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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended July 29, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
- ---------------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
170 West Tasman Drive
San Jose, California 95134-1706
- ---------------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 526-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of September 22, 2000, 7,041,991,896 shares of Registrant's common stock were
outstanding. The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant was $424,723,657,223 (based upon the closing
price for shares of the Registrant's common stock as reported by the NASDAQ
National Market on that date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's 2000
Annual Meeting of Shareholders, to be held on November 14, 2000, are
incorporated by reference into Part III of this Form 10-K where indicated.
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PART I
Item 1 Business................................................................... 3
General................................................................... 3
End-to-End Networking Solutions........................................... 4
Customers and Markets..................................................... 7
Cisco Sales Overview...................................................... 8
Acquisitions, Investments, and Alliances.................................. 9
Minority Investments...................................................... 9
Strategic Alliances....................................................... 10
Backlog................................................................... 10
Competition............................................................... 10
Research and Development.................................................. 11
Manufacturing............................................................. 12
Patents, Intellectual Property, and Licensing............................. 12
Employees................................................................. 13
Risk Factors.............................................................. 14
Item 2 Properties.................................................................. 25
Item 3 Legal Proceedings........................................................... 25
Item 4 Submission of Matters to a Vote of Security Holders......................... 25
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters....... 26
Item 6 Selected Financial Data..................................................... 28
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Item 7A Quantitative and Qualitative Disclosures About Market Risk.................. 38
Item 8 Financial Statements and Supplementary Data................................. 42
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.............................................................. 75
PART III
Item 10 Directors and Executive Officers of the Registrant.......................... 75
Item 11 Executive Compensation...................................................... 77
Item 12 Security Ownership of Certain Beneficial Owners and Management.............. 77
Item 13 Certain Relationships and Related Transactions.............................. 77
PART IV
Item 14 Exhibits, Financial Statements, and Reports on Form 8-K..................... 78
Signatures............................................................................... 85
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PART I
ITEM 1. BUSINESS
GENERAL
Certain statements contained in this Annual Report on Form 10-K ("Report"),
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," "projections," and words of similar
import, constitute "forward-looking statements." You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including risks faced by us described in this Report, including the
"Risk Factors" section contained in this Item 1, and the other documents we file
with the Securities and Exchange Commission ("SEC"), including our most recent
reports on Form 8-K and Form 10-Q, and amendments thereto.
Cisco Systems, Inc. (together with its subsidiaries, "Cisco" or the "Company")
is the worldwide leader in networking for the Internet. Cisco hardware,
software, and service offerings are used to create Internet solutions so that
individuals, companies, and countries have seamless access to information --
regardless of differences in time and place. Cisco solutions provide competitive
advantage to our customers through more efficient and timely exchange of
information, which in turn leads to cost savings, process efficiencies, and
closer relationships with their customers, prospects, business partners,
suppliers, and employees. These solutions form the networking foundation for
companies, universities, utilities, and government agencies worldwide.
The Company markets its products through its direct sales force, single and
two-tier distributors, value-added resellers, service providers, and system
integrators. This multiple-channel approach allows customers to select the
channel that addresses their specific needs and provides the Company with broad
coverage of worldwide markets.
Cisco was incorporated in California in December 1984 and is headquartered in
San Jose. The mailing address for the Company's headquarters is 170 West Tasman
Drive, San Jose, California, 95134-1706, and its telephone number at that
location is (408) 526-4000. Cisco can also be reached at its Web site
www.cisco.com.
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END-TO-END NETWORKING SOLUTIONS
Cisco is the worldwide leader in networking for the Internet. The Cisco strategy
is to provide end-to-end networking solutions to help its customers improve
productivity and gain a competitive advantage in today's global economy. Cisco
helps its customers build their own network infrastructure while also providing
tools to allow them to communicate to their customers, prospects, business
partners, suppliers, and employees. An end-to-end networking solution allows
network services to be consistently provided to all users on the network.
Cisco's product portfolio offers a broad range of end-to-end networking
hardware, software, and services. Products are used individually or in
combinations to connect computing devices to networks or computer networks with
each other -- whether they are within a building, across a campus, or around the
world. The Company's breadth of product offerings enables it to offer a wide
range of solutions to meet customer requirements. Many of the Company's products
are easily upgraded or expanded, offering customers the ability to extend their
networks as their needs grow.
The Company also provides products and services that allow customers to
transition their data networks to a single multiservice data, voice, and video
network.
Cisco product offerings fall into several categories:
Routing
Routing is a foundation technology for computer networking. Routers move
information from one network to another, applying intelligence in the process to
ensure that the information reaches its destination securely and in the most
direct way possible. Cisco offers a broad range of routers that can be used from
a large backbone infrastructure to a small office, including the Cisco 12000
gigabit switch router ("GSR") series; the Cisco 7500 series; the Cisco 4000
series; and the Cisco 8500, 3600, 2600, 2500, 1000, 800, and 700 product
families.
Switching
Switching is another important networking technology that is used in both
local-area networks ("LANs") and wide-area networks ("WANs"). Cisco's switching
strategy is designed to help users migrate from traditional shared LANs to fully
switched networks by delivering products that support the varying levels of
flexibility, cost-effectiveness, and high bandwidth required for today's
desktop, workgroup, and backbone applications. Cisco solutions employ all widely
used switching technologies --
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Ethernet, Gigabit Ethernet, Token Ring, and Asynchronous Transfer Mode ("ATM").
Cisco's LAN switching products include the Catalyst(R) product family, and its
WAN switching products include the Cisco IGX(TM), Cisco BPX(R), Cisco TGX, and
Cisco MGX(TM) families.
Access
Today, people need remote access to the Internet or to a network that is used
for a variety of personal, professional, or work-related applications. Cisco
access solutions give groups and individuals who are remotely located similar
levels of connectivity and information access, as they would have if they were
located at the company's head office or at home. Asynchronous and integrated
services digital network ("ISDN") remote-access routers, dial-up access servers,
digital subscriber line ("DSL") technologies, and cable universal broadband
routers provide telecommuters and mobile workers and students with remote
network access. The Company's access products include the Cisco AS5000 family of
access servers; the Cisco 6100 and 6200 lines of digital subscriber line access
multiplexers ("DSLAM"); the Cisco uBR7200 Universal Broadband Router cable
head-end equipment; access routers such as the Cisco 6000, 4000, 3800, 3600,
2600, 1700, and 1600 families; and the Cisco ISR 3303 Integrated SONET/SDH
Router, and network security and management software.
Other
The other product offerings consists of systems network architecture, Internet
services, network management software, and customer advocacy, among others, as
follows:
Systems Network Architecture
Most large organizations have existing IBM computing systems that use the
Systems Network Architecture ("SNA") networking method as well as LANs based on
open network architectures [such as the Transmission Control Protocol/Internet
Protocol ("TCP/IP")]. Increasingly, network managers want to combine these two
networks into a single network that leverages existing investments. Cisco
provides a broad range of products and solutions for the IBM marketplace that
maximizes availability, scalability, performance, flexibility, and management.
These products provide IBM networks with a clear migration path to the future
while protecting investments in existing equipment and applications.
Internet Service
Cisco offers end-to-end Internet services to improve a network manager's ability
to cope with challenges posed by the growing popularity of the Internet, such as
network traffic volume and network address shortages. Cisco Internet Service
Units ("ISUs")
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drive architectural consistency across the Company by focusing on
standards-based services between clients and servers such as end-to-end quality
of service ("QoS") and end-to-end security. Cisco ISU products include: the
PIX(TM) Firewall family, which prevents unauthorized access to a network; the
NetSonar(TM) System, which scans the network for security risks; the
NetRanger(R) System, which detects and responds to unauthorized activity or
network attacks; Cisco Secure VPN Client 1.0, which ensures data privacy when
accessing the network remotely; Cisco LocalDirector, Cisco Cache Engine, and
Cisco DistributedDirector, which balance the load between multiple servers to
enable timely access and to eliminate redundant Internet content; and the Cisco
Server Suite 1000, which consists of server applications with a graphical user
interface ("GUI").
Network Management Software
Cisco is extending its leading Internet business practices to its network
management vision and products. One component of this initiative is
CiscoWorks2000, a family of products based on Internet standards that enables
enterprise customers to better control their large, complex, and heterogeneous
networks and devices.
In order for service providers to profit from increasing new business
opportunities, services must be carefully planned, quickly provisioned,
efficiently operated, and accurately billed. The Cisco Service Management system
("CSM") is a network service and delivery management system that provides a
modular suite of service management products integrated within a common and
scalable infrastructure. CSM enables service providers to effectively deploy,
monitor, and manage these new network services, while potentially increasing
revenue and reducing cost.
Cisco created a new business group focused on building software solutions to
expand the Company's technology offerings into messaging and call centers and
extend Cisco's presence in the broader market for intelligent customer contact
software applications. Software applications from this team will provide
end-users with the ability to unify voice-mail, e-mail, and fax traffic into a
single mailbox accessible over an Internet-based network independent of
location, time, or device. And, when calling in for customer support, they will
be connected to the best available customer service representative regardless of
physical location.
Customer Advocacy
The Company enables successful deployment of global networks by providing
flexible support service solutions that meet today's needs, provide a smooth
transition to the new world,
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ensure faster deployment of services, reduce and manage the risk associated with
rapidly integrating new technologies, streamline business processes, and reduce
operating costs. Customer Advocacy provides a broad range of services, such as
consultative, technical, project, quality, customer service, and maintenance
level services, which further complement Cisco product offerings.
The following product is offered in conjunction with all of the above product
categories:
Cisco IOS(R) Software
Cisco IOS Software is a common networking software platform deployed across a
broad spectrum of Cisco products. Cisco IOS Software delivers intelligent
network services -- such as QoS, load-balancing, and multicast functions -- that
enable customers to build a flexible network infrastructure that is scalable,
reliable, and secure. These intelligent network services also support Internet
business solutions.
Among the emerging types of applications that require these features are
on-demand media, electronic commerce services, real-time trading, and
distance-learning activities. These applications form the foundation for new
business models that increase competition, improve customer service, and enhance
productivity.
CUSTOMERS AND MARKETS
Networking needs are influenced by a number of factors, including the size of
the organization, number and types of computer systems, geographic location, and
the applications requiring data communications. The Cisco customer base is not
concentrated in any particular industry and in each of the past five fiscal
years, no single customer has accounted for 10 percent or more of the Company's
net sales. For additional information regarding segment information for the
Company, see Note 12 to the Consolidated Financial Statements contained in Part
II, Item 8.
The Cisco market strategy addresses four main customer profiles:
Enterprise
Enterprise customers generally are large organizations with 500 or more
employees with complex networking needs, usually spanning multiple locations and
types of computer systems. Enterprise customers include corporations, government
agencies, utilities, and educational institutions.
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Service Providers
These customers provide data, voice, and video communication services to
businesses and consumers. They include regional, national, and international
long distance telecommunications carriers, as well as Internet, cable, and
wireless service providers.
Small/Medium-Sized Businesses
These customers have less than 500 employees and a need for networks of their
own, as well as connection to the Internet and to business partners. However,
these customers generally have limited expertise in networking technology;
therefore, the Company attempts to provide products that are affordable and easy
to install and use.
Consumers
Consumers have a need for networking devices and services to connect them to the
Internet from within their homes. In addition, some advanced consumers will
network together a range of devices within their home, linking together devices
such as personal computer, television, telephone, fax, and more, into an
integrated personal network. Internet access services are provided to them
through regional carriers and Internet service providers.
CISCO SALES OVERVIEW
The Company's worldwide direct sales and marketing organization at July 29, 2000
consisted of approximately 14,000 individuals, including managers, sales
representatives, and technical support personnel. The Company has field sales
offices globally providing coverage throughout the world. Additionally, the
Company's international sales are currently being made through multiple channels
including international distributors, resellers, and direct sales throughout the
world. The distributors provide system installation, technical support, and
follow-up services to end-customers. Generally, the Company's international
distributors have nonexclusive, country-wide agreements. For additional
information regarding the Company's international sales, see Note 12 to the
Consolidated Financial Statements contained in Part II, Item 8.
Cisco Capital specializes in financing networking equipment. Cisco Capital
offers innovative, flexible financial services to Cisco's customers and channel
partners at competitive rates. Our services are designed to help our customers
spread their costs of acquisition, management, and end-of-life disposal
associated with networking products. For additional information regarding Cisco
Capital's financing activities, see Note 5 to the Consolidated Financial
Statements contained in Part II, Item 8.
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ACQUISITIONS, INVESTMENTS AND ALLIANCES
The end-to-end networking strategy pursued by Cisco requires a wide variety of
technologies, products, and capabilities. The combination of complexity and
rapid change make it difficult for one company, no matter how large, to develop
all technological solutions alone. Acquisitions, investments, and alliances are
tools used by the Company to fill gaps in its offerings and enable it to deliver
complete solutions to customers and prospects in its target markets.
Satisfying customers' networking needs requires a constant monitoring of market
and technology trends, plus an ability to act quickly. Cisco has a four-part
approach to satisfying the need for new or enhanced networking products and
solutions. In order of preference, the approach is to develop new technologies
and products internally; enter into joint-development efforts with other
companies; resell another company's product; and acquire all or part of another
company.
Since 1993, the Company has acquired a number of companies. The Company expects
to make future acquisitions where it believes that it can acquire new products
and channels of distribution or otherwise rapidly enter new or emerging markets.
Mergers and acquisitions of high-technology companies are inherently risky and
no assurance can be given that the Company's previous or future acquisitions
will be successful or will not materially adversely affect the Company's
financial condition or operating results. The risks associated with acquisitions
are more fully discussed in the "Risk Factors" section contained in Item 1 of
this Report.
The Company's acquisitions have furthered its commitment towards providing an
end-to-end networking solution. The Company now has a broad set of product
offerings and technologies, which include Ethernet, Gigabit Ethernet switching,
Token Ring, ATM switching, SONET/SDH, xDSL, dial-up access, converged data,
voice, and video technologies, Tag Switching [currently also known as
multiprotocol label switching ("MPLS")], optical transport, wireless, content
networking, call center and unified messaging solutions, network security, and
network management software solutions, among others.
MINORITY INVESTMENTS
The Company makes minority investments in companies that build technology or
provide services that are complementary to Cisco products or that support the
Internet. By investing in new ventures, Cisco strengthens its partnerships with
such companies. Together,
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Cisco and its partners can offer more complete solutions to the market.
STRATEGIC ALLIANCES
Cisco pursues strategic alliances with other industry leaders in areas where
collaboration can produce industry advancement and acceleration of new markets.
The objectives and goals for a strategic alliance can include one or more of the
following: technology exchange, product development, joint sales and marketing,
and new-market creation. This year, Cisco expanded or entered into alliances
with Cap Gemini/Ernst & Young, Hewlett Packard, Intel, IBM, KPMG Consulting,
Inc., Microsoft, Motorola, Oracle, Sun Microsystems, and Telcordia, among
others.
BACKLOG
The Company's backlog at September 25, 2000 was approximately $3.83 billion
compared with a backlog of approximately $922 million at September 20, 1999. The
Company includes in its backlog only orders confirmed with a purchase order for
products to be shipped within 120 days to customers with approved credit status.
Because of the generally short cycle between order and shipment, and occasional
customer changes in delivery schedules or cancellation of orders (which are made
without significant penalty), the Company does not believe that its backlog, as
of any particular date, is necessarily indicative of actual net sales for any
future period.
COMPETITION
Cisco competes in the Internet infrastructure market, providing solutions for
transporting data, voice, and video traffic across intranets, extranets, and the
Internet. The market is characterized by rapid growth, converging technologies,
and a conversion to New World solutions that offer superior advantages. These
market factors represent both an opportunity and a competitive threat to Cisco.
The Company competes with numerous vendors in each product category. Cisco
expects that the overall number of competitors providing niche product solutions
will increase due to the market's attractive growth. On the other hand, the
Company expects the number of vendors supplying end-to-end networking solutions
will decrease, due to the rapid pace of acquisitions in the industry. The
Company believes its primary competition comes from nimble start-ups and young
companies offering innovative niche solutions.
Cisco's competitors include Alcatel, Ericsson, Extreme, Foundry, Juniper,
Lucent, Nortel, Redback, Siemens AG, and Sycamore. Some of our competitors
compete across many of our product lines, while others do not offer as wide a
breadth of solutions.
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Several of our current and potential competitors have greater financial,
marketing, and technical resources than we do.
The principal competitive factors in the markets in which the Company presently
competes and may compete in the future are:
- - Price and/or ability to provide financing;
- - Performance;
- - The ability to provide end-to-end networking solutions and support;
- - Conformance to standards;
- - The ability to provide value-added features such as security, reliability,
and investment protection; and
- - Market presence
The Company also faces competition from customers it licenses technology to and
suppliers from whom it transfers technology. Networking's inherent nature
requires inter-operability. As such, the Company must cooperate and at the same
time compete with these companies. The Company's inability to effectively
manage these complicated relationships with customers and suppliers could have a
material adverse effect on the Company's business, operating results, and
financial condition.
RESEARCH AND DEVELOPMENT
The Company has enhanced and extended its product lines with new product and
feature introductions including optical transport, data, voice, and video
integration, virtual private networking, DSL, cable modem, gigabit switching,
wireless, content networking (content distribution and management, content
routing, content edge delivery, content switching, and intelligent network
services), security, and network management, among others.
However, the industry in which Cisco competes in is subject to rapid
technological developments, evolving industry standards, changes in customer
requirements, and frequent new product introductions and enhancements. As a
result, the Company's success, in part, depends upon its ability, on a
cost-effective and timely basis, to continue to enhance its existing solutions
and to develop and introduce new solutions that improve performance and reduce
total cost of ownership. In order to achieve these objectives, the Company's
management and engineering personnel work closely with customers to identify and
respond to customer needs, as well as with other innovators of inter-networking
products, including universities, laboratories, and corporations. The Company
will also continue to make strategic acquisitions and equity investments where
appropriate. The Company intends to remain dedicated to industry standards and
to continue to support important protocol standards as they
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emerge. Still, there can be no assurance that Cisco will be able to successfully
develop new products to address new customer requirements and technological
changes, or that such products will achieve market acceptance.
In fiscal 2000, 1999, and 1998, the Company's research and development
expenditures were approximately $2.70 billion, $1.66 billion, and $1.05 billion,
respectively. All of the Company's expenditures for research and development
costs, as well as in-process research and development of approximately $1.37
billion, $471 million, and $594 million in fiscal 2000, 1999, and 1998,
respectively, have been expensed as incurred.
MANUFACTURING
The Company's manufacturing operations primarily consist of quality assurance of
materials, components, and subassemblies. Additionally, the Company performs
final assembly and test. The Company presently uses a variety of independent
third-party companies to perform printed circuit board assembly, in-circuit
test, and product repair. The Company and its single enterprise partners install
proprietary software on electronically programmable memory chips installed in
its systems in order to configure products to customer needs and to maintain
quality control and security. The manufacturing process enables the Company to
configure the hardware and software in unique combinations to meet a wide
variety of individual customer requirements. The Company and its single
enterprise partners also use automated testing equipment and "burn-in"
procedures, as well as comprehensive inspection, testing, and statistical
process control, to assure the quality and reliability of its products. The
Company's and its partners' manufacturing processes and procedures are ISO 9001
certified.
PATENTS, INTELLECTUAL PROPERTY AND LICENSING
Cisco's success is dependent upon its proprietary technology. Cisco generally
relies upon patents, copyrights, trademarks, and trade secret laws to establish
and maintain its proprietary rights in its technology and products. Cisco has a
program to file applications for and obtain patents in the United States and in
selected foreign countries where a potential market for Cisco's products exists.
Cisco has been issued a number of patents; other patent applications are
currently pending. There can be no assurance that any of these patents will not
be challenged, invalidated, or circumvented, or that any rights granted
thereunder will provide competitive advantages to Cisco. In addition, there can
be no assurance that patents will be issued from pending applications, or that
claims allowed on any future patents will be sufficiently broad to protect
Cisco's technology. In addition, the laws of some foreign countries may
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not permit the protection of Cisco's proprietary rights to the same extent as do
the laws of the United States. Although Cisco believes the protection afforded
by its patents, patent applications, copyrights, and trademarks has value, the
rapidly changing technology in the networking industry makes Cisco's future
success dependent primarily on the innovative skills, technological expertise,
and management abilities of its employees rather than on patent, copyright, and
trademark protection.
Many of Cisco's products are designed to include software or other intellectual
property licensed from third-parties. While it may be necessary in the future to
seek or renew licenses relating to various aspects of its products, Cisco
believes that based upon past experience and standard industry practice, such
licenses generally could be obtained on commercially reasonable terms. Because
of the existence of a large number of patents in the networking field and the
rapid rate of issuance of new patents, it is not economically practical to
determine in advance whether a product or any of its components infringe patent
rights of others. From time to time, Cisco receives notices from or is sued by
third-parties regarding patent claims. If infringement is alleged, Cisco
believes that, based upon industry practice, any necessary license or rights
under such patents may be obtained on terms that would not have a material
adverse effect on Cisco's business, operating results, or financial condition.
Nevertheless, there can be no assurance that the necessary licenses would be
available on acceptable terms, if at all, or that Cisco would prevail in any
such challenge. The inability to obtain certain licenses or other rights or to
obtain such licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on Cisco's business, operating
results, and financial condition.
EMPLOYEES
As of July 29, 2000, the Company employed approximately 34,000 persons,
including 6,000 in manufacturing, service and support, 14,000 in sales and
marketing, 11,000 in engineering, and 3,000 in finance and administration.
Approximately 9,000 employees were in international locations.
The Company considers the relationships with its employees to be positive. The
Company has not experienced any work stoppages.
Competition for technical personnel in the industry that Cisco competes in is
intense. The Company believes that our future success depends in part on our
continued ability to hire, assimilate, and retain qualified personnel. To date,
Cisco believes that they have been successful in recruiting qualified employees,
but there is no assurance that the Company will continue to be successful in the
future.
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RISK FACTORS
Set forth below and elsewhere in this Report and in other documents we file with
the SEC are risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements
contained in this Report.
YOU SHOULD EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have in the past
been, and will continue to be, subject to quarterly fluctuations as a result of
a number of factors. These factors include:
- - The integration of people, operations, and products from acquired businesses
and technologies;
- - Increased competition in the networking industry;
- - The overall trend toward industry consolidation;
- - The introduction and market acceptance of new technologies and standards,
including switch routers, Gigabit Ethernet switching, Tag Switching
(currently also known as multiprotocol label switching ["MPLS"]), optical
transport, wireless, content networking and data, voice, and video
capabilities;
- - Variations in sales channels, product costs, or mix of products sold;
- - The timing of orders and manufacturing lead times;
- - The trend towards sales of integrated network solutions;
- - The timing and amount of employer payroll tax to be paid on employees' gains
on stock options exercised; and
- - Changes in general economic conditions and specific economic conditions in
the computer and networking industries.
Any of the above factors could have a material adverse impact on our operations
and financial results. For example, from time to time, we have made acquisitions
that result in in-process research and development expenses being charged in an
individual quarter. These charges may occur in any particular quarter resulting
in variability in our quarterly earnings. Additionally, as a further example,
the dollar amounts of large orders for our products have been increasing and
therefore the operating results for a quarter could be materially adversely
affected if a number of large orders are either not received or are delayed, for
example, due to cancellations, delays, or deferrals by customers.
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WE CONTINUE TO INVEST IN NEW AND EXISTING MARKET OPPORTUNITIES
We are investing in increased headcount, inventory, manufacturing capacity, and
product development through internal efforts and acquisitions, as a result of
growth in existing opportunities and new or emerging opportunities in our target
markets. We intend to add resources across all functions.
With increased levels of spending, an inability to meet expected revenue levels
in a particular quarter could have a material, negative impact on our operating
results for that period as we will not be able to react quickly enough to scale
back expenses. Increased investments across all functions could translate into a
faster rate of expense growth compared to revenue growth.
SINCE OUR GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER ARE
DIFFICULT TO PREDICT
We expect that in the future, our net sales may grow at a slower rate than
experienced in previous periods and that on a quarter-to-quarter basis, our
growth in net sales may be significantly lower than our historical quarterly
growth rate. As a consequence, operating results for a particular quarter are
extremely difficult to predict. Our ability to meet financial expectations could
be hampered if the nonlinear sales pattern seen in past quarters reoccurs in
future periods. We generally have had one quarter of the fiscal year when
backlog has been reduced. Although such reductions have not occurred
consistently in recent years, they are difficult to predict and may occur in the
future. In addition, in response to customer demand, we continue to attempt to
reduce our product manufacturing lead times, which may result in corresponding
reductions in order backlog. A decline in backlog levels could result in more
variability and less predictability in our quarter-to-quarter net sales and
operating results going forward. On the other hand, for certain products, lead
times are longer than our goal. If we cannot reduce manufacturing lead times for
such products, our customers may cancel orders or not place further orders if
shorter lead times are available from other manufacturers.
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WE EXPECT GROSS MARGIN TO DECLINE OVER TIME
We expect gross margin may be adversely affected by increases in material or
labor costs, heightened price competition, increasing levels of services, higher
inventory balances, introduction of new products for new high-growth markets,
and changes in channels of distribution or in the mix of products sold. We
believe gross margin may additionally be impacted due to constraints relating to
certain component shortages that currently exist in the supply chain. We may
also experience a lower gross margin as the product mix for access and optical
product volume grows.
We have recently introduced several new products, with additional new products
scheduled to be released in the future. Increase in demand would result in
increased manufacturing capacity, which in turn would result in higher inventory
balances. In addition, our vendor base is capacity-constrained, and this could
result in increased cost pressure on certain components. If product or related
warranty costs associated with these new products are greater than we have
experienced, gross margin may be adversely affected. Our gross margin may also
be impacted by geographic mix, as well as the mix of configurations within each
product group. We continue to expand into third-party or indirect-distribution
channels, which generally results in a lower gross margin. In addition,
increasing third-party and indirect-distribution channels generally results in
greater difficulty in forecasting the mix of our product, and to a certain
degree, the timing of orders from our customers. Downward pressures on our gross
margin may be further impacted by other factors, such as increased percentage of
revenue from service provider markets, which may have lower margins or an
increase in product costs, which could adversely affect our future operating
results.
We also expect that our operating margin may decrease as we continue to hire
additional personnel and experience increases in overall operating expenses to
support our business. We plan our operating expense levels based primarily on
forecasted revenue levels. Because these expenses are relatively fixed in the
short term, a shortfall in revenue could lead to operating results being below
expectations.
WE ARE DEPENDENT UPON ADEQUATE COMPONENT SUPPLY AND MANUFACTURING CAPACITY
Our growth and ability to meet customer demands also depend in part on our
ability to obtain timely deliveries of parts from our suppliers. We have
experienced component shortages in the past that have adversely affected our
operations. Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurance that we will not encounter these problems
in the future. Although we generally use standard parts
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and components for our products, certain components are presently available only
from a single source or limited sources.
While our suppliers have performed effectively and been relatively flexible to
date, we believe that we will be faced with the following challenges going
forward:
- - New markets that we participate in may grow quickly and thus, consume
significant component capacity;
- - As we continue to acquire companies and new technologies, we are dependent,
at least initially, on unfamiliar supply chains or relatively small supply
partners;
- - We face increased competition for certain components, which are currently
supply constrained, from existing competitors and companies in other
markets.
Manufacturing capacity and component supply constraints could be significant
issues for us. For example, we have increased our manufacturing capacity
significantly and plan to further increase capacity during the coming months. To
mitigate the component supply constraints, we have started to build inventory
levels. A reduction or interruption in supply or a significant increase in the
price of one or more components would adversely affect our business, operating
results and financial condition, perhaps materially, and could materially damage
customer relationships.
WE COMPETE IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET
For additional information regarding our competition, see the section entitled
"Competition" contained in Item 1 of this Report.
WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS
The networking business is highly competitive, and as such, our growth is
dependent upon market growth, our ability to enhance our existing products and
our ability to introduce new products on a timely basis. One of the ways we have
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:
- - Difficulties in integrating the operations, technologies, and products of the
acquired companies;
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- - The risk of diverting management's attention from normal daily operations of
the business;
- - Potential difficulties in completing projects associated with in-process
research and development;
- - Risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions;
- - Initial dependence on unfamiliar supply chains or relatively small supply
partners;
- - Insufficient revenues to offset increased expenses associated with
acquisitions; and
- - The potential loss of key employees of the acquired companies.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results, or financial condition.
We must also manage any growth effectively. Failure to manage growth effectively
and successfully integrate acquisitions we made could harm our business and
operating results in a material way.
WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY
As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures have related to nondollar-denominated sales
in Japan, Canada, and Australia and nondollar-denominated operating expenses in
Europe, Latin America, and Asia where we sell primarily in U.S. dollars.
Additionally, we have continued to see our exposures to emerging market
currencies, such as the Korean won, increase because of our expanding presence
in these markets and their extreme currency volatility. We will continue to
monitor our exposure and may hedge against these or any other emerging market
currencies as necessary.
The increasing use of the euro as a common currency for members of the European
Union could impact our foreign exchange exposure. We are currently hedging
against fluctuations with the euro and will continue to evaluate the impact of
the euro on our future foreign exchange exposure as well as on our internal
systems. At the present time, we hedge only those currency exposures associated
with certain assets and liabilities denominated in nonfunctional currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by
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us is intended to offset the impact of currency fluctuations on certain
nonfunctional currency assets and liabilities.
WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT
EXPOSURES IN WEAKENED MARKETS
A significant proportion of our sales are derived through our partners in
two-tier distribution channels. These customers are generally given privileges
to return inventory, receive credits for changes in selling prices, and
participate in cooperative marketing programs. We maintain appropriate accruals
and allowances for such exposures. However, such partners tend to have access to
more limited financial resources than other resellers and end-user customers and
therefore represent potential sources of increased credit risk. We are
experiencing increased demands for customer financing, including loan financing,
and leasing solutions. We expect demands for customer financing to continue. We
believe it is a competitive factor in obtaining business, particularly in
supplying customers involved in significant infrastructure projects. Our loan
financing arrangements may include not only financing the acquisition of our
products but also providing additional funds for soft costs associated with
network installation and integration of our products and for working capital
purposes. Although we have programs in place to monitor and mitigate the
associated risk, there can be no assurance that such programs will be effective
in reducing our credit risk. We also continue to monitor increased credit
exposures from weakened financial conditions in certain geographical regions,
and the impact that such conditions may have on the worldwide economy. We have
experienced losses due to customers failing to meet their obligations. Although
these losses have not been significant, future losses, if incurred, could harm
our business and have a material adverse effect on our operating results and
financial condition.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES
For additional information regarding the sensitivity of and risks associated
with the market value of portfolio investments and interest rates, see Item 7A
"Quantitative and Qualitative Disclosures About Market Risk" contained in Part
II of this Report.
WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB
Recent actions and comments from the SEC have indicated they are reviewing the
current valuation methodology of in-process research and development related to
business combinations. The SEC is concerned that some companies are writing off
more of the
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value of an acquisition than is appropriate. We believe we are in compliance
with all of the rules and related guidance as they currently exist. However,
there can be no assurance that the SEC will not seek to reduce the amount of
in-process research and development previously expensed by us. This would result
in the restatement of our previously filed financial statements and could have a
material adverse effect on our operating results and financial condition for
periods subsequent to the acquisitions. Additionally, FASB has announced that it
plans to rescind the pooling of interests method of acquisition accounting. If
this occurs, it could alter our acquisition strategy and impair our ability to
acquire companies.
OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT
For additional information regarding our proprietary rights, see the section
entitled "Patents, Intellectual Property, and Licensing" contained in Item 1 of
this Report.
WE FACE RISKS FROM THE UNCERTAINTIES OF REGULATION OF THE INTERNET
There are currently few laws or regulations that apply directly to access or
commerce on the Internet. We could be materially adversely affected by
regulation of the Internet and Internet commerce in any country where we
operate, on such technology as voice over the Internet, encryption technology,
and access charges for Internet service providers. We also could be materially
adversely affected by the continuing deregulation of the telecommunications
industry. The adoption of regulation of the Internet and Internet commerce could
decrease demand for our products, and at the same time increase our cost of
selling our products, which could have a material adverse effect on our
business, operating results, and financial condition.
THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS
TO RISKS
As we focus on new market opportunities, such as transporting data, voice, and
video traffic across the same network, we will increasingly compete with large
telecommunications equipment suppliers such as Alcatel, Ericsson, Lucent,
Nortel, and Siemens AG, among others, and several well-funded start-up
companies. Several of our current and potential competitors have greater
financial, marketing, and technical resources than we do. Additionally, as
customers in these markets complete infrastructure deployments, they may require
greater levels of service, support, and financing than we have experienced in
the past. We have not entered into a material amount of labor intensive service
contracts which require significant production
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or customization. However, we expect that demand for these types of service
contracts will increase in the future. There can be no assurance that we can
provide products, service, support, and financing to effectively compete for
these market opportunities. Further, provision of greater levels of services by
us may result in less favorable timing of revenue recognition than we have
historically experienced.
THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND FLOODS
Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
certain of our facilities, which includes one of our manufacturing facilities,
are located near rivers that have experienced flooding in the past. A
significant natural disaster, such as an earthquake or a flood, could have a
material adverse impact on our business, operating results, and financial
condition.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ARE SUBJECT TO RAPID CHANGES
IN TECHNOLOGY AND THE MARKET
Our operating results will depend to a significant extent on our ability to
reduce the costs to produce existing products. In particular, we broadened our
product line by introducing network access products. Sales of these products,
which are generally lower priced and carry lower margins than our core products,
have increased more rapidly than sales of our core products. The success of
these and other new products is dependent on several factors, including proper
new product definition, product cost, timely completion and introduction of new
products, differentiation of new products from those of our competitors, and
market acceptance of these products. The markets for our products are
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions, and evolving methods of building and
operating networks. There can be no assurance that we will successfully identify
new product opportunities, develop and bring new products to market in a timely
manner, and achieve market acceptance of our products or that products and
technologies developed by others will not render our products or technologies
obsolete or noncompetitive.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES
We have increased the number of our strategic alliances with large and complex
organizations and our ecosystem partners. These arrangements are generally
limited to specific projects, the goal of which is generally to facilitate
product compatibility and adoption of industry standards. If successful, these
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relationships will be mutually beneficial and result in industry growth.
However, these alliances carry an element of risk because, in most cases, we
must compete in some business areas with a company with which we have strategic
alliances and, at the same time, cooperate with such company in other business
areas. Also, if these companies fail to perform or if these relationships fail
to materialize as expected, we could suffer delays in product development or
other operational difficulties.
THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION
There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
that industry consolidation may provide stronger competitors that are better
able to compete as sole-source vendors for customers. This could lead to more
variability in operating results as we compete to be a single vendor solution
and could have a material adverse effect on our business, operating results, and
financial condition.
SALES IN THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION
Although sales to the service provider market have grown historically, this
market is characterized by large and often sporadic purchases. Sales activity in
this industry depends upon the stage of completion of expanding network
infrastructures, the availability of funding, and the extent that service
providers are affected by regulatory and business conditions in the country of
operations. A decline or delay in sales orders from this industry could have a
material adverse effect on our business, operating results, and financial
condition.
WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATION AND
TARIFFS
Changes in domestic and international telecommunications requirements could
affect the sales of our products. In particular, we believe it is possible that
there may be significant changes in domestic telecommunications regulation in
the near future that could slow the expansion of the service providers' network
infrastructures and materially adversely affect our business, operating results,
and financial condition. Future changes in tariffs by regulatory agencies or
application of tariff requirements to currently untariffed services could affect
the sales of our products for certain classes of customers. Additionally, in the
United States, our products must comply with various Federal Communications
Commission requirements and regulations. In countries outside of the United
States, our products must meet various requirements of local telecommunications
authorities. Changes in tariffs or failure by
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us to obtain timely approval of products could have a material adverse effect on
our business, operating results, and financial condition.
OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS
We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; service provider and
government spending patterns; and natural disasters. Any or all of these factors
could have a material adverse impact on our future international business.
OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET-BASED SYSTEMS
We believe that there will be performance problems with Internet communications
in the future which could receive a high degree of publicity and visibility. As
we are a large supplier of equipment for the Internet infrastructure, customers'
perceptions of our products and the marketplace's perception of us as a supplier
of networking products may be materially adversely affected, regardless of
whether or not these problems are due to the performance of our products. Such
an event could also result in a material adverse effect on the market price of
our common stock and could materially adversely affect our business, operating
results, and financial condition.
OUR STOCK PRICE MAY BE VOLATILE
Our common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results, the
published expectations of analysts, and as a result of announcements by our
competitors and us. In addition, the stock market has experienced extreme price
and volume fluctuations that have affected the market price of many technology
companies, in particular, and that have often been unrelated to the operating
performance of these companies. These factors, as well as general economic and
political conditions, may materially adversely affect the market price of our
common stock in the future. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of whom have been granted stock options.
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OTHER
PricewaterhouseCoopers LLP ("PwC"), our independent accountants, has notified us
that PwC is engaged in discussions with the SEC following an internal review by
PwC, pursuant to an administrative settlement with the SEC, of PwC's compliance
with auditor independence guidelines. PwC has advised us that we are one of the
companies affected by such discussions. We are not involved in the discussions
between the SEC and PwC and cannot predict the result of those discussions.
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ITEM 2. PROPERTIES
The Company's principal corporate offices are located at sites in Alviso,
Milpitas, and San Jose, California. The Company's main headquarters are situated
in San Jose, California. There are currently 50 buildings located at these
sites, three of which are manufacturing facilities, and the Company expects that
construction at its current sites will continue through fiscal 2001. The Company
has certain other operating leases for buildings, which include additional
manufacturing facilities, located at various sites near San Jose, California.
Additionally, the Company leases land for research and development and
customer-support activities in Boxborough, Massachusetts; Salem, New
Hampshire; Richardson, Texas; and Research Triangle Park, North Carolina.
The Company also leases various small offices throughout the United States and
on a worldwide basis. For additional information regarding the Company's
obligations under leases, see Note 8 to the Consolidated Financial Statements
contained in Part II, Item 8.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Cisco common stock (NASDAQ symbol CSCO) is traded on the NASDAQ National Market.
The following table sets forth the range of high and low closing prices for each
period indicated, adjusted to reflect the two-for-one split effective March
2000:
2000 1999 1998
---- ---- ----
High Low High Low High Low
---- --- ---- --- ---- ---
First quarter $37.00 $29.38 $17.32 $10.97 $ 9.37 $ 7.75
Second quarter $57.63 $35.00 $26.67 $15.19 $10.05 $ 8.10
Third quarter $80.06 $54.75 $29.69 $23.78 $12.31 $ 9.44
Fourth quarter $71.44 $50.55 $33.53 $26.09 $17.20 $11.74
The Company has never paid cash dividends on its common stock and has no present
plans to do so. There were approximately 60,150 shareholders of record at July
29, 2000.
During the quarter ended July 29, 2000, the Company issued an aggregate of
approximately 10.4 million shares of its common stock in connection with the
purchase of the capital stock of Atlantech Technologies, SightPath, Inc., and
PentaCom, Ltd. The shares were issued pursuant to exemptions by reason of
Section 4(2) of the Securities Exchange Act of 1933, as amended (the "Securities
Act"). These sales were made without general solicitation or advertising. Each
purchaser was an accredited investor or a sophisticated investor with access to
all relevant information necessary. The Company has filed Registration
Statements on Form S-3 covering the resale of such securities.
During the quarter ended July 29, 2000, the Company issued an aggregate of
approximately 6.7 million shares of its common stock in connection with the
purchase of the capital stock of JetCell, Inc. and InfoGear Technology
Corporation. The shares were issued pursuant to exemptions by reason of Section
3(a)(10) of the Securities Act. The terms and conditions of such issuances were
approved after hearings upon the fairness of such terms and conditions by a
government authority expressly authorized by the law to grant such approval.
During the quarter ended July 29, 2000, the Company issued approximately 13.7
million shares of its common stock in connection with the purchase of the
capital stock of Qeyton Systems. Shares issued to U.S. Persons within the
meaning of Regulation S under the Securities Act ("U.S. Persons") were issued
pursuant to an exemption by reason of Section 4(2) of the Security Act. Shares
issued to non-U.S. Persons were issued pursuant to an exemption
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by reason of Regulation S under the Securities Act. The sales were made
without general solicitation or advertising. Each purchaser who was a U.S.
Person was an accredited investor or a sophisticated investor with access to all
relevant information necessary. The Company has filed a Registration Statement
on Form S-3 covering the resale of such securities.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA(1)
FIVE YEARS ENDED JULY 29, 2000
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
July 29, July 31, July 25, July 26, July 28,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $18,928 $12,173 $8,489 $6,452 $4,101
Net income $ 2,668(2) $ 2,023(3) $1,331(4) $1,047(5) $ 915(6)
Net income per common
share--basic $ 0.39 $ 0.30 $ 0.21 $ 0.17 $ 0.16
Net income per common
share--diluted $ 0.36(2) $ 0.29(3) $ 0.20(4) $ 0.17(5) $ 0.15(6)
Shares used in per-common
share calculation--basic* 6,917 6,646 6,312 6,007 5,758
Shares used in per-common
share calculation--diluted* 7,438 7,062 6,658 6,287 6,008
Total assets $32,870 $14,893 $9,043 $5,504 $3,647
* Reflects the two-for-one stock split effective March 2000.
(1) All historical financial information has been restated to reflect the
acquisitions that were accounted for as poolings of interests (see Note 3
to the Consolidated Financial Statements).
(2) Net income and net income per common share include in-process research and
development expenses of $1.37 billion, amortization of goodwill and
purchased intangible assets of $291 million, acquisition-related costs of
$62 million, payroll tax on stock option exercises of $51 million, and net
gains realized on minority investments of $531 million. Pro forma net
income and diluted net income per common share, excluding these items net
of tax of $0, were $3.91 billion and $0.53, respectively.
(3) Net income and net income per common share include in-process research and
development expenses of $471 million, amortization of goodwill and
purchased intangible assets of $61 million, and acquisition-related costs
of $16 million. Pro forma net income and diluted net income per common
share, excluding these items net of tax benefits of $54 million, were
$2.52 billion and $0.36, respectively.
(4) Net income and net income per common share include in-process research and
development expenses of $594 million, amortization of goodwill and
purchased intangible assets of $23 million, and net gains realized on
minority investments of $5 million. Pro forma net income and diluted net
income per common share, excluding these items net of tax benefits of $67
million, were $1.88 billion and $0.28, respectively.
(5) Net income and net income per common share include in-process research and
development expenses of $508 million, amortization of goodwill and
purchased intangible assets of $11 million, and net gains realized on
minority investments of $152 million. Pro forma net income and diluted net
income per common share, excluding these items net of tax benefits of $7
million, were $1.42 billion and $0.23, respectively.
(6) Net income and net income per common share include amortization of
goodwill and purchased intangible assets of $14 million. Pro forma net
income and diluted net income per common share, excluding this item net of
a tax benefit of $2 million, were $927 million and $0.15, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All historical financial information has been restated to reflect the
acquisitions that were accounted for as poolings of interests (see Note 3 to the
Consolidated Financial Statements).
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including risks faced by us described in this Report, including those set forth
under the section entitled "Risk Factors" in Item 1, and the other documents we
file with the Securities and Exchange Commission ("SEC"), including our most
recent reports on Form 10-K, Form 8-K, and Form 10-Q, and amendments thereto.
COMPARISON OF FISCAL 2000 AND FISCAL 1999
Net sales in fiscal 2000 were $18.93 billion, compared with $12.17 billion in
fiscal 1999, an increase of 55.5%. The increase in net sales was primarily a
result of increased unit sales of switch, router, and access products; growth in
the sales of add-on boards that provide increased functionality; optical
transport products; and maintenance, service, and support sales (see Note 12 to
the Consolidated Financial Statements).
We manage our business on four geographic theaters: the Americas; Europe, the
Middle East, and Africa ("EMEA"); Asia Pacific; and Japan. Summarized financial
information by theater for fiscal 2000 and 1999 is presented in the following
table (in millions):
Percentage of
Amount Net Sales
-------------------------- -------------------------
July 29, July 31, July 29, July 31,
Years Ended 2000 1999 2000 1999
- ----------- -------- -------- -------- --------
Net sales:
Americas $ 12,924 $ 8,088 68.3% 66.4%
EMEA 4,770 3,216 25.2 26.4
Asia Pacific 1,705 825 9.0 6.8
Japan 935 566 4.9 4.7
Sales adjustments (1,406) (522) (7.4) (4.3)
-------- -------- -------- --------
Total $ 18,928 $ 12,173 100.0% 100.0%
======== ======== ======== ========
The revenue growth for each theater was primarily driven by market demand and
the deployment of Internet technologies and business solutions.
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Gross margin in fiscal 2000 was 64.4%, compared with 65.0% in fiscal 1999. The
following table shows the standard margins for each theater:
July 29, July 31,
Years Ended 2000 1999
- ----------- ---- ----
Standard margins:
Americas 72.8% 72.2%
EMEA 75.1% 74.0%
Asia Pacific 71.3% 71.0%
Japan 78.8% 77.0%
The net sales and standard margins by geographic theater differ from the amounts
recognized under generally accepted accounting principles because we do not
allocate certain sales adjustments, production overhead, and manufacturing
variances and other related costs to the theaters. Sales adjustments relate to
revenue deferrals and reserves, credit memos, returns, and other timing
differences.
Standard margins increased for all geographic theaters as compared with fiscal
1999. The decrease in the overall gross margin was primarily due to shifts in
product mix, introduction of new products, which generally have lower margins
when first released, higher production-related costs, the continued pricing
pressure seen from competitors in certain product areas, and the above-mentioned
sales adjustments, which were not included in the standard margins.
We expect gross margin may be adversely affected by increases in material or
labor costs, heightened price competition, increasing levels of services, higher
inventory balances, introduction of new products for new high-growth markets,
and changes in channels of distribution or in the mix of products sold. We
believe gross margin may additionally be impacted due to constraints relating to
certain component shortages that currently exist in the supply chain. We may
also experience a lower gross margin as the product mix for access and optical
product volume grows.
We have recently introduced several new products, with additional new products
scheduled to be released in the future. Increase in demand would result in
increased manufacturing capacity, which in turn would result in higher inventory
balances. In addition, our vendor base is capacity-constrained, and this could
result in increased cost pressure on certain components. If product or related
warranty costs associated with these new products are greater than we have
experienced, gross margin may be adversely affected. Our gross margin may also
be impacted by geographic mix, as well as the mix of configurations within each
product group. We continue to expand into third-party or indirect-distribution
channels, which generally results in a lower gross margin. In addition,
increasing third-party and indirect-
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distribution channels generally results in greater difficulty in forecasting the
mix of our product, and to a certain degree, the timing of orders from our
customers. Downward pressures on our gross margin may be further impacted by
other factors, such as increased percentage of revenue from service provider
markets, which may have lower margins or an increase in product costs, which
could adversely affect our future operating results.
Research and development ("R&D") expenses in fiscal 2000 were $2.70 billion,
compared with $1.66 billion in fiscal 1999, an increase of 62.6%. R&D expenses,
as a percentage of net sales, increased to 14.3% in fiscal 2000, compared with
13.7% in fiscal 1999. The increase reflected our ongoing R&D efforts in a wide
variety of areas such as data, voice, and video integration, digital subscriber
line ("DSL") technologies, cable modem technology, wireless access, dial access,
enterprise switching, optical transport, security, network management, and
high-end routing technologies, among others. A significant portion of the
increase was due to the addition of new personnel, partly through acquisitions,
as well as higher expenditures on prototypes and depreciation on additional lab
equipment. We also continued to purchase technology in order to bring a broad
range of products to the market in a timely fashion. If we believe that we are
unable to enter a particular market in a timely manner with internally developed
products, we may license technology from other businesses or acquire businesses
as an alternative to internal R&D. All of our R&D costs are expensed as
incurred. We currently expect that R&D expenses will continue to increase in
absolute dollars as we continue to invest in technology to address potential
market opportunities.
Sales and marketing expenses in fiscal 2000 were $3.95 billion, compared with
$2.46 billion in fiscal 1999, an increase of 60.1%. Sales and marketing
expenses, as a percentage of net sales, increased to 20.8% in fiscal 2000,
compared with 20.2% in fiscal 1999. The increase was principally due to an
increase in the size of our direct sales force and related commissions,
additional marketing and advertising investments associated with the
introduction of new products, the expansion of distribution channels, and
general corporate branding. The increase also reflected our efforts to invest in
certain key areas, such as expansion of our end-to-end networking strategy and
service provider coverage, in order to be positioned to take advantage of future
market opportunities. We currently expect that sales and marketing expenses will
continue to increase in absolute dollars.
General and administrative ("G&A") expenses in fiscal 2000 were $633 million,
compared with $381 million in fiscal 1999, an increase of 66.1%. G&A expenses,
as a percentage of net sales, increased to 3.3% in fiscal 2000, compared with
3.1% in fiscal 1999. G&A expenses for fiscal 2000 and 1999 included
acquisition-
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related costs of approximately $62 million and $16 million, respectively.
Excluding the acquisition-related costs, the increase in G&A expenses was
primarily related to the addition of new personnel and investments in
infrastructure. We intend to keep G&A expenses relatively constant as a
percentage of net sales; however, this depends on the level of acquisition
activity and our growth, among other factors.
Amortization of goodwill and purchased intangible assets included in operating
expenses was $291 million in fiscal 2000, compared with $61 million in fiscal
1999. Amortization of goodwill and purchased intangible assets primarily relates
to various purchase acquisitions (see Note 3 and Note 4 to the Consolidated
Financial Statements). Amortization of goodwill and purchased intangible assets
will continue to increase as we acquire companies and technologies.
