Cisco 2003 Annual Report Download - page 58

The following table presents the option exercises for the year ended July 26, 2003 and option values as of that date for the Named
Executive Officers (in millions):
NUMBER OF SECURITIES INTRINSIC VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT JULY 26, 2003 OPTIONS AT JULY 26, 2003
Number of Shares
Acquired on Value
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Named Executive Officers 1 $ 6 41 19 $280 $ 39
Pro forma Information The Company is required under SFAS 123 to disclose pro forma information regarding option grants made to its
employees based on specified valuation techniques that produce estimated compensation charges. The pro forma information is as
follows (in millions, except per-share amounts):
Years Ended July 26, 2003 July 27, 2002 July 28, 2001
Net income (loss)—as reported $3,578 $1,893 $ (1,014)
Compensation expense, net of tax (1,259) (1,520) (1,691)
Net income (loss)—pro forma $2,319 $373 $ (2,705)
Basic net income (loss) per share—as reported $0.50 $0.26 $ (0.14)
Diluted net income (loss) per share—as reported $0.50 $0.25 $ (0.14)
Basic net income (loss) per share—pro forma $0.33 $0.05 $ (0.38)
Diluted net income (loss) per share—pro forma $0.32 $0.05 $ (0.38)
The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
EMPLOYEE STOCK OPTION PLANS EMPLOYEE STOCK PURCHASE PLANS
July 26, 2003 July 27, 2002 July 28, 2001 July 26, 2003 July 27, 2002 July 28, 2001
Expected dividend 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 3.2% 4.7% 5.4% 1.1% 3.1% 5.3%
Expected volatility 45.7% 47.5% 34.8% 45.7% 58.1% 35.0%
Expected life (in years) 5.8 5.5 3.6 0.5 0.5 0.5
The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions
and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected
stock price volatility and expected life. The Company uses projected data for expected volatility and expected life of its stock options based
upon historical and other economic data trended into future years. Because the Company’s employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the
estimate, in management’s opinion, the existing valuation models do not provide a reliable measure of the fair value of the Company’s
employee stock options. Under the Black-Scholes option pricing model, the weighted-average estimated values of employee stock options
granted during fiscal 2003, 2002, and 2001 were $5.67, $8.60, and $13.31, respectively. The value of shares of common stock relating
to the Purchase Plans included in compensation expense was not material.
Employee 401(k) Plans
The Company sponsors the Cisco Systems, Inc. 401(k) Plan (the “Plan”) to provide retirement benefits for its employees. As allowed
under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. The Company
also has other 401(k) plans that it sponsors. These plans arose from acquisitions of other companies and are not material to the Company
on either an individual or aggregate basis.
56 CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS