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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 28,1996
[ ] 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
170 West Tasman Drive
San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 526-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
None Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
(Title of class)
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 such filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
/ /
As of October 4, 1996, the approximate aggregate market value of voting
stock held by non-affiliates of the registrant was $ 43,091,773,000
(based upon the closing price for shares of the Registrant's Common Stock
as reported by the National Market System of the National Association of
Securities Dealers Automated Quotation System on that date). Shares of
Common Stock held by each officer, director, and holder of 5% or more of
the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of October 4, 1996, 653,383,481 shares of registrant's common stock
were outstanding.
Designated portions of the Cisco Systems, Inc. Proxy Statement for the
1996 Annual Meeting of Shareholders to be held on November 15, 1996, are
incorporated by reference into Part III of this Annual Report on Form
10-K where indicated.
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PART I
ITEM 1. BUSINESS
GENERAL
Cisco Systems Inc. ("Cisco", or "the Company") develops, manufactures,
markets and supports high-performance internetworking systems that link
geographically dispersed local-area and wide-area networks ("LANs" and
"WANs", respectively). Cisco products include a wide range of
multiprotocol routers, LAN and WAN switches, dial access servers,
Internet software and network management software. Most of these products
incorporate features of the Cisco Internetwork Operating System (Cisco
IOS(TM)) software, which provides various network services, as well as
network connectivity, security and interoperability. The Company's
business is subject to various risks as discussed in the "Other Risk
Factors" section, and elsewhere in this report.
The Company has expanded the Cisco IOS feature set by addressing new
markets and technologies. These include a range of remote access
products, as well as switching products. In 1994 the Company introduced
the CiscoFusion(TM) architecture, which blends the capabilities of routed
internetworks with the technologies of ATM, LAN workgroup switches and
virtual LANs.
Cisco's internetworking solutions are used by customers to form a single,
seamless information infrastructure (a "network of networks") that allows
people to access or transfer information without regard to differences in
time, place or type of computer system.
The internetworking market has experienced strong growth, caused by the
increasingly important role that electronic information plays in modern
life today. While internetworking has been used until recently primarily
by large companies and institutions, the growth in use of the global
Internet has shown that the benefits of internetworking are being adopted
by organizations of all sizes, as well as individuals.
Cisco sells and supports its products in approximately 75 countries
through a combination of direct sales, distributors and resellers. The
Company has established relationships with a number of companies to
address specialized segments of the internetworking marketplace, and to
sell and support its products. Cisco offers customer support through
Technical Assistance Centers in California, North Carolina, Australia and
Belgium.
Satisfying customers' internetworking needs requires a constant
monitoring of market and technology trends, plus an ability to act
quickly. Cisco has a four-part approach to satisfying the need for new or
enhanced internetworking products and solutions. In order of importance,
this approach is to develop new technologies and products internally;
enter into joint-development efforts with other companies; resell another
company's products; and acquire all or part of another company.
Beginning in fiscal year 1994, Cisco began entering new markets and
broadening its product offerings through a series of acquisitions. The
following acquisitions have been, or soon will be, integrated into one of
the Company's business units, and product offerings, which are more fully
described later in the "Products" section of this report.
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In September 1993, the Company acquired Crescendo Communications, Inc.
("Crescendo") a networking company that provides high-performance
workgroup solutions. The Company issued approximately 6.8 million shares
of common stock for all the outstanding shares of common stock of
Crescendo in a transaction that was accounted for as a pooling of
interests. The Company also assumed options and warrants to purchase
Crescendo stock that remain outstanding as options to purchase the
Company's common stock.
In August 1994, the Company acquired Newport Systems Solutions(TM), Inc.
("Newport"), a privately held networking company providing software-based
routers for remote network sites. The Company issued approximately 6.5
million shares of common stock for all the outstanding stock of Newport
in a transaction accounted for as a pooling of interests. The Company
also assumed options to purchase Newport stock that remain outstanding as
options to purchase the Company's common stock.
In December 1994, the Company acquired Kalpana(R), Inc. ("Kalpana"), a
privately held manufacturer of Ethernet switches. Under the terms of the
agreement, the Company issued approximately 13.6 million shares of common
stock for all the outstanding stock of Kalpana in a transaction accounted
for as a pooling of interests. In connection with this transaction, the
Company assumed options to purchase Kalpana stock that remain outstanding
as options to purchase the Company's common stock.
In January 1995, the Company acquired substantially all of the assets and
assumed the liabilities of LightStream(R) Corporation ("LightStream"), a
developer of enterprise-class Asynchronous Transfer Mode (ATM) switching
technology, for $120.0 million in cash and related acquisition costs of
approximately $.5 million. This acquisition was accounted for as a
purchase.
In September 1995, the Company acquired Combinet Inc. ("Combinet"), a
privately held manufacturer of remote access networking products. The
Company issued approximately 3.5 million 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 the Company's common stock.
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 9.2 million 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 the Company's common stock.
In March 1996, the Company acquired TGV Software Inc. ("TGV") a
publicly-held developer of internetworking software. The Company issued
approximately 2.4 million shares of common stock for all the outstanding
shares of TGV in a transaction accounted for as a pooling of interests.
The Company also assumed options to purchase TGV stock that remain
outstanding as options to purchase the Company's common stock.
In July 1996, the Company acquired StrataCom, Inc.("StrataCom"). Under
the terms of the agreement, one share of Cisco common stock was exchanged
for each outstanding share of StrataCom, Inc. in a transaction accounted
for as a pooling of interests. Approximately 76.4 million
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shares of common stock were issued to acquire StrataCom. The Company also
assumed options to purchase StrataCom stock that remain outstanding as
options to purchase the Company's common stock.
Business Combinations Pending or Completed after Year-end
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 the
Company's common stock. The historical operations of Nashoba and the
impact of the transaction are not material to the financial position of
the Company.
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 the Company's common
stock. The historical operations of Granite and the impact of the
transaction are not material to the financial position of the Company.
On July 22, 1996, the Company entered into an agreement to acquire
Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation
(MICA) technologies for $200 million in cash. The transaction will be
accounted for as a purchase of assets and is expected to be completed by
October 1996, subject to certain shareholder and regulatory approvals.
Under the terms of the agreement, the Company will purchase Telebit
patents, MICA intellectual property and establish employment contracts
with MICA personnel, and will assume preferred stock and notes receivable
of $35 million in respect of a planned management buyout of the remaining
assets of Telebit.
On October 14, 1996, the Company entered into an agreement to acquire
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 will be 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 along with a strategic reseller agreement. The agreement is
subject to the receipt of certain government approvals and approval by
Netsys shareholders and is expected to be completed by November 1996.
The Company expects to make future acquisitions where it believes that it
can acquire new products and channels of distribution or otherwise
rapidly enter new or emerging markets. Mergers and acquisitions of
high-technology companies are inherently risky, and no assurance can be
given that the foregoing or any future acquisitions will be successful
and will not adversely affect the Company's financial condition or
results of operations.
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Cisco was incorporated in California in December 1984. The Company's
executive offices are located at 170 West Tasman Drive, San Jose,
California 95134, and its telephone number at that location is
(408)526-4000.
PRODUCTS
Cisco's products are used individually or in combination to connect
computer networks with each other, within a building, across a campus or
around the world. The breadth of product offerings and modular system
design enable the Company to configure hardware and software features to
match customer needs. Many of the Company's products are expandable,
offering customers the option to upgrade their internetworks with
existing equipment as their needs grow.
Cisco's product and solutions offerings fall into several categories:
Core Routing Solutions
Cisco pioneered the concept of a multi-protocol router, which moves
information between networks that speak different "languages"
(protocols). The Cisco 7000 family of routers delivers the high levels of
performance and availability needed for mission-critical networked
applications. Cisco 7000 family routers are used to create the backbone
of enterprise-wide networks and service-provider infrastructures.
Switching Solutions
Switching is a complementary internetworking technology used in both
workgroup local-area networks (LANs) and wide-area networks (WANs).
Cisco's switching solutions employ all widely used switching technologies
-- Ethernet (at both 10 and 100 million bits per second), Token Ring and
Asynchronous Transfer Mode (ATM). Cisco's wide-area switching solutions
are used by large enterprises and service providers (such as
telecommunications carriers) to connect networks over long distances,
using standard communications methods such as frame relay and ATM.
Access Solutions
Cisco's Access Solutions are employed by customers to give groups and
individuals who are remotely located the same level of connectivity and
information access as if they were located at headquarters. Asynchronous
and ISDN remote-access routers and dial access servers are used for
telecommuting, Internet access, branch-site connectivity, and in
educational applications.
SNA/LAN Solutions
Most large organizations have existing IBM computing systems that use the
System Network Architecture (SNA) networking method, as well as LANs
based on open network architectures. Network managers with both types of
networks increasingly want to combine them into a seamless internetwork
that leverages the investments that have already been made. Cisco
provides a broad range of products and solutions for this need that
maximize availability, scalability, performance, flexibility, and
management. The CiscoBlue strategy provides a roadmap for IBM
internetworking customers who want to consolidate duplicate networks,
effectively manage SNA and non-SNA resources, and integrate IBM networks
into higher-speed switched internetworks.
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Internet Solutions
Cisco's Internet solutions are led by the CiscoAdvantage(TM) product
line, which improves network managers' ability to cope with several
challenges posed by the growing popularity of the Internet. These
challenges include security, high volumes of network traffic, and the
shortage of network addresses. CiscoAdvantage products are designed for
use both by Internet service providers and by companies who manage their
own networks. The products harness the intelligent capabilities of
internetworks to offer smarter services to network users who want to
access the World Wide Web.
Cisco IOS Software Solutions
Most Cisco products incorporate features of the Cisco IOS(TM) software,
which ensures robust, reliable internetworks by supporting both LAN and
WAN protocols, optimizing WAN services, and controlling internetwork
access. Cisco IOS software also allows centralized, integrated, and
automated installation and management of products. In addition, Cisco IOS
technologies are licensed to other companies for use in complementary
products, thus increasing the range of networking solutions that can be
integrated through common functionality and management.
Enterprise Network Management
Cisco provides applications that centralize management, automate routine
tasks, and can be integrated into customers' existing network management
environments. The CiscoWorks software is a suite of standards-based
applications that allow users to manage their Cisco devices from a single
integrated console. CiscoWorks software provides applications for
enterprise and switched internetwork management, remote monitoring,
device management, simulation-based planning and problem-solving, and
performance analysis.
CUSTOMERS AND MARKETS
Cisco market strategy addresses four types of customers. These are:
Enterprise customers--Large enterprises with complex internetworking
needs, including corporations, government and educational entities, and
other large organizations; Service Providers--Companies that provide data
communication services, including telecommunication carriers, cable
companies, wireless communication providers, and Internet Service
Providers; Volume Markets--Small and medium-sized businesses, home
offices and residential users; Software Licensees--Other suppliers who
license features of the Cisco IOS software for inclusion in their
products or services.
Internetworking needs are influenced by a number of factors, including
the size of the customer's organization, number and types of computer
systems, geographic locations, and the applications requiring data
communications. Cisco's business is not concentrated in any particular
industry and in each of the past five fiscal years, no single customer
accounted for ten percent or more of the Company's net sales.
An important trend influencing demand for the Company's products is the
worldwide phenomenon of the Internet. The Internet is a network of
networks, consisting of thousands of sub-networks and computer resources
linked together. The demand by companies, institutions and individuals
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for access to the Internet is spurring demand for a wide variety of
Cisco's remote access, switching, routing and software products, and the
Company also benefits from the Internet phenomenon through its
relationships with numerous service providers.
Another significant factor affecting internetworking is the global trend
toward deregulated telecommunications and the resulting increase in use
of higher-performance telecommunications services. Cisco has equipment
installed with a majority of the world's major telecommunications
carriers.
The Company markets its products in the United States primarily through
its direct sales force and resellers, and internationally, through
distributors, value-added resellers (VARs) and its direct sales force in
subsidiary companies. In addition, the Company sells to system
integrators, both domestic and international, who resell the Company's
internetworking products along with other computer and communications
equipment. This multiple-channel approach allows customers to select the
supply channel that addresses their specific needs and provides the
Company with broad coverage of worldwide markets.
The Company's worldwide direct sales organization consisted of 2,471
individuals, including managers, sales representatives, and technical
support personnel. The Company has approximately 110 U.S. field sales
offices providing coverage in the following metropolitan areas: Atlanta,
Boston, Chicago, Cincinnati, Cleveland, Dallas, Denver, Durham, Honolulu,
Houston, Indianapolis, Los Angeles, Miami, New Orleans, New York,
Orlando, Phoenix, Pittsburgh, Portland (Oregon), Princeton, Salt Lake
City, San Antonio, San Diego, San Francisco, San Jose, Seattle, St.
Louis, and Washington, D.C., among others.
The Company's international sales are currently being made through
multiple channels including approximately 75 international distributors
and resellers in Africa, Asia, Australia, Canada, Europe, Latin America,
Mexico and South America. The international distributors provide system
installation, technical support, and follow-up service to local
customers. Generally, the Company's international distributors have
nonexclusive, country-wide agreements. International sales through the
various channels, including the Company's subsidiaries, accounted for
approximately 48.2% of total sales in fiscal 1996, 41.7% in fiscal 1995,
and 41.3% in fiscal 1994. Sales to international customers and
distributors generally have been made in United States dollars.
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The Company has sales support subsidiaries worldwide. New subsidiaries
formed in fiscal 1996 include Argentina, Chile, Cisco Systems
International B.V., Colombia, Costa Rica, Czech Republic, Malaysia,
Netherlands, Peru, Spain, Singapore, and Thailand. No individual
subsidiary has had direct sales that have been material to date.
