<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CABLETRON SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3577 04-2797263
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
35 INDUSTRIAL WAY ROCHESTER, NH 03867 (603) 332-9400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID J. KIRKPATRICK
DIRECTOR OF FINANCE AND CHIEF FINANCIAL OFFICER
35 INDUSTRIAL WAY, ROCHESTER, NH 03867, (603) 332-9400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID A. FINE, ESQ. JOHN HESSION, ESQ.
ROPES & GRAY TESTA, HURWITZ & THIBEAULT, LLP
ONE INTERNATIONAL PLACE HIGH STREET TOWER, 125 HIGH STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the merger of a wholly-owned subsidiary of
the Registrant with and into Netlink, Inc., which shall occur as soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of all conditions to closing of such merger as
described in the enclosed Proxy Statement/Prospectus.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ----------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER UNIT PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 2,258,975 shares N/A(2) $144,475,144(2) $43,780(2)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 416, this Registration Statement also covers an
indeterminant number of additional shares which may be issuable in respect
of the shares indicated hereby as a result of a stock split or stock
dividend with respect to the Registrant's Common Stock.
(2) The Registration Fee was calculated in accordance with Rule 457(f)(2)
based on the aggregate par value of the Common Stock of Netlink, Inc. to
be exchanged for the shares of the Common Stock of the Registrant
registered pursuant hereto. Netlink, Inc. has an accumulated capital
deficit, and in accordance with Rule 457 (f)(2) the Registration Fee was
calculated by dividing the aggregate par value of Netlink Common Stock by
three. The aggregate par value of Netlink Common Stock is $131,341.04
(13,134,104 shares multiplied by $.01 par value per share).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
NETLINK, INC.
1881 WORCESTER ROAD
FRAMINGHAM, MASSACHUSETTS 01701
, 1996
To the Shareholders of Netlink, Inc.:
The Board of Directors of Netlink, Inc. ("Netlink") has unanimously approved
and is recommending to our shareholders the merger with Cabletron Systems,
Inc. ("Cabletron"). In order to complete this transaction, we will hold a
special meeting of shareholders at 10:00 a.m. on , 1996, at the office of
Netlink's counsel Testa, Hurwitz & Thibeault, LLP at 125 High Street, Boston,
Massachusetts 02110. You are cordially invited to attend.
At this meeting, shareholders will be asked to vote on (i) a proposal to
approve and adopt the Agreement and Plan of Merger, as amended (the "Merger
Agreement"), dated as of September 26, 1996, among Cabletron, Cabletron
Merger, Inc. ("Merger Sub") and Netlink, and to approve the merger (the
"Merger") of Merger Sub, a wholly-owned subsidiary of Cabletron, with and into
Netlink pursuant to the Merger Agreement by which Netlink would become a
wholly-owned subsidiary of Cabletron, (ii) a proposal to convert immediately
prior to the Merger each share of Netlink 1993 Preferred Stock into one share
of Common Stock of Netlink, (iii) a proposal to convert immediately prior to
the Merger each share of Netlink 1994 Preferred Stock into one share of Common
Stock of Netlink, (iv) a proposal to convert immediately prior to the Merger
each share of Netlink 1996 Preferred Stock into one share of Common Stock of
Netlink, (v) a proposal to amend immediately prior to the Merger the 1996
Preferred Stock Purchase Agreement dated February 29, 1996 among Netlink and
certain holders of Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock
and Netlink 1996 Preferred Stock (the "Netlink Preferred Stock Agreement") to
terminate Articles IV, V and VI of the Netlink Preferred Stock Agreement
(relating to certain covenants of Netlink, registration rights and rights of
first refusal) and (vi) such other matters as may properly be brought before
the Netlink Special Meeting.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT BY THE
SHAREHOLDERS OF NETLINK.
YOUR BOARD OF DIRECTORS ALSO RECOMMENDS A VOTE FOR APPROVAL OF THE
CONVERSION BY THE HOLDERS OF NETLINK 1993 PREFERRED STOCK, NETLINK 1994
PREFERRED STOCK AND NETLINK 1996 PREFERRED STOCK AND A VOTE FOR APPROVAL OF
AMENDING THE NETLINK PREFERRED STOCK AGREEMENT.
It is important that you vote on this transaction and we ask you to please
complete, sign and date the accompanying Proxy Card. The details of the
proposed Merger appear in the accompanying Proxy Statement/Prospectus. You
should consider carefully the investment considerations associated with the
Merger discussed under "Risk Factors" in the accompanying Proxy
Statement/Prospectus which is being furnished to the holders of the Netlink
Common Stock, the Netlink Series E Preferred Stock, the Netlink 1993 Preferred
Stock, the Netlink 1994 Preferred Stock and the Netlink 1996 Preferred Stock
(collectively referred to as the Netlink Stock). Please note that one of the
conditions to Cabletron's obligation to consummate the Merger (unless such
condition is waived by Cabletron) is the requirement that the holders of no
more than 10% of Netlink's stock shall have exercised their rights as
dissenting shareholders. Such rights are discussed in the section entitled
"The Merger--Appraisal Rights."
The approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of a majority of the outstanding shares of
Netlink Stock voting together as a single class (for the purpose of this vote
each share of Preferred Stock shall be entitled to that number of votes equal
to the number of shares of Common Stock into which it is currently
convertible) and the affirmative vote of the holders of at least 60% of each
of the Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and Netlink
1996 Preferred Stock each voting as a separate class. The approval of the
conversion of all the shares of Netlink 1993 Preferred Stock will require the
<PAGE>
vote of the holders of a majority of the Netlink 1993 Preferred Stock. The
approval of the conversion of all the shares of Netlink 1994 Preferred Stock
will require the vote of the holders of a majority of the Netlink 1994
Preferred Stock. The approval of the proposal to amend the Netlink Preferred
Stock Agreement will require the vote of the holders of a majority of the
Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and Netlink 1996
Preferred Stock, voting together as a single class.
Representatives of Ernst & Young LLP expect to be present at the Netlink
Special Meeting, and while they do not plan to make a statement at the Netlink
Special Meeting, such representatives will be available to respond to
appropriate questions from stockholders in attendance.
Your management appreciates the support and confidence that you have given
us over the twelve-year life of Netlink. We are very enthusiastic about our
combination with Cabletron and we believe it is in the best interest of our
shareholders and employees. We look at this as a new era in the life of our
company and we feel that your investment will continue to be very rewarding.
Nina F. Saberi
President and Chief Executive
Officer
<PAGE>
NETLINK, INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
To the Stockholders of NETLINK, INC.:
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of Netlink,
Inc., a Delaware corporation ("Netlink"), will be held at 10:00 a.m., Eastern
time, on , 1996, at the office of the Company's counsel Testa, Hurwitz &
Thibeault, LLP at 125 High Street, Boston, Massachusetts 02110, to consider
and vote upon proposals:
1. To approve and adopt the Agreement and Plan of Merger, as amended (the
"Merger Agreement") dated as of September 26, 1996 among Cabletron Systems,
Inc. ("Cabletron"), Cabletron Merger, Inc. ("Merger Sub") and Netlink, and
to approve the merger (the "Merger") of Merger Sub, a wholly owned
subsidiary of Cabletron, with and into Netlink pursuant to the Merger
Agreement by which Netlink would become a wholly owned subsidiary of
Cabletron.
2. To convert immediately prior to the Merger each share of Netlink 1993
Preferred Stock into one share of Common Stock of Netlink.
3. To convert immediately prior to the Merger each share of Netlink 1994
Preferred Stock into one share of Common Stock of Netlink.
4. To convert immediately prior to the Merger each share of Netlink 1996
Preferred Stock into one share of Common Stock of Netlink.
5. To amend immediately prior to the Merger the 1996 Preferred Stock
Purchase Agreement dated February 29, 1996 among Netlink and certain
holders of Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and
Netlink 1996 Preferred Stock (the "Netlink Preferred Stock Agreement") to
terminate Articles IV, V and VI of the Netlink Preferred Stock Agreement
(relating to certain covenants of Netlink, registration rights and rights
of first refusal).
6. To transact such other business as may properly be brought before the
Special Meeting of Shareholders.
Only stockholders of record at the close of business on , 1996 are
entitled to notice of and to vote at the meeting.
In accordance with Section 262 of the Delaware General Corporation Law, a
copy of which is enclosed as Annex B to the accompanying Proxy Statement and
Prospectus, holders of Netlink Stock are entitled to appraisal rights with
respect to such stock in connection with the Merger.
All stockholders are cordially invited to attend the meeting in person. To
ensure your representation at the meeting, however, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
enclosed postage-prepaid envelope. You may revoke your proxy in the manner
described in the accompanying Proxy Statement/Prospectus at any time before it
has been voted at the Special Meeting. Any stockholder attending the Special
Meeting may vote in person even if he or she has returned a proxy.
By Order of the Board of Directors,
Nina F. Saberi
President and Chief Executive
Officer
<PAGE>
NETLINK, INC.
PROXY STATEMENT
----------------
CABLETRON SYSTEMS, INC.
PROSPECTUS
This Proxy Statement and Prospectus ("Proxy Statement/Prospectus") is being
furnished to the holders of (i) common stock, $.01 par value per share
("Netlink Common Stock"), (ii) 1993 Preferred Stock, $.01 par value per share
(the "Netlink 1993 Preferred Stock"), (iii) 1994 Preferred Stock, $.01 par
value per share (the "Netlink 1994 Preferred Stock"), (iv) 1996 Preferred
Stock, $.01 par value per share (the "Netlink 1996 Preferred Stock"), and (v)
Series E Preferred Stock, $.01 par value per share (the "Netlink Series E
Preferred Stock" and together with the Netlink 1993 Preferred Stock, the
Netlink 1994 Preferred Stock and the Netlink 1996 Preferred Stock, the
"Netlink Preferred Stock") of Netlink, Inc., a Delaware corporation
("Netlink"), in connection with the solicitation of proxies by the Board of
Directors of Netlink for use at the Special Meeting of Stockholders of Netlink
to be held on , 1996 at the office of Netlink's counsel Testa, Hurwitz &
Thibeault, LLP at 125 High Street, Boston, Massachusetts 02110, commencing at
10:00 a.m., local time, and at any and all adjournments or postponements
thereof (the "Netlink Special Meeting"). The Netlink Common Stock and the
Netlink Preferred Stock are referred to together in this Proxy
Statement/Prospectus as the "Netlink Stock".
This Proxy Statement/Prospectus also constitutes the Prospectus of Cabletron
Systems, Inc., a Delaware corporation ("Cabletron"), with respect to the
issuance of up to 2,258,975 shares of Cabletron common stock, $.01 par value
per share ("Cabletron Common Stock"), to be issued to the stockholders of
Netlink in connection with the Merger described below, including shares issued
upon exercise prior to the consummation of the Merger of outstanding options
to acquire shares of Netlink Common Stock. Stockholders of Cabletron will not
be voting to approve the Merger. Cabletron Common Stock is traded on the New
York Stock Exchange, Inc. (the "NYSE") under the symbol "CS".
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Cabletron Merger, Inc., a Delaware corporation and a wholly-owned
subsidiary of Cabletron ("Merger Sub"), with and into Netlink, pursuant to an
Agreement and Plan of Merger dated as of September 26, 1996, as amended (the
"Merger Agreement"), by and among Cabletron, Merger Sub and Netlink. Upon
consummation of the Merger, Netlink will become a wholly-owned subsidiary of
Cabletron. Consummation of the Merger is subject to various conditions,
including (i) the approval and adoption of the Merger Agreement by the holders
of a majority of the outstanding shares of Netlink Stock at the Netlink
Special Meeting (for the purpose of this vote each share of Netlink Preferred
Stock shall be entitled to that number of votes equal to the number of shares
of Netlink Common Stock into which it is currently convertible), (ii) the
approval and adoption of the Merger Agreement by the holders of 60% of the
outstanding shares of Netlink 1993 Preferred Stock, (iii) the approval and
adoption of the Merger Agreement by the holders of 60% of the outstanding
shares of Netlink 1994 Preferred Stock, (iv) the approval and adoption of the
Merger Agreement by the holders of 60% of the outstanding shares of Netlink
1996 Preferred Stock, and (v) the conversion of the Netlink Preferred Stock
into Netlink Common Stock. This Proxy Statement/Prospectus also relates to a
proposal to amend immediately prior to the Merger the 1996 Preferred Stock
Purchase Agreement dated February 29, 1996 among Netlink and certain holders
of Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and Netlink 1996
Preferred Stock (the "Netlink Preferred Stock Agreement") to terminate
Articles IV, V and VI of the Netlink Preferred Stock Agreement (relating to
certain covenants of Netlink, registration rights and rights of first
refusal).
At the Effective Time (as defined below), each share of Netlink Common Stock
issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive that number of shares of Cabletron Common
Stock equal to a fraction (the "Exchange Ratio"), the numerator of which is
2,258,975 and the denominator of which is the sum of (i) the number of shares
of Netlink Common Stock outstanding immediately prior to the Effective Time
and (ii) the number of shares of Netlink Common Stock issuable upon the
conversion or exercise of all options, warrants, preferred stock and other
securities of Netlink convertible into or exercisable for shares of Netlink
Common Stock that are outstanding immediately prior to the Effective
<PAGE>
Time. Based upon the capitalization of Netlink on October 24, 1996, it is
currently anticipated that each share of Netlink Common Stock will convert
into the right to receive 0.14609 shares of Cabletron Common Stock. Thus, each
holder of Netlink Common Stock shall be entitled to receive (in addition to
cash in lieu of fractional shares) a number of shares of Cabletron Common
Stock equal to the product (rounded down to the nearest whole number) of (i)
the number of shares of Netlink Common Stock exchanged by such stockholder and
(ii) the Exchange Ratio. In addition, each option to purchase Netlink Common
Stock that is outstanding at the Effective Time (each a "Netlink Option") will
be assumed by Cabletron and will automatically be converted into an option to
purchase a number of shares of Cabletron Common Stock (rounded down to the
nearest whole number) determined by multiplying the number of shares of
Netlink Common Stock subject to the Netlink Option by the Exchange Ratio, at
an exercise price per share equal to the aggregate exercise price for Netlink
Common Stock purchasable pursuant to the Netlink Option divided by the product
of (i) the number of shares of Netlink Common Stock subject to the Netlink
Option and (ii) the Exchange Ratio. See "The Merger--General", "--Conversion
of Shares" and "--Conversion of Netlink Options."
Approximately 161,355 shares of Cabletron Common Stock, which equals
approximately 8% of the shares of Cabletron Common Stock which the Netlink
stockholders are entitled to receive in the Merger, will be withheld and
deposited into an escrow account to secure certain indemnification obligations
of the Netlink stockholders under the Merger Agreement. See "The Merger
Agreement--Escrow Agreement."
All information contained in this Proxy Statement/Prospectus, or
incorporated herein by reference, with respect to Merger Sub and Cabletron has
been provided by Cabletron. All information contained in this Proxy
Statement/Prospectus with respect to Netlink has been provided by Netlink.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Netlink on or about , 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. NETLINK STOCKHOLDERS
ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" STARTING ON PAGE 9.
IN ACCORDANCE WITH THE DELAWARE GENERAL CORPORATION LAW, HOLDERS OF NETLINK
STOCK ARE ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER. SEE "THE
MERGER--APPRAISAL RIGHTS."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Proxy Statement/Prospectus is , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 2
TRADEMARKS.................................................................. 2
SUMMARY..................................................................... 3
The Business of Cabletron................................................. 3
The Business of Netlink................................................... 3
The Merger................................................................ 3
Conversion of Shares; Options........................................... 4
Exchange of Certificates; Assumption of Options......................... 4
Listing................................................................. 4
Conditions to the Merger................................................ 4
Escrow Agreement........................................................ 5
Termination............................................................. 5
Termination Fee......................................................... 5
Netlink Special Meeting................................................... 5
Time, Place and Date.................................................... 5
Record Date; Shares Entitled to Vote.................................... 5
Purposes of the Meeting................................................. 6
Vote Required........................................................... 6
Amendment to the Netlink Preferred Stock Agreement........................ 7
Recommendation of Netlink's Board of Directors............................ 7
Interests of Certain Persons in the Merger................................ 7
Certain Federal Income Tax Consequences................................... 7
Anticipated Accounting Treatment.......................................... 8
Comparative Rights of Stockholders........................................ 8
Risk Factors.............................................................. 8
Employment Agreements..................................................... 8
Appraisal Rights.......................................................... 8
RISK FACTORS................................................................ 9
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED SELECTED
FINANCIAL DATA............................................................. 13
Selected Historical Financial Data........................................ 13
Unaudited Pro Forma Combined Selected Financial Data...................... 14
COMPARATIVE PER SHARE DATA.................................................. 15
MARKET PRICE PER SHARE DATA................................................. 16
Cabletron................................................................. 16
Netlink................................................................... 16
Dividend Policy........................................................... 16
Recent Closing Prices..................................................... 16
NETLINK SPECIAL MEETING..................................................... 17
Time, Place and Date...................................................... 17
Matters To Be Considered at the Netlink Special Meeting................... 17
Voting at the Netlink Special Meeting; Record Date........................ 17
Proxies................................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
THE MERGER................................................................ 19
General................................................................. 19
Conversion of Shares.................................................... 19
Conversion of Netlink Options........................................... 20
Exchange of Certificates................................................ 20
Notification Regarding Netlink Options.................................. 21
Effective Time.......................................................... 21
Background of the Merger; Recommendation of Netlink's
Board of Directors.................................................... 21
Netlink's Reasons for the Merger........................................ 23
Cabletron's Reasons for the Merger...................................... 24
Certain Considerations.................................................. 25
Employment Agreements................................................... 25
Interests of Certain Persons in the Merger.............................. 26
Certain Federal Income Tax Consequences................................. 27
Anticipated Accounting Treatment........................................ 29
Governmental Filings.................................................... 29
Certain Federal Securities Law Consequences; Affiliate Letters.......... 29
Stock Exchange Listing.................................................. 29
Dividends............................................................... 30
Appraisal Rights........................................................ 30
CONVERSION OF THE NETLINK PREFERRED STOCK................................. 32
AMENDMENT TO THE NETLINK PREFERRED STOCK AGREEMENT ....................... 32
THE MERGER AGREEMENT...................................................... 33
Representations and Warranties.......................................... 33
Conduct of Cabletron's and Netlink's Business Prior to the Merger....... 34
No Solicitation......................................................... 35
Conditions to the Merger................................................ 36
Termination............................................................. 37
Termination Fee......................................................... 38
Indemnification......................................................... 39
Escrow.................................................................. 41
BUSINESS.................................................................. 41
The Company............................................................. 41
Background and Technology............................................... 41
Products................................................................ 43
Sales and Marketing..................................................... 44
Customers Support and Training.......................................... 44
Competition............................................................. 44
Proprietary Rights...................................................... 45
Research and Development................................................ 45
Manufacturing........................................................... 45
Governmental Regulation................................................. 46
Employees............................................................... 46
Facilities.............................................................. 46
Legal Proceeding........................................................ 46
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 47
General................................................................. 47
Results of Operations................................................... 47
Liquidity and Capital Resources......................................... 50
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL STOCKHOLDERS OF NETLINK........................................... 51
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA....................... 53
DESCRIPTION OF CAPITAL STOCK OF CABLETRON................................... 56
Common Stock.............................................................. 56
Preferred Stock........................................................... 56
COMPARISON OF STOCKHOLDER RIGHTS............................................ 56
Voting Rights............................................................. 56
Voting Requirements and Quorums for Stockholder Meetings.................. 57
Stockholder Meetings...................................................... 57
Stockholder Action by Written Consent..................................... 57
Amendments to Charter..................................................... 58
Bylaws.................................................................... 58
Number and Qualification of Directors..................................... 58
Board Classification...................................................... 59
Nomination and Election of Directors...................................... 59
Removal of Directors...................................................... 59
Newly Created Directorships and Vacancies................................. 60
Vote Required for Mergers................................................. 60
Anti-takeover Provisions.................................................. 61
Limitation on Directors' Liability........................................ 62
Indemnification........................................................... 62
Dividends and Other Distributions......................................... 62
OTHER MATTERS............................................................... 64
LEGAL MATTERS............................................................... 64
EXPERTS..................................................................... 64
NETLINK, INC.--AUDITED FINANCIAL STATEMENTS................................. F-1
ANNEXES
A. AGREEMENT AND PLAN OF MERGER............................................ A-1
B. SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW-APPRAISAL RIGHTS.... B-1
</TABLE>
iii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES
OFFERED BY THIS PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN
ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION, IN ANY SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE
ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR INCORPORATED BY REFERENCE SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Cabletron is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained from the
Public Reference Facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, Cabletron is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Cabletron Common Stock is listed on
the NYSE, and such reports, proxy statements and other information concerning
Cabletron may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Cabletron has filed with the Commission a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Proxy Statement/Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in this Proxy
Statement/Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Items and information omitted from this Proxy
Statement/Prospectus but contained in the Registration Statement may be
inspected and copied at the Public Reference Facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH
DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS THEY ARE SPECIFICALLY
INCORPORATED BY REFERENCE, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED UPON WRITTEN OR ORAL REQUEST TO: CABLETRON INVESTOR RELATIONS,
CABLETRON SYSTEMS, INC., 35 INDUSTRIAL WAY, ROCHESTER, NEW HAMPSHIRE 03867
(TELEPHONE: (603) 332-9400). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1996.
The following documents which have been filed with the Commission are
incorporated by reference into this Proxy Statement/Prospectus:
1. Cabletron's Annual Report on Form 10-K for the fiscal year ended
February 29, 1996 (which incorporates by reference certain information from
Cabletron's Proxy Statement relating to the 1996 Annual Meeting of
Shareholders) (File No. 1-10228);
2. Cabletron's Quarterly Reports on Form 10-Q for the fiscal quarters
ended May 31 and August 31, 1996;
3. Cabletron's Current Report on Form 8-K filed with the Commission on
October 24, 1996.
4. The description of Cabletron Common Stock contained in Cabletron's
Registration Statement on Form 8-A under the Exchange Act (File No. 1-
10228) filed with the Commission on April 9, 1989, including all amendments
and reports filed for the purpose of updating such description.
All documents subsequently filed by Cabletron pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
offering of the Cabletron Common Stock, shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing such
documents. Any statement contained herein or in any document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for the purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
TRADEMARKS
Cabletron Systems and design, IMT, MMAC Plus, Synthesis, SmartSwitch, and
DNI are registered trademarks of Cabletron; MMAC, SPECTRUM, ES/1 ATX, FastNet,
and The Complete Netlinking Solution are trademarks of Cabletron. Netlink has
applied for registration of the trademarks OmniLinx, OmniView, TurboFRAD,
SafeLinx, Matrix VC, Netlink, NetFRAD, OmniFRAD, The Frame Relay Access
Company and Making Frame Relay Work For You and such applications are
currently pending; SmartLinx, OmniLinx Switch, SDLC Link Server, Link
Server/Plus, In/View, Internetwork SNA Gateway, Frame Relay Access Node, FRAN,
EMMA (Enterprise Management and Monitoring Application), SNA-Gate, SNA-Hub,
SNA-Link, SN/View, Xtendlink and XTend/PC are trademarks of Netlink. This
Proxy Statement/Prospectus also contains the trademarks of other companies.
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SUMMARY
Reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained in, attached to or incorporated by
reference in this Proxy Statement/Prospectus and the Annexes hereto. Netlink
stockholders are urged to read this Proxy Statement/Prospectus and the Annexes
in their entirety.
THE BUSINESS OF CABLETRON
Cabletron develops, manufactures, markets, installs and supports a wide range
of standards-based local area network ("LAN") and wide area network ("WAN")
connectivity hardware and software products. Cabletron's approach to networking
is based on a strategy called Synthesis(R), a strategic framework which
combines infrastructure products and technologies, automated management tools,
and support services to allow users to migrate smoothly from traditional
router-based internetworks to switch-based virtual enterprise internetworks. An
integral part of Synthesis is the MMAC product family, which includes the
MMAC(TM), Cabletron's wiring closet smart hub, and the MMAC Plus(R),
Cabletron's modular advanced switching intelligent hub. All of Cabletron's
intelligent network products are managed by SPECTRUM(R), Cabletron's
sophisticated enterprise-wide network management system. SPECTRUM incorporates
Inductive Modeling Technology ("IMT(R)"), a form of artificial intelligence
which provides SPECTRUM with the ability to model every element of the network,
including physical cables, network devices and applications. Cabletron also
produces and supports other network products, such as adapter cards, other
interconnection equipment, wiring cables, and file server products, and
provides a wide range of network services. Cabletron believes that its broad
product line and its ability to provide full service enable it to offer its
customers "The Complete Networking Solution."(TM) Cabletron was incorporated in
Delaware in 1988. Cabletron's principal executive offices are located at 35
Industrial Way, Rochester, New Hampshire 03867 and its telephone number is
(603) 332-9400.
THE BUSINESS OF NETLINK
Netlink provides internetworking products that permit customers to combine
multiple data traffic types, including IBM mainframe and LAN-based client-
server data, for transmission over frame relay and X.25 networks. Netlink has
developed an architecture and switching platform to consolidate IBM mainframe
data and LAN-based client-server data over frame relay and X.25 services.
Netlink's OmniLinx(TM) product family enables users to migrate existing
mainframe and client-server traffic onto frame relay services and to
consolidate both traffic types onto a common infrastructure. Netlink's purpose-
designed architecture (Matrix VC(TM)) and high-performance RISC-based platform
enable the consolidation of mainframe and client-server data without
compromising the service quality of either traffic type. Netlink markets and
sells its products primarily through indirect distribution channels worldwide.
The distribution strategy focuses on establishing channel partnerships with
selected, leading communications and networking companies. Netlink focuses on
four types of channels in the U.S. market: frame relay service providers,
national distributors, OEM partners and value-added resellers. Outside the
United States, Netlink sells its products primarily through international
distributors. Netlink was incorporated in Delaware in 1984. In 1994, it
acquired all of the outstanding shares of Amnet, Inc. In 1995, Netlink
relocated its operations from Raleigh, North Carolina to Framingham,
Massachusetts. Netlink maintains its corporate office and operations at 1881
Worcester Road, Framingham, Massachusetts, 01701 and its telephone number at
that location is (508) 879-6306.
THE MERGER
The Merger Agreement provides for the merger of Merger Sub, a wholly-owned
subsidiary of Cabletron, with and into Netlink, with the result that Netlink
would become a wholly-owned subsidiary of Cabletron. For the Merger to be
consummated it must be approved by the Netlink stockholders and the other
conditions specified in the Merger Agreement must be satisfied or waived. See
"The Merger."
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Conversion of Shares; Options
Upon the consummation of the Merger, each then outstanding share of Netlink
Common Stock will automatically be converted into the right to receive that
number of shares of Cabletron Common Stock equal to the Exchange Ratio. Based
upon the capitalization of Netlink on October 24, 1996, it is currently
anticipated that each share of Netlink Common Stock will convert into the right
to receive 0.14609 shares of Cabletron Common Stock. Cash will be paid in lieu
of fractional shares of Cabletron Common Stock. In the aggregate, Cabletron
will exchange approximately 2,258,975 shares of Cabletron Common Stock for all
the shares of Netlink Stock outstanding immediately prior to the Effective
Time, including shares of Netlink Stock issuable upon the conversion or
exercise of any option, warrant, preferred stock or other security convertible
into or exercisable for shares of Netlink Stock that are outstanding
immediately prior to the Effective Time. Based upon the capitalization of
Netlink and Cabletron, the stockholders of Netlink will own Cabletron Common
Stock representing approximately 3% of the Cabletron Common Stock outstanding
immediately after consummation of the Merger. See "The Merger--Conversion of
Shares."
Upon consummation of the Merger, each then outstanding Netlink Option will be
assumed by Cabletron and will automatically be converted into an option to
purchase a number of shares of Cabletron Common Stock (rounded down to the
nearest whole number) determined by multiplying the number of shares of Netlink
Common Stock subject to the Netlink Option by the Exchange Ratio, at an
exercise price per share equal to the aggregate exercise price for Netlink
Common Stock purchasable pursuant to the Netlink Option divided by the product
of (i) number of shares of Netlink Common Stock subject to the Netlink Option
and (ii) the Exchange Ratio. Cabletron will file a Registration Statement on
Form S-8 with the Commission with respect to the shares of Cabletron Common
Stock issuable upon exercise of the assumed Netlink Options. As of ,
1996, the record date for the Netlink Special Meeting (the "Netlink Record
Date"), 2,327,946 shares of Netlink Common Stock were subject to outstanding
Netlink Options, all of which will become exercisable prior to the expected
Effective Time. Upon the assumption of such Netlink Options by Cabletron upon
consummation of the Merger, approximately 340,089 shares of Cabletron Common
Stock will be subject to such options. See "The Merger--Conversion of Netlink
Options."
