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 August 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 September 30, 1996 there were 75,721,155 shares of the Registrant's common
stock outstanding.
This document contains 13 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
(All Financial Statements for prior periods have been restated
to reflect the acquisitions of Network Express and ZeitNet)
Consolidated Balance Sheets - August 31, 1996 (unaudited)
and February 29, 1996 (unaudited) 3
Consolidated Statements of Income - Three and six months
ended August 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows - Six months ended
August 31, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements - August 31, 1996 6 - 7
(All notes have been restated to reflect the acquisitions)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Index to the Exhibits 12
Exhibit 11 - Statement re: Computation of Per Share Earnings 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(unaudited)
8/31/96 2/29/96
Assets
Current Assets:
Cash and cash equivalents .................. $ 160,429 $105,467
Short-term investments ..................... 158,664 172,896
Accounts receivable, net ................... 196,113 151,263
Inventories ................................ 164,401 159,678
Deferred taxes ............................. 54,985 38,315
Prepaid expenses and other assets .......... 43,062 31,528
---------- --------
Total current assets .................. 777,654 659,147
Long-term investments ........................... 164,184 153,424
Property, plant and equipment, net .............. 179,955 153,210
Long-term deferred taxes ........................ 14,376 23,473
Other Assets .................................... -- 3,022
---------- --------
Total assets .................................... $1,136,169 $992,276
========== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................... $ 39,545 $ 36,432
Accrued expenses ........................... 160,566 115,660
Other current liabilities .................. -- 1,275
Income taxes payable ....................... 16,498 18,536
---------- --------
Total current liabilities ............. 216,609 171,903
Deferred taxes .................................. 1,068 9,088
---------- --------
Total liabilities ............................... 217,677 180,991
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
75,608 and 75,254, respectively .......... 756 752
Additional paid-in capital ................. 200,463 197,454
Retained earnings .......................... 717,763 614,128
---------- --------
918,982 812,334
Cumulative translation adjustment .......... (490) (1,049)
---------- --------
Total stockholders' equity ...................... 918,492 811,285
---------- --------
Total liabilities and stockholders' equity ...... $1,136,169 $992,276
========== ========
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales .............................. $338,603 $264,974 $659,046 $510,748
Cost of sales .......................... 137,715 108,084 269,286 208,255
-------- -------- -------- --------
Gross profit ...................... 200,888 156,890 389,760 302,493
-------- -------- -------- --------
Operating expenses:
Research and development .......... 37,852 30,193 76,768 57,612
Selling, general and administrative 68,656 51,347 132,589 101,006
Non-recurring Items ............... 43,024 -- 43,024 --
-------- -------- -------- --------
Total operating expenses ..... 149,532 81,540 252,381 158,618
-------- -------- -------- --------
Income from operations ....... 51,356 75,350 137,379 143,875
Interest income ........................ 4,846 4,226 9,342 7,886
-------- -------- -------- --------
Income before income taxes ... 56,202 79,576 146,721 151,761
Income taxes ........................... 18,113 27,735 51,088 53,103
-------- -------- -------- --------
Net income ............................. $ 38,089 $ 51,841 $ 95,633 $ 98,658
======== ======== ======== ========
Net income per common share ............ $ 0.50 $ 0.70 $ 1.27 $ 1.35
======== ======== ======== ========
Weighted average number of shares
outstanding ............................ 75,580 74,488 75,486 73,139
======== ======== ======== ========
</TABLE>
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Six Months Ended
August 31,
1996 1995
Cash flows from operating activities:
Net income ........................................ $ 95,633 $ 98,658
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................. 24,983 16,618
Provision for losses on accounts receivable ... 2,660 (331)
Deferred taxes ................................ (15,594) (123)
Gain/loss on disposal of property ............. 80 (71)
Changes in assets and liabilities:
Accounts receivable ........................ (46,221) (23,735)
Inventories ................................ (3,665) (12,037)
Prepaid expenses and other assets .......... (7,238) (11,453)
Accounts payable and accrued expenses ...... 34,160 18,971
Income taxes payable ....................... (2,080) 5,523
-------- --------
Net cash provided by operating activities ...... 82,718 92,020
-------- --------
Cash flows from investing activities:
Capital expenditures .............................. (51,399) (35,041)
Purchase of available-for-sale securities ......... (95,640) (25,417)
Purchase of held-to-maturity securities ........... (160,985) (65,872)
Maturities of marketable securities ............... 269,914 66,187
-------- --------
Net cash used in investing activities .......... (38,110) (60,143)
-------- --------
Cash flows from financing activities:
Common stock issued to employee stock purchase plan -- 1,376
Net proceeds from sale of stock
(Network Express/ZeitNet) ......................... -- 37,543
Proceeds from stock option exercise ............... 9,738 4,764
Proceeds from purchases of common stock ........... 544 --
-------- --------
Net cash provided by financing activities ...... 10,282 43,683
-------- --------
Effect of exchange rate changes on cash .............. 72 745
-------- --------
Net increase in cash and cash equivalents ............ 54,962 76,305
Cash and cash equivalents, beginning of period ....... 105,467 116,683
-------- --------
Cash and cash equivalents, end of period ............. $160,429 $192,988
======== ========
Cash paid during the year for:
Income taxes ...................................... $ 66,024 $ 44,928
======== ========
<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:
8/31/96 2/29/96
Raw materials $ 45,637 $ 51,771
Work in process 43,221 39,176
Finished goods 75,543 68,731
-------- --------
Total inventories $164,401 $159,678
======== ========
3. Business Combinations
On July 26, 1996, the Company acquired ZeitNet, Inc., a privately-held company,
and provider of solutions for connecting applications, servers and workgroups to
high-performance Asynchronous Transfer Mode (ATM) networks. Under the terms of
the merger agreement, approximately 1,924,137 shares of Cabletron common stock
were exchanged for all outstanding shares of ZeitNet. This transaction was
accounted for as a pooling of interests.
