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 MARCH 29, 1997
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 April 21, 1997
- -------------------------------------- -----------------------------------------
- -------------------------------------- -----------------------------------------
Common Stock, $.001 par value 94,452,267 shares
- -------------------------------------- -----------------------------------------
This report including exhibits consists of 20 pages. The exhibit index appears
on page 18.
<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
months ended March 29, 1997 and March 30, 1996 3
Consolidated Balance Sheets as of March 29, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows for the
three months ended March 29, 1997 and March 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 5. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit Index 18
Exhibit 11 Weighted shares Used in Computation of
Earnings Per Share 19
Exhibit 27 Financial Data Schedule 20
<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
March 29, March 30,
1997 1996
---------- ---------
<S> <C> <C>
Revenue $ 90,328 $56,037
Cost of revenue 32,931 19,782
---------- ---------
Gross profit 57,397 36,255
Operating expenses:
Research and development 17,652 8,965
Sales and marketing 13,784 8,696
General and administrative 3,701 2,222
Purchased research and development 213,100 -
---------- ---------
Total operating expenses 248,237 19,883
---------- ---------
Income (loss) from operations (190,840) 16,372
Interest income, net 1,748 1,117
---------- ---------
Income (loss) before income taxes (189,092) 17,489
Provision for income taxes 9,242 7,054
---------- ---------
Net income (loss) $(198,334) $ 10,435
========== =========
Net income (loss) per common share $ (2.13) $ 0.11
========== =========
Average common and dilutive equivalent 92,946 95,629
shares outstanding
========== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Balance Sheets
(in thousands)
Mar. 29, Dec. 31,
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $116,853 $ 98,399
Marketable securities 14,307 13,920
Accounts receivable, net 77,690 81,949
Notes receivable 2,939 1,750
Inventories 23,582 19,303
Deferred income taxes 9,437 8,300
Prepaid expenses 3,645 11,421
--------- ---------
Total current assets 248,453 235,042
Property and equipment, net 45,312 33,012
Notes receivable 3,230 899
Other assets 3,574 1,308
--------- ---------
Total assets $300,569 $270,261
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,916 $ 17,555
Deferred revenue 10,779 9,038
Accrued expenses 26,063 23,885
Accrued income taxes 1,332 -
Current portion of long term debt 134 -
--------- --------
Total current liabilities 58,224 50,478
Long term debt 298 -
Stockholders' equity:
Common stock 94 90
Additional paid-in capital 342,403 121,809
Retained earnings (deficit) (100,450) 97,884
---------- ---------
Total stockholders' equity 242,047 219,783
---------- ---------
Total liabilities and stockholders' equity $300,569 $270,261
========== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
CASCADE COMMUNICATIONS CORP.
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
Mar. 29, Mar. 30,
1997 1996
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(198,334) $ 10,435
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Non-cash charge for purchased research and
development for stock 213,100 -
Depreciation and amortization 5,398 1,942
Deferred income taxes (1,814) (308)
Tax benefits related to stock options exercised 3,616 1,954
Changes in operating assets and liabilities, net of
the effects of the purchase of Sahara:
Accounts receivable 4,259 (9,237)
Notes receivable (3,520) 496
Inventories (4,279) 747
Prepaid expenses 7,776 47
Accounts payable 2,361 717
Accrued expenses and other current liabilities 1,232 4,417
------------ ---------
Net cash provided by operating activities 29,795 11,210
------------ ---------
Cash flows from investing activities:
Purchases of property and equipment, net (16,688) (5,475)
Purchases of marketable securities (9,187) (10,339)
Proceeds from maturities of marketable
securities 8,800 3,600
Increase (decrease) in other assets (17) 39
------------ ---------
Net cash used for investing activities (17,092) (12,175)
------------ ---------
Cash flows from financing activities:
Cash acquired from Sahara purchase 2,700 -
Repayments of debt (807) -
Proceeds from sale of common stock, net 3,858 7,439
------------ ---------
Net cash provided by financing activities 5,751 7,439
Net increase in cash and cash equivalents 18,454 6,474
Cash and cash equivalents, beginning of period 98,399 55,474
------------ ---------
Cash and cash equivalents, end of period $116,853 $ 61,948
============ =========
Supplemental schedule of noncash investing activities:
Common Stock and options issued to acquire Sahara $213,115
============
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 months ended March 29,
1997 and the related footnote information are unaudited and have been prepared
on a basis substantially consistent with the 1996 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, 1996 included in the Company's Annual Report on Form 10-K. The
results of operations for the three month period ended March 29, 1997 are not
necessarily indicative of the results to be expected for the entire year.
