1
SELECTED FINANCIAL DATA
Five Years Ended July 26, 1997 (in thousands, except per-share amounts)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Net sales $6,440,171 $4,096,007 $2,232,652 $1,334,436 $ 714,533
Net income $1,048,679(1) $ 913,324 $ 456,489(2) $ 322,981 $ 176,201
Net income per common share $ 1.52(1) $ 1.37 $ 0.72(2) $ 0.54 $ 0.30
Shares used in per-share calculation 689,319 666,586 630,711 596,539 580,623
Total assets $5,451,984 $3,630,232 $1,991,949 $1,129,034 $ 656,394
- ------------------------------------------------------------------------------------------------------------
(1) Net income and net income per share include purchased research and
development expenses of $508.4 million and realized gains on the sale of a
minority stock investment of $152.7 million. Pro forma net income and net
income per share, excluding these nonrecurring items net of tax, would
have been $1,413,893 and $2.05, respectively.
(2) Net income and net income per share include purchased research and
development expenses of $95.8 million. Pro forma net income and net income
per share, excluding these nonrecurring items net of tax, would have been
$515,723 and $0.82, respectively.
21
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Other Risk Factors" section of the Annual
Report on Form 10-K, as well as the "Financial Risk Management" and "Future
Growth Subject to Risks" sections contained herein, which identify important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements.
COMPARISON OF 1997 AND 1996
Net sales grew to $6.4 billion in 1997 from $4.1 billion in 1996. The 57.2%
increase in net sales during the year was primarily the result of increasing
unit sales of LAN switching products such as the Catalyst(R) 5000, high-end
routers such as the Cisco 7500 product family, modular access routers such as
the Cisco 4700, and growth in the sales of add-on boards that provide increased
functionality. These increases were partially offset by decreasing unit sales of
the Company's older product lines, consisting of the Cisco 7000 and Cisco 4000.
The sales growth rate for lower-priced access and switching products targeted
toward small and medium-sized businesses has increased faster than that of the
Company's high-end core router products. These products typically carry lower
average selling prices, thereby contributing to the slowdown in the Company's
overall growth rate in 1997 versus 1996. Additionally, some of the Company's
more established product lines, such as the Cisco 2500 series, have experienced
decelerating growth rates. Sales to international customers decreased to 43.5%
of net sales in 1997 from 48.2% for 1996. The decrease reflects slower sales
growth in certain international markets, particularly Japan, France, and
Germany. Sales growth in these markets has been impacted by certain factors
including weaker economic conditions, delayed government spending, a stronger
dollar versus the local currencies, and slower adoption of networking
technologies.
Gross margins decreased slightly to 65.2% during 1997 from 65.6% in 1996.
This decrease is due to several factors, including the continued shift in
revenue mix to the Company's lower-margin products consisting primarily of
access and workgroup products for small to medium-sized businesses. These
products traditionally have fewer features and less software functionality than
the Company's service provider and enterprise offerings. The prices of component
parts have fluctuated in the recent past, and the Company expects that this
trend may continue. An increase in the price of component parts may have a
material adverse impact on gross margins. The Company expects that gross margins
will continue to decrease in the future, because it believes that the market for
lower-margin remote access and switching products for small to medium-sized
businesses will continue to increase at a faster rate than the market for the
Company's higher-margin router and high-performance switching products. The
Company is attempting to mitigate this trend through various means, such as
increasing the functionality of its products, value engineering, controlling
royalty costs, and improving manufacturing efficiencies. There can be no
assurance that any efforts made by the Company in these and other areas will
successfully offset decreasing margins.
Research and development expenses increased by $299 million in 1997
compared with 1996 expenditures, an increase to 10.8% of net sales from 9.7% in
1996. The increase reflects the Company's ongoing research and development
efforts in a wide variety of areas such as voice, video, and data integration,
Digital Subscriber Line (DSL) technologies, dial access, enterprise switching,
security, network management, and high-end routing technologies,
22
3
among others. A significant portion of the increase was due to the addition of
new personnel, as well as higher expenditures on prototypes and depreciation on
new equipment. The Company is primarily developing new technologies internally.
Accordingly, research and development expenses are expected to increase at the
same or a slightly greater rate than the sales growth rate. The Company also
continues to purchase technology in order to bring a broad range of products to
the market in a timely fashion. If the Company believes that it is unable to
enter a particular market in a timely manner, it may acquire other businesses or
license technology from other businesses as an alternative to internal research
and development. All of the Company's research and development costs are
expensed as incurred.
Sales and marketing expenses increased by $434 million in fiscal 1997 over
fiscal 1996, an increase to 18.0% of net sales in 1997 from 17.7% in fiscal
1996. The increase in these expenses resulted from an increase in the size of
the Company's direct sales force and related commissions, additional marketing
programs to support the launch of new products, the entry into new markets, and
expanding distribution channels.
General and administrative expenses rose by $45 million in fiscal 1997
over fiscal 1996, a decrease to 3.2% from 3.9% of net sales. The dollar increase
reflects increased personnel costs necessary to support the Company's business
infrastructure, including those associated with its new European Logistics
Center, as well as the further development of its information systems. The
percentage decrease reflects management's continued efforts to control
discretionary spending. It is management's intent to keep general and
administrative costs relatively constant as a percentage of net sales; however,
this goal is dependent upon the level of acquisition activity, among other
factors.
The amount expensed to purchased research and development in fiscal 1997
arose from the acquisitions of Telebit Corporation, Netsys Technologies,
Skystone Systems Corporation, Ardent Communications, and Global Internet
Software Group (see Note 3).
Interest and other income, net, was $109 million in 1997 and $64 million
in 1996. Interest income rose as a result of additional investment income on the
Company's increasing investment balances. The Company currently holds
approximately .3 million shares of common stock in a publicly traded company
with a cost basis significantly below its current market value. Beginning in
fiscal year 1997, the Company began selling its equity stake in this company.
Also in 1997, the Company established the Cisco Systems Foundation ("the
Foundation"). As part of this initiative, the Company donated a portion of this
investment, along with other equity securities, with a combined cost basis of
approximately $2 million and an approximate market value of $72 million at July
26, 1997, to the Foundation. The realized gains on the sale of this investment,
net of the amounts donated to the Foundation, were $153 million in fiscal 1997.
The Company expects to sell its remaining stake in the publicly traded company
in fiscal year 1998 and will realize additional gains, based on an established
hedge on this investment (see Note 5).
COMPARISON OF 1996 AND 1995
Net sales grew to $4.1 billion in 1996 from $2.2 billion in 1995. The 83.5%
increase in net sales during the year was primarily a result of increasing unit
sales of the Cisco 7500 series; continued strong sales of Access business unit
products, including the Cisco 4500 and Cisco 2500 series; and continued market
acceptance of the Company's Workgroup business unit products, particularly the
Catalyst 5000. In connection with the acquisition of StrataCom, Inc., the
Company formed the WAN business unit, which consists
23
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
of the IPX(R), BPX(R), IGX(TM), and AXIS product lines. Sales of these products
increased from 1995 levels primarily because of an increase in demand for
Asynchronous Transfer Mode (ATM) cell switching products by public carrier
customers. These increases were partially offset by decreasing unit sales of the
Company's older product lines, comprising mainly the Cisco 7000 series. Sales to
international customers were 48.2% of net sales in 1996 compared with 41.7% in
1995. This increase was attributed to continued expansion into new geographic
markets, as well as growth in existing European and Japanese markets. Sales
growth between 1996 and 1995 increased more substantially in Japan than in other
geographical markets.
Gross margins decreased to 65.6% of net sales in 1996 from 66.7% in 1995.
Gross margins were affected by several factors, including higher material costs
as a result of certain component shortages and the continued shift in revenue
mix to the Company's lower-margin products consisting primarily of products in
the Access and Workgroup business units.
Research and development expenses increased in 1996 by $189 million over
1995 expenditures. This represents an increase to 9.7% of net sales from 9.4% in
1995. The increase reflected the Company's ongoing research and development
efforts, including the further development of the CiscoFusion architecture, as
well as the acquisition of technologies to bring a broad range of products to
the market in a timely fashion. A significant portion of the increase was due to
the addition of new personnel, both from hiring and through acquisitions, as
well as higher expenditures on prototypes and depreciation on new equipment.
Sales and marketing expenses increased by $326 million in 1996 over 1995,
but decreased to 17.7% of net sales in 1996 from 17.9% of net sales in 1995. The
dollar increase in these expenses resulted mainly from an increase in the size
of the Company's direct sales force and its commissions. Other factors affecting
the dollar increase in expenses were additional marketing programs to support
the launch of new products; the entry into new markets as noted by the
significant percentage increase in business outside the U.S.; and expansion of
distribution channels, particularly the two-tier channels associated with the
Company's initial efforts to reach the mass market.
