LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S . LERACH (68581) 2 SPENCER A. BURKHOLZ (147029) DANIEL S. DROSMAN (200643) 3 JONAH H. GOLDSTEIN (193777) MATTHEW P. MONTGOMERY ( 180196) 4 JESSICA T. SHINNEFIELD (234432) 655 West Broadway , Suite 1900 5 San Diego, CA 92101 Telephone : 619/231-1058 6 619/231-7423 (fax) Bi11L@lerachlaw .com 7 [email protected] [email protected] 8 [email protected] [email protected] 9 [email protected] - and - 10 PATRICK J. COUGHLIN (111070) LESLEY E . WEAVER (191305) LEVIN, PAPANTONIO, THOMAS, MITCHELL, 11 100 Pine Street , Suite 2600 ECHSNER & PROCTOR, P.A. San Francisco, CA 94111 TIMOTHY M. O'BRIEN (pro hac vice) 1 2 Telephone : 415/288-4545 316 South Baylen Street , Suite 600 415/288-4534 (fax) Pensacola, FL 3250 1 13 [email protected] Telephone : 850/435-7000 [email protected] 850/497-7057 (fax) 14 Co-Lead Counsel for Plaintiffs 15 UNITED STATES DISTRICT COURT 1 6 NORTHERN DISTRICT OF CALIFORNI A 17 SAN JOSE DIVISION 18 In re CISCO SYSTEMS, INC. SECURITIES ) Master File No.C-01-20418-JW(PVT) 19 LITIGATION ) . 20 CLASS ACTION 21 This Document Relates To : DECLARATION OF JOSEPH S . KRAEMER, Ph.D. IN SUPPORT OF MOTION FOR 22 ALL ACTIONS . FINAL APPROVAL OF CLASS ACTION SETTLEMENT AND PLAN O F 23 ALLOCATION OF SETTLEMENT PROCEEDS, AND AWARD OF 24 ATTORNEYS FEES AND 25 REIMBURSEMENT OF EXPENSE S 26 DATE: December 5, 2006 TIME : 9:00 a.m. 27 CTRM: The Honorable James Ware 28 1 I, Joseph S. Kraemer, Ph.D ., declare as follows : 2 INTRODUCTION 3 1 . I submit this declaration to set forth the basis for the charges incurred by 4 plaintiffs' counsel for my work in connection with the action entitled In re Cisco Systems, Inc. 5 Securities Litigation , No. C-01-20418 -JW(PVT). I performed all work in connection with the 6 Cisco litigation on an assignment basis . 7 2. The purpose of this declaration is to summarize my professional qualifications 8 I and the services I rendered in connection with the Cisco litigation. 9 1 QUALIFICATIONS 10 I 11 3 . I am currently a Director at the firm of Law & Economics Consulting Group 12 ("LECG") where I work in the Washington, DC office. I am a member of th e 13 telecommunications industry practice group. 14 4. I have consulted in the telecommunications and high technology industries since 15 1975 . My areas of expertise include business strategy, regulation, market analysis, new product 16 development and rollout, revenue/cost forecasting and operational improvement. I have 17 provided consulting services to a range of telecommunications service providers including : 18 incumbent local exchange carriers, competitive local exchange carriers ("CLECs"), 19 interexchange carriers, wireless carriers and satellite carriers . I have also consulted with network 20 equipment and high technology manufacturers, as well as with television and radio 21 broadcasters/content providers. At various times, financial institutions have engaged me to 22 perform due diligence on potential investments in telecommunications companies /ventures. The 23 range of clients served includes both start-up companies and well established service providers . 24 My clients have included companies in North America, Europe and Asia. 25 5 . I began my consulting career at, and was a partner with, Touche Ross (which later 26 merged with Deloitte, Haskins & Sells to form Deloitte & Touche) where I led the Globa l 27 Telecommunications and Electronic Service practice. In 1994, after retiring from Deloitte & 28 DECLARATION OF JOSEPH S . KRAEMER, Ph.D . IN SUPPORT OF MOTION FO R FINAL APPROVAL OF CLASS ACTION SETTLEMENT - C-01-20418-JW(PVT) - 1 - 1 Touche, I joined EDS where I led a consulting practice focused on the telecommunications, hig h 2 technology and media industries. 3 6. In 1999, I left EDS and joined PHB Hagler Bailley ("PHB"), an economic and 4 I management consultancy, where I led the firm's telecommunications practice . When PHB was 5 I sold, I left and joined LECG where I continue to provide consulting services to 6 telecommunications service providers. 7 7 . I am a Certified Public Accountant (Virginia) and a Certified Managemen t 8 Consultant. My education includes a Ph .D. and Masters degree (University of Michigan), a 9 Masters of Business Administration (George Washington University), and a Bachelor's degre e 10 (Georgetown University). I currently serve as an adjunct professor at both Georgetown 1 1 University's McDonough School of Business and at American University's Kogod Business 12 School where I teach courses related to electronic commerce and Internet-based business strateg y 13 and practice. 14 8 . I have appeared as an expert witness in multiple regulatory proceedings and in 15 disputes involving mediation, arbitration and litigation. I have also testified before state and 16 federal legislative committees on competition and other public policy issues in the 17 telecommunications and television industries. 