<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 26, 1996
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 (I.R.S. Employer
of Identification Number)
incorporation or
organization)
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 6, 1996, 657,415,953 shares of the Registrant's common stock were
outstanding.
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 26, 1996
INDEX
<TABLE>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. a) Consolidated balance sheets at October 26, 1996
and July 28, 1996 3
b) Consolidated statements of operations for the
three month periods ended October 26, 1996 and
October 29, 1995 4
c) Consolidated statements of cash flows for the
three month periods ended October 26, 1996 and
October 29, 1995 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 9
Part II. Other information 15
Signature 16
Exhibit Exhibit 11.01, Computation of net income per share 17
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 26, July 28,
1996 1996
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 553,825 $ 279,695
Short-term investments 723,420 758,489
Accounts receivable, net of allowance for doubtful
accounts of $21,815 at October 26, 1996 and
$21,074 at July 28, 1996 752,643 622,859
Inventories, net 243,538 301,188
Deferred income taxes 148,597 101,827
Prepaid expenses and other current assets 92,730 95,582
----------- -----------
Total current assets 2,514,753 2,159,640
Investments 1,083,318 832,114
Restricted investments 238,406 228,644
Property and equipment, net 379,388 331,315
Other assets 86,567 78,519
----------- -----------
Total assets $ 4,302,432 $ 3,630,232
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 196,368 $ 153,683
Income taxes payable 323,683 169,894
Accrued payroll and related expenses 199,546 195,197
Other accrued liabilities 456,442 250,579
----------- -----------
Total current liabilities 1,176,039 769,353
Minority interest 41,176 41,257
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at October 26, 1996
and July 28, 1996
Common stock, no par value, 1,200,000 shares authorized:
656,293 shares issued and outstanding at
October 26, 1996 and 649,284 at July 28, 1996 974,464 888,067
Retained earnings 1,932,543 1,777,369
Unrealized gains on marketable securities 184,435 158,848
Cumulative translation adjustments (6,225) (4,662)
----------- -----------
Total shareholders' equity 3,085,217 2,819,622
----------- -----------
Total liabilities and shareholders' equity $ 4,302,432 $ 3,630,232
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------- ----------
October 26, October 29,
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
Net sales $1,434,826 $ 798,291
Cost of sales 501,480 267,742
---------- ----------
Gross margin 933,346 530,549
Operating expenses:
Research and development 144,711 78,180
Sales and marketing 259,110 145,251
General and administrative 41,776 28,267
Purchased research and development 174,589
---------- ----------
Total operating expenses 620,186 251,698
---------- ----------
Operating income 313,160 278,851
Realized gain on sale of investment 55,108
Interest and other income, net 21,478 12,858
---------- ----------
Income before provision for income taxes 389,746 291,709
Provision for income taxes 208,804 110,322
---------- ----------
Net income $ 180,942 $ 181,387
========== ==========
Net income per share $ .26 $ .28
========== ==========
Shares used in per-share calculation 682,918 652,174
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
October 26, October 29,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 180,942 $ 181,387
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 43,745 26,824
Deferred income taxes (4,143) 10,286
Tax benefit of disqualifying dispositions 37,066 37,306
Adjustment to conform StrataCom, Inc. fiscal year (11,020)
Change in operating assets and liabilities:
Accounts receivable (129,695) (66,767)
Inventories 60,196 (59,575)
Prepaid expenses and other current assets 2,852 (21,258)
Income taxes payable 153,789 65,625
Accounts payable 42,234 38,981
Accrued payroll and related expenses 4,030 20,780
Other accrued liabilities 148,673 12,000
--------- ---------
Net cash provided by operating activities 528,669 245,589
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (432,893) (231,964)
Proceeds from sales and maturities of short-term
investments 451,928 75,094
Purchases of investments (589,188) (129,449)
Proceeds from sales of investments 391,222 47,456
Purchases of restricted investments (66,741) (29,306)
Proceeds from sales and maturities of restricted
investments 56,288 15,449
Acquisition of property and equipment (88,058) (46,834)
Other (18,361) 3,599
--------- ---------
