SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263 (State or other
jurisdiction of (I.R.S. Employer 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
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 -
As of July 8, 1996 there were 72,465,931 shares of the Registrant's common stock
outstanding.
This document contains 12 pages
Exhibit index on page 11
<PAGE>
INDEX
CABLETRON SYSTEMS, INC.
Page
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - May 31, 1996 (unaudited)
and February 29, 1996 3
Consolidated Statements of Income - Three months ended
May 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows - Three months ended
May 31, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements - May 31, 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Index to the Exhibits 11
Exhibit 11 - Statement re: Computation of Per Share Earnings 12
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(unaudited)
May 31,1996 February 29, 1996
Assets
Current Assets:
Cash and cash equivalents $ 169,309 $ 98,713
Short-term investments 154,827 132,462
Accounts receivable, net 147,934 180,350
Inventories 153,625 161,933
Deferred taxes 38,315 38,319
Prepaid expenses and other assets 30,930 32,851
---------- ---------
Total current assets 624,344 715,224
Long-term investments 153,424 171,620
Property, plant and equipment, net 150,028 158,923
Long-term deferred taxes 23,473 12,363
---------- ---------
Total assets $1,058,130 $951,269
========== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 49,701 $ 32,811
Accrued expenses 119,023 113,005
Income taxes payable 42,783 18,536
--------- ---------
Total current liabilities 211,507 164,352
Deferred taxes --- 9,088
--------- ---------
Total liabilities 211,507 173,440
--------- ---------
Stockholders' equity:
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 72,283
and 72,234, respectively 723 722
Additional paid-in capital 141,502 135,943
Retained earnings 704,868 642,197
-------- --------
847,093 778,862
Cumulative translation adjustment (470) (1,033)
-------- --------
Total stockholders' equity 846,623 777,829
-------- --------
Total liabilities and
stockholders' equity $1,058,130 $951,269
========== ========
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<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
Three months ended
May 31, 1996 May 31, 1995
Net sales $315,126 $240,754
Cost of sales 128,382 97,433
-------- --------
Gross profit 186,744 143,321
-------- --------
Operating expenses:
Research and development 33,801 26,019
Selling, general and administrative 61,655 47,298
-------- --------
Total operating expenses 95,456 73,317
-------- --------
Income from operations 91,288 70,004
Interest income 4,246 3,625
-------- -------
Income before income taxes 95,534 73,629
Income taxes 32,864 25,328
-------- --------
Net income $ 62,670 $ 48,301
======== ========
Net income per common share $ 0.87 $ 0.68
======== ========
Weighted average number of shares
outstanding 72,283 71,500
======== ========
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<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Three Months Ended
(unaudited)
May 31, 1996 May 31, 1995
Cash flows from operating activities:
Net income $62,670 $48,301
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,794 8,505
Provision for losses on accounts
receivable 777 3,051
Deferred taxes 5 (23)
Gain on disposal of property (6) ---
Changes in assets and liabilities:
Accounts receivables (33,227) (17,376)
Inventories (8,270) (6,297)
Prepaid expenses and other assets (1,650) (635)
Accounts payable and accrued expenses 25,527 8,300
Income taxes payable 24,273 22,236
------- -------
Net cash provided by operating activities 80,893 66,062
------- -------
Cash flows from investing activities:
Capital expenditures (19,979) (18,660)
Purchase of available-for-sale securities (21,187) (11,020)
Purchase of held-to-maturity securities (43,015) (81,457)
Maturities of marketable securities 68,340 4,986
------- -------
Net cash used in investing activities (15,841) (106,151)
------- -------
Cash flows from financing activities:
Proceeds from stock option exercise 5,016 1,079
Proceeds from purchases of common stock 544 ---
------- -------
Net cash provided by financing activities 5,560 1,079
------- -------
Effect of exchange rate changes on cash (16) 442
------- -------
Net (decrease) increase in cash and cash
equivalents 70,596 (38,568)
------- -------
Cash and cash equivalents, beginning of year 98,713 114,032
------- -------
Cash and cash equivalents, end of year $169,309 $75,464
======== =======
Cash paid during the year for:
Income taxes $ 7,682 $ 2,885
======== =======
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<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and Article 2 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
entire year. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 29, 1996.
2. Inventories
Inventories consist of:
5/31/96 2/29/96
Raw materials $ 48,062 $ 50,843
Work in process 38,624 39,176
Finished goods 75,247 63,606
-------- --------
Total inventories $161,933 $153,625
======== ========
3. Proposed acquisitions
On May 22, 1996, the Company announced it had entered into a merger agreement to
acquire Network Express, Inc., a provider of Integrated Services Digital Network
(ISDN) high-speed LAN switched access solutions. Under the terms of the merger
agreement, .1388 shares of Cabletron common stock will be exchanged for each
outstanding share of Network Express in a transaction to be accounted for as a
pooling of interests. Network Express has approximately 10.2 million shares
outstanding. The agreement is subject to receipt of certain government approvals
and approval of Network Express shareholders and is expected to be consummated
in August 1996.
