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Letter to Our Shareholders:
Cabletron Systems continues to perform as one of the major internetworking
companies in the industry. For the fiscal year ending February 28, 1997,
Cabletron reported sales of $1.4 billion, an increase of 28 percent over the
$1.1 billion reported for fiscal year 1996. Net income for fiscal year 1997
was $222.1 million or $1.43 per share, compared to $144.5 million or $0.95
per share for fiscal year 1996. All results have been re-stated to reflect
the acquisitions that occurred in fiscal year 1997. Cabletron also announced
a two-for-one stock split in November 1996, the company's second stock split
in the past three years.
This has been a very busy year for Cabletron. We picked up where we left off
in fiscal year 1996 (when we acquired a business unit of Standard
Microsystems, Inc.) by making four more strategic technology acquisitions.
Agreements with Zeitnet, Inc. (for Asynchronous Transfer Mode or ATM),
Network Express, Inc. (for Integrated Services Digital Network or ISDN),
Netlink, Inc. (for frame relay) and The OASys Group (for telecommunications
management applications) have allowed us to enhance our existing product line
and still provide the tightly integrated, end-to-end solutions our customers
demand. Whether it's through internal development or an outside acquisition,
Cabletron is committed to being the single, reliable source for today's
growing enterprise networks.
And while today's networks are demanding better performance, more horsepower
and faster connections, what about tomorrow's infrastructures? Cabletron is
already ahead of the game, developing solutions that meet and exceed the
mission-critical requirements for future environments. During the past year
alone, Cabletron has introduced powerful switches that lay the groundwork for
a full-blown ATM network or Gigabit Ethernet backbone. Both are relatively
new technologies. At the same time, we have introduced innovative network and
systems management applications that work with the fastest growing management
platform in the industry: SPECTRUM. These applications allow companies to
monitor and control precious networked resources including bandwidth
allocation, e-mail file servers and selected databases from a centralized
location.
It doesn't seem that long ago that Cabletron was a two-man operation based in
a small garage. Times have certainly changed to the point where we are now a
billion-dollar company on the verge of even greater success. The substantial
investments we've made in R&D, acquisitions, service and support, our global
sales strategy and our people will springboard Cabletron well into the next
century and change the way customers rely on their information networks.
We are grateful to all of our customers, suppliers, partners and employees,
because without you, this year could not have been as successful as it was.
Thank you. We are equally appreciative of our shareholders whose continued
support helps keep Cabletron's momentum building.
Sincerely,
/s/ S. Rober Levine /s/ Craig, R. Benson
S. Robert Levine Craig R. Benson
President and Chief Executive Officer Chairman and Chief Operating Officer
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . to . . . .
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263
State or other jurisdiction of (I.R.S. Employee
incorporation or organization) identification no.)
35 Industrial Way, Rochester, New Hampshire 03866
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (603) 332-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, Name of each exchange on which registered:
$0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 8, 1997, 157,047,949 shares of the Registrant's common stock were
outstanding. The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of May 8, 1997 was approximately $4.4
billion.
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (229.405) is not contained herein and will not be contained,
to the best of the registrant's knowledge, in definitive proxy for information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Part III Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 1997 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I
Item
Page
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
4a. Executive Officers of the Registrant 9
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 10
6. Selected Financial Data 11
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
8. Consolidated Financial Statements and Supplementary Data 17-30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III
10. Directors and Executive Officers of the Registrant 32
11. Executive Compensation 32
12. Security Ownership of Certain Beneficial Owners
and Management 32
13. Certain Relationships and Related Transactions 32
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 33
PART I
Unless otherwise indicated, all information in this Annual Report on Form 10-K
gives effect to a two-for-one stock split of the Company's common stock
implemented as a 100 percent stock dividend, effective November 27, 1996.
1. ITEM 1. Business
General
Cabletron Systems, Inc. (referred to herein as "Cabletron," "Registrant" or "the
Company") develops, manufactures, markets, installs and supports a wide range of
standards-based local area network and wide area network (LAN and WAN,
respectively) connectivity hardware and software products (including intelligent
switches and hubs, remote access devices, and sophisticated management
software). Cabletron delivers products to address the full range of networking
technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, token ring,
fiber distributed data interface (FDDI), asynchronous transfer mode (ATM),
integrated services digital network (ISDN) and frame relay.
The Company's networking strategy, known as Synthesis, is a strategic framework
which combines infrastructure products and technologies, automated management
tools, and support services. Synthesis allows the creation of a network with
enhanced performance and capabilities, manageability, and reliability and a
lower overall cost structure. The Company's products includes the MMAC-Plus
products, the Company's modular advanced switching intelligent hubs, the
SmartSwitch products, switching products which provide a high density of
switched ports for predominant technologies using a combination of ASICs and
RISC-based processors, the MMAC, the Company's wiring closet smart hub, and ISDN
and frame relay products. All of the Company's intelligent networking products
are managed by SPECTRUM, Cabletron's sophisticated enterprise-wide network
management system. The Company also produces and supports other networking
products, such as adapter cards, other interconnection equipment, wiring cables,
and file server products, and provides a wide range of networking services. The
Company believes that its broad product line and full service capabilities
enable it to offer its customers "The Complete Networking Solution(R)"
Recent Product Line Acquisitions
Fiscal 1997 Acquisitions
In July 1996, the Company acquired ZeitNet Inc. ("ZeitNet"), a privately held
manufacturer and a leader in providing high-quality, low-cost solutions for
connecting applications, servers and workgroups to high-performance asynchronous
transfer mode (ATM) networks. Under the terms of the agreement, Cabletron issued
approximately 3.3 million shares of common stock for all of the outstanding
shares of ZeitNet (as well as all shares to be issued pursuant to ZeitNet
options assumed by Cabletron) in a transaction accounted for as a pooling of
interests.
In August 1996, the Company acquired Network Express, Inc. ("Network Express"),
a publicly held manufacturer and a provider of ISDN high-speed LAN switched
access solutions. Under the terms of the agreement, Cabletron issued
approximately 2.9 million shares of common stock for all of the outstanding
shares of Network Express (as well as all shares to be issued pursuant to
Network Express options assumed by Cabletron) in a transaction accounted for as
a pooling of interests.
In December 1996, the Company acquired Netlink, Inc. ("Netlink"), a privately
held manufacturer and supplier of frame relay access solutions for
multi-protocol, mission-critical networks. Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of the
outstanding shares of Netlink (as well as all shares to be issued pursuant to
Netlink options assumed by Cabletron) in a transaction accounted for as a
pooling of interests.
In February 1997, the Company acquired The OASys Group, Inc. ("OASys"), a
privately-held developer of software used to manage telecommunications devices
and connections in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
of OASys (as well as all shares to be issued pursuant to OASys options assumed
by Cabletron) in a transaction accounted for as a purchase.
Fiscal 1996 Acquisitions
In order to broaden the range of switching products offered by the Company, in
January 1996 Cabletron acquired the Enterprise Networks Business Unit (ENBU) of
Standard Microsystems Corporation for $85.7 million. The products acquired from
the ENBU include standalone Fast Ethernet market, as well as a modular chassis
offering several networking technologies. The transaction was accounted for as a
purchase.
Cabletron is a Delaware corporation organized in 1988. The executive offices
of the Company are located at 35 Industrial Way, Rochester, New Hampshire
03866 (telephone: (603) 332-9400).
Products and Services
The Company's operations are grouped into the product areas discussed below.
Smart Switches and Hubs, and Related Products
MMAC-Plus
The MMAC-Plus is an enterprise-level backbone switching chassis. The MMAC-Plus,
with its high bandwidth (aggregate bandwidth 60 Gbps), switching rate (aggregate
switching rate of 10 million packets/cells per second) and modularity (up to 14
separate MMAC-Plus modules), is designed to operate as the central switching hub
for networks containing large numbers of nodes and multiple disparate networking
technologies. Each MMAC-Plus module implements one or more of the following
technologies: ATM cell transport, SecureFast packet switching (Cabletron's own
standards-based switching technology), SecureFast Virtual networking and network
layer routing or standard MAC layer bridging. In addition to accommodating the
latest networking technologies, the MMAC-Plus is designed to integrate
customers' legacy systems. The MMAC-Plus, like all members of the MMAC family,
is designed to be highly fault tolerant.
MMAC-Plus 6
The MMAC-Plus 6, introduced in 1996, is a six module switching chassis. The
MMAC-Plus 6 offers many of the MMAC-Plus' advanced capabilities, including
distributed virtual routing, high performance switching and embedded management,
in a product designed to be used in the wiring closet or smaller distributed
data centers. The MMAC-Plus 6 enables deployment of dedicated bandwidth to the
desktop, with support for over 200 shared or switched Ethernet ports.
SmartSwitch 6000
The SmartSwitch 6000, based upon the Company's SmartSwitch architecture, is
intended primarily for the wiring closet environment. The SmartSwitch 6000,
which principally provides interconnectivity between Fast Ethernet, ATM or FDDI
backbone connections and local Ethernet connections, accepts up to five
SmartSwitch modules, including a thirteen port 10 Mbps Ethernet module, a two
port 100 Mbps Fast Ethernet module, a single port FDDI module and an ATM module.
By allowing virtually any combination of these modules, the SmartSwitch 6000
provides customers with substantial flexibility.
SmartSwitch 2200
The SmartSwitch 2200 is a standalone switch that provides twenty-four 10Mbps
switch ports and two 100 Mbps switch ports and has been designed specifically
for use at the workgroup or desktop level of the enterprise. The SmartSwitch
2200 offers both high-performance Ethernet switching and also high-speed
backbone connections through either Fast Ethernet, FDDI, or ATM.
MMAC
First introduced in 1988, the Multi Media Access Center (MMAC) provides
centralized management and connectivity for any standard LAN or WAN through a
variety of networking technologies. The MMAC supports both previously existing
networking technologies such as Ethernet, token ring, FDDI and Systems Network
Architecture (SNA) as well as emerging advancements including ATM and
Cabletron's own SecureFast Switching. With more than one hundred MMAC interface
modules available, customers can custom configure a network according to their
particular needs. As requirements change, the MMAC can be reconfigured to
provide a smooth migration to higher bandwidth technologies.
ATX
Cabletron's ATX (acquired from the ENBU of SMC) provides high-performance,
multiprotocol LAN solutions for high-capacity backbone or departmental networks.
The ATX permits high-bandwidth switching between Ethernet, token ring, FDDI and
100BASE-T LANs, with full connectivity to ATM.
Standalone Switches
Cabletron offers three families of standalone switches: the FN family of
departmental Ethernet network switches (acquired from the ENBU of SMC); the
ZX-250 family of ATM workgroup and interworkgroup switches (acquired from
ZeitNet); and the SFCS family of products for ATM datacenter applications
(through the Company's partnership with Fore Systems). The FN10 provides
switched 12 or 24 Ethernet ports with two optional Fast Ethernet ports, while
the FN100 is designed to support full 10 Mbps or 100Mbps connectivity on eight
ports. The SmartCell ZX-250 ATM switch family combines high-performance ATM
switching with advanced networking software in a compact platform. The SFCS
switches are designed to meet the needs of the LAN backbone networks. They offer
a wide variety of options for connectivity with LAN to ATM access devices,
inter-switch links, and entry to the WAN backbone.
Wide Area Networking Products
Cabletron's CyberSWITCH family of products includes both internally developed
remote access products, as well as Network Express' remote access product line.
The CyberSWITCH products provide connectivity from the small office/home office
(SOHO) environment, to the central site locations of corporations.
In its acquisition of Netlink Cabletron acquired products for transmitting data
over frame relay for WAN connectivity. For branch locations, the Netlink FRX
products provide seamless integration of all network traffic over frame relay to
provide prioritized service to mainframe-based applications. For the data center
of a company, the Netlink FRX product brings multiprotocol, T1 and frame relay
networking through a scaleable, parallel processing architecture.
Network Management Software
As enterprise networks grow in number, become more diverse and complex and
incorporate increasing bandwidth capacity, organizations require more
sophisticated network management systems. SPECTRUM, Cabletron's enterprise-wide
network management software, allows network administrators to monitor and
control all of the physical layer components making up a worldwide network.
SPECTRUM, which integrates a graphical user interface and a UNIX-based
client/server architecture, provides powerful network management tools in an
easy-to-use, scaleable and distributed environment. SPECTRUM incorporates IMT, a
form of artificial intelligence that provides SPECTRUM with the ability to model
every element of the network, including physical cables, network devices, and
applications. SPECTRUM is designed to enable network administrators to view
worldwide enterprise networks and diagnose, actively anticipate and correct
problems at many levels, including the individual node level. The Company has
developed SPECTRUM modules for a wide range of network products, including over
110 applications for third-party products. The Company plans to continue to
develop SPECTRUM system enhancements and modules to increase the number of
third-party network products for which SPECTRUM is applicable. OASys' TL1/CMIP
product, which is being integrated into SPECTRUM will position Cabletron to
manage gigabit-speed telco carrier networks. OASys products support the
management of SONET (Synchronous Optical Network) devices, which are becoming
prevalent among telco carries for high bandwidth communications. Cabletron also
offers SPECTRUM toolkits, Application Program Interfaces (APIs), and Platform
External Interfaces (PEIs) which are designed to enable the Company's customers
and partners to quickly and easily establish links with SPECTRUM.
The Company believes that SPECTRUM has helped to establish Cabletron as a leader
in the field of network management software and contributes to the market
acceptance of the Company's interconnectivity hardware. SPECTRUM is sold both to
purchasers of Cabletron's LAN and WAN products and on a stand-alone basis as a
network management platform.
Network Interconnection Equipment
The Company manufactures a line of dual-port and multiport stand-alone
repeaters, which are designed to connect up to eight Ethernet/IEEE 802.3
segments together or to an Ethernet backbone. The Company also produces Desktop
Network Interface ("DNI") cards, which enable the user to connect directly to
10BASE-T unshielded twisted pair, fiber optic or coaxial cabling via a built-in
transceiver on the card, and provide high-speed Ethernet and Token Ring data
connections for various personal computer platforms.
Service and Support
Cabletron is one of the few companies that, in addition to manufacturing a broad
line of network equipment, also offers a wide range of services for networks,
including service maintenance; consulting, design and configuration; project
planning; project management; training; testing, certification and
documentation; and performance analysis. To provide service to our multinational
customers, Cabletron has introduced World/One, a program that offers focused
account management and global support, as well as special tools and privileges,
to qualifying multinational corporations. Cabletron offers comprehensive
training programs to ensure that customers receive the maximum benefit from
their networks. Cabletron's service group forms an integral part of the
Company's marketing strategy, as it constitutes a key element of the complete
networking solution offered by the Company. The Company believes that the
combination of its broad line of networking products, its emphasis on service,
and its close acquaintance with customers' needs enable it to compete
effectively.
Other Products
The Company's other products include test equipment designed to analyze networks
and protocols and to verify proper installation and operation of the network,
cabling, transceivers, repeaters and other devices. The Company also sells
electronically-tested Ethernet coaxial cable, shielded twisted pair (IBM-type)
wire, unshielded twisted-pair wire and optical fiber cut to specific lengths.
Distribution and Marketing
Cabletron distributes its products through a substantial direct sales force that
is supplemented by several distributors and other resellers through the Synergy
Plus Program. The Company's direct sales are made by approximately 200-plus
sales representatives located in 33 countries around the world. This direct
sales force is supplemented by more than 2,500 people located at the Company's
headquarters and regional in-house technical services and sales support staff.
The Company believes that its ratio of in-house sales, marketing and technical
services and sales support staff to field sales force is among the highest in
the industry and contributes significantly to the effectiveness of the Company's
field sales force. The Company's international locations use various sales
strategies depending on the best channel of distribution for each country. Such
strategies include a direct sales presence, a direct sales force working with
local distributors or a combination of the two. The Synergy Plus Program is a
blueprint for resellers that outlines the building blocks of a business
relationship with Cabletron. The blueprint sets forth the principles of the
relationship, including level of information and training, business support and
services, pricing structure, and levels of organization. Synergy Plus offers a
comprehensive, well-defined business strategy, a clear pricing policy, and
effective support in sales and marketing.
The Company actively employs several methods to market its products, including
regular participation in trade shows as both a vendor and networker, frequent
advertisement in trade journals, regular attendance by corporate officers at
press briefings and trade seminars, submission of demonstration products to
selected customers for evaluation, and direct mailings and telemarketing
efforts.
Customers
Cabletron's end-user customers include commercial, industrial and manufacturing
companies; federal, state and local government agencies; brokerage and
investment banking firms; multinational and international companies; insurance
companies and other financial institutions; universities; and leading accounting
and law firms.
In fiscal 1997, no single customer represented more than 3% of Cabletron's net
sales, and the Company's top ten customers represented, in the aggregate,
approximately 13% of its net sales. Net sales to the federal government
accounted for approximately 12% of the Company's sales during the last fiscal
year. Most of the Company's contracts with the federal government are on a
fixed-price basis. The books and records of the Company are subject to audit by
the General Services Administration, the Department of Labor and other
government agencies.
Competition
The computer networking industry is intensely competitive and subject to
increasing consolidation. Cabletron expects competition to increase
significantly in the future from its primary competitors (Cisco Systems, Inc.,
Bay Networks, Inc. and 3Com Corporation) and other existing competitors and from
potential competitors that may enter Cabletron's existing or future markets.
Increased competition could result in price reductions, reduced margins and loss
of market share, any or all of which could materially and adversely affect
Cabletron's business and operating results and increase fluctuations in
operating results. Cabletron's margins may also decrease as a result of changes
in product mix, increased sales through lower margin sales channels, increased
component costs and higher research and development and sales, general and
administrative expenses which may be necessary in future periods to meet the
demand of greater competition. Competitors may develop new products with
features that could adversely affect the competitive position of Cabletron's
products. There can be no assurance that Cabletron will be successful in
selecting, developing, manufacturing and marketing new products or enhancing its
existing products or that Cabletron will be able to respond effectively to
technological changes, new standards or product announcements by competitors.
Cabletron's competitors include many large domestic and foreign companies, as
well as emerging companies attempting to sell products to specialized markets
such as those addressed by Cabletron.
For other factors related to the Company's competitive outlook, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Business Environment and Risks Factors."
Research and Development
The networking industry is characterized by rapid technological advances,
frequent product introductions and evolving industry standards. Cabletron
believes that its future success depends on its ability to continue to enhance
its existing products and to develop on a timely basis technologically advanced
new products that meet industry standards, perform successfully and achieve
market acceptance. Because of the nature of the Company's distribution system,
which places heavy reliance on direct sales to end-users, Cabletron believes it
has been able to react quickly to changes in customer demand and users' needs.
Additionally, the Company has representatives on many of the industry committees
drafting evolving standards. In recent years, Cabletron has substantially
increased its research and development expenses and its staff of software and
hardware engineers. There can, however, be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
that will perform satisfactorily and achieve market acceptance or in enhancing
its existing products. Nor can there be any assurance that the Company will be
able to respond effectively to technological changes or new product
announcements by others or that the Company will be successful in augmenting its
software capability. In addition, technological changes may render portions of
the Company's inventory obsolete.
During fiscals years 1997, 1996 and 1995, research and development expenses were
$161.7 million, $127.3 million and $89.1 million, respectively. The Company
believes that as networks grow larger and more complex, end-users' evaluation of
network technology will increasingly be based on the software component of
products, particularly in the area of network control management. As of February
28, 1997 approximately 60% of the personnel in the Company's research and
development department consisted of software development personnel. The
remaining personnel were involved in hardware development. The Company intends
to continue to increase both its research and development budget and engineering
staff.
Supply of Components
Cabletron's network interconnection products are manufactured principally in
printed circuit board format produced from Company designs together with
standard and semi-custom components. Certain components used in Cabletron's
products are presently available from only one source and others are available
only from a limited number of sources.
Many of the connectors, power supplies, and ASICs used in Cabletron's products
are sole sourced. These sole sourced products are either proprietary or patented
by the manufacturer, or designed to Cabletron's specifications. Cabletron
utilizes the design and manufacturing capabilities of many of the leading
companies in the semiconductor industry. The Company believes current agreements
with these suppliers will adequately meet its design and production requirements
for the foreseeable future.
The supply of critical integrated circuits, which are often proprietary and are
used in the Company's DNI cards and bridging products, remains steady. The
demand for critical DRAM, SRAM and Flash products has decreased but is monitored
carefully. Sources of supply are in place to meet manufacturing and engineering
requirements. Agreements with strategically sourced silicon vendors are in place
and continue to be updated for changes in design and manufacturing volumes.
The Company believes it is well positioned to meet its raw material
requirements. Most other parts are multiple sourced. The Company continues to
improve its materials support by utilizing world class suppliers and effectively
managing raw material flows. The Company believes its relationship with its
suppliers is good, but the inability to develop alternatives if and as required
in the future, or to obtain sufficient sole or limited source components as
required in the future, could result in delays or reductions in product
shipments, which could adversely affect the Company's operating results.
Manufacturing
Since the Company manufactures and assembles virtually all of its products, it
maintains direct control over production, quality and product availability. By
controlling its manufacturing process, Cabletron is able to maintain a strict
quality control program, respond to changes in market demand and offer its
customers modified or customized products.
Intellectual Property
The Company relies upon US and foreign patents, copyright and trademark laws,
and upon trade secret laws to establish its proprietary rights to its products.
The Company holds a number of US and foreign trademark registration and patent
rights. The Company currently has several US and foreign trademark registrations
and patent applications pending.
There can be no assurance that the steps taken by Cabletron in this regard will
be adequate to prevent misappropriation of its technology or that Cabletron's
competitors will not independently develop technologies that are substantially
equivalent or superior to Cabletron's technology. In addition, the laws of some
foreign countries do not protect Cabletron's proprietary rights to the same
extent as do the laws of the United States. No assurance can be given that any
patents issued to Cabletron will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages.
Backlog
The Company's backlog at February 28, 1997, was approximately $125.0 million,
compared with backlog at February 29, 1996, of approximately $129.5 million. In
general, orders included in backlog may be canceled or rescheduled by the
customer without significant penalty. Therefore, backlog as of any particular
date may not be indicative of the Company's actual sales for any succeeding
fiscal period. The Company does not anticipate any problems in fulfilling its
backlog within the upcoming fiscal year.
Inventory and Working Capital
The Company's policy is to maintain a sufficient inventory of products to permit
the shipping of most customer orders that require rapid delivery within 24 to 48
hours of receipt. This delivery policy requires higher levels of inventory than
those of other companies in the networking industry. Additional financial
information on inventories and working capital is contained in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" at
pages 12 to 16 of this document.
Employees
As of February 28, 1997, the Company had 6,607 full-time employees. The
Company's employees are not represented by a union or other collective
bargaining agent and the Company considers its relations with its employees to
be good.
Domestic and Foreign Financial Information
Financial information concerning foreign and domestic operations is contained in
Note 13 of "Notes to the Consolidated Financial Statements" included at page 30
of this document.
ITEM 2. Properties
The Company owns and occupies a number of buildings Rochester, New Hampshire
including a 206,000 square-foot manufacturing facility which also accommodates a
portion of corporate engineering buildings totaling 122,000 square-feet which
accommodate sales, marketing, administration and technical support personnel,
and a warehousing and distribution facility, totaling 221,000 square-feet. The
Company owns a 114,000 square-foot engineering building in Merrimack, New
Hampshire. The Company also occupies facilities in Newington and Nashua, New
Hampshire, Andover and Framingham, Massachusetts, Ann Arbor, Michigan and Santa
Clara, California.
The Company leases three manufacturing buildings totaling 87,000 square feet in
Ironton, Ohio, a 100,000 square-foot manufacturing facility in Limerick,
Ireland, and a 50,000 square-foot distribution center in Shannon, Ireland, to
support its European sales activities. The Company also leases a 62,000
square-foot research and development facility in Durham, New Hampshire and a
34,000 square-foot engineering office in Nashua, New Hampshire. Cabletron also
leases sales and technical support offices that range from 1,000 to 20,000
square feet at various locations throughout the world.
The Company believes that its facilities are adequate to support anticipated
sales growth over the next 12 to 18 months. Such growth, however, will require
additional production employees and capital equipment. The Company believes that
adequate supplies of labor are available in the areas where the Company's
manufacturing operations are located.
