<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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 APRIL 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-18225
CISCO SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0059951
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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 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 filing requirements
for the past 90 days.
YES [X] NO [ ]
As of May 26, 2000, 7,023,852,451 shares of the Registrant's common stock were
outstanding.
================================================================================
<PAGE> 2
CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED APRIL 29, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated statements of operations for the
three and nine months ended April 29, 2000
and May 1, 1999 3
b) Consolidated balance sheets at
April 29, 2000 and July 31, 1999 4
c) Consolidated statements of cash flows for the nine
months ended April 29, 2000 and May 1, 1999 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 41
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 42
Item 6. Exhibits and Reports on Form 8-K 43
Signature 44
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ---------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
-------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 4,919 $ 3,171 $13,183 $ 8,614
Cost of sales 1,748 1,112 4,671 2,997
------- ------- ------- -------
Gross margin 3,171 2,059 8,512 5,617
Operating expenses:
Research and development 719 433 1,854 1,144
Sales and marketing 1,023 656 2,760 1,752
General and administrative 146 94 399 253
Amortization of goodwill
and purchased intangible
assets 51 19 122 42
In-process research
and development 488 -- 912 390
------- ------- ------- -------
Total operating expenses 2,427 1,202 6,047 3,581
------- ------- ------- -------
Operating income 744 857 2,465 2,036
Interest and other
income, net 313 91 566 237
------- ------- ------- -------
Income before provision for
income taxes 1,057 948 3,031 2,273
Provision for income taxes 395 312 1,124 846
------- ------- ------- -------
Net income $ 662 $ 636 $ 1,907 $ 1,427
======= ======= ======= =======
Net income per share--basic $ .10 $ .10 $ .28 $ .22
======= ======= ======= =======
Net income per share--diluted $ .09 $ .09 $ .26 $ .21
======= ======= ======= =======
Shares used in per-share
calculation--basic 6,944 6,624 6,892 6,543
======= ======= ======= =======
Shares used in per-share
calculation--diluted 7,450 7,054 7,366 6,955
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
April 29, July 31,
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,542 $ 886
Short-term investments 1,111 1,189
Accounts receivable, net of allowance for
doubtful accounts of $38 at April 29, 2000
and $27 at July 31, 1999 1,922 1,249
Inventories, net 878 656
Deferred tax assets 905 571
Prepaid expenses and other current assets 722 170
------- -------
Total current assets 9,080 4,721
Investments 10,419 7,032
Restricted investments 1,170 1,080
Property and equipment, net 1,153 822
Other assets, net 4,263 1,191
------- -------
Total assets $26,085 $14,846
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 596 $ 372
Income taxes payable 941 630
Accrued payroll and related expenses 974 679
Other accrued liabilities 2,588 1,353
------- -------
Total current liabilities 5,099 3,034
Deferred tax liabilities 915 --
Minority interest 45 44
Shareholders' equity:
Preferred stock, no par value, 5 shares authorized:
none issued or outstanding at April 29, 2000
and July 31, 1999 -- --
Common stock and additional paid-in capital,
$0.001 par value, 20,000 shares authorized:
7,001 shares issued and outstanding at
April 29, 2000 and 6,748 at July 31, 1999 10,701 5,665
Retained earnings 7,624 5,805
Accumulated other comprehensive income 1,701 298
------- -------
Total shareholders' equity 20,026 11,768
------- -------
Total liabilities and shareholders' equity $26,085 $14,846
======= =======
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
April 29, May 1,
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,907 $ 1,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 492 335
Deferred income taxes (330) (195)
Tax benefits from employee stock option plans 930 679
Adjustments to conform fiscal year ends of
pooled acquisitions (18) 1
In-process research and development 912 298
Change in operating assets and liabilities:
Accounts receivable (631) 19
Inventories (196) (266)
Prepaid expenses and other current assets (23) (26)
Income taxes payable 305 110
Accounts payable 149 100
Accrued payroll and related expenses 235 88
Other accrued liabilities 788 329
------- -------
Net cash provided by operating activities 4,520 2,899
------- -------
Cash flows from investing activities:
Purchases of short-term investments (1,431) (833)
Proceeds from sales and maturities of short-term
investments 1,428 1,179
Purchases of investments (9,797) (3,977)
Proceeds from sales and maturities of investments 8,775 1,338
Purchases of restricted investments (272) (661)
Proceeds from sales and maturities of restricted
investments 181 408
Acquisition of property and equipment (666) (385)
Acquisition of businesses, net of cash
acquired and in-process research and development 34 (19)
Increase in lease receivables (397) (175)
Other (722) (196)
------- -------
Net cash used in investing activities (2,867) (3,321)
------- -------
Cash flows from financing activities:
Issuance of common stock 1,005 675
Other (2) 5
------- -------
Net cash provided by financing activities 1,003 680
------- -------
Net increase in cash and cash equivalents 2,656 258
Cash and cash equivalents, beginning of period 886 609
------- -------
Cash and cash equivalents, end of period $ 3,542 $ 867
======= =======
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. ("Cisco" or the "Company") is the worldwide leader in
networking for the Internet. Cisco hardware, software, and service offerings are
used to create Internet solutions so that individuals, companies, and countries
have seamless access to information - regardless of differences in time and
place. Cisco solutions provide competitive advantage to our customers through
more efficient and timely exchange of information, which in turn leads to cost
savings, process efficiencies, and closer relationships with their customers,
prospects, business partners, suppliers, and employees. These solutions form the
networking foundation for companies, universities, utilities, and government
agencies worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52-week or 53-week period ending on the last
Saturday in July. Fiscal 2000 is a 52-week year while fiscal 1999 was a 53-week
year.
Basis of Presentation
All historical financial information has been restated to reflect the
acquisitions of StratumOne Communications, Inc.("StratumOne") and TransMedia
Communications, Inc.("TransMedia") in the first quarter of fiscal 2000 and
Cerent Corporation ("Cerent") and WebLine Communications Corporation ("WebLine")
in the second quarter of fiscal 2000 which were accounted for as poolings of
interests. In addition, the historical financial information has been restated
to reflect the acquisition of Fibex Systems which was completed in the fourth
quarter of fiscal 1999 and accounted for as a pooling of interests.
The accompanying financial data as of April 29, 2000 and for the three and nine
months ended April 29, 2000 and May 1, 1999, has been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The July 31, 1999 consolidated balance sheet was derived
from audited financial statements, but does not include all disclosures required
by
6
<PAGE> 7
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
generally accepted accounting principles. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended July 31, 1999 and
Current Report on Form 8-K/A filed February 3, 2000.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present a fair statement of financial
position as of April 29, 2000, results of operations for the three and nine
months ended April 29, 2000 and May 1, 1999, and cash flows for the nine months
ended April 29, 2000 and May 1, 1999 have been made. The results of operations
for the three and nine months ended April 29, 2000 are not necessarily
indicative of the operating results for the full fiscal year or any future
periods.
Payroll Taxes Associated with Stock Option Exercises
In September 1999, the FASB issued Emerging Issues Task Force Topic No. D-83
("EITF D-83"), "Accounting for Payroll Taxes Associated with Stock Option
Exercises." EITF D-83 requires that payroll taxes paid on the difference between
the exercise price and the fair value of acquired stock in association with an
employee's exercise of stock options to be treated as operating expenses.
Payroll taxes on stock option exercises were $25 million in the third quarter of
fiscal 2000.
Computation of Net Income Per Common Share
Basic net income per common share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per common
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either
7
<PAGE> 8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assets or liabilities in the balance sheet and measure those instruments at fair
value. Management does not expect the adoption of SFAS 133 to have a material
effect on the Company's operations or financial position. The Company is
required to adopt SFAS 133 in the first quarter of fiscal 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Management does not expect the adoption of
SAB 101 to have a material effect on the Company's operations or financial
position. The Company is required to adopt SAB 101 in the first quarter of
fiscal 2001.
3. BUSINESS COMBINATIONS
Purchase Combinations
The Company has made a number of purchase acquisitions. The consolidated
financial statements include the operating results of each business from the
date of acquisition. Pro forma results of operations have not been presented
because the effects of these acquisitions were not material on either an
individual or an aggregate basis.
The amounts allocated to in-process research and development expense were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.
Research and development costs to bring the products from the acquired companies
to technological feasibility are not expected to have a material impact on the
Company's future results of operations or financial condition. Amounts allocated
to goodwill and purchased intangible assets are amortized on a straight-line
basis over periods not exceeding five years.
In September 1999, the Company completed its purchase of Monterey Networks, Inc.
("Monterey"), a developer of infrastructure-class, optical cross-connect
technology that is used to increase network capacity at the core of an optical
network. The Company's acquired technology consists of one product currently
under development which will result in a wavelength router that would
intelligently route signals over long-haul optical pipes created by Dense Wave
Division Multiplexing. Also, in September 1999, the Company completed its
purchase of MaxComm Technologies, Inc.
8
<PAGE> 9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
("MaxComm"), a developer of broadband Internet technology that brings data and
multiple voice lines to consumers. The Company's acquired technology consists of
one product currently under development which is designed to allow the end user
to create an adaptable home Local Area Network ("LAN") utilizing their existing
in-home wiring to support up to four separate phone lines with different
numbers.
In November 1999, the Company completed its purchase of Calista, Inc.
("Calista") and Tasmania Network Systems, Inc. ("Tasmania"). Calista is a
developer of Internet technology that allows different business phone systems to
work together over an open Internet-based infrastructure. The Company's acquired
technology for Calista consists of one product currently under development which
is designed to link up telecommuters or branch office phones to a corporate PBX
over the Internet or intranet. Tasmania is a developer of network caching
software technology. The Company's acquired technology consists of one product
currently under development which will improve the performance of cache
technology.
In December 1999, the Company acquired Internet Engineering Group, L.L.C.
("IEng") and Worldwide Data Systems, Inc. ("Worldwide"). IEng is a developer of
high-performance software to enable service providers to build next-generation
high speed networks. Worldwide is a leader in consulting and engineering
services for the convergence of data and voice networks.
In February 2000, the Company completed its purchase of the optical systems
business of Pirelli S.p.A. of Milan, Italy ("Pirelli"), an innovator in both
optical component technology and optical systems for service providers. The
Company's acquired technology consists of products which will allow service
providers to transmit multi-channel Dense Wave Division Multiplexing signals
over optical fiber.
In March 2000, the Company completed its purchase of Aironet Wireless
Communications, Inc. ("Aironet"), a developer of standards-based, high-speed
wireless LAN products. The Company's acquired technology consists of wireless
data solutions, including LAN and bridge products, for intra and inter-building
applications.
9
<PAGE> 10
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of purchase transactions completed in fiscal 2000 (in
millions):
<TABLE>
<CAPTION>
In-process
Research &
Development Form of Consideration and Other
Entity Name Consideration Expense Notes to Acquisition
----------- ------------- ----------- -------------------------------------------
<S> <C> <C> <C>
Monterey $ 517 $ 354 Common stock and options assumed; $14 in
liabilities assumed; goodwill and other
intangibles recorded of $154.
$ 73 $ 27 Common stock and options assumed;
MaxComm goodwill and other intangibles recorded
of $41.
Calista $ 57 $ 28 Common stock and options assumed; $3 in
liabilities assumed; goodwill and other
intangibles recorded of $34.
Tasmania $ 26 $ 15 Common stock; goodwill and other
intangibles recorded of $13.
Pirelli $ 2,018 $ 245 Common stock; $362 in liabilities
assumed; goodwill and other intangibles
recorded of $1,717.
Aironet $ 835 $ 243 Common stock and options assumed; $34 in
liabilities assumed; goodwill and other
intangibles recorded of $589.
</TABLE>
Total in-process research and development expense for the nine months ended
April 29, 2000 and May 1, 1999 was $912 million and $390 million, respectively.
The in-process research and development expense for the nine months ended April
29, 2000 was attributable to stock consideration. The in-process research and
development expense for the nine months ended May 1, 1999 was attributable to
$298 million of stock consideration and $92 million of cash consideration.
Pooling of Interests Combinations
In September 1999, the Company acquired StratumOne, a developer of highly
integrated, high-performance semiconductor technology, and TransMedia, a
provider of Media Gateway technology that unites the multiple networks of public
voice communications. Under the terms of the agreements, approximately 13.3
million and 13.9 million shares of common stock were exchanged and options
10
<PAGE> 11
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
were assumed to acquire StratumOne and TransMedia, respectively. Also, in
September 1999, the Company acquired COCOM A/S ("COCOM"), a European developer
of high-speed Internet access solutions over cable, satellite, and wireless
networks based on international standards. Under the terms of the agreements,
approximately 1.9 million shares of common stock were exchanged to acquire
Cocom. Based on the shares of common stock exchanged and options assumed as of
the consummation date, the total fair values of the acquisitions were
approximately $435 million, $407 million, and $66 million for StratumOne,
Transmedia, and COCOM, respectively.
In November 1999, the Company completed the acquisitions of Cerent and WebLine.
Cerent is a developer of next-generation optical transport products and WebLine
is a provider of customer interaction management software for Internet customer
service and e-commerce. Under the terms of the agreements, approximately 199.9
million and 9.5 million shares of common stock were exchanged and options were
assumed to acquire Cerent and WebLine, respectively. Based on the shares of
common stock exchanged and options assumed as of the consummation date, the
total fair values of the acquisitions were approximately $6.9 billion and $325
million for Cerent and WebLine, respectively.
In December 1999, the Company acquired V-Bits, Inc. ("V-Bits"), a provider of
standards-based digital video processing systems for cable television service
providers. Under the terms of the agreement, approximately 2.8 million shares of
common stock were exchanged and options were assumed to acquire V-Bits. Based on
the shares of common stock exchanged and options assumed as of the consummation
date, the total fair value of the acquisition was approximately $128 million.
In March 2000, the Company acquired Growth Networks, Inc. ("Growth"), a
developer of Internet switching fabrics. Under the terms of the agreement,
approximately 5.6 million shares of common stock were exchanged and options were
assumed to acquire Growth. Based on the shares of common stock exchanged and
options assumed as of the date of consummation, the total fair value of the
acquisition was approximately $355 million.
Also, in March 2000, the Company acquired Altiga Networks, Inc. ("Altiga") and
Compatible Systems Corporation ("Compatible"). Altiga is a developer of
integrated Virtual Private Networks ("VPN") solutions for remote access
applications. Compatible is a developer of standards-based, reliable and
scalable VPN solutions for service provider networks. Under the terms of the
agreements,
11
<PAGE> 12
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
approximately 6.3 million and 3.8 million shares of common stock were exchanged
and options were assumed to acquire Altiga and Compatible, respectively. Based
on the shares of common stock exchanged and options assumed as of the date of
consummation, the total fair values of the acquisitions were approximately $335
million and $232 million for Altiga and Compatible, respectively.
