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FORM 10-K
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 30,1995
/ / 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
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None Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(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 2, 1995, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $16,746,720,000 (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 2, 1995, 273,931,124 shares of registrant's common stock were
outstanding.
Designated portions of the Cisco Systems, Inc. Proxy Statement for the 1995
Annual Meeting of Shareholders to be held on November 14, 1995, 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. develops, manufactures, markets and supports
high-performance, multiprotocol internetworking systems that link geographically
dispersed local-area and wide-area networks (LANs and WANs) to form a single,
seamless information infrastructure. Cisco products include a wide range of
routers, LAN and Asynchronous Transfer Mode (ATM) switches, dial-up access
servers, and network management software solutions. The common thread running
through these products is the Cisco Internetwork Operating System (Cisco
IOS(TM)) software, which today provides the native intelligence for more than
450,000 installed Cisco units and is an integral part of the products of more
than two dozen global partners.
When Cisco shipped its first commercial multiprotocol router in 1986, it created
a new part of the information technology industry - internetworking. Since then
the market has changed greatly, and Cisco has kept pace with that change. In
addition to enhancing its core business of routers, the Company has developed or
acquired technology and products in all major categories of internetworking,
including LAN switching, ATM, and network access for remote offices and mobile
workers, incorporating the Cisco IOS software across all product lines. These
changes have allowed Cisco to continue to grow at or above the rate of the
overall market and to maintain leading market share in all the segments in which
it participates.
The Cisco IOS software is a sophisticated suite of networking capabilities that
provides network connectivity, security and interoperability for all of today's
standard data protocols, media access methods and products from leading
Information Service vendors. This software resides at the heart of Cisco's
internetworking products and within the hardware of more than two dozen vendor
partners including Alcatel, Cabletron Systems, Compaq Computers, LanOptics, NEC,
Northern Telecom and Sun Microsystems. Cisco's modular hardware and software
architecture allows products to be configured in a wide variety of ways to suit
customers' specific needs.
The Company expanded the Cisco IOS feature set by moving aggressively into 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 today's routed internetworks with
the emerging technologies of ATM, LAN workgroup switches and virtual LANs.
Cisco sells its products in approximately 75 countries through a combination of
direct sales, distributors, and direct and indirect resellers. Cisco's worldwide
Original Equipment Manufacturer (OEM) customers and resellers include Alcatel,
AT&T, British Telecom, Cabletron Systems, Digital Equipment Corporation,
Ericsson, Hewlett-Packard, MCI, NEC Corporation, Olivetti, Siemens, Sprint,
Unisys and US West. Cisco has established technology partnerships with a number
of companies to address specialized segments of the internetworking marketplace,
and has partnered with leading WAN technology and service providers to offer
flexible options to customers. The Company offers customer service and support
through Technical Assistance Centers in California, North Carolina, Australia
and Belgium, and provides onsite hardware maintenance on a worldwide basis
through IBM, AT&T, and Hewlett-Packard.
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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 the ATM, Access, or
Workgroup business units, which are more fully described later in the "Products"
section of this report.
In September 1993, the Company acquired Crescendo Communications, Inc.
("Crescendo"), a privately held networking company that provides
high-performance workgroup solutions. The Company issued approximately 3,400,000
shares of common stock for all the outstanding stock of Crescendo in a
transaction accounted for as a pooling of interests. The Company also assumed
options and warrants to purchase Crescendo stock of which the options remain
outstanding to purchase approximately 280,000 shares of the Company's common
stock.
In August 1994, the Company purchased Newport Systems Solutions(TM), Inc.
("Newport"), a privately held networking company providing software-based
routers for remote network sites. The Company issued approximately 3,300,000
shares of common stock for all the outstanding stock of Newport in a transaction
also accounted for as a pooling of interests. In addition, the Company assumed
options to purchase Newport stock that remain outstanding as options to purchase
approximately 190,000 shares of 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 6,800,000 shares of common stock for all the
outstanding stock of Kalpana in a transaction also 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 500,000 shares of 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") for
$120,000,000 in cash and related acquisition costs of approximately $500,000.
LightStream was a developer of enterprise-class ATM switching technology. 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 1,750,000 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 250,000 shares of
the Company's common stock.
Additionally, in September 1995, the Company acquired Internet Junction, Inc., a
developer of Internet gateway software that connects desktop users with the
Internet. The Company issued 81,000 shares of stock for the net assets of
Internet Junction in a transaction accounted for as a purchase.
On September 27, 1995, the Company entered into an agreement to acquire Grand
Junction Networks, Inc., a privately held manufacturer and the inventor of Fast
Ethernet (100BaseT) and Ethernet desktop switching products. The agreement calls
for the Company to issue approximately 5,000,000 shares to acquire all the
equity of Grand Junction, including outstanding options and warrants. The
transaction is subject to several closing conditions and, if consummated, will
be accounted for as a pooling of interests.
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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.
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. As used in this Form
10-K, the terms "Cisco" and "the Company" refer to Cisco Systems, Inc., and its
subsidiaries.
PRODUCTS
Cisco's breadth of product offerings and modular system design enable the
Company to configure media interfaces, protocol software and port capacity to
match customer needs for networks of varying sizes and complexity. Many of the
Company's products, particularly its core products, are expandable, offering
customers the option to upgrade their internetworks with existing equipment as
their needs grow.
In May 1995, Cisco created five internal business units that reflect the
Company's major product groups. Each of the five business units - Core, ATM
Enterprise, Access, Workgroup and InterWorks - has its own marketing and
engineering staffs. The Cisco IOS software and network management products
support all five business units, serving as the foundation upon which Cisco's
internetworking solutions are built.
CORE
Cisco's core routing strength is provided by the Cisco 7000 family, which
includes the high-end Cisco 7500 series, the Cisco 7000 and the compact Cisco
7010. The Cisco 7000 family offers users connectivity to ATM networks,
channelized T1/E1 connections, mainframe attachment, and a unique
packet-switching architecture that easily handles the demands of large
internetworks running many diverse protocols and applications. With the March
1995 introduction of a new Fast Ethernet Interface Processor (FEIP), the Cisco
7000 became the industry's only router family to support all three of the key
high-bandwidth networking technologies on the market. The Cisco 7000 series has
supported 100-Mbps Fiber Distributed Data Interface (FDDI) since early 1993 and
155-Mbps ATM since June 1994.
ATM
ATM has gained wide acceptance by customers as the strategic technology of
choice for long-term networking decisions. Cisco Systems is the first
internetworking vendor to offer a complete, end-to-end ATM solution, including
enterprise ATM switches, workgroup/campus ATM switches, ATM interface cards for
internetwork routers and LAN switches, and ATM adapters for desktop systems and
servers. The LightStream 2020 enterprise ATM multiservice switch provides LAN
and WAN internetworking for campus environments or global networks. The
LightStream 100 workgroup/campus ATM switch supports up to 16 155-Mbps ATM
interfaces.
ACCESS
Cisco's access routers are designed to improve productivity by extending the
enterprise network beyond the boundaries of corporate headquarters to regional
sales groups, small satellite offices and individual telecommuters.
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The Cisco 4000 series delivers a high-performance, modular solution that can
expand to meet the needs of large offices and regional sites. The Cisco 2500
series is available in 13 models customized for the needs of small branch
offices. The Cisco 1000 series provides low-cost remote LAN attachment to
corporate networks or Internet services for small offices and home offices. The
AS5100 dial-up access server enables the large-scale deployment of telecommuting
over standard telephone lines, integrating routing and modem-based technologies.