Financial information regarding leases and lease commitments are contained in
Note 8 of "Notes to the Consolidated Financial Statements" included at page 25
of this document.
ITEM 3. Legal Proceedings
The Company is involved in various legal proceedings and claims arising in the
ordinary course of business. Management believes that the disposition of these
matters would not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of the Company's security holders.
ITEM 4a. Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
S. Robert Levine 39 President, Chief Executive Officer
and Director
Craig R. Benson 42 Chairman, Chief Operating Officer,
Treasurer and Director
Christopher J. Oliver 36 Director of Engineering and
Manufacturing
David J. Kirkpatrick 45 Director of Finance and Chief
Financial Officer
S. Robert Levine founded the Company in March 1983 and has been President and
Chief Executive Officer and a director of the Company since that date.
Craig R. Benson was Director of Operations from November 1984 until April of
1989, when he became Chairman, Chief Operating Officer and Treasurer.
Christopher J. Oliver has been Director of Engineering and Manufacturing of the
Company since February 1985.
David J. Kirkpatrick has been Director of Finance and Chief Financial Officer of
the Company since August 1990. From 1986 to 1990 he was the Vice President of
Zenith Data Systems, a subsidiary of Zenith Electronics Corporation.
The Company's success is dependent in large part on S. Robert Levine, President
and Chief Executive Officer, Craig R. Benson, Chairman and Chief Operating
Officer, Christopher J. Oliver, Director of Engineering and Manufacturing, and
other key technical, sales and management personnel, the loss of one or more of
whom could adversely affect Cabletron's business.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICE HISTORY
The following table sets forth the high and low sale prices for the Company's
Common Stock as reported on the New York Stock Exchange (symbol - CS) during the
last three fiscal years. As of February 28, 1997, the Company had approximately
3,500 stockholders of record. The Company has paid no dividends on its Common
Stock and anticipates it will continue to reinvest earnings to finance future
growth.
Fiscal 1997 High Low
First quarter $43.56 $31.63
Second quarter 36.06 26.50
Third quarter 41.50 27.56
Fourth quarter $42.50 $28.00
Fiscal 1996 High Low
First quarter $27.88 $19.44
Second quarter 29.81 24.31
Third quarter 43.88 26.00
Fourth quarter $41.63 $32.94
Fiscal 1995 High Low
First quarter $26.50 $17.85
Second quarter 22.23 16.53
Third quarter 26.44 20.50
Fourth quarter $24.63 $18.69
Note: The above stock prices have been adjusted for the two-for-one stock
split November 27, 1996.
ITEM 6. SELECTED FINANCIAL
DATA
CABLETRON SYSTEMS, INC.
Income Statement Data: FISCAL YEAR ENDED
(in thousands, except per
share data)
February February February February February
28, 29, 28, 28, 28,
1997 1996 1995 1994 1993
--------- --------- -------- --------- --------
Net sales .............. $1,406,552 $1,100,349 $833,218 $602,486 $419,607
Cost of sales 575,107 448,699 340,424 246,154 170,924
Research and development 161,674 127,289 89,129 61,456 42,315
Selling, general and
administrative ......... 286,469 223,083 166,649 118,373 82,345
Nonrecurring items 63,024 94,343 -- -- --
--------- ---------- -------- -------- --------
Income from operations 320,278 206,935 237,016 176,503 124,023
Interest income 19,422 17,891 5,572 5,948 5,583
--------- ---------- -------- -------- --------
Income before taxes 339,700 224,826 242,588 182,451 129,606
Income taxes 117,575 80,341 86,014 64,130 46,405
--------- ---------- -------- -------- --------
Net income ............. $ 222,125 $ 144,485 $156,574 $118,321 $ 83,201
========== ========== ======== ======== ========
Net income per share ... $ 1.43 $ 0.95 $ 1.08 $ 0.82 $ 0.59
========== ========== ======== ======== ========
Weighted average shares
outstanding ............ 155,207 151,525 145,125 143,692 141,456
========== ========== ======== ======== ========
Included in fiscal 1997 results are $39.2 million (net of tax) of nonrecurring
items related to all acquisitions for the fiscal year. Excluding these one-time
charges, fiscal year 1997 net income would have been $261.4 million or $1.68 per
share, compared to fiscal 1996 net income of $205.4 million or $1.36 per share
before nonrecurring acquisition related expenses of $60.8 million (net of tax).
Balance Sheet Data: February February February February February
28, 29, 28, 28, 28,
(in thousands) 1997 1996 1995 1994 1993
--------- --------- -------- --------- --------
Working capital $676,336 $485,152 $381,758 $258,463 $234,114
Total assets 1,306,855 996,908 702,200 502,377 344,517
Stockholders' equity 1,081,498 809,886 593,942 425,719 289,279
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements relating to,
among other things, estimates of economic and industry conditions, sales trends,
expense levels and capital expenditures. Actual results may vary from those
contained in such forward-looking statements. See "Business Environment and Risk
Factors" below.
Results of Operations
This table sets forth Cabletron's net sales, cost of sales, expenses by
category, income from operations, interest income, income before income taxes
and net income expressed as percentages of net sales, for the fiscal years ended
February 28, 1997, February 29, 1996 and February 28, 1995:
1997
1996 1995
----
Net sales 100.0% 100.0% 100.0%
Cost of sales 40.9 40.8 40.9
------ ------ ------
Gross profit 59.1 59.2 59.1
Research and development 11.5 11.6 10.7
Selling, general and administrative 20.4 20.3 20.0
Nonrecurring items 4.5 8.6 --
------ ------ ------
Income from operations 22.7 18.7 28.4
Interest income 1.4 1.6 0.7
------ ------ ------
Income before income taxes 24.1 20.3 29.1
------ ------ ------
Net income 15.8% 13.1% 18.8%
====== ====== ======
Acquisitions
During fiscal 1997 the Company augmented its product line and expanded its
markets by acquiring: (1) ZeitNet Inc., a manufacturer of ATM products, in July
1996; (2) Network Express, Inc., a manufacturer of remote access equipment, in
August 1996; (3) Netlink, Inc., a manufacturer of frame relay products, in
December 1996; and (4) The OASys Group, Inc., a software developer, in February
1997. The nonrecurring charges related to these acquisitions were $39.2 million
(net of tax). Excluding these one time charges, fiscal 1997 net income would
have been $261.4 million or $1.68 per share.
During fiscal 1996 the Company acquired the Enterprise Networks Business Unit
from Standard Microsystems Corporation in January 1996. The acquisition added a
line of Fast Ethernet products, as well as switching products for token ring,
Ethernet and FDDI. For fiscal 1996 net income would have been $205.4 million or
$1.36 per share before acquisition related expenses of $60.8 million (net of
tax).
Revenues
Net sales in fiscal 1997 increased by 27.8%, to $1,406.6 million, from $1,100.3
million in fiscal 1996, a 32.1% increase from $833.2 million in fiscal 1995. The
increases in revenues in fiscal years 1997, 1996 and 1995 were primarily the
result of increases in sales of the MMAC-Plus and the MMAC and in fiscal 1997,
the SmartSwitch product lines.
Net sales outside the United States in fiscal 1997 were $408.2 million, or 29.0%
of net sales, compared to $329.2 million or 29.9% of net sales in fiscal 1996
and $242.9 million or 29.2% of net sales in fiscal 1995. In addition to its
direct international sales force, the Company sells its products through several
international distributors. Management anticipates that foreign shipments will
continue to increase in absolute dollars during the coming fiscal year.
The Company currently has 41 foreign subsidiaries throughout the world. The
impact of fluctuations in foreign exchange rates on operations was not
significant in fiscal 1997.
During fiscal 1997, growth in net sales was attributed to the SmartSwitch and
the MMAC-Plus product lines and other switching products, small stackable hubs
and SPECTRUM, the Company's network management software. During fiscal 1996,
MMAC-Plus, token ring management interface modules for the MMAC and the
MMAC-Plus, small stackable hubs, bridges and routers, and network management
(SPECTRUM) accounted for the largest sales growth within the network
interconnection products. During fiscal 1995, the MMAC, including token ring
modules, SPECTRUM and other network management software, accounted for the
largest sales growth within the network interconnection products.
Net sales of diagnostic test instruments, installation and maintenance services,
and other products were $188.1 million or 13.4% of net sales in fiscal 1997,
compared to $97.8 million or 8.9% of net sales in fiscal 1996 and $59.7 million
or 7.2% of net sales in fiscal 1995. Sales of diagnostic test instruments are on
a downward trend due to greater functionality being incorporated into more
intelligent devices. Management anticipates diagnostic test instruments to
decrease as a percentage of sales in the next fiscal year. Installation and
maintenance services are an integral part of Cabletron's customer development
and support activities. Management anticipates that sales of such services and
other products could increase in absolute sales dollars in the future year.
Costs, Expenses and Interest Income
Cost of sales was $575.1 million or 40.9% of net sales in fiscal 1997, compared
to $448.7 million or 40.8% of net sales in fiscal 1996 and $340.4 million or
40.9% of net sales in fiscal 1995. The Company was able to maintain its gross
margins in fiscal 1997, 1996 and 1995 by introducing and selling products with
improved functionality, further developing its service maintenance program and
improving purchasing and manufacturing efficiencies.
Research and development ("R&D") expenses in fiscal 1997 increased to $161.7
million or 11.5% of net sales, compared to $127.3 million or 11.6% of net sales
in fiscal 1996. In fiscal 1995, R&D expenses were $89.1 million or 10.7% of net
sales. The increased R&D spending in fiscal 1997 reflected increased hiring of
software and hardware engineers, the addition of engineers through acquisitions
and associated costs related to the development of new products. The increased
expenditures in R&D over the past three fiscal years in both absolute spending
and as a percentage of sales are indicative of the commitment the Company has
made to remain in the forefront of developing new and innovative products for
the networking industry, as exemplified by the Company's SmartSwitch family of
products.
Selling, general and administrative ("SG&A") expenses were $286.5 million or
20.4% of net sales in fiscal 1997, compared to $223.1 million or 20.3% of net
sales in fiscal 1996 and $166.6 million or 20.0% of net sales in fiscal 1995.
Increases in SG&A spending resulted from expanding the sales and support
workforce, establishing additional office locations domestically and
internationally, the addition of administrative personnel as a result of
acquisitions and increased administrative spending primarily due to increases in
volume.
For fiscal 1997 a $63.0 million nonrecurring charge was taken for the
acquisitions of ZeitNet, Network Express, Netlink and The OASys Group. In fiscal
1996 a $94.3 million nonrecurring charge was taken for the purchase of the ENBU
of SMC and Fivemere Limited (purchased by Network Express in fiscal 1996).
Interest income in fiscal 1997 was $19.4 million compared to $17.9 million in
fiscal 1996 and $5.6 million in fiscal 1995. The increase in interest income
reflects increased cash and marketable securities acquired from favorable
operating results.
Income
Income before income taxes was $339.7 million or 24.1% of net sales in fiscal
1997, compared to $224.8 million or 20.3% of net sales in fiscal 1996 and $242.6
million or 29.1% of net sales in fiscal 1995. In fiscal 1997 the Company's
nonrecurring charges related to acquisitions was $63.0 million as compared to
$94.3 million in fiscal 1996. As a consequence, the increase in income before
income taxes in fiscal 1997, was in part due to the $31.3 million decrease in
nonrecurring charges. The decrease in income before income taxes, in fiscal
1996, as a percentage of sales, was due primarily to expenses related to the
acquisition of the ENBU of SMC and Fivemere (Network Express). The tax rate for
fiscal 1997 was 34.6%, a 1.1% decrease from a tax rate of 35.7% for fiscal 1996,
which was due to tax loss carryforwards of the acquired aforementioned
acquisitions.
Net income was $222.1 million in fiscal 1997, compared to $144.5 million in
fiscal 1996 and $156.6 million in fiscal 1995. Excluding the above nonrecurring
charges for fiscal 1997 and 1996 the Company would have realized net income of
$261.4 million and $205.4 million in fiscal 1997 and 1996, respectively.
