SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1996
Commission File Number 0-24578
[GRAPHIC OMITTED]
CASCADE COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099677
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5 Carlisle Road, Westford, Massachusetts 01886-3601
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (508) 692-2600
No change since last report
(Former name, former address and former fiscal
year, if changed since last report)
--------------------------------
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
- -------------------------- -----------------------------------------------------
Class Outstanding at August 5, 1996
- -------------------------- -----------------------------------------------------
- -------------------------- -----------------------------------------------------
Common Stock, $.001 par value 88,901,356 shares
- -------------------------- -----------------------------------------------------
This report including exhibits consists of 15 pages. The exhibit index appears
on page 14.
<PAGE>
CASCADE COMMUNICATIONS CORP.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the three and six
months ended June 29, 1996 and July 1, 1995 3
Consolidated Balance Sheets as of June 29, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows for the
six months ended June 29, 1996 and July 1, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibit Index 14
Exhibit 11 Weighted Shares Used in Computation of Earnings
per Share 15
Exhibit 27 Financial Data Schedule 16
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue $80,432 $29,109 $136,469 $ 52,615
Cost of revenue 28,150 10,603 47,933 19,192
-------- -------- -------- -------
Gross profit 52,282 18,506 88,536 33,423
Operating expenses:
Research and development 12,730 4,251 21,695 7,726
Sales and marketing 9,899 4,779 18,596 8,802
General and administrative 3,739 1,610 5,960 2,788
------- ------- ------- -------
Total operating expenses 26,368 10,640 46,251 19,316
Income from operations 25,914 7,866 42,285 14,107
Interest income 1,217 699 2,334 1,328
------- ------- ------- -------
Income before income taxes 27,131 8,565 44,619 15,435
Provision for income taxes 10,445 3,298 17,498 5,943
------- ------- ------- -------
Net income $16,686 $5,267 $27,121 $9,492
======= ====== ====== ======
Net income per common share $0.17 $0.06 $0.28 $0.10
Weighted average number of common
and common equivalent shares
outstanding 97,842 90,713 96,873 90,604
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Balance Sheets
(in thousands)
June 29, Dec. 31,
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 65,820 $ 55,474
Marketable securities 18,755 5,120
Accounts receivable, net 49,254 19,910
Notes receivable 1,652 1,548
Inventories 12,525 7,645
Deferred income taxes 7,598 4,262
Prepaid expenses 795 781
---------- --------
Total current assets 156,399 94,740
Property and equipment, net 21,957 13,980
Notes receivable 1,800 2,657
Other assets 1,154 482
--------- ---------
Total assets $ 181,310 $ 111,859
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,812 $ 6,771
Deferred revenue 3,462 1,585
Accrued expenses 19,098 12,197
Accrued income taxes 1,696 5,000
-------- -------
Total current liabilities 44,068 25,553
Stockholder's equity:
Common stock 88 84
Additional paid-in capital 82,928 58,397
Retained earnings 54,226 27,825
-------- -------
Total stockholders' equity 137,242 86,306
-------- -------
Total liabilities and stockholders' equity $ 181,310 $111,859
========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 29, July 1,
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,121 $ 9,492
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,603 2,005
Deferred income taxes (4,038) (1,271)
Tax benefits related to stock options exercised 8,721 3,693
Changes in operating assets and liabilities:
Accounts receivable (29,344) (9,915)
Notes receivable 753 (2,439)
Inventories (4,880) 886
Prepaid expenses 12 (74)
Accounts payable 13,023 1,141
Accrued expenses and other current liabilities 5,450 4,952
-------- --------
Net cash provided by operating activities 21,421 8,470
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (12,203) (5,177)
Purchases of marketable securities (17,235) (18,263)
Proceeds from maturities of marketable securities 3,600 19,795
Decrease (increase) in other assets 30 (138)
--------- ---------
Net cash used for investing activities (25,808) (3,783)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 10,194 605
------- ------
Net increase in cash and cash equivalents 5,807 5,292
Cash and cash equivalents, beginning of period 60,013 26,859
------- -------
Cash and cash equivalents, end of period $ 65,820 $ 32,151
======== ========
The accompanying footnotes are an integral part of these financial statements.