The amount expensed to in-process research and development ("in-process R&D")
arose from the purchase acquisitions completed in fiscal 2000 (see Note 3 to the
Consolidated Financial Statements).
The fair values of the existing products and patents, as well as the technology
currently under development, were determined using the income approach, which
discounts expected future cash flows to present value. The discount rates used
in the present value calculations were typically derived from a weighted-average
cost of capital analysis and venture capital surveys, adjusted upward to reflect
additional risks inherent in the development life cycle. These risk factors have
increased the overall discount rate for acquisitions in the current year. We
consider the pricing model for products related to these acquisitions to be
standard within the high-technology communications equipment industry. However,
we do not expect to achieve a material amount of expense reductions or synergies
as a result of integrating the acquired in-process technology. Therefore, the
valuation assumptions do not include significant anticipated cost savings.
The development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products, and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing, and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging
markets and could have a material adverse impact on our business and operating
results.
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The following table summarizes the significant assumptions underlying the
valuations for our significant purchase acquisitions completed in fiscal 2000
and 1999 (in millions, except percentages):
Acquisition Assumptions
-----------------------
Estimated Cost
to Complete Risk-Adjusted
Technology at Discount
Time of Rate for In-
Acquired Company Acquisition Process R&D
---------------- ----------- -----------
Fiscal 2000
- -----------
Monterey Networks, Inc. $ 4 30.0%
The optical systems business of Pirelli S.p.A. $ 5 20.0%
Aironet Wireless Communications, Inc. $ 3 23.5%
Atlantech Technologies $ 6 37.5%
JetCell, Inc. $ 7 30.5%
PentaCom, Ltd. $ 13 30.0%
Qeyton Systems $ 6 35.0%
Fiscal 1999
- -----------
Summa Four, Inc. $ 5 25.0%
Clarity Wireless, Inc. $ 42 32.0%
Selsius Systems, Inc. $ 15 31.0%
PipeLinks, Inc. $ 5 31.0%
Amteva Technologies $ 4 35.0%
Regarding our purchase acquisitions completed in fiscal 2000 and 1999, actual
results to date have been consistent, in all material respects, with our
assumptions at the time of the acquisitions. The assumptions primarily consist
of an expected completion date for the in-process projects, estimated costs to
complete the projects, and revenue and expense projections once the products
have entered the market. Shipment volumes of products from the above-acquired
technologies are not material to our overall financial results at the present
time. Therefore, it is difficult to determine the accuracy of overall revenue
projections early in the technology or product life cycle. Failure to achieve
the expected levels of revenue and net income from these products will
negatively impact the return on investment expected at the time that the
acquisitions were completed and potentially result in impairment of any other
assets related to the development activities.
Interest and other income, net, was $577 million in fiscal 2000, compared with
$330 million in fiscal 1999. The increase was primarily due to interest income
related to the general increase in cash and investments, which was generated
from our operations. Net gains realized on minority investments were $531
million in
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fiscal 2000. The net gains realized on minority investments were not material in
fiscal 1999.
Our pro forma effective tax rate for fiscal 2000 was 30.0%. The actual effective
tax rate was 38.6%, which included the impact of nondeductible in-process R&D
and acquisition-related costs. Our future effective tax rates could be adversely
affected if earnings are lower than anticipated in countries where we have lower
effective rates or by unfavorable changes in tax laws and regulations.
Additionally, we have provided a valuation allowance on certain of our deferred
tax assets because of uncertainty regarding their realizability due to
expectation of future employee stock option exercises (see Note 11 to the
Consolidated Financial Statements).
COMPARISON OF FISCAL 1999 AND FISCAL 1998
Net sales in fiscal 1999 were $12.17 billion, compared with $8.49 billion in
fiscal 1998, an increase of 43.4%. The increase in net sales was primarily a
result of increased unit sales of LAN switching products, access servers,
high-performance WAN switching and routing products, and maintenance service
contracts.
Gross margin in fiscal 1999 was 65.0%, compared with 65.6% in fiscal 1998. The
decrease in the overall gross margin was primarily due to our continued shift in
revenue mix toward our lower-margin products and the continued pricing pressure
seen from competitors in certain product areas.
R&D expenses in fiscal 1999 were $1.66 billion, compared with $1.05 billion in
fiscal 1998, an increase of 58.1%. R&D expenses, as a percentage of net sales,
increased to 13.7% in fiscal 1999, compared with 12.4% in fiscal 1998. The
increase reflected our ongoing R&D efforts in a wide variety of areas such as
data, voice, and video integration, DSL technologies, cable modem technology,
wireless access, dial access, enterprise switching, security, network
management, and high-end routing technologies, among others. A significant
portion of the increase was due to the addition of new personnel, partly through
acquisitions, as well as higher expenditures on prototypes and depreciation on
additional lab equipment.
Sales and marketing expenses in fiscal 1999 were $2.46 billion, compared with
$1.58 billion in fiscal 1998, an increase of 56.1%. Sales and marketing
expenses, as a percentage of net sales, increased to 20.2% in fiscal 1999,
compared with 18.6% in fiscal 1998. The increase was principally due to an
increase in the size of our direct sales force and related commissions,
television advertising campaigns to build brand awareness, additional marketing
and advertising costs associated with the introduction
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of new products, and the expansion of distribution channels. The increase also
reflected our efforts to invest in certain key areas, such as expansion of our
end-to-end networking strategy and service provider coverage, in order to be
positioned to take advantage of future market opportunities.
G&A expenses in fiscal 1999 were $381 million, compared with $247 million in
fiscal 1998, an increase of 54.3%. G&A expenses, as a percentage of net sales,
increased to 3.1% in fiscal 1999, compared with 2.9% in fiscal 1998. The
increase was primarily related to additional personnel and acquisition-related
costs of $16 million.
Amortization of goodwill and purchased intangible assets included in operating
expenses was $61 million in fiscal 1999, compared with $23 million in fiscal
1998. Amortization of goodwill and purchased intangible assets increased as we
acquired companies and technologies.
Interest and other income, net, in fiscal 1999 was $330 million, compared with
$196 million in fiscal 1998. Interest income rose primarily as a result of
additional investment income on our increased investment balances.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. We do not expect the initial adoption of SFAS 133 to have a material
effect on our operations or financial position. We are required to adopt SFAS
133 in the first quarter of fiscal year 2001.
In September 1999, the FASB issued Emerging Issues Task Force Topic No. D-83,
"Accounting for Payroll Taxes Associated with Stock Option Exercises" ("EITF
D-83"). EITF D-83 requires that payroll tax paid on the difference between the
exercise price and the fair value of acquired stock in association with an
employee's exercise of stock options be recorded as operating expenses. Payroll
tax on stock option exercises of $51 million was expensed in fiscal 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended,
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue
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recognition in financial statements. At this time, we do not expect the adoption
of SAB 101 to have a material effect on our operations or financial position;
however, the SEC's final guidance for implementation has not been released to
date. We are required to adopt SAB 101 in the fourth quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, short-term investments, and investments were $20.50
billion at July 29, 2000, an increase of $10.28 billion from July 31, 1999. The
increase was primarily a result of $5.00 billion of net unrealized gains on
publicly held investments and $7.70 billion of cash generated by operating and
financing activities partially offset by investing activities, including net
capital expenditures of $1.09 billion, purchases of technology licenses of $444
million, and investments in lease receivables of $535 million.
Accounts receivable increased 83.9% during fiscal 2000. Days sales outstanding
in receivables increased to 37 days for fiscal 2000, from 32 days for fiscal
1999. The increase in accounts receivable and days sales outstanding was due, in
part, to growth in total net sales combined with conditions in a number of
markets, resulting in longer payment terms.
Inventories increased 87.2% during fiscal 2000; however, inventory turns
remained constant at 7.8 times. The increase in inventory levels reflected new
product introductions, continued growth in our two-tier distribution system, and
increased purchases to secure the supply of certain components. Inventory
management remains an area of focus as we balance the need to maintain strategic
inventory levels to ensure competitive lead times with the risk of inventory
obsolescence due to rapidly changing technology and customer requirements.
At July 29, 2000, we had a line of credit totaling $500 million, which expires
in July 2002. There have been no borrowings under this agreement (see Note 7 to
the Consolidated Financial Statements).
We have entered into several agreements to lease 448 acres of land located in
San Jose, California, where our headquarters operations are established, and 759
acres of land located in Boxborough, Massachusetts; Salem, New Hampshire;
Richardson, Texas; and Research Triangle Park, North Carolina, where we have
expanded certain R&D and customer-support activities. In connection with these
transactions, we have pledged $1.29 billion of our investments as collateral for
certain obligations of the leases. We anticipate that we will occupy more leased
property in the future that will require similar pledged securities; however, we
do not expect the impact of this activity to be material to
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our liquidity position (see Note 8 to Consolidated Financial Statements).
We believe that our current cash and cash equivalents, short-term investments,
line of credit, and cash generated from operations will satisfy our expected
working capital, capital expenditure, and investment requirements through at
least the next 12 months.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain an investment portfolio of various holdings, types, and maturities.
These securities are generally classified as available for sale and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income, net of tax. Part of this portfolio includes minority
equity investments in several publicly traded companies, the values of which are
subject to market price volatility. For example, as a result of recent market
price volatility of our publicly traded equity investments, we experienced a
$111 million after-tax unrealized loss during the third quarter of fiscal 2000
and a $1.83 billion after-tax unrealized gain during the fourth quarter of
fiscal 2000 on these investments. We have also invested in numerous privately
held companies, many of which can still be considered in the start-up or
development stages. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial investment in
these companies. We also have certain real estate lease commitments with
payments tied to short-term interest rates. At any time, a sharp rise in
interest rates could have a material adverse impact on the fair value of our
investment portfolio while increasing the costs associated with our lease
commitments. Conversely, declines in interest rates could have a material impact
on interest earnings for our investment portfolio. We do not currently hedge
these interest rate exposures.
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INVESTMENTS
The following table presents the hypothetical changes in fair values in the
financial instruments held at July 29, 2000 that are sensitive to changes in
interest rates. These instruments are not leveraged and are held for purposes
other than trading. The modeling technique used measures the change in fair
values arising from selected potential changes in interest rates. Market changes
reflect immediate hypothetical parallel shifts in the yield curve of plus or
minus 50 basis points ("BPS"), 100 BPS, and 150 BPS over a 12-month horizon.
Beginning fair values represent the principal plus accrued interest and
dividends of the interest rate-sensitive financial instruments at July 29, 2000.
Ending fair values are the market principal plus accrued interest, dividends,
and reinvestment income at a 12-month horizon. The following table estimates the
fair value of the portfolio at a 12-month horizon (in millions):
Valuation of Securities Valuation of Securities
Given an Interest Rate Fair Value Given an Interest Rate
Decrease of X Basis Points as of Increase of X Basis Points
Issuer (150 BPS) (100 BPS) (50 BPS) July 29,2000 50 BPS 100 BPS 150 BPS
- ------ --------- --------- -------- ------------ ------ ------- -------
U.S. government notes and bonds $2,350 $2,329 $2,307 $2,285 $2,262 $2,240 $2,218
State, municipal, and county
government notes and bonds 3,666 3,632 3,598 3,564 3,529 3,494 3,459
Corporate notes and bonds 3,296 3,266 3,235 3,204 3,173 3,141 3,110
------ ------ ------ ------ ------ ------ ------
Total $9,312 $9,227 $9,140 $9,053 $8,964 $8,875 $8,787
====== ====== ====== ====== ====== ====== ======
A 50 BPS move in the Federal Funds Rate has occurred in nine of the last 10
years; a 100 BPS move in the Federal Funds Rate has occurred in six of the last
10 years; and a 150 BPS move in the Federal Funds Rate has occurred in four of
the last 10 years.
The following analysis presents the hypothetical changes in fair values of
public equity investments that are sensitive to changes in the stock market.
These equity securities are held for purposes other than trading. The modeling
technique used measures the hypothetical change in fair values arising from
selected hypothetical changes in each stock's price. Stock price fluctuations of
plus or minus 15%, plus or minus 35%, and plus or minus 50% were selected based
on the probability of their occurrence.
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The following table estimates the fair value of the publicly traded corporate
equities at a 12-month horizon (in millions):
Valuation of Securities Valuation of Securities
Given X% Decrease Given X% Increase
in Each Stock's Price Fair Value in Each Stock's Price
-------------------------------------- as of ----------------------------------
(50%) (35%) (15%) July 29, 2000 15% 35% 50%
----------- ----------- ---------- -------------- ---------- ----------- --------
Corporate equities $3,112 $4,046 $5,291 $6,225 $7,159 $8,404 $9,337
Our equity portfolio consists of securities with characteristics that most
closely match the S&P Index or companies traded on the NASDAQ National Market.
The NASDAQ Composite Index has shown a 15% movement in each of the last three
years and a 35% and 50% movement in at least one of the last three years.
We also have an investment in KPMG Consulting, Inc. in the principal amount of
$1.05 billion of Series A Mandatorily Redeemable Convertible Preferred Stock,
which carries a 6% dividend rate on the original issue price until converted to
common stock. Conversion is at our option upon or after the completion of an
initial public offering of KPMG Consulting, Inc. We have not included the
investment in the above sensitivity analyses due to the nature of this
investment.
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LEASES
We are exposed to interest rate risk associated with leases on our facilities
where payments are tied to the London Interbank Offered Rate ("LIBOR"). We have
evaluated the hypothetical change in lease obligations held at July 29, 2000 due
to changes in the LIBOR. The modeling technique used measures hypothetical
changes in lease obligations arising from selected hypothetical changes in the
LIBOR. The hypothetical market changes reflected immediate parallel shifts in
the LIBOR curve of plus or minus 50 BPS, 100 BPS, and 150 BPS over a 12-month
period. The results of this analysis were not material in comparison to our
financial results.
FOREIGN EXCHANGE FORWARD AND OPTION CONTRACTS
We enter into foreign exchange forward contracts to offset the impact of
currency fluctuations on certain nonfunctional currency assets and liabilities,
primarily denominated in Australian, Canadian, Japanese, Korean, and several
European currencies, primarily the euro and British pound. We also periodically
hedge anticipated transactions with purchased currency options.
