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 SEPTEMBER 28, 1996
Commission File Number 0-24578
[Cascade Logo Here]
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 November 1, 1996
- ----------------------------- --------------------------------------------------
- ----------------------------- --------------------------------------------------
Common Stock, $.001 par value 89,856,691 shares
- ----------------------------- --------------------------------------------------
This report including exhibits consists of 13 pages. The exhibit index appears
on page 12.
<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 nine
months ended September 28, 1996 and September 30, 1995 3
Consolidated Balance Sheets as of September 28, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows for the
nine months ended September 28, 1996 and September 30, 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 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
Exhibit Index 12
Exhibit 11 Weighted Shares Used in Computation of Earnings
per Share 13
<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 Nine months ended
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue $ 94,207 $ 36,015 $ 230,676 $ 88,630
Cost of revenue 32,965 12,966 80,898 32,157
-------- -------- --------- --------
Gross profit 61,242 23,049 149,778 56,473
Operating expenses:
Research and development 14,727 5,419 36,422 13,145
Sales and marketing 11,638 5,581 30,233 14,383
General and administrative 3,351 1,977 9,311 4,765
-------- -------- --------- --------
Total operating expenses 29,716 12,977 75,966 32,293
Income from operations 31,526 10,072 73,812 24,180
Interest income 1,411 964 3,745 2,290
-------- -------- --------- --------
Income before income taxes 32,937 11,036 77,557 26,470
Provision for income taxes 12,674 4,249 30,174 10,191
-------- -------- --------- --------
Net income $ 20,263 $ 6,787 $ 47,383 $ 16,279
======== ======== ========= ========
Net income per common share $ 0.21 $ 0.07 $ 0.49 $ 0.18
======== ========= ========= ========
Weighted average shares
of common stock outstanding 98,517 91,329 97,457 90,817
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Balance Sheets
(in thousands)
Sept. 28, Dec. 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 84,276 $ 55,474
Marketable securities 15,876 5,120
Accounts receivable, net 48,570 19,910
Note receivable 1,703 1,548
Inventories 18,611 7,645
Deferred income taxes 7,335 4,262
Prepaid expenses 2,075 781
-------- --------
Total current assets 178,446 94,740
Property and equipment, net 29,051 13,980
Note receivable 1,353 2,657
Other assets 1,156 482
-------- --------
Total assets $210,006 $111,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,398 $ 6,771
Deferred revenue 6,890 1,585
Accrued expenses 16,320 12,197
Accrued income taxes - 5,000
-------- --------
Total current liabilities 36,608 25,553
Stockholders' equity:
Common stock 89 84
Additional paid-in capital 98,820 58,397
Retained earnings 74,489 27,825
-------- --------
Total stockholders' equity 173,398 86,306
-------- --------
Total liabilities and stockholders' equity $210,006 $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)
Nine Months Ended
Sept. 28, Sept. 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 47,383 $ 16,279
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 8,204 3,405
Deferred income taxes (3,725) (2,227)
Tax benefits related to stock options exercised 20,058 4,176
Changes in operating assets and liabilities:
Accounts receivable (28,660) (10,088)
Notes receivable 1,149 (3,371)
Inventories (10,966) 2,785
Prepaid expenses (1,268) (280)
Accounts payable 6,609 127
Accrued expenses and other current liabilities 4,404 7,435
--------- ---------
Net cash provided by operating activities 43,188 18,241
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (22,898) (8,850)
Purchases of marketable securities (17,357) (28,631)
Proceeds from maturities of marketable securities 6,600 28,895
Increase in other assets (22) (187)
--------- ---------
Net cash used for investing activities (33,677) (8,773)
---------- ---------
Cash flows from financing activities:
Issuance of common stock 14,752 1,463
--------- ---------
Net increase in cash and cash equivalents 24,263 10,931
Cash and cash equivalents, beginning of period 60,013 26,859
--------- ---------
Cash and cash equivalents, end of period $ 84,276 $ 37,790
========= =========
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 nine month periods
ended September 28, 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 nine month periods ended September 28,
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:
Sept. 28, Dec. 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 13,178 $ 5,095
Work-in-process 788 890
Finished goods 4,645 1,660
-------- --------
Total $ 18,611 $ 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
In May 1996, 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 third quarter ended September 28, 1996 increased by 162% to
$94.2 million from $36.0 million for the quarter ended September 30, 1995 and
17% from the second quarter of 1996. Revenue for the nine months of 1996
increased by 160% from the same period in 1995. The Company believes that the
increase in revenue is attributable to continued revenue growth from the B-STDX
product line, expansion of the broadband packet market and the rapid customer
acceptance of the CBX 500 ATM (Asynchronous Transfer Mode) switch which
accounted for slightly above 10% of the total revenue for the third quarter
ended September 28, 1996. Revenue from the Company's main product line, the
B-STDX, accounted for approximately 80% of total revenue for the third quarter
of 1996 compared to 89% for the third quarter of 1995. For the nine months ended
September 28, 1996 B-STDX sales accounted for 87% of product revenue compared to
88% for the same period in 1995.