General and administrative expenses rose by $75 million in 1996 over 1995,
a slight increase to 3.9% from 3.8% of net sales in 1996 versus 1995. The dollar
increase reflects increased personnel costs necessary to support the Company's
business infrastructure, the amortization of goodwill related to the acquisition
of LightStream(R), and a one-time write-down of $5 million of LightStream
goodwill. There were also nonrecurring costs related to the acquisition of
StrataCom that totaled $15 million for fiscal 1996. Excluding the effect of
these nonrecurring costs, general and administrative expenses as a percentage of
net sales declined to 3.4%, which reflected management's continued controls over
discretionary spending.
The amount expensed to purchased research and development in fiscal year
1995 reflects the acquisition of LightStream (see Note 3).
Interest and other income, net, was $64 million in 1996 and $40 million in
1995. Interest income rose as a result of additional investment income on the
Company's increasing investment balances.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share"
(EPS), which simplifies existing computational guidelines, revises disclosure
requirements, and increases the comparability of earnings per share on an
international basis. Management has not yet evaluated the effects of this change
in computational guidelines on
24
5
the Company's EPS. SFAS No. 128 is effective for periods ending after December
15, 1997 and requires restatement of all prior period EPS data presented. The
Company will adopt SFAS No. 128 in its second quarter of fiscal year 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt SFAS No. 130 in
its fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management has not yet
evaluated the effects of this change on its reporting of segment information.
The Company will adopt SFAS No. 131 in its fiscal year 1999.
FINANCIAL RISK MANAGEMENT
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures
related to nondollar-denominated sales in Japan, Canada, and Australia and
nondollar-denominated operating expenses in Europe, Latin America, and Asia
where the Company sells primarily in U.S. dollars. The Company has recently
expanded its business activities in Europe. As a result, the Company expects to
see an increase in exposures related to nondollar-denominated sales in several
European currencies. At the present time, the Company hedges only those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and does not generally hedge anticipated foreign
currency cash flows. The hedging activity undertaken by the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities. The success of this activity depends upon forecasts of
transaction activity denominated in various currencies, primarily the Japanese
yen, Canadian dollar, Australian dollar, and certain European currencies. To the
extent that these forecasts are over- or understated during periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. These securities are generally classified as available
for sale, and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of shareholders'
equity. Part of this portfolio includes minority equity investments in several
publicly traded companies, the values of which are subject to market price
volatility. The Company also has certain real estate lease commitments with
payments tied to short-term interest rates. Given the current profile of
interest rate exposures, a sharp rise in interest rates could have a material
adverse impact on the fair value of the Company's investment portfolio while
increasing the costs associated with its lease commitments. The Company does not
currently hedge these interest rate exposures.
25
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
The following tables present the hypothetical changes in fair values in
the financial instruments held by the Company at July 26, 1997 that are
sensitive to changes in interest rates. These instruments are not leveraged and
are held for purposes other than trading. The modeling technique used measures
the change in fair values arising from selected potential changes in interest
rates. Market changes reflect immediate hypothetical parallel shifts in the
yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS over
six- and twelve-month time horizons. Beginning fair values represent the market
principal plus accrued interest, dividends, and certain interest rate-sensitive
securities considered cash and equivalents for financial reporting purposes at
July 26, 1997. Ending fair values are the market principal plus accrued
interest, dividends, and reinvestment income at six- and twelve-month time
horizons. This table estimates the fair value of the portfolio at a six-month
time horizon (in millions):
VALUATION OF SECURITIES NO CHANGE VALUATION OF SECURITIES
GIVEN AN INTEREST RATE IN INTEREST GIVEN AN INTEREST RATE
ISSUER DECREASE OF X BASIS POINTS RATES INCREASE OF X BASIS POINTS
- --------------------------------------------------------------------------------------------------------------
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
- --------------------------------------------------------------------------------------------------------------
U.S. government notes and bonds $ 635 $ 633 $ 631 $ 629 $ 626 $ 624 $ 622
State, municipal, and county
government notes and bonds 1,432 1,421 1,411 1,400 1,389 1,378 1,367
Foreign government notes and bonds 33 33 33 33 33 33 33
Corporate notes and bonds 723 723 722 719 722 722 721
- --------------------------------------------------------------------------------------------------------------
Total $2,823 $2,810 $2,797 $2,781 $2,770 $2,757 $2,743
==============================================================================================================
This table estimates the fair value of the portfolio at a twelve-month time
horizon (in millions):
VALUATION OF SECURITIES NO CHANGE VALUATION OF SECURITIES
GIVEN AN INTEREST RATE IN INTEREST GIVEN AN INTEREST RATE
ISSUER DECREASE OF X BASIS POINTS RATES INCREASE OF X BASIS POINTS
- --------------------------------------------------------------------------------------------------------------
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
- --------------------------------------------------------------------------------------------------------------
U.S. government notes and bonds $ 650 $ 649 $ 648 $ 647 $ 646 $ 645 $ 644
State, municipal, and county
government notes and bonds 1,454 1,446 1,438 1,430 1,422 1,413 1,404
Foreign government notes and bonds 34 34 34 34 34 34 34
Corporate notes and bonds 731 734 738 741 745 748 752
- --------------------------------------------------------------------------------------------------------------
Total $2,869 $2,863 $2,858 $2,852 $2,847 $2,840 $2,834
==============================================================================================================
A 50-BPS move in the Federal Funds Rate has occurred in 14 of the last 40
quarters; a 100-BPS move in the Federal Funds Rate has occurred in 4 of the last
40 quarters; and a 150-BPS move in the Federal Funds Rate has not occurred in
any of the last 40 quarters.
The following analysis presents the hypothetical change in fair values of
public equity investments held by the Company that are sensitive to changes in
the stock market. These equity securities are held for purposes other than
trading.
26
7
The modeling technique used measures the hypothetical change in fair
values arising from selected hypothetical changes in each stock's price. Stock
price fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus
50% were selected based on the probability of their occurrence.
This table estimates the fair value of the publicly traded corporate
equities at a twelve-month time horizon (in millions):
VALUATION OF SECURITY FAIR VALUE VALUATION OF SECURITY
GIVEN X% DECREASE IN AS OF GIVEN X% INCREASE IN
EACH STOCK'S PRICE JULY 26, 1997 EACH STOCK'S PRICE
- ----------------------------------------------------------------------------------------------
(50%) (35%) (15%) 15% 35% 50%
- ----------------------------------------------------------------------------------------------
Corporate Equities $48 $62 $81 $95 $110 $128 $143
==============================================================================================
During fiscal year 1997, the Company began to sell its minority equity position
in a publicly traded company. A hedge, in the form of a cashless collar, was
formed to protect unrealized gains on the investment. Because this investment is
hedged against upward and downward price movement, it has been excluded from the
above analysis (see Note 5).
Within the Company's public equity investment portfolio, a 15% movement in
the stock price has occurred in 75% of the quarters since the shares were
initially offered or in the last three years; a 35% movement in the stock price
has occurred in 45% of the quarters since the shares were initially offered or
in the last three years; and a 50% movement in the stock price has occurred in
15% of the quarters since the shares were initially offered or in the last three
years.
The Company also has interest rate risk associated with leases on its
facilities whose payments are tied to the London Interbank Offered rate (LIBOR),
and has evaluated the hypothetical change in lease obligations held at July 26,
1997 due to changes in the LIBOR rate. The modeling technique used for analysis
measured hypothetical changes in lease obligations arising from selected
hypothetical changes in the LIBOR rate. Market changes reflected immediate
hypothetical parallel shifts in the LIBOR curve of plus or minus 50 BPS, 100
BPS, and 150 BPS over a six-month and a twelve-month period. The results of this
analysis were not material to the Company's financial results.
The Company enters into forward foreign exchange contracts to offset the
impact of currency fluctuations on certain nonfunctional currency assets and
liabilities, primarily denominated in Japanese, Canadian, Australian, and
certain European currencies.
The Company generally enters into forward currency contracts that have
original maturities of one to three months, with none having a maturity greater
than one year in length. The total notional values of forward contracts
purchased and forward contracts sold were $211 million and $268 million,
respectively. The net unrealized gain on forward exchange contracts is $.6
million. Management does not expect gains or losses on these contracts to have a
material impact on the Company's financial results.