Exchange of Certificates; Assumption of Options
As soon as practicable after the Effective Time, a letter of transmittal with
instructions will be mailed to each Netlink stockholder for use in exchanging
Netlink Stock certificates for Cabletron Common Stock certificates. See "The
Merger--Exchange of Certificates." HOLDERS OF NETLINK STOCK CERTIFICATES SHOULD
NOT SUBMIT THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER
OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO ABOVE.
Following the Effective Time, Cabletron will issue to each person who,
immediately prior thereto, was a holder of an outstanding Netlink Option, a
document evidencing the assumption of such Netlink Option by Cabletron. Such
assumption will be automatic and no action will be required on the part of the
option holder to convert such holder's Netlink Option into an option to
purchase shares of Cabletron Common Stock. See "The Merger--Notification
Regarding Netlink Options."
Listing
The shares of Cabletron Common Stock to be issued in the Merger will be
authorized for listing and trading on the NYSE.
Conditions to the Merger
The obligations of Cabletron and Netlink to consummate the Merger are subject
to the satisfaction of certain conditions, including, but not limited to,
obtaining requisite Netlink stockholder and regulatory approvals, the
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conversion of Netlink Preferred Stock into Netlink Common Stock, that certain
employees of Netlink shall have entered into employment agreements with
Cabletron, that holders of not more than 10% of the Netlink Stock entitled to
vote on the Merger have exercised their appraisal rights, the absence of any
injunction prohibiting consummation of the Merger, the continuing accuracy of
the other party's representations and warranties made in the Merger Agreement
on and as of the Effective Time, the other party's performance of its
covenants, the receipt of certain legal opinions to the effect that the Merger
qualifies as a tax-free reorganization and the receipt and confirmation of
certain accountants' letters to the effect that the Merger qualifies for
pooling of interests accounting treatment if closed and consummated in
accordance with the Merger Agreement. See "The Merger--Anticipated Accounting
Treatment," "The Merger--Certain Federal Income Tax Consequences" and "The
Merger Agreement--Conditions to the Merger."
Escrow Agreement
Pursuant to an Escrow Agreement to be entered into by Cabletron, Netlink, a
representative of the holders of Netlink Common Stock (the "Stockholders
Representative") and Fleet National Bank (the "Escrow Agent") (the "Escrow
Agreement"), approximately 161,355 shares of Cabletron Common Stock will be
deposited in escrow and will be held and disposed of in accordance with the
terms of the Escrow Agreement. Such shares will be available to reimburse
Cabletron in connection with breaches of representations, warranties or
covenants made by Netlink in the Merger Agreement as well as certain other
matters. As a result of the Escrow Agreement, stockholders of Netlink will be
entitled to receive, depending on the number of dissenting shares and
unexercised Netlink Options at the Effective Time, approximately 92% of the
shares of Cabletron Common Stock into which their shares of Netlink Common
Stock are converted pursuant to the Merger and the remaining 8% of the shares
of Cabletron Common Stock into which the shares of Netlink Common Stock are
converted will be deposited in escrow. See "The Merger Agreement--Escrow."
Termination
The Merger Agreement is subject to termination by mutual written consent of
Cabletron and Netlink and at the option of either Cabletron or Netlink if the
Merger is not consummated before February 28, 1997. The Merger Agreement is
also subject to termination upon the occurrence of certain other events. See
"The Merger Agreement--Termination."
Termination Fee
Under certain circumstances, upon termination of the Merger Agreement,
Netlink will be required to pay Cabletron a fee of $2,800,000, plus certain
expenses of Cabletron. See "The Merger Agreement--Termination Fee."
NETLINK SPECIAL MEETING
Time, Place and Date
The Netlink Special Meeting will be held on , 1996 at the office of
Netlink's counsel Testa, Hurwitz & Thibeault, LLP at 125 High Street, Boston,
Massachusetts 02110, commencing at 10:00 a.m., local time.
Record Date; Shares Entitled to Vote
Holders of record of shares of Netlink Stock at the close of business on the
Netlink Record Date are entitled to notice of, and to vote at, the Netlink
Special Meeting. At such Netlink Record Date, there were outstanding 2,406,840
shares of Netlink Common Stock; 3,970,030 shares of Netlink 1993 Preferred
Stock; 3,207,666 shares of Netlink 1994 Preferred Stock; 3,482,901 shares of
Netlink 1996 Preferred Stock; and 1,333,333 shares of Netlink Series E
Preferred Stock. Holders of shares of Netlink Common Stock, Netlink 1993
Preferred Stock,
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Netlink 1994 Preferred Stock and Netlink 1996 Preferred Stock are entitled to
one vote for each such share held by the holder on the proposal to approve and
adopt the Merger Agreement and for any other matter to be acted upon or which
may properly come before the Netlink Special Meeting. Holders of the Netlink
Series E Preferred Stock are entitled to one vote for every twenty shares of
Netlink Series E Preferred Stock held by such holder on the proposal to approve
and adopt the Merger Agreement and for any other matter to be acted upon or
which may properly come before the Netlink Special Meeting. Holders of shares
of Netlink 1993 Preferred Stock are entitled to one vote for each share of
Netlink 1993 Preferred Stock held by the holder on the proposal to convert each
share of Netlink 1993 Preferred Stock into one share of Netlink Common Stock
and on the proposal to amend the Netlink Preferred Stock Agreement. Holders of
shares of Netlink 1994 Preferred Stock are entitled to one vote for each share
of Netlink 1994 Preferred Stock held by the holder on the proposal to convert
each share of Netlink 1994 Preferred Stock into one share of Netlink Common
Stock and on the proposal to amend the Netlink Preferred Stock Agreement.
Holders of shares of Netlink 1996 Preferred Stock are entitled to one vote for
each share of Netlink 1996 Preferred Stock held by the holder on the proposal
to convert each share of Netlink 1996 Preferred Stock into one share of Netlink
Common Stock and on the proposal to amend the Netlink Preferred Stock
Agreement. The presence of holders of a majority of the shares of Netlink Stock
in person or by proxy is required to constitute a quorum at the Netlink Special
Meeting. See "Netlink Special Meeting--Voting at the Netlink Special Meeting;
Record Date."
Purposes of the Meeting
The purposes of the Netlink Special Meeting are to consider and vote upon (1)
a proposal to approve and adopt the Merger Agreement, pursuant to which, among
other things, Merger Sub will be merged with and into Netlink and Netlink will
become a wholly-owned subsidiary of Cabletron, and each outstanding share of
Netlink Common Stock will be converted into the right to receive shares of
Cabletron Common Stock at the Exchange Ratio, (2) a proposal to convert
immediately prior to the Merger each outstanding share of Netlink 1993
Preferred Stock into one share of Netlink Common Stock, (3) a proposal to
convert immediately prior to the Merger each outstanding share of Netlink 1994
Preferred Stock into one share of Netlink Common Stock, (4) a proposal to
convert immediately prior to the Merger each outstanding share of Netlink 1996
Preferred Stock into one share of Netlink Common Stock, (5) a proposal to amend
immediately prior to the Merger the Netlink Preferred Stock Agreement and (6)
such other matters as may properly be brought before the Netlink Special
Meeting. See "Netlink Special Meeting--Matters To Be Considered at the Netlink
Special Meeting."
Vote Required
The approval and adoption by the Netlink stockholders of the Merger Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of Netlink Stock voting together as a single class (for the
purpose of this vote each share of Netlink Preferred Stock shall be entitled to
that number of votes equal to the number of shares of Netlink Common Stock into
which it is currently convertible); the affirmative vote of the holders of 60%
of the outstanding shares of the Netlink 1993 Preferred Stock voting separately
as a class; the affirmative vote of the holders of 60% of the outstanding
shares of the Netlink 1994 Preferred Stock voting separately as a class; and
the affirmative vote of the holders of 60% of the outstanding shares of the
Netlink 1996 Preferred Stock voting separately as a class. See "Netlink Special
Meeting--Voting at the Netlink Special Meeting; Record Date."
The conversion of each outstanding share of Netlink 1993 Preferred Stock into
one share of Netlink Common Stock will require the affirmative vote of the
holders of a majority of the outstanding shares of the Netlink 1993 Preferred
Stock voting separately as a class. The conversion of each outstanding share of
Netlink 1994 Preferred Stock into one share of Netlink Common Stock will
require the affirmative vote of the holders of a majority of the outstanding
shares of the Netlink 1994 Preferred Stock voting separately as a class. The
conversion of each outstanding share of Netlink 1996 Preferred Stock into one
share of Netlink Common Stock will require the affirmative vote of the holders
of a majority of the outstanding shares of the Netlink 1996 Preferred Stock
voting separately as a class. See "Netlink Special Meeting--Voting at the
Netlink Special Meeting; Record Date."
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The approval of the proposal to amend the Netlink Preferred Stock Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of the Netlink 1993 Preferred Stock, the Netlink 1994
Preferred Stock and the Netlink 1996 Preferred Stock, voting together as a
single class. See "Netlink Special Meeting--Voting at the Netlink Special
Meeting; Record Date" and "Amendment to the Netlink Preferred Stock Agreement."
As of the Netlink Record Date, directors and executive officers of Netlink
and their affiliates have the right to vote approximately 53.1% of the
outstanding shares of Netlink Stock, 68.7% of the outstanding shares of Netlink
1993 Preferred Stock, 49.8% of the outstanding shares of Netlink 1994 Preferred
Stock, 36.9% of the outstanding shares of Netlink 1996 Preferred Stock and none
of the Netlink Series E Preferred Stock. Each of the directors and executive
officers has advised Netlink that he or she presently intends to vote or direct
the vote of all the outstanding shares of Netlink Stock over which he or she
has voting control in favor of approval and adoption of the Merger Agreement,
in favor of converting each series of Netlink Preferred Stock into Netlink
Common Stock and in favor of amending the Netlink Preferred Stock Agreement.
See "The Merger--Interests of Certain Persons in the Merger" and "Principal
Stockholders of Netlink."
AMENDMENT TO THE NETLINK PREFERRED STOCK AGREEMENT
The Netlink Preferred Stock Agreement grants certain registration rights and
rights of first refusal to holders of Netlink 1993 Preferred Stock, Netlink
1994 Preferred Stock and Netlink 1996 Preferred Stock. The Netlink Preferred
Stock Agreement also contains certain financial and other covenants of Netlink.
It is a condition to the consummation of the Merger that the registration
rights be terminated prior to the Effective Time. In addition, Cabletron has
requested that the rights of first refusal and covenants also be terminated
prior to the Effective Time. The vote of a majority of the Netlink 1993
Preferred Stock, Netlink 1994 Preferred Stock and Netlink 1996 Preferred Stock,
voting as a single class, is required to terminate the registration rights,
rights of first refusal and covenants. See "Amendment to the Netlink Preferred
Stock Agreement."
RECOMMENDATION OF NETLINK'S BOARD OF DIRECTORS
The Board of Directors of Netlink has unanimously approved the Merger
Agreement and the Merger and recommends that holders of Netlink Stock approve
and adopt the Merger Agreement and the Merger. The Board of Directors of
Netlink also recommends that holders of Netlink 1993 Preferred Stock, Netlink
1994 Preferred Stock and Netlink 1996 Preferred Stock vote to convert their
respective shares of Netlink Preferred Stock into Netlink Common Stock and vote
to amend the Netlink Preferred Stock Agreement. See "The Merger--Background of
the Merger; Recommendation of Netlink's Board of Directors."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Netlink Board of Directors with
respect to the Merger Agreement and the Merger, the Netlink stockholders should
be aware that all outstanding Netlink Options, including Netlink Options held
by Netlink's directors and officers, will become exercisable in full upon the
consummation of the Merger and that certain directors and officers of Netlink
have entered into employment agreements with Cabletron with respect to
employment following the Merger. The accelerated vesting schedule of the
Netlink options and the employment arrangements present these directors and
officers with potential conflicts of interest. See "The Merger--Interests of
Certain Persons in the Merger," and "--Employment Agreements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), so that, except
for cash received in lieu of fractional shares, no gain or loss will be
recognized for federal income tax purposes by a holder of Netlink Stock upon
receipt of Cabletron
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Common Stock in exchange for shares of Netlink Stock pursuant to the Merger. It
is a condition to the Merger that Cabletron and Netlink shall have each
received an opinion from their respective counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code. Such opinions will be based on various representations, qualifications
and assumptions. Holders of Netlink Stock are urged to consult their own tax
advisors concerning the specific tax consequences of the Merger to them,
including any foreign, state or local tax consequences of the Merger. See "The
Merger--Certain Federal Income Tax Consequences."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. The Merger Agreement provides that a
condition to the consummation of the Merger is the receipt by Cabletron and
Netlink of a letter from KPMG Peat Marwick LLP, independent certified public
accountants of Cabletron, to the effect that the Merger qualifies for pooling
of interests accounting treatment if consummated in accordance with the Merger
Agreement and the receipt by Netlink of a letter from Ernst & Young LLP,
independent auditors of Netlink, concurring with the conclusion of Netlink's
management that no conditions exist related to Netlink that would preclude
Cabletron's accounting for the merger with Netlink as a pooling of interests.
See "The Merger--Anticipated Accounting Treatment" and "The Merger Agreement--
Conditions to the Merger."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of stockholders of Netlink currently are governed by the General
Corporation Law of the State of Delaware (the "DGCL"), Netlink's Certificate of
Incorporation and Netlink's Bylaws. Upon consummation of the Merger,
stockholders of Netlink will become stockholders of Cabletron, which is also a
Delaware corporation, and their rights as stockholders of Cabletron will be
governed by Cabletron's Restated Certificate of Incorporation, Cabletron's
Bylaws and, as before the Merger, the DGCL. For a discussion of various
differences between the rights of stockholders of Netlink and the rights of
stockholders of Cabletron, see "Comparison of Stockholder Rights."
RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE MERGER AGREEMENT AND THE CONSUMMATION
OF THE MERGER, NETLINK STOCKHOLDERS SHOULD CAREFULLY REVIEW AND CONSIDER THE
INFORMATION CONTAINED BELOW UNDER THE CAPTION "RISK FACTORS."
EMPLOYMENT AGREEMENTS
It is a condition to consummation of the Merger that certain specified
employees of Netlink have entered into employment agreements with Cabletron,
that such agreements be in force at the Effective Time and that such employees
shall be employed by Netlink immediately prior to the Effective Time. Each of
these employees has entered into an employment agreement with Cabletron. See
"The Merger--Employment Agreements."
APPRAISAL RIGHTS
If the Merger is approved by the required vote of Netlink stockholders and is
not abandoned or terminated, holders of Netlink Stock on the Netlink Record
Date who did not vote for the Merger may, by complying with the procedures
prescribed by the DGCL, be entitled to appraisal rights as described therein.
See "The Merger--Appraisal Rights."
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RISK FACTORS
The following risk factors should be considered by holders of Netlink Common
Stock in evaluating whether to approve and adopt the Merger Agreement and the
consummation of the Merger and thereby become holders of Cabletron Common
Stock. These factors should be considered in conjunction with the other
information contained in this Proxy Statement/Prospectus, the Annexes hereto
and the documents incorporated by reference herein.
Competition; Sales Margins. 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. Cabletron's competitors consist
primarily of three types of companies: independent network vendors; large
computer manufacturers; and manufacturers of specific network devices.
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. See "Risk Factors--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.
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. For
example, pursuant to agreements with Cisco, Cabletron markets certain Cisco
products in conjunction with its own products. Cisco has notified Cabletron
that these agreements will not be renewed as they expire or will be
terminated. The first of these agreements expired on October 22, 1996.
Cabletron has acquired or developed products intended to replace certain of
these Cisco products. There can be no assurance that Cabletron will not
experience difficulties that could delay or interfere with Cabletron's ability
to successfully introduce, manufacture or market such replacement products or
to supply Cisco products to its customers. 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.
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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 Netlink, Network Express, Inc., ZeitNet, Inc. 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, product mix, competitive pricing pressures,
materials costs and timely availability, revenue and expenses related to new
products and new versions or upgrades of existing products, as well as delays
in customer purchases in anticipation of the introduction of new products or
new versions of existing products by Cabletron or its competitors. 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 aversely affect future earnings. Accordingly, past results may not be
indicative of future results.
Acquisition Strategy. Cabletron has addressed the need to develop new
products, in part, through the acquisition of other companies. Acquisitions,
such as the Merger, 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.
10
<PAGE>
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.
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. 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.
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.
11
<PAGE>
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 sub-
assemblies 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.
12
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED SELECTED FINANCIAL DATA
The following Selected Historical Financial Data of Cabletron and Netlink
has been derived from their respective consolidated historical financial
statements and should be read in conjunction with such consolidated financial
statements and notes thereto included elsewhere herein or incorporated by
reference in this Proxy Statement/Prospectus. The Netlink historical financial
data as of and for the nine months ended September 30, 1996 and 1995 has been
prepared on the same basis as the historical financial data derived from its
audited financial statements and, in the opinion of Netlink's management,
contains all adjustments, consisting only of normal recurring accruals,
necessary for the fair presentation of the financial position and results of
operations for such periods.
The Unaudited Pro Forma Combined Selected Financial Data gives effect to the
Merger on a pooling of interests basis, and should be read in conjunction with
the unaudited pro forma combined condensed financial statements and notes
thereto included elsewhere herein. The unaudited pro forma combined condensed
balance sheet assumes that the Merger took place on February 29, 1996 and
combines Cabletron's February 29, 1996 consolidated balance sheet with
Netlink's December 31, 1995 balance sheet. The unaudited pro forma combined
condensed statements of income assume that the Merger took place as of the
beginning of the periods presented and combine Cabletron's consolidated
statements of income for the fiscal years ended February 29, 1996, and
February 28, 1995 and 1994 with Netlink's results of operations for the years
ended December 31, 1995, 1994 and 1993, respectively. The consolidated
financial statements of Cabletron give retroactive effect to the mergers of
Cabletron and ZeitNet, Inc. and of Cabletron and Network Express, Inc., which
have been accounted for as poolings of interests. The unaudited pro forma
financial data for Cabletron's fiscal years ended in 1993 and 1992 is not
presented as it is not meaningful. No cash dividends have been declared or
paid on Cabletron Common Stock or Netlink Common Stock.
SELECTED HISTORICAL FINANCIAL DATA
CABLETRON
<TABLE>
<CAPTION>
YEAR ENDED THE LAST DAY OF FEBRUARY,
-------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $1,093,107 $824,676 $602,486 $419,607 $290,763
Income from operations...... 209,257 238,953 176,503 124,023 86,225
Net income.................. 147,101(1) 162,595 118,321 83,201 56,287
Net income per share........ $ 1.97 $ 2.22 $ 1.65 $ 1.18 $ 0.80
Weighted average number of
shares outstanding......... 74,718 73,355 71,846 70,728 70,104
BALANCE SHEET DATA:
Working capital............. $ 487,244 $379,896 $258,463 $234,114 $162,459
Total assets................ 992,276 697,686 502,377 344,517 236,736
Total stockholders' equity.. 811,285 592,726 425,719 289,279 203,449
</TABLE>
- --------
(1) Net income for fiscal 1996 included a net of tax charge of approximately
$52.3 million, or $0.73 per share, related to the acquisition of the
Enterprise Networks Business Unit of Standard Microsystems Corporation
("SMC") and approximately $8.4 million net of a tax charge related to the
acquisition made by a Cabletron subsidiary, Network Express, Inc., of
Fivemere, Ltd.
13
<PAGE>
NETLINK
<TABLE>
<CAPTION>
NINE MONTH PERIOD
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 7,242 $ 8,542 $ 3,592 $ 3,275 $ 3,744 $ 7,935 $ 5,424
Loss from operations.... (2,322) (1,937) (3,267) (1,962) (1,623) (2,856) (1,141)
Net loss................ (2,616) (6,021) (3,318) (2,064) (1,652) (2,887) (1,469)
Net loss per share(1)... $ (2.95) $ (6.91) $ (4.47) $(13.57) $(10.90) $ (1.41) $ (2.22)
Weighted average number
of shares
outstanding(1)......... 885 872 742 152 152 2,049 662
BALANCE SHEET DATA:
Working capital......... $(1,586) $ 1,782 $ 1,155 $ 779 $ 684 $ 2,690 $ (216)
Total assets............ 4,632 4,514 2,438 1,666 1,529 8,671 3,884
Total stockholders'
equity (deficit)....... (1,399) 1,216 1,488 (1,151) 894 4,295 (252)
</TABLE>
- --------
(1) The net loss per share and weighted average number of shares outstanding
are based on the number of Netlink Common Stock currently outstanding, not
taking into account the conversion of Netlink Preferred Stock into Netlink
Common Stock. It is a condition to consummation of the Merger that all
Netlink Preferred Stock convert into Netlink Common Stock. Assuming the
conversion of Netlink Preferred Stock into Netlink Common Stock, which
will occur upon consummation of the Merger, had occurred at the later of
the date of its issuance or the earliest period presented, the net loss
per share and weighted average number of shares for Netlink would have
been:
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------- -------------
1995 1994 1993 1992 1991 1996 1995
----- ----- ----- ------ ------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental pro forma net
loss per share............ $(.32) $(.87) $(.78) $(2.26) $(1.81) $(.24) $(.24)
Supplemental pro forma
weighted average number of
shares outstanding........ 8,130 6,886 4,241 913 912 12,026 6,080
</TABLE>
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED THE LAST DAY OF FEBRUARY,
---------------------------------------
1996 1995 1994
--------------------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENTS OF
INCOME DATA:(1)
Net sales............................. $ 1,100,349 $ 833,218 $ 606,078
Income from operations................ 206,935 237,016 173,236
Net income............................ 144,485 156,574 115,003
Net income per share.................. $ 1.90 2.11 1.59
Weighted average number of shares
outstanding.......................... 75,906 74,361 72,465
<CAPTION>
FEBRUARY 29,
1996
-----------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET
DATA:(1)
Working capital....................... $ 481,879
Total assets.......................... 997,230
Stockholders' equity.................. 806,108
</TABLE>
- --------
(1) Cabletron expects to record charges to operations, currently estimated to
be between $6 to $8 million in the quarter in which the Merger is
consummated. Such expenses reflect direct transaction costs, consisting
primarily of investment banking fees and costs associated with combining
the operations of the two companies. An estimated pretax charge of $6.25
million, $3.8 million on an after-tax basis, is reflected in the Unaudited
Pro Forma Combined Balance Sheet but has not been reflected in the
Unaudited Combined Condensed Statements of Income because they are
directly attributable to the Merger and are nonrecurring. The range is a
preliminary estimate only and is therefore subject to change.
See "Unaudited Pro Forma Combined Condensed Financial Data" and the notes
thereto.
14
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of
Cabletron and Netlink and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling of interests basis
assuming the issuance of 0.14609 shares of Cabletron Common Stock in exchange
for each share of Netlink Common Stock. This data should be read in
conjunction with the Selected Historical Financial Data, the Unaudited Pro
Forma Combined Condensed Financial Data and the separate historical
consolidated financial statements of Cabletron and Netlink included elsewhere
herein or incorporated by reference in this Proxy Statement/Prospectus. The
unaudited pro forma combined financial data is not necessarily indicative of
the operating results that would have been achieved had the transaction been
in effect as of the beginning of the periods presented and should not be
construed as representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED LAST DAY OF
FEBRUARY,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
HISTORICAL CABLETRON:
Net income......................................... $ 1.97 2.22 1.65
Book value......................................... $10.75
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
HISTORICAL NETLINK:
Net income (loss).................................. $(2.95) $(6.91) $(4.47)
Book value......................................... $(.17)
<CAPTION>
YEAR ENDED LAST DAY OF
FEBRUARY,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
PRO FORMA COMBINED PER CABLETRON SHARE(1):
Net income......................................... $ 1.90 2.11 1.59
Book value......................................... $10.51
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
EQUIVALENT PRO FORMA COMBINED PER NETLINK SHARE(2):
Net income......................................... $ .28 .31 .23
Book value......................................... $ 1.54
</TABLE>
- --------
(1) Cabletron expects to record charges to operations, currently estimated to
be between $6 to $8 million in the quarter in which the Merger is
consummated. Such expenses reflect direct transaction costs, consisting
primarily of investment banking fees and costs associated with combining
the operations of the two companies. An estimated pretax charge of $6.25
million, $3.8 million on an after-tax basis, is reflected in the Unaudited
Pro Forma Combined Balance Sheet but has not been reflected in the
Unaudited Combined Condensed Statements of Income because they are
directly attributable to the Merger and are nonrecurring. The range is a
preliminary estimate only and is therefore subject to change.
(2) The equivalent pro forma combined per Netlink share amounts are calculated
by multiplying the pro forma combined per Cabletron share amounts by the
Exchange Ratio of 0.14609 shares of Cabletron Common Stock for each share
of Netlink Common Stock.
15
<PAGE>
MARKET PRICE PER SHARE DATA
CABLETRON
Cabletron Common Stock is listed and traded on the New York Stock Exchange
under the symbol "CS". As of September 30, 1996, Cabletron had 2,849
stockholders of record. The following table sets forth the high and low
closing sales prices per share of Cabletron Common Stock as reported on the
NYSE for the quarterly periods presented below, which periods correspond to
Cabletron's quarterly fiscal periods for financial reporting purposes.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED FEBRUARY 28, 1995
First Quarter.................................................. $52.70 $37.20
Second Quarter................................................. 44.10 34.00
Third Quarter.................................................. 52.38 41.15
Fourth Quarter................................................. 48.25 37.50
FISCAL YEAR ENDED FEBRUARY 29, 1996
First Quarter.................................................. $54.88 $38.88
Second Quarter................................................. 59.13 49.50
Third Quarter.................................................. 85.13 52.50
Fourth Quarter................................................. 82.50 67.50
FISCAL YEAR ENDING FEBRUARY 28, 1997
First Quarter.................................................. $86.50 $63.38
Second Quarter................................................. 72.13 53.00
Third Quarter (through October , 1996)........................
</TABLE>
NETLINK
There is not an established trading market for the Netlink Stock. On the
Netlink Record Date, there were 149 holders of Netlink Common Stock, 20
holders of Netlink 1993 Preferred Stock, 60 holders of Netlink 1994 Preferred
Stock, 39 holders of Netlink 1996 Preferred Stock and one holder of Netlink
Series E Preferred Stock.
DIVIDEND POLICY
Neither Cabletron nor Netlink has ever paid a cash dividend and each of
Cabletron and Netlink currently intends to retain all of its earnings for use
in its business to finance future growth and, accordingly, do not anticipate
paying cash dividends in the foreseeable future.
RECENT CLOSING PRICES
The last reported sale price per share of the Cabletron Common Stock as
reported on the NYSE on September 26, 1996, the last trading day before the
announcement of the proposed Merger, was $68.38.The last reported sale price
per share of the Cabletron Common Stock on October 25, 1996, the latest
practicable trading day before the printing of this Proxy Statement/Prospectus
was $60.125. Based upon the last reported sale price of Cabletron Stock on
October 25, 1996, and an Exchange Ratio equal to 0.14609, each share of
Netlink Stock would be converted in the Merger into the right to receive
Cabletron Common Stock having a market value of $8.78.
Because the market price of Cabletron Common Stock is subject to
fluctuation, the market value of the shares of Cabletron Common Stock that
holders of Netlink Common Stock will receive in the Merger may increase or
decrease prior to and following the Merger. STOCKHOLDERS ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR CABLETRON COMMON STOCK. NO ASSURANCE CAN BE
GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR CABLETRON COMMON STOCK. See "Risk
Factors--Volatility of Stock Price."
16
<PAGE>
NETLINK SPECIAL MEETING
TIME, PLACE AND DATE
The Netlink Special Meeting will be held on , 1996 at the offices of
Netlink's counsel Testa, Hurwitz & Thibeault, LLP at 125 High Street, Boston,
Massachusetts 02110, commencing at 10:00 a.m., local time.
