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FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 23, 1999
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)
<TABLE>
<S> <C>
California 77-0059951
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
</TABLE>
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to 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
filing requirements for the past 90 days.
YES [X] NO [ ]
As of March 2, 1999, 1,597,195,347 shares of the Registrant's common stock were
outstanding.
This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q
for the quarter ended January 23, 1999 (as amended, the "Report") is being filed
to add the following section entitled "Risk Factors" to the Report at the end of
Part I Item 2. No other changes are being made to the Form 10-Q.
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RISK FACTORS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes",
"anticipates", "estimates", "expects", and words of similar import constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Quarterly
Report.
CISCO IS EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY
As a global concern, Cisco faces 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 Cisco's financial
results. Historically, Cisco's primary exposures related to
nondollar-denominated sales in Japan, Canada, and Australia and
nondollar-denominated operating expenses in Europe, Latin America, and Asia
where it sells primarily in U.S. dollars. Additionally, Cisco has recently seen
its exposures to emerging market currencies, such as the Korean Won and Russian
Ruble, among others, increase because of Cisco's expanding presence in these
markets and the extreme currency volatility. Cisco currently does not hedge
against these or any other emerging market currencies and could suffer
unanticipated gains or losses as a result.
The increasing use of the Euro as a common currency for members of the
European union could impact Cisco's foreign exchange exposure. Cisco is prepared
to hedge against fluctuations in the Euro if this exposure becomes material.
Cisco will continue to evaluate the impact of the Euro on its foreign exchange
exposure as well as on its internal systems.
At the present time, Cisco hedges only those currency exposures associated
with certain assets and liabilities denominated in nonfunctional currencies and
does not generally hedge anticipated foreign currency cash flows. The hedging
activity undertaken by Cisco is intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and liabilities. The
success of this activity depends upon estimations of intercompany balances
denominated in various currencies, primarily the Japanese yen, Canadian dollar,
Australian dollar and certain European currencies. To the extent that these
forecasts are over- or understated during periods of currency volatility, Cisco
could experience unanticipated currency gains or losses.
CISCO IS EXPOSED TO THE CREDIT RISK OF SOME OF ITS CUSTOMERS AND TO CREDIT
EXPOSURES IN WEAKENED MARKETS
Cisco is experiencing a greater proportion of its sales activity through
its partners in two-tier distribution channels. These customers are generally
given privileges to return inventory, receive credits for changes in Cisco's
selling prices and participate in cooperative marketing programs. Cisco
maintains appropriate accruals and allowances for such exposures. However,
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such partners tend to have access to more limited financial resources than other
resellers and end user customers and therefore represent potential sources of
increased credit risk. Additionally, Cisco is experiencing increased demands for
customer financing and leasing solutions. Cisco also continues to monitor
increased credit exposures because of the weakened financial conditions in Asia,
and other emerging market regions, and the impact that such conditions may have
on the worldwide economy. Although Cisco has not experienced significant losses
due to customers failing to meet their obligations to date, such losses, if
incurred, could harm our business and financial position.
CISCO IS EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF ITS PORTFOLIO
INVESTMENTS AND IN INTEREST RATES
Cisco maintains investment portfolio holdings of various issuers, 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 comprehensive
income, net of tax. Part of this portfolio includes minority equity investments
in several publicly-traded companies, the values of which are subject to market
price volatility. Cisco also has certain real estate lease commitments with
payments tied to short-term interest rates. At any time, a sharp rise in
interest rates could have a material adverse impact on the fair value of Cisco's
investment portfolio while increasing the costs associated with its lease
commitments. Conversely, declines in interest rates could have a material impact
on interest earnings for Cisco's investment portfolio. Cisco does not currently
hedge these interest rate exposures.
