FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 31, 1999
[ ] 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
170 West Tasman Drive
San Jose, California 95134
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(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:
Name of each exchange
Title of each class on which registered
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Common Stock Nasdaq National Market
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. [X]
As of September 20, 1999, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $ 235,936,179,459 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
National Market System of the National Association of Securities Dealers
Automated Quotation System on that date). Shares of Common Stock held by each
officer, director, and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of September 20, 1999, 3,297,512,440 shares of
registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Shareholders for its fiscal
year ended July 31, 1999 are incorporated by reference into Part I and Part
II of this Annual Report on Form 10-K where indicated.
(2) Portions of the Registrant's Proxy Statement related to the 1999 Annual
Meeting of Shareholders, to be held on November 10, 1999, are incorporated
by reference into Part III of this Annual Report on Form 10-K where
indicated. The table of exhibits filed appears at page 28.
PART I
ITEM 1. BUSINESS
GENERAL
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Readers are referred to the "Risk Factors" section of the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Cisco Systems, Inc.'s 1999 Annual Report to Shareholders, which
section is incorporated herein by reference, as well as the "Risk Factors"
section contained herein, which identify important risk factors that could cause
actual results to differ materially from those contained in the forward looking
statements.
Cisco Systems, Inc. and its subsidiaries (together with its subsidiaries
"Cisco", or the "Company") is the worldwide leader in networking for the
Internet. Cisco creates hardware and software solutions that link computer
networks so that people have easy access to information without regard to
differences in time, place, or type of computer system.
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, and its telephone number at that location is
408 526-4000. Cisco can also be reached at its Web site http://www.cisco.com.
END-TO-END NETWORKING SOLUTIONS
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 suppliers' or
vendors' networks. An end-to-end networking solution provides a common technical
architecture that 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 products
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
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a campus, or around the world. The Company's breadth of product offerings
enables it to configure hardware and software features to meet customer
requirements. Many of the Company's products are easily upgraded, offering
customers the option to expand their networks as their needs grow.
The Company is now also delivering video and voice capabilities in its products,
allowing 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 fastest
way possible. Cisco offers a broad range of routers, 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, 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 and cost-effectiveness required for today's desktop, workgroup, and
backbone applications. Cisco solutions employ all widely used switching
technologies -- Ethernet, Gigabit Ethernet, Token Ring, and Asynchronous
Transfer Mode (ATM). Cisco LAN switching products include the Catalyst(R)
product family, and its WAN switching products include the IGX(TM), BPX(R), TGX,
and MGX(TM) families.
Access
Today, people need to access their computers and communicate from the home, from
remote locations, and while traveling. 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. Asynchronous and Integrated Services Digital Network (ISDN)
remote-access routers, dialup access servers, Digital Subscriber Line (DSL)
technologies, and cable universal broadband routers provide telecommuters and
mobile workers with Internet access and branch-office connectivity. The
Company's access products include the AS5000 family of access servers, the Cisco
6100 and 6200 lines of Digital Subscriber Line Access Multiplexers (DSLAM), and
the Cisco uBR7200 Universal Broadband Router cable head-end equipment; access
routers such as the Cisco 6000, 4000, 3800, 3600, 2600, 2500, 1700, 1600, 1000,
800, and 700 families, and the Cisco ISR 3303 Integrated SONET/SDH Router, and
network security and management software.
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Systems Network Architecture (SNA)/LAN
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
maximize availability, scalability, performance, flexibility, and management.
Much of this functionality is available through Cisco IOS(R) software, which
provides IBM networks with a clear migration path to the future while protecting
investments in existing equipment and applications.
Internet Services
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) 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 Internet Services products
include: the PIX 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).
Cisco IOS Software
Cisco IOS Software is the common networking software product deployed across a
broad spectrum of Cisco systems for an integrated solution. 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 next-generation Internet applications.
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 reduce the cost
of network services.
Network Management Software
Cisco is extending its leading Internet business practices to its network
management vision and products. For example, Cisco Assured Network Services
(ANS) is the Company's vision and strategy for enterprise network management.
This initiative combines the power of
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the Internet with access to Cisco's networking expertise to deliver
enterprise-wide network availability, performance, and security. ANS ties
together all Cisco network management applications, on-line knowledge base, and
enterprise network infrastructure devices. 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 (CSM)
system 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 recently 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 voicemail, email 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.
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 locations,
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 11, "Segment Information and Major Customers," on page 52 of
the Company's 1999 Annual Report to Shareholders, which is incorporated by
reference herein.
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.
Service Providers
These customers provide data, voice, and video communication services to
businesses and consumers. They include national and international
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regional and 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 the home. In addition, some advanced consumers will network
together a range of devices within their home, linking together such devices as
PCs, TV, phone, fax, and more, into an integrated personal network. Internet
access services are provided to them through regional carriers and Internet
Service Providers (ISPs).
Cisco Sales Overview
The Company's worldwide direct sales organization at August 28, 1999 consisted
of approximately 7,200 individuals, including managers, sales representatives,
and technical support personnel. The Company has approximately 105 field sales
offices providing coverage throughout the United States.