On June 3, 1996, the Company announced it has entered into a merger agreement to
acquire ZeitNet, Inc., a privately-held company, and provider of high-quality,
low-cost solutions for connecting applications, servers and workgroups to
high-performance Asynchronous Transfer Mode (ATM) networks. Under the terms of
the merger agreement, 1,924,137 shares of Cabletron common stock will be
exchanged for all outstanding shares of ZeitNet. This transaction is intended to
qualify as a pooling of interests. The agreement is subject to receipt of
certain government approvals and approval of ZeitNet shareholders and is
expected to be consummated in July 1996.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cabletron Systems' worldwide net sales of $315.1 million for the fiscal quarter
ended May 31, 1996 represented a 31 percent increase over net sales of $240.8
million reported in the first quarter of the preceding year. The increase was
primarily the result of higher sales of Multi Media Access Center (MMAC ) and
related items, inclusive of MMAC Plus, the next generation intelligent switching
hubs, and small stackable hubs. As a percentage of net sales, international
sales were 30 percent in the fiscal quarter ended May 31, 1996 compared to 30
percent for the same quarter of the preceding year.
Gross profit as a percentage of net sales for the three months ended May 31,
1996 was 59.3 percent, down .2 percent as compared to the same quarter of the
preceding fiscal year.
As a percentage of net sales, spending for research and development was 10.7
percent from 10.8 percent for the same quarter of the preceding year. The higher
dollar spending for research and development reflected the hiring of additional
software and hardware engineers and associated costs related to development of
new products.
Spending for selling, general and administrative expenses for the three months
ended May 31, 1996 increased to $61.7 million compared to $47.3 million for the
same period of the preceding year. The increase in absolute spending dollars was
due predominately to increased sales volume. As a percentage of net sales,
spending for selling, general and administration remained unchanged at 19.6
percent.
Net interest income in the current period was $4.2 million, compared to $3.6
million in the same period last year. Interest income in both periods reflect
returns on invested cash, marketable securities and investments. The increase in
interest income resulted from higher interest rates and increased cash reserves.
Income before income taxes increased to $95.5 million compared to $73.6 million
for the same period of the prior fiscal year. As a percentage of net sales,
income from operations before income taxes remained the same at 30 percent for
both periods.
For the period ended May 31, 1996, net income of $62.7 million represented an
increase of 30 percent from $48.3 million for the same quarter a year ago.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investment increased
$66.5 million from $406.9 million at February 29, 1996 to $473.4 million at May
31, 1996, primarily as the result of favorable operating results offset in part
by capital investments for future development and sales growth.
-7-
<PAGE>
Accounts receivable at May 31, 1996 were $180.4 million compared to $147.9
million at February 29, 1996. Average days sales outstanding were 47 days for
the quarter ended May 31, 1996 compared to 42 days of sales in accounts
receivable at February 29, 1996. The increase was a result of the Company
offering less stringent payment terms for some of its higher volume customers
and shipment of products shifting towards the latter part of the quarter.
The Company has historically maintained higher levels of inventory than its
competitors in the LAN industry in order to implement its policy of shipping
most orders requiring immediate delivery within 24 to 48 hours. Worldwide
inventories at May 31, 1996 were $161.9 million, or 112 days of inventory,
compared to $147.9 million, or 111 days of inventory at the end of the prior
fiscal year. The slight increase in days in inventory from the quarter ended
February 29, 1996 was due to the increase in sales volume offset, in part, by
the absolute dollar increase in inventory.
Capital expenditures for the first quarter of fiscal 1997 were $20.0 million
compared to $18.7 million for the same period of the preceding year. Capital
expenditures the first three months included approximately $15.8 million for
equipment costs, of which $9.4 million was for computer related costs and $3.4
million for manufacturing related costs.
Current liabilities at May 31, 1996 were $211.5 million compared to $136.5
million at the end of the prior fiscal year. This increase was mainly due to the
growth in operations and the timing of disbursements.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will prove adequate
to support the Company's working capital and capital expenditure requirements
for the next twelve months.
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.
-8-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
[a] There were no reports on Form 8-K filed during the quarter ended May 31,
1996.
[b] Exhibit 11 - Statement re: Computation of Per Share Earnings (page 13 of
this report)
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABLETRON SYSTEMS, INC.
(Registrant)
July 12, 1996 /s/ Craig R. Benson
Date -------------------
Craig R. Benson
Chairman of the Board, Treasurer,
and Chief Operating Officer
July 12, 1996 /s/ David J. Kirkpatrick
Date ------------------------
David J. Kirkpatrick
Director of Finance and Chief
Financial Officer
-10-
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
11.1 Statement regarding computation of per share earnings 11
-11-
<PAGE>
EXHIBIT 11.1
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For period ended May 31, 1996 and 1995
(in thousands of dollars, except per share amounts)
(unaudited)
Three Months Ended
May 31, May 31,
1996 1995
------- -------
Net Income Per Common Share - (non-dilutive)
Net income $62,670 $48,301
======= =======
Weighted average common shares outstanding 72,283 71,500
Reported net income per common share $ 0.87 $ 0.68
======= =======
Net Income Per Common Share - (full dilution)
Net income $62,670 $48,301
======= =======
Weighted average common shares outstanding 72,283 71,500
Add net additional common shares upon exercise
of common stock options 1,639 1,323
------- -------
Adjusted average common shares outstanding 73,922 72,823
======== =======
Net income per common share - (full dilution) $ 0.85 $ 0.66
======== =======
-12-
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