The foreign exchange forward and option contracts we enter into generally have
original maturities ranging from one to three months. We do not enter into
foreign exchange forward and option contracts for trading purposes. We do not
expect gains or losses on these contracts to have a material impact on our
financial results (see Note 8 to the Consolidated Financial Statements).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- -------- -------- --------
NET SALES $ 18,928 $ 12,173 $ 8,489
Cost of sales 6,746 4,259 2,924
-------- -------- --------
GROSS MARGIN 12,182 7,914 5,565
Operating expenses:
Research and development 2,704 1,663 1,052
Sales and marketing 3,946 2,465 1,579
General and administrative 633 381 247
Amortization of goodwill and purchased
intangible assets 291 61 23
In-process research and development 1,373 471 594
-------- -------- --------
Total operating expenses 8,947 5,041 3,495
-------- -------- --------
OPERATING INCOME 3,235 2,873 2,070
Net gains realized on minority investments 531 -- 5
Interest and other income, net 577 330 196
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,343 3,203 2,271
Provision for income taxes 1,675 1,180 940
-------- -------- --------
NET INCOME $ 2,668 $ 2,023 $ 1,331
======== ======== ========
Net income per common share--basic $ 0.39 $ 0.30 $ 0.21
======== ======== ========
Net income per common share--diluted $ 0.36 $ 0.29 $ 0.20
======== ======== ========
Shares used in per-common share calculation--basic 6,917 6,646 6,312
======== ======== ========
Shares used in per-common share calculation--diluted 7,438 7,062 6,658
======== ======== ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
July 29, July 31,
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 4,234 $ 913
Short-term investments 1,291 1,189
Accounts receivable, net of allowance for doubtful
accounts of $43 at 2000 and $27 at 1999 2,299 1,250
Inventories, net 1,232 658
Deferred tax assets 1,091 580
Prepaid expenses and other current assets 963 171
-------- --------
Total current assets 11,110 4,761
Investments 13,688 7,032
Restricted investments 1,286 1,080
Property and equipment, net 1,426 825
Goodwill and purchased intangible assets, net 4,087 460
Lease receivables 527 500
Other assets 746 235
-------- --------
TOTAL ASSETS $ 32,870 $ 14,893
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 739 $ 374
Income taxes payable 233 630
Accrued compensation 1,317 679
Deferred revenue 1,386 724
Other accrued liabilities 1,521 631
-------- --------
Total current liabilities 5,196 3,038
Commitments and contingencies (Note 8)
Deferred tax liabilities 1,132 --
Minority interest 45 44
Shareholders' equity:
Preferred stock, no par value: 5 shares authorized;
none issued and outstanding -- --
Common stock and additional paid-in capital, $0.001 par
value: 20,000 shares authorized; 7,138 and 6,821
shares issued and outstanding at 2000 and 1999,
respectively 14,609 5,731
Retained earnings 8,358 5,782
Accumulated other comprehensive income 3,530 298
-------- --------
Total shareholders' equity 26,497 11,811
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,870 $ 14,893
======== ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- -------- -------- --------
Cash flows from operating activities:
Net income $ 2,668 $ 2,023 $ 1,331
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 863 489 329
Provision for doubtful accounts 40 19 43
Provision for inventory allowances 339 151 161
Deferred income taxes (782) (247) (76)
Tax benefits from employee stock option plans 2,495 837 422
Adjustment to conform fiscal year ends of pooled acquisitions (18) 1 --
In-process research and development 1,279 379 436
Gains on minority investments (92) -- --
Change in operating assets and liabilities:
Accounts receivable (1,043) 45 (166)
Inventories (887) (443) (267)
Prepaid expenses and other current assets (249) (101) 21
Accounts payable 286 111 32
Income taxes payable (365) 217 155
Accrued compensation 576 285 123
Deferred revenue 662 385 156
Other accrued liabilities 369 174 165
-------- -------- --------
Net cash provided by operating activities 6,141 4,325 2,865
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (2,473) (1,250) (1,611)
Proceeds from sales and maturities of short-term investments 2,481 1,660 1,751
Purchases of investments (14,778) (5,632) (3,561)
Proceeds from sales and maturities of investments 13,240 1,994 1,107
Purchases of restricted investments (458) (1,101) (527)
Proceeds from sales and maturities of restricted investments 206 560 337
Acquisition of property and equipment (1,086) (602) (429)
Purchases of technology licenses (444) (95) --
Acquisition of businesses, net of cash and cash equivalents 24 (19) --
Net investment in lease receivables (535) (310) (171)
Other (554) (190) 1
-------- -------- --------
Net cash used in investing activities (4,377) (4,985) (3,103)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 1,564 947 555
Other (7) 7 (7)
-------- -------- --------
Net cash provided by financing activities 1,557 954 548
-------- -------- --------
Net increase in cash and cash equivalents 3,321 294 310
Cash and cash equivalents, beginning of fiscal year 913 619 309
-------- -------- --------
Cash and cash equivalents, end of fiscal year $ 4,234 $ 913 $ 619
======== ======== ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
Common Stock Accumulated
Common Stock and Other Total
Number of Additional Retained Comprehensive Shareholders'
Shares Paid-In Capital Earnings Income Equity
------------ -------------- ---------- ------------- -------------
BALANCE AT JULY 26, 1997 6,163 $ 1,814 $ 2,478 $ 40 $ 4,332
Net income -- -- 1,331 -- 1,331
Change in net unrealized gains on investments -- -- -- 28 28
Translation adjustments -- -- -- (10) (10)
--------
Comprehensive income -- -- -- -- 1,349
--------
Issuance of common stock 280 555 -- -- 555
Tax benefits from employee stock option plans -- 422 -- -- 422
Pooling of interests acquisitions 6 12 (9) -- 3
Purchase acquisitions 42 536 -- -- 536
-------- -------- -------- -------- --------
BALANCE AT JULY 25, 1998 6,491 3,339 3,800 58 7,197
Net income -- -- 2,023 -- 2,023
Change in net unrealized gains on investments -- -- -- 234 234
Translation adjustments -- -- -- 6 6
--------
Comprehensive income -- -- -- -- 2,263
--------
Issuance of common stock 300 947 -- -- 947
Tax benefits from employee stock option plans -- 837 -- -- 837
Pooling of interests acquisitions 4 38 (42) -- (4)
Purchase acquisitions 26 570 -- -- 570
Adjustment to conform fiscal year
ends of pooled acquisitions -- -- 1 -- 1
-------- -------- -------- -------- --------
BALANCE AT JULY 31, 1999 6,821 5,731 5,782 298 11,811
Net income -- -- 2,668 -- 2,668
Change in net unrealized gains on investments -- -- -- 3,240 3,240
Translation adjustments -- -- -- (8) (8)
--------
Comprehensive income -- -- -- -- 5,900
--------
Issuance of common stock 219 1,564 -- -- 1,564
Tax benefits from employee stock option plans -- 3,077 -- -- 3,077
Pooling of interests acquisitions 20 75 (74) -- 1
Purchase acquisitions 78 4,162 -- -- 4,162
Adjustment to conform fiscal year
ends of pooled acquisitions -- -- (18) -- (18)
-------- -------- -------- -------- --------
BALANCE AT JULY 29, 2000 7,138 $ 14,609 $ 8,358 $ 3,530 $ 26,497
======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. and its subsidiaries ("Cisco" or the "Company") is the
worldwide leader in networking for the Internet. Cisco hardware, software, and
service offerings are used to create Internet solutions so that individuals,
companies, and countries have seamless access to information - regardless of
differences in time and place. Cisco solutions provide competitive advantage to
our customers through more efficient and timely exchange of information, which
in turn leads to cost savings, process efficiencies, and closer relationships
with their customers, prospects, business partners, suppliers, and employees.
These solutions form the networking foundation for companies, universities,
utilities, and government agencies worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR The Company's fiscal year is the 52 or 53 weeks ending on the last
Saturday in July. Fiscal 2000, 1999, and 1998 were 52-week, 53-week, and 52-week
fiscal years, respectively.
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the
accounts of Cisco Systems, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents. Substantially all cash and cash
equivalents are custodied with three major financial institutions.
INVESTMENTS The Company's investments comprise U.S., state, and municipal
government obligations; corporate debt securities; and public corporate equity
securities. Investments with maturities of less than one year are considered
short-term and are carried at fair value. All investments are primarily held in
the Company's name and custodied with two major financial institutions. The
specific identification method is used to determine the cost of securities
disposed. At July 29, 2000 and July 31, 1999, substantially all of the Company's
investments were classified as available for sale. Unrealized gains and losses
on these investments are included as a separate component of shareholders'
equity, net of any related tax effect.
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The Company also has certain other minority investments in nonpublicly traded
companies. These investments are included in other assets on the Company's
balance sheet and are generally carried at cost. The Company monitors these
investments for impairment and makes appropriate reductions in carrying values
when necessary.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on a first-in,
first-out basis.
RESTRICTED INVESTMENTS Restricted investments consist of U.S. government
obligations with maturities of more than one year. These investments are carried
at fair value and are restricted as to withdrawal. Restricted investments are
held in the Company's name and custodied with two major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's
financial instruments, including cash and cash equivalents, accrued
compensation, and other accrued liabilities, approximate fair value because of
their short maturities. The fair values of investments are determined using
quoted market prices for those securities or similar financial instruments.
CONCENTRATIONS Cash and cash equivalents are primarily maintained with three
major financial institutions in the United States. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company performs ongoing credit evaluations of its customers and, with the
exception of certain financing transactions, does not require collateral from
its customers.
The Company receives certain of its components from sole suppliers.
Additionally, the Company relies on a limited number of hardware manufacturers.
The inability of any supplier or manufacturer to fulfill supply requirements of
the Company could materially impact future operating results.
REVENUE RECOGNITION The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, fee is
fixed or determinable, and collectibility is probable. Revenue from service
obligations is deferred and generally recognized ratably over the period of the
obligation. The Company makes certain sales to partners in two-tier distribution
channels. These partners are generally given privileges to return a portion of
inventory and participate in various cooperative marketing programs. The Company
recognizes
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revenue to two-tier distributors based on estimates which approximate the point
products have been sold by the distributors and also maintains accruals and
allowances for all cooperative marketing and other programs. The Company accrues
for warranty costs, sales returns, and other allowances based on its experience.
LEASE RECEIVABLES Cisco provides a variety of lease financing services to its
customers to build, maintain, and upgrade their networks. Lease receivables
represent the principal balance remaining in sales-type and direct-financing
leases under these programs. These leases typically have two to three year terms
and are collateralized by a security interest in the underlying assets.
ADVERTISING COSTS The Company expenses all advertising costs as incurred.
SOFTWARE DEVELOPMENT COSTS Software development costs, which are required to be
capitalized pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," have not been material to date.
DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives of 24 to 30 months are used on computer equipment
and related software and production and engineering equipment and five years for
office equipment, furniture, and fixtures. Depreciation and amortization of
leasehold improvements is computed using the shorter of the remaining lease term
or five years.
GOODWILL AND PURCHASED INTANGIBLE ASSETS Goodwill and purchased intangible
assets are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally three to five years.
INCOME TAXES Income tax expense is based on pre-tax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
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COMPUTATION OF NET INCOME PER COMMON SHARE Basic net income per common share is
computed using the weighted-average number of common shares outstanding during
the period. Diluted net income per common share is computed using the
weighted-average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options. Share and per-common share data for all periods presented reflect
the two-for-one stock split effective March 2000.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of non-U.S. subsidiaries
that operate in a local currency environment are translated to U.S. dollars at
exchange rates in effect at the balance sheet date with the resulting
translation adjustments recorded directly to a separate component of
shareholders' equity. Income and expense accounts are translated at average
exchange rates during the year. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in income.
DERIVATIVES The Company enters into foreign exchange forward contracts to
minimize the short-term impact of foreign currency fluctuations on assets and
liabilities denominated in currencies other than the functional currency of the
reporting entity. All foreign exchange forward contracts are highly inversely
correlated to the hedged items and are designated as, and considered effective
as, hedges of the underlying assets or liabilities. Gains and losses on the
contracts are included in interest and other income, net, and offset foreign
exchange gains or losses from the revaluation of intercompany balances or other
current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity. Fair values of foreign exchange
forward contracts are determined using published rates. If a derivative contract
terminates prior to maturity, the investment is shown at its fair value with the
resulting gain or loss reflected in interest and other income, net. The Company
periodically hedges anticipated transactions with purchased currency options.
The premium paid is amortized over the life of the option while any intrinsic
value is recognized in income during the same period as the hedged transaction.
MINORITY INTEREST Minority interest represents the preferred stockholders'
proportionate share of the equity of Cisco Systems, K.K. (Japan). At July 29,
2000, the Company owned all issued and outstanding common stock amounting to
73.2% of the voting rights. Each share of preferred stock is convertible into
one share of common stock at any time at the option of the holder.
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USE OF ESTIMATES The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the Consolidated Financial Statements and accompanying notes.
Estimates are used for, but not limited to, the accounting for the allowance for
doubtful accounts, inventory allowances, depreciation and amortization, sales
returns, warranty costs, taxes, and contingencies.
Actual results could differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset
and its eventual disposition. Measurement of an impairment loss for long-lived
assets and certain identifiable intangible assets that management expects to
hold and use are based on the fair value of the asset. Long-lived assets and
certain identifiable intangible assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Management does not expect the
initial adoption of SFAS 133 to have a material effect on the Company's
operations or financial position. The Company is required to adopt SFAS 133 in
the first quarter of fiscal 2001.
In September 1999, the FASB issued Emerging Issues Task Force Topic No. D-83,
"Accounting for Payroll Taxes Associated with Stock Option Exercises" ("EITF
D-83"). EITF D-83 requires that payroll tax paid on the difference between the
exercise price and the fair value of acquired stock in association with an
employee's exercise of stock options be recorded as operating expenses. Payroll
tax on stock option exercises of $51 million was expensed in fiscal 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101, as amended, summarizes certain of the SEC's views in applying
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generally accepted accounting principles to revenue recognition in financial
statements. At this time, management does not expect the adoption of SAB 101 to
have a material effect on the Company's operations or financial position;
however, the SEC's final guidance for implementation has not been released to
date. The Company is required to adopt SAB 101 in the fourth quarter of fiscal
2001.
RECLASSIFICATIONS Certain reclassifications have been made to prior year
balances in order to conform to the current year presentation.
3. BUSINESS COMBINATIONS
POOLING OF INTERESTS COMBINATIONS
In fiscal 2000, the Company acquired StratumOne Communications, Inc.
("StratumOne"); TransMedia Communications, Inc. ("TransMedia"); Cerent
Corporation ("Cerent"); WebLine Communications Corporation ("WebLine");
SightPath, Inc. ("SightPath"); InfoGear Technology Corporation ("InfoGear"); and
ArrowPoint Communications, Inc. ("ArrowPoint"), which were accounted for as
poolings of interests. All historical financial information has been restated to
reflect these acquisitions. In addition, the historical financial information
has been restated to reflect the acquisition of Fibex Systems ("Fibex"), which
was completed in the fourth quarter of fiscal 1999 and accounted for as a
pooling of interests. These transactions are summarized as follows (in
millions):
Shares of
Cisco Stock
Issued, Including Fair Value of
Acquisition Date Acquired Company Options Assumed Acquisition
- ---------------- ---------------- --------------- -----------
May 1999 Fibex 11.5 $ 314
September 1999 StratumOne 13.3 $ 435
September 1999 TransMedia 13.9 $ 407
November 1999 Cerent 200.0 $ 6,900
November 1999 WebLine 8.6 $ 325
May 2000 SightPath 11.4 $ 800
June 2000 InfoGear 4.7 $ 301
June 2000 ArrowPoint 90.2 $ 5,700
All of these acquired companies used a calendar year end. In order for all
companies to operate on the same fiscal year, operations for the one-month
period ending July 31, 1999, which were not significant to the Company, have
been reflected as an adjustment to retained earnings in fiscal 2000. No
significant adjustments were necessary to conform accounting policies. However,
the companies' historical results have been adjusted to reflect the elimination
of previously provided valuation allowances on deferred tax assets. There were
no intercompany
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transactions requiring elimination in any period presented. The following table
shows the historical results for the periods prior to the mergers of these
entities (in millions):
Years Ended
Nine Months Ended -----------------------
April 29, July 31, July 25,
2000 1999 1998
-------- -------- --------
Net sales:
Cisco $ 13,147 $ 12,154 $ 8,488
Fibex -- 3 --
StratumOne -- -- --
TransMedia -- -- --
Cerent 35 10 --
WebLine 1 3 1
SightPath -- -- --
InfoGear -- -- --
ArrowPoint 25 3 --
-------- -------- --------
Total $ 13,208 $ 12,173 $ 8,489
======== ======== ========
Net income (loss):
Cisco $ 1,932 $ 2,096 $ 1,355
Fibex -- (13) (3)
StratumOne (3) (6) (1)
TransMedia (4) (7) --
Cerent (15) (31) (9)
WebLine (3) (4) (2)
SightPath (8) (2) --
InfoGear (15) (5) (5)
ArrowPoint (12) (5) (4)
-------- -------- --------
Total $ 1,872 $ 2,023 $ 1,331
======== ======== ========
In fiscal 1999, the Company acquired GeoTel Communications Corporation and
approximately 68 million shares of common stock were exchanged and options were
assumed for a fair value of $2 billion. The transaction was accounted for as a
pooling of interests and all periods presented prior to fiscal 1999 were
restated.
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OTHER POOLING OF INTERESTS COMBINATIONS COMPLETED AS OF JULY 29, 2000
The Company has also completed a number of other pooling transactions during the
three years ended July 29, 2000. The historical operations of these entities
were not material to the Company's consolidated operations on either an
individual or aggregate basis; therefore, prior period statements have not
been restated for these acquisitions. These transactions are summarized as
follows (in millions):
Shares of
Cisco Stock
Issued, Including Fair Value of
Fiscal Year Acquired Company Options Assumed Acquisition
- ----------- ---------------- --------------- -----------
1998 Precept Software, Inc. 6.0 $ 84
1999 Sentient Networks, Inc. 4.0 $ 131
2000 Cocom A/S 1.9 $ 66
2000 V-Bits, Inc. 2.8 $ 128
2000 Growth Networks, Inc. 5.6 $ 355
2000 Altiga Networks, Inc. 6.3 $ 335
2000 Compatible Systems
Corporation 3.8 $ 232
PURCHASE COMBINATIONS
During the three years ended July 29, 2000, the Company completed a number of
purchase acquisitions. The Consolidated Financial Statements include the
operating results of each business from the date of acquisition. Pro forma
results of operations have not been presented because the effects of these
acquisitions were not material on either an individual or an aggregate basis.