Direct and indirect international sales accounted for approximately 21% of
revenue in the third quarter of 1996, compared to approximately 20% of revenue
for the third quarter of 1995. International sales accounted for approximately
18% of revenue for the first nine months of 1996 and 1995, respectively. The
Company has continued to expand its network of distributors and resellers and
other third party distribution channels in an effort to increase its
international presence. International sales may fluctuate as a percentage of
revenue. To date, the Company's international sales have been denominated in
U.S. currency.
In an effort to expand its presence in the enterprise market , the Company
and International Business Machines ("IBM") have formed a business and
technology alliance to jointly market, enhance and develop Frame Relay and ATM
products worldwide to enterprise customers. Presently, IBM sells the Company's
B-STDX 9000 and CBX 500 product lines on a worldwide basis to enterprise
customers through an OEM relationship. The alliance also includes manufacturing
rights and joint development focused on the enhancement of existing products and
the development of new products for the enterprise marketplace.
Gross Profit
Gross profit increased to 65% of revenue or $61.2 million for the third
quarter of 1996, compared to 64.0% of revenue or $23.0 million for the same
period in 1995. For the nine months ended September 28, 1996, gross profit as a
percentage or revenue improved to 64.9% from 63.7% in the same period in 1995.
The continued improvement in gross profit as a percentage of revenue was
primarily a result of increased revenue levels and decreased materials costs for
the B-STDX product family.
<PAGE>
In future periods, gross profit will vary depending upon a number of
factors, including channels of distribution, the mix of products sold, price
competition as well as manufacturing and component costs. As the Company
continues to introduce 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 third quarter of 1996 were $14.7
million or 15.6% of revenue, compared to $5.4 million or 15.0% of revenue for
the same period in 1995. For the nine months of 1996, research and development
expenses represented 15.8% of revenue compared to 14.8% for the same period in
1995. The Company has continued the development of new products such as the CBX
500 ATM switch and the remote access product family, as well as the enhancement
of the B-STDX products. The increased spending was related to additional
personnel, prototype materials and expansion of development laboratories. The
Company considers product development expenditures to be critical to future
revenues and expects to increase spending in absolute dollars in, 1996, while
the percentage of revenue may fluctuate.
Sales and Marketing
The Company's sales and marketing expenses increased to $11.6 million for
the third quarter of 1996 from $5.6 million in the same period for 1995. These
expenses decreased as a percentage of revenue to 12.4% in the third quarter of
1996 from 15.5% in the same period for 1995. For the nine months of 1996, sales
and marketing expenses represented 13.1% of revenue compared to 16.2% 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,
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 $3.4 million for the third
quarter of 1996 from $2.0 million in the same period for 1995. These expenses
increased in dollars, but decreased as a percentage of revenue to 3.6% in the
third quarter of 1996 from 5.5% in the same period in 1995. For the nine months
of 1996, general and administrative expenses represented 4.0% of revenue
compared to 5.4% 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 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 $1.4 million or 1.5% of revenue for the third
quarter of 1996 from $964,000 or 2.7% of revenue for the same period in 1995.
Interest income for the nine months of 1996 was $3.7 million compared to $2.3
million for the same period in 1995. The increase in interest income was
attributable to higher invested cash balances and interest earned from notes
receivable.
Provision for Income Taxes
The Company's effective tax rate for the three month and nine month periods
ended September 28, 1996 was 38.5% and 38.9%, respectively. The effective tax
rate for the three and nine month periods ended September 30, 1995 was 38.5%.