BACKLOG
The Company's backlog on September 21, 1996 was approximately $292.3
million compared with an approximate backlog of $365.2 million at
September 25, 1995.
The Company includes in its backlog only orders confirmed with a purchase
order for products to be shipped within six months to customers with
approved credit status. Because of the generally short cycle between
order and shipment, and occasional customer changes in delivery schedules
or cancellation of orders (which are made without significant penalty),
the Company does not believe that its backlog as of any particular date
is necessarily indicative of actual net sales for any future period.
COMPETITION
Cisco competes in the computer networking market. The Company provides
solutions to end user customers, as well as service providers, through
both its direct sales and distributor channels. This market is
characterized by rapid growth, technological change, and a convergence of
technologies. These market factors represent both an opportunity and at
the same time a competitive threat to Cisco.
The Company faces competition from customers it licenses technology to
and suppliers from whom it transfers technology. Networking's inherent
nature is such that the Company must compete, and at the same time
cooperate, with these companies. At a minimum these relationships exist
to achieve interoperability. Optimally, these relationships are
synergistic and mutually beneficial resulting in growth for the industry.
3Com, Bay Networks, IBM, Cabletron, Fore, Ascend, and Cascade exemplify
companies that compete with Cisco. Some companies compete across all of
Cisco's product lines, while others do not offer as wide a breadth of
networking solutions.
The Company estimates that it competes with over 70 vendors in Access
routing, over 40 vendors in Core routing, over 50 vendors in Workgroup
switching, over 30 vendors in Frame Relay and ATM switching, over 20
companies providing Internet software solutions, and over 40 vendors in
SNA Internetworking. Cisco expects that the overall number of vendors
will grow in these markets due to its attractive growth opportunities.
However, the Company expects the growth in the overall number of
competitive vendors to be partially offset by mergers and acquisitions.
Consolidation in the industry is a result of customers and prospects
requesting end-to-end solutions and wanting to reduce the number of
suppliers. Also, companies in this industry seek synergies and market
presence that may result from mergers and acquisitions. Several of the
Company's current and potential competitors have substantially greater
financial, marketing and technical resources than the Company.
The principal competitive factors in these markets are: price;
performance; the ability to provide end to end solutions and support;
conformance to standards; added value features; and market presence. The
Company promotes its CiscoFusion Architecture and Cisco IOS software, as
providing the premier internetworking solutions in the industry. These
solutions offer many competitive advantages in the areas described above.
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RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, and frequent new
product introductions. Management believes that the Company's future
success depends in large part upon its ability to continue to enhance its
existing products and to develop new products that maintain technological
competitiveness. The Company closely monitors, through electronic mail
and onsite visits by engineering personnel, customers' needs for
additional products, and works actively with innovators of
internetworking products, including universities, laboratories, and
corporations. The Company intends to remain dedicated to industry
standards and to continue to support important protocol standards as they
emerge.
The Company is focusing development efforts around its seven internal
business units in the following areas: high-speed LAN and WAN switching
technologies, core and remote-access routing, remote access and ISDN
connectivity, improving overall system performance through increased
software functionality, expanding its network management capabilities,
and IBM and WAN services connectivity. Cisco's development efforts
continue to be guided by its CiscoFusion architecture announced in 1994,
with the Cisco IOS software serving as the underlying common thread.
There can be no assurance, however, that the Company's product
development efforts will result in commercially successful products, or
that the Company's products will not be rendered obsolete by changing
technology or new product announcements by others. The Company has
announced several new products, including a wide range of remote access
products and a new line of high-end routers. Although the Company has
announced its expected shipment dates for some of these products,
schedules for high-technology products are inherently difficult to
predict, and there can be no assurance that the Company will achieve its
expected initial shipments dates of these or any other new or enhanced
products developed by the Company. Because timely availability of new and
enhanced products and their acceptance by customers are critical to the
success of the Company, delays in availability of these products or lack
of market acceptance of such products could have a material adverse
effect on the Company.
In fiscal 1996, 1995, and 1994, the Company's research and development
expenditures were approximately $399.3 million, $210.8 million, and
$106.7 million respectively. All of the Company's expenditures for
research and development costs, including purchased research and
development of approximately $95.8 million in fiscal 1995, have been
expensed as incurred.
MANUFACTURING
The Company's manufacturing operations consist primarily of quality
assurance of materials, components and subassemblies, final assembly, and
test. The Company presently uses a variety of independent third-party
contract assembly companies to perform printed circuit board assembly, in
circuit test, and product repair. The Company installs its proprietary
software on electronically programmable memory chips installed in its
systems in order to configure products to customer needs and to maintain
quality control and security. The manufacturing process enables the
Company to configure the hardware and software in unique combinations to
meet a wide variety of individual customer requirements. The Company uses
automated testing equipment and "burn-in" procedures, as well as
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comprehensive inspection, testing, and statistical process control to
assure the quality and reliability of its products. The Company's
manufacturing processes and procedures are ISO 9001 certified. To date,
the Company has not experienced significant customer returns of its
products.
PATENTS, INTELLECTUAL PROPERTY AND LICENSING
Cisco's success is dependent upon its proprietary technology. Cisco
generally relies upon patents, copyright, trademark and trade secret laws
to establish and maintain its proprietary rights in its technology and
products. Cisco has a program to file applications for and obtain patents
in the United States and in selected foreign countries where a potential
market for Cisco's products exists. Cisco has been issued several
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 Cisco. In addition, there can be no assurance
that patents will be issued from pending applications, or that claims
allowed on any future patents will be sufficiently broad to protect
Cisco's technology. In addition, the laws of some foreign countries may
not permit the protection of Cisco's proprietary rights to the same
extent as do the laws of the United States. Although Cisco believes the
protection afforded by its patents, patent applications, copyrights and
trademarks has value, the rapidly changing technology in the networking
industry makes Cisco's future success dependent primarily on the
innovative skills, technological expertise and management abilities of
its employees rather than on patent, copyright and trademark protection.
Many of Cisco's products are designed to include software or other
intellectual property licensed from third parties. From time to time,
Cisco receives notices from third parties regarding patent claims. While
it may be necessary in the future to seek or renew licenses relating to
various aspects of its products, Cisco believes that based upon past
experience and standard industry practice, such licenses generally could
be obtained on commercially reasonable terms. Because of the existence of
a large number of patents in the networking field and the rapid rate of
issuance of new patents, it is not economically practical to determine in
advance whether a product or any of its components infringe patent rights
of others. If infringement is alleged, Cisco believes that based upon
industry practice, any necessary license or rights under such patents may
be obtained on terms that would not have a material adverse effect on
Cisco's financial condition or its results of operations. Nevertheless,
there can be no assurance that the necessary licenses would be available
on acceptable terms, if at all, or that Cisco would prevail in any such
challenge. The inability to obtain certain licenses or other rights or to
obtain such licenses or rights on favorable terms, or litigation arising
out of such other parties' assertion, could have a material adverse
effect on Cisco's business, operating results and financial condition.
OTHER RISK FACTORS
The Company's business and stock is subject to a number of risks. Some of
those risks are described below. Other risks are presented elsewhere in
this report. See, in particular, the last eight paragraphs of "Item 7,
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Comparison of 1996 and 1995."
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Potential Fluctuations in Quarterly Results
The Company's operating results have in the past been, and may 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, which Cisco 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 and specific economic conditions in the computer and
networking industries, any of which could have an adverse impact on
operations and financial results. For example, in the second quarter of
fiscal 1995, the Company acquired substantially all of the assets of
LightStream and incurred an expense of approximately $95 million
associated with purchased research and development, which resulted in net
income being significantly lower than in the prior quarter. Subsequent to
fiscal 1996, the Company purchased Telebit, which, upon completion of the
acquisition, will result in a charge to purchased research and
development that may result in net income being significantly lower than
in the prior quarter. Additionally, the dollar amounts of large orders
for the Company's products have been increasing, and therefore the
operating results for a quarter could be materially adversely affected if
a number of large orders are either not received or are delayed, due for
example, to cancellations, delays or deferrals by customers. Further, the
Company's expense levels are required, in part, to generate future net
sales. If net sales are below expectations, operating results are likely
to be adversely affected. Net income may be disproportionately affected
by a reduction in net sales because a proportionately smaller amount of
the Company's expenses varies with its net sales.
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 has previously experienced longer sales cycles for its core
products resulting from larger order sizes and believes that some
customers may have deferred purchases at that time in order to complete
detailed reviews of their overall network plans. This situation could
occur again. 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.
Dependence on New Product Development; Rapid Technological and Market
Change
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.
The Company's operating results will depend to a significant extent on
its ability to reduce costs of existing products. In particular, the
Company broadened its product line by introducing network access
products. Sales of these products, which are generally lower priced and
carry lower margins than the Company's core products, have increased more
rapidly than sales of the core products. In addition, in 1994 Cisco
announced its CiscoFusion architecture that provides a method of
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merging router-based networks with emerging technologies such as ATM and
LAN switches. While some elements of the CiscoFusion architecture have
been introduced, others are still in development. 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 the
Company's competitors and market acceptance of these products. The
Company has addressed the need to develop new products through its
internal development effort, joint developments with other companies and
acquisitions. 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 the Company's products or
technologies obsolete or noncompetitive. The failure of the Company's new
product development efforts could have a material adverse effect on the
Company's business operating results and financial condition.
Acquisition Strategy
In part, the Company has addressed, and expects to continue to address,
the need to develop new products through the acquisition of other
companies. Acquisitions involve numerous risks including difficulties in
the assimilation of the operations, technologies and products of the
acquired companies, the diversion of management's attention from other
business concerns, 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. Achieving the anticipated benefits of an
acquisition will depend in part upon whether the integration of
businesses is accomplished in an efficient and effective manner, and
there can be no assurance that this will occur. The successful
combination of companies in the high technology industry may be more
difficult to accomplish than in other industries. The combination of
companies requires, among other things, integration of the companies'
respective product offerings and coordination of their sales and
marketing and research and development efforts. There can be no assurance
that such integration will be accomplished smoothly or successfully. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of
certain operations following an acquisition, including the merger, will
require the dedication of management resources that may distract
attention from the day-to-day business of the combined company. The
inability of management to successfully integrate the operations of any
acquired company, could have a material adverse effect on the business
and results of operations of the Company. In addition, as commonly occurs
with mergers of technology companies, during the pre-merger and
integration phases, aggressive competitors may undertake initiatives to
attract customers and to recruit key employees through various
incentives.
Manufacturing Risks
Although the Company generally uses standard parts and components for its
products, certain components are presently available only from a single
source or limited sources. The Company has generally been able to obtain
adequate supplies of all components in a timely manner from existing
sources, or where necessary, from alternative sources of supply. A
reduction or interruption in supply or a significant increase in the
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<PAGE> 13
price of one or more components would adversely affect the Company's
operating results and could damage customer relationships.
Risks Associated With Internet Infrastructure
The Company's management believes that there will be in the future
performance problems with Internet communications which could receive a
high degree of publicity and visibility. Since 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 of the market price of the Company's Common Stock and could
adversely affect Cisco's business.
Business Environment
There is a State of California initiative called Proposition 211 on the
November 5, 1996 ballot which the Company believes may substantially
increase the likelihood of securities fraud lawsuits being brought
against the Company and its officers and directors. Such lawsuits, if
brought, could adversely affect the market price of the Company's Common
Stock. Additionally, the initiative could make it extremely unattractive
for individuals to serve as officers and directors of publicly-held
companies which may affect Cisco's ability to obtain or retain qualified
individuals to serve in such capacities. The Company is also considering
taking certain actions if the initiative passes, but has not made final
decisions. Such actions, if taken, may affect shareholder rights, result
in increased expenses to the Company and result in reduced communication
with market analysts.
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 factors, as well as
general economic and political conditions, may adversely affect the
market price of the Company's Common Stock in the future.
EMPLOYEES
As of September 21, 1996, the Company employed 8,782 persons, including
2,147 in manufacturing, service, and support, 3,387 in sales and
marketing, 2,420 in engineering, and 828 in finance and administration.
Approximately 1,400 employees were in international locations. The
Company also employs a number of temporary and contract employees. As of
September 21, 1996, the Company employed approximately 1,600 such
individuals.
None of the employees is represented by a labor union, and the Company
considers its relations with its employees to be positive. The Company
has experienced no work stoppages.
Competition for technical personnel in the Company's industry is intense.
To date, the Company believes that it has been successful in recruiting
qualified employees, but there is no assurance that it will continue to
be as successful in the future. The Company believes that its future
success depends in part on its continued ability to hire, assimilate, and
retain qualified personnel.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at sites in Santa
Clara and San Jose, California. The Santa Clara facilities are leased
through June 1998 and have approximately .1 million square feet of
office space. The Company's main headquarters are situated on 82 acres of
leased land in San Jose, California. There are twelve buildings located
at this site, one of which is a manufacturing facility. The San Jose
headquarters consist of approximately 1.4 million square feet of leased
office space at the present time. Construction has started at this site
on three additional office buildings of approximately .3 million square
feet which are expected to be occupied sometime in the middle of calendar
1997.
As part of the StrataCom acquisition, the Company also assumed certain
operating leases for buildings. The buildings, including an additional
manufacturing facility, are located at various sites in San Jose,
California and total approximately .5 million square feet.
