PROXIES
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional solicitation material furnished to shareholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company has retained Corporate Investor Communications, Inc.
("CIC") to act as a proxy solicitor in conjunction with the Annual Meeting.
Under the terms of an agreement dated August 16, 1999, the Company has agreed to
pay $14,000, plus reasonable out of pocket expenses, to CIC for proxy
solicitation services. The original solicitation of proxies by mail may be
supplemented by a solicitation by telephone, telegram, or other means by
directors, officers, or employees of the Company. No additional compensation
will be paid to these individuals for any such services. Except as described
above, the Company does not presently intend to solicit proxies other than by
mail.
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<PAGE> 7
PROPOSAL NO. 1
ELECTION OF DIRECTORS
GENERAL
The names of persons who are nominees for director and their positions and
offices with the Company are set forth in the table below. The proxy holders
intend to vote all proxies received by them in the accompanying form for the
nominees listed below unless otherwise instructed. In the event any nominee is
unable or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for any nominee who may be designated by the present Board
of Directors to fill the vacancy. As of the date of this Proxy Statement, the
Board of Directors is not aware of any nominee who is unable or will decline to
serve as a director. The ten (10) nominees receiving the highest number of
affirmative votes of the shares entitled to vote at the Annual Meeting will be
elected directors of the Company to serve until the next Annual Meeting and
until their successors have been elected and qualified. Shareholders may not
cumulate votes in the election of directors. Neither Robert L. Puette nor
Masayoshi Son is standing for re-election to the Board at the Annual Meeting.
<TABLE>
<CAPTION>
NOMINEES POSITIONS AND OFFICES HELD WITH THE COMPANY
-------- -------------------------------------------
<S> <C>
Carol A. Bartz................ Director
John T. Chambers.............. President, Chief Executive Officer, and Director
Mary A. Cirillo............... Director
Dr. James F. Gibbons.......... Director
Edward R. Kozel............... Senior Vice President, Corporate Development, and Director
James C. Morgan............... Director
John P. Morgridge............. Chairman of the Board
Arun Sarin.................... Director
Donald T. Valentine........... Vice Chairman of the Board
Steven M. West................ Director
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS
Ms. Bartz, 51, has been a member of the Board of Directors since November
1996. From April 1992 to present she has served as Chairman of the Board and
Chief Executive Officer of Autodesk, Inc. From April 1992 to September 1996 she
was Chairman, Chief Executive Officer and President of Autodesk, Inc. Prior to
that, she was with Sun Microsystems from August 1983 to April 1992 most recently
as Vice President of Worldwide Field Operations. Ms. Bartz also currently serves
on the Boards of Directors of BEA Systems, Inc., Cadence Design Systems, Inc.
and Network Appliance, Inc.
Mr. Chambers, 50, has been a member of the Board of Directors since
November 1993. He joined the Company as Senior Vice President in January 1991
and became Executive Vice President in June 1994. Mr. Chambers became President
and Chief Executive Officer of the Company as of January 31, 1995. Prior to his
services at the Company, he was with Wang Laboratories for eight years, most
recently as Senior Vice President of U.S. Operations.
Ms. Cirillo, 52, has been a member of the Board of Directors since February
1998. She has been at Deutsche Bank as Chief Executive Officer of Global
Institutional Services and Divisional Board Member of Global Technology and
Services since the merger with Bankers Trust Company in June 1999. She was the
Executive Vice President and Managing Director at Bankers Trust Company from
July 1997 to June 1999. Prior to joining Bankers Trust Company, she was with
Citibank, N.A. for twenty years, most recently as Senior Vice President. Ms.
Cirillo also currently serves on the Board of Directors of Quest Diagnostics,
Inc.
Dr. Gibbons, 68, has been a member of the Board of Directors since May
1992. He is a Reid Weaver Dennis Professor of Electrical Engineering at Stanford
University and also Special Consul to the Stanford President for Industrial
Relations. He was Dean of the Stanford University School of Engineering from
1984
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<PAGE> 8
to 1996. Dr. Gibbons also currently serves on the Boards of Directors of
Lockheed Martin Corporation, Centigram Communications Corporation and El Paso
Natural Gas Company.
Mr. Kozel, 44, has been a member of the Board of Directors since November
1996. He joined the Company as Director, Program Management in March 1989. In
April 1992, he became Director of Field Operations and in February 1993, he
became Vice President of Business Development. From January 1996 to April 1998
he was Senior Vice President and Chief Technical Officer. In April 1998, Mr.
Kozel became Senior Vice President, Corporate Development of the Company.
Mr. Morgan, 61, has been a member of the Board of Directors since February
1998. He has been Chief Executive Officer of Applied Materials, Inc. since 1977
and also Chairman of the Board since 1987. He was President of Applied
Materials, Inc. from 1976 to 1987. He was previously a senior partner with West
Ven Management, a private venture capital partnership affiliated with Bank of
America Corporation.
Mr. Morgridge, 66, joined the Company as President and Chief Executive
Officer and was elected to the Board of Directors in October 1988. Mr. Morgridge
became Chairman of the Board on January 31, 1995. From 1986 to 1988 he was
President and Chief Operating Officer at GRiD Systems, a manufacturer of laptop
computer systems. Mr. Morgridge currently serves on the Board of Directors of
Polycom, Inc.
Mr. Sarin, 44, has been a member of the Board of Directors since September
1998. He has been the Chief Executive Officer of the USA/Asia Pacific Region for
Vodafone AirTouch, Plc since July 1999. From February 1997 to July 1999 he was
the President and Chief Operating Officer of AirTouch Communications, Inc., a
wireless telecommunications services company. He served as President and Chief
Executive Officer of AirTouch International from April 1994 to February 1997.
Mr. Sarin joined AirTouch Communications, Inc. in 1984 and held a variety of
positions, including Vice President and General Manager, Vice President, Chief
Financial Officer and Controller, and Vice President of Corporate Strategy. Mr.
Sarin currently serves on the Boards of Directors of Vodafone AirTouch, Plc and
Charles Schwab Corporation.
Mr. Valentine, 67, has been a member of the Board of Directors of the
Company since December 1987 and was elected Chairman of the Board of Directors
in December 1988. He became Vice Chairman of the Board on January 31, 1995. He
has been a general partner of Sequoia Capital since 1974. Mr. Valentine
currently serves as Chairman of the Board of Directors of C-Cube Microsystems
Inc., a semiconductor video compression company, and Chairman of the Board of
Network Appliance, Inc.
Mr. West, 44, has been a member of the Board of Directors since April 1996.
He has been the President and Chief Executive Officer of Entera, Inc. since
September 1999. From January 1999 to August 1999 he was the President of the
Services Business Unit at Electronic Data Systems Corporation. He was the
President and Chief Executive Officer of Hitachi Data Systems, a joint venture
computer hardware services company owned by Hitachi, Ltd. and Electronic Data
Systems Corporation, from June 1996 to January 1999. Prior to that, Mr. West was
at Electronic Data Systems Corporation from November 1984 to June of 1996, most
recently as President of Electronic Data Systems Corporation Infotainment
Business Unit.
BOARD COMMITTEES AND MEETINGS
During the fiscal year that ended on July 31, 1999, the Board of Directors
held eight meetings. During this period, all of the directors except one
attended or participated in more than 75% of the aggregate of (i) the total
number of meetings of the Board of Directors and (ii) the total number of
meetings held by all Committees of the Board on which each such director served.
Masayoshi Son, a member of the Board of Directors residing in Japan, attended
50% of the Board of Directors meetings during the 1999 fiscal year.
The Company has eight standing Committees: the Acquisition Committee, the
Special Acquisition Committee, the Audit Committee, the Compensation/Stock
Option Committee, the Executive Committee, the Investment Committee, the
Nomination Committee, and the Special Stock Option Committee.
The Acquisition Committee reviews acquisition strategies and candidates
with the Company's management, approves acquisitions and also makes
recommendations to the Board of Directors. This Committee
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<PAGE> 9
acted by unanimous written consent on six separate occasions during the last
fiscal year. This Committee currently consists of Messrs. Valentine, Chambers,
Morgridge, Puette and Sarin.