Net cash used by investing activities (295,803) (295,955)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 42,827 31,192
Other (1,563) (6,615)
--------- ---------
Net cash provided by financing activities 41,264 24,577
--------- ---------
Net increase (decrease) in cash and equivalents 274,130 (25,789)
Cash and equivalents, beginning of period 279,695 284,388
--------- ---------
Cash and equivalents, end of period $ 553,825 $ 258,599
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems Inc. ("Cisco" or "the Company") develops, manufactures, markets
and supports high-performance, multiprotocol internetworking systems that link
geographically dispersed local-area and wide-area networks (LANs and WANs,
respectively). Cisco's products include a wide range of routers, LAN and WAN
switches, dial access servers, and network management solutions. The Company
sells its products in approximately 80 countries through a combination of direct
sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the last Saturday in
July. Fiscal year 1997 and 1996 are both 52 week years. Prior to fiscal year
1997, the Company's fiscal year was the 52 or 53 weeks ending on the last Sunday
in July.
Basis of Presentation
The consolidated balance sheet as of October 26, 1996, and the consolidated
statements of operations and cash flows for the three months ended October 26,
1996 and October 29, 1995, 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 28, 1996.
In July 1996, the Company acquired StrataCom, Inc.("StrataCom"), a company that
develops, manufactures, and supports high speed LAN and WAN switching equipment.
The merger was accounted for as a pooling-of-interests and, accordingly, the
Company's consolidated financial statements were restated for all periods prior
to the merger to include the results of operations, financial positions, and
cash flows for StrataCom for the twelve months ended June 30, 1996. Prior to the
merger, StrataCom used a calendar year-end. In order for both companies to
operate on the same fiscal calendar for 1997, StrataCom's operations for the
one-month period ended July 28, 1996, that are not material to the consolidated
companies, have been reflected as an adjustment to retained earnings in the
first quarter of fiscal 1997.
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 as of October 26, 1996 and for the three
month periods ended October 26, 1996 and October 29, 1995, have been made. The
results of operations for the period ended
6
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 26, 1996 are not necessarily indicative of the operating results for the
full year.
The July 28, 1996 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 March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires the Company to review for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 is effective
for the Company's fiscal year 1997. The Company does not expect the adoption of
SFAS No. 121 to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
statement, 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 on a pro forma basis of net income and earnings per
share under the new method. SFAS No. 123 is effective for fiscal year 1997. The
Company has elected to continue to measure compensation cost for its employee
stock compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25. Pro forma disclosure of net income and
earnings per share, which will be made on an annual basis, will reflect the
difference between compensation cost included in net income and the related cost
measured by the fair value-based method defined in SFAS No. 123, including tax
effects, that would have been recognized in the consolidated statement of
operations if the fair value-based method had been used.
3. BUSINESS COMBINATIONS
In September 1996, the Company acquired Nashoba Networks ("Nashoba"). The
Company issued approximately 1.6 million shares of common stock for all the
outstanding stock of Nashoba in a transaction accounted for as a pooling of
interests. The Company also assumed options to purchase Nashoba stock that
remain outstanding as options to purchase approximately .2 million shares of the
Company's common stock.
7
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATIONS (CONTINUED)
Also, in September 1996, the Company acquired Granite Systems, Inc. ("Granite"),
a company established to develop, market, and sell multilayer switching and
gigabit Ethernet equipment. The Company issued approximately 2.2 million shares
of common stock for all the outstanding stock of Granite in a transaction
accounted for as a pooling of interests. The Company also assumed options to
purchase Granite stock that remain outstanding as options to purchase
approximately 1.6 million shares of the Company's common stock.
