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FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO
----- -----
As of December 2, 1997, 676,453,778 shares of the Registrant's common stock were
outstanding.
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CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 25, 1997
INDEX
Page
----
Facing sheet 1
Index 2
Part I. Financial information
Item 1. Financial Statements and Supplementary Data
a) Consolidated statements of operations for the three months ended
October 25, 1997 and October 26, 1996 3
b) Consolidated balance sheets at October 25, 1997 and July 26, 1997 4
c) Consolidated statements of cash flows for the three months
ended October 25, 1997 and October 26, 1996 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 8
Part II. Other information 15
Signature 16
Exhibits 17
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share amounts)
Three Months Ended
--------------------------
October 25, October 26,
1997 1996
----------- -----------
(Unaudited)
Net sales $1,868,717 $1,434,826
Cost of sales 652,181 501,480
---------- ----------
Gross margin 1,216,536 933,346
Operating expenses:
Research and development 224,235 144,711
Sales and marketing 333,417 259,110
General and administrative 56,414 41,776
Purchased research and development 127,191 174,589
---------- ----------
Total operating expenses 741,257 620,186
---------- ----------
Operating income 475,279 313,160
Realized gain on sale of investment 5,411 55,108
Interest and other income, net 37,056 21,478
---------- ----------
Income before provision for income taxes 517,746 389,746
Provision for income taxes 181,211 208,804
---------- ----------
Net income $ 336,535 $ 180,942
========== ==========
Net income per common share $ .48 $ .26
========== ==========
Shares used in per-share calculation 704,390 682,918
========== ==========
See notes to consolidated financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
October 25, July 26,
1997 1997
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 378,196 $ 269,608
Short-term investments 1,448,381 1,005,977
Accounts receivable, net of allowance for doubtful
accounts of $21,815 at October 25, 1997 and
$22,340 at July 26, 1997 1,147,282 1,170,401
Inventories, net 241,122 254,677
Deferred income taxes 326,068 312,132
Prepaid expenses and other current assets 61,883 88,471
----------- -----------
Total current assets 3,602,932 3,101,266
Investments 1,359,764 1,267,174
Restricted investments 404,474 363,216
Property and equipment, net 467,150 466,352
Other assets 340,910 253,976
----------- -----------
Total assets $ 6,175,230 $ 5,451,984
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 202,145 $ 207,178
Income taxes payable 409,443 256,224
Accrued payroll and related expenses 274,787 263,269
Other accrued liabilities 443,162 393,438
----------- -----------
Total current liabilities 1,329,537 1,120,109
Minority interest 42,262 42,253
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at October 25, 1997
and July 26, 1997
Common stock, no par value, 1,200,000 shares authorized:
674,810 shares issued and outstanding at
October 25, 1997 and 670,779 at July 26, 1997 1,946,082 1,763,200
Retained earnings 2,823,593 2,487,058
Unrealized gain on investments 45,576 49,628
Cumulative translation adjustments (11,820) (10,264)
----------- -----------
Total shareholders' equity 4,803,431 4,289,622
----------- -----------
Total liabilities and shareholders' equity $ 6,175,230 $ 5,451,984
=========== ===========
See notes to consolidated financial statements.
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CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
---------------------------
October 25, October 26,
1997 1996
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 336,535 $ 180,942
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67,538 43,745
Deferred income taxes (54,209) (4,143)
Tax benefits from employee stock plans 68,668 37,066
Adjustment to conform StrataCom fiscal year - (11,020)
Purchased research and development from
acquisition 19,009 -
Change in operating assets and liabilities:
Accounts receivable 23,119 (129,695)
Inventories 13,555 60,196
Prepaid expenses and other current assets 26,588 2,852
Income taxes payable 153,219 153,789
Accounts payable (5,073) 42,234
Accrued payroll and related expenses 11,518 4,030
Other accrued liabilities 45,924 148,673
--------- ---------
Net cash provided by operating activities 706,391 528,669
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (484,483) (432,893)
Proceeds from sales and maturities of short-term
investments 186,447 451,928
Purchases of investments (466,825) (589,188)
Proceeds from sales of investments 218,323 391,222
Purchases of restricted investments (104,975) (66,741)
Proceeds from sales and maturities of restricted
investments 65,494 56,288
Acquisition of property and equipment (63,325) (88,058)
Other (43,313) (18,361)
--------- ---------
Net cash used in investing activities (692,657) (295,803)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 96,410 42,827
Other (1,556) (1,563)
--------- ---------
Net cash provided by financing activities 94,854 41,264
--------- ---------
Net increase in cash and equivalents 108,588 274,130
Cash and equivalents, beginning of period 269,608 279,695
--------- ---------
Cash and equivalents, end of period $ 378,196 $ 553,825
========= =========
See notes to consolidated financial statements.