</TABLE>
<PAGE>
CASCADE COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Consolidated Financial Statements
The consolidated financial statements for the three and six month periods
ended June 29, 1996 and the related footnote information are unaudited and have
been prepared on a basis substantially consistent with the 1995 audited
consolidated financial statements, and in the opinion of management include all
adjustments (consisting of only normal recurring adjustments) necessary for fair
presentation of the results of this interim period. These statements should be
read in conjunction with the consolidated financial statements and related notes
for the year ended December 31, 1995 included in the Company's Form 10-K. The
results of operations for the three and six month periods ended June 29, 1996
are not necessarily indicative of the results to be expected for the entire
year.
2. Common Stock
Net income per common share is computed based upon the weighted average
number of common shares and common equivalent shares from stock options (using
the treasury stock method). Fully diluted net income per common share is not
presented as the dilutive effect is immaterial. In May 1996, the Company
increased the number of authorized shares of its Common Stock, par value $.001
per share from 50,000,000 to 225,000,000.
All share and per share data have been restated to reflect the following
stock splits in the form of stock dividends: two-for-one split in June 1995,
three-for-two split in February 1996 and two-for-one split in May 1996.
3. Inventories
<TABLE>
Inventories consist of:
June 29, Dec. 31,
1996 1995
<S> <C> <C>
Raw materials $ 8,690 $ 5,095
Work-in-process 1,835 890
Finished goods 2,000 1,660
------- -------
Total $12,525 $ 7,645
======= =======
</TABLE>
4. Business Combinations
In May 1996, the Company exchanged approximately 3.2 million shares of its
Common Stock, $.001 par value (the "Common Stock") for all of the outstanding
stock of Arris Networks, Inc.("Arris"), a development stage company of high
performance remote access technology for carrier class networks. The Company
also assumed all outstanding Arris options to purchase approximately 242,000
shares of the Company's Common Stock. The business combination was accounted for
as a pooling of interests. The operating expenses of Arris from December 31,
1995 to the acquisition date are immaterial to the combined operations. The
accompanying financial statements for periods prior to December 31, 1995 do not
include the amounts for this acquisition as they were deemed to be immaterial.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying financial
statements and the associated notes for the periods specified. Further reference
should be made to the Company's 1995 Form 10-K for the year ended December 31,
1995.
Acquisition
During the quarter, the Company expanded its product plans to include the
remote access market with the acquisition of Arris a developer of high
performance remote access technology for carrier class networks for
approximately 3.2 million shares of its Common Stock. The Company also assumed
all outstanding Arris options to purchase approximately 242,000 shares of the
Company's Common Stock. The combination was accounted for as a pooling of
interests. The operating expenses of Arris from December 31, 1995 to the
acquisition date are immaterial to the combined operations. The accompanying
financial statements for periods prior to December 31, 1995 do not include the
amounts for this acquisition as they were deemed to be immaterial.
Results of Operations
Revenue
Revenue for the second quarter ended June 29, 1996 increased by 176% to
$80.4 million from $29.1 million for the quarter ended July 1, 1995 and 44% or
$24.4 million from the first quarter of 1996. Revenue for the first six months
of 1996 increased by $83.9 million or 159% from the same period in 1995. The
Company believes that the increase in revenue is attributable to several
factors, including the continued market acceptance of the Company's products,
expansion of the broadband packet equipment market and the Company's ability to
deliver multi-service wide area networking products for the enterprise and
public carrier network markets.
Sales of the Company's B-STDX product line accounted for approximately 97%
of product revenue for the second quarter of 1996 compared to 94% for the second
quarter of 1995. For the six months ended June 29, 1996 B-STDX sales accounted
for 97% of product revenue compared to 92% for the same period in 1995. In March
of 1996, the Company released the first commercial shipment of the Cascade 500
ATM switch. The Cascade 500 is an ATM switch which supports next generation
speeds of 45, 155 and 622 MBS with currently one of the highest port densities
on a single platform that is commercially available.