All historical financial information contained herein has been restated to
reflect the acquisitions of StratumOne, TransMedia, Cerent, and WebLine. The
historical operations of Cocom, V-Bits, Growth, Altiga and Compatible were not
material to the Company's consolidated operations or financial position;
therefore, prior period financial statements have not been restated for these
acquisitions.
Acquisitions Pending or Completed After April 29, 2000
In March 2000, the Company announced definitive agreements to acquire Atlantech
Technologies ("Atlantech") and JetCell, Inc. ("JetCell") for approximately $180
million and $200 million, respectively, payable in common stock and cash.
Atlantech is a provider of network element management software designed to help
configure and monitor network hardware. JetCell is a developer of
standards-based, in-building wireless telephony solutions for corporate
networks. The Atlantech and JetCell acquisitions were completed in May 2000 and
accounted for as purchases.
Also, in March 2000, the Company announced definitive agreements to acquire
InfoGear Technology Corporation ("InfoGear") and SightPath, Inc. ("SightPath").
InfoGear is a provider of Internet appliances and software used to manage
information appliances. SightPath is a provider of appliances for creating
intelligent Content Delivery Networks. Under the terms of the agreements,
approximately 4.7 million and 11.4 million shares of common stock were exchanged
and options were assumed to acquire InfoGear and SightPath, respectively. Based
upon the shares of common stock exchanged and options assumed as of the date of
consummation, the total fair values of the acquisitions were approximately $301
million and $800 million, respectively. The InfoGear and Sightpath acquisitions
were completed in June 2000 and May 2000, respectively, and accounted for as
poolings of interests.
In April 2000, the Company announced definitive agreements to acquire Pentacom,
Ltd. ("Pentacom") and a wholly-owned subsidiary of Seagull Semiconductor, Ltd.
("Seagull") for approximately $118 million and $19 million, respectively,
payable in common stock. Pentacom is a provider of products implementing Spatial
Reuse
12
<PAGE> 13
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Protocol which allows Internet Protocol-based metropolitan networks to offer the
same protection and restoration benefits as SONET-based networks while doubling
bandwith efficiency. Seagull is a developer of silicon technology. The Pentacom
and Seagull acquisitions are expected to be completed in the fourth quarter of
fiscal 2000 and will be accounted for as purchases.
In May 2000, the Company announced a definitive agreement to acquire ArrowPoint
Communications, Inc. ("ArrowPoint"). ArrowPoint is a provider of content
switches that optimize the delivery of web content. Under the terms of the
agreement, approximately 90.0 million shares of common stock will be exchanged
and options will be assumed to acquire ArrowPoint. Based on the common stock
exchanged and options assumed as of the date of consummation, the total fair
value of the acquisition is approximately $5.7 billion. The ArrowPoint
acquisition is expected to be completed in the fourth quarter of fiscal 2000 and
will be accounted for as a pooling of interests.
Also, in May 2000, the Company announced a definitive agreement to acquire
Qeyton Systems ("Qeyton") for approximately $800 million, payable in common
stock. Qeyton is a developer of Metropolitan Dense Wave Division Multiplexing
technology to optimize the performance and cost requirements of service
providers' metropolitan networks. The Qeyton acquisition is expected to be
completed in the fourth quarter of fiscal 2000 and will be accounted for as a
purchase.
13
<PAGE> 14
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. BALANCE SHEET DETAIL
(In millions)
<TABLE>
<CAPTION>
Inventories, net: April 29, July 31,
2000 1999
--------- ---------
<S> <C> <C>
Raw materials $ 109 $ 143
Work in process 303 198
Finished goods 360 280
Demonstration systems 106 35
------- -------
Total $ 878 $ 656
======= =======
</TABLE>
<TABLE>
<CAPTION>
Other Assets, net: April 29, July 31,
2000 1999
--------- ---------
<S> <C> <C>
Intangible assets:
Goodwill--gross $ 2,200 $ 157
Purchased intangible assets--gross 1,246 395
Less: Accumulated amortization (232) (92)
------- -------
Intangible assets, net 3,214 460
Other assets 1,049 731
------- -------
Total $ 4,263 $ 1,191
======= =======
</TABLE>
The following table presents the details of the amortization of goodwill and
purchased intangible assets as reported in the consolidated statements of
operations (in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
------------------- ------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Reported as:
Cost of sales $ 6 $ 2 $ 18 $ 2
Operating expenses 51 19 122 42
---- ---- ---- ----
Total amortization
expense $ 57 $ 21 $140 $ 44
==== ==== ==== ====
</TABLE>
14
<PAGE> 15
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
The following table presents the calculation of comprehensive income as required
by SFAS No. 130. Comprehensive income has no impact on the Company's net income,
balance sheet, or shareholders' equity. The components of comprehensive income,
net of tax, are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
------------------------ -----------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
---------- ------- ---------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income $ 662 $ 636 $ 1,907 $ 1,427
Other comprehensive
income (loss):
Change in unrealized
gain on investments,
net (111) (30) 1,408 61
Change in accumulated
translation adjustments (9) (6) (5) 5
------- ------- ------- -------
Total comprehensive
income $ 542 $ 600 $ 3,310 $ 1,493
======= ======= ======= =======
</TABLE>
6. INCOME TAXES
The Company paid income taxes of $217 million and $221 million for the nine
months ended April 29, 2000 and May 1, 1999, respectively. The Company's income
taxes currently payable for federal, state, and foreign purposes have been
reduced by the tax benefits from stock option transactions. The tax benefits
totaled $930 million and $679 million for the nine months ended April 29, 2000
and May 1, 1999, respectively, and were credited directly to shareholders'
equity.
7. SHAREHOLDERS' EQUITY AND STOCK SPLIT
Cisco's Board of Directors authorized the splitting of the Company's common
stock on a two-for-one basis for shareholders of record on February 22, 2000.
Shares resulting from the split were distributed by the transfer agent on March
22, 2000. All share and per-share numbers contained herein reflect this stock
split.
15
<PAGE> 16
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company's operations involve the design, development, manufacturing,
marketing, and technical support of networking products and services. The
Company offers end-to-end networking solutions for its customers. Cisco products
include routers, LAN and ATM switches, dialup access servers, and network
management software. These products, integrated by the Cisco IOS(R) software,
link geographically dispersed LANs, WANs, and IBM networks.
The Company conducts business globally and is managed geographically. The
Company's management relies on an internal management system that provides sales
and standard cost information by geographical theater. Sales are attributed to a
theater based on the ordering location of the customer. The Company's management
makes financial decisions and allocates resources based on the information it
receives from this internal management system. The Company does not allocate
engineering, sales and marketing, or general and administrative expenses to
geographical segments as management does not use this information to measure the
performance of the operating segments. Management does not believe that
allocating these expenses is material in evaluating a geographical segment's
performance. Information from this internal management system differs from the
amounts reported under generally accepted accounting principles due to certain
corporate level adjustments. These corporate level adjustments are primarily
sales adjustments related to credit memos and returns. Based on the criteria set
forth in SFAS No. 131, the Company has four reportable segments: the Americas,
Europe, Middle East and Africa ("EMEA"), Asia/Pacific, and Japan.