All Cisco access products can be centrally configured and managed from
headquarters, reducing the need for internetworking expertise in the field.
WORKGROUP
Cisco's LAN switching products include the Catalyst(TM) and Kalpana families.
Cisco's Catalyst family of LAN switches link network resources with maximum
modularity, performance and flexibility in LAN switching, and include embedded
Cisco IOS functionality to meet future needs as switched internetworks evolve.
The newest member of the Catalyst family, the Catalyst 5000, delivers dedicated
bandwidth to users through multiple-media switching options such as 10-Mbps
Ethernet, 100-Mbps Ethernet, and ATM with future capability for switched FDDI
and switched Token Ring. The Kalpana EtherSwitch family is a high-performance
stackable switching platform. The Kalpana ProStack, also announced this year,
consists of the EtherSwitch Pro16 and ProStack Matrix, and allows users to
expand network capacity as bandwidth demands dictate. High-speed connectivity to
routers or other switches is achieved with Fast Ethernet and ATM modules. Switch
management is achieved through the CiscoWorks(TM) software, a comprehensive
suite of network management applications.
INTERWORKS
A major area of market opportunity is the integration of legacy networks built
around large-scale IBM computers and their networking framework called Systems
Network Architecture (SNA). To address this market, Cisco has a separate
business unit, InterWorks, which focuses on integrating the large number of
SNA-based computing environments with newer multiprotocol networks. Cisco has a
comprehensive suite of capabilities for this market, including TCP/IP
encapsulation of SNA data; integrated Synchronous Data Link Control (SDLC)
support; mixed-media bridging, translation and conversion; enhanced data link
switching; Frame Relay connectivity; Token Ring router interfaces and switching;
Advanced Peer-to-Peer Networking (APPN); and direct channel attachment of Cisco
7000 routers to IBM mainframes.
The CiscoWorks Blue network management support enables operators visibility into
and control over Cisco routers from either IBM NetView operator consoles or
Simple Network Management Protocol (SNMP) network management stations.
NETWORK MANAGEMENT
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 internetworking products in three major
areas: monitoring and diagnostics; troubleshooting and administration tasks; and
a management series for implementation and change to administration tasks and
planning and optimization for offline analysis of network traffic patterns and
trends. CiscoWorks supports the HP OpenView, NetView AIX, SunNet Manager and
Microsoft Windows platforms.
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CUSTOMERS AND MARKETS
Cisco's customers include corporations of all sizes, utilities, educational and
research institutions, and government agencies. Internetworking needs are
influenced most strongly by the size and complexity of a customer's information
systems, and therefore Cisco's business is not concentrated in any particular
industry.
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 subnetworks and computer resources linked together.
Cisco's high-performance routers are widely used in the "backbone"
infrastructure of the Internet, and the Company believes that 80 percent or more
of all routers on the Internet are its products. In addition, the demand by
companies, institutions and individuals for access to the Internet is spurring
demand for remote access, switching and routing products of all kinds. The
Company also benefits from the Internet phenomenon through its alliance
relationships with numerous Internet 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 alliance relationships
with a majority of the world's telecommunications carriers.
Cisco is the first U.S.-based manufacturer to receive self-certification
approval from the British Approvals Board for Telecommunications, which allows
Cisco to more quickly bring products to the European Union.
The Company markets its internetworking products in the United States primarily
through its direct sales force and resellers, and internationally, through
distributors, Value-Added Resellers ("VARs"), OEMs, resellers, 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 one that addresses
their specific needs and provides the Company with broad coverage of worldwide
markets.
At September 25, 1994, the Company's worldwide direct sales organization
consisted of 1375 individuals, including managers, sales representatives, and
technical support personnel. The Company has approximately 69 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-on 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 39.0% of total sales in fiscal 1993,
41.9% in fiscal 1994, and 42.4% in fiscal 1995. 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 1995 include Brazil, Korea, South Africa, Sweden, Switzerland, and
Venezuela. No individual subsidiary has had direct sales that have been material
to date.
Patterns of both revenue growth and types of products sold are affected by
various conditions in geographic regions. As a general rule, adoption of
internetworking technology in Europe tends to be 1 to 2 years behind the United
States, while Japan follows another 1 to 2 years later. Less-developed economies
tend to lag even farther in technology adoption, although the Company has noted
a recent tendency in some newly opened Eastern European economies to leapfrog
intermediate technologies and purchase products with the most advanced
technology. In November 1994, Cisco announced a joint venture with 13 leading
Japanese technology companies to expand the internetworking market in Japan.
BACKLOG
The Company's backlog on September 24, 1995, was approximately $278,800,000
compared with an approximate backlog of $88,200,000 at September 25, 1994. 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
The networking 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 that it transfers technology from. The inherent nature of networking
is such that Cisco must compete, and at the same time, co-operate 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, Alantec, Ascend, Bay Networks, Cabletron, Fore, IBM, and Shiva 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.
Cisco estimates that it competes with over 70 vendors in Access, over 40 vendors
in Core, over 50 vendors in Workgroup, over 30 vendors in ATM, and over 40
vendors in InterWorks. Cisco expects that the overall number of vendors will
grow in these markets because of its attractive growth opportunities. The
Company also expects that overall increases to the number of competitors will be
partially offset by mergers and acquisitions, as companies seek synergies and
market presence.
Over the past year, the networking industry has experienced some consolidation.
This has primarily been achieved through mergers and acquisitions, and to a
lesser extent, through joint technology agreements. Remaining competitors are
broadening their product offerings and attempting to strengthen their positions
in emerging and high-growth markets including remote access, high-speed
switching, and ATM technologies.
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The principal competitive factors in the market for internetworking products are
performance, price, value-added features, reliability, conformance to industry
standards, service, 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. Cisco believes that it will continue to provide
solutions that offer competitive advantages and exceed end-users' buying
criteria in the computer networking market.
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 five internal business
units in the following areas: high-speed switching and ATM technologies, remote
access and ISDN connectivity, improving overall system performance, 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 1995, 1994, and 1993, the Company's research and development
expenditures were $164,819,000, $88,753,000, and $44,254,000, respectively. All
of the Company's expenditures for research and development costs, including
purchased research and development of $95,760,000 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
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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 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
The Company generally relies upon patents, copyright, trademark, and trade
secret laws to establish and maintain its proprietary rights in its technology
and products. However, it may be technologically possible for competitors to
reverse-engineer the Company's products. Because the internetworking industry is
characterized by rapid technological change, the Company believes that its
success is more dependent upon its expertise in internetworking than its
proprietary rights.
The Company has, from time to time, established strategic distribution and
technology transfer relationships with other companies involved in the computer
and communications industries. The Company intends to continue to explore
strategic relationships and expects to enter into other such relationships in
the future.
The Company has a program to file applications for and obtain patents in the
United States and in selected foreign countries where a potential market for the
Company's products exists. The Company has been issued several patents; other
patent applications are currently pending.
There can be no assurance that any of these patents would be upheld as valid if
litigated or that any patent applications will result in issued patents. While
the Company believes that its patents and applications have value, it also
believes that its competitive position depends primarily on the innovative
skills, technological expertise and management abilities of its employees.