MATTERS TO BE CONSIDERED AT THE NETLINK SPECIAL MEETING
At the Netlink Special Meeting, holders of shares of Netlink Stock will
consider and vote upon (1) a proposal to approve and adopt the Merger
Agreement, (2) a proposal to convert immediately prior to the Merger each
outstanding share of Netlink 1993 Preferred Stock into one share of Netlink
Common Stock, (3) a proposal to convert immediately prior to the Merger each
outstanding share of Netlink 1994 Preferred Stock into one share of Netlink
Common Stock, (4) a proposal to convert immediately prior to the Merger each
outstanding share of Netlink 1996 Preferred Stock into one share of Netlink
Common Stock, (5) a proposal to amend immediately prior to the Merger the
Netlink Preferred Stock Agreement to terminate Articles IV, V and VI of the
Netlink Preferred Stock Agreement (relating to certain covenants of Netlink,
registration rights and rights of first refusal) and (6) such other matters as
may properly be brought before the Netlink Special Meeting. The Directors of
Netlink have unanimously approved the Merger Agreement and recommend a vote
FOR (i) approval and adoption of the Merger Agreement by the stockholders of
Netlink, (ii) converting each outstanding share of Netlink 1993 Preferred
Stock into one share of Netlink Common Stock, (iii) converting each
outstanding share of Netlink 1994 Preferred Stock into one share of Netlink
Common Stock, (iv) converting each outstanding share of Netlink 1996 Preferred
Stock into one share of Netlink Common Stock, and (v) amending the Netlink
Preferred Stock Agreement.
VOTING AT THE NETLINK SPECIAL MEETING; RECORD DATE
The Netlink Board of Directors has fixed , 1996 as the Netlink Record
Date for the determination of the Netlink stockholders entitled to notice of
and to vote at the Netlink Special Meeting. Accordingly, only holders of
record of shares of Netlink Stock on the Netlink Record Date will be entitled
to notice of and to vote at the Netlink Special Meeting. As of such Netlink
Record Date, there were outstanding 2,406,840 shares of Netlink Common Stock
held by approximately 149 holders of record, 3,870,030 shares of Netlink 1993
Preferred Stock, held by approximately 20 holders of record, 3,207,666 shares
of Netlink 1994 Preferred Stock, held by approximately 60 holders of record,
3,482,901 shares of Netlink 1996 Preferred Stock, held by approximately 39
holders of record, and 1,333,333 shares of Netlink Series E Preferred Stock,
held by approximately one holder of record. Each holder of record of shares of
Netlink Common Stock on the Netlink Record Date is entitled to cast one vote
per share on the proposal to approve and adopt the Merger Agreement and on any
other proposal properly submitted for the vote of the Netlink stockholders,
either in person or by properly executed proxy, at the Netlink Special
Meeting. Each holder of record of shares of Netlink 1993 Preferred Stock on
the Netlink Record Date is entitled to cast one vote per share on the proposal
to approve and adopt the Merger Agreement, on the proposal to convert each
share of Netlink 1993 Preferred Stock into one share of Netlink Common Stock,
on the proposal to amend the Netlink Preferred Stock Agreement and on any
other proposal properly submitted for the vote of the Netlink stockholders,
either in person or by properly executed proxy, at the Netlink Special
Meeting. Each holder of record of shares of Netlink 1994 Preferred Stock on
the Netlink Record Date is entitled to cast one vote per share on the proposal
to approve and adopt the Merger Agreement, on the proposal to convert each
share of Netlink 1994 Preferred Stock into one share of Netlink Common Stock,
on the proposal to amend the Netlink Preferred Stock Agreement and on any
other proposal properly submitted for the vote of the Netlink stockholders,
either in person or by properly executed proxy, at the Netlink Special
Meeting. Each holder of record of shares of Netlink 1996 Preferred Stock on
the Netlink Record Date is entitled to cast one vote per share on the proposal
to approve and adopt the Merger Agreement, on the proposal to convert each
share of Netlink 1996 Preferred Stock into one share of Netlink Common Stock,
on the proposal to amend the Netlink Preferred Stock Agreement and on any
other proposal properly submitted
17
<PAGE>
for the vote of the Netlink stockholders, either in person or by properly
executed proxy, at the Netlink Special Meeting. Each holder of record of
shares of Netlink Series E Preferred Stock on the Netlink Record Date is
entitled to cast one vote for every twenty shares of Netlink Series E
Preferred Stock owned by such holder on the proposal to approve and adopt the
Merger Agreement and on any other proposal properly submitted for the vote of
the Netlink stockholders, either in person or by properly executed proxy, at
the Netlink Special Meeting. The presence, in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of Netlink Stock
entitled to vote is necessary to constitute a quorum at the Netlink Special
Meeting.
The approval and adoption by Netlink stockholders of the Merger Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of Netlink Stock voting together as a class (for the
purpose of this vote each share of Netlink Preferred Stock shall be entitled
to that number of votes equal to the number of shares of Netlink Common Stock
into which it is currently convertible), the affirmative vote of the holders
of 60% of the outstanding shares of Netlink 1993 Preferred Stock voting
separately as a class, the affirmative vote of the holders of 60% of the
outstanding shares of Netlink 1994 Preferred Stock voting separately as a
class, and the affirmative vote of the holders of 60% of the outstanding
shares of Netlink 1996 Preferred Stock voting separately as a class.
The conversion of Netlink 1993 Preferred Stock into Netlink Common Stock
will require the affirmative vote of the holders of a majority of the
outstanding shares of Netlink 1993 Preferred Stock, voting separately as a
class. The conversion of Netlink 1994 Preferred Stock into Netlink Common
Stock will require the affirmative vote of the holders of a majority of the
outstanding shares of Netlink 1994 Preferred Stock, voting separately as a
class. The conversion of Netlink 1996 Preferred Stock into Netlink Common
Stock will require the affirmative vote of the holders of a majority of the
outstanding shares of Netlink 1996 Preferred Stock, voting separately as a
class.
The approval of the proposal to amend the Netlink Preferred Stock Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of the Netlink 1993 Preferred Stock, the Netlink 1994
Preferred Stock and the Netlink 1996 Preferred Stock, voting together as a
single class.
Abstentions will be included in determining the number of shares present and
voting at the meeting for purposes of determining the presence of a quorum,
but will not be counted as a vote cast on the matter. Therefore, abstentions
will have the same effect as votes against such proposal.
Approval of the Merger Agreement and the Merger shall constitute approval of
the terms of the Escrow Agreement and the appointment of Mr. Geoffrey Yang as
representative of the Netlink stockholders under the Escrow Agreement.
As of the Netlink Record Date, directors and executive officers of Netlink
and their affiliates have the right to vote 6,979,852 shares, or approximately
53.1% of the outstanding shares of Netlink Stock, 1,366,495 shares, or
approximately 56.7% of the outstanding shares of Netlink Common Stock,
2,728,660 shares, or approximately 68.7% of the outstanding shares of Netlink
1993 Preferred Stock, 1,598,601 shares, or approximately 49.8% of the
outstanding shares of Netlink 1994 Preferred Stock, 1,286,090 shares, or
approximately 36.9% of the outstanding shares of Netlink 1996 Preferred Stock
and no shares of Netlink Series E Preferred Stock. Each of the directors and
executive officers has advised Netlink that he or she intends to vote or
direct the vote of all shares of Netlink Stock over which he or she has voting
control, to the extent such shares are entitled to vote on such matter, in
favor of each of the five specific proposals described above. As of the
Netlink Record Date, neither Cabletron nor any of its subsidiaries owned any
outstanding shares of Netlink Common Stock.
PROXIES
All shares of Netlink Stock which are entitled to vote and are represented
at the Netlink Special Meeting by properly executed proxies received prior to
or at the Netlink Special Meeting, and not revoked, will be voted at
18
<PAGE>
such Special Meeting in accordance with the instructions indicated on such
proxies. If no instructions are indicated, such proxies will be voted FOR
approval and adoption of the Merger Agreement, FOR approval of converting the
Netlink 1993 Preferred Stock into Netlink Common Stock, FOR approval of
converting the Netlink 1994 Preferred Stock into Netlink Common Stock, FOR
approval of converting the Netlink 1996 Preferred Stock into Netlink Common
Stock and FOR approval of amending the Netlink Preferred Stock Agreement. The
Board of Directors of Netlink knows of no matters to be presented at the
Netlink Special Meeting other than those described in this Proxy
Statement/Prospectus. If any other matters are properly presented at the
Netlink Special Meeting for consideration, including, among other things,
consideration of a motion to adjourn the Netlink Special Meeting to another
time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the enclosed form of
proxy and acting thereunder will have discretion to vote on such matters in
accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Netlink, at or before the taking of the vote at the
relevant Special Meeting, a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a later dated proxy relating to the same
shares and delivering it to the Secretary of Netlink before the taking of the
vote at the Netlink Special Meeting, or (iii) attending the Netlink Special
Meeting and voting in person (although attendance at the Netlink Special
Meeting will not in and of itself constitute a revocation of a proxy). Any
written notice of revocation or subsequent proxy should be sent so as to be
delivered to Netlink, Inc., 1881 Worcester Road, Framingham, Massachusetts
01701, Attention: Secretary, or hand delivered to the Secretary of Netlink at
or before the taking of the vote at the Netlink Special Meeting.
All expenses of this solicitation will be borne by Netlink and the costs of
preparing this Proxy Statement/Prospectus will be borne by Cabletron. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of Cabletron and Netlink in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Netlink will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
NETLINK STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. NETLINK STOCKHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
THE MERGER
GENERAL
The Merger Agreement provides for the merger of Merger Sub, a wholly-owned
subsidiary of Cabletron, with and into Netlink, with the result that Netlink
would become a wholly-owned subsidiary of Cabletron. For the Merger to be
consummated it must be approved by the Netlink stockholders and the other
conditions specified in the Merger Agreement must be satisfied or waived. The
discussion in this Proxy Statement/Prospectus of the Merger and the
description of the principal terms and conditions of the Merger Agreement are
subject to and qualified in their entirety by reference to the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Annex A and is incorporated herein by reference. Netlink stockholders are
urged to read the Merger Agreement in its entirety.
CONVERSION OF SHARES
Immediately prior to the Merger, it is expected that each share of Netlink
Preferred Stock will convert into Netlink Common Stock. Upon the consummation
of the Merger, each then outstanding share of Netlink Common
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Stock will automatically be converted into the right to receive the number of
shares of Cabletron Common Stock equal to the Exchange Ratio. Based upon the
capitalization of Netlink on October 24, 1996, it is currently anticipated
that each share of Netlink Common Stock will convert into the right to receive
0.14609 shares of Cabletron Common Stock. No fractional shares of Cabletron
Common Stock will be issued in the Merger. Instead, each Netlink stockholder
who would otherwise be entitled to receive a fraction of a share of Cabletron
Common Stock will receive an amount of cash, rounded down to the nearest whole
cent, equal to the closing price of Cabletron Common Stock on the NYSE on the
date of the Effective Time, multiplied by the fraction of a share of Cabletron
Common Stock to which the stockholder would otherwise be entitled. In the
aggregate, Cabletron will exchange approximately 2,258,975 shares of Cabletron
Common Stock for all the shares of Netlink Stock outstanding immediately prior
to the Effective Time, including shares of Netlink Stock issuable upon the
conversion or exercise of any option, warrant, preferred stock or other
security convertible into or exercisable for shares of Netlink Stock that are
outstanding immediately prior to the Effective Time. Based upon the
capitalization of Netlink and Cabletron as of the date of the Merger
Agreement, the stockholders of Netlink will own Cabletron Common Stock
representing approximately 3% of the Cabletron Common Stock outstanding
immediately after consummation of the Merger.
CONVERSION OF NETLINK OPTIONS
Upon consummation of the Merger, each then outstanding Netlink Option will
be assumed by Cabletron and will automatically be converted into an option to
purchase the number of shares of Cabletron Common Stock (rounded down to the
nearest whole number) determined by multiplying the number of shares of
Netlink Common Stock subject to the Netlink Option by the Exchange Ratio, at
an exercise price per share equal to the aggregate exercise price for Netlink
Common Stock purchasable pursuant to such Netlink Option divided by the
product of (i) the number of shares of Netlink Common Stock purchasable
pursuant to such Netlink Option and (ii) the Exchange Ratio. The other terms
of the Netlink Options will remain unchanged. Cabletron will file a
Registration Statement on Form S-8, with the Commission with respect to the
shares of Cabletron Common Stock issuable upon exercise of the assumed Netlink
Options.
As of the Record Date, 2,327,946 shares of Netlink Common Stock were subject
to outstanding Netlink Options, all of which will become exercisable prior to
the expected Effective Time, exercisable. Upon the assumption of such options
by Cabletron upon consummation of the Merger, approximately 340,089 shares of
Cabletron Common Stock will be subject to such options.
EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, a letter of transmittal
with instructions will be mailed to each Netlink stockholder for use in
exchanging Netlink Stock certificates for Cabletron Common Stock certificates.
Upon surrender of a Netlink Stock certificate for cancellation to the exchange
agent in connection with the Merger, Boston Equiserve or such other agent or
agents as may be appointed by Cabletron, together with such letter of
transmittal, duly executed in accordance with the instructions thereto, the
holder of such certificate will be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Cabletron Common Stock
equal to the Exchange Ratio multiplied by the number of shares of Netlink
Common Stock subject to the Netlink Stock certificate being exchanged. It is a
condition to consummation of the Merger that all Netlink Preferred Stock
convert into Netlink Common Stock immediately prior to the Effective Time. At
such time each outstanding Netlink Preferred Stock certificate shall be deemed
to evidence the ownership of the number of whole shares of Netlink Common
Stock into which such share of Netlink Preferred Stock shall have been
converted. No Netlink Common Stock certificates will be issued as a result of
such conversion. Accordingly, holders of Netlink Preferred Stock certificates
will exchange such certificates as herein provided.
Immediately after the Effective Time, each outstanding Netlink Stock
certificate will be deemed for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of whole shares of
Cabletron Common Stock into which such shares of Netlink Stock shall have been
so converted as a result of the Merger and the right to receive an amount in
cash in lieu of the issuance of any fractional shares.
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No dividends or other distributions with respect to Cabletron Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered Netlink Stock certificate with respect to the shares of
Cabletron Common Stock represented thereby until the holder of record of such
certificate surrenders such certificate. Subject to applicable law, following
surrender of any such certificate, there will be paid to the record holder of
the certificates representing whole shares of Cabletron Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of any such dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such shares of Cabletron
Common Stock and at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time and a payment
date subsequent to such surrender.
If any certificate for shares of Cabletron Common Stock is to be issued in a
name other than that in which the Netlink Stock certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance
thereof that the Netlink Stock certificate so surrendered be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange have paid to Cabletron or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Cabletron Common Stock in any name other than that of the registered holder of
the Netlink Stock certificate surrendered, or established to the satisfaction
of Cabletron or any agent designated by it that such tax has been paid or is
not payable.
HOLDERS OF NETLINK STOCK CERTIFICATES SHOULD NOT SUBMIT THEIR CERTIFICATES FOR
EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS
REFERRED TO ABOVE.
NOTIFICATION REGARDING NETLINK OPTIONS
Following the Effective Time, Cabletron will issue to each person who,
immediately prior thereto was a holder of an outstanding Netlink Option, a
document evidencing the assumption of such Netlink Option by Cabletron. Such
assumption will be automatic and no action will be required on the part of the
option holder to convert such holder's Netlink Option into an option to
purchase shares of Cabletron Common Stock.
EFFECTIVE TIME
Consummation of the Merger will occur upon the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware or at such later
time as is specified on such certificate (the "Effective Time"). The filing of
the Certificate of Merger will occur as soon as practicable after the
satisfaction or waiver of all conditions to the closing of the transactions
contemplated by the Merger Agreement. The Merger Agreement may be terminated
by any party thereto if the Merger shall not have been consummated on or
before February 28, 1997. The Merger Agreement is also subject to termination
upon the occurrence of certain other events. See "The Merger Agreement--
Conditions to the Merger" and "--Termination."
BACKGROUND OF THE MERGER; RECOMMENDATION OF NETLINK'S BOARD OF DIRECTORS
In early 1995 Netlink began marketing and building distribution channels for
its frame relay switching and network access products. As part of this
strategy, Netlink discussed potential strategic and product distribution
relationships with a number of organizations that had well developed sales and
marketing capabilities in Netlink's target market. In November 1995, senior
Netlink management met with Gregory DeMund, Cabletron's Director of Business
Development, to discuss potential business relationships between Netlink and
Cabletron. At the same time, members of Cabletron's engineering staff met with
Netlink's engineers to review Netlink's products and technology.
There were no further substantive contacts until August 1996, when Mr.
DeMund contacted Nina Saberi, Netlink's Chief Executive Officer, to renew
discussions regarding a potential strategic relationship. At approximately the
same time, Larry Lenihan of Broadview Associates, an investment banking firm,
also called Ms. Saberi and indicated that Cabletron was interested in
acquiring rights to frame relay access technology.
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On August 26, 1996, Ms. Saberi informed Mr. DeMund that Netlink had received
indications from a third party ("the Other Party") that it was interested in
acquiring Netlink. Mr. DeMund indicated that Cabletron was interested in
exploring a possible acquisition of Netlink. On August 27, 1996, Mr. DeMund,
along with Susan Sabatino, Cabletron's Manager of Remote Access Development
and Michael Skubisz, the Director of Product Marketing, met with Ms. Saberi
and Roger Walton, Netlink's Vice President of Marketing, to discuss Netlink's
technology and business plans and to explore a possible acquisition. On August
28, 1996, Mr. DeMund and David Kirkpatrick, Cabletron's Chief Financial
Officer, called Ms. Saberi to discuss further a possible acquisition and later
that day sent Netlink a letter outlining the terms of a proposed acquisition
of Netlink by Cabletron.
On August 29, 1996 the Netlink Board of Directors held a telephonic meeting
to discuss the proposals from Cabletron and the Other Party. The Board of
Directors of Netlink weighted the relative merits of the proposals of
Cabletron and the Other Party and concluded that proceeding with negotiations
with Cabletron was in the best interests of Netlink shareholders. Accordingly,
the Board of Directors of Netlink, subject to receiving clarification of
certain terms of Cabletron's proposal, authorized Ms. Saberi to execute a non-
binding letter of intent with Cabletron. The Board also instructed Ms. Saberi
to inform the Other Party that Netlink had decided to proceed with an
alternative transaction.
On September 3, 1996 Ms. Saberi met with Craig Benson, the Chairman and
Chief Operating Officer of Cabletron, and Chris Oliver, Cabletron's Director
of Engineering and Manufacturing, at Cabletron's offices in Rochester, New
Hampshire to discuss plans for the operation of Netlink following the
acquisition and the potential technology and product development synergies to
be gained by the combination of the organizations. On September 4, Mr.
Kirkpatrick, Mr. DeMund, Robert Barber, Cabletron's Director of Tax and
Financial Planning, members of Cabletron's engineering staff and Cabletron's
counsel, visited Netlink's offices in Framingham, Massachusetts. Netlink's
management made technical and marketing presentations to the Cabletron
representatives. After the presentation, the terms of the non-binding letter
of intent were discussed in detail. Ms. Saberi then discussed the letter of
intent with Netlink's counsel and after determining that it met the guidelines
established by the Board of Directors, she signed the letter of intent on
behalf of Netlink.
On September 12, 1996 certain members of Netlink's Board of Directors
visited Cabletron in Rochester, New Hampshire and met with several members of
senior Cabletron management to conduct a financial and business review of
Cabletron. After the meeting, the Directors of Netlink met to discuss the
details of the proposed terms of the acquisition, including the terms of the
exchange of shares.
In early September, the parties, together with their respective legal
advisors, commenced negotiation of a merger agreement and various other
aspects of the proposed acquisition. Discussions continued through September
26, 1996. These negotiations and discussions focused on various aspects of the
proposed merger agreement, including (i) developing a mechanism to arrive at
the Exchange Ratio, (ii) the operation of Netlink pending the closing of the
Merger, (iii) the provisions for termination of the Merger Agreement, (iv) the
circumstances under which a termination fee would be paid and the amount of
the termination fee, (v) various provisions related to limitations on
transactions with third parties, and (vi) the extent and nature of
indemnification to be provided by the Netlink shareholders and the associated
escrow agreement. During this period, the Netlink Board of Directors held
telephonic meetings on September 6, September 10 and September 13 to review
the status of the negotiations, the timing of the execution of the merger
agreement and various other matters related to the proposed transaction. At
the September 13 meeting the Netlink Board authorized an amendment to the
letter of intent to extend the term of the letter of intent.
On September 18, 1996, a special meeting of the Cabletron Board of Directors
was held by conference telephone call. Mr. Benson reported to the Board on the
negotiations between Cabletron and Netlink. Mr. Benson discussed Netlink's
business and how its frame relay access and other products would complement
those of Cabletron. The Board discussed information about Netlink contained in
its business plan, including a proposed budget, audited financial statements
for the fiscal year ended December 31, 1995 and unaudited financial statements
through July 30, 1996. Cabletron's legal counsel discussed the terms of the
Merger Agreement which had previously been distributed to the directors. Mr.
Benson reviewed the purchase price and advised the Board that the Exchange
Ratio was fixed, without so-called collars and floors. He also discussed plans
to ensure that
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certain key employees would continue with Netlink after the Merger. After
further discussion and analysis, the Board unanimously voted to proceed with
the Merger and to approve the Merger Agreement and the transactions
contemplated thereby.
On September 24, 1996, the Netlink Board met to consider the Merger
Agreement, which had previously been distributed to the directors, and the
transactions contemplated thereby, including the proposed consideration to be
paid to Netlink shareholders. Members of Netlink's management and
representatives of Netlink's legal advisor, made presentations to the Netlink
Board of Directors and discussed with the Netlink Board of Directors their
views and analyses of various aspects of the proposed transaction. The Netlink
Board of Directors reviewed and considered, among other things, the background
of the proposed transaction, Netlink's strategic alternatives, the terms of
the Merger Agreement, and the other matters described below under "Netlink's
Reasons for the Merger."
After further deliberation, the Netlink Board of Directors unanimously
approved the Merger Agreement and authorized the execution of the Merger
Agreement.
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Netlink and Cabletron.
NETLINK'S REASONS FOR THE MERGER
In approving the Merger Agreement and the transactions contemplated thereby,
the Netlink Board of Directors considered a number of factors, including:
(i) The business, results of operations, properties and financial
condition of Netlink and the competitive nature of the industry in which it
operates, based, in part, upon presentations by management of Netlink,
including management's view of the business and financial prospects for
Netlink if it were to remain independent, taking into account Netlink's
continued losses from operations, its current position in the frame relay
market and its size and resources as compared to its competitors.
(ii) Information available to them concerning Cabletron, its business,
size, market characteristics of Cabletron Common Stock and other matters
based, in part, on information provided by management of Netlink and on
information discussed by the Board of Directors at the meeting with
Cabletron's Management on September 12, 1996.
(iii) The relatively limited breadth of Netlink's product offerings at a
time when the market, and many of Netlink's competitors, are moving toward
a model of offering fully integrated, end-to-end, networking solutions.
(iv) The opportunity to access Cabletron's sales channels for the
distribution of Netlink's products.
(v) The terms of the Merger Agreement, including the proposed structure
of the Merger as a tax-free reorganization under the Code, and the fact
that the exchange ratio was established at a ratio of shares of Cabletron
Common Stock for each share of Netlink Common Stock based on the average
trading price of Cabletron Common Stock.
(vi) That the terms of the Merger Agreement, including the termination
fee provisions, should not unduly discourage third parties from making a
proposal to acquire Netlink subsequent to signing the Merger Agreement.
(vii) That the Merger Consideration (as defined in the Merger Agreement)
represented a premium of approximately 300% over the price paid in February
1996 for the 1996 Preferred Stock.
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(viii) That the exchange of Netlink Common Stock for Cabletron Common
Stock will give current holders publicly listed shares that trade on the
New York Stock Exchange in place of the illiquid Netlink Common Stock.
(ix) That the Merger Agreement permits Netlink, in the exercise of
fiduciary duties of the Board of Directors, to furnish non public
information and access in response to requests which were not solicited by
Netlink after the date of the Merger Agreement to third parties pursuant to
confidentiality agreements, and to participate in discussions and
negotiations with third parties concerning an acquisition proposal.
(x) The termination provisions of the Merger Agreement, which were a
condition to Cabletron's proposal, providing that Cabletron could be
entitled to a fee of $2.8 million (plus expenses) upon termination of the
Merger Agreement under certain circumstances, including the withdrawal of
the Board of Directors' recommendation with respect to the Merger.
The Board did not assign relative weights to the factors or determine that
any factor was of particular importance. Rather, the Board of Directors viewed
its position and recommendations as being based upon the totality of the
information presented to and considered by them.
CABLETRON'S REASONS FOR THE MERGER
The Cabletron Board arrived at its unanimous decision to approve the Merger
Agreement after consideration of a number of significant factors. Among those
factors were:
. Netlink's focus on remote access for the enterprise is highly
complementary to Cabletron's technology for LAN/WAN networks and
information infrastructures.
. The market for Frame Relay remote access products is forecasted to be one
of the more rapidly growing segments of the networking market for the
next several years.
. The inclusion of Netlink's technology and products in the Cabletron
technological solution to its customers' information infrastructure needs
will enable Cabletron to provide a more complete, enterprise-wide
solution to its customers, supporting the customers' information
infrastructure at every level of access.
. The ability to leverage the research and development capabilities of
Netlink by combining its research and development efforts and personnel
with those of Cabletron to improve and increase product development.
In addition, the Cabletron Board of Directors considered, among other
matters, (i) information concerning Cabletron's and Netlink's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position; (ii) the consideration to be
received by Netlink stockholders in the Merger and the relationship between
the market value of Cabletron Common Stock to be issued in exchange for each
share of Netlink Common Stock and Cabletron's per share reported earnings,
earnings before interest and taxes and certain other measures; (iii) a
comparison of selected recent acquisition and merger transactions involving
high-technology companies; (iv) the belief that the terms of the Merger
Agreement, including the parties' respective representations, warranties and
covenants, and the conditions to their respective obligations, are reasonable;
(v) the ability of Cabletron to devote management time and energy to the
integration and assimilation of Netlink's business and organization should the
Merger be consummated; (vi) the fact that the Merger is expected to be
accounted for as a pooling of interests; and (vii) the fact that the Merger is
expected to be a tax-free reorganization under Section 368(a) of the Code.
The Cabletron Board also considered negative factors relating to the Merger,
including (i) the risks that the benefits sought in the Merger would not be
fully achieved, (ii) the risk that the Merger would not be consummated, (iii)
the effect of the public announcement of the Merger on Netlink's sales,
operating results, and business relationships, (iv) Netlink's current trend of
operating losses, (v) the dilutive effect on the earnings per share of
Cabletron Common Stock as a result of increasing the number of shares
outstanding of Cabletron
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Common Stock, and (vi) other risks described above under "Risk Factors." The
Cabletron Board believed that these risks were outweighed by the potential
benefits to be gained by the Merger.
In view of the wide variety of factors considered by the Cabletron Board of
Directors, the Cabletron Board of Directors did not find it practicable to
quantify or otherwise assign relative weights to the specific factors
considered in approving the Merger Agreement and Merger. However, after taking
into account all of the factors set forth above, the Cabletron Board of
Directors determined that the Merger Agreement and Merger were in the best
interests of Cabletron and its stockholders and that Cabletron should proceed
with the Merger Agreement and the Merger.
CERTAIN CONSIDERATIONS
In considering whether to approve the Merger Agreement and the transactions
contemplated thereby, stockholders of Netlink should be aware that the stock
price of Cabletron Common Stock at the Effective Time may vary significantly
from the price as of the date of execution of the Merger Agreement, the date
hereof or the date on which stockholders of Netlink vote on the Merger due to
changes in the business, operations and prospects of Cabletron, general market
and economic conditions, and other factors. Because the market price of
Cabletron Common Stock is subject to fluctuation, the market value of the
shares of Cabletron Common Stock that holders of Netlink Common Stock will
receive in the Merger may increase or decrease prior to and following the
Merger. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
CABLETRON COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OR
MARKETS FOR CABLETRON COMMON STOCK. See "Risk Factors--Volatility of Stock
Price."