16
<PAGE> 17
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized financial information by segment for the three and nine months ended
April 29, 2000 and May 1, 1999, as taken from the internal management system
discussed above, is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales:
U.S./Americas $ 3,370 $ 2,046 $ 8,900 $ 5,718
EMEA 1,203 864 3,305 2,288
Asia/Pacific 505 206 1,139 556
Japan 253 154 592 438
Sales adjustments (412) (99) (753) (386)
-------- -------- -------- --------
Total--Net Sales $ 4,919 $ 3,171 $ 13,183 $ 8,614
======== ======== ======== ========
Standard Margin:
U.S./Americas $ 2,439 $ 1,478 $ 6,489 $ 4,143
EMEA 902 639 2,468 1,694
Asia/Pacific 363 146 830 403
Japan 197 120 466 337
Sales adjustments (412) (99) (753) (386)
Production overhead (133) (66) (322) (183)
Manufacturing
variances and other
related costs (185) (159) (666) (391)
-------- -------- -------- --------
Total--Gross Margin $ 3,171 $ 2,059 $ 8,512 $ 5,617
======== ======== ======== ========
</TABLE>
The standard margins by geographical segment differ from the amounts recognized
under generally accepted accounting principles because the Company does not
allocate certain sales adjustments, production overhead, and manufacturing
variances and other related costs to the segments. The above table reconciles
the net sales and standard margins by geographical segment to net sales and
gross margins as reported in the consolidated statements of operations by
including such adjustments.
17
<PAGE> 18
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents external net sales for groups of similar products
and services (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -----------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Routers $ 1,999 $ 1,295 $ 5,285 $ 3,737
Switches 1,924 1,342 5,191 3,659
Access 632 326 1,614 789
Other 776 307 1,846 815
Sales adjustments (412) (99) (753) (386)
-------- -------- -------- --------
Total--Net Sales $ 4,919 $ 3,171 $ 13,183 $ 8,614
======== ======== ======== ========
</TABLE>
Substantially all of the Company's assets at April 29, 2000 and July 31, 1999
were attributable to U.S. operations. No single customer accounted for 10% or
more of net sales during the three or nine months ended April 29, 2000 and May
1, 1999.
9. NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per
share (in millions, except per-share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 662 $ 636 $1,907 $1,427
====== ====== ====== ======
Denominator:
Weighted average
shares--basic 6,944 6,624 6,892 6,543
Effect of dilutive
securities:
Employee stock options 506 430 474 412
------ ------ ------ ------
Weighted average
shares--diluted 7,450 7,054 7,366 6,955
====== ====== ====== ======
Net income per share--basic $ .10 $ .10 $ .28 $ .22
====== ====== ====== ======
Net income per share--diluted $ .09 $ .09 $ .26 $ .21
====== ====== ====== ======
</TABLE>
18
<PAGE> 19
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. OTHER
In the third quarter of fiscal 2000, the Company invested approximately $1
billion in mandatorily redeemable convertible preferred stock of KPMG
Consulting, Inc., a privately held subsidiary of KPMG LLP. KPMG Consulting, Inc.
is a provider of Internet integration services.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All historical financial information has been restated to reflect the
acquisitions of StratumOne Communications, Inc. and TransMedia Communications,
Inc. in the first quarter of fiscal 2000 and Cerent Corporation and WebLine
Communications Corporation in the second quarter of fiscal 2000 which were
accounted for as poolings of interests. In addition, the historical financial
information has been restated to reflect the acquisition of Fibex Systems which
was completed in the fourth quarter of fiscal 1999 and accounted for as a
pooling of interests.
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Quarterly
Report, and in other documents we file with the Securities and Exchange
Commission.
Net sales grew to $4.92 billion in the third quarter of fiscal 2000 from $3.17
billion in the third quarter of fiscal 1999. Net sales for the first nine months
of fiscal 2000 were $13.18 billion, compared with $8.61 billion for the first
nine months of fiscal 1999. The 55.1% increase in net sales between the two
three-month periods and the 53.0% increase in net sales between the two
nine-month periods were primarily a result of increasing unit sales of LAN
switching products such as the Catalyst 3500 and 6000 families, the Cisco 12000
gigabit switch router ("GSR"), modular access routers such as the Cisco 2600 and
3600 families, growth in the sales of add-on boards that provide increased
functionality, optical transport products such as the ONS 15400, remote access
products such as the AS5300 and AS5800, and increased maintenance service
contract sales. Additionally, sales of some of our more established product
lines, such as the Catalyst 5000, Cisco 2500 and Cisco 4000 product families
have migrated towards newer products such as the Catalyst 6000, Cisco 2600,
Cisco 3600 and Cisco 7200 product families. Sales in the third quarter of fiscal
2000 grew 64.7% in the Americas, 39.2% in EMEA, 145.1% in Asia/Pacific and 64.3%
in Japan compared to the third quarter of fiscal 1999. Sales in the first nine
months of fiscal 2000 grew 55.6% in the Americas, 44.4% in EMEA, 104.9% in
Asia/Pacific and 35.2% in Japan compared to the first nine months of fiscal 1999
(See Note 8 to the consolidated financial statements). Market demand and
deployment of Internet technologies and business solutions, as well as the
overall
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
economic health, are primarily driving the strong growth within these regions.
Gross margins decreased to 64.5% in the third quarter of fiscal 2000 from 64.9%
in the third quarter of fiscal 1999. Gross margins decreased to 64.6% in the
first nine months of fiscal 2000 from 65.2% in the first nine months of fiscal
1999. Standard margins for the Americas, EMEA, Asia/Pacific and Japan were
72.4%, 75.0%, 71.9%, and 77.9%, respectively, for the third quarter of fiscal
2000 compared to 72.2%, 74.0%, 70.9%, and 77.9%, respectively, for the third
quarter of fiscal 1999. Standard margins for the Americas, EMEA, Asia/Pacific
and Japan were 72.9%, 74.7%, 72.9%, and 78.7%, respectively, for the first nine
months of fiscal 2000 compared to 72.5%, 74.0%, 72.5%, and 76.9%, respectively,
for the first nine months of fiscal 1999 (see Note 8 to the consolidated
financial statements). The standard margins by geographical segment differ from
the amounts recognized under generally accepted accounting principles because
the Company does not allocate certain sales adjustments, production overhead,
and manufacturing variances and other related costs to the segments. Standard
margins for the Americas, where 68.5% and 67.5% of our revenues were derived in
the third quarter and the first nine months of fiscal 2000, respectively,
increased by 0.2% and 0.4%, respectively, compared to the same periods in fiscal
1999. Standard margins for EMEA, where 24.5% and 25.1% of our revenues were
derived in the third quarter and the first nine months of fiscal 2000,
respectively, increased by 1.0% and 0.7%, respectively, compared to the same
periods in fiscal 1999. The changes in standard margins for the Americas and
EMEA were due to a shift in revenue mix and the timing of when certain sales
adjustments are applied to geographical theatres. The decrease in the overall
gross margin was primarily due to the continued shift in revenue mix towards our
lower-margin products, other production related costs, and the continued pricing
pressure seen from competitors in certain product areas. The prices of component
parts have fluctuated in the recent past, and we expect that this trend may
continue. An increase in the price of component parts may have a material
adverse impact on gross margins. We expect that gross margins will continue to
decrease in the future because we believe that the market for lower-margin
remote access and switching products for small to medium-sized businesses will
continue to increase at a faster rate than the market for our higher-margin
router and high-performance switching products. Additionally, as we focus on new
market opportunities, we face increasing competitive pressure from large
telecommunications equipment suppliers and well funded start-up companies, which
may materially adversely affect gross margins. We are attempting to mitigate
this trend through various means, such as increasing the functionality of our
products, continued
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
value engineering, controlling royalty costs, and improving manufacturing
efficiencies. There can be no assurance that any efforts made by us in these and
other areas will successfully offset decreasing margins.
