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FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition
period from to
------------------- -------------------
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction (I.R.S. Employer
of Identification Number)
incorporation or
organization)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to filing requirements for the past 90 days.
YES X NO
--------- --------
As of February 28, 1997 663,646,520 shares of the Registrant's common stock were
outstanding.
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 25, 1997
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. a) Consolidated balance sheets at January 25, 1997
and July 28, 1996 3
b) Consolidated statements of operations for the
three and six month periods ended
January 25, 1997 and January 28, 1996 4
c) Consolidated statements of cash flows for the six
month periods ended January 25, 1997 and
January 28, 1996 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 8
Part II. Other information 16
Signature 17
Exhibits Exhibit 3.02, Restated Bylaws of the Corporation 18
Exhibit 10.45, Employment agreement with Don LeBeau
Exhibit 11.01, Computation of net income per share
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 25, July 28,
1997 1996
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 332,807 $ 279,695
Short-term investments 774,673 758,489
Accounts receivable, net of allowance for doubtful
accounts of $17,166 at January 25, 1997 and
$21,074 at July 28, 1996 1,024,942 622,859
Inventories, net 203,721 301,188
Deferred income taxes 191,268 101,827
Prepaid expenses and other current assets 91,608 95,582
----------- -----------
Total current assets 2,619,019 2,159,640
Investments 1,160,995 832,114
Restricted investments 247,649 228,644
Property and equipment, net 410,065 331,315
Other assets 132,316 78,519
----------- -----------
Total assets $ 4,570,044 $ 3,630,232
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 253,406 $ 153,683
Income taxes payable 172,744 169,894
Accrued payroll and related expenses 252,419 195,197
Other accrued liabilities 269,190 250,579
----------- -----------
Total current liabilities 947,759 769,353
Minority interest 41,192 41,257
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at January 25, 1997
and July 28, 1996
Common stock, no par value, 1,200,000 shares
authorized:
661,616 shares issued and outstanding at
January 25, 1997 and 649,284 at July 28, 1996 1,180,201 888,067
Retained earnings 2,271,002 1,777,369
Unrealized gains on marketable securities 139,147 158,848
Cumulative translation adjustments (9,257) (4,662)
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Total shareholders' equity 3,581,093 2,819,622
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Total liabilities and shareholders' equity $ 4,570,044 $ 3,630,232
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
Jan. 25, Jan. 28, Jan. 25, Jan. 28,
1997 1996 1997 1996
---------------------------------- ---------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $1,592,377 $918,510 $3,027,203 $1,716,801
Cost of sales 552,519 312,315 1,053,999 580,057
---------------- ---------------- --------------- ----------------
Gross margin 1,039,858 606,195 1,973,204 1,136,744
Operating expenses:
Research and development 167,652 89,695 312,363 167,875
Sales and marketing 288,341 163,527 547,451 308,778
General and administrative 52,111 31,462 93,887 59,729
Purchased research and development 43,203 217,792
---------------- ---------------- --------------- ----------------
Total operating expenses 551,307 284,684 1,171,493 536,382
---------------- ---------------- --------------- ----------------
Operating income 488,551 321,511 801,711 600,362
Realized gain on sale of investment 47,299 102,407
Interest and other income, net 27,064 15,646 48,542 28,504
---------------- ---------------- --------------- ----------------
Income before provision for income taxes 562,914 337,157 952,660 628,866
Provision for income taxes 224,455 127,420 433,258 237,742
---------------- ---------------- --------------- ----------------
Net income $ 338,459 $209,737 $ 519,402 $ 391,124
================ ================ =============== ================
Net income per share $ .49 $ .31 $ .76 $ .59
================ ================ =============== ================
Shares used in per-share calculation 690,304 666,177 686,824 659,625
================ ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
January 25, January 28,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 519,402 $ 391,124
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 98,541 52,798
Deferred income taxes (61,461) (22,129)
Tax benefit of disqualifying dispositions 101,546 93,704
Adjustment to conform StrataCom, Inc. fiscal year (11,020)
Purchased research and development from
Netsys Technology, Inc. acquisition 43,203
Change in operating assets and liabilities:
Accounts receivable (399,887) (124,117)
