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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 28, 2001
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
170 West Tasman Drive
San Jose, California 95134-1706
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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:
Common stock, $0.001 par value
Preferred Stock Purchase Rights
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 13, 2001, 7,334,019,051 shares of Registrant's common stock were
outstanding. The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant was $104,195,415,267 (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
(1) Portions of the Registrant's Annual Report to Shareholders for its fiscal
year ended July 28, 2001 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 relating to the Registrant's
2001 Annual Meeting of Shareholders, to be held on November 13, 2001, 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 ............................................... 8
Minority Investments ................................................................... 9
Strategic Alliances .................................................................... 9
Backlog ................................................................................ 9
Competition ............................................................................ 9
Research and Development ............................................................... 10
Manufacturing .......................................................................... 11
Patents, Intellectual Property, and Licensing........................................... 11
Employees .............................................................................. 12
Risk Factors ........................................................................... 13
Item 2 Properties ................................................................................ 24
Item 3 Legal Proceedings ......................................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders ....................................... 24
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ..................... 25
Item 6 Selected Financial Data ................................................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................ 25
Item 8 Financial Statements and Supplementary Data ............................................... 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ..... 25
PART III
Item 10 Directors and Executive Officers of the Registrant ........................................ 26
Item 11 Executive Compensation .................................................................... 27
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................ 27
Item 13 Certain Relationships and Related Transactions ............................................ 28
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 28
Signatures .......................................................................................... 32
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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." Readers should not place undue
reliance on these forward-looking statements. Cisco's actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including risks faced by the Company described in this Report,
including the "Risk Factors" section contained in this Item 1, and the other
documents Cisco files with the Securities and Exchange Commission ("SEC"),
including its most recent reports on Form 8-K and Form 10-Q, and amendments
thereto.
Cisco Systems, Inc. (the "Company" or "Cisco") is the worldwide leader in
networking for the Internet. Cisco Internet Protocol ("IP")-based networking
solutions are the foundation of the Internet and are installed at corporations,
public institutions, telecommunication companies, and are found in a growing
number of medium-sized commercial enterprises. Cisco provides a broad line of
solutions for transporting data, voice, and video within buildings, across
campuses, or around the world. Cisco solutions allow networks, both public and
private, to operate with flexibility, security, and performance.
The Company markets its products through its direct sales force, single and
two-tier distributors, value-added resellers, service providers, and systems
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.
On April 16, 2001, due to macroeconomic and capital spending issues affecting
the networking industry, the Company announced a restructuring program to
prioritize its initiatives around high-growth areas of its business, focus on
profit contribution, reduce expenses, and improve efficiency. This restructuring
program included a worldwide workforce reduction, consolidation of excess
facilities, and restructuring of certain businesses. As a result of the
restructuring program and decline in forecasted revenue, the Company recorded
restructuring costs and other special charges and an additional excess inventory
charge. For additional information regarding the restructuring program, see the
section titled "Restructuring Costs and Other Special Charges and Provision for
Inventory" on pages 17 to 19 of the Company's 2001 Annual Report to
Shareholders, which is incorporated by reference herein.
On August 23, 2001, Cisco announced several organizational changes designed to
align the Company's focus around changing customer requirements and emphasize
the Company's advantages as the communications market and industries
consolidate. These changes include moving from the Company's existing line of
business structure to centralized engineering and marketing organizations. The
new engineering organization will focus on 11 new technology groups, while
marketing will focus on communicating Cisco's unique technology differentiation.
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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. The Cisco Web site can be found at www.cisco.com.
END-TO-END NETWORKING SOLUTIONS
Cisco is the worldwide leader in networking for the Internet. The Cisco strategy
is to provide open, end-to-end, standards-based networking solutions to help
customers improve productivity and gain a competitive advantage in the global
economy. Cisco helps customers build their own network infrastructure while also
providing tools to allow them to communicate with 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.
The Cisco 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, while protecting their investments.
The Company also provides products and services that allow customers to
transition their various data networks to a single multiservice data, voice, and
video network.
Cisco's 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 in a
large backbone infrastructure or a small office, including the Cisco 12000,
10000, 7600, 7400, and 7300 Series Internet Routers and the Cisco 3600, 2600,
2500, 1700, 1600, and 800 Series Internet Routers.
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 -- Ethernet, Gigabit Ethernet, Token Ring, and
Asynchronous Transfer Mode ("ATM"). The Cisco LAN switching products include the
Catalyst(R) Family and its WAN switching products include the Cisco IGX(TM),
Cisco BPX(R), and Cisco MGX(TM) Families.
