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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 APRIL 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition to
period from ____________ _____________
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction (I.R.S. Employer
of
incorporation or Identification Number)
organization)
170 W. 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 June 1, 1995, 271,326,925 shares of the Registrant's common stock were
outstanding.
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1995
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial information
Item 1. a) Consolidated balance sheets at
April 30, 1995 and July 31, 1994 3
b) Consolidated statements of operations
for the three and nine month periods ended
April 30, 1995 and May 1, 1994 4
c) Consolidated statements of cash flows
for the nine month periods ended
April 30, 1995 and May 1, 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 6 Exhibits and Reports on Form 8-K 12
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, July 31,
1995 1994
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 107,010 $ 53,567
Short-term investments 257,572 129,219
Accounts receivable, net of allowance for doubtful
accounts of $10,855 at April 30, 1995 and
$8,077 at July 31, 1994 355,504 237,570
Inventories 52,864 27,896
Deferred income taxes 60,428 46,739
Prepaid expenses and other current assets 18,308 12,686
---------- ----------
Total current assets 851,686 507,677
Investments 401,845 371,494
Restricted investments 114,650 85,900
Property and equipment, net 119,554 77,449
Other assets 51,489 11,174
---------- ----------
Total assets $1,539,224 $1,053,694
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,398 $ 31,708
Income taxes payable 50,197 42,958
Accrued payroll and related expenses 76,302 46,334
Other accrued liabilities 124,277 84,512
---------- ----------
Total current liabilities 317,174 205,512
Minority Interest 40,615
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at April 30, 1995
and July 31, 1994
Common stock, no par value, 320,000 shares authorized:
270,326 shares issued and outstanding at
April 30, 1995 and 257,697 at July 31, 1994 321,779 227,835
Retained earnings 818,425 620,135
Unrealized gains on marketable securities 32,903
Cumulative translation adjustments 8,328 212
---------- ----------
Total shareholders' equity 1,181,435 848,182
---------- ----------
Total liabilities and shareholders' equity $1,539,224 $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 Nine Months
Ended Ended
------------------------- ------------------------
April 30, May 1, April 30, May 1,
1995 1994 1995 1994
--------- ------- --------- -------
(Unaudited)
Net sales $509,910 $331,193 $1,357,732 $881,816
Cost of sales 165,522 109,141 441,695 294,420
-------- -------- ---------- --------
Gross margin 344,388 222,052 916,037 587,396
Operating expenses:
Research and development 43,992 23,311 112,158 62,916
Sales and marketing 88,868 55,358 235,644 141,417
General and administrative 20,652 11,796 51,612 33,665
Purchased research and development 95,760
-------- -------- ---------- --------
Total operating expenses 153,512 90,465 495,174 237,998
-------- -------- ---------- --------
Operating income 190,876 131,587 420,863 349,398
Interest and other income, net 10,785 4,892 26,371 15,166
-------- -------- ---------- --------
Income before provision for income taxes 201,661 136,479 447,234 364,564
Provision for income taxes 76,631 52,135 169,949 139,263
-------- -------- ---------- --------
Net income $125,030 $ 84,344 $ 277,285 $225,301
======== ======== ========== ========
Net income per share $ .45 $ .32 $ 1.01 $ .85
======== ======== ========== ========
Shares used in per-share calculation 278,872 266,126 275,719 265,020
======== ======== ========== ========
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)
Nine Months Ended
-------------------------
April 30, May 1,
1995 1994
--------- ------
(Unaudited)
Cash flows from operating activities:
Net income $ 277,285 $ 225,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,132 20,285
Deferred income taxes (54,094) (20,082)
Change in operating assets and liabilities:
Accounts receivable (115,157) (73,055)
Inventories (24,884) (9,611)
Prepaid expenses and other current assets (5,605) (7,184)
Accounts payable 33,379 4,399
Income taxes payable 40,927 48,953
Accrued payroll and related expenses 29,968 13,819
Other accrued liabilities 35,093 23,487
---------- ----------
Total adjustments (18,241) 1,011
---------- ----------
Net cash provided by operating activities 259,044 226,312
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (280,725) (66,256)
Proceeds from sales of short-term investments 115,512 37,234
Maturities of short-term investments 85,505 43,700
Purchases of investments (206,581) (358,208)
Proceeds from sales of investments 155,740 233,099
Purchases of restricted investments (74,343)
Proceeds from sales of restricted investments 52,341
Acquisition of property and equipment (80,498) (41,759)
Acquisition of business, net of cash acquired
and purchased research and development (17,920)
Decrease (increase) in other assets 13,136 (4,254)
---------- ----------
Net cash used by investing activities (215,831) (178,446)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 28,891 19,826
Repurchase of common stock (67,325)
Proceeds from sale of subsidiary stock 40,548
Other 8,116 232
---------- ----------
Net cash provided by financing activities 10,230 20,058
---------- ----------
Net increase in cash and equivalents 53,443 67,924
Cash and equivalents, beginning of period 53,567 27,247
---------- ----------
Cash and equivalents, end of period $ 107,010 $ 95,171
========== ==========
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 April 30, 1995, and the consolidated
statements of operations and cash flows for the periods ended April 30, 1995 and
May 1, 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 April 30, 1995 and for all periods
presented, have been made. The results of operations for the period ended April
30, 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 200,000 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
520,000 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 ("LightStream") for $120.0 million in
cash and related acquisition costs of approximately $.5 million. 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 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 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):
Nine months ended
----------------------------
April 30, May 1,
1995 1994
----------- -----------
(Unaudited)
Sales $ 1,366,126 $ 882,946
Net income $ 268,764 $ 215,126
Net income per share $ .97 $ .81
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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 May 1, 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: April 30, July 31,
1995 1994
---------- ----------
(Unaudited)
Raw materials $ 24,173 $ 13,724
Work in process 8,531 8,649
Finished goods 16,319 2,090
Demonstration systems 3,841 3,433
