Cisco 2003 Annual Report Download - page 56

The maximum number of shares issuable over the term of the 1996 Plan is limited to 2.5 billion shares. Such share reserve consists
of the 620 million shares originally transferred from the predecessor plan plus the number of shares added to the reserve pursuant to
the automatic share increases effected annually beginning in December 1996 and expired in December 2001. The share reserve had
automatically increased on the first trading day of each December by an amount equal to 4.75% of the outstanding shares on the last
trading day of the immediately preceding November. Options granted under the 1996 Plan have an exercise price equal to the fair
market value of the underlying stock on the grant date and expire no later than nine years from the grant date.
Although the Board of Directors has the authority to set other terms, the options will generally become exercisable for 20% or
25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain
other grants have utilized a 60-month ratable vesting schedule.
In 1997, the Company adopted the Supplemental Plan, under which options can be granted or shares can be directly issued to
eligible employees. Officers and members of the Company’s Board of Directors are not eligible to participate in the Supplemental Plan.
Nine million shares have been reserved for issuance under the Supplemental Plan, of which 3 million shares are subject to outstanding
options, and 0.5 million shares have been issued in fiscal 2003. All option grants have an exercise price equal to the fair market value
of the underlying stock on the grant date.
Distribution and Dilutive Effect of Options The following table illustrates the grant dilution and exercise dilution (in millions,
except percentages):
Years Ended July 26, 2003 July 27, 2002
Shares of common stock outstanding 6,998 7, 303
Granted and assumed 199 282
Canceled (57) (82)
Net options granted 142 200
Grant dilution(1) 2.0% 2.7%
Exercised 45 54
Exercise dilution(2) 0.6% 0.7%
Note 1: The percentage for grant dilution is computed based on options granted and assumed less options canceled as a percentage
of shares of common stock outstanding.
Note 2: The percentage for exercise dilution is computed based on options exercised as a percentage of shares of common
stock outstanding.
Basic and diluted shares outstanding for the year ended July 26, 2003 were 7.1 billion shares and 7.2 billion shares, respectively.
Diluted shares outstanding include the dilutive impact of in-the-money options, which is calculated based on the average share price
for each fiscal period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be
hypothetically received from the exercise of all in-the-money options are assumed to be used to repurchase shares. In fiscal 2003,
the dilutive impact of in-the-money employee stock options was approximately 99 million shares or 1.4% of the basic shares outstanding
based on Cisco’s average share price of $14.11.
The following table summarizes the options granted to the Named Executive Officers during the periods indicated. The Named
Executive Officers represent the Company’s Chief Executive Officer and the four other most highly paid executive officers whose salary
and bonus for the fiscal year ended July 26, 2003 and July 27, 2002 were in excess of $100,000.
Years Ended July 26, 2003 July 27, 2002
Options granted to the Named Executive Officers 6 million 10 million
Options granted to the Named Executive Officers as a % of net options granted 4.2% 5.0%
Options granted to the Named Executive Officers as a % of outstanding shares 0.09% 0.14%
Cumulative options held by Named Executive Officers as % of total options outstanding 4.6% 4.6%
54 CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS