-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NY1VSzvBBMuYSKMGhsvrXHQ1d9GA9awkJ5XWoV83mJq8dXWlequmf9Dpj80GzcZC NOQA4vPqXz4P9v4GIMup5Q== 0000950149-96-001640.txt : 19961028 0000950149-96-001640.hdr.sgml : 19961028 ACCESSION NUMBER: 0000950149-96-001640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960728 FILED AS OF DATE: 19961025 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CISCO SYSTEMS INC CENTRAL INDEX KEY: 0000858877 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770059951 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18225 FILM NUMBER: 96648075 BUSINESS ADDRESS: STREET 1: 170 W TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085264000 MAIL ADDRESS: STREET 1: 170 WEST TASMAN DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134-1706 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED JULY 28, 1996 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 28,1996 [ ] 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 (IRS Employer incorporation or organization) Identification No.) 170 West Tasman Drive San Jose, California 95134 -------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 526-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- None Nasdaq National Market Securities registered pursuant to Section 12(g) of the Act: Common Stock - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of October 4, 1996, the approximate aggregate market value of voting stock held by non-affiliates of the registrant was $ 43,091,773,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the National Market System of the National Association of Securities Dealers Automated Quotation System on that date). Shares of Common Stock held by each officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of October 4, 1996, 653,383,481 shares of registrant's common stock were outstanding. Designated portions of the Cisco Systems, Inc. Proxy Statement for the 1996 Annual Meeting of Shareholders to be held on November 15, 1996, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. 2 PART I ITEM 1. BUSINESS GENERAL Cisco Systems Inc. ("Cisco", or "the Company") develops, manufactures, markets and supports high-performance internetworking systems that link geographically dispersed local-area and wide-area networks ("LANs" and "WANs", respectively). Cisco products include a wide range of multiprotocol routers, LAN and WAN switches, dial access servers, Internet software and network management software. Most of these products incorporate features of the Cisco Internetwork Operating System (Cisco IOS(TM)) software, which provides various network services, as well as network connectivity, security and interoperability. The Company's business is subject to various risks as discussed in the "Other Risk Factors" section, and elsewhere in this report. The Company has expanded the Cisco IOS feature set by addressing new markets and technologies. These include a range of remote access products, as well as switching products. In 1994 the Company introduced the CiscoFusion(TM) architecture, which blends the capabilities of routed internetworks with the technologies of ATM, LAN workgroup switches and virtual LANs. Cisco's internetworking solutions are used by customers to form a single, seamless information infrastructure (a "network of networks") that allows people to access or transfer information without regard to differences in time, place or type of computer system. The internetworking market has experienced strong growth, caused by the increasingly important role that electronic information plays in modern life today. While internetworking has been used until recently primarily by large companies and institutions, the growth in use of the global Internet has shown that the benefits of internetworking are being adopted by organizations of all sizes, as well as individuals. Cisco sells and supports its products in approximately 75 countries through a combination of direct sales, distributors and resellers. The Company has established relationships with a number of companies to address specialized segments of the internetworking marketplace, and to sell and support its products. Cisco offers customer support through Technical Assistance Centers in California, North Carolina, Australia and Belgium. Satisfying customers' internetworking needs requires a constant monitoring of market and technology trends, plus an ability to act quickly. Cisco has a four-part approach to satisfying the need for new or enhanced internetworking products and solutions. In order of importance, this approach is to develop new technologies and products internally; enter into joint-development efforts with other companies; resell another company's products; and acquire all or part of another company. Beginning in fiscal year 1994, Cisco began entering new markets and broadening its product offerings through a series of acquisitions. The following acquisitions have been, or soon will be, integrated into one of the Company's business units, and product offerings, which are more fully described later in the "Products" section of this report. 2 3 In September 1993, the Company acquired Crescendo Communications, Inc. ("Crescendo") a networking company that provides high-performance workgroup solutions. The Company issued approximately 6.8 million shares of common stock for all the outstanding shares of common stock of Crescendo in a transaction that was accounted for as a pooling of interests. The Company also assumed options and warrants to purchase Crescendo stock that remain outstanding as options to purchase the Company's common stock. In August 1994, the Company acquired Newport Systems Solutions(TM), Inc. ("Newport"), a privately held networking company providing software-based routers for remote network sites. The Company issued approximately 6.5 million shares of common stock for all the outstanding stock of Newport in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Newport stock that remain outstanding as options to purchase the Company's common stock. In December 1994, the Company acquired Kalpana(R), Inc. ("Kalpana"), a privately held manufacturer of Ethernet switches. Under the terms of the agreement, the Company issued approximately 13.6 million shares of common stock for all the outstanding stock of Kalpana in a transaction accounted for as a pooling of interests. In connection with this transaction, the Company assumed options to purchase Kalpana stock that remain outstanding as options to purchase the Company's common stock. In January 1995, the Company acquired substantially all of the assets and assumed the liabilities of LightStream(R) Corporation ("LightStream"), a developer of enterprise-class Asynchronous Transfer Mode (ATM) switching technology, for $120.0 million in cash and related acquisition costs of approximately $.5 million. This acquisition was accounted for as a purchase. In September 1995, the Company acquired Combinet Inc. ("Combinet"), a privately held manufacturer of remote access networking products. The Company issued approximately 3.5 million shares of common stock for all the outstanding stock of Combinet in a transaction accounted for as a pooling of interests. In addition, the Company assumed options and warrants to purchase Combinet stock that remain outstanding as options to purchase the Company's common stock. In November 1995, the Company acquired Grand Junction Networks, Inc. ("Grand Junction") a privately held manufacturer of Fast Ethernet (100BaseT) and Ethernet desktop switching products. Under the terms of the agreement, the Company issued approximately 9.2 million shares of common stock for all the outstanding stock of Grand Junction in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Grand Junction stock that remain outstanding as options to purchase the Company's common stock. In March 1996, the Company acquired TGV Software Inc. ("TGV") a publicly-held developer of internetworking software. The Company issued approximately 2.4 million shares of common stock for all the outstanding shares of TGV in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase TGV stock that remain outstanding as options to purchase the Company's common stock. In July 1996, the Company acquired StrataCom, Inc.("StrataCom"). Under the terms of the agreement, one share of Cisco common stock was exchanged for each outstanding share of StrataCom, Inc. in a transaction accounted for as a pooling of interests. Approximately 76.4 million 3 4 shares of common stock were issued to acquire StrataCom. The Company also assumed options to purchase StrataCom stock that remain outstanding as options to purchase the Company's common stock. Business Combinations Pending or Completed after Year-end In September 1996, the Company acquired Nashoba Networks ("Nashoba"). The Company issued approximately 1.6 million shares of common stock for all the outstanding stock of Nashoba in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Nashoba stock that remain outstanding as options to purchase the Company's common stock. The historical operations of Nashoba and the impact of the transaction are not material to the financial position of the Company. Also, in September 1996, the Company acquired Granite Systems, Inc. ("Granite"), a company established to develop, market, and sell multilayer switching and gigabit Ethernet equipment. The Company issued approximately 2.2 million shares of common stock for all the outstanding stock of Granite in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Granite stock that remain outstanding as options to purchase the Company's common stock. The historical operations of Granite and the impact of the transaction are not material to the financial position of the Company. On July 22, 1996, the Company entered into an agreement to acquire Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation (MICA) technologies for $200 million in cash. The transaction will be accounted for as a purchase of assets and is expected to be completed by October 1996, subject to certain shareholder and regulatory approvals. Under the terms of the agreement, the Company will purchase Telebit patents, MICA intellectual property and establish employment contracts with MICA personnel, and will assume preferred stock and notes receivable of $35 million in respect of a planned management buyout of the remaining assets of Telebit. On October 14, 1996, the Company entered into an agreement to acquire Netsys Technologies ("Netsys"), a privately held innovator of network infrastructure management and performance analysis software. Under the terms of the agreement, shares of the Company's common stock worth approximately $79 million will be exchanged for all outstanding shares and options of Netsys in a transaction to be accounted for as a purchase. The Company has held a minority equity interest in Netsys since February 1995 along with a strategic reseller agreement. The agreement is subject to the receipt of certain government approvals and approval by Netsys shareholders and is expected to be completed by November 1996. The Company expects to make future acquisitions where it believes that it can acquire new products and channels of distribution or otherwise rapidly enter new or emerging markets. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that the foregoing or any future acquisitions will be successful and will not adversely affect the Company's financial condition or results of operations. 4 5 Cisco was incorporated in California in December 1984. The Company's executive offices are located at 170 West Tasman Drive, San Jose, California 95134, and its telephone number at that location is (408)526-4000. PRODUCTS Cisco's products are used individually or in combination to connect computer networks with each other, within a building, across a campus or around the world. The breadth of product offerings and modular system design enable the Company to configure hardware and software features to match customer needs. Many of the Company's products are expandable, offering customers the option to upgrade their internetworks with existing equipment as their needs grow. Cisco's product and solutions offerings fall into several categories: Core Routing Solutions Cisco pioneered the concept of a multi-protocol router, which moves information between networks that speak different "languages" (protocols). The Cisco 7000 family of routers delivers the high levels of performance and availability needed for mission-critical networked applications. Cisco 7000 family routers are used to create the backbone of enterprise-wide networks and service-provider infrastructures. Switching Solutions Switching is a complementary internetworking technology used in both workgroup local-area networks (LANs) and wide-area networks (WANs). Cisco's switching solutions employ all widely used switching technologies -- Ethernet (at both 10 and 100 million bits per second), Token Ring and Asynchronous Transfer Mode (ATM). Cisco's wide-area switching solutions are used by large enterprises and service providers (such as telecommunications carriers) to connect networks over long distances, using standard communications methods such as frame relay and ATM. Access Solutions Cisco's Access Solutions are employed by customers to give groups and individuals who are remotely located the same level of connectivity and information access as if they were located at headquarters. Asynchronous and ISDN remote-access routers and dial access servers are used for telecommuting, Internet access, branch-site connectivity, and in educational applications. SNA/LAN Solutions Most large organizations have existing IBM computing systems that use the System Network Architecture (SNA) networking method, as well as LANs based on open network architectures. Network managers with both types of networks increasingly want to combine them into a seamless internetwork that leverages the investments that have already been made. Cisco provides a broad range of products and solutions for this need that maximize availability, scalability, performance, flexibility, and management. The CiscoBlue strategy provides a roadmap for IBM internetworking customers who want to consolidate duplicate networks, effectively manage SNA and non-SNA resources, and integrate IBM networks into higher-speed switched internetworks. 5 6 Internet Solutions Cisco's Internet solutions are led by the CiscoAdvantage(TM) product line, which improves network managers' ability to cope with several challenges posed by the growing popularity of the Internet. These challenges include security, high volumes of network traffic, and the shortage of network addresses. CiscoAdvantage products are designed for use both by Internet service providers and by companies who manage their own networks. The products harness the intelligent capabilities of internetworks to offer smarter services to network users who want to access the World Wide Web. Cisco IOS Software Solutions Most Cisco products incorporate features of the Cisco IOS(TM) software, which ensures robust, reliable internetworks by supporting both LAN and WAN protocols, optimizing WAN services, and controlling internetwork access. Cisco IOS software also allows centralized, integrated, and automated installation and management of products. In addition, Cisco IOS technologies are licensed to other companies for use in complementary products, thus increasing the range of networking solutions that can be integrated through common functionality and management. Enterprise Network Management Cisco provides applications that centralize management, automate routine tasks, and can be integrated into customers' existing network management environments. The CiscoWorks software is a suite of standards-based applications that allow users to manage their Cisco devices from a single integrated console. CiscoWorks software provides applications for enterprise and switched internetwork management, remote monitoring, device management, simulation-based planning and problem-solving, and performance analysis. CUSTOMERS AND MARKETS Cisco market strategy addresses four types of customers. These are: Enterprise customers--Large enterprises with complex internetworking needs, including corporations, government and educational entities, and other large organizations; Service Providers--Companies that provide data communication services, including telecommunication carriers, cable companies, wireless communication providers, and Internet Service Providers; Volume Markets--Small and medium-sized businesses, home offices and residential users; Software Licensees--Other suppliers who license features of the Cisco IOS software for inclusion in their products or services. Internetworking needs are influenced by a number of factors, including the size of the customer's organization, number and types of computer systems, geographic locations, and the applications requiring data communications. Cisco's business is not concentrated in any particular industry and in each of the past five fiscal years, no single customer accounted for ten percent or more of the Company's net sales. An important trend influencing demand for the Company's products is the worldwide phenomenon of the Internet. The Internet is a network of networks, consisting of thousands of sub-networks and computer resources linked together. The demand by companies, institutions and individuals 6 7 for access to the Internet is spurring demand for a wide variety of Cisco's remote access, switching, routing and software products, and the Company also benefits from the Internet phenomenon through its relationships with numerous service providers. Another significant factor affecting internetworking is the global trend toward deregulated telecommunications and the resulting increase in use of higher-performance telecommunications services. Cisco has equipment installed with a majority of the world's major telecommunications carriers. The Company markets its products in the United States primarily through its direct sales force and resellers, and internationally, through distributors, value-added resellers (VARs) and its direct sales force in subsidiary companies. In addition, the Company sells to system integrators, both domestic and international, who resell the Company's internetworking products along with other computer and communications equipment. This multiple-channel approach allows customers to select the supply channel that addresses their specific needs and provides the Company with broad coverage of worldwide markets. The Company's worldwide direct sales organization consisted of 2,471 individuals, including managers, sales representatives, and technical support personnel. The Company has approximately 110 U.S. field sales offices providing coverage in the following metropolitan areas: Atlanta, Boston, Chicago, Cincinnati, Cleveland, Dallas, Denver, Durham, Honolulu, Houston, Indianapolis, Los Angeles, Miami, New Orleans, New York, Orlando, Phoenix, Pittsburgh, Portland (Oregon), Princeton, Salt Lake City, San Antonio, San Diego, San Francisco, San Jose, Seattle, St. Louis, and Washington, D.C., among others. The Company's international sales are currently being made through multiple channels including approximately 75 international distributors and resellers in Africa, Asia, Australia, Canada, Europe, Latin America, Mexico and South America. The international distributors provide system installation, technical support, and follow-up service to local customers. Generally, the Company's international distributors have nonexclusive, country-wide agreements. International sales through the various channels, including the Company's subsidiaries, accounted for approximately 48.2% of total sales in fiscal 1996, 41.7% in fiscal 1995, and 41.3% in fiscal 1994. Sales to international customers and distributors generally have been made in United States dollars. 7 8 The Company has sales support subsidiaries worldwide. New subsidiaries formed in fiscal 1996 include Argentina, Chile, Cisco Systems International B.V., Colombia, Costa Rica, Czech Republic, Malaysia, Netherlands, Peru, Spain, Singapore, and Thailand. No individual subsidiary has had direct sales that have been material to date. BACKLOG The Company's backlog on September 21, 1996 was approximately $292.3 million compared with an approximate backlog of $365.2 million at September 25, 1995. The Company includes in its backlog only orders confirmed with a purchase order for products to be shipped within six months to customers with approved credit status. Because of the generally short cycle between order and shipment, and occasional customer changes in delivery schedules or cancellation of orders (which are made without significant penalty), the Company does not believe that its backlog as of any particular date is necessarily indicative of actual net sales for any future period. COMPETITION Cisco competes in the computer networking market. The Company provides solutions to end user customers, as well as service providers, through both its direct sales and distributor channels. This market is characterized by rapid growth, technological change, and a convergence of technologies. These market factors represent both an opportunity and at the same time a competitive threat to Cisco. The Company faces competition from customers it licenses technology to and suppliers from whom it transfers technology. Networking's inherent nature is such that the Company must compete, and at the same time cooperate, with these companies. At a minimum these relationships exist to achieve interoperability. Optimally, these relationships are synergistic and mutually beneficial resulting in growth for the industry. 3Com, Bay Networks, IBM, Cabletron, Fore, Ascend, and Cascade exemplify companies that compete with Cisco. Some companies compete across all of Cisco's product lines, while others do not offer as wide a breadth of networking solutions. The Company estimates that it competes with over 70 vendors in Access routing, over 40 vendors in Core routing, over 50 vendors in Workgroup switching, over 30 vendors in Frame Relay and ATM switching, over 20 companies providing Internet software solutions, and over 40 vendors in SNA Internetworking. Cisco expects that the overall number of vendors will grow in these markets due to its attractive growth opportunities. However, the Company expects the growth in the overall number of competitive vendors to be partially offset by mergers and acquisitions. Consolidation in the industry is a result of customers and prospects requesting end-to-end solutions and wanting to reduce the number of suppliers. Also, companies in this industry seek synergies and market presence that may result from mergers and acquisitions. Several of the Company's current and potential competitors have substantially greater financial, marketing and technical resources than the Company. The principal competitive factors in these markets are: price; performance; the ability to provide end to end solutions and support; conformance to standards; added value features; and market presence. The Company promotes its CiscoFusion Architecture and Cisco IOS software, as providing the premier internetworking solutions in the industry. These solutions offer many competitive advantages in the areas described above. 8 9 RESEARCH AND DEVELOPMENT The market for the Company's products is characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. Management believes that the Company's future success depends in large part upon its ability to continue to enhance its existing products and to develop new products that maintain technological competitiveness. The Company closely monitors, through electronic mail and onsite visits by engineering personnel, customers' needs for additional products, and works actively with innovators of internetworking products, including universities, laboratories, and corporations. The Company intends to remain dedicated to industry standards and to continue to support important protocol standards as they emerge. The Company is focusing development efforts around its seven internal business units in the following areas: high-speed LAN and WAN switching technologies, core and remote-access routing, remote access and ISDN connectivity, improving overall system performance through increased software functionality, expanding its network management capabilities, and IBM and WAN services connectivity. Cisco's development efforts continue to be guided by its CiscoFusion architecture announced in 1994, with the Cisco IOS software serving as the underlying common thread. There can be no assurance, however, that the Company's product development efforts will result in commercially successful products, or that the Company's products will not be rendered obsolete by changing technology or new product announcements by others. The Company has announced several new products, including a wide range of remote access products and a new line of high-end routers. Although the Company has announced its expected shipment dates for some of these products, schedules for high-technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipments dates of these or any other new or enhanced products developed by the Company. Because timely availability of new and enhanced products and their acceptance by customers are critical to the success of the Company, delays in availability of these products or lack of market acceptance of such products could have a material adverse effect on the Company. In fiscal 1996, 1995, and 1994, the Company's research and development expenditures were approximately $399.3 million, $210.8 million, and $106.7 million respectively. All of the Company's expenditures for research and development costs, including purchased research and development of approximately $95.8 million in fiscal 1995, have been expensed as incurred. MANUFACTURING The Company's manufacturing operations consist primarily of quality assurance of materials, components and subassemblies, final assembly, and test. The Company presently uses a variety of independent third-party contract assembly companies to perform printed circuit board assembly, in circuit test, and product repair. The Company installs its proprietary software on electronically programmable memory chips installed in its systems in order to configure products to customer needs and to maintain quality control and security. The manufacturing process enables the Company to configure the hardware and software in unique combinations to meet a wide variety of individual customer requirements. The Company uses automated testing equipment and "burn-in" procedures, as well as 9 10 comprehensive inspection, testing, and statistical process control to assure the quality and reliability of its products. The Company's manufacturing processes and procedures are ISO 9001 certified. To date, the Company has not experienced significant customer returns of its products. PATENTS, INTELLECTUAL PROPERTY AND LICENSING Cisco's success is dependent upon its proprietary technology. Cisco generally relies upon patents, copyright, trademark and trade secret laws to establish and maintain its proprietary rights in its technology and products. Cisco has a program to file applications for and obtain patents in the United States and in selected foreign countries where a potential market for Cisco's products exists. Cisco has been issued several patents; other patent applications are currently pending. There can be no assurance that any of these patents will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide competitive advantages to Cisco. In addition, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect Cisco's technology. In addition, the laws of some foreign countries may not permit the protection of Cisco's proprietary rights to the same extent as do the laws of the United States. Although Cisco believes the protection afforded by its patents, patent applications, copyrights and trademarks has value, the rapidly changing technology in the networking industry makes Cisco's future success dependent primarily on the innovative skills, technological expertise and management abilities of its employees rather than on patent, copyright and trademark protection. Many of Cisco's products are designed to include software or other intellectual property licensed from third parties. From time to time, Cisco receives notices from third parties regarding patent claims. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products, Cisco believes that based upon past experience and standard industry practice, such licenses generally could be obtained on commercially reasonable terms. Because of the existence of a large number of patents in the networking field and the rapid rate of issuance of new patents, it is not economically practical to determine in advance whether a product or any of its components infringe patent rights of others. If infringement is alleged, Cisco believes that based upon industry practice, any necessary license or rights under such patents may be obtained on terms that would not have a material adverse effect on Cisco's financial condition or its results of operations. Nevertheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all, or that Cisco would prevail in any such challenge. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or litigation arising out of such other parties' assertion, could have a material adverse effect on Cisco's business, operating results and financial condition. OTHER RISK FACTORS The Company's business and stock is subject to a number of risks. Some of those risks are described below. Other risks are presented elsewhere in this report. See, in particular, the last eight paragraphs of "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of 1996 and 1995." 10 11 Potential Fluctuations in Quarterly Results The Company's operating results have in the past been, and may continue to be, subject to quarterly fluctuations as a result of a number of factors. These factors include the integration of people, operations and products from acquired businesses and technologies; increased competition, which Cisco expects; the introduction and market acceptance of new products, including high-speed switching and ATM technologies; variations in sales channels, product costs or mix of products sold; the timing of orders and manufacturing lead times; and changes in general economic conditions and specific economic conditions in the computer and networking industries, any of which could have an adverse impact on operations and financial results. For example, in the second quarter of fiscal 1995, the Company acquired substantially all of the assets of LightStream and incurred an expense of approximately $95 million associated with purchased research and development, which resulted in net income being significantly lower than in the prior quarter. Subsequent to fiscal 1996, the Company purchased Telebit, which, upon completion of the acquisition, will result in a charge to purchased research and development that may result in net income being significantly lower than in the prior quarter. Additionally, the dollar amounts of large orders for the Company's products have been increasing, and therefore the operating results for a quarter could be materially adversely affected if a number of large orders are either not received or are delayed, due for example, to cancellations, delays or deferrals by customers. Further, the Company's expense levels are required, in part, to generate future net sales. If net sales are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in net sales because a proportionately smaller amount of the Company's expenses varies with its net sales. 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. The Company has previously experienced longer sales cycles for its core products resulting from larger order sizes and believes that some customers may have deferred purchases at that time in order to complete detailed reviews of their overall network plans. This situation could occur again. In addition, in response to customer demand, the Company has, from time to time, reduced its product manufacturing lead times and its backlog of orders. To the extent that backlog is reduced during any particular period, it would result in more variability and less predictability in the Company's quarter-to-quarter net sales and operating results. Dependence on New Product Development; Rapid Technological and Market Change The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and evolving methods of building and operating networks. The Company's operating results will depend to a significant extent on its ability to reduce costs of existing products. In particular, the Company broadened its product line by introducing network access products. Sales of these products, which are generally lower priced and carry lower margins than the Company's core products, have increased more rapidly than sales of the core products. In addition, in 1994 Cisco announced its CiscoFusion architecture that provides a method of 11 12 merging router-based networks with emerging technologies such as ATM and LAN switches. While some elements of the CiscoFusion architecture have been introduced, others are still in development. The success of these and other new products is dependent on several factors, including proper new product definition, product cost, timely completion and introduction of new products, differentiation of new products from those of the Company's competitors and market acceptance of these products. The Company has addressed the need to develop new products through its internal development effort, joint developments with other companies and acquisitions. 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 failure of the Company's new product development efforts could have a material adverse effect on the Company's business operating results and financial condition. Acquisition Strategy In part, the Company has addressed, and expects to continue to address, the need to develop new products through the acquisition of other companies. Acquisitions involve numerous risks including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions, and the potential loss of key employees of the acquired company. Achieving the anticipated benefits of an acquisition will depend in part upon whether the integration of businesses is accomplished in an efficient and effective manner, and there can be no assurance that this will occur. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. The combination of companies requires, among other things, integration of the companies' respective product offerings and coordination of their sales and marketing and research and development efforts. There can be no assurance that such integration will be accomplished smoothly or successfully. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations following an acquisition, including the merger, will require the dedication of management resources that may distract attention from the day-to-day business of the combined company. The inability of management to successfully integrate the operations of any acquired company, could have a material adverse effect on the business and results of operations of the Company. In addition, as commonly occurs with mergers of technology companies, during the pre-merger and integration phases, aggressive competitors may undertake initiatives to attract customers and to recruit key employees through various incentives. Manufacturing Risks Although the Company generally uses standard parts and components for its products, certain components are presently available only from a single source or limited sources. The Company has generally been able to obtain adequate supplies of all components in a timely manner from existing sources, or where necessary, from alternative sources of supply. A reduction or interruption in supply or a significant increase in the 12 13 price of one or more components would adversely affect the Company's operating results and could damage customer relationships. Risks Associated With Internet Infrastructure The Company's management believes that there will be in the future performance problems with Internet communications which could receive a high degree of publicity and visibility. Since the Company is a large supplier of equipment for the Internet infrastructure, customer's perceptions of the Company's products and the marketplace's perception of Cisco as a supplier of internetworking products, whether or not these problems are due to the performance of Cisco's products, may be adversely affected. Such an event could also result in an adverse effect of the market price of the Company's Common Stock and could adversely affect Cisco's business. Business Environment There is a State of California initiative called Proposition 211 on the November 5, 1996 ballot which the Company believes may substantially increase the likelihood of securities fraud lawsuits being brought against the Company and its officers and directors. Such lawsuits, if brought, could adversely affect the market price of the Company's Common Stock. Additionally, the initiative could make it extremely unattractive for individuals to serve as officers and directors of publicly-held companies which may affect Cisco's ability to obtain or retain qualified individuals to serve in such capacities. The Company is also considering taking certain actions if the initiative passes, but has not made final decisions. Such actions, if taken, may affect shareholder rights, result in increased expenses to the Company and result in reduced communication with market analysts. Volatility of Stock Price The Company's Common Stock has experienced substantial price volatility, particularly as a result of variations between the Company's actual or anticipated financial results and the published expectations of analysts and as a result of announcements by the Company and its competitors. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in particular and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock in the future. EMPLOYEES As of September 21, 1996, the Company employed 8,782 persons, including 2,147 in manufacturing, service, and support, 3,387 in sales and marketing, 2,420 in engineering, and 828 in finance and administration. Approximately 1,400 employees were in international locations. The Company also employs a number of temporary and contract employees. As of September 21, 1996, the Company employed approximately 1,600 such individuals. None of the employees is represented by a labor union, and the Company considers its relations with its employees to be positive. The Company has experienced no work stoppages. Competition for technical personnel in the Company's industry is intense. To date, the Company believes that it has been successful in recruiting qualified employees, but there is no assurance that it will continue to be as successful in the future. The Company believes that its future success depends in part on its continued ability to hire, assimilate, and retain qualified personnel. ITEM 2. PROPERTIES The Company's principal corporate offices are located at sites in Santa Clara and San Jose, California. The Santa Clara facilities are leased through June 1998 and have approximately .1 million square feet of office space. The Company's main headquarters are situated on 82 acres of leased land in San Jose, California. There are twelve buildings located at this site, one of which is a manufacturing facility. The San Jose headquarters consist of approximately 1.4 million square feet of leased office space at the present time. Construction has started at this site on three additional office buildings of approximately .3 million square feet which are expected to be occupied sometime in the middle of calendar 1997. As part of the StrataCom acquisition, the Company also assumed certain operating leases for buildings. The buildings, including an additional manufacturing facility, are located at various sites in San Jose, California and total approximately .5 million square feet. In addition to the California facilities, the Company leases approximately 45 acres of land in Research Triangle Park, North Carolina, where the InterWorks Business Unit, as well as a Technical Assistance Center, telesales, and various other support functions, are 13 14 located. Two building of approximately .2 million square feet have been constructed and are currently occupied under a lease that expires in July 1999. A third building is currently under construction. In April 1996, the Company announced an agreement with the State of California and the City of San Jose which provides for the acquisition of approximately 139 acres of land located in northeast San Jose subject to certain conditions. The transaction is valued at approximately $95 million, with the counterparties providing approximately $25 million in infrastructure and improvements. The Company anticipates that this site will accommodate its growth for the next five years. Certain legal challenges were raised subsequent to the announcement of the agreement that may impact the Company's ability to complete this acquisition. Although there are alternative sites, they may not be as cost effective or suitable for the Company's needs. The Company's inability to successfully purchase this land may impede it from having facilities adequate to meet future demand. Nevertheless, management believes that suitable additional space will be available to accommodate expansion of the Company's operations on commercially reasonable terms. The Company also leases various small offices throughout the U.S. and on a worldwide basis. See Note 7 to the Consolidated Financial Statements for additional information regarding the Company's obligations under leases. ITEM 3. LEGAL PROCEEDINGS Pursuant to a Purchase and Sale Agreement and Joint Escrow Instructions dated April 1996, ("Purchase Agreement"), Cisco is under contract to purchase approximately 160 gross acres of undeveloped land("Property") in the City of San Jose, California from the State of California. Pursuant to Section 5.3 of the Purchase Agreement, Cisco's obligation to acquire the Property is conditional upon receipt of all governmental approvals needed for Cisco's intended use of the Property (for an expansion of its research and development facilities). Among the necessary approvals is an amendment to the General Plan of the City of San Jose ("GPA") redesignating the Property for industrial use. The State of California filed an application for the GPA, which was approved by the San Jose City Council on May 21, 1996. On June 21, 1996, a group of businesses and landowners in the neighboring City of Milpitas filed a "Petition for writ of Mandate and Administrative Mandamus and Complaint for Declaratory and Injunctive Relief" against the City of San Jose challenging the GPA. The action is entitled Tencor Instruments, Inc. v. City of San Jose; City Council of the City of San Jose; City of San Jose Planning Commission; and Does I through X, and is currently pending in the Superior Court of the State of California, County of Santa Clara. The action alleges that the environmental impact report ("EIR") prepared by the City of San Jose in connection with the GPA fails to meet the requirements of the California Environmental Quality Act ("CEQA"). If successful, the action would invalidate both the EIR and the GPA, and would preclude the City of San Jose from granting any approvals pursuant to the GPA until the EIR was brought into compliance with CEQA. See Item 2 "Properties" above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 14 15 EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
POSITION NAME AGE POSITION HELD SINCE ---- --- -------- ---------- Larry R. Carter 53 Vice President, Finance and Administration, Chief 1995 Financial Officer, and Secretary Mr. Carter joined the Company in January 1995 in his present position. From July 1992 to January 1995, he was Vice President and Corporate Controller for Advanced Micro Devices. Prior to that, he was with V.L.S.I. Technology, Inc. for four years where he held the position of Vice President, Finance and Chief Financial Officer. John T. Chambers 47 President, Chief Executive Officer and Director 1995 (1)(4)(5)(6) Mr. Chambers has been a member of the Board of Directors since November 1993. He joined the Company as Senior Vice President in January 1991 and became Executive Vice President in June 1994. Mr. Chambers became President and Chief Executive Officer of the Company as of January 31, 1995. Prior to his services at Cisco, he was with Wang Laboratories for eight years, most recently as Senior Vice President of U.S. Operations. Mr. Chambers Currently serves on the Board of Directors for Clarity and Arbor Software. Dr. Michael S. Frankel 50 Director 1992 (2)(3)(5) Dr. Frankel has been a member of the Board of Directors since May 1992. He has been Vice President and Division Director of SRI International since January 1989 and became Center Director of SRI International in 1986. Dr. Frankel is not running for re-election and will cease being a Board Member in November 1996. Dr. James F. Gibbons 65 Director 1992 (2)(4)(5) Dr. Gibbons has been a member of the Board of Directors since May 1992. He is a Professor of Electrical Engineering at Stanford University and also Special Consul to the Stanford President for Industrial Relations. He was Dean of the Stanford University School of Engineering from 1984 to 1996. Dr. Gibbons also currently serves on the Board of Directors of Lockheed Martin Corporation, Centigram Communications Corporation, El Paso Natural Gas Company, Amati Communications Corporation and Raychem Corporation. Edward R. Kozel 41 Vice President, Business Development, and Chief 1995 Technical Officer Mr. Kozel, will, assuming election by the Company's shareholders, become a member of the Board of Directors. He joined the Company as Director, Program Management in March 1989. In April 1992, became Director of Field Operations and in February 1993 he became Vice President of Business Development. Since January 1996, he has been Chief Technology Officer of the Company. Mr. Kozel currently serves on the Board of Directors of Cybercash and NetFrame Systems. Donald A. LeBeau 49 Senior Vice President, Worldwide Operations 1994 Mr. LeBeau joined the Company as Vice President of North American Sales in July 1992 and became Senior Vice President of Worldwide Sales in August 1994. From May 1989 to July 1992, he was Vice President of Western Operations at Wang Laboratories. From August 1985 to May 1989 he was with United Research most recently as Senior Vice President. On October 1, 1996 Mr. LeBeau took a one-year leave of absence from the Company.
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POSITION NAME AGE POSITION HELD SINCE ---- --- -------- ---------- Richard M. Moley 57 Senior Vice President and General Manager 1996 Wide-Area Network Business Unit Mr. Moley has been a member of the Board of Directors since July 1996. He has been Senior Vice President, Wide Area Business Unit since July 1996. Prior to that, he was President, Chief Executive Officer and Chairman of StrataCom, Inc. from June 1986 to July 1996. Mr. Moley currently serves on the Board of Directors of Linear Technology, Inc. and Cidco, Inc. John P. Morgridge 63 Chairman of the Board of Directors 1995 (1)(5)(6) Mr. Morgridge joined the Company as President and Chief Executive Officer and was elected to the Board of Directors in October 1988. Mr. Morgridge became Chairman of the Board on January 31, 1995. From 1986 to 1988 he was President and Chief Operating Officer at GRiD Systems, a manufacturer of laptop computer systems. Mr. Morgridge currently serves on the Board of Directors of Polycom, Inc. Robert L. Puette 54 Director 1991 (2)(3)(4) Mr. Puette has been a member of the Board of Directors since January 1991. He has been President, Chief Executive Officer and on the Board of Directors of NetFRAME Systems, since January 1995 and became Chairman of the Board of Directors in January 1996. He was a consultant from November 1993 to December 1994. Prior to that, he was Senior Vice President of Apple Computer, Inc. and President of Apple USA Division from June 1990 to October 1993. Mr. Puette also currently serves on the Board of Directors of Quality Semiconductor. Carl Redfield 49 Vice President, Manufacturing 1993 Mr. Redfield joined the Company in August 1993 as Director, Supply/Demand of Manufacturing and became Vice President of Manufacturing in September 1993. Prior to joining Cisco, he spent eighteen years at Digital Equipment Company, most recently as Group Manufacturing and Logistics Manager of the PC Group. Masayoshi Son 39 Director 1995 Mr. Son has been a member of the Board of Directors since July 26, 1995. He has been the President and Chief Executive Officer of SOFTBANK Corporation for more than fifteen years. Donald T. Valentine 64 Vice Chairman of the Board of Directors 1995 (1)(5) Mr. Valentine has been a member of the Board of Directors of the Company since December 1987, and was elected Chairman of the Board of Directors in December 1988. He became Vice Chairman of the Board on January 31, 1995. He has been a general partner of Sequoia Capital since 1974. Mr. Valentine currently serves as Chairman of the Board of Directors of C-Cube Microsystems, Inc., a semiconductor video compression company, Chairman of the Board of Network Appliance Corporation, a company in the network file server business, and Chairman of the Board of Elantec, a manufacturer of analog integrated circuits.
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POSITION NAME AGE POSITION HELD SINCE ---- --- -------- ---------- F. Selby Wellman 54 Senior Vice President, Business Units 1996 Mr. Wellman joined the Company in April 1995 as Vice President and General Manager of InterWorks Business Unit in Research Triangle Park, North Carolina. He was promoted to Senior Vice President of Business Units in March 1996. Prior to joining Cisco, Mr. Wellman was Corporate Vice President of Sales, Marketing and Operations at FiberCom Inc. /NetEdge Systems, Inc. from 1988-1994. From 1984- 1988, he was Corporate Vice President and General Manager of Sales and Marketing at Paradyne, Corp. Mr. Wellman began his career with IBM where he held a variety of field, staff, and management positions in IBM's Large System Division over a 15 year period. Steven M. West 41 Mr. West has been a member of the Board of 1996 (3) Directors of the Company since April 1996. He has been President and Chief Executive Officer of Hitachi Data Systems Corporation, a joint venture computer hardware services company owned by Hitachi, Ltd. And EDS, since June 1996. Prior to that Mr. West was at EDS from 1986 to June of 1996, most recently as President of EDS's Infotainment Business Unit.