EMPLOYMENT AGREEMENTS
It is a condition to consummation of the Merger that certain specified
employees of Netlink (the "Netlink Employees") have entered into employment
agreements with Cabletron and the Surviving Corporation (defined below), that
such agreements be in force at the Effective Time and that such employees
shall be employed by Netlink immediately prior to the Effective Time. All of
the Netlink Employees have entered into employment agreements that take effect
at the Effective Time with Cabletron and Netlink (referred to in its context
after the Merger, when it will be a wholly-owned subsidiary of Cabletron, as
the "Surviving Corporation").
The terms of Employment Agreements between Cabletron, the Surviving
Corporation and each of Nina Saberi, Allan Jennings and Roger Walton (the
"Long Form Employment Agreements") are substantially identical with the
exception of the compensation arrangements which are described below. The
terms of Employment Agreements between Cabletron, the Surviving Corporation
and each of Jerry Joyner, Robert Tonti Judy Megelich and Bryan Siegal (the
"Short Form Employment Agreements") are substantially identical to each other,
with the exception of the compensation arrangements for each which are
described below, but differ from the Long Form Employment Agreements.
Each Long Form Employment Agreement begins at the Effective Time and
terminates on June 26, 1998, and provides that the employee will perform such
duties and responsibilities as the Board of Directors of the Surviving
Corporation may designate. The employee is obligated to work for the Surviving
Corporation or Cabletron on a full-time basis and not to engage in any other
business activity except as may be approved by Cabletron. The employee is
eligible to participate in the employee benefit plans of the Surviving
Corporation, which plans shall remain, at least until January 1, 1998,
substantially similar to the plans in effect at Netlink before the Merger.
After January 1, 1998, the employee will be eligible to participate in
Cabletron's employee benefit plans from time to time in effect for Cabletron
employees generally. The employee is entitled to the base salary, bonus
compensation and stock options described below. The employee is obligated to
assign all intellectual property developed or conceived by the employee during
the employment term to Cabletron and is restricted by confidentiality
provisions. Pursuant to the Long Form Employment Agreement, the employee also
agrees, during the term of employment with Cabletron and for a period of one
(1) year thereafter (but only if the termination of employment occurs during
the term of the Long Form Employment Agreement), not to engage in any business
activity which is competitive with the Surviving Corporation or any other line
of business of Cabletron for which the employee works. In addition, the Long
Form Employment Agreement obligates the
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employee not to solicit employees or customers of Cabletron, for a period of
one (1) year following termination of the employee's employment. Under the
Long Form Employment Agreement, in the event Cabletron terminates the employee
without cause, or in the event the employee terminates his or her employment
as a result of a material diminution in the nature or scope of the employee's
responsibilities or duties, the employee is entitled to receive his or her
then current base salary and to participate in Cabletron's employee benefit
plans for a period of twelve (12) months following the date of termination of
employment. The Long Form Agreement also provides that if the employee
voluntarily terminates his or her employment with Cabletron during the twelve
month period immediately following the consummation of the Merger, the
employee will pay a predetermined amount of money (such amounts set forth
below) to Cabletron, ("Liquidated Damages"). Under the terms of her Long Form
Employment Agreement, Ms. Saberi's base salary is $170,000 and she is eligible
to receive up to an additional approximately $295,000 as bonus compensation
during the term of the agreement and up to an additional $210,000 in bonus
compensation if Ms. Saberi's employment continues for a year beyond June 26,
1998. Ms. Saberi will also receive a stock option to purchase up to 35,000
shares of Cabletron Common Stock. The Liquidated Damages for Ms. Saberi are
$100,000. Under the terms of his Long Form Employment Agreement, Mr. Walton's
base salary is $125,000 and he is eligible to receive up to an additional
approximately $132,500 as bonus compensation during the term of the agreement
and up to an additional $142,500 in bonus compensation if Mr. Walton's
employment continues for a year beyond June 26, 1998. Mr. Walton will also
receive a stock option to purchase up to 20,000 shares of Cabletron Common
Stock. The Liquidated Damages under Mr. Walton's agreement are $35,000. Under
the terms of his Long Form Employment Agreement, Mr. Jenning's base salary is
$130,000 and he is eligible to receive up to an additional approximately
$130,000 as bonus compensation during the term of the agreement and up to an
additional $165,000 in bonus compensation if Mr. Jenning's employment
continues for a year beyond June 26, 1998. Mr. Jennings will also receive a
stock option to purchase up to 25,000 shares of Cabletron Common Stock. The
Liquidated Damages under Mr. Jenning's agreement are $35,000. Each of the
stock options will have an exercise price equal to the fair market value of
Cabletron Common Stock on the date of grant and will vest over five years.
Each Short Form Employment Agreement begins at the Effective Time and
provides that the employee will perform such duties and responsibilities as
the Surviving Corporation may assign to him. The employee is obligated to
devote his full business time and best professional efforts to the performance
of his duties for the Surviving Corporation. The employee is entitled to the
base salary, bonus compensation and stock options described below. The Short
Form Employment Agreement also obligates the employee to assign to Cabletron
all intellectual property developed or conceived by the employee during his
employment with Cabletron and to abide by certain confidentiality provisions.
In addition, the Short Form Employment Agreement obligates the employee not to
solicit employees or customers of Cabletron, for a period of one (1) year
following termination of the employee's employment. Under the Short Form
Employment Agreement, in the event Cabletron terminates the employee without
cause during the one year period immediately following consummation of the
Merger, the employee is entitled to receive his then current base salary for a
period of six (6) months following the date of termination of employment.
Under the terms of his Short Form Employment Agreement, Mr. Joyner's base
salary is $87,000 and he is eligible to receive up to an additional
approximately $40,000 as bonus compensation and will receive a stock option to
purchase up to 3,000 shares of Cabletron Common Stock. Under the terms of his
Short Form Employment Agreement, Mr. Tonti's base salary is $134,000 and he is
eligible to receive up to an additional approximately $80,000 as bonus
compensation and will receive a stock option to purchase up to 5,000 shares of
Cabletron Common Stock. Under the terms of her Short Form Employment
Agreement, Ms. Megelich's base salary is $97,000 and she is eligible to
receive up to an additional approximately $50,000 as bonus compensation and
will receive a stock option to purchase up to 3,000 shares of Cabletron Common
Stock. Under the terms of his Short Form Employment Agreement, Mr. Siegal's
base salary is $94,000 and he is eligible to receive up to an additional
approximately $50,000 as bonus compensation and will receive a stock option to
purchase up to 3,000 shares of Cabletron Common Stock. Each of the stock
options will have an exercise price equal to the fair market value of
Cabletron Common Stock on the date of grant and will vest over five years.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Netlink Board with respect to the
Merger, stockholders of Netlink should be aware that certain officers and
directors of Netlink have interests in the Merger, including those referred to
below, that presented them with potential conflicts of interests. In
particular, the terms of the directors'
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and officers' option agreements, like those of all Netlink option holders,
provide that all options to acquire shares of Netlink Common Stock originally
issued to such persons by Netlink prior to the Effective Time and not
otherwise currently exercisable will become fully exercisable immediately
prior to the Effective Time. Further, certain officers of Netlink have entered
into employment agreements with Cabletron that take effect at the Effective
Time. The Netlink Board was aware of these potential conflicts and considered
them along with the other matters described in "The Merger--Background of the
Merger; Recommendation of Netlink's Board of Directors" and "--Netlink's
Reasons for the Merger" and "--Employment Agreements."
Pursuant to the Merger Agreement, Cabletron has agreed that all rights to
indemnification or exculpation now existing in favor of the employees, agents,
directors or officers of Netlink as provided in its charter or bylaws shall
continue in full force and effect for a period of not less than six years from
the Effective Time.
As of the Netlink Record Date, directors and executive officers of Netlink
and their affiliates have the right to vote approximately 53.1% of the
outstanding shares of Netlink Stock. Each of the directors and executive
officers has advised Netlink that he or she presently intends to vote or
direct the vote of all the outstanding shares of Netlink Common Stock over
which he or she has voting control in favor of approval and adoption of the
Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material federal income tax
consequences of the Merger. This is not a complete description of all the tax
consequences of the Merger and does not address the tax consequences that may
be relevant to particular categories of shareholders subject to special
treatment under certain federal income tax laws, such as dealers in
securities, banks, insurance companies, foreign individuals and entities, tax-
exempt organizations and shareholders who acquired Netlink Common Stock
pursuant to an employee stock option or otherwise as compensation. Each
Netlink shareholder's individual circumstances may affect the tax consequences
of the Merger to him or her. No information is provided herein with respect to
the tax consequences of the Merger under foreign, state or local laws or the
tax consequences of transactions effected prior to, concurrently with, or
after the Merger (whether or not such transactions are undertaken in
connection with the Merger). Moreover, the description set forth below is
based on existing law and currently applicable United States Treasury
regulations promulgated under the Code, judicial authority, and current
published administrative positions of the Internal Revenue Service contained
in revenue rulings and revenue proceedings, all of which are subject to change
either prospectively or retroactively. Any such changes could adversely affect
the accuracy of the statements and conclusions set forth herein.
It is intended that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
Subject to the limitations and qualifications referred to herein, and assuming
the Merger qualifies as a reorganization, the Merger will generally result in
the following federal income tax consequences:
(i) No gain or loss will be recognized by holders of Netlink Common Stock
(including Netlink Common Stock issued upon conversion of the Netlink
Preferred Stock) upon their receipt in the Merger of Cabletron Common Stock
(except to the extent of cash received by Netlink shareholders in lieu of
fractional share interests in Cabletron Common Stock) exchanged therefor.
(ii) The aggregate tax basis of the Cabletron Common Stock received by
Netlink shareholders in the Merger (including any fractional share that is
treated as issued and sold pursuant to paragraph (iv) below and including
any shares of Cabletron Common Stock initially held in escrow) will be the
same as the aggregate tax basis of the Netlink Common Stock surrendered in
exchange therefor.
(iii) The holding period of the shares of Cabletron Common Stock received
in the Merger by Netlink shareholders will include the period during which
the shares of Netlink Common Stock surrendered in exchange therefor were
held, provided that such shares of Netlink Common Stock were held as
capital assets at the Effective Time.
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(iv) Cash received by a holder of Netlink Common Stock in lieu of a
fractional share interest in Cabletron Common Stock will be treated as if
it was received upon the sale by such Netlink shareholder of a fractional
share of Cabletron Common Stock issued in the Merger. A Netlink shareholder
receiving such cash will recognize gain or loss for federal income tax
purposes upon such payment, equal to the difference (if any) between the
amount of cash received and such shareholder's basis in the fractional
share. Such gain or loss will be capital gain or loss, provided that such
share of Netlink Common Stock was held as a capital asset at the Effective
Time and will be long-term capital gain or loss if such share of Netlink
Common Stock has been held for more than one year.
Even if the Merger qualifies as a reorganization, a recipient of shares of
Cabletron Common Stock could recognize gain for federal income tax purposes to
the extent that such shares were considered by the Internal Revenue Service to
be received in exchange for consideration other than Netlink Common Stock. All
or a portion of such gain may be taxable as ordinary income. Gain could also
have to be recognized to the extent that a Netlink shareholder was treated by
the Internal Revenue Service as receiving (directly or indirectly)
consideration other than Cabletron Common Stock in exchange for his or her
Netlink Common Stock.
The tax consequences to a shareholder who exercises dissenters' rights with
respect to a share of Netlink Stock and receives payment for such share in
cash will generally not depend on the Merger's qualifying as a reorganization.
Such shareholder will generally recognize gain or loss for federal income tax
purposes, measured by the difference between the holder's basis in such share
and the amount of cash received, provided that the payment is neither
essentially equivalent to a dividend within the meaning of Section 302 of the
Code nor has the effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Code. Such gain or loss will be capital gain or loss
provided that the share of Netlink Common Stock was held as capital asset at
the Effective Time.
No advance ruling will be requested or received from the Internal Revenue
Service as to the federal income tax consequences of the Merger. It is a
condition to the consummation of the Merger that Cabletron and Netlink shall
each have received an opinion of their respective counsel to the effect that
the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code. Netlink shareholders should be aware that the tax opinions
do not bind the Internal Revenue Service and the Internal Revenue Service is
therefore not precluded from successfully asserting a contrary opinion. In
addition, the tax opinions are subject to certain assumptions and
qualifications, including but not limited to an assumption that certain
representations made by Cabletron, Netlink, Merger Sub, and certain Netlink
shareholders, including representations in certain certificates to be
delivered to counsel by the respective management of Cabletron, Netlink,
Merger Sub and certain Netlink shareholders are true and accurate. Of
particular importance are certain assumptions and representations relating to
the Code's "continuity of interest" requirement for reorganization treatment.
To satisfy the continuity of interest requirement, Netlink shareholders must
not, pursuant to a plan or intent existing at or prior to the Merger, sell,
exchange or otherwise dispose of so much of either (i) their Netlink Common
Stock in anticipation of the Merger or (ii) the Cabletron Common Stock to be
received in the Merger (collectively, "Agreement Dispositions"), such that
Netlink shareholders, as a group, would no longer have a significant equity
interest in Netlink business being conducted by Cabletron after the Merger.
Agreement Dispositions include, among other things, shares disposed of
pursuant to the exercise of dissenters' rights. Although it is uncertain as to
what constitutes sufficient continuity of interest, the published advance
ruling guidelines of the Internal Revenue Service provide that the requirement
will be satisfied if the Netlink shareholders do not dispose of, in Agreement
Dispositions, a number of shares of Cabletron Common Stock having a value, as
of the date of the Merger, of 50 percent or more of the value of all of the
formerly outstanding Netlink Common Stock as of the same date.
A successful Internal Revenue Service challenge to the status of the Merger
as a reorganization under Section 368(a) of the Code (as a result of a failure
of the continuity of interest or otherwise) would result in Netlink
shareholders recognizing taxable gain or loss with respect to each share of
Netlink Common Stock surrendered equal to the difference between the
shareholder's basis in such share and the fair market value, as of
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the Effective Time, of the Cabletron Common Stock received in exchange
therefor. In such event, a shareholder's aggregate basis in the Cabletron
Common Stock so received would equal its fair market value and the holding
period for such stock would begin the day after the Merger.
EACH HOLDER OF SHARES OF NETLINK STOCK IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR AS TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO HIM OR HER,
AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. Under this method of accounting, the
recorded historical basis of assets and liabilities of Cabletron and Netlink
will be combined at such recorded amounts, subject to any adjustments required
to conform the accounting policies of the two companies, net income of
Cabletron will include net income of Cabletron and Netlink for the entire
fiscal year in which the combination occurs and the reported net income or
loss of the separate companies for prior periods will be combined and restated
as net income of Cabletron. The Merger Agreement provides that a condition to
the consummation of the Merger is the receipt by Cabletron and Netlink of a
letter from each of KPMG Peat Marwick LLP, independent certified public
accountants of Cabletron, to the effect that the Merger qualifies for pooling
of interests accounting treatment if consummated in accordance with the Merger
Agreement and the receipt by Netlink of a letter from Ernst & Young LLP,
independent auditors of Netlink, concurring with the conclusion of Netlink's
management that no conditions exist related to Netlink that would preclude
Cabletron's accounting for the merger with Netlink as a pooling of interests.
GOVERNMENTAL FILINGS
Cabletron and Netlink do not believe that any governmental filings in the
United States are required with respect to the Merger, other than the filing
of the Certificate of Merger required to be filed with the Secretary of State
of the State of Delaware in accordance with the DGCL and the filing of the
registration statement of which this Prospectus is a part.
CERTAIN FEDERAL SECURITIES LAW CONSEQUENCES; AFFILIATE LETTERS
The Cabletron Common Stock to be issued in the Merger has been registered
under the Securities Act, thereby allowing those shares to be traded without
restriction, except for those shares held by stockholders of Netlink or
Cabletron who are deemed to control or be under common control with Netlink or
Cabletron, respectively ("Affiliates"). Affiliates of Netlink may not sell
their shares of Cabletron Common Stock acquired in the Merger except pursuant
to (i) an effective registration statement under the Securities Act covering
such shares, (ii) the resale provisions of Rule 145 promulgated under the
Securities Act or (iii) another applicable exemption from the registration
requirements of the Securities Act. Affiliates of Cabletron may not sell any
shares of Cabletron Common Stock except pursuant to an effective registration
statement under the Securities Act covering such shares or an applicable
exemption from the registration requirements of the Securities Act. In
connection with the requirements of the Commission's accounting rules for
pooling-of-interests, Netlink has agreed to cause each person who is
identified as an Affiliate (as such term is defined for purposes of Rule 145
under the Securities Act) of Netlink to execute and deliver, prior to the
closing of the Merger, an agreement that such person will not offer to sell,
sell or otherwise dispose of Cabletron Common Stock or Netlink Common Stock
during the period beginning thirty days prior to the Effective Time and ending
when financial results covering at least thirty days of the combined
operations of Cabletron and Netlink after the Effective Time have been
published. Thereafter, it is expected that Affiliates of Netlink and Cabletron
will be able to sell shares of Cabletron Common Stock without registration
subject to the volume, manner of sale and other applicable limitations of the
Securities Act and the rules and regulations of the Commission thereunder.
STOCK EXCHANGE LISTING
The shares of Cabletron Common Stock to be issued in the Merger will be
authorized for listing and trading on the NYSE.
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DIVIDENDS
Netlink is not permitted under the terms of the Merger Agreement to declare,
set aside or pay any dividend in cash, stock, property or otherwise in respect
of its capital stock during the period from the date of the Merger Agreement
until the earlier of the termination of the Merger Agreement or the Effective
Time.
APPRAISAL RIGHTS
If the Merger is consummated, dissenting holders of Netlink Stock who follow
the procedures specified in Section 262 of the DGCL are entitled to have their
shares of Netlink Stock appraised by the Delaware Court of Chancery (the
"Court") and to receive the "fair value" of such shares ("Dissenting Shares")
in cash as determined by the Court in lieu of the consideration that such
stockholder would otherwise be entitled to receive pursuant to the Merger
Agreement.
The following is a brief summary of Section 262, which sets forth the
procedures for dissenting from the Merger and demanding statutory appraisal
rights, if such rights are available. This summary does not purport to be a
complete statement of the provisions of the DGCL relating to the rights of
Netlink stockholders to an appraisal of the value of their shares and is
qualified in its entirety by reference to Section 262, the full text of which
is attached as Annex B. Failure to follow these procedures exactly could
result in the loss of appraisal rights. This Proxy Statement/Prospectus
constitutes notice to holders of Netlink Stock concerning the availability of
appraisal rights under Section 262. Under Section 262, a stockholder of record
wishing to assert appraisal rights must hold the shares of stock on the date
of making a demand for appraisal rights with respect to such shares and must
continuously hold such shares through the Effective Time of the Merger.
STOCKHOLDERS WHO DESIRE TO EXERCISE THEIR APPRAISAL RIGHTS MUST SATISFY ALL
OF THE CONDITIONS OF SECTION 262. A WRITTEN DEMAND FOR APPRAISAL OF SHARES
MUST BE FILED WITH NETLINK BEFORE THE TAKING OF THE VOTE ON THE MERGER. THIS
WRITTEN DEMAND FOR APPRAISAL OF SHARES MUST BE IN ADDITION TO AND SEPARATE
FROM ANY PROXY VOTE ABSTAINING FROM OR VOTING AGAINST THE MERGER. ANY SUCH
ABSTENTION OR VOTE AGAINST THE MERGER WILL NOT CONSTITUTE A DEMAND FOR
APPRAISAL WITHIN THE MEANING OF SECTION 262.
STOCKHOLDERS ELECTING TO EXERCISE THEIR APPRAISAL RIGHTS UNDER SECTION 262
MUST NOT VOTE FOR APPROVAL OF THE MERGER. IF A STOCKHOLDER RETURNS A SIGNED
PROXY BUT DOES NOT SPECIFY A VOTE AGAINST APPROVAL OF THE MERGER OR A
DIRECTION TO ABSTAIN, THE PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER,
WHICH WILL HAVE THE EFFECT OF WAIVING THAT STOCKHOLDER'S APPRAISAL RIGHTS.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on the certificates
representing shares of Netlink Stock. If the shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, such demand
must be executed by or for the fiduciary. If the shares are owned of record by
or for more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by or for all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose that, in exercising the demand, he is
acting as agent for the record owner. A person having a beneficial interest in
Netlink Stock held of record in the name of another person, such as a broker
or nominee, must act promptly to cause the record holder to follow the steps
summarized below and in a timely manner to perfect whatever appraisal rights
the beneficial owners may have.
A record owner, such as a broker, who holds shares as a nominee for others,
may exercise appraisal rights with respect to the shares held for all or less
than all beneficial owners of shares as to which the holder is the record
owner. In such case the written demand must set forth the number of shares
covered by such demand. Where the number of shares is not expressly stated,
the demand will be presumed to cover all shares outstanding in the name of
such record owner.
A Netlink stockholder who elects to exercise appraisal rights will be
required to mail or deliver his or her written demand to: Netlink, Inc., 1881
Worcester Road, Framingham, Massachusetts 01701, Attention: Jerry M. Joyner,
Secretary. The written demand for appraisal should specify the stockholder's
name and mailing address,
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the number of shares owned, and that the stockholder is thereby demanding
appraisal of his or her shares. Within ten days after the Effective Time of
the Merger, Netlink must provide notice of the Effective Time of the Merger to
all of its stockholders who have complied with Section 262 and have not voted
for approval of the Merger.
Within 120 days after the Effective Time of the Merger, any stockholder who
has satisfied the requirements of Section 262 will be entitled, upon written
request, to receive from Netlink a statement setting forth the aggregate
number of shares not voted in favor of the Merger and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares.
Within 120 days after the Effective Time of the Merger (but not thereafter),
either Netlink or any stockholder who has complied with the required
conditions of Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the Dissenting Shares.
Upon the filing of any petition by a stockholder in accordance with Section
262, service of a copy must be made upon Netlink, which must, within 20 days
after service, file in the office of the Register of Chancery in which the
petition was filed, a duly verified list containing the names and addresses of
all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by Netlink.
If a petition is filed by Netlink, the petition must be accompanied by the
verified list. The Register of Chancery, if so ordered by the Court, will give
notice of the time and place fixed for the hearing of such petition by
registered or certified mail to Netlink and to the stockholders shown on the
list at the addresses therein stated, and notice will also be given by
publishing a notice at least one week before the day of the hearing in a
newspaper of general circulation published in the City of Wilmington,
Delaware, or such publication as the Court deems advisable. The forms of
notices by mail and by publication must be approved by the Court, and the
costs thereof shall be borne by Netlink.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Court will determine which stockholders are entitled to
appraisal rights and thereafter will appraise the shares owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be the fair value. In determining fair value, the Court is to
take into account all relevant factors. In Weinberger v. UOP, Inc., the
Delaware Supreme Court stated that "proof of value of any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court," should be considered and that "[f]air
price obviously requires consideration of all relevant factors involving the
value of a company." The Delaware Supreme Court stated that in making this
determination of fair value the court must consider "market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any
other facts which were known or which could be ascertained as of the date of
merger and which throw any light on future prospects of the merged
corporation....." The Delaware Supreme Court construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." However, the Delaware Supreme Court noted
that Section 262 provides that fair value is to be determined "exclusive of
any element of value arising from the accomplishment or expectation of the
merger." In addition, the Delaware Supreme Court has determined that the
statutory appraisal remedy, depending upon the factual circumstances, may or
may not be a stockholder's exclusive remedy in connection with a merger.
Netlink stockholders considering seeking appraisal should bear in mind that
the fair value of their shares determined under Section 262 could be more
than, the same as, or less than the applicable consideration they are entitled
to receive pursuant to the Merger Agreement if they do not seek appraisal of
their shares. The cost of the appraisal proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder seeking appraisal rights, the
Court may order that all or a portion of the expenses incurred by such
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts,
be charged pro rata against the value of all shares entitled to appraisal. In
the absence of such a determination or assessment, each party bears its own
expenses.
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Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time of the Merger, be entitled to
vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends
or other distributions payable to stockholders of record at a date prior to
the Effective Time of the Merger).
At any time within 60 days after the Effective Time of the Merger, any
stockholder shall have the right to withdraw his or her demand for appraisal
and to accept the terms offered in the Merger Agreement. After this period, a
stockholder may withdraw his or her demand for appraisal only with the consent
of Netlink. If no petition for appraisal is filed with the Court within 120
days after the Effective Time of the Merger, stockholders' rights to appraisal
(if available) shall cease and all stockholders shall be entitled to receive
the consideration as provided for in the Merger Agreement. Inasmuch as Netlink
has no obligation to file such a petition, and has no present intention to do
so, any stockholder who desires such a petition to be filed is advised to file
it on a timely basis. However, no petition timely field in the Court demanding
appraisal shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
CONVERSION OF THE NETLINK PREFERRED STOCK
It is a condition to the consummation of the Merger that all Netlink
Preferred Stock be converted into Netlink Common Stock prior to the Effective
Date. Each series of Netlink Preferred Stock may be converted into Netlink
Common Stock, at any time, at the election of the holder. In addition, all of
the Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and Netlink
1996 Preferred Stock will convert if a majority of the holders of such series
of Netlink Preferred Stock elect to convert the shares of such series of
Netlink Preferred Stock into shares of Netlink Common Stock.
Each series of Netlink Preferred Stock converts into a number of shares of
Netlink Common Stock determined by the conversion ratio applicable to such
series of Netlink Preferred Stock. The conversion ratio of each such series is
set out either in the amended and restated certificate of incorporation of
Netlink, in the case of the Netlink Series E Preferred Stock, or in the
certificate of designation of preferences and relative rights of each of the
Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and Netlink 1996
Preferred Stock. The conversion ratio for each series of Netlink Preferred
Stock was initially set at 1:1 subject to adjustment due to stock splits,
recapitalizations, reorganizations and certain dilutive stock issuances.
As of the date of this Proxy Statement/Prospectus the conversion ratio for
each of the Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and
Netlink 1996 Preferred Stock is 1:1. Accordingly, holders of such Netlink
Preferred Stock will receive one share of Netlink Common Stock for each share
of such Netlink Preferred Stock converted. The conversion ratio for the Series
E Preferred Stock as of such date is 1:20. Accordingly, each holder of Series
E Preferred Stock will receive one share of Netlink Common Stock for every
twenty shares of Series E Preferred Stock converted. Netlink is prohibited by
the terms of the Merger Agreement from taking any action from the date hereof
until the Effective Time which would cause the above conversion ratios to be
adjusted.
The Netlink Preferred Stock has certain preferences relative to the Netlink
Common Stock with respect to the distribution of assets upon the liquidation
or winding up of Netlink as well as certain protective voting provisions. The
rights, preferences and other characteristics of the Netlink Preferred Stock
are more fully set forth elsewhere in this Proxy Statement/Prospectus. See
"Comparison of Stockholder Rights."
AMENDMENT TO THE NETLINK PREFERRED STOCK AGREEMENT
It is a condition to the consummation of the Merger that the registration
rights of certain holders of Netlink Stock be terminated prior to the
Effective Time. In addition, Cabletron has requested that certain rights of
first refusal and convenants granted in connection with the sale of the
Netlink 1993 Preferred Stock, Netlink 1994
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Preferred Stock and Netlink 1996 Preferred Stock be terminated prior to the
Effective Time. The Netlink Preferred Stock Agreement governs each of the
registration rights and rights of first refusal discussed above as well as
setting forth the covenants referred to above. The vote of the holders of a
majority of the Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock and
Netlink 1996 Preferred Stock, voting together as a single class, is required
to amend the Netlink Preferred Stock Agreement to terminate such provisions.
The registration rights entitle certain stockholders (the "Rightsholders")
to have shares owned by them included in any registration under the Securities
Act of Netlink securities undertaken by Netlink on its own behalf or
otherwise. In addition, at the election of Rightsholders holding in the
aggregate 40% or more of the issued and outstanding Netlink 1993 Preferred
Stock, Netlink 1994 Preferred Stock and Netlink 1996 Preferred Stock, Netlink
must use its best efforts to register the shares of the Rightsholders for sale
under the Securities Act provided that the shares to be sold have an aggregate
value of at least $5,000,000. Netlink is required to honor no more than two
such demand registrations. Finally, should Netlink become eligible to register
shares on Form S-3, it must notify the Rightsholders and provide them the
opportunity to request registration of their shares on Form S-3. Netlink will
then be required to use its best efforts to cause any requested registration
to become effective as expeditiously as possible, provided the shares to be
registered have an aggregate market value of at least $1,000,000.