Many of the Company's products are designed to include software or other
intellectual property licensed from third parties. From time to time, the
Company 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, the Company 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. In the event of any infringement, the Company 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 the Company's financial condition or its results of operations. However,
there can be no assurance in this regard.
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 four paragraphs of "Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations - Comparison of
1994 and 1995."
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Potential Fluctuations in Quarterly Results
The Company's operating results may be subject to quarterly fluctuations as a
result of a number of factors. These factors include the integration of people,
operations, and products from acquired businesses and technologies; increased
competition, which the company expects; the introductions and market acceptance
of new products, including high-speed switching and ATM technologies; variations
in sales channels, product costs, or mix of products sold; the timing of orders
and manufacturing lead times; and changes in general economic conditions, any of
which could have an adverse impact on operations and financial results. 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. Additionally, the dollar amount 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 revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in revenues because a proportionately
smaller amount of the Company's expenses varies with its revenues.
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 continue to
successfully introduce new products on a timely basis and to reduce costs of
existing products. In particular, in August 1992, the Company broadened its
product line by introducing its first network access product. Since that time,
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 merging router-based networks with
emerging technologies such as Asynchronous Transfer Mode 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 efforts and through joint developments with other companies
and through acquisitions. 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. 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 or 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
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material adverse effect on the Company's business and results of operations.
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 price of one or more components would
adversely affect the Company's operating results and could damage customer
relationships. For example, recent shortages in the supply of semiconductors has
resulted in price increases and has limited the Company's ability to obtain
price reductions with respect to such components. These developments could
result in lower gross margins. The Company expects that it will continue to be
dependent on single or limited source supplier relationships in the future.
Volatility of Stock Price
The Company's Common Stock has experienced substantial price volatility,
particularly as a result of variations between the Company's actual or
anticipated financial results and the published expectations of analysts and as
a result of announcements by the Company and its competitors. In addition, the
stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies in particular and that
have often been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's Common Stock.
EMPLOYEES
As of September 24, 1995, the Company employed 4086 persons, including 427 in
manufacturing, 1092 in domestic sales and marketing, 525 in customer service,
1016 in engineering, 405 in finance and administration, and 621 employees in
international locations. The Company also employs a number of temporary and
contract employees, and during fiscal 1995 the Company employed between 473 and
742 such people at any one time.
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 December
1996 and have approximately 120,000 square feet of office space. The Company's
main headquarters are situated on 46 acres of leased land in San Jose,
California. Eight buildings are located at this site, one of which is the
Company's manufacturing facility. The San Jose headquarters consist of
approximately 825,000 square feet of leased office space at the
11
12
present time. To meet its anticipated needs at its main headquarters, the
Company has leased an additional 36 acres of land at two nearby sites where it
will eventually lease facilities to be constructed on each site. Construction
has started at one of the sites on a series of office buildings which, when
completed, will have approximately 575,000 square feet. Occupancy is expected
to begin prior to the end of calendar 1996.
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 located. One building of approximately 80,000
square feet has been constructed and is currently occupied under a lease that
expires in July 1999. A 120,000-square-foot building at this location is
currently under construction and should be occupied before the end of the 1996
fiscal year. This site can accommodate one additional building.
The Company's ATM Business Unit occupies approximately 50,000 square feet of
leased office space in Billerica, Massachusetts.
The Company also leases various small offices throughout the U.S. and on a
worldwide basis. See Note 6 to the Consolidated Financial Statements for
additional information regarding the Company's obligations under leases.
Management believes that suitable additional space will be available to
accommodate expansion of the Company's operations on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
None.
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.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
POSITION
NAME AGE POSITION HELD SINCE
- ----------------------- --- ------------------------------------------------------- ----------
Larry R. Carter 52 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 46 President, Chief Executive Officer and Director 1995
(1)(4)(5) 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 that, he was with Wang Laboratories
for eight years, most recently as Senior Vice President
of U.S. Operations.
12
13
POSITION
NAME AGE POSITION HELD SINCE
- ----------------------- --- ------------------------------------------------------- ----------
Dr. Michael S. Frankel 49 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. James F. Gibbons 64 Director 1992
(2)(4)(5) Dr. Gibbons has been a member of the Board of Directors
since May 1992. He has been Dean of the Stanford
University School of Engineering since September 1984.
Dr. Gibbons also currently serves on the Board of
Directors of Lockheed Martin Corporation, Raychem
Corporation, Centigram Corporation, and El Paso Natural
Gas.
Edward R. Kozel 40 Vice President, Business Development, and Chief 1995
Technical Officer
Mr. Kozel joined the Company in March 1989 as Market
Development Manager. From 1992-1993 he was Director
of Field Operations/Business Development. In February
1993 he became Vice President of Business Development
and in May 1995 also became Chief Technical Officer.
Donald A. LeBeau 48 Senior Vice President, Worldwide Sales 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 Company, most
recently as Senior Vice President.
Frank J. Marshall 48 Vice President and General Manager, Core Business Unit 1995
Mr. Marshall joined the Company as Vice President of
Engineering in April 1992 and became Vice President and
General Manager of the Core Business Unit in May 1995.
Prior to that, he was at Convex Computer Corporation
for 10 years, most recently as Senior Vice President of
Engineering.
John P. Morgridge 62 Chairman of the Board of Directors 1995
(1)(5) 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.
Robert L. Puette 53 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, Inc. since January 1995. 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.
13
14
POSITION
NAME AGE POSITION HELD SINCE
- ----------------------- --- ------------------------------------------------------- ----------
Carl Redfield 48 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 38 Director 1995
Mr. Son has been a member of the Board of Directors
since July 1995. He has been the President and Chief
Executive Officer of SOFTBANK Corporation for more than
fifteen years.
Donald T. Valentine 63 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, a
venture capital firm that was an investor in the Company,
since 1974. Mr. Valentine currently serves as Chairman
of the Board of Directors of C-Cube Microsystems, Inc., a
semiconductor video compression company, and
serves on the Board of Directors of Sierra
Semiconductor, Inc., a communications semiconductor
company.
- -------
(1) Member of the Executive Committee
(2) Member of the Compensation/Stock Option Committee
(3) Member of the Audit Committee
(4) Member of the Nomination Committee
(5) Member of the Acquisition Committee
TRANSFER AGENT AND REGISTRAR INDEPENDENT ACCOUNTANTS
Bank of Boston Coopers & Lybrand L.L.P.
50 Royal Street Ten Almaden Boulevard
Canton, MA 92021 San Jose, CA 95113
LEGAL COUNSEL
Brobeck, Phleger & Harrison
2200 Geng Road
Palo Alto, CA 94303
14
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION
Price range of the Company's common stock that reflects the two-for-one splits
effective March 1993 and March 1994:
1995 1994 1993
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $ 30.00 $ 20.87 $ 29.37 $ 20.87 $ 14.78 $ 11.25
Second Quarter 36.62 30.12 35.37 24.75 23.12 14.62
Third Quarter 40.75 32.56 40.37 29.00 23.94 20.22
Fourth Quarter 58.62 39.37 32.50 19.06 28.12 20.19
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
4917 shareholders of record on October 2, 1995.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEARS ENDED JULY 30, 1995
(In thousands, except per-share amounts)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net sales $1,978,916 $ 1,242,975 $ 649,035 $ 339,623 $183,184
========== =========== =========== =========== ========
Net income $ 421,008 $ 314,867 $ 171,955 $ 84,386 $ 43,189
========== =========== =========== =========== ========
Net income per common share $ 1.52 $ 1.19 $ .67 $ .33 $ .17
========== =========== =========== =========== ========
Shares used in per-share
calculation 277,298 265,051 258,133 254,072 250,320
========== =========== =========== =========== ========
Total assets $1,757,279 $ 1,053,694 $ 595,213 $ 323,933 $154,145
========== =========== =========== =========== ========
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of 1994 and 1995:
Net sales grew from $1,243.0 million in 1994 to $1,978.9 million in 1995. The
59.2% 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 product family,
sales of new products including the Cisco 4500, as well as 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 product families.