Liquidity and Capital Resources
Accounts receivable, net of allowance for doubtful accounts, were $219.9 million
at February 28, 1997 or 52 days of sales outstanding, compared to $153.3 million
or 43 days of sales outstanding in accounts receivable at February 29, 1996.
This increase in receivables reflects timing on shipments and collections. These
trends are expected to continue for the intermediate term.
The Company has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories were $197.4 million at February 28, 1997 or 109 days of
inventory, compared to $160.8 million or 112 days of inventory at the end of the
preceding fiscal year. The decrease of days in inventory was the result of
improving inventory control procedures.
Net cash provided by operating activities was $189.0 million in fiscal 1997,
compared to $79.2 million in fiscal 1996 and $150.3 million in fiscal 1995.
Capital expenditures for fiscal 1997 of $94.4 million included $58.9 million for
the engineering computer hardware and software and $3.3 million for leasehold
improvements. During fiscal 1996, $67.8 million of capital expenditures included
$9.8 million for building costs of which $3.4 million was for the purchase of an
engineering building, $21.4 million for engineering computer hardware and
software, $5.5 million for manufacturing and related equipment and $19.0 million
for expanding global sales operations. During fiscal 1995, capital expenditures
of $66.1 million included approximately $8.2 million for building costs related
to expanding manufacturing and distribution capacities and enlarging worldwide
sales operations, $12.5 million for manufacturing and manufacturing support
equipment and $15.0 million for engineering hardware and software, and $15.0
million in support of expanded global sales activities.
Cash, cash equivalents, marketable securities and long-term investments
increased during fiscal 1997 to $568.3 million, from $432.4 million in the prior
fiscal year. State and local municipal bonds of approximately $464.9 million,
maturing in three years or less, were being held by the Company at February 28,
1997.
At February 28, 1997, the Company did not have any short or long term borrowing
or any significant financial commitments outstanding, other than those required
in the normal course of business.
On March 7, 1997 the Company obtained a $250 million revolving credit facility
with Chase Manhattan Bank, First National Bank of Chicago and several other
lenders. The facility has a term of three years but the Company has the option
to extend the facility for an additional two years. As of May 27, 1997 the
Company had not drawn down any money under the facility.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and marketable securities will be adequate to
support Cabletron's working capital and capital expenditure requirements for
both short and long term needs.
Business Environment and Risk Factors
THE FOLLOWING ARE CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company may occasionally make forward-looking statements and estimates such
as forecasts and projections of the Company's future performance or statements
of management's plans and objectives. These forward-looking statements may be
contained in, among other things, SEC filings and press releases made by the
Company and in oral statements made by the officers of the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among others, the factors mentioned below.
Cabletron's primary competitors have recently acquired several other networking
companies possessing complementary technologies, and Cabletron expects that such
acquisitions will continue in the future. The acquisition of these technologies
may allow Cabletron's primary competitors to offer new products without the
lengthy time delays typically associated with internal product development. As a
consequence, such competitors may be able to more swiftly meet the growing
demand for so-called "end-to-end" enterprise-wide networking solutions. With
such increased competition, Cabletron anticipates an increase in the degree of
sales variability and a decreased ability to predict aggregate sales demand.
Certain of these acquisitions may also have the effect of limiting Cabletron's
access to commercially significant technologies. The greater resources of the
competitors engaged in these acquisitions may permit them to accelerate the
development and commercialization of new competitive products and the marketing
of existing competitive products to their larger installed bases. Cabletron
expects that competition will increase substantially as a result of these and
other industry consolidations.
In the past, Cabletron has relied upon a combination of internal product
development and partnerships with other networking vendors to broaden its
product line to meet this demand for "end-to-end" enterprise wide solutions. The
increasing competitiveness among vendors, together with acquisitions by
Cabletron and its competitors of smaller networking companies possessing
complementary technologies, may materially limit Cabletron's ability to continue
to partner with other vendors for new or complementary products. In the future,
Cabletron expects to meet the demand for a broad array of products primarily
through internal development and acquisitions. There can be no assurance that
Cabletron will be successful in developing or acquiring products that will meet
customers' needs.
Volatility of Stock Price. As is frequently the case with the stocks of high
technology companies, the market price of Cabletron's stock has been, and may
continue to be, volatile. Factors such as quarterly fluctuations in results of
operations, increased competition, the introduction of new products by Cabletron
or its competitors, expenses or other difficulties associated with assimilating
OASys, Netlink, Network Express, ZeitNet and other companies that may be
acquired in the future by Cabletron, changes in the mix of sales channels, the
timing of significant customer orders (the average dollar amount of customer
orders has increased in recent periods), and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of Cabletron. 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, on occasion, have appeared to be unrelated
to the operating performance of such companies. Past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. Any shortfall in revenue or earnings from the levels anticipated
by securities analysts could have an immediate and significant adverse effect on
the market price of Cabletron's stock in any given period.
Fluctuations in Operating Results. A variety of factors may cause
period-to-period fluctuations in the operating results of Cabletron. Such
factors include, but are not limited to, the rate of growth of the market for
the Company's products, product mix, competitive pricing pressures, costs of
materials, and timely availability, revenue and expenses related to new
products, upgrades of existing products, as well as delays in customer purchases
and variability in overall customer purchasing patterns. Further, because of the
possibility of customer changes in delivery schedules, cancellation of orders,
purchasing patterns or inventory levels, backlog as of any particular date is
not indicative of future revenue. In particular, Cabletron has been experiencing
longer sales cycles for its core products as a result of the increasing dollar
amount of customer orders and longer customer planning cycles. In addition, the
increase in the average dollar amount of customer orders has increased the
possibility that the operating results for a quarter could be materially
adversely affected if a number of large customer orders are either not received
or are delayed, due, for example, to cancellations, delays or deferrals by
customers. Cabletron plans to continue to invest in research and development,
sales and marketing and technical support staff, and its earnings could be
adversely affected if it is unable to match spending to revenue levels.
Moreover, with industry standards established and new standards emerging, more
companies have developed standards-based products and are seeking to compete on
the basis of price. If Cabletron does not respond with lower production costs,
pricing pressures could adversely affect future earnings. Accordingly, past
results may not be indicative of future results. There can be no assurance that
the announcement or introduction of new products by the Company or its
competitors, or a change in industry standards, will not cause customers to
defer or cancel purchases of the Company's existing products, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. The market of the Company's products is evolving. The
rate of growth of the market and the resulting demand for the Company's recently
introduced products is subject to a high level of uncertainty. The rate of
growth in the market in recent periods has exceeded the long term historical
rate of growth in similar markets. If the market fails to grow or grows more
slowly than anticipated, the Company's business, financial condition or results
of operations would be materially adversely affected.
Technological Changes. The market for networking products is subject to rapid
technological change, evolving industry standards and frequent new product
introductions, and therefore requires a high level of expenditures for research
and development. Cabletron may be required to incur significant expenditures to
develop such new integrated product offerings. There can be no assurance that
customer demand for products integrating routing, switching, hub, network
management and remote access technologies will grow at the rate expected by
Cabletron, that Cabletron will be successful in developing, manufacturing and
marketing new products or product enhancements that respond to these customer
demands or to evolving industry standards and technological change, that
Cabletron will not experience difficulties that could delay or prevent the
successful development, introduction, manufacture and marketing of these
products (especially in light of the increasing design and manufacturing
complexities associated with the integration of technologies), or that its new
product and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Cabletron's business, operating
results and financial condition may be materially and adversely affected if
Cabletron encounters delays in developing or introducing new products or product
enhancements or if such product enhancements do not gain market acceptance. In
order to maintain a competitive position, Cabletron must also continue to
enhance its existing products and there is no assurance that it will be able to
do so. In addition, the demand for traditional "shared media" hubs such as the
Company's basic MMAC product have been experiencing declines over the last few
years, and there can be no assurance that such decline will not accelerate. A
portion of future revenues will come from new products and services. Cabletron
cannot determine the ultimate effect that new products will have on its
revenues, earnings or stock price.
Acquisition Strategy. Cabletron has addressed the need to develop new products,
in part, through the acquisition of other companies. Acquisitions involve
numerous risks including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which Cabletron has no or limited direct prior experience and where
competitors in such markets have stronger market positions, and the potential
loss of key employees of the acquired company. Achieving the anticipated
benefits of an acquisition will depend in part upon whether the integration of
the companies' businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The successful combination
of companies in the high technology industry may be more difficult to accomplish
than in other industries. The combination of such companies will require, among
other things, integration of the companies' respective product offerings and
coordination of their sales and marketing and research and development efforts.
There can be no assurance that such integration will be accomplished smoothly or
successfully. The difficulties of such integration may be increased by the
necessity of coordinating geographically separated organizations. The
integration of certain operations following an acquisition will require the
dedication of management resources that may temporarily distract attention from
the day-to-day business of Cabletron. The inability of management to
successfully integrate the operations of such companies could have a material
adverse effect on the business and results of operations of Cabletron. In
addition, as commonly occurs with mergers of technology companies, during the
pre-merger and integration phases, aggressive competitors may undertake formal
initiatives to attract customers and to recruit key employees through various
incentives.
Dependence on Key Personnel and Management of Change. Cabletron's success
depends upon the continued contributions of Craig R. Benson, Chairman and Chief
Operating Officer, S. Robert Levine, President and Chief Executive Officer,
Christopher J. Oliver, Director of Engineering and Manufacturing, and certain
other key personnel, many of whom would be difficult to replace. If these key
personnel were to leave Cabletron, operating results could be adversely
affected. The success of Cabletron will depend on the ability of Cabletron to
attract and retain skilled employees, and on the ability of its officers and key
employees to manage change successfully.
Product Protection and Intellectual Property. Cabletron's success depends in
part on its proprietary technology. Cabletron attempts to protect its
proprietary technology through patents, copyrights, trademarks, trade secrets
and license agreements. Cabletron believes, however, that its success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. There can be no assurance that the steps taken by
Cabletron in this regard will be adequate to prevent misappropriation of its
technology or that Cabletron's competitors will not independently develop
technologies that are substantially equivalent or superior to Cabletron's
technology. In addition, the laws of some foreign countries do not protect
Cabletron's proprietary rights to the same extent as do the laws of the United
States. No assurance can be given that any patents issued to Cabletron will not
be challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages.
Although Cabletron does not believe that its products infringe the proprietary
rights of any third parties, third parties have asserted infringement and other
claims against Cabletron from time to time, and there can be no assurance that
third parties will not assert such claims against Cabletron in the future or
that such claims will not be successful. Patents have been granted recently on
fundamental technologies incorporated in Cabletron's products. Since patent
applications in the United States are not publicly disclosed until the patent
issues, applications may have been filed by third parties which, if issued as
patents, could relate to Cabletron's products. In addition, participants in
Cabletron's industry also rely upon trade secret law. Cabletron could incur
substantial costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights which could have a material
adverse effect on Cabletron's business, financial condition and results of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief
which could effectively block Cabletron's ability to license its products in the
United States or abroad. Such a judgment could have a material adverse effect on
Cabletron's business, financial condition and results of operations.
Dependence on Suppliers. Cabletron's products include certain components,
including application specific integrated circuits ("ASICs"), that are currently
available from single or limited sources, some of which require long order lead
times. In addition, certain of Cabletron's products and subassemblies are
manufactured by single source third parties. With the increasing technological
sophistication of new products and the associated design and manufacturing
complexities, Cabletron anticipates that it may need to rely on additional
single source or limited suppliers for components or manufacture of products and
subassemblies. Any reduction in supply, interruption or extended delay in timely
supply, variances in actual needs from forecasts for long order lead time
components, or change in costs of components could affect Cabletron's ability to
deliver its products in a timely and cost-effective manner and may adversely
impact Cabletron's operating results and supplier relationships.
New Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Company will continue to measure its compensation cost in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Therefore, the adoption of SFAS 123 was not material to the
Company's financial condition or results of operations; however, the proforma
impact on earnings per share has been disclosed in the Notes to Consolidated
Financial Statements as required by SFAS 123.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 123"). 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 128, the Company will be required to present both basic net
income per share and diluted net income per share. The impact on diluted net
income per share is not expected to be material. The Company plans to adopt SFAS
128 in its fiscal quarter ending February 28, 1998 and at that time all
historical net income per share data will be restated to conform to the
provisions of SFAS No. 128.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 29, 1996
(in
thousands)
Assets 1997 1996
---- ----
Current
assets:
Cash and cash equivalents $214,828 $106,102
Short-term investments(note 4) 165,396 172,896
Accounts receivable, net of allowance
for doubtful accounts ($15,476 and
$6,655 in 1997 and 1996,
respectively) 219,896 153,256
Inventories (note 5) 197,438 160,806
Deferred income taxes (note 9) 57,107 38,315
Prepaid expenses and
other assets 35,925 31,711
--------- --------
Total current assets 890,590 663,086
--------- --------
Long-term investments (note 4) 188,081 153,424
Long-term deferred income taxes (note 9) 29,627 23,473
Property, plant and equipment, net (note 6) 198,557 153,904
Other assets --- 3,021
========== ========
Total assets $1,306,855 $996,908
========== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 68,604 $ 38,826
Accrued expenses (note 7) 135,208 120,572
Income taxes payable 10,442 18,536
---------- --------
Total current liabilities 214,254 177,934
Long-term deferred income taxes (note 9) 11,103 9,088
---------- ---------
Total liabilities 225,357 187,022
---------- ---------
Commitments and contingencies (notes 8 and 10)
Stockholders' equity (notes 11 and 12):
Preferred stock, $1.00 par value.
Authorized
2,000 shares; none issued --- ---
Common stock, $0.01 par value.
Authorized
240,000 shares; issued and outstanding
156,305 and 152,892 shares in 1997
and 1996, respectively 1,563 776
Additional paid-in capital 266,829 218,792
Retained earnings 812,885 591,518
---------- --------
1,081,277 811,086
Cumulative translation adjustment 221 (1,049)
Notes receivable, stockholders --- (151)
---------- --------
Total stockholders' equity 1,081,498 809,886
---------- --------
Total liabilities and stockholders'
equity $1,306,855 $996,908
========== ========
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended February 28, 1997, February 29, 1996 and February 28, 1995 (in
thousands, except per share amounts)
1997 1996 1995
---- ---- ----
Net sales (note 13) $1,406,552 $1,100,349 $833,218
Cost of sales 575,107 448,699 340,424
---------- ---------- --------
Gross 831,445 651,650 492,794
profit
Operating expenses:
Research and development 161,674 127,289 89,129
Selling, general and
administrative 286,469 223,083 166,649
Nonrecurring items (note 3) 63,024 94,343 ---
---------- ---------- --------
Income from operations 320,278 206,935 237,016
Interest income 19,422 17,891 5,572
---------- ---------- --------
Income before income taxes 339,700 224,826 242,588
Income taxes (note 9) 117,575 80,341 86,014
---------- ---------- --------
Net income $ 222,125 $ 144,485 $156,574
========== ========== ========
Net income per common share $ 1.43 $ 0.95 $ 1.08
========== ========== ========
Weighted average number of shares
outstanding 155,207 151,525 145,125
========== ========== ========
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended February 28, 1997,
February 29, 1996 and February 28, 1995
- - ------------------------------------------------------------------------------------------------------------------------------
(in thousands) ADDITIONAL CUMULATIVE NOTES TOTAL
COMMON PAID-IN RETAINED TRANSLATION RECEIVABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBURARY 28, 1994 ......... $309 $139,515 $290,888 ($3,171) ($335) $427,206
- - ------------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
stockholders .................... -- -- -- -- 131 131
Canceled 38 shares upon employee
terminations, net ............... -- (30) -- -- 30 --
Issuance of common stock, net ........ 19 8,584 -- -- (195) 8,408
Exercise of options for 741
shares of common stock .......... 3 4,884 -- -- -- 4,887
Tax benefit for options exercised .... -- 5,712 -- -- -- 5,712
Issuance of 136 shares under employee
stock purchase plan ............. -- 2,287 -- -- -- 2,287
Stock dividend from stock split ...... 429 (11) (429) -- -- (11)
Stock repurchased and retired ........ (3) (13,056) -- -- -- (13,059)
Effect of foreign currency translation -- -- -- 1,807 -- 1,807
Net income ........................... -- -- 156,574 -- -- 156,574
- - ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1995 ......... 757 147,885 447,033 (1,364) (369) 593,942
- - ------------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
stockholders .................... -- -- -- -- 218 218
Issuance of common stock, net ........ 9 41,765 -- -- -- 41,774
Issuance of common stock for
Fivemere acquisition ............ 1 2,564 -- -- -- 2,565
Exercise of options for 1,453
shares of common stock .......... 8 17,214 -- -- -- 17,222
Tax benefit for options exercised .... -- 7,215 -- -- -- 7,215
Issuance of 154 shares under employee
stock purchase plan ............. 1 3,322 -- -- -- 3,323
Stock repurchased and retired ........ -- (1,173) -- -- -- (1,173)
Effect of foreign currency translation -- -- -- 315 -- 315
Net income ........................... -- -- 144,485 -- -- 144,485
- - ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996 ......... 776 218,792 591,518 (1,049) (151) 809,886
- - ------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net ........ 15 8,562 -- -- -- 8,577
Exercise of options for 1,345
shares of common stock .......... 10 18,012 -- -- -- 18,022
Repayment of notes receivable ........ -- -- -- -- 151 151
Issuance of common stock for The
OASys Group acquisition ......... 2 6,955 -- -- -- 6,957
Tax benefit for options exercised .... -- 8,302 -- -- -- 8,302
Stock split .......................... 758 -- (758) -- -- --
Issuance of 197 shares under employee
stock purchase plan ............. 2 6,206 -- -- -- 6,208
Effect of foreign currency translation -- -- -- 1,270 -- 1,270
Net income ........................... -- -- 222,125 -- -- 222,125
- - ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997 ......... $1,563 $266,829 $812,885 $221 -- $1,081,498
- - ------------------------------------------------------------------------------------------------------------------------------
On November 27, 1996, the Company's common stock split 2-for-1 and was
distributed as a stock dividend. All share amounts have been adjusted
accordingly.
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28, 1997, February 29, 1996 and
February 28, 1995
(in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $222,125 $144,485 $156,574
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation and amortization 49,704 32,739 31,144
Provision for losses on accounts
receivable 9,140 435 187
Loss on disposal of property, plant and
equipment 87 93 174
Deferred income taxes (22,933) (38,766) (4,434)
Changes in assets and liabilities:
Accounts receivable (74,925) (55,795) (29,623)
Inventories (37,669) (55,597) (23,168)
Prepaid expenses and other assets (1,709) (18,947) (3,427)
Accounts payable and accrued expenses 52,812 66,882 12,400
Income taxes payable (7,653) 3,705 10,476
-------- -------- --------
Net cash provided by operating
activities 188,979 79,234 150,303
-------- -------- ---------
Cash flows from investing activities:
Capital expenditures (94,368) (67,760) (66,116)
Purchase of available-for-sale securities (203,667) (124,968) (71,598)
Purchase of held-to-maturity securities (247,855) (205,852) (282,712)
Sales/maturities of marketable securities 424,308 236,393 323,682
-------- -------- --------
Net cash used in investing
activities (121,582) (162,187) (96,744)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of short-term
notes 8,577 15,607 ---
Principal payments on debt --- (438) (377)
Repayment of notes receivable from
stockholders --- 217 131
Repurchase of common stock --- (1,173) (13,070)
Tax benefit of options exercised 8,302 7,215 5,712
Proceeds from sale of common stock --- 28,548 8,258
Common stock issued to employee stock
purchase plan 6,208 3,323 2,287
Proceeds from exercise of stock options 18,022 17,164 4,887
-------- -------- --------
Net cash provided by financing
activities 41,109 70,463 7,828
-------- -------- --------
Effect of exchange rate changes on cash 220 159 712
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents 108,726 (12,331) 62,099
Cash and cash equivalents, beginning of
year 106,102 118,433 56,334
-------- -------- --------
Cash and cash equivalents, end of year $214,828 $106,102 $118,433
======== ======== ========
Cash paid during year for:
Income taxes $132,291 $142,733 $ 68,420
======== ======== ========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note (1) Business Operations
The Company develops, manufactures, markets, designs, installs and supports a
broad range of standards-based local and wide area network connectivity hardware
and software products.
Note (2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Cabletron Systems,
Inc. (the "Company") and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(b) Investments
Held-to-maturity securities are those investments which the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for amortization of premiums and discounts,
which approximates market value. Available-for-sale securities are also recorded
at amortized cost, adjusted for amortization of premiums and discounts. Due to
the nature of the Company's investments and the resulting low volatility, the
difference between fair value and amortized cost is not material.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are determined at
standard which approximates the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the lives of
the related assets or the term of the lease. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If it is determined that
the carrying amount of an asset cannot be fully recovered, an impairment loss is
recognized.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company has reinvested earnings of its foreign subsidiaries and, therefore,
has not provided income taxes which could result from the remittance of such
earnings. The unremitted earnings at February 28, 1997 amounted to approximately
$125.7 million. Furthermore, any taxes paid to foreign governments on those
earnings may be used, in whole or in part, as credits against the US tax on any
dividends distributed from such earnings. It is not practicable to estimate the
amount of unrecognized deferred US taxes on these undistributed earnings.
(f) Net Income Per Share
Net income per share of common stock is based on the weighted average number of
shares outstanding during the period. The effect of outstanding stock options is
excluded from the computation because the dilutive effect is not material.
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 then is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic net
income per share and diluted net income per share. The impact on diluted net
income per share is not expected to be material.
The Company plans to adopt SFAS 128 in its fiscal quarter ending February 28,
1998 and at that time all historical net income per share data will be restated
to conform to the provisions of SFAS No. 128.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(g) Foreign Currency Translation and Transaction Gains and Losses
Assets and liabilities of the Company's foreign operations are translated into
US dollars at the exchange rate in effect at the balance sheet date and revenue
and expenses are translated at average rates in effect during the period. The
resultant translation adjustment is reflected as a separate component of
stockholders' equity on the consolidated balance sheets. Transaction gains
(losses) are reflected in the consolidated statements of income and were not
material.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term investments
with original maturities of three months or less.
(i) Revenue Recognition
Sales are recognized upon shipment of products and software. In the case of
design, consulting, installation, support services and evaluations, revenues are
recognized upon completion and acceptance of such products and services.
Revenues from service contracts are recognized ratably over the period the
services are performed. Warranty costs and sales returns and allowances are
accrued at the time of shipment.
(j) Derivatives
The Company uses derivative financial instruments, principally forward exchange
contracts and options in its management of foreign currency exposure. These
financial instruments are designed to minimize exposure and reduce risk from
exchange rate fluctuations in the regular course of the Company's international
business operations. Market value gains and losses are included in income as
incurred and effectively offset gains and losses on foreign currency assets or
liabilities that are hedged.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(l) New Accounting Pronouncement
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the proforma impact on earnings per
share has been disclosed in the Notes to Consolidated Financial Statements as
required by SFAS 123.
Note (3) Business Combinations
For acquisitions accounted for under the pooling-of-interests method, all
financial data of Cabletron has been restated to include the historical
financial data of these acquired companies. For acquisitions accounted for as
purchases, Cabletron's consolidated results of operations include the operating
results of the acquired companies from their acquisition dates. Acquired assets
and liabilities were recorded at their estimated fair market values at the
acquisition date and the aggregate purchase price plus costs directly
attributable to the completion of acquisitions have been allocated to the assets
and liabilities acquired.
On July 26, 1996, the Company acquired ZeitNet Inc., a privately held
manufacturer of ATM products. Under the terms of the agreement, Cabletron issued
approximately 3.3 million shares of common stock for all of the outstanding
shares (and all shares issuable upon exercise of options) of ZeitNet in a
transaction accounted for as a pooling of interests. In connection with the
acquisition, the Company recorded nonrecurring charges of $23.0 million.
On August 1, 1996, the Company acquired Network Express, Inc., a publicly held
manufacturer of ISDN LAN switched access solutions. Under the terms of the
agreement, Cabletron issued approximately 2.9 million shares of common stock for
all of the outstanding shares (and all shares issuable upon exercise of options)
of Network Express in a transaction accounted for as a pooling of interests. In
connection with the acquisition, the Company recorded nonrecurring charges of
$20.0 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (3) Business Combinations (continued)
On December 11, 1996, the Company acquired Netlink Inc., a privately held
manufacturer of frame relay products. Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of the
outstanding shares (and all shares issuable upon exercise of options) of Netlink
in a transaction accounted for as a pooling of interests. In connection with the
acquisition, the Company recorded nonrecurring charges of $13.0 million.