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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 remotely located groups and individuals similar levels of
connectivity and information access, as 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, mobile workers, and students with remote network access. The
Company's access products include the Cisco AS5000 Series Access Servers; the
Cisco 6100 and 6200 lines of digital subscriber line access multiplexers
("DSLAMs"); the Cisco uBR7200 Series Universal Broadband Router cable head-end
equipment; access routers such as the Cisco 3800, 3600, and 2600 Series Internet
Routers; and network security and management software.
Customer Advocacy
Customer Advocacy ("CA") complements the Company's product offerings via a broad
range of consulting, technical, project, quality, and maintenance support level
services striving to ensure high availability networks and customer
satisfaction. Cisco CA provides flexible service solutions such as 24x7 online
and telephone support, onsite technical assistance center ("TAC") engineers, and
more. Cisco CA helps customers transition to the Internet economy by enabling
them to rapidly deploy new technologies, reduce and manage the risk associated
with the deployment of new technologies, streamline business processes, and
reduce operating costs.
Other
Other Cisco offerings include Internet services, network management software,
and optical networking, among others, as follows:
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 drives 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. These products include: Cisco Secure PIX(R) Firewall, which prevents
unauthorized access to a network; the Cisco Secure Scanner, which scans the
network for security risks; the Cisco Intrusion Detection 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").
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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
("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 also offers 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. These
software applications allow end-users 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, users are connected to the best available customer service
representative regardless of physical location.
Optical Networking
Cisco provides optical networking solutions through its Cisco ONS 15000 Series
optical networking systems, which includes the ONS 15800 Series. The Cisco ONS
15000 Series enables multiservice networking and bandwidth management for
scalable, data-optimized networks using dense wave division multiplexing
("DWDM") and SONET technology for metropolitan networks.
The following technologies are offered in conjunction with all of the above
product categories:
Cisco AVVID
Cisco AVVID (Architecture for Voice, Video, and Integrated Data) provides an
intelligent network infrastructure for Internet business solutions. As the
industry's only enterprise-wide, standards-based network architecture, Cisco
AVVID provides the roadmap for combining Cisco and its customers' business and
technology strategies into one cohesive model. The Cisco AVVID architecture
consists of several building blocks that deliver Internet business solutions --
network platforms, infrastructure, service control, and Internet business.
Cisco IOS Software
Cisco IOS(R) 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, voice delivery, and multicast
functions -- that enable customers to build a
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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 13, "Segment Information and Major Customers" on pages 43 to
45 of the Company's 2001 Annual Report to Shareholders, which is incorporated by
reference herein.
Cisco's customers are primarily in the following markets:
Large Enterprise Businesses
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 regional, national, and international
long distance telecommunications carriers, as well as Internet, cable, and
wireless service providers.
Small and Medium-Sized Businesses
These customers have fewer 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 resources and expertise in networking
technology; therefore, the Company attempts to provide products that are
affordable and easy to install and use.
Cisco also works to set standards for the consumer market through the Internet
Home Alliance. This not-for-profit, open alliance was established based on a
shared mission of making a difference through market collaboration and
education.
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CISCO SALES OVERVIEW
The Company's worldwide direct sales and marketing organization at July 28, 2001
consisted of approximately 15,000 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, countrywide agreements. For additional
information regarding the Company's international sales, see Note 13, "Segment
Information and Major Customers" on pages 43 to 45 of the Company's 2001 Annual
Report to Shareholders, which is incorporated by reference herein.
Cisco Systems Capital Corporation provides financing to certain qualified
customers to be used for the purchase of equipment and other needs. For
additional information regarding Cisco Systems Capital Corporation's financing
activities, see Note 6, "Lease Receivables" on page 34 of the Company's 2001
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 technical gaps in its offerings and enable it
to deliver complete solutions to customers and prospects in its target markets.
The Company's acquisitions have reinforced its commitment to providing an
end-to-end networking solution.
Satisfying customers' networking needs requires a constant monitoring of market
and technology trends, plus an ability to act quickly. Cisco employs one of the
following strategies to satisfy the need for new or enhanced networking products
and solutions: Develop new technologies and products internally; enter into
joint-development efforts with other companies; resell another company's
product; or acquire all or part of another company.
Since 1993, Cisco has acquired a number of companies. The Company expects to
make future acquisitions where it believes that it can acquire new technologies
and products. 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.
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MINORITY INVESTMENTS
The Company makes minority investments in companies that develop 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, 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 and solution development, joint sales
and marketing, and new-market creation. To date, Cisco has entered into
alliances with Callisma, Cap Gemini/Ernst & Young, Compaq, Hewlett Packard,
Intel, IBM, Italtel, KPMG Consulting, Inc., Microsoft, Motorola, Oracle, Sun
Microsystems, and Thrupoint, among others.