The increase in the effective tax rate for the nine months ended September 28,
1996 relates to nondeductible acquisition costs and certain restrictions on net
operating loss carryforwards assumed as a result of the Arris acquisition.
<PAGE>
Liquidity and Capital Resources
At September 28, 1996, the Company had cash, cash equivalents and marketable
securities of $100.2 million, an increase of $39.6 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 $43.2 million for the nine months ended
September 28, 1996. This was primarily generated from net income and the tax
benefits related to disqualifying dispositions of stock options, offset by
increased accounts receivable and inventory balances. The increase in accounts
receivable was due to increased revenue. Days sales outstanding were 47 days at
September 28, 1996 compared to 46 days at September 30, 1995. Inventory balances
increased to meet the demand for the Company's existing products and the desired
lead times and anticipated demand for new products. The Company believes that
inventory balances are likely to increase in future periods to support customer
demands and new product introductions.
Cash used for investing activities during the nine months ended September
28, 1996 was $33.7 million. The primary components of this cash were capital
investments and the purchase of marketable securities. Capital investments
include expansion of the Company's facilities, the purchase of engineering
development equipment and the information technology necessary to support the
rapid growth of the Company's business. The purchases of marketable securities
were placed in U.S. Government obligations and highly rated commercial paper.
During the nine months of 1996, the Company received proceeds of $8.2
million from the sale of its Common Stock through its employee stock purchase
and option plans. The remaining common stock activity relates primarily to the
Arris acquisition.
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.
<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
which involve a number of risks and uncertainties that could cause actual
results to differ materially. Thus, some of the Company's statements are
forward-looking, including without limitation, statements relating to new
product development, strategic alliances and the Company's current intention to
increase spending levels in the areas of research and development, sales and
marketing, and general and administrative expenses, 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 the factors
discussed above under the caption "Fluctuations in Revenue and Operating
Results". Because of these and other factors, past financial performance should
not be considered an indicator of future performance. 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, Second
Quarter 1996 Form 10-Q and Form S-3 filed on June 17, 1996.
PART II. OTHER INFORMATION
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 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)
November 11, 1996 ___________/s/________________________
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 13
EXHIBIT 11
<TABLE>
CASCADE COMMUNICATIONS CORP.
Weighted Shares Used in Computation of Earnings per Share
Shares
For the three months ended September 28, 1996
<S> <C>
Common stock outstanding, beginning of period 85,166,457
Weighted average common stock issued during the
three months ended September 28, 1996 3,808,422
Weighted average common stock equivalents 9,542,555
----------
Weighted average shares of common stock outstanding 98,517,434
==========
For the three months ended September 30, 1995
Common stock outstanding, beginning of period 83,261,364
Weighted average common stock issued during the
three months ended September 30, 1995 117,711
Weighted average common stock equivalents 7,950,003
----------
Weighted average shares of common stock outstanding 91,329,078
==========
For the nine months ended September 28, 1996
Common stock outstanding, beginning of period 83,781,080
Weighted average common stock issued during the
nine months ended September 28, 1996 4,159,568
Weighted average common stock equivalents 9,516,077
----------
Weighted average shares of common stock outstanding 97,456.725
==========
For the nine months ended September 30, 1995
Common stock outstanding, beginning of period 81,487,740
Weighted average common stock issued during the
nine months ended September 30, 1995 1,436,880
Weighted average common stock equivalents 7,892,655
----------
Weighted average shares of common stock outstanding 90,817,275
==========
</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 SEPTEMBER 28, 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> Jun-29-1996
<PERIOD-END> Sep-28-1996
<CASH> 84,276
<SECURITIES> 15,876
<RECEIVABLES> 50,826
<ALLOWANCES> 553
<INVENTORY> 18,611
<CURRENT-ASSETS> 178,446
<PP&E> 44,479
<DEPRECIATION> 15,428
<TOTAL-ASSETS> 210,006
<CURRENT-LIABILITIES> 36,608
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 173,309
<TOTAL-LIABILITY-AND-EQUITY> 210,006
<SALES> 94,207
<TOTAL-REVENUES> 94,207
<CGS> 32,965
<TOTAL-COSTS> 32,965
<OTHER-EXPENSES> 29,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,937
<INCOME-TAX> 12,674
<INCOME-CONTINUING> 20,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,263
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