The right of first refusal prohibits Netlink from selling any Netlink
securities unless it first offers to the Rightsholders the option to purchase
the securities on the same terms as would be offered to a third-party. Each
Rightsholder then has the right to purchase its pro rata share of such offered
securities based on the Rightsholder's ownership of Netlink 1993 Preferred
Stock, Netlink 1994 Preferred Stock and Netlink 1996 Preferred Stock. If a
Rightsholder does not exercise its option to purchase its pro rata share it
forfeits any future right of first refusal and its pro rata share becomes
available for purchase by the remaining Rightsholders.
The convenants include undertakings by Netlink to (i) maintain its corporate
existence; (ii) comply with all applicable laws; (iii) cause certain of its
employees to enter into confidentiality and assignment of inventions
agreements; (iv) refrain from merging with or into another entity or selling
all or substantially all of its assets; (v) refrain from entering into self-
dealing transactions; (vi) refrain from redeeming or repurchasing its stock;
(vii) refrain from amending its charter or by-laws; (viii) refrain from
issuing securities; and (ix) provide certain periodic reports to the
Rightsholders.
The above described covenants, registration rights and rights of first
refusal can be terminated by amending the Netlink Preferred Stock Agreement to
delete Articles IV, V and VI respectively.
THE MERGER AGREEMENT
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Annex A and incorporated herein by reference. Statements in this Proxy
Statement/Prospectus with respect to the terms of the Merger are qualified in
their entirety by reference to the Merger Agreement. Netlink shareholders are
urged to read the full text of the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties, including representations by Netlink relating to (i) its organization
and qualification to do business (ii) the full force and effect of its
certificate of incorporation and by-laws (iii) its capitalization (iv) its
authority relative to this agreement (v) the conflicts, required filings and
consents necessitated by the Merger (vi) the compliance and permits
necessitated by the Merger (vii) its financial statements (viii) the absence
of certain changes or events (ix) the absence of any undisclosed liabilities
(x) the absence of litigation (xi) its employee benefit plans and
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employment agreements (xii) its labor matters (xiii) the accuracy of
information supplied in this registration statement relating to Netlink (xiv)
the absence of any restrictions on its business activities (xv) its title to
property (xvi) the payment of its taxes (xvii) its environmental matters
(xviii) its intellectual property (xix) any interested party transactions (xx)
its insurance (xxi) the accuracy of its accounts receivable, inventories and
fixed assets (xxii) the ability to account for the Merger as a pooling of
interests (xxiii) the absence of a broker (xxiv) any change in control
payments (xxv) its expenses incurred as a result of the merger, and (xxvi) the
full disclosure by Netlink. The Merger Agreement also contains representations
and warranties of Cabletron and Merger Sub as to (i) their organization and
qualification to do business (ii) the full force and effect of their
certificate of incorporation and by-laws (iii) their capitalization (iv) their
authority relative to this agreement (v) the conflicts, required filings and
consents necessitated by the Merger (vi) their financial statements (viii) the
accuracy of information supplied in this registration statement relating to
Cabletron or Merger Sub (viii) the ability to account for the Merger as a
pooling of interests, and (ix) Cabletron's ownership of Merger Sub. The
representations and warranties made by Cabletron and Merger Sub will not
survive consummation of the Merger. However, the representations and
warranties of Netlink, except for those relating to Netlink's financial
statements, accounts receivable, inventories and fixed assets, will survive
for a period of one year from the closing date of the Merger. Netlink's
representations and warranties regarding financial statements, accounts
receivable, inventories and fixed assets will survive until the earlier of (i)
one year from the closing date or (ii) the release by Cabletron of the
combined audited financial statements of Cabletron and Netlink.
CONDUCT OF CABLETRON'S AND NETLINK'S BUSINESS PRIOR TO THE MERGER
Under the terms of the Merger Agreement, Netlink has agreed that, during the
period from the date of the Merger Agreement and continuing until the earlier
of the termination of the Merger Agreement or the Effective Time, unless
Cabletron otherwise agrees in writing, Netlink will conduct its business and
will cause the business of its subsidiaries to be conducted only in, and
Netlink and its subsidiaries shall not take any action except in, the ordinary
course of business and in a manner consistent with past practice other than
actions taken by Netlink or its subsidiaries in contemplation of the Merger
and in accordance with the Netlink operations budget attached as a schedule to
the Merger Agreement; and Netlink shall use all reasonable commercial efforts
to preserve substantially intact the business organization of Netlink and its
subsidiaries, to keep available the services of the present officers,
employees and consultants of Netlink and its subsidiaries and to preserve the
present relationships of Netlink and its subsidiaries with customers,
suppliers and other persons with which Netlink or any of its subsidiaries has
significant business relations.
Netlink further agreed that neither it nor any of its subsidiaries will,
during the period from the date of the Merger Agreement and continuing until
the earlier of the termination of the Merger Agreement or the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Cabletron: (a) amend or otherwise change the Charter
or Bylaws of Netlink or any of its subsidiaries; (b) issue, sell, pledge,
dispose of or encumber, or authorize the issuance, sale, pledge, disposition
or encumbrance of, any shares of capital stock of any class, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of capital stock, or any other ownership interest (including, without
limitation, any phantom interest) in Netlink, any of its subsidiaries or
affiliates (except for the issuance of shares of Netlink Common Stock issuable
pursuant to stock options which were granted under either of the Netlink stock
option plans and are outstanding on the date hereof or in connection with the
conversion of the Netlink Preferred Stock into shares of Netlink Common
Stock); (c) sell, pledge, dispose of or encumber any assets of Netlink or any
of its subsidiaries (except for (i) sales of assets in the ordinary course of
business and in a manner consistent with past practice, (ii) dispositions of
obsolete or worthless assets, and (iii) sales of immaterial assets not in
excess of $50,000 in the aggregate); (d) (i) declare, set aside, make or pay
any dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of any of its capital stock, except that a
wholly owned subsidiary of Netlink may declare and pay a dividend to Netlink,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock (except for the
issuance of shares of Netlink Common Stock issuable pursuant to stock options
which were granted under either of the Netlink stock option plans and are
outstanding
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on the date hereof or in connection with the Conversion or other conversion of
the Netlink Preferred Stock into shares of Netlink Common Stock), or (iii)
amend the terms or change the period of exercisability of, purchase,
repurchase, redeem or otherwise acquire, or permit any subsidiary to purchase,
repurchase, redeem or otherwise acquire, any of its securities or any
securities of its subsidiaries, including, without limitation, shares of
Netlink Common Stock or any option, warrant or right, directly or indirectly,
to acquire shares of Netlink Common Stock, or propose to do any of the
foregoing; (e) (i) acquire (by merger, consolidation, or acquisition of stock
or assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money calling for
aggregate payments in excess of $100,000 or issue any debt securities or
assume, guarantee or endorse or otherwise as an accommodation become
responsible for, the obligations of any person or, except in the ordinary
course of business consistent with past practice, make any loans or advances;
(iii) enter into or amend any material contract or agreement; (iv) authorize
any capital expenditures or purchase of fixed assets which are, in the
aggregate, in excess of $50,000, for Netlink and its subsidiaries taken as a
whole, unless the purchase is in the ordinary course of business and is
contemplated by and in conformity with the Netlink operations budget attached
as a schedule to the Merger Agreement, or (v) enter into or amend any contract,
agreement, commitment or arrangement to effect any of the matters prohibited by
this Section (e); (f) increase the compensation payable or to become payable to
its officers or employees, or grant any severance or termination pay to, or
enter into any employment or severance agreement with any director, officer or
other employee of Netlink or any of its subsidiaries, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any current or former
directors, officers or employees, except, in each case, as may be required by
law provided Netlink may increase wages in the ordinary course of business
consistent with Netlink's past practice and timing but not more than 10% for
any individual employee; (g) take any action to change accounting policies or
procedures (including, without limitation, procedures with respect to revenue
recognition, payments of accounts payable and collection of accounts
receivable); (h) make any material tax election inconsistent with past practice
or settle or compromise any material federal, state, local or foreign tax
liability or agree to an extension of a statute of limitations; (i) pay,
discharge or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business and consistent
with past practice of liabilities reflected or reserved against in the Netlink
financial statements or incurred in the ordinary course of business and
consistent with past practice; or (j) take, or agree in writing or otherwise to
take, any of the actions described in (a) through (i) above, or any action
which to Netlink's knowledge at the time the action is taken will cause any of
the representations or warranties of Netlink contained in the Merger Agreement
to be untrue or incorrect or prevent Netlink from performing or cause Netlink
not to perform its covenants hereunder.
NO SOLICITATION
The Merger Agreement provides, subject to certain exceptions, that: (a)
Netlink cannot, directly or indirectly, through any officer, director,
employee, representative or agent of Netlink or any of its subsidiaries, (i)
solicit, initiate or encourage the initiation of any inquiries or proposals
regarding any merger, sale of substantial assets, sale of shares of capital
stock (including without limitation by way of a tender offer) or similar
transactions involving Netlink or any subsidiaries of Netlink other than the
Merger (each an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any nonpublic information to any person
relating to, any Acquisition Proposal or (iii) agree to, approve or recommend
any Acquisition Proposal. Notwithstanding the foregoing, the Board of Directors
of Netlink may furnish or provide such information (subject to section (c)) or
consider, negotiate, agree to, approve or recommend to the Shareholders of
Netlink an Acquisition Proposal not solicited in violation of the Merger
Agreement, if, in the opinion of the Board of Directors of Netlink, its failure
to do so would be a violation of its fiduciary duties under Delaware law (after
receiving advice from its independent legal counsel to such effect); (b)
Netlink shall immediately notify Cabletron after receipt of any Acquisition
Proposal, or any modification of or amendment to any Acquisition Proposal, or
any request for nonpublic information relating to Netlink or any of its
subsidiaries in connection with an Acquisition Proposal or for access to the
properties, books or records of Netlink or any subsidiary by any person or
entity that informs the Board of Directors of Netlink or such subsidiary that
it is considering
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making, or has made, an Acquisition Proposal. Such notice to Cabletron shall
be made orally and in writing, and shall indicate whether Netlink is providing
or intends to provide the person making the Acquisition Proposal with access
to information concerning Netlink as provided in section (c); (c) if the Board
of Directors of Netlink receives a request for material nonpublic information
by a person who makes a bona fide Acquisition Proposal, and the Board of
Directors determines in good faith and upon the advice of independent counsel
that it is required to cause Netlink to act as provided in this section (c) in
order to discharge properly the directors' fiduciary duties, then, provided
the person making the Acquisition Proposal has executed a confidentiality
agreement substantially similar to the one then in effect between Netlink and
Cabletron, Netlink may provide such person with access to information
regarding Netlink; (d) Netlink was obligated to immediately cease and cause to
be terminated any discussions or negotiations with any persons (other than
Cabletron and Merger Sub) conducted prior to execution of the Merger Agreement
with respect to any of the foregoing. Netlink agrees not to release any third
party from the confidentiality provisions of any confidentiality agreement to
which Netlink is a party; (e) Netlink shall ensure that the officers,
directors and employees of Netlink and its subsidiaries and any investment
banker or other advisor or representative retained by Netlink are aware of the
restrictions described in this section.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to, among
other things, the satisfaction prior to the Effective Time of the following
conditions: (a) the Commission having declared the Registration Statement on
Form S-4, of which this Proxy Statement/Prospectus is a part, effective, with
no stop order suspending the effectiveness of the Registration Statement
having been issued by the Commission and no proceedings for that purpose and
no similar proceeding in respect of the Proxy Statement/Prospectus having been
initiated or threatened by the Commission; (b) the absence of any temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger, any pending proceeding brought by
any administrative agency seeking any of the foregoing or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal; and (c) the
absence of any instituted, pending or threatened action or proceeding (or any
investigation or other inquiry that might result in such an action or
proceeding) by any governmental authority or administrative agency before any
governmental authority, administrative agency or court of competent
jurisdiction, any judgment, decree or order of any governmental authority,
administrative agency or court of competent jurisdiction, seeking to prohibit
or limit Cabletron from exercising all material rights and privileges
pertaining to its ownership of the "Surviving Corporation" (defined in the
Merger Agreement and hereafter as Netlink after Merger Sub is merged with and
into Netlink, the separate corporate existence of Merger Sub ceases, and
Netlink continues as the surviving corporation) or the ownership or operation
by Cabletron or any of its subsidiaries of all or a material portion of the
business or assets of Cabletron or any of its subsidiaries, or seeking to
compel Cabletron or any of its subsidiaries to dispose of or hold separate all
or any material portion of the business or assets of Cabletron or any of its
subsidiaries (including Netlink and its subsidiaries), as a result of the
Merger or the transactions contemplated by the Merger Agreement.
The obligations of Cabletron and Merger Sub to effect the Merger are also
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions: (a) the accuracy, in all respects, of the
representations and warranties of Netlink as of the Effective Time (except for
(i) changes contemplated by the Merger Agreement, (ii) those representations
and warranties which address matters only as of a particular date, and (iii)
where the failure to be true and correct could not reasonably be expected to
have a Material Adverse Effect (as defined in the Merger Agreement)) and the
receipt of a certificate to such effect signed by the President and the Chief
Financial Officer of Netlink; (b) the performance and compliance by Netlink in
all material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by Netlink at or prior to the
Effective Time and the receipt of a certificate to such effect signed on
behalf of Netlink by the President and the Chief Financial Officer of Netlink;
(c) Netlink having obtained all necessary consents, waivers, approvals,
authorizations or orders, and having made all required filings, for the due
authorization, execution and delivery of the Merger Agreement and the
consummation by Netlink of the transactions contemplated by the Merger
Agreement except as previously disclosed to Cabletron; (d) the receipt by
Cabletron
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of an opinion from Testa, Hurwitz & Thibeault LLP, counsel to Netlink,
regarding the validity of certain actions taken by Netlink with respect to the
merger; (e) the receipt by Cabletron of an opinion from Ropes & Gray, in form
and substance reasonably satisfactory to Cabletron, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368 of
the Code; (f) the receipt by Cabletron of letters from each of KPMG Peat
Marwick LLP and Ernst & Young LLP, independent certified public accountants,
to the effect that the Merger qualifies for pooling of interests accounting
treatment if consummated in accordance with the Merger Agreement; (g) the
receipt by Cabletron of an "Affiliate Agreement" by each person who is
identified as an "affiliate" of Netlink; (h) the termination of all existing
registration rights of holders of Netlink securities; (i) that each of Escrow
Agent, Netlink and the Stockholders Representative shall have executed and
delivered to Cabletron the Escrow Agreement (described below); (j) that
certain specified persons shall have entered into employment/non-competition
agreements with Cabletron, such agreements shall be in full force and effect
as of the Effective Time and such persons shall be in the employ of Netlink
immediately prior to the Effective Time; and (k) that the number of Netlink
Dissenting Shares shall not exceed 10% of the number of outstanding shares of
Netlink Common Stock at the Effective Time.
The obligation of Netlink to effect the Merger is also subject to the
following conditions: (a) the accuracy, in all respects, of the
representations and warranties of Cabletron and Merger Sub as of the Effective
Time, (except for (i) changes contemplated by the Merger Agreement, (ii) those
representations and warranties which address matters only as of a particular
date, and (iii) where the failure to be true and correct could not reasonably
be expected to have a Material Adverse Effect), and the receipt of a
certificate to such effect signed by the Chairman and the Chief Financial
Officer of Cabletron; (b) the performance and compliance by Cabletron and
Merger Sub in all material respects with all agreements and covenants required
by the Merger Agreement to be performed or complied with by them on or prior
to the Effective, and Netlink shall have received a certificate to such effect
signed by the Chairman and the Chief Financial Officer of Cabletron; (c)
Cabletron and Merger Sub having obtained all necessary consents, waivers,
approvals, authorizations or orders, and having made all required filings, for
the authorization, execution and delivery of the Merger Agreement and the
consummation by them of the transactions contemplated by the Merger Agreement;
(d) the receipt by Netlink of the written opinion from Testa, Hurwitz &
Thibeault, in form and substance reasonably satisfactory to Netlink, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368 of the Code; (e) the receipt by Netlink of the written opinion
from Ropes & Gray, counsel to Cabletron, regarding the validity of certain
actions taken by Cabletron with respect to the Merger; (f) the receipt by
Netlink of a copy of the letters from KPMG Peat Marwick LLP and Ernst & Young
LLP, independent certified public accountants, to the effect that the merger
qualifies for pooling of interests accounting treatment if consummated in
accordance with the Merger Agreement; and (g) that the Cabletron shares to be
issued in the Merger have been authorized for listing on the NYSE.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, notwithstanding approval thereof by the stockholders of Netlink or
Cabletron: (a) by mutual written consent duly authorized by the Boards of
Directors of Cabletron and Netlink; or (b) by either Cabletron or Netlink if
the Merger shall not have been consummated by February 28, 1997 (provided that
the right to terminate the Merger Agreement under this section (b) shall not
be available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); or (c) by either Cabletron or Netlink
if a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a nonappealable final
order, decree or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger
(provided that the right to terminate the Merger Agreement under this section
(c) shall not be available to any party who has not complied with its
obligations under the Merger Agreement with respect to taking further action
to ensure that proper tax treatment of the Merger and such noncompliance
materially contributed to the issuance of any such order, decree or ruling or
the taking of such action); or (d) by Cabletron or Netlink, if the required
stockholder approvals have not been obtained and the conversion of the shares
of the Netlink Series E Preferred Stock into shares of Netlink's Common Stock
shall not have occurred by February 28, 1997; or (e) by Cabletron, if: (i) the
Board of Directors of Netlink shall withdraw, modify or change its approval or
recommendation of the Merger Agreement,
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the Merger or the conversion of the Netlink Preferred Stock into Netlink Common
Stock in a manner adverse to Cabletron or shall have resolved to do so; (ii)
the Board of Directors of Netlink shall have recommended to the stockholders of
Netlink an Alternative Transaction (as defined below); or (iii) a tender offer
or exchange offer for 25% or more of the outstanding shares of Company Common
Stock is commenced (other than by Cabletron or an affiliate of Cabletron) and
the Board of Directors of Netlink recommends that the stockholders of Netlink
tender their shares in such tender or exchange offer; or (f) by Cabletron or
Netlink, (i) if any representation or warranty of Netlink or Cabletron,
respectively, set forth in the Merger Agreement shall be untrue when made, or
(ii) upon a breach of any covenant or agreement on the part of Netlink or
Cabletron, respectively, set forth in the Merger Agreement, such that the
conditions to the requisite obligations of Cabletron and Merger Sub or Netlink,
as the case may be, would not be satisfied (either (i) or (ii) above being a
"Terminating Breach"), provided, that, if such Terminating Breach is curable
prior to February 28, 1997 by Netlink or Cabletron, as the case may be, through
the exercise of its reasonable best efforts and for so long as Netlink or
Cabletron, as the case may be, continues to exercise such reasonable best
efforts, neither Cabletron nor Netlink, respectively, may terminate the Merger
Agreement under this section; or (g) by Cabletron, if any representation or
warranty of Netlink shall have become untrue such that the requisite condition
would not be satisfied, or by Netlink, if any representation or warranty of
Cabletron shall have become untrue such that the requisite condition would not
be satisfied, in either case other than by reason of a Terminating Breach; (h)
by Cabletron, if any person other than Cabletron or its affiliates is or
becomes the beneficial owner of 25% or more of the outstanding Shares of
Netlink; or (i) by Cabletron or Netlink, if Netlink enters into a definitive
agreement relating to an Alternative Transaction.
As used herein, "Alternative Transaction" means any of (i) a transaction
pursuant to which any person (or group of persons) other than Cabletron or its
affiliates (a "Third Party") acquires or would acquire more than 25% of the
outstanding Shares, whether from Netlink or pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger or other business combination
involving Netlink pursuant to which any Third Party acquires more than 25% of
the outstanding equity securities of Netlink or the entity surviving such
merger or business combination, or (iii) any other transaction pursuant to
which any Third Party acquires or would acquire control of assets (including
for this purpose the outstanding equity securities of subsidiaries of Netlink,
and the entity surviving any merger or business combination including any of
them) of Netlink or any of its subsidiaries having a fair market value (as
determined by the Board of Directors of Netlink in good faith) equal to more
than 25% of the fair market value of all the assets of Netlink and its
subsidiaries, taken as a whole, immediately prior to such transaction.
In the event of the termination of the Merger Agreement, the Merger Agreement
shall forthwith become void and there shall be no liability on the part of any
party hereto or any of its affiliates, directors, officers or stockholders
except (i) certain fees, including termination fee described below, and certain
other obligations including, specifically, indemnification obligations, and
(ii) nothing in the Merger Agreement shall relieve any party from liability for
any breach of the Merger Agreement.
TERMINATION FEE
All fees and expenses incurred in connection with the Merger Agreement and
the transactions contemplated by it will generally be paid by the party
incurring such expenses, whether or not the Merger is consummated, except that:
(a) Cabletron shall pay the fees and expenses, incurred in connection with the
printing of the Proxy Statement/Prospectus (including any preliminary materials
related thereto and including any registration fees payable to the Commission)
and any amendments or supplements thereto, and, in the event the Merger is
consummated, the Surviving Corporation (defined in the Merger Agreement and
hereafter as Netlink after Merger Sub is merged with and into Netlink, the
separate corporate existence of Merger Sub ceases, and Netlink continues as the
surviving corporation) shall be responsible for the legal and accounting fees
of Netlink in an amount not to exceed $85,000 and the stockholders will be
responsible for any balance (the "Excess Fees and Expenses"); and (b) Netlink
shall pay Cabletron a fee of $2,800,000 (the "Fee"), plus actual, documented
and reasonable out-of-pocket expenses of Cabletron relating to the transactions
contemplated by the Merger Agreement (including, but not limited to, fees and
expenses of Cabletron's counsel, accountants and financial
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advisers), within one day of and upon the first to occur of the following
events: (1) the termination of the Merger Agreement by Cabletron or Netlink as
a result of the failure to receive the requisite vote for approval and
adoption of the Merger Agreement by the Shareholders of Netlink by February
28, 1997 or the failure of the holders of the shares of the Netlink Series E
Preferred Stock to convert such shares into shares of Netlink's Common Stock
by such date; provided, however, that Cabletron shall only be entitled to be
paid the Fee if the Board of Directors of Netlink has withdrawn, modified or
changed its recommendation of the Merger in a manner adverse to Cabletron or
if Netlink enters into an Alternative Transaction within nine months of the
date of termination by Cabletron; (2) the termination of the Merger Agreement
by Cabletron because: (i) the Board of Directors of Netlink has modified its
recommendation of the Merger in a manner adverse to Cabletron; (ii) the Board
of Directors of Netlink has recommended to the stockholders of Netlink an
Alternative Transaction; or (iii) a tender offer or exchange offer for 25% or
more of the outstanding shares of Netlink Common Stock is commenced (other
than by Cabletron or an affiliate of Cabletron) and the Board of Directors of
Netlink recommends that the stockholders of Netlink tender their shares in
such tender or exchange offer; or (3) the termination of the Merger Agreement
by Cabletron or Netlink on account of a Terminating Breach by Netlink, but
only if Netlink enters into an Alternative Transaction within nine months of
the date of termination by Cabletron; or (4) the termination of the Merger
Agreement by Cabletron because a person other than Cabletron or its affiliates
became the beneficial owner of 25% or more of the outstanding shares; or (5)
the termination of the Merger Agreement by Cabletron or Netlink because
Netlink entered into a definitive agreement relating to an Alternative
transaction.
INDEMNIFICATION
The Merger Agreement provides that all rights to indemnification or
exculpation now existing in favor of the employees, agents, directors or
officers of Netlink as provided in its charter or Bylaws shall continue in
full force and effect for a period of not less than six years from the Closing
Date, except, that, in the event any claim or claims are asserted or made
within such six year period, all rights to indemnification in respect of any
such claim or claims shall continue until disposition of any and all such
claims. Any determination required to be made with respect to whether such an
indemnified party's conduct complies with the standards set forth in the
charter or Bylaws of Netlink or otherwise shall be made by independent counsel
selected by such an indemnified party reasonably satisfactory to the Surviving
Corporation (whose fees and expenses shall be paid by the Surviving
Corporation). From and after the Effective Time, Cabletron shall guarantee the
obligations of the Surviving Corporation pursuant to these provisions.
The representations and warranties of Netlink, except for those relating to
Netlink's financial statements, accounts receivable, inventories and fixed
assets, will survive for a period of one year from the closing date of the
Merger. Netlink's representations and warranties regarding financial
statements, accounts receivable, inventories and fixed assets will survive
until the earlier of (i) one year from the closing date or (ii) the release by
Cabletron of the combined audited financial statements of Cabletron and
Netlink. No claim for indemnification for breach of a representation or
warranty by Netlink may be commenced after the first anniversary of the
Closing Date, provided, however, that claims made within the applicable time
period shall survive to the extent of such claim until such claim is finally
determined and, if applicable, paid.
By approving the Merger Agreement and accepting the shares of Cabletron
Common Stock issuable in connection with the Merger, the stockholders of
Netlink will agree that the escrow account established under the Escrow
Agreement (described below) shall be available to indemnify, defend, protect,
and hold harmless each of Cabletron, Merger Sub, the Surviving Corporation and
each of their respective subsidiaries and affiliates at all times from and
after the date of the Merger Agreement from and against all claims, damages,
actions, suits, proceedings, demands, assessments, adjustments, costs and
expenses, including attorney's fees ("Damages") as a result of or incident to
(i) any breach of any representation or warranty of Netlink in the Merger
Agreement with respect to which a claim for indemnification is brought within
the applicable survival period, (ii) any breach or nonfulfillment by Netlink,
or any noncompliance by Netlink with, any covenant, agreement, or obligation
contained in the Merger Agreement except to the extent waived by Cabletron,
(iii) any claim by a stockholder or former stockholder of Netlink or any other
person, firm, corporation or entity, seeking to assert, or based upon:
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(A) ownership or rights of ownership to any shares of capital stock of
Netlink; (B) any rights of the stockholder (other than the right to receive
the shares of Cabletron Common Stock issuable pursuant to the Merger Agreement
or appraisal rights under the applicable provisions of the DGCL), including
any option, preemptive rights, or rights to notice or to vote; (C) any rights
under the charter or bylaws of Netlink; or (D) any claim that his, her or its
shares were wrongfully repurchased by Netlink, regardless of whether an
action, suit or preceding can or has been made against Netlink, (iv) certain
fees and expenses of Netlink related to the Merger or (v) certain other
matters.
Promptly after an indemnified party has received notice of or has knowledge
of any claim by a person not a party to the Merger Agreement ("Third Person")
or the commencement of any action or proceeding by a Third Person, the
indemnified party shall, as a condition precedent to a claim with respect
thereto being made under the Escrow Agreement (described below), give the
Stockholders Representative written notice of such claim or the commencement
of such action or proceeding; provided, however, that the failure to give such
notice will not effect the indemnified party's right to indemnification
pursuant to the Merger Agreement with respect to such claim, action or
proceeding, except to the extent that the Stockholders Representative has, or
the stockholders have, been actually prejudiced as a result of such failure.
If the Stockholders Representative notifies the indemnified party within 30
days from the receipt of the foregoing notice that he wishes to defend against
the claim by the Third Person and if the estimated amount of the claim,
together with all other claims made against the Escrow Funds that have not
been settled, is less than the remaining balance of the escrow account, then
the Stockholders Representative shall have the right to assume and control the
defense of the claim by appropriate proceedings with counsel reasonably
acceptable to the indemnified party, and the Stockholders Representative shall
be entitled to reimbursement out of the escrow account for such defense. The
indemnified party may participate in the defense, at its sole expense of any
such claim for which the Stockholders Representative shall have assumed the
defense pursuant to the preceding sentence, provided that counsel for the
Stockholders Representative shall act as lead counsel in all matters
pertaining to the defense or settlement of such claims, suit or proceedings;
provided, however, that the indemnified party shall control the defense of any
claim or proceeding that in indemnified party's reasonable judgment could have
a material and adverse effect on indemnified party's business apart from the
payment of money damages. The indemnified party shall be entitled to
indemnification for the reasonable fees and expenses of its counsel for any
period during which the Stockholders Representative has not assumed the
defense of any claim. Whether or not the Stockholders Representative shall
have assumed the defense of any claim, neither the indemnified party nor the
Stockholders Representative shall make any settlement with respect to any such
claim, suit or proceeding without the prior consent of the other, which
consent shall not be unreasonably withheld or delayed. It is understood and
agreed that in situations where failure to settle a claim expeditiously could
have an adverse effect on the party wishing to settle, the failure of the
party controlling the defense to act upon a request for consent to such
settlement within five business days of receipt of notice thereof shall be
deemed to constitute consent to such settlement for purposes of these
indemnification provisions.