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The amounts allocated to in-process research and development ("in-process R&D")
were determined through established valuation techniques in the high-technology
communications equipment industry and were expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. Amounts allocated to goodwill and purchased intangible assets are
amortized on a straight-line basis over periods not exceeding five years. A
summary of purchase transactions is outlined as follows (in millions):
In-Process R&D Form of Consideration
Acquired Company Consideration Expense and Other Notes to Acquisition
- ---------------- ------------- ------- ------------------------------
FISCAL 2000
- -----------
Monterey Networks, Inc. $ 517 $ 354 Common stock and options assumed; $14
in liabilities assumed; goodwill and
other intangibles recorded of $154
The optical systems business of $2,018 $ 245 Common stock; $362 in liabilities
Pirelli S.p.A. assumed; goodwill and other
intangibles recorded of $1,717
Aironet Wireless Communications, $ 835 $ 243 Common stock and options assumed; $34
Inc. in liabilities assumed; goodwill and
other intangibles recorded of $589
Atlantech Technologies $ 179 $ 63 Cash of $92; common stock and options
assumed; $1 in liabilities assumed;
goodwill and other intangibles
recorded of $140
JetCell, Inc. $ 203 $ 88 Cash of $5; common stock and options
assumed; $2 in liabilities assumed;
goodwill and other intangibles
recorded of $137
PentaCom, Ltd. $ 102 $ 49 Cash of $26; common stock and options
assumed; goodwill and other
intangibles recorded of $40
Qeyton Systems $ 887 $ 260 Common stock; goodwill and other
intangibles recorded of $567
Other $ 228 $ 71 Cash of $31; common stock and options
assumed; $5 in liabilities assumed;
goodwill and other intangibles
recorded of $155
FISCAL 1999
- -----------
Summa Four, Inc. $ 129 $ 64 Common stock and options assumed; $16
in liabilities assumed; goodwill and
other intangibles recorded of $29
Clarity Wireless, Inc. $ 153 $ 94 Common stock and options assumed;
goodwill and other intangibles
recorded of $73
Selsius Systems, Inc. $ 134 $ 92 Cash of $111; options assumed;
goodwill and other intangibles
recorded of $41
PipeLinks, Inc. $ 118 $ 99 Common stock and options assumed;
goodwill and other intangibles
recorded of $11
Amteva Technologies, Inc. $ 159 $ 81 Common stock and options assumed; $9
in liabilities assumed; goodwill and
other intangibles recorded of $85
Other $ 58 $ 41 Common stock and options assumed;
goodwill and other intangibles
recorded of $18
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FISCAL 1998
- -----------
Dagaz Technologies, Inc. $ 130 $ 127 Cash of $108; $18 in common stock;
liabilities assumed of $4
LightSpeed International, Inc. $ 161 $ 143 Common stock and options assumed;
other intangibles recorded of $15
WheelGroup Corporation $ 124 $ 97 Common stock and options assumed;
goodwill and other intangibles
recorded of $38
NetSpeed International, Inc. $ 252 $ 179 Cash of $12; common stock and options
assumed; liabilities assumed of $18;
goodwill and other intangibles
recorded of $76
Other $ 51 $ 48 Cash of $38 and options assumed
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OTHER PURCHASE COMBINATIONS COMPLETED AS OF JULY 29, 2000
In fiscal 2000, the Company acquired Maxcomm Technologies, Inc.; Calista, Inc.;
Tasmania Network Systems, Inc.; Internet Engineering Group, LLC; Worldwide Data
Systems, Inc.; and Seagull Networks, Ltd. for a total purchase price of $228
million, paid in common stock and cash. Total in-process R&D related to these
acquisitions amounted to $71 million.
Total in-process R&D expense in fiscal 2000, 1999, and 1998 was $1.37 billion,
$471 million, and $594 million, respectively. The in-process R&D expense that
was attributable to stock consideration for the same periods was $1.28 billion,
$379 million, and $436 million, respectively.
4. BALANCE SHEET DETAIL
The following tables provide details of selected balance sheet items (in
millions):
July 29, July 31,
2000 1999
-------- --------
INVENTORIES, NET:
Raw materials $ 145 $ 143
Work in process 472 198
Finished goods 496 282
Demonstration systems 119 35
-------- --------
Total $ 1,232 $ 658
======== ========
PROPERTY AND EQUIPMENT, NET:
Leasehold improvements $ 607 $ 289
Computer equipment and related software 908 639
Production and engineering equipment 407 238
Office equipment, furniture, and fixtures 1,083 685
-------- --------
3,005 1,851
Less, accumulated depreciation and amortization (1,579) (1,026)
-------- --------
Total $ 1,426 $ 825
======== ========
GOODWILL AND PURCHASED INTANGIBLE ASSETS, NET:
Goodwill $ 2,937 $ 157
Purchased intangible assets 1,558 395
-------- --------
4,495 552
Less, accumulated amortization (408) (92)
-------- --------
Total $ 4,087 $ 460
======== ========
The following table presents the details of the amortization of goodwill and
purchased intangible assets as reported in the Consolidated Statements of
Operations:
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---------- --------- --------
Reported as:
Cost of sales $ 25 $ 1 $ --
Operating expenses 291 61 23
--------- -------- --------
Total $ 316 $ 62 $ 23
========= ======== ========
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5. LEASE RECEIVABLES
Lease receivables represent sales-type and direct-financing leases resulting
from the sale of the Company's and complementary third-party products and
services. These lease arrangements typically have terms from two to three years
and are usually collateralized by a security interest in the underlying assets.
The net lease receivables are summarized as follows (in millions):
July 29, July 31,
2000 1999
-------- --------
Gross lease receivables $ 1,310 $ 663
Unearned income and other reserves (195) (83)
-------- --------
Total 1,115 580
Less, current portion (588) (80)
-------- --------
Long-term lease receivables, net $ 527 $ 500
======== ========
Contractual maturities of the gross lease receivables at July 29, 2000 were $588
million in fiscal 2001, $354 million in fiscal 2002, $337 million in fiscal
2003, $29 million in fiscal 2004, and $2 million in fiscal 2005. Actual cash
collections may differ from the contractual maturities due to early customer
buyouts or refinancings. The current portion of lease receivables is included in
prepaid expenses and other current assets.
6. INVESTMENTS
The following tables summarize the Company's investments in securities (in
millions):
Gross Gross
Amortized Unrealized Unrealized Fair
JULY 29, 2000 Cost Gains Losses Value
- ------------- ---------- ----------- ----------- --------
U.S. government notes and bonds $ 2,317 $ -- $ (32) $ 2,285
State, municipal, and county
government notes and bonds 3,592 13 (41) 3,564
Corporate notes and bonds 3,222 1 (19) 3,204
Corporate equity securities 641 5,621 (37) 6,225
Mandatorily redeemable convertible
preferred stock 987 -- -- 987
--------- --- ------ --------
Total $ 10,759 $5,635 $ (129) $ 16,265
========= ====== ======= ========
Reported as:
Short-term investments $ 1,291
Investments 13,688
Restricted investments 1,286
--------
Total $ 16,265
========
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Gross Gross
Amortized Unrealized Unrealized Fair
JULY 31, 1999 Cost Gains Losses Value
- ------------- ---------- ---------- ---------- -------
U.S. government notes and bonds $ 2,187 $ -- $ (29) $ 2,158
State, municipal, and county
government notes and bonds 5,177 5 (44) 5,138
Corporate notes and bonds 1,145 -- (17) 1,128
Corporate equity securities 288 615 (26) 877
------- ----- ----- --------
Total $ 8,797 $ 620 $(116) $ 9,301
======= ===== ====== ========
Reported as:
Short-term investments $ 1,189
Investments 7,032
Restricted investments 1,080
--------
Total $ 9,301
========
Net gains realized on minority investments were $531 million in fiscal 2000. The
net gains realized on minority investments that were attributable to noncash
activity were $92 million in fiscal 2000. The net gains realized on minority
investments were not material in fiscal 1999 and were $5 million in fiscal 1998.
The following table summarizes debt investment and mandatorily redeemable
convertible preferred stock maturities (including restricted investments) at
July 29, 2000 (in millions):
Amortized Cost Fair Value
-------------- ----------
Less than one year $ 1,753 $ 1,744
Due in 1-2 years 1,930 1,922
Due in 2-5 years 4,218 4,161
Due after 5 years 2,217 2,213
-------- --------
Total $ 10,118 $ 10,040
======== ========
7. LINE OF CREDIT
At July 29, 2000, the Company had a syndicated credit agreement under the terms
of which a group of banks committed a maximum of $500 million on an unsecured,
revolving basis for borrowings of various maturities. The commitments made under
this agreement expire on July 1, 2002. Under the terms of the agreement,
borrowings bear interest at a spread over the London Interbank Offered Rate
based on certain financial criteria and third-party rating assessments. As of
July 29, 2000, this spread was 17.5 basis points. From this spread, a commitment
fee of 5.5 basis points is assessed against any undrawn amounts. The agreement
includes a single financial covenant that places a variable floor on tangible
net worth, as defined, if certain leverage ratios are exceeded. There have been
no borrowings under this agreement to date.
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8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into several agreements to lease 448 acres of land
located in San Jose, California, where it has established its headquarters
operations, and 759 acres of land located in Boxborough, Massachusetts; Salem,
New Hampshire; Richardson, Texas; and Research Triangle Park, North Carolina,
where it has expanded certain research and development and customer-support
activities.
All of the leases have initial terms of five to seven years and options to renew
for an additional three to five years, subject to certain conditions. At any
time during the terms of these leases, the Company may purchase the land. If the
Company elects not to purchase the land at the end of each of the leases, the
Company has guaranteed a residual value of $624 million.
The Company has also entered into agreements to lease certain buildings standing
or to be constructed on the land described above. The lessors of the buildings
have committed to fund up to a maximum of $1.40 billion (subject to reductions
based on certain conditions in the respective leases) for the construction of
the buildings, with the portion of the committed amount actually used to be
determined by the Company. Rent obligations for the buildings commenced on
various dates and will expire at the same time as the land leases.
The Company has options to renew the building leases for an additional three to
five years, subject to certain conditions. The Company may, at its option,
purchase the buildings during or at the end of the terms of the leases at
approximately the amount expended by the lessors to construct the buildings. If
the Company does not exercise the purchase options by the end of the leases, the
Company will guarantee a residual value of the buildings as determined at the
lease inception date of each agreement (approximately $748 million at July 29,
2000).
As part of the above lease transactions, the Company restricted $1.29 billion of
its investment securities as collateral for specified obligations of the lessors
under the leases. These investment securities are restricted as to withdrawal
and are managed by a third party subject to certain limitations under the
Company's investment policy. In addition, the Company must maintain a minimum
consolidated tangible net worth, as defined.
The Company also leases office space in Santa Clara, California; Chelmsford,
Massachusetts; and for its various U.S. and international sales offices.
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Future annual minimum lease payments under all noncancelable operating leases as
of July 29, 2000 are as follows (in millions):
FISCAL YEAR
2001 $ 302
2002 299
2003 310
2004 251
2005 237
Thereafter 1,506
-------
Total $ 2,905
=======
Rent expense totaled $229 million, $123 million, and $90 million for fiscal
2000, 1999, and 1998, respectively.
FOREIGN EXCHANGE FORWARD AND OPTION CONTRACTS
The Company conducts business on a global basis in several major currencies. As
such, it is exposed to adverse movements in foreign currency exchange rates. The
Company enters into foreign exchange forward contracts to reduce the impact of
certain currency exposures. These contracts hedge exposures associated with
nonfunctional currency assets and liabilities denominated in Australian,
Canadian, Japanese, Korean, and several European currencies, primarily the euro
and British pound.
The Company does not enter into foreign exchange forward contracts for trading
purposes. Gains and losses on the contracts are included in interest and other
income, net, and offset foreign exchange gains or losses from the revaluation of
intercompany balances or other current assets and liabilities denominated in
currencies other than the functional currency of the reporting entity. The
Company's foreign exchange forward contracts generally range from one to three
months in original maturity.
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The Company periodically hedges anticipated transactions with purchased
currency options. A purchased currency option's premium is amortized over the
life of the option while any intrinsic value is recognized in income during the
same period as the hedged transaction. The deferred premium and intrinsic value
from hedging anticipated transactions were not material at July 29, 2000. In the
unlikely event that the underlying transaction terminates or becomes improbable,
the remaining premium or deferred intrinsic value will be recorded in the
Consolidated Statements of Operations. The Company does not purchase currency
options for trading purposes. Foreign exchange forward and option contracts as
of July 29, 2000 are summarized as follows (in millions):
Notional Carrying Fair
Amount Value Value
--------- -------- -------
Forward contracts:
Assets $ 1,377 $ (5) $ (15)
Liabilities $ 1,500 $ 12 $ 37
Option contracts:
Assets $ 561 $ 12 $ 14
The Company's foreign exchange forward and option contracts contain credit risk
to the extent that its bank counterparties may be unable to meet the terms of
the agreements. The Company minimizes such risk by limiting its counterparties
to major financial institutions. In addition, the potential risk of loss with
any one party resulting from this type of credit risk is monitored. Management
does not expect any material losses as a result of default by other parties.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings, claims, and litigation arising in
the ordinary course of business. While the outcome of these matters is currently
not determinable, management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on the Company's consolidated
financial position, results of operations, or cash flows.
9. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
On November 10, 1999, the shareholders of the Company approved an increase to
the authorized number of shares of common stock from 5.40 billion to 10 billion
shares. On March 20, 2000, the Board of Directors of the Company approved an
increase to the authorized number of shares of common stock from 10 billion to
20
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billion shares relating to the two-for-one stock split distributed on March 22,
2000.
STOCK SPLIT
The Board of Directors authorized the splitting of the Company's common stock on
a two-for-one basis for shareholders of record on February 22, 2000 and the
resulting shares from the split were distributed on March 22, 2000. All
references to share and per-share data for all periods presented have been
adjusted to give effect to this two-for-one stock split.
SHAREHOLDERS' RIGHTS PLAN
In June 1998, the Board of Directors approved a Shareholders' Rights Plan
("Rights Plan"). The Rights Plan is intended to protect shareholders' rights in
the event of an unsolicited takeover attempt. It is not intended to prevent a
takeover of the Company on terms that are favorable and fair to all shareholders
and will not interfere with a merger approved by the Board of Directors. Each
right entitles shareholders to buy a unit equal to a portion of a new share of
Series A Preferred Stock of the Company. The rights will be exercisable only if
a person or a group acquires or announces a tender or exchange offer to acquire
15% or more of the Company's common stock.
In the event the rights become exercisable, the Rights Plan allows for Cisco
shareholders to acquire, at an exercise price of $108 per right owned, stock of
the surviving corporation having a market value of $217, whether or not Cisco is
the surviving corporation. The rights, which expire in June 2008, are redeemable
for $0.00017 per right at the approval of the Board of Directors.
PREFERRED STOCK
Under the terms of the Company's Articles of Incorporation, the Board of
Directors may determine the rights, preferences, and terms of the Company's
authorized but unissued shares of preferred stock.
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COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
millions):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
----------- --------- --------- ---------
Net income $ 2,668 $ 2,023 $ 1,331
Other comprehensive income (loss):
Change in net unrealized gains on investments,
net of tax of $1,762, $144, and $17
in fiscal 2000, 1999, and 1998, respectively 3,240 234 25
Reclassification for net unrealized gains
previously included in net income, net of tax
of $2 in fiscal 1998 -- -- 3
--------- --------- ---------
Net unrealized gains 3,240 234 28
Change in accumulated translation adjustments (8) 6 (10)
--------- --------- ---------
Total $ 5,900 $ 2,263 $ 1,349
========= ========= =========
10. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which 222 million shares of common stock have been reserved for issuance.
Eligible employees may purchase a limited number of shares of the Company's
common stock at 85% of the market value at certain plan-defined dates. The
Purchase Plan terminates on January 3, 2005. In fiscal 2000, 1999, and 1998,
seven million, 10 million, and 14 million shares, respectively, were issued
under the Purchase Plan. At July 29, 2000, 123 million shares were available for
issuance under the Purchase Plan.
EMPLOYEE STOCK OPTION PLANS
The Company has two main stock option plans: the 1987 Stock Option Plan (the
"Predecessor Plan") and the 1996 Stock Incentive Plan (the "1996 Plan").
The Predecessor Plan was terminated in 1996. All outstanding options under the
Predecessor Plan were transferred to the 1996 Plan. However, all outstanding
options under the Predecessor Plan continue to be governed by the terms and
conditions of the existing option agreements for those grants.
The maximum number of shares under the 1996 Plan was initially limited to the
620 million shares transferred from the Predecessor Plan. However, under the
terms of the 1996 Plan, the share reserve increased each December for the three
fiscal years beginning with fiscal 1997, by an amount equal to 4.75% of the
outstanding shares on the last trading day of the immediately preceding
November. In fiscal 1999, the Company's shareholders
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approved the extension of the automatic share increase provision of the 1996
Plan for an additional three-year period.
