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FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition
period from __________________ to __________________
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to filing requirements for the past 90 days.
YES X NO
--- ---
As of March 1, 1995, 268,659,060 shares of the Registrant's common stock were
outstanding.
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 29, 1995
INDEX
Page
----
Facing sheet 1
Index 2
Part I. Financial information
Item 1. a) Consolidated balance sheets at
January 29, 1995 and July 31, 1994 3
b) Consolidated statements of operations
for the three and six month periods ended
January 29, 1995 and January 30, 1994 4
c) Consolidated statements of cash flows
for the six month periods ended
January 29, 1995 and January 30, 1994 5
d) Notes to consolidated financial
statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other information
Item 4 Submission of Matters to a Vote of
Security Holders 13
Item 6 Exhibits and Reports on Form 8-K 13
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 29, July 31,
1995 1994
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 94,241 $ 53,567
Short-term investments 164,799 129,219
Accounts receivable, net of allowance for doubtful
accounts of $11,346 at January 29, 1995 and
$8,077 at July 31, 1994 295,878 237,570
Inventories 54,953 27,896
Deferred income taxes 55,161 46,739
Prepaid expenses and other current assets 12,826 12,686
---------- ----------
Total current assets 677,858 507,677
Investments 409,452 371,494
Restricted investments 105,900 85,900
Property and equipment, net 109,064 77,449
Other assets 55,965 11,174
---------- ----------
Total assets $1,358,239 $1,053,694
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,129 $ 31,708
Income taxes payable 47,237 42,958
Accrued payroll and related expenses 55,638 46,334
Other accrued liabilities 109,319 84,512
---------- ----------
Total current liabilities 281,323 205,512
Minority Interest 40,597
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at January 29, 1995
and July 31, 1994
Common stock, no par value, 320,000 shares authorized:
269,093 shares issued and outstanding at
January 29, 1995 and 257,697 at July 31, 1994 285,820 227,835
Retained earnings 729,072 620,135
Unrealized gains on marketable securities 21,553
Cumulative translation adjustments (126) 212
---------- ----------
Total shareholders' equity 1,036,319 848,182
---------- ----------
Total liabilities and shareholders' equity $1,358,239 $1,053,694
========== ==========
The accompanying notes are an integral part of these financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share amounts)
Three Months Six Months
Ended Ended
------------------------ -----------------------
Jan. 29, Jan. 30, Jan. 29, Jan. 30,
1995 1994 1995 1994
-------- -------- -------- --------
(Unaudited)
Net sales $454,897 $302,166 $847,822 $550,623
Cost of sales 148,204 101,522 276,173 185,279
-------- -------- -------- --------
Gross margin 306,693 200,644 571,649 365,344
Operating expenses:
Research and development 38,118 21,050 68,166 39,605
Sales and marketing 78,454 47,776 146,776 86,059
General and administrative 16,045 11,894 30,960 21,869
Purchased research and development 95,760 95,760
-------- -------- -------- --------
Total operating expenses 228,377 80,720 341,662 147,533
-------- -------- -------- --------
Operating income 78,316 119,924 229,987 217,811
Interest and other income, net 7,950 5,435 15,586 10,274
-------- -------- -------- --------
Income before provision for income taxes 86,266 125,359 245,573 228,085
Provision for income taxes 32,781 47,887 93,318 87,128
-------- -------- -------- --------
Net income $53,485 $ 77,472 $152,255 $140,957
======== ======== ======== ========
Net income per share $.19 $ .29 $.56 $ .53
======== ======== ======== ========
Shares used in per share calculation 278,662 265,056 274,142 264,468
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
---------------------------------
January 29, January 30,
1995 1994
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 152,255 $ 140,957
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 25,733 14,077
Deferred income taxes (45,991) (19,011)
Change in operating assets and liabilities:
Accounts receivable (55,531) (45,169)
Inventories (26,973) (13,359)
Prepaid expenses and other current assets (123) (1,417)
Income taxes payable 16,803 24,692
Accounts payable 36,110 9,444
Accrued payroll and related expenses 9,304 5,840
Other accrued liabilities 20,076 12,965
---------- ----------
Total adjustments (20,592) (11,938)