Additionally, the Company's international sales are currently being made through
multiple channels including approximately 120 international distributors and
resellers throughout the world. These international 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 11, "Segment Information and Major Customers," on
page 52 of the Company's 1999 Annual Report to Shareholders, which is
incorporated by reference herein.
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 its customers and prospects in 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
6
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.
Acquisitions involve numerous risks, which are more fully discussed in the "Risk
Factors" section of this report.
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 and will not adversely affect the Company's financial
condition or results of operations.
Each of the Company's acquisitions has furthered the Company's commitment to
providing an end-to-end solution. The Company now has a broad set of product
offerings and technologies, which include Ethernet, Gigabit Ethernet, Token
Ring, ATM switching, SONET/SDH, xDSL, dial, converged data, voice, and video
technologies, 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 complementary
technology to Cisco products, and by investing in new ventures Cisco strengthens
its partnerships with such companies. Together, Cisco and its portfolio
companies 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 marketing and sales,
and new-market creation. This year, Cisco expanded its relationships with
Microsoft, Hewlett-Packard, Intel, and Sprint and created new alliances with
KPMG, IBM, Telcordia, Motorola, and Portal Software. We also extended our
business alliances with Fujitsu and Japan Telecom, while announcing strategic
relationships with USWest and NTT, among others.
BACKLOG
The Company's backlog on September 20, 1999 was approximately $922 million
compared with an approximate backlog of $693 million at September 19, 1998. 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
7
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 solutions will
decrease, due to the rapid pace of acquisitions in the industry. The Company
believes its primary competition will be from a few large suppliers of
end-to-end solutions.
Cisco's competitors include Lucent, Nortel, Ericsson, 3Com, Cabletron, Alcatel
and Juniper. Some of the Company's competitors compete across many of Cisco's
product lines, while others do not offer as wide a breadth of solutions. Several
of the Company's current and potential competitors have greater financial,
marketing and technical resources than the Company.
The principal competitive factors in the markets in which the Company presently
competes and may compete in the future are:
o price
o performance
o the ability to provide end-to-end solutions and support
o conformance to standards
o the ability to provide added value features such as security, reliability,
and investment protection and
o 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 interoperability. 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 continues to enhance and extend its product lines with new product
and feature introductions including optical networking, data, voice, and video
integration, Virtual Private Networking (VPN), Digital Subscriber Line (DSL),
cable modem, gigabit switching, security, and network management, among others.
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However, the industry in which Cisco competes 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 internetworking 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 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 1999, 1998, and 1997, the Company's research and development
expenditures were approximately $1,594 million, $1,026 million, and $702
million, respectively. All of the Company's expenditures for research and
development costs, as well as purchased in-process research and development of
approximately $471 million, $594 million, and $508 million in fiscal 1999, 1998,
and 1997, respectively, have been expensed as incurred.
MANUFACTURING
The Company's manufacturing operations consist primarily 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
9
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 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 and 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.
RISK FACTORS
Our business and the value of our stock is subject to a number of risks. Some of
those risks are described above and certain additional risks are set forth
below. Other risks are presented in the "Risk Factors" section on pages 27-32 of
our Annual Report to Shareholders for the year ended July 31, 1999, which pages
we incorporated herein by reference.
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 and our ability to enhance our existing products
and 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.
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Acquisitions involve numerous risks, including the following:
o difficulties in integration of the operations, technologies, and products
of the acquired companies;
o the risk of diverting management's attention from normal daily operations
of the business;
o potential difficulties in completing projects associated with purchased in-
process research and development;
o risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions; and
o the potential loss of key employees of the acquired company.
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 maintain our ability to manage any such growth effectively. Failure
to manage growth effectively and successfully integrate acquisitions made by us
could materially harm our business and operating results.
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 in any country where we operate, on such technology as voice over the
Internet, encryption technology and access charges for Internet service
providers, as well as the continuing deregulation of the telecommunication
industry. The adoption of such measures could decrease demand for our products,
and at the same time increase our cost of selling our products. Changes in laws
or regulations governing the Internet and Internet commerce 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 Lucent, Ericsson and Nortel,
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 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
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services by us may result in less favorable timing of revenue recognition than
we have historically experienced.
WE ARE DEPENDENT UPON THE ABILITY OF SUPPLIERS TO DELIVER PARTS ON TIME
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 assurances that we will not encounter these problems
in the future.
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,
one of our manufacturing facilities is located near a river that has 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, financial condition
and operating results.
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 a number of strategic alliances with companies including Microsoft,
Hewlett-Packard, EDS, Sprint and Motorola, among others. 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 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
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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, which
has continued during fiscal 1999. 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 ARE SUBJECT TO RISKS ASSOCIATED WITH THE MANUFACTURE OF PARTS AND COMPONENTS
OF OUR PRODUCTS
Although we generally use standard parts and components for our products,
certain components are presently available only from a single source or limited
sources. 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 and could materially damage customer
relationships.
WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATION REGULATION AND
TARIFFS
Changes in domestic and international telecommunication 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
U.S. our products must comply with various Federal Communication Commission
requirements and regulations. In countries outside of the U.S., our products
must meet
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various requirements of local telecommunications authorities. Changes in
tariffs, or failure by 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 among other factors;
government spending patterns; and natural disasters. In fiscal 1999, the sales
growth rate in Japan, as well as in certain other parts of Asia continued to be
slower than that in other areas. Any or all of these factors could have a
material adverse impact on our future international business in these or other
countries.
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 and 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
Cisco's Common Stock in the future.
EMPLOYEES
As of July 31, 1999, we employed approximately 21,000 persons, including 3,900
in manufacturing, service and support, 8,600 in sales and marketing, 7,000 in
engineering, and 1,500 in finance and administration. Approximately 4,400
employees were in international locations.
None of the employees are represented by a labor union, and we
14
consider our relations with our employees to be positive. We have experienced no
work stoppages.
Competition for technical personnel in our industry is intense. We believe that
our future success depends in part on our continued ability to hire, assimilate,
and retain qualified personnel. To date, we believe that we have been successful
in recruiting qualified employees, but there is no assurance that we will
continue to be successful in the future.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at sites in Santa Clara
and San Jose, California. The Company's main headquarters are situated on 448
acres of leased land in San Jose, California. There are 29 buildings located at
these sites, one of which is a manufacturing facility. The San Jose headquarters
consist of approximately 3.8 million square feet of leased office space at the
present time. The Company expects that construction at its current sites will
continue through 2000, with the potential to add approximately 1.2 million
square feet of leased office space. Additionally, two new sites have recently
been leased near its present corporate offices in San Jose, California. The
Company has certain other operating leases for buildings, including those
assumed as part of the StrataCom acquisition. These buildings, which include
additional manufacturing facilities, are located at various sites near San Jose,
California and consist of approximately 1 million square feet of leased space.
In addition to the California facilities, the Company leases approximately 45
acres of land in Research Triangle Park, North Carolina, where the InterWorks
Business Division, as well as a Technical Assistance Center, telesales, and
various other support functions, are located. There are six buildings at this
site with a total of approximately 1 million square feet of office space.
The Company also leases various small offices throughout the U.S. and on a
worldwide basis. For additional information regarding the Company's obligations
under leases, see Note 7 "Commitments and Contingencies" on page 45 of the
Company's 1999 Annual Report to Shareholders, which is hereby incorporated by
reference.
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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EXECUTIVE OFFICERS OF THE REGISTRANT
16
17
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The information required by this Item is incorporated by reference to
page 55 of the Company's 1999 Annual Report to Shareholders.
(b) During the quarter ended July 31, 1999, the Company issued an aggregate
of 2,017,180 shares of its Common Stock in connection with the purchase
of the capital stock of Amteva Technologies, Inc. The shares were issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act
of 1933. 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 a Registration Statement on Form S-3 covering the resale of
such securities.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 21 of
the Company's 1999 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to pages
22-32 of the Company's 1999 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to pages
28-29 of the Company's 1999 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
33-55 of the Company's 1999 Annual Report to Shareholders.
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 to be mailed to
Shareholders on or about September 27, 1999, which information is incorporated
herein by reference; and to
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the information under the heading "Executive Officers of the Registrant" in Part
I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing at the end of Part I and under the caption "Executive
Compensation and Related Information" in the Company's proxy statement to be
mailed to Shareholders on or about September 27, 1999, 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 to be mailed to
Shareholders on or about September 27, 1999, 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 to be mailed to Shareholders on or about September 27, 1999, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in Item 14(a) are filed or
incorporated herein by reference as part of this annual report.
See Index to Financial Statements and Financial Statement Schedule
on Page 24.
2. Financial Statement Schedule
The financial statement schedule listed in Item 14(a) is filed as
part of this annual report. See Index to Financial Statements and
Financial Statement Schedule on Page 24.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on pages
28-30 are filed or incorporated by reference as part of this
annual report.
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the fourth
quarter ended July 31, 1999. Information regarding the items
reported on is as follows:
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21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 23rd day of September, 1999. Cisco Systems, Inc.
/s/ John T. Chambers
-----------------------------------
(John T. Chambers, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Report on Form
10-K has been signed by the following persons in the capacities and on the dates
indicated.
22
23
CISCO SYSTEMS, INC.
-------------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 14(A)
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the consolidated financial statements or
notes thereto.
With the exception of the consolidated financial statements and the independent
accountants' report thereon listed in the above index, the information referred
to in Items 1, 5, 6, 7 and 7A and the
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supplementary quarterly financial information referred to in Item 8, all of
which is included in the Company's Annual Report to Shareholders and
incorporated by reference into this Form 10-K Annual Report, the 1999 Annual
Report to Shareholders is not to be deemed "filed" as part of this report.
25
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 10, 1999 appearing in the 1999 Annual Report to Shareholders of
Cisco Systems, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule present 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 10, 1999
26
CISCO SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
(1) Deductions principally relate to charges for standards changes.
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INDEX TO EXHIBITS
(Item 14 (a))
28
29
(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 4 of the Company's Form 8-K filed on
June 11, 1998.
(3) 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.
(4) 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.
* 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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