No indemnified party shall be entitled to indemnification for Damages
relating to breaches of representations and warranties set forth in the Merger
Agreement, until the aggregate amount of Damages incurred by such person or
persons exceeds $250,000, in which event such party shall be entitled to
indemnification for all Damages. This limitation shall not apply to Damages
for any matters for which the stockholders of Netlink indemnify Cabletron,
Merger Sub and Netlink, as described above, except that it will apply to any
breach of any representation or warranty of Netlink in the Merger Agreement
with respect to which a claim for indemnification is brought within the
applicable survival period, if any. Notwithstanding any provision in the
Merger Agreement to the contrary, all Damages shall be net of any insurance
proceeds actually received that are attributable to such Damages.
The aggregate liability of the stockholders of Netlink with respect to the
matters set forth above shall not exceed the aggregate value of the Escrow
Shares (as defined below) and all claims for indemnification shall be paid
solely from the escrow account. No stockholder shall have any personal
obligation to indemnify Cabletron, or Merger Sub or the Surviving Corporation
under these indemnification provisions. To the extent that Cabletron, Merger
Sub, or the Surviving Corporation makes a claim against the escrow account
pursuant to the Escrow Agreement, and such claim is paid in shares of
Cabletron Common Stock, then for purposes of such payment, the shares of
Cabletron Common Stock shall be valued at $61.975.
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ESCROW
In order to secure the indemnification obligations of the indemnifying
persons under the Merger Agreement, approximately 161,355 shares of Cabletron
Common Stock (which equals approximately 8% of the Cabletron Common Stock to
be issued in the Merger, depending on the number of dissenting shares and
unexercised Netlink Options) (the "Escrow Shares") will be held in escrow. At
the Closing, Cabletron, Netlink, the Stockholders Representative (on behalf of
Netlink Stockholders) and the Escrow Agent will enter into the Escrow
Agreement. Each stockholder will have voting rights with respect to the Escrow
Shares deposited in the Escrow Account with respect to such stockholder so
long as such Escrow Shares are held in escrow, and Cabletron will take all
reasonable steps necessary to allow the exercise of such rights. While the
Escrow Shares remain in the Escrow Agent's possession pursuant to the Escrow
Agreement, the stockholders will retain and will be able to exercise all other
incidents of ownership of said Escrow Shares which are not inconsistent with
the terms and conditions of the Escrow Agreement.
BUSINESS
THE COMPANY
Netlink, Inc. ("Netlink" or the "Company") provides internetworking products
that permit customers to combine multiple data traffic types, including IBM
mainframe and LAN-based client-server data, for transmission over frame relay
and X.25 networks. Netlink has developed an architecture and switching
platform to consolidate IBM mainframe data and LAN-based client-server data
over frame relay and X.25 services. The Company's OmniLinx product family
enables users to migrate existing mainframe and client-server traffic onto
frame relay services, and to consolidate both traffic types onto a common
infrastructure. Netlink's purpose-designed architecture (Matrix VC(TM)) and
high-performance RISC-based platform enable the consolidation of mainframe and
client-server data without compromising the service quality of either traffic
type. The Company markets and sells its products primarily through indirect
distribution channels worldwide. The Company's distribution strategy focuses
on establishing channel partnerships with selected, leading communications and
networking companies. Netlink focuses on four types of channels in the U.S.
market: frame relay service providers, national distributors, OEM partners and
value-added resellers. Outside the United States, the Company sells its
products primarily through international distributors. Netlink was
incorporated in Delaware in 1984. In 1994, the Company acquired all of the
outstanding shares of Amnet, Inc. In 1995, the Company relocated its
operations from Raleigh, North Carolina to Framingham, Massachusetts. The
Company maintains its corporate office and operations at 1881 Worcester Road,
Framingham, Massachusetts, 01701 and its telephone number at that location is
(508) 879-6306.
BACKGROUND AND TECHNOLOGY
The traditional voice-oriented telecommunications networks implemented by
public carriers are based on dedicated or dialed circuits that do not scale
efficiently to accommodate data traffic. In response to the growth in data
traffic, the carriers have developed network solutions that provide high-
speed, high volume data communications services cost effectively, in addition
to supporting non-data traffic such as voice and video. The solutions they
have developed are fast packet network architectures, principally frame relay
and Asynchronous Transfer Mode ("ATM"). In these fast packet architectures,
all network traffic is divided into packets ("frames" or "cells") and "virtual
circuits" take the place of the dedicated circuits of voice-oriented
architectures. In a virtual circuit, a connection is established by an initial
exchange of signaling packets between the communicating terminals. Data
transfer then takes place and at the end of the session the connection is
cleared. During the data transfer, or conversation phase, the network tries to
create the illusion of a real end-to-end connection. The principal distinction
between a virtual circuit and a dedicated circuit is that a dedicated circuit
creates a dedicated, exclusive connection between two points that other users
of the network cannot interfere with, while a virtual circuit uses network
capacity as the data is transmitted and thus allows other users of the network
to share the available capacity and resources of the network. The
characteristics of the two principal fast packet architectures are as follows:
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Frame Relay. Data is divided into variable-length packets called frames.
Frame relay is most commonly used for access speeds between 56 thousand bits
per second ("Kbps") and 1.54 million bits per second ("Mbps") ("T-1 speeds"),
although it is technically applicable outside this range. Frame relay is a
virtual circuit-based service that, with suitable provisioning, class-of-
service management and access equipment, is ideal for most types of data
traffic.
Asynchronous Transfer Mode (ATM). Data is divided into very small fixed
length packets called cells. ATM can be used for access speeds from 1.54 Mbps
(T-1 speeds) to 150 Mbps and higher. At speeds below 10 Mbps, ATM is generally
considered to be less efficient than frame relay. A benefit of ATM over frame
relay is that the fixed length packets used in ATM are more suitable for real-
time traffic such as voice than the variable length frames used in frame
relay. Like frame relay, ATM is a virtual circuit-based service that, with
suitable provisioning, class-of-service management and access equipment, is
ideal for all types of data and non-data traffic at the high operating speeds
for which it has been designed.
Access Devices for Fast Packet Services
An access device is an item of networking equipment that is used to connect
devices and local area networks on the user site to a service such as frame
relay. The access device may be resident at the user's location, or on the
premises of the service provider. The functions of an access device include
converting between local and network protocols, concentrating a number of end
devices onto one access link, allocating services among competing traffic
sources, and supporting network operations through monitoring and diagnostic
tools. Access devices for fast packet services can be divided according to the
technology implementation (or architecture) they use to perform their
function. The most common architecture used today is that of the IP router.
Frame relay access devices that are not IP router-based are often grouped
together as "Frame Relay Access Devices' or "FRADs'.
Netlink's products are based on two fundamental technologies: a product
architecture known as Matrix VC that has been designed for multiprotocol
operation over fast packet networks and a high performance communications
platform utilizing Intel's I960 RISC processor.
Matrix VC Architecture
Netlink's products are based on the Company's Matrix VC architecture. Using
virtual connection operations as its fundamental building blocks, this
architecture was designed specifically for optimal operation in virtual
circuit-based networks such as frame relay and ATM. The result is a product
set that is inherently more cost-effective and scaleable in virtual circuit-
based networks. Above all, it provides native connection-oriented service for
connection-oriented applications (IBM mainframe communications, voice), while
enabling LAN support that is equivalent in capability and performance to an IP
router-based architecture. Matrix VC allows link protocol, addressing,
congestion management and encapsulation to be independently selectable on a
connection-by-connection basis, facilitating multiprotocol networking over
logical mesh networks. Features such as switching, concentration, dynamic
alternate routing, DLCI mapping, rate control, prioritization and class-of-
service definition are inherent. Furthermore, all protocol support is
completely software defined and can be loaded and configured remotely.
High Performance RISC Platform
The Company's products utilize a high performance platform based on the
Intel 80960CA (I960) RISC processor. Netlink's implementation uses Wind
River's Vx-Works operation system. This choice of operating system not only
brings features that improve software quality and maintainability, it also
makes very efficient use of memory. A further significant attribute of the
platform design is that it was developed for multiprotocol operation. Thus,
while like some IP routers, the platform employs hardware assistance to boost
performance, unlike IP routers the hardware assistance is protocol
independent.
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PRODUCTS
Netlink's core product line is the OmniLinx family. Each member of the
family is an implementation of Netlink's Matrix VC architecture on a high
performance RISC platform. Members of the OmniLinx family include:
TurboFRAD. TurboFRAD provides multiprotocol access to public or private
frame relay networks. It supports IBM mainframe data, LAN-based client-
server data, and a variety of legacy traffic. Each TurboFRAD contains one
RISC processor and has 4 to 8 serial ports and 1 LAN port (Ethernet or
Token Ring). TurboFRAD can support one or more frame relay access ports at
up to 2 Mbps.
OmniFRAD. OmniFRAD is a frame relay access device for use in higher
volume branches or as the frame relay network interface at the user's data
center. It shares an identical feature set to TurboFRAD. Depending upon
configuration, it contains from 2 to 8 RISC processors, offers 4 to 64
serial ports (including up to eight at T-1 speeds) and up to 2 LAN ports
(Ethernet or Token Ring).
NetFRAD. NetFRAD is a high capacity fault tolerant frame relay access
device for use within the network of frame relay service provider. It
differs from OmniFRAD in employing a high availability chassis supporting
two independent groups of up to six RISC processors. Its primary interface
is a T-1 interface that employs DS0A submultiplexing to operate directly on
T-1 circuits carrying multiple channels. NetFRAD supports up to 22 T-1
interfaces.
OmniLinx Switch. OmniLinx Switch adds backbone switching capabilities to
the frame relay access and concentration capabilities of OmniFRAD. It can
be used to complement TurboFRAD by providing the middle tier of a
hierarchical network, or to provide a complete networking solution for a
medium-sized enterprise. OmniLinx Switch provides similar protocols and
compatibility to TurboFRAD and OmniFRAD, adding the SmartLinx transport
architecture which provides fail-safe dynamic routing over a mesh of
virtual circuits. OmniLinx Switch uses a common hardware platform with
OmniFRAD.
OmniView. OmniView is an element manager that provides network
monitoring, diagnostics and configuration support for an OmniLinx network.
OmniView is based on the industry-standard Hewlett Packard OpenView
platform, and uses SNMP ("Simple Network Management Protocol") to
communicate with the OmniLinx nodes via the frame relay network.
Product Capabilities
The following are some of the notable capabilities of the OmniLinx family:
Fast packet support. OmniLinx supports all commonly implemented versions of
frame relay at speeds of up to 2 Mbps. Notable capabilities include: the
ability to configure the full complement of 992 DLCIs (virtual circuits) per
port; complete implementation of RFC1490 encapsulation in all versions for all
protocols; inbound and outbound rate control; frame relay concentration and
switching; BECN and FECN support; adaptive use of burst window based on DE bit
control; bandwidth allocation using multiple queues per DLCI.
IBM network support. IBM network compatibility includes support for all
systems and protocol versions in use in IBM mainframe and mid-range (AS/400)
networks. This includes support for PU (Physical Unit) 1.0, 2.0, 2.1, 4.0
devices; full compatibility with IBM's front-end processor implementation (NCP
7.1+); support of IBM's Boundary Access Node (BAN); support of, and
interoperability among IBM network protocols: SDLC (IBM's serial line
protocol), LLC2 (IBM's LAN protocol), RFC1490 (IBM's frame relay
implementation in two versions) and QLLC (IBM's X.25 protocol).
Client-server support. The OmniLinx family supports access router-equivalent
support for the principal protocols used on LAN-based client-server
applications: IP and IPX. Capabilities include Token Ring and Ethernet
support, full dynamic routing using RIP for IP and RIP and SAP for IPX;
prioritization among IP applications with different service needs (e.g. telnet
and ftp); filtering; RFC1490 support; and participation in internet diagnostic
routines such as path trace. LAN protocols other than IP/IPX (which are
typically non-strategic) are transported via an RFC1490
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Other protocol support. The OmniLinx family also supports legacy protocols
including X.25 (used by many corporate networks migrating to frame relay) and
bisync (widely used in the banking and retail industries).
SafeLinx. SafeLinx is a suite of capabilities for reliable transport of SNA
and legacy traffic over frame relay under virtually all circumstances, and is
a key differentiator of the OmniLinx family. SafeLinx has the following
components:
. Multi-level Bandwidth Allocation guarantees minimum percentages of frame
relay bandwidth for different applications and protocols. Bandwidth can
be assigned to individual protocols (IP or IPX), to IBM network logical
connections (PU or LU type), or to MAC addresses or sockets for LAN
traffic.
. Adaptive Burst Rate enables a selective mix of congestion handling for
different traffic types, even within a single frame relay virtual
circuit. For example, a conservative approach to IBM data transport
improves performance by virtually eliminating congestion discards of IBM
data, while aggressively handling LAN traffic to take full advantage of
the burst window of the frame relay circuit for bursty LAN traffic.
. Virtual Circuit Backup enables transparent backup solutions, including
dynamic remapping of frame relay circuits and dialing around a network
failure.
Backbone switching. OmniLinx Switch supplements its frame relay access
capabilities with comprehensive backbone switching. Backbone switching
provides for data to be routed across a network of OmniLinx Switches
interconnected by leased lines or other communications paths. SPF ("Shortest
Path First') routing is used to ensure traffic takes the lowest delay path
among those available. Different classes of service provide sequenced delivery
and error correction for those traffic types that need it.
Network Management. The OmniLinx family supports two approaches to network
management that can be used independently or concurrently. First, an SNMP
management agent in each node provides for management from OmniView or from
many other SNMP systems. Second, an integral NetView Service Point (in
OmniFRAD and TurboFRAD), together with Netlink's NetView Supplemental
Software, provides for monitoring and control from a mainframe-based NetView
console. SNMP and NetView are supplemented by an embedded network management
process that provides full software configuration of all operational
parameters, comprehensive diagnostics and software download and maintenance
support.
SALES AND MARKETING
The Company markets and sells its products primarily through indirect
distribution channels worldwide. The Company's distribution strategy focuses
on establishing channel partnerships with selected, leading communications and
networking companies. Resellers focus their sales effort on organizations with
larger networks (30+ branches) where traffic is "mission critical" and
sensitive to mishandling. Netlink focuses on four types of channels in the
U.S. market: frame relay service providers, national distributors, OEM
partners and value-added resellers. Outside the United States, the Company
sells its products primarily through international distributors. The Company
also sells directly to a small number of house accounts. The Company promotes
its products by participation in industry tradeshows and advertising in
industry and trade magazines.
CUSTOMERS, SUPPORT AND TRAINING
Netlink's customers typically are large organizations and are diverse,
representing financial institutions, manufacturing companies, public utilities
and government agencies. Netlink's customer support group provides technical
support from the Company's Framingham office. In addition, Netlink has
contracted with IBM's Availability Services to provide installation and
maintenance services for the Company's OmniLinx family of products throughout
the United States. Services to be provided under this contract include
installation (scheduling, hardware installation and configuration) and
maintenance (call handling, first line telephone support, on-site support and
sparing). In addition to IBM, many of Netlink's distributors also provide
first line support.
COMPETITION
The networking industry is characterized by intense competition among
companies within each technological segment. Competition for devices providing
access to fast packet services comes from two classes
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of vendor: router vendors that offer frame relay access as an extension of
general purpose access routers, and vendors of access devices specifically
designed for frame relay, often grouped together as "FRADs'. Many of the
Company's current and potential competitors have longer operating histories
and greater financial, technical, sales, marketing and other resources, as
well as greater name recognition and a larger customer base, than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or may be able to devote
greater resources to the development, promotion, sale and support of their
products than the Company. Many also have long-standing customer relationships
with large enterprises that are part of the Company's target market and these
relationships may make it more difficult to complete sales of the Company's
products to these enterprises. Furthermore, the Company expects that certain
of its channel partners may in the future develop competitive products and may
then decide to terminate their relationships with the Company. Consequently,
the Company expects increased competition, particularly in the frame relay
market. Increased competition could result in significant price competition,
reduced profit margins or loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able
to complete successfully in the future.
In addition to Netlink, there are more than fifteen producers of frame relay
access devices that, despite their widely differing origins and capabilities,
are grouped together as FRADs. Direct competitors to the Company's products
include Hypercom, Motorola and Sync Research. The Company believes that it
differentiates itself from FRAD vendors based on its superior handling of LAN-
based client-server traffic.
LAN router manufacturers that compete with the Company include Advanced
Computer Communications, Bay Networks, Cisco Systems, IBM, Proteon Inc., and
3Com Corp. Most router manufacturers have added frame relay interfaces to
their access routers, and so compete in the frame relay access market. The
Company believes that it differentiates itself from IP router-based products
based on its superior handling of IBM mainframe traffic.
PROPRIETARY RIGHTS
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to
establish and protect its proprietary rights in its products. The Company
enters into confidentiality and assignment of invention agreements with its
employees and consultants. There can be no assurance that the steps taken by
the Company to protect its intellectual property will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. In the event that protective measures
are not successful, the Company's business, operating results and financial
condition could be materially and adversely affected.
RESEARCH AND DEVELOPMENT
The Company is focusing its product development efforts on maintaining its
technology leadership in consolidating IBM mainframe and LAN-based client
server traffic over frame relay and products designed to extend into
complementary segments of the frame relay market. Netlink plans to broaden its
position within the market for access to fast packet services. In doing so,
the Company will continue to focus on applications where the Company's Matrix
VC architecture brings a competitive advantage over IP router-based products.
The Company monitors changing customer needs and works closely with its
channel partners and resellers, end user customers and market research
organizations to monitor changes in the marketplace. The Company intends to
remain dedicated to industry standards and to continue to support emerging
networking protocols.
MANUFACTURING
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, systems integration, test and
quality assurance. The Company's relies on contract manufacturers to produce
subassemblies on a turnkey basis. The Company's products are manufactured
using primarily "off-the-
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shelf" components. The Company currently uses two contract manufacturers to
provide protection against disruption of operations should difficulties arise.
GOVERNMENTAL REGULATION
The Company's products are subject to regulations promulgated by the Federal
Communications Commission (FCC) regarding emission of electromagnetic energy,
which may interfere with other equipment. All of the Company's current
products have been tested and comply with the relevant FCC regulations and
with all required Underwriters Laboratories (UL) safety specifications.
The Company's products are also subject to extensive governmental regulation
and product certification in certain foreign countries. These regulations and
product certification requirements are often significantly more stringent and
burdensome than the regulations to which the Company's products are subject in
the United States.
EMPLOYEES
As of September 30, 1996, the Company employed 65 persons. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages to date and believes its relationship with its
employees is good.
FACILITIES
The Company's principal administrative, engineering and manufacturing
facilities are located in Framingham, Massachusetts. This facility is occupied
under a lease for 23,792 square feet that expires on October 31, 1999. The
Company also has sales offices in Houston, Miami, New York and Raleigh, which
are typically small office suites. The Company believes that its facilities
are adequate for its current needs.
LEGAL PROCEEDING
The Company is not involved in any pending material legal proceedings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and related Notes thereto contained elsewhere in this
Proxy Statements/Prospectus
GENERAL
Netlink, Inc. was founded in November, 1983 to operate in the IBM data
communications marketplace. From its inception through early 1994, Netlink was
based in Raleigh, North Carolina and was primarily engaged in developing,
manufacturing and marketing a variety of protocol conversion and data
concentration products in the Systems Network Architecture ("SNA") market
place.
In May, 1994, Netlink acquired all of the outstanding shares of Amnet, Inc.,
a company located in Framingham, Massachusetts with experience in
multiprotocol LAN and WAN traffic handling plus expertise in X.25 packet
switching technology. The acquisition was recorded as a purchase and was
accomplished through the issuance of 1,000,000 shares of Netlink's 1994
Preferred Stock valued at $1.80 per share, payment of $200,000 in cash, and
assumption of $1,925,457 in net liabilities of Amnet. At December 31, 1994,
Netlink assessed the value of goodwill that arose as a result of the
acquisition and determined that future cash flows expected from the
acquisition were not sufficient to justify the carrying value of any portion
of the associated goodwill. Among the factors contributing to this
determination were the continuing actual and projected losses of Netlink after
the acquisition, the rapid pace of technological changes in Netlink's
industry, the quick phase-out of the products acquired, the subsequent
development of unrelated new technologies and products, and the attendant
market re-positioning accomplished by Netlink based upon those new
technologies and products. Based upon that analysis, management determined
that there had been a permanent impairment in the value of goodwill and at
December 31, 1994, Netlink recorded a one-time charge of $3,925,457 to
recognize that impairment.
In the first half of 1995, Netlink consolidated all of its operations to
Framingham, Massachusetts dedicated its entire product development efforts and
budgets toward the frame relay market, and started to build a channel of
distribution suited for that market.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages of
net sales represented by each item in Netlink's statement of operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- -------------------
1995 1994 1993 1996 1995
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....... 36.1 34.8 42.9 46.9 35.4
------- ------- ------- --------- ---------
Gross profit............. 63.9 65.2 57.1 53.1 64.6
Operating expenses:
Sales and marketing..... 42.6 43.0 67.4 41.3 41.9
Research and develop-
ment................... 31.5 24.7 46.6 36.5 31.3
General and administra-
tive................... 21.8 20.2 34.0 11.3 12.5
------- ------- ------- --------- ---------
Total operating ex-
penses.................. 95.9 87.9 148.0 89.1 85.7
------- ------- ------- --------- ---------
Loss from operations..... (32.0) (22.7) (90.9) (36.0) (21.1)
Write-off of goodwill... 0.0 (46.0) 0.0 0.0 0.0
Net interest and other
expenses............... (4.1) (1.8) (1.5) (0.4) (6.0)
------- ------- ------- --------- ---------
Net loss................. (36.1)% (70.5)% (92.4)% (36.4)% (27.1)%
======= ======= ======= ========= =========
</TABLE>
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NET SALES
Net sales increased 46.3% to $7.9 million for the nine month period ended
September 30, 1996 from $5.4 million for the nine month period ended September
30, 1995. This increase is attributable to increased sales of the OmniLinx
family of products for international private network applications.
Net sales in 1995 decreased by 15.2% to $7.2 million compared to $8.5
million in 1994. SDLC conversion, a mature product segment, accounted for $3.7
million of 1994 net revenues and virtually all of the remaining $4.8 million
of 1994 revenues came from sales into applications that were non-frame relay.
Of 1995 net revenues, SDLC conversion, which was put in maintenance mode,
accounted for approximately $1.5 million, with frame relay applications
accounting for the balance.
Net sales increased 137.8% to $8.5 million for 1994 from $3.6 million in
1993. This increase was primarily due to shipments of products acquired in the
Amnet acquisition which accounted for $4.3 million, or 87.3% of the increase
between the two years.
GROSS MARGIN
Gross margin represents net sales less the cost of goods sold, which
includes cost of materials and manufacturing overhead. Manufacturing overhead
is expensed in the period incurred. Netlink's gross margin was $4.2 million,
or 53.1% of net sales, for the nine month period ended September 30, 1996.
Gross margin for the corresponding period in 1995 was $3.5 million, or 64.6%
of net sales for that period. This decrease in gross margin as a percentage of
sales is primarily attributable to changing to an indirect channel of
distribution, the introduction of new products in 1996 and associated price
competition. With respect to new product introductions, Netlink generally
experiences higher manufacturing, component and other costs and commensurately
lower margins, for new products for a period of time following their
introduction. In 1996, Netlink introduced its TurboFRAD and NetFRAD products.
Also, with the relocation of its manufacturing operations from Raleigh to
Framingham, Netlink experienced greater labor and facility costs and also
staffed its Framingham operation in anticipation of increasing capacity
requirements in the future.
Gross margin in 1995 was $4.6 million, or 63.9% of sales compared to $5.6
million, or 65.2% of sales in 1994. The slight decrease in gross margin as a
percentage of sales between 1994 and 1995 is attributable to a relatively high
volume of direct sales in 1994 compared to 1995 when Netlink began to sell
more products through indirect channels.
Gross margin in 1994 was $5.6 million, or 65.2% of sales, compared to $2.0
million, or 57.1% of sales in 1993. The increase in gross margin percentage in
1994 compared to 1993 is attributable to purchasing and production
efficiencies associated with the higher level of net sales in 1994 compared to
1993 and to the high level of sales of products acquired in the Amnet
acquisition which had higher per unit margins than Netlink products sold in
1993.
OPERATING EXPENSES
Research and development. Research and development expense increased to $2.9
million, or 36.5% of net sales for the nine month period ended September 30,
1996 from $1.7 million, or 31.3% of net sales for the nine month period ended
September 30, 1995. This increase was primarily attributable to the costs of
increasing the size of the research and development staff relating to the
development of new products and enhancement of existing products.
Research and development expense increased to $2.3 million, or 31.5% of net
sales for 1995 from $2.1 million, or 24.7% of net sales in 1994. The dollar
amount of the increase between the two periods was attributable to normal
inflationary pressures on the cost of labor and materials and the percentage
change is a function of the decrease in revenues between the two years.
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Research and development expense increased to $2.1 million, or 24.7% of net
sales for 1994 from $1.7 million, or 46.6% of net sales, for 1993. The dollar
amount of this increase is attributable to an increase in the number of
employees as a result of the Amnet acquisition in May of 1994 and the decrease
in the amount as a percentage of net sales is a function of the increase in
revenues between the two years without a proportional increase in expenditures
for research and development.
Sales and marketing. Sales and marketing expense increased to $3.3 million,
or 41.3% of net sales for the nine month period ended September 30, 1996 from
$2.3 million, or 41.9% of net sales for the nine month period ended September
30, 1995. The dollar amount of the increase was attributable primarily to the
recruiting and hiring of individuals experienced in the development of third
party channels and increased marketing activities as Netlink focused on
developing new channels for distributing its products.
Sales and marketing expense decreased to $3.1 million, or 42.6% of net sales
for 1995 from $3.7 million, or 43.0% of net sales for 1994. The decrease
reflects a reduction in the size of Netlink's direct sales force as Netlink
de-emphasized its direct sales activities and focused more on developing
third-party distribution channels.
Sales and marketing expense increased to $3.7 million, or 43.0% of net sales
for 1994 from $2.4 million, or 67.4% of net sales for 1993. This increase is
attributable primarily to an increase in the number of sales and marketing
personnel resulting from the Amnet acquisition and the decrease as a
percentage of net sales is a function of the increase in revenues between the
two years resulting primarily from the fulfillment of orders received by Amnet
prior to its acquisition by Netlink, including several relatively large
international orders that were in Amnet's backlog at the May 1994 acquisition
date.
General and administrative. General and administrative expense increased to
$0.9 million, or 11.3% of net sales for the nine month period ended September
30, 1996 from $0.7 million, or 12.4% of net sales for the nine month period
ended September 30, 1995. This increase in expense levels is attributable
primarily to the addition of administrative personnel in anticipation of
increased administrative workload.
General and administrative expense decreased to $1.6 million, or 21.8% of
net sales for 1995 from $1.7 million, or 20.2% of net sales for 1994. The
decrease is a result of a restructuring and corresponding reduction in
personnel associated with the integration of Amnet into Netlink.
General and administrative expense increased to $1.7 million, or 20.2% of
net sales for 1994 from $1.2 million, or 34.0% of net sales, for 1993. The
dollar amount of the increase is reflective of duplication of administrative
personnel and facilities in the Framingham and Raleigh locations in 1994
following the merger. The decrease as a percentage of sales is a function of
the greater 1994 revenues resulting from the fulfillment of backlogged Amnet
orders after the 1994 merger.
NET INTEREST AND OTHER INCOME (EXPENSE)
Netlink derives interest income primarily from investing the proceeds from
the sale of Netlink securities in short-term commercial paper. Interest income
was $120,000 for the nine month period ended September 30, 1996 compared to
interest income of $34,000 for the corresponding period in 1995. This increase
is attributable to the sale by Netlink of the Netlink 1996 Preferred Stock and
the exercise of common stock warrants for Netlink Common Stock in February
1996. Interest income in 1994 and 1995 was $59,000 and $61,000, respectively.
Interest expense for the nine month period ended September 30, 1996 was
$153,000 compared to interest expense of $195,000 for the corresponding period
in 1995. Both periods include interest paid in connection with a sale and
leaseback arrangement entered into by Amnet prior to the May 1994 merger. The
1995 period also includes interest on a bridge loan in the principal amount of
approximately $993,000 dated June 1995 and the 1996 period includes interest
on two bridge loans in the aggregate principal amount of approximately
$2,323,000 which were repaid at the end of February 1996.
