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 Quarterly Period Ended May 31, 1997
[ ] 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 2, 1997 there were 157,674,725 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, 1997 (unaudited) and
February 28, 1997 3
Consolidated Statements of Income - Three months ended May 31, 1997
and 1996 (unaudited) 4
Consolidated Statements of Cash Flows - Three months ended
May 31, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements - May 31, 1997 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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
May 31, 1997 February 28, 1997
Assets
Current assets:
Cash and cash equivalents ................ $ 173,142 $ 214,828
Short-term investments ................... 187,538 165,396
Accounts receivable, net ................. 289,582 219,896
Inventories .............................. 236,216 197,438
Deferred income taxes .................... 58,257 57,107
Prepaid expenses and other assets ........ 42,488 35,925
---------- ----------
Total current assets ................ 987,223 890,590
Long-term investments ......................... 199,592 188,081
Property, plant and equipment, net ............ 207,636 198,557
Long-term deferred income taxes ............... 30,778 29,627
---------- ----------
Total assets .................................. $1,425,229 $1,306,855
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ......................... $ 81,775 $ 68,604
Accrued expenses ......................... 146,908 135,208
Income taxes payable ..................... 32,630 10,442
---------- ----------
Total current liabilities ........... 261,313 214,254
Deferred income taxes ......................... 12,116 11,103
---------- ----------
Total liabilities ............................. 273,429 225,357
---------- ----------
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
157,503 and 156,305, respectively ...... 1,575 1,563
Additional paid-in capital ............... 278,428 266,829
Retained earnings ........................ 871,709 812,885
---------- ----------
1,151,712 1,081,277
Cumulative translation adjustment ........ 88 221
---------- ----------
Total stockholders' equity .................... 1,151,800 1,081,498
---------- ----------
Total liabilities and stockholders' equity .... $1,425,229 $1,306,855
========== ==========
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three months ended
May 31, 1997 May 31, 1996
Net sales ........................................ $362,688 $323,499
Cost of sales .................................... 153,561 132,854
-------- --------
Gross profit ................................ 209,127 190,645
-------- --------
Operating expenses:
Research and development .................... 43,616 39,589
Selling, general and administrative ......... 80,915 65,384
-------- --------
Total operating expenses ............... 124,531 104,973
-------- --------
Income from operations ................. 84,596 85,672
Interest income .................................. 4,801 4,442
-------- --------
Income before income taxes ............. 89,397 90,114
Income taxes ..................................... 30,573 32,975
-------- --------
Net income ....................................... $ 58,824 $ 57,139
======== ========
Net income per common share ...................... $ 0.38 $ 0.37
======== ========
Weighted average number of shares outstanding .... 156,857 154,608
======== ========
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
May 31, 1997 May 31,1996
Cash flows from operating activities:
Net income ................................ $ 58,824 $ 57,139
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......... 17,943 11,206
Provision for losses on accounts
receivable .......................... (185) 777
Deferred income taxes ................. (494) 5
Gain on disposal of property .......... (1,289) (6)
Changes in assets and liabilities:
Accounts receivables ............... (69,590) (34,248)
Inventories ........................ (38,833) (9,780)
Prepaid expenses and other assets .. (6,501) (1,607)
Accounts payable and accrued expenses 25,014 23,758
Income taxes payable ............... 22,234 24,254
-------- --------
Net cash provided by operating activities 7,123 71,498
-------- --------
Cash flows from investing activities:
Capital expenditures....................... (26,595) (20,568)
Purchase of available-for-sale securities . (35,058) (21,387)
Purchase of held-to-maturity securities ... (27,228) (43,015)
Maturities of marketable securities ....... 28,630 71,290
-------- --------
Net cash used in investing activities .. (60,251) (13,680)
-------- --------
Cash flows from financing activities:
Net proceeds from sale of stock ........... -- 9,823
Repayment of notes receivable, stockholders -- 151
Proceeds from exercise of stock options ... 11,611 5,027
Repurchase of common stock ................ -- (415)
-------- --------
Net cash provided by financing activities 11,611 14,586
-------- --------
Effect of exchange rate changes on cash........ (169) (7)
-------- --------
Net (decrease) increase in cash and cash
equivalents .................................. (41,686) 72,397
Cash and cash equivalents, beginning of year .. 214,828 106,101
-------- --------
Cash and cash equivalents, end of year ........ $173,142 $178,498
======== ========
Cash paid during the year for:
Income taxes ............................... $ 5,988 $ 7,742
======== ========
<PAGE>
NOTES TO CONSOLIDATED 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 28, 1997.