In addition to the California facilities, the Company leases
approximately 45 acres of land in Research Triangle Park, North Carolina,
where the InterWorks Business Unit, as well as a Technical Assistance
Center, telesales, and various other support functions, are
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<PAGE> 14
located. Two building of approximately .2 million square feet have been
constructed and are currently occupied under a lease that expires in July
1999. A third building is currently under construction.
In April 1996, the Company announced an agreement with the State of
California and the City of San Jose which provides for the acquisition of
approximately 139 acres of land located in northeast San Jose subject to
certain conditions. The transaction is valued at approximately $95
million, with the counterparties providing approximately $25 million in
infrastructure and improvements. The Company anticipates that this site
will accommodate its growth for the next five years. Certain legal
challenges were raised subsequent to the announcement of the agreement
that may impact the Company's ability to complete this acquisition.
Although there are alternative sites, they may not be as cost effective
or suitable for the Company's needs. The Company's inability to
successfully purchase this land may impede it from having facilities
adequate to meet future demand. Nevertheless, management believes that
suitable additional space will be available to accommodate expansion of
the Company's operations on commercially reasonable terms.
The Company also leases various small offices throughout the U.S. and on
a worldwide basis. See Note 7 to the Consolidated Financial Statements
for additional information regarding the Company's obligations under
leases.
ITEM 3. LEGAL PROCEEDINGS
Pursuant to a Purchase and Sale Agreement and Joint Escrow Instructions
dated April 1996, ("Purchase Agreement"), Cisco is under contract to
purchase approximately 160 gross acres of undeveloped land("Property") in
the City of San Jose, California from the State of California. Pursuant
to Section 5.3 of the Purchase Agreement, Cisco's obligation to acquire
the Property is conditional upon receipt of all governmental approvals
needed for Cisco's intended use of the Property (for an expansion of its
research and development facilities). Among the necessary approvals is an
amendment to the General Plan of the City of San Jose ("GPA")
redesignating the Property for industrial use. The State of California
filed an application for the GPA, which was approved by the San Jose City
Council on May 21, 1996. On June 21, 1996, a group of businesses and
landowners in the neighboring City of Milpitas filed a "Petition for writ
of Mandate and Administrative Mandamus and Complaint for Declaratory and
Injunctive Relief" against the City of San Jose challenging the GPA. The
action is entitled Tencor Instruments, Inc. v. City of San Jose; City
Council of the City of San Jose; City of San Jose Planning Commission;
and Does I through X, and is currently pending in the Superior Court of
the State of California, County of Santa Clara. The action alleges that
the environmental impact report ("EIR") prepared by the City of San Jose
in connection with the GPA fails to meet the requirements of the
California Environmental Quality Act ("CEQA"). If successful, the action
would invalidate both the EIR and the GPA, and would preclude the City of
San Jose from granting any approvals pursuant to the GPA until the EIR
was brought into compliance with CEQA. See Item 2 "Properties" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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<PAGE> 15
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Larry R. Carter 53 Vice President, Finance and Administration, Chief 1995
Financial Officer, and Secretary
Mr. Carter joined the Company in January 1995 in
his present position. From July 1992 to January
1995, he was Vice President and Corporate
Controller for Advanced Micro Devices. Prior to
that, he was with V.L.S.I. Technology, Inc. for
four years where he held the position of Vice
President, Finance and Chief Financial Officer.
John T. Chambers 47 President, Chief Executive Officer and Director 1995
(1)(4)(5)(6) Mr. Chambers has been a member of the Board of
Directors since November 1993. He joined the
Company as Senior Vice President in January 1991
and became Executive Vice President in June 1994.
Mr. Chambers became President and Chief Executive
Officer of the Company as of January 31, 1995.
Prior to his services at Cisco, he was with Wang
Laboratories for eight years, most recently as
Senior Vice President of U.S. Operations.
Mr. Chambers Currently serves on the Board of
Directors for Clarity and Arbor Software.
Dr. Michael S. Frankel 50 Director 1992
(2)(3)(5) Dr. Frankel has been a member of the Board of
Directors since May 1992. He has been Vice
President and Division
Director of SRI International
since January 1989 and became
Center Director of SRI
International in 1986. Dr.
Frankel is not running for
re-election and will cease
being a Board Member in
November 1996.
Dr. James F. Gibbons 65 Director 1992
(2)(4)(5) Dr. Gibbons has been a member of the Board of
Directors since May 1992. He is a Professor of
Electrical Engineering at Stanford
University and also Special Consul to the Stanford
President for Industrial Relations. He was Dean of the
Stanford University School of
Engineering from 1984 to 1996. Dr. Gibbons also
currently serves on the Board of Directors of Lockheed
Martin Corporation, Centigram Communications Corporation,
El Paso Natural Gas Company, Amati Communications
Corporation and Raychem Corporation.
Edward R. Kozel 41 Vice President, Business Development, and Chief 1995
Technical Officer
Mr. Kozel, will, assuming election by the Company's
shareholders, become a member of the Board of
Directors. He joined the Company as Director,
Program Management in March 1989. In April 1992,
became Director of Field Operations and in February
1993 he became Vice President of Business
Development. Since January 1996, he has been Chief
Technology Officer of the Company. Mr. Kozel
currently serves on the Board of Directors of
Cybercash and NetFrame Systems.
Donald A. LeBeau 49 Senior Vice President, Worldwide Operations 1994
Mr. LeBeau joined the Company as Vice President of
North American Sales in July 1992 and became Senior
Vice President of Worldwide Sales in August 1994.
From May 1989 to July 1992, he was Vice President
of Western Operations at Wang Laboratories. From
August 1985 to May 1989 he was with United Research
most recently as Senior Vice President. On October 1,
1996 Mr. LeBeau took a one-year leave of absence
from the Company.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Richard M. Moley 57 Senior Vice President and General Manager 1996
Wide-Area Network Business Unit
Mr. Moley has been a member of the Board of
Directors since July 1996. He has been Senior
Vice President, Wide Area Business Unit since
July 1996. Prior to that, he was President,
Chief Executive Officer and Chairman of
StrataCom, Inc. from June 1986 to July 1996.
Mr. Moley currently serves on the Board of
Directors of Linear Technology, Inc. and
Cidco, Inc.
John P. Morgridge 63 Chairman of the Board of Directors 1995
(1)(5)(6) Mr. Morgridge joined the Company as President and
Chief Executive Officer and was elected to the
Board of Directors in October 1988. Mr. Morgridge
became Chairman of the Board on January 31, 1995.
From 1986 to 1988 he was President and Chief
Operating Officer at GRiD Systems, a manufacturer
of laptop computer systems. Mr. Morgridge
currently serves on the Board of Directors of
Polycom, Inc.
Robert L. Puette 54 Director 1991
(2)(3)(4) Mr. Puette has been a member of the Board of
Directors since January 1991. He has been President, Chief
Executive Officer and on the Board of Directors of
NetFRAME Systems, since January 1995 and became
Chairman of the Board of Directors in January 1996. He
was a consultant from November 1993 to December
1994. Prior to that, he was Senior Vice President of
Apple Computer, Inc. and President of Apple USA
Division from June 1990 to October 1993. Mr. Puette also
currently serves on the Board of Directors of Quality
Semiconductor.
Carl Redfield 49 Vice President, Manufacturing 1993
Mr. Redfield joined the Company in August 1993 as
Director, Supply/Demand of Manufacturing and became
Vice President of Manufacturing in September 1993.
Prior to joining Cisco, he spent eighteen years at
Digital Equipment Company, most recently as Group
Manufacturing and Logistics Manager of the PC Group.
Masayoshi Son 39 Director 1995
Mr. Son has been a member of the Board of Directors since
July 26, 1995. He has been the President and Chief
Executive Officer of SOFTBANK Corporation for more than
fifteen years.
Donald T. Valentine 64 Vice Chairman of the Board of Directors 1995
(1)(5) Mr. Valentine has been a member of the Board of
Directors of the Company since December 1987, and was
elected Chairman of the Board of Directors in December
1988. He became Vice Chairman of the Board on January 31,
1995. He has been a general partner of Sequoia Capital
since 1974. Mr. Valentine currently serves as Chairman
of the Board of Directors of C-Cube Microsystems, Inc., a
semiconductor video compression company, Chairman
of the Board of Network Appliance Corporation, a
company in the network file server business, and Chairman
of the Board of Elantec, a manufacturer of analog
integrated circuits.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
---- --- -------- ----------
<S> <C> <C> <C>
F. Selby Wellman 54 Senior Vice President, Business Units 1996
Mr. Wellman joined the Company in April 1995 as
Vice President and General Manager of InterWorks
Business Unit in Research Triangle Park, North
Carolina. He was promoted to Senior Vice President
of Business Units in March 1996. Prior to joining
Cisco, Mr. Wellman was Corporate Vice President of
Sales, Marketing and Operations at FiberCom Inc.
/NetEdge Systems, Inc. from 1988-1994. From 1984-
1988, he was Corporate Vice President and General
Manager of Sales and Marketing at Paradyne, Corp.
Mr. Wellman began his career with IBM where he held
a variety of field, staff, and management positions
in IBM's Large System Division over a 15 year
period.
Steven M. West 41 Mr. West has been a member of the Board of 1996
(3) Directors of the Company since April 1996. He has
been President and Chief Executive Officer of Hitachi
Data Systems Corporation, a joint venture computer
hardware services company owned by Hitachi, Ltd. And
EDS, since June 1996. Prior to that Mr. West was at EDS
from 1986 to June of 1996, most recently as President of
EDS's Infotainment Business Unit.
</TABLE>
-------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Nomination Committee
(5) Member of the Acquisition Committee
(6) Member of the Special Stock Option Committee
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
c/o Boston EquiServe
M/S 45-02-09
P.O. Box 644
Boston, MA 02102
http://www.EQUISERVE.com
Investor Relations: 617 575-3120
INDEPENDENT ACCOUNTANTS & LEGAL COUNSEL
Coopers & Lybrand L.L.P.
San Jose, California
Brobeck, Phleger & Harrison LLP
Palo Alto, California
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION
The following table sets forth the price range of the Company's common stock
for the periods indicated. Prices reflect the two-for-one splits effective
March 1994 and February 1996:
<TABLE>
<CAPTION>
1996 1995 1994
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 38.62 $ 26.12 $ 15.00 $ 10.43 $ 14.68 $ 10.43
Second Quarter 43.93 32.68 18.31 15.06 17.68 12.37
Third Quarter 52.37 40.56 20.37 16.28 20.18 14.50
Fourth Quarter 58.75 47.12 29.31 19.68 16.25 9.53
</TABLE>
Cisco Systems' common stock (Nasdaq symbol CSCO) is traded on the Nasdaq
National Market. The table above reflects the range of high and low closing
prices for each period indicated. The Company has never paid cash dividends
on the common stock and has no present plans to do so. There were
approximately 8,568 shareholders of record on October 4, 1996.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEARS ENDED JULY 28, 1996
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 4,096,007 $ 2,232,652 $ 1,334,436 $ 714,533 $ 381,996
============= ============= ============= ============= =============
Net income $ 913,324 $ 456,489 $ 322,981 $ 176,201 $ 81,861
============= ============= ============= ============= =============
Net income per common share $ 1.37 $ 0.72 $ 0.54 $ 0.30 $ 0.15
============= ============= ============= ============= =============
Shares used in per-share
calculation 666,586 630,711 596,539 580,623 561,987
============= ============= ============= ============= =============
Total assets $ 3,630,232 $ 1,991,949 $ 1,129,034 $ 656,394 $ 361,273
============= ============= ============= ============= =============
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K 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 this Form 10-K, which identify
important risk factors that could cause actual results to differ from
those contained in the forward-looking statements.
COMPARISON OF 1996 AND 1995
Net sales grew to $4,096 million in 1996 from $2,233 million in 1995. The
83.5% increase in net sales during the year was primarily a result of
increasing unit sales of the Cisco 7500 series; continued strong
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<PAGE> 19
sales of Access business unit products, including the Cisco 4500 and
Cisco 2500 series; and continued market acceptance of the Company's
Workgroup business unit products, particularly the Catalyst 5000. In
connection with the acquisition of StrataCom, Inc., the Company formed
the WAN business unit, which consists of the IPXo, BPX, IGX and AXIS
product lines. Sales of these products increased from 1995 levels
primarily because of an increase in demand for Asynchronous Transfer Mode
(ATM) cell switching products by public carrier customers. 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 were 48.2% of net sales in 1996 compared with
41.7% in 1995. This increase is attributable to continued expansion into
new geographic markets, as well as growth in existing European and
Japanese markets. Sales growth between 1996 and 1995 increased more
substantially in Japan than in any other geographical markets.
Gross margins decreased to 65.6% of net sales in 1996 from 66.7% in 1995.
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 Access and Workgroup business units. 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 offset 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 in 1996 by $188.5 million
over 1995 expenditures. This represents an increase to 9.7% of net sales
from 9.4% in 1995. The increase reflects the Company's ongoing research
and development efforts, including the further development of
CiscoFusiono 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, both from hiring and through acquisitions, 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 as a percentage of sales is expected to
increase. 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 by $326.3 million in 1996 over
1995, but decreased to 17.7% of net sales in 1996 from 17.9% of net sales
in 1995. The dollar increase in these expenses resulted mainly from an
increase of approximately 1,200 employees 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
CiscoProo, to support the launch of new products; the
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<PAGE> 20
entry into new markets as noted by the significant percentage increase in
business outside the U.S.; 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 by $74.5 million in 1996 over
1995, a slight increase to 3.9% from 3.8% of net sales in 1996 versus
1995. The dollar increase reflects increased personnel costs necessary to
support the Company's business infrastructure, the amortization of
goodwill related to the acquisition of Lightstream, and a one-time
write-down of $5.1 million of LightStream goodwill. There were also
non-recurring costs related to the acquisition of StrataCom which totaled
$15.5 million for fiscal 1996. Excluding the effect of these
non-recurring costs, general and administrative expenses as a percentage
of net sales declined to 3.4%, which reflects management's continued
controls over discretionary spending. 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 fiscal year
1995 reflects the acquisition of LightStream (see note 3).