Inventories 100,013 (157,357)
Prepaid expenses and other current assets 4,150 (29,257)
Income taxes payable 2,750 33,866
Accounts payable 99,272 74,283
Accrued payroll and related expenses 56,447 30,353
Other accrued liabilities 4,315 30,537
----------- -----------
Net cash provided by operating activities 557,271 373,805
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (697,891) (337,811)
Proceeds from sales and maturities of short-term
investments 706,535 269,814
Purchases of investments (1,007,291) (319,996)
Proceeds from sales of investments 618,377 130,404
Purchases of restricted investments (133,744) (72,348)
Proceeds from sales and maturities of restricted
investments 114,071 58,165
Acquisition of property and equipment (169,372) (101,249)
Acquisition of Telebit Corporation, net of
purchased research and development (25,189)
Other (8,000) (13,652)
----------- -----------
Net cash used in investing activities (602,504) (386,673)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 102,940 50,335
Repurchase of common stock (112,734)
Other (4,595) (9,424)
----------- -----------
Net cash provided by (used in)financing
activities 98,345 (71,823)
----------- -----------
Net increase (decrease) in cash and equivalents 53,112 (84,691)
Cash and equivalents, beginning of period 279,695 284,388
----------- -----------
Cash and equivalents, end of period $ 332,807 $ 199,697
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems Inc. ("Cisco" or "the Company") develops, manufactures, markets
and supports high-performance, multiprotocol internetworking systems that link
geographically dispersed local-area and wide-area networks (LANs and WANs,
respectively). Cisco's products include a wide range of routers, LAN and WAN
switches, dial access servers, and network management solutions. The Company
sells its products in approximately 90 countries through a combination of direct
sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the last Saturday in
July. Fiscal years 1997 and 1996 are both 52 week years. Prior to fiscal year
1997, the Company's fiscal year was the 52 or 53 weeks ending on the last Sunday
in July.
Basis of Presentation
The accompanying financial data as of January 25, 1997 and July 28, 1996 and for
the three and six month periods ended January 25, 1997 and January 28, 1996,
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 28, 1996.
In July 1996, the Company acquired StrataCom, Inc.("StrataCom"), a Company that
develops, manufactures, and supports high speed LAN and WAN switching equipment.
The merger was accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements were restated for all periods prior
to the merger to include the results of operations, financial positions, and
cash flows for StrataCom for the twelve months ended June 30, 1996. Prior to the
merger, StrataCom used a calendar year-end. In order for both companies to
operate on the same fiscal calendar for 1997, StrataCom's operations for the one
month period ended July 28, 1996, which are not material to the consolidated
companies, have been reflected as an adjustment to retained earnings in the
first quarter of fiscal 1997.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the
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financial position, results of operations, and cash flows for the three and six
month periods ended January 25, 1997 and January 28, 1996, have been made. The
results of operations for the period ended January 25, 1997 are not necessarily
indicative of the operating results for the full year.
The July 28, 1996 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
Computation of Net Income Per Share
Net income per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options.
3. BUSINESS COMBINATIONS
In September 1996, the Company acquired Nashoba Networks ("Nashoba"). The
Company issued approximately 1.6 million shares of common stock for all the
outstanding stock of Nashoba in a transaction accounted for as a pooling of
interests. The Company also assumed options to purchase Nashoba stock that
remain outstanding as options to purchase approximately .1 million shares of the
Company's common stock.
Also, in September 1996, the Company acquired Granite Systems, Inc. ("Granite"),
a company established to develop, market, and sell multilayer switching and
gigabit Ethernet equipment. The Company issued approximately 2.2 million shares
of common stock for all the outstanding stock of Granite in a transaction
accounted for as a pooling of interests. The Company also assumed options to
purchase Granite stock that remain outstanding as options to purchase
approximately 1.6 million shares of the Company's common stock.
The historical operations of Nashoba and Granite are not material to the
Company's consolidated operations and financial position on either an individual
or an aggregated basis. Therefore, prior period statements have not been
restated for these acquisitions.
