SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT : NOVEMBER 18, 1996
CABLETRON SYSTEMS, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Commission File Number 1-10288
Delaware 04-2797263
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) identification no.)
35 Industrial Way Rochester, New Hampshire 03867
---------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (603-332-9400)
------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
The Registrant has previously announced the acquisition by the Registrant on
July 26, 1996 of ZeitNet, Inc. ("ZeitNet"), a California corporation by the
statutory merger of a wholly-owned subsidiary of the Registrant with and into
ZeitNet, and the acquisition by the Registrant on August 1, 1996 of Network
Express, Inc. ("Network"), a Michigan corporation, by the statutory merger of a
wholly owned subsidiary of the Registrant with and into Network. Both of the
acquisitions have been accounted for as a pooling of interests. The following
are the supplemental audited consolidated financial statements of the Registrant
giving retroactive effect to the mergers of ZeitNet and Network Express into
wholly owned subsidiaries of the Registrant. The financial statements include
the consolidated balance sheets of the Registrant as of February 29, 1996 and
February 28, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal years ended February 29, 1996
and February 28, 1995 and 1994. The Registrant also incorporates by reference
into this report the Registrant's Quarterly Report on Form 10-Q for the quarter
ending August 31, 1996 and financial information contained therein.
-2-
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
CABLETRON SYSTEMS, INC.
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Income Statement Data: FISCAL YEAR ENDED
February February February February February
29, 1996 28, 1995 28, 1994 28, 1993 29, 1992
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales ................................... $1,093,107 $824,676 $602,486 $419,607 $290,763
Cost of sales ............................... 446,083 337,451 246,154 170,924 117,472
---------- -------- -------- -------- --------
Research and development .................... 125,004 87,022 61,456 42,315 28,300
Selling, general and administrative ......... 217,727 161,250 118,373 82,345 58,766
Nonrecurring items .......................... 95,036 -- -- -- --
---------- -------- -------- -------- --------
Income from operations ...................... 209,257 238,953 176,503 124,023 86,225
Interest income ............................. 18,185 9,656 5,948 5,583 3,910
---------- -------- -------- -------- --------
Income before income taxes................... 227,442 248,609 182,451 129,606 90,135
Income taxes ................................ 80,341 86,014 64,130 46,405 33,848
---------- -------- -------- -------- ========
Net income .................................. $ 147,101 $162,595 $118,321 $ 83,201 $ 56,287
========== ======== ======== ======== ========
Net income per common share ................ $ 1.97 $ 2.22 $ 1.65 $ 1.18 $ 0.80
========== ======== ======== ======== ========
Weighted average number of
shares outstanding ..................... 74,718 73,355 71,846 70,728 70,104
=========== ======== ======== ======== ========
</TABLE>
Note: Net income for fiscal 1996 included a net of tax charge of approximately
$52.3 million or $0.73 per share related to the acquisition of the Enterprise
Networks Business Unit of Standard Microsystems Corporation (SMC) and
approximately $8.4 million net of tax charge related to the acquisition made by
a Cabletron subsidiary Network Express, Fivemere Ltd. (see note 3).
<TABLE>
<CAPTION>
Balance Sheet Data: February February February February February
29, 28, 28, 28, 29,
(in thousands) 1996 1995 1994 1993 1992
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital .................. $487,244 $379,896 $258,463 $234,114 $162,459
Total assets ..................... 992,276 697,686 502,377 344,517 236,736
Stockholders' equity ............. 811,285 592,726 425,719 289,279 203,449
</TABLE>
-3-
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
February 29, 1996 and February 28, 1995
(in thousands)
Assets 1996 1995
---- ----
Currents assets:
Cash and cash equivalents ..................... $105,467 $116,683
Short-term investments (note 4) ............... 172,896 130,563
Accounts receivable, net of allowance for
doubtful accounts ($6,488 and $6,066 in 1996
and 1995, respectively) ..................... 151,263 93,999
Inventories (note 5) .......................... 159,678 104,371
Deferred taxes (note 9) ....................... 38,315 20,062
Prepaid expenses and other assets ............. 31,528 13,050
-------- --------
Total current assets ....................... 659,147 478,728
-------- --------
Long-term investments (note 4) ................... 153,424 101,333
Long-term deferred taxes (note 9) ................ 23,473 --
Property, plant and equipment, net (note 6) ...... 153,211 117,554
Goodwill ......................................... 2,540 --
Other assets ..................................... 481 71
-------- --------
Total assets ..................................... $992,276 $697,686
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................. $ 36,432 $ 30,314
Accrued expenses (note 7) ..................... 116,459 53,497
Income taxes payable .......................... 19,012 15,021
-------- --------
Total current liabilities ................... 171,903 98,832
Deferred taxes (note 9) .......................... 9,088 6,128
-------- --------
Total liabilities ................................ 180,991 104,960
--------- --------
Commitments and contingencies (notes 8 and 10)
Stockholders' equity (notes 11 and 12):
Preferred stock, $1.00 par value. Authorized
2,000 shares; none issued ................... -- --
Common stock, $0.01 par value. Authorized
240,000 shares; issued and outstanding 75,254
and 73,400 shares in 1996 and 1995,
respectively ................................ 752 734
Additional paid-in capital .................... 189,604 118,697
Retained earnings ............................. 622,129 475,028
--------- --------
812,485 594,459
Cumulative translation adjustment ............. (1,049) (1,364)
Notes receivable, stockholders ................. (151) (369)
-------- --------
Total stockholders' equity ....................... 811,285 592,726
-------- --------
Total liabilities and stockholders' equity ....... $992,276 $697,686
======== ========
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended February 29, 1996, and February 28, 1995 and 1994 (in thousands,
except per share amounts)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (note 13) ......................... $1,093,107 $824,676 $602,486
Cost of sales ............................... 446,083 337,451 246,154
---------- -------- --------
Gross profit ............................ 647,024 487,225 356,332
Operating expenses:
Research and development ................ 125,004 87,022 61,456
Selling, general and administrative ..... 217,727 161,250 118,373
Nonrecurring items (note 3) 95,036 -- --
---------- -------- --------
Income from operations ............... 209,257 238,953 176,503
Interest income ............................. 18,185 9,656 5,948
---------- -------- --------
Income before income taxes ........... 227,442 248,609 182,451
Income taxes (note 9) ....................... 80,341 86,014 64,130
---------- -------- --------
Net income .................................. $ 147,101 $162,595 $118,321
========== ======== ========
Net income per common share ................. $ 1.97 $ 2.22 $ 1.65
========== ======== ========
Weighted average number of shares outstanding 74,718 73,355 71,846
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended February 29, 1996,
and February 28, 1995 and 1994
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
Additional Cumulative Notes Total
Common paid-in Retained translation receivable- stockholders'
stock capital earnings adjustment stockholders equity
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Balances at February 28, 1993 ............ $286 $98,026 $194,492 ($3,124) ($401) $289,279
- ------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
stockholders .......................... -- -- -- -- 66 66
Issuance of common stock, net ............ 4 1,880 -- -- -- 1,884
Exercise of options for 729
shares of common stock ................ 4 7,546 -- -- -- 7,550
Other .................................. -- -- 49 -- -- 49
Tax benefit for options exercised ........ -- 6,980 -- -- -- 6,980
Issuance of 55 shares under employee
stock purchase plan ................... 1 1,636 -- -- -- 1,637
Effect of foreign currency translation ... -- -- -- (47) -- (47)
Net income ............................... -- -- 118,321 -- -- 118,321
- ------------------------------------------------------------------------------------------------------------------------
Balances at February 28, 1994 ............ 295 116,068 312,862 (3,171) (335) 425,719
- ------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
stockholders .......................... -- -- -- -- 131 131
Canceled 19 shares upon employee
terminations, net ..................... -- (30) -- -- 30 --
Issuance of common stock, net ............ 10 2,843 -- -- (195) 2,658
Exercise of options for 369
shares of common stock ................ 3 4,884 -- -- -- 4,887
Tax benefit for options exercised ........ -- 5,712 -- -- -- 5,712
Issuance of 68 shares under employee
stock purchase plan ................... -- 2,287 -- -- -- 2,287
Stock split in the form of stock
dividend, net of fractional share buy-back 429 (11) (429) -- -- (11)
Stock repurchased and retired ............ (3) (13,056) -- -- -- (13,059)
Effect of foreign currency translation ... -- -- -- 1,807 -- 1,807
Net income ............................... -- -- 162,595 -- -- 162,595
- ------------------------------------------------------------------------------------------------------------------------
Balances at February 28, 1995 ............ 734 118,697 475,028 (1,364) (369) 592,726
- ------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
stockholders .......................... -- -- -- -- 174 174
Issuance of common stock, net . .......... 9 41,765 -- -- -- 41,774
Issuance of common stock for Fivemere
acquisition ........................... 1 2,564 -- -- -- 2,565
Repayment of notes receivable ............ -- -- -- -- 44 44
Exercise of options for 762
shares of common stock ................ 8 17,213 -- -- -- 17,221
Tax benefit for options exercised ........ -- 7,215 -- -- -- 7,215
Issuance of 77 shares under employee
stock purchase plan ................... -- 3,323 -- -- -- 3,323
Stock repurchased and retired ............ -- (1,173) -- -- -- (1,173)
Effect of foreign currency translation ... -- -- -- 315 -- 315
Net income ............................... -- -- 147,101 -- -- 147,101
- ------------------------------------------------------------------------------------------------------------------------
Balances at February 29, 1996 ............ $752 $189,604 $622,129 ($1,049) (151) $811,285
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
<TABLE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 29, 1996, and February 28, 1995 and 1994
(in thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $147,101 $162,595 $118,321
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ..................... 32,528 26,995 17,455
Provision for losses on accounts receivable ....... 356 72 1,734
Forgiveness of notes receivable from shareholders . -- -- 224
Loss on disposals of property, plant and equipment 93 174 113
Deferred taxes .................................... (38,766) (4,434) (6,151)
Changes in assets and liabilities:
Accounts receivables ........................... (54,982) (29,399) (18,493)
Inventories .................................... (55,183) (23,314) (9,607)
Prepaid expenses and other assets .............. (19,026) (3,463) 1,186
Accounts payable and accrued expenses .......... 66,034 12,669 22,527
Income taxes payable ........................... 3,705 10,476 (3,924)
-------- ------- --------
Net cash provided by operating activities .... 81,860 152,371 123,385
-------- ------- --------
Cash flows from investing activities:
Capital expenditures .............................. (67,385) (63,816) (39,575)
Purchase of available-for-sale securities ......... (124,968) (71,598) (30,097)
Purchase of held-to-maturity securities ........... (205,852) (282,712) (258,517)
Maturities of marketable securities................ 208,922 323,682 197,406
Sales of available for sale securities ............ 27,471 -- --
-------- ------- --------
Net cash used in investing activities ........ (161,812) (94,444) (130,783)
-------- ------- --------
Cash flows from financing activities:
Repayments of notes receivable from stockholders .. 217 131 66
Repurchase of common stock ........................ (1,173) (13,070) --
Tax benefit of options exercised .................. 7,215 5,712 6,980
Proceeds of issuance of common stock, net ......... 41,831 2,508 1,980
Common stock issued to employee stock purchase plan 3,323 2,287 1,637
Proceeds from stock option exercise ............... 17,164 4,887 7,356
-------- -------- --------
Net cash provided by financing
activities ................................... 68,577 2,455 18,019
-------- -------- --------
Effect of exchange rate changes on cash ............. 159 712 161
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (11,216) 61,094 10,782
Cash and cash equivalents, beginning of year ........ 116,683 55,589 44,807
-------- -------- --------
Cash and cash equivalents, end of year .............. $105,467 $116,683 $ 55,589
======== ======== ========
Cash paid during the year for:
Income taxes ...................................... $142,733 $ 68,420 $ 67,263
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note (1) Business Operations
The Company develops, manufactures, markets, designs, installs and supports a
broad range of standards-based local and wide area network connectivity hardware
and software products.
Note (2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Cabletron Systems,
Inc. (the "Company") and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been restated to give retroactive
effect to the acquisitions of ZeitNet, Inc. and Network Express, Inc., which
were accounted for as poolings of interest described in note 3 of the financial
statements.
(b) Investments
In the past the Company had managed its own investment portfolio. However,
during fiscal 1996 and 1995 the Company placed $20 million and $40 million of
securities with various investment management firms.
Held-to-maturity securities are those investments in which the Company has the
ability and intent to hold the security until maturity. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization of
premiums and discounts which approximates market value. Available-for-sale
securities are also recorded at amortized cost, adjusted for the amortization of
premiums and discounts. Due to the nature of the Company's investments and the
resulting low volatility, the difference between fair value and amortized cost
is not material.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are determined at
standard which approximates the first-in, first-out method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the lives of
the related assets or the term of the lease. In accordance with Financial
Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If it is
determined that the carrying amount of an asset cannot be fully recovered, an
impairment loss is recognized.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company has reinvested earnings of its foreign subsidiaries and, therefore,
has not provided income taxes which could result from the remittance of such
earnings. The unremitted earnings at February 29, 1996 amounted to approximately
$88.3 million. Furthermore, any taxes paid to foreign governments on those
earnings may be used, in whole or in part, as credits against the US tax on any
dividends distributed from such earnings. It is not practicable to estimate the
amount of unrecognized deferred US taxes on these undistributed earnings.
-8-
<PAGE>
(f) Earnings Per Share
Earnings per share of common stock are based on the weighted average number of
shares outstanding during the period. The effect of outstanding stock options is
excluded from the computation because the dilutive effect is not material.
(g) Foreign Currency Translation and Transaction Gains and Losses
Assets and liabilities of the Company's foreign operations are translated into
US dollars at the exchange rate in effect at the balance sheet date and revenue
and expenses are translated at average rates in effect during the period. The
resultant translation adjustment is reflected as a separate component of
stockholders' equity on the consolidated balance sheets. Transaction gains
(losses) are reflected in the consolidated statements of income and were not
material.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term investments
with maturities of three months or less.
(i) Revenue Recognition
Sales are recognized upon shipment of products and software. In the case of
design, consulting, installation, support services and evaluations, revenues are
recognized upon completion and acceptance of such products and services.
Revenues from service contracts are recognized ratably over the period the
services are performed. Warranty costs and sales returns and allowances are
accrued at the time of shipment.
(j) Derivatives
The Company uses derivative financial instruments, principally forward exchange
contracts and options in its management of foreign currency exposure. These
financial instruments are designed to minimize exposure and reduce risk from
exchange rate fluctuations in the regular course of the Company's international
business operations. Market value gains and losses are included in income as
incurred and effectively offset gains and losses on foreign currency assets or
liabilities that are hedged.
(k) Use of Estimates
The preparation of consolidated 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 those estimates.
(l) New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which established financial
accounting and reporting standards for stock-based employee compensation plans.
Companies are encouraged, rather than required, to adopt a new method that
accounts for stock compensation awards based on their fair value using an option
pricing model. Companies that do not adopt this new method will be required to
make pro forma footnote disclosures of net income as if the fair value-based
method of accounting required by SFAS No. 123 had been applied. The Company is
required to adopt SFAS No. 123 beginning in fiscal 1997. Adoption of this
pronouncement is not expected to have a material impact on the Company's
financial position or results of operations because the Company intends to make
pro forma footnote disclosures instead of adopting the new accounting method.
-9-
<PAGE>
Note (3) Business Combination
On November 17, 1995, Network Express acquired the entire capital of Fivemere
Limited located in Aldershot, England. The total purchase price of $13.5 million
included a cash payment of $10 million, the issuance of 66,000 shares and
acquisition costs of $917,000. The acquisition has been accounted for by the
purchase method of accounting and, accordingly, the accompanying consolidated
financial statements include the results of operations that are combined with
Network Express. The fair value of the net assets and acquired in-process
research and development was $2.2 million and $8.7 million respectively. Because
the technological feasibility of the acquired in-process research and
development had not yet been established and the in-process technology had no
alternative use, this amount was immediately charged to operations in the fourth
quarter of Network Express financial statements. The excess of $2.6 million of
the acquisition price over such fair value has been recorded as goodwill.