Interest and other income, net, was $64.0 million in 1996 and $40.0
million in 1995. Interest income rose as a result of additional
investment income on the Company's increasing investment balances. The
Company currently holds approximately 5.4 million shares of common stock
in a publicly traded company with a cost basis significantly below its
current market value. Beginning in fiscal year 1997, the Company expects
to begin selling its equity stake in this company. As a result, interest
and other income may increase materially in the next fiscal year versus
fiscal 1996.
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 non-functional currency assets and
liabilities 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
20
<PAGE> 21
associated with its lease commitments. The Company does not currently
hedge these interest rate exposures.
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 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 will be effective for
the Company's fiscal year 1997. The Company has studied the implications
of the statement, and based on its initial evaluation, does not expect it
to have a material impact on the Company's financial condition or results
of operations upon adoption.
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 of pro forma
net income and earnings per share under the new method. The Company is
required to adopt SFAS No. 123 by fiscal 1997, and, upon adoption, will
elect 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 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.
FUTURE GROWTH SUBJECT TO RISKS
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
StrataComs 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
21
<PAGE> 22
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 of 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.
In 1996 and 1995, the Company's lead times for certain products and
backlog increased. If manufacturing lead times are not reduced, the
Company's customers may cancel orders or not place further orders if
shorter lead times are available from other manufacturers. Each year,
with the exception of fiscal years 1996 and 1995, the Company has
generally had one quarter of a fiscal year when backlog has been reduced.
Traditionally, this has occurred in the third quarter of each year. While
such a reduction did not occur in the past two fiscal years, such
reductions are extremely difficult to predict and may occur in the
future. In addition, in response to customer demand, the Company has,
from time to time, reduced its product manufacturing lead times, which
resulted in corresponding reductions in order backlog. To the extent that
backlog levels decline during any particular period, it could result in
more volatility 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
changes in channels of distribution or in the mix of products sold. In
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 fiscal
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, 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,
22
<PAGE> 23
any of which could have a material adverse impact on operations and
financial results.
In April 1996, the Company announced an agreement with the State of
California and the City of San Jose that provides for the acquisition of
approximately 139 acres of land located in northeast San Jose subject to
certain conditions. The transaction is valued at approximately $95
million, with the counterparties providing approximately $25 million in
infrastructure and improvements. The Company anticipates that this site
will accommodate its growth for the next five years. Certain legal
challenges were raised subsequent to the announcement of the agreement
that may impact the Company's ability to complete this acquisition.
Although there are alternative sites, they may not be as cost effective
or suitable for the Company's needs. The Company's inability to
successfully purchase this land may impede it from having facilities
adequate to meet future demand.
The Company's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in
the Silicon Valley area of Northern California, a region known for
seismic activity. Operating results could be materially affected by a
significant earthquake.
COMPARISON OF 1995 AND 1994:
Net sales grew to $2,233 million in 1995 from $1,334 million in 1994. The
67.3% increase in net sales during the year was primarily a result of
increasing unit sales of the Cisco 7010, the Cisco 7000, and the Cisco
2500 series; greater market acceptance of ATM WAN switching products;
sales of new products including the Cisco 4500; and the initial market
acceptance of the Company's high-speed switching products. These
increases were partially offset by decreasing unit sales of the Company's
older product lines, comprising the AGS+ as well as the Cisco 2000 and
Cisco 3000 series. Sales to international customers were 41.7% of net
sales in 1995 compared with 41.3% in 1994. This moderate increase
reflects the Company's continued expansion into new geographic markets.
Gross margins increased to 66.7% of net sales in 1995 from 66.2% in 1994.
Gross margins improved as a result of several factors, including lower
material costs achieved through volume and prompt payment discounts,
certain manufacturing overhead efficiencies, and a decrease in warranty
expenses. This improvement was partially offset by the continued shift in
revenue mix to the Company's lower-margin remote access products.
Research and development expenses increased $104.1 million in 1995 over
1994, an increase to 9.4% of net sales in 1995 from 8.0% in 1994. The
increase reflected the Company's ongoing research and development
efforts, including the further development of its CiscoFusion
architecture, as well as the acquisition of technologies to bring a broad
range of 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.
Sales and marketing expenses increased $174.5 million in 1995 over 1994,
an increase to 17.9% of net sales from 16.9%. The increase in these
expenses resulted from an increase in the size of the Company's direct
sales force and its commissions, additional marketing programs to
23
<PAGE> 24
support the launch of new products, the entry into new markets both
domestic and international, and expansion of distribution channels.
General and administrative expenses rose $33.8 million in 1995, a slight
decrease to 3.8% from 3.9% of net sales. The increase in the dollar
amount of these expenses reflects increased personnel costs,
implementation of the Company's new information system, and the
amortization of goodwill since the date of the acquisition of the assets
and assumption of the liabilities of LightStream (see note 3). The amount
expensed to purchased research and development related to the acquisition
of the assets and assumption of the liabilities of LightStream (see note
3).
Interest and other income, net, was $40.0 million in 1995 and $22.3
million in 1994. Interest income rose as a result of higher average
investment balances in 1995 versus 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments, and investments were $1,870 million at July
28, 1996, an increase of $895.4 million from 1995. The increase reflects
cash generated by operations and, to a lesser extent, the exercise of
employee stock options. This increase was partially offset by capital
expenditures of approximately $282.8 million and by the repurchase of
$115.6 million of common stock during the year. The company entered into
an agreement to purchase Telebit Corporation for $200 million in cash; It
anticipates that it will make the disbursement in the first quarter of
fiscal 1997.
Accounts receivable rose 47.7% during 1996, while sales grew by 83.5%.
Days sales outstanding in receivables were 44 days at the end of the year
versus 54 days at July 30, 1995. Inventories increased by 268.2% in 1996
compared with 1995 because of production planning associated with higher
sales levels and desired manufacturing lead times, particularly on new
products. The growth in inventory 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 156.9% in 1996 compared to 1995 because of
increases in operating expenses and material purchases to support the
growth in net sales. The 108.0% increase in accrued payroll and related
expenses can be attributed to a 102.2% increase in personnel during the
year. Other accrued liabilities increased by 53.5% over 1995, primarily
because of increases in deferred service contract revenues, as well as
accruals made for merger-related costs associated with the StrataCom
acquisition.
At July 28, 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, certain research and
development, and customer support activities. In connection with these
transactions, the Company pledged $228.6 million of its investments as
24
<PAGE> 25
collateral for certain obligations of the leases. The restricted
investments balance will continue to increase as the Company continues to
expand its operations at these and other possible lease sites.
Under the Company's stock repurchase program, shares have been purchased
periodically to meet employee stock plan requirements. On October 9,
1996, the Company terminated its share repurchase program. Approximately
7.2 million shares of common stock have been repurchased by the Company
since the original authorization of the program in August 1994.
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.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 28, July 30,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 279,695 $ 284,388
Short-term investments 758,489 279,754
Accounts receivable, net of allowance for doubtful
accounts of $21,074 in 1996 and $18,427 in 1995 622,859 421,747
Inventories, net 301,188 81,805
Deferred income taxes 101,827 88,038
Prepaid expenses and other current assets 95,582 28,428
----------- -----------
Total current assets 2,159,640 1,184,160
Investments 832,114 410,798
Restricted investments 228,644 173,073
Property and equipment, net 331,315 172,561
Other assets 78,519 51,357
----------- -----------
Total assets $ 3,630,232 $ 1,991,949
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 153,683 $ 59,812
Income taxes payable 169,894 71,970
Accrued payroll and related expenses 195,197 93,863
Other accrued liabilities 250,579 163,236
----------- -----------
Total current liabilities 769,353 388,881
Commitments (note 7)
Minority interest 41,257 40,792
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding in 1996 and 1995
Common stock, no par value, 1,200,000 shares authorized:
649,284 shares issued and outstanding in 1996 and
617,176 shares in 1995 888,067 508,674
Retained earnings 1,777,369 996,805
Unrealized gain on marketable securities 158,848 50,948
Cumulative translation adjustments (4,662) 5,849
----------- -----------
Total shareholders' equity 2,819,622 1,562,276
----------- -----------
Total liabilities and shareholders' equity $ 3,630,232 $ 1,991,949
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
July 28, July 30, July 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $4,096,007 $2,232,652 $1,334,436
Cost of sales 1,409,862 742,860 450,591
---------- ---------- ----------
Gross margin 2,686,145 1,489,792 883,845
Expenses:
Research and development 399,291 210,815 106,680
Sales and marketing 726,278 399,983 225,511
General and administrative 159,770 85,271 51,484
Purchased research and development 95,760
---------- ---------- ----------
Total operating expenses 1,285,339 791,829 383,675
---------- ---------- ----------
Operating income 1,400,806 697,963 500,170
Interest and other income, net 64,019 40,014 22,330
---------- ---------- ----------
Income before provision for income taxes 1,464,825 737,977 522,500
Provision for income taxes 551,501 281,488 199,519
---------- ---------- ----------
Net income $ 913,324 $ 456,489 $ 322,981
========== ========== ==========
Net income per common share $ 1.37 $ 0.72 $ 0.54
========== ========== ==========
Shares used in per-share calculation 666,586 630,711 596,539
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
Unrealized Total
Number Gain on Cumulative Share-
of Retained Marketable Translation holders'
Shares Amount Earnings Securities Adjustment Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances July 25, 1993 556,460 $ 210,290 $ 311,676 $ (428) $ 521,538
Issuance of common stock
under stock option and
purchase plans 15,313 24,810 24,810
Tax benefits related to
disqualifying
dispositions of stock
options 36,283 36,283
Pooling of interests with
Crescendo
Communications, Inc. 6,792 11,295 (12,855) (1,560)
Net income 322,981 322,981
Translation adjustments 270 270
----------- ----------- ----------- ----------- ----------- -----------
Balances July 31, 1994 578,565 282,678 621,802 (158) 904,322
Issuance of common stock
under stock option and
purchase plans 15,733 53,660 53,660
Issuance of common stock
in conjunction with a
secondary offering
by StrataCom 6,900 81,688 81,688
Tax benefits related to
disqualifying
dispositions of stock
options 59,348 59,348
Common stock repurchases (4,188) (2,073) (67,808) (69,881)
Pooling of interests with
Newport Systems
Solutions(TM), Inc. 6,524 6,805 1,603 8,408
Pooling of interests with
Kalpana(R), Inc. 13,642 26,568 (15,281) 11,287
Unrealized gains
on marketable
securities $ 50,948 50,948
Net income 456,489 456,489
Translation adjustments 6,007 6,007
----------- ----------- ----------- ----------- ----------- -----------
Balances July 30, 1995 617,176 508,674 996,805 50,948 5,849 1,562,276
</TABLE>
28
<PAGE> 29
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Unrealized Total
Number Gain on Cumulative Share-
of Retained Marketable Translation holders'
Shares Amount Earnings Securities Adjustment Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances July 30, 1995 617,176 508,674 996,805 50,948 5,849 1,562,276
Issuance of common stock
under stock option
and purchase plans 19,072 116,554 116,554
Tax benefits related to
disqualifying
dispositions of stock
options 198,468 198,468
Common stock repurchases (3,060) (3,876) (111,745) (115,621)
Pooling of interests with
Combinet, Inc. 3,525 13,262 (6,920) 6,342
Pooling of interests with
Grand Junction
Networks, Inc. 9,171 17,064 (17,994) (930)
Pooling of interests with
TGV Software, Inc. 2,398 32,254 3,834 36,088
Other acquisitions 1,002 5,667 65 5,732
Unrealized gains on
marketable securities 107,900 107,900
Net income 913,324 913,324
Translation adjustments (10,511) (10,511)
----------- ----------- ----------- ----------- ----------- -----------
Balances, July 28, 1996 649,284 $ 888,067 $ 1,777,369 $ 158,848 $ (4,662) $ 2,819,622
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 30
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------
July 28, July 30, July 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 913,324 $ 456,489 $ 322,981
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 132,594 74,961 36,293
Provision for doubtful accounts 18,548 15,213 5,102
Provision for inventory allowances 53,025 55,783 17,597
Deferred income taxes (74,292) (74,856) (31,406)
Tax benefit of disqualifying dispositions 198,468 59,348 36,283
Change in operating assets and liabilities:
Accounts receivable (219,628) (181,083) (117,726)
Inventories (272,408) (104,484) (24,784)
Prepaid expenses and other current
assets (67,154) (16,725) (5,882)
Accounts payable 93,773 22,605 8,834
Income taxes payable 97,924 27,976 26,200
Accrued payroll and related expenses 101,221 43,485 21,810
Other accrued liabilities 87,331 64,121 33,020
----------- ----------- -----------
Net cash provided by operating
activities 1,062,726 442,833 328,322
----------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (786,197) (341,578) (172,069)
Proceeds from sales and maturities of short-term
investments 641,974 295,234 151,269
Purchases of investments (809,098) (289,569) (560,090)
Proceeds from sales and maturities of
investments 219,178 228,680 348,123
Purchases of restricted investments (164,624) (160,396) (74,343)
Proceeds from sales and maturities of
restricted investments 115,429 100,472 52,341
Acquisition of property and equipment (282,840) (151,828) (69,831)
Acquisition of business, net of cash acquired
and purchased research and development (17,920)
Other 8,337 5,273 (2,966)
----------- ----------- -----------
Net cash used by investing activities (1,057,841) (331,632) (327,566)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 116,554 135,348 24,810
Common stock repurchases (115,621) (69,881)
Proceeds from sale of subsidiary stock 40,548
Other (10,511) 6,007 270
----------- ----------- -----------
Net cash (used) provided by financing
activities (9,578) 112,022 25,080
----------- ----------- -----------
Net (decrease) increase in cash and
equivalents (4,693) 223,223 25,836
Cash and equivalents, beginning of period 284,388 61,165 35,329
----------- ----------- -----------
Cash and equivalents, end of period $ 279,695 $ 284,388 $ 61,165
=========== =========== ===========
</TABLE>
Non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
July 28, July 30,
1996 1995
<S> <C> <C>
Transfers of securities to restricted
investments $ 3,586 $ 27,249
======== ========
Unrealized gain on marketable securities
$173,054 $ 82,704
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 31
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
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 75 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 Sunday in July. The fiscal years ended July 28, 1996, July
30, 1995, and July 31, 1994 comprised 52, 52, and 53 weeks, respectively.