Sales to international customers were 42.4% of net sales in 1995 compared with
41.9% in 1994. This moderate increase reflects the Company's continued expansion
into new geographic markets.
Gross margins increased from 66.8% of net sales in 1994 to 67.4% in 1995. Gross
margins have 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 from
2.0% of net sales in 1994 to 1.5% in 1995. This was partially offset by the
continued shift in revenue mix to the Company's lower-margin remote access
products. In the future, the Company expects its gross margins to decrease,
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 improve manufacturing efficiencies, but there can be no assurance
that it will be able to do so, or that any efficiencies attained will be
sufficient to maintain gross margins.
Research and development expenses increased $76.1 million from 1994 to 1995, an
increase from 7.1% of net sales in 1994 to 8.3% in 1995. The increase reflects
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. 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.
When appropriate, the Company may acquire other businesses or license technology
from other businesses as an alternative to internal research and development.
Sales and marketing expenses increased $148.9 million in 1995, an increase from
16.6% to 17.9% of net sales. 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 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 $29.0 million from 1994 to 1995 which
represents an increase from 3.8% of net sales in 1994 to 3.9% in 1995. The
increase in 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 2).
16
17
The amount expensed to purchased research and development arose from the
acquisition of the assets and assumption of the liabilities of LightStream (see
note 2).
Interest and other income, net, was $21.4 million in 1994 and $36.1 million in
1995. Interest income rose as a result of additional investment income on the
Company's increasing investment balances.
During March 1995, the Financial Accounting Standards Board issued Statement 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
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. Statement 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.
Future Growth Subject to Risks
The Company's growth is dependent upon market growth and its ability to enhance
its existing products and introduce new products on a timely basis. The Company
must also maintain its ability to manage any such growth effectively. In this
regard, in May 1995 the Company completed an internal reorganization, which it
believes will better enable it to address its markets. No assurance can be given
that this reorganization will achieve its objectives. Failure to manage growth
effectively could materially and adversely affect the Company's business and
operating results. The Company's growth and ability to meet customer demand also
depend, in part, on its ability to have stable supplies of parts from its
suppliers. Many of these parts, particularly semiconductor parts, may be in
short supply. An inability to obtain these parts could have a material and
adverse affect on the Company's growth.
The Company expects that in the future, its net sales will grow at a slower rate
than was experienced in previous periods and that on a quarter-to-quarter basis,
the Company's growth in net sales may be significantly lower than its historical
quarterly growth rate. The Company has been experiencing longer sales cycles for
its core products resulting from larger order sizes and believes that some
customers may be deferring purchases in order to complete detailed reviews of
their overall network plans. In addition, in response to customer demand, the
Company has, from time to time, reduced its product manufacturing lead times and
its backlog of orders. To the extent that backlog is reduced during any
particular period, it would result in more variability and less predictability
in the Company's quarter-to-quarter net sales and operating results.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and by
changes in channels of distribution or in the mix of products sold. In
particular, the Company broadened its product line by introducing its first
network access product in August 1992. Since that time, sales of these products,
which are generally lower-priced and carry lower gross margins than the
Company's core products, have increased more rapidly than the sales of the core
products.
The Company also expects that its operating margins may decrease as it continues
to hire additional personnel and to increase other operating
17
18
expenses to support its business. The results of operations for 1995 are not
necessarily indicative of results to be expected in future periods, and the
Company's operating results may be subject to quarterly fluctuations as a result
of a number of factors. These factors include the integration of people,
operations, and products from acquired businesses and technologies; increased
competition, which the Company expects; the introduction and market acceptance
of new products, including high-speed switching and ATM technologies; variations
in sales channels, product costs, or mix of products sold; the timing of orders
and manufacturing lead times; and changes in general economic conditions, any of
which could have an adverse impact on operations and financial results.
Comparison of 1993 and 1994:
Net sales grew from $649.0 million in 1993 to $1,243.0 million in 1994. The
91.5% increase in net sales during the year was primarily a result of increasing
unit sales of the Cisco 3000, the Cisco 4000, and the Cisco 7000, sales of new
products including the Cisco 2500 and the Cisco 7010, and growth in sales of
add-on boards, which provide increased functionality. Sales to international
customers were 41.9% of net sales in 1994, compared with 39.0% in 1993. This
increase reflects the Company's continued expansion into new geographic markets.
Gross margins decreased from 67.6% of net sales in 1993 to 66.8% in 1994. Gross
margins decreased as a result of the increasing unit sales of lower-margin
products, principally the Cisco 3000 and the Cisco 4000, and from the sales of
new products, primarily the Cisco 2500. Warranty expenses increased slightly
from 1.7% of net sales in 1993 to 2.0% in 1994, reflecting the new product
introductions. In the future, the Company expects its gross margins to decrease,
because the Company believes that the market for lower-margin remote access and
high-speed switching products will increase at a faster rate than the market for
the Company's higher-margin router products. Decreases could be partially
offset by various measures employed to lower the cost of raw materials
purchased.
Research and development expenses increased $44.5 million from 1993 to 1994,
primarily as a result of additions to engineering personnel, including Crescendo
Communications personnel, depreciation on new engineering equipment, material
costs for prototypes, and increased facilities expenses. These expenses
increased from 6.8% of net sales in 1993 to 7.1% in 1994. 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. When
appropriate, the Company may acquire other businesses or license technology from
other businesses as an alternative to internal research and development.
Sales and marketing expenses increased $96.1 million in 1994 as a result of
increased marketing and sales personnel and support costs, including
commissions, in both the U.S. and the Company's international subsidiaries.
Sales and marketing expenses decreased slightly as a percentage of net sales,
from 16.9% in 1993 to 16.6% in 1994. However, management expects sales
expenditures to increase as a percentage of net sales as the Company penetrates
new markets.
General and administrative expenses rose $26.5 million from 1993 to 1994, which
represents an increase from 3.2% of net sales in 1993 to 3.8% in 1994. The
increase in these expenses was due primarily to increased personnel costs, legal
and tax fees as the Company expands internationally, costs associated with the
Crescendo acquisition, and charitable contributions.
18
19
Interest and other income, net, was $11.6 million in 1993 and $21.4 million in
1994. Interest income rose as a result of additional investment income on the
Company's increasing investment balances.