FUTURE GROWTH SUBJECT TO RISKS
The networking business is highly competitive, and as such, the Company's growth
is dependent upon market growth and its ability to enhance its existing products
and introduce new products on a timely basis. One of the ways the Company has
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including difficulties in assimilation of the operations, technologies, and
27
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
products of the acquired companies; the risk of diverting management's attention
from normal daily operations of the business; risks of entering markets in which
the Company has no or limited direct prior experience and where competitors in
such markets have stronger market positions; and the potential loss of key
employees of the acquired company. The Company must also maintain its ability to
manage any such growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions made by the Company could adversely affect
the Company's business and operating results.
The markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions, and evolving methods of building and operating networks. There
can be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
or that products and technologies developed by others will not render the
Company's products or technologies obsolete or noncompetitive.
The Company expects that in the future, its net sales may grow at a slower
rate than was experienced in previous periods, and that on a quarter-to-quarter
basis, the Company's growth in net sales may be significantly lower than its
historical quarterly growth rate. In the Company's most recent quarters, the
sequential sales growth slowed from prior levels, and a disproportionate share
of the sales occurred in the last month of the quarter. As a consequence,
operating results for a particular quarter are extremely difficult to predict.
The Company's ability to meet financial expectations could be hampered if the
nonlinear sales pattern continues in future periods. In addition, in response to
customer demand, the Company has attempted to reduce its product manufacturing
lead times, which may result in corresponding reductions in order backlog. A
decline in backlog levels could result in more variability and less
predictability in the Company's quarter-to-quarter net sales and operating
results going forward. On the other hand, for certain products, lead times are
longer than the Company's goal. If the Company cannot reduce manufacturing lead
times for such products, the Company's customers may cancel orders or not place
further orders if shorter lead times are available from other manufacturers,
thus creating additional variability.
Many computer systems were not designed to handle any dates beyond the
year 1999, and therefore computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is concerned
that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
may result in spending being diverted from networking solutions over the next
three years. Additionally, the Company will have to devote resources to
providing the year 2000 solution for its own products. The year 2000 issue could
lower demand for the Company's products while increasing the Company's costs.
These combining factors could have a material adverse impact on the Company's
financial results.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. For example, the
Company believes that gross margins may continue to decline over time, because
the sales of lower-margin access and switching products targeted toward small to
medium-sized customers have continued to grow at a faster rate than the
Company's higher-margin router and high-performance switching products targeted
toward enterprise and service provider customers. The Company's gross margins
may also be impacted by geographic mix, as well as the mix of configurations
within each product group. The Company continues to expand into third-party or
indirect distribution
28
9
channels, which generally results in lower gross margins. In addition,
increasing third-party and indirect distribution channels generally results in
greater difficulty in forecasting the mix of the Company's products, and to a
certain degree, the timing of its orders.
The Company's growth and ability to meet customer demands also depend in
part on its ability to obtain timely deliveries of parts from its suppliers. The
Company has experienced component shortages in the past that have adversely
affected its operations. Although the Company works closely with its suppliers
to avoid these types of shortages, there can be no assurance that the Company
will not encounter these problems in the future.
The Company also expects that its operating margins may decrease as it
continues to hire additional personnel and increases other operating expenses to
support its business. The Company plans its operating expense levels based
primarily on forecasted revenue levels. Because these expenses are relatively
fixed in the short term, a shortfall in revenue could lead to operating results
being below expectations. The results of operations for 1997 are not necessarily
indicative of results to be expected in future periods, and the Company's
operating results may be subject to quarterly fluctuations as a result of a
number of factors. These factors include the integration of people, operations,
and products from acquired businesses and technologies; increased competition in
the networking industry; the overall trend toward industry consolidation; the
introduction and market acceptance of new technologies, including Gigabit Switch
Routing and Tag Switching, currently known as multiprotocol label switching
(MPLS); variations in sales channels, product costs, or mix of products sold;
the timing of orders and manufacturing lead times; and changes in general
economic conditions, any of which could have a material adverse impact on
operations and financial results.
The Company's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in the
Silicon Valley area of Northern California, a region known for seismic activity.
Additionally, one of the Company's manufacturing facilities is located near a
river that has experienced flooding in the past. A significant natural disaster,
such as an earthquake or a flood, could have a material adverse impact on the
Company's financial results.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents, short-term investments, and investments were $2.5 billion
at July 26, 1997, an increase of $672 million from 1996. The increase is
primarily a result of cash generated by operations, and to a lesser extent,
through financing activities, mainly the exercise of employee stock options.
These cash flows were partially offset by cash outflows from operating
activities including tax payments of approximately $659 million; cash flows from
investing activities including capital expenditures of approximately $330
million; and cash outflows from financing activities, particularly the Company's
stock repurchase of $323 million.
Accounts receivable increased 87.9% during 1997, while sales grew by
57.2%. Days sales outstanding in receivables increased to 60 days as of July 26,
1997 from 44 days at July 28, 1996. Inventories decreased 15.4% during 1997.
Inventory management remains an area of focus as the Company balances the need
to maintain strategic inventory levels to ensure competitive lead times versus
the risk of inventory obsolescence because of rapidly changing technology and
customer requirements.
Accounts payable increased by 34.8% during 1997 because of increases in
operating expenses and material purchases to support the growth in net sales.
Other accrued liabilities increased by 57.0%, primarily due to higher deferred
revenue on service contracts.
29
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
At July 26, 1997, the Company had a line of credit totaling $500 million,
which expires in July 2002. There have been no borrowings under this agreement
(see Note 6).
The Company has entered into certain lease arrangements in San Jose,
California, and Research Triangle Park, North Carolina, where it has established
its headquarters operations and certain research and development and customer
support activities, respectively. In connection with these transactions, the
Company restricted $363 million of its investments as collateral for certain
obligations of the leases. The Company anticipates that it will occupy more
leased property in the future that will require similar restricted securities;
however, the Company does not expect the impact of this activity to be material
to liquidity.
During fiscal 1997, the Company's Board of Directors authorized a stock
repurchase program under which 5 million shares of the Company's stock could be
reacquired. All 5 million shares were repurchased at an aggregate purchase price
of approximately $323 million and subsequently reissued in connection with the
Company's stock plans. However, the Company's ability to repurchase shares has
been restricted and is expected to continue to be restricted from time to time
due to business combinations and limitations under pooling of interests
accounting.
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements
through fiscal 1998.
30
11
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Years Ended July 26, 1997 July 28, 1996 July 30, 1995
- --------------------------------------------------------------------------------------
NET SALES $6,440,171 $4,096,007 $2,232,652
Cost of sales 2,241,378 1,409,862 742,860
- --------------------------------------------------------------------------------------
Gross margin 4,198,793 2,686,145 1,489,792
- --------------------------------------------------------------------------------------
Expenses:
Research and development 698,172 399,291 210,815
Sales and marketing 1,160,269 726,278 399,983
General and administrative 204,661 159,770 85,271
Purchased research and development 508,397 95,760
- --------------------------------------------------------------------------------------
Total operating expenses 2,571,499 1,285,339 791,829
- --------------------------------------------------------------------------------------
OPERATING INCOME 1,627,294 1,400,806 697,963
Realized gains on sale of investment 152,689
Interest and other income, net 108,889 64,019 40,014
- --------------------------------------------------------------------------------------
Income before provision for income taxes 1,888,872 1,464,825 737,977
Provision for income taxes 840,193 551,501 281,488
======================================================================================
NET INCOME $1,048,679 $ 913,324 $ 456,489
======================================================================================
NET INCOME PER COMMON SHARE $ 1.52 $ 1.37 $ 0.72
======================================================================================
Shares used in per-share calculation 689,319 666,586 630,711
======================================================================================
See notes to consolidated financial statements.