The historical operations of Nashoba and Granite are not material to the
Company's consolidated operations and financial position on either an individual
or an aggregated basis. Therefore, prior period statements have not been
restated for these acquisitions.
On October 24, 1996, the Company acquired substantially all of the assets of
Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation (MICA)
technologies for approximately $200 million in cash. The Company purchased
Telebit patents, MICA intellectual property and established employment contracts
with MICA personnel, and assumed certain preferred stock and notes receivable
related to a management buyout of the remaining assets of Telebit. The
transaction was accounted for as a purchase. Accordingly, the results of
operations of the acquired business and the fair values of the acquired assets
and liabilities were included in the Company's financial statements as of the
effective date. As part of this transaction, the Company recorded approximately
$174 million in purchased research and development expense in the current
quarter. The amount allocated to purchased research and development was
determined through established valuation techniques in the high technology
communications industry, and was expensed upon acquisition as no further
alternative uses existed. A pro forma summary is not presented as the historical
operations of Telebit are not material to the Company's consolidated operations
and financial position.
4. BALANCE SHEET DETAIL
(In thousands)
<TABLE>
<CAPTION>
October 26, July 28,
1996 1996
-------- --------
(Unaudited)
<S> <C> <C>
Inventories:
Raw materials $113,271 $134,531
Work in process 71,731 99,723
Finished goods 43,569 51,920
Demonstration systems 14,967 15,014
-------- --------
$243,538 $301,188
======== ========
</TABLE>
8
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The Company paid income taxes of $41.4 million for the quarter ended October 26,
1996 and $4.2 million for the quarter ended October 29, 1995. 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
$37.1 million in the first quarter of fiscal 1997, and was credited directly to
shareholders' equity.
6. SUBSEQUENT EVENTS
On November 19, 1996, the Company acquired Netsys Technologies ("Netsys"), a
privately held innovator of network infrastructure management and performance
analysis software. Under the terms of the agreement, shares of the Company's
common stock worth approximately $79 million have been exchanged for all
outstanding shares and options of Netsys in a transaction to be accounted for as
a purchase. The Company has held a minority equity interest in Netsys since
February 1995 and had also entered into a strategic reseller agreement. A pro
forma summary is not presented as the historical operations of Netsys 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
This Quarterly Report on Form 10-Q may consist of forward-looking statements
that involve risks and uncertainties. These statements may differ materially
from actual future events or results. Readers are referred to the "Other Risk
Factors" section of the Company's 1996 Form 10-K filed on October 25, 1996, as
well as the "Financial Risk Management", "Future Growth Subject to Risks",
"Volatility of Stock Price", and "Risks Associated With Internet Infrastructure"
sections contained in this report, which identify important risk factors that
could cause actual results to differ from those contained in the forward-looking
statements.
Net sales grew to $1,435 million in the first quarter of 1997 from $798 million
in the first quarter of 1996. The 79.7% increase in net sales between the two
periods was primarily a result of increasing unit sales of the Cisco 7500
series; continued strong sales of Access business unit products, including the
Cisco 4700 and Cisco 2500 series; and continued market acceptance of the
Company's Workgroup business unit products, particularly the Catalyst 5000.
These increases were partially offset by decreasing unit sales of the Company's
older product lines, comprising mainly the Cisco 7000 series. Sales to
international customers remained relatively constant at 47.0% in the first
quarter of 1997 versus 47.3% for the first quarter of 1996.
Gross margins decreased to 65.0% in the first quarter of 1997 from 66.5% in the
first quarter of 1996. This is due principally to the continued shift in revenue
mix to the Company's lower-margin products consisting primarily of products in
the Workgroup business unit, and to a lesser
9
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extent to write-downs of inventory and higher warranty costs. The prices of
component parts have fluctuated in the recent past, and the Company expects that
this trend may continue. An increase in the price of component parts may have a
material adverse impact on gross margins. The Company expects that gross margins
will continue to decrease in the future, because it believes that the market for
lower-margin remote access and high-speed switching products will continue to
increase at a faster rate than the market for the Company's higher-margin router
products. The Company is attempting to mitigate this trend through various
means, such as emphasizing software content, increasing the functionality of its
products, controlling warranty and royalty costs, and improving manufacturing
efficiencies. There can be no assurance that any efforts made by the Company in
these and other areas will successfully offset decreasing margins.