The Company completed the acquisition of the Enterprise Networks Business Unit
from Standard Microsystems Corporation on January 12, 1996. The acquisition was
accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market value at the date of
the acquisition. The total charge of approximately $85.7 million, included $67.8
million for in-process research and development and $17.9 million for
nonrecurring charges which included adjustments to conform the ENBU accounting
policies with the Company's accounting policies. The Company's consolidated
results of operations include the operating results of the acquired business
from its acquisition date. The following unaudited pro forma combined results of
operations for fiscal 1996 and fiscal 1995 have been prepared assuming that the
acquisition of the Enterprise Networks Business Unit of Standard Microsystems
Corporation occurred at the beginning of each such period. The following
unaudited pro forma financial information is not necessarily indicative of
results of operations that would have occurred had the transaction taken place
at the beginning of each of fiscal 1996 or fiscal 1995 or of the future results
of the combined companies.
1996 1995
---- ----
(in thousands)
Net sales $1,109,100 $846,789
Operating income $191,208 $231,657
The Company completed the acquisitions of Zeitnet, Inc. and Network Express,
Inc. on July 26, 1996 and August 1, 1996, respectively, by issuing approximately
3,349,000 shares of Cabletron common stock in exchange for all the outstanding
shares of ZeitNet and Network Express. These acquisitions were accounted for as
poolings of interests. In connection with these acquisitions the Company
recorded a nonrecurring charge of $43 million in the quarter ended August 31,
1996 (unaudited), which related to direct transaction costs, consisting
primarily of investment banking fees and costs associated with combining the
operations of the two companies, the majority of which relates to redundant
assets and facilities. These consolidated financial statements for fiscal years
1996, 1995 and 1994 have been prepared assuming that the acquisitions of
ZeitNet, Inc. and Network Express, Inc. occurred at the beginning of each such
period.
-10-
<PAGE>
<TABLE>
Note (4) Investments
Investments are summarized as follows at February 29, 1996 and February 28,
1995:
<CAPTION>
1996 1995
---------------------------------- -------------------------------
(in thousands) Current Long Term Total Current Long Term Total
<S> <C> <C> <C> <C> <C> <C>
-------- --------- -------- -------- --------- --------
Held-to-maturity . $130,079 $115,500 $245,579 $ 90,414 $86,816 $177,230
Available-for-sale 42,817 37,924 80,741 40,149 14,517 54,666
-------- -------- -------- -------- -------- --------
Total ........ $172,896 $153,424 $326,320 $130,563 $101,333 $231,896
======== ======== ======== ======== ======== ========
</TABLE>
Note (5) Inventories
Inventories consist of the following at February 29, 1996 and February 28,
1995:
(in thousands) 1996 1995
---- ----
Raw materials $ 51,665 $ 22,885
Work-in-process 39,312 23,483
Finished goods 68,701 58,003
-------- --------
Total $159,678 $104,371
======== ========
Note (6) Property, Plant and Equipment
<TABLE>
Property, plant and equipment consist of the following at February 29, 1996 and
February 28, 1995:
<CAPTION>
Estimated useful
(in thousands) 1996 1995 lives
---- ---- -----------------
<S> <C> <C> <C>
Land and land improvements ........... $ 1,760 $ 1,438 --
Building and building
improvements ...................... 37,058 23,799 30-40 years
Construction in progress ............. -- 3,265 --
Equipment ............................ 194,200 142,201 3-5 years
Furniture and fixtures ............... 10,374 6,958 5-7 years
Leasehold improvements ............... 6,304 3,201 3-5 years
Motor vehicles ....................... 3,651 3,854 3-5 years
-------- --------
253,347 184,716
Less accumulated depreciation and
amortization ...................... 100,136 67,162
-------- --------
$153,211 $117,554
======== ========
</TABLE>
-11-
<PAGE>
Note (7) Accrued Expenses
Accrued expenses consist of the following at February 29, 1996 and February 28,
1995:
(in thousands) 1996 1995
---- ----
Salaries and benefits ................ $ 18,625 10,163
Deferred revenue ..................... 38,132 21,752
Warranty ............................. 18,719 25
Other ................................ 40,983 21,557
-------- -------
Total ........................... $116,459 $53,497
======== =======
Note (8) Leases
The Company leases manufacturing and office facilities under noncancelable
operating leases expiring through the year 2020. The leases provide for
increases based on the consumer price index and increases in real estate taxes.