Research and development expenses increased by $286 million in the third quarter
of fiscal 2000 over the third quarter of fiscal 1999, an increase to 14.6% from
13.7% of net sales. Research and development expenses increased by $710 million
in the first nine months of fiscal 2000 over the first nine months of fiscal
1999, an increase to 14.1% from 13.3% of net sales. The increases reflect our
ongoing research and development efforts in a wide variety of areas such as
voice, video, and data integration, Digital Subscriber Line ("DSL")
technologies, cable modem technology, wireless access, dial access, enterprise
switching, optical transport, security, network management, and high-end routing
technologies, among others. A significant portion of the increase was due to the
addition of new personnel, partly through acquisitions, as well as higher
expenditures on prototypes and depreciation on additional lab equipment. For the
near future, research and development expenses are expected to increase at a
rate similar to or slightly greater than the sales growth rate, as we invest in
technology to address potential market opportunities. We also continue to
purchase technology in order to bring a broad range of products to the market in
a timely fashion. If we believe that we are unable to enter a particular market
in a timely manner with internally developed products, we may license technology
or acquire other businesses as an alternative to internal research and
development. All of our research and development costs are expensed as incurred.
Sales and marketing expenses increased by $367 million in the third quarter of
fiscal 2000 over the third quarter of fiscal 1999, an increase to 20.8% from
20.7% of net sales. Sales and marketing expenses increased by $1,008 million in
the first nine months of fiscal 2000 over the first nine months of fiscal 1999,
an increase to 20.9% from 20.3% of net sales. The increases were principally due
to an increase in the size of our direct sales force and related commissions,
additional marketing and advertising investments associated with the
introduction of new products, the expansion of distribution channels, and
general corporate branding. The increases also reflect our efforts to invest in
certain key areas such as expansion of our end-to-end strategy and service
provider coverage in order to position ourselves to take advantage of future
market opportunities.
General and administrative expenses increased by $52 million in the third
quarter of fiscal 2000 over the third quarter of fiscal 1999, remaining
consistent at 3.0% of net sales. General and
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
administrative expenses increased by $146 million in the first nine months of
fiscal 2000 over the first nine months of fiscal 1999, an increase to 3.0% from
2.9% of net sales. General and administrative expenses for the three and nine
months ended April 29, 2000 include acquisition related costs of approximately
$25 million. Excluding the acquisition related costs, the increases in general
and administrative expenses primarily relate to the addition of new personnel
and investments in infrastructure. It is management's intent to keep general and
administrative costs relatively constant as a percentage of net sales; however,
this is dependent upon the level of acquisition activity and our growth, among
other factors.
Amortization of goodwill and purchased intangible assets increased by $32
million in the third quarter of fiscal 2000 over the third quarter of fiscal
1999. Amortization of goodwill and purchased intangible assets increased by $80
million in the first nine months of fiscal 2000 over the first nine months of
fiscal 1999. Amortization of goodwill and purchased intangible assets includes
the amortization of goodwill and other purchased intangible assets relating to
various purchase acquisitions (See Note 4 to the consolidated financial
statements).
The amounts expensed to in-process research and development in the first nine
months of fiscal 2000 arose from the completed acquisitions of Monterey,
MaxComm, Calista, Tasmania, Pirelli, and Aironet (See Note 3 and Note 4 to the
consolidated financial statements).
The fair value of the existing products and patents as well as the technology
currently under development was determined by using the income approach, which
discounts expected future cash flows to present value. The discount rates used
in the present value calculations were typically derived from a weighted average
cost of capital analysis and venture capital surveys, adjusted upward to reflect
additional risks inherent in the development life cycle. These risk factors have
increased the overall discount rate between 5% to 20% for acquisitions in the
current period. We consider the pricing model for products related to these
acquisitions to be standard within the high-technology communications industry.
We do not expect to achieve a material amount of expense reductions or synergies
as a result of integrating the acquired in-process technology. Therefore, the
valuation assumptions do not include anticipated cost savings. We expect that
products incorporating the acquired technology from these acquisitions will be
completed and begin to generate cash flows over the six to nine months after
integration. However, development of these technologies remains a significant
risk to us due to the remaining effort to achieve technical viability,
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
rapidly changing customer markets, uncertain standards for new products, and
significant competitive threats from numerous companies. The nature of the
efforts to develop the acquired technology into commercially viable products
consists principally of planning, designing, and testing activities necessary to
determine that the product can meet market expectations, including functionality
and technical requirements. Failure to bring these products to market in a
timely manner could result in a loss of market share, or a lost opportunity to
capitalize on emerging markets, and could have a material adverse impact on our
business and operating results.
The following table summarizes the significant assumptions underlying the
valuations in fiscal 2000 and 1999 (in millions, except percentages):
<TABLE>
<CAPTION>
Acquisition Assumptions Development
-------------------------------- Costs Incurred
Estimated Cost to Date After
to Complete Risk Adjusted Acquisition on
Technology at Discount Acquired
Time of Rate for In- In-Process
Entity Name Acquisition Process R&D Technology
----------- ----------- ----------- --------------
<S> <C> <C> <C>
Fiscal 2000
-----------
Monterey Networks, Inc. $ 4 30% $25
MaxComm Technologies, Inc. $ 2 25% $ 4
Calista, Inc. $ 1 37.5% $ 1
Tasmania Network Systems, Inc. $ 1 45% $ 1
Pirelli S.p.A $ 5 20% $ 2
Aironet Wireless Communications, Inc. $ 3 23.5% $ 2
Fiscal 1999
-----------
American Internet Corp. $ 1 25% $ 1
Summa Four, Inc. $ 5 25% $24
Clarity Wireless, Inc. $42 32% $30
Selsius Systems, Inc. $15 31% $17
PipeLinks, Inc. $ 5 31% $18
Amteva Technologies, Inc. $ 4 35% $ 4
</TABLE>
Regarding our purchase acquisitions completed in fiscal 2000 and 1999, actual
results to date have been materially consistent with the assumptions at the time
of the acquisitions as they relate to the value of in-process research and
development. The assumptions primarily consist of an expected completion date
for the
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
in-process projects, estimated costs to complete the projects, and
revenue and expense projections once the products have entered the market.
Products from these acquisitions have generally been introduced to the market
six to nine months after the acquisition. Failure to achieve the expected levels
of revenues and net income from these products will negatively impact the return
on investment expected at the time that the acquisition was completed and
potentially result in impairment of any other assets related to the development
activities.