2. Business Combinations
On March 30, 1997, the Company announced that it had signed a definitive
merger agreement with Ascend Communications, Inc. ("Ascend") pursuant to which a
wholly-owned subsidiary of Ascend will merge with and into the Company. The
Company shall survive the merger and become a wholly-owned subsidiary of Ascend.
Under the terms of the agreement, each share of the Company's common stock will
be exchanged for 0.7 of a share of Ascend common stock (the "Exchange Ratio").
Outstanding options and rights to purchase the Company's common stock will be
assumed by Ascend and will become an option or right to purchase shares of
Ascend common stock, with appropriate adjustments to the number of shares
issuable thereunder and the exercise price thereof based on the Exchange Ratio.
The transaction is intended to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. In connection with the transaction, each
company granted the other an option, exercisable under certain conditions, to
purchase shares equal to approximately 19.9% of the other Company's outstanding
shares as of March 30, 1997, subject to adjustment upon certain changes in each
Company's capitalization. The merger has been approved by the boards of
directors of the Company and Ascend, but is still subject to various customary
conditions, including without limitation, clearance under the Hart-Scott-Rodino
Antitrust Improvements Act and the approval by shareholders of both Ascend and
the Company.
On January 28, 1997, the Company completed its acquisition of Sahara
Networks, Inc. ("Sahara"), a privately-held developer of scaleable, high-speed
broadband access products located in Wallingford, Connecticut, by means of a
merger of a wholly-owned subsidiary of the Company with and into Sahara. As a
result of the Merger, Sahara became a wholly-owned subsidiary of the Company.
The Company issued approximately 3.4 million shares of the Company's Common
Stock in exchange for all the outstanding shares of capital stock of Sahara. In
addition, the Company assumed all outstanding Sahara stock options to purchase
approximately 400,000 shares of the Company's Common Stock.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price of $219 million was allocated to the net assets
acquired based upon their estimated fair market values. The estimated fair value
of the tangible net assets acquired was $6 million and $213 million of the
purchase price was allocated to purchased research and development that has not
reached technological feasibility and that has no alternative future use and was
charged to operations in the quarter ended March 29, 1997. Purchased research
and development was valued using a risk adjusted cash flow model under which
future cash flows were discounted, taking into account risks related to existing
and future markets and assessments of the life expectancy of the underlying
technology. Expected future cash flows associated with purchased research and
development are discounted considering risks and uncertainties related to the
viability of and to the potential changes in future target markets and to the
completion of the products expected to ultimately be marketed by Cascade. The
in-process technology relates to the products that management intends to further
develop to the point of technological feasibility. No completed technology was
purchased as Sahara has brought no products to market and no development project
has reached technological feasibility. The estimated costs to complete the
technology subsequent to the acquisition date are approximately $4 million.
<PAGE>
The following summary, prepared on an unaudited pro forma basis, combines
the results of operations as if Sahara had been acquired as of January 1, 1996,
however the one-time charge of $213,100 as a result of the purchase price
allocated to research and development has been excluded due to its nonrecurring
nature.
<TABLE>
Year ended Three months ended
Dec. 31, 1996 March 29, 1997
------------- --------------
<S> <C> <C>
Total revenues $ 340,976 $ 90,328
Net income $ 66,380 $ 14,176
Net income per share $ 0.66 $ 0.14
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect for the
entire periods presented. In addition, they are not intended to be a projection
of future results and do not reflect any synergy's that might be achieved from
combined operations.
3. Common Stock
Net income (loss) per common share is computed based upon the weighted
average number of common shares and as appropriate, 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. The
Company effected the following stock splits in the form of stock dividends:
two-for-one in June 1995, three-for-two in February 1996 and two-for-one in May
1996. All share and per share data have been restated in these consolidated
financial statements for all periods to reflect the stock splits.