---------- ----------
Net cash provided by operating activities 131,663 129,019
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (157,052) (36,268)
Proceeds from sales of short-term investments 55,738 24,623
Maturities of short-term investments 76,006 41,060
Purchases of investments (138,019) (272,917)
Proceeds from sales of investments 104,575 186,065
Purchases of restricted investments (69,581)
Proceeds from sales of restricted investments 52,341
Acquisition of property and equipment (55,484) (28,145)
Acquisition of business, net of cash acquired
and purchased research and development (17,920)
Decrease (increase) in other assets 18,509 (3,031)
---------- ----------
Net cash used by investing activities (113,647) (105,853)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 12,995 14,259
Repurchase of common stock (30,547)
Proceeds from sale of subsidiary stock 40,548
Other (338) (114)
---------- ----------
Net cash provided by financing activities 22,658 14,145
---------- ----------
Net increase in cash and equivalents 40,674 37,311
Cash and equivalents, beginning of period 53,567 27,247
---------- ----------
Cash and equivalents, end of period $ 94,241 $ 64,558
========== ==========
The accompanying notes are an integral part of these financial statements.
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the last Sunday in
July. Fiscal 1995 is a 52 week year while fiscal 1994 was a 53 week year. The
extra week in fiscal 1994 was included in the second quarter ended January 30,
1994.
Basis of Presentation
The consolidated balance sheet as of January 29, 1995, and the consolidated
statements of operations and cash flows for the periods ended January 29, 1995
and January 30, 1994, have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended July 31, 1994.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows at January 29, 1995 and for all periods
presented, have been made. The results of operations for the period ended
January 29, 1995 are not necessarily indicative of the operating results for
the full year.
The July 31, 1994 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
Computation of Net Income Per Share
Net income per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options.
2. BUSINESS COMBINATIONS
On August 8, 1994, the Company acquired Newport Systems Solutions, Inc.
("Newport"), a privately held networking company providing software-based
routers for remote network sites. The Company issued approximately 3.3 million
shares of common stock for all the outstanding stock of Newport in a
transaction which has been accounted for as a pooling of interests. The
Company also assumed options to purchase Newport stock which remain outstanding
as options to purchase approximately 350,000 shares of the Company's common
stock.
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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 6.8 million 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 which remain outstanding as options to purchase
approximately 620,000 shares of the Company's common stock.
The aggregated historical operations of 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 liabilities of LightStream Corporation for $120.0 million in cash
and related acquisition costs of approximately $.5 million. LightStream
Corporation 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 liabilities were included in the Company's financial statements as
of the effective date.
The purchase price was allocated to the assets and liabilities acquired based
on fair market values as follows (in thousands):
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
==========
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 Corporation had been acquired as of the beginning
of the periods presented, after including the impact of certain adjustments,
such as: goodwill amortization, 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):
Six months ended
--------------------------------
January 29, January 30,
1995 1994
----------- -----------
(Unaudited)
Sales $ 856,849 $ 551,131
Net income $ 144,939 $ 135,100
Net income per share $ .53 $ .51
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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 combined
operations.
3. SHAREHOLDERS' EQUITY
A two-for-one stock split of the Company's common stock was approved by the
Board of Directors on February 8, 1994 payable to shareholders of record on
March 4, 1994. Share and per-share data for the period ended January 30, 1994
in the consolidated financial statements have been adjusted to give effect to
the two-for-one stock split.