Research and development expenses increased $66.5 million in the first quarter
of 1997 over the first quarter of 1996, which represents an increase to 10.1%
from 9.8% of net sales. The increase reflects the Company's ongoing research and
development efforts, including the further development of the CiscoFusion(TM)
architecture, as well as the acquisition of technologies to bring a broad range
of products to the market in a timely fashion. A significant portion of the
increase was due to the addition of new personnel, as well as higher
expenditures on prototypes and depreciation on new equipment. All of the
Company's research and development costs are expensed as incurred. The Company
is primarily developing new technologies internally, and because of this,
research and development expenses are expected to increase at the same, or a
slightly greater rate than the sales growth rate. If the Company believes it is
unable to enter a particular market in a timely manner, it may acquire other
businesses or license technology from other businesses as an alternative to
internal research and development.
Sales and marketing expenses increased $113.9 million in the first quarter of
1997 over the first quarter of 1996, but decreased slightly to 18.1% from 18.2%
of net sales. The dollar increase in these expenses resulted mainly from an
increase in the size of the Company's direct sales force, and its commissions.
Other factors affecting the dollar increase in expenses were additional
marketing programs, such as the NetBeyond program, to support the launch of new
products; and expansion of distribution channels, particularly the two-tier
channel associated with the Company's initial efforts to reach the mass market.
General and administrative expenses rose $13.5 million between the first
quarters of 1997 and 1996, but decreased to 2.9% from 3.5% of net sales in the
first quarter of 1997 and 1996, respectively, which reflects management's
continued controls over discretionary spending. The dollar increase reflects
increased personnel costs necessary to support the Company's business
infrastructure, as well as merger and acquisition related costs. The Company is
continuously evaluating potential acquisition candidates as part of its growth
strategy and incurs legal, accounting, and other related costs associated with
this activity. It is management's intent to keep general and administrative
costs relatively constant as a percentage of net sales; however, this goal is
dependent upon the level of acquisition activity, among other factors.
The amount expensed to purchased research and development in the first quarter
of fiscal 1997 arose from the acquisition of the assets and the assumption of
the liabilities of Telebit (See Note 2).
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Recent Accounting Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires the Company to review for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 is effective
for the Company's fiscal year 1997. The Company does not expect the adoption of
SFAS No. 121 to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
statement, 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 on a pro forma basis of net income and earnings per
share under the new method. SFAS No. 123 is effective for fiscal year 1997. The
Company has elected to continue to measure compensation cost for its employee
stock compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25. Pro forma disclosure of net income and
earnings per share, which will be made on an annual basis, will reflect the
difference between compensation cost included in net income and the related cost
measured by the fair value-based method defined in SFAS No. 123, including tax
effects, that would have been recognized in the consolidated statement of
operations if the fair value-based method had been used.
Financial Risk Management
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Presently, the Company's primary exposures relate to the U.S.
dollar value of non dollar-denominated sales in Japan, Canada, and Australia and
non dollar-denominated operating expenses in Europe, Latin America, and Asia
where the Company sells primarily in U.S. dollars. At the present time, the
Company hedges only those currency exposures associated with certain assets and
liabilities denominated in non-functional currencies and does not generally
hedge anticipated foreign currency cash flows.
The Company maintains investment portfolio holdings of various issuers, types,
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of shareholders'
equity. The Company also has certain real estate lease commitments with payments
tied to short-term interest rates. Given the current profile of interest rate
exposures, a sharp rise in interest rates could have a material adverse impact
on the market value of the Company's investment portfolio while increasing the
costs associated with its lease commitments. The Company does not currently
hedge these interest rate exposures.