31
12
CONSOLIDATED BALANCE SHEETS
(in thousands)
July 26, 1997 July 28, 1996
- --------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 269,608 $ 279,695
Short-term investments 1,005,977 758,489
Accounts receivable, net of allowance for doubtful
accounts of $22,340 in 1997 and $21,074 in 1996 1,170,401 622,859
Inventories, net 254,677 301,188
Deferred income taxes 312,132 101,827
Prepaid expenses and other current assets 88,471 95,582
- --------------------------------------------------------------------------------------------
Total current assets 3,101,266 2,159,640
Investments 1,267,174 832,114
Restricted investments 363,216 228,644
Property and equipment, net 466,352 331,315
Other assets 253,976 78,519
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,451,984 $ 3,630,232
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 207,178 $ 153,683
Income taxes payable 256,224 169,894
Accrued payroll and related expenses 263,269 195,197
Other accrued liabilities 393,438 250,579
- --------------------------------------------------------------------------------------------
Total current liabilities 1,120,109 769,353
Commitments and contingencies (Note 7)
Minority interest 42,253 41,257
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized;
none issued or outstanding in 1997 and 1996
Common stock, no par value, 1,200,000 shares authorized;
issued and outstanding: 670,779 shares in 1997
and 649,284 shares in 1996 1,763,200 888,067
Retained earnings 2,487,058 1,777,369
Unrealized gain on investments 49,628 158,848
Cumulative translation adjustments (10,264) (4,662)
- --------------------------------------------------------------------------------------------
Total shareholders' equity 4,289,622 2,819,622
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,451,984 $ 3,630,232
============================================================================================
See notes to consolidated financial statements.
32
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED JULY 26, 1997 JULY 28, 1996 JULY 30, 1995
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,048,679 $ 913,324 $ 456,489
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 212,200 132,594 74,961
Provision for doubtful accounts 13,318 18,548 15,213
Provision for inventory allowances 123,431 53,025 55,783
Deferred income taxes (185,944) (74,292) (74,856)
Tax benefits from employee stock plans 274,341 198,468 59,348
Adjustment to conform StrataCom fiscal year (11,020)
Purchased research and development from acquisitions 273,532
Change in operating assets and liabilities:
Accounts receivable (558,664) (219,628) (181,083)
Inventories (74,374) (272,408) (104,484)
Prepaid expenses and other current assets 7,332 (67,154) (16,725)
Accounts payable 52,225 93,773 22,605
Income taxes payable 86,230 97,924 27,976
Accrued payroll and related expenses 66,375 101,221 43,485
Other accrued liabilities 114,462 87,331 64,121
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,442,123 1,062,726 442,833
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (1,430,556) (786,197) (341,578)
Proceeds from sales and maturities
of short-term investments 1,276,379 641,974 295,234
Purchases of investments (1,761,952) (809,098) (289,569)
Proceeds from sales and maturities of investments 1,052,363 219,178 228,680
Purchases of restricted investments (351,168) (164,624) (160,396)
Proceeds from sales and maturities of
restricted investments 218,948 115,429 100,472
Acquisition of property and equipment (330,297) (282,840) (151,828)
Acquisition of businesses, net of cash acquired
and purchased research and development (18,642) (17,920)
Other (59,083) 8,337 5,273
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,404,008) (1,057,841) (331,632)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 280,212 116,554 135,348
Common stock repurchases (322,812) (115,621) (69,881)
Proceeds from sale of subsidiary stock 40,548
Other (5,602) (10,511) 6,007
- ----------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (48,202) (9,578) 112,022
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (10,087) (4,693) 223,223
Cash and equivalents, beginning of period 279,695 284,388 61,165
- ----------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 269,608 $ 279,695 $ 284,388
================================================================================================================
Non-cash investing and financing activities are as follows:
Transfers of securities to restricted investments $ -- $ 3,586 $ 27,249
================================================================================================================
See notes to consolidated financial statements.
33
14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
COMMON STOCK
------------------------- UNREALIZED CUMULATIVE TOTAL
NUMBER RETAINED GAIN ON TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT EARNINGS INVESTMENTS ADJUSTMENTS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 31, 1994 578,565 $ 282,678 $621,802 $(158) $904,322
Issuance of common stock
under stock option and
purchase plans 15,733 53,660 53,660
Issuance of common stock
in conjunction with
secondary offering by
StrataCom 6,900 81,688 81,688
Tax benefits from
employee stock plans 59,348 59,348
Common stock repurchases (4,188) (2,073) (67,808) (69,881)
Pooling of interests
acquisitions 20,166 33,373 (13,678) 19,695
Change in unrealized $50,948 50,948
gains on investments
Net income 456,489 456,489
Translation adjustments 6,007 6,007
- ------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 30, 1995 617,176 508,674 996,805 50,948 5,849 1,562,276
Issuance of common stock
under stock option and
purchase plans 19,072 116,554 116,554
Tax benefits from
employee stock plans 198,468 198,468
Common stock repurchases (3,060) (3,876) (111,745) (115,621)
Acquisitions of businesses 16,096 68,247 (21,015) 47,232
Change in unrealized
gains on investments 107,900 107,900
Net income 913,324 913,324
Translation adjustments (10,511) (10,511)
- -----------------------------------------------------------------------------------------------------------------------
BALANCES JULY 28, 1996 649,284 888,067 1,777,369 158,848 (4,662) 2,819,622
See notes to consolidated financial statements.
34
15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
COMMON STOCK
------------------------- UNREALIZED CUMULATIVE TOTAL
NUMBER RETAINED GAIN ON TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT EARNINGS INVESTMENTS ADJUSTMENTS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES JULY 28, 1996 649,284 888,067 1,777,369 158,848 (4,662) 2,819,622
Issuance of common stock
under stock option and
purchase plans 18,841 280,212 280,212
Tax benefits from
employee stock plans 274,341 274,341
Common stock repurchases (5,000) (9,590) (313,222) (322,812)
Pooling of interests
acquisitions 3,814 6,504 (14,748) (8,244)
Purchase acquisitions 3,840 323,666 323,666
Change in unrealized
gains on investments (109,220) (109,220)
Adjustment to conform
StrataCom fiscal year (11,020) (11,020)
Net income 1,048,679 1,048,679
Translation adjustments (5,602) (5,602)
- -----------------------------------------------------------------------------------------------------------------------
BALANCES JULY 26, 1997 670,779 $1,763,200 $2,487,058 $49,628 $(10,264) $4,289,622
=======================================================================================================================
See notes to consolidated financial statements.
35
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. (the "Company") provides networking solutions that connect
computing devices and computer networks, allowing people to access or transfer
information without regard to differences in time, place, or type of computer
system. The Company sells its products in approximately 90 countries through a
combination of direct sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR The Company's fiscal year is the 52 or 53 weeks ending on the last
Saturday in July. The fiscal years ended July 26, 1997, July 28, 1996, and July
30, 1995 all comprised 52-week years. Prior to fiscal year 1997, the Company's
fiscal year was the 52- or 53-week period ending on the last Sunday in July.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Cisco Systems, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
CASH AND EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original or remaining maturity of less than three
months at the date of purchase to be cash equivalents. Substantially all of its
cash and equivalents are custodied with three major financial institutions.
SHORT-TERM INVESTMENTS The Company's short-term investments comprise U.S.,
state, and municipal government obligations, and foreign and corporate
securities with maximum maturities of one year. These investments are carried at
fair value. Nearly all short-term investments are held in the Company's name and
custodied with two major financial institutions.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on a first-in,
first-out basis.
INVESTMENTS Investments consist of U.S., state, and municipal government
obligations, and foreign and corporate securities with maturities of more than
one year. These investments are carried at fair value. Nearly all investments
are held in the Company's name and custodied with two major financial
institutions.
RESTRICTED INVESTMENTS Restricted investments consist of U.S. governmental
obligations with maturities of more than one year. These investments are carried
at fair value and are restricted as to withdrawal (see Note 7). Restricted
investments are held in the Company's name and custodied with two major
financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's
financial instruments including cash and equivalents, accrued payroll, and other
accrued liabilities approximate fair value because of their short maturities.
The fair values of investments are determined using quoted market prices for
those securities or similar financial instruments (see Note 5 on investments).
CONCENTRATIONS Cash and equivalents are, for the most part, maintained with
several major financial institutions in the United States. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally
these deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers.
The Company receives certain of its custom semiconductor chips for some of
its products from sole suppliers. Additionally, the Company relies on a limited
number of hardware manufacturers. The inability of any supplier or manufacturer
to fulfill supply requirements of the Company could impact future results. The
Company continually monitors exposures in this regard.
REVENUE RECOGNITION The Company generally recognizes product revenue upon
shipment of product. Revenue from service obligations is deferred and recognized
over the lives of the contracts. The Company accrues for warranty costs, sales
returns, and other allowances at the time of shipment based on its experience.
36
17
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. Goodwill and other
intangible assets are included in other assets and are carried at cost less
accumulated amortization, which is being provided on a straight-line basis over
the economic lives of the respective assets, generally three to five years.
INCOME TAXES Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
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 Substantially all of the Company's international
subsidiaries use their local currency as their functional currency. For those
subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet date
and income and expense accounts at average exchange rates during the year.
Resulting translation adjustments are recorded directly to a separate component
of shareholders' equity. Where the U.S. dollar is the functional currency,
translation adjustments are recorded in income.