International operating income as a percentage of net international sales
decreased from 4.8% in 1993 to 1.5% in 1994. International operating income
consists of net operating income of the Company's international subsidiaries,
which have various distribution arrangements with the Company. The decrease from
1993 to 1994, in percentage terms, can be attributed to a shifting mix of
intercompany arrangements and higher organizational expenditures associated with
expanding international operations through new and existing entities.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments, and investments increased by $289.1 million from
1994 to 1995, primarily as a result of cash generated by operations, cash
received in connection with the exercise of employee stock options, and proceeds
received from minority shareholders in the Company's Japanese subsidiary (see
note 7). The increase was partially offset by the cash paid to acquire the
assets and assume the liabilities of LightStream (see note 2) and repurchases of
the Company's common stock.
Accounts receivable rose 61.7% from 1994 to 1995, while sales grew by 59.2%.
Days sales outstanding in receivables were 56 days at the end of the year,
versus 59 days at July 31, 1994. Inventories increased 155.1% from 1994 to 1995
because of production planning associated with higher sales levels. In addition,
inventory levels were unusually low at July 31, 1994 because of the planned
delay in raw material receipts to accommodate the manufacturing operations move
to the Company's new headquarters. As a result, inventory turnover decreased
from 16.1 turns at July 31, 1994 to 13.0 turns at July 30, 1995.
Accounts payable increased 42.6% from 1994 to 1995 because of increases in
capital expenditures, operating expenses, and material purchases to support the
growth in net sales. The 82.8% increase in accrued payroll and related expenses
is primarily a result of personnel additions made during the year. Other accrued
liabilities increased by 61.2% from 1994 to 1995, primarily because of increases
in the warranty accrual and deferred service contracts.
At July 30, 1995, the Company had a line of credit totaling $100.0 million,
which expires April 1998. There have been no borrowings under this agreement.
The Company has entered into certain lease arrangements in San Jose, California,
and Research Triangle Park, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities. In connection with these transactions, the Company pledged
$173.1 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.
Under the Company's ongoing stock repurchase program, shares have been purchased
periodically and retired. During the year ended July 30, 1995, the Company
purchased and retired approximately 2.1 million shares for an aggregate price of
$69.9 million. As of July 30, 1995, the Company was authorized to repurchase up
to an additional 4.9 million shares of its common stock in the open market or
through privately negotiated transactions.
19
20
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements
through 1996.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 30, July 31,
1995 1994
---------- ----------
ASSETS
Current assets:
Cash and equivalents $ 204,846 $ 53,567
Short-term investments 234,681 129,219
Accounts receivable, net of allowance for doubtful
accounts of $13,305 in 1995 and $8,077 in 1994 384,242 237,570
Inventories 71,160 27,896
Deferred income taxes 75,297 46,739
Prepaid expenses and other current assets 25,743 12,686
---------- ----------
Total current assets 995,969 507,677
Investments 403,855 371,494
Restricted investments 173,073 85,900
Property and equipment, net 136,635 77,449
Other assets 47,747 11,174
---------- ----------
Total assets $1,757,279 $1,053,694
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,205 $ 31,708
Income taxes payable 71,583 42,958
Accrued payroll and related expenses 84,695 46,334
Other accrued liabilities 136,273 84,512
---------- ----------
Total current liabilities 337,756 205,512
Commitments (Note 6)
Minority interest 40,792
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding in 1995 and 1994
Common stock, no par value, 320,000 shares authorized:
272,246 shares issued and outstanding in 1995 and
257,697 shares in 1994 362,292 227,835
Retained earnings 959,657 620,135
Unrealized gain on marketable securities 50,933
Cumulative translation adjustments 5,849 212
---------- ----------
Total shareholders' equity 1,378,731 848,182
---------- ----------
Total liabilities and shareholders' equity $1,757,279 $1,053,694
========== ==========
The accompanying notes are an integral part of these financial statements.
21
22
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
Years Ended
---------------------------------------
July 30, July 31, July 25,
1995 1994 1993
---------- ---------- --------
Net sales $1,978,916 $1,242,975 $649,035
Cost of sales 644,152 412,824 210,528
---------- ---------- --------
Gross margin 1,334,764 830,151 438,507
Expenses:
Research and development 164,819 88,753 44,254
Sales and marketing 354,722 205,797 109,717
General and administrative 76,524 47,485 20,965
Purchased research and development 95,760
---------- ---------- --------
Total operating expenses 691,825 342,035 174,936
---------- ---------- --------
Operating income 642,939 488,116 263,571
Interest and other income, net 36,107 21,377 11,557
---------- ---------- --------
Income before provision for income taxes 679,046 509,493 275,128
Provision for income taxes 258,038 194,626 103,173
---------- ---------- --------
Net income $ 421,008 $ 314,867 $171,955
========== ========== ========
Net income per common share $ 1.52 $ 1.19 $ .67
========== ========== ========
Shares used in per-share calculation 277,298 265,051 258,133
========== ========== ========
The accompanying notes are an integral part of these financial statements.
22
23
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock
----------------------
Unrealized Total
Number gain on Cumulative Share-
of Retained marketable translation holders'
Shares Amount Earnings securities adjustments Equity
------- -------- -------- ---------- ----------- ----------
Balances, July 26, 1992 240,444 $ 98,940 $146,168 $ 502 $ 245,610
Issuance of common stock
under stock option and
purchase plans 6,972 18,621 18,621
Tax benefits related to
disqualifying
dispositions of stock
options 39,622 39,622
Amortization of deferred
compensation resulting
from stock options
issued 296 296
Net income 171,955 171,955
Translation adjustments (923) (923)
------- -------- -------- -------- ------ ----------
Balances, July 25, 1993 247,416 157,479 318,123 (421) 475,181
Issuance of common stock
under stock option and
purchase plans 6,885 23,407 23,407
Tax benefits related to
disqualifying
dispositions of stock
options 35,654 35,654
Pooling-of-interests with
Crescendo
Communications, Inc. 3,396 11,295 (12,855) (1,560)
Net income 314,867 314,867
Translation adjustments 633 633
------- -------- -------- -------- ------ ----------
Balances, July 31, 1994 257,697 227,835 620,135 212 848,182
Issuance of common stock
under stock option
and purchase plans 6,560 47,401 47,401
Tax benefits related to
disqualifying
dispositions of
stock options 55,756 55,756
Common stock repurchases (2,094) (2,073) (67,808) (69,881)
Pooling-of-interests with
Newport Systems
Solutions, Inc. 3,262 6,805 1,603 8,408
Pooling-of-interests with
Kalpana, Inc. 6,821 26,568 (15,281) 11,287
Unrealized gain on
marketable securities $ 50,933 50,933
Net income 421,008 421,008
Translation adjustments 5,637 5,637
------- -------- -------- -------- ------ ----------
Balances, July 30, 1995 272,246 $362,292 $959,657 $ 50,933 $5,849 $1,378,731
======= ======== ======== ======== ====== ==========
The accompanying notes are an integral part of these financial statements.