On August 1, 1996, the Company acquired Network Express, Inc., a provider of
Integrated Services Digital Network (ISDN) high-speed LAN switched access
solutions. Under the terms of the merger agreement, approximately 1,425,000
shares of Cabletron common stock were exchanged for all outstanding shares of
Network Express, Inc. This merger transaction was accounted for as a pooling of
interests.
In connection with these acquisitions the Company recorded a nonrecurring charge
of $43 million in the quarter ended August 31, 1996.
<PAGE>
4. Proposed acquisitions
On September 27, 1996, the Company announced it had entered into a merger
agreement to acquire privately-held Netlink, Inc. a provider of frame relay
access solutions for multi-protocol , mission critical networks. Under the terms
of the merger agreement, approximately 2.3 million shares of Cabletron common
stock will be exchanged for all outstanding shares of Netlink. The merger
transaction will be accounted for as a pooling of interests. The merger
agreement is subject to receipt of certain government approvals and approval of
Netlink shareholders and is expected to be completed by fiscal year end.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cabletron Systems' worldwide net sales of $338.6 million for the three months
ended August 31, 1996 represented a 27.8 percent increase over net sales of
$265.0 million reported in the second quarter of the preceding fiscal year. The
increase was primarily the result of higher sales of the Company's Multi Media
Access Center (MMAC ) product family, including the Company's MMAC Plus, an
intelligent switching hub, and small stackable hubs. As a percentage of net
sales, international sales were 29 percent in the fiscal quarter ended August
31, 1996 compared to 27 percent for the same quarter of the preceding year.
Gross profit as a percentage of net sales for the three months ended August 31,
1996 was 59.3 percent, up 0.1 percent as compared to the same quarter of the
preceding fiscal year.
Spending for research and development was $37.9 million, or 11.2 percent of net
sales, compared to $30.2 million, or 11.4 percent of net sales, 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 the development of new products.
Selling, general and administrative expenses for the three months ended August
31, 1996 increased to $68.7 million compared to $51.3 million for the same
period of the preceding year. The dollar increase in expenses was due
predominately to increased sales volume. Expenses for selling, general and
administration as a percentage of net sales increased 0.9 percent over the same
period of the preceding year.
Net interest income in the current period was $4.8 million, compared to $4.2
million in the same period of the preceding 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 was $56.2 million or 16.6% of net sales compared to
$79.6 million or 30.0% of net sales for the same period of the prior fiscal
year. The decrease in income before taxes, as a percentage of net sales for the
quarter, was due primarily to a nonrecurring charge of $43 million, resulting
from the acquisitions of Network Express and ZeitNet.
Net income for the three months ended August 31, 1996 was $38.1 million compared
to $51.8 million for the same period of the preceding year. Excluding the above
mentioned one time non-recurring charge the Company would have realized net
income of $65.1 million.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investment increased
$51.5 million from $431.8 million at February 29, 1996 to $483.3 million at
August 31, 1996, primarily as the result of favorable operating results offset
in part by capital investments for future development and sales growth.
Accounts receivable at August 31, 1996 were $196.1 million compared to $151.3
million at February 29, 1996. Average days sales outstanding were 52 days for
the three months ended August 31, 1996 compared to 43 days for the fiscal year
ended 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 networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories at August 31, 1996 were $164.4 million, or 111 days of
inventory, compared to $159.7 million, or 112 days of inventory at the end of
the prior fiscal year.
Capital expenditures for the first six months of fiscal 1997 were $51.4 million
compared to $35.0 million for the same period of the preceding year. Capital
expenditures included approximately $29.9 million for equipment costs, of which
$27.2 million was for computer and computer related equipment, and $7.0 million
for manufacturing related equipment.
Current liabilities at August 31, 1996 were $216.6 million compared to $171.9
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.
<PAGE>
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.