---------- ----------
$ 52,864 $ 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 April 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 April 30, 1995 (in
thousands):
Unrealized
Amortized Market Gains Carrying
Issue Cost Value (Losses) Value
- ---------------------------------- --------- --------- ---------- ----------
U.S. government notes and bonds $ 170,106 $ 166,075 $ (4,031) $ 166,075
State, municipal, and county
government notes and bonds 411,389 405,479 (5,910) 405,479
Foreign government notes and bonds 41,150 41,595 445 41,595
Corporate notes and bonds 59,554 59,520 (34) 59,520
Corporate equity securities 2,900 65,585 62,685 65,585
Municipal mutual funds 35,813 35,813 35,813
--------- --------- --------- ---------
$ 720,912 $ 774,067 53,155 $ 774,067
========= ========= ========= =========
Tax effect (20,252)
---------
Net unrealized gains $ 32,903
=========
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6. INCOME TAXES
The Company paid income taxes of $180.3 million for the nine months ended April
30, 1995 and $108.0 million for the nine months ended May 1, 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
$33.7 million in the first nine 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 $331.2 million in the third quarter of 1994 to $509.9
million in the third quarter of 1995. Net sales for the first nine months of
1994 were $881.8 million, compared to $1,357.7 million in the first nine months
of 1995. The 54.0% increases in net sales between the two three and nine 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. These increases were partially offset by decreasing
unit sales of the Company's older product lines, comprising of the AGS+, as well
as the Cisco 2000 and Cisco 3000 product families. Sales to international
customers increased from 43.4% of net sales in the third quarter of 1994 to
44.5% for the third quarter of 1995. International sales in the first nine
months of 1995 were 42.3% of net sales, increasing slightly from 41.8% for the
same period in 1994.
Gross margins were 67.5% for both the third quarter and first nine months of
1995. This compares to gross margins of 67.0% and 66.6% 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 $20.7 million from the third quarter
of 1994 to the third quarter of 1995, and increased $49.2 million between the
first nine months of 1994 and the first nine months of 1995. This represents
increases from 7.0% to 8.6% of net sales in the quarter to quarter period and
from 7.1% to 8.3% of net sales for the first nine months of each fiscal year.
The increases reflect the Company's ongoing research and development efforts,
including the further development of
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its CiscoFusion architecture; as well as acquiring 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 $33.5 million between the third quarters
of 1994 and 1995, and $94.2 million from the first nine months of 1994 to the
same period in 1995. This represents increases from 16.7% to 17.4% of net sales
in the quarter to quarter period and from 16.0% to 17.4% of net sales for the
first nine 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 $8.9 million between the third
quarters of 1994 and 1995, an increase from 3.6% to 4.1% of net sales. These
expenses increased $17.9 million from the first nine months of 1994 to the first
nine months of 1995. As a percentage of net sales, general and administrative
expenses remained constant at 3.8% for each nine month period. The dollar and
percentage increase in these expenses for the comparable three month periods was
due to 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 liabilities of LightStream (See note 2). The
dollar increase in these expenses for the comparable nine month periods can be
attributed to the same factors noted above.
The amount expensed to purchased research and development arose from the
acquisition of the assets and liabilities of LightStream (See note 2).
RISK FACTORS
Dependence on New Product Development; Rapid Technological and Market Change;
and Management of Growth
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, the Company recently 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 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,
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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
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 expenses to support its business. The results of operations for the
first nine 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 $212.1 million from
July 31, 1994 to April 30, 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 (See note 2).
Accounts receivable increased 49.6% from July 31, 1994 to April 30, 1995,
primarily as a result of higher sales levels. Days sales outstanding in
receivables were 63 days at the end of the third quarter, versus 59 days at
July 31, 1994. During the quarter, a greater proportion of the Company's sales
were made outside the U.S., where customer payment practices are often longer.
Inventories increased 89.5% for the first nine months of fiscal 1995. The
increase in inventory was necessary to
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support the higher sales volume. 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 15.8 turns at
July 31, 1994 to 14.6 turns at April 30, 1995.
Accounts payable increased 109.4% during the same period, due to increases in
capital expenditures, operating expenses, and material purchases to support the
growth in net sales. The 64.7% increase in accrued payroll and related
expenses during the period is primarily a result of personnel additions during
the nine month period. Other accrued liabilities increased by 47.1%, largely
due to increases in warranty accruals and deferred service contracts.
At April 30, 1995, the Company has a line of credit totaling $25 million, down
from $50 million at July 31, 1994. There were no borrowings under this
agreement.
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 $114.6 million of its investments as collateral for certain
obligations of the leases. The restricted investments balance will continue to
increase as the Company phases in operations at these lease sites.
Under the Company's ongoing stock repurchase program, shares have been
purchased periodically and retired. During the nine months ended April 30,
1995, the Company purchased and retired approximately 2.0 million shares for an
aggregate price of $67.5 million. As of April 30, 1995, the Company was
authorized to repurchase up to an additional 5.0 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.
PART II. OTHER INFORMATION
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
None.
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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: June 12, 1995 By /s/ Larry R. Carter
------------------------------------------
Larry R. Carter, Vice President
Finance, and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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