BACKLOG
The Company's backlog at September 14, 2001 was approximately $2.03 billion
compared with a backlog of approximately $3.40 billion at September 25, 2000.
The Company includes in its backlog only orders confirmed with a purchase order
for products to be shipped within 90 days to customers with approved credit
status. During fiscal 2001, the Company changed its backlog policy to include
products that will be shipped within 90 days from the previous policy of 120
days. Under the terms of the previous policy, the backlog at September 25, 2000
was approximately $3.83 billion. 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 change, 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. The overall
number of competitors providing niche product solutions may increase due to the
market's long-term attractive growth. On the other hand, the Company expects the
number of vendors supplying end-to-end networking solutions will decrease, due
to consolidations in and accompanying economic pressure upon 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, Ciena, Ericsson, Extreme Networks, Foundry
Networks, Juniper, Lucent, Nortel Networks, Redback Networks, Siemens AG, and
Sycamore Networks,
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among others. Some of the Company's competitors compete across many of its
product lines, while others do not offer as wide a breadth of solutions. Several
of the Company's current and potential competitors have greater resources,
including technical and engineering resources, than it does.
The principal competitive factors in the markets in which the Company presently
competes and may compete in the future are:
- The ability to provide end-to-end networking solutions and support
- Performance
- Price
- The ability to provide new technologies and products
- The ability to provide value-added features such as security,
reliability, and investment protection
- Conformance to standards
- Market presence
- The ability to provide financing
The Company also faces competition from customers to whom it licenses technology
and suppliers from whom it transfers technology. The inherent nature of
networking 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,
or the uncontrollable and unpredictable acts of others, 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 in areas including data, voice, and video over IP;
wireless access; dial access; enterprise switching; optical transport; storage
networking; content networking; security; network management; advanced routing
and switching technologies; DSL technologies; cable; and other broadband
technologies, among others.
However, the industry in which Cisco competes is subject to rapid technological
developments, evolving industry standards, changes in customer requirements, and
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 also expects to 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
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technological changes, or that such products will achieve market acceptance.
The Company's research and development expenditures were $3.92 billion, $2.70
billion, and $1.66 billion in fiscal 2001, 2000, and 1999, respectively. All of
the Company's expenditures for research and development costs, as well as
in-process research and development of $855 million, $1.37 billion, and $471
million in fiscal 2001, 2000, and 1999, 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 supply 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 and provide turnkey solutions to its
customers. The Company and its supply 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 or ISO 9003 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 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.
The industry in which Cisco competes is characterized by the existence of a
large number of patents and frequent claims and related litigation regarding
patent and other intellectual property rights. From time to time, third parties
have asserted exclusive patent, copyright, trademark and other intellectual
property rights to technologies and related standards that are important to
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Cisco. These claims have increased recently as a result of the Company's
acquisitions of businesses and technologies. Such parties have pursued and may
in the future assert claims or initiate litigation against the Company or its
manufacturers, suppliers, or customers alleging infringement of their
proprietary rights with respect to the Company's existing or future products.
Regardless of the merit of these claims, they could be time-consuming, result in
costly litigation and diversion of technical management personnel, or require
Cisco to develop a non-infringing technology or enter into royalty or license
agreements. If any infringement or other intellectual property claim made
against the Company by any third party is successful, or if the Company fails to
develop non-infringing technology or license the proprietary rights, the
Company's business could be materially and adversely affected.
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 infringement claims. If infringement claims are
found to have merit, 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. 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 regarding
these matters could have a material adverse effect on Cisco's business,
operating results, and financial condition.
EMPLOYEES
As of July 28, 2001, the Company employed approximately 38,000 persons,
including 7,000 in manufacturing, service and support; 13,000 in engineering;
15,000 in sales and marketing; and 3,000 in finance and administration.
Approximately 11,000 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 in which Cisco competes may be intense. The Company believes that its
future success depends in part on its continued ability to hire, assimilate, and
retain qualified personnel. To date, Cisco believes that the Company has 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 the Report.