DERIVATIVES The Company enters into forward exchange contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward contracts are designated as and effective
as a hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles.
Gains and losses on the contracts are included in other income and offset
foreign exchange gains or losses from the revaluation of intercompany balances
or other current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity. Fair values of exchange contracts
are determined using published rates. If a derivative contract terminates prior
to maturity, the investment is shown at its fair value with the resulting
gain/(loss) reflected in operating results.
MINORITY INTEREST Minority interest represents the minority stockholders'
proportionate share of the equity of Nihon Cisco Systems, K.K. At July 26, 1997,
the Company maintained all issued and outstanding common stock, 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.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Estimates are used for, but not limited to, the accounting for doubtful
accounts, depreciation and amortization, sales returns, warranty costs, taxes,
and contingencies. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 128, "Earnings per Share" (EPS), which simplifies existing computational
guidelines, revises disclosure requirements, and increases the comparability of
earnings per share on an international basis. Management has not yet evaluated
the effects of this change in computational guidelines on the Company's EPS.
SFAS No. 128 is effective for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. The Company will
adopt SFAS No. 128 in its second quarter of fiscal year 1998.
37
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt SFAS No. 130 in
its fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management has not yet
evaluated the effects of this change on its reporting of segment information.
The Company will adopt SFAS No. 131 in its fiscal year 1999.
3. BUSINESS COMBINATIONS
Pooling of Interests Combinations
On July 9, 1996, the Company acquired StrataCom, Inc. ("StrataCom"). Under the
terms of the agreement, one share of the Company's common stock was exchanged
for each outstanding share of StrataCom. Approximately 76.4 million shares of
common stock were issued to acquire StrataCom.
The Company also assumed remaining outstanding StrataCom stock options
that were converted to options to purchase approximately 11.5 million shares of
the Company's common stock. The transaction was accounted for as a pooling of
interests in fiscal year 1996; therefore, all prior periods presented were
restated.
Prior to the merger, StrataCom used a calendar year end. Restated
financial statements of the Company combine the July 28, 1996, and July 30, 1995
results of the Company with the June 30, 1996, and July 1, 1995 results of
StrataCom, respectively. No adjustments have been made to conform accounting
policies of the entities. However, StrataCom's historical results have been
adjusted to reflect an increase in income taxes because of the elimination of a
previously provided valuation allowance on its deferred tax asset as of the
earliest period presented. There were no significant intercompany transactions
requiring elimination in any period presented. In order for both companies to
operate on the same fiscal year for 1997, StrataCom's operations for the
one-month period ended July 28, 1996 that are not material to the consolidated
companies have been reflected as an adjustment to retained earnings in the first
quarter of fiscal 1997.
The Company has also completed a number of other pooling acquisitions. The
historical operations of these entities is immaterial to the Company's
consolidated operations on either an individual or an aggregated basis;
therefore, prior period statements have not been restated for these
acquisitions. These transactions are summarized as follows (in millions of
shares):
TOTAL SHARES OF
FISCAL YEAR ACQUIRED COMPANIES CISCO STOCK ISSUED
- -----------------------------------------------------------------------
1995 Newport Systems Solutions, Inc. 6.6
Kalpana, Inc. 13.6
1996 Combinet, Inc. 3.5
Grand Junction Networks, Inc. 9.2
TGV Software, Inc. 2.4
1997 Nashoba Networks 1.6
Granite Systems, Inc. 2.2
- -----------------------------------------------------------------------
In conjunction with these poolings, the Company also assumed the outstanding
options of these companies, which were converted to options to purchase
approximately 3.6 million shares of the Company's common stock.
PURCHASE COMBINATIONS
During the three years ended July 26, 1997, the Company made the acquisitions
described in the paragraphs that follow, each of which has been accounted for as
a purchase. The consolidated financial statements include the operating results
of each business from the date of acquisition. Pro forma results of operations
have not been presented, because the effects of these acquisitions were not
material on either an individual or an aggregate basis.
38
19
The amounts allocated to purchased research and development were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition, because
technological feasibility had not been established and no future alternative
uses existed. Research and development costs to bring the products from the
acquired companies to technological feasibility are not expected to have a
material impact on the Company's future results of operations or cash flows.
Amounts allocated to goodwill and other intangibles are amortized on a
straight-line basis up to a five-year period.
In January 1995, the Company acquired substantially all of the assets and
assumed the liabilities of LightStream Corporation ("LightStream"), a developer
of enterprise-class ATM switching technology, for $120.0 million in cash and
related acquisition costs of approximately $.5 million.
The purchase price was allocated to the acquired assets and assumed
liabilities based on fair 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)
- ----------------------------------------------
Total $120,500
==============================================
The remaining amounts allocated to goodwill after the $5.1 million write-off in
fiscal 1996 were amortized on a straight-line basis over two years.
In October 1996, the Company acquired substantially all of the assets of
Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation
(MICA(TM)) technologies for approximately $200.0 million in cash. The Company
purchased Telebit patents and MICA intellectual property, established employment
contracts with MICA personnel, and assumed certain preferred stock and notes
receivable related to a management buyout of the remaining assets of Telebit. As
part of this transaction, the Company recorded approximately $174.6 million in
purchased research and development expense in the first quarter of fiscal 1997.
In November 1996, the Company acquired Netsys Technologies ("Netsys"), a
privately held innovator of network infrastructure management and performance
analysis software. Under the terms of the agreement, the Company exchanged
common stock worth approximately $81.1 million and assumed net liabilities of
approximately $3.8 million for all outstanding shares and options of Netsys. As
part of this transaction, the Company recorded approximately $43.2 million in
purchased research and development expense and $41.7 million of goodwill and
other intangible assets in the second quarter of fiscal 1997.
In July 1997, the Company completed the acquisition of Skystone Systems
Corporation ("Skystone"), an innovator of high-speed Synchronous Optical
Network/Synchronous Digital Hierarchy (SONET/SDH). Under the terms of the
agreement, shares of the Company's common stock worth approximately $69.4
million, and $22.7 million in cash has been exchanged for all outstanding
shares, warrants, and options of Skystone. As part of this transaction, the
Company recorded approximately $89.4 million in purchased research and
development expense.
In July 1997, the Company acquired Ardent Communications ("Ardent"), a
designer of combined communications support for compressed voice, LAN, data, and
video traffic across public and private Frame Relay and ATM networks. Under the
terms of the agreement, shares of the Company's stock worth approximately $165.3
million have been exchanged for the outstanding shares and options of Ardent. As
part of this transaction, the Company recorded approximately $163.6 million in
purchased research and development expense.
Also in July 1997, the Company acquired Global Internet Software Group
("Global Internet"), a wholly owned subsidiary of Global Internet.Com and a
pioneer in the Windows NT network security marketplace. Approximately $40.2
million in cash was exchanged for all of the outstanding shares of Global
Internet. As part of this transaction, the Company recorded approximately $37.6
million in purchased research and development expense.
39
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS COMBINATIONS COMPLETED SUBSEQUENT TO YEAR-END
On July 28, 1997, the Company entered into an agreement to purchase the Dagaz
xDSL business of Integrated Network Corporation ("INC"). The Company agreed to
pay approximately $108.0 million in cash for the xDSL business. As part of this
transaction, the Company assumed approximately .2 million shares of INC stock
options, which will be converted to options to purchase the Company's common
stock. This transaction was completed in August 1997.
4. BALANCE SHEET DETAIL
(IN THOUSANDS) JULY 26, 1997 JULY 28, 1996
- ---------------------------------------------------------------------------------------------
Inventories, net:
Raw materials $ 89,226 $ 134,531
Work in process 114,724 99,723
Finished goods 21,733 51,920
Demonstration systems 28,994 15,014
- ---------------------------------------------------------------------------------------------
Total $ 254,677 $ 301,188
=============================================================================================
Property and equipment, net:
Leasehold improvements $ 88,801 $ 40,927
Computer equipment and related software 394,735 280,777
Production and engineering equipment 108,520 108,477
Office equipment, furniture, fixtures, and other 290,129 145,291
- ---------------------------------------------------------------------------------------------
882,185 575,472
Less accumulated depreciation and amortization (415,833) (244,157)
- ---------------------------------------------------------------------------------------------
Total $ 466,352 $ 331,315
=============================================================================================
Accrued payroll and related expenses:
Accrued wages, paid time off, and related expenses $ 127,779 $ 97,780
Accrued commissions 66,851 33,589
Accrued bonuses 68,639 63,828
- ---------------------------------------------------------------------------------------------
Total $ 263,269 $ 195,197
=============================================================================================
Other accrued liabilities:
Deferred revenue $ 183,268 $ 116,229
Accrued warranties 41,526 32,256
Other liabilities 168,644 102,094
- ---------------------------------------------------------------------------------------------
Total $ 393,438 $ 250,579
=============================================================================================
40
21
5. INVESTMENTS
At July 26, 1997 and July 28, 1996, substantially all of the Company's
investments were classified as available for sale. The difference between the
cost and fair value of those investments, net of the tax effect, is shown as a
separate component of shareholders' equity.