23
24
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
---------------------------------------
July 30, July 31, July 25,
1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
Net income $ 421,008 $ 314,867 $ 171,955
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 58,510 30,812 13,583
Provision for doubtful accounts 10,429 4,562 6,421
Provision for inventory allowances 42,482 14,608 3,900
Deferred income taxes (65,665) (30,715) (6,645)
Change in operating assets and liabilities:
Accounts receivable (154,324) (113,023) (74,272)
Inventories (85,662) (19,004) (18,258)
Prepaid expenses and other current
assets (13,040) (5,705) (2,005)
Accounts payable 12,186 6,964 8,482
Income taxes payable 84,381 60,816 42,310
Accrued payroll and related expenses 38,361 19,878 9,227
Other accrued liabilities 47,089 33,476 21,312
--------- --------- ---------
Total adjustments (25,253) 2,669 4,055
--------- --------- ---------
Net cash provided by operating
activities 395,755 317,536 176,010
Cash flows from investing activities:
Purchases of short-term investments (276,463) (135,186) (139,606)
Proceeds from sales of short-term investments 153,032 71,787 148,448
Maturities of short-term investments 89,147 46,753 71,753
Purchases of investments (277,239) (560,090) (280,563)
Proceeds from sales of investments 228,680 348,123 66,213
Purchases of restricted investments (160,396) (74,343) (70,800)
Proceeds from sales of restricted investments 55,619 52,341 31,900
Maturities of restricted investments 44,853
Acquisition of property and equipment (111,922) (59,589) (33,942)
Acquisition of business, net of cash acquired
and purchased research and development (17,920)
Other 4,428 (5,052) 181
--------- --------- ---------
Net cash used by investing activities (268,181) (315,256) (206,416)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 47,401 23,407 18,621
Common stock repurchases (69,881)
Proceeds from sale of subsidiary stock 40,548
Other 5,637 633 (923)
--------- --------- ---------
Net cash provided by financing
activities 23,705 24,040 17,698
--------- --------- ---------
Net increase (decrease) in cash and
equivalents 151,279 26,320 (12,708)
Cash and equivalents, beginning of period 53,567 27,247 39,955
--------- --------- ---------
Cash and equivalents, end of period $ 204,846 $ 53,567 $ 27,247
========= ========= =========
Non-cash investing and financing activities in fiscal year 1995:
Transfers of securities to restricted investments $27,249
Unrealized gain on marketable securities 82,689
The accompanying notes are an integral part of these financial statements.
24
25
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. The Company's fiscal year is the 52 or 53 weeks ending on the
last Sunday in July. The fiscal years ended July 30, 1995, July 31, 1994, and
July 25, 1993 comprised 52, 53, and 52 weeks, respectively.
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 all highly liquid investments
purchased with a maturity of less than three months to be cash equivalents.
Substantially all of its cash and equivalents are maintained with two major
financial institutions.
Short-Term Investments. The Company's short-term investments comprise
U.S., state, and municipal government obligations, and foreign and corporate
obligations. These investments are carried at market value and have maximum
maturities of one year. Prior to adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", in fiscal year 1995, the Company's short-term investments were
carried at cost, which approximated market value at July 31, 1994. Nearly all
short-term investments are held in the Company's name and maintained with one
large financial institution.
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 obligations, and corporate securities with
maturities of more than one year. These investments are carried at market value.
Prior to adoption of Statement No. 115 in fiscal year 1995, the Company's
investments were carried at cost, which approximated market value at July 31,
1994. Investments are held in the Company's name and maintained with one large
financial institution.
Restricted Investments. Restricted investments consist of U.S.
governmental obligations with maturities of more than one year. These
investments are carried at market value at July 30, 1995 and are restricted as
to withdrawal (see Note 6). Prior to adoption of Statement No. 115 in fiscal
year 1995, the Company's restricted investments were carried at cost, which
approximated market value at July 31, 1994. Restricted investments are held in
the Company's name and maintained with one large financial institution.
Revenue Recognition. The Company recognizes product revenue upon shipment
of product. Revenue from service obligations is deferred and recognized over the
lives of the contracts.
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.
25
26
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
Income Taxes. The Company accounts for income taxes using 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 currencies as their functional currencies. 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
the asset and liability positions of its international subsidiaries. Gains and
losses on these contracts are recognized in net income in the period in which
exchange rate changes occur.
Recent Accounting Pronouncements. During March 1995, the Financial
Accounting Standards Board issued Statement 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 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. Statement 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.
26
27
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
2. BUSINESS COMBINATIONS
In September 1993, the Company acquired Crescendo Communications, Inc., a
networking company that provides high-performance workgroup solutions. The
Company issued approximately 3400 shares of common stock for all the outstanding
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 of which the options remain outstanding to purchase approximately 280
shares of the Company's common stock.
On August 8, 1994, the Company acquired Newport Systems Solutions, Inc., a
privately held networking company providing software-based routers for remote
network sites. The Company issued approximately 3300 shares of common stock for
all the outstanding stock of Newport in a transaction also accounted for as a
pooling of interests. The Company also assumed options to purchase Newport stock
that remain outstanding as options to purchase approximately 190 shares of the
Company's common stock.
On December 6, 1994, the Company acquired Kalpana, Inc., a privately held
manufacturer of Ethernet switches. Under the terms of the agreement, the Company
issued approximately 6800 shares of common stock for all the outstanding stock
of Kalpana in a transaction also 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 500
shares of the Company's common stock.
The aggregated historical operations of Crescendo, Newport and Kalpana are not
material to the Company's consolidated operations and financial position.
Therefore, prior period statements have not been restated.
Effective January 11, 1995, the Company acquired substantially all of the assets
and assumed the liabilities of LightStream Corporation for $120,000 in cash and
related acquisition costs of approximately $500. LightStream was a developer of
enterprise-class Asynchronous Transfer Mode (ATM) switching technology.
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:
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
==========
27
28
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
The amount allocated to purchased research and development was determined
through known valuation techniques in the high-technology communications
industry. Amounts allocated to goodwill will be amortized on a straight-line
basis over periods ranging from two to five 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 in interest income due to cash
outlays associated with the transaction and the related income tax effects (in
thousands, except per-share amounts):
Twelve months ended
-----------------------------
July 30, July 31,
1995 1994
---------- ----------
(Unaudited)
Sales $1,987,310 $1,244,863
Net income $ 410,456 $ 299,676
Net income per share $ 1.48 $ 1.13
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.
28
29
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
3. BALANCE SHEET DETAIL
Inventories:
1995 1994
--------- ---------
Raw materials $ 33,555 $ 13,724
Work in process 16,913 8,649
Finished goods 9,373 2,090
Demonstration systems 11,319 3,433
--------- ---------
Total $ 71,160 $ 27,896
========= =========
Property and equipment, net:
Leasehold improvements $ 16,170 $ 11,154
Computer equipment and related software 126,331 71,281
Production and engineering equipment 49,695 25,067
Office equipment, furniture,
fixtures, and other 50,682 24,297
--------- ---------
242,878 131,799
Less accumulated depreciation and
amortization (106,243) (54,350)
--------- ---------
Total $ 136,635 $ 77,449
========= =========
Accrued payroll and related expenses:
Accrued wages, paid time off, and related
expenses $ 56,623 $ 32,020
Accrued bonuses 28,072 14,314
--------- ---------
Total $ 84,695 $ 46,334
========= =========
Other accrued liabilities:
Deferred revenue $ 55,984 $ 30,981
Accrued warranties 38,731 22,962
Other liabilities 41,558 30,569
--------- ---------
Total $ 136,273 $ 84,512
========= =========
29
30
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
4. INVESTMENTS
Effective August 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This statement requires the Company to classify debt and equity
securities into one of three categories: held-to-maturity, trading, or
available-for-sale. At July 30, 1995, substantially all of the Company's
investments were classified as available-for-sale, and 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 table summarizes the Company's securities at July 30, 1995:
Gross Gross
Amortized Unrealized Unrealized Market
Issue Cost Gains (Losses) Value
- ------------------------------- --------- ---------- ---------- --------
U.S. government notes and bonds $200,902 $ 665 $ (2,963) $198,604
State, municipal, and county
government notes and bonds 425,225 1,599 (4,995) 421,829
Foreign government notes and
bonds 38,841 433 39,274
Corporate notes and bonds 61,052 77 (242) 60,887
Corporate equity securities 2,900 88,115 91,015
-------- -------- --------- --------
$728,920 $ 90,889 $ (8,200) $811,609
======== ======== ========= ========
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.