CISCO EXPECTS TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS
INVOLVE NUMEROUS RISKS
The networking business is highly competitive, and as such, Cisco's growth
is dependent upon market growth and its ability to enhance its existing products
and introduce new products on a timely basis. One of the ways Cisco has
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:
o difficulties in integration of the operations, technologies, and
products of the acquired companies;
o the risk of diverting management's attention from normal daily
operations of the business;
o potential difficulties in completing projects associated with
purchased in process research and development;
o risks of entering markets in which Cisco has no or limited direct
prior experience and where competitors in such markets have stronger
market positions; and
o the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that Cisco's previous or future acquisitions will
be successful. Unsuccessful acquisitions could harm our business and financial
results.
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Cisco must also maintain its ability to manage any such growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions
made by Cisco could harm our business and financial results.
SINCE CISCO'S GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER
ARE DIFFICULT TO PREDICT
Cisco expects that in the future, its net sales may grow at a slower rate
than was experienced in previous periods, and that on a quarter-to-quarter
basis, Cisco's growth in net sales may be significantly lower than its
historical quarterly growth rate. As a consequence, operating results for a
particular quarter are extremely difficult to predict. Cisco's ability to meet
financial expectations could be hampered if the nonlinear sales pattern seen in
past quarters reoccurs in future periods. Cisco generally has had one quarter of
the fiscal year when backlog has been reduced. Although such reductions have not
occurred consistently in recent years, they are difficult to predict and may
occur in the future. In addition, in response to customer demand, Cisco
continues to attempt to reduce its 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 Cisco's
quarter-to-quarter net sales and operating results going forward. On the other
hand, for certain products, lead times are longer than Cisco's goal. If Cisco
cannot reduce manufacturing lead times for such products, Cisco's customers may
cancel orders or not place further orders if shorter lead times are available
from other manufacturers, thus creating additional variability.
As a result of recent unfavorable economic conditions, sales to certain
countries in Latin America and the Pacific Rim have declined as a percentage of
Cisco's total revenue. If the economic conditions in these markets, or other
markets which recently experienced unfavorable conditions, such as Eastern
Europe, worsen, or if these unfavorable conditions result in a wider regional or
global economic slowdown, this decline may have a material adverse impact on
Cisco's business and financial condition.
Recent actions and comments from the Securities and Exchange Commission
have indicated they are reviewing the current valuation methodology of purchased
in-process research and development related to business combinations. The
Commission is concerned that some companies are writing off more of the value of
an acquisition than is appropriate. Cisco believes it is in compliance with all
of the rules and related guidance as they currently exist. However, there can be
no assurance that the Commission will not seek to reduce the amount of purchased
in-process research and development previously expensed by Cisco. This would
result in the restatement of previously filed financial statements of Cisco and
could have a material negative impact on financial results for the periods
subsequent to acquisitions.
Cisco also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. For example, Cisco
believes that gross margins may decline over time, because the markets for
lower-margin access products targeted toward small to medium-sized customers
have continued to grow at a faster rate than the markets for Cisco's
higher-margin router and high-performance switching products targeted toward
enterprise and service provider
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customers. Cisco has recently introduced several new products with additional
new products scheduled to be released in the near future. If warranty costs
associated with these new products are greater than Cisco has experienced
historically, gross margins may be adversely affected. Cisco's gross margins may
also be impacted by geographic mix, as well as the mix of configurations within
each product group. Cisco continues to expand into third-party or indirect
distribution channels, which generally results in lower gross margins. In
addition, increasing third-party and indirect distribution channels generally
results in greater difficulty in forecasting the mix of Cisco's products, and to
a certain degree, the timing of its orders.
Cisco also expects that its operating margins may decrease as it continues
to hire additional personnel and increases other operating expenses to support
its business. Cisco plans its operating expense levels based primarily on
forecasted revenue levels. Because these expenses are relatively fixed in the
short term, a shortfall in revenue could lead to operating results being below
expectations.
YOU SHOULD EXPECT THAT CISCO'S OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Cisco's operating results have in the
past been, and will continue to be, subject to quarterly fluctuations as a
result of a number of factors. These factors include:
o the integration of people, operations, and products from acquired
businesses and technologies;
o increased competition in the networking industry;
o the overall trend toward industry consolidation;
o the introduction and market acceptance of new technologies and
standards, including switch routers, Gigabit Ethernet switching, Tag
Switching (currently also known as multiprotocol label switching
(MPLS)) and voice, video and data capabilities;
o variations in sales channels, product costs, or mix of products sold;
and
o the timing of orders and manufacturing lead times; and
o changes in general economic conditions and specific economic
conditions in the computer and networking industries.
Any of the factors could have a material adverse impact on Cisco's
operations and financial results. For example, Cisco from time to time has made
acquisitions that result in purchased research and development expenses being
charged in an individual quarter. These charges may occur in any particular
quarter resulting in variability in Cisco's quarterly earnings. Additionally,
the dollar amounts of large orders for Cisco's products have been increasing,
and therefore the operating results for a quarter could be materially adversely
affected if a number of large orders are either not received or are delayed, due
for example, to cancellations, delays or deferrals by customers.
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THE YEAR 2000 PROBLEM MAY HAVE AN ADVERSE EFFECT ON CISCO'S OPERATIONS AND
ABILITY TO OFFER PRODUCTS AND SERVICES WITHOUT INTERRUPTION
Cisco is continuing to assess the impact of the Year 2000 issue on its
current and future products, internal information systems and non-information
technology systems (equipment and systems) and has begun, and in many cases
completed, corrective efforts in these areas.
Cisco is using a four phase approach to address the issue.
o The first phase consists of the inventorying of all potential business
disruption problems, including those with products and systems, as
well as potential disruption from suppliers and other third parties.
o The second phase consists of the prioritization of all the potential
problems to allocate the appropriate level of resources to the most
critical areas.
o The third phase addresses the remediation programs to solve or
mitigate any identified Year 2000 problems.
o The fourth phase, if necessary, will be to develop contingency plans
if it appears Cisco or its key suppliers will not be Year 2000
compliant, and such noncompliance is expected to have a material
adverse impact on Cisco's operations.
Cisco has largely completed the implementation of Year 2000 compliant
internal computer applications for its main financial, manufacturing and order
processing systems. The systems are being tested for compliance and Cisco does
not currently expect any significant issues to be identified during this review.
However, the failure of any internal system to achieve Year 2000 readiness could
result in material disruption to Cisco's operations.
Cisco has also conducted extensive work regarding the status of its
currently available, developing and installed base of products. Cisco believes
that its current products are largely Year 2000 compliant. There can be no
assurance that certain previous releases of Cisco's products which are no longer
under support will prove to be Year 2000 compliant with customers' systems or
within an existing network. Further information about Cisco's products is
available on its Year 2000 Internet web site. Cisco has developed programs for
customers who have indicated a need to upgrade components of their systems.
However, the inability of any of Cisco's products to properly manage and
manipulate data in the year 2000 could result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material costs and
liabilities.
Cisco has completed phases I and II of its review of its supplier bases
and, in the third phase of the compliance approach, is in the process of
reviewing the state of readiness of its supplier base. This exercise includes
compliance inquiries and reviews that will continue throughout 1999. Where
issues are identified with a particular supplier, contingency plans will be
developed as discussed below. Even where assurances are received from third
parties there
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remains a risk that failure of systems and products of other companies on which
Cisco relies could have a material adverse effect on Cisco. Further, if these
suppliers fail to adequately address the Year 2000 issue for the products they
provide to Cisco, critical materials, products and services may not be delivered
timely and Cisco may not be able to manufacture sufficient product to meet sales
demand.
Based on the work done to date, Cisco has not incurred material costs and
does not expect to incur future material costs in the work to address the Year
2000 problem for its systems (as a result of relatively new legacy information
systems) and products.
Cisco has taken and will continue to take corrective action to mitigate any
significant Year 2000 problems with its systems and products and believes that
the Year 2000 issue for information systems will not have a material impact on
its operations or financial results. However, there can be no assurance that
Cisco will not experience significant business disruptions or loss of business
due to an inability to adequately address the Year 2000 issue. Cisco is
concerned that many enterprises will be devoting a substantial portion of their
information systems spending to addressing the Year 2000 issue. This expense may
result in spending being diverted from networking solutions in the near future.