The following tables summarize the Company's investment in securities (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JULY 26, 1997 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
U.S. government notes and bonds $ 609,580 $ 1,407 $ (960) $ 610,027
State, municipal, and county
government notes and bonds 1,313,652 6,214 (755) 1,319,111
Foreign government notes and bonds 31,565 29 (111) 31,483
Corporate notes and bonds 562,039 594 (589) 562,044
Corporate equity securities 40,759 89,390 (16,447) 113,702
- ----------------------------------------------------------------------------------------------
Total $2,557,595 $97,634 $(18,862) $2,636,367
==============================================================================================
Reported as:
Short-term investments $1,005,977
Investments 1,267,174
Restricted investments 363,216
- ----------------------------------------------------------------------------------------------
Total $2,636,367
==============================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JULY 28, 1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
U.S. government notes and bonds $ 445,539 $ 192 $ (2,911) $ 442,820
State, municipal, and county
government notes and bonds 1,023,399 1,448 (5,860) 1,018,987
Foreign government notes and bonds 2,498 42 2,540
Corporate notes and bonds 62,766 99 (134) 62,731
Corporate equity securities 30,900 357,049 (95,780) 292,169
- ----------------------------------------------------------------------------------------------
Total $1,565,102 $358,830 $(104,685) $1,819,247
==============================================================================================
Reported as:
Short-term investments $ 758,489
Investments 832,114
Restricted investments 228,644
- ----------------------------------------------------------------------------------------------
Total $1,819,247
==============================================================================================
41
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes debt maturities (including restricted
investments) at July 26, 1997 (in thousands):
AMORTIZED FAIR
COST VALUE
- ---------------------------------------------------------------------------------
Less than one year $1,269,663 $1,270,079
Due in 1-2 years 516,523 517,457
Due in 2-5 years 694,504 699,411
Due after 5 years 36,146 35,718
- ---------------------------------------------------------------------------------
Total $2,516,836 $2,522,665
=================================================================================
During fiscal year 1997, the Company began to sell its minority equity position
in a publicly traded company. A hedge was formed to protect the unrealized gains
the Company had earned while holding this investment. The hedge took the form of
a cashless collar and was constructed as a series of purchased puts and sold
calls, with the cost of the purchased puts exactly offset by the premium earned
on the sold calls. The total face values of the puts and calls at July 26, 1997
were $16.5 million and $21.1 million, respectively. The collar expires over a
period of two years commencing October 1996. Net unrealized gains or losses for
the stock and associated hedge are reflected as a separate component of
shareholders' equity. Realized gains or losses on the combined position have
been reflected in income for the period in which the stock was sold or the hedge
was terminated. Also in fiscal 1997, the Company established the Cisco Systems
Foundation ("the Foundation"). As part of this initiative, the Company donated a
portion of this investment, along with other equity securities, with a combined
cost basis of approximately $2.3 million and an approximate fair value of $71.5
million at July 26, 1997, to the Foundation. The realized gains on the sale of
this investment, net of the amounts donated to the Foundation, were $152.7
million in fiscal 1997. The Company expects to sell its remaining stake in the
publicly traded company in fiscal year 1998 and will realize additional gains.
There were no material realized gains in fiscal years 1996 and 1995. Gross
realized gains and losses on the sale of investments are calculated using the
specific identification method.
6. LINE OF CREDIT
In July 1997, the Company entered into a syndicated credit agreement under the
terms of which a group of banks has committed a maximum of $500.0 million on an
unsecured, revolving basis for cash borrowings of various maturities. The
commitments made under this agreement expire on July 1, 2002. This agreement
replaces an earlier, three-year, $100.0 million credit agreement entered into on
May 22, 1995. Under the terms of the new agreement, borrowings bear interest at
a spread over the London Interbank Offered Rate based on certain financial
criteria and third-party rating assessments or other alternative rates. As of
July 26, 1997, this spread was 20 basis points. A commitment fee of 7 basis
points is assessed against any undrawn amounts. The agreement includes a single
financial covenant that places a variable floor on tangible net worth, as
defined, if certain leverage ratios are exceeded. There have been no borrowings
under this or the previous agreement.
42
23
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into several agreements to lease 221 acres of land
located in San Jose, California, where it has established its headquarters
operations, and 45 acres of land located in Research Triangle Park, North
Carolina, where it has expanded certain research and development and customer
support activities. All of the leases have initial terms of five to seven years
and options to renew for an additional three to 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 end of
each of the leases, the Company has guaranteed a residual value of $124.1
million.
The Company has also 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 $341.6 million (subject to reductions based
on certain conditions in the respective leases) for the construction of the
buildings, with the portion of the committed amount actually used to be
determined by the Company. Rent obligations for the buildings commenced on
various dates and will expire at the same time as the land leases.
The Company has an option to renew the building leases for an additional
three to five years, subject to certain conditions. The Company may, at its
option, purchase the buildings during or at the ends of 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 by 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 $186.6 million at July
26, 1997).
As part of the above lease transactions, the Company restricted $363.2
million of its investment securities as collateral for specified obligations of
the lessor under the leases. These investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations under
the Company's investment policy. In addition, the Company must maintain a
minimum consolidated tangible net worth, as defined, of $1 billion.
The Company also leases office space in Santa Clara, California; Chelmsford,
Massachusetts; and for its various U.S. and international sales offices.
Future annual minimum lease payments under all noncancelable operating
leases as of July 26, 1997, are as follows (in thousands):
- ---------------------------------------------
1998 $ 65,876
1999 54,531
2000 41,530
2001 29,710
2002 17,895
Thereafter 39,513
- ---------------------------------------------
Total minimum lease payments $249,055
=============================================
Rent expense totaled $64.4 million, $36.8 million, and $24.0 million for 1997,
1996, and 1995, respectively.
FORWARD EXCHANGE CONTRACTS
The Company conducts business on a global basis in several major international
currencies. As such, it is exposed to adverse movements in foreign currency
exchange rates. The Company enters into forward foreign exchange contracts to
reduce certain currency exposures. These contracts hedge exposures associated
with nonfunctional currency assets and liabilities denominated in Japanese,
Canadian, Australian, and several European currencies. At the present time, the
Company hedges only those currency exposures associated with certain
nonfunctional currency assets and liabilities and does not generally hedge
anticipated foreign currency cash flows.
The Company does not enter into forward exchange contracts for trading
purposes. Gains and losses on the contracts are included in other income and
offset foreign exchange gains or losses from the revaluation of intercompany
balances or other current assets and liabilities denominated in currencies other
than the functional currency
43
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the reporting entity. The Company's forward currency contracts generally
range from one to three months in original maturity. Forward exchange contracts
outstanding and their unrealized gains and (losses) as of July 26, 1997 are
summarized as follows (in thousands):
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED
PURCHASED SOLD GAIN/(LOSS)
- --------------------------------------------------------------
Japanese yen $ 36,150 $ (84,483) $ 111
Australian dollar 33,171 (58,072) 521
Canadian dollar -- (42,021) 15
European currencies 142,036 (83,225) (74)
- --------------------------------------------------------------
Total $ 211,357 $(267,801) $ 573
==============================================================
The Company's forward exchange contracts contain credit risk in that its banking
counterparties may be unable to meet the terms of the agreements. The Company
minimizes such risk by limiting its counterparties to major financial
institutions. In addition, the potential risk of loss with any one party
resulting from this type of credit risk is monitored. Management does not expect
any material losses as a result of default by other parties.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to legal proceedings, claims, and
litigation arising in the ordinary course of business. The Company's management
does not expect that the ultimate costs to resolve these matters will have a
material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
8. SHAREHOLDERS' EQUITY
The Company's common stock was split two for one on February 16, 1996. All
applicable share and per-share data in these consolidated financial statements
have been restated to give effect to this stock split.
Under the terms of the Company's Articles of Incorporation, the Board of
Directors may determine the rights, preferences, and terms of the Company's
authorized but unissued shares of preferred stock.