In October 1996, the Company acquired substantially all of the assets of Telebit
Corporation ("Telebit") and its Modem ISDN Channel Aggregation (MICA)
technologies for approximately $200 million in cash. The Company purchased
Telebit patents, MICA intellectual property and established employment contracts
with MICA personnel, and assumed certain preferred stock and notes receivable
related to a management buyout of the remaining assets of Telebit. The
transaction was accounted for as a purchase. Accordingly, the results of
operations of the acquired business and the fair values of the acquired assets
and liabilities were included in the Company's financial statements as of the
effective date. As part of this transaction, the Company recorded approximately
$174 million in purchased research and development expense in the first quarter
of fiscal 1997.
In November 1996, the Company acquired Netsys Technologies ("Netsys"), a
privately held innovator of network infrastructure
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management and performance analysis software. Under the terms of the agreement,
shares of the Company's common stock worth approximately $79 million have been
exchanged for all outstanding shares and options of Netsys in a transaction
accounted for as a purchase. The Company had held a minority equity interest in
Netsys since February 1995 and had also entered into a strategic reseller
agreement. As part of this transaction, the Company recorded approximately $43
million in purchased research and development expense and $41 million of
goodwill and other intangible assets in the second quarter of fiscal 1997.
Amounts allocated to goodwill and other intangibles will be amortized on a
straight-line basis over a five year period.
The historical operations of Telebit and Netsys are not material to the
Company's consolidated operations and financial position on either an individual
or an aggregated basis, therefore, pro forma summaries are not presented. The
amounts allocated to purchased research and development were determined through
established valuation techniques in the high technology communications industry,
and were expensed upon acquisition, because technological feasibility had not
been established and no future alternative uses existed.
4. BALANCE SHEET DETAIL
(In thousands)
<TABLE>
<CAPTION>
January 25, July 28,
Inventories: 1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Raw materials $ 85,993 $134,531
Work in process 77,127 99,723
Finished goods 18,551 51,920
Demonstration systems 22,050 15,014
-------- --------
$203,721 $301,188
======== ========
</TABLE>
5. INCOME TAXES
The Company paid income taxes of $390 million for the six months ended January
25, 1997 and $136 million for the six months ended January 28, 1996. The
Company's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit from stock option transactions. This
benefit totaled $102 million in the first six months of 1997, and was credited
directly to shareholders' equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Other Risk Factors" section of the
Company's 1996 Form 10-K filed on October 25, 1996, as well as the "Financial
Risk Management", "Future Growth Subject to Risks", "Potential Volatility in
Operating Results", "Risks Associated With Internet Infrastructure", and
"Volatility of Stock Price" sections contained in this report, which identify
important risk factors that
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could cause actual results to differ from those contained in the forward-looking
statements.
Net sales grew to $1,592 million in the second quarter of 1997 from $919 million
in the second quarter of 1996. Net sales for the first half of 1997 were $3,027
million, compared to $1,717 million in the first half of 1996. The 73.2%
increase in net sales between the two three month periods and the 76.3% increase
in net sales between the two six month periods was primarily the result of
increasing unit sales of the Cisco 2500 product family, the Cisco 4700, LAN
switching products such as the Catalyst 5000, and high end routers such as the
Cisco 7500 product family. These increases were partially offset by decreasing
unit sales of the Company's older product lines, consisting of the Cisco 7000
and Cisco 4000. Sales to international customers decreased to 43.6% of net sales
in the second quarter of 1997, from 51.9% for the second quarter of 1996.
International sales in the first six months of 1997 were 45.1% of net sales
compared with 49.7% of net sales for the same period in 1996. These decreases
reflect slower sales growth in certain international markets, particularly
Japan, France, Germany and Italy. Sales growth in these markets have been
impacted by certain factors such as weaker economic conditions, delayed
government spending, a stronger dollar versus the local currencies, and slower
adoption of networking technologies, among other factors.