Rent expense associated with operating leases was approximately $9,734,000,
$7,425,000 and $7,090,000 for the years ended February 29, 1996, and February
28, 1995 and 1994, respectively.
Total future minimum lease payments under all noncancelable operating leases as
of February 29, 1996, are as follows:
(in thousands) Year
1997 $ 7,948
1998 6,358
1999 3,901
2000 2,976
2001 1,701
Thereafter 8,501
---------
$31,385
=========
-12-
<PAGE>
Note (9) Income Taxes
Income before income taxes and income tax expense are summarized as follows:
(in thousands) 1996 1995 1994
---- ---- ----
Total US domestic income ............ $186,275 $207,091 $169,679
Total foreign subsidiaries income ... 41,167 41,518 12,772
-------- -------- --------
Income before income taxes .......... $227,442 $248,609 $182,451
======== ======== ========
Currently payable:
Federal ......................... $91,963 $63,916 $53,673
State ........................... 20,807 19,286 14,448
Foreign ......................... 11,665 7,246 1,922
Deferred tax benefit ................ (44,094) (4,434) (5,913)
------- ------- -------
Total tax provision ................. $80,341 $86,014 $64,130
======= ======= =======
The following is a reconciliation of the effective tax rates to the statutory
federal tax rate:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate ... 35.0% 35.0% 35.0%
State income tax (net of federal
tax benefit) ...................... 3.8 4.7 4.6
Increase in valuation allowance ..... 2.6 -- 0.4
Exempt income of foreign sales
corporation, net of tax ........... (1.1) (0.7) (0.9)
Research and experimentation credit . -- (1.1) (1.1)
Foreign operations................... (1.6) (2.7) (1.3)
Other ............................... (3.4) (0.6) (1.7)
----- ----- -----
35.3% 34.6% 35.0%
===== ===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at February 29, 1996 and
February 28, 1995 are presented below:
(in thousands) 1996 1995
---- ----
Deferred tax assets:
Accounts receivable ................ $ 2,031 $ 3,851
Inventories ....................... 28,202 12,248
Other reserves and accruals ....... 6,206 4,250
Acquired research and
development ................... 26,322 --
Capitalized research and
development ................... 2,892 --
Net operating loss
carryforwards.................. 1,293 1,131
Foreign net operating loss
carryforwards ................. 3,268 1,071
------ -------
Total gross deferred tax
assets ........................ 70,214 22,551
Less valuation allowance .......... (8,426) (2,489)
------- -------
Net deferred tax assets ......... 61,788 20,062
------- -------
Deferred tax liabilities:
Property, plant and equipment ..... (9,088) (6,128)
------- -------
Total gross deferred
liabilities ..................... (9,088) (6,128)
------- -------
Net deferred tax assets ..... $52,700 $13,934
======= =======
-13-
<PAGE>
Note (9) Income Taxes continues
The net change in the total valuation allowance for fiscal years 1996, 1995 and
1994 were increases of $5,937,000, $397,000 and $773,000, respectively. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, not of the
existing valuation allowance at February 29, 1996.
Portions of the net operating loss carryforwards are subject to annual
limitations pursuant to federal tax law.
Note (10) Financial Instruments and Concentration of Credit Risk
The Company uses derivative financial instruments, principally forward contracts
and options, in its management of foreign currency exposures arising from its
international operations. These contracts primarily require the Company to
purchase or sell certain foreign currencies either with or for US dollars at
contractual rates. The Company's foreign currency hedging activities are used to
minimize adverse foreign exchange movements on the eventual dollar net cash
inflows of its foreign denominated net assets. The Company does not hold or
issue derivative financial instruments for trading purposes.