The Special Acquisition Committee reviews acquisition strategies and
candidates with the Company's management, approves acquisitions for stock valued
below a certain dollar threshold and also makes recommendations to the Board of
Directors. This committee was established in May 1999 and held no meetings
during the last fiscal year. The Committee currently consists of Messrs.
Chambers and Kozel.
The Audit Committee is responsible for reviewing the Company's financial
procedures and controls and for selecting and meeting with the independent
accountants. This Committee held four meetings during the last fiscal year. This
Committee currently consists of Ms. Bartz, Ms. Cirillo and Messrs. Puette and
West.
The Compensation/Stock Option Committee is responsible for reviewing the
compensation arrangements in effect for the Company's executive officers and for
administering all the Company's employee benefit plans, including the 1996 Stock
Incentive Plan. This Committee acted by unanimous written consent on sixteen
separate occasions during the last fiscal year. This Committee currently
consists of Messrs. Puette, Gibbons, Morgan and Sarin.
The Executive Committee's duties include anything permitted by law to be
performed by the Board of Directors that does not require the full Board. This
Committee held no meetings during the last fiscal year. This Committee currently
consists of Messrs. Morgridge, Chambers, and Valentine.
The Investment Committee reviews and approves the Company's investment
policy, and the Company's currency, interest rate and equity risk management
policies. The Committee also reviews the Company's minority equity investments,
fixed income assets and its insurance management policies and programs. This
Committee was established in January 1999 and held two meetings during the last
fiscal year. This Committee currently consists of Messrs. Morgridge, Kozel and
Valentine and Ms. Cirillo.
The Nomination Committee is responsible for nominating new members to be
considered for the Board of Directors. This Committee held no meetings during
the last fiscal year. This Committee currently consists of Messrs. Chambers,
Gibbons, and Puette.
The Special Stock Option Committee has concurrent authorization with the
Compensation/Stock Option Committee to make option grants under the 1996 Stock
Incentive Plan to eligible individuals other than executive officers of the
Company. This committee held no meetings during the last fiscal year with
respect to the approval of such option grants. This committee currently consists
of Messrs. Chambers and Morgridge.
DIRECTOR COMPENSATION
Non-employee directors were each paid a $32,000 annual retainer fee for
serving on the Board during the 1999 fiscal year except that the fee paid to Mr.
Sarin was $40,000 to include a period of Board service commencing in September
1998. During such fiscal year, non-employee directors were also eligible to
participate in the Discretionary Option Grant Program in effect under the 1996
Stock Incentive Plan and to receive periodic option grants under the Automatic
Option Grant Program in effect under the 1996 Plan. Directors who are also
employees of the Company are eligible to receive options under the Company's
1996 Stock Incentive Plan and to participate in the Company's 1989 Employee
Stock Purchase Plan, the 401(k) Plan, and the Management Incentive Plan.
At the Annual Meeting held on November 12, 1998, each of the following
non-employee directors re-elected to the Board received an option grant under
the Automatic Option Grant Program for 20,000 shares of Common Stock with an
exercise price of $32.5938 per share: Ms. Bartz, Ms. Cirillo and Messrs.
Gibbons, Morgan, Puette, Son, Valentine, and West. Mr. Sarin received an initial
automatic option grant for 40,000 shares on September 22, 1998 when he was first
appointed to the Board, with an exercise price of $31.4375 per share. The
exercise price in effect for each option is equal to the fair market value per
share of Common Stock on the grant date. Each option has a maximum term of nine
(9) years measured from the grant date, subject to earlier termination following
the optionee's cessation of Board service. The shares
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<PAGE> 10
subject to each 20,000-share grant will vest in two successive equal annual
installments upon the optionee's completion of each year of Board service over
the two (2)-year period measured from the grant date. The shares subject to the
40,000-share grant made to Mr. Sarin will vest in four (4) successive equal
annual installments upon the completion of each year of Board service over the
four (4)-year period measured from the grant date. Each option is immediately
exercisable for all of the option shares; however, any shares purchased under
the option will be subject to repurchase by the Company, at the option exercise
price paid per share, upon the optionee's cessation of Board service prior to
vesting in those shares. Lastly, the option shares will immediately vest in full
upon certain changes in control or ownership of the Company or upon the
optionee's death or disability while a Board member.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the nominees listed herein.
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO THE 1996 STOCK INCENTIVE PLAN
The Company's shareholders are being asked to approve an amendment to the
Automatic Option Grant Program in effect for non-employee Board members under
the Company's 1996 Stock Incentive Plan (the "1996 Plan"). The proposed
amendment would effect the following changes to the Automatic Option Grant
Program:
(i) Each newly elected or appointed non-employee Board member will
receive an automatic option grant for 30,000 shares of Common Stock upon
his or her initial election or appointment to the Board. Previously, such a
newly elected or appointed non-employee Board member would have received an
initial option grant for 20,000 shares.
(ii) Each continuing non-employee Board member will receive an
automatic option grant for 15,000 shares of Common Stock at each Annual
Shareholders Meeting at which he or she is re-elected to the Board.
Previously, such a continuing non-employee Board member would have received
an annual option grant for 10,000 shares.
The proposed amendment is intended to assure that the Automatic Option
Grant Program is competitive and will provide sufficient equity incentives to
attract and retain the services of highly-qualified and experienced non-employee
Board members. The proposed amendment was adopted by the Board on July 8, 1999,
subject to shareholder approval at the Annual Meeting.
The following is a summary of the principal features of the 1996 Plan, as
most recently amended. A copy of the 1996 Plan will be furnished by the Company
to any shareholder upon written request to the Corporate Secretary located in
San Jose, California.
DESCRIPTION OF THE 1996 PLAN
Structure. The 1996 Plan consists of two (2) separate equity incentive
programs: (i) a Discretionary Option Grant Program under which eligible
individuals in the Company's employ or service may, at the discretion of the
Plan Administrator, be granted options to purchase shares of Common Stock and
(ii) an Automatic Option Grant Program under which eligible non-employee Board
members automatically receive option grants to purchase shares of Common Stock
at designated intervals over their period of Board service. The principal
features of each program are described below.
Administration. The Compensation/Stock Option Committee of the Board
currently serves as the Plan Administrator with respect to the Discretionary
Option Grant Program. However, one or more additional Board committees may be
appointed to administer that program with respect to certain designated classes
of individuals in the Company's service. The term "Plan Administrator" as used
in this summary means the Compensation/Stock Option Committee and any other
appointed committee acting within the scope of its administrative authority
under the 1996 Plan. Administration of the Automatic Option Grant Program is
self-
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<PAGE> 11
executing in accordance with the express provisions of that program, and no Plan
Administrator exercises any discretion with respect to that program. Shareholder
approval of this Proposal will also constitute pre-approval of each option
granted under the amended Automatic Option Grant Program on or after the date of
the Annual Meeting and the subsequent exercise of that option pursuant to the
terms of such program and the applicable stock option agreement.
Eligibility. Officers and employees, non-employee Board members, and
independent consultants and advisors in the service of the Company or any parent
or subsidiary corporation (whether now existing or subsequently established) are
eligible to participate in the Discretionary Option Grant Program. Only non-
employee Board members are eligible to participate in the Automatic Option Grant
Program.
As of August 13, 1999, eight (8) executive officers, including John P.
Morgridge in his capacity as Chairman of the Board, approximately 21,014 other
employees and nine (9) non-employee Board members were eligible to participate
in the Discretionary Option Grant Program, and each of those non-employee Board
members was also eligible to participate in the Automatic Option Grant Program.
Share Reserve. The 309,762,450 shares of Common Stock transferred from the
Company's 1987 Stock Option Plan (the "Predecessor Plan") comprised the initial
share reserve under the 1996 Plan. However, pursuant to the automatic share
increase provisions of the 1996 Plan, the share reserve automatically increases
on the first trading day of fiscal December each 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. In no event,
however, may any such annual increase exceed 240,000,000 shares, as adjusted
from time to time to reflect any subsequent stock dividends or stock splits. As
a result of the automatic share increases that occurred in December 1996,
December 1997 and December 1998, the share reserve has been increased by an
additional 435,351,114 shares to a total reserve of 745,113,564 shares.