YOU SHOULD EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter or fiscal year 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 and annual
fluctuations as a result of a number of factors. These factors include:
- Overall information technology spending
- Changes in general economic conditions and specific market conditions in
the communications and networking industries
- Fluctuations in demand for our products and services
- The long sales and implementation cycle for our products and the reduced
visibility into our customers' spending plans and associated revenue
- Inventory levels exceeding our requirements based upon future demand
forecasts
- Existing network capacity, sharing of existing network capacity, and
network capacity utilization rates of our customers
- Price and product competition in the networking industry
- The overall trend toward industry consolidation
- The introduction and market acceptance of new technologies and products,
as well as the adoption of new networking standards
- Variations in sales channels, product costs, or mix of products sold
- The timing of orders, timing of shipments, and the ability to satisfy all
contractual obligations in customer contracts
- Manufacturing lead times
- The impact of acquired businesses and technologies
- The geographical mix of our revenue and the associated impact on gross
margin
- Our ability to achieve targeted cost reductions
- Adverse changes in the public and private equity and debt markets
- The ability of our customers and suppliers to obtain financing or to fund
capital expenditures
- The trend toward sales of integrated network solutions
- The timing and amount of employer payroll tax to be paid on employees'
gains on stock options exercised
As a consequence, operating results for a particular future period are difficult
to predict, especially in recent periods. Any of the foregoing factors, or any
other factors discussed elsewhere herein, could have a material adverse effect
on our business, results of operations, and financial condition.
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In response to changes in industry and market conditions, we may strategically
realign our resources and consider restructuring, disposing of, or otherwise
exiting businesses. Any decision to limit investment in or to dispose of or
otherwise exit businesses may result in the recording of accrued liabilities for
special one-time charges, such as workforce reduction costs. Additionally,
estimates with respect to the useful life and ultimate recoverability of our
carrying basis of assets, including goodwill and purchased intangible assets,
could change as a result of such assessments and decisions.
WE ARE EXPOSED TO GENERAL ECONOMIC AND MARKET CONDITIONS
Our business is subject to the effects of general economic conditions in the
United States and globally, and, in particular, market conditions in the
communications and networking industries. In recent quarters, our operating
results have been adversely affected as a result of unfavorable economic
conditions and reduced capital spending in the United States, Europe, and Asia.
In particular, sales to service providers, e-commerce and Internet businesses,
and the manufacturing industry in the United States were adversely affected
during fiscal 2001. If the economic conditions in the United States and globally
do not improve, or if we experience a worsening in the global economic slowdown,
we may continue to experience material adverse impacts on our business,
operating results, and financial condition.
OPERATING RESULTS FOR A PARTICULAR QUARTER ARE DIFFICULT TO PREDICT
As a result of a variety of factors discussed herein, operating results for a
particular quarter are extremely difficult to predict. Our net sales may grow at
a slower rate than experienced in previous periods and, in particular periods,
may decline. Our ability to meet financial expectations could also be adversely
affected if the nonlinear sales pattern seen in certain of our recent quarters
recurs in future periods. We generally have had at least 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 place the same orders within our
various sales channels, cancel orders, or not place further orders if shorter
lead times are available from other manufacturers.
As a result of our growth in past periods, our fixed costs have increased. With
increased levels of spending and the impact of long-term commitments, an
inability to meet expected revenue levels in a particular quarter could have a
material adverse impact on our operating results for that period as we may not
be able to quickly reduce these fixed expenses in response to short-term
business changes.
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
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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, 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.
WE EXPECT GROSS MARGIN VARIABILITY OVER TIME
We expect gross margin may be adversely affected by increases in material or
labor costs, higher inventory balances, obsolescence charges, loss of cost
savings, price competition, and changes in channels of distribution or in the
mix of products sold, in particular, optical and access products.
If product or related warranty costs associated with our products are greater
than we have experienced, gross margin may be adversely affected. Our gross
margin may also be adversely affected 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. These distribution channels are generally given privileges to return
inventory. In addition, increasing third-party and indirect-distribution
channels generally results in greater difficulty in forecasting the mix of our
products, and to a certain degree, the timing of orders from our customers.
We plan our operating expense levels primarily based 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
capability 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 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 have been relatively flexible
to date, we believe that we may be faced with the following challenges going
forward:
- New markets that we participate in may grow quickly and thus, consume
significant component capacity
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- 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 competition for certain components, which are supply constrained,
from existing competitors and companies in other markets
Manufacturing capacity and component supply constraints could be significant
issues for us. We use several supply partners to manufacture our products.
During the normal course of business, in order to reduce manufacturing lead
times and ensure adequate component supply, we enter into agreements with
certain supply partners which allow these partners to procure inventory based
upon criteria as defined by us. For additional information regarding our
purchase commitments, see Note 9, "Commitments and Contingencies" on pages 36 to
38 of our 2001 Annual Report to Shareholders, which is incorporated by reference
herein. A reduction or interruption in supply, a significant increase in the
price of one or more components, or a decrease in demand of products could
materially adversely affect our business, operating results and financial
condition 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 HAVE INVESTED IN AND WILL CONTINUE TO INVEST IN NEW AND EXISTING MARKET
OPPORTUNITIES
We have made investments in 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 over the past years. We will continue to invest in these markets either
through additional investments or through re-alignment of existing resources.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING
PRODUCTS AND ARE SUBJECT TO RAPID CHANGES IN TECHNOLOGY AND THE MARKET
Our operating results may depend on our ability to develop and introduce new
products into existing and emerging markets and to reduce the costs to produce
existing products. The success of 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, 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.