At February 29, 1996 and February 28, 1995, the Company had forward contracts
and purchased option contracts, all having maturities less than two years, in
the contractual amount of $93.5 million (forward contracts $47.5 million and
option contracts $46.0 million) and $44.7 million (forward contracts $21.7
million and option contracts $23.0 million), respectively.
Realized and unrealized foreign exchange gains and losses are recognized in
operating income and offset foreign exchange gains and losses on the underlying
exposures. The Company's derivative financial instruments are revalued at the
balance sheet date and the carrying amount approximates the fair value of the
instruments.
Several major international financial institutions are counterparties to the
Company's financial instruments. It is Company practice to monitor the financial
standing of the counterparties and limit the amount of exposure with any one
institution. The Company may be exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but believes that the
risk of such loss is remote and that it would not be material to its financial
position and results of operations.
With respect to trade receivables, concentration of credit risk is limited, due
to the diverse areas covered by the Company's operations. Any probable bad debt
loss has been provided for in the allowance for doubtful accounts. The carrying
amounts for cash, short-term and long-term investments, receivables, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments.
Note (11) Common Stock
On September 12, 1994, the Company's common stock split 2.5-for-1 and was
distributed as a stock dividend. All share and per share amounts have been
adjusted accordingly.
-14-
<PAGE>
Note (12) Stock Plans
(a) Equity Incentive and Directors Plans
The Company has an Equity Incentive Plan which provides for the availability of
12,500,000 shares of common stock for the granting of a variety of incentive
awards to eligible employees. As of February 29, 1996, the Company had issued
7,094,518 stock options under the Equity Incentive Plan, which were granted at
fair market value at the date of grant, vest over a three to five year period
and expire within six to ten years from the date of grant.
The Company has a Directors Option Plan which provides for the availability of
625,000 shares of common stock for purchase by the nonemployee directors of the
Company. The Directors Option Plan provides for issuance of options at their
fair market value on the date of grant. The options vest over a period of three
years and expire six years from the date of grant. A total of 445,000 stock
options have been issued under the Directors Option Plan.
A summary of option transactions under the two plans follows:
Option
Price
Shares Per Share
--------- ------------
Options outstanding at February 28, 1993 2,857,577 $1.80-35.45
--------- ------------
Granted ................................ 1,179,304 1.80-48.45
Exercised .............................. (728,910) 1.80-24.95
Canceled ............................... (141,521) 1.80-42.95
--------- ------------
Options outstanding at February 28, 1994 3,166,450 4.00-48.45
--------- ------------
Granted ................................ 1,402,534 0.11-49.60
Exercised .............................. (369,487) 4.00-42.95
Canceled ............................... (256,735) 6.45-47.125
--------- ------------
Options outstanding at February 28, 1995 3,942,762 0.11-49.60
--------- -----------
Granted ................................ 1,965,186 1.70-126.08
Exercised .............................. (762,128) 0.11-48.45
Canceled ............................... (213,432) 0.11-71.08
---------- ------------
Options outstanding at February 29, 1996 4,932,388 $0.11-126.08
========= ============
Options exercisable at February 29, 1996 1,025,314 $0.11-49.60
========= ============
(b) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (ESPP) which provides for the
availability of 1,250,000 shares of common stock to be purchased by employees
who have completed a minimum period of employment. Under this plan, options are
granted to eligible employees twice yearly and are exercisable through the
accumulation of employee payroll deductions from two to ten percent of employee
compensation as defined in the plan, to a maximum of $1,904 (adjusted to reflect
increases in the consumer price index) which may be used to purchases stock at
85 percent of the fair market value of the common stock at the beginning of the
option period or the end of the option period, whichever is lower. In fiscal
1996, 76,884 shares were purchased at a weighted average price of $42.86 (68,349
at $33.49 and 55,783 at $29.33, for 1995 and 1994, respectively). The remaining
balance of the ESPP available for purchase by employees at February 29, 1996 was
856,100 shares.