49
<PAGE>
Interest expense in 1994 was $159,000 and interest expense in 1995 was
$294,000. 1994 interest expense related primarily to the sale and leaseback
arrangement and the 1995 interest included interest attributable to the sale
and leaseback arrangement and interest accrued on the bridge loans.
Net interest expense in 1993 was $3,000.
LIQUIDITY AND CAPITAL RESOURCES
Netlink has funded its operations primarily from the sale of stock,
borrowings from investors and borrowings under a bank facility. Proceeds from
sales of preferred and common stock were $8.562 million in the nine month
period ended September 30, 1996. From those proceeds, Netlink repaid bridge
loans and accrued interest to investors in the aggregate amount of $2.443
million. For the nine month period ended September 30, 1996, Netlink's
operating activities used cash of approximately $4.375 million. At September
30, 1996, Netlink had approximately $2.652 million in working capital,
including $1.447 million in cash.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, and computer software amounted to approximately
$1.238 million for the nine month period ended September 30, 1996. Netlink
currently has no material commitments for capital expenditures.
Netlink has a loan agreement (the "Loan Agreement") with Fleet Bank (the
"Bank"), which provides for a revolving credit facility and a term loan
secured by a blanket lien on all of Netlink's assets. Under the revolving
credit facility, Netlink may borrow up to the lesser of $1 million or 80% of
the net amount of Netlink's approved accounts receivable from customers inside
the United States and under certain conditions approved accounts receivable
from customers outside the United States. The Bank may also issue up to $1
million in letters of credit for the account of Netlink. The amount available
for borrowing under the revolving credit facility is reduced by the aggregate
amount of such letters of credit outstanding from time to time. Under the term
loan, Netlink may borrow up to $1.5 million for purchases of equipment and
certain technologies. In no event may the aggregate outstanding principal
balance of all loans made to Netlink under the Loan Agreements exceed
$2.5 million. At September 30, 1996, Netlink had borrowed $608,000 under the
term loan.
The Loan Agreement also requires Netlink to maintain certain financial
ratios and limits Netlink's ability to incur additional debt, to repurchase
Netlink's stock and to pay dividends. Netlink has failed to meet certain
financial covenants of the Loan Agreement; however, it believes that the Bank
will not demand immediate payment of the amount outstanding under the term
loan in light of the pending acquisition of Netlink by Cabletron Systems.
Netlink further believes that its available cash and the cash flow available
from its operations will be sufficient to meet its normal operating and
capital requirements until the Merger is completed. In the event that the
Merger is not consummated, Netlink would, in the first quarter of 1997, need
to obtain additional capital or pursue other strategic alternatives, including
evaluating the sale of Netlink. Potential sources of capital include financing
in the public or private markets. If the Bank were to demand payment under the
Loan Agreement or if Netlink was required to pay Cabletron the $2,800,000 Fee
payable if the Merger is not consummated under certain circumstances, Netlink
would have more immediate liquidity concerns which would increase the urgency
of such additional financing. While Netlink believes it would be able to
obtain such financing in either case, there can be no assurance that it would
be able to do so within required timeframes or on acceptable terms.
50
<PAGE>
PRINCIPAL STOCKHOLDERS OF NETLINK
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 24, 1996,
assuming the conversion of all Netlink Preferred Stock into Netlink Common
Stock, by (i) each person known by the Company to beneficially own more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) Netlink's Chief Executive Officer and each other executive
officer of Netlink who received total annual salary in excess of $100,000 and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the address of the stockholder is c/o Netlink, Inc., 1881
Worcester Rd., Framingham, MA 01701.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER: OWNERSHIP: (1) OF CLASS:
------------------------------------- -------------------- ---------
<S> <C> <C>
Institutional Venture Group
3000 Sand Hill Road, Building #2, Suite 290
Menlo Park, CA 94025 (2)..................... 2,306,606 17.56%
Morgan Holland Group
One Liberty Square
Boston, MA 02109 (3)......................... 1,495,846 11.39%
Accel Associates
One Palmer Square
Princeton, NJ 08542 (4)...................... 1,989,552 15.15%
St. Paul Venture Capital, Inc.
8500 Normandale Lake Blvd.
Bloomington, MN 55437........................ 1,405,287 10.70%
Geoffrey Yang (5).............................. 2,306,606 17.56%
Joseph T. McCullen (6)......................... 1,495,846 11.39%
Bruns Grayson (7).............................. 912,357 6.95%
Nina Saberi (8)................................ 292,007 2.18%
Robert Tonti (9)............................... 74,420 *
Roger Walton (10).............................. 52,113 *
Dixon Doll (11)................................ 141,456 1.08%
Jim Flach (12)................................. 44,313 *
All directors and executive officers as a group
(12 persons) (13)............................. 5,437,814 41.35%
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) Includes 2,265,952 shares owned by Institutional Venture Partners V, L.P.
and 40,654 shares beneficially owned by Institutional Venture Management
V, L.P. Institutional Venture Management V, L.P. is the general partner of
Institutional Venture Partners V, L.P.
(3) The Morgan Holland Group is comprised of the affiliated funds: Morgan
Holland Fund, L.P., Morgan Holland Fund II, L.P. and Morgan Holland Fund
III, L.P.
(4) Includes 795,805 shares beneficially owned by Accel Capital
(International) L.P. and 1,193,747 shares owned by Accel Capital L.P.
Accel Associates (International) L.P. is a general partner of Accel
Capital (International) L.P., and Accel Associates, L.P. is the general
partner of Accel Capital, L.P. Accel Associates, L.P. and Accel Associates
(International), L.P. share the same general partners.
(5) Includes 2,265,952 shares beneficially owned by International Venture
Partners V, L.P. and 40,654 shares beneficially owned by International
Venture Management V, L.P. Mr. Yang, as a general partner of International
Venture Management V, L.P., which is the general partner of International
Venture Partners V, L.P., may be deemed to share voting and dispositive
power with respect to these shares. Mr. Yang disclaims beneficial
ownership of these shares except to the extent of his direct pecuniary
interest.
(6) Includes 1,495,846 shares beneficially owned by the Morgan Holland Group.
Mr. McCullen, as general partner of Morgan Holland Fund L.P., may be
deemed to share voting and dispositive power with respect to these shares.
Mr. McCullen disclaims beneficial ownership of these shares except to the
extent of his direct pecuniary interest.
51
<PAGE>
(7) Includes 134,362 shares beneficially owned by Brown Technology Associates
Limited Partnership, 409,278 shares beneficially owned by ABS Ventures II
Prime Limited Partnership, and includes 368,717 shares beneficially owned
by ABS Ventures III Limited Partnership. Mr. Grayson, as a general partner
of Calvert Capital, L.P., which is a general partner of ABS Ventures III
Limited Partnership and ABS Ventures II Prime Limited Partnership and, as
a general partner of Brown Technology Associates Limited Partnership, may
be deemed to share voting and dispositive power with respect to these
shares. Mr. Grayson disclaims beneficial ownership of these shares except
to the extent of his direct pecuniary interest.
(8) Includes 292,007 shares issuable upon exercise of options which are or
will be vested within 60 days of October 24, 1996.
(9) Includes 74,420 shares issuable upon exercise of options which are or will
be vested within 60 days of October 24, 1996.
(10) Includes 52,113 shares issuable upon exercise of options which are or
will be vested within 60 days of October 24, 1996.
(11) Includes 32,360 shares beneficially owned by International Synergies Ltd.
Mr. Doll, as an affiliate of International Synergies Ltd., may be deemed
to share voting and dispositive power with respect to these shares. Mr.
Doll disclaims beneficial ownership of these shares.
(12) Includes 44,313 shares issuable upon exercise of options which are or
will be vested within 60 days of October 24, 1996.
(13) Includes 2,265,952 shares held by International Venture Partners V, L.P.,
40,654 shares held by International Venture Management V, L.P., 134,362
shares beneficially owned by Brown Technology Associates Limited
Partnership, 409,278 shares held by ABS Ventures II Prime Limited
Partnership, 368,717 shares held by ABS Ventures III Limited Partnership,
1,495,846 shares held by the Morgan Holland Group and 32,360 shares held
by International Synergies, Ltd. Also includes an aggregate of 557,364
shares issuable to the Company's directors and executive officers upon
the exercise of options held by such directors and executive officers
which are or will be vested within 60 days of October 24, 1996.
52
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following Unaudited Pro Forma Combined Condensed Financial Data assumes
a business combination between Cabletron and Netlink which is accounted for on
a pooling of interests basis and is based upon the respective historical
financial statements and related notes thereto which are included elsewhere
herein or incorporated by reference in this Proxy Statement/Prospectus. The
unaudited pro forma combined condensed balance sheet combines Cabletron's
February 29, 1996 consolidated balance sheet with Netlink's December 31, 1995
consolidated balance sheet. The unaudited pro forma combined condensed
statements of income combine Cabletron's statements of income for the fiscal
years ended February 29, 1996 and February 28, 1995 and 1994 with Netlink's
results of operations for the years ended December 31, 1995, 1994 and 1993,
respectively. The consolidated financial statements of Cabletron give
retroactive effect to the mergers of Cabletron and ZeitNet, Inc. and of
Cabletron and Network Express, Inc., which have been accounted for as poolings
of interests. The unaudited pro forma financial data as of and for the six
months ended August 31, 1996 and 1995 is not presented as it is not
meaningful. The unaudited pro forma financial data for Cabletron's fiscal
years ended in 1993 and 1992 also is not presented as it is not meaningful.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated at the beginning of
each period presented, nor is it necessarily indicative of the future
operating results or financial position of the combined companies following
the Merger. These financial statements should be read in conjunction with the
historical consolidated financial statements and related notes thereto
included elsewhere herein or incorporated by reference in this Proxy
Statement/Prospectus.
53
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
CABLETRON NETLINK
FEBRUARY 29, DECEMBER 31, COMBINED
1996 1995 ADJUSTMENTS(2) PRO FORMA
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $105,467 $ 634 $ -- $106,101
Short-term investments.... 172,896 -- -- 172,896
Accounts receivable....... 151,263 1,993 (1,400) 151,856
Inventories............... 159,678 1,128 (750) 160,056
Deferred taxes............ 38,315 -- 2,472 40,787
Prepaid expenses and other
assets................... 31,528 183 -- 31,711
-------- ------- ------- --------
Total current assets...... 659,147 3,938 322 663,407
Long-term investments...... 153,424 -- -- 153,424
Long-term deferred taxes... 23,473 -- -- 23,473
Property, plant and
equipment................. 153,211 694 -- 153,905
Goodwill................... 2,540 -- -- 2,540
Other assets............... 481 -- -- 481
-------- ------- ------- --------
Total assets.............. $992,276 $ 4,632 $ 322 $997,230
======== ======= ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........... $ 36,432 $ 2,394 -- 38,826
Accrued expenses........... 116,459 -- 4,100 120,559
Deferred revenue........... -- 193 -- 193
Income taxes payable....... 19,012 -- -- 19,012
Investor short-term notes.. -- 2,323 -- 2,323
Current portion of long-
term debt................. -- 615 -- 615
-------- ------- ------- --------
Total current
liabilities.............. 171,903 5,525 4,100 181,528
Deferred taxes............. 9,088 -- -- 9,088
Long-term capital lease
obligation................ -- 506 -- 506
-------- ------- ------- --------
Total liabilities......... 180,991 6,031 4,100 191,122
-------- ------- ------- --------
Stockholders' equity:
Common stock(2)............ 752 14 -- 766
Additional paid-in
capital................... 189,604 29,198 -- 218,802
Retained earnings
(accumulated deficit)..... 622,129 (30,611) (3,778) 587,740
-------- ------- ------- --------
812,485 (1,399) (3,778) 807,308
Cumulative translation
adjustment................ (1,049) -- (1,049)
Notes receivable from
stockholders.............. (151) -- -- (151)
-------- ------- ------- --------
Total stockholders'
equity................... 811,285 (1,399) (3,778) 806,108
-------- ------- ------- --------
Total liabilities and
stockholders' equity..... $992,276 $ 4,632 $ 322 $997,230
======== ======= ======= ========
</TABLE>
54
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED LAST DAY IN
FEBRUARY,
----------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Net sales......................................... $1,100,349 $833,218 $606,078
Cost of sales..................................... 448,699 340,424 247,696
---------- -------- --------
Gross profit.................................... 651,650 492,794 358,382
Operating expenses:
Research and development........................ 127,289 89,129 63,131
Selling, general and administrative............. 222,390 166,649 122,015
Nonrecurring items.............................. 95,036 -- --
---------- -------- --------
Income from operations.......................... 206,935 237,016 173,236
Interest income, net.............................. 17,891 5,572 5,897
---------- -------- --------
Income before income taxes...................... 224,826 242,588 179,133
Income taxes...................................... 80,341 86,014 64,130
---------- -------- --------
Net income........................................ $ 144,485 $156,574 $115,003
========== ======== ========
Net income per common share....................... $ 1.90 $ 2.11 $ 1.59
========== ======== ========
Weighted average number of shares outstanding..... 75,906 74,361 72,465
========== ======== ========
</TABLE>
- --------
Notes to Unaudited Pro Forma Combined Condensed Financial Data
(1) The Unaudited Pro Forma Combined Condensed Financial Data reflects the
issuance of 0.14609 shares of Cabletron Common Stock for each share of
Netlink Common Stock to effect the Merger. The actual number of shares of
Cabletron Common Stock to be issued in the Merger will be determined at
the Effective Time of the Merger based on the Exchange Ratio and the
number of shares of Netlink Common Stock then outstanding.
(2) Cabletron expects to record charges to operations, currently estimated to
be between $6 to $8 million in the the quarter in which the Merger is
consummated. Such expenses reflect direct transaction costs, consisting
primarily of investment banking fees and costs associated with combining
the operations of the two companies. An estimated pretax charge of $6.25
million, $3.8 million on an after-tax basis, is reflected in the Unaudited
Pro Forma Combined Balance Sheet but has not been reflected in the
Unaudited Combined Condensed Statements of Income because they are
directly attributable to the Merger and are nonrecurring. The range is a
preliminary estimate only and is therefore subject to change.
(3) Certain amounts have been reclassified to conform to the pro forma
presentation.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF CABLETRON
The following description does not purport to be complete and is subject in
all respects to the applicable provisions of Cabletron's Restated Certificate
of Incorporation, as amended, and Bylaws, copies of which are filed as
exhibits to the Proxy Statement/Prospectus.
The authorized capital stock of Cabletron consists of 240,000,000 shares of
Cabletron Common Stock, $.01 par value, and 2,000,000 shares of preferred
stock, $1.00 par value.
COMMON STOCK
Subject to the powers, preferences and rights of any preferred stock, the
holders of Cabletron Common Stock are entitled to all powers and voting and
other rights pertaining to the stock of Cabletron and each share of Common
Stock is entitled to one vote. There is no cumulative voting. Holders of
Cabletron Common Stock have no preemptive or other subscription rights, and
there are no conversion, redemption or sinking fund provisions applicable
thereto. The Board of Directors of Cabletron is authorized to issue from time
to time all of the authorized and unissued shares of Cabletron Common Stock.
PREFERRED STOCK
The Cabletron Board of Directors is authorized to issue preferred stock from
time to time in one or more series, each of such series to have such voting
powers, full or limited, or no voting powers, and such designations,
preferences and special rights as shall be determined by the board of
directors in a resolution or resolutions providing for the issue of such
preferred stock.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of the material differences between the rights of
holders of Netlink Stock and the rights of holders of Cabletron Common Stock.
Because each of Netlink and Cabletron is organized under the Delaware General
Corporation Law ("DGCL"), these differences arise from various differences in
the provisions of the Restated Certificate of Incorporation, as amended, (the
"Netlink Certificate"), Certificates of Designation, and Restated Bylaws (the
"Netlink Bylaws") of Netlink and the Restated Certificate of Incorporation, as
amended, (the "Cabletron Certificate") and Bylaws, as amended, (the "Cabletron
Bylaws") of Cabletron.
VOTING RIGHTS
Holders of Netlink Common Stock are entitled to one vote per share, in
person or by proxy, at all meetings of the shareholders and on all
propositions before such meetings. The Netlink Common Stock does not have
cumulative voting rights in the election of directors. The Netlink Common
Stock is substantially identical to the Cabletron Common Stock in these
respects. Each holder of each class of Netlink Preferred Stock is entitled to
vote on all matters and is entitled to that number of votes equal to the
largest number of whole shares of Netlink Common Stock into which such
holder's shares of Preferred Stock could be converted pursuant to the
conversion provisions in the Netlink Certificate and Certificates of
Designation relating to Preferred Stock. The conversion rate for the Netlink
Series E Preferred is 20 shares of Series E Preferred Stock for 1 share of
Common Stock. The conversion rate for the Netlink 1993 Preferred is 1 to 1.
The conversion rate for the Netlink 1994 Preferred is 1 to 1. The conversion
rate for the Netlink 1996 Preferred is 1 to 1.
Except as otherwise required by law, or by the Netlink Certificate or
Certificates of Designation, the holders of the Netlink Series E, 1993, 1994
and 1996 Preferred Stock and the Netlink Common Stock vote together as a
single class on all matters. The separate Netlink Certificates of Designation
for each of the Netlink 1993, 1994 and 1996 Preferred Stock provide that each
such class is entitled to vote as a separate class to approve certain actions
adversely affecting its own class of stock. Certain actions may not be taken
without approval by vote or
56
<PAGE>
written consent by the holders of at least 60 percent of the then outstanding
shares of any such class of the Netlink 1993, 1994 and 1996 Preferred Stock,
including: (i) any redemption, purchase or other acquisition for value of any
share of its own class of stock; (ii) any increase or decrease in the total
number of authorized shares of its own class of stock; (iii) any sale, lease,
assignment, transfer or other conveyance or all or substantially all of the
assets or capital stock of Netlink or any subsidiary of Netlink, or any
consolidation or merger involving Netlink or any subsidiary of Netlink, or any
reclassification or other change of stock, or any capital reorganization,
recapitalization, or any dissolution, liquidation or winding up of Netlink;
(iv) any amendment to the Netlink Certificate that would change the relative
seniority rights of holders of its own class of stock as to the payment of
dividends in relation to the holders of any other class of capital stock of
Netlink; (v) any amendment to the Netlink Certificate that would reduce the
amount payable to its own class of stock upon liquidation, dissolution or
winding up of Netlink, or change the relative seniority of the liquidation
preferences of the holders of its own class in relation to the rights upon
liquidation of the holders of any other class of capital stock of Netlink or
change the dividend rights of the holders of its own class of stock; or (vi)
any amendment to the Netlink Certificate that would change or modify the
conversion rights of the holders of its own class of stock.
VOTING REQUIREMENTS AND QUORUMS FOR STOCKHOLDER MEETINGS
Under the DGCL, a majority of the issued and outstanding stock entitled to
vote, present in person or by proxy, at any meeting of stockholders shall
constitute a quorum for the transaction of business at such meeting, unless
the certificate of incorporation or bylaws specifies a different percentage,
but in no event may a quorum consist of less than one-third of the shares
entitled to vote at the meeting. Neither Netlink nor Cabletron have quorum
requirements which differ from the requirements of the DGCL in their
certificate or bylaws.
Under the DGCL, the affirmative vote of the majority of shares present in
person or represented by proxy at a duly held meeting at which a quorum is
present and entitled to vote on the subject matter is deemed to be the act of
the stockholders, unless the DGCL, the certificate of incorporation or the
bylaws specify a different voting requirement. The Netlink Bylaws provide that
a majority of the stock having voting power present in person or represented
by proxy will decide any question brought before such meeting, unless the
question is one upon which, by express provision of the applicable statute or
of Netlink's Bylaws, a different vote is required. The Cabletron Bylaws
provide that a majority of the votes properly cast upon any question other
than an election to an office will decide the question, except when a larger
vote is required by law, by the certificate of incorporation or by the bylaws.
A plurality of the votes properly cast for election to any office will elect
to such office.
STOCKHOLDER MEETINGS
Under the DGCL, special meetings of stockholders may be called by the board
of directors and by such person or persons as so authorized by the charter or
the bylaws. The Netlink Bylaws provide that special meetings of stockholders
may be called at any time by the chairman of the board, a majority of the
board of directors, the president, or at the request, in writing, of
stockholders owning a majority of the amount of the entire capital stock of
the corporation issued and outstanding and entitled to vote. The Cabletron
Bylaws provide that special meetings of stockholders may be called at any time
by the chairman of the board, if any, the president or the board of directors.
A special meeting may also be called by the secretary upon application of a
majority of the directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Under the DGCL, unless the charter provides otherwise, any action required
to be taken or which may be taken at a meeting of stockholders may be taken
without a vote, without a meeting and without prior notice, with the written
consent of not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Neither the Netlink nor the Cabletron
Certificate provides otherwise.
57
<PAGE>
AMENDMENTS TO CHARTER
To amend a certificate of incorporation, the DGCL requires the affirmative
recommendation of the board of directors and the approval of a majority of all
outstanding shares entitled to vote therefor. Furthermore, under the DGCL, the
holders of the outstanding shares of a class are entitled to vote as a class
upon any proposed amendment to the certificate of incorporation if the
amendment would increase or decrease the number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or
alter or change the powers, preferences or special rights of the shares of
such class so as to adversely affect the holders thereof. The Netlink
Certificate does not provide otherwise. The separate Netlink Certificates of
Designation for each of the Netlink 1993, 1994 and 1996 Preferred Stock
provide that each such class is entitled to vote as a separate class to
approve certain amendments to the Netlink Certificate. Such amendments must be
approved by vote or written consent by the holders of at least 60 percent of
the then outstanding shares of any such class of the Netlink 1993, 1994 and
1996 Preferred Stock, including amendments that would (i) change the relative
seniority rights of holders of its own class of stock as to the payment of
dividends in relation to the holders of any other class of capital stock of
Netlink; (ii) reduce the amount payable to its own class of stock upon
liquidation, dissolution or winding up of Netlink, or change the relative
seniority of the liquidation preferences of the holders of its own class in
relation to the rights upon liquidation of the holders of any other class of
capital stock of Netlink or change the dividend rights of the holders of its
class of stock; or (iii) change or modify the conversion rights of the holders
of its own class of stock.
The Cabletron Certificate provides that certain of its articles can only be
amended by the affirmative vote of 85% of the total number of votes of the
then outstanding shares of capital stock of Cabletron entitled to vote
generally in the election of directors, voting together as a single class
excluding shares beneficially owned by a Related Person (defined in the
Cabletron Certificate).
BYLAWS
Under the DGCL, the authority to adopt, amend or repeal the bylaws of a
Delaware corporation is held exclusively by the stockholders entitled to vote
unless such authority is conferred upon the board of directors in the
corporation's certificate of incorporation. The Netlink Certificate grants to
its board of directors the powers to adopt, amend or repeal the Bylaws. The
Netlink Bylaws also provide that the bylaws may be altered, amended or
repealed or new bylaws may be adopted by the stockholders or by the board of
directors, when such power is conferred upon the board of directors by the
Netlink Certificate, at any regular meeting of the stockholders or the board
of directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. The Cabletron
Certificate grants to its board of directors the powers to make, alter or
amend the Cabletron Bylaws by vote of a majority of the directors.
Stockholders of Cabletron also have the power to adopt, amend or repeal the
bylaws by a two-thirds vote.
NUMBER AND QUALIFICATION OF DIRECTORS
Under the DGCL, the minimum number of directors is one. The DGCL permits the
board of directors to change the authorized number or the range of directors
by amendment to the bylaws, unless the directors are not authorized in the
certificate of incorporation to amend the bylaws or the number of directors is
fixed in the certificate of incorporation, in which case a change in the
number of directors may be made only upon approval of such change by the
stockholders. Neither the Netlink Certificate nor the Cabletron Certificate
sets a number of directors. The Netlink Bylaws provide that the board of
directors shall consist of at least one but not more than nine directors, as
may be determined from time to time by resolution of the board of directors.
The Cabletron Bylaws provide that, except as fixed by the certificate of
incorporation, the number of directors shall be determined from time to time
by vote of a majority of the board of directors, provided that the minimum
number of directors is three. The Netlink Certificate sets forth no specific
qualification requirements for directors, but the Netlink Bylaws require that
all directors of Netlink be natural persons, though they need not be residents
of
58
<PAGE>
Delaware or stockholders of Netlink. Neither the Cabletron Certificate nor the
Cabletron Bylaws set forth specific qualification requirements for directors.
BOARD CLASSIFICATION
The DGCL provides that the directors of any corporation may be divided into
one, two or three classes. Neither the Netlink Certificate nor the Netlink
Bylaws provide for a classified board The Cabletron Bylaws provide that
Cabletron's directors shall be divided into three equal classes with each
class comprised of one third of the directors being elected to serve until the
third succeeding annual meeting.
NOMINATION AND ELECTION OF DIRECTORS
The DGCL provides that directors shall be elected at an annual meeting of
stockholders held on a date and at a time designated by or in the manner
provided in the bylaws. Elections of directors must be by written ballot,
unless otherwise provided in the certificate of incorporation. Both the
Netlink Certificate and the Cabletron Certificate provide that elections of
directors need not be by written ballot, unless otherwise provided in the
bylaws. The Netlink Bylaws do not provide otherwise. The Cabletron Bylaws
state that no ballot shall be required for any election unless requested by a
shareholder present or represented at the meeting and entitled to vote in the
election.
Under the DGCL, directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. The Netlink Bylaws provide that
the vote of the holders of the majority of the stock having voting power and
present in person or represented by proxy shall decide any question brought
before such meeting, including the election of directors, unless a different
vote is required by the applicable statute or the Netlink Bylaws. The
Cabletron Bylaws provide that directors are elected by a plurality of the
votes properly cast by stockholders voting in person or by proxy at the annual
meeting of stockholders. Subject to the rights of the holders of any preferred
stock, nominations for the election of directors may be made by the board of
directors or by any stockholder entitled to vote for the election of
directors.
Neither the Netlink Certificate nor the Netlink Bylaws contains provisions
regarding the nomination of directors. Any Cabletron stockholder entitled to
vote for the election of directors at a meeting may nominate persons for
election as directors by giving timely written notice thereof to the secretary
accompanied by a petition signed by at least 100 record holders of capital
stock of the corporation which shows the class and number of shares held by
each person and which represent in the aggregate 1% of the outstanding shares
entitled to vote in the election of directors. To be timely, notice must be
given to the principal executive offices of Cabletron not less than 60 days
nor more than 90 days prior to the meeting. In the event that less than 70
days notice or prior public disclosure of the date of the meeting is given or
made to the stockholders, to be timely, notice by the stockholder must be
received at the principal executive offices not later than the close of
business on the tenth day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made. To be in proper
written form, a stockholder's notice shall set forth in writing (i) as to each
person nominated by the stockholder to serve as director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, including, without limitation, such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected and (ii) as to the stockholder giving the notice (x) the name and
address of such stockholder and (y) the class and number of shares of the
corporation which are beneficially owned by such stockholder. If any person is
nominated by the board of directors for election as a director, that person
shall furnish to the secretary the same information regarding the nominee as
is required of those stockholders submitting notices of nomination.
REMOVAL OF DIRECTORS
The DGCL provides that any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors, except (i) unless
59
<PAGE>
the certificate of incorporation otherwise provides, in the case of a
corporation with a classified board, shareholders may effect removal only for
cause; or (ii) in the case of a corporation having cumulative voting, if less
than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of directors,
or, if there be classes of directors, at an election of the class of directors
of which he is a part. Neither the Netlink Certificate nor the Netlink Bylaws
provide otherwise.
The Cabletron Bylaws provide for removal of directors at any time, but only
for cause and only by the affirmative vote of 85% of the total number of votes
of the then outstanding shares of capital stock of Cabletron entitled to vote
generally in the election of directors, voting together as a single class
excluding shares beneficially owned by a Related Person, as defined in the
Cabletron Certificate. Related Person is defined broadly in the Cabletron
Certificate to include any entity or person, that together with its affiliates
and associates beneficially owns, or owned within the prior three years, 5
percent or more of the aggregate shares of the voting stock of any class of
the Corporation, and any affiliate or associate of any such Related Person.
