<PAGE> 1
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 OCTOBER 29, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition to
period from ------------------- -------------------
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 December 4, 1995, 276,252,134 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 29, 1995
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. a) Consolidated balance sheets at October 29, 1995 and July 30, 1995
3
b) Consolidated statements of operations for the three month periods ended October
29, 1995 and October 30, 1994
4
c) Consolidated statements of cash flows for the three month periods ended October
29, 1995 and October 30, 1994 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 8
Part II. Other information 13
Signature 14
Exhibits Exhibit 11.01, Computation of net income per share 15
Exhibit 27, Financial Data Schedule 16
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 29, July 30,
1995 1995
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 187,521 $ 204,846
Short-term investments 410,747 234,681
Accounts receivable, net of allowance for doubtful
accounts of $12,784 at October 29, 1995 and
$13,305 at July 30, 1995 438,480 384,242
Inventories 129,350 71,160
Deferred income taxes 78,304 75,297
Prepaid expenses and other current assets 45,908 25,743
---------- ----------
Total current assets 1,290,310 995,969
Investments 462,490 403,855
Restricted investments 187,560 173,073
Property and equipment, net 157,884 136,635
Other assets 49,642 47,747
---------- ----------
Total assets $2,147,886 $1,757,279
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 88,952 $ 45,205
Income taxes payable 135,846 71,583
Accrued payroll and related expenses 103,858 84,695
Other accrued liabilities 148,105 136,273
---------- ----------
Total current liabilities
476,761 337,756
Minority interest 40,819 40,792
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at October 29, 1995
and July 30, 1995
Common stock, no par value, 320,000 shares authorized:
276,365 shares issued and outstanding at
October 29, 1995 and 272,246 at July 30, 1995 446,394 362,292
Retained earnings 1,121,484 959,657
Unrealized gains on marketable securities 63,194 50,933
Cumulative translation adjustments (766) 5,849
---------- ----------
Total shareholders' equity 1,630,306 1,378,731
---------- ----------
Total liabilities and shareholders' equity $2,147,886 $1,757,279
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
October 29, October 30,
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales $710,191 $392,925
Cost of sales 234,403 127,969
-------- --------
Gross margin 475,788 264,956
Operating expenses:
Research and development 62,865 30,048
Sales and marketing 129,011 68,322
General and administrative 25,736 14,915
-------- --------
Total operating expenses 217,612 113,285
-------- --------
Operating income 258,176 151,671
Interest and other income, net 11,819 7,636
-------- --------
Income before provision for income taxes 269,995 159,307
Provision for income taxes 101,248 60,537
-------- --------
Net income $168,747 $ 98,770
======== ========
Net income per share $ .59 $ .37
======== ========
Shares used in per-share calculation 286,041 269,661
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
October 29, October 30,
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 168,747 $ 98,770
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 18,749 11,425
Deferred income taxes 3,648 (6,285)
Change in operating assets and liabilities:
Accounts receivable (54,206) (32,657)
Inventories (58,190) (3,891)
Prepaid expenses and other current assets (20,165) 1,632
Income taxes payable 101,569 53,301
Accounts payable 43,649 5,160
Accrued payroll and related expenses 19,050 1,251
Other accrued liabilities 11,820 10,411
--------- ---------
Total adjustments 65,924 40,347
--------- ---------
Net cash provided by operating activities 234,671 139,117
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (209,254) (68,660)
Proceeds from sales of short-term investments 27,056 51,375
Maturities of short-term investments 30,829 2,185
Purchases of investments (119,965) (97,022)
Proceeds from sales of investments 47,456 42,532
Purchases of restricted investments (29,306)
Proceeds from sales of restricted investments 10,031
Maturities of restricted investments 5,418
Acquisition of property and equipment (38,411) (25,278)
Other 2,881 7,350
--------- ---------
Net cash used by investing activities (273,265) (87,518)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 27,884 4,701
Repurchase of common stock (10,201)
Proceeds from sale of subsidiary stock 40,548
Other (6,615) 526
--------- ---------
Net cash provided by financing activities 21,269 35,574
--------- ---------
Net (decrease) increase in cash and equivalents (17,325) 87,173
Cash and equivalents, beginning of period 204,846 53,567
--------- ---------
Cash and equivalents, end of period $ 187,521 $ 140,740
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the last Sunday in
July. Fiscal years 1996 and 1995 are both 52 week years.
