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 November 30, 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 January 6, 1997 there were 155,819,755 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,
Inc. and ZeitNet, Inc.)
Consolidated Balance Sheets - November 30, 1996 (unaudited)
and February 29, 1996 (audited) 3
Consolidated Statements of Income - Three and nine months
ended November 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows - Nine months ended
November 30, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements -
November 30, 1996 (All notes have been restated to reflect
the acquisitions) 6-7
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) (audited)
11/30/96 2/29/96
Assets
Current assets:
Cash and cash equivalents ...................... $ 176,443 $ 105,467
Short-term investments ......................... 175,795 172,896
Accounts receivable, net ....................... 220,371 151,263
Inventories .................................... 177,258 159,678
Deferred taxes ................................. 58,767 38,315
Prepaid expenses and other assets .............. 36,892 31,528
---------- ----------
Total current assets ...................... 845,526 659,147
---------- ----------
Long-term investments ............................... 163,724 153,424
Property, plant and equipment, net .................. 185,110 153,210
Long-term deferred taxes ............................ 14,375 23,473
Other assets ........................................ --- 3,022
---------- ----------
Total assets ........................................ $1,208,735 $ 992,276
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................... $ 50,057 $ 36,432
Accrued expenses ............................... 145,046 115,660
Other current liabilities ...................... --- 1,275
Income taxes payable ........................... 17,228 18,536
---------- ----------
Total current liabilities ................. 212,331 171,903
---------- ----------
Deferred taxes ...................................... 1,068 9,088
---------- ----------
Total liabilities ................................... 213,399 180,991
---------- ----------
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
151,676 and 150,508 respectively.............. 1,517 1,505
Additional paid-in capital ..................... 206,851 188,700
Retained earnings .............................. 786,037 622,129
---------- ----------
994,405 812,334
Cumulative translation adjustment .............. 931 (1,049)
---------- ----------
Total stockholders' equity .......................... 995,336 811,285
---------- ----------
Total liabilities and stockholders' equity .......... $1,208,735 $ 992,276
========== ==========
<PAGE>
<TABLE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
<CAPTION>
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1996 1995 1996 1995
--- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ......................................... $359,016 $282,838 $1,018,062 $793,586
Cost of sales ..................................... 146,299 115,503 415,585 323,758
-------- -------- ---------- --------
Gross profit ................................. 212,717 167,335 602,477 469,828
-------- -------- ---------- --------
Operating expenses:
Research and development ..................... 39,783 32,405 116,551 90,017
Selling, general and administrative .......... 72,625 56,608 205,214 157,640
Nonrecurring items ........................... --- --- 43,024 ---
-------- -------- ---------- ---------
Total operating expenses ................ 112,408 89,013 364,789 247,657
-------- -------- ---------- --------
Income from operations .................. 100,309 78,322 237,688 222,171
Interest income ................................... 4,943 5,088 14,285 13,000
-------- -------- ---------- --------
Income before income taxes .............. 105,252 83,410 251,973 235,171
Income taxes ...................................... 36,219 29,379 87,307 82,482
-------- -------- -------- --------
Net income ........................................ $ 69,033 $ 54,031 $ 164,666 $152,689
======== ========= =========== ========
Net income per common share ....................... $ 0.46 $ 0.36 $ 1.09 $ 1.03
======== ========= =========== ========
Weighted average number of shares
outstanding ....................................... 151,465 149,642 151,140 148,728
======== ======== ========== ========
</TABLE>
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Nine Months Ended
November 30,
1996 1995
---- ----
Cash flows from operating activities:
Net income ........................................ $ 164,666 $ 152,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................. 36,933 26,041
Provision for losses on accounts receivable ... 7,276 (297)
Deferred taxes ................................ (19,376) (24)
Gain/loss on disposal of property ............. 83 (75)
Forgiveness of Notes Receivable from
Shareholders ................................ --- 151
Changes in assets and liabilities:
Accounts receivable ........................ (71,281) (35,936)