Interest and other income increased by $222 million in the third quarter of
fiscal 2000 over the third quarter of fiscal 1999. Interest and other income
increased by $329 million for the first nine months of fiscal 2000 over the
first nine months of fiscal 1999. The increases were principally due to gains
realized on minority investments of $156 million and $187 million in the third
quarter and for the first nine months of fiscal 2000, respectively and income
related to the general increase in cash and investments which was generated from
our positive cash flows. The gains realized on minority investments were not
material in fiscal 1999.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments, and investments were $15.1
billion at April 29, 2000, an increase of $6.0 billion from July 31, 1999. The
increase is primarily a result of unrealized gains on publicly held investments
and cash generated by operations and from the exercise of employee stock
options. The cash flows from operating activities were partially offset by cash
outflows from tax payments of approximately $217 million, and cash outflows from
investing activities primarily relating to capital expenditures of approximately
$666 million.
Accounts receivable increased 53.9% from July 31, 1999 to April 29, 2000. Days
sales outstanding in receivables increased to 36 days at April 29, 2000 from 32
days at July 31, 1999. Inventory levels increased 33.8% from July 31, 1999 to
April 29, 2000. Inventory management remains an area of focus as we balance the
need to maintain strategic inventory levels to ensure competitive lead times
versus the risk of inventory obsolescence because of rapidly changing technology
and customer requirements.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
At April 29, 2000, we had a line of credit totaling $500 million, which expires
July 2002. There have been no borrowings under this facility.
We have entered into certain lease arrangements in San Jose, California, and
Research Triangle Park, North Carolina, where we have established our
headquarter operations and certain research and development and customer support
activities. In connection with these transactions, we pledged $1.2 billion of
our investments as collateral for certain obligations of the leases. We
anticipate that we will occupy more leased property in the future that will
require similar pledged securities; however, we do not expect the impact of this
activity to be material to liquidity.
We believe that our current cash and cash equivalents, short-term investments,
line of credit, and cash generated from operations will satisfy our expected
working capital and capital expenditure requirements at least through the next
twelve months.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Quarterly Report.
YOU SHOULD EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have in the past
been, and will continue to be, subject to quarterly fluctuations as a result of
a number of factors. These factors include:
- The integration of people, operations, and products from acquired
businesses and technologies;
- Increased competition in the networking industry;
- The overall trend toward industry consolidation;
- The introduction and market acceptance of new technologies and
standards, including switch routers, Gigabit Ethernet switching, Tag
Switching (currently also known as multiprotocol label switching
["MPLS"]), optical transport, wireless, content networking and data,
voice, and video capabilities;
- Variations in sales channels, product costs, or mix of products sold;
- The timing of orders and manufacturing lead times;
- The trend towards sales of integrated network solutions;
- Employer payroll taxes to be paid on an employee's gain on stock options
exercised. Such payroll taxes are recorded as operating expenses and
could be material based upon the number of optionees who exercise their
options and the price of our common stock; and
- Changes in general economic conditions and specific economic conditions
in the computer and networking industries.
Any of the above factors could have a material adverse impact on our operations
and financial results. For example, from time to time, we have made acquisitions
that result in-process research and development expenses being charged in an
individual quarter. These charges may occur in any particular quarter resulting
in variability in our quarterly earnings. Additionally, the dollar amounts of
large orders for our products have been increasing and therefore the operating
results for a quarter could be materially
27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
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 CONTINUE TO INVEST IN NEW AND EXISTING MARKET OPPORTUNITIES
We are investing in increased headcount, inventory, manufacturing capacity, and
product development through internal efforts and acquisitions, as a result of
growth in existing opportunities and new or emerging opportunities in our target
markets. Given the expected rate of growth of our segment of the market, we
intend to add resources across all functions.
With increased levels of spending, an inability to meet shipment requirements in
a particular quarter could have a negative impact on our operating results for
that period as we will not be able to react quickly enough to scale back
expenses. Increased investments across all functions could translate into a
faster rate of expense growth compared to revenue growth.
SINCE OUR GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER ARE
DIFFICULT TO PREDICT
We expect that in the future, our net sales may grow at a slower rate than
experienced in previous periods and that on a quarter-to-quarter basis, our
growth in net sales may be significantly lower than our historical quarterly
growth rate. As a consequence, operating results for a particular quarter are
extremely difficult to predict. Our ability to meet financial expectations could
be hampered if the nonlinear sales pattern seen in past quarters reoccur in
future periods. We generally have had one quarter of the fiscal year when
backlog has been reduced. Although such reductions have not occurred
consistently in recent years, they are difficult to predict and may occur in the
future. In addition, in response to customer demand, we continue to attempt to
reduce our product manufacturing lead times, which may result in corresponding
reductions in order backlog. A decline in backlog levels could result in more
variability and less predictability in our quarter-to-quarter net sales and
operating results going forward. On the other hand, for certain products, lead
times are longer than our goal. If we cannot reduce manufacturing lead times for
such products, our customers may cancel orders or not place further orders if
shorter lead times are available from other manufacturers, thus creating
additional variability.
28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
WE EXPECT GROSS MARGINS TO DECLINE OVER TIME
We expect that gross margins may be adversely affected by increases in material
or labor costs, heightened price competition, increasing levels of services, and
changes in channels of distribution or in the mix of products sold. For example,
we believe 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 our higher-margin
router and high-performance switching products targeted toward enterprise and
service provider customers. We have recently introduced several new products,
with additional new products scheduled to be released in the future. If product
or related warranty costs associated with these new products are greater than we
have experienced historically, gross margins may be adversely affected. Our
gross margins may also be impacted by geographic mix, as well as the mix of
configurations within each product group. We continue to expand into third-party
or indirect distribution channels, which generally results in lower gross
margins. In addition, increasing third-party and indirect distribution channels
generally result in greater difficulty in forecasting the mix of our product,
and to a certain degree, the timing of orders from our customers. Downward
pressures on our gross margin may be further impacted by other factors, such as
increased percentage of revenues from service provider markets which may have
lower margins and/or an increase in product costs, which would adversely affect
our future operating results.
We also expect that our operating margins may decrease as we continue to hire
additional personnel and experience increases in overall operating expenses to
support our business. We plan our operating expense levels based primarily on
forecasted revenue levels. Because these expenses are relatively fixed in the
short term, a shortfall in revenue could lead to operating results being below
expectations.
29
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
WE ARE DEPENDENT UPON ADEQUATE COMPONENT SUPPLY AND MANUFACTURING CAPACITY
Our growth and ability to meet customer demands also depend in part on our
ability to obtain timely deliveries of parts from our suppliers. We have
experienced component shortages in the past that have adversely affected our
operations. Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurance that we will not encounter these problems
in the future. Although we generally use standard parts and components for our
products, certain components are presently available only from a single source
or limited sources.
While our suppliers have performed effectively and been relatively flexible to
date, we believe that we will be faced with the following challenges going
forward:
- New markets that we participate in may grow quickly and thus, consume
significant component capacity; and
- As we continue to acquire companies and new technologies, we are
dependent, at least initially, on unfamiliar supply chains or relatively
small supply partners.
Manufacturing capacity and component supply constraints could be significant
issues for us. A reduction or interruption in supply or a significant increase
in the price of one or more components would adversely affect our business,
operating results and financial condition and could materially damage customer
relationships.
WE COMPETE IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET
We compete 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 us. We compete
with numerous vendors in each product category. We expect that the overall
number of competitors providing niche product solutions will increase due to the
market's attractive growth. On the other hand, we expect the number of vendors
supplying end-to-end telecommunications solutions will decrease due to the rapid
pace of acquisitions in the industry. Ultimately we believe only a few large
suppliers of
30
<PAGE> 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
end-to-end telecommunication equipment solutions will become our primary
competitors.
