Employee Benefit Plans


(a)	Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of January 26, 2019, we had one stock incentive plan: the 2005 Stock Incentive Plan (the “2005 Plan”). In addition, we have, in connection with our acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with Cisco. The number and frequency of share-based awards are based on competitive practices, operating results of Cisco, government regulations, and other factors. Our primary stock incentive plan is summarized as follows:

2005 Plan As of January 26, 2019, the maximum number of shares issuable under the 2005 Plan over its term was 694 million shares, plus shares from certain previous plans that are forfeited or are terminated for any other reason before being exercised or settled. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, the unexercised or unsettled shares underlying the awards will again be available under the 2005 Plan. In addition, starting November 19, 2013, shares withheld by Cisco from an award other than a stock option or stock appreciation right to satisfy withholding tax liabilities resulting from such award will again be available for issuance, based on the fungible share ratio in effect on the date of grant.

Pursuant to an amendment approved by our shareholders on November 12, 2009, the number of shares available for issuance under the 2005 Plan is reduced by 1.5 shares for each share awarded as a stock grant or a stock unit, and any shares underlying awards outstanding from certain previous plans that expire unexercised at the end of their maximum terms become available for reissuance under the 2005 Plan. The 2005 Plan permits the granting of stock options, restricted stock, and restricted stock units ("RSUs"), the vesting of which may be performance-based or market-based along with the requisite service requirement, and stock appreciation rights to employees (including employee directors and officers), consultants of Cisco and its subsidiaries and affiliates, and non-employee directors of Cisco. Stock options and stock appreciation rights granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date. The expiration date for stock options and stock appreciation rights shall be no later than 10 years from the grant date.

The stock 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 months or 36 months, respectively. Time-based stock grants and time-based RSUs will generally vest over a four year term. The majority of the performance-based and market-based RSUs vests at the end of the three-year requisite service period or earlier if the award recipient meets certain retirement eligibility conditions. Certain performance-based RSUs, that are based on the achievement of financial and/or non-financial operating goals, typically vest upon the achievement of milestones (and may require subsequent service periods), with overall vesting of the shares underlying the award ranging from six months to three years. The Compensation and Management Development Committee of our Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants, and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.


(b)	Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan, which includes its subplan named the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 721 million shares of our common stock have been reserved for issuance as of January 26, 2019. Eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited number of shares of our stock at a discount of up to 15% of the lesser of the market value at the beginning of the offering period or the end of each 6-month purchase period. The Purchase Plan is scheduled to terminate on the earlier of (i) January 3, 2030 and (ii) the date on which all shares available for issuance under the Purchase Plan are sold pursuant to exercised purchase rights. Under the Purchase Plan, we issued 9 million shares during the second quarter and first six months of fiscal 2019 and 12 million shares during the second quarter and first six months of fiscal 2018. As of January 26, 2019, 169 million shares were available for issuance under the Purchase Plan.


(c)	Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and RSUs granted to employees. The following table summarizes share-based compensation expense (in millions):



	Three Months Ended				Six Months Ended
	January 26, 2019		January 27, 2018		January 26, 2019		January 27, 2018
Cost of sales—product	$	22	$	23	$	45	$	46
Cost of sales—service	31		31		64		65
Share-based compensation expense in cost of sales	53		54		109		111
Research and development	133		134		263		270
Sales and marketing	125		135		262		270
General and administrative	65		64		127		128
Restructuring and other charges	19		12		42		18
Share-based compensation expense in operating expenses	342		345		694		686
Total share-based compensation expense	$	395	$	399	$	803	$	797
Income tax benefit for share-based compensation	$	126	$	96	$	291	$	271

As of January 26, 2019, the total compensation cost related to unvested share-based awards not yet recognized was $3.2 billion which is expected to be recognized over approximately 2.7 years on a weighted-average basis.


(d)	Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows (in millions):



	Share-Based Awards Available for Grant
BALANCE AT JULY 29, 2017	272
Restricted stock, stock units, and other share-based awards granted	(70	)
Share-based awards canceled/forfeited/expired	18
Shares withheld for taxes and not issued	25
BALANCE AT JULY 28, 2018	245
Restricted stock, stock units, and other share-based awards granted	(37	)
Share-based awards canceled/forfeited/expired	12
Shares withheld for taxes and not issued	15
Other	1
BALANCE AT JANUARY 26, 2019	236

For each share awarded as restricted stock or a restricted stock unit award under the 2005 Plan, 1.5 shares was deducted from the available share-based award balance. For restricted stock units that were awarded with vesting contingent upon the achievement of future financial performance or market-based metrics, the maximum awards that can be achieved upon full vesting of such awards were reflected in the preceding table.