Although the Board of Directors has the authority to set other terms, the
options are generally 20% or 25% exercisable one year from the date of grant and
then ratably over the following 48 or 36 months, respectively. Options issued
under the Predecessor Plan generally had terms of four years. New options
granted under the 1996 Plan expire no later than nine years from the grant date.
A summary of option activity follows (in millions, except per-share amounts):
Options Outstanding
-----------------------------
Weighted-Average
Options Available Exercise Price
for Grant Options per Share
----------------- ------- ----------------
BALANCE AT JULY 26, 1997 96 810 $ 4.05
Granted and assumed (282) 282 10.00
Exercised -- (168) 2.40
Canceled 48 (48) 4.59
Additional shares reserved 314 -- --
----- ---- --------
BALANCE AT JULY 25, 1998 176 876 6.25
Granted and assumed (245) 245 22.22
Exercised -- (210) 3.09
Canceled 22 (22) 10.85
Additional shares reserved 359 -- --
----- ---- --------
BALANCE AT JULY 31, 1999 312 889 11.22
Granted and assumed (295) 295 52.10
Exercised -- (176) 5.75
Canceled 37 (37) 22.70
Additional shares reserved 339 -- --
----- ---- --------
BALANCE AT JULY 29, 2000 393 971 $ 24.19
===== ==== ========
The Company has, in connection with the acquisitions of various companies,
assumed the stock option plans of each acquired company. During fiscal 2000, a
total of approximately 31 million shares of the Company's common stock have been
reserved for issuance under the assumed plans and the related options are
included in the preceding table.
In 1997, the Company adopted a Supplemental Stock Incentive Plan (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 9,000 shares are subject to outstanding options and 66,600 shares have
been issued in fiscal 2000.
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The following table summarizes information concerning outstanding and
exercisable options at July 29, 2000 (in millions, except number of years and
per-share amounts):
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in Years) per Share Exercisable per Share
- --------------- ----------- ---------------------- ----------------- ----------- ----------------
$ 0.01-5.56 229 5.20 $ 5.23 188 $ 4.44
5.57-12.27 258 6.16 9.56 162 8.95
12.28-28.61 194 7.49 23.59 63 22.47
28.62-54.53 241 8.34 49.91 5 31.02
54.54-72.56 49 8.64 65.65 -- --
---- ---- -------- --- --------
Total 971 6.87 $ 24.19 418 $ 9.22
==== ==== ======== === ========
At July 31, 1999 and July 25, 1998, approximately 370 million and 312 million
outstanding options, respectively, were exercisable. The weighted-average
exercise prices for outstanding options were $5.75 and $3.64 at July 31, 1999
and July 25, 1998, respectively.
The Company is required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to disclose pro
forma information regarding option grants made to its employees based on
specified valuation techniques that produce estimated compensation charges.
These amounts have not been reflected in the Company's Consolidated Statements
of Operations because no compensation charge arises when the price of the
employees' stock options equals the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees.
Pro forma information under SFAS 123 is as follows (in millions, except
per-share amounts):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---- ---- ----
Net income--as reported $ 2,668 $ 2,023 $ 1,331
Net income--pro forma $ 1,549 $ 1,487 $ 1,074
Basic net income per common share--as reported $ 0.39 $ 0.30 $ 0.21
Diluted net income per common share--as reported $ 0.36 $ 0.29 $ 0.20
Basic net income per common share--pro forma $ 0.22 $ 0.22 $ 0.17
Diluted net income per common share--pro forma $ 0.21 $ 0.21 $ 0.16
The fair 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 Plan
---------------------------------- -----------------------------------
July 29, July 31, July 25, July 29, July 31, July 25,
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Expected dividend
yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest
rate 6.4% 5.1% 5.7% 5.3% 4.9% 5.4%
Expected volatility 33.9% 40.2% 35.6% 43.3% 47.2% 44.8%
Expected life
(in years) 3.1 3.1 3.1 0.5 0.5 0.5
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The Black-Scholes option pricing model was developed for use in estimating the
fair 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. The
Company uses projected volatility rates which are based upon historical
volatility rates 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 fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's options. The weighted-average estimated fair values of employee stock
options granted during fiscal 2000, 1999, and 1998 were $19.44, $8.40, and $3.57
per share, respectively.
The above pro forma disclosures under SFAS 123 are also not likely to be
representative of the effects on net income and net income per common share in
future years, because they do not take into consideration pro forma compensation
expense related to grants made prior to fiscal 1996.
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.
Employees may contribute from 1% to 15% of their annual compensation to the
Plan, limited to a maximum annual amount as set periodically by the Internal
Revenue Service. The Company matches employee contributions dollar for dollar up
to a maximum of $1,500 per year per person. All matching contributions vest
immediately. In addition, the Plan provides for discretionary contributions as
determined by the Board of Directors. Such contributions to the Plan are
allocated among eligible participants in the proportion of their salaries to the
total salaries of all participants. The Company's matching contributions to the
Plan totaled $34 million, $20 million, and $15 million in fiscal 2000, 1999, and
1998, respectively. No discretionary contributions were made in fiscal 2000,
1999, or 1998.
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11. INCOME TAXES
The provision for (benefit from) income taxes consisted of (in millions):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---- ---- ----
Federal:
Current $ 1,843 $ 1,164 $ 855
Deferred (652) (221) (54)
--------- -------- -------
1,191 943 801
-------- -------- -------
State:
Current 282 112 87
Deferred (118) (24) (8)
--------- -------- -------
164 88 79
--------- -------- -------
Foreign:
Current 332 151 74
Deferred (12) (2) (14)
--------- -------- -------
320 149 60
-------- -------- -------
Total provision for income taxes $ 1,675 $ 1,180 $ 940
======== ======== =======
The Company paid income taxes of $327 million, $301 million, and $440 million in
fiscal 2000, 1999, and 1998, respectively. Income before provision for income
taxes consisted of (in millions):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
----------- ---- ---- ----
United States $ 2,544 $ 2,092 $ 1,950
International 1,799 1,111 321
-------- -------- --------
$ 4,343 $ 3,203 $ 2,271
======== ======== ========
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes consisted of:
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal tax benefit 1.9 2.2 2.2
Foreign sales corporation (1.9) (1.6) (2.4)
Foreign income at other than U.S. rates (1.6) (1.0) --
Nondeductible in-process R&D 8.1 3.9 6.4
Tax-exempt interest (1.8) (1.9) (1.6)
Tax credits (1.6) (1.2) (1.4)
Other, net 0.5 1.5 3.2
----- ----- -----
Total 38.6% 36.9% 41.4%
===== ===== =====
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U.S. income taxes and foreign withholding taxes were not provided for on a
cumulative total of approximately $411 million of undistributed earnings for
certain non-U.S. subsidiaries. The Company intends to reinvest these earnings
indefinitely in operations outside the United States. The components of the
deferred tax assets (liabilities) follow (in millions):
July 29, July 31,
2000 1999
-------- --------
ASSETS
Allowance for doubtful accounts and returns $ 418 $ 185
In-process R&D 265 163
Inventory allowances and capitalization 94 57
Accrued state franchise tax -- 32
Depreciation 41 28
Deferred revenue 177 65
Credits and net operating loss carryforwards 1,023 --
Other 451 256
-------- --------
Gross deferred tax assets 2,469 786
Valuation allowance (299) --
-------- --------
Total deferred tax assets 2,170 786
-------- --------
LIABILITIES
Purchased intangible assets (257) (88)
Unrealized gain on investments (1,954) (192)
-------- --------
Total deferred tax liabilities (2,211) (280)
-------- --------
Total $ (41) $ 506
======== ========
The noncurrent portion of the deferred tax liabilities, which totaled $74
million at July 31, 1999, is included in other assets.
The Company has provided a valuation allowance on certain of its deferred tax
assets because of uncertainty regarding their realizability due to expectation
of future employee stock option exercises. Deferred tax assets of approximately
$963 million at July 29, 2000 pertain to certain tax credits and net operating
loss carryforwards resulting from the exercise of employee stock options. When
recognized, the tax benefit of these credits and losses will be accounted for as
a credit to shareholders' equity rather than as a reduction of the income tax
provision.
As of July 29, 2000, the Company's federal and state net operating loss
carryforwards for income tax purposes were approximately $496 million and $865
million, respectively. If not utilized, the federal net operating loss
carryforwards will begin to expire in fiscal 2020, and the state net operating
loss carryforwards will begin to expire in fiscal 2005. As of July 29, 2000, the
Company's federal and state tax credit carryforwards for income tax purposes
were approximately $678 million and $197 million, respectively. If not utilized,
the federal and state tax credit carryforwards will begin to expire in fiscal
2005.
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The Company's income taxes payable for federal, state, and foreign purposes have
been reduced, and the deferred tax assets increased, by the tax benefits
associated with dispositions of employee stock options. The Company receives an
income tax benefit calculated as the difference between the fair market value of
the stock issued at the time of exercise and the option price, tax effected.
These benefits were credited directly to shareholders' equity and amounted to
$3.08 billion, $837 million, and $422 million for fiscal 2000, 1999, and 1998,
respectively. Benefits reducing taxes payable amounted to $2.49 billion, $837
million, and $422 million for fiscal 2000, 1999, and 1998, respectively.
Benefits increasing gross deferred tax assets amounted to $582 million in fiscal
2000.
12. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company's operations involve the design, development, manufacture,
marketing, and technical support of networking products and services. The
Company offers end-to-end networking solutions for its customers. Cisco products
include routers, LAN and ATM switches, dial-up access servers, and
network-management software. These products, integrated by the Cisco IOS(R)
software, link geographically dispersed LANs, WANs, and IBM networks.
The Company conducts business globally and is managed geographically. The
Company's management relies on an internal management system that provides sales
and standard cost information by geographic theater. Sales are attributed to a
theater based on the ordering location of the customer. The Company's management
makes financial decisions and allocates resources based on the information it
receives from this internal management system. The Company does not allocate
research and development, sales and marketing, or general and administrative
expenses to its geographic theaters as management does not use this information
to measure the performance of the operating segments. Management does not
believe that allocating these expenses is material in evaluating a geographic
theater's performance. Information from this internal management system differs
from the amounts reported under generally accepted accounting principles due to
certain corporate level adjustments not included in the internal management
system. These corporate level adjustments are primarily sales adjustments
relating to revenue deferrals and reserves, credit memos, returns, and other
timing differences. Based on established criteria, the Company has four
reportable segments: the Americas; Europe, the Middle East, and Africa ("EMEA");
Asia Pacific; and Japan.
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Summarized financial information by theater for fiscal 2000, 1999, and 1998, as
taken from the internal management system discussed previously, is as follows
(in millions):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---- ---- ----
Net sales:
Americas $ 12,924 $ 8,088 $ 5,732
EMEA 4,770 3,216 2,114
Asia Pacific 1,705 825 535
Japan 935 566 459
Sales adjustments (1,406) (522) (351)
---------- --------- ---------
Total $ 18,928 $ 12,173 $ 8,489
========= ========= =========
Gross margin:
Americas $ 9,412 $ 5,836 $ 4,261
EMEA 3,581 2,380 1,565
Asia Pacific 1,215 586 395
Japan 737 436 340
--------- --------- ---------
Standard margins 14,945 9,238 6,561
Sales adjustments (1,406) (522) (351)
Production overhead (455) (255) (207)
Manufacturing variances and other
related costs (902) (547) (438)
---------- --------- ---------
Total $ 12,182 $ 7,914 $ 5,565
========= ========= =========
The standard margins by geographic theater differ from the amounts recognized
under generally accepted accounting principles because the Company does not
allocate certain sales adjustments, production overhead, and manufacturing
variances and other related costs to the theaters. The above table reconciles
the net sales and standard margins by geographic theater to net sales and gross
margin as reported in the Consolidated Statements of Operations by including
such adjustments.
Enterprise-wide information provided on geographic sales is based on the
ordering location of the customer. Property and equipment information is based
on the physical location of the assets. The following table presents net sales
and property and equipment information for geographic areas (in millions):
July 29, July 31, July 25,
2000 1999 1998
-------- -------- --------
Net sales:
United States $ 12,013 $ 7,454 $ 5,232
International 8,321 5,241 3,608
Sales adjustments (1,406) (522) (351)
-------- -------- --------
Total $ 18,928 $ 12,173 $ 8,489
======== ======== ========
Property and equipment, net:
United States $ 1,242 $ 711 $ 537
International 184 114 72
-------- -------- --------
Total $ 1,426 $ 825 $ 609
======== ======== ========
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The following table presents net sales for groups of similar products and
services (in millions):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- ---- ---- ----
Net sales:
Routers $ 7,611 $ 5,196 $ 3,856
Switches 7,509 5,167 3,613
Access 2,396 1,127 630
Other 2,818 1,205 741
Sales adjustments (1,406) (522) (351)
----------- ---------- --------
Total $ 18,928 $ 12,173 $ 8,489
========== ========== ========
Substantially all of the Company's assets at July 29, 2000 and July 31, 1999
were attributable to U.S. operations. In fiscal 2000, 1999, and 1998, no single
customer accounted for 10% or more of the Company's net sales.
13. NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted net income per
common share (in millions, except per-share amounts):
July 29, July 31, July 25,
Years Ended 2000 1999 1998
- ----------- --------- --------- ---------
Net income $ 2,668 $ 2,023 $ 1,331
========= ========= =========
Weighted-average shares--basic 6,917 6,646 6,312
Effect of dilutive securities:
Employee stock options 521 416 346
--------- --------- ---------
Weighted-average shares--diluted 7,438 7,062 6,658
========= ========= =========
Net income per common share--basic $ 0.39 $ 0.30 $ 0.21
========= ========= =========
Net income per common share--diluted $ 0.36 $ 0.29 $ 0.20
========= ========= =========
14. SUBSEQUENT EVENTS (UNAUDITED)
PENDING BUSINESS COMBINATIONS
The Company announced definitive agreements to acquire HyNEX, Ltd.; Netiverse,
Inc.; Komodo Technology, Inc.; NuSpeed Internet Systems, Inc.; IPmobile, Inc.;
and PixStream Incorporated for a total purchase price of approximately $1.76
billion, payable in common stock and cash. These acquisitions will be accounted
for as purchases and are expected to close in the first quarter of fiscal 2001.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Cisco Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Cisco
Systems, Inc. and its subsidiaries at July 29, 2000 and July 31, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended July 29, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
San Jose, California
August 8, 2000
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SUPPLEMENTARY FINANCIAL DATA(1) (Unaudited)
(In millions, except per-share amounts)
July 29, April 29, Jan. 29, Oct. 30, July 31, May 1, Jan. 23, Oct. 24,
2000 2000 2000 1999 1999 1999 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 5,720 $ 4,933 $ 4,357 $ 3,918 $ 3,558 $ 3,172 $ 2,845 $ 2,598
Gross margin 3,662 3,172 2,818 2,530 2,297 2,059 1,857 1,701
Net income $ 796(2) $ 641(3) $ 816(4) $ 415(5) $ 605(6) $ 632(7) $ 279(8) $ 507(9)
Net income per common
share--basic* $ 0.11 $ 0.09 $ 0.12 $ 0.06 $ 0.09 $ 0.09 $ 0.04 $ 0.08
Net income per common
share--diluted* $ 0.11(2) $ 0.08(3) $ 0.11(4) $ 0.06(5) $ 0.08(6) $ 0.09(7) $ 0.04(8) $ 0.07(9)
* Reflects the two-for-one stock split effective March 2000.
(1) All historical financial information has been restated to reflect the
acquisitions that were accounted for as poolings of interests (see Note 3 to the
Consolidated Financial Statements).
(2) Net income and net income per common share include in-process research and
development expenses of $461 million, payroll tax on stock option exercises of
$26 million, amortization of goodwill and purchased intangible assets of $169
million, acquisition-related costs of $37 million, and net gains realized on
minority investments of $344 million. Pro forma net income and diluted net
income per common share, excluding these items net of tax of $53 million, were
$1.20 billion and $0.16, respectively.
(3) Net income and net income per common share include in-process research and
development expenses of $488 million, payroll tax on stock option exercises of
$25 million, amortization of goodwill and purchased intangible assets of $51
million, and net gains realized on minority investments of $156 million. Pro
forma net income and diluted net income per common share, excluding these items
net of tax benefits of $44 million, were $1.01 billion and $0.13, respectively.
(4) Net income and net income per common share include in-process research and
development expenses of $43 million, amortization of goodwill and purchased
intangible assets of $47 million, acquisition-related costs of $25 million, and
net gains realized on minority investments of $31 million. Pro forma net income
and diluted net income per common share, excluding these items net of tax
benefits of $3 million, were $897 million and $0.12, respectively.