4. Inventories
<TABLE>
Inventories consist of:
March 29, Dec. 31,
1997 1996
---------- ---------
<S> <C> <C>
Raw materials $ 15,945 $14,827
Work-in-process 149 552
Finished goods 7,488 3,924
---------- ---------
Total $ 23,582 $19,303
======== =======
</TABLE>
5. Litigation
On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General Datacomm Industries, Inc. in the
Superior Court for the State of Connecticut. The complaint alleges several
causes for action, including: breach of contract; tortious interference with
contractual relations; misappropriation of trade secrets; unfair competition
and; violation of the Connecticut Unfair Trade Practices Act. The plaintiff
seeks relief of unspecified monetary damages, costs and injunctive relief. Based
on the Company's preliminary investigation, the Company believes the allegations
of the lawsuit are without merit and plans to vigorously defend this lawsuit;
however, the ultimate outcome of this matter cannot yet be determined. No
provision for any liability that may result from the action has been recognized
in the consolidated financial statements.
On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. The Company is currently
investigating the claims of such infringement and thus the ultimate outcome of
this claim cannot yet be determined. No provision for any liability that may
result from the action has been recognized in the consolidated financial
statements.
<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 for the periods specified and the associated notes. Further reference
should be made to the Company's 1996 Form 10K for the year ended December 31,
1996.
Business Environment and Risk Factors.
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein as well as the
section below under the heading "Risk Factors That May Affect Future Results".
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, risks associated with the announcement of the proposed business
combination with Ascend, changes in general economic conditions, rapid or
unexpected changes in technologies, activities of competitors, timing of product
shipments and uncertain business conditions that affect the data networking
industry. Accordingly, past results and trends should not be used by investors
to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. The
Company wishes to caution readers that a number of important factors, including
those identified in the section entitled "Risk Factors That May Affect Future
Results," as well as factors discussed elsewhere in this report and in the
Company's other reports filed with the Securities and Exchange Commission, could
affect the Company's actual results and cause actual results to differ
materially from those in the forward-looking statements.
Revenue
Revenue for the first quarter ended March 29, 1997 increased by 61.2% to
$90.3 million from $56.0 million for the quarter ended March 30, 1996, but
decreased 18.1% or $20.0 million from the fourth quarter of 1996. The Company
believes that the increase in revenue from the first quarter of 1997 compared to
the first quarter of 1996 is primarily attributable to shipments of the CBX 500
ATM switch, which began in the second quarter of 1996, and increased volume of
B-STDX shipments as well as increased service and training revenues due to an
expanded customer base. Sales of the B-STDX product line accounted for
approximately 80% and 90% of total revenue for the quarters ended March 29, 1997
and March 30, 1996, respectively. The Company believes that the decrease in
revenue in the first quarter of 1997 from the fourth quarter of 1996 is
primarily due to variations in the timing of Frame Relay expansions among
regional bell operating customers due to in part uncertainties over regulatory
policies and economic terms and uneven growth in ATM product shipments.
Direct and indirect international sales accounted for approximately 24% of
revenue in the first quarter of 1997, compared to approximately 17% of revenue
for the first quarter of 1996. The international sales increase was primarily
due to the expansion of the Company's Pacific Rim customer base and increased
international sales through distributor channels. In the first quarter of 1997,
the Company continued its global expansion with the opening of new sales offices
in Hong Kong, France and Korea. The Company intends to increase its presence
internationally, but 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 decreased to 63.5% of revenue and was $57.4 million for the
first quarter of 1997, compared to 64.7% of revenue or $36.3 million for the
same period in 1996. The decrease in gross profit as a percentage of revenue was
primarily a result of higher fixed manufacturing and product delivery costs due
to the introduction of CBX 500 product line. 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.
<PAGE>
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 first quarter of 1997 were $17.7
million or 19.5% of revenue, compared to $9.0 million or 16.0% of revenue for
the same period in 1996. The dollar increase resulted from the addition of
engineering staff through hiring and acquisitions along with the related costs
to support the Company's commitment to new product and technology development.
Several enhancements were made to the Frame Relay products during the quarter
including priority Frame Relay capabilities and OC 3 interworking. The Company
completed its acquisitions of Arris and Sahara in May 1996 and January 1997,
respectively and has incurred incremental development expenses bringing these
products to market. The Company considers product development expenditures to be
critical to future revenue and expenses may increase in absolute dollars while
the percentage of revenue may fluctuate.