11
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Future Growth Subject to Risks
The Company's operating performance each quarter is subject to various risks and
uncertainties as discussed in the Company's Annual Report on Form 10-K for 1996
filed on October 25, 1996, and the Company's Registration Statement on Form S-4
filed on June 7, 1996. This report on Form 10-Q should be read in conjunction
with such Annual Report and Form S-4, particularly "Other Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Annual Report on Form 10-K and "Risk Factors"
contained in Form S-4. The internetworking business is highly competitive, and
as such, 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. One
of the ways the Company has addressed and will continue to address the need to
develop new products is through acquisitions of other companies. Acquisitions
involve numerous risks, including difficulties in assimilation of the
operations, technologies, and products of the acquired companies; risks of
entering markets in which the Company has no or limited direct prior experience
and where competitors in such markets have stronger market positions; and the
potential loss of key employees of the acquired company. The Company must also
maintain its ability to manage any such growth effectively. In particular, this
would include potential growth associated with the StrataCom acquisition. The
Company has not completed an acquisition and integration of a company of
StrataCom's size to date. This process could divert management's attention from
normal daily operations of the business. Failure to manage growth effectively
and successfully integrate StrataCom or other acquisitions made by the Company
could 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 obtain timely supplies of parts from its vendors. While lead times
for commodity components have improved recently, some components, particularly
proprietary application-specific integrated circuits (ASICs) and other
networking-specific components, continue to be in short supply. An inability to
obtain these items at reasonable prices could have a materially adverse effect
on the Company's growth and operating results.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions, and
evolving methods of building and operating networks. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely manner, or that products
and technologies developed by others will not render Cisco's products or
technologies obsolete or noncompetitive. The failure of Cisco's new product
development efforts could have a material adverse effect on Cisco's business
operating results and financial condition.
The Company expects that, in the future, its net sales may grow at a slower rate
than was experienced in previous periods and that on a quarter-to-quarter basis,
the Company's growth in net sales may be significantly lower than its historical
quarterly growth rate.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. In
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<PAGE> 13
particular, the Company broadened its product line by introducing network access
products. 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 sales of the core products. The introduction of the CiscoPro line
during 1996, as well as the increasing growth rates experienced in the switching
markets, may accelerate this trend.
The Company also expects that its operating margins may decrease as it continues
to hire additional personnel and increases other operating expenses to support
its business. The results of operations for the first quarter of 1997 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, especially
StrataCom; increased competition in the internetworking industry; the overall
trend toward industry consolidation; 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 a material adverse impact on operations and financial results.
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 have
often been unrelated to the operating performance of these companies. These
factors, as well as general economic and political conditions, may adversely
affect the market price of the Company's Common Stock in the future.
Risks Associated With Internet Infrastructure
The Company's management believes that in the future there will be performance
problems with Internet communications which could receive a high degree of
publicity and visibility. As the Company is a large supplier of equipment for
the Internet infrastructure, customer's perceptions of the Company's products
and the marketplace's perception of Cisco as a supplier of internetworking
products, whether or not these problems are due to the performance of Cisco's
products, may be adversely affected. Such an event could also result in an
adverse effect on the market price of the Company's Common Stock and could
adversely affect Cisco's business.
Liquidity and Capital Resources
Cash, short-term investments, and investments increased by $490.3 million from
July 28, 1996 to October 26, 1996, 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 $88.1 million during this time. The Company entered into an
agreement to purchase Telebit Corporation for approximately $200 million in
cash. Approximately $14 million had been paid as of October 26, 1996; the
Company anticipates that it will
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make the remaining disbursement in the second quarter of fiscal 1997. In fiscal
1996, the Company hedged its minority equity position in a publicly traded
company. The hedge expires over a period of two years which commenced in October
1996. Cash proceeds on this transaction in the first quarter of 1997 were
approximately $56 million.