Competitive Outlook
Competition in the computer networking industry has increased significantly in
the recent past as companies more directly compete in offering so-called
"end-to-end" enterprise networking solutions rather than component products
within the enterprise network.Cabletron expects this trend to continue to
increase in the future, in particular from its primary competitors (Cisco
Systems, Inc., Bay Networks, Inc. and 3Com Corporation). In the past, Cabletron
has relied upon a combination of internal product development and partnerships
with other networking vendors to broaden its product line to meet this demand
for "end-to-end" enterprise wide solutions. The increasing competitiveness among
vendors, together with acquisitions by the Company and its competitors of
smaller networking companies possessing complementary technologies, may
materially limit Cabletron's ability to continue to partner with other vendors
for new or complementary products. For example, pursuant to agreements with
Cisco, Cabletron markets certain Cisco products in conjunction with its own
products. Cisco has notified Cabletron that these agreements will not be renewed
as they expire or will be terminated. The first of these agreements will expire
on October 22, 1996. The Company believes Cisco's actions in failing to renew or
terminating these agreements is anti-competitive. Cabletron has acquired or
developed products intended to replace certain of these Cisco products. There
can be no assurance that Cabletron will not experience difficulties that could
delay or interfere with Cabletron's ability to successfully introduce,
manufacture or market such replacement products or to supply Cisco products to
its customers. The Company believes that the termination and nonrenewals will
not have a material adverse effect on the Company's operating results. In the
future, Cabletron expects to meet the demand for a broad array of products
primarily through internal development and acquisitions. There can be no
assurance that Cabletron will be successful in developing or acquiring products
that will meet customers needs.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 7, 1996, a lawsuit was filed by Fred S. Havenick et al. Against
Network Express, Inc. (which was recently acquired by Cabletron), certain of
Network Express's officers and directors, two investment banking firms and
Cabletron in the United States District Court of Michigan. The lawsuit purports
to be a class action filed on behalf of persons who purchased Network Express
stock between March 13, 1995 and October 6, 1995. The complaint alleges that
certain of the defendants violated the securities laws by selling or
participating in the sale of Network Express stock at a time when they were
purportedly in possession of material nonpublic information concerning a decline
in Network Express's sales in Japan and technical deficiencies in one of Network
Express's principal products. The complaint does not specify the amount of the
damages sought by plaintiffs. The Company is in the process of reviewing the
allegations contained in the complaint.
Item 6. Exhibits and Reports on Form 8-K.
[a] There were no reports on Form 8-K filed during the quarter ended August 31,
1996.
[b] Exhibit 11 - Statement re: Computation of Per Share Earnings (page 13 of
this report)
<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)
October 11, 1996 /s/ Craig R. Benson
Date Craig R. Benson
Chairman of the Board, Treasurer,
and Chief Operating Officer
October 11, 1996 /s/ David J. Kirkpatrick
Date David J. Kirkpatrick
Director of Finance and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
11.1 Statement regarding computation of per share earnings 13
EXHIBIT 11.1
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For period ended August 31, 1996 and 1995
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income Per Common Share - (non-dilutive)
Net income ................................... $38,089 $51,841 $95,633 $98,658
======= ======= ======= =======
Weighted average common shares outstanding ... 75,580 74,488 75,486 73,139
======= ======= ======= =======
Reported net income per common share ......... $ 0.50 $ 0.70 $ 1.27 $ 1.35
======= ======= ======= =======
Net Income Per Common Share - (full dilution)
Net income ................................... $38,089 $51,841 $95,633 $98,658
======= ======= ======= =======
Weighted average common shares outstanding ... 75,580 74,488 75,486 73,139
Add net additional common shares upon exercise
of common stock options ..................... 1,610 1,220 1,797 1,178
------- ------- ------- -------
Adjusted average common shares outstanding ... 77,190 75,708 77,283 74,317
======= ======= ======= =======
Net income per common share - (full dilution) $ 0.49 $ 0.68 $ 1.24 $ 1.33
======= ======= ======= =======
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending August 31, 1996, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000846909
<NAME> CABLETRON SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 160,429
<SECURITIES> 158,664
<RECEIVABLES> 205,183
<ALLOWANCES> 9,070
<INVENTORY> 164,401
<CURRENT-ASSETS> 777,654
<PP&E> 179,995
<DEPRECIATION> 123,169
<TOTAL-ASSETS> 1,136,169
<CURRENT-LIABILITIES> 216,609
<BONDS> 0
0
0
<COMMON> 756
<OTHER-SE> 917,736
<TOTAL-LIABILITY-AND-EQUITY> 1,136,169
<SALES> 659,046
<TOTAL-REVENUES> 659,046
<CGS> 269,286
<TOTAL-COSTS> 521,667
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<INCOME-TAX> 51,103
<INCOME-CONTINUING> 95,633
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,633
<EPS-PRIMARY> 1.27
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</TABLE>