2. Inventories
Inventories consist of:
5/31/97 2/28/97
Raw materials $ 79,811 $ 64,685
Work in process 26,415 57,070
Finished goods 129,990 75,683
-------- --------
Total inventories $236,216 $197,438
======== ========
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cabletron Systems' worldwide net sales in the first quarter of fiscal 1998
(the three month period ended May 31, 1997) were $362.7 million, a 12.1%
increase over net sales of $323.5 million for the first quarter of fiscal
1997. The increase was primarily the result of higher sales of the Company's
more recent, higher-end products, including the MMAC Plus-6, the SmartSwitch
6000 and SPECTRUM, the Company's network management software product. As a
percentage of net sales, international sales in the first quarter of fiscal
1998 decreased to 27% from 30% in the first quarter of fiscal 1997.
Although sales in the Company's first quarter of fiscal 1998 increased from
the Company's comparable quarter a year ago, sales decreased $17.9 million or
4.7% from the $380.6 million reported in the fourth quarter of fiscal 1997.
Factors responsible for the decrease included the Company's inability to
manufacture sufficient quantities of the Company's SmartSwitch 6000 product,
resulting in backlog and some lost sales opportunities, due to a limited
supply of proprietary integrated circuit chips being manufactured for the
SmartSwitch 6000. The Company and its suppliers are working to increase
production, but constraints on the supply of the proprietary chips are
expected to continue at least through the Company's second fiscal quarter.
Second, sales of the Company's shared media products such as the MMAC and
other mature products declined during the quarter compared to the fourth
quarter of fiscal 1997. The Company expects sales of shared media products,
which have declined more swiftly than the Company had anticipated, to
continue declining in future periods, both in absolute dollars and as a
percentage of sales. Third, international sales, in particular in Europe,
declined in comparison to international sales for the fourth quarter of
fiscal 1997. The Company has undertaken efforts to address European
performance issues, but as a consequence of the general decrease in business
activity in Europe during the summer months, the Company does not anticipate
improvement during the second quarter of fiscal 1998.
Gross profit as a percentage of net sales in the first quarter of fiscal 1998
decreased to 57.7% from 58.9% for the first quarter of fiscal 1997. The
decrease reflects (i) the Company's inability to reduce costs, which are
largely determined prior to the beginning of the quarter and which include
fixed components, sufficiently to match sales which were lower than the
Company expected, and (ii) a shift in product mix primarily related to lower
than expected European sales, which typically carry higher margins than sales
in the United States.
Research and development expenses in the first quarter of fiscal 1998
increased 10.2% to $43.6 million from $39.6 million in the first quarter of
fiscal 1997. The increase in research and development spending reflected the
hiring of additional software and hardware engineers and associated costs
related to development of new products. Research and development spending as
a percentage of net sales decreased to 12.0% from 12.2% in the first quarter
of fiscal 1997. The decrease in research and development spending as a
percentage of net sales was due to consolidation of some engineering
functions.
<PAGE>
Selling, general and administrative ("SG&A") expenses in the first quarter of
fiscal 1998 increased 23.7% to $80.9 million from $65.4 million in the first
quarter of fiscal 1997. The increase in SG&A expenses was due predominately
to an increase in sales and technical personnel and the addition of new
office locations. SG&A expenses as a percentage of net sales increased to
22.3% from 20.2% in the first quarter of fiscal 1997. SG&A increased as a
percentage of sales primarily as a result of lower than expected sales.
