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8/24/2004
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Cisco Takes Hit After Increasing Stock Options

The networking equipment maker's stock price fell after it increased the number of stock option grants to employees, including CEO John Chambers.

SAN JOSE, Calif. (AP) -- Shares of Cisco Systems Inc. fell Tuesday after the network gear maker announced it increased the number of stock option grants to employees, including chief executive John Chambers.

In a regulatory filing, Cisco said it has granted 165 million options in the current fiscal year, compared with 141 million shares last year. The grants were based on merit, according to the document filed Monday.

Chambers received 1.5 million stock options in fiscal 2005, compared with none last year during the annual companywide distribution. Earlier this month, Cisco disclosed that its compensation committee reinstated the CEO's $350,000 annual salary, which had been reduced at his request to $1 a year during the tech downturn.

For the first time, the terms of Chambers' grant is different from other employees. The chief executive's options won't become effective for seven years as long as he remains the CEO. Other employees' options will vest over five years.

Terry Anderson, a Cisco spokeswoman, said the grants were in line with the company's policy of offering grants of 2 percent to 3 percent of shares outstanding. The current grant is about 2.4 percent, she said.

Still, some analysts were surprised at the increase, given the uncertainty over whether they will have to be treated as an expense.

In March, the Financial Accounting Standards Board in March proposed a rule that all companies may soon be required to treat them as an expense when computing their financial statements. Tech companies have relied heavily on stock option grants to reward employees.

Cisco's increase in option grants is "slightly negative for Cisco given the increased concern on stock option expensing into 2005," Nikos Theodosopoulos, a UBS analyst, said in a research report Tuesday.

After intense lobbying by Silicon Valley, the U.S. House of Representatives passed a measure that would slow down the rule change. The Senate, however, did not act.

Shares of Cisco fell 21 cents, or 1.1 percent, to close at $18.97 Tuesday on the Nasdaq Stock Market.

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