(5) Net income and net income per common share include in-process research and
development expenses of $381 million and amortization of goodwill and purchased
intangible assets of $24 million. Pro forma net income and diluted net income
per common share, excluding these items net of tax benefits of $6 million, were
$814 million and $0.11, respectively.
(6) Net income and net income per common share include in-process research and
development expenses of $81 million, amortization of goodwill and purchased
intangible assets of $19 million, and acquisition-related costs of $16 million.
Pro forma net income and diluted net income per common share, excluding these
items net of tax benefits of $11 million, were $710 million and $0.10,
respectively.
(7) Net income and net income per common share include amortization of goodwill
and purchased intangible assets of $19 million. Pro forma net income and diluted
net income per common share, excluding this item net of a tax benefit of $6
million, were $645 million and $0.09, respectively.
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(8) Net income and net income per common share include in-process research and
development expenses of $349 million and amortization of goodwill and purchased
intangible assets of $12 million. Pro forma net income and diluted net income
per common share, excluding these items net of tax benefits of $34 million, were
$606 million and $0.09, respectively.
(9) Net income and net income per common share include in-process research and
development expenses of $41 million and amortization of goodwill and purchased
intangible assets of $11 million. Pro forma net income and diluted net income
per common share, excluding these items net of tax benefits of $3 million, were
$556 million and $0.08, respectively.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information regarding Directors appearing under the
caption "Election of Directors" in the Company's Proxy Statement related to the
Annual Meeting of Shareholders to be held on November 14, 2000, which
information is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION
NAME AGE POSITION HELD SINCE
- ---- --- -------- ----------
Larry R. Carter 57 Senior Vice President, Finance and Administration, Chief 1997
Financial Officer, Secretary, and Director
Mr. Carter was elected to the Board of Directors in July
2000. He joined the Company in January 1995 as Vice
President for Finance and Administration, Chief Financial
Officer and Secretary. In July 1997, he was promoted to
his present position of Senior Vice President for Finance
and Administration, Chief Financial Officer and
Secretary. Prior to his services with the Company, he was
with Advanced Micro Devices, Inc. as the Vice President
and Corporate Controller. Mr. Carter currently serves on
the Board of Directors of eSpeed, Inc., Network
Appliance, Inc., and QLogic Corporation; and is on the
Board of Trustees for Loyola Marymount University.
John T. Chambers 51 President, Chief Executive Officer, and Director 1995
Mr. Chambers has been a member of the Board of Directors
since November 1993. He joined the Company as Senior Vice
President in January 1991 and became Executive Vice
President in June 1994. Mr. Chambers became President and
Chief Executive Officer of the Company as of January 31,
1995. Prior to his services at the Company, he was with
Wang Laboratories for eight years, most recently as Senior
Vice President of U.S. Operations.
Gary J. Daichendt 50 Executive Vice President, Worldwide Operations 1998
Mr. Daichendt joined the Company in October 1994 as Vice
President for Intercontinental Operations, covering Asia,
Pacific Rim, Canada, Central and South America, and Mexico.
In October 1997, Mr. Daichendt became Senior Vice
President, Worldwide Operations of the Company and became
Executive Vice President in August 1998. He is responsible
for managing the sales and distribution operations of
Cisco offices worldwide. Prior to his services at Cisco,
he spent eight years at Wang Laboratories, most recently
as Vice President of Central Operations and Vice President
of Worldwide Marketing. Mr. Daichendt also spent ten years
with IBM in various sales, marketing, and management
positions.
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Charles H. Giancarlo 42 Senior Vice President, Small/Medium Business Line Business, 1999
Consumer Line of Business
Mr. Giancarlo joined the Company in December 1994 as
Director of Business Development. He was promoted to Vice
President in September 1995. He was Vice President of
Global Alliances from April 1997 to April 1999 and
promoted to Senior Vice President in April 1998. In April
1999, he was promoted to his present position of Senior
Vice President, Small/Medium Line of Business. Prior to
Cisco, he was Vice President of Marketing with Kalpana
Corporation from July 1993. Kalpana was acquired by Cisco
in December 1994.
Richard J. Justice 50 Senior Vice President, Worldwide Field Operations 2000
Mr. Justice joined the Company in December 1996 as Senior
Vice President of the Americas. In February 2000, he was
promoted to Senior Vice President of Worldwide Field
Operations. Prior to Cisco, Mr. Justice spent 22 years at
Hewlett-Packard Company where in his last role, he was
responsible for Worldwide Enterprise Sales and Marketing.
Carl Redfield 53 Senior Vice President, Manufacturing and Worldwide 1997
Logistics
Mr. Redfield joined the Company in June 1993 as Vice
President of Manufacturing and Logistics. Mr. Redfield
became Senior Vice President, Manufacturing and Logistics
in February 1999. Prior to joining Cisco, he spent
seventeen years at Digital Equipment Company, most
recently as Senior Director of Manufacturing and Logistics
for the personal computer division. Mr. Redfield currently
serves on the Board of Directors of CEC Communications,
iBasis, and VA Linux Systems.
James Richardson 43 Senior Vice President, Enterprise Line of Business and 2000
Internet Communications Software Group
Mr. Richardson joined the Company in May 1990, founding
the Company's Canadian operations and became Vice
President of Intercontinental Operations in June 1992. Mr.
Richardson became Vice President of North American
Operations in July 1994. Mr. Richardson became President
of EMEA and Senior Vice President in August 1996. In April
2000, he was promoted to his current position of Senior
Vice President of the Enterprise Line of Business and
Internet Communications Software Group.
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Michelangelo Volpi 34 Senior Vice President, Chief Strategy Officer 2000
Mr. Volpi joined the Company in August 1994 as Business
Development Manager and was appointed to Director of
Business Development in April 1996. Mr. Volpi became Vice
President of Business Development in April 1997. Mr. Volpi
was named Senior Vice President of Business
Development/Global Alliances in June 1999. In April 2000,
he was named to his current position of Senior Vice
President, Chief Strategy Officer. Mr. Volpi previously
held increasingly responsible management positions while
at Hewlett Packard Company's Optoelectonics Division.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation and Related
Information" in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held on November 14, 2000, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the captions "Election of Directors" and
"Ownership of Securities" in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held on November 14, 2000, is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Ownership of Securities" and
"Executive Compensation and Related Information" in the Company's Proxy
Statement related to the Annual Meeting of Shareholders to be held on November
14, 2000, is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this item is included in Item
8 of Part II of this Form 10-K.
2. Financial Statement Schedule
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Balance at Charged to Balance at
Beginning Expenses or End of
of Period Other Accounts Deductions Period
---------------- ------------------- ---------------- ----------------
Year ended July 25, 1998:
Allowance for doubtful accounts $ 22 $ 43 $ 25 $ 40
Allowance for excess and obsolete
inventory $ 81 $161 $ 98 $144
Year ended July 31, 1999:
Allowance for doubtful accounts $ 40 $ 19 $ 32 $ 27
Allowance for excess and obsolete
inventory $144 $151 $144 $151
Year ended July 29, 2000:
Allowance for doubtful accounts $ 27 $ 40 $ 24 $ 43
Allowance for excess and obsolete
inventory $151 $339 $ 95 $395
Valuation allowance for deferred
tax assets -- $299(1) -- $299
(1) The Company has provided a valuation allowance on certain of its deferred
tax assets because of uncertainty regarding their realizability due to an
expectation of future employee stock option exercises.
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Cisco Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated August 8, 2000 appearing in the 2000 Annual Report to Shareholders of
Cisco Systems, Inc. (which report and consolidated financial statements are
included in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14 (a) (2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
San Jose, California
August 8, 2000
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3. Exhibits
Exhibit
Number Exhibit Description
- ------- -------------------
3.1.1 Restated Articles of Incorporation (1)
3.1.2 Amendment to the Cisco Systems, Inc. Restated Articles of Incorporation, as
currently in effect (2)
3.2 Cisco Systems, Inc. Amended and Restated Bylaws, as currently in effect (3)
4.1 Rights Agreement dated as of June 10, 1998 between Cisco Systems, Inc. and Bank
Boston, N.A. (4)
4.2 First Amendment to the Rights Agreement and Certification of Compliance with
Section 27 Thereof between Cisco Systems, Inc. and Fleet National Bank (f/k/a
Bank Boston, N.A.) (filed herewith)
10.2 * Cisco Systems, Inc. Amended and Restated 1996 Stock Incentive Plan (5)
10.3 * 1997 Supplemental Stock Incentive Plan (including the following: Stock Option
Agreement in connection with the 1997 Supplemental Stock Incentive Plan) (1)
10.12 * Senior Management Incentive Plan-Fiscal Year 2001 (filed herewith)
10.13 * Cisco Systems, Inc. 1989 Employee Stock Purchase Plan (7)
10.14 Master Lease (Cisco Technology, Inc. Trust 1998), dated as of June 2, 1998
between State Street Bank and Trust Company of California,
N.A., not in its individual capacity, but solely as
Certificate Trustee, as Lessor, and Cisco Technology, Inc.,
as Lessee, and General Guarantee (Cisco Technology, Inc.
Trust 1998) from Cisco Systems, Inc., dated as of June 2,
1998 and a Participant Guarantee (Cisco Technology, Inc.
Trust 1998) from Cisco Systems, Inc., dated as of June 2,
1998 (1)
10.23 Lease Agreement between the Company and SGA Development
Partnership, Ltd., dated February 19, 1993, for the
Company's site in San Jose, California (6)
10.24 Lease Agreement between the Company and Sumitomo Bank Leasing and Finance,
Inc., dated May 13, 1993 for the Company's facilities in San Jose, California
(6)
10.25 Lease Agreement between the Company and SGA Development
Partnership, Ltd., dated February 19, 1993, for the
Company's site in San Jose, California (6)
10.27 Lease Agreement between the Company and Sumitomo Bank Leasing and Finance,
Inc., dated July 11, 1994 for the Company's site in Wake County, North Carolina
(6)
10.28 Lease Agreement between the Company and Sumitomo Bank Leasing and Finance,
Inc., dated August 12, 1994 for
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the Company's facilities in Wake County, North Carolina (6)
10.29 Lease (Buildings "I" and "J") by and between Sumitomo Bank
of New York Trust Company ("SBNYTC") as trustee under that
certain Trust Agreement dated May 22, 1995 between Sumitomo
Bank Leasing and Finance, Inc. and SBNYTC ("SB Trust"), as
Landlord, and the Company, as tenant, dated May 22, 1995 (6)
10.30 First Amendment to Lease (Buildings "I" and "J") between SB Trust and the
Company, dated July 18, 1995 (6)
10.31 Lease (Buildings "K" and "L") by and between SB Trust and the Company, dated
May 22, 1995 (6)
10.32 First Amendment to Lease (Buildings "K" and "L") between SB Trust and the
Company, dated July 18, 1995 (6)
10.33 Lease (Improvements Phase "C") between SB Trust and the Company, dated May 22,
1995 (6)
10.34 First Amendment to Lease (Improvements Phase "C") between SB Trust and the
Company, dated July 18, 1995 (6)
10.35 Ground Lease (Parcel 2 and Lot 54) by and between Irish
Leasing Corporation ("Irish"), as Landlord, and the Company,
as Tenant, dated February 28, 1995 for the Company's site in
San Jose, California (6)
10.36 First Amendment to Lease (Parcel 2 and Lot 54) by and between Irish and the
Company dated as of May 1, 1995 (6)
10.37 Second Amendment to Lease (Parcel 2 and Lot 54) by and between Irish and the
Company dated as of May 22, 1995 (6)
10.38 Ground Lease (Lots 58 and 59) by and between Irish and the
Company dated February 28, 1995 for the Company's site in
San Jose, California (6)
10.39 First Amendment to Lease (Lots 58 and 59) by and between Irish and the Company
dated as of May 1, 1995 (6)
10.40 Second Amendment to Lease (Lots 58 and 59) by and between Irish and the Company
dated as of May 22, 1995 (6)
10.41 Ground Lease (Tasman Phase C) by and between Irish and the Company dated April
12, 1995 for the Company's site in San Jose, California (6)
10.42 First Amendment to Lease (Tasman Phase C) by and between Irish and the Company
dated as of May 1, 1995 (6)
10.43 Second Amendment to Lease (Tasman Phase C) by and between Irish and the Company
dated as of May 22, 1995 (6)
10.46 Second Amendment to Lease between Sumitomo Bank Leasing
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and Finance, Inc. and the Company, dated February 24, 1998, for the Company's
site in San Jose, California (8)
10.47 First Amendment to the Lease between Sumitomo Bank Leasing and Finance, Inc.
and the Company, dated July 10, 1999 (8)
10.48 Second Amendment to Ground Lease (North Carolina) between Sumitomo Bank Leasing
and Finance, Inc. and the Company, dated July 10, 1999 (8)
10.52 Master Lease between the Company, as the Lessee, and UBS MORTGAGE FINANCE INC.
as the Lessor, dated December 27, 1996 (7)
10.53 Credit Agreement dated as of July 2, 1997 among Cisco
Systems, Inc., and Citicorp USA, Inc., as Administrative
Agent, Morgan Guaranty Trust Company of New York, as
Documentation Agent, Bank of America National Trust and
Savings Association, the Chase Manhattan Bank, as Co-Agents,
and Citicorp Securities, Inc. and J.P. Morgan Securities
Inc. Arrangers (7)
10.54 Second Amendment to Lease between Cisco Systems, Inc. and Sumitomo Bank Leasing
and Finance, Inc., dated February 24, 1998 (1)
10.55 Third Amendment to Lease between SGA Development Partnership, LTD. and Cisco
Systems, Inc., dated February 24, 1998 (1)
21.01 Subsidiaries of the Company
23.02 Consent of Independent Accountants
27.1 Financial Data Schedule
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(1) Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the Company's Annual Report on Form 10-K for the
fiscal year ended July 25, 1998.
(2) Incorporated by reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 29, 2000.
(3) Incorporated by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 30, 1999.
(4) Incorporated by reference to Exhibit 4 of the Company's Current Report on
Form 8-K filed on June 11, 1998.
(5) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 30, 1999.
(6) Incorporated by reference to exhibits with the corresponding exhibit
numbers of the Company's Annual Report on Form 10-K for the fiscal
year ended July 30, 1995.
(7) Incorporated by reference to exhibits with the corresponding exhibit
numbers of the Company's Annual Report on Form 10-K for the fiscal
year ended July 26, 1997.
(8) Incorporated by reference to exhibits with the corresponding exhibit
numbers of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1999.
* Management compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
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(b) Reports on Form 8-K
The Company filed seven reports on Form 8-K during the fourth quarter ended July
29, 2000. Information regarding the items reported on is as follows:
May 3, 2000
The Company announced the completion of the acquisition of JetCell, Inc.
May 15, 2000
The Company announced the acquisition of ArrowPoint Communications, Inc.
May 18, 2000
The Company announced its financial results for the quarter ending April 29,
2000.
May 26, 2000
The Company announced the acquisition of Qeyton Systems and the completion of
the acquisition of SightPath, Inc.
June 7, 2000
The Company announced the completion of the acquisition of InfoGear Technology
Corporation.
June 29, 2000
The Company announced the completion of the acquisition of ArrowPoint
Communications, Inc.
July 28, 2000
The Company announced the acquisition of Komodo Technology, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Jose, State of
California on this 28th day of September, 2000.
Cisco Systems, Inc.
/s/ John T. Chambers
----------------------------------
(John T. Chambers, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- -----
President and Chief
/s/ John T. Chambers Executive Officer September 28, 2000
- ----------------------------- (Principal Executive Officer and Director)
John T. Chambers
Senior Vice President,
Finance and Administration,
Chief Financial Officer,
/s/ Larry R. Carter Secretary, and Director September 28, 2000
- ----------------------------- (Principal Financial and Accounting
Larry R. Carter Officer)
/s/ John P. Morgridge Chairman of the September 28, 2000
- ----------------------------- Board and Director
John P. Morgridge
/s/ Donald T. Valentine Vice Chairman of the September 28, 2000
- ----------------------------- Board and Director
Donald T. Valentine
/s/ Carol A. Bartz Director September 28, 2000
- -----------------------------
Carol A. Bartz
/s/ Mary Cirillo Director September 28, 2000
- -----------------------------
Mary Cirillo
/s/ James F. Gibbons Director September 28, 2000
- -----------------------------
Dr. James F. Gibbons
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/s/ Edward R. Kozel Director September 28, 2000
- -----------------------------
Edward R. Kozel
/s/ James C. Morgan Director September 28, 2000
- -----------------------------
James C. Morgan
/s/ Arun Sarin Director September 28, 2000
- -----------------------------
Arun Sarin
/s/ Steven M. West Director September 28, 2000
- -----------------------------
Steven M. West
/s/ Jerry Yang Director September 28, 2000
- -----------------------------
Jerry Yang
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