Commencing with fiscal year 1997, the Company's fiscal year will be the
52- or 53-week period ending on the last Saturday in July.
Principles of Consolidation The consolidated financial statements
include the accounts of Cisco Systems, Inc. and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Cash and Equivalents The Company considers cash and all highly
liquid investments purchased with an original or remaining maturity of
less than three months at the date of purchase to be cash equivalents.
Substantially all of its cash and equivalents are custodied with three
major financial institutions.
Short-Term Investments The Company's short-term investments comprise
U.S., state, and municipal government obligations and corporate
securities. These investments are carried at market value and have
maximum maturities of one year. Nearly all short-term investments are
held in the Company's name and custodied with two major financial
institutions.
Inventories Inventories are stated at the lower of cost or market.
Cost is computed using standard cost, which approximates actual cost on a
first-in, first-out basis.
Investments Investments consist of U.S., state, and municipal
government obligations, foreign and corporate securities with maturities
of more than one year. These investments are carried at market value.
Investments are held in the Company's name and custodied with two major
financial institutions.
Restricted Investments Restricted investments consist of U.S.
governmental obligations with maturities of more than one year. These
investments are carried at market value and are restricted as to
withdrawal (see note 7). Restricted investments are held in the Company's
name and custodied with one major financial institution.
31
<PAGE> 32
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
Fair Value of Financial Instruments Carrying amounts of certain of
the Company's financial instruments including cash and cash equivalents,
accrued payroll, and other accrued liabilities approximate fair value
because of their short maturities. The fair values of investments are
determined using quoted market prices for those securities or similar
financial instruments.
Concentrations Cash and cash equivalents are, for the most part,
maintained with several major financial institutions in the United
States. Deposits held with banks may exceed the amount of insurance
provided on such deposits. Generally these deposits may be redeemed upon
demand and therefore, bear minimal risk.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers.
The Company receives certain of its custom semiconductor chips for some
of its products from sole suppliers. Additionally, the Company relies on
a limited number of hardware manufacturers. The inability of any vendor
or manufacturer to fulfill supply requirements of the Company could
impact future results. The Company continually monitors exposures in this
regard.
Revenue Recognition The Company generally recognizes product revenue
upon shipment of product. Revenue from service obligations is deferred
and recognized over the lives of the contracts. The Company accrues for
warranty costs, sales returns, and other allowances at the time of
shipment.
Depreciation and Amortization Property and equipment are stated at
cost and depreciated on a straight-line basis over the estimated useful
lives of the assets. Such lives vary from two and one-half to five years.
Income Taxes The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes," which uses the liability method to calculate deferred
income taxes. The realization of deferred tax assets is based on
historical tax positions and expectations about future taxable income.
Computation of Net Income per Common 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.
Foreign Currency Translation The Company's international
subsidiaries use their local currency as their functional currency.
Assets and liabilities are translated at exchange rates in effect at the
balance sheet date, and income and expense accounts at average exchange
rates during the year. Resulting translation adjustments are recorded
directly to a separate component of shareholders' equity.
Forward Exchange Contracts The Company enters into forward
exchange contracts to minimize the short-term impact of foreign currency
fluctuations on assets and liabilities denominated in currencies other
32
<PAGE> 33
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
than the functional currency of the reporting entity. Gains and losses on
these contracts are recognized in net income in the period in which
exchange rate changes occur. Fair market values of exchange contracts are
determined using published rates.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
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 will be effective for the Company's fiscal year
1997. The Company has studied the implications of the statement, and
based on its initial evaluation, does not expect it to have a material
impact on the Company's financial condition or results of operations upon
adoption.
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.
The Company is required to adopt SFAS No. 123 by fiscal 1997, and upon
adoption, will elect 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 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
All applicable share and per share data have been restated to give effect
to all stock splits.
33
<PAGE> 34
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
POOLING OF INTERESTS COMBINATIONS
In September 1993, the Company acquired Crescendo Communications, Inc.
("Crescendo"), a networking company that provides high-performance
workgroup solutions. The Company issued approximately 6.8 million shares
of common stock for all the outstanding shares of common stock of
Crescendo in a transaction that was accounted for as a pooling of
interests. The Company also assumed options and warrants to purchase
Crescendo stock that remain outstanding as options to purchase
approximately .3 million shares of the Company's common stock.
In August 1994, the Company acquired Newport Systems Solutions, Inc.
("Newport"), a privately held networking company providing software-based
routers for remote network sites. The Company issued approximately 6.5
million shares of common stock for all the outstanding stock of Newport
in a transaction accounted for as a pooling of interests. The Company
also assumed options to purchase Newport stock that remain outstanding as
options to purchase approximately .2 million shares of the Company's
common stock.
In December 1994, the Company acquired Kalpana, Inc. ("Kalpana"), a
privately held manufacturer of Ethernet switches. Under the terms of the
agreement, the Company issued approximately 13.6 million shares of common
stock for all the outstanding stock of Kalpana in a transaction accounted
for as a pooling of interests. In connection with this transaction, the
Company assumed options to purchase Kalpana stock that remain outstanding
as options to purchase approximately .6 million shares of the Company's
common stock.
In September 1995, the Company acquired Combinet Inc. ("Combinet"), a
privately held manufacturer of remote access networking products. The
Company issued approximately 3.5 million shares of common stock for all
the outstanding stock of Combinet in a transaction also 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 .3 million shares of the Company's common stock.
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 9.2 million 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 .5 million shares of the Company's
common stock.
In March 1996, the Company acquired TGV Software Inc. ("TGV"), a
publicly-held developer of internetworking software. The company issued
approximately 2.4 million shares of common stock for all the outstanding
shares of TGV in a transaction accounted for as a pooling of interests.
The Company also assumed options to purchase TGV stock that remain
outstanding as options to purchase approximately .3 million shares of the
Company's common stock.
34
<PAGE> 35
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
The historical operations of the above companies 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 July 9, 1996, the Company acquired StrataCom, Inc.("StrataCom"). Under
the terms of the agreement, one share of Cisco common stock was exchanged
for each outstanding share of StrataCom, Inc. Approximately 76.4 million
shares of common stock were issued to acquire StrataCom.
The Company also assumed options to purchase StrataCom stock that remain
outstanding as options to purchase approximately 11.5 million shares of
the Company's common stock. The transaction was accounted for as a
pooling of interests; therefore, all prior periods presented have been
restated as if the merger took place at the beginning of the earliest
period presented.
Prior to the merger, StrataCom used a calendar year end. Restated
financial statements of the Company combine the July 28, 1996, July 30,
1995 and July 31, 1994 results of Cisco Systems Inc. with the June 30,
1996, July 1, 1995 and July 1, 1994 results of StrataCom, respectively.
No adjustments have been made to conform accounting policies of the
entities. However, as noted below, StrataCom's historical results have
been adjusted to reflect an increase in income taxes because of the
elimination of a previously provided valuation allowance on its deferred
tax asset as of the earliest period presented. There were no significant
intercompany transactions requiring elimination in any period presented.
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 will be reflected as
an adjustment to retained earnings in the first quarter of fiscal 1997.
The following table shows the historical results of the Company and
StrataCom for the periods prior to the consummation of the merger of the
two entities:
35
<PAGE> 36
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
<TABLE>
<CAPTION>
Year ended
Nine Months -----------------------------
Ended April 30, July 30, July 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Cisco $ 2,521,820 $ 1,978,916 $ 1,242,975
StrataCom 282,037 253,736 91,461
----------- ----------- -----------
Total $ 2,803,857 $ 2,232,652 $ 1,334,436
=========== =========== ===========
Net Income:
Cisco as prevously
reported $ 594,777 $ 421,008 $ 314,867
StrataCom as prevously
reported 44,542 37,873 9,818
----------- ----------- -----------
Total 639,319 458,881 324,685
Adjustment to reflect
elimination of
valuation allowance (2,546) (2,392) (1,704)
----------- ----------- -----------
Net income, as restated $ 636,773 $ 456,489 $ 322,981
=========== =========== ===========
</TABLE>
PURCHASE COMBINATIONS
In January 1995, the Company acquired substantially all of the assets and
assumed the liabilities of LightStream Corporation("LightStream"), a
developer of enterprise-class ATM switching technology, for $120.0
million in cash and related acquisition costs of approximately $.5
million.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of the acquired business and the fair market values of the
acquired assets and assumed liabilities were included in the Company's
financial statements as of the effective date.
The purchase price was allocated to the acquired assets and assumed
liabilities based on fair market values as follows:
<TABLE>
<S> <C>
Cash $ 6,320
Accounts receivable 2,777
Other current assets 101
Property and equipment 1,815
Purchased research and development 95,760
Goodwill 19,710
Current liabilities (5,983)
---------
$ 120,500
=========
</TABLE>
The amount allocated to purchased research and development was determined
through known valuation techniques in the high-technology communications
industry and was immediately expensed in the period of acquisition
because technological feasibility had not been established and no
alternative commercial use had been identified. Remaining amounts
allocated to goodwill are being amortized on a straight-line basis over
two years.
The following summary, prepared on a pro forma basis, combines the
results of operations as if LightStream had been acquired as of the
beginning of the periods presented. The summary includes the impact of
certain adjustments such as goodwill amortization and estimated changes
36
<PAGE> 37
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
in interest income because of cash outlays associated with the
transaction and the related income tax effects (in thousands, except
per-share amounts):
<TABLE>
<CAPTION>
Twelve months ended
--------------------------
July 30, July 31,
1995 1994
---------- ----------
(Unaudited)
<S> <C> <C>
Sales $2,241,046 $1,336,324
Net income $ 445,937 $ 307,790
Net income per share $ 0.71 $ 0.52
</TABLE>
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire
periods presented. In addition, they are not intended to be a projection
of future results and do not reflect any synergies that might be achieved
from the combined operations.
In September 1995, the Company acquired Internet Junction, Inc.
("Internet Junction"), a developer of Internet gateway software that
connects desktop users with the Internet. The Company issued .2 million
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 acquired date. Amounts allocated to goodwill are being amortized on a
straight-line basis over a four-year period. Pro forma information is not
presented, because the results of Internet Junction's operations are not
material to the Company's historical results.
BUSINESS COMBINATIONS PENDING OR COMPLETED SUBSEQUENT TO YEAR-END
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. The
historical operations of Nashoba and the impact of the transaction are
not material to the financial position of the Company. The Company also
assumed options to purchase Nashoba stock that remain outstanding as
options to purchase approximately .5 million shares of the Company's
common stock.
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 1.7 million
shares of the Company's common stock. The historical results of
operations of Granite are not material to the financial position of the
Company.
37
<PAGE> 38
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
On July 22, 1996, the Company entered into an agreement to acquire
Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation
(MICA) technologies for $200 million in cash. The transaction will be
accounted for as a purchase of assets and is expected to be completed in
October 1996, subject to certain shareholder and regulatory approvals.
Under the terms of the agreement, the Company will purchase Telebit
patents, MICA intellectual property and establish employment contracts
with MICA personnel, and will assume preferred stock and notes receivable
of $35 million in respect of a planned management buyout of the remaining
assets of Telebit. Subsequent to the signing of this agreement, a class
action law suit was filed on behalf of shareholders of Telebit alleging
that the acquisition price was too low. The Company was named as one of
the defendants in that law suit, but believes that the claim against it
is without merit and will not result in any material loss to the Company.
Consequently, no amount has been accrued for any loss that may occur.
On October 14, 1996, the Company entered into an agreement to acquire
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 will be exchanged for all outstanding shares
and options of Netsys. The Company has held a minority equity interest in
Netsys since February 1995 along with a strategic reseller agreement.
The agreement is subject to the receipt of certain government approvals
and approval by Netsys shareholders and is expected to be completed by
November 1996.
4. BALANCE SHEET DETAIL
Inventories, net:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Raw materials $ 134,531 $ 34,913
Work in process 99,723 25,611
Finished goods 51,920 9,962
Demonstration systems 15,014 11,319
--------- ---------
Total $ 301,188 $ 81,805
========= =========
Property and equipment, net:
Leasehold improvements $ 40,927 $ 21,070
Computer equipment and related software 280,777 149,637
Production and engineering equipment 108,477 78,585
Office equipment, furniture,
fixtures, and other 145,291 55,488
--------- ---------
575,472 304,780
Less accumulated depreciation and
amortization (244,157) (132,219)
--------- ---------
Total $ 331,315 $ 172,561
========= =========
</TABLE>
38
<PAGE> 39
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
4. BALANCE SHEET DETAIL (CONTINUED)
<TABLE>
<S> <C> <C>
Accrued payroll and related expenses:
Accrued wages, paid time off, and
related expenses $131,369 $ 63,965
Accrued bonuses 63,828 29,898
-------- --------
Total $195,197 $ 93,863
======== ========
Other accrued liabilities:
Deferred revenue $116,229 $ 62,738
Accrued warranties 32,256 46,454
Other liabilities 102,094 54,044
-------- --------
Total $250,579 $163,236
======== ========
</TABLE>
5. INVESTMENTS
At July 28, 1996 and July 30, 1995, substantially all of the Company's
investments were classified as available for sale. The difference between
the cost and fair market value of those securities, net of the tax
effect, is shown as a separate component of shareholders' equity.