In addition to the product competition, we compete to attract and retain our
current and future key employees. Competition for highly skilled business,
technical, marketing and other personnel is intense for high technology
companies. Our continued growth and success depends on our ability to retain
senior management and other key employees, and the hiring of new qualified
employees.
Our competitors include, among others, Alcatel, Ericsson, Extreme, Foundry,
Juniper, Lucent, Nortel, Siemens AG, and Sycamore. Some of our competitors
compete across many of our product lines, while others do not offer as wide a
breadth of solutions. Several of our current and potential competitors have
greater financial, marketing, and technical resources than us.
The principal competitive factors in the markets in which we presently compete
and may compete in the future are:
- price;
- performance;
- the ability to provide end-to-end solutions and support;
- conformance to standards;
- the ability to provide value added features such as security,
reliability, and investment protection; and
- market presence.
We also face competition from customers we license technology to and suppliers
from whom we transfer technology. Networking's inherent nature requires
interoperability. As such, we must cooperate and at the same time compete with
these companies. Our inability to effectively manage these complicated
relationships with customers and suppliers could have a material adverse effect
on our business, operating results, and financial condition.
31
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS
The networking business is highly competitive, and as such, our growth is
dependent upon market growth, our ability to enhance our existing products and
our ability to introduce new products on a timely basis. One of the ways we have
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:
- difficulties in integration of 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; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition.
We must also maintain our ability to manage any such growth effectively. Failure
to manage growth effectively and successfully integrate acquisitions we made
could harm our business and operating results.
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
32
<PAGE> 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
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 recently seen our exposures to emerging market currencies,
such as the Brazilian real, Korean won, and Russian ruble, among others,
increase because of our expanding presence in these markets and the 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
do not 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 significant proportion of our sales are derived through our partners in
two-tier distribution channels. These customers are generally given privileges
to return inventory, receive credits for changes in selling prices, and
participate in cooperative marketing programs. We maintain appropriate accruals
and allowances for such exposures. However, such partners tend to have access to
more limited financial resources than other resellers and end-user customers and
therefore represent potential sources of increased credit risk. We are
experiencing increased demands for customer financing and leasing solutions,
particularly from competitive local exchange carriers ("CLECs"). CLECs typically
finance significant networking infrastructure deployments through alternative
forms of financing, including leasing, through us. Although we have programs in
place to monitor and mitigate the associated risk, there can be no assurance
that such programs will alleviate all of our credit risk. We also continue to
monitor increased credit exposures because of the weakened financial conditions
in certain geographical regions, and the impact that such conditions may have on
the worldwide economy. Although we have not experienced significant losses due
to customers failing to meet their obligations to date, such losses, if
incurred, could harm our
33
<PAGE> 34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
business and have a material adverse effect on our operating results and
financial condition.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES
We maintain 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 other
comprehensive income, net of tax. Part of this portfolio includes minority
equity investments in several publicly traded companies, the values of which are
subject to market price volatility. For example, as a result of recent market
price volatility of our publicly traded equity investments, we experienced a
$111 million after-tax unrealized loss on these investments during the third
quarter of fiscal 2000. We have also invested in numerous privately held
companies, many of which can still be considered in the startup or development
stages. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial investment in
these companies. We also have certain real estate lease commitments with
payments tied to short-term interest rates. At any time, a sharp rise in
interest rates could have a material adverse impact on the fair value of our
investment portfolio while increasing the costs associated with our lease
commitments. Conversely, declines in interest rates could have a material impact
on interest earnings for our investment portfolio. We do not currently hedge
these interest rate exposures.
Readers are referred to pages 28-29 of our fiscal 1999 Annual Report to
Shareholders for a more detailed discussion of quantitative and qualitative
disclosures about market risk. The following analysis presents the hypothetical
change in fair values of public equity investments that are sensitive to changes
in the stock market. These equity securities are held for purposes other than
trading. The modeling technique used measures the hypothetical change in fair
values arising from selected hypothetical changes in each stock's price. Stock
price fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus
50% were selected based on the probability of their occurrence.
34
<PAGE> 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
This table estimates the fair value of the publicly traded corporate equities at
a twelve-month time horizon (in millions):
<TABLE>
<CAPTION>
Fair value
Valuation of security as of Valuation of security
given X% decrease in each April 29, given X% increase in each
stock's price 2000 stock's price
------------------------------------- ------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(50%) (35%) (15%) 15% 35% 50%
------- ------- ------- ------- ------- -------
Corporate
Equities $ 1,622 $ 2,108 $ 2,757 $ 3,243 $ 3,729 $ 4,378 $ 4,865
</TABLE>
Our equity portfolio consists of securities with characteristics that most
closely match the S&P Index or companies traded on the NASDAQ Exchange. The
NASDAQ Composite Index has occurrence of a 15% movement in all of the last three
years and a 35% and 50% movement in at least one of the last three years.
WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB
Recent actions and comments from the SEC have indicated they are reviewing the
current valuation methodology of in-process research and development related to
business combinations. The SEC is concerned that some companies are writing off
more of the value of an acquisition than is appropriate. We believe we are in
compliance with all of the rules and related guidance as they currently exist.
However, there can be no assurance that the SEC will not seek to reduce the
amount of in-process research and development previously expensed by us. This
would result in the restatement of our previously filed financial statements and
could have a material adverse effect on our results of operations and financial
condition for periods subsequent to the acquisitions. Additionally, the
Financial Accounting Standards Board ("FASB") has announced that it plans to
rescind the pooling of interests method of acquisition accounting. If this
occurs, it could alter our acquisition strategy and potentially impair our
ability to acquire companies.
OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT
Our success is dependent upon our proprietary technology. We generally rely upon
patents, copyrights, trademarks, and trade secret laws to establish and maintain
our proprietary rights in our technology and products. We have a program to file
applications for and obtain patents in the United States and in selected foreign
countries where a potential market for our
35
<PAGE> 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
products exists. We have 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 us. 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
our technology. In addition, the laws of some foreign countries may not permit
the protection of our proprietary rights to the same extent as do the laws of
the United States. Although we believe the protection afforded by our patents,
patent applications, copyrights, and trademarks has value, the rapidly changing
technology in the networking industry makes our future success dependent
primarily on the innovative skills, technological expertise, and management
abilities of our employees rather than on patent, copyright, and trademark
protection.
Many of our 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 our products, we believe
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 on patent rights
of others. From time to time, we receive notices from or are sued by third
parties regarding patent claims. If infringement is alleged, there can be no
assurance that the necessary licenses would be available on acceptable terms, if
at all, or that we 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 our business, operating results and financial condition.
WE FACE RISKS FROM THE UNCERTAINTIES OF REGULATION OF THE INTERNET
There are currently few laws or regulations that apply directly to access or
commerce on the Internet. We could be materially adversely affected by
regulation in any country where we operate, on such technology as voice over the
Internet, encryption technology and access charges for Internet service
providers, as well as the continuing deregulation of the telecommunications
36
<PAGE> 37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
industry. The adoption of such measures could decrease demand for our products,
and at the same time increase our cost of selling our products. Changes in laws
or regulations governing the Internet and Internet commerce could have a
material adverse effect on our business, operating results and financial
condition.
THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS
TO RISKS
As we focus on new market opportunities, such as transporting data, voice, and
video traffic across the same network, we will increasingly compete with large
telecommunications equipment suppliers such as Alcatel, Ericsson, Lucent,
Nortel, and Siemens AG, among others, and several well-funded start-up
companies. Several of our current and potential competitors have greater
financial, marketing, and technical resources than we do. Additionally, as
customers in these markets complete infrastructure deployments, they may require
greater levels of service, support, and financing than we have experienced in
the past. We have not entered into a material amount of labor intensive service
contracts which require significant production or customization. However, we
expect that demand for these types of service contracts will increase in the
future. There can be no assurance that we can provide products, service,
support, and financing to effectively compete for these market opportunities.
Further, provision of greater levels of services by us may result in less
favorable timing of revenue recognition than we have historically experienced.
THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND FLOODS
Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
certain of our facilities, which includes one of our manufacturing facilities,
are located near rivers that have experienced flooding in the past. A
significant natural disaster, such as an earthquake or a flood, could have a
material adverse impact on our business, operating results and financial
condition.
37
<PAGE> 38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ARE SUBJECT TO RAPID CHANGES
IN TECHNOLOGY AND THE MARKET
Our operating results will depend to a significant extent on our ability to
reduce the costs to produce existing products. In particular, we broadened our
product line by introducing network access products. Sales of these products,
which are generally lower priced and carry lower margins than our core products,
have increased more rapidly than sales of our core products. The success of
these and other new products is dependent on several factors, including proper
new product definition, product cost, timely completion and introduction of new
products, differentiation of new products from those of our competitors, and
market acceptance of these products. The markets for our products are
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions, and evolving methods of building and
operating networks. There can be no assurance that we will successfully identify
new product opportunities, develop and bring new products to market in a timely
manner, and achieve market acceptance of our products or that products and
technologies developed by others will not render our products or technologies
obsolete or noncompetitive.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES
We have increased the number of our strategic alliances with large and complex
organizations and our ecosystem partners. These arrangements are generally
limited to specific projects, the goal of which is generally to facilitate
product compatibility and adoption of industry standards. If successful, these
relationships will be mutually beneficial and result in industry growth.
However, these alliances carry an element of risk because, in most cases, we
must compete in some business areas with a company with which we have strategic
alliances and, at the same time, cooperate with such company in other business
areas. Also, if these companies fail to perform, or if these relationships fail
to materialize as expected, we could suffer delays in product development or
other operational difficulties.
THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION
There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
that industry consolidation may provide stronger competitors that are better
able to compete as sole-source vendors for customers. This could
38
<PAGE> 39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
lead to more variability in operating results as we compete to be a single
vendor solution and could have a material adverse effect on our business,
operating results and financial condition.
SALES IN THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION
Although sales to the service provider market have grown historically, this
market is characterized by large, and often sporadic purchases. Sales activity
in this industry depends upon the stage of completion of expanding network
infrastructures, the availability of funding, and the extent that service
providers are affected by regulatory and business conditions in the country of
operations. A decline or delay in sales orders from this industry could have a
material adverse effect on our business, operating results and financial
condition.
WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATION AND
TARIFFS
Changes in domestic and international telecommunications requirements could
affect the sales of our products. In particular, we believe it is possible that
there may be significant changes in domestic telecommunications regulation in
the near future that could slow the expansion of the service providers' network
infrastructures and materially adversely affect our business, operating results
and financial condition. Future changes in tariffs by regulatory agencies or
application of tariff requirements to currently untariffed services could affect
the sales of our products for certain classes of customers. Additionally, in the
U.S., our products must comply with various Federal Communications Commission
requirements and regulations. In countries outside of the U.S., 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.
OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS
We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; government spending
patterns; and natural disasters. Any or all of these
39
<PAGE> 40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
factors could have a material adverse impact on our future international
business in these or other countries.
OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND
INTERNET-BASED SYSTEMS
We believe that there will be performance problems with Internet communications
in the future which could receive a high degree of publicity and visibility. As
we are a large supplier of equipment for the Internet infrastructure, customers'
perceptions of our products and the marketplace's perception of us as a supplier
of networking products may be materially adversely affected, regardless of
whether or not these problems are due to the performance of our products. Such
an event could also result in a material adverse effect on the market price of
our common stock and could materially adversely affect our business, operating
results and financial condition.
OUR STOCK PRICE MAY BE VOLATILE
Our common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results, 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.
OTHER
PricewaterhouseCoopers LLP ("PWC"), our independent accountants, has notified us
that PWC is engaged in discussions with the Securities and Exchange Commission
following an internal review by PWC, pursuant to an administrative settlement
with the SEC, of PWC's compliance with auditor independence guidelines. PWC has
advised us that we are one of the companies affected by such discussions. We are
not involved in the discussions between the SEC and PWC and cannot predict the
result of those discussions.
40
<PAGE> 41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RISK FACTORS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "We Are
Exposed To Fluctuations In The Market Values Of Our Portfolio Investments And In
Interest Rates" under Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
41
<PAGE> 42
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the quarter, the Company issued an aggregate of approximately
32.6 million shares of its common stock in exchange for the outstanding
capital stock of Compatible Systems Corporation, Growth Networks, Inc.
and a subsidiary of Pirelli S.p.A. The shares were issued pursuant to an
exemption by reason of Section 4(2) of the Securities Act of 1933. These
sales were made without general solicitation or advertising. Each
purchaser was an accredited investor or a sophisticated investor (either
alone or through its representative) with access to all relevant
information necessary. The Company has filed Registration Statements on
Form S-3 covering the resale of such securities.
During the quarter, the Company issued an aggregate of approximately 6.2
million shares of its common stock in exchange for the outstanding
capital stock of Altiga Networks, Inc. The shares were issued pursuant
to an exemption by reason of Section 3(a)(10) of the Securities Act of
1933. The terms and conditions of such issuances were approved after a
hearing upon the fairness of such terms and conditions by a government
authority expressly authorized by the law to grant such approval.
42
<PAGE> 43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed six reports on Form 8-K during the quarter ended April 29,
2000. Information regarding the items reported on is as follows:
Date Item Reported On
---- ----------------
February 3, 2000 The Company amended the Form 8-K filed on
December 15, 1999 to provide additional
information relating to SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related
Information" and to provide additional disclosure
in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations"
section.
February 17, 2000 The Company announced the completion of the
acquisition of the optical systems business of
Pirelli S.p.A of Milan, Italy.
March 16, 2000 The Company announced the completion of the
acquisition of Aironet Wireless Communications,
Inc.
March 27, 2000 The Company announced the acquisitions of
InfoGear Technology Corporation and JetCell, Inc.
March 28, 2000 The Company announced the completion of the
acquisitions of Compatible Systems Corporation
and Growth Networks, Inc.
April 3, 2000 The Company announced the completion of the
acquisition of Altiga Networks, Inc.
43
<PAGE> 44
SIGNATURE
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: June 13, 2000 By /s/ Larry R. Carter
-------------------------------
Larry R. Carter, Senior Vice
President, Finance and
Administration, Chief Financial
Officer, and Secretary
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
EX-3.1 Amendment to the Restated
Articles of Incorporation
EX-27 Financial Data Schedule
</TABLE>
45