International sales accounted for approximately 10% of revenue in the second
quarter of 1996, compared to approximately 12% of revenue for the second quarter
of 1995. For the six months ended June 29, 1996 international sales represented
12% of revenue compared to 18% for the same period in 1995. International sales
in absolute dollars increased in all major geographic markets including Europe
and the Pacific Rim. The Company believes that this increase reflects the
expansion of its worldwide service and support programs as well as the growth of
the international broadband packet market. During 1996, the Company continued
global expansion through the opening of new sales offices in Canada and
Singapore. The Company intends to increase its presence internationally.
International sales may fluctuate as a percentage of revenue. To date, the
Company's international sales have been denominated in U.S. currency.
Gross Profit
Gross profit increased to 65% of revenue or $52.3 million for the second
quarter of 1996, compared to 63.6% of revenue or $18.5 million for the same
period in 1995 and 64.7% or $36.3 million for the first quarter of 1996. For the
six months ended June 29, 1996, gross profit as a percentage or revenue improved
to 64.9% from 63.5% in the same period in 1995.
<PAGE>
The continued improvement in gross profit as a percentage of revenue was
primarily a result of manufacturing efficiencies due to economies of scale as
the volume of production has increased as well as decreased material costs. In
future periods, gross profit will vary depending upon a number of factors,
including the channels of distribution, the mix of products as well as
manufacturing and component costs. As the Company introduces new products, it is
possible that they may have a lower gross profit than other established products
in high volume production. Accordingly, gross profit as a percentage of revenue
may vary.
Research and Development
Research and development expenses for the second quarter of 1996 were $12.7
million or 15.8% of revenue, compared to $4.3 million or 14.6% of revenue for
the same period in 1995. For the first six months of 1996, research and
development expenses represented 15.9% of revenue compared to 14.7% for the same
period in 1995. The expense increase was due principally to costs associated
with the development of new products, including the Cascade 500 ATM switch and
remote access products, as well as the enhancement of existing products in the
form of additions to personnel, prototype materials and expansion of development
laboratories. The Company considers product development expenditures to be
critical to future revenue and expects to increase spending in absolute dollars
while the percentage of revenue may fluctuate.
Sales and Marketing
The Company's sales and marketing expenses increased to $9.9 million for the
second quarter of 1996 from $4.8 million in the same period for 1995. These
expenses decreased as a percentage of revenue to 12.3% in the second quarter of
1996 from 16.4% in the same period for 1995. For the first six months of 1996,
sales and marketing expenses represented 13.6% of revenue compared to 16.7% for
the same period in 1995. The increase in spending was due to personnel costs
associated with the expansion of domestic and international sales offices, sales
commissions associated with revenue growth and increased promotional costs. The
Company expects to increase spending in the remainder of 1996 for sales and
marketing programs both domestically and internationally as part of its
continuing efforts to expand its markets, introduce new products and expand its
international presence.
These expenses may vary as a percentage of revenue.
General and Administrative
General and administrative expenses increased to $3.7 million for the second
quarter of 1996 from $1.6 million in the same period for 1995. These expenses
increased in dollars, but decreased as a percentage of revenue to 4.6% in the
second quarter of 1996 from 5.5% in the same period in 1995. For the first six
months of 1996, general and administrative expenses represented 4.4% of revenue
compared to 5.3% for the same period in 1995. The increase in dollars spent was
primarily due to nonrecurring acquisition costs, increased legal and
professional services, as well as continued investments in both the personnel
and information technology necessary to support the growth of the Company. The
Company expects that expenses in this area will increase in absolute dollars in
1996, but will remain relatively consistent as a percentage of revenue.
Interest Income
Interest income increased to $1.2 million or 1.5% of revenue for the second
quarter of 1996 from $699,000 or 2.4% of revenue for the same period in 1995.
Interest income for the first six months of 1996 was $2.3 million compared to
$1.3 million for the same period in 1995. The increase in interest income was
attributable to higher invested cash balances and interest received from notes
receivable.