The following tables summarize the Company's securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Issue, July 28, 1996 Cost Gains Losses Value
------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government notes and bonds $ 445,539 $ 192 $ (2,911) $ 442,820
State, municipal, and county
government notes and bonds 1,023,399 1,448 (5,860) 1,018,987
Foreign government notes and
bonds 2,498 42 2,540
Corporate notes and bonds 62,766 99 (134) 62,731
Corporate equity securities 30,900 357,049 (95,780) 292,169
----------- ----------- ----------- -----------
$ 1,565,102 $ 358,830 $ (104,685) $ 1,819,247
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Issue, July 30, 1995 Cost Gains Losses Value
-------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. government notes and bonds $ 206,400 $ 665 $ (3,030) $ 204,035
State, municipal, and county
government notes and bonds 470,728 1,698 (5,011) 467,415
Foreign government notes and
bonds 38,841 433 39,274
Corporate notes and bonds 62,052 77 (243) 61,886
Corporate equity securities 2,900 88,115 91,015
--------- --------- --------- ---------
$ 780,921 $ 90,988 $ (8,284) $ 863,625
========= ========= ========= =========
</TABLE>
39
<PAGE> 40
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
The following table summarizes debt maturities (including restricted
investments) at July 28, 1996:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Less than one year $ 730,387 $ 726,691
Due in 1-2 years 277,722 278,484
Due in 2-5 years 495,466 492,190
Due after 5 years 30,627 29,713
---------- ----------
Total $1,534,202 $1,527,078
========== ==========
</TABLE>
Gross realized gains and losses on the sale of securities are calculated
using the specific identification method and were not material to the
Company's consolidated results of operations.
During the year, the Company hedged its minority equity position in a
publicly traded company. The hedge took the form of a cashless collar and
was constructed as a series of purchased puts and sold calls, with the
cost of the purchased puts exactly offset by the premium earned on the
sold calls. The total face value of the puts and calls at July 28, 1996
was $220,452 and $276,514 respectively. The collar expires over a period
of two years commencing October 1996. Unrealized gains or losses for the
stock and associated hedge are reflected as a separate component of
shareholders' equity. Any realized gains or losses on the combined
position will be reflected in income in the period in which in which the
stock is sold, or the hedge is terminated.
6. LINE OF CREDIT
On May 22, 1995, the Company entered into a syndicated credit agreement
under the terms of which a syndication of banks has committed a maximum
of $100.0 million on an unsecured basis for cash borrowings and letters
of credit. The commitments made under this agreement expire on April 30,
1998. During fiscal year 1996, the Company paid annual fees of
approximately $.2 million. Outstanding borrowings under these
arrangements bear interest at the London Interbank Offered Rate plus 31
basis points, or other alternative rates. The agreement specifies various
financial covenants, including a variable floor on tangible net worth,
all of which the Company has met. There have been no borrowings under
this agreement.
7. COMMITMENTS
LEASES
In February 1993, the Company entered into an agreement to lease 46 acres
of land located in San Jose, California, where it has established its
headquarters operations. In July 1994, the Company entered into an
agreement to lease 45 acres of land located in Research Triangle Park,
North Carolina, where it expanded certain research and development and
customer support activities. In February and April 1995, the Company
entered into agreements to lease an additional 36 acres of land in San
Jose, California, where it will further expand its headquarters
operations. All of the leases have initial terms of five years and
options to renew for an additional five years, subject to certain
conditions.
40
<PAGE> 41
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
At any time during the terms of these land leases, the Company may
purchase the land. If the Company elects not to purchase the land at the
ends of the leases, the Company has guaranteed a residual value of
approximately $55.9 million.
In May 1993, August 1994, and May 1995, the Company entered into
agreements to lease certain buildings to be constructed on the land
described above. The lessors of the buildings have committed to fund up
to a maximum of $170.2 million (subject to reductions based on certain
conditions in the lease) for the construction of the buildings, with the
portion of the committed amount actually used to be determined by the
Company. Rent obligations for the buildings commenced on various dates
and will expire at the same time as the land leases.
The Company has an option to renew the building leases for an additional
five years, subject to certain conditions.
The Company may, at its option, purchase the buildings during the terms
of the leases at approximately the amount expended by the lessors to
construct the buildings. If the Company does not exercise the purchase
options at the ends of the leases, the Company will guarantee a residual
value of the buildings as determined at the lease inception date of each
agreement (approximately $132.2 million at July 28, 1996).
As part of the above lease transactions, the Company restricted $228.6
million of its securities as collateral for specified obligations of the
lessor under the leases. These securities will be restricted as to
withdrawal and will be managed by the Company subject to certain
limitations under its investment policy. In addition, the Company must
maintain a minimum consolidated tangible net worth of $750.0 million.
The Company also leases office space in Santa Clara, California;
Chelmsford, Massachusetts; and for its various U.S. and international
sales offices.
Future annual minimum lease payments under all noncancelable operating
leases as of July 28, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 41,027
1998 34,445
1999 23,298
2000 16,917
2001 11,373
Thereafter 19,156
--------
Total minimum lease payments $146,216
========
</TABLE>
Rent expense totaled $36.8 million, $24.0 million, and $15.4 million for
1996, 1995, and 1994, respectively.
41
<PAGE> 42
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
FORWARD EXCHANGE CONTRACTS
The Company conducts business on a global basis in several major
international currencies. As such, it is exposed to adverse movements in
foreign currency exchange rates. The Company enters into foreign exchange
forward contracts to reduce currency exposures. These contracts
principally hedge exposures associated with intercompany product sales
denominated in Japanese, Canadian and Australian currencies and with
intercompany commission obligations denominated in several European
currencies and with intercompany commission obligations denominated in
several European currencies. At the present time, the Company hedges only
those currency exposures associated with certain nonfunctional currency
assets and liabilities and does not generally hedge anticipated foreign
currency cash flows.
The Company does not enter into foreign exchange contracts for trading
purposes. Gains and losses on the contracts are included in other income
and offset foreign exchange gains or losses from the revaluation of
intercompany balances or other current assets and liabilities denominated
in currencies other than the functional currency of the reporting entity.
The Company's forward currency contracts generally range from one to
three months in original maturity. Foreign exchange contracts outstanding
and their unrealized gains as of July 28, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Notional Notional
Value Value Unrealized
Currency Purchased Sold Gain
--------------------- --------- --------- ---------
<S> <C> <C> <C>
Japanese Yen $ 5,570 $ (40,013) $ 291
Australian dollar 3,945 (33,360) 157
Canadian dollar 5,112 (29,871) 178
European currencies 35,045 (6,555) 122
--------- --------- ---------
Total $ 49,672 $(109,799) $ 748
========= ========= =========
</TABLE>
The Company's forward exchange contracts contain credit risk in that its
banking counterparties may be unable to meet the terms of the agreements.
However, the Company minimizes such risk by limiting its counterparties
to major financial institutions. In addition, the potential risk of loss
with any one party resulting from this type of credit risk is monitored.
Management does not expect any material losses as a result of default by
other parties.
8. MINORITY INTEREST
In October 1994, the Company's Japanese subsidiary, Nihon Cisco Systems,
K.K., completed the sale of preferred stock to a group of outside
investors in a private placement. Aggregate proceeds to Nihon Cisco
Systems, K.K. were approximately $40.5 million. The investors received
26.8% of the voting rights. The Company retains ownership of all issued
and outstanding common stock of its subsidiary, amounting to 73.2% of the
voting rights. Each share of preferred stock is convertible into one
share of common stock at any time at the option of the holder. The net
income of the subsidiary has not been material to date.
42
<PAGE> 43
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
9. SHAREHOLDERS' EQUITY
The Company's common stock was split two-for-one on March 4, 1994 and
February 16, 1996. All applicable share and per-share data in these
financial statements have been restated to give effect to these stock
splits.
Under the terms of the Company's Articles of Incorporation, the Board of
Directors may determine the rights, preferences, and terms of the
Company's authorized but unissued shares of preferred stock.
10. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("the Purchase Plan")
under which 9.8 million shares of common stock have been reserved for
issuance. Eligible employees may designate not more than 10% of their
cash compensation to be deducted each pay period for the purchase of
common stock under the Purchase Plan, and participants may purchase not
more than $25 worth of common stock in any one calendar year. On the last
business day of each calendar quarter, shares of common stock are
purchased with the employees' payroll deductions over the immediately
preceding six months, at a price per share of 85% of the lesser of the
market price of the common stock on the purchase date or the market price
on the first day of the period.
The Purchase Plan will terminate no later than January 3, 2000. In 1996,
1995, and 1994, 1.3 million, 1.5 million, and 1.2 million shares
respectively were issued under the Purchase Plan. At July 28, 1996, 3.4
million shares were available for issuance under the Purchase Plan.
11. STOCK OPTION PLANS
The Company established a Stock Option Plan in 1987 under which it has
reserved a total of 221.3 million shares of common stock for issuance to
employees, officers, directors, consultants, and independent contractors.
Both incentive and nonqualified stock options have been granted at prices
not less than fair market value at the date of grant as determined by the
Board of Directors. Although the Board has the authority to set other
terms, the options are generally 25% exercisable one year from the date
of grant and then ratably over the following 36 months.
43
<PAGE> 44
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
A summary of option activity follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Options
Available Exercise
for Grant Options Prices Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, July 25, 1993 14,407 36,442 $ .01-$13.44 $ 159,817
Options granted (12,241) 12,241 3.11-18.50 129,212
Options exercised (14,145) .01-11.35 (15,138)
Options canceled 1,030 (1,030) .08-18.50 (8,905)
Additional shares reserved 16,000
------------ ------------ ------------ ------------
Balances, July 31, 1994 19,196 33,508 .01-18.50 264,986
Options granted (36,792) 36,792 4.07-28.88 623,401
Options exercised (14,232) .01-18.50 (37,859)
Options canceled 2,207 (2,207) .08-21.50 (26,763)
Additional shares reserved 12,474
------------ ------------ ------------ ------------
Balances, July 30, 1995 (2,915) 53,861 .01-28.88 823,765
Options granted and assumed (35,170) 35,170 .36-55.88 890,807
Options exercised (17,771) .01-33.00 (84,147)
Options canceled 2,171 (2,171) .31-55.88 (44,127)
Additional shares reserved 52,170
------------ ------------ ------------ ------------
Balances, July 28, 1996 16,256 69,089 $.01-$55.88 $ 1,586,298
============ ============ ============ ============
</TABLE>
At July 28, 1996, approximately 21.7 million outstanding options were
exercisable.
The Company has, in connection with the acquisition of various companies,
assumed the stock option plans of each acquired company. A total of 14.2
million shares of the Company's common stock have been reserved for
issuance under the assumed plans, and the related options are included in
the table above.
12. EMPLOYEE BENEFIT PLAN
The Company has adopted a plan known as the Cisco Systems, Inc. 401 (k)
Plan ("the Plan") to provide retirement and incidental benefits for its
employees. As allowed under Section 401(k) of the Internal Revenue Code,
the Plan provides tax-deferred salary deductions for eligible employees.
Employees may contribute from 1% to 15% of their annual compensation to
the Plan, limited to a maximum annual amount as set periodically by the
Internal Revenue Service. The Company matches employee contributions
dollar for dollar up to a maximum of $1.5 per year per person. All
matching contributions vest immediately. In addition, the Plan provides
for discretionary contributions as determined by the Board of Directors.
Such contributions to the Plan are allocated among eligible participants
in the proportion of their salaries to the total salaries of all
participants. Company matching contributions to the Plan totaled $6.6
million in 1996, $3.5 million in 1995, and $1.8 million in 1994. No
discretionary contributions were made in 1996, 1995, or 1994.
44
<PAGE> 45
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR VALUES IN THOUSANDS, EXCEPT EXERCISE PRICES)
13. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current $ 514,050 $ 288,656 $ 180,584
Deferred (64,133) (63,310) (24,565)
--------- --------- ---------
449,917 225,346 156,019
State:
Current 92,291 59,927 45,860
Deferred (6,907) (9,968) (5,119)
--------- --------- ---------
85,384 49,959 40,741
Foreign:
Current 19,452 7,761 4,481
Deferred (3,252) (1,578) (1,722)
--------- --------- ---------
16,200 6,183 2,759
--------- --------- ---------
$ 551,501 $ 281,488 $ 199,519
========= ========= =========
</TABLE>
The Company paid income taxes of $335.1 million, $270.5 million, and $167.1
million, in 1996, 1995, and 1994, respectively.
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes follow:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
State rates, net of federal benefits 3.6 4.1 4.7
Foreign Sales Corporation benefit (2.9) (2.5)
(2.9)
Tax-exempt interest (1.0) (1.1) (1.1)
Tax credits (0.3) (1.1) (0.6)
Other, net 3.2 4.1 2.7
---- ---- ----
37.6% 38.1% 38.2%
==== ==== ====
</TABLE>
The components of the deferred income tax assets follow:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Other nondeductible accruals $ 66,950 $ 30,940
Inventory allowances and capitalization 44,334 27,940
Purchased research and development 33,806 36,310
Allowance for doubtful accounts and returns 26,632 9,167
Accrued state franchise tax 13,847 7,866
Depreciation 10,451 7,990
Deferred revenue 8,664 4,975
Warranty accruals 8,406 10,072
Unrealized gain on marketable securities (95,296) (31,756)
--------- ---------
$ 117,794 $ 103,504
========= =========
</TABLE>
The noncurrent portion of the deferred income tax assets, which totaled
$16.0 million at July 28, 1996, and $15.5 million at July 30, 1995, is
included in other assets.