Inventories ................................ (17,086) (38,064)
Prepaid expenses and other assets .......... (2,175) (12,910)
Accounts payable and accrued expenses ...... 37,753 39,598
Income taxes payable ....................... (1,148) 9,051
--------- ---------
Net cash provided by operating activities ...... 135,645 140,224
--------- ---------
Cash flows from investing activities:
Capital expenditures .............................. (68,176) (49,982)
Purchase of available-for-sale securities ......... (169,349) (57,623)
Purchase of held-to-maturity securities ........... (170,595) (213,974)
Maturities of marketable securities ............... 326,729 198,642
--------- ---------
Net cash used in investing activities .......... (81,391) (122,937)
--------- ---------
Cash flows from financing activities:
Common stock issued to employee stock purchase plan 3,019 1,522
Net proceeds from sale of stock
(Network Express/ZeitNet) ......................... --- 38,097
Proceeds from stock option exercise ............... 13,110 12,750
Proceeds from purchases of common stock ........... 544 ---
--------- ---------
Net cash provided by financing activities ...... 16,673 52,369
--------- ---------
Effect of exchange rate changes on cash .............. 49 68
--------- ---------
Net increase in cash and cash equivalents ............ 70,976 69,724
Cash and cash equivalents, beginning of period ....... 105,467 247,246
--------- ---------
Cash and cash equivalents, end of period ............. $ 176,443 $ 316,970
========= =========
Cash paid during the year for:
Income taxes ...................................... $ 101,318 $ 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.
Historical financial statements have been restated to give retroactive
effect for the acquisitions of Network Express, Inc. and ZeitNet, Inc., both
of which have been accounted for as poolings of interests.
2. Inventories
Inventories consist of:
11/30/96 2/29/96
Raw materials $ 35,592 $ 51,771
Work in process 54,290 39,176
Finished goods 87,376 68,731
-------- --------
Total inventories $177,258 $159,678
======== ========
3. Stock Split
On October 28, 1996, Cabletron Systems, Inc. announced that its Board of
Directors had authorized a 2-for-1 split of its common stock to be effected in
the form of a 100 percent stock dividend.
Presentation of common stock outstanding and earnings per share on the attached
financial statements have been adjusted to reflect this 2-for-1 common stock
split, which took effect on November 26, 1996.
4. Subsequent events
On December 10, 1996 the Company acquired Netlink, Inc. a provider of frame
relay access solutions for multi-protocol, mission critical networks. Under the
terms of the merger agreement, 4,514,638 shares of post-split Cabletron common
stock were exchanged for all outstanding shares of Netlink on a fully diluted
basis. This merger transaction was accounted for as a pooling of interests.
<PAGE>
5. Proposed acquisitions
On December 2, 1996, the Company announced it had entered into a merger
agreement to acquire privately-held The OASys Group Inc. a leading supplier of
software targeted at managing telecommunications devices and connections used in
high-speed, fiber-optic networks. Under the terms of the merger agreement
approximately 240,000 shares of post-split Cabletron common stock will be
exchanged for all outstanding shares of OASys. The issusance of the shares to
OASys upon consummation of the merger is not expected to have a materially
dilutive effect on earnings. The transaction will be accounted for as a purchase
and is expected to qualify as a tax-free reorganization. The merger is subject
to approval by the shareholders of OASys.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cabletron Systems' worldwide net sales of $359.0 million for the three
months ended November 30, 1996 represented a 26.9 percent increase over net
sales of $282.8 million reported in the third 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 30.0 percent
in the fiscal quarter ended November 30, 1996 compared to 29.6 percent for
the same quarter of the preceding year.
Gross profit as a percentage of net sales for the three months ended November
30, 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 $39.8 million, or 11.1 percent of net
sales, compared to $32.4 million, or 11.5 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 November
30, 1996 increased to $72.6 million compared to $56.6 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 0.2 percent over the same
period of the preceding year.
Net interest income in the current period was $4.9 million, compared to $5.1
million in the same period of the preceding year. Interest income in both
periods reflect returns on invested cash, marketable securities and investments.
The decrease in interest income resulted from lower interest rates earned on
investment.
Income before income taxes was $105.3 million or 29.3% of net sales compared to
$83.4 million or 29.5% of net sales for the same period of the prior fiscal
year.