Revenues, operating income (loss), and net income (loss) of the four entities
during the periods preceding the acquisitions are presented in the following
table.
(in thousands)
Unaudited
------------------------
Nine Three
months months Fiscal Fiscal
ended ended 1996 1995
11/30/96 5/31/96
Revenues:
Cabletron Systems, Inc. $1,025,997 $664,439 $1,069,715 $810,684
ZeitNet, Inc. --- 2,140 4,395 2,879
Network Express, Inc --- 3,177 18,997 11,113
Netlink, Inc. 7,935 --- 7,242 8,542
---------- -------- ---------- --------
$1,033,932 $669,756 $1,100,349 $833,218
========== ======== ========== ========
Operating income (loss):
Cabletron Systems, Inc. $234,842 $135,813 $227,562 $238,363
ZeitNet, Inc. --- (2,965) (8,890) 171
Network Express, Inc. --- (2,293) (9,415) 419
Netlink, Inc. (2,856) --- (2,322) (1,937)
--------- --------- --------- --------
$231,986 $130,555 $206,935 $237,016
========= ========= ========= =========
Net income (loss):
Cabletron Systems, Inc. $161,789 $94,047 $164,418 $161,974
ZeitNet, Inc. --- (2,972) (8,938) 155
Network Express, Inc. --- (2,154) (8,475) 466
Netlink, Inc. (2,887) --- (2,520) (6,021)
-------- ------- --------- --------
$158,902 $88,921 $144,485 $156,574
======== ======= ======== ========
Note that the fiscal 1997 interim financial information is presented for the
interim periods nearest the dates that the combinations were consummated.
On February 7, 1997, the Company acquired The OASys Group, Inc., a privately
held developer of software targeted at managing telecommunications devices and
connections used in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
(and all shares issuable upon exercise of options) of OASys in a transaction
accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the date of
acquisition. The total purchase price of $7.0 million included $6.7 million for
in-process research and development and $0.3 million for nonrecurring charges
which included adjustments to conform with Cabletron's accounting policies.
The Company's consolidated results of operations include the operating results
of the acquired business from its acquisitions date. Proforma financial
information is not presented as it is not material to the consolidated financial
statements.
On January 12, 1996, the Company acquired the Enterprise Networks Business Unit
from Standard Microsystems Corporation. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and liabilities were recorded at
their estimated fair market values at the date of the acquisition. The total
purchase price of $85.7 million included $67.8 million for in-process research
and development and $17.9 million for nonrecurring charges which included
adjustments to conform the ENBU accounting policies with the Company's
accounting policies. The Company's consolidated results of operations include
the operating results of the acquired business from its acquisition date.
Proforma financial information is not presented as it is not material to the
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (4) Investments
Investments are summarized as follows at February 28, 1997 and February 29,
1996:
1997 1996
---------------------------- -----------------------------
(in thousands) Long Long
Current Term Total Current Term Total
-------- -------- -------- --------- -------- --------
Held-to-maturity $84,261 $115,209 $199,470 $130,079 $115,500 $245,579
Available-for-sale 81,135 72,872 154,007 42,817 37,924 80,741
======== ======== ======== ========= ======== ========
Total $165,396 $188,081 $353,477 $172,896 $153,424 $326,320
======== ======== ======== ========= ======== ========
The contractual maturities for the above securities are less than three years.
Note (5) Inventories
Inventories consist of the following at February 28, 1997 and February 29,
1996:
(in thousands) 1997 1996
---- ----
Raw materials $64,685 $52,642
Work-in-process 57,070 39,317
Finished goods 75,683 68,847
-------- --------
Total $197,438 $160,806
======== ========
Note (6) Property, Plant and Equipment
Property, plant and equipment consist of the following at February 28, 1997 and
February 29, 1996:
(in thousands) 1997 1996 Estimated useful
---- ---- lives
---------------
Land and land improvements $7,751 $1,760 ---
Buildings and building
improvements 38,015 37,058 30-40 years
Construction in progress 305 --- ---
Equipment 284,621 194,366 3-5 years
Furniture and fixtures 11,711 14,004 5-7 years
Leasehold improvements 9,448 6,445 3-5 years
Motor vehicles 4,690 3,651 3-5 years
-------- --------
350,541 257,284
Less accumulated
depreciation and amortization 151,984 103,380
-------- --------
$198,557 $153,904
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (7) Accrued Expenses
Accrued expenses consist of the following at February 28, 1997 and February 29,
1996:
(in thousands) 1997 1996
---- ----
thousands)
Salaries and benefits $ 15,527 $ 18,625
Deferred revenue 50,041 38,325
Warranty 19,315 18,719
Other 50,325 44,903
-------- --------
Total $135,208 $120,572
======== ========
Note (8) Leases
The Company leases manufacturing and office facilities under noncancelable
operating leases expiring through the year 2020. The leases provide for
increases based on the consumer price index and increases in real estate taxes.
Rent expense associated with operating leases was approximately $12,179,000,
$10,265,000 and $7,642,000 for the years ended February 28, 1997, February 29,
1996 and February 28, 1995, respectively.
Total future minimum lease payments under all noncancelable operating leases as
of February 28, 1997, are as follows:
(in Year
thousands)
1998 $8,108
1999 5,163
2000 3,538
2001 2,720
2002 1,853
Thereafter 7,825
-------
$29,207
=======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (9) Income Taxes
Income before income taxes is summarized as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Total US domestic income $313,017 $173,515 $202,620
Total foreign subsidiaries income 26,683 51,311 39,968
-------- -------- --------
Total income before income taxes $339,700 $224,826 $242,588
======== ======== ========
Currently payable:
Federal $117,546 $92,109 $63,944
State 21,962 20,807 19,286
Foreign 1,000 11,519 7,218
Deferred tax benefit (22,933) (44,094) (4,434)
-------- -------- -------
Total tax expense $117,575 $80,341 $86,014
======== ======== =======
The following is a reconciliation of the effective tax rates to the statutory
federal tax rate:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax (net of federal
tax benefit) 3.6 3.8 4.7
Exempt income of foreign sales
corporation, net of tax (0.7) (1.1) (0.7)
Research and experimentation credit (0.7) --- (1.1)
Foreign operations (2.7) (1.6) (2.7)
Other 0.1 (0.4) 0.3
---- ----- ----
34.6% 35.7% 35.5%
===== ===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at February 28, 1997 and
February 29, 1996 are presented below:
(in thousands) 1997 1996
---- ----
Deferred tax assets:
Accounts receivable $ 4,996 $ 2,019
Inventories 33,859 27,993
Other reserves and accruals 24,079 5,454
Acquired research and
development 29,262 26,322
Domestic net operating loss
carryforwards 27,213 ---
Foreign net operating loss
carryforwards 5,636 3,268
------- -------
Total gross deferred tax assets 125,045 65,056
Less valuation allowance (38,381) (3,268)
------- ------
Net deferred tax assets 86,664 61,788
------- ------
Deferred tax liabilities:
Property, plant and equipment (11,033) (9,088)
------- -------
Total gross deferred
liabilities (11,033) (9,088)
------- -------
Net deferred tax assets $75,631 $52,700
======= =======
At February 28, 1997, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $27,213,000 expiring in fiscal 1998 through
fiscal 2010. The NOL carryforwards were acquired from acquisitions of ZeitNet
Inc., Network Express, Inc., Netlink, Inc. and The OASys Group, Inc.
The net change in the total valuation allowance for the year ended February 28,
1997 was an increase of $4,619,000. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences, net of the existing valuation allowance at
February 28, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (10) Financial Instruments and Concentration of Credit Risk
The Company uses derivative financial instruments, principally forward exchange
contracts and options, in its management of foreign currency exposures arising
from its international operations. These contracts primarily require the Company
to purchase or sell certain foreign currencies either with or for US dollars at
contractual rates. The Company's foreign currency hedging activities are used to
minimize adverse foreign exchange movements on the eventual dollar net cash
inflows of its foreign denominated net assets. The Company does not hold or
issue derivative financial instruments for trading purposes.
At February 28, 1997 and February 29, 1996, the Company had forward exchange
contracts and purchased option contracts, all having maturities less than two
years, in the contractual amount of $69 million (forward contracts $31 million
and option contracts $38 million) and $90 million (forward contracts $49 million
and option contracts $41 million), respectively.
Realized and unrealized foreign exchange gains and losses are recognized in
operating income and offset foreign exchange gains and losses on the underlying
exposures. The Company's derivative financial instruments are revalued at the
balance sheet date and the carrying amount approximates the fair value of the
instruments.
Several major international financial institutions are counterparties to the
Company's financial instruments. It is Company practice to monitor the financial
standing of the counterparties and limit the amount of exposure with any one
institution. The Company may be exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but believes that the
risk of such loss is remote and that it would not be material to its financial
position and results of operations.
The carrying amounts of cash, cash equivalents, accounts receivable and accounts
payable approximate fair value because of the short maturity of these financial
instruments.
For the year ended February 28, 1997, no single customer represented more than
3% of net sales. However, sales to the federal government accounted for
approximately 12% of net sales for the year ended February 28, 1997.
With respect to trade receivables, concentration of credit risk is limited, due
to the diverse areas covered by the Company's operations. Any probable bad debt
loss has been provided for in the allowance for doubtful accounts. The carrying
amounts for cash, short-term and long-term investments, receivables, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments.
Note (11) Common Stock
On November 27, 1996, the Company's common stock split 2-for-1 and was
distributed as a stock dividend. On September 12, 1994, the Company's common
stock split 2.5-for-1 and was distributed as a stock dividend. All share and per
share amounts have been adjusted accordingly.
Note (12) Stock Plans
(a) Equity Incentive and Directors Plans
The Company has an Equity Incentive Plan which provides for the availability of
25,000,000 shares of common stock for the granting of a variety of incentive
awards to eligible employees. As of February 28, 1997, the Company had issued
19,953,680 stock options under the Equity Incentive Plan, which were granted at
fair market value at the date of grant, vest over a three to five year period
and expire within six to ten years from the date of grant.
The Company has a Directors Option Plan which provides for the availability of
1,250,000 shares of common stock for purchase by nonemployee directors of the
Company. The Directors Option Plan provides for issuance of options at their
fair market value on the date of grant. The options vest over a period of three
years and expire six years from the date of grant. A total of 381,000 stock
options are outstanding under the Directors Option Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (12) Stock Plans (continued)
A summary of option transactions under the two plans follows:
Weighted
average
exercise
price of
shares under
Shares plan
--------- ------------
Options outstanding at February 28, 1994 6,302,028 $12.29
--------- ------------
Granted and assumed 2,736,182 21.18
Exercised (740,980) 6.60
Cancelled (440,004) 15.96
--------- ------------
Options outstanding at February 28, 1995 7,857,226 15.72
--------- ------------
Granted and assumed 3,898,112 28.50
Exercised (1,453,402) 11.13
Cancelled (465,410) 24.28
--------- ------------
Options outstanding at February 29, 1996 9,836,526 20.02
--------- ------------
Granted and assumed 6,542,663 29.67
Exercised (1,345,415) 12.50
Cancelled (1,497,219) 24.28
--------- ------------
Options outstanding at February 28, 1997 13,536,555 $24.96
========== ============
Options exercisable at February 28, 1997 3,356,372 $14.88
========== ============
The following table summarizes information concerning currently outstanding and
exercisable options as of February 28, 1997:
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual outstanding Options exercise
exercise outstanding life option exercisable price
prices (years) price
- - -------------- ----------- ----------- ---------- ----------- --------
$0.053 - 15.00 2,104,815 5.7 $ 5.38 1,681,115 $5.14
$15.01 - 30.00 4,407,408 7.4 24.00 1,268,117 22.67
$30.01 - 45.00 7,004,068 8.9 31.38 402,075 30.60
$45.01 - 65.00 20,264 8.0 46.83 5,065 46.83
---------- ---------
13,536,555 3,356,372
========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (12) Stock Plans (continued)
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option and employee stock purchase plans, accordingly, no compensation
expense has been recognized in the consolidated financial statements for such
plans. The following assumptions were used in the calculation of these values
for fiscal years 1996 and 1997, respectively: volatility of 63.97%, risk free
interest rate of 6.18% and expected life of 3.7 years. Had compensation cost for
the Company's stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, "Accounting for Stock-based Compensation," the
Company's net income would have been reduced to the pro forma amounts indicated
below:
(in thousands) 1997 1996
---- ----
Net income As reported $222,125 $144,485
Pro forma 207,109 121,302
The effect of applying SFAS 123 as shown in the above proforma disclosure is not
representative of the proforma effect on net income in future years because it
does not take into consideration proforma compensation expense related to grants
made prior to fiscal 1996.