Accounts receivable increased 20.8% from July 28, 1996 to October 26, 1996,
while sales grew by 11.0% over the same period. Days sales outstanding in
receivables increased to 47 days as of October 26, 1996 from 43 days at July 28,
1996. Inventories decreased 19.1% between July 28, 1996 and October 26, 1996
which reflects management's continued efforts to reduce inventory levels which,
in part, reflects the better availability of commodity component parts.
Inventory levels are still higher than they have been historically, because of
production planning associated with higher sales levels and desired
manufacturing lead times, particularly on new products. The higher inventory
levels in recent quarters may result in future write-downs due to obsolescence
if the Company does not correctly anticipate market demand for certain products.
At the same time, the Company recognizes that it must maintain strategic levels
of components to ensure its manufacturing lead times will remain competitive. As
such, the Company may carry more inventory than it has historically.
Accounts payable increased by 27.8% at October 26, 1996 over July 28, 1996
because of increases in operating expenses, and material purchases to support
the growth in net sales. Other accrued liabilities increased by 82.2%, primarily
due to the acquisition of Telebit, which resulted in a $185 million payable to
its former shareholders.
At October 26, 1996, 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 $238.4 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.
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 fiscal 1997.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit
11.01 Computation of net income per share
27 Financial Data Schedule
(b)Reports on Form 8-K
The Company filed one report on form 8-K during
the first quarter ended October 26, 1996. The
report was filed on October 1, 1996, and was
amended on October 15, 1996. The items reported
on were the acquisitions of Nashoba Networks,
Inc. and Granite Systems, Inc.
15
<PAGE> 16
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 9, 1996 By /s/ Larry R. Carter
----------------------------
Larry R. Carter, Vice President
Finance, and Chief Financial
Officer (Principal Financial and
Accounting Officer)
16
<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)
Three Months
Ended
-----------------------
-----------------------
<TABLE>
<CAPTION>
Oct. 26, Oct 29,
1996 1995
-------- --------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Actual weighted average common shares
outstanding for the period 652,120 630,518
Weighted average shares assuming exercise of
employees' stock options using average market
price 30,798 21,656
-------- --------
Shares used in per-share calculations 682,918 652,174
======== ========
Net income applicable to primary income
per share $180,942 $181,387
======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ 0.26 $ 0.28
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Actual weighted average common shares
outstanding for the period 652,120 630,518
Weighted average shares assuming exercise of
employees' stock options using ending market
price 30,973 23,439
-------- --------
Shares used in per-share calculations 683,093 653,957
======== ========
Net income applicable to fully diluted income
per share $180,942 $181,387
======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ 0.26 $ 0.28
======== ========
</TABLE>
- -----------
(A) These calculations are submitted in accordance with Securities
Exchange Act of 1934 Release No. 34-9083.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of income and consolidated
statement of cash flows included in the Company's Form 10-Q for the period
ending October 26, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-26-1997
<PERIOD-START> JUL-29-1996
<PERIOD-END> OCT-26-1996
<CASH> 553,825
<SECURITIES> 2,045,144
<RECEIVABLES> 774,458
<ALLOWANCES> 21,815
<INVENTORY> 243,538
<CURRENT-ASSETS> 2,514,753
<PP&E> 664,908
<DEPRECIATION> 285,520
<TOTAL-ASSETS> 4,302,432
<CURRENT-LIABILITIES> 1,176,039
<BONDS> 0
0
0
<COMMON> 974,464
<OTHER-SE> 2,110,753
<TOTAL-LIABILITY-AND-EQUITY> 4,302,432
<SALES> 1,434,826
<TOTAL-REVENUES> 1,434,826
<CGS> 501,480
<TOTAL-COSTS> 1,121,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 389,746
<INCOME-TAX> 208,804
<INCOME-CONTINUING> 180,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,942
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