Net income for the three months ended November 30, 1996 was $69.0 million
compared to $54.0 million for the same period of the preceding year.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investment increased
$84.2 million from $431.8 million at February 29, 1996 to $516.0 million at
November 30, 1996, primarily as the result of favorable operating results offset
in part by capital investments for future development and sales growth.
Accounts receivable at November 30, 1996 were $220.4 million compared to $151.3
million at February 29, 1996. Average days sales outstanding were 53 days for
the three months ended November 30, 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.
<PAGE>
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 November 30, 1996 were $177.3 million, or 104 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 nine months of fiscal 1997 were $68.2 million
compared to $50.0 million for the same period of the preceding year. Capital
expenditures included approximately $46.1 million for equipment costs, of which
$27.2 million was for computer and computer related equipment, and $8.3 million
for manufacturing related equipment.
Current liabilities at November 30, 1996 were $212.3 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings related to the
Company. See the Company's Quarterly Report on Form 10-Q for the period ended
August 31, 1996.
Item 6. Exhibits and Reports on Form 8-K.
[a] Exhibit 11 - Statement re: Computation of Per Share Earnings (page 13 of
this report)
(b) Cabletron filed the following Reports on Form 8-K during the quarter ended
November 30, 1996.
1. Current report on Form 8-K/A-2 dated November 20, 1996. Such report
disclosed restated historical financial statements of the Company to reflect
previous acquisitions which were accounted for as poolings of interest.
2. Current report on Form 8-K/A dated October 25, 1996. Such report disclosed
restated historical financial statements of the Company to reflect previous
acquisitions which were accounted for as poolings of interest.
3. Current report on Form 8-K dated October 24, 1996. Such report disclosed
restated historical financial statements of the Company to reflect previous
acquisitions which were accounted for as poolings of interest.
<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)
January 14, 1997 /s/ Craig R. Benson
Date Craig R. Benson
Chairman of the Board, Treasurer,
and Chief Operating Officer
January 14, 1997 /s/ David J. Kirkpatrick
Date David J. Kirkpatrick
Director of Finance and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
11.1 Statement regarding computation of per share earnings 13
<PAGE>
<TABLE>
EXHIBIT 11.1
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For periods ended November 30, 1996 and 1995
(in thousands of dollars, except per share amounts)
<CAPTION>
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income Per Common Share - (non-dilutive)
Net income ............................................... $ 69,033 $ 54,031 $164,666 $152,689
======== ======== ======== ========
Weighted average common shares outstanding ............... 151,465 149,642 151,140 148,728
======== ======== ======== ========
Reported net income per common share ..................... $ 0.46 $ 0.36 $ 1.09 $ 1.03
======== ======== ======== ========
Net Income Per Common Share - (full dilution)
Net income ............................................... $ 69,033 $ 54,031 $164,666 $152,689
======== ======== ======== ========
Weighted average common shares outstanding ............... 151,465 149,642 151,140 148,728
Add net additional common shares upon assumed exercise
of common stock options ........................ 3,414 3,970 4,921 3,970
-------- -------- -------- --------
Adjusted average common shares outstanding ............... 154,879 153,612 156,061 152,698
======== ======== ======== ========
Net income per common share - (full dilution) ............ $ 0.45 $ 0.35 $ 1.06 $ 1.00
======== ======== ======== ========
</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 November 30, 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> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 0
<CASH> 176,443
<SECURITIES> 175,795
<RECEIVABLES> 234,069
<ALLOWANCES> 13,698
<INVENTORY> 177,258
<CURRENT-ASSETS> 845,526
<PP&E> 339,204
<DEPRECIATION> 154,094
<TOTAL-ASSETS> 1,208,735
<CURRENT-LIABILITIES> 212,331
<BONDS> 0
0
0
<COMMON> 1,517
<OTHER-SE> 993,819
<TOTAL-LIABILITY-AND-EQUITY> 1,208,735
<SALES> 1,018,062
<TOTAL-REVENUES> 1,018,062
<CGS> 415,585
<TOTAL-COSTS> 780,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 251,973
<INCOME-TAX> 87,307
<INCOME-CONTINUING> 164,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,666
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
</TABLE>