As of August 13, 1999, options covering 410,556,800 shares of Common Stock
were outstanding under the 1996 Plan, 186,629,677 shares had been issued, and
147,927,087 shares remained available for future option grants.
The shares issuable under the 1996 Plan may be made available either from
the Company's authorized but unissued Common Stock or from Common Stock
reacquired by the Company, including shares purchased in the open market. In
addition, shares subject to any outstanding options under the 1996 Plan
(including options transferred from the Predecessor Plan) which expire or
terminate prior to exercise and any unvested shares reacquired by the Company
pursuant to its repurchase rights under the 1996 Plan will be available for
subsequent issuance.
No one participant in the 1996 Plan may receive stock option grants or
separately exercisable stock appreciation rights for more than 9,000,000 shares
of Common Stock in the aggregate per calendar year. Shareholder approval of this
Proposal will also constitute re-approval of that limit for purposes of Internal
Revenue Code Section 162(m).
Valuation. For purposes of establishing the option price and for all other
valuation purposes under the 1996 Plan, the fair market value per share of
Common Stock on any relevant date under the 1996 Plan is the closing sales price
per share of Common Stock on that date, as such price is reported on the Nasdaq
National Market. The closing sales price of the Common Stock on August 13, 1999
was $63.5625 per share.
DISCRETIONARY OPTION GRANT PROGRAM
Exercise Price, Term and Vesting Schedule. The options granted under the
Discretionary Option Grant Program may be either incentive stock options under
the federal tax laws or non-statutory options. Each granted option will have an
exercise price per share not less than one hundred percent (100%) of the fair
market value per share of Common Stock on the option grant date, and no granted
option will have a term in excess of nine (9) years. The shares subject to each
option will generally vest in a series of installments over a specified period
of service measured from the grant date.
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<PAGE> 12
Cessation of Service. Upon cessation of service, the optionee will have a
limited period of time in which to exercise any outstanding option to the extent
exercisable for vested shares. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding options may be exercised and/or to
accelerate the exercisability or vesting of such options in whole or in part.
Such discretion may be exercised at any time while the options remain
outstanding.
Stock Appreciation Rights. Three types of stock appreciation rights are
authorized for issuance under the Discretionary Option Grant Program: (i) tandem
rights, which require the option holder to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of such option
for an appreciation distribution; (ii) stand-alone stock appreciation rights not
tied to an option grant but with a base price per share equal to the fair market
value per share of Common Stock on the grant date; and (iii) limited rights
which become exercisable upon the occurrence of a hostile take-over.
The appreciation distribution payable by the Company upon the exercise of a
tandem stock appreciation right will be equal in amount to the excess of (i) the
fair market value (on the exercise date) of the shares of Common Stock in which
the optionee is at the time vested under the surrendered option over (ii) the
aggregate exercise price payable for those shares. Such appreciation
distribution may, at the Plan Administrator's discretion, be made in cash or in
shares of Common Stock valued at fair market value on the exercise date.
The appreciation distribution payable by the Company upon the exercise of a
stand-alone stock appreciation right will be equal in amount to the excess of
(i) the fair market value (on the exercise date) of the shares of Common Stock
underlying the exercised right over (ii) the aggregate base price in effect for
those shares. Such appreciation distribution may, at the Plan Administrator's
discretion, be made in cash or in shares of Common Stock valued at fair market
value on the exercise date. The base price in effect for each stand-alone right
may not be less than the fair market value per share of Common Stock on the date
that right is granted.
One or more officers or directors of the Company subject to the short-swing
profit restrictions of the Federal securities laws may, at the discretion of the
Plan Administrator, be granted limited stock appreciation rights in connection
with their option grants under the Discretionary Option Grant Program. Each
option with such a limited stock appreciation right may be surrendered to the
Company, to the extent such option is exercisable for one or more vested option
shares, upon the successful completion of a hostile tender offer for more than
thirty-five percent (35%) of the Company's outstanding voting stock. In return,
the optionee will be entitled to a cash distribution from the Company in an
amount per surrendered option share equal to the excess of (i) the highest price
per share of Common Stock paid in the tender offer over (ii) the option exercise
price per share.
Shares subject to stock appreciation rights exercised under the 1996 Plan
will not be available for subsequent issuance.
Shareholder Rights and Option Transferability. No optionee will have any
shareholder rights with respect to the option shares until such optionee has
exercised the option and paid the exercise price for the purchased shares.
Options are not assignable or transferable other than by will or the laws of
inheritance following optionee's death, and during the optionee's lifetime, the
option may only be exercised by the optionee. However, the Plan Administrator
may establish procedures pursuant to which non-statutory options may be
transferred or assigned during the optionee's lifetime to one or more members of
the optionee's family or to a trust established exclusively for one or more such
family members or to the optionee's former spouse, to the extent such transfer
is in furtherance of the optionee's estate plan or in connection with a domestic
relations order.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, non-employee Board members will
receive option grants at specified intervals over their period of Board service.
All grants under such program will be made in strict compliance with the express
provisions of the program, and shareholder approval of this Proposal will also
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<PAGE> 13
constitute pre-approval of each option granted on or after the date of the
Annual Meeting pursuant to the amended provisions of the Automatic Option Grant
Program summarized below and the subsequent exercise of that option in
accordance with such provisions.
If the shareholders approve this Proposal, then each individual who first
becomes a non-employee Board member at or after the 1999 Annual Meeting, whether
through election by the shareholders or appointment by the Board, will receive,
at the time of such initial election or appointment, an initial automatic option
grant for 30,000 shares of Common Stock, provided such individual was not
previously in the Company's employ. In addition, on the date of each Annual
Meeting, beginning with the 1999 Annual Meeting, each individual re-elected to
serve as a non-employee Board member automatically will be granted a stock
option to purchase 15,000 shares of Common Stock, provided such individual has
served as a non-employee Board member for at least six (6) months. There will be
no limit on the number of such 15,000-share option grants any one non-employee
Board member may receive over his or her period of Board service, and
non-employee Board members who have previously served in the Company's employ
are fully eligible for one or more 15,000-share option grants.
Prior to the amendment which is the subject of this Proposal, each newly
elected or appointed non-employee Board member received a 20,000-share option
grant at the time of initial appointment or election to the Board and each
continuing non-employee Board member received an annual option grant for 10,000
shares at each Annual Shareholders Meeting at which he or she was re-elected to
the Board.
Each option granted under the Automatic Option Grant Program is subject to
the following terms and conditions:
- The exercise price per share will be equal to 100% of the fair
market value per share of Common Stock on the automatic grant date.
- Each option will have a maximum term equal to the lesser of (i) nine
(9) years measured from the grant date or (ii) twelve (12) months following
termination of Board service.
- Each option will be immediately exercisable for all the option
shares, but any purchased shares will be subject to repurchase by the
Company, at the exercise price paid per share, upon the optionee's
cessation of Board service prior to vesting in those shares.
- The shares subject to each initial automatic 30,000 option grant
will vest 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
initial automatic grant date. The shares subject to each annual automatic
15,000 option grant will vest in two (2) 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.
- The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled
while a Board member or should any of the following events occur while the
optionee continues in Board service: (i) an acquisition of the Company by
merger or asset sale; (ii) the successful completion of a hostile tender
offer for more than thirty-five percent (35%) of the outstanding voting
securities; or (iii) a change in the majority of the Board occasioned by
one or more contested elections for Board membership.
- Upon the successful completion of a hostile tender offer for
securities possessing more than thirty-five percent (35%) of the total
combined voting power of the Company's outstanding voting securities, each
outstanding automatic option grant may be surrendered to the Company for a
cash distribution per surrendered option share in an amount equal to the
excess of (i) the highest price per share of Common Stock paid in such
hostile tender offer over (ii) the exercise price payable per share.
Shareholder approval of this Proposal will also constitute pre-approval of
each option grant with such a cash surrender right made on or after the
date of the Annual Meeting and the subsequent exercise of that right in
accordance with the foregoing terms.