Gross margins decreased to 65.3% in the second quarter of 1997 from 66.0% for
the second quarter of 1996. Gross margins for the first six months of 1997 were
65.2% compared with 66.2% for the same period in 1996. This is due principally
to the continued shift in revenue mix to the Company's lower margin products
consisting primarily of products in the Access and Workgroup business units, and
to a lesser extent to write-downs of inventory and higher warranty costs. The
prices of component parts have fluctuated in the recent past, and the Company
expects that this trend may continue. An increase in the price of component
parts may have a material adverse impact on gross margins. The Company expects
that gross margins will continue to decrease in the future, because it believes
that the market for lower margin remote access and high-speed switching products
will continue to increase at a faster rate than the market for the Company's
higher margin router products. The Company is attempting to mitigate this trend
through various means, such as emphasizing software content, increasing the
functionality of its products, controlling 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 $78 million in the second quarter of
1997 over the second quarter of 1996, and increased $144.5 million in the first
six months of 1997 over the first six months of 1996. This represents an
increase to 10.5% from 9.8% of net sales in the quarter to quarter period and to
10.3% from 9.8% of net sales for the first six months of each fiscal year. The
increase reflects the Company's ongoing research and development efforts,
including the further development of the CiscoFusion(TM) architecture, as well
as the acquisition of technologies to bring a broad range of products to the
market in a timely fashion. A significant portion of the increase was due to the
addition of new personnel, as well as higher
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expenditures on prototypes and depreciation on new equipment. The Company is
primarily developing new technologies internally. Accordingly, research and
development expenses are expected to increase at the same, or a slightly greater
rate than the sales growth rate. If the Company believes it is unable to enter a
particular market in a timely manner, it may acquire other businesses or license
technology from other businesses as an alternative to internal research and
development. All of the Company's research and development costs are expensed as
incurred.
Sales and marketing expenses in the second quarter of fiscal 1997 increased
$124.8 million over the second quarter of fiscal 1996, and $238.7 million over
the first six months of 1996. This represents slight increases to 18.1% from
17.8% of net sales in the quarter to quarter period and to 18.1% from 18.0% of
net sales for the first six months of each fiscal year. The increases in these
expenses resulted from an increase in the size of the Company's direct sales
force and related commissions, additional marketing programs to support the
launch of new products, the entry into new markets, both domestic and
international, and expanding distribution channels.
General and administrative expenses rose by $21 million in the second quarter of
1997 versus the second quarter of 1996 which is a slight decrease to 3.3% from
3.4% of net sales. These expenses increased $34 million in the first half of
1997 from the first half of 1996, representing a slight decrease to 3.1% from
3.5% of net sales for the comparable six month periods, which reflects
management's continued efforts to control discretionary spending. The dollar
increase reflects increased personnel costs necessary to support the Company's
business infrastructure, as well as merger and acquisition related costs. The
Company is continuously evaluating potential acquisition candidates as part of
its growth strategy and incurs legal, accounting, and other related costs
associated with this activity. It is management's intent to keep general and
administrative costs relatively constant as a percentage of net sales; however,
this goal is dependent upon the level of acquisition activity, among other
factors.
The amount expensed to purchased research and development in the second quarter
of fiscal 1997 arose from the acquisition of the outstanding shares of Netsys.
The remaining purchased research and development for the first six months of
fiscal 1997 is due to the acquisition of assets and assumption of liabilities of
Telebit (See Note 3).
Recent Accounting Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires the Company to review for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 is effective
for the Company's fiscal year 1997. The Company does not expect the adoption of
SFAS No. 121 to have a material
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impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
statement, which establishes a fair value-based method of accounting for
stock-based compensation plans, also permits an election to continue following
the requirements of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," with disclosures on a pro forma basis of net income and earnings per
share under the new method. SFAS No. 123 is effective for fiscal year 1997. The
Company has elected to continue to measure compensation cost for its employee
stock compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25. Pro forma disclosure of net income and
earnings per share, which will be made on an annual basis, will reflect the
difference between compensation cost included in net income and the related cost
measured by the fair value-based method defined in SFAS No. 123, including tax
effects, that would have been recognized in the consolidated statement of
operations if the fair value-based method had been used.
Financial Risk Management
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Historically, the Company's primary exposures related to 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. The Company is planning to expand
its business activities in Europe. As a result, the Company expects to have
exposures related to non dollar-denominated sales in several European
currencies. At the present time, the Company hedges only those currency
exposures associated with certain assets and liabilities denominated in
non-functional currencies and does not generally hedge anticipated foreign
currency cash flows.
The Company maintains investment portfolio holdings of various issuers, types,
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of shareholders'
equity. Part of this portfolio includes minority equity investments in several
publicly traded companies, the value of which is subject to market price
volatility. The Company also has certain real estate lease commitments with
payments tied to short-term interest rates. Given the current profile of
interest rate exposures, a sharp rise in interest rates could have a material
adverse impact on the market value of the Company's investment portfolio while
increasing the costs associated with its lease commitments. The Company does not
currently hedge these interest rate exposures.