(e)	Restricted Stock and Stock Unit Awards

A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based RSUs, is as follows (in millions, except per-share amounts):



	Restricted Stock/ Stock Units		Weighted-Average Grant Date Fair Value per Share		Aggregate Fair Value
UNVESTED BALANCE AT JULY 29, 2017	141		$	26.94
Granted	46		35.62
Assumed from acquisitions	1		28.26
Vested	(53	)	26.02		$	1,909
Canceled/forfeited/other	(16	)	28.37
UNVESTED BALANCE AT JULY 28, 2018	119		30.56
Granted	25		44.69
Vested	(31	)	27.99		$	1,453
Canceled/forfeited/other	(10	)	31.20
UNVESTED BALANCE AT JANUARY 26, 2019	103		$	34.66


(f)	Stock Option Awards

A summary of the stock option activity is as follows (in millions, except per-share amounts):



	STOCK OPTIONS OUTSTANDING
	Number Outstanding		Weighted-Average Exercise Price per Share
BALANCE AT JULY 29, 2017	12		$	6.15
Assumed from acquisitions	3		8.20
Exercised	(8	)	5.77
Canceled/forfeited/expired	(1	)	8.75
BALANCE AT JULY 28, 2018	6		7.18
Exercised	(2	)	6.79
BALANCE AT JANUARY 26, 2019	4		$	7.27

The following table summarizes significant ranges of outstanding and exercisable stock options as of January 26, 2019 (in millions, except years and share prices):



	STOCK OPTIONS OUTSTANDING						STOCK OPTIONS EXERCISABLE
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value		Number Exercisable	Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value
$ 0.01 – 35.00	4	5.3	$	7.27	$	167	3	$	7.11	$	130

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $46.13 as of January 25, 2019. The total number of in-the-money stock options exercisable as of January 26, 2019 was 3 million. As of July 28, 2018, 4 million outstanding stock options were exercisable and the weighted-average exercise price was $6.84.


(g)	Valuation of Employee Share-Based Awards

Time-based restricted stock units and performance-based restricted stock units ("PRSUs") that are based on our financial performance metrics or non-financial operating goals are valued using the market value of our common stock on the date of grant, discounted for the present value of expected dividends. On the date of grant, we estimated the fair value of the total shareholder return ("TSR") component of the PRSUs using a Monte Carlo simulation model. The assumptions for the valuation of time-based RSUs and PRSUs are summarized as follows:



	RESTRICTED STOCK UNITS						PERFORMANCE BASED RESTRICTED STOCK UNITS
Three Months Ended	January 26, 2019			January 27, 2018			January 26, 2019	January 27, 2018
Number of shares granted (in millions)	17			21			—	—
Grant date fair value per share	$	44.53		$	34.89		N/A	$	32.47
Weighted-average assumptions/inputs:
Expected dividend yield	2.8		%	3.1		%	N/A	3.2		%
Range of risk-free interest rates	0.0% – 2.8%			0.0% – 2.1%			N/A	1.0%-1.8%
Range of expected volatilities for index	N/A			N/A			N/A	13.2%-81.0%



	RESTRICTED STOCK UNITS						PERFORMANCE BASED RESTRICTED STOCK UNITS
Six Months Ended	January 26, 2019			January 27, 2018			January 26, 2019			January 27, 2018
Number of shares granted (in millions)	23			28			2			3
Grant date fair value per share	$	44.48		$	33.50		$	47.00		$	31.31
Weighted-average assumptions/inputs:
Expected dividend yield	2.8		%	3.2		%	2.8		%	3.6		%
Range of risk-free interest rates	0.0% – 2.9%			0.0% – 2.1%			2.1% – 3.0%			1.0%-1.8%
Range of expected volatilities for index	N/A			N/A			13.0% – 65.2%			13.2%-81.0%

The PRSUs granted during the periods presented are contingent on the achievement of our financial performance metrics, our comparative market-based returns, or the achievement of financial and non-financial operating goals. For the awards based on financial performance metrics or comparative market-based returns, generally 50% of the PRSUs are earned based on the average of annual operating cash flow and earnings per share goals established at the beginning of each fiscal year over a three-year performance period. Generally, the remaining 50% of the PRSUs are earned based on our TSR measured against the benchmark TSR of a peer group over the same period. Each PRSU recipient could vest in 0% to 150% of the target shares granted contingent on the achievement of our financial performance metrics or our comparative market-based returns and 0% to 100% of the target shares granted contingent on the achievement of non-financial operating goals.