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<PAGE> 14
GENERAL PROVISIONS
Vesting Acceleration. If the Company is acquired by merger or asset sale,
each outstanding option under the Discretionary Option Grant Program which is
not to be assumed or replaced by the successor corporation will automatically
accelerate in full, except to the extent that option is assumed or replaced by
the successor corporation. However, the Plan Administrator will have complete
discretion to grant one or more options under the Discretionary Option Grant
Program which will become fully exercisable for all option shares in the event
those options are assumed in an acquisition and the optionee's service with the
Company or the acquiring entity is involuntarily terminated within a designated
period following such acquisition. If there is a hostile change in control of
the Company (whether by successful tender offer for more than thirty five
percent (35%) of the outstanding voting stock or by proxy contest for the
election of Board members), each outstanding option under the Discretionary
Option Grant will automatically accelerate in full and become exercisable for
all of the option shares as fully-vested shares. The shares subject to each
option outstanding under the Automatic Option Grant Program will automatically
vest in full in the event of an acquisition of the Company by merger or asset
sale or a hostile change in control of the Company.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
Financial Assistance. The Plan Administrator may institute a loan program
to assist one or more participants in financing the exercise of outstanding
options under the Discretionary Option Grant Program through full-recourse
interest-bearing promissory notes. However, the maximum amount of financing
provided any optionee may not exceed the cash consideration payable for the
issued shares plus all applicable taxes incurred in connection with the
acquisition of the shares.
Changes in Capitalization. In the event any change is made to the
outstanding shares of Common Stock by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other change
in corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to (i) the maximum number and/or class of
securities issuable under the 1996 Plan, (ii) the limitation on the maximum
number and/or class of securities by which the share reserve is to increase
automatically each year, (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 1996 Plan per calendar year, (iv) 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 and (v) the number and/or class of securities and the exercise price per
share in effect under each outstanding option in order to prevent the dilution
or enlargement of benefits thereunder.
Each outstanding option which is assumed in connection with an acquisition
will be appropriately adjusted to apply and pertain to the number and class of
securities which would otherwise have been issued, in consummation of such
acquisition to the option holder had the option been exercised immediately prior
to the acquisition. Appropriate adjustments will also be made to the option
price payable per share and to the class and number of securities available for
future issuance under the 1996 Plan on both an aggregate and a per-participant
basis.
Special Tax Election. The Plan Administrator may, in its discretion,
provide one or more holders of outstanding options under the Discretionary
Option Grant Program with the right to have the Company withhold a portion of
the shares of Common Stock otherwise issuable to such individuals in
satisfaction of the income and employment withholding taxes to which they become
subject in connection with the exercise of those options. Alternatively, the
Plan Administrator may allow such individuals to deliver existing shares of
Common Stock in satisfaction of such withholding tax liability.
Amendment and Termination. The Board may amend or modify the 1996 Plan in
any or all respects whatsoever. However, certain amendments may require
shareholder approval pursuant to applicable laws and regulations.
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<PAGE> 15
Unless sooner terminated by the Board, the 1996 Plan will in all events
terminate on December 31, 2006. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
Predecessor Plan. All outstanding options under the Predecessor Plan which
were transferred to the 1996 Plan continue to be governed solely by the terms of
the documents evidencing such options, and no provisions of the 1996 Plan affect
or otherwise modify the rights or obligations of the holders of those
transferred options with respect to their acquisition of shares of Common Stock.
However, the Plan Administrator has complete discretion to extend one or more
provisions of the 1996 Plan to the transferred options to the extent those
options do not otherwise contain such provisions. In June 1998, the Plan
Administrator approved an amendment to each outstanding option incorporated from
the Predecessor Plan pursuant to which each of those options will vest and
become immediately exercisable for all the option shares upon a hostile
take-over of the Company.
OPTION GRANTS
For each of the executive officers named in the Summary Compensation Table
and the various indicated groups, the table below shows (i) the number of shares
of Common Stock subject to options granted under the 1996 Plan during the period
from July 26, 1998 to August 13, 1999 and (ii) the weighted average exercise
price payable per share under such options.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
NUMBER OF OF GRANTED
NAME AND POSITION OPTION SHARES OPTIONS
----------------- ------------- --------------
<S> <C> <C>
John T. Chambers
President and Chief Executive Officer................... 2,500,000 $52.8438
Donald J. Listwin
Executive Vice President, Service Provider and Consumer
Lines of Business, Corporate Marketing............... 500,000 $56.3483
Larry R. Carter
Senior Vice President, Finance and Administration, Chief
Financial Officer, and Secretary..................... 320,000 $57.2188
Gary J. Daichendt
Executive Vice President, Worldwide Operations.......... 600,000 $52.0417
Mario Mazzola
Senior Vice President, Enterprise Line of Business...... 320,000 $57.2188
All current executive officers, including John P.
Morgridge in his capacity as Chairman of the Board, as a
group (8 persons)....................................... 5,310,000 $52.3968
All current directors (other than executive officers,
including John P. Morgridge in his capacity as Chairman
of the Board) as a group (10 persons)................... 200,000 $32.3625
All employees, including current officers who are not
executive officers, as a group (21,014 persons)......... 102,636,619 $50.4249
</TABLE>
In July 1997, the Company implemented the Special Non-Officer Stock
Incentive Plan, pursuant to which 4,500,000 shares of Common Stock have been
authorized for issuance over the ten (10)-year term of that plan pursuant to
stock option grants or share right awards. The shares will be made available
from the Company's authorized but unissued Common Stock or from Common Stock
repurchased by the Company. As of August 13, 1999, options for 37,800 shares of
Common Stock were outstanding under this plan with a weighted average exercise
price of $13.2911 per share, and 4,500 shares of Common Stock has been issued
under such plan.
NEW PLAN BENEFITS
As of August 13, 1999, no options have been granted on the basis of the
proposed increases to the number of shares of Common Stock for which newly
elected or appointed non-employee Board members and continuing non-employee
Board members may be granted stock options under the Automatic Option Grant
Program. However, if this Proposal is approved by the shareholders, then at the
Annual Meeting, each of the
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<PAGE> 16
following individuals will, upon re-election to the Board, receive an option
grant under the Automatic Option Grant Program to purchase 15,000 shares of
Common Stock at an exercise price per share equal to the fair market value per
share of Common Stock on the grant date: Ms. Bartz, Ms. Cirillo and Messrs.
Gibbons, Morgan, Sarin, Valentine and West.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE OPTION PLAN
Options granted under the 1996 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of a taxable disposition. For Federal tax purposes, dispositions are
divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the optionee
has held the shares for more than two (2) years after the option grant date and
more than one (1) year after the exercise date. If either of these two holding
periods is not satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for those shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of the
shares on the exercise date over (ii) the exercise price paid for those shares
will be taxable as ordinary income to the optionee. Any additional gain or loss
recognized upon the disposition will be taxable as a capital gain or loss.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
No taxable income is recognized upon the receipt of a stock appreciation
right. The holder will recognize ordinary income, in the year in which the right
is exercised, equal to the excess of the fair market value of the
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<PAGE> 17
underlying shares of Common Stock on the exercise date over the base price in
effect for the exercised right, and the holder will be required to satisfy the
tax withholding requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the holder in connection with the exercise of
the stock appreciation right. The deduction will be allowed for the taxable year
of the Company in which such ordinary income is recognized.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of the
Company. Accordingly, all compensation deemed paid with respect to those options
will remain deductible by the Company without limitation under Code Section
162(m).
ACCOUNTING TREATMENT
Option grants with an exercise price per share equal to 100% of the fair
market value of the shares at the time of grant will not result in any direct
charge to the Company's earnings. However, the fair value of those options must
be disclosed in the notes to the Company's financial statements, in the form of
pro-forma statements to those financial statements, the impact those options
would have upon the Company's reported earnings were the value of those options
at the time of grant treated as compensation expense. In addition, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a diluted basis.