Sales and Marketing
The Company's sales and marketing expenses increased to $13.8 million for
the first quarter of 1997 from $8.7 million in the same period for 1996. These
expenses remained relatively constant as a percentage of revenue at 15.3% in the
first quarter of 1997 and 15.5% in the same period for 1996. The increase in
spending was due to the addition of personnel, expansion of domestic and
international sales presence, commissions associated with revenue growth and
expenditures for investments related to marketing programs for new product
introductions. The Company expects to increase spending in the remainder of 1997
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 first
quarter of 1997 from $2.2 million in the same period for 1996. These expenses
remained relatively constant as a percentage of revenue at 4.1% in the first
quarter of 1997 compared to 4.0% in the same period for 1996. The increase in
dollars spent was primarily due to the addition of finance and administrative
personnel as well as expenditures in information and communication technology
necessary to support the growth of the Company. The Company expects that
expenses in this area may increase in absolute dollars in 1997, but may vary as
a percentage of revenue.
Interest Income
Interest income, net of interest expense, increased to $1.7 million or 1.9%
of revenue for the first quarter of 1997 from $1.1 million or 2.0% of revenue
for the same period in 1996. The increase in interest income was attributable to
higher invested cash generated from operations and interest generated from notes
receivable.
Provision for Income Taxes
The Company's effective tax rate for the first quarter of 1997 was (4.9%)
compared to 40.3% in the same period of 1996. Excluding the purchase of in
process technology associated with the Sahara acquisition, which is not
deductible for income tax purposes, the effective tax rate for the first quarter
of 1997 would have been 38.5%. Excluding certain merger related costs associated
with the pooling of interest with Arris Networks, Inc., the effective tax rate
would have been 38.5% for the first quarter of 1996. The significant differences
between the statutory federal income tax rate and the Company's effective tax
rate is principally due to state income taxes, research and development tax
credits and the benefit of the Company's Foreign Sales Corporation.
<PAGE>
Liquidity and Capital Resources
At March 29, 1997, the Company had cash, cash equivalents and marketable
securities of $131.2 million, an increase of $18.8 million from December 31,
1996. The Company has funded its operations primarily through cash flows
generated from operations and proceeds and associated tax benefits from the sale
of its common stock through its employee stock plans.
Cash generated from operations was $29.8 million for the quarter ended March
29, 1997. Net loss adjusted for non cash items consisting of purchased research
and development, depreciation, deferred income taxes and tax benefits related to
stock option exercises was $22.0 million. Cash flows from working capital
accounts totaled $7.8 million . Significant cash flows from the working capital
accounts were: $7.8 million from prepaid expenses primarily for income taxes,
$4.3 million from accounts receivable and $3.6 million from accounts payable and
other current liabilities. Working capital decreased by $4.3 million due to an
increase in inventory levels for new product introductions and $3.5 million for
the issuance of notes receivable, net of payments received.
Investment activities in the first quarter of 1997 included capital
expenditures of $16.7 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 $387,000. These investments were placed in U.S. Government
obligations and highly rated commercial paper.
Cash flows from financing activities for the first quarter of 1997 were $5.8
million. This amount was mostly comprised of $3.9 million of proceeds from the
sale of its common stock through its employee stock purchase and option plans
and $2.7 million of cash assumed in the Sahara purchase. In addition, $807,000
of payments for notes payable and capital lease obligations assumed in the
Sahara purchase were made during the quarter.
The Company believes that its existing cash, cash equivalents and marketable
securities, along with anticipated funds generated from operations, will satisfy
the Company's working capital and capital expenditure needs at least for the
next twelve months.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income (loss)
per share for the quarters ended March 29, 1997 and March 30, 1996 would have
been ($2.13) and $0.12 per share, respectively. The impact of SFAS 128 on the
calculation of diluted net income per share for these quarters is not expected
to be material. The Company plans to adopt SFAS 128 in its fiscal quarter ending
December 31, 1997 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
Business Combinations
On January 28, 1997, the Company completed its acquisition of Sahara
Networks Inc. ("Sahara"), a privately-held developer of scaleable, high-speed
broadband access products located in Wallingford, Connecticut, by means of a
merger of a wholly-owned subsidiary of the Company with and into Sahara. As a
result of the Merger, Sahara became a wholly-owned subsidiary of the Company.
The Company issued approximately 3.4 million shares of the Company's Common
Stock in exchange for all the outstanding shares of capital stock of Sahara. In
addition, the Company assumed all outstanding Sahara stock options to purchase
approximately 400,000 shares of the Company's Common Stock.
<PAGE>
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price of $219 million was allocated to the net assets
acquired based upon their estimated fair market values. The estimated fair value
of the tangible net assets acquired was $6 million and $213 million of the
purchase price was allocated to purchased research and development that has not
reached technological feasibility and that has no alternative future use and was
charged to operations in the quarter ended March 29, 1997. Purchased research
and development was valued using a risk adjusted cash flow model under which
future cash flows were discounted, taking into account risks related to existing
and future markets and assessments of the life expectancy of the underlying
technology. Expected future cash flows associated with purchased research and
development are discounted considering risks and uncertainties related to the
viability of and to the potential changes in future target markets and to the
completion of the products expected to ultimately be marketed by Cascade. The
in-process technology relates to the products that management intends to further
develop to the point of technological feasibility. No completed technology was
purchased as Sahara has brought no products to market and no development project
has reached technological feasibility. The estimated costs to complete the
technology subsequent to the acquisition date are approximately $4 million.
On March 30, 1997, the Company announced that it had signed a definitive
merger agreement with Ascend Communications, Inc. ("Ascend") pursuant to which a
wholly-owned subsidiary of Ascend will merge with and into the Company. The
Company shall survive the merger and become a wholly-owned subsidiary of Ascend.
Under the terms of the agreement, each share of the Company's common stock will
be exchanged for 0.7 of a share of Ascend common stock (the "Exchange Ratio").
Outstanding options and rights to purchase the Company's common stock will be
assumed by Ascend and will become an option or right to purchase shares of
Ascend common stock, with appropriate adjustments to the number of shares
issuable thereunder and the exercise price thereof based on the Exchange Ratio.
The transaction is intended to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. In connection with the transaction, each
company granted the other an option, exercisable under certain conditions, to
purchase shares equal to approximately 19.9% of the other company's outstanding
shares as of March 30, 1997, subject to adjustment upon certain changes in each
company's capitalization. The merger has been approved by the boards of
directors of the Company and Ascend, but is still subject to various customary
conditions, including without limitation, clearance under the Hart-Scott-Rodino
Antitrust Improvements Act and the approval by shareholders of both Ascend and
the Company.
Risk Factors That May Affect Future Results
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. 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
statements, including without limitation statements relating to new product
development, expansion of operations, international expansion and growth in the
market for WAN data communication services, are forward-looking, and involve a
number of risks and uncertainties. In addition, Cascade identifies the following
risk factors which could affect the Company's actual results and could cause
actual results to differ materially from forward-looking statements. The
Company's future results remain difficult to predict and may be affected by a
number of factors including risks associated with the announcement of the
proposed business combination with Ascend; business conditions within the
telecommunication industry; timing of orders from, and shipments to, customers;
the timing of new product introductions; and the market acceptance of those
products; factors associated with international operations; increased
competition; changes in manufacturing costs; changes in world economic
conditions; changes in the mix of product sales; the rate of end user adoption
and carrier and private network development of WAN data communications services
and the risks identified in the following risk factors. Because of these and
other factors, past financial performance should not be considered an indicator
of future performance.
<PAGE>
Risks Associated With the Announcement of the Proposed Business Combination With
Ascend
Various risks related to the proposed business combination (the "Merger")
between the Company and Ascend could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that customers of the Company will continue their current and
historical buying patterns without regard to the proposed Merger, or that
certain customers will not defer purchasing decisions as they evaluate, among
other things, the proposed Merger, or that certain existing and prospective
customers will not ultimately decide to purchase competitors' products in lieu
of the Company's products. The Company's success depends to a significant degree
upon the continuing contribution of key employees. A number of factors relating
to the proposed Merger, including without limitation the recruitment activities
of competitors, may make it more difficult to retain and attract key employees.
In addition, the Company expects to incur significant expenses in connection
with the proposed Merger, whether or not consummated.
