Cisco 2013 Annual Report Download - page 37

FAILURE TO RETAIN AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY
OBJECTIVES
Our success has always depended in large part on our ability to attract and retain highly skilled technical, managerial, sales,
and marketing personnel. Competition for these personnel is intense, especially in the Silicon Valley area of Northern
California. Stock incentive plans are designed to reward employees for their long-term contributions and provide incentives
for them to remain with us. Volatility or lack of positive performance in our stock price or equity incentive awards, or changes
to our overall compensation program, including our stock incentive program, resulting from the management of share dilution
and share-based compensation expense or otherwise, may also adversely affect our ability to retain key employees. As a result
of one or more of these factors, we may increase our hiring in geographic areas outside the United States, which could subject
us to additional geopolitical and exchange rate risk. The loss of services of any of our key personnel; the inability to retain and
attract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel,
could make it difficult to meet key objectives, such as timely and effective product introductions. In addition, companies in our
industry whose employees accept positions with competitors frequently claim that competitors have engaged in improper
hiring practices. We have received these claims in the past and may receive additional claims to this effect in the future.
ADVERSE RESOLUTION OF LITIGATION OR GOVERNMENTAL INVESTIGATIONS MAY HARM OUR
OPERATING RESULTS OR FINANCIAL CONDITION
We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are difficult to predict. For example, Brazilian
authorities have investigated our Brazilian subsidiary and certain of its current and former employees, as well as a Brazilian
importer of our products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper
transactions involving the subsidiary and the importer. Brazilian tax authorities have assessed claims against our Brazilian
subsidiary based on a theory of joint liability with the Brazilian importer for import taxes, interest, and penalties. In the first
quarter of fiscal 2013, the Brazilian federal tax authorities asserted an additional claim against our Brazilian subsidiary based
on a theory of joint liability with respect to an alleged underpayment of income taxes, social taxes, interest, and penalties by a
Brazilian distributor. The asserted claims by Brazilian federal tax authorities are for calendar years 2003 through 2008 and the
related asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005 through 2007. The total
asserted claims by Brazilian state and federal tax authorities aggregate to approximately $385 million for the alleged evasion
of import and other taxes, approximately $1.1 billion for interest, and approximately $1.7 billion for various penalties, all
determined using an exchange rate as of July 27, 2013. We have completed a thorough review of the matters and believe the
asserted claims against our Brazilian subsidiary are without merit, and we are defending the claims vigorously. While we
believe there is no legal basis for the alleged liability, due to the complexities and uncertainty surrounding the judicial process
in Brazil and the nature of the claims asserting joint liability with the importer, we are unable to determine the likelihood of an
unfavorable outcome against our Brazilian subsidiary and are unable to reasonably estimate a range of loss, if any. We do not
expect a final judicial determination for several years. An unfavorable resolution of lawsuits or governmental investigations
could have a material adverse effect on our business, operating results, or financial condition. For additional information
regarding certain of the matters in which we are involved, see Item 3, “Legal Proceedings,” contained in Part I of this report.
CHANGES IN OUR PROVISION FOR INCOME TAXES OR ADVERSE OUTCOMES RESULTING FROM
EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR RESULTS
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in
countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation
of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax credit or domestic manufacturing deduction
laws; by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our
intercompany R&D cost sharing arrangement and legal structure; by tax effects of nondeductible compensation; by tax costs
related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, including
possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign
income, or the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attribute
prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes
applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could
adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing
employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and
in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for
income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service
and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations
will not have an adverse effect on our operating results and financial condition.
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