On March 31, 1999, the Financial Accounting Standards Board issued an
Exposure Draft of a proposed interpretation of APB Opinion 25, "Accounting for
Stock Issued to Employees." Under the proposed interpretation, as modified on
August 11, 1999, option grants made to non-employee consultants (but not non-
employee Board members) after December 15, 1998 will result in a direct charge
to the Company's reported earnings based upon the fair value of the option
measured initially as of the grant date and then subsequently on the vesting
date of each installment of the underlying option shares. Such charge will
accordingly include the appreciation in the value of the option shares over the
period between the grant date of the option (or, if later, the effective date of
the final amendment) and the vesting date of each installment of the option
shares.
Should one or more optionees be granted stock appreciation rights under the
1996 Plan that have no conditions upon exercisability other than a service or
employment requirement, then such rights would result in a compensation expense
to be charged against the Company's reported earnings. Accordingly, at the end
of each fiscal quarter, the amount (if any) by which the fair market value of
the shares of Common Stock subject to such outstanding stock appreciation rights
has increased from the prior quarter-end would be accrued as compensation
expense, to the extent such fair market value is in excess of the aggregate
exercise price in effect for those rights.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the 1999 Annual Meeting,
together with the affirmative vote of a majority of the required quorum, is
required for approval of this Proposal. Should such shareholder approval not be
obtained, the proposed increases to the number of shares of Common Stock for
which newly elected or appointed non-employee Board members and continuing
non-employee Board members may be granted stock options under the Automatic
Option Grant Program will not become effective. The 1996 Plan will continue to
remain in effect and option grants will continue to be made pursuant to the
provisions of the 1996 Plan, including option grants under the Automatic Option
Grant Program as in effect prior to the amendments summarized in this Proposal,
until the available reserve of Common Stock under the 1996 Plan has been issued.
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<PAGE> 18
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote FOR the
amendment to the Automatic Option Grant Program of the 1996 Plan.
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO BYLAWS
GENERAL
Section 2 of Article III of the Company's Amended and Restated Bylaws (the
"Bylaws") currently provides that the authorized number of directors shall be a
minimum of seven (7) and a maximum of thirteen (13), with the exact number of
directors to be fixed from time to time within such range by the Board of
Directors or the shareholders. The Board of Directors has adopted, subject to
shareholder approval, an amendment to the Bylaws that would increase the
specified limits of the authorized number of directors to a maximum of fifteen
(15).
The Board of Directors believes that this proposed Bylaw amendment will
enable the Board to take timely advantage of the availability of well-qualified
candidates for appointment to the Board, in particular, candidates from outside
the Company whose skills and experience will benefit the Company.
AMENDMENT TO BYLAWS
If approved, Section 2 of Article III of the Bylaws would be amended to
read as follows:
"Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of authorized
directors shall be not less than seven (7) nor more than fifteen (15), with 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 in accordance
with the Company's Bylaws."
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company, together with the affirmative vote of a majority of the required
quorum, is required for approval of the proposed amendment to the Bylaws at the
1999 Annual Meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote FOR the
approval of the amendment to the Company's Bylaws.
PROPOSAL NO. 4
APPROVAL OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
GENERAL
The shareholders are being asked to approve a Certificate of Amendment to
the Company's Restated Articles of Incorporation (the "Articles") to increase
the authorized number of shares of Common Stock from 5,400,000,000 to
10,000,000,000. The Board authorized the amendment on July 8, 1999. The full
text of the proposed amendment to the Articles is set forth below.
The Articles currently provide that the Company is authorized to issue two
classes of stock, consisting of 5,400,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. On September 13, 1999, 3,290,189,804 shares
of Common Stock were issued and outstanding, 427,001,718 shares of Common Stock,
excluding shares subject to options granted in September 1999, were reserved for
issuance upon the exercise of
14
<PAGE> 19
outstanding options and 64,452,185 shares of Common Stock were reserved for
issuance under the Company's 1989 Employee Stock Purchase Plan. The remaining
shares of authorized but unissued Common Stock are not reserved for any specific
use and are available for future issuance.
PURPOSE AND EFFECT OF AMENDMENT
The proposed amendment will authorize sufficient additional shares of
Common Stock to provide the Company the flexibility to make such issuances as
may be necessary in order for the Company to complete acquisitions or other
corporate transactions and to issue shares in connection with the Company's
stock option, stock purchase and other existing employee benefit plans. The
proposed amendment to the Articles, authorizing an additional 4,600,000,000
shares of Common Stock, would facilitate the Company's ability to accomplish
these goals and other business and financial objectives in the future without
the necessity of delaying such activities for further shareholder approval,
except as may be required in particular cases by the Company's charter
documents, applicable law or the rules of any stock exchange or other system on
which the Company's securities may then be listed. Future issuances of
additional shares of Common Stock or securities convertible into Common Stock,
whether pursuant to an acquisition or other corporate transaction, would have
the effect of diluting the voting rights and could have the effect of diluting
earnings per share and book value per share of existing shareholders. The
availability for issuance of additional shares of Common Stock could discourage
or make more difficult efforts to obtain control of the Company.
AMENDMENT TO RESTATED ARTICLES
If approved, Section A of Article IV of the Restated Articles of
Incorporation would be amended and restated 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)
shall be Preferred Stock."
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company, together with the affirmative vote of a majority of the required
quorum, is required for approval of the proposed Certificate of Amendment to the
Company's Restated Articles of Incorporation at the 1999 Annual Meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that the amendment of the Articles is
necessary to provide the Company agility and flexibility over the upcoming
years. The Board of Directors recommends that the shareholders vote FOR the
approval of a Certificate of Amendment to the Company's Restated Articles of
Incorporation.
PROPOSAL NO. 5
RATIFICATION OF INDEPENDENT ACCOUNTANTS
GENERAL
The Company is asking the shareholders to ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending July 29, 2000. The affirmative vote of a majority of the
outstanding voting shares of the Company present or represented and entitled to
vote at the 1999 Annual Meeting, together with the affirmative vote of a
majority of the required quorum, is required to ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent accountants.
In the event the shareholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board of Directors, in its discretion, may direct the appointment
15
<PAGE> 20
of a different independent accounting firm at any time during the year if the
Board of Directors determines that such a change would be in the Company's and
its shareholders' best interests.
PricewaterhouseCoopers LLP has audited the Company's financial statements
annually since fiscal 1988. Its representatives will be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote FOR the
ratification of the selection of PricewaterhouseCoopers LLP to serve as the
Company's independent accountants for the fiscal year ending July 29, 2000.
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of July
31, 1999 for (i) all persons who are beneficial owners of five percent or more
of the Company's Common Stock, (ii) each director and nominee for director,
(iii) the Company's Chief Executive Officer and the other executive officers
named in the Summary Compensation Table below, and (iv) all current executive
officers and directors as a group as of July 31, 1999:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENT
NAME OWNED(1) OWNED(2)
---- ------------ --------
<S> <C> <C>
Carol A. Bartz.............................................. 155,000 *
Larry R. Carter(3).......................................... 1,853,901 *
John T. Chambers(4)......................................... 7,400,083 *
Mary A. Cirillo............................................. 80,000 *
Gary J. Daichendt........................................... 564,974 *
James F. Gibbons............................................ 115,460 *
Edward R. Kozel............................................. 1,337,452 *
Donald J. Listwin(5)........................................ 1,432,248 *
Mario Mazzola............................................... 1,031,494 *
James C. Morgan(6).......................................... 84,500 *
John P. Morgridge(7)........................................ 42,874,153 1.3
Robert L. Puette............................................ 200,000 *
Arun Sarin.................................................. 41,500 *
Masayoshi Son............................................... 290,000 *
Donald T. Valentine(8)...................................... 2,725,877 *
Steven M. West(9)........................................... 132,700 *
All executive officers and directors as a group (18
persons)(10).............................................. 73,812,105 2.2
</TABLE>
- ---------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. The number of shares beneficially owned includes Common Stock of
which such individual has the right to acquire beneficial ownership either
currently or within 60 days after July 31, 1999, including, but not limited
to, upon the exercise of an option.
(2) Percentage of beneficial ownership is based upon 3,271,171,395 shares of
Common Stock, all of which were outstanding on July 31, 1999. For each
named person, this percentage includes Common Stock of which such person
has the right to acquire beneficial ownership either currently or within 60
days of July 31, 1999, including, but not limited to, upon the exercise of
an option; however, such Common
16
<PAGE> 21
Stock shall not be deemed outstanding for the purpose of computing the
percentage owned by any other person. Such calculation is required by
General Rule 13d-3(d)(1)(i) under the Securities Exchange Act of 1934.