This diversion of information technology spending could have a material adverse
impact on Cisco's future sales volume.
Contingency plans will be developed in certain key areas, in particular
surrounding third party manufacturers and other suppliers, to ensure that any
potential business interruptions caused by the Year 2000 issue are mitigated.
Such contingency plans include identification of alternative sources of supply
and test exercises to ensure that such alternatives are able to provide Cisco
with an adequate level of support. These plans are expected to be developed
beginning in May 1999.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to:
o the availability and cost of personnel trained in this area;
o the ability to locate and correct all relevant computer codes;
o the nature and amount of programming required to upgrade or replace
each of the affected programs; and
o the rate and magnitude of related labor and consulting costs and the
success of Cisco's external customers and suppliers in addressing the
Year 2000 issue.
Cisco's evaluation is on-going and it expects that new and different
information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Year 2000
ready in time.
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CISCO COMPETES IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET
Cisco competes in the telecommunications equipment market, providing
solutions for transporting data, voice and video traffic across intranets,
extranets, and the Internet. The market is characterized by rapid growth,
converging technologies, and a conversion to new solutions that offer superior
advantages. These market factors represent both an opportunity and a competitive
threat to Cisco. Cisco competes with numerous vendors in each product category.
Cisco expects that the overall number of competitors providing niche product
solutions will increase due to the market's attractive growth. On the other
hand, Cisco expects the number of vendors supplying end-to-end
telecommunications solutions will decrease, due to the rapid pace of
acquisitions in the industry. Ultimately Cisco believes only a few larger
suppliers of end-to-end telecommunication equipment solutions will become its
primary competitors.
Cisco's competitors include Lucent, Nortel, Ericsson, 3Com, Cabletron, Fore
and IBM. Some of Cisco's competitors compete across many of Cisco's product
lines, while others do not offer as wide a breadth of solutions. Several of
Cisco's current and potential competitors have greater financial, marketing and
technical resources than Cisco.
The principal competitive factors in the markets in which Cisco presently
competes and may compete in the future are:
o price;
o performance;
o the ability to provide end-to-end solutions and support;
o conformance to standards;
o the ability to provide added value features such as security,
reliability, and investment protection; and
o market presence.
Cisco also faces competition from customers it licenses technology to and
suppliers from whom it transfers technology. Networking's inherent nature
requires interoperability. As such, Cisco must cooperate, and at the same time
compete, with these companies. Cisco's inability to effectively manage these
complicated relationships with customers and suppliers could have a material
adverse effect on Cisco's business and financial results.
CISCO'S BUSINESS DEPENDS UPON ITS PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT
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 under these patents will provide
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competitive advantages to Cisco. In addition, there can be no assurance that
patents will be issued from pending applications, or that claims allowed on any
future patents will be sufficiently broad to protect Cisco's technology. In
addition, the laws of some foreign countries may not permit the protection of
Cisco's proprietary rights to the same extent as do the laws of the United
States. Although Cisco believes the protection afforded by its patents, patent
applications, copyrights and trademarks has value, the rapidly changing
technology in the networking industry makes Cisco's future success dependent
primarily on the innovative skills, technological expertise and management
abilities of its employees rather than on patent, copyright and trademark
protection.
Many of Cisco's products are designed to include software or other
intellectual property licensed from third parties. While it may be necessary in
the future to seek or renew licenses relating to various aspects of its
products, Cisco believes that based upon past experience and standard industry
practice, such licenses generally could be obtained on commercially reasonable
terms. Because of the existence of a large number of patents in the networking
field and the rapid rate of issuance of new patents, it is not economically
practical to determine in advance whether a product or any of its components
infringe patent rights of others. From time to time, Cisco receives notices from
or is sued by third parties regarding patent claims. If infringement is alleged,
Cisco believes that, based upon industry practice, any necessary license or
rights under such patents may be obtained on terms that would not have a
material adverse effect on Cisco's business, operating results and financial
condition. Nevertheless, there can be no assurance that the necessary licenses
would be available on acceptable terms, if at all, or that Cisco would prevail
in any such challenge. The inability to obtain certain licenses or other rights
or to obtain such licenses or rights on favorable terms, or the need to engage
in litigation could have a material adverse effect on Cisco's business,
operating results and financial condition.