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CISCO SYSTEMS, INC.
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. Fiscal years 1998 and 1997 are both 52 week years.
Basis of Presentation
The accompanying financial data as of October 25, 1997, and for the three months
ended October 25, 1997 and October 26, 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The July 26, 1997 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended July 26, 1997.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of October 25, 1997 and for the three
months ended October 25, 1997 and October 26, 1996, have been made. The results
of operations for the period ended October 25, 1997 are not necessarily
indicative of the operating results for the full year.
Computation of Net Income Per Share
Net income per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options.
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
Management has evaluated the effects of this change in computational guidelines
on the Company's EPS, and basic net income per common share computed under the
new pronouncement would have been $0.50 and $0.28 in the first quarters of
fiscal 1998 and 1997, respectively, while diluted net income per common share
would have been $0.48 and $0.26.
In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information." Readers are referred to the "Recent Accounting
Pronouncements" section of the Company's 1997 Annual Report to Shareholders for
further discussion.
3. BUSINESS COMBINATIONS
In August 1997, the Company completed its purchase of Dagaz Technologies,
Inc.("Dagaz"), a wholly owned subsidiary of Integrated Network Corporation, and
its xDSL technology. Under the terms of the agreement the Company paid cash of
$108 million, exchanged stock worth $18 million and assumed net liabilities of
$1 million, in exchange for all of the outstanding common stock of Dagaz. The
Company recorded purchased research and development related to this transaction
of $127 million. A pro forma summary is not presented as the historical
operations of Dagaz are not material to the Company's consolidated operations
and financial position. Research and development costs to bring the xDSL
products to technological feasibility are not expected to have a material impact
on the Company's future results of operations, cash flows, or liquidity.
4. BALANCE SHEET DETAIL
(In thousands)
Inventories:
October 25, July 26,
1997 1997
----------- --------
(Unaudited)
Raw materials $ 51,802 $ 89,226
Work in process 97,751 114,724
Finished goods 69,754 21,733
Demonstration systems 21,815 28,994
-------- --------
$241,122 $254,677
======== ========
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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The Company paid income taxes of $14 million for the quarter ended October 25,
1997 and $41 million for the quarter ended October 26, 1996. The Company's
income taxes currently payable for both federal and state purposes have been
reduced by the tax benefit of disqualifying dispositions of stock options. This
benefit totaled $69 million in the first quarter of fiscal 1998, and was
credited directly to shareholders' equity.
6. SHAREHOLDER'S EQUITY AND STOCK SPLIT
(In thousands, except per-share amounts)
At the Annual Meeting of Shareholders held on November 13, 1997, the
shareholders approved an amendment to the Articles of Incorporation changing the
Company's Common Stock from no par value to a par value of $.001 per share. On
the effective date, the Company will transfer from Common Stock an amount equal
to the capital contributed in excess of par value to a new equity account which
will be reflected in its financial statements as "Additional Paid-in Capital."
In November 1997, the Company announced that its Board of Directors approved a
three-for-two split of the Company's common stock that is payable to
shareholders of record on November 18, 1997 and effective on December 16, 1997.
Share and per-share data presented here have not been adjusted to give effect to
this three-for-two stock split.
The pro forma shares used to calculate EPS if the stock split had been effective
for the periods ended October 25, 1997 and October 26, 1996 would have been
1,056,585 and 1,024,377, respectively, and the resulting EPS would have been
$0.32 and $0.18.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import, constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Readers are referred to the "Acquisitions, Investments and Alliances",
"Competition", "Research and Development", "Manufacturing", "Patents,
Intellectual Property and Licensing" and "Other Risk Factors" sections contained
in the Company's 1997 Form 10-K filed on October 22, 1997, and to the "Financial
Risk Management" and "Future Growth Subject to Risk" sections contained herein
which identify important risk factors that could cause actual results to differ
from those contained in the forward looking statements.
Net sales grew to $1,869 million in the first quarter of 1998 from $1,435
million in the first quarter of 1997. The 30.2% increase in net sales between
the two periods was primarily a result of increasing unit sales of LAN switching
products such as the Catalyst(R) 5000 family, access servers such as the Cisco
3600 family, growth in the sales of add-on boards that provide increased
functionality, and increased
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service contract sales. 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, and thus have slowed the
Company's growth rate versus the first quarter of last year. Additionally, some
of the Company's more established product lines, such as the Cisco 2500 product
family, have experienced decelerating growth rates. Sales to international
customers declined to 39.1% in the first quarter of 1998 versus 47.0% for the
first quarter of 1997. The decrease reflects slower sales growth in certain
international markets, particularly Japan, Korea, France, Germany and Italy.