Future Growth Subject to Risks
The Company's operating performance each quarter is subject to various risks and
uncertainties as discussed in the Company's Annual Report on Form 10-K for 1996
filed on October 25, 1996, and the
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Company's Registration Statement on Form S-4 filed on June 7, 1996. This report
on Form 10-Q should be read in conjunction with such Annual Report and Form S-4,
particularly "Other Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report on
Form 10-K and "Risk Factors" contained in Form S-4.
The internetworking business is highly competitive, and as such, the Company's
growth is dependent upon market growth and its ability to enhance its existing
products and introduce new products on a timely basis. One of the ways the
Company has addressed and will continue to address the need to develop new
products is through acquisitions of other companies. Acquisitions involve
numerous risks, including difficulties in assimilation of the operations,
technologies, and products of the acquired companies; risks of entering markets
in which the Company has no or limited direct prior experience and where
competitors in such markets have stronger market positions; and the potential
loss of key employees of the acquired company. The Company must also maintain
its ability to manage any such growth effectively. In particular, this would
include potential growth associated with the StrataCom acquisition. 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 has essentially completed the functional integration of StrataCom.
The Company is now focusing on training the sales force, and further integrating
StrataCom's products and technologies into its sales channels. Although the
integration has met the Company's sales expectations to date, it may be a year
or more before the Company can assess the commercial success of the acquisition.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions, and
evolving methods of building and operating networks. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely manner, or that products
and technologies developed by others will not render Cisco's products or
technologies obsolete or noncompetitive. The failure of Cisco's new product
development efforts could have a material adverse effect on Cisco's business
operating results and financial condition.
Potential Volatility in Operating Results
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 generally has had one quarter of a fiscal
year when backlog has been reduced. Traditionally, it has been the third
quarter. While such a reduction has not occurred 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 attempted to reduce
its product manufacturing lead times which may result in corresponding
reductions in order backlog. A decline in backlog levels could result in more
variability and less
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predictability in the Company's quarter-to-quarter net sales and operating
results going forward. On the other hand, for certain products, lead times are
longer than the Company's goal. If the Company can not reduce manufacturing lead
times for such products, the Company's customers may cancel orders, or not place
further orders if shorter lead times are available from other manufacturers,
thus creating additional variability.
Although sales to the service provider market have continued to grow, this
market is characterized by large, and often times sporadic purchases. Sales
activity in this industry depends upon their status regarding infrastructure
build out, the availability of funding, and the extent that they are affected by
regulatory and business conditions in the country of operations. A decline or
delay in sales orders from this industry could have a material adverse effect on
the Company's business operating results and financial condition.
The Company conducts business on a global basis. Accordingly, the Company's
future results could be adversely affected by a variety of uncontrollable and
changing factors including foreign currency exchange rates, regulatory,
political or economic conditions in a specific country or region, trade
protection measures and other regulatory requirements, government spending
patterns, and natural disasters, among other factors. In the second quarter of
fiscal 1997 the Company experienced slower sales growth in Japan,
France, Germany, and Italy. Any or all of these factors could have a material
adverse impact on the Company's future international business in these or other
countries.
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. For example, the
Company believes that gross margins may continue to decline over time, because
the sales of lower margin Access and Workgroup business unit products have
continued to grow at a faster rate than the Company's higher margin Core
business unit products. The Company's gross margins may also be impacted by
geographic mix, as well as the mix of configurations within each product group.
The Company continues to expand into third-party or indirect distribution
channels, which generally result in lower gross margins. In addition, increasing
third-party and indirect distribution channels generally result in greater
difficulty in forecasting the mix of the Company's products, and to a certain
degree the timing of its orders.
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. During the
second quarter, one of the Company's suppliers experienced technical problems
with a component. As a result of the component problem, the Company's sales flow
was impeded resulting in higher sales volume toward the end of the quarter.
Although the Company works closely with its vendors to avoid these types of
shortages, there can be no assurance that the Company will not encounter these
problems in the future.