5. 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 $100,000 on
an unsecured basis for cash borrowings and letters of credit. The commitments
made under this agreement expire on April 30, 1998. During the commitment
period, the Company is obligated to pay annual fees of approximately $150.
Outstanding borrowings under these arrangements bear interest at the London
Interbank Offered Rate plus .31%, 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.
6. COMMITMENTS
LEASES
The Company leases office space for its U.S. and international sales offices.
The Company also leases buildings at its headquarters in Santa Clara and San
Jose, California. The Santa Clara lease expires December 1996.
30
31
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
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.
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 $114.0
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
utilized to be determined by the Company. Rent obligations for the buildings
will commence on varying 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 $69.3
million at July 30, 1995).
As part of the above lease transactions, the Company restricted $173.1 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.
Future annual minimum lease payments under all noncancelable operating leases as
of July 30, 1995, are as follows:
1996 $18,887
1997 14,365
1998 8,901
1999 4,522
2000 2,028
Thereafter 1,468
-------
Total minimum lease payments $50,171
=======
31
32
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
Rent expense totaled $19,157, $12,399, and $7,243 for 1995, 1994, and 1993,
respectively.
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to reduce its exposure to
potentially adverse changes in foreign currency exchange rates. The contracts
hedge certain balance sheet exposures and intercompany balances against future
movements in foreign exchange rates. The Company does not hold these financial
instruments for trading purposes. Foreign exchange contracts outstanding,
primarily in European, Canadian, and Australian currencies, amounted to $44.5
million and $21.8 million at July 30, 1995 and July 31, 1994, respectively.
Gains and losses on the contracts are included in other income, which offset
foreign exchange gains or losses from revaluation of intercompany balances. The
maturity dates of the contracts outstanding at July 30, 1995 extended to
approximately one month.
The Company's forward exchange contracts contain an element of risk that the
other parties may be unable to meet the terms of the agreements. However, the
Company minimizes such risk exposure by limiting the other parties to major
financial institutions. In addition, the amount of agreements entered into with
any one party is also monitored. Management does not expect any significant
losses as a result of default by the other parties.
7. 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.
8. SHAREHOLDERS' EQUITY
The Company's common stock was split two-for-one on March 5, 1993 and March 4,
1994. 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 preferred stock.
32
33
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
9. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which
4800 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 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 1995,
1994, and 1993, 579, 387, and 344 shares were issued under the Purchase Plan,
respectively. At July 30, 1995, 2142 shares were available for issuance under
the Purchase Plan.
10. STOCK OPTION PLANS
The Company established a Stock Option Plan in 1987 under which it has reserved
a total of 91,640 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.
A summary of option activity follows:
Options Outstanding
--------------------------------------------------------------------
Options
Available Exercise
for Grant Options Prices Amount
---------------- ----------------- ------------------------------- ----------------
Balances, July 26, 1992 3,388 25,196 $ .01 $12.12 87,522
Options granted (3,234) 3,234 12.87 - 26.87 67,869
Options exercised (6,628) .01 - 12.12 (14,375)
Options canceled 376 (376) .01 - 26.87 (2,218)
Additional shares reserved 4,000
---------------- ----------------- -------------- -------------- -----------------
Balances, July 25, 1993 4,530 21,426 .01 - 26.87 138,798
Options granted (4,779) 4,779 20.12 - 37.00 113,641
Options exercised (6,498) .01 - 22.69 (14,836)
Options canceled 684 (684) .16 - 37.00 (9,762)
Additional shares reserved 4,000
---------------- ----------------- -------------- -------------- -----------------
Balances, July 31, 1994 4,435 19,023 .01 - 37.00 227,841
Options granted and assumed (15,265) 15,265 8.15 - 57.75 557,523
Options exercised (5,981) .01 - 37.00 (33,567)
Options canceled 1,067 (1,067) .16 - 43.00 (25,651)
Additional shares reserved 6,237
---------------- ----------------- -------------- -------------- -----------------
Balances, July 30, 1995 (3,526) 27,240 $ .01 - $57.75 $726,146
================ ================= ============== ============== =================
At July 30, 1995, approximately 9287 outstanding options were exercisable.
Options granted for approximately 4000 shares reflected in the 1995 fiscal year
are subject to shareholder approval of a 19,000 increase to the number of shares
made available for issuance under the plan.
33
34
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
The Company has, in connection with the acquisition of Crescendo, Newport, and
Kalpana, assumed the stock option plans of each acquired company. A total of
2,237 shares of the Company's common stock has been reserved for issuance under
those assumed plans.
11. EMPLOYEE BENEFIT PLAN
The Company has adopted a plan to provide retirement and incidental benefits for
its employees, known as the Cisco Systems, Inc. 401(k) Plan (the Plan). 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 amount as set by the Internal Revenue Service. The
Company matches employee contributions dollar for dollar, up to a maximum of
$1.5 per year. 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 $3,456 in 1995, $1,796 in 1994, and $1,015 in 1993. No discretionary
contributions were made in 1995, 1994, or 1993.
12. INCOME TAXES
The provision for income taxes consists of:
1995 1994 1993
-------------------- -------------------- --------------------
Federal:
Currently payable $ 260,874 $ 176,314 $ 85,125
Deferred (54,955) (24,084) (5,387)
-------------------- -------------------- --------------------
205,919 152,230 79,738
State:
Currently payable 56,108 44,718 22,444
Deferred (9,132) (4,909) (1,258)
-------------------- -------------------- --------------------
46,976 39,809 21,186
Foreign:
Currently payable 6,721 4,309 2,249
Deferred (1,578) (1,722)
-------------------- -------------------- --------------------
5,143 2,587 2,249
-------------------- -------------------- --------------------
$ 258,038 $ 194,626 $ 103,173
==================== ==================== ====================
The Company paid income taxes of $240.7 million, $164.3 million, and $63.3
million, in 1995, 1994, and 1993, respectively.