CISCO FACES 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. Cisco could be materially adversely affected by
regulation in any country where Cisco operates, on such technology as voice over
the Internet, encryption technology and access charges for Internet service
providers, as well as the continuing deregulation of the telecommunication
industry. The adoption of such measures could decrease demand for Cisco's
products, and at the same time increase Cisco's cost of selling its products.
Changes in laws or regulations governing the Internet and Internet commerce
could have a material adverse effect on Cisco's business and financial results.
THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS
TO RISKS
As Cisco focuses on new market opportunities, such as transporting data,
voice and video traffic across the same network, it will increasingly compete
with a number of large telecommunications equipment suppliers, such as Lucent,
Ericsson, and Nortel, among others, and well funded start-up companies. Many of
these companies have substantially greater financial, marketing and technical
resources than Cisco. If Cisco cannot successfully compete
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with these and other potential competitors, it could have a material adverse
effect on Cisco's business, operating results and financial condition.
Additionally, as customers in these markets complete infrastructure deployment,
they may require greater levels of service, support and financing than Cisco has
experienced in the past. There can be no assurance that Cisco can provide
products, service, support and financing to effectively compete for these market
opportunities. Further, provision of greater levels of services by Cisco may
result in less favorable revenue recognition treatment than has historically
been experienced.
CISCO IS DEPENDENT UPON THE ABILITY OF SUPPLIERS TO DELIVER PARTS ON TIME
Cisco's growth and ability to meet customer demands also depend in part on
its ability to obtain timely deliveries of parts from its suppliers. Cisco has
experienced component shortages in the past that have adversely affected its
operations. Although Cisco works closely with its suppliers to avoid these types
of shortages, there can be no assurances that Cisco will not encounter these
problems in the future.
THE LOCATION OF OUR FACILITIES SUBJECTS CISCO TO THE RISK OF EARTHQUAKES AND
FLOODS
Cisco's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in the
Silicon Valley area of Northern California, a region known for seismic activity.
Additionally, one of Cisco's manufacturing facilities is located near a river
that has experienced flooding in the past. A significant natural disaster, such
as an earthquake or a flood, could have a material adverse impact on Cisco's
business, financial condition and operating results.
CISCO DEPENDS UPON THE DEVELOPMENT OF NEW PRODUCTS AND IS SUBJECT TO RAPID
CHANGES IN TECHNOLOGY AND THE MARKET
Cisco's operating results will depend to a significant extent on its
ability to reduce the costs to produce existing products. In particular, Cisco
broadened its product line by introducing network access products. Sales of
these products, which are generally lower priced and carry lower margins than
Cisco's core products, have increased more rapidly than sales of Cisco's core
products. The success of these and other new products is dependent on several
factors, including proper new product definition, product cost, timely
completion and introduction of new products, differentiation of new products
from those of Cisco's competitors and market acceptance of these products. The
markets for Cisco's products are characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions, and evolving
methods of building and operating networks. There can be no assurance that Cisco
will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, and achieve market acceptance of its
products or that products and technologies developed by others will not render
Cisco's products or technologies obsolete or noncompetitive.
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CISCO IS SUBJECT TO THE RISKS ASSOCIATED WITH STRATEGIC ALLIANCES
Cisco has a number of strategic alliances with companies including
Microsoft, Hewlett-Packard, EDS, and Sprint, among others. These arrangements
are generally limited to specific projects, the goal of which is generally to
facilitate product compatibility and adoption of industry standards. If
successful, these relationships will be mutually beneficial and result in
industry growth. However, these alliances carry an element of risk because, in
most cases, Cisco must compete in some business areas with a company with which
it has strategic alliances and, at the same time, cooperate with such company in
other business areas. Also, if these companies fail to perform, or if these
relationships fail to materialize as expected, Cisco could suffer delays in
product development or other operational difficulties.