The Company also expects that its operating margins may decrease as it continues
to hire additional personnel and increases other
13
<PAGE> 14
operating expenses to support its business. The Company plans its operating
expense levels based primarily on forecasted revenue levels. Since these
expenses are relatively fixed in the short-term, a shortfall in revenues could
lead to operating results being below expectations. The results of operations
for the second quarter of 1997 are not necessarily indicative of results to be
expected in future periods, and the Company's operating results may be subject
to quarterly fluctuations as a result of a number of factors. These factors
include the integration of people, operations, and products from acquired
businesses and technologies; increased competition in the internetworking
industry; the overall trend toward industry consolidation; the introduction and
market acceptance of new products, including high-speed switching and ATM
technologies; variations in sales channels, product costs, or mix of products
sold; the timing of orders and manufacturing lead times; and changes in general
economic conditions, any of which could have a material adverse impact on
operations and financial results.
Risks Associated with Internet Infrastructure
The Company's management believes that in the future there will be performance
problems with Internet communications which could receive a high degree of
publicity and visibility. As the Company is a large supplier of equipment for
the Internet infrastructure, customer's perceptions of the Company's products
and the marketplace's perception of Cisco as a supplier of internetworking
products, whether or not these problems are due to the performance of Cisco's
products, may be adversely affected, particularly as the Company migrates toward
providing end-to-end solutions for its customers. Such an event could also
result in an adverse effect on the market price of the Company's Common Stock
and could adversely affect Cisco's business.
Volatility of Stock Price
The Company's Common Stock has experienced substantial price volatility,
particularly as a result of variations between the Company's actual or
anticipated financial results and the published expectations of analysts and as
a result of announcements by the Company and its competitors. In addition, the
stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies in particular and have
often been unrelated to the operating performance of any specific company. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments, and investments increased by $398 million from
July 28, 1996 to January 25, 1997, primarily as a result of cash generated by
operations and to a lesser extent through the exercise of employee stock
options. This increase was partially offset by cash payments to Telebit
Corporation shareholders and optionees for approximately $200 million, tax
payments of approximately $390 million, and capital expenditures of
approximately $169 million during this time. In fiscal 1996, the Company hedged
14
<PAGE> 15
its minority equity position in a publicly traded company. The hedge expires
quarterly over a period of two years which commenced in October 1996. Cash
proceeds on the sales of this investment in fiscal 1997 were approximately $104
million.
Accounts receivable increased 64.6% from July 28, 1996 to January 25, 1997. Days
sales outstanding in receivables increased to 59 days as of January 25, 1997
from 43 days at July 28, 1996. Inventories decreased 32.4% between July 28, 1996
and January 25, 1997 which reflects the Company's continued asset management
efforts. Inventory management remains an area of focus, as the Company balances
the need to maintain strategic inventory levels to ensure competitive lead times
versus the risk of inventory obsolescence, due to rapidly changing technology
and customer requirements.
Accounts payable increased by 64.9% at January 25, 1997 over July 28, 1996
because of increases in operating expenses, and material purchases to support
the growth in net sales. Other accrued liabilities increased by 7.4%, primarily
due to higher deferred revenue on service contracts.
At January 25, 1997, the Company had a line of credit totaling
$100.0 million, which expires April 1998. There have been no borrowings under
this agreement.
The Company has entered into certain lease arrangements in San Jose, California,
and Research Triangle Park, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities, respectively. In connection with these transactions, the
Company pledged $247.6 million of its investments as collateral for certain
obligations of the leases. The restricted investments balance will continue to
increase as the Company phases in operations at these lease sites.
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 the next year.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on
November 15, 1996. The following actions were taken at this
meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
------ ----- -------- ---------
a. Election of Directors
<S> <C> <C> <C> <C>
John T. Chambers 576,028,842 - 3,486,656 -
James F. Gibbons 577,066,158 - 2,449,340 -
Edward R. Kozel 575,913,735 - 3,601,763 -
Richard M. Moley 576,875,312 - 2,640,186 -
John P. Morgridge 576,017,327 - 3,498,171 -
Robert L. Puette 576,298,912 - 3,216,586 -
Masayoshi Son 577,006,159 - 2,509,339 -
Donald T. Valentine 576,670,347 - 2,845,151 -
Steven M. West 576,900,810 - 2,614,688 -
b. Approval of the 1996
Stock Option Plan 339,224,813 148,579,505 1,536,710 90,174,470
c. Amendment to the
Company's Bylaws to
increase minimum and 557,363,936 2,632,156 1,472,615 18,046,791
maximum number of
directors.