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("the Purchase Plan") under
which 9.8 million shares of common stock have been reserved for issuance.
Eligible employees may designate not more than 10% of their cash compensation to
be deducted each pay period for the purchase of common stock under the Purchase
Plan, and participants may purchase not more than $25,000 of common stock in any
one calendar year. On the last business day of each calendar quarter, shares of
common stock are purchased with the employees' payroll deductions over the
immediately preceding six months at a price per share of 85% of the lesser of
the market price of the common stock on the purchase date or the market price on
the first day of the period. The Purchase Plan will terminate no later than
January 3, 2000. In fiscal 1997, 1996, and 1995, 1.4 million, 1.3 million, and
1.5 million shares, respectively, were issued under the Purchase Plan. At July
26, 1997, 2.0 million shares were available for issuance under the Purchase
Plan.
STOCK OPTION PLANS
In November 1996, the Company's shareholders approved the 1996 Stock Incentive
Plan (the "1996 Plan"). This plan was the successor to the Company's 1987 Stock
Option Plan (the "Predecessor Plan"). The 1996 Plan became effective immediately
upon shareholder approval, and all outstanding options under the Predecessor
Plan were transferred to the 1996 Plan. However, all outstanding options under
the Predecessor Plan continue to be governed by the terms and conditions of the
existing option agreements for those grants. The maximum number of shares under
the 1996 Plan was initially limited to the 68.8 million shares transferred from
the Predecessor Plan. Under the terms of the 1996 Plan, the share reserve will
increase each December for the next three fiscal years, beginning with fiscal
1997, by an amount equal to 4.75% of the outstanding shares on the last trading
day of the immediately preceding November. 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.
44
25
Under the Predecessor Plan, the options generally had terms of five years. Under
the 1996 Plan, options expire no later than nine years from the grant date.
A summary of option activity follows (in thousands, except per-share
amounts):
OPTIONS OUTSTANDING
------------------------------
OPTIONS AVAILABLE WEIGHTED AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
- ------------------------------------------------------------------------------------------------
BALANCES JULY 31, 1994 19,196 33,508 $ 7.91
Options granted and assumed (36,792) 36,792 16.94
Options exercised (14,232) 2.66
Options canceled 2,207 (2,207) 12.13
Additional shares reserved 12,474
- ------------------------------------------------------------------------------------------------
BALANCES JULY 30, 1995 (2,915) 53,861 15.29
Options granted and assumed (35,170) 35,170 25.33
Options exercised (17,771) 4.74
Options canceled 2,171 (2,171) 20.33
Additional shares reserved 52,170
- ------------------------------------------------------------------------------------------------
BALANCES JULY 28, 1996 16,256 69,089 22.96
Options granted and assumed (42,402) 42,402 48.91
Options exercised (17,483) 12.76
Options canceled 4,673 (4,673) 34.37
Additional shares reserved 31,815
- ------------------------------------------------------------------------------------------------
BALANCES JULY 26, 1997 10,342 89,335 $36.68
================================================================================================
At July 26, 1997 and July 28, 1996, approximately 24.8 million and 21.7 million
outstanding options, respectively, were exercisable. The weighted average
exercise prices for options were $20.66 and $11.42 at July 26, 1997 and July 28,
1996, respectively.
The Company has, in connection with the acquisition of various companies,
assumed the stock option plans of each acquired company. A total of 4.6 million
shares of the Company's common stock have been reserved for issuance under the
assumed plans, and the related options are included in the preceding table.
The following tables summarize information concerning outstanding and
exercisable options at July 26, 1997 (in thousands, except per-share amounts):
OPTIONS OUTSTANDING
---------------------------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
$ 0.01-16.62 18,807 2.6 $10.48
16.69-34.15 18,136 4.9 25.20
34.32-46.50 21,948 8.2 44.09
47.75-52.25 19,617 8.1 50.47
53.37-75.50 10,827 8.3 61.39
- -----------------------------------------------------------------------------------------------------
Total 89,335 6.4 $36.68
=====================================================================================================
45
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS EXERCISABLE
------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------
$ 0.01-16.62 12,290 $ 9.30
16.69-34.15 8,135 24.48
34.32-46.50 2,442 39.18
47.75-52.25 1,236 50.86
53.37-75.50 745 55.51
- ------------------------------------------------------------------------------------------------
Total 24,848 $20.66
================================================================================================
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October of 1995. In accordance with SFAS No. 123, the Company applies
APB Opinion 25 and related Interpretations in accounting for its stock option
plans, and accordingly does not record compensation costs. If the Company had
elected, beginning in fiscal 1996, to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
net income and net income per common share would have been reduced to the pro
forma amounts shown below (in thousands, except per-share amounts):
1997 1996
- -----------------------------------------------------------------------------------------------------
Net income--as reported $ 1,048,679 $ 913,324
Net income--pro forma $ 897,939 $ 872,263
Net income per common share--as reported $ 1.52 $ 1.37
Net income per common share--pro forma $ 1.32 $ 1.32
- -----------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
- -----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 6.4% 5.9% 5.3% 5.4%
Expected volatility 32.8% 32.9% 44.4% 44.9%
Expected life (in years) 3.1 3.1 0.5 0.5
- -----------------------------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options. The weighted average estimated fair
values of employee stock options granted during fiscal 1997 and 1996 were $15.60
and $13.34 per share, respectively.
46
27
The above pro forma disclosures are not likely to be representative of the
effects on net income and net income per common share in future years, because
they do not take into consideration pro forma compensation expense related to
grants made prior to the Company's fiscal year 1996.
EMPLOYEE 401(k) PLAN
The Company has adopted a plan known as the Cisco Systems, Inc. 401(k) Plan
("the Plan") to provide retirement and incidental benefits for its employees. As
allowed under Section 401(k) of the Internal Revenue Code, the Plan provides
tax-deferred salary deductions for eligible employees.
Employees may contribute from 1% to 15% of their annual compensation to the
Plan, limited to a maximum annual amount as set periodically by the Internal
Revenue Service. The Company matches employee contributions dollar for dollar up
to a maximum of $1,500 per year per person. All matching contributions vest
immediately. In addition, the Plan provides for discretionary contributions as
determined by the Board of Directors. Such contributions to the Plan are
allocated among eligible participants in the proportion of their salaries to the
total salaries of all participants. Company matching contributions to the Plan
totaled $12.6 million in 1997, $6.6 million in 1996, and $3.5 million in 1995.
No discretionary contributions were made in 1997, 1996, or 1995.
10. INCOME TAXES
The provision (benefit) for income taxes consists of (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Federal:
Current $ 845,254 $ 514,050 $ 288,656
Deferred (171,571) (64,133) (63,310)
- --------------------------------------------------------------------------------
673,683 449,917 225,346
- --------------------------------------------------------------------------------
State:
Current 153,110 92,291 59,927
Deferred (15,043) (6,907) (9,968)
- --------------------------------------------------------------------------------
138,067 85,384 49,959
- --------------------------------------------------------------------------------
Foreign:
Current 27,773 19,452 7,761
Deferred 670 (3,252) (1,578)
- --------------------------------------------------------------------------------
28,443 16,200 6,183
- --------------------------------------------------------------------------------
Total provision $ 840,193 $ 551,501 $ 281,488
================================================================================
47
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company paid income taxes of $658.7 million, $335.1 million, and $270.5
million, in fiscal 1997, 1996, and 1995, respectively.
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes follow:
1997 1996 1995
- ---------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefit 4.5 3.6 4.1
Foreign sales corporation (3.3) (2.9) (2.9)
Nondeductible purchased R&D 7.1
Tax-exempt interest (1.0) (1.0) (1.1)
Tax credits (1.3) (0.3) (1.1)
Other, net 3.5 3.2 4.1
- ---------------------------------------------------------------------------------
44.5% 37.6% 38.1%
=================================================================================
The components of the deferred income tax assets (liabilities) follow (in
thousands):
JULY 26, 1997 JULY 28, 1996
- --------------------------------------------------------------------------------
Other nondeductible accruals $ 125,010 $ 66,950
Inventory allowances and capitalization 89,984 44,334
Purchased research and development 81,115 33,806
Allowance for doubtful accounts and returns 38,008 26,632
Accrued state franchise tax 29,231 13,847
Depreciation 11,031 10,451
Deferred revenue 16,629 8,664
Warranty accruals 16,290 8,406
Unrealized gain on investments (29,146) (95,296)
- --------------------------------------------------------------------------------
$ 378,152 $ 117,794
- --------------------------------------------------------------------------------
The noncurrent portion of the deferred income tax assets, which totaled $66.0
million at July 26, 1997 and $16.0 million at July 28, 1996, is included in
other assets.