THE INDUSTRY IN WHICH CISCO COMPETES IS SUBJECT TO CONSOLIDATION
There has been a trend toward industry consolidation for several years,
which has continued during fiscal 1999. Cisco expects this trend toward industry
consolidation to continue as companies attempt to strengthen or hold their
market positions in an evolving industry. Cisco believes that industry
consolidation may provide stronger competitors that are better able to compete
as sole-source vendors for customers. This could lead to more variability in
operating results as Cisco competes to be a single vendor solution and could
have a material adverse effect on Cisco's business, operating results and
financial condition.
SALES IN THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION
Although sales to the service provider market have continued to grow, this
market is characterized by large, and often sporadic purchases. Sales activity
in this industry depends upon the stage of completion of expanding network
infrastructures, the availability of funding, and the extent that service
providers are affected by regulatory and business conditions in the country of
operations. A decline or delay in sales orders from this industry could have a
material adverse effect on Cisco's business, operating results and financial
condition.
CISCO IS SUBJECT TO RISKS ASSOCIATED WITH THE MANUFACTURE OF PARTS AND
COMPONENTS OF ITS PRODUCTS
Although Cisco generally uses standard parts and components for its
products, certain components are presently available only from a single source
or limited sources. A reduction or interruption in supply or a significant
increase in the price of one or more components would adversely affect Cisco's
business, operating results and financial condition and could damage customer
relationships.
CISCO FACES RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATION REGULATION AND
TARIFFS
Changes in domestic and international telecommunication requirements could
affect Cisco's sales of its products. In particular, Cisco believes it is
possible that there may be significant changes in domestic telecommunications
regulations in the near future that could
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slow the expansion of the service providers' network infrastructures and
adversely affect Cisco's 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 Cisco's
products for certain classes of customers. Additionally, in the U.S. Cisco's
products must comply with various Federal Communication Commission requirements
and regulations. In countries outside of the U.S., Cisco's products must meet
various requirements of local telecommunications authorities. Changes in
tariffs, or failure by Cisco to obtain timely approval of products could have a
material adverse effect on Cisco's business and financial results.
CISCO'S BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS
Cisco conducts business globally. Accordingly, Cisco's future results could
be adversely affected by a variety of uncontrollable and changing factors
including foreign currency exchange rates; regulatory, political or economic
conditions in a specific country or region; trade protection measures and other
regulatory requirements; government spending patterns; and natural disasters,
among other factors. In fiscal 1998, and 1999, Cisco experienced slower sales
growth in Japan, as well as in certain other parts of Asia. Any or all of these
factors could have a material adverse impact on Cisco's future international
business in these or other countries.
CISCO'S BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET
AND INTERNET-BASED SYSTEMS
Cisco's management believes that there will be performance problems with
Internet communications in the future which could receive a high degree of
publicity and visibility. As Cisco is a large supplier of equipment for the
Internet infrastructure, customers' perceptions of Cisco's products and the
marketplace's perception of Cisco as a supplier of networking products, may be
materially adversely affected, regardless of whether or not these problems are
due to the performance of Cisco's products. Such an event could also result in a
material adverse effect on the market price of Cisco's Common Stock and could
materially adversely affect Cisco's business, operating results and financial
condition.
CISCO'S STOCK PRICE MAY BE VOLATILE
Cisco's Common Stock has experienced substantial price volatility,
particularly as a result of variations between Cisco's actual or anticipated
financial results and the published expectations of analysts and as a result of
announcements by Cisco and its competitors. 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 adversely affect the
market price of Cisco's Common Stock in the future.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cisco Systems, Inc.
Date: May 14, 1999 By /s/ Larry R. Carter
-----------------------------------------
Larry R. Carter,
Senior Vice President Finance, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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