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 increased slightly to 65.1% in the first quarter of 1998 from
65.0% in the first quarter of 1997. The increase is due principally to the
Company's value engineering efforts, and was partially offset by 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 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 $80 million in the first quarter
of 1998 over the first quarter of 1997, an increase to 12.0% from 10.1% of net
sales. 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, 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 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 $74 million in the first quarter of 1998
over the first quarter of 1997, but decreased slightly to 17.8%
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from 18.1% of net sales. The dollar increase in these expenses resulted mainly
from an increase in the size of the Company's direct sales force and its
commissions, additional marketing programs to support the launch of new products
and expanding distribution channels.
General and administrative expenses rose $15 million between the first quarters
of 1998 and 1997, and increased to 3.0% from 2.9% of net sales in the first
quarter of 1998 and 1997, respectively. The 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
further development of its information systems. It is management's intent to
keep general and administrative costs relatively constant as a percentage of net
sales; however, this goal is dependent upon the level of acquisition activity,
among other factors.
The amount expensed to purchased research and development in the first quarter
of fiscal 1998 arose from the acquisition of Dagaz (See Note 3).
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. 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.
Management has evaluated the effects of this change in computational guidelines
on the Company's EPS, and basic net income per common share computed under the
new pronouncement would have been $0.50 and $0.28 in the first quarters of
fiscal 1998 and 1997, respectively, while diluted net income per common share
would have been $0.48 and $0.26.
In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information." Readers are referred to the "Recent Accounting
Pronouncements" section of the Company's 1997 Annual Report to Shareholders for
further discussion.
FINANCIAL RISK MANAGEMENT
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Historically, the Company's primary exposures related to
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
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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 value 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. Readers are referred to pages
26-27 of the Company's 1997 Annual Report to Shareholders for further discussion
of the Company's interest rate exposures.
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 integration of the operations, technologies, and
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 recent quarters, the sequential sales
growth has slowed from prior levels, and a disproportionate share of the sales
has occurred in the last month of the quarter. As a consequence, operating
results for a
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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 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 the quarter ended October 25, 1997
are not necessarily indicative of results to be expected in future periods, and
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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 business, financial condition and operating results.
Liquidity and Capital Resources
Cash and equivalents, short-term investments, and investments were $3.2 billion
at October 25, 1997, an increase of $644 million from July 26, 1997. The
increase is primarily a result of cash generated by operations; and to a lesser
extent, through financing activities, primarily the exercise of employee stock
options. These cash flows were partially offset by cash payments of $108 million
related to the acquisition of Dagaz, and cash outflows from investing activities
including capital expenditures of approximately $63 million.
Accounts receivable decreased 2.0% from July 26, 1997 to October 25, 1997, while
sales grew by 5.9% over the same period. Days sales outstanding in receivables
decreased to 56 days at October 25, 1997 from 60 days at July 26, 1997.
Inventories decreased 5.3% between July 26, 1997 and October 25, 1997, which
reflects the Company's continued inventory management efforts. Inventory
management remains an area of focus as the Company balances the need to maintain
strategic inventory levels to ensure competitive lead times versus the risk of
inventory obsolescence because of rapidly changing technology and customer
requirements.
Accounts payable decreased by 2.4% at October 25, 1997 over July 26, 1997. Other
accrued liabilities increased by 12.6% primarily due to higher deferred revenue
on service contracts.
At October 25, 1997, the Company had a line of credit totaling $500 million,
which expires July 2002. There have been no borrowings under this facility.
The Company has entered into certain lease arrangements in San Jose, California,
and Research Triangle Park, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities. In connection with these transactions, the Company pledged
$404 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
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will require similar pledged securities; however, the Company does
not expect the impact of this activity to be material to liquidity.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.01 Computation of net income per share
27 Financial data schedule
(b) Reports on Form 8-K
The Company filed two reports on form 8-K during the first
quarter ended October 25, 1997. The first report was filed
on August 22, 1997 and reported on the July 1997
acquisitions of Skystone Systems Corporation, Ardent
Communications Corporation and Global Internet Software
Group. The second report was filed on September 9, 1997 and
reported on the August 1997 acquisition of Dagaz
Technologies, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cisco Systems, Inc.
Date: December 9, 1997 /s/ Larry R. Carter
----------------------------------
Larry R. Carter,
Senior Vice President Finance, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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11.01 Computation of net income per share
27 Financial data schedule
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