Difficulty of Integrating Acquired Businesses
The Company acquired Arris in May 1996 and Sahara in January 1997. There can
be no assurance that products, technologies, distribution channels, key
personnel and businesses of acquired companies will be successfully integrated
into the Company's business or product offerings, or that such integration will
not adversely affect the Company's business, financial condition or results of
operations. There can be no assurance that any acquired products, technologies
or businesses will contribute significantly to the Company's sales or earnings,
that the sales and earnings from acquired businesses will not be adversely
affected by the integration process or other factors. If the Company is not
successful in the integration of such acquired businesses, there could be an
adverse impact on the financial results of the Company. The historical growth of
the computer networking industry, coupled with critical time-to-market factors,
has caused increased competition and consolidation. As a result, there has been
a significant increase in the acquisition value of computer networking
companies. Therefore, acquisitions are more likely to result in values that are
material to the Company's operations. There can be no assurance that the Company
will continue to be able to identify and consummate suitable acquisition
transactions in the future.
Fluctuations in Revenue and Operating Results
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 development
of WAN data communications services; factors associated with international
operations; and changes in world economic conditions.
Evolving Market
The Company's success will depend in part on the growth in the broadband
packet equipment market. The market for these services continues to evolve, and
there are a number of competing technologies providing these services.
Regulatory policies affecting the telecommunications industry in the United
States and internationally are likely to continue to have a significant impact
on pricing and demand for both voice and data communications products and
services. There can be no assurance whether, and at what rate, end user demand
will develop for these services or that public carriers or private networks will
continue to adopt the Company's products and technology to implement these
services.
Management of Growth
The Company has recently experienced a period of rapid growth which has
placed, and could continue to place, a significant strain on the resources. In
order to support the anticipated growth of its business, the Company plans to
significantly expand its level of operations during 1997. If the Company's
management is unable to manage growth effectively, the Company's operating
results could be adversely affected.
<PAGE>
Timing of Product Orders and Shipments
One of the risks which may affect the Company's operating results is the
fact that a substantial portion of the Company's revenue in any period may
result from shipments during the latter part of a period. Because revenue in any
quarter may be substantially dependent on orders booked and shipped in that
quarter, particularly in the latter part of that quarter, revenue for any future
quarter may be difficult to predict. Since the Company's operating expense
levels are based on its operational goals, if orders and shipments in any period
do not meet such goals the Company's business, operating results and financial
condition are likely to be materially adversely affected. As a result, the
Company believes that period-to-period comparisons of the Company's results of
operations are not and will not necessarily be meaningful and should not be
relied upon as any indication of future performance.
Dependence on Key Employees
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing, research and development
and manufacturing personnel, many of whom would be difficult to replace. The
Company does not have employment contracts with its key personnel. The Company
believes that its future success will depend in large part upon its ability to
attract and retain highly-skilled hardware and software engineers, management
and sales and marketing personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. Failure to attract and retain key personnel could
have a material adverse effect on the Company's business, operating results and
financial condition.
Competition
The market for wide area network and remote access communications products
is intensely competitive and is subject to rapid technological change. The
Company expects competition to increase significantly in the future from
existing competitors and a number of companies which may enter the Company's
existing or future markets. In addition to competition from other switch and
remote access providers, the Company expects to face competition from other
vendors in the networking market such as network router vendors, who may
incorporate switching functionality into their products or provide alternative
network solutions. Increased competition could adversely affect the Company's
revenue and profitability through price reductions and loss of market share. The
principal competitive factors in the market for switching products are breadth
of network services supported, conformance to industry standards, price per
port, performance, product features, network management capabilities,
reliability and customer support. Many of the Company's current and potential
competitors have longer operating histories and substantially greater financial,
technical, sales and marketing resources than the Company. There can be no
assurance that the Company will be able to continue to compete successfully with
its existing competitors or will be able to compete successfully with new
competitors.
Third Party Manufacturing
The Company relies on a variety of independent third party assembly
companies to perform printed circuit board assembly, in circuit test and product
repair. There can be no assurance that in the future the Company's independent
contractors will be able to meet the Company's demand for manufacturing capacity
in a timely and cost-effective manner. In the event that the Company's
subcontractors were to experience financial, operational, production or quality
assurance difficulties that resulted in a reduction or interruption in supply to
the Company, the Company's operating results would be adversely affected until
the Company established sufficient manufacturing supply from alternative
sources.