Basis of Presentation
The consolidated balance sheet as of October 29, 1995, and the consolidated
statements of operations and cash flows for the periods ended October 29, 1995
and October 30, 1994, have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. 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. 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 financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended July 30, 1995.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows for the three month periods ended October
29, 1995 and October 30, 1994, have been made. The results of operations for
the period ended October 29, 1995 are not necessarily indicative of the
operating results for the full year.
The July 30, 1995 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
Computation of Net Income Per Share
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
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
standard, which establishes a fair value based method of accounting for
stock-based compensation plans, also permits an election to continue following
the requirements of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" with disclosures of pro forma net income and earnings per share
under the new method. The Company is reviewing the implications of SFAS No.
123 and evaluating the effect, if any, on the financial condition and results
of operations of the Company. SFAS No. 123 will be effective for the Company's
fiscal year 1997.
6
<PAGE> 7
2. BUSINESS COMBINATIONS
In September 1995, the Company acquired Combinet Inc. ("Combinet"), a privately
held manufacturer of remote access networking products. The Company issued
approximately 1,750,000 shares of common stock for all the outstanding stock of
Combinet in a transaction accounted for as a pooling of interests. In
addition, the Company assumed options and warrants to purchase Combinet stock
that remain outstanding as options to purchase approximately 220,000 shares of
the Company's common stock. The historical operations of Combinet are not
material to the Company's consolidated operations and financial position,
therefore the Company's financial statements have not been restated.
Additionally, in September 1995, the Company acquired Internet Junction, Inc.,
a developer of Internet gateway software that connects desktop users with the
Internet. The Company issued 81,000 shares of stock for the net assets of
Internet Junction in a transaction accounted for as a purchase. Accordingly,
the results of operations of the acquired business and the fair market values
of the acquired assets and liabilities were included in the Company's financial
statements as of the acquisition date. Amounts allocated to goodwill will be
amortized on a straight-line basis over a four year period. A pro forma
summary is not presented as the historical operations of Internet Junction are
not material to the Company's consolidated operations and financial position.
3. BALANCE SHEET DETAIL
(In thousands)
<TABLE>
<CAPTION>
Inventories: October 29, July 30,
1995 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Raw materials $ 64,988 $ 33,555
Work in process 33,959 16,913
Finished goods 16,335 9,373
Demonstration systems 14,068 11,319
--------- ---------
$ 129,350 $ 71,160
========= =========
</TABLE>
4. INCOME TAXES
The Company paid income taxes of $3.4 million for the quarter ended October 29,
1995 and $14.1 million for the quarter ended October 30, 1994. The Company's
income taxes currently payable for both federal and state purposes have been
reduced by the tax benefit from stock option transactions. This benefit
totaled $37.3 million in the first quarter of 1996, and was credited directly
to shareholders' equity.
7
<PAGE> 8
5. SUBSEQUENT EVENTS
In November 1995, the Company acquired Grand Junction Networks, Inc. ("Grand
Junction") a privately held manufacturer of Fast Ethernet (100BaseT) and
Ethernet desktop switching products. Under the terms of the agreement, the
Company issued approximately 4,590,000 shares of common stock for all the
outstanding stock of Grand Junction in a transaction accounted for as a pooling
of interests. The Company also assumed options to purchase Grand Junction
stock that remain outstanding as options to purchase approximately 410,000
shares of the Company's common stock. The historical operations of Grand
Junction are not material to the Company's consolidated operations and
financial position.
Additionally, in December 1995, the Company acquired Network Translation, Inc.
in a transaction accounted for as a pooling of interests. Network Translation
develops and sells address translation and firewall products for use in
accessing the Internet. Financial terms of the transaction are not material to
the Company's consolidated operations and financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net sales grew from $392.9 million in the first quarter of 1995 to $710.2
million in the first quarter of 1996. The 80.7% increase in net sales between
the two periods was primarily a result of increasing unit sales of the Cisco
4500 and the Cisco 2500 product family, and also reflects the market acceptance
of new LAN switching products such as the Catalyst 5000. These increases were
partially offset by decreasing unit sales of the Company's older product lines,
consisting of the AGS+ and Cisco 4000. Sales to international customers
increased from 38.7% of net sales in the first quarter of 1995, to 47.9% for
the first quarter of 1996. This increase reflects the Company's continued
expansion into new geographic markets and growth in existing European markets.
Gross margins decreased from 67.4% in the first quarter of 1995 to 67.0% in the
first quarter of 1996. Gross margins were affected by several factors,
including higher material costs as a result of certain component shortages and
the continued shift in revenue mix to the Company's lower margin products
consisting primarily of products in the Company's Access and Workgroup business
units. The Company expects this trend of decreasing gross margins to continue
in the future, although quarterly fluctuations may occur due to certain factors
such as component availability, mix of products sold, manufacturing
efficiencies, and warranty costs.