4. BALANCE SHEET DETAIL
(In thousands)
Inventories: January 29, July 31,
1995 1994
----------- --------
(Unaudited)
Raw materials $ 25,853 $ 13,724
Work in process 14,596 8,649
Finished goods 11,410 2,090
Demonstration systems 3,094 3,433
---------- ----------
$ 54,953 $ 27,896
========== ==========
5. 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 January 29, 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 January 30, 1995 (in
thousands):
Unrealized
Amortized Market Gains Carrying
Issue Cost Value (Losses) Value
----- --------- ------ ---------- --------
U.S. government notes and bonds $ 130,944 $ 123,589 $ (7,355) $ 123,589
State, municipal, and county
government notes and bonds 372,527 361,902 (10,625) 361,902
Foreign government notes and bonds 43,799 43,613 (186) 43,613
Corporate notes and bonds 50,186 50,045 (141) 50,045
Corporate equity securities 2,900 55,993 53,093 55,993
Municipal mutual funds 45,009 45,009 45,009
--------- --------- --------- ---------
645,365 680,151 34,786 680,151
========= ========= =========
Tax effect (13,233)
---------
Net unrealized gains 21,553
==========
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6. INCOME TAXES
The Company paid income taxes of $122.9 million for the six months ended
January 29, 1995 and $80.5 million for the six months ended January 30, 1994.
The Company's income taxes currently payable for both federal and state
purposes have been reduced by the tax benefit from stock option transactions.
This benefit totaled $12.5 million in the first six months of 1995 and was
credited directly to shareholders' equity.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net sales grew from $302.2 million in the second quarter of 1994 to $454.9
million in the second quarter of 1995. Net sales for the first half of 1994
were $550.6 million, compared to $847.8 million in the first half of 1995. The
50.5% increase in net sales between the two three month periods and the 54.0%
increase between the two six month periods were 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 to
initial market acceptance of the Company's high speed switching products.
Sales to international customers increased from 41.7% of net sales in the
second quarter of 1994 to 42.8% for the second quarter of 1995. International
sales in the first six months of 1995 were 41.0% of net sales, increasing
slightly from 40.8% for the same period in 1994.
Gross margins were 67.4% for both the second quarter and first six months of
1995. This compares to gross margins of 66.4% for each of the corresponding
periods in 1994. Gross margins have improved as a result of several factors,
including lower material costs achieved through volume discounts and certain
manufacturing overhead efficiencies. This was partially offset by the
continued shift in revenue mix to the Company's lower margin remote access
products.
Research and development expenses increased $17.1 million from the second
quarter of 1994 to the second quarter of 1995, and increased $28.6 million
between the first six months of 1994 and the first six months of 1995. This
represents increases from 7.0% to 8.4% of net sales in the quarter to quarter
period and from 7.2% to 8.0% of net sales for the first six months of each
fiscal year. The increases reflect the Company's ongoing research and
development efforts, including the further development of its CiscoFusion
architecture; as well as acquiring
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technologies, in order to bring a broad range of products to market in a timely
fashion. A significant portion of the increases were due to additional
personnel, primarily from internal hiring and to a lesser extent through
acquisitions, material costs for prototypes, and depreciation on new equipment.
All of the Company's research and development costs are expensed as incurred.
Sales and marketing expenses increased $30.7 million between the second
quarters of 1994 and 1995, and $60.7 million from the first six months of 1994
to the same period in 1995. This represents increases from 15.8% to 17.2% of
net sales in the quarter to quarter period and from 15.6% to 17.3% of net sales
for the first six months of each fiscal year. The increases in these expenses
resulted from an increase in the size of the Company's direct sales force and
their commissions, additional marketing programs to support the launch of new
products, the entry into new markets, both domestic and international, and
expanding distribution channels.
General and administrative expenses rose $4.2 million between the second
quarters of 1994 and 1995, a decrease from 3.9% to 3.5% of net sales. These
expenses increased $9.1 million from the first half of 1994 to the first half
of 1995, representing a decrease from 4.0% to 3.7% of net sales. The dollar
increase in these expenses was due primarily to increased personnel costs as
well as to the Company's ongoing efforts to implement a new information system
necessary to support the growth of the business. The percentage decline
reflects continued net sales growth and management controls over discretionary
spending.