------- (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) Member of the Special Stock Option Committee TRANSFER AGENT AND REGISTRAR The First National Bank of Boston c/o Boston EquiServe M/S 45-02-09 P.O. Box 644 Boston, MA 02102 http://www.EQUISERVE.com Investor Relations: 617 575-3120 INDEPENDENT ACCOUNTANTS & LEGAL COUNSEL Coopers & Lybrand L.L.P. San Jose, California Brobeck, Phleger & Harrison LLP Palo Alto, California 17 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK MARKET INFORMATION The following table sets forth the price range of the Company's common stock for the periods indicated. Prices reflect the two-for-one splits effective March 1994 and February 1996:
1996 1995 1994 High Low High Low High Low ---- --- ---- --- ---- --- First Quarter $ 38.62 $ 26.12 $ 15.00 $ 10.43 $ 14.68 $ 10.43 Second Quarter 43.93 32.68 18.31 15.06 17.68 12.37 Third Quarter 52.37 40.56 20.37 16.28 20.18 14.50 Fourth Quarter 58.75 47.12 29.31 19.68 16.25 9.53
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 8,568 shareholders of record on October 4, 1996. ITEM 6. SELECTED FINANCIAL DATA FIVE YEARS ENDED JULY 28, 1996 (In thousands, except per-share amounts)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net sales $ 4,096,007 $ 2,232,652 $ 1,334,436 $ 714,533 $ 381,996 ============= ============= ============= ============= ============= Net income $ 913,324 $ 456,489 $ 322,981 $ 176,201 $ 81,861 ============= ============= ============= ============= ============= Net income per common share $ 1.37 $ 0.72 $ 0.54 $ 0.30 $ 0.15 ============= ============= ============= ============= ============= Shares used in per-share calculation 666,586 630,711 596,539 580,623 561,987 ============= ============= ============= ============= ============= Total assets $ 3,630,232 $ 1,991,949 $ 1,129,034 $ 656,394 $ 361,273 ============= ============= ============= ============= =============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K may consist of forward-looking statements that involve risks and uncertainties. These statements may differ materially from actual future events or results. Readers are referred to the "Other Risk Factors" section of this Form 10-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. COMPARISON OF 1996 AND 1995 Net sales grew to $4,096 million in 1996 from $2,233 million 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 18 19 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 of the IPXo, BPX, IGX 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 is attributable 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 any 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. 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 high-speed switching products will continue to increase at a faster rate than the market for the Company's higher-margin router products. The Company is attempting to offset this trend through various means, such as emphasizing software content, increasing the functionality of its products, controlling warranty and 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 in 1996 by $188.5 million over 1995 expenditures. This represents an increase to 9.7% of net sales from 9.4% in 1995. The increase reflects the Company's ongoing research and development efforts, including the further development of CiscoFusiono 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. All of the Company's research and development costs are expensed as incurred. The Company is primarily developing new technologies internally, and because of this, research and development as a percentage of sales is expected to increase. 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. Sales and marketing expenses increased by $326.3 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 of approximately 1,200 employees 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, such as CiscoProo, to support the launch of new products; the 19 20 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 channel associated with the Company's initial efforts to reach the mass market. General and administrative expenses rose by $74.5 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, and a one-time write-down of $5.1 million of LightStream goodwill. There were also non-recurring costs related to the acquisition of StrataCom which totaled $15.5 million for fiscal 1996. Excluding the effect of these non-recurring costs, general and administrative expenses as a percentage of net sales declined to 3.4%, which reflects management's continued controls over discretionary spending. The Company is continuously evaluating potential acquisition candidates as part of its growth strategy and incurs legal, accounting, and other related costs associated with this activity. 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 year 1995 reflects the acquisition of LightStream (see note 3). Interest and other income, net, was $64.0 million in 1996 and $40.0 million in 1995. Interest income rose as a result of additional investment income on the Company's increasing investment balances. The Company currently holds approximately 5.4 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 expects to begin selling its equity stake in this company. As a result, interest and other income may increase materially in the next fiscal year versus fiscal 1996. 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. Presently, the Company's primary exposures relate to the U.S. dollar value of non dollar-denominated sales in Japan, Canada, and Australia and non dollar-denominated operating expenses in Europe, Latin America, and Asia where the Company sells primarily in U.S. dollars. At the present time, the Company hedges only those currency exposures associated with certain non-functional currency assets and liabilities and does not generally hedge anticipated foreign currency cash flows. 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. 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 market value of the Company's investment portfolio while increasing the costs 20 21 associated with its lease commitments. The Company does not currently hedge these interest rate exposures. RECENT ACCOUNTING PRONOUNCEMENTS During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 will be effective for the Company's fiscal year 1997. The Company has studied the implications of the statement, and based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition or results of operations upon adoption. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This statement, which establishes a fair value-based method of accounting for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures of pro forma net income and earnings per share under the new method. The Company is required to adopt SFAS No. 123 by fiscal 1997, and, upon adoption, will elect to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25. Pro forma disclosure of net income and earnings per share will reflect the difference between compensation cost included in net income and the related cost measured by the fair value- based method defined in SFAS No. 123, including tax effects that would have been recognized in the consolidated statement of operations if the fair value-based method had been used. FUTURE GROWTH SUBJECT TO RISKS The internetworking 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 products of the acquired companies; 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. In particular, this would include potential growth associated with the StrataCom acquisition. The Company has not completed an acquisition and integration of a company of StrataComs size to date. This process could divert management's attention from normal daily operations of the business. Failure to manage growth effectively and successfully integrate StrataCom or other acquisitions made by the Company could adversely affect the Company's business and operating results. The Company's growth and ability to meet customer demand also depend in part on its ability to obtain timely supplies of parts from its vendors. While lead times for commodity components have improved recently, some components, particularly proprietary application-specific integrated circuits (ASICs) and other 21 22 networking-specific components, continue to be in short supply. An inability to obtain these items at reasonable prices could have a materially adverse effect on the Company's growth 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 Cisco's products or technologies obsolete or noncompetitive. The failure of Cisco's new product development efforts could have a material adverse effect of Cisco's business operating results and financial condition. 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 1996 and 1995, the Company's lead times for certain products and backlog increased. If manufacturing lead times are not reduced, the Company's customers may cancel orders or not place further orders if shorter lead times are available from other manufacturers. Each year, with the exception of fiscal years 1996 and 1995, the Company has generally had one quarter of a fiscal year when backlog has been reduced. Traditionally, this has occurred in the third quarter of each year. While such a reduction did not occur in the past two fiscal years, such reductions are extremely difficult to predict and may occur in the future. In addition, in response to customer demand, the Company has, from time to time, reduced its product manufacturing lead times, which resulted in corresponding reductions in order backlog. To the extent that backlog levels decline during any particular period, it could result in more volatility and less predictability in the Company's quarter-to-quarter net sales and operating results. The Company also expects that gross margins may be adversely affected by increases in material or labor costs, heightened price competition, and changes in channels of distribution or in the mix of products sold. In particular, the Company broadened its product line by introducing network access products. Sales of these products, which are generally lower priced and carry lower gross margins than the Company's core products, have increased more rapidly than sales of the core products. The introduction of the CiscoPro line during 1996, as well as the increasing growth rates experienced in the switching markets, may accelerate this trend. 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 results of operations for fiscal 1996 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, especially StrataCom; increased competition in the internetworking industry; the overall trend toward industry consolidation; the introduction and market acceptance of new products, including high-speed switching and ATM technologies; variations in sales channels, product costs, or mix of products sold; the timing of orders and manufacturing lead times; and changes in general economic conditions, 22 23 any of which could have a material adverse impact on operations and financial results. In April 1996, the Company announced an agreement with the State of California and the City of San Jose that provides for the acquisition of approximately 139 acres of land located in northeast San Jose subject to certain conditions. The transaction is valued at approximately $95 million, with the counterparties providing approximately $25 million in infrastructure and improvements. The Company anticipates that this site will accommodate its growth for the next five years. Certain legal challenges were raised subsequent to the announcement of the agreement that may impact the Company's ability to complete this acquisition. Although there are alternative sites, they may not be as cost effective or suitable for the Company's needs. The Company's inability to successfully purchase this land may impede it from having facilities adequate to meet future demand. 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. Operating results could be materially affected by a significant earthquake. COMPARISON OF 1995 AND 1994: Net sales grew to $2,233 million in 1995 from $1,334 million in 1994. The 67.3% increase in net sales during the year was primarily a result of increasing unit sales of the Cisco 7010, the Cisco 7000, and the Cisco 2500 series; greater market acceptance of ATM WAN switching products; sales of new products including the Cisco 4500; and the initial market acceptance of the Company's high-speed switching products. These increases were partially offset by decreasing unit sales of the Company's older product lines, comprising the AGS+ as well as the Cisco 2000 and Cisco 3000 series. Sales to international customers were 41.7% of net sales in 1995 compared with 41.3% in 1994. This moderate increase reflects the Company's continued expansion into new geographic markets. Gross margins increased to 66.7% of net sales in 1995 from 66.2% in 1994. Gross margins improved as a result of several factors, including lower material costs achieved through volume and prompt payment discounts, certain manufacturing overhead efficiencies, and a decrease in warranty expenses. This improvement was partially offset by the continued shift in revenue mix to the Company's lower-margin remote access products. Research and development expenses increased $104.1 million in 1995 over 1994, an increase to 9.4% of net sales in 1995 from 8.0% in 1994. The increase reflected the Company's ongoing research and development efforts, including the further development of its CiscoFusion architecture, as well as the acquisition of technologies to bring a broad range of products to market in a timely fashion. A significant portion of the increase was due to the addition of new personnel, primarily from hiring and to a lesser extent through acquisitions, as well as higher material costs for prototypes and depreciation on new equipment. Sales and marketing expenses increased $174.5 million in 1995 over 1994, an increase to 17.9% of net sales from 16.9%. The increase in these expenses resulted from an increase in the size of the Company's direct sales force and its commissions, additional marketing programs to 23 24 support the launch of new products, the entry into new markets both domestic and international, and expansion of distribution channels. General and administrative expenses rose $33.8 million in 1995, a slight decrease to 3.8% from 3.9% of net sales. The increase in the dollar amount of these expenses reflects increased personnel costs, implementation of the Company's new information system, and the amortization of goodwill since the date of the acquisition of the assets and assumption of the liabilities of LightStream (see note 3). The amount expensed to purchased research and development related to the acquisition of the assets and assumption of the liabilities of LightStream (see note 3). Interest and other income, net, was $40.0 million in 1995 and $22.3 million in 1994. Interest income rose as a result of higher average investment balances in 1995 versus 1994. LIQUIDITY AND CAPITAL RESOURCES Cash, short-term investments, and investments were $1,870 million at July 28, 1996, an increase of $895.4 million from 1995. The increase reflects cash generated by operations and, to a lesser extent, the exercise of employee stock options. This increase was partially offset by capital expenditures of approximately $282.8 million and by the repurchase of $115.6 million of common stock during the year. The company entered into an agreement to purchase Telebit Corporation for $200 million in cash; It anticipates that it will make the disbursement in the first quarter of fiscal 1997. Accounts receivable rose 47.7% during 1996, while sales grew by 83.5%. Days sales outstanding in receivables were 44 days at the end of the year versus 54 days at July 30, 1995. Inventories increased by 268.2% in 1996 compared with 1995 because of production planning associated with higher sales levels and desired manufacturing lead times, particularly on new products. The growth in inventory in recent quarters may result in future write-downs due to obsolescence if the Company does not correctly anticipate market demand for certain products. At the same time, the Company recognizes that it must maintain strategic levels of components to ensure its manufacturing lead times will remain competitive. As such, the Company may carry more inventory than it has historically. Accounts payable increased by 156.9% in 1996 compared to 1995 because of increases in operating expenses and material purchases to support the growth in net sales. The 108.0% increase in accrued payroll and related expenses can be attributed to a 102.2% increase in personnel during the year. Other accrued liabilities increased by 53.5% over 1995, primarily because of increases in deferred service contract revenues, as well as accruals made for merger-related costs associated with the StrataCom acquisition. At July 28, 1996, the Company had a line of credit totaling $100.0 million, which expires April 1998. There have been no borrowings under this agreement. The Company has entered into certain lease arrangements in San Jose, California, and Research Triangle Park, North Carolina, where it has established its headquarters operations, certain research and development, and customer support activities. In connection with these transactions, the Company pledged $228.6 million of its investments as 24 25 collateral for certain obligations of the leases. The restricted investments balance will continue to increase as the Company continues to expand its operations at these and other possible lease sites. Under the Company's stock repurchase program, shares have been purchased periodically to meet employee stock plan requirements. On October 9, 1996, the Company terminated its share repurchase program. Approximately 7.2 million shares of common stock have been repurchased by the Company since the original authorization of the program in August 1994. 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 1997. 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CISCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