8
<PAGE> 9
Research and development expenses increased $32.8 million from the first
quarter of 1995 to the first quarter of 1996, which represents an increase from
7.6% to 8.9% of net sales. The increase reflects the Company's continued
commitment to develop new technologies internally, including the further
development of its CiscoFusion architecture; as well as the acquisition of
technologies to bring a broad range of innovative products to market in a
timely fashion. A significant portion of the increase was due to the addition
of new personnel, primarily from hiring and to a lesser extent through
acquisitions, as well as higher material costs for prototypes and depreciation
on new equipment. All of the Company's research and development costs are
expensed as incurred.
Sales and marketing expenses increased $60.7 million between the first quarters
of 1995 and 1996, an increase from 17.4% to 18.2% of net sales. The increases
in these expenses resulted from an increase in the size of the Company's direct
sales force and related commissions, additional marketing programs to support
the launch of new products, the entry into new markets, both domestic and
international, and expanding distribution channels.
General and administrative expenses rose $10.8 million between the first
quarters of 1995 and 1996, but decreased from 3.8% to 3.6% of net sales. The
dollar increase in these expenses was due primarily to increased personnel
costs as well as to the amortization of goodwill associated with the
acquisition of LightStream Corporation in fiscal year 1995. The percentage
decline reflects continued net sales growth and management controls over
discretionary spending.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
standard, which establishes a fair value based method of accounting for
stock-based compensation plans, also permits an election to continue following
the requirements of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" with disclosures of pro forma net income and earnings per share
under the new method. The Company is reviewing the implications of SFAS No.
123 and evaluating the effect, if any, on the financial condition and results
of operations of the Company. SFAS No. 123 will be effective for the Company's
fiscal year 1997.
9
<PAGE> 10
Future Growth Subject to Risks
The Company's operating performance each quarter is subject to various risks
and uncertainties as discussed in the the Company's Annual Report on Form 10-K
for 1995. This Report on Form 10-Q should be read in conjunction with such
Annual Report, particularly "Other Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained
therein. The Company's growth is dependent upon market growth and its ability
to enhance its existing products and introduce new products on a timely basis.
The Company must also maintain its ability to manage any such growth
effectively. Failure to manage growth effectively could materially and
adversely affect the Company's business and operating results. The Company's
growth and ability to meet customer demand also depend, in part, on its ability
to have stable supplies of parts from its suppliers. Many of these parts,
particularly semiconductor parts, have been and may continue to be in short
supply. An inability to obtain these parts could have a material and adverse
affect on the Company's growth.
The Company expects that in the future, its net sales will grow at a slower
rate than was experienced in previous periods and that on a quarter-to-quarter
basis, the Company's growth in net sales may be significantly lower than its
historical quarterly growth rate. The Company has been experiencing longer
sales cycles for its core products resulting from larger order sizes and
believes that some customers may be deferring purchases in order to complete
detailed reviews of their overall network plans. In addition, in response to
customer demand, the Company has, from time to time, reduced its product
manufacturing lead times and its backlog of orders. To the extent that backlog
is reduced during any particular period, it would result in more variability
and less predictability in the Company's quarter-to-quarter net sales and
operating results.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and by
changes in channels of distribution or in the mix of products sold. In
particular, the Company broadened its product line by introducing its first
network access product in August 1992. Since that time, sales of these
products, which are generally lower-priced and carry lower gross margins than
the Company's core products, have increased more rapidly than the sales of the
core products. The introduction of the CiscoPro product line during the first
quarter of fiscal year 1996 may accelerate this trend.
The Company also expects that its operating margins may decrease as it
continues to hire additional personnel and to increase other operating expenses
to support its business. The results of operations for the first quarter of
1996 are not necessarily indicative of results to be expected in future
periods, and the Company's operating results may 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, which the Company expects; the
introduction and market acceptance of new products, including high-speed
switching and ATM technologies; variations in sales channels, product costs, or
mix of products sold; the timing of orders and manufacturing lead times; and
changes in general economic conditions, any of which could have an adverse
impact on operations and financial results.
10
<PAGE> 11
Volatility of Stock Price
The Company's Common Stock has experienced substantial price volatility,
particularly as a result of variations between the Company's actual or
anticipated financial results and the published expectations of analysts and as
a result of announcements by the Company and its competitors. In addition, the
stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies in particular and that
have often been unrelated to the operating performance of these companies.