Based upon a review of 13G filings made with the Securities and Exchange
Commission during fiscal year 1999, there were no 5% shareholders.
(3) Includes 16,304 shares held by the Carter Rev. Trust dated October 18,
1994.
(4) Includes 17,964 shares held by the Sequoia Capital VII Partnership.
(5) Includes 34,626 shares held by Donald Listwin's spouse, Lorene Arey.
(6) Includes 4,500 shares held by James Morgan's spouse, Rebecca Q. Morgan.
(7) Includes 41,013,856 shares held by John P. Morgridge and Tashia F.
Morgridge as Trustees of the Morgridge Family Trust (UTA DTD 6/30/88).
Includes 53,504 shares held by John Morgridge's spouse, Tashia F.
Morgridge. Includes 1,113,099 shares held in the Morgridge Family
Foundation. Includes 9,044 shares held by the Sequoia Technology VI
Partnership.
(8) Includes 877,434 shares held by the Donald T. Valentine Family Trust Under
Agreement dated April 29, 1967. Includes 928,443 shares held in total by
the following partnerships in which Mr. Valentine holds a partnership or
other economic interest: 16,966 shares held by Sequoia Technology Partners
VI, 1,196 shares held by Sequoia XXIV, 50,780 shares held by Sequoia 1995,
527,071 shares held by Sequoia Capital VII, 23,616 shares held by Sequoia
Technology Partners VII and 308,814 shares held by Sequoia Capital VI
(collectively the "Sequoia Entities"). Mr. Valentine disclaims beneficial
ownership of shares held by the Sequoia Entities, except to the extent of
his pecuniary interest therein.
(9) Includes 200 shares held by Steven West's spouse, Donna Karam.
(10) Includes outstanding options to purchase 27,160,681 shares of Common Stock
to the extent such options are either currently exercisable or will become
exercisable within 60 days after July 31, 1999. See Note 2 with respect to
shares that have been included herein.
COMPLIANCE WITH SEC REPORTING REQUIREMENTS
Under the securities laws of the United States, the Company's directors,
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in their ownership to the
Securities and Exchange Commission ("SEC"). Specific due dates have been
established by the SEC, and the Company is required to disclose in this Proxy
Statement any failure to file by those dates. Based upon (i) the copies of
Section 16(a) reports that the Company received from such persons for their 1999
fiscal year transactions and (ii) the written representations received from one
or more of such persons that no annual Form 5 reports were required to be filed
for them for the 1999 fiscal year, the Company believes that there has been
compliance with all Section 16(a) filing requirements applicable to such
officers, directors, and ten-percent beneficial owners for such fiscal year.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
The Compensation/Stock Option Committee (the "Committee") of the Board of
Directors sets the compensation of the Chief Executive Officer, reviews the
design, administration and effectiveness of compensation programs for other key
executives, and approves stock option grants for all executive officers. The
Committee, serving under a charter adopted by the Board of Directors, is
composed entirely of outside directors who have never served as officers of the
Company.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company operates in the extremely competitive and rapidly changing high
technology industry. The Committee believes that the compensation programs for
the executive officers should be designed to attract,
17
<PAGE> 22
motivate and retain talented executives responsible for the success of the
Company and should be determined within a competitive framework and based on the
achievement of designated financial targets, individual contribution, customer
satisfaction and financial performance relative to that of the Company's
competitors. Within this overall philosophy, the Committee's objectives are to:
- Offer a total compensation program that takes into consideration the
compensation practices of a group of specifically identified peer
companies (the "Peer Companies") and other selected companies with which
the Company competes for executive talent.
- Provide annual variable incentive awards that take into account the
Company's overall financial performance in terms of designated corporate
objectives and the relative performance of the Peer Companies as well as
individual contributions and a measure of customer satisfaction.
- Align the financial interests of executive officers with those of
shareholders by providing significant equity-based, long-term incentives.
COMPENSATION COMPONENTS AND PROCESS
The three major components of the Company's executive officer compensation
are: (i) base salary, (ii) variable incentive awards, and (iii) long-term,
equity-based incentive awards.
The Committee determines the compensation levels for the executive officers
with the assistance of the Company's Human Resources Department, which works
with an independent consulting firm that furnishes the Committee with executive
compensation data drawn from a nationally recognized survey of similarly sized
technology companies which have been identified as the Peer Companies. A
significant number of the Peer Companies are listed in the Hambrecht & Quist
Technology Index, which is included in the Stock Performance Graph for this
proxy statement. Certain companies not included in this Index were considered
Peer Companies because the Company competes for executive talent with those
companies. However, some organizations in the Hambrecht & Quist Technology Index
were excluded from the Peer Company list because they were not considered
competitors for executive talent or because compensation information was not
available.
The positions of the Company's CEO and executive officers were compared
with those of their counterparts at the Peer Companies, and the market
compensation levels for comparable positions were examined to determine base
salary, target incentives and total cash compensation. In addition, the
practices of the Peer Companies concerning stock option grants were reviewed and
compared.
Base Salary. The base salary for each executive officer is determined at
levels considered appropriate for comparable positions at the Peer Companies.
The Company's policy is to target base salary levels between the 25th and 50th
percentile of compensation practices at the Peer Companies.
Variable Incentive Awards. To reinforce the attainment of Company goals,
the Committee believes that a substantial portion of the annual compensation of
each executive officer should be in the form of variable incentive pay. The
annual incentive pool for executive officers is determined on the basis of the
Company's achievement of the financial performance targets established at the
beginning of the fiscal year and also includes a range for the executive's
contribution, a measure of customer satisfaction and a strategic component tied
to the Company's performance relative to a select group of competitors. The
incentive plan sets a threshold level of Company performance based on both
revenue and profit before interest and taxes that must be attained before any
incentives are awarded. Once the fiscal year's threshold is reached, specific
formulas are in place to calculate the actual incentive payment for each
officer. A target is set for each executive officer based on targets for
comparable positions at the Peer Companies and is stated in terms of an
escalating percentage of the officer's base salary for the year. In fiscal 1999,
the Company exceeded its corporate performance targets as well as the strategic
target tied to revenue performance relative to the selected competitor group.
Awards paid reflected those results plus individual accomplishments of both
corporate and functional objectives and a component based upon customer
satisfaction.
18
<PAGE> 23
Long-Term, Equity-Based Incentive Awards. The goal of the Company's
long-term, equity-based incentive awards is to align the interests of executive
officers with shareholders and to provide each executive officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. The Committee determines the size of
long-term, equity-based incentives according to each executive's position within
the Company and sets a level it considers appropriate to create a meaningful
opportunity for stock ownership. In addition, the Committee takes into account
an individual's recent performance, his or her potential for future
responsibility and promotion, comparable awards made to individuals in similar
positions with the Peer Companies, and the number of unvested options held by
each individual at the time of the new grant. The relative weight given to each
of these factors varies among individuals at the Committee's discretion.
During fiscal 1999, the Committee made option grants to Messrs. Carter,
Chambers, Daichendt, Listwin and Mazzola under the Company's 1996 Stock
Incentive Plan. Each grant allows the officer to acquire shares of the Company's
Common Stock at a fixed price per share (the market price on the grant date)
over a specified period of time. Options granted to this group of individuals in
April 1999 and later vest in periodic installments over a five (5)-year period,
contingent upon the executive officer's continued employment with the Company.
Accordingly, the option grants will provide a return only if the officer remains
with the Company and only if the market price appreciates over the option term.
The September 1998 option grant made to Mr. Daichendt and the option grants made
to the Company's executive officers, in prior fiscal years, vest or have vested
over a four (4)-year period. The Committee believes that the longer vesting
schedule will enhance the Company's ability to retain the services of key
executives through the equity incentives provided under the 1996 Plan.