July 28, July 30, 1996 1995 ---- ---- ASSETS Current assets: Cash and equivalents $ 279,695 $ 284,388 Short-term investments 758,489 279,754 Accounts receivable, net of allowance for doubtful accounts of $21,074 in 1996 and $18,427 in 1995 622,859 421,747 Inventories, net 301,188 81,805 Deferred income taxes 101,827 88,038 Prepaid expenses and other current assets 95,582 28,428 ----------- ----------- Total current assets 2,159,640 1,184,160 Investments 832,114 410,798 Restricted investments 228,644 173,073 Property and equipment, net 331,315 172,561 Other assets 78,519 51,357 ----------- ----------- Total assets $ 3,630,232 $ 1,991,949 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 153,683 $ 59,812 Income taxes payable 169,894 71,970 Accrued payroll and related expenses 195,197 93,863 Other accrued liabilities 250,579 163,236 ----------- ----------- Total current liabilities 769,353 388,881 Commitments (note 7) Minority interest 41,257 40,792 Shareholders' equity: Preferred stock, no par value, 5,000 shares authorized: none issued or outstanding in 1996 and 1995 Common stock, no par value, 1,200,000 shares authorized: 649,284 shares issued and outstanding in 1996 and 617,176 shares in 1995 888,067 508,674 Retained earnings 1,777,369 996,805 Unrealized gain on marketable securities 158,848 50,948 Cumulative translation adjustments (4,662) 5,849 ----------- ----------- Total shareholders' equity 2,819,622 1,562,276 ----------- ----------- Total liabilities and shareholders' equity $ 3,630,232 $ 1,991,949 =========== ===========
The accompanying notes are an integral part of these financial statements. 26 27 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share amounts)
Years Ended ------------------------------------------ July 28, July 30, July 31, 1996 1995 1994 ---------- ---------- ---------- Net sales $4,096,007 $2,232,652 $1,334,436 Cost of sales 1,409,862 742,860 450,591 ---------- ---------- ---------- Gross margin 2,686,145 1,489,792 883,845 Expenses: Research and development 399,291 210,815 106,680 Sales and marketing 726,278 399,983 225,511 General and administrative 159,770 85,271 51,484 Purchased research and development 95,760 ---------- ---------- ---------- Total operating expenses 1,285,339 791,829 383,675 ---------- ---------- ---------- Operating income 1,400,806 697,963 500,170 Interest and other income, net 64,019 40,014 22,330 ---------- ---------- ---------- Income before provision for income taxes 1,464,825 737,977 522,500 Provision for income taxes 551,501 281,488 199,519 ---------- ---------- ---------- Net income $ 913,324 $ 456,489 $ 322,981 ========== ========== ========== Net income per common share $ 1.37 $ 0.72 $ 0.54 ========== ========== ========== Shares used in per-share calculation 666,586 630,711 596,539 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 27 28 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Common Stock Unrealized Total Number Gain on Cumulative Share- of Retained Marketable Translation holders' Shares Amount Earnings Securities Adjustment Equity ----------- ----------- ----------- ----------- ----------- ----------- Balances July 25, 1993 556,460 $ 210,290 $ 311,676 $ (428) $ 521,538 Issuance of common stock under stock option and purchase plans 15,313 24,810 24,810 Tax benefits related to disqualifying dispositions of stock options 36,283 36,283 Pooling of interests with Crescendo Communications, Inc. 6,792 11,295 (12,855) (1,560) Net income 322,981 322,981 Translation adjustments 270 270 ----------- ----------- ----------- ----------- ----------- ----------- 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 a secondary offering by StrataCom 6,900 81,688 81,688 Tax benefits related to disqualifying dispositions of stock options 59,348 59,348 Common stock repurchases (4,188) (2,073) (67,808) (69,881) Pooling of interests with Newport Systems Solutions(TM), Inc. 6,524 6,805 1,603 8,408 Pooling of interests with Kalpana(R), Inc. 13,642 26,568 (15,281) 11,287 Unrealized gains on marketable securities $ 50,948 50,948 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
28 29 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (In thousands)
Unrealized Total Number Gain on Cumulative Share- of Retained Marketable Translation holders' Shares Amount Earnings Securities Adjustment Equity ----------- ----------- ----------- ----------- ----------- ----------- 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 related to disqualifying dispositions of stock options 198,468 198,468 Common stock repurchases (3,060) (3,876) (111,745) (115,621) Pooling of interests with Combinet, Inc. 3,525 13,262 (6,920) 6,342 Pooling of interests with Grand Junction Networks, Inc. 9,171 17,064 (17,994) (930) Pooling of interests with TGV Software, Inc. 2,398 32,254 3,834 36,088 Other acquisitions 1,002 5,667 65 5,732 Unrealized gains on marketable securities 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 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 29 30 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended ----------------------------------------------- July 28, July 30, July 31, 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 913,324 $ 456,489 $ 322,981 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132,594 74,961 36,293 Provision for doubtful accounts 18,548 15,213 5,102 Provision for inventory allowances 53,025 55,783 17,597 Deferred income taxes (74,292) (74,856) (31,406) Tax benefit of disqualifying dispositions 198,468 59,348 36,283 Change in operating assets and liabilities: Accounts receivable (219,628) (181,083) (117,726) Inventories (272,408) (104,484) (24,784) Prepaid expenses and other current assets (67,154) (16,725) (5,882) Accounts payable 93,773 22,605 8,834 Income taxes payable 97,924 27,976 26,200 Accrued payroll and related expenses 101,221 43,485 21,810 Other accrued liabilities 87,331 64,121 33,020 ----------- ----------- ----------- Net cash provided by operating activities 1,062,726 442,833 328,322 ----------- ----------- ----------- Cash flows from investing activities: Purchases of short-term investments (786,197) (341,578) (172,069) Proceeds from sales and maturities of short-term investments 641,974 295,234 151,269 Purchases of investments (809,098) (289,569) (560,090) Proceeds from sales and maturities of investments 219,178 228,680 348,123 Purchases of restricted investments (164,624) (160,396) (74,343) Proceeds from sales and maturities of restricted investments 115,429 100,472 52,341 Acquisition of property and equipment (282,840) (151,828) (69,831) Acquisition of business, net of cash acquired and purchased research and development (17,920) Other 8,337 5,273 (2,966) ----------- ----------- ----------- Net cash used by investing activities (1,057,841) (331,632) (327,566) ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock 116,554 135,348 24,810 Common stock repurchases (115,621) (69,881) Proceeds from sale of subsidiary stock 40,548 Other (10,511) 6,007 270 ----------- ----------- ----------- Net cash (used) provided by financing activities (9,578) 112,022 25,080 ----------- ----------- ----------- Net (decrease) increase in cash and equivalents (4,693) 223,223 25,836 Cash and equivalents, beginning of period 284,388 61,165 35,329 ----------- ----------- ----------- Cash and equivalents, end of period $ 279,695 $ 284,388 $ 61,165 =========== =========== ===========
Non-cash investing and financing activities are as follows:
July 28, July 30, 1996 1995 Transfers of securities to restricted investments $ 3,586 $ 27,249 ======== ======== Unrealized gain on marketable securities $173,054 $ 82,704 ======== ========
The accompanying notes are an integral part of these financial statements. 30 31 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) 1. DESCRIPTION OF BUSINESS Cisco Systems, Inc. ("Cisco" or "the Company") develops, manufactures, markets and supports high-performance, multiprotocol internetworking systems that link geographically dispersed local-area and wide-area networks ("LANs" and "WANs", respectively). Cisco's products include a wide range of routers, LAN and WAN switches, dial access servers, and network management solutions. The Company sells its products in approximately 75 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 Sunday in July. The fiscal years ended July 28, 1996, July 30, 1995, and July 31, 1994 comprised 52, 52, and 53 weeks, respectively. Commencing with fiscal year 1997, the Company's fiscal year will be the 52- or 53-week period ending on the last Saturday 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 corporate securities. These investments are carried at market value and have maximum maturities of one year. 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, foreign and corporate securities with maturities of more than one year. These investments are carried at market value. 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 market value and are restricted as to withdrawal (see note 7). Restricted investments are held in the Company's name and custodied with one major financial institution. 31 32 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) Fair Value of Financial Instruments Carrying amounts of certain of the Company's financial instruments including cash and cash 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. Concentrations Cash and cash 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 vendor 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. 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. Income Taxes The Company accounts for income taxes pursuant to Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," which uses the liability method to calculate deferred income taxes. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Computation of Net Income per Common Share Net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. Foreign Currency Translation The Company's international subsidiaries use their local 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. Forward Exchange Contracts 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 32 33 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) than the functional currency of the reporting entity. Gains and losses on these contracts are recognized in net income in the period in which exchange rate changes occur. Fair market values of exchange contracts are determined using published rates. 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 revenues and expenses during the reporting period. Actual results could differ from these estimates. Recent Accounting Pronouncements During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 will be effective for the Company's fiscal year 1997. The Company has studied the implications of the statement, and based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition or results of operations upon adoption. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This statement, which establishes a fair value-based method of accounting for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures on a pro forma basis of net income and earnings per share under the new method. The Company is required to adopt SFAS No. 123 by fiscal 1997, and upon adoption, will elect to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25. Pro forma disclosure of net income and earnings per share will reflect the difference between compensation cost included in net income and the related cost measured by the fair value-based method defined in SFAS No. 123, including tax effects, that would have been recognized in the consolidated statement of operations if the fair value-based method had been used. 3. BUSINESS COMBINATIONS All applicable share and per share data have been restated to give effect to all stock splits. 33 34 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) POOLING OF INTERESTS COMBINATIONS In September 1993, the Company acquired Crescendo Communications, Inc. ("Crescendo"), a networking company that provides high-performance workgroup solutions. The Company issued approximately 6.8 million shares of common stock for all the outstanding shares of common stock of Crescendo in a transaction that was accounted for as a pooling of interests. The Company also assumed options and warrants to purchase Crescendo stock that remain outstanding as options to purchase approximately .3 million shares of the Company's common stock. In August 1994, the Company acquired Newport Systems Solutions, Inc. ("Newport"), a privately held networking company providing software-based routers for remote network sites. The Company issued approximately 6.5 million shares of common stock for all the outstanding stock of Newport in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Newport stock that remain outstanding as options to purchase approximately .2 million shares of the Company's common stock. In December 1994, the Company acquired Kalpana, Inc. ("Kalpana"), a privately held manufacturer of Ethernet switches. Under the terms of the agreement, the Company issued approximately 13.6 million shares of common stock for all the outstanding stock of Kalpana in a transaction accounted for as a pooling of interests. In connection with this transaction, the Company assumed options to purchase Kalpana stock that remain outstanding as options to purchase approximately .6 million shares of the Company's common stock. In September 1995, the Company acquired Combinet Inc. ("Combinet"), a privately held manufacturer of remote access networking products. The Company issued approximately 3.5 million shares of common stock for all the outstanding stock of Combinet in a transaction also accounted for as a pooling of interests. In addition, the Company assumed options and warrants to purchase Combinet stock that remain outstanding as options to purchase approximately .3 million shares of the Company's common stock. In November 1995, the Company acquired Grand Junction Networks, Inc. ("Grand Junction") a privately held manufacturer of Fast Ethernet (100BaseT) and Ethernet desktop switching products. Under the terms of the agreement, the Company issued approximately 9.2 million shares of common stock for all the outstanding stock of Grand Junction in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Grand Junction stock that remain outstanding as options to purchase approximately .5 million shares of the Company's common stock. In March 1996, the Company acquired TGV Software Inc. ("TGV"), a publicly-held developer of internetworking software. The company issued approximately 2.4 million shares of common stock for all the outstanding shares of TGV in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase TGV stock that remain outstanding as options to purchase approximately .3 million shares of the Company's common stock. 34 35 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) The historical operations of the above companies are not material to the Company's consolidated operations and financial position on either an individual or an aggregated basis. Therefore, prior period statements have not been restated for these acquisitions. On July 9, 1996, the Company acquired StrataCom, Inc.("StrataCom"). Under the terms of the agreement, one share of Cisco common stock was exchanged for each outstanding share of StrataCom, Inc. Approximately 76.4 million shares of common stock were issued to acquire StrataCom. The Company also assumed options to purchase StrataCom stock that remain outstanding as options to purchase approximately 11.5 million shares of the Company's common stock. The transaction was accounted for as a pooling of interests; therefore, all prior periods presented have been restated as if the merger took place at the beginning of the earliest period presented. Prior to the merger, StrataCom used a calendar year end. Restated financial statements of the Company combine the July 28, 1996, July 30, 1995 and July 31, 1994 results of Cisco Systems Inc. with the June 30, 1996, July 1, 1995 and July 1, 1994 results of StrataCom, respectively. No adjustments have been made to conform accounting policies of the entities. However, as noted below, 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 calendar for 1997, StrataCom's operations for the one-month period ended July 28, 1996 that are not material to the consolidated companies will be reflected as an adjustment to retained earnings in the first quarter of fiscal 1997. The following table shows the historical results of the Company and StrataCom for the periods prior to the consummation of the merger of the two entities: 35 36 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices)
Year ended Nine Months ----------------------------- Ended April 30, July 30, July 31, 1996 1995 1994 ----------- ----------- ----------- Revenues: Cisco $ 2,521,820 $ 1,978,916 $ 1,242,975 StrataCom 282,037 253,736 91,461 ----------- ----------- ----------- Total $ 2,803,857 $ 2,232,652 $ 1,334,436 =========== =========== =========== Net Income: Cisco as prevously reported $ 594,777 $ 421,008 $ 314,867 StrataCom as prevously reported 44,542 37,873 9,818 ----------- ----------- ----------- Total 639,319 458,881 324,685 Adjustment to reflect elimination of valuation allowance (2,546) (2,392) (1,704) ----------- ----------- ----------- Net income, as restated $ 636,773 $ 456,489 $ 322,981 =========== =========== ===========
PURCHASE COMBINATIONS 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 acquisition was accounted for as a purchase. Accordingly, the results of operations of the acquired business and the fair market values of the acquired assets and assumed liabilities were included in the Company's financial statements as of the effective date. The purchase price was allocated to the acquired assets and assumed liabilities based on fair market values as follows: Cash $ 6,320 Accounts receivable 2,777 Other current assets 101 Property and equipment 1,815 Purchased research and development 95,760 Goodwill 19,710 Current liabilities (5,983) --------- $ 120,500 =========