18 9 . My curriculum vitae is attached hereto as Exhibit A. 19 10 . I was compensated for my work on this case at my usual and customary billin g 20 I rate of $425 per hour. My compensation was not dependent on the outcome of this matter or on 2 1 the opinions I expressed. 22 I DESCRIPTION OF WORK PERFORMED 23 11 . The law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP retaine d 24 me in this case as a telecommunications industry expert . In that role I was engaged to express an 25 opinion as to : (1) whether reports filed by defendants' experts, James H . Vander Weide ("Vander 26 Weide") and Jeffrey P . Williams ("Williams"), accurately described industry conditions ; (2) the 27 28 DECLARATION OF JOSEPH S. KRAEMER , Ph.D. IN SUPPORT OF MOTION FOR FINAL APPROVAL OF CLASS ACTION SETTLEMENT - C-01-20418-JW (PVT) -2- 1 impact of those conditions on Cisco System, Inc .'s ("Cisco") business plans; and (3) what was 2 known and disclosed by Cisco's management with respect to that impact . 3 12 . If there were defects in reports filed by Vander Weide and Williams, then I was 4 asked to correct such errors, supply additional information and/or provide the necessary industry 5 context on an as required basis so as to correct defects in the expert reports of Vander Weide an d 6 I Williams. 7 13 . In preparing my report, I reviewed the relevant sections of the Vander Weide and 8 Williams Reports, as well as the documents listed in Exhibit B attached hereto . Those 9 documents included: 10 (a) The First Amended Consolidated Complaint for Violation of the Federal 11 Securities Laws; 12 (b) The Expert Report of D . Paul Regan; 13 (c) More than a dozen transcripts of depositions taken in the litigation; 1 4 (d) A book about Cisco ; 15 I (e) Numerous internal documents produced by Cisco in discovery ; 16 I (f) Economic data; and 17 (g) SEC filings for Cisco and several other companies within the 18 telecommunications or network provider industry. 19 14 . While the Vander Weide report suffered from a multitude of errors and omissions , 20 I identified the core defects as follows : 21 (a) Vander Weide's "Summary of Opinions" contains five opinions of which 22 the fourth ("[t]he rapid decline in industry revenues in the spring of 2001 was unexpected") and 23 fifth ("Cisco's vendor financing and inventory practices were a rational and necessary response 24 to industry and competitive conditions") were the most relevant and significant to the issues 25 raised in the case . 26 (b) Although the relevant period in this case included the full calendar year 27 I 2000, Vander Weide emphasized industry conditions in the spring of 2001 in his fourth summar y 28 I DECLARATION OF JOSEPH S . KRAEMER , Ph.D. IN SUPPORT OF MOTION FO R FINAL APPROVAL OF CLASS ACTION SETTLEMENT - C-01-20418-JW(PVT) - 3 - 1 opinion while largely ignoring conditions during 2000 . After analyzing Cisco's internal 2 documents, deposition testimony from Cisco's management and publicly-available documents 3 such as SEC filings, scholarly articles and books, and economic data, I concluded that by mid- 4 2000, the external market conditions had become adverse and put the successful attainment of 5 Cisco's FY 2001 (beginning August 2000) business plan goals at risk . The record showed that 6 the information necessary to understand the market situation was in the possession of Cisco 7 management . However, Cisco's management chose to ignore information that was contrary to 8 the attainment of the company's FY 2001 plan . Consequently, Cisco's management failed to 9 disclose information in a timely way that would have been of value to investors . 10 (c) I also concluded that Cisco seemed to have viewed vendor financing as a 11 sales channel or as a sales channel complement . Vendor financing was focused primarily on the 1 2 Service Provider ("SP") markets , especially in Cisco's FY 2001 . The CY 2000 surge in the 1 3 demand for vendor financing should have served as a warning of deteriorating financial 14 conditions among customers and prospects in the SP industry . The information required to 15 update the financial information in the lease/loan files (had Cisco bothered to collect it) would 16 have provided even more confirmation that the new entrants in the SP industry (e.g., CLECs) 17 were at risk of insolvency . 18 15. My analysis led me to conclude that Vander Weide missed or failed to describe 19 the basic situation as it existed in the time frame addressed by his report . For example, Cisco's 20 FY 2001 (August 2000-July 2001) plan was dependent upon a significant increase both in 21 bookings and revenues in the SP line of business .