(b) Employee Stock Purchase Plans
The Company has two Employee Stock Purchase Plans (ESPP) which provide for the
combined availability of 4,500,000 shares of common stock to be purchased by
employees who have completed a minimum period of employment. Under the 1989
ESPP, employees must be continuously employed for a period of six months and
under the 1995 ESPP employees must be continuously employed for a period of two
years. Under these plans, options are granted to eligible employees twice yearly
and are exercisable through the accumulation of employee payroll deductions from
two to ten percent of employee compensation as defined in the plan, to a maximum
of $1,904 annually, for each plan, (adjusted to reflect increases in the
consumer price index) which may be used to purchase stock at 85 percent of the
fair market value of the common stock at the beginning or end of the option
period, whichever amount is lower. In fiscal 1997, 197,262 shares were purchased
at a weighted average price of $31.47 (153,768 at $21.43 and 136,698 at $16.75,
for 1996 and 1995, respectively). The remaining balance of both ESPPs for
purchase by employees at February 28, 1997 was 3,514,937 shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (13) Geographic Area Information
(dollars in thousands)
% of % of % of
1997 Total 1996 Total 1995 Total
---- ----- ---- ----- ---- -----
Net Sales:
US $ 998,384 71.0% $771,179 70.1% $590,331 70.8%
Direct Foreign Export 38,457 2.7 35,378 3.2 37,889 4.5
----------- ----- ---------- ----- -------- -----
Total US Source 1,036,841 73.7 806,557 73.3 628,220 75.3
Europe 273,972 19.5 215,796 19.6 155,467 18.7
Other (1) 95,739 6.8 77,996 7.1 49,531 6.0
----------- ----- ---------- ----- -------- -----
Total Sales $1,406,552 100.0% $1,100,349 100.0% $833,218 100.0%
========== ===== ========== ===== ======== =====
Income from
Operations:
US $282,480 88.2% $169,103 81.7% $196,792 83.0%
Europe 29,877 9.3 33,834 16.4 39,343 16.6
Other (1) 7,921 2.5 3,998 1.9 881 0.4
-------- ---- -------- ---- -------- ----
Total Income
from Operations $320,278 100.0% $206,935 100.0% $237,016 100.0%
======== ===== ========= ===== ======== =====
Identifiable Assets:
US $1,122,762 85.9% $841,979 84.4% $588,028 83.7%
Europe 119,527 9.2 115,949 11.7 92,548 13.2
Other (1) 64,566 4.9 38,980 3.9 21,624 3.1
---------- ----- -------- ----- -------- -----
Total Assets $1,306,855 100.0% $996,908 100.0% $702,200 100.0%
========== ===== ======== ===== ======== =====
(1) Includes Australia, Latin America and the
Pacific Rim countries.
Note (14) Quarterly Financial Data (unaudited)
(in thousands, except per share amounts)
Income Net
Net Gross From Net Income
Sales Profit Operations Income Per Share (a)
1997
First Quarter $ 323,499 $190,645 $ 85,672 $ 57,139 $0.37
Second Quarter 340,940 202,085 50,141 36,908 (b) 0.24
Third Quarter 361,558 213,960 99,029 67,742 0.44
Fourth Quarter 380,555 224,756 85,436 60,336 (c) 0.39
---------- -------- -------- -------- -----
Total Year $1,406,552 $831,445 $320,278 $222,125 $1.43
========== ======== ======== ======== =====
1996
First Quarter $ 247,337 $146,612 $ 68,048 $ 46,262 $0.31
Second Quarter 266,804 158,067 74,968 51,389 0.34
Third Quarter 284,193 168,213 78,619 54,286 0.36
Fourth Quarter 302,015 178,758 (14,699) (7,451) (d) (0.05)
---------- --------- -------- -------- ------
Total Year $1,100,349 $651,650 $206,935 $144,485 $0.95
========== ======== ======== ======== ======
(a) Due to rounding some totals will not add.
(b) Includes $43.0 million nonrecurring charge related to the acquisitions of
ZeitNet and Network Express.
(c) Includes $20.0 million nonrecurring charge related to the acquisitions of
Netlink and OASys.
(d) Includes $94.3 million nonrecurring charge related to acquisitions of
SMC's Enterprise Networks Business Unit and Fivemere (by
Network Express)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cabletron Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 28, 1997 and February 29, 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended February 28, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cabletron Systems,
Inc. and subsidiaries as of February 28, 1997 and February 29, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 28, 1997, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
March 21, 1997
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information relating to the Directors of the Company is set forth in the section
entitled "Election of Directors," appearing in the Company's Proxy Statement for
its 1997 Annual Meeting of Stockholders ("Proxy Statement"), which is
incorporated herein by reference. Information relating to the executive officers
of the Company is included in Item 4a, "Executive Officers of the Registrant,"
appearing in Part I hereof. Information with respect to directors and executive
officers who failed to timely file reports required by Section 16(a) of the
Securities Exchange Act of 1934 may be found in the Proxy Statement under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance." Such
information is incorporated herein by reference.
ITEM 11. Executive Compensation
See the information set forth in the section entitled "Executive Compensation,"
appearing in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
See the information set forth in the section entitled "Election of Directors -
Beneficial Ownership," appearing in the Company's Proxy Statement for its 1997
Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
See the information set forth in the section entitled "Certain Transactions,"
appearing in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Consolidated financial statements (see item 8)
The consolidated financial statements of Cabletron Systems, Inc. can be
found in this document on the following pages:
page(s)
Independent Auditors' Report 31
Consolidated Balance Sheets at February 28, 1997
and February 29, 1996 17
Consolidated Statements of Income for fiscal years
1997, 1996 and 1995 18
Consolidated Statements of Stockholders' Equity
for fiscal years 1997, 1996 and 1995 ` 19
Consolidated Statements of Cash Flows for fiscal years
1997, 1996 and 1995 20
Notes to Consolidated Financial Statements 21-30
2. Consolidated financial statement schedule
The consolidated financial statement schedule of Cabletron
Systems, Inc. is included in Part IV of this report:
Independent Auditors' Report 31
Schedule II - Valuation and Qualifying Accounts 36
All other schedules have been omitted since they are not required, not
applicable or the information has been included in the consolidated financial
statements or the notes thereto.
3. Exhibits
The following exhibits unless herein filed are incorporated by reference.
3.1 Restated Certificate of Incorporation of Cabletron Systems, Inc., a
Delaware corporation, which is incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-1, No.
33-28055, (the First Form S-1).
3.2 Certificate of Correction of the Company's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2
of the Company's Registration Statement on Form S-1, No. 33-42534
(the Third Form S-1).
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of Cabletron Systems, Inc., incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form S-3, No. 33-54466, (the First Form S-3).
3.4 Amended bylaws of Cabletron Systems, Inc., which is incorporated by
reference to Exhibit 3.2 of the Company's Registration Statement on
the Third Form S-1.
10.1 1989 Restricted Stock Purchase Plan, which is incorporated by
reference to Exhibit 10.1 of the First Form S-1.
10.2 1989 Restricted Stock Plan, which is incorporated by reference to
Exhibit 10.2 of the First Form S-1.
10.3 1989 Equity Incentive Plan, as amended, which is incorporated by
reference to Exhibit 4 of the Company's Registration Statement on
Form S-8, No.33-50454.
10.4 1989 Employee Stock Purchase Plan, as amended, which is incorporated
by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-8, No. 33-31572.
10.5 1989 Stock Option Plan for Directors, as amended, which is
incorporated by reference to Exhibit 10.5 of the Third Form S-1.
10.6 Agency Agreement between the Registrant and International
Cable Networks Inc., which is incorporated by reference to Exhibit
10.6 of the First Form S-1.
10.7 Modification dated October 1990, of the Blue, Inc. Lease, relating
to leased premises in Ironton, Ohio, which is incorporated by
reference to Exhibit 10.8 of the First Form S-3.
10.8 Lease dated October 19, 1992 between the Registrant and Heidelberg
Harris, Inc., relating to leased premises in Durham, New Hampshire,
which is incorporated by reference to Exhibit 10.9 of the First Form
S-3.
10.9 Lease dated December 1, 1991 between the Registrant and George L.
Beattie, Ruth V. Blomstedt and Dan A. Wooley, as trustees of the
Execpark Realty Trust, relating to leased premises in Merrimack, New
Hampshire, which I s incorporated by reference to Exhibit 10.10 of
the First Form S-3.
10.10 Lease dated July 3, 1992 between the Registrant and Shannon Free
Airport Development Company Limited, relating to leased premises in
Limerick, Ireland, which is incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on the First Form S-3.
10.11 Lease dated July 15, 1996 between the Registrant and the Lawrence
County Economic Development Corporation, relating to leased premises
in Ironton, Ohio, which is filed with this form 10-K.
10.12 Credit Agreement dated March7, 1997, between the Registrant and the
Chase Manhattan Bank, as administrative agent, the First National
Bank of Chicago, as syndication agent and certain other lenders
relating to the Company's $250,000,000 revolving credit facility.
11.1 Statement regarding computation of per share earnings.
22.1 Subsidiaries of Cabletron Systems, Inc.
23.1 Consent of Independent Auditors.
(b) The Registrant filed on form 8-K during the last quarter of the fiscal year
ended February 28, 1997, as follows:
The Company filed this report on form 8-K to disclose certain information
that Network Express had filed confidentially before the Company had acquired
them.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cabletron Systems, Inc.:
Under date of March 21, 1997, we reported on the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1997 and February
29, 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
February 28, 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related consolidated
financial statement schedule as listed in item 14(a)2 of this Form 10-K. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 21, 1997
SCHEDULE II
CABLETRON SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended February 28, 1997, February 29, 1996 and February 28, 1995
(in thousands)
Amounts
attributable
Balance at to changes Balance
in
beginning Charged to foreign Amounts at end
Description of period expense currency written off of period
rates
Allowance for
doubtful
accounts
February 28, 1997 $6,655 $10,698 ($1) ($1,876) $15,476
February 29, 1996 $6,190 $2,725 $1 ($2,261) $6,655
February 28, 1995 $6,066 $124 --- --- $6,190
Signatures
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CABLETRON SYSTEMS, Inc.
Date: May 28, 1997 By: /s/ S. Robert Levine
S. Robert Levine
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Titles Date
/s/ S. Robert Levine President, Chief Executive Officer, May 28, 1997
S. Robert Levine and Director
/s/ Craig R. Benson Chairman, Chief Operating Officer May 28, 1997
Craig R. Benson Treasurer and Director
/s/ David J. Kirkpatrick Director of Finance and Chief May 28, 1997
David J. Kirkpatrick Financial Officer
/s/ Michael D. Myerow Secretary and Director May 28, 1997
Michael D. Myerow
/s/ Paul R. Duncan Director May 28, 1997
Paul R. Duncan
/s/ Donald F. McGuinness Director May 28, 1997
Donald F. McGuinness
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
10.11 Lease between the Registrant and Lawrence County
Economic Development Corporation 46
10.12 Credit Agreement between the Registrant and the Chase
Manhattan Bank, the First National Bank of Chicago and
and other lenders for a $250,000,000 revolving credit
facility 65
11.1 Statement regarding computation of per share earnings 39
22.1 Subsidiaries of Cabletron Systems, Inc. 40
23.1 Consent of Independent Auditors 41
EXHIBIT 11.1
CABLETRON SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For Years Ended February 28, 1997, February 29, 1996 and February 28, 1995
1997 1996 1995
---- ---- ----
(in thousands, except per share data)
Net Income Per Common Share - (non-dilutive)
Net income $222,125 $144,485 $156,574
======== ======== ========
Weighted average number of common
shares
outstanding 155,207 151,525 145,125
======= ======= =======
Net income per common share $ 1.43 $ 0.95 $ 1.08
======== ======== ========
Net Income Per Common Share - (full dilution)
Net income $222,125 $144,485 $156,574
========= ======== ========
Weighted average number of common
shares
outstanding 155,207 151,525 145,125
Add net additional common shares upon
exercise of
common stock options 3,726 3,646 1,892
-------- ------- -------
Adjusted average common shares outstanding 158,933 155,171 147,017
======== ======= =======
Net income per common share $ 1.40 $ 0.93 $ 1.07
======== ======= =======
EXHIBIT 22.1
SUBSIDIARIES OF CABLETRON SYSTEMS, INC.