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OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET-BASED SYSTEMS
A substantial portion of our business and revenue depends on the continued
growth of the Internet and on the deployment of our products by customers that
depend on the growth of the Internet. As a result of the economic slowdown and
the reduction in capital spending, spending on Internet infrastructure has
declined, which has had a material adverse effect on our business. To the extent
that the economic slowdown and reduction in capital spending continue to
adversely affect spending on Internet infrastructure, we could continue to
experience material adverse effects on our business, operating results, and
financial condition.
We believe that there will be certain 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 networking products, we 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.
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 and technologies. Acquisitions involve
numerous risks, including the following:
- Difficulties in integrating the operations, technologies, and products of
the acquired companies
- 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
- 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
make could harm our business and operating results in a material way.
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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 startup companies. Several of
our current and potential competitors may have greater resources, including
technical and engineering 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 may 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.
SALES TO THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION
Sales to the service provider market have been 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, economic, 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. The slowdown in the general economy,
changes in the service provider market, and the constraints on capital
availability have had a material adverse effect on many of our service provider
customers, with a number of such customers going out of business or
substantially reducing their expansion plans. These conditions have had a
material adverse effect on our business and operating results, and we expect
that these conditions may continue for the foreseeable future.
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 result in 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.
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
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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.
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 exposures to emerging market currencies which have 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 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 portion of our sales is derived through our resellers in two-tier distribution
channels. These resellers/customers are generally given privileges to return
inventory, receive credits for changes in selling prices, and participate in
cooperative marketing programs. We maintain estimated accruals and allowances
for such exposures. However, such resellers 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 have experienced
increased demands for customer financing, including loan financing and leasing
solutions. We expect demands for customer financing may continue. We believe
customer financing 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. Due to the current slowdown in the economy, the credit risks relating
to these resellers/customers have increased. 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 risks. We also continue to
monitor credit exposures from weakened financial conditions in certain
geographic 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
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significant, future losses, if incurred, could harm our business and have a
material adverse effect on our operating results and financial condition.
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 technology such as voice over the Internet, encryption technology, and access
charges for Internet service providers. Our business could be materially
adversely affected by the changes in the regulations surrounding 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 the cost of selling our products, which could have a material adverse
effect on our business, operating results, and financial condition.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL
Our success has always depended in large part on our ability to attract and
retain highly skilled technical, managerial, sales, and marketing personnel. In
spite of the economic slowdown, competition for these personnel is intense,
especially in the Silicon Valley area of Northern California. Volatility or lack
of positive performance in our stock price may also adversely affect our ability
to retain key employees, all of whom have been granted stock options. The loss
of services of any of our key personnel, the inability to retain and attract
qualified personnel in the future, or delays in hiring required personnel,
particularly engineers and sales personnel, could make it difficult to meet key
objectives, such as timely product introductions. In addition, companies in the
networking industry whose employees accept positions with competitors frequently
claim that competitors have engaged in improper hiring practices. We have
received these claims in the past and may receive additional claims to this
effect in the future.
WE FACE CERTAIN LITIGATION RISKS
We are a party to lawsuits in the normal course of our business. Litigation can
be expensive, lengthy and disruptive to normal business operations. Moreover,
the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of a particular lawsuit could have a material adverse
effect on our business, results of operations, or financial condition. For
additional information regarding certain of the lawsuits in which we are
involved, see Item 3, "Legal Proceedings" contained in Part I of this Report.
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OUR BUSINESS IS SUBJECT TO THE RISKS OF EARTHQUAKES, FLOODS, AND OTHER
CATASTROPHIC EVENTS
Our corporate headquarters, including certain 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 include 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. In addition, despite our implementation of network security measures,
our servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with our computer systems. Any such
event could have a material adverse effect on our business, operating results,
and financial condition. In addition, the effects of war or acts of terrorism
could have a material adverse effect on our business, operating results, and
financial condition
THE ENERGY CRISIS IN CALIFORNIA COULD DISRUPT OUR BUSINESS AND THE BUSINESSES OF
OUR SUPPLIERS AND SUPPLY PARTNERS AND COULD INCREASE OUR EXPENSES
The western United States (and California in particular) has experienced
repeated episodes of diminished electrical power supply, and we anticipate that
this situation could continue or worsen in the near future. As a result of
these episodes, certain of our operations or facilities have been and may
continue to be subject to "rolling blackouts" or other unscheduled interruptions
of electrical power. The prospect of such unscheduled interruptions may continue
for the foreseeable future, and we are unable to predict their occurrence or
duration. Certain of our suppliers and supply partners are also located in this
area and their operations may also be materially and adversely affected by such
interruptions. These suppliers and manufacturers may be unable to manufacture
sufficient quantities of our products to meet our demands, or they may increase
the costs of such products, which in turn could have a material adverse effect
on our business or results of operations.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES
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 (loss), 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 market
price volatility of our publicly traded equity investments, we experienced a
$5.76 billion ($3.81 billion, net of tax) decrease in net unrealized gains
during fiscal 2001 on these investments. As of July 28, 2001, our publicly
traded equity investments had gross unrealized losses of $784 million. Recent
events have adversely affected the public equities market and general economic
conditions may continue to worsen. As a result, subsequent to fiscal 2001, we
may recognize in earnings declines in fair value of our publicly traded equity
investments below the cost basis that are considered to be other-than-temporary.