These broad market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of the Company's Common
Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments, and investments increased by $217.4 million from
July 30, 1995 to October 29, 1995, primarily as a result of cash generated by
operations and to a lesser extent through the exercise of employee stock
options. This increase was partially offset by capital expenditures of
approximately $38.4 million during this time.
Accounts receivable increased 14.1% from July 30, 1995 to October 29, 1995,
primarily as a result of higher sales levels. Days sales outstanding in
receivables remained constant at 56 days as of October 29, 1995 and July 30,
1995. Inventories increased 81.8% between July 30, 1995 and October 29, 1995
which was a planned investment necessary to support the higher sales volumes
and desired manufacturing lead times. Additionally, strategic purchases of
certain components in short supply contributed to the increase. As a result,
inventory turnover on an annualized basis decreased from 13.1 turns at July 30,
1995 to 9.4 turns at October 29, 1995.
Accounts payable increased 96.8% from July 30, 1995 to October 29, 1995 because
of increases in capital expenditures, operating expenses, and material
purchases to support the growth in net sales. The 22.6% increase in accrued
payroll and related expenses can be attributed to an increase in personnel
during the three month period. Other accrued liabilities increased by 8.7%,
primarily due to increases in deferred service contracts.
At October 29, 1995, the Company had a line of credit totaling $100.0 million,
which expires April 1998. There have been no borrowings under this agreement.
The Company has entered into certain lease arrangements in San Jose,
California, and Research Triangle Park, North Carolina, where it has
established its headquarters operations and certain research and development
and customer support activities, respectively. In connection with these
transactions, the Company pledged $187.6 million of its investments as
collateral for certain obligations of the leases. The restricted investments
balance will continue to increase as the Company phases in operations at these
lease sites.
11
<PAGE> 12
Under the Company's ongoing stock repurchase program, shares are purchased
periodically to meet employee stock plan requirements. During the quarter
ended October 29, 1995, the Company did not purchase any shares. As of October
29, 1995, the Company was authorized to repurchase up to an additional 4.9
million shares of its common stock in the open market or through privately
negotiated transactions. The Company's ability to repurchase shares has been
restricted, and is expected to continue to be restricted from time to time by
virtue of business combinations and limitations imposed under
pooling-of-interests accounting.
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements
through 1996.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.01 Computation of net income per share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE> 14
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: December 11, 1995 By /s/ Larry R. Carter
------------------------------
Larry R. Carter, Vice President
Finance, and Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<PAGE> 1
EXHIBIT 11.01
COMPUTATION OF NET INCOME PER SHARE
IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
October 29, October 30,
1995 1994
---------- ----------
PRIMARY EARNINGS PER SHARE (Unaudited)
<S> <C> <C>
Actual weighted average common shares outstanding
for the period 275,213 261,136
Weighted average shares assuming exercise of
employee stock options using average market price 10,828 8,525
-------- --------
Shares used in per-share calculations 286,041 269,661
======== ========
Net income applicable to primary income per share $168,747 $ 98,770
======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ .59 $ .37
======== ========
FULLY DILUTED EARNINGS PER SHARE
Actual weighted average common shares outstanding
for the period 275,213 261,136
Weighted average shares assuming exercise of
employee stock options using the greater of
ending or average market price 11,719 9,434
-------- --------
Shares used in per-share calculations 286,932 270,570
======== ========
Net income applicable to fully diluted income per share $168,747 $ 98,770
======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ .59 $ .37
======== ========
</TABLE>
These calculations are submitted in accordance with Securities Exchange Act of
1934 Release No. 34-9083
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending October 29, 1995, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-28-1996
<PERIOD-START> JUL-31-1995
<PERIOD-END> OCT-29-1995
<CASH> 187,521
<SECURITIES> 1,060,797
<RECEIVABLES> 451,264
<ALLOWANCES> 12,784
<INVENTORY> 129,350
<CURRENT-ASSETS> 1,290,310
<PP&E> 281,340
<DEPRECIATION> 123,456
<TOTAL-ASSETS> 2,147,886
<CURRENT-LIABILITIES> 476,761
<BONDS> 0
<COMMON> 446,394
0
0
<OTHER-SE> 1,183,912
<TOTAL-LIABILITY-AND-EQUITY> 2,147,886
<SALES> 710,191
<TOTAL-REVENUES> 710,191
<CGS> 234,403
<TOTAL-COSTS> 452,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 269,995
<INCOME-TAX> 101,248
<INCOME-CONTINUING> 168,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168,747
<EPS-PRIMARY> .59
<EPS-DILUTED> 0
</TABLE>