<PAGE>
Provision for Income Taxes
The Company's effective tax rate for the three month and six month periods
ended June 29, 1996 was 38.5% and 39.2%, respectively. The effective tax rate
for the three and six month periods ended July 1, 1995 was 38.5%. The increase
in the effective tax rate for the six months ended June 29, 1996 relates to
nondeductible acquisition costs and certain restrictions on net operating loss
carryforwards assumed as a result of the Arris acquisition.
Liquidity and Capital Resources
At June 29, 1996, the Company had cash, cash equivalents and marketable
securities of $84.6 million, an increase of $24.0 million from December 31,
1995. The Company has continued to fund its operations primarily through cash
flows generated from operations and the proceeds from the sale of its Common
Stock through its employee stock purchase and option plans.
Cash generated from operations was $21.4 million for the six months ended
June 29, 1996. Accounts receivable increased $29.3 million from December 31,
1995 primarily due to the timing of shipments and increased revenue. Inventory
balances increased by $4.9 million to meet the increased demand for the
Company's existing products and the desired lead times for new products.
Inventory turnover improved to 9.5 turns in first six months of 1996 from 5.1
turns during the same period in 1995. The Company believes that inventory
balances are likely to increase to support customer demands and new product
introductions.
The increase of $18.5 million in accounts payable and accrued expenses was
due primarily to increases in deferred revenue, warranty accrual and a general
increase in business activity. The Company's income taxes payable have been
reduced by the tax benefit related to disqualifying dispositions of stock
options which totaled $8.7 million for the first six months of 1996. This amount
was recorded as an increase to stockholders' equity.
Investment activities in the first six months of 1996 included capital
expenditures of $12.2 million. Capital investments included expansion of the
Company's facilities, the purchase of engineering development equipment and the
upgrade of the internal networking system. The net purchases of marketable
securities was $13.6 million. These investments were placed in U.S. Government
obligations and highly rated commercial paper.
During the first six months of 1996, the Company received proceeds of $3.8
million from the sale of its Common Stock through its employee stock purchase
and option plans. The remaining common stock activity relates Arris.
The Company believes that its existing cash, cash equivalents and marketable
securities, along with anticipated funds from operations, will satisfy the
Company's working capital and capital expenditure needs at least for the next
twelve months.
Fluctuations in Revenue and Operating Results
Revenue in the data networking industry is subject to fluctuation and the
growth rates recently experienced by the Company are not necessarily indicative
of the operating results for any future periods. The Company's operating results
may fluctuate as a result of a number of factors, including the timing of orders
from, and shipments to, customers; the timing of new product introductions and
the market acceptance of those products; increased competition; changes in
manufacturing costs; changes in the mix of product sales; the rate of end user
adoption and carrier and private network deployment of WAN data communications
services; factors associated with international operations; and changes in world
economic conditions. For a more detailed description of the risk factors
associated with the Company and the data networking industry, please refer to
the Company's 1995 Form 10-K, First Quarter 1996 Form 10-Q and Form S-3 filed on
June 17, 1996.
<PAGE>
Factors Affecting Future Results
The Company makes forward-looking statements under the provisions of the
"safe harbor" section of the Private Securities Litigation Reform Act of 1995.
Thus, some of the Company's statements are forward-looking, including without
limitation statements relating to new product development, expansion of
operations, strategic alliances, international expansion and growth in the
market for WAN data communication services, which involve a number of risks and
uncertainties. The Company's future results remain difficult to predict and may
be affected by a number of factors including business conditions within the
telecommunication industry; timing of orders from, and shipments to, major
customers; the timing of new product sales; the introduction and market
acceptance of new products; factors associated with international operations;
and changes in world economic conditions. Because of these and other factors,
past financial performance should not be considered an indicator of future
performance.
Newly Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. While the
Company is reviewing the adoption and impact of SFAS 123, it expects to adopt
the disclosure only alternative and accordingly this standard will have no
impact on the Company's results of operations or its financial position.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 2, 1996, the Annual Meeting of Stockholders of Cascade Communications
Corp. was held in Boston, Massachusetts.