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For information regarding the sensitivity of and risks associated with the
market value of portfolio investments and interest rates, see the section titled
"Quantitative and Qualitative Disclosures About Market Risk" on pages 21 to 22
of our 2001 Annual Report to Shareholders, which is incorporated by reference
herein.
WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC
The SEC has been reviewing registrants' valuation methodologies of in-process
research and development related to business combinations. We believe we are in
compliance with all of the existing rules and related guidance as applicable to
our business operations. However, the SEC may change these rules or issue new
guidance applicable to our business in the future. 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.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES
We have a number of 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 relationships may 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 a strategic alliance and, at
the same time, cooperate with that 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.
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 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 us to obtain timely approval of
products could have a material adverse effect on our business, operating
results, and financial condition.
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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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ITEM 2. PROPERTIES
The Company's headquarters is located on leased premises in San Jose,
California. The Company has certain other operating leases for sites, both
completed and under construction, which include additional manufacturing
facilities, in the surrounding areas of San Jose, California; Boxborough,
Massachusetts; Salem, New Hampshire; Richardson, Texas; and Research Triangle
Park, North Carolina.
The Company also leases office space in other U.S. locations, as well as
locations in the Americas; Europe, the Middle East, and Africa ("EMEA"); Asia
Pacific; and Japan. For additional information regarding the Company's
obligations under leases, see Note 9, "Commitments and Contingencies" on
pages 36 to 38 of the Company's 2001 Annual Report to Shareholders, which is
incorporated by reference herein.
ITEM 3. 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.
Beginning on April 20, 2001, a number of purported shareholder class action
lawsuits have been filed in the United States District Court for the Northern
District of California against the Company and certain of its officers and
directors. The lawsuits are essentially identical, and purport to bring suit on
behalf of those who purchased the Company's publicly traded securities between
August 10, 1999 and April 16, 2001. Plaintiffs allege that defendants made false
and misleading statements, purport to assert claims for violations of the
federal securities laws, and seek unspecified compensatory damages and other
relief. The Company believes the claims are without merit and intends to defend
the actions vigorously.
In addition, beginning on April 23, 2001, a number of purported shareholder
derivative lawsuits have been filed in the Superior Court of California, County
of Santa Clara, against the Company (as a nominal defendant), its directors and
certain officers. At least two purported derivative suits have also been filed
in the United States District Court for the Northern District of California, and
another has been filed in the Superior Court of California, County of San Mateo.
The complaints in the various derivative actions include claims for breach of
fiduciary duty, waste of corporate assets, mismanagement, unjust enrichment and
violations of the California Corporations Code, seek compensatory and other
damages, disgorgement and other relief, and are based on essentially the same
allegations as the class actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to page 47 of
the Company's 2001 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 13 of
the Company's 2001 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 14
to 20 of the Company's 2001 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 21
to 22 of the Company's 2001 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages 23
to 47 of the Company's 2001 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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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 13, 2001, which
information is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION
NAME AGE POSITION HELD SINCE
---------------------- ---- -------------------------------------------------------------------------- -------------
Larry R. Carter 58 Senior Vice President, Finance and Administration, Chief Financial 1997
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., QLogic
Corporation, and Transmeta Corporation; and is on the Board of Trustees
for Loyola Marymount University.
John T. Chambers 52 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 with the Company, he was with Wang
Laboratories for eight years, most recently as Senior Vice President of
U.S. Operations. Mr. Chambers currently serves on the Board of Directors
of Wal-Mart Stores, Inc.
Charles H. Giancarlo 43 Senior Vice President and General Manager 2001
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 Senior Vice President, Commercial Line of Business. In August
2001, he was promoted to his current position of Senior Vice President and
General Manager of Access Aggregation, Ethernet Switching, and Wireless
Business Groups. 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 51 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.