Cabletron Systems de Argentina S.A.(Argentina)
Cabletron Systems Pty. Limited (Australia)
Cabletron Systems do Brasil Representacoes Ltda. (Brazil)
Cabletron Systems of Canada Limited (Canada)
Cabletron Systems Chile (Chile)
Cabletron Systems de Colombia Ltda. (Colombia)
Cabletron Systems Inc. - Organizacni Slozka (Czech Republic)
Cabletron Systems Acquisition, Inc. (Delaware)
Cabletron Systems Government Sales, Inc. (Delaware)
Cabletron Insurance Company (Vermont)
Cabletron Systems Sales & Service, Inc. (Delaware)
Cabletron Systems Ltd. (England)
Cabletron Systems S.A. (France)
International Cable Networks, Inc.(Virgin Islands)
Cabletron Systems, GmbH (Germany)
Cabletron Systems Limited (Ireland)
Cabletron Systems (Distribution)Limited (Ireland)
Cabletron Systems Inc. (Hong Kong)
Cabletron Systems S.r.l. (Italy)
Cabletron Systems, K.K. (Japan)
Cabletron Systems, Pte Ltd (Korea)
Cabletron Systems Sdn Bhd (Malaysia)
Cabletron Systems, S.A. de C. V.(Mexico)
Cabletron Systems Benelux BV (Netherlands)
Netlink, Inc. (Delaware)
Netlink, Ltd (UK)
Network Express, Inc. (Michigan)
Network Express GmbH (Germany)
Network Express K.K. (Japan)
Network Express Europe Limited (UK)
The OASys Group, Inc. (California)
Cabletron Systems, Pte Ltd.(Singapore)
Cabletron Systems, Ltd (South Africa)
Cabletron Systems S.A. (Spain)
Cabletron Systems Sweden AB (Sweden)
Cabletron Systems de Venezuela C.A.(Venezuela)
Fivemere Ltd (UK)
Fivemere Asia-Pacific Singapore Limited
Fivemere Developments Limited
ZeitNet Inc. (California)
ZeitNet India Private Limited (India)
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cabletron Systems, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-50454, 33-31572 and 33-42490) on Form S-8 of Cabletron Systems, Inc. of our
reports dated March 21, 1997, relating to the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1997 and February
29, 1996, and the related consolidated statements of income, stockholders'
equity and cash flows and the related schedule for each of the years in the
three-year period ended February 28, 1997, which reports are included in the
February 28, 1997 Annual Report to Stockholders on Form 10-K of Cabletron
Systems, Inc.
Boston, Massachusetts
May 29, 1997
DIRECTORS AND OFFICERS
Board of Directors Officers
S. Robert Levine S. Robert Levine
President and Chief Executive Officer, President and Chief Executive Officer
Cabletron Systems, Inc.
Craig R. Benson
Craig R. Benson Chairman of the Board
Chairman of the Board, Chief Operating Officer and
Chief Operating Officer and Treasurer, Treasurer
Cabletron Systems, Inc.
Christopher J. Oliver
Michael D. Myerow Director of Engineering and
Partner in law firm of Myerow & Poirier Manufacturing
Paul R. Duncan David J. Kirkpatrick
Executive Vice President Director of Finance and
and President, Specialty Business Group Chief Financial Officer
Reebok International, Ltd.
Michael D. Myerow
Donald F. McGuinness Secretary
Chairman of the Board,
Electronic Designs, Inc.
STOCKHOLDER INFORMATION
Annual Meeting of Stockholders Transfer Agent
The Annual Meeting of Stockholders will State Street Bank and Trust Company
take place at 10:00 a.m. on Thursday, is the Transfer Agent and Registrar
July 10, 1997 at the Cabletron Systems, of the Company's common stock.
Training Facility, Pease International Inquires regarding lost
Trade-port, Newington, NH 03801 certificates, change of address,
name or ownership should be
addressed to:
Stockholder Inquiries Boston EquiServe
Inquiries relating to financial information PO Box 8200
of Cabletron Systems, Inc. should be Boston, MA 02266-8200
addressed to:
Cabletron Systems, Inc. Independent Auditors
Investor Relations KPMG Peat Marwick LLP
PO Box 5005 99 High Street
Rochester, NH 03866-5005 Boston, MA 02110
Telephone: (603) 337-4225
Facsimile: (603)332-4004 Legal Counsel
Ropes & Gray
Listing One International Place
Cabletron Systems, Inc. common stock is Boston, MA 02110
traded on the New York Stock Exchange -
symbol CS.
WORLDWIDE LOCATIONS
Corporate Headquarters
Cabletron Systems, Inc.
Rochester, NH
Phone: (603) 332-9400
North America
ALASKA
Anchorage
Phone: (205) 733-1772
ARIZONA
Phoenix
Phone: (602) 953-8500
CALIFORNIA
Inglewood
Phone: (310) 342-5942
Newport Beach
Phone: (714) 852-4126
Sacramento
Phone: (916) 449-9622
San Diego
Phone: (619) 497-2546
San Jose
Phone: (408) 383-1550
Santa Clara
Phone: (408) 986-9100
COLORADO
Denver
Phone: (303) 331-0990
CONNECTICUT
Hartford
Phone: (860) 947-7684
FLORIDA
Ft. Lauderdale
Phone: (305) 776-2004
Tallahasse
Phone: (904) 309-0212
Tampa
Phone: (813) 282-1227
GEORGIA
Atlanta
Phone: (404) 395-9909
HAWAII.
Honolulu
Phone: (808) 532-9830
IDAHO
Post Falls
Phone: (208) 773-1711
ILLINOIS
Chicago
Phone: (312) 214-2595
Rolling Meadows
Phone: (708) 364-4555
INDIANA
Indianapolis
Phone: (317) 587-1600
IOWA
Iowa City
Phone: (319) 337-3330
KANSAS
Overland Park
Phone: (913) 338-7119
KENTUCKY
Lexington
Phone: (606) 225-8518
LOUISIANA
Metaire
Phone: (504) 836-5526
MARYLAND
Baltimore
Phone: (410) 385-5224
MICHIGAN
Grand Rapids
Phone: (313) 953-1334
Livonia
Phone: (313) 953-8510
Ann Arbor
Phone: (313) 761-5005
MINNESOTA
Minnetonka
Phone: (612) 449-5214
MISSOURI
St. Louis
Phone:( 314) 542-3142
NEBRASKA
Omaha
Phone: (402) 496-9390
NEVADA
Las Vegas
Phone: (702) 892-3775
NEW YORK
New York
Phone: (212) 643-9560
Rochester
Phone: (716) 383-4240
NORTH CAROLINA
Durham
Phone: (919) 484-8381
Charlotte
Phone: (704) 525-4895
Greensboro
Phone: (910) 299-2928
OHIO
Cincinnati
Phone: (513) 762-7646
Columbus
Phone: (614) 785-6416
Independence
Phone: (216) 573-3709
OKLAHOMA
Tulsa
Phone: (918) 492-2895
OREGON
Lake Oswego
Phone: (503)968-6919
PENNSYLVANIA
Erie
Phone: (814) 454-5755
Philadelphia
Phone: (215) 569-5100
Pittsburgh
Phone: (412) 928-4999
RHODE ISLAND
Lincoln
Phone: (401) 334-1600
SOUTH CAROLINA
Columbia
Phone: (803) 748-1232
TENNESSEE
Goodlesville
Phone: (615) 859-7797
TEXAS
Austin
Phone: (512) 794-9166
Dallas
Phone: (972) 931-6222
Houston
Phone: (713) 871-3134
San Antonio
Phone: (210) 344-7241
WORLDWIDE LOCATIONS CONTINUED
UTAH
Salt Lake City
Phone: (801) 350-9480
VIRGINIA
Herndon
Phone: (703) 736-9100
Richmond, VA 23236
Phone: (804) 323-0291
WASHINGTON
Bellevue
Phone: (206) 637-2977
WISCONSIN
Milwaukee
Phone: (414) 221-0475
Madison
Phone: (608) 273-9192
PUERTO RICO
Guaynabo
Phone: (787) 273-6770
Canada
CALGARY
Calgary
Phone: (403) 234-8012
VANCOUVER
Vancouver
Phone: (604) 688-2550
OTTAWA
Ottawa
Phone: (613) 782-2320
TORONTO
Toronto
Phone: (416) 213-8222
MONTREAL
Montreal
Phone: (514) 395-4949
EUROPE
BELGIUM
Belgium
Phone: 011-32-2176-4901
CZECH REPUBLIC
Praha
Phone: 011-42-2-2423-8127
ENGLAND
Berkshire
Phone: 011-44--635-580000
London
Phone: 011-44-171-312-0210
Cheshire, England WA7 1HR
Phone: 011-44-928-579013
FRANCE
Rosny-Sous-Bois
Phone: 011-33-148-947072
GERMANY
Frankfurt
Phone: 011-49-610-339900
Berlin
Phone: 011-49-30-399-5939
Munich
Phone: 011-49-89-3177450
ITALY
Assago
Phone: 011-39-2-892-2021
NETHERLANDS
Woerden
Phone: 011-31-348-433155
RUSSIA
Moscow
Phone: 011-7501-258-7673
SCOTLAND
Sterling
Phone: 011-44-1786-449-264
SPAIN
Madrid
Phone: 011-34-1326-4320
SWEDEN
Taby
Phone: 011-46-8792-6040
SWITZERLAND
Zurich
Phone: 011-41-1308-3610
Latin America
ARGENTINA
Buenos Aires
Phone: 011-54-13-42777
BRASIL
Sao Paulo
Phone: 011-55-11-5561-0888
Rio de Janeiro
Phone: 011-55-21-532-1504
Curitiba
Phone: 011-55-41-232-7154
CHILE
Santiago
Phone: 011-56-2203-3733
COLUMBIA
Santa fe de Bogata
Phone: 011-57-1-2960009
MEXICO
Mexico City
Phone: 011-525-629-9904
Guadalajara
Phone: 011-52-3678-9224
Monterrey
Phone: 011-52-8-335-9234
VENEZUELA
Caracas
Phone: 011-58-2285-6267
Pacific Rim
AUSTRALIA
Brisbane
Phone: 011-61-7367-1750
Canberra
Phone: 011-61-6-257-2422
Melbourne
Phone: 011-61-3526-3639
Sydney
Phone: 011-61-29950-5900
CHINA
Beijing
Phone: 011-86-1-8492748
Shanghai
Phone: 011-86-21-6248-1120
HONG KONG
Wanchai
Phone: 011-852-539-6882
INDIA
Bombay
Phone: 011-91-22-2184-434
New Delhi
Phone: 011-91-11-462-1586
JAPAN
Tokyo
Phone: 011-81-3-3459-1981
KOREA
Seoul
Phone: 011-822-739-5257
WORLDWIDE LOCATIONS CONTINUED
MALAYSIA
Penang
Phone: 011-60-3754-4388
Selangor
Phone: 011-60-3754-4388
SINGAPORE
The Cavendish
Phone: 011-65-775-5355
TAIWAN
Taipei Hsien
Phone: 011-886-2-6487641
THAILAND
Bangkok
Phone: 011-662-661-9238
Middle East
SAUDI ARABIA
Phone: 011-9661-462-0101
Africa
SOUTH AFRICA
Johannesburg
Phone: 011-27-11-709-1300