-15-
<PAGE>
<TABLE>
Note (13) Geographic Area Information
<CAPTION>
(in thousands) % of % of % of
1996 Total 1995 Total 1994 Total
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
US .................... $ 763,937 69.9% $581,789 71.2% $435,745 72.7%
Direct Foreign Export . 35,378 3.3 37,889 4.7 28,404 4.7
---------- ------ --------- ------ --------- ------
Total US Source ....... 799,315 73.2 619,678 75.9 464,149 77.4
Europe ................ 215,796 21.0 155,467 19.2 119,840 20.0
Other ... ............. 77,996 5.8 49,531 4.9 18,497 2.6
---------- ------ -------- ------ -------- ------
Total Sales ....... $1,093,107 100.0% $824,676 100.0% $602,486 100.0%
========== ====== ======== ====== ========= ======
Income from Operations:
US .................... $ 171,425 80.8% $198,729 83.3% $164,914 93.0%
Europe ................ 33,834 14.0 39,343 16.5 11,143 6.7
Other ... ............. 3,998 5.2 881 0.2 446 0.3
Total Income From ---------- ------ -------- ------ -------- ------
Operations ..... $ 209,257 100.0% $238,953 100.0% $176,503 100.0%
========== ====== ======== ====== ======== ======
Identifiable Assets:
US .................... $ 837,347 84.4% $583,514 83.8% $433,726 86.4%
Europe ................ 115,949 11.6 92,548 13.4 54,367 10.9
Other ... ............. 38,980 4.0 21,624 2.8 14,284 2.7
---------- ------ -------- ------ -------- ------
Total Assets ...... $ 992,276 100.0% $697,686 100.0% $502,377 100.0%
========== ====== ======== ====== ======== ======
</TABLE>
Note (14) Quarterly Financial Data (unaudited)
(in thousands, except per share amounts)
Income Net
Net Gross From Net Income
Sales Profit Operations Income Per Share (a)
1996
First Quarter $ 245,774 $145,603 $ 68,525 $ 46,817 $0.63
Second Quarter 264,974 156,890 75,350 51,841 0.70
Third Quarter 282,838 167,335 78,334 54,030 0.72
Fourth Quarter 299,521 177,194 (12,952)(b) (5,587) (0.07)
---------- -------- -------- -------- -----
Total Year ... $1,093,107 $647,024 $209,257 $147,101 $1.97
========== ======== ======== ======== =====
1995
First Quarter $183,118 $108,104 $ 53,510 $ 36,252 $0.50
Second Quarter 196,902 116,506 56,932 38,589 0.53
Third Quarter 213,865 126,318 61,613 41,925 0.58
Fourth Quarter 230,791 136,297 66,898 45,829 0.61
-------- -------- -------- -------- -----
Total Year ... $824,676 $487,225 $238,953 $162,595 $2.22
======== ======== ======== ======== =====
(a) Due to rounding some totals will not add.
(b) Includes $85.7 million nonrecurring charge related to acquisition of SMC's
Enterprise Networks Business Unit and $8.7 million for the acquisition made by
Network Express of Fivemere.
-16-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cabletron Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended February 29, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cabletron Systems,
Inc. and subsidiaries as of February 29, 1996 and February 28, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 29, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 22, 1996
-17-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CABLETRON SYSTEMS, Inc.
Dated: November 18, 1996 By: /S/ CRAIG R. BENSON
-------------------
Craig R. Benson
Chairman and Chief Operating Officer
-18-
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
23.1 Consent of Independent Auditors 20
-19-
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Cabletron Systems, Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-50454, 33-31572, 33-42490, 33-09403 and 33-09029) on form S-8 of Cabletron
Systems, Inc. of our report dated October 22, 1996 relating to the consolidated
balance sheets of Cabletron Systems, Inc. and subsidiaries as of February 29,
1996 and February 28, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three year
period ended February 29, 1996, which report is included in the November 18,
1996 Current Report on Form 8-K/A-2 of Cabletron Systems, Inc.
KPMG Peat Marwick LLP
Boston, Massachuetts
November 18, 1996
-20-