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Mario Mazzola 55 Senior Vice President, Chief Development Officer 2001
Mr. Mazzola joined the Company in September 1993 as Vice President and
General Manager of the Workgroup Business Unit. He was promoted to Senior
Vice President of the Enterprise Line of Business in April 1997. In August
2001, he was promoted to his current position of Senior Vice President,
Chief Development Officer. Prior to Cisco, he was President and CEO of
Crescendo Communications, Inc. from 1990. Crescendo was acquired by Cisco
in September 1993.
Carl Redfield 54 Senior Vice President, Manufacturing and Worldwide Logistics 1997
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 17 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 CTC
Communications, iBasis, Broadwing Corp., and VA Linux Systems.
James Richardson 44 Senior Vice President, Chief Marketing Officer 2001
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 named
Senior Vice President of the Enterprise Line of Business and Internet
Communications Software Group. In August 2001, Mr. Richardson was named to
his current position of Chief Marketing Officer.
Michelangelo Volpi 34 Senior Vice President, Internet Switching and Services 2001
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 and
Senior Vice President of Business Development/Global Alliances in June
1999. In April 2000, Mr. Volpi was named Senior Vice President, Chief
Strategy Officer, adding the corporate strategy role to his prior
responsibilities, which included managing the Business Development and
Strategic Alliance organizations. In August 2001, Mr. Volpi was named to
his current position of Senior Vice President, Internet Switching and
Services. Prior to Cisco, Mr. Volpi spent three years at Hewlett
Packard's Optoelectonics Division, holding numerous engineering and product
marketing management positions.
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 13, 2001, 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 13, 2001, is incorporated herein
by reference.
27
28
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
13, 2001, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 Report. See Index
to Financial Statements and Financial Statement Schedule on Page
29.
2. Financial Statement Schedule
The financial statement schedule listed in Item 14(a) is filed as
part of this Report. See Index to Financial Statements and
Financial Statement Schedule on Page 29.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on pages
34 to 36 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 quarter ended July 28,
2001. Information regarding the items reported on is as follows:
Date Item Reported On
May 11, 2001 The Company reported its third quarter results for the
period ending April 28, 2001.
July 12, 2001 The Company announced the acquisition of AuroraNetics, Inc.,
which was completed on August 22, 2001.
28
29
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 14(a)
Page
------------------------------
2001 Annual
Report to
Form 10-K Shareholders
Consolidated Statements of Operations for each of the three years in the
period ended July 28, 2001 ......................................................... 23
Consolidated Balance Sheets at July 28, 2001 and July 29, 2000 ....................... 24
Consolidated Statements of Cash Flows for each of the three years in
the period ended July 28, 2001 ..................................................... 25
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended July 28, 2001 ............................................ 36
Notes to Consolidated Financial Statements ........................................... 27-45
Report of Independent Accountants .................................................... 46
Supplementary Financial Data and Stock Market Information:
Fiscal 2001 and 2000 by quarter (Unaudited) ........................................ 47
Financial Statement Schedule:
II Valuation and Qualifying Accounts ............................................. 30
Report of Independent Accountants .................................................. 31
29
30
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 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 -- $ 299
Year ended July 28, 2001:
Allowance for doubtful accounts $ 43 $ 268 $ 23 $ 288
Allowance for excess and obsolete
inventory $ 395 $2,775 $ 891 $2,279
Valuation allowance for deferred
tax assets $ 299 -- $ 299 --
30
31
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Cisco Systems, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated August 7, 2001 appearing in the 2001 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 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 7, 2001
31
32
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 21st day of September, 2001.