45
<PAGE> 46
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar values in thousands, except exercise prices)
The Company's income taxes currently payable for federal, state and
foreign purposes have been reduced by the tax benefit derived from stock
options transactions. The U.S. benefit, which totaled $198.5 million in
1996 and $59.3 million in 1995, was credited directly to common stock.
14. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the
design, development, manufacture, marketing, and technical support of
internetworking products and services.
In 1996, 1995, and 1994, no single customer accounted for 10% or more of
the Company's net sales.
International sales, primarily in Europe, the Pacific region, and Canada,
were $1,976 million in 1996, $931 million in 1995, and $551 million in
1994. Export sales, primarily to these regions, were $1,530 million in
1996, $737 million in 1995, and $403 million in 1994.
Summarized financial information by geographic region for 1996, 1995, and
1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States $ 4,024,482 $ 2,199,940 $ 1,332,281
International 446,437 194,217 147,539
Eliminations (374,912) (161,505) (145,384)
----------- ----------- -----------
Total $ 4,096,007 $ 2,232,652 $ 1,334,436
=========== =========== ===========
Operating income:
United States $ 1,379,994 $ 692,174 $ 502,015
International 22,704 4,199 2,109
Eliminations (1,892) 1,590 (3,954)
----------- ----------- -----------
Total $ 1,400,806 $ 697,963 $ 500,170
=========== =========== ===========
Identifiable assets:
United States $ 3,467,637 $ 1,869,197
International 184,291 147,400
Eliminations (21,696) (24,648)
----------- -----------
Total $ 3,630,232 $ 1,991,949
=========== ===========
</TABLE>
46
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cisco Systems, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Cisco
Systems, Inc. and its subsidiaries as of July 28, 1996 and July 30, 1995
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
July 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cisco Systems, Inc. and its subsidiaries as of July 28, 1996 and July 30,
1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended July 28, 1996 in
conformity with generally accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
San Jose, California
August 13, 1996, except for Note 3 for
which the date is October 14, 1996.
47
<PAGE> 48
SUPPLEMENTARY FINANCIAL DATA
1996 AND 1995 BY QUARTER
(Unaudited) (in thousands, except per-share amounts)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
July 28, Apr. 28, Jan. 28, Oct. 29, July 30, Apr. 30, Jan. 29, Oct. 30,
1996 1996 1996 1995 1995 1995 1995 1994
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $1,292,150 $1,087,056 $ 918,510 $ 798,291 $ 701,213 $ 581,497 $ 515,983 $ 433,959
Gross margin 839,499 709,902 606,195 530,549 468,048 388,516 343,513 289,715
Operating income 423,872 376,572 321,511 278,851 240,618 207,065 90,890 159,390
Income before provision
for income taxes
442,715 393,244 337,157 291,709 251,740 219,087 99,861 167,289
Net income $ 276,551 $ 245,649 $ 209,737 $ 181,387 $ 155,324 $ 135,174 $ 62,140 $ 103,851
Net income
per common share $ .41 $ .37 $ .31 $ .28 $ .24 $ .21 $ .10 $ .17
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors appearing under the caption "Election
of Directors" in the Company's proxy statement to be mailed to
Shareholders on or before October 4, 1996, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing at the end of Part I and under the caption
"Executive Compensation" in the Company's proxy statement to be mailed to
Shareholders on or before October 4, 1996, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the captions "Election of Directors" and
"Ownership of Securities" in the Company's proxy statement to be mailed
to Shareholders on or before October 4, 1996, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Ownership of Securities" and
"Certain Relationships and Related Transactions" in the Company's proxy
statement to be mailed to Shareholders on or before October 4, 1996, is
incorporated herein by reference.
48
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The financial statements listed in Item 14(a) are
filed as part of this annual report.
2. Financial Statement Schedules
The financial statement schedules listed in Item
14(a) are filed as part of this annual report.
3. Exhibits
The exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as
part of this annual report.
(b) Reports on Form 8-K
The Company filed one report on form 8-K during the
fourth quarter ended July 28, 1996. The date of the
filing was July 23, 1996. The item reported on was
the acquisition of StrataCom.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California on this 23rd day of October, 1996.
Cisco Systems, Inc.
/s/ John T. Chambers
-----------------------------------
(John T. Chambers, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Report on
Form 10-K has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President and Chief
Executive Officer
/s/ John T. Chambers (Principal Executive October 23, 1996
- ------------------------------------- Officer and Director)
John T. Chambers
Vice President, Finance and
Administration, Chief
Financial Officer and
/s/ Larry R. Carter Secretary October 23, 1996
- ------------------------------------- (Principal Financial and
Larry R. Carter Accounting Officer)
/s/ John P. Morgridge Chairman of the October 23, 1996
- ------------------------------------- Board and Director
John P. Morgridge
/s/ Donald T. Valentine Vice Chairman of the October 23, 1996
- ------------------------------------- Board and Director
Donald T. Valentine
/s/ Dr. Michael S. Frankel Director October 23, 1996
- -------------------------------------
Dr. Michael S. Frankel
Director
- -------------------------------------
Dr. James F. Gibbons
/s/ Richard M. Moley Senior Vice President, October 23, 1996
- ------------------------------------- Wide Area Business Unit
Richard M. Moley and Director
/s/ Robert L. Puette Director October 23, 1996
- -------------------------------------
Robert L. Puette
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
- -------------------------------------
Masayoshi Son
/s/ Steve M. West Director October 23, 1996
- -------------------------------------
Steve M. West
</TABLE>
51
<PAGE> 52
CISCO SYSTEMS, INC.
-------------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEM 14(A)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated balance sheets at July 28, 1996 and July 30, 1995 ................ 26
Consolidated statements of operations for each of the three years in the period
ended July 28, 1996 ......................................................... 27
Consolidated statements of shareholders' equity for each of the three years in
the period ended July 28, 1996 .............................................. 28
Consolidated statements of cash flows for each of the three years in the period
ended July 28, 1996 ......................................................... 30
Notes to consolidated financial statements .................................... 31
Report of Independent Accountants ............................................. 47
Supplementary financial data:
Fiscal years 1996 and 1995 by quarter (unaudited) ........................... 48
Report of Independent Accountants ............................................. 53
Schedule:
II Valuation and qualifying accounts ................................... 54
</TABLE>
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedules,
or because the information required is included in the consolidated
financial statements or notes thereto.
52
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Cisco Systems,
Inc. and its subsidiaries is included on page 47 of this Form 10-K. In
connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on
page 52 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required
to be included therein.
/s/Coopers & Lybrand L.L.P.
San Jose, California
August 13, 1996
53
<PAGE> 54
CISCO SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charged to End of
of Period Expenses Deductions Period
------ ------ ------ ------
<S> <C> <C> <C> <C>
Year ended July 31, 1994:
Allowance for doubtful accounts 6,283 5,102 1,503 9,882
Allowance for excess and obsolete
inventory 5,822 17,597 3,888 19,531
Year ended July 30, 1995:
Allowance for doubtful accounts 9,882 15,213 6,668 18,427
Allowance for excess and obsolete
inventory 19,531 55,783 29,072 46,242
Year ended July 28, 1996:
Allowance for doubtful accounts 18,427 18,548 15,901 21,074
Allowance for excess and obsolete
inventory 46,242 53,025 37,481 61,786
</TABLE>
(1) Deductions principally relate to charges for standards changes.
54
<PAGE> 55
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Table
------ -------------
2.01** Agreement and Plan of Reorganization dated as of September
20, 1993 among the Company, Crescendo Communications Inc.,
and Co Acquisition Corporation
2.02** Agreement of Merger among the Company, Crescendo
Communications Inc., and Co Acquisition Corporation 2.03#
Agreement and Plan of Reorganization dated as of July 11,
1994 among the Company, Newport Systems Solutions, Inc. and
New Acquisition Corporation
2.04@ Agreement and Plan of Reorganization dated as of October 21,
1994 among the Company, Kalpana, Inc. and Pan Acquisition
Corporation
2.05@@ Asset Purchase Agreement dated as of December 8, 1994 among
the Company and LightStream Corporation
2.06& Agreement and Plan of Reorganization by and among the
Company, Jet Acquisition Corporation, and StrataCom, Inc.,
dated as of April 21, 1996
3.01* The Company's Restated Articles of Incorporation, as
currently in effect
3.02* The Company's Bylaws, as currently in effect
4.01## The Company's 1987 Stock Option Plan, as currently in effect
4.02* Form of Incentive Stock Option Agreement for granting
incentive stock options under the Company's 1987 Stock Option
Plan
4.03* Series A Preferred Stock Purchase Agreement between the
Company and certain investors dated December 22, 1987, as
amended
10.05* Form of Restricted Stock Purchase Agreement for sales of
Common Stock to employees, officers, directors and
consultants
10.10* License Agreement between the Company and Network Equipment
Technologies Inc dated February 14, 1989
10.12* License Agreement between the Company and The Board of
Trustees of Leland Stanford Junior University dated April 15,
1987, as amended
10.13* 1989 Employee Stock Purchase Plan
10.14 Fiscal Year 1996 Management Incentive Plan
10.16* Agreement between the Company and American Telephone and
Telegraph Company dated February 1, 1990
10.19* Letter of Employment between the Company and John T. Chambers
dated January 9, 1991
10.20* Letter of Employment between the Company and John P.
Morgridge dated October 17, 1988
10.21* Letter of Employment between the Company and Donald A. LeBeau
dated July 15, 1992
10.22* Letter of Employment between the Company and Frank J.
Marshall dated March 31, 1992
10.23* Lease Agreement between the Company and SGA Development
Partnership, Ltd., dated February 19, 1993, for the Company's
site in San Jose, California
10.24* Lease Agreement between the Company and Sumitomo Bank Leasing
and Finance, Inc., dated May 13, 1993 for the Company's
facilities in San Jose, California
10.25* Lease Agreement between the Company and SGA Development
Partnership, Ltd., dated February 19, 1993, for the Company's
site in San Jose, California
10.26* Lease Agreement between the Company and the State of
California Public Employees' Retirement System dated March
11, 1993, for the Company's facilities at 3100 Smoketree
Court
10.27* Lease Agreement between the Company and Sumitomo Bank Leasing
and Finance, Inc., dated July 11, 1994 for the Company's site
in Wake County, North Carolina
10.28* Lease Agreement between the Company and Sumitomo Bank Leasing
and Finance, Inc., dated August 12, 1994 for the Company's
facilities in Wake County, North Carolina
55
<PAGE> 56
Exhibit
Number Exhibit Table
------ -------------
10.29&& Lease (Buildings "I" and "J") by and between Sumitomo Bank of
New York Trust Company ("SBNYTC"), as trustee under that
certain Trust Agreement dated May 22, 1995 between Sumitomo
Bank Leasing and Finance, Inc. and SBNYTC ("SB Trust"), as
Landlord, and the Company, as tenant, dated May 22, 1995
10.30&& First Amendment to Lease (Buildings "I" and "J") between SB
Trust and the Company, dated July 18, 1995
10.31&& Lease (Buildings "K" and "L") by and between SB Trust and the
Company, dated May 22, 1995
10.32&& First Amendment to Lease (Buildings "K" and "L") between SB
Trust and the Company, dated July 18, 1995
10.33&& Lease (Improvements Phase "C") by and between SB Trust and
the Company, dated May 22, 1995
10.34&& First Amendment to Lease (Improvements Phase "C") between SB
Trust and the Company, dated July 18, 1995
10.35&& Ground Lease (Parcel 2 and Lot 54) by and between Irish
Leasing Corporation ("Irish"), as Landlord, and the Company,
as Tenant, dated February 28, 1995 for the Company's site in
San Jose, California
10.36&& First Amendment to Lease (Parcel 2 and Lot 54) by and between
Irish and the Company dated as of May 1, 1995
10.37&& Second Amendment to Lease (Parcel 2 and Lot 54) by and
between Irish and the Company dated as of May 22, 1995
10.38&& Ground Lease (Lots 58 and 59) by and between Irish and the
Company dated February 28, 1995 for the Company's site in San
Jose, California
10.39&& First Amendment to Lease (Lots 58 and 59) by and between
Irish and the Company dated as of May 1, 1995
10.40&& Second Amendment to Lease (Lots 58 and 59) by and between
Irish and the Company dated as of May 22, 1995
10.41&& Ground Lease (Tasman Phase C) by and between Irish and the
Company dated April 12, 1995 for the Company's site in San
Jose, California
10.42&& First Amendment to Lease (Tasman Phase C) by and between
Irish and the Company dated as of May 1, 1995
10.43&& Second Amendment to Lease (Tasman Phase C) by and between
Irish and the Company dated as of May 22, 1995
10.44&& Credit Agreement between the Company, the Banks Listed
Herein, Bank of America National Trust and Savings
Association, as Administrative Agent, Morgan Guaranty Trust
Company of New York, as Documentation Agent and Bank of
America National Trust and Savings Association, as Issuing
Bank dated as of May 22, 1995
11.01 Statement Regarding Computation of Net Income Per Share
21.01 Subsidiaries of the Company
23.02 Consent of Independent Accountants
27 Financial Data Schedule
(b) The following financial statement schedules are filed herewith
Schedule
--------
II Valuation and qualifying accounts
- ----------
* Previously filed with registrant's registration statements
(File #33-32778)
** Previously filed with registrant's Form 8-K dated October 8,
1993
@ Previously filed with registrant's Form 8-K dated December 9,
1994
@@ Previously filed with registrant's Form 8-K dated January 25,
1995
# Previously filed with registrant's Form 8-K dated August 19,
1994
## Previously filed with registrant's Proxy statement dated
October 2, 1995
& Previously filed with registrant's Form S-4 dated June 7,
1996
&& Previously filed with registrant's Form 10-K dated October
26, 1995
56
<PAGE> 1
EXHIBIT 10.14
CISCO SYSTEMS, INC.