The Company's income taxes payable for federal, state, and foreign purposes
have been reduced by the tax benefits of disqualifying dispositions of stock
options. The benefit is the difference between the market value of the stock
issued at the time of exercise and the option price tax effected.
48
29
11. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the design,
development, manufacture, marketing, and technical support of networking
products and services.
In 1997, 1996, and 1995, no single customer accounted for 10% or more of the
Company's net sales. International sales, primarily in Europe, the Pacific
region, and Canada, were $2,803 million in 1997, $1,976 million in 1996, and
$931 million in 1995. Export sales, primarily to these regions, were $1,939
million in 1997, $1,530 million in 1996, and $737 million in 1995.
Summarized financial information by geographic region for 1997, 1996, and
1995 is as follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Net sales:
United States $ 6,328,720 $ 4,024,482 $ 2,199,940
International 863,855 446,437 194,217
Eliminations (752,404) (374,912) (161,505)
- --------------------------------------------------------------------------------
Total $ 6,440,171 $ 4,096,007 $ 2,232,652
- --------------------------------------------------------------------------------
Operating income:
United States $ 1,581,622 $ 1,379,994 $ 692,174
International 48,750 22,704 4,199
Eliminations (3,078) (1,892) 1,590
- --------------------------------------------------------------------------------
Total $ 1,627,294 $ 1,400,806 $ 697,963
- --------------------------------------------------------------------------------
Identifiable assets:
United States $ 5,041,225 $ 3,467,637
International 505,115 184,291
Eliminations (94,356) (21,696)
- --------------------------------------------------------------------------------
Total $ 5,451,984 $ 3,630,232
================================================================================
49
30
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 26, 1997 and July 28, 1996 and the
related consolidated statements of operations, cash flows, and shareholders'
equity for each of the three years in the period ended July 26, 1997. 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 26, 1997 and July 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 26, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
August 4, 1997
50
31
SUPPLEMENTARY FINANCIAL DATA
(unaudited) (in thousands, except per-share amounts)
1997 1996
------------------------------------------------- -------------------------------------------------
JULY 26, APR. 26, JAN. 25, OCT. 26, JULY 28, APR. 28, JAN. 28, OCT. 29,
1997 1997 1997 1996 1996 1996 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $1,765,097 $1,647,871 $1,592,377 $1,434,826 $1,292,150 $1,087,056 $ 918,510 $ 798,291
Gross margin 1,149,057 1,076,532 1,039,858 933,346 839,499 709,902 606,195 530,549
Operating income 286,453 539,130 488,551 313,160 423,872 376,572 321,511 278,851
Income before provision
for income taxes 335,701 600,511 562,914 389,746 442,715 393,244 337,157 291,709
Net income $ 150,957(1) $ 378,321(2) $ 338,459(3) $ 180,942(4) $ 276,551 $ 245,649 $ 209,737 $ 181,387
Net income per
common share $ .22(1) $ .55(2) $ .49(3) $ .26(4) $ .41 $ .37 $ .31 $ .28
- -------------------------------------------------------------------------------------------------------------------------------
(1) Net income and net income per share include purchased research and
development expenses of $290.6 million and realized gains on the sale of a
minority stock investment of $18.0 million. Pro forma net income and net
income per share, excluding these nonrecurring items net of tax, would have
been $383,237 and $0.55, respectively.
(2) Net income and net income per share include realized gains on the sale of a
minority stock investment of $32.3 million. Pro forma net income and net
income per share, excluding this nonrecurring item net of tax, would have
been $357,980 and $0.52, respectively.
(3) Net income and net income per share include purchased research and
development expenses of $43.2 million and realized gains on the sale of a
minority stock investment of $47.3 million. Pro forma net income and net
income per share, excluding these nonrecurring items net of tax, would have
been $351,863 and $0.51, respectively.
(4) Net income and net income per share include purchased research and
development expenses of $174.6 million and realized gains on the sale of a
minority stock investment of $55.1 million. Pro forma net income and net
income per share, excluding these nonrecurring items net of tax, would have
been $320,813 and $0.47, respectively.
STOCK MARKET INFORMATION
The following table presents the ranges of the Company's common stock. Prices
reflect the two-for-one split effective February 1996:
1997 1996 1995
- -----------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW
First Quarter $ 67.00 $ 50.00 $ 38.62 $ 26.12 $ 15.00 $ 10.43
Second Quarter 74.87 57.62 43.93 32.68 18.31 15.06
Third Quarter 69.75 46.37 52.37 40.56 20.37 16.28
Fourth Quarter 80.37 46.50 58.75 47.12 29.31 19.68
- -----------------------------------------------------------------------------------------------
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
12,880 shareholders of record on July 26, 1997.
51
32
DIRECTORS
- --------------------------------------------------------------------------------
CAROL BARTZ(3)
Chairman and Chief Executive Officer
Autodesk, Inc.
JOHN T. CHAMBERS(1)(4)(5)(6)
President and Chief Executive Officer
Cisco Systems, Inc.
JAMES F. GIBBONS, Ph.D.(2)(4)
Professor of Electrical Engineering
and Special Consul for Industrial Relations
Stanford University
EDWARD R. KOZEL
Senior Vice President and Chief Technical Officer
Cisco Systems, Inc.
RICHARD M. MOLEY
Senior Vice President
Cisco Systems, Inc.
JOHN P. MORGRIDGE(1)(5)(6)
Chairman
Cisco Systems, Inc.
ROBERT L. PUETTE(2)(3)(4)(5)
President, Chief Executive Officer,
and Chairman of the Board
NetFRAME Systems, Inc.
MASAYOSHI SON
President and Chief Executive Officer
SOFTBANK Corp.
DONALD T. VALENTINE(1)(5)(7)
General Partner
Sequoia Capital
STEVEN M. WEST(3)(7)
President and Chief Executive Officer
Hitachi Data Systems
OFFICERS
- --------------------------------------------------------------------------------
LARRY R. CARTER
Senior Vice President, Finance and Administration
Chief Financial Officer and Secretary
JOHN T. CHAMBERS
President and Chief Executive Officer
GARY DAICHENDT
Senior Vice President, Worldwide Operations
EDWARD R. KOZEL
Senior Vice President and Chief Technical Officer
DONALD J. LISTWIN
Senior Vice President,
Service Provider Line of Business
MARIO MAZZOLA
Senior Vice President,
Enterprise Line of Business
CARL REDFIELD
Senior Vice President, Manufacturing
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
Boston Equiserve
P.O. Box 8040
Boston, MA 02266-8040
www.equiserve.com
617 575-3120
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
San Jose, California
LEGAL COUNSEL
Brobeck, Phleger & Harrison LLP
Palo Alto, California
NOTICE OF ANNUAL MEETING
Cisco Systems Headquarters
255 West Tasman Drive
San Jose, California
November 13, 1997
10:00 a.m. Pacific Time
INVESTOR RELATIONS
For further information on the company, additional copies of
this report, Form 10-K, or other financial information contact:
Investor Relations
Cisco Systems, Inc.
170 West Tasman Drive
San Jose, CA 95134-1706
408 227-CSCO (2726)
You may also contact us by sending an e-mail to investor-relations@cisco.com or
by visiting the company's Web site at www.cisco.com.
ONLINE ANNUAL REPORT
We invite you to visit our online interactive annual report at
www.cisco.com/annualreport/1997. In this version you will find our shareholders'
letter in multiple languages, a financial section that lets you create
customized charts and graphs, detailed customer profiles, and additional company
and product information. This Web-based report complements our printed report,
giving you a comprehensive understanding of Cisco Systems.
- --------------------------------------------------------------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Nomination Committee
(5) Member of the Acquisition Committee
(6) Special Stock Option Committee
(7) Special Technology Committee
- --------------------------------------------------------------------------------
Copyright (C)1997 Cisco Systems, Inc. All rights reserved. Ardent, Cisco IOS,
the Cisco Powered Network logo, Granite, IGX, Kalpana, MICA, Nashoba Networks,
Netsys Technologies, and Skystone are trademarks; and BPX, Catalyst, Cisco,
Cisco Systems, the Cisco Systems logo, Combinet, Grand Junction Networks, IPX,
LightStream, StrataCom, and TGV are registered trademarks of Cisco Systems, Inc.
in the U.S. and certain other countries. All other trademarks mentioned in this
document are the property of their respective owners.
Printed in the U.S.A. on recycled paper. [RECYCLE LOGO]
52