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
-------------------------------- ------------------------------------------- ------------------
/s/ John T. Chambers President and Chief
-------------------------------- Executive Officer September 21, 2001
John T. Chambers (Principal Executive Officer and Director)
/s/ Larry R. Carter Senior Vice President,
-------------------------------- Finance and Administration,
Larry R. Carter Chief Financial Officer,
Secretary, and Director September 21, 2001
(Principal Financial and Accounting Officer)
/s/ John P. Morgridge Chairman of the September 21, 2001
-------------------------------- Board and Director
John P. Morgridge
/s/ Donald T. Valentine Vice Chairman of the September 21, 2001
-------------------------------- Board and Director
Donald T. Valentine
/s/ Carol A. Bartz Director September 21, 2001
--------------------------------
Carol A. Bartz
32
33
/s/ Mary Cirillo Director September 21, 2001
--------------------------------
Mary Cirillo
/s/ Carly Fiorina Director September 21, 2001
--------------------------------
Carly Fiorina
/s/ James F. Gibbons Director September 21, 2001
--------------------------------
Dr. James F. Gibbons
/s/ Edward R. Kozel Director September 21, 2001
--------------------------------
Edward R. Kozel
/s/ James C. Morgan Director September 21, 2001
--------------------------------
James C. Morgan
/s/ Arun Sarin Director September 21, 2001
--------------------------------
Arun Sarin
/s/ Steven M. West Director September 21, 2001
--------------------------------
Steven M. West
/s/ Jerry Yang Director September 21, 2001
--------------------------------
Jerry Yang
33
34
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
------- -------------------
3.1 Restated Articles of Incorporation of Cisco Systems, Inc., as
currently in effect (1)
3.2 Amended and Restated Bylaws of Cisco Systems, Inc., as currently
in effect (1)
4.1 Rights Agreement dated as of June 10, 1998 between Cisco Systems,
Inc. and Bank Boston, N.A. (2)
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.) (3)
10.2* Cisco Systems, Inc. Amended and Restated 1996 Stock Incentive
Plan (4)
10.3* 1997 Supplemental Stock Incentive Plan (including the following:
Stock Option Agreement in connection with the 1997 Supplemental
Stock Incentive Plan) (5)
10.12* Senior Management Incentive Plan-Fiscal Year 2001 (3)
10.13* Cisco Systems, Inc. 1989 Employee Stock Purchase Plan (6)
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 (7)
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 (8)
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 (8)
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 (8)
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 (8)
10.28 Lease Agreement between the Company and Sumitomo Bank Leasing and
Finance, Inc., dated August 12, 1994 for the Company's facilities
in Wake County, North Carolina (8)
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 (8)
10.30 First Amendment to Lease (Buildings "I" and "J") between SB Trust
and the Company, dated July 18, 1995 (8)
10.31 Lease (Buildings "K" and "L") by and between SB Trust and the
Company, dated May 22, 1995 (8)
34
35
10.32 First Amendment to Lease (Buildings "K" and "L") between SB Trust
and the Company, dated July 18, 1995 (8)
10.33 Lease (Improvements Phase "C") between SB Trust and the Company,
dated May 22, 1995 (8)
10.34 First Amendment to Lease (Improvements Phase "C") between SB
Trust and the Company, dated July 18, 1995 (8)
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 (8)
10.36 First Amendment to Lease (Parcel 2 and Lot 54) by and between
Irish and the Company dated as of May 1, 1995 (8)
10.37 Second Amendment to Lease (Parcel 2 and Lot 54) by and between
Irish and the Company dated as of May 22, 1995 (8)
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 (8)
10.39 First Amendment to Lease (Lots 58 and 59) by and between Irish
and the Company dated as of May 1, 1995 (8)
10.40 Second Amendment to Lease (Lots 58 and 59) by and between Irish
and the Company dated as of May 22, 1995 (8)
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 (8)
10.42 First Amendment to Lease (Tasman Phase C) by and between Irish
and the Company dated as of May 1, 1995 (8)
10.43 Second Amendment to Lease (Tasman Phase C) by and between Irish
and the Company dated as of May 22, 1995 (8)
10.46 Second Amendment to Lease between Sumitomo Bank Leasing and
Finance, Inc. and the Company, dated February 24, 1998, for the
Company's site in San Jose, California (9)
10.47 First Amendment to the Lease between Sumitomo Bank Leasing and
Finance, Inc. and the Company, dated July 10, 1999 (9)
10.48 Second Amendment to Ground Lease (North Carolina) between
Sumitomo Bank Leasing and Finance, Inc. and the Company, dated
July 10, 1999 (9)
10.52 Master Lease between the Company, as the Lessee, and UBS MORTGAGE
FINANCE INC. as the Lessor, dated December 27, 1996 (10)
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 (10)
10.54 Second Amendment to Lease between Cisco Systems, Inc. and
Sumitomo Bank Leasing and Finance, Inc., dated February 24, 1998
(11)
10.55 Third Amendment to Lease between SGA Development Partnership,
LTD. and Cisco Systems, Inc., dated February 24, 1998 (11)
13 Pages 13 to 47 of the Registrant's 2001 Annual Report to
Shareholders
21.01 Subsidiaries of the Company
23.02 Consent of Independent Accountants
35
36
(1) Incorporated by reference to our registration statement on Form S-3, No.
333-56004, filed on February 21, 2001.
(2) Incorporated by reference to Exhibit 4 of the Company's Current Report on
Form 8-K filed on June 11, 1998.
(3) 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 29, 2000.
(4) 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.
(5) 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.
(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 26, 1997.
(7) 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.
(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 30, 1995.
(9) 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.
(10) 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.
(11) 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.
* Management compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
36