The amount expensed to purchased research and development arose from the
acquisition of the assets and liabilities of LightStream Corporation (See note
2).
RISK FACTORS
Dependence on New Product Development; Rapid Technological and Market Change
The Company's growth is dependent upon market growth and the Company's ability
to enhance its existing products and introduce new products on a timely basis.
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 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 reduced its product manufacturing lead times and its backlog of
orders during recent periods, which may 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
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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 expenses to support its business. The results of
operations for the first six months of 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,
including 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.
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 which have
affected the market price of many technology companies in particular and which
have often been unrelated to the operating performance of these companies.
These broad market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of the Company's Common
Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments, and investments increased by $114.2 million from
July 31, 1994 to January 29, 1995, primarily as a result of cash generated by
operations 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 liabilities of LightStream Corporation (See
note 2).
Accounts receivable increased 24.5% from July 31, 1994 to January 29, 1995,
primarily as a result of higher sales levels. Days sales outstanding in
receivables remained unchanged at 59 days as of July 31, 1994 and January 29,
1995. Inventories increased 97.0% for the first six months of fiscal 1995.
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. In addition, inventory levels were
unusually high in relation to quarterly sales at January 29, 1995 because of
the planned acceleration of raw material purchases necessary to accomodate the
Company's conversion to its new information system. Such higher inventory
levels were necessary in order to mitigate any unforseen circumstances
associated with the conversion which might have impacted the manufacturing
process. As a result, inventory turnover decreased from 14.1 turns at July 31,
1994 to 13.3 turns at January 31, 1994.
Accounts payable increased 118.0% during the same period, due to increases in
capital expenditures, operating expenses, and material
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purchases to support the growth in net sales and to accommodate the Company's
conversion to its new information system. The 20.1% increase in accrued
payroll and related expenses during the period is primarily a result of
personnel additions during the six month period. Other accrued liabilities
increased by 29.4%, largely due to increases in warranty accruals and deferred
service contracts.
At January 29, 1995, the Company has lines of credit totaling $75 million, up
from $50 million at July 31, 1994, which expire beginning June 1995. There
have been no borrowings under these agreements.
The Company has entered into certain lease arrangements in San Jose,
California, and Raleigh, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities, respectively. In connection with these transactions, the
Company pledged $105.9 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 six months ended January 29,
1995, the Company purchased and retired approximately 1.0 million shares for an
aggregate price of $30.5 million. As of January 29, 1995, the Company was
authorized to repurchase up to an additional 6.0 million shares of its common
stock in open market or privately negotiated transactions.
The Company's management believes that its current cash and equivalents,
short-term investments, lines of credit, and cash generated from operations
will satisfy its expected working capital and capital expenditure requirements
through 1995.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on
November 15, 1994. The following actions were taken at this
meeting:
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
----- ----- -------- ---------
a. Election of Directors
Carol A. Bartz 212,003,857 - 860,283 -
John T. Chambers 211,912,508 - 951,632 -
Michael S. Frankel 212,041,173 - 822,967 -
James F. Gibbons 212,042,191 - 821,949 -
John P. Morgridge 211,930,047 - 934,093 -
Robert L. Puette 212,040,909 - 823,231 -
David H. Ring 211,883,844 - 980,296 -
Donald T. Valentine 211,923,122 - 941,018 -
b. Amendment to the 1987 stock option 155,296,497 50,480,887 1,424,454 5,662,302
plan.
c. Ratification of Coopers & Lybrand
as auditors. 211,867,139 459,903 537,098 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of net income per share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the
quarter ended January 29, 1995. The dates of the
filings were December 10, 1994 and January 26, 1995.
The items reported on were the acquisitions of
Kalpana, Inc. and LightStream Corporation,
respectively.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cisco Systems, Inc.
Date: March 13, 1995 By /s/Larry R. Carter
------------------------------
Larry R. Carter, Vice President
Finance and Administration, Chief
Financial Officer (Principal
Financial and Accounting Officer)
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