d. Ratification of
Coopers & Lybrand
L.L.P. as the
Company's independent
accountants 578,105,944 501,478 908,076
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.02 The Company's Restated Bylaws, as currently in
effect
10.45 Employment Agreement with Don LeBeau
11.01 Computation of net income per share
27 Financial Data Schedule
(b) Report on Form 8-K
The Company filed one report on Form 8-K during the
quarter ended January 25, 1997. The filing was on
January 22, 1997. The item reported on was the
acquisition of Netsys Technologies, Inc.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cisco Systems, Inc.
Date: March 4, 1997
By /s/ LARRY R. CARTER
--------------------------------
Larry R. Carter, Vice President
Finance, and Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
<PAGE> 18
CISCO SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 25, 1997
<TABLE>
<CAPTION>
Sequentially
Exhibit# Description Numbered Plan
- -------- ----------- -------------
<S> <C>
3.02 Restated Bylaws of the Corporation
10.45 Employment agreement Don LeBeau
11.01 Computation of net income per share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.02
CERTIFICATE OF
AMENDMENT TO THE BYLAWS OF
CISCO SYSTEMS, INC.
The undersigned, Secretary of Cisco Systems, Inc., hereby
represents that Article III, Section 2 of the Company's Bylaws was amended by
the Board of Directors of the Company on July 31, 1996. By such amendment, the
first and second sentences of Article III, Section 2 are to be deleted in their
entirety and replaced with the following sentence:
"The number of authorized directors shall be not less than
seven (7) nor more than thirteen (13), the exact number of directors to
be fixed from time to time within such range by a duly adopted
resolution of the Board of Directors or shareholders."
/s/ LARRY R. CARTER
----------------------------------------
Larry R. Carter
Secretary and Chief Financial Officer
<PAGE> 1
EXHIBIT 10.45
[CISCO SYSTEMS LETTERHEAD]
October 11, 1996
Mr. Don LeBeau
Dear Don:
Let me first thank you for your hard work and dedication to
Cisco over the past few years. I understand and fully support your desire for
some much-deserved time off. I am also thankful that you will remain employed by
the Company during your leave and hope that you will return to work on a
full-time basis at the end of that leave. Please allow me to confirm the terms
of your leave of absence from Cisco:
1. As you requested, you will continue to work on a regular
basis through November 1, at which time you will take a six-week vacation which
will last through December 13, 1996. At the conclusion of your vacation, you
will go on a personal leave of absence from Cisco effective December 14, 1996
and lasting through December 13, 1997. While on vacation, you will receive your
full salary and continue to participate in all Company benefits. Starting on
December 14, 1996 and during the remainder of your leave, you will be paid
one-half of your current base salary. You will not participate in any bonus or
incentive plans or receive payments under such plans for fiscal year 1997.
2. I hope it goes without saying that you have been a critical
part of
<PAGE> 2
Mr. Don LeBeau October 11, 1996
Page 2
Cisco's operation and your absence will be greatly felt. I very much
appreciate your willingness to assist during the transition. Although it will
not be necessary for you to report into the office on a regular basis during
your leave, it is very important to Cisco that you make yourself available, as
needed, to assist in making your successor effective and successful.
3. Because you will not be working on a regular full-time basis
during your leave, your participation in all Company benefits, including the
medical plan and Employee Stock Purchase Plan, will cease on December 13, 1996.
The only exception will be the section 401(k) Plan. As long as you are employed
and continue to provide substantial services to the Company, you may continue to
participate in that Plan. You may also continue your medical coverage under
COBRA, but you will have to pay for that coverage. You will continue to vest in
your outstanding stock options from December 14, 1996 through December 13, 1997,
at five-twelfths of your normal rate. Thus, your outstanding stock options will
continue to become exercisable after December 13, 1996, but only as to
five-twelfths of the number of shares that otherwise would have become
exercisable for that month. This reduced rate of vesting will continue until
either your employment terminates, the end of one year, or you resume regular
full-time employment with Cisco, whichever occurs first.
4. Your Proprietary Information Agreement and Employment
Agreement will continue in effect.