An election of directors was held with the following individuals being
elected to the Board of Directors of Cascade Communications Corp. as Class II
directors:
<TABLE>
Total Vote For Total Vote Withheld
Each Director From Each Director
<S> <C> <C>
Paul J. Ferri 34,954,129 246,394
Daniel E. Smith 34,957,434 243,089
</TABLE>
The following individuals' term of office as director continued after the
meeting:
Victoria A. Brown Bruns H. Grayson
Richard M. Burnes Jr. Steven C. Walske
Gururaj Deshpande
Other matters voted upon and approved by the stockholders at the meeting
and the number of votes cast with respect to each such matter were as follows:
1. A proposal to approve an amendment to the Company's Amended and
Restated Certificate of Incorporation increasing from 50,000,000 to 225,000,000
the number of authorized shares of Common Stock, par value $.001 per share, of
the Corporation.
For Against Abstain No Vote
23,057,522 11,838,842 64,825 239,334
2.A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
auditors for the fiscal year ended December 31, 1996.
For Against Abstain No Vote
35,058,868 35,686 54,476 51,493
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11. Weighted Shares Used in Computation of Earnings per Share
(b) Reports on Form 8-K.
(1) The Company filed a current report on Form 8-K dated May 3, 1996
reporting the acquisition by the Company of Arris Networks, Inc., a Delaware
corporation.
(2) The Company filed a current report on Form 8-K dated May 30, 1996
relating to a two-for-one stock split in the form of a stock dividend paid on
May 30, 1996 to stockholders of record on May 21, 1996.
(3) The Company filed a current report on Form 8-K dated July 11, 1996
relating to the Company's earnings release for the quarter ended June 29, 1996.
<PAGE>
SIGNATURES
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.
CASCADE COMMUNICATIONS CORP.
(Registrant)
August 7, 1996 /s/ Paul E. Blondin
Paul E. Blondin
Vice President of Finance and
Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page No.
11. Weighted Shares Used in Computation of
Earnings Per Share
27. Financial Data Schedule
EXHIBIT 11
<TABLE>
CASCADE COMMUNICATIONS CORP.
Weighted Shares Used in Computation of Earnings per Share
Shares
For the three months ended June 29, 1996
<S> <C>
Common stock outstanding, beginning of period 84,859,034
Weighted average common stock issued during the
three months ended June 29, 1996 3,387,570
Weighted average common stock equivalents 9,595,004
Weighted average shares of common stock outstanding 97,841,608
For the three months ended July 1, 1995
Common stock outstanding, beginning of period 83,001,816
Weighted average common stock issued during the
three months ended July 1, 1995 126,333
Weighted average common stock equivalents 7,584,930
Weighted average shares of common stock outstanding 90,713,079
For the six months ended June 29, 1996
Common stock outstanding, beginning of period 83,781,080
Weighted average common stock issued during the
six months ended June 29, 1996 3,652,417
Weighted average common stock equivalents 9,439,183
Weighted average shares of common stock outstanding 96,872,680
For the six months ended July 1, 1995
Common stock outstanding, beginning of period 81,487,740
Weighted average common stock issued during the
six months ended July 1, 1995 1,209,654
Weighted average common stock equivalents 7,906,266
------------
Weighted average shares of common stock outstanding 90,603,660
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE PERIOD ENDING JUNE 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Mar-31-1996
<PERIOD-END> Jun-29-1996
<CASH> 65,820
<SECURITIES> 18,755
<RECEIVABLES> 49,254
<ALLOWANCES> 434
<INVENTORY> 12,525
<CURRENT-ASSETS> 156,399
<PP&E> 33,817
<DEPRECIATION> 11,860
<TOTAL-ASSETS> 181,310
<CURRENT-LIABILITIES> 44,068
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 137,154
<TOTAL-LIABILITY-AND-EQUITY> 181,310
<SALES> 80,432
<TOTAL-REVENUES> 80,432
<CGS> 52,282
<TOTAL-COSTS> 52,282
<OTHER-EXPENSES> 26,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,131
<INCOME-TAX> 10,445
<INCOME-CONTINUING> 16,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,686
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