The amount allocated to purchased research and development was determined through known valuation techniques in the high-technology communications industry and was immediately expensed in the period of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. Remaining amounts allocated to goodwill are being amortized on a straight-line basis over two years. The following summary, prepared on a pro forma basis, combines the results of operations as if LightStream had been acquired as of the beginning of the periods presented. The summary includes the impact of certain adjustments such as goodwill amortization and estimated changes 36 37 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) in interest income because of cash outlays associated with the transaction and the related income tax effects (in thousands, except per-share amounts):
Twelve months ended -------------------------- July 30, July 31, 1995 1994 ---------- ---------- (Unaudited) Sales $2,241,046 $1,336,324 Net income $ 445,937 $ 307,790 Net income per share $ 0.71 $ 0.52
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from the combined operations. In September 1995, the Company acquired Internet Junction, Inc. ("Internet Junction"), a developer of Internet gateway software that connects desktop users with the Internet. The Company issued .2 million shares of stock for the net assets of Internet Junction in a transaction accounted for as a purchase. Accordingly, the results of operations of the acquired business and the fair market values of the acquired assets and liabilities were included in the Company's financial statements as of the acquired date. Amounts allocated to goodwill are being amortized on a straight-line basis over a four-year period. Pro forma information is not presented, because the results of Internet Junction's operations are not material to the Company's historical results. BUSINESS COMBINATIONS PENDING OR COMPLETED SUBSEQUENT TO YEAR-END In September 1996, the Company acquired Nashoba Networks ("Nashoba"). The Company issued approximately 1.6 million shares of common stock for all the outstanding stock of Nashoba in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Nashoba stock that remain outstanding as options to purchase approximately .2 million shares of the Company's common stock. The historical operations of Nashoba and the impact of the transaction are not material to the financial position of the Company. The Company also assumed options to purchase Nashoba stock that remain outstanding as options to purchase approximately .5 million shares of the Company's common stock. In September 1996, the Company acquired Granite Systems, Inc. ("Granite"), a company established to develop, market, and sell multilayer switching and gigabit Ethernet equipment. The Company issued approximately 2.2 million shares of common stock for all the outstanding stock of Granite in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Granite stock that remain outstanding as options to purchase approximately 1.7 million shares of the Company's common stock. The historical results of operations of Granite are not material to the financial position of the Company. 37 38 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) On July 22, 1996, the Company entered into an agreement to acquire Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation (MICA) technologies for $200 million in cash. The transaction will be accounted for as a purchase of assets and is expected to be completed in October 1996, subject to certain shareholder and regulatory approvals. Under the terms of the agreement, the Company will purchase Telebit patents, MICA intellectual property and establish employment contracts with MICA personnel, and will assume preferred stock and notes receivable of $35 million in respect of a planned management buyout of the remaining assets of Telebit. Subsequent to the signing of this agreement, a class action law suit was filed on behalf of shareholders of Telebit alleging that the acquisition price was too low. The Company was named as one of the defendants in that law suit, but believes that the claim against it is without merit and will not result in any material loss to the Company. Consequently, no amount has been accrued for any loss that may occur. On October 14, 1996, the Company entered into an agreement to acquire Netsys Technologies ("Netsys"), a privately held innovator of network infrastructure management and performance analysis software. Under the terms of the agreement, shares of the Company's common stock worth approximately $79 million will be exchanged for all outstanding shares and options of Netsys. The Company has held a minority equity interest in Netsys since February 1995 along with a strategic reseller agreement. The agreement is subject to the receipt of certain government approvals and approval by Netsys shareholders and is expected to be completed by November 1996. 4. BALANCE SHEET DETAIL Inventories, net:
1996 1995 --------- --------- Raw materials $ 134,531 $ 34,913 Work in process 99,723 25,611 Finished goods 51,920 9,962 Demonstration systems 15,014 11,319 --------- --------- Total $ 301,188 $ 81,805 ========= ========= Property and equipment, net: Leasehold improvements $ 40,927 $ 21,070 Computer equipment and related software 280,777 149,637 Production and engineering equipment 108,477 78,585 Office equipment, furniture, fixtures, and other 145,291 55,488 --------- --------- 575,472 304,780 Less accumulated depreciation and amortization (244,157) (132,219) --------- --------- Total $ 331,315 $ 172,561 ========= =========
38 39 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) 4. BALANCE SHEET DETAIL (CONTINUED) Accrued payroll and related expenses: Accrued wages, paid time off, and related expenses $131,369 $ 63,965 Accrued bonuses 63,828 29,898 -------- -------- Total $195,197 $ 93,863 ======== ======== Other accrued liabilities: Deferred revenue $116,229 $ 62,738 Accrued warranties 32,256 46,454 Other liabilities 102,094 54,044 -------- -------- Total $250,579 $163,236 ======== ========
5. INVESTMENTS At July 28, 1996 and July 30, 1995, substantially all of the Company's investments were classified as available for sale. The difference between the cost and fair market value of those securities, net of the tax effect, is shown as a separate component of shareholders' equity. The following tables summarize the Company's securities:
Gross Gross Amortized Unrealized Unrealized Market Issue, 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 ----------- ----------- ----------- ----------- $ 1,565,102 $ 358,830 $ (104,685) $ 1,819,247 =========== =========== =========== ===========
Gross Gross Amortized Unrealized Unrealized Market Issue, July 30, 1995 Cost Gains Losses Value -------------------------------- --------- --------- --------- --------- U.S. government notes and bonds $ 206,400 $ 665 $ (3,030) $ 204,035 State, municipal, and county government notes and bonds 470,728 1,698 (5,011) 467,415 Foreign government notes and bonds 38,841 433 39,274 Corporate notes and bonds 62,052 77 (243) 61,886 Corporate equity securities 2,900 88,115 91,015 --------- --------- --------- --------- $ 780,921 $ 90,988 $ (8,284) $ 863,625 ========= ========= ========= =========
39 40 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) The following table summarizes debt maturities (including restricted investments) at July 28, 1996:
Amortized Fair Cost Value ---------- ---------- Less than one year $ 730,387 $ 726,691 Due in 1-2 years 277,722 278,484 Due in 2-5 years 495,466 492,190 Due after 5 years 30,627 29,713 ---------- ---------- Total $1,534,202 $1,527,078 ========== ==========
Gross realized gains and losses on the sale of securities are calculated using the specific identification method and were not material to the Company's consolidated results of operations. During the year, the Company hedged its minority equity position in a publicly traded company. 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 value of the puts and calls at July 28, 1996 was $220,452 and $276,514 respectively. The collar expires over a period of two years commencing October 1996. Unrealized gains or losses for the stock and associated hedge are reflected as a separate component of shareholders' equity. Any realized gains or losses on the combined position will be reflected in income in the period in which in which the stock is sold, or the hedge is terminated. 6. LINE OF CREDIT On May 22, 1995, the Company entered into a syndicated credit agreement under the terms of which a syndication of banks has committed a maximum of $100.0 million on an unsecured basis for cash borrowings and letters of credit. The commitments made under this agreement expire on April 30, 1998. During fiscal year 1996, the Company paid annual fees of approximately $.2 million. Outstanding borrowings under these arrangements bear interest at the London Interbank Offered Rate plus 31 basis points, or other alternative rates. The agreement specifies various financial covenants, including a variable floor on tangible net worth, all of which the Company has met. There have been no borrowings under this agreement. 7. COMMITMENTS LEASES In February 1993, the Company entered into an agreement to lease 46 acres of land located in San Jose, California, where it has established its headquarters operations. In July 1994, the Company entered into an agreement to lease 45 acres of land located in Research Triangle Park, North Carolina, where it expanded certain research and development and customer support activities. In February and April 1995, the Company entered into agreements to lease an additional 36 acres of land in San Jose, California, where it will further expand its headquarters operations. All of the leases have initial terms of five years and options to renew for an additional five years, subject to certain conditions. 40 41 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) At any time during the terms of these land leases, the Company may purchase the land. If the Company elects not to purchase the land at the ends of the leases, the Company has guaranteed a residual value of approximately $55.9 million. In May 1993, August 1994, and May 1995, the Company entered into agreements to lease certain buildings to be constructed on the land described above. The lessors of the buildings have committed to fund up to a maximum of $170.2 million (subject to reductions based on certain conditions in the lease) for the construction of the buildings, with the portion of the committed amount actually 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 five years, subject to certain conditions. The Company may, at its option, purchase the buildings during the terms of the leases at approximately the amount expended by the lessors to construct the buildings. If the Company does not exercise the purchase options at the ends of the leases, the Company will guarantee a residual value of the buildings as determined at the lease inception date of each agreement (approximately $132.2 million at July 28, 1996). As part of the above lease transactions, the Company restricted $228.6 million of its securities as collateral for specified obligations of the lessor under the leases. These securities will be restricted as to withdrawal and will be managed by the Company subject to certain limitations under its investment policy. In addition, the Company must maintain a minimum consolidated tangible net worth of $750.0 million. 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 28, 1996, are as follows: 1997 $ 41,027 1998 34,445 1999 23,298 2000 16,917 2001 11,373 Thereafter 19,156 -------- Total minimum lease payments $146,216 ========
Rent expense totaled $36.8 million, $24.0 million, and $15.4 million for 1996, 1995, and 1994, respectively. 41 42 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) 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 foreign exchange forward contracts to reduce currency exposures. These contracts principally hedge exposures associated with intercompany product sales denominated in Japanese, Canadian and Australian currencies and with intercompany commission obligations denominated in several European currencies and with intercompany commission obligations denominated in 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 foreign 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 of the reporting entity. The Company's forward currency contracts generally range from one to three months in original maturity. Foreign exchange contracts outstanding and their unrealized gains as of July 28, 1996 are summarized as follows:
Notional Notional Value Value Unrealized Currency Purchased Sold Gain --------------------- --------- --------- --------- Japanese Yen $ 5,570 $ (40,013) $ 291 Australian dollar 3,945 (33,360) 157 Canadian dollar 5,112 (29,871) 178 European currencies 35,045 (6,555) 122 --------- --------- --------- Total $ 49,672 $(109,799) $ 748 ========= ========= =========
The Company's forward exchange contracts contain credit risk in that its banking counterparties may be unable to meet the terms of the agreements. However, 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. 8. MINORITY INTEREST In October 1994, the Company's Japanese subsidiary, Nihon Cisco Systems, K.K., completed the sale of preferred stock to a group of outside investors in a private placement. Aggregate proceeds to Nihon Cisco Systems, K.K. were approximately $40.5 million. The investors received 26.8% of the voting rights. The Company retains ownership of all issued and outstanding common stock of its subsidiary, amounting to 73.2% of the voting rights. Each share of preferred stock is convertible into one share of common stock at any time at the option of the holder. The net income of the subsidiary has not been material to date. 42 43 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) 9. SHAREHOLDERS' EQUITY The Company's common stock was split two-for-one on March 4, 1994 and February 16, 1996. All applicable share and per-share data in these financial statements have been restated to give effect to these stock splits. Under the terms of the Company's Articles of Incorporation, the Board of Directors may determine the rights, preferences, and terms of the Company's authorized but unissued shares of preferred stock. 10. 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 worth of common stock in any one calendar year. On the last business day of each calendar quarter, shares of common stock are purchased with the employees' payroll deductions over 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 1996, 1995, and 1994, 1.3 million, 1.5 million, and 1.2 million shares respectively were issued under the Purchase Plan. At July 28, 1996, 3.4 million shares were available for issuance under the Purchase Plan. 11. STOCK OPTION PLANS The Company established a Stock Option Plan in 1987 under which it has reserved a total of 221.3 million shares of common stock for issuance to employees, officers, directors, consultants, and independent contractors. Both incentive and nonqualified stock options have been granted at prices not less than fair market value at the date of grant as determined by the Board of Directors. Although the Board has the authority to set other terms, the options are generally 25% exercisable one year from the date of grant and then ratably over the following 36 months. 43 44 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) A summary of option activity follows:
Options Outstanding ------------------------------------------------- Options Available Exercise for Grant Options Prices Amount ------------ ------------ ------------ ------------ Balances, July 25, 1993 14,407 36,442 $ .01-$13.44 $ 159,817 Options granted (12,241) 12,241 3.11-18.50 129,212 Options exercised (14,145) .01-11.35 (15,138) Options canceled 1,030 (1,030) .08-18.50 (8,905) Additional shares reserved 16,000 ------------ ------------ ------------ ------------ Balances, July 31, 1994 19,196 33,508 .01-18.50 264,986 Options granted (36,792) 36,792 4.07-28.88 623,401 Options exercised (14,232) .01-18.50 (37,859) Options canceled 2,207 (2,207) .08-21.50 (26,763) Additional shares reserved 12,474 ------------ ------------ ------------ ------------ Balances, July 30, 1995 (2,915) 53,861 .01-28.88 823,765 Options granted and assumed (35,170) 35,170 .36-55.88 890,807 Options exercised (17,771) .01-33.00 (84,147) Options canceled 2,171 (2,171) .31-55.88 (44,127) Additional shares reserved 52,170 ------------ ------------ ------------ ------------ Balances, July 28, 1996 16,256 69,089 $.01-$55.88 $ 1,586,298 ============ ============ ============ ============
At July 28, 1996, approximately 21.7 million outstanding options were exercisable. The Company has, in connection with the acquisition of various companies, assumed the stock option plans of each acquired company. A total of 14.2 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 table above. 12. EMPLOYEE BENEFIT 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 $1.5 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 $6.6 million in 1996, $3.5 million in 1995, and $1.8 million in 1994. No discretionary contributions were made in 1996, 1995, or 1994. 44 45 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR VALUES IN THOUSANDS, EXCEPT EXERCISE PRICES) 13. INCOME TAXES The provision for income taxes consists of:
1996 1995 1994 --------- --------- --------- Federal: Current $ 514,050 $ 288,656 $ 180,584 Deferred (64,133) (63,310) (24,565) --------- --------- --------- 449,917 225,346 156,019 State: Current 92,291 59,927 45,860 Deferred (6,907) (9,968) (5,119) --------- --------- --------- 85,384 49,959 40,741 Foreign: Current 19,452 7,761 4,481 Deferred (3,252) (1,578) (1,722) --------- --------- --------- 16,200 6,183 2,759 --------- --------- --------- $ 551,501 $ 281,488 $ 199,519 ========= ========= =========