CEO Compensation. The annual base salary for Mr. Chambers was established
by the Committee on July 29, 1998, for the period July 26, 1998 to July 31,
1999. The Committee's decision was based on both Mr. Chambers' personal
performance of his duties and the salary levels paid to chief executive officers
of the Peer Companies, but set below the 25th percentile of the surveyed data in
order to have a substantial portion of his total compensation, in the form of
variable incentive awards and stock option grants, tied to Company performance
and stock price appreciation.
Mr. Chambers' 1999 fiscal year incentive compensation was based on the
actual financial performance of the Company in achieving designated corporate
objectives and attaining a strategic revenue objective measured against
competitor performance and also included a component based upon customer
satisfaction. Mr. Chambers' incentive compensation was based on the incentive
plan used for all executive officers and provided no dollar guarantees. The
option grant made to Mr. Chambers during the 1999 fiscal year was awarded within
substantially the same timeframe the Committee granted stock options to other
employees under the Company's broad-based stock option program. The option grant
made to Mr. Chambers was based upon his performance and leadership with the
Company and placed a significant portion of his total compensation at risk,
since the value of the option grant depends upon the appreciation of the
Company's Common Stock over the option term. As mentioned, the option grant to
Mr. Chambers has the new five (5)-year vesting schedule applicable to the
executive officers instead of the standard four (4)-year vesting schedule in
effect for most other employees.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code disallows a Federal income tax deduction to publicly held
companies for compensation paid to certain of their executive officers, to the
extent that compensation exceeds $1 million per covered officer in any fiscal
year. This limitation applies only to compensation which is not considered to be
performance based. The Company's 1996 Stock Incentive Plan has been structured
so that any compensation deemed paid in connection with the exercise of option
grants made under that plan will qualify as performance-based compensation which
will not be subject to the $1 million limitation. Non-performance based
compensation paid to the Company's executive officers for the 1999 fiscal year
exceeded the $1 million limit per officer only by an insubstantial amount for
one executive officer, and the Committee has decided not to take any action at
19
<PAGE> 24
this time to limit or restructure the elements of cash compensation payable to
the Company's executive officers.
COMPENSATION/STOCK OPTION COMMITTEE
Robert L. Puette, Chairman
James F. Gibbons
James C. Morgan
Arun Sarin
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation/Stock Option Committee of the Company's
Board of Directors for the 1999 fiscal year are those named above in the
Compensation/Stock Option Committee Report. No member of this Committee was at
any time during the 1999 fiscal year or at any other time an officer or employee
of the Company.
Mr. Puette, the Chairman of the Compensation/Stock Option Committee, is the
President, Chief Executive Officer and member of the Board of Directors of
Centigram Communications Corporation and Mr. Kozel, a member of the Board and an
employee of the Company, was also a member of the Centigram Communications
Corporation Board of Directors. Mr. Kozel resigned as a Board of Director of
Centigram Communications Corporation, effective June 23, 1999. No other
executive officer of Cisco Systems, Inc. served on the board of directors or
compensation committee of any entity that includes one or more members of the
Board of Directors of Cisco Systems, Inc.
20
<PAGE> 25
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned, by the Company's
Chief Executive Officer and the four other highest-paid executive officers whose
salary and bonus for the 1999 fiscal year were in excess of $100,000, for
services rendered in all capacities to the Company and its subsidiaries for each
of the last three fiscal years. No executive officer who would have otherwise
been includable in such table on the basis of salary and bonus earned for the
1999 fiscal year has been excluded by reason of his or her termination of
employment or change in executive status during that fiscal year. The
individuals included in the table will be collectively referred to as the "Named
Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMPENSATION
--------------------------------------------- LONG-TERM
ANNUAL COMPENSATION OTHER ANNUAL COMPENSATION ALL OTHER
------------------------------ COMPENSATION AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) OPTIONS(#) ($)(3)
--------------------------- ---- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers............... 1999 305,915 637,184 0 2,500,000 1,500
President, Chief Executive 1998 285,622 604,895 0 2,700,000 1,500
Officer, Director 1997 266,991 291,243 3,600,000 1,500
Donald J. Listwin.............. 1999 397,399 637,280 6,306 500,000 0
Executive Vice President, 1998 332,261 598,407 21,341 825,000 0
Service Provider and 1997 282,712 187,122 21,903 787,500 0
Consumer Lines of Business,
Corporate Marketing
Larry R. Carter................ 1999 367,063 612,131 13,085 320,000 1,500
Senior Vice President, 1998 326,439 555,152 22,431 675,000 1,500
Finance and Administration, 1997 270,166 200,078 23,030 562,500 1,500
Chief Financial Officer,
and Secretary
Gary J. Daichendt.............. 1999 368,490 591,053 0 600,000 0
Executive Vice President, 1998 322,132 547,697 0 600,000 0
Worldwide Operations 1997 265,325 183,711 0 900,000 0
Mario Mazzola.................. 1999 374,640 576,882 0 320,000 1,500
Senior Vice President, 1998 327,353 556,839 0 600,000 1,500
Enterprise Line of Business 1997 266,740 199,021 0 1,125,000 1,500
</TABLE>
- ---------------
(1) The amounts shown under the Bonus column represent cash bonuses earned for
the indicated fiscal years.
(2) The amounts reported for the 1999 fiscal year consist of: (i) reimbursement
for the payment of taxes attributable to imputed interest income on certain
loans made by the Company to the Named Officers ($6,306 for Mr. Listwin and
$13,085 for Mr. Carter).
(3) Represents the matching contribution which the Company made on behalf of
each Named Officer to the Company's 401(k) Plan.
21
<PAGE> 26
STOCK OPTIONS
The following table provides information with respect to the stock option
grants made during the 1999 fiscal year under the Company's 1996 Stock Incentive
Plan to the Named Officers. No stock appreciation rights were granted to the
Named Officers during the fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE OF ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION --------------------------
NAME (1) YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ----------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers........... 2,500,000 2.3621 $52.8438 04/16/08 $72,835,695 $179,397,790
Donald J. Listwin.......... 400,000 .3779 57.2188 04/05/08 12,618,536 31,080,055
100,000 .0945 52.8438 04/16/08 2,913,428 7,175,912
Larry R. Carter............ 320,000 .3024 57.2188 04/05/08 10,094,828 24,864,044
Gary J. Daichendt.......... 100,000 .0945 30.5313 09/18/07 1,683,277 4,145,991
400,000 .3779 57.2188 04/05/08 12,618,536 31,080,055
100,000 .0945 52.8438 04/16/08 2,913,428 7,175,912
Mario Mazzola.............. 320,000 .3024 57.2188 04/05/08 10,094,828 24,864,044
</TABLE>
- ---------------
(1) Options were granted on September 18, 1998, April 5, 1999 and April 16, 1999
and have a maximum term of 9 years measured from the applicable grant date,
subject to earlier termination in the event of the optionee's cessation of
service with the Company. The stock option granted in September 1998 will
become exercisable for 25% of the option shares upon the completion of one
year of service measured from the grant date and will become exercisable for
the remaining shares in equal monthly installments over the next 36 months
of service thereafter. Options granted in April 1999 will become exercisable
for 20% of the option shares upon the completion of one year of service and
will become exercisable for the remaining shares in equal monthly
installments over the next 48 months of service thereafter. However, the
option will immediately become exercisable for all of the option shares in
the event the Company is acquired by a merger or asset sale, unless the
options are assumed by the acquiring entity, or in the event there is a
hostile change in control or ownership of the Company.
(2) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the nine (9)-year option term will be at the assumed 5% or 10% annual rates
of compounded stock price appreciation or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
22
<PAGE> 27
OPTION EXERCISES AND HOLDINGS
The table below sets forth information with respect to the Named Officers
concerning their exercise of options during the 1999 fiscal year and the
unexercised options held by them as of the end of such year. No stock
appreciation rights were exercised during the fiscal year, and no stock
appreciation rights were outstanding at the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF VALUE OPTIONS AT JULY 31, 1999 AT JULY 31, 1999($)(1)
SHARES ACQUIRED REALIZED --------------------------- ----------------------------
NAME ON EXERCISE ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Chambers............ 2,970,000 $120,757,030 6,056,250 5,893,750 $310,567,933 $171,884,772
Donald J. Listwin........... 1,216,876 46,464,440 1,208,593 1,494,531 57,772,975 46,351,116
Larry R. Carter............. 532,800 20,151,804 1,764,544 1,105,156 92,958,083 36,896,477
Gary J. Daichendt........... 683,918 17,115,566 457,501 1,443,751 21,133,055 43,505,008
Mario Mazzola............... 600,000 16,015,519 845,910 1,412,188 41,403,872 52,185,203
</TABLE>
- ---------------
(1) Based upon the market price of $62.1250 per share, which was the closing
selling price per share of Common Stock on the Nasdaq National Market on the
last day of the 1999 fiscal year, less the option exercise price payable per
share.