<PAGE>
Dependence on Sole Source Suppliers
Some key components of the Company's products are currently available only
from single sources. There can be no assurance that in the future the Company's
suppliers will be able to meet the Company's demand for components in a timely
and cost-effective manner. The Company generally purchases these single or
limited source components pursuant to purchase orders and has no guaranteed
supply arrangements with the suppliers. In addition, the availability of many of
these components to the Company is dependent in part on the ability of the
Company or its subcontractors to provide the suppliers with accurate forecasts
of future requirements. The Company has generally been able to obtain adequate
supplies of parts and components in a timely manner from existing sources. The
Company's operating results and customer relationships could be adversely
affected by either an increase in prices for, or an interruption or reduction in
supply of, any key components.
Technological Change
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, emerging network architectures, and
frequent new product introductions. Current competitors or new market entrants
may develop new products with features that could adversely affect the
competitive position of the Company's products. There can be no assurance that
the Company will be successful in selecting, developing, manufacturing and
marketing new products or enhancing its existing products or that the Company
will be able to respond effectively to technological changes, new standards or
product announcements by competitors. The timely availability of new products
and enhancements, and their acceptance by customers are important to the future
success of the Company. Delays in such availability or a lack of market
acceptance could have an adverse affect on the Company.
Customer Concentration
The Company's customer base includes public carrier providers and ISPs, many
of whom generally require product vendors to comply with rigorous industry
standards. Any failure to comply with such standards may result in a significant
loss or reduction of sales. The Company has diversified its customer base over
time; however, in recent periods, certain customers have accounted for over 10%
of the Company's revenue. For the quarter ended March 29, 1997, one customer
accounted for more than 14% of revenue and for the same period in 1996 sales to
two customers accounted for approximately 15% and 10% of revenue, respectively.
There can be no assurance that these customers will place additional orders, or
that the Company will obtain orders of similar magnitude from other customers. A
decline in demand from public network carriers would have an adverse effect on
the Company's operating results.
International Operations
Direct and indirect international sales accounted for approximately 24% and
17% of revenue for the first quarter of 1997 and 1996, respectively. The Company
anticipates that international sales will continue to account for a significant
portion of revenue. The Company's international sales are subject to risks
inherent in foreign operations including unexpected changes in regulatory
requirements, tariffs or other barriers and potentially negative tax
consequences. In addition, sales of the Company's products in international
markets are heavily dependent on third-party distribution channels. To date, the
Company's international sales have been denominated in U.S. currency; however,
if this were to change, the Company would be subject to exchange rate
fluctuations.
Uncertainties Regarding Patents and Protection of Proprietary Technology
The Company's success will depend, to a large extent, on its ability to
protect its proprietary technology. The Company has a number of patent
applications that are currently pending for certain of its existing products and
currently relies on a combination of contractual rights, trade secrets and
copyrights to protect its proprietary rights. Although the Company intends to
apply for additional patents in the future, there can be no assurance that the
Company's intellectual property protection will be sufficient to prevent
competitors from developing similar
<PAGE>
technology. Moreover, in the absence of patent protection, the Company's
business may be adversely affected by competitors that independently develop
functionally equivalent technology. The Company currently licenses certain
hardware and software technology from third parties and plans to continue to do
so in the future. The Company attempts to ensure that its products and processes
do not infringe patents and other proprietary rights. The Company, however, is
currently subject to infringement claims and there can be no assurance that
additional infringement claims will not be alleged by third parties in the
future. If infringement is alleged, there can be no assurance that the necessary
licenses would be available on acceptable terms, if at all, or that the Company
would prevail in any such challenge.