The Company paid income taxes of $335.1 million, $270.5 million, and $167.1 million, in 1996, 1995, and 1994, respectively. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes follow:
1996 1995 1994 ---- ---- ---- Federal statutory rate 35.0% 35.0% 35.0% Effect of: State rates, net of federal benefits 3.6 4.1 4.7 Foreign Sales Corporation benefit (2.9) (2.5) (2.9) Tax-exempt interest (1.0) (1.1) (1.1) Tax credits (0.3) (1.1) (0.6) Other, net 3.2 4.1 2.7 ---- ---- ---- 37.6% 38.1% 38.2% ==== ==== ====
The components of the deferred income tax assets follow:
1996 1995 --------- --------- Other nondeductible accruals $ 66,950 $ 30,940 Inventory allowances and capitalization 44,334 27,940 Purchased research and development 33,806 36,310 Allowance for doubtful accounts and returns 26,632 9,167 Accrued state franchise tax 13,847 7,866 Depreciation 10,451 7,990 Deferred revenue 8,664 4,975 Warranty accruals 8,406 10,072 Unrealized gain on marketable securities (95,296) (31,756) --------- --------- $ 117,794 $ 103,504 ========= =========
The noncurrent portion of the deferred income tax assets, which totaled $16.0 million at July 28, 1996, and $15.5 million at July 30, 1995, is included in other assets. 45 46 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar values in thousands, except exercise prices) The Company's income taxes currently payable for federal, state and foreign purposes have been reduced by the tax benefit derived from stock options transactions. The U.S. benefit, which totaled $198.5 million in 1996 and $59.3 million in 1995, was credited directly to common stock. 14. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS The Company operates in a single industry segment encompassing the design, development, manufacture, marketing, and technical support of internetworking products and services. In 1996, 1995, and 1994, 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 $1,976 million in 1996, $931 million in 1995, and $551 million in 1994. Export sales, primarily to these regions, were $1,530 million in 1996, $737 million in 1995, and $403 million in 1994. Summarized financial information by geographic region for 1996, 1995, and 1994 is as follows:
1996 1995 1994 ----------- ----------- ----------- Net sales: United States $ 4,024,482 $ 2,199,940 $ 1,332,281 International 446,437 194,217 147,539 Eliminations (374,912) (161,505) (145,384) ----------- ----------- ----------- Total $ 4,096,007 $ 2,232,652 $ 1,334,436 =========== =========== =========== Operating income: United States $ 1,379,994 $ 692,174 $ 502,015 International 22,704 4,199 2,109 Eliminations (1,892) 1,590 (3,954) ----------- ----------- ----------- Total $ 1,400,806 $ 697,963 $ 500,170 =========== =========== =========== Identifiable assets: United States $ 3,467,637 $ 1,869,197 International 184,291 147,400 Eliminations (21,696) (24,648) ----------- ----------- Total $ 3,630,232 $ 1,991,949 =========== ===========
46 47 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 28, 1996 and July 30, 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended July 28, 1996. 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 28, 1996 and July 30, 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 28, 1996 in conformity with generally accepted accounting principles. /s/Coopers & Lybrand L.L.P. San Jose, California August 13, 1996, except for Note 3 for which the date is October 14, 1996. 47 48 SUPPLEMENTARY FINANCIAL DATA 1996 AND 1995 BY QUARTER (Unaudited) (in thousands, except per-share amounts) (In thousands, except per-share amounts)
July 28, Apr. 28, Jan. 28, Oct. 29, July 30, Apr. 30, Jan. 29, Oct. 30, 1996 1996 1996 1995 1995 1995 1995 1994 ------------------------------------------------------------------------------------------------ Net Sales $1,292,150 $1,087,056 $ 918,510 $ 798,291 $ 701,213 $ 581,497 $ 515,983 $ 433,959 Gross margin 839,499 709,902 606,195 530,549 468,048 388,516 343,513 289,715 Operating income 423,872 376,572 321,511 278,851 240,618 207,065 90,890 159,390 Income before provision for income taxes 442,715 393,244 337,157 291,709 251,740 219,087 99,861 167,289 Net income $ 276,551 $ 245,649 $ 209,737 $ 181,387 $ 155,324 $ 135,174 $ 62,140 $ 103,851 Net income per common share $ .41 $ .37 $ .31 $ .28 $ .24 $ .21 $ .10 $ .17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding Directors appearing under the caption "Election of Directors" in the Company's proxy statement to be mailed to Shareholders on or before October 4, 1996, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information appearing at the end of Part I and under the caption "Executive Compensation" in the Company's proxy statement to be mailed to Shareholders on or before October 4, 1996, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the captions "Election of Directors" and "Ownership of Securities" in the Company's proxy statement to be mailed to Shareholders on or before October 4, 1996, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the caption "Ownership of Securities" and "Certain Relationships and Related Transactions" in the Company's proxy statement to be mailed to Shareholders on or before October 4, 1996, is incorporated herein by reference. 48 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements listed in Item 14(a) are filed as part of this annual report. 2. Financial Statement Schedules The financial statement schedules listed in Item 14(a) are filed as part of this annual report. 3. Exhibits The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this annual report. (b) Reports on Form 8-K The Company filed one report on form 8-K during the fourth quarter ended July 28, 1996. The date of the filing was July 23, 1996. The item reported on was the acquisition of StrataCom. 49 50 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on this 23rd day of October, 1996. Cisco Systems, Inc. /s/ John T. Chambers ----------------------------------- (John T. Chambers, President and Chief Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- President and Chief Executive Officer /s/ John T. Chambers (Principal Executive October 23, 1996 - ------------------------------------- Officer and Director) John T. Chambers Vice President, Finance and Administration, Chief Financial Officer and /s/ Larry R. Carter Secretary October 23, 1996 - ------------------------------------- (Principal Financial and Larry R. Carter Accounting Officer) /s/ John P. Morgridge Chairman of the October 23, 1996 - ------------------------------------- Board and Director John P. Morgridge /s/ Donald T. Valentine Vice Chairman of the October 23, 1996 - ------------------------------------- Board and Director Donald T. Valentine /s/ Dr. Michael S. Frankel Director October 23, 1996 - ------------------------------------- Dr. Michael S. Frankel Director - ------------------------------------- Dr. James F. Gibbons /s/ Richard M. Moley Senior Vice President, October 23, 1996 - ------------------------------------- Wide Area Business Unit Richard M. Moley and Director /s/ Robert L. Puette Director October 23, 1996 - ------------------------------------- Robert L. Puette
50 51
Signature Title Date --------- ----- ---- Director - ------------------------------------- Masayoshi Son /s/ Steve M. West Director October 23, 1996 - ------------------------------------- Steve M. West
51 52 CISCO SYSTEMS, INC. ------------- INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEM 14(A)
Page ---- Consolidated balance sheets at July 28, 1996 and July 30, 1995 ................ 26 Consolidated statements of operations for each of the three years in the period ended July 28, 1996 ......................................................... 27 Consolidated statements of shareholders' equity for each of the three years in the period ended July 28, 1996 .............................................. 28 Consolidated statements of cash flows for each of the three years in the period ended July 28, 1996 ......................................................... 30 Notes to consolidated financial statements .................................... 31 Report of Independent Accountants ............................................. 47 Supplementary financial data: Fiscal years 1996 and 1995 by quarter (unaudited) ........................... 48 Report of Independent Accountants ............................................. 53 Schedule: II Valuation and qualifying accounts ................................... 54
All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. 52 53 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Cisco Systems, Inc. and its subsidiaries is included on page 47 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 52 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/Coopers & Lybrand L.L.P. San Jose, California August 13, 1996 53 54 CISCO SYSTEMS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Balance at Balance at Beginning Charged to End of of Period Expenses Deductions Period ------ ------ ------ ------ Year ended July 31, 1994: Allowance for doubtful accounts 6,283 5,102 1,503 9,882 Allowance for excess and obsolete inventory 5,822 17,597 3,888 19,531 Year ended July 30, 1995: Allowance for doubtful accounts 9,882 15,213 6,668 18,427 Allowance for excess and obsolete inventory 19,531 55,783 29,072 46,242 Year ended July 28, 1996: Allowance for doubtful accounts 18,427 18,548 15,901 21,074 Allowance for excess and obsolete inventory 46,242 53,025 37,481 61,786
(1) Deductions principally relate to charges for standards changes. 54 55 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith. Exhibit Number Exhibit Table ------ ------------- 2.01** Agreement and Plan of Reorganization dated as of September 20, 1993 among the Company, Crescendo Communications Inc., and Co Acquisition Corporation 2.02** Agreement of Merger among the Company, Crescendo Communications Inc., and Co Acquisition Corporation 2.03# Agreement and Plan of Reorganization dated as of July 11, 1994 among the Company, Newport Systems Solutions, Inc. and New Acquisition Corporation 2.04@ Agreement and Plan of Reorganization dated as of October 21, 1994 among the Company, Kalpana, Inc. and Pan Acquisition Corporation 2.05@@ Asset Purchase Agreement dated as of December 8, 1994 among the Company and LightStream Corporation 2.06& Agreement and Plan of Reorganization by and among the Company, Jet Acquisition Corporation, and StrataCom, Inc., dated as of April 21, 1996 3.01* The Company's Restated Articles of Incorporation, as currently in effect 3.02* The Company's Bylaws, as currently in effect 4.01## The Company's 1987 Stock Option Plan, as currently in effect 4.02* Form of Incentive Stock Option Agreement for granting incentive stock options under the Company's 1987 Stock Option Plan 4.03* Series A Preferred Stock Purchase Agreement between the Company and certain investors dated December 22, 1987, as amended 10.05* Form of Restricted Stock Purchase Agreement for sales of Common Stock to employees, officers, directors and consultants 10.10* License Agreement between the Company and Network Equipment Technologies Inc dated February 14, 1989 10.12* License Agreement between the Company and The Board of Trustees of Leland Stanford Junior University dated April 15, 1987, as amended 10.13* 1989 Employee Stock Purchase Plan 10.14 Fiscal Year 1996 Management Incentive Plan 10.16* Agreement between the Company and American Telephone and Telegraph Company dated February 1, 1990 10.19* Letter of Employment between the Company and John T. Chambers dated January 9, 1991 10.20* Letter of Employment between the Company and John P. Morgridge dated October 17, 1988 10.21* Letter of Employment between the Company and Donald A. LeBeau dated July 15, 1992 10.22* Letter of Employment between the Company and Frank J. Marshall dated March 31, 1992 10.23* Lease Agreement between the Company and SGA Development Partnership, Ltd., dated February 19, 1993, for the Company's site in San Jose, California 10.24* Lease Agreement between the Company and Sumitomo Bank Leasing and Finance, Inc., dated May 13, 1993 for the Company's facilities in San Jose, California 10.25* Lease Agreement between the Company and SGA Development Partnership, Ltd., dated February 19, 1993, for the Company's site in San Jose, California 10.26* Lease Agreement between the Company and the State of California Public Employees' Retirement System dated March 11, 1993, for the Company's facilities at 3100 Smoketree Court 10.27* Lease Agreement between the Company and Sumitomo Bank Leasing and Finance, Inc., dated July 11, 1994 for the Company's site in Wake County, North Carolina 10.28* Lease Agreement between the Company and Sumitomo Bank Leasing and Finance, Inc., dated August 12, 1994 for the Company's facilities in Wake County, North Carolina 55 56 Exhibit Number Exhibit Table ------ ------------- 10.29&& Lease (Buildings "I" and "J") by and between Sumitomo Bank of New York Trust Company ("SBNYTC"), as trustee under that certain Trust Agreement dated May 22, 1995 between Sumitomo Bank Leasing and Finance, Inc. and SBNYTC ("SB Trust"), as Landlord, and the Company, as tenant, dated May 22, 1995 10.30&& First Amendment to Lease (Buildings "I" and "J") between SB Trust and the Company, dated July 18, 1995 10.31&& Lease (Buildings "K" and "L") by and between SB Trust and the Company, dated May 22, 1995 10.32&& First Amendment to Lease (Buildings "K" and "L") between SB Trust and the Company, dated July 18, 1995 10.33&& Lease (Improvements Phase "C") by and between SB Trust and the Company, dated May 22, 1995 10.34&& First Amendment to Lease (Improvements Phase "C") between SB Trust and the Company, dated July 18, 1995 10.35&& Ground Lease (Parcel 2 and Lot 54) by and between Irish Leasing Corporation ("Irish"), as Landlord, and the Company, as Tenant, dated February 28, 1995 for the Company's site in San Jose, California 10.36&& First Amendment to Lease (Parcel 2 and Lot 54) by and between Irish and the Company dated as of May 1, 1995 10.37&& Second Amendment to Lease (Parcel 2 and Lot 54) by and between Irish and the Company dated as of May 22, 1995 10.38&& Ground Lease (Lots 58 and 59) by and between Irish and the Company dated February 28, 1995 for the Company's site in San Jose, California 10.39&& First Amendment to Lease (Lots 58 and 59) by and between Irish and the Company dated as of May 1, 1995 10.40&& Second Amendment to Lease (Lots 58 and 59) by and between Irish and the Company dated as of May 22, 1995 10.41&& Ground Lease (Tasman Phase C) by and between Irish and the Company dated April 12, 1995 for the Company's site in San Jose, California 10.42&& First Amendment to Lease (Tasman Phase C) by and between Irish and the Company dated as of May 1, 1995 10.43&& Second Amendment to Lease (Tasman Phase C) by and between Irish and the Company dated as of May 22, 1995 10.44&& Credit Agreement between the Company, the Banks Listed Herein, Bank of America National Trust and Savings Association, as Administrative Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent and Bank of America National Trust and Savings Association, as Issuing Bank dated as of May 22, 1995 11.01 Statement Regarding Computation of Net Income Per Share 21.01 Subsidiaries of the Company 23.02 Consent of Independent Accountants 27 Financial Data Schedule (b) The following financial statement schedules are filed herewith Schedule -------- II Valuation and qualifying accounts - ---------- * Previously filed with registrant's registration statements (File #33-32778) ** Previously filed with registrant's Form 8-K dated October 8, 1993 @ Previously filed with registrant's Form 8-K dated December 9, 1994 @@ Previously filed with registrant's Form 8-K dated January 25, 1995 # Previously filed with registrant's Form 8-K dated August 19, 1994 ## Previously filed with registrant's Proxy statement dated October 2, 1995 & Previously filed with registrant's Form S-4 dated June 7, 1996 && Previously filed with registrant's Form 10-K dated October 26, 1995 56 EX-10.14 2 SENIOR MANAGEMENT INCENTIVE PLAN 1 EXHIBIT 10.14 CISCO SYSTEMS, INC. SENIOR MANAGEMENT INCENTIVE PLAN FY 1996 I. INTRODUCTION A. THE OBJECTIVE OF THE SENIOR MANAGEMENT INCENTIVE PLAN is to financially reward Senior Managers for their contributions to the success of Cisco Systems, Inc. B. PARTICIPANTS: This plan applies to Cisco Systems, Inc. senior management staff in the following positions: POSITION President Vice Presidents Directors (excluding Operations Directors) Managers, Grade 12 & Individual Contributors, Grade 13 Any exceptions to the above will need to be approved in writing by the President. The participant must be employed on or before the first day of the last fiscal quarter and may not be concurrently enrolled in any other bonus, sales, or incentive plan. Participants in the Plan with less than one year of service will be eligible for a prorated bonus amount. C. EFFECTIVE DATE: The Plan is effective for the Fiscal Year 1996, beginning July 31, 1995 through July 28, 1996. D. CHANGES IN PLAN: The Company presently has no plan to change the Senior Management Incentive Plan during the fiscal year. However, the Company reserves the right to modify the Senior Management Bonus Plan in total or in part, at any time. Any such change must be in writing and signed by the President. The President or plan designers reserve the right to interpret the plan document as needed. E. ENTIRE AGREEMENT: This Plan is the entire agreement between Cisco Systems, Inc. and the employee regarding the subject matter of this Plan and supersedes all prior compensation or incentive plans or any written or verbal representations regarding the subject matter of this Plan. II. BONUS PLAN ELEMENTS A. BASE SALARY is determined by the participant's manager, on the Focal review date scheduled for either August 1, April 1, or October 1 of each year. The annual base salary in effect at the end of the fiscal year represents the basis for the bonus calculation. B. BONUS BASIS PERCENTAGE is a percentage level of base salary determined by the position.