(2) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
None of the Company's executive officers have employment or severance
agreements with the Company, and their employment may be terminated at any time
at the discretion of the Board of Directors.
Each outstanding option under the Company's 1996 Stock Incentive Plan will
vest and become immediately exercisable for all of the option shares at the time
subject to that option in the event there should occur a hostile take-over of
the Company, whether through a tender offer for more than thirty-five percent
(35%) of the Company's outstanding voting securities which the Board does not
recommend the shareholders to accept or a change in the majority of the Board as
a result of one or more contested elections for Board membership.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, the Company loaned Larry R. Carter, Senior Vice
President, Finance and Administration, Chief Financial Officer, and Secretary of
the Company, $400,000. The loan was paid in full in February 1999. The loan was
interest free and was collateralized by a deed of trust on real property.
In January 1996, the Company loaned Gary J. Daichendt, Executive Vice
President, Worldwide Operations of the Company, $400,000. The loan is due in
full on January 12, 2000. The loan is interest free and is collaterized by a
deed of trust on real property.
In April 1996, the Company loaned Donald J. Listwin, Executive Vice
President, Service Provider and Consumer Lines of Business, Corporate Marketing
of the Company, $400,000. The loan was paid in full in September 1998. The loan
was interest free and was collaterized by a deed of trust on real property.
23
<PAGE> 28
STOCK PERFORMANCE GRAPH
The graph depicted below shows the Company's stock price as an index
assuming $100 invested on July 31, 1994, along with the composite prices of
companies listed in the S&P 500 and the Hambrecht & Quist Technology Index.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
HAMBRECHT & QUIST
CISCO SYSTEMS, INC. S & P 500 TECHNOLOGY INDEX
------------------- --------- -----------------
<S> <C> <C> <C>
7/31/94 100 100 100
7/30/95 267 126 186
7/28/96 489 147 179
7/26/97 759 224 302
7/25/98 1396 267 326
7/31/99 2662 321 526
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings made by the Company under those
statutes, the preceding Compensation/Stock Option Committee Report on Executive
Compensation and the Company Stock Performance Graph will not be incorporated by
reference into any of those prior filings, nor will such report or graph be
incorporated by reference into any future filings made by the Company under
those statutes.
Notes
(1) The Company's fiscal year ended on July 31, 1999.
(2) No cash dividends have been declared on the Company's Common Stock.
Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns.
24
<PAGE> 29
SHAREHOLDER PROPOSALS FOR 2000 PROXY STATEMENT
Shareholder proposals that are intended to be presented at the Company's
Annual Meeting of Shareholders to be held in 2000 must be received by the
Company no later than May 30, 2000 in order to be included in the proxy
statement and related proxy materials.
In addition, the proxy solicited by the Board of Directors for the 2000
Annual Meeting of Shareholders will confer discretionary authority to vote on
any shareholder proposal presented at that meeting, unless the Company is
provided with notice of such proposal no later than August 13, 2000.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS,
SCHEDULES, AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO CISCO SYSTEMS, INC.,
170 W. TASMAN DRIVE, SAN JOSE, CALIFORNIA 95134-1706, ATTN: INVESTOR RELATIONS.
OTHER MATTERS
The Board knows of no other matters to be presented for shareholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ LARRY R. CARTER
Larry R. Carter
Secretary
25
<PAGE> 30
DIRECTIONS TO PARAMOUNT'S GREAT AMERICA MAP
1028-PS-99
<PAGE> 31
PROXY
CISCO SYSTEMS, INC.
Annual Meeting of Shareholders, November 10, 1999
This Proxy is Solicited on Behalf of the Board of Directors of Cisco Systems,
Inc.
The undersigned revokes all previous proxies, acknowledges receipt of the
notice of the shareholders meeting to be held November 10, 1999 and the proxy
statement, and appoints John T. Chambers and Larry R. Carter or either of them
the proxy of the undersigned, with full power of substitution, to vote all
shares of Common Stock of Cisco Systems, Inc. that the undersigned is entitled
to vote, either on his or her own behalf or on behalf of an entity or entities,
at the Annual Meeting of Shareholders of the Company to be held at Paramount's
Great America in the Paramount Pavilion, located at 1 Great America Parkway,
Santa Clara, California 95054, on Wednesday, November 10 at 10:00 a.m., and at
any adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat. The shares
represented by this proxy are as of September 13, 1999, and shall be voted in
the manner set forth on the reverse side.
- ---------------- ----------------
SEE REVERSE SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
- ---------------- ----------------
<PAGE> 32
CISCO SYSTEMS, INC.
c/o EquiServe
P.O. Box 9398
Boston, MA 02205-9398
Please note, all votes cast via telephone or the Internet must be cast prior
to 5p.m., EST, November 9, 1999.
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VOTE BY TELEPHONE
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It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
1-877-PRX-VOTE (1-877-779-8683).
Follow these four easy steps:
1. Read the accompanying Proxy
Statement/Prospectus and Proxy Card.
2. Call the toll-free number
1-877-PRX-VOTE (1-877-779-8683). For
shareholder's residing outside of the United
States call collect on a touch-tone phone
1-202-536-8073.
3. Enter your 14-digit Voter Control Number
located on your Proxy Card above your name.
4. Follow recorded instructions.
YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime!
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VOTE BY INTERNET
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It's fast, convenient, and your vote is immediately
confirmed and posted.
Follow these four easy steps:
1. Read the accompanying Proxy
Statement/Prospectus and Proxy Card.
2. Go to the Website
http://eproxyvote.com/csco
3. Enter your 14-digit Voter Control Number
located on your Proxy Card above your name.
4. Follow instructions provided.
YOUR VOTE IS IMPORTANT!
Go to http://eproxyvote.com/csco anytime!
DO NOT RETURN YOUR PROXY CARD IF YOUR ARE VOTING BY TELEPHONE OR INTERNET
DETACH HERE
/X/ Please mark
votes as in
this example.
1. To elect ten members of the Board of Directors to serve until the next
Annual Meeting and until their successors have been elected and qualified;
Nominees: (01) Carol A. Bartz, (02) John T. Chambers, (03) Mary A. Cirillo,
(04) Dr. James F. Gibbons, (05) Edward R. Koxel, (06) James C. Morgan,
(07) John P. Morgridge, (08) Arun Sarin, (09) Donald T. Valentine,
(10) Steven M. West.
FOR WITHHELD
ALL /X/ / / FROM ALL
NOMINEES NOMINEES
/ / --------------------------------------
For all nominees except as noted above
2. To approve an amendment to the Automatic Option Grant Program for
non-employee Board members under the Company's 1996 Stock Incentive Plan;
FOR AGAINST ABSTAIN
/ / / / / /
3. To approve an amendment to the Company's Bylaws to increase the authorized
number of directors to a maximum of fifteen (15);
FOR AGAINST ABSTAIN
/ / / / / /
4. To approve a Certificate of Amendment to the Company's Restated Articles of
Incorporation to increase the authorized number of shares of Common Stock
from 5,400,000,000 to 10,000,000,000;
FOR AGAINST ABSTAIN
/ / / / / /
5. To ratify the election of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending July 29, 2000;
FOR AGAINST ABSTAIN
/ / / / / /
6. To act upon such other matters as may properly come before the meeting or
any adjournments or postponements thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please sign your name exactly as it appears hereon. If acting as attorney,
executor, trustee, or in other representative capacity, sign name and title.
Signature: ______________________________ Date: ________________
Signature: ______________________________ Date: ________________