34
35
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes follow:
1995 1994 1993
------------------ ------------------ ------------------
Federal statutory rate 35.0% 35.0% 34.0%
Effect of:
State rates, net of federal benefits 4.4 4.7 4.9
Foreign Sales Corporation benefit (2.6) (2.5) (2.0)
Tax-exempt interest (0.8) (1.1) (1.0)
Tax credits (0.8) (0.6)
Other 2.8 2.7 1.6
------------------ ------------------ ------------------
38.0% 38.2% 37.5%
================== ================== ==================
The components of the deferred income tax provision are as follows:
1995 1994 1993
------------------ ------------------ ------------------
Purchased research and development $(36,310)
Inventory allowances and capitalization (12,145) $ (5,640) $ (2,677)
Warranty accruals 1,446 (3,764) (883)
Accrued state franchise tax (3,816) (3,395)
Allowance for doubtful accounts and returns 101 (2,783) (874)
Depreciation (1,486) (3,034) (88)
Deferred revenue (2,141) (857) (339)
Royalty accruals (499) (746) (689)
Other nondeductible accruals (10,815) (10,496) (1,095)
------------------ ------------------ ------------------
$(65,665) $(30,715) $ (6,645)
================== ================== ==================
The components of the deferred income tax assets follow:
1995 1994
----------------- ------------------
Purchased research and development $ 36,310
Unrealized gain on marketable securities (31,756)
Inventory allowances and capitalization 25,114 $ 13,273
Warranty accruals 7,429 9,651
Accrued state franchise tax 7,211 3,395
Allowance for doubtful accounts and returns 7,020 5,913
Depreciation 4,882 4,392
Deferred revenue 3,800 1,800
Royalty accruals 2,414 1,690
Other nondeductible accruals 24,278 12,679
----------------- ------------------
$ 86,702 $ 52,793
================= ==================
The noncurrent portion of the deferred income tax assets, which totaled
$11,405 at July 30, 1995, and $6,054 at July 31, 1994, is included in other
assets.
The Company's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit derived from the disqualifying dispositions
of incentive and nonqualified stock options. This benefit, which totaled $55,756
in 1995 and $35,654 in 1994, was credited directly to common stock.
35
36
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except exercise prices and percentages)
13. 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 1995, 1994, and 1993, no customers accounted for 10% or more of the Company's
net sales.
International sales, primarily in Europe, the Pacific region, and Canada, were
$838.3 million in 1995, $520.5 million in 1994, and $252.9 million in 1993.
Export sales, primarily to these regions, were $661.6 million in 1995, $376.2
million in 1994, and $166.3 million in 1993.
Summarized financial information by geographic region for 1995, 1994, and 1993
is as follows:
1995 1994 1993
------------------------ -------------------- -------------------
Net sales:
United States $1,948,098 $1,240,585 $ 629,747
International 176,715 144,277 86,600
Eliminations (145,897) (141,887) (67,312)
------------------------ -------------------- -------------------
Total $1,978,916 $1,242,975 $ 649,035
======================== ==================== ===================
Operating income:
United States $ 638,167 $ 489,659 $ 260,131
International 2,515 2,231 4,122
Eliminations 2,257 (3,774) (682)
------------------------ -------------------- -------------------
Total $ 642,939 $ 488,116 $ 263,571
======================== ==================== ===================
Identifiable assets:
United States $1,638,984 $1,009,243
International 141,280 61,027
Eliminations (22,985) (16,576)
------------------------ --------------------
Total $1,757,279 $1,053,694
======================== ====================
14. SUBSEQUENT EVENT
On August 10, 1995, the Company entered into an agreement to acquire Combinet
Inc., a privately held manufacturer of remote access networking products. The
agreement calls for the Company to issue approximately 2000 shares to acquire
all the equity of Combinet, including outstanding options and warrants. The
transaction is subject to several closing conditions and, if consummated, will
be accounted for as a pooling of interests.
36
37
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 30, 1995 and July 31, 1994 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended July 30, 1995. 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 30, 1995 and July 31, 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 30, 1995 in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
San Jose, California
August 15, 1995
37
38
SUPPLEMENTARY FINANCIAL DATA
1995 AND 1994 BY QUARTER
(Unaudited) (in thousands, except per-share amounts)
(In thousands, except per-share amounts)
July 30, Apr. 30, Jan. 29, Oct. 30, July 31, May 1, Jan. 30, Oct. 24,
1995 1995 1995 1994 1994 1994 1994 1993
--------------------------------------------------------------------------------------------------
Net Sales $621,184 $509,910 $454,897 $392,925 $361,159 $331,193 $302,166 $248,457
Gross margin 418,727 344,388 306,693 264,956 242,755 222,052 200,644 164,700
Operating income 222,076 190,876 78,316 151,671 138,718 131,587 119,924 97,887
Income before provision for
income taxes 231,812 201,661 86,266 159,307 144,929 136,479 125,359 102,726
Net income $143,723 $125,030 $ 53,485 $ 98,770 $ 89,566 $ 84,344 $ 77,472 $ 63,485
Net income
per common share $ .51 $ .45 $ .19 $ .37 $ .34 $ .32 $ .29 $ .24
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 2, 1995, 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 2, 1995, 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 2, 1995, 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 2, 1995, is
incorporated herein by reference.
38
39
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
No reports on Form 8-K were filed during the fourth quarter of fiscal
1995.
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40
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 17th day of October, 1995.
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.
Signature Title Date
President and Chief
Executive Officer
/s/ John T. Chambers (Principal Executive October 17, 1995
- ------------------------------------------- Officer and Director)
John T. Chambers
Vice President, Finance and
Administration, Chief
Financial Officer and
/s/ Larry R. Carter Secretary October 17, 1995
- ------------------------------------------- (Principal Financial and
Larry R. Carter Accounting Officer)
/s/ John Morgridge Chairman of the October 17, 1995
- ------------------------------------------- Board and Director
John P. Morgridge
Vice Chairman of the
- ------------------------------------------- Board and Director
Donald T. Valentine
/s/ Michael S. Frankel Director October 17, 1995
- -------------------------------------------
Dr. Michael S. Frankel
/s/ James F. Gibbons Director October 17, 1995
- -------------------------------------------
Dr. James F. Gibbons
/s/ Robert L. Puette Director October 17, 1995
- -------------------------------------------
Robert L. Puette
/s/ Masayoshi Son Director October 17, 1995
- -------------------------------------------
Masayoshi Son
40
41
CISCO SYSTEMS, INC.
-------------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEM 14(A)
Page
----
Consolidated balance sheets at July 30, 1995 and July 31, 1994 ................. 21
Consolidated statements of operations for each of the three years in the period
ended July 30, 1995........................................................... 22
Consolidated statements of shareholders' equity for each of the three years in
the period ended July 30, 1995................................................ 23
Consolidated statements of cash flows for each of the three years in the period
ended July 30, 1995........................................................... 24
Notes to consolidated financial statements...................................... 25
Report of Independent Accountants............................................... 37
Supplementary financial data:
Fiscal years 1995 and 1994 by quarter (unaudited)............................. 38
Report of Independent Accountants............................................... 42
Schedule:
II Valuation and qualifying accounts 43
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.
41
42
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Cisco Systems, Inc. and
its subsidiaries is included on page 37 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 41 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 15, 1995
42
43
CISCO SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance at
Beginning Charged to End of
of Period Expenses Deductions Period
-------------------- -------------------- -------------------- -------------------
Year ended July 25, 1993:
Allowance for doubtful accounts $ 2,905 $ 6,421 $ 4,412 $ 4,914
Allowance for excess and obsolete
inventory 3,590 3,900 2,965(1) 4,525
Year ended July 31, 1994:
Allowance for doubtful accounts 4,914 4,562 1,399 8,077
Allowance for excess and obsolete
inventory 4,525 14,608 2,027(1) 17,106
Year ended July 30, 1995:
Allowance for doubtful accounts 8,077 10,429 5,201 13,305
Allowance for excess and obsolete 17,106 42,482 21,779(1) 37,809
inventory
(1) Deductions principally relate to charges for standards changes.
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44
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
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 1995 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
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45
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
45