SENIOR MANAGEMENT INCENTIVE PLAN
FY 1996
I. INTRODUCTION
A. THE OBJECTIVE OF THE SENIOR MANAGEMENT INCENTIVE PLAN is to financially
reward Senior Managers for their contributions to the success of Cisco
Systems, Inc.
B. PARTICIPANTS: This plan applies to Cisco Systems, Inc. senior
management staff in the following positions:
POSITION
President
Vice Presidents
Directors (excluding Operations Directors)
Managers, Grade 12 & Individual Contributors, Grade 13
Any exceptions to the above will need to be approved in writing by the
President. The participant must be employed on or before the first day
of the last fiscal quarter and may not be concurrently enrolled in any
other bonus, sales, or incentive plan. Participants in the Plan with
less than one year of service will be eligible for a prorated bonus
amount.
C. EFFECTIVE DATE: The Plan is effective for the Fiscal Year 1996,
beginning July 31, 1995 through July 28, 1996.
D. CHANGES IN PLAN: The Company presently has no plan to change the Senior
Management Incentive Plan during the fiscal year. However, the Company
reserves the right to modify the Senior Management Bonus Plan in total
or in part, at any time. Any such change must be in writing and signed
by the President. The President or plan designers reserve the right to
interpret the plan document as needed.
E. ENTIRE AGREEMENT: This Plan is the entire agreement between Cisco
Systems, Inc. and the employee regarding the subject matter of this
Plan and supersedes all prior compensation or incentive plans or any
written or verbal representations regarding the subject matter of this
Plan.
II. BONUS PLAN ELEMENTS
A. BASE SALARY is determined by the participant's manager, on the Focal
review date scheduled for either August 1, April 1, or October 1 of
each year. The annual base salary in effect at the end of the fiscal
year represents the basis for the bonus calculation.
B. BONUS BASIS PERCENTAGE is a percentage level of base salary determined
by the position.
<TABLE>
<CAPTION>
POSITION BONUS %
-------- -------
<S> <C>
President 60%
Vice President 50%
Directors 40%
Managers, Grade 12 & Individual Contributors, Grade 13 30%
</TABLE>
CISCO CONFIDENTIAL
<PAGE> 2
Senior Management Incentive Plan Page 2 of 4
C. INDIVIDUAL PERFORMANCE FACTOR is based upon the manager's evaluation of
performance and contribution for the fiscal year. This factor may range
from .9 - 1.3. The assigned factor may also be a zero resulting in no
bonus based on the manager's evaluation of performance and
contribution. A written performance evaluation is required in
conjunction with any assigned factor of zero.
Employees who are on a Written Warning and/or are performing at a level
of 1 or 2 ("N" in the 3-tiered performance rating system) at the end of
the fiscal year are not eligible to receive a bonus. Any exceptions to
this must be in writing and approved by the President.
D. COMPANY PERFORMANCE FACTOR consists of two elements: 50% based upon
achieving an established worldwide Revenue target and 50% based upon
achieving a worldwide Profit Before Interest and Tax (PBIT) target per
the current Plan. 80% of each objective must be achieved for any bonus
to be paid.
<TABLE>
<CAPTION>
COMPANY
REVENUE PBIT PERFORMANCE FACTOR MULTIPLIER
------- ---- ------------------ ----------
<S> <C> <C> <C> <C>
less than 80% less than 80% less than 80% 0 (no bonus paid)
80-100% 80-100% 80-100% .8 - 1.0
greater than 100% greater than 100% 101%+ 3% for each 1% above 100%
</TABLE>
COMPANY PERFORMANCE FACTOR = (REVENUE + PBIT)/2
Example:
Actual Revenue Performance is 105% of goal
Actual PBIT Performance is 115% of goal
105% + 115% = 110%
-----------
2
COMPANY PERFORMANCE MULTIPLIER: = 1.30
E. CUSTOMER SATISFACTION FACTOR is based upon achievement of an overall
worldwide customer satisfaction survey score. This factor may range
from .95 - 1.20.
<TABLE>
<CAPTION>
WORLDWIDE SATISFACTION SCORE FACTOR
---------------------------- ------
<S> <C> <C>
less than 3.95 .95
3.95 - 4.07 1.05
4.08 - 4.14 1.10
4.15+ 1.20
</TABLE>
CISCO CONFIDENTIAL
<PAGE> 3
Senior Management Incentive Plan Page 3 of 4
F. PRORATION FACTOR accounts for the number of calendar days or hours
within the day during the fiscal year that the employee was in the
bonus-eligible position. For example, the Proration Factor for an
employee who has been on the Plan the entire year will be "1.00". For
an employee who has been on the plan for 6 months, this factor will be
".50". Employees in the following situations will have a proration
factor of less than "1.00":
- Participants in the Plan who transferred to a new position not
governed by any incentive plan.
- Employees who transferred from one bonus-eligible position to
another bonus-eligible position. Employees in this situation will
have their bonus prorated based on length of time in each
position.
- Employees who have been on the Plan less than 12 months (such as a
new hire).
- Employees who have been on a leave of absence of any length during
the fiscal year.
- Employees who have been on the Plan, terminated their employment,
and returned to a bonus-eligible position all in the same fiscal
year.
- Employees working less than a 40-hour week will receive bonuses
prorated according to the following schedule:
20 - 39 hours/week: prorated according to
number of hours worked
less than 20 hours/week: not bonus eligible
Any modification to the above schedule must be approved by the
next-level Manager and Compensation in advance of the year-end
close date.
G. BONUS FORMULA AND CALCULATION EXAMPLE: Assume a Director-level
participant with a base salary of $130,000 at the 40% level, individual
performance factor of 1.10, company performance of 110%, a customer
satisfaction factor of 1.05 and a proration factor of 1.00.
SAMPLE CALCULATION:
<TABLE>
<CAPTION>
BONUS INDIVIDUAL COMPANY CUSTOMER
BASE BASIS PERFORMANCE PERFORMANCE SATISFACTION PRORATION TOTAL
SALARY PERCENTAGE FACTOR FACTOR FACTOR FACTOR BONUS
------ ---------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$130,000 x .40 x 1.10 x 1.30 x 1.05 x 1.00 = $78,078
</TABLE>
In this example, the Total Bonus equals 60.06% of Base Salary.
CISCO CONFIDENTIAL
<PAGE> 4
Senior Management Incentive Plan Page 4 of 4
H. BONUS PAYMENTS: If company performance is at a minimum of 100% of
mid-year revenue and PBIT targets, a partial payment will be
distributed to active employees midway through the fiscal year. This
advance will be 50% of the bonus target by level net of any advances,
draws, or prorations. The bonuses will go to employees who have met job
expectations and were hired on or before October 30, 1995 and active on
the day of distribution. For example, a director would receive an
advance equal to 20% of base salary. The final balance of the bonus
will be paid after the close of the fiscal year, typically in mid-to
late August.
III. PROCEDURES AND PRACTICES
A. PROCEDURE:
1. A list of eligible employees will be sent by Human Resources to the
Executive Staff for review at the beginning of the fiscal year.
Additions, deletions or other changes to the list will be made and the
approved list will be returned to Human Resources.
2. Once the list is confirmed, a copy of the Plan will be sent to each
participant.
3. Each eligible new hire and employees promoted into eligible
positions will receive a copy of the plan during the fiscal year.
4. A month before fiscal year end, a list of eligible employees with
all changes made during the year will again be sent to the Executive
Staff for final review and approval.
B. BUSINESS CONDUCT: It is the established policy of Cisco Systems, Inc.
to conduct business with the highest standards of business ethics.
Cisco employees may not offer, give, solicit or receive any payment
that could appear to be a bribe, kickback or other irregular type of
payment from anyone involved in any way with an actual or potential
business transaction. Gifts, favors and entertainment are allowed such
that they are consistent with our business practice, do not violate any
applicable laws, are of limited value ($50.00 or less) and would not
embarrass Cisco if publicly disclosed.
C. TRANSFERS AND TERMINATIONS: Employees who are participants in the
Senior Management Incentive Plan and who transfer to a new position not
governed by this Plan will be eligible on a pro-rata basis for the
applicable period and paid as defined by the Plan. Any exceptions to
the Plan must be designated in writing and approved by the President.
A participant must be employed as of the last day of the fiscal year to
be eligible for the bonus. If an employee terminates during the fiscal
year, the employee is not eligible for the bonus.
D. EMPLOYMENT AT WILL: The employment of all Plan participants at Cisco
Systems, Inc. is for an indefinite period of time and is terminable
at any time, with or without cause being shown or advance notice by
either party. This Plan shall not be construed to create a contract of
employment for a specified period of time between Cisco Systems, Inc.
and any Plan participant.
FY'96 SENIOR MGMT INCENTIVE PLAN
9/15/95
CISCO CONFIDENTIAL
<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>
Years Ended
------------------------------------
July 28, July 30, July 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Actual weighted average common shares outstanding
for the period 638,680 607,757 572,004
Weighted average shares assuming exercise of
employees' stock options using average market price 27,906 22,954 24,535
-------- -------- --------
Shares used in per-share calculations 666,586 630,711 596,539
======== ======== ========
Net income applicable to primary income per share $913,324 $456,489 $322,981
======== ======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ 1.37 $ 0.72 $ 0.54
======== ======== ========
</TABLE>
- ----------
(A) These calculations are submitted in accordance with
Securities Exchange Act of 1934 Release No. 34-9083.
57
<PAGE> 2
EXHIBIT 11.01
(CONTINUED)
COMPUTATION OF NET INCOME PER SHARE
IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Years Ended
------------------------------------
July 28, July 30, July 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE:
Actual weighted average common shares outstanding
for the period 638,680 607,757 572,004
Weighted average shares assuming exercise of
employees' stock options using ending market price 30,058 27,214 25,465
-------- -------- --------
Shares used in per-share calculations 668,738 634,971 597,469
======== ======== ========
Net income applicable to fully diluted income per share $913,324 $456,489 $322,981
======== ======== ========
Net income per share based on SEC Interpretive
Release No. 34-9083 $ 1.37 $ 0.72 $ .54
======== ======== ========
</TABLE>
- ----------
(A) These calculations are submitted in accordance with
Securities Exchange Act of 1934 Release No. 34-9083.
58
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
Cisco Systems Canada Limited
Cisco Systems Europe, S.A.R.L. (France)
Cisco Systems Import/Export Corporation (U.S. Virgin Islands)
Cisco Systems Belgium, S.A.
Cisco Systems Limited (U.K.)
Cisco Systems Australia PTY. Limited
Nihon Cisco Systems, K.K. (Japan)
Cisco Systems de Mexico, S.A. de C.V.
Cisco Systems New Zealand Limited
Cisco Systems (HK) Limited (Hong Kong)
Cisco Systems GmbH (Germany)
Cisco Systems (Italy) Srl
Cisco Systems GesmbH (Austria)
Cisco do Brasil Ltda. (Brazil)
Cisco Systems (Korea) Ltd.
VZ, Cisco Systems, C.A. (Venezuela)
Cisco Systems South Africa (Pty) Ltd.
Cisco Systems Sweden Aktiebolag
Cisco Systems (Switzerland) AG
Cisco Systems Netherlands, B.V.
Cisco Systems International Netherlands, B.V.
Cisco Systems Czech Republic, s.r.o.
Cisco Systems Spain, S.L.
Cisco Systems Argentina S.A.
Cisco Systems Chile, S.A.
Cisco Sistemas de Redes S.A., (Costa Rica)
Cisco Systems Malaysia, Sdn. Bhd.
Cisco Systems (USA) Pte. Ltd., Singapore
Cisco Systems Thailand, Ltd.
Cisco Systems Peru, S.A.
59
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Cisco Systems, Inc. on Form S-8 (File Numbers: 33-34849,
33-40509, 33-44221, 33-70644, 33-71860, 33-83268, 33-87100, 33-87096,
33-63331, 33-64283, 33-64283 [Post Eff.] 33-01069, 333-02101, 333-05447,
333-09903, 333-14383) of our reports dated August 13, 1996, except for
Note 3 for which the date is October 14, 1996, on our audits of the
consolidated financial statements and financial statement schedule of
Cisco Systems, Inc. as of July 28, 1996 and July 30, 1995, and for the
years ended July 28, 1996, July 30, 1995, and July 31, 1994, which
reports are included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
October 24, 1996
60
<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-K for the period
ending July 28, 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-28-1996
<PERIOD-START> JUL-31-1995
<PERIOD-END> JUL-28-1996
<CASH> 279,695
<SECURITIES> 1,819,247
<RECEIVABLES> 643,933
<ALLOWANCES> 21,074
<INVENTORY> 301,188
<CURRENT-ASSETS> 2,159,640
<PP&E> 575,472
<DEPRECIATION> 244,157
<TOTAL-ASSETS> 3,630,232
<CURRENT-LIABILITIES> 769,353
<BONDS> 0
0
0
<COMMON> 888,067
<OTHER-SE> 1,931,555
<TOTAL-LIABILITY-AND-EQUITY> 3,630,232
<SALES> 4,096,007
<TOTAL-REVENUES> 4,096,007
<CGS> 1,409,862
<TOTAL-COSTS> 2,695,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,464,825
<INCOME-TAX> 551,501
<INCOME-CONTINUING> 913,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913,324
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 0
</TABLE>