<PAGE> 3
Mr. Don LeBeau October 11, 1996
Page 3
5. Because you will be an employee of Cisco and providing
services during your leave, I ask that you talk with me before taking any
position with, or providing services to, any other company. We agree that it
would not be appropriate for you to provide services, as an employee, consultant
or otherwise, to any company in a business competitive with Cisco. Accordingly,
you will not accept employment with, or provide any services to, Bay Networks,
Fore Systems, Inc., Cascade Communications Corporation, Ipsilion Networks, Inc.,
Ascend Communications, 3Com Corporation, Xylan, or any other company in a
business competitive with Cisco during your leave. If you wish to provide
services to a company that is not competitive with Cisco, then I will not
withhold my consent as long as you agree to any modification of the terms of
your leave that the Company might believe are appropriate under the
circumstances.
6. I sincerely hope that you will consider rejoining Cisco on a
regular, full-time basis at the end of your leave. Although neither of us can
predict what the Company's needs will be at that time, I would certainly want to
talk with you about any opportunity that might be of interest to you and the
Company.
<PAGE> 4
Mr. Don LeBeau October 11, 1996
Page 4
I hope you are able to relax and enjoy the next few months. And, again,
thank you for your dedication and willingness to assist in this transition.
Sincerely,
/s/ JOHN CHAMBERS
---------------------
John Chambers
JC:
--
I ACCEPT THE TERMS SET FORTH ABOVE.
/s/ DON LEBEAU
- -----------------------------
Don LeBeau
October 2, 1996
- -----------------------------
Date
<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>
Three Months Six Months
Ended Ended
-------------------------- --------------------------
Jan. 25, Jan. 28, Jan. 25, Jan. 28,
1997 1996 1997 1996
-------- -------- -------- --------
PRIMARY EARNINGS PER SHARE (Unaudited)
<S> <C> <C> <C> <C>
Actual weighted average common shares
outstanding for the period 658,739 644,012 655,525 637,332
Weighted average shares assuming exercise
of employee stock options using average
market price 31,565 22,165 31,299 22,293
-------- -------- -------- --------
Shares used in per-share calculations 690,304 666,177 686,824 659,625
======== ======== ======== ========
Net income applicable to primary income
per share $338,459 $209,737 $519,402 $391,124
======== ======== ======== ========
Net income per share based on SEC
Interpretive Release No. 34-9083 $ .49 $ .31 $ .76 $ .59
======== ======== ======== ========
FULLY DILUTED EARNINGS PER SHARE
Actual weighted average common shares
outstanding for the period 658,739 644,012 655,525 637,332
Weighted average shares assuming exercise
of employee stock options using the
greater of ending or average market price 32,398 22,738 33,324 23,807
-------- -------- -------- --------
Shares used in per-share calculations 691,137 666,750 688,849 661,139
======== ======== ======== ========
Net income applicable to fully diluted
income per share $338,459 $209,737 $519,402 $391,124
======== ======== ======== ========
Net income per share based on SEC
Interpretive Release No. 34-9083 $ .49 $ .31 $ .75 $ .59
======== ======== ======== ========
</TABLE>
These calculations are submitted in accordance with Securities Exchange Act of
1934 Release No. 34-9083
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JANUARY 25, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-26-1997
<PERIOD-START> JUL-29-1996
<PERIOD-END> JAN-25-1997
<CASH> 332,807
<SECURITIES> 2,183,317
<RECEIVABLES> 1,042,108
<ALLOWANCES> 17,166
<INVENTORY> 203,721
<CURRENT-ASSETS> 2,619,019
<PP&E> 737,532
<DEPRECIATION> 327,467
<TOTAL-ASSETS> 4,570,044
<CURRENT-LIABILITIES> 947,759
<BONDS> 0
0
0
<COMMON> 1,180,201
<OTHER-SE> 2,400,892
<TOTAL-LIABILITY-AND-EQUITY> 4,570,044
<SALES> 3,027,203
<TOTAL-REVENUES> 3,027,203
<CGS> 1,053,999
<TOTAL-COSTS> 2,225,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 952,660
<INCOME-TAX> 433,258
<INCOME-CONTINUING> 519,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519,402
<EPS-PRIMARY> .76
<EPS-DILUTED> 0
</TABLE>