POSITION BONUS % -------- ------- President 60% Vice President 50% Directors 40% Managers, Grade 12 & Individual Contributors, Grade 13 30%
CISCO CONFIDENTIAL 2 Senior Management Incentive Plan Page 2 of 4 C. INDIVIDUAL PERFORMANCE FACTOR is based upon the manager's evaluation of performance and contribution for the fiscal year. This factor may range from .9 - 1.3. The assigned factor may also be a zero resulting in no bonus based on the manager's evaluation of performance and contribution. A written performance evaluation is required in conjunction with any assigned factor of zero. Employees who are on a Written Warning and/or are performing at a level of 1 or 2 ("N" in the 3-tiered performance rating system) at the end of the fiscal year are not eligible to receive a bonus. Any exceptions to this must be in writing and approved by the President. D. COMPANY PERFORMANCE FACTOR consists of two elements: 50% based upon achieving an established worldwide Revenue target and 50% based upon achieving a worldwide Profit Before Interest and Tax (PBIT) target per the current Plan. 80% of each objective must be achieved for any bonus to be paid.
COMPANY REVENUE PBIT PERFORMANCE FACTOR MULTIPLIER ------- ---- ------------------ ---------- less than 80% less than 80% less than 80% 0 (no bonus paid) 80-100% 80-100% 80-100% .8 - 1.0 greater than 100% greater than 100% 101%+ 3% for each 1% above 100%
COMPANY PERFORMANCE FACTOR = (REVENUE + PBIT)/2 Example: Actual Revenue Performance is 105% of goal Actual PBIT Performance is 115% of goal 105% + 115% = 110% ----------- 2 COMPANY PERFORMANCE MULTIPLIER: = 1.30 E. CUSTOMER SATISFACTION FACTOR is based upon achievement of an overall worldwide customer satisfaction survey score. This factor may range from .95 - 1.20.
WORLDWIDE SATISFACTION SCORE FACTOR ---------------------------- ------ less than 3.95 .95 3.95 - 4.07 1.05 4.08 - 4.14 1.10 4.15+ 1.20
CISCO CONFIDENTIAL 3 Senior Management Incentive Plan Page 3 of 4 F. PRORATION FACTOR accounts for the number of calendar days or hours within the day during the fiscal year that the employee was in the bonus-eligible position. For example, the Proration Factor for an employee who has been on the Plan the entire year will be "1.00". For an employee who has been on the plan for 6 months, this factor will be ".50". Employees in the following situations will have a proration factor of less than "1.00": - Participants in the Plan who transferred to a new position not governed by any incentive plan. - Employees who transferred from one bonus-eligible position to another bonus-eligible position. Employees in this situation will have their bonus prorated based on length of time in each position. - Employees who have been on the Plan less than 12 months (such as a new hire). - Employees who have been on a leave of absence of any length during the fiscal year. - Employees who have been on the Plan, terminated their employment, and returned to a bonus-eligible position all in the same fiscal year. - Employees working less than a 40-hour week will receive bonuses prorated according to the following schedule: 20 - 39 hours/week: prorated according to number of hours worked less than 20 hours/week: not bonus eligible Any modification to the above schedule must be approved by the next-level Manager and Compensation in advance of the year-end close date. G. BONUS FORMULA AND CALCULATION EXAMPLE: Assume a Director-level participant with a base salary of $130,000 at the 40% level, individual performance factor of 1.10, company performance of 110%, a customer satisfaction factor of 1.05 and a proration factor of 1.00. SAMPLE CALCULATION:
BONUS INDIVIDUAL COMPANY CUSTOMER BASE BASIS PERFORMANCE PERFORMANCE SATISFACTION PRORATION TOTAL SALARY PERCENTAGE FACTOR FACTOR FACTOR FACTOR BONUS ------ ---------- ------ ------ ------ ------ ----- $130,000 x .40 x 1.10 x 1.30 x 1.05 x 1.00 = $78,078
In this example, the Total Bonus equals 60.06% of Base Salary. CISCO CONFIDENTIAL 4 Senior Management Incentive Plan Page 4 of 4 H. BONUS PAYMENTS: If company performance is at a minimum of 100% of mid-year revenue and PBIT targets, a partial payment will be distributed to active employees midway through the fiscal year. This advance will be 50% of the bonus target by level net of any advances, draws, or prorations. The bonuses will go to employees who have met job expectations and were hired on or before October 30, 1995 and active on the day of distribution. For example, a director would receive an advance equal to 20% of base salary. The final balance of the bonus will be paid after the close of the fiscal year, typically in mid-to late August. III. PROCEDURES AND PRACTICES A. PROCEDURE: 1. A list of eligible employees will be sent by Human Resources to the Executive Staff for review at the beginning of the fiscal year. Additions, deletions or other changes to the list will be made and the approved list will be returned to Human Resources. 2. Once the list is confirmed, a copy of the Plan will be sent to each participant. 3. Each eligible new hire and employees promoted into eligible positions will receive a copy of the plan during the fiscal year. 4. A month before fiscal year end, a list of eligible employees with all changes made during the year will again be sent to the Executive Staff for final review and approval. B. BUSINESS CONDUCT: It is the established policy of Cisco Systems, Inc. to conduct business with the highest standards of business ethics. Cisco employees may not offer, give, solicit or receive any payment that could appear to be a bribe, kickback or other irregular type of payment from anyone involved in any way with an actual or potential business transaction. Gifts, favors and entertainment are allowed such that they are consistent with our business practice, do not violate any applicable laws, are of limited value ($50.00 or less) and would not embarrass Cisco if publicly disclosed. C. TRANSFERS AND TERMINATIONS: Employees who are participants in the Senior Management Incentive Plan and who transfer to a new position not governed by this Plan will be eligible on a pro-rata basis for the applicable period and paid as defined by the Plan. Any exceptions to the Plan must be designated in writing and approved by the President. A participant must be employed as of the last day of the fiscal year to be eligible for the bonus. If an employee terminates during the fiscal year, the employee is not eligible for the bonus. D. EMPLOYMENT AT WILL: The employment of all Plan participants at Cisco Systems, Inc. is for an indefinite period of time and is terminable at any time, with or without cause being shown or advance notice by either party. This Plan shall not be construed to create a contract of employment for a specified period of time between Cisco Systems, Inc. and any Plan participant. FY'96 SENIOR MGMT INCENTIVE PLAN 9/15/95 CISCO CONFIDENTIAL EX-11.01 3 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.01 COMPUTATION OF NET INCOME PER SHARE IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083 (In thousands, except per-share amounts)
Years Ended ------------------------------------ July 28, July 30, July 31, 1996 1995 1994 -------- -------- -------- PRIMARY EARNINGS PER SHARE: Actual weighted average common shares outstanding for the period 638,680 607,757 572,004 Weighted average shares assuming exercise of employees' stock options using average market price 27,906 22,954 24,535 -------- -------- -------- Shares used in per-share calculations 666,586 630,711 596,539 ======== ======== ======== Net income applicable to primary income per share $913,324 $456,489 $322,981 ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ 1.37 $ 0.72 $ 0.54 ======== ======== ========
- ---------- (A) These calculations are submitted in accordance with Securities Exchange Act of 1934 Release No. 34-9083. 57 2 EXHIBIT 11.01 (CONTINUED) COMPUTATION OF NET INCOME PER SHARE IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083 (In thousands, except per-share amounts)
Years Ended ------------------------------------ July 28, July 30, July 31, 1996 1995 1994 -------- -------- -------- FULLY DILUTED EARNINGS PER SHARE: Actual weighted average common shares outstanding for the period 638,680 607,757 572,004 Weighted average shares assuming exercise of employees' stock options using ending market price 30,058 27,214 25,465 -------- -------- -------- Shares used in per-share calculations 668,738 634,971 597,469 ======== ======== ======== Net income applicable to fully diluted income per share $913,324 $456,489 $322,981 ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ 1.37 $ 0.72 $ .54 ======== ======== ========
- ---------- (A) These calculations are submitted in accordance with Securities Exchange Act of 1934 Release No. 34-9083. 58 EX-21.01 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.01 SUBSIDIARIES Cisco Systems Canada Limited Cisco Systems Europe, S.A.R.L. (France) Cisco Systems Import/Export Corporation (U.S. Virgin Islands) Cisco Systems Belgium, S.A. Cisco Systems Limited (U.K.) Cisco Systems Australia PTY. Limited Nihon Cisco Systems, K.K. (Japan) Cisco Systems de Mexico, S.A. de C.V. Cisco Systems New Zealand Limited Cisco Systems (HK) Limited (Hong Kong) Cisco Systems GmbH (Germany) Cisco Systems (Italy) Srl Cisco Systems GesmbH (Austria) Cisco do Brasil Ltda. (Brazil) Cisco Systems (Korea) Ltd. VZ, Cisco Systems, C.A. (Venezuela) Cisco Systems South Africa (Pty) Ltd. Cisco Systems Sweden Aktiebolag Cisco Systems (Switzerland) AG Cisco Systems Netherlands, B.V. Cisco Systems International Netherlands, B.V. Cisco Systems Czech Republic, s.r.o. Cisco Systems Spain, S.L. Cisco Systems Argentina S.A. Cisco Systems Chile, S.A. Cisco Sistemas de Redes S.A., (Costa Rica) Cisco Systems Malaysia, Sdn. Bhd. Cisco Systems (USA) Pte. Ltd., Singapore Cisco Systems Thailand, Ltd. Cisco Systems Peru, S.A. 59 EX-23.02 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cisco Systems, Inc. on Form S-8 (File Numbers: 33-34849, 33-40509, 33-44221, 33-70644, 33-71860, 33-83268, 33-87100, 33-87096, 33-63331, 33-64283, 33-64283 [Post Eff.] 33-01069, 333-02101, 333-05447, 333-09903, 333-14383) of our reports dated August 13, 1996, except for Note 3 for which the date is October 14, 1996, on our audits of the consolidated financial statements and financial statement schedule of Cisco Systems, Inc. as of July 28, 1996 and July 30, 1995, and for the years ended July 28, 1996, July 30, 1995, and July 31, 1994, which reports are included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. San Jose, California October 24, 1996 60 EX-27 6 FINANACIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet, consolidated statement of income and consolidated statement of cash flows included in the Company's Form 10-K for the period ending July 28, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS JUL-28-1996 JUL-31-1995 JUL-28-1996 279,695 1,819,247 643,933 21,074 301,188 2,159,640 575,472 244,157 3,630,232 769,353 0 0 0 888,067 1,931,555 3,630,232 4,096,007 4,096,007 1,409,862 2,695,201 0 0 0 1,464,825 551,501 913,324 0 0 0 913,324 1.37 0
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