Possible Volatility of Stock Price
The market price of the Company's Common Stock has increased significantly
since the Company's initial public offering in July 1994, and has experienced
fluctuations during this period. The market price of the Company's Common Stock
has been, and may continue to be, extremely volatile. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in earnings
estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, challenges associated with
integration of businesses and other events or factors. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price for many high technology
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
PART II. OTHER INFORMATION
Item 2 - Changes in Securities
(c) Recent Sales of Unregistered Securities
On January 28, 1997 the Company completed a private placement of 3,409,196
shares (the "Shares") of its Common Stock to the holders of the outstanding
capital stock of Sahara Networks, Inc. ("Sahara") in exchange for all of the
outstanding shares of capital stock of Sahara. Such private placement was made
to effect the acquisition of Sahara by the Company. The Company claims that the
offer and sale of the Shares were exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act") pursuant to Rule 506 of
Regulation D under the Securities Act in reliance upon information available to
the Company as of January 28, 1997, including certain representations and
warranties of the purchasers of the Shares. The Shares were offered only to
"accredited investors" (as such terms are defined in Regulation D) or to
purchasers who, in the reasonable belief of the Company, either alone or with
his/her purchaser representative, had such knowledge and experience in financial
and business matters that he/she was capable of evaluating the merits and risks
of the investment. On February 4, 1997, the Company filed a registration
statement on Form S-3 (File No. 333-21115) with the SEC covering the resale of
the shares sold in the private placement, which registration statement became
effective on February 12, 1997.
Item 5. Legal Proceedings
On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General Datacomm Industries, Inc. in the
Superior Court for the State of Connecticut. The complaint alleges several
causes for action, including: breach of contract; tortious interference with
contractual relations; misappropriation of trade secrets; unfair competition
and; violation of the Connecticut Unfair Trade Practices Act. The plaintiff
seeks relief of unspecified monetary damages, costs and injunctive relief. Based
on the Company's preliminary investigation, the Company believes the allegations
of the lawsuit are without merit and plans to vigorously defend this lawsuit;
however, the ultimate outcome of this matter cannot yet be determined. No
provision for any liability that may result from the action has been recognized
in the consolidated financial statements.
<PAGE>
On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. The Company is currently
investigating the claims of such infringement and thus the ultimate outcome of
this claim cannot yet be determined. No provision for any liability that may
result from the action has been recognized in the consolidated financial
statements
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Weighted Shares Used in Computation of Earnings per Share
27 Financial Data Schedule
(b) Report on Form 8-K.
The Company filed a Current Report on Form 8-K dated January 16, 1997
relating to the election of a new Chair of the Board of Directors of
the Company.
The Company filed a Current Report on Form 8-K dated February 4, 1997
relating to the acquisition by the Company of Sahara Networks, Inc.
The Company filed a Current Report on Form 8-K dated March 30, 1997
relating to the proposed business combination of the Company with
Ascend Communications, Inc.
<PAGE>
SIGNATURE
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)
April 25, 1997 _/s/_______________________________________________
Paul E. Blondin
Vice President of Finance and Administration, Chief
Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Page No.
11 Weighted Shares Used in Computation of Earnings Per
Share 19
27 Financial Data Schedule 20
EXHIBIT 11
<TABLE>
CASCADE COMMUNICATIONS CORP.
Weighted Shares Used in Computation of Earnings per Share
Shares
<S> <C>
For the three months ended March 30, 1996
Common stock outstanding, beginning of period 83,781,082
Weighted average common stock issued during the
three months ended March 30, 1996 2,472,370
Weighted average common stock equivalents 9,375,064
Weighted average shares of common stock outstanding 95,628,516
==========
For the three months ended March 29, 1997
Common stock outstanding, beginning of period 90,154,507
Weighted average common stock issued during the
three months ended March 29, 1997 2,791,636
----------
Weighted average shares of common stock outstanding 92,946,143
==========
</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-Q for the period
ending March 29, 1997, and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-29-1997
<CASH> 116,853
<SECURITIES> 14,307
<RECEIVABLES> 81,129
<ALLOWANCES> 500
<INVENTORY> 23,582
<CURRENT-ASSETS> 248,453
<PP&E> 70,346
<DEPRECIATION> 25,034
<TOTAL-ASSETS> 300,569
<CURRENT-LIABILITIES> 58,224
<BONDS> 298
0
0
<COMMON> 94
<OTHER-SE> 241,953
<TOTAL-LIABILITY-AND-EQUITY> 300,569
<SALES> 90,328
<TOTAL-REVENUES> 90,328
<CGS> 32,931
<TOTAL-COSTS> 32,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (189,092)
<INCOME-TAX> 9,242
<INCOME-CONTINUING> (198,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (198,334)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