Net interest income in the first quarter of fiscal 1998 increased 10.0% to
$4.8 million from $4.4 million in the first quarter of fiscal 1997. Interest
income in both periods reflects 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 in the first quarter of fiscal 1998 decreased 0.1%
to $89.4 million from $90.1 million in the first quarter of fiscal 1997. The
decrease in income before income taxes was due to the lower gross margin and
higher research and development and SG&A expenses. Income before income
taxes as a percentage of net sales decreased to 24.6% from 27.9% for the same
quarter of the preceding fiscal year. The decrease as a percentage of net
sales was due to the lower gross profit as a percentage of sales and the
higher research and development and SG&A expenses as a percentage of sales.
Net income in the first quarter of fiscal 1998 increased 3.0% to $58.8
million from $57.1 million in the first quarter of fiscal 1997. The slight
increase was due to higher sales volume.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investment
decreased $8.0 million to $560.3 million at May 31, 1997 from $568.3 million
at February 28, 1997 primarily as the result of timing of collections of
accounts receivable.
Net accounts receivable increased $69.7 million to $289.6 million at May 31,
1997 from $219.9 million at February 28, 1997. Average day sales outstanding
were 63 days at May 31, 1997 compared to 52 days at February 28, 1997. The
increase was a result of 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 May 31, 1997 were $236.2 million, or 127 days of
inventory, compared to $197.4 million, or 109 days of inventory at February
28, 1997. Inventory turnover was 2.7 turns at May 31, 1997, compared to 3.4
turns at February 28, 1997. The lower inventory turnover was due to lower
sales in the quarter.
Capital expenditures in the first quarter of fiscal 1998 increased $6.0
million to $26.6 million from $20.6 million in the first quarter of fiscal
1997. Capital expenditures included approximately $20.0 million for
equipment costs, of which $15.0 million was for computer related costs and
$3.1 million for manufacturing related costs.
<PAGE>
Current liabilities at May 31, 1997 were $261.3 million compared to $214.3
million at February 28, 1997. 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 February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share." This Statement establishes and simplifies standards for
computing and presenting earnings per share. SFAS 128 will be effective for
the Company's fourth quarter of fiscal 1998, and requires restatement of all
previously reported earnings per share data that are presented. Early
adoption of this Statement is not permitted. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company expects that basic earnings per share amounts will be accretive
compared to the Company's non-dilutive earnings per share amounts, and
diluted earnings per share amounts will not be materially different from the
Company's fully diluted earnings per share amounts.
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,
1997.
[b] Exhibit 11 - Statement re: Computation of Per Share Earnings (page 12 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)
July 15, 1997 /s/ Craig R. Benson
Date Craig R. Benson
Chairman of the Board, Treasurer,
and Chief Operating Officer
July 15, 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 Statement re: Computation of Per Share Earnings 12
<PAGE>
EXHIBIT 11
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For periods ended May 31, 1997 and 1996
(in thousands, except per share amounts)
(unaudited)
Three months ended
May 31,
1997 1996
Net Income Per Common Share - (non-dilutive)
Net income ....................................... $ 58,824 $ 57,139
======== ========
Weighted average common shares outstanding ....... 156,857 154,608
======== ========
Reported net income per common share ............. $ 0.38 $ 0.37
======== ========
Net Income Per Common Share - (full dilution)
Net income ....................................... $ 58,824 $ 57,139
======== ========
Weighted average common shares outstanding ....... 156,857 154,608
Add net additional common shares upon exercise
of common stock options ................ 4,895 3,279
-------- --------
Adjusted average common shares outstanding ....... 161,752 157,887
======== ========
Net income per common share - (full dilution) .... $ 0.36 $ 0.36
======== ========
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 May 31, 1997, 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> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 0
<CASH> 173,142
<SECURITIES> 187,538
<RECEIVABLES> 304,865
<ALLOWANCES> 15,283
<INVENTORY> 236,216
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<PP&E> 374,605
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0
0
<COMMON> 1,575
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</TABLE>