Related Person shall not include (i) the Corporation or any majority-owned
subsidiary of the Corporation; (ii) any Person that together with its
affiliates and associates beneficially owned in the aggregate 5 percent or
more of the outstanding shares of voting stock of any class of the Corporation
at the time of its initial public offering, any affiliate or associate of such
Person or any Person that acquired said shares from any such Person by gift,
inheritance or other exchange in which no consideration was exchanged; and
(iii) any Person whose ownership of shares in excess of the 5 percent
limitation is the result of action taken solely by the Corporation. Such
Person shall be a Related Person if thereafter he acquires additional shares
of voting stock of the Corporation, except as a result of further corporate
action not caused by such Person.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under the DGCL, newly created directorships resulting from an increase in
the number of directors may be filled by a majority vote of the directors then
in office, even if the number of directors then in office is less than a
quorum. The DGCL also provides that unless the certificate of incorporation or
bylaws otherwise provide, vacancies occurring by reason of the removal of
directors with or without cause may be filled by a majority vote of the
directors then in office. In addition, under the DGCL, if, at the time of
filling any vacancy or newly created directorship, the directors then in
office constitute less than a majority of the entire board of directors, the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of shares
outstanding at the time and entitled to vote, summarily order an election to
be held to fill any such vacancies or newly created directorships, or to
replace the directors chosen by the directors then in office, such election to
be conducted in accordance with the procedures under the DGCL for holding
stockholder meetings.
The Netlink Bylaws provide that vacancies may be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If the are no directors in office, then an election of
directors may be held in the manner provided by statute.
The Cabletron Bylaws provide that vacancies may be filled only by a majority
vote of the directors in office, although less than a quorum, and newly
created directorships may be filled by the board of directors, or if not so
filled, by the stockholders at the next annual meeting or at any special
meeting called for such purpose.
VOTE REQUIRED FOR MERGERS
The DGCL generally requires the affirmative vote of a majority of a
corporation's outstanding shares entitled to vote, unless the certificate of
incorporation requires a greater proportion, to authorize a merger,
consolidation, share exchange, dissolution or disposition of all or
substantially all of its assets, except that, (a) unless required by its
charter, no authorizing stockholder vote is required of a corporation
surviving a merger if (i) such corporation's charter is not amended by the
merger; (ii) each share of stock of such corporation will be
60
<PAGE>
an identical share of the surviving corporation after the merger; and (iii)
the number of shares to be issued in the merger does not exceed twenty percent
(20%) of such corporation's outstanding common stock immediately prior to the
effective date of the merger and (b) unless a dissolution is adopted by a
majority of the board of directors, a dissolution must be approved by all
stockholders entitled to vote thereon.
The Cabletron Certificate does not require a greater proportion of
stockholders to approve a merger than is required by the DGCL. The Netlink
Certificate does not require a greater proportion of votes of Netlink Common
Stock or Netlink Series E Preferred Stock to approve a merger. The Netlink
Common Stock and Netlink Series E Preferred Stock vote together as one class
to approve a merger. However, the Netlink Certificates of Designation provide
that each of the Netlink 1993, 1994 and 1996 Preferred Stock is entitled to
vote as a separate class to approve any sale, lease, assignment, transfer or
conveyance of all or substantially all of the assets or capital stock of
Netlink or any subsidiary thereof, or any consolidation or merger involving
Netlink or any subsidiary thereof, or any reclassification or other change of
stock, or any capital reorganization, recapitalization or any dissolution,
liquidation or winding up of Netlink. No such action may be taken without the
approval by vote or written consent by the holders of at least 60 percent of
the then outstanding shares of each of the Netlink 1993, 1994 and 1996
Preferred Stock.
The Cabletron Certificate provides that certain transactions, including
mergers, consolidations, issuances of securities, certain asset dispositions,
liquidations or dissolutions between Cabletron and a Related Person must be
approved by the affirmative vote of 85% of the outstanding shares of stock
entitled to vote generally for the election of directors unless (i) the board
of directors of Cabletron has approved a binding agreement with such Related
Person with respect to such transaction or has approved the transaction which
resulted in such party becoming a Related Person, in either case prior to the
time such party became a Related Person and provided that a majority of the
members of the board of directors voting for the approval of such transaction
were continuing directors; or (ii) the Related Person is a majority-owned
subsidiary of Cabletron. Related Person is defined broadly in the Cabletron
Certificate to include any entity or person, that together with its affiliates
and associates beneficially owns, or owned within the prior three years, 5
percent or more of the aggregate shares of the voting stock of any class of
the Corporation, and any affiliate or associate of any such Related Person.
Related Person shall not include (i) the Corporation or any majority-owned
subsidiary of the Corporation; (ii) any Person that together with its
affiliates and associates beneficially owned in the aggregate 5 percent or
more of the outstanding shares of voting stock of any class of the Corporation
at the time of its initial public offering, any affiliate or associate of such
Person or any Person that acquired said shares from any such Person by gift,
inheritance or other exchange in which no consideration was exchanged; and
(iii) any Person whose ownership of shares in excess of the 5 percent
limitation is the result of action taken solely by the Corporation. Such
Person shall be a Related Person if thereafter he acquires additional shares
of voting stock of the Corporation, except as a result of further corporate
action not caused by such Person.
ANTI-TAKEOVER PROVISIONS
The DGCL prohibits certain transactions between a Delaware corporation and
an "interested stockholder," which is defined as a person that is directly or
indirectly a beneficial owner of 15% or more of the voting power of the
outstanding voting stock of a Delaware corporation and such persons,
affiliates and associates. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain other transactions)
between an interested stockholder and a corporation for a period of three
years after the date the interested stockholder acquired its stock. However,
the prohibition does not apply if: (i) the business combination is approved by
the corporation's board of directors prior to the date the interested
stockholder acquired its shares; (ii) the interested stockholder acquired at
least 85% of the voting stock of the corporation (excluding shares held by
directors of the corporation who are also officers and shares held under
certain employee stock plans) in the transaction in which it became an
interested stockholder: or (iii) the business combination is approved by a
majority of the board of directors and the affirmative vote of two-thirds of
the votes entitled to be cast by disinterested stockholders at an annual or
special meeting. The law applies automatically to a Delaware corporation
unless otherwise provided in its certificate of incorporation or bylaws or
61
<PAGE>
if it has less than 2,000 stockholders of record and does not have voting
stock listed on a national securities exchange or listed for quotation with a
registered national securities association. This provision of the DGCL does
not apply to Netlink, which has less than 2,000 stockholders of record and
does not have listed voting stock. There are no provisions governing
transactions with interested stockholders in the Netlink Certificate or
Netlink Bylaws. However, neither the Cabletron Certificate nor the Cabletron
Bylaws exempts Cabletron from the DGCL provision regarding transactions with
interested stockholders.
LIMITATION ON DIRECTORS' LIABILITY
Both the Netlink Certificate and the Cabletron Certificate provide that no
director shall be liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exculpation from liabilities is not permitted under the DGCL. The DGCL
prohibits exculpation (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions; or (iv) for any transactions from which the director derived an
improper personal benefit.
INDEMNIFICATION
The DGCL provides that a corporation may indemnify a director, officer,
employee or agent of the corporation and certain other persons serving at the
request of the corporation in related capacities against amounts paid and
expenses incurred in connection with an action or proceeding to which he is or
is threatened to be made a party by reason of such position, if such person
shall have acted in good faith and in a manner he reasonably believed to be in
the best interests of the corporation, and, in any criminal proceeding, if
such person had no reasonable cause to believe his conduct was unlawful.
However, no indemnification shall be made with respect to any manner as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances. These provisions of the
DGCL are generally referred to as "statutory indemnification" provisions.
Corporations are permitted to adopt charter provisions or bylaws which provide
for additional indemnification of directors and officers. These non-exclusive
provisions are generally referred to as "non-statutory indemnification"
provisions. Non-statutory indemnification provisions are generally adopted to
expand the circumstances and liberalize the conditions under which
indemnification will occur. The Netlink Certificate and the Cabletron
Certificate each provide that officers and directors shall be indemnified to
the full extent permitted by the DGCL.
DIVIDENDS AND OTHER DISTRIBUTIONS
Under the DGCL, a corporation may generally pay dividends out of surplus or,
if there is no surplus, out of its net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year, unless the capital
of the corporation has been diminished by depreciation in the value of its
property, losses or otherwise, to an amount less than the aggregate amount of
the capital represented by the issued outstanding stock of all classes having
a preference upon the distribution of assets.
The Netlink Certificate and Certificates of Designation provide that no
dividends shall be declared and set aside for any shares of the Netlink Series
E, 1993, 1994 or 1996 Preferred Stock except in the event that the board of
directors declares a cash dividend payable upon the then outstanding shares of
the Netlink Common Stock, in which event the holders of any shares of
Preferred Stock shall be entitled to the amount of dividends per share of
Preferred Stock as would be declared payable on the largest number of whole
shares of Common Stock into which each share of Preferred Stock held by each
holder thereof could be converted pursuant to the conversion provisions of the
Netlink Certificate and Certificates of Designation relating to Preferred
Stock. The conversion rate for the Netlink Series E Preferred is 20 shares of
Series E Preferred Stock for 1 share of Common Stock. The conversion rate for
the Netlink 1993 Preferred is 1 to 1. The conversion rate for the Netlink 1994
Preferred is 1 to 1. The conversion rate for the Netlink 1996 Preferred is 1
to 1. No dividend shall be declared
62
<PAGE>
and paid on the Common Stock at a rate greater than the rate at which
dividends are declared and paid on any class of Preferred Stock. The Netlink
Certificate provides that the holders of Common Stock shall be entitled to
receive dividends out of funds legally available therefor at such times and in
such amounts as the board of directors may determine in their sole discretion.
Each class of Netlink Preferred Stock is entitled to certain payments upon a
liquidation of Netlink. A reorganization of the Netlink Common Stock or a
consolidation or merger of Netlink or a sale of all or substantially all of
the assets of Netlink is regarded as a liquidation, dissolution or winding up
of the affairs of Netlink only with respect to the rights of the Netlink 1993,
1994 and 1996 Preferred Stock, but not with respect to the rights of the
Netlink Series E Preferred Stock. In the event of any liquidation, dissolution
or winding up of Netlink, the Netlink 1993, 1994 and 1996 Preferred Stock rank
on a parity, and the holder of each share of such stock is entitled to be paid
first out of the assets of Netlink available for distribution to holders of
Netlink's capital stock of all classes, whether such assets are capital,
surplus or earnings, before any sums are paid or any assets distributed among
the holders of the shares of Netlink Series E Preferred Stock or Netlink
Common Stock. In liquidation, the holders of the Netlink 1993, 1994 and 1996
Preferred Stock are entitled to receive an amount equal to the greater of (i)
such amount per share as would have been payable had all shares of the 1993,
1994 and 1996 Preferred Stock been converted into Common Stock immediately
prior to such event of liquidation, dissolution or winding up, or (ii) the
following per share liquidation preference (subject to adjustment for stock
splits, stock dividends, combinations, reclassifications, recapitalizations,
reorganizations, or other similar events involving the 1993, 1994 or 1996
Preferred Stock), plus accrued dividends: (a) 1993 Preferred Stock, $1.50 per
share; (b) 1994 Preferred Stock, $1.80 per share; and (c) 1996 Preferred
Stock, $2.25 per share. The Netlink Series E Preferred Stock is subordinate to
the Netlink 1993, 1994 and 1996 Preferred Stock upon liquidation, but is
senior to the Netlink Common Stock. Upon liquidation, holders of the Series E
Preferred Stock are entitled to receive $1.50 per share (subject to
adjustments), plus accrued dividends. After the Series E Preferred Stock
receives its liquidation preference, or the funds necessary for such payment
are placed in trust for the account of holders of any shares of the Series E
Preferred Stock so as to be available for payment, then the remaining assets
of Netlink will be distributed ratably among the holders of the Netlink 1993,
1994 and 1996 Preferred Stock and the Netlink Common Stock, with the holders
of the 1993, 1994 and 1996 Preferred Stock deemed to hold that number of
shares equal to the number of shares of Common Stock into which such shares of
preferred stock are then convertible.
In addition, Netlink may at any time, and from time to time, with 20 days
prior written notice, redeem all or any portion of the unconverted shares of
Netlink Series E Preferred Stock. The redemption price for each share of
Series E Preferred Stock shall be $1.50 per share plus an additional 5%
interest per annum from the date of issuance up to and including the date
fixed for redemption. Netlink may not redeem any of the Netlink 1993, 1994 or
1996 Preferred Stock without the approval by vote or written consent by the
holders of at least 60 percent of the then outstanding shares of whichever
class of stock is to be redeemed, voting together as a single class, each
share being entitled to one vote.
Neither the Cabletron Certificate nor the Cabletron Bylaws place any
restrictions on the payment of dividends or provide for any preferences upon
liquidation.
The foregoing is a summary of the material differences between the rights of
holders of Netlink Common Stock and Netlink Series E, 1993, 1994 and 1996
Preferred Stock and the rights of holders of Cabletron Common Stock, and is
qualified in its entirety by reference to the DGCL, the Netlink Certificate,
Certificates of Designation and Bylaws and the Cabletron Certificate and
Bylaws.
63
<PAGE>
OTHER MATTERS
It is not expected that any matters other than those described in this Proxy
Statement/Prospectus will be brought before the Netlink Special Meeting. If
any other matters are presented, however, it is the intention of the persons
named in the Netlink proxy to vote the proxy in accordance with the discretion
of the persons named in such proxy.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities offered
hereby will be passed upon for Cabletron by Ropes & Gray, Boston,
Massachusetts. Certain legal matters in connection with the Merger will be
passed upon for Netlink by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedule of Cabletron Systems, Inc. and subsidiaries as of February
29, 1996 and February 28, 1995, and for each of the years in the three-year
period ended February 29, 1996, have been incorporated by reference herein and
in the Registration Statement, of which this Proxy Statement/Prospectus is a
part, in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Netlink, Inc. at December 31, 1995 and 1994, and
for each of the three years in the period ended December 31, 1995, included in
the Proxy Statement of Netlink, Inc., which is referred to and made a part of
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
64
<PAGE>
NETLINK, INC.
AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Audited Financial Statements
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Shareholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Netlink, Inc.
We have audited the accompanying balance sheets of Netlink, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated April 19, 1996,
the Company has violated certain debt covenants. Should the lender call the
related debt, the Company may be required to obtain other financing. Note 13
describes management's plans to address these issues.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netlink, Inc. at December
31, 1994 and 1995, and the results of its operations and cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
April 19, 1996,
except for Note 13 as to which the
date is October 1, 1996.
F-2
<PAGE>
NETLINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
-------------------------- ------------
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................ $ 1,749,933 $ 634,376 $ 1,447,270
Trade accounts receivable, net of
allowance for doubtful accounts of
$124,500, $177,100 and $173,300 in
1994, 1995 and 1996, respectively.. 1,111,331 1,984,776 3,141,817
Other receivables................... 120,836 7,901 72,100
Inventories, net of reserve for
obsolescence of $311,600, $200,700
and $352,100 in 1994, 1995 and
1996, respectively................. 726,963 1,128,303 2,163,062
Other............................... 249,855 183,528 241,700
------------ ------------ ------------
Total current assets............. 3,958,918 3,938,884 7,065,949
Property and equipment............... 3,588,617 3,937,907 5,331,678
Less accumulated depreciation........ (3,033,277) (3,244,360) (3,726,911)
------------ ------------ ------------
555,340 693,547 1,604,767
------------ ------------ ------------
Total assets..................... $4,514,258 $4,632,431 $ 8,670,716
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses........................... $ 1,671,337 $ 2,394,148 $ 2,980,718
Deferred income..................... 67,470 192,870 105,930
Short-term bank note payable........ -- -- 608,000
Secured investor short-term notes... -- 2,323,065 --
Current portion of long-term debt... 438,348 614,784 680,953
------------ ------------ ------------
Total current liabilities........ 2,177,155 5,524,867 4,375,601
Long-term debt....................... 1,120,823 506,103 --
------------ ------------ ------------
3,297,978 6,030,970 4,375,601
Shareholders' equity (deficit):
Convertible preferred stock:
Series E, $0.01 par value,
1,333,333 shares authorized,
1,333,333 issued and outstanding
in 1994, 1995 and 1996............ 13,333 13,333 13,333
1993 Series, $0.01 par value,
3,970,030 shares authorized,
3,970,030 issued and outstanding
in 1994, 1995 and 1996............ 39,700 39,700 39,700
1994 Series, $0.01 par value,
3,500,000 shares authorized,
3,207,666 issued and outstanding
in 1994, 1995 and 1996............ 32,077 32,077 32,077
1996 Series, $0.01 par value,
3,500,000 shares authorized,
0 issued and outstanding in 1994
and 1995 and 3,482,901 in 1996.... -- -- 34,829
Common stock, $0.01 par value,
27,000,000 shares authorized,
882,162, 886,581 and 2,405,965
issued and outstanding in 1994,
1995 and 1996, respectively........ 8,821 8,866 24,060
Capital in excess of par value...... 29,117,417 29,118,476 37,648,929
Accumulated deficit................. (27,995,068) (30,610,991) (33,497,813)
------------ ------------ ------------
Total shareholders' equity
(deficit)....................... 1,216,280 (1,398,539) 4,295,115
------------ ------------ ------------
Total liabilities and
shareholders' equity (deficit).. $ 4,514,258 $ 4,632,431 $ 8,670,716
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
NETLINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales and other
revenues............. $ 3,591,810 $ 8,541,618 $ 7,242,350 $ 5,423,885 $ 7,934,594
Costs, expenses and
other:
Cost of products
sold................. 1,542,438 2,972,671 2,616,108 1,919,561 3,722,154
Sales and marketing... 2,419,686 3,674,486 3,082,244 2,272,948 3,277,117
Research and
development.......... 1,674,533 2,106,662 2,284,442 1,699,509 2,892,902
General and
administrative....... 1,222,447 1,725,032 1,581,152 672,693 898,640
Interest expense...... 50,890 158,630 294,327 328,063 30,603
Write-off of
goodwill............. -- 3,925,457 -- -- --
----------- ----------- ----------- ----------- -----------
6,909,994 14,562,938 9,858,273 6,892,774 10,821,416
----------- ----------- ----------- ----------- -----------
Net loss................ $(3,318,184) $(6,021,320) $(2,615,923) $(1,468,889) $(2,886,822)
=========== =========== =========== =========== ===========
Net loss per share...... $ (4.47) $ (6.91) $ (2.95) $ (2.22) $ (1.41)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 742,427 871,558 885,329 661,862 2,048,628
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NETLINK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A,
B, C AND D SERIES E 1993 SERIES 1994 SERIES 1996 SERIES
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CAPITAL IN
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON EXCESS OF ACCUMULATED
STOCK STOCK STOCK STOCK STOCK STOCK PAR DEFICIT TOTAL
----------- ----------- ----------- ----------- ----------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992............ $ 135,928 $13,333 $ -- $ -- $ -- $ 30,422 $17,324,419 $(18,655,564) $(1,151,462)
Conversion of
Series A, B, C
and D preferred
stock to common
stock.......... (135,928) -- -- -- -- 135,928 -- -- --
Exercise of
warrants....... -- -- -- -- -- 2,500 -- -- 2,500
Effect of 20:1
reverse stock
split.......... -- -- -- -- -- (160,265) 160,265 -- --
Issuance of
shares......... -- -- 39,700 -- -- -- 5,915,345 -- 5,955,045
Net loss for the
year........... -- -- -- -- -- -- -- (3,318,184) (3,318,184)
--------- ------- ------- ------- ------- --------- ----------- ------------ -----------
Balance at
December 31,
1993............ -- 13,333 39,700 -- -- 8,585 23,400,029 (21,973,748) 1,487,899
Issuance of
shares......... -- -- -- 32,077 -- 236 5,717,388 -- 5,749,701
Net loss for the
year........... -- -- -- -- -- -- -- (6,021,320) (6,021,320)
--------- ------- ------- ------- ------- --------- ----------- ------------ -----------
Balance at
December 31,
1994............ -- 13,333 39,700 32,077 -- 8,821 29,117,417 (27,995,068) 1,216,280
Issuance of
shares......... -- -- -- -- -- 45 1,059 -- 1,104
Net loss for the
year........... -- -- -- -- -- -- -- (2,615,923) (2,615,923)
--------- ------- ------- ------- ------- --------- ----------- ------------ -----------
Balance at
December 31,
1995............ -- 13,333 39,700 32,077 -- 8,866 29,118,476 (30,610,991) (1,398,539)
Issuance of
shares
(unaudited).... -- -- -- -- 34,829 15,194 8,530,453 -- 8,580,476
Net loss for the
period
(unaudited).... -- -- -- -- -- -- -- (2,886,822) (2,886,822)
--------- ------- ------- ------- ------- --------- ----------- ------------ -----------
Balance at
September 30,
1996
(unaudited)..... $ -- $13,333 $39,700 $32,077 $34,829 $ 24,060 $37,648,929 $(33,497,813) $ 4,295,115
========= ======= ======= ======= ======= ========= =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NETLINK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH PERIOD
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.............. $(3,318,184) $(6,021,320) $(2,615,923) $(1,468,889) $(2,886,822)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 107,174 183,877 211,083 154,836 401,452
Write-off of
goodwill............ -- 3,925,457 -- -- --
Loss on disposal of
equipment........... 597 (2,271) -- -- --
Change in allowance
for unreturned
demonstration
equipment........... 71,746 60,321 25,613 (49,360) (74,901)
Change in allowance
for doubtful
accounts............ 31,000 54,696 52,600 (51,344) (3,783)
Changes in operating
assets and
liabilities:
Accounts
receivable......... (111,269) (236,598) (813,110) (847,843) (1,217,458)
Inventories......... (105,387) 145,673 (401,340) 23,732 (1,034,759)
Other current
assets............. (114,811) 19,148 66,327 47,815 (58,172)
Accounts payable and
accrued expenses... 295,338 (242,663) 722,811 193,214 586,570
Deferred income..... 5,014 (26,276) 125,400 (21,214) (86,939)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities....... (3,138,782) (2,139,956) (2,626,539) (2,019,053) (4,374,812)
Investing activities
Payments for property
and equipment........ (293,816) (232,842) (374,903) (195,479) (1,237,771)
Purchase of Amnet,
Inc., net of cash
acquired............. -- (1,994,804) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities....... (293,816) (2,227,646) (374,903) (195,479) (1,237,771)
Financing activities
Proceeds from issuance
of short-term notes.. 315,762 -- 2,323,065 993,476 608,000
Principal payments on
long-term debt....... (2,483,416) (376,830) (438,284) (328,280) (439,934)
Principal payments on
short-term debt...... -- -- -- -- (2,323,065)
Proceeds from sale of
common stock......... 2,500 5,902 1,104 1,105 743,949
Proceeds from sale of
preferred stock...... 5,955,045 5,743,799 -- -- 7,836,527
----------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities....... 3,789,891 5,372,871 1,885,885 666,301 6,425,477
----------- ----------- ----------- ----------- -----------
Increase (decrease) in
cash.................. 357,293 1,005,269 (1,115,557) (1,548,231) 812,894
Cash at beginning of
year.................. 387,371 744,664 1,749,933 1,749,933 634,376
----------- ----------- ----------- ----------- -----------
Cash at end of year.... $ 744,664 $ 1,749,933 $ 634,376 $ 201,702 $ 1,447,270
=========== =========== =========== =========== ===========
Supplemental
disclosures of cash
flow information
Cash paid for
interest............. $ 130,072 $ 158,630 $ 211,893 $ 194,577 $ 153,285
=========== =========== =========== =========== ===========
Cash paid for income
taxes................ $ 9,584 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Netlink, Inc. (the "Company") develops, manufactures, and markets
internetworking solutions for organizations in both foreign and domestic
markets wishing to combine mission-critical IBM mainframe and client-server
data for transmission over fast packet networks such as frame relay.
Distribution of the Company's product is accomplished through direct sales to
end-users and through OEM partners, manufacturers' representatives, value-
added resellers, system integrators, and distributors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product revenues are recognized when products are shipped. Initial license
fees for the software portion of certain products are recognized at the time
the related hardware revenue is recognized. Annual software license fees
subsequent to those recognized at the date of sale are deferred when collected
and amortized to income over the period to which they relate.
Because of the complex nature of the environments in which the Company's
products are designed to operate, it is often necessary to provide products to
customers on a demonstration basis. At December 31, 1993, 1994 and 1995,
demonstration equipment is included in property and equipment net of an
allowance for unreturned items. No revenue is recognized on demonstration
equipment until the customer issues a purchase order or otherwise indicates
acceptance of the product.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash.
Research and Development Costs
Research and development costs are charged to expense when incurred.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value.
Property and Equipment
Property and equipment are recorded at cost, which is depreciated primarily
on a straight-line basis over the estimated useful lives of the respective
assets, generally three to five years. Property and equipment is presented net
of an allowance for unreturned demonstration equipment of approximately
$130,000, $156,000 and $81,000 as of December 31, 1994 and 1995 and September
30, 1996, respectively. Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures............. $3,340,737 $3,629,857 $4,746,208
Computer equipment................. 109,282 62,790 62,790
Leasehold improvements............. 52,859 141,218 154,170
Demonstration equipment, net....... 85,739 104,042 368,510
---------- ---------- ----------
$3,588,617 $3,937,907 $5,331,678
========== ========== ==========
</TABLE>
F-7
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1994 1995 1996
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses............................. $180,422 $ 88,682 $172,105
Software license fees........................ 61,660 85,590 60,045
Other........................................ 7,773 9,256 9,550
-------- -------- --------
$249,855 $183,528 $241,700
======== ======== ========
</TABLE>
Interim Financial Data
The unaudited interim financial statements at and for the nine months ended
September 30, 1995 and 1996 include all adjustments (consisting of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair presentation of the financial position of Netlink, Inc. as of September
30, 1995 and 1996 and the results of operations for such interim periods.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the entire year
ending December 31, 1996. All September 30, 1995 and 1996 data presented in
these footnotes is unaudited.
Concentration of Credit Risk
The financial instrument which potentially subjects the Company to
concentrations of credit risk is accounts receivable. Concentrations of credit
risk are limited due to the large number of customers in the Company's
customer base, and their dispersion across different industries and geographic
areas. The Company extends credit based on an evaluation of the customer's
financial condition and generally, collateral is not required. Estimated
credit losses are provided for in the financial statements and historically
have been within management's expectations. The risk of additional losses
related to accounts receivable exists should actual credit losses prove to be
in excess of the Company's estimates.
Net Loss Per Share
Net loss per share has been computed using the weighted average number of
common shares outstanding during each period in accordance with APB15. Common
stock equivalents have not been included in the calculation since the effect
of their inclusion would be anti-dilutive for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
Advertising Expense
Statement of Position 93-7 "Reporting on Advertising Costs" was implemented
by the Company during the year ended December 31, 1995. The adoption of this
statement did not have a material impact on the financial statements. The cost
of advertising is expensed as incurred. The Company incurred approximately
$116,000, $307,000 and $190,000 in advertising costs during 1993, 1994 and
1995, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for secured investor
short-term notes and long-term debt approximate their fair values, which are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FASB
F-8
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
121"), which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. FASB 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company's adoption
of FASB 121 in the first quarter of 1996 did not have any impact on the
Company's balance sheet or income statement.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
provides an alternative to APB No. 25 in accounting for stock based
compensation issued to employees. SFAS 123 provides for a fair value based
method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock based
compensation arrangements under APB No. 25. SFAS 123 requires disclosure of
the pro forma effect on net income and earnings per share as if the fair value
based method prescribed by SFAS 123 had been applied. The disclosure
requirements are effective for fiscal years beginning after December 31, 1995,
or upon initial adoption of the statement, if earlier. The Company plans to
continue to account for stock based compensation arrangements under APB No. 25
and plans to adopt the pro forma disclosure requirements of SFAS 123 in 1996.
3. ACQUISITION AND GOODWILL IMPAIRMENT
On May 23, 1994, the Company acquired all the outstanding shares of Amnet,
Inc., a Company in the business of developing, manufacturing and marketing
hardware which incorporated technology similar to Netlink's in exchange for
$200,000 in cash, the issuance of 1,000,000 shares of 1994 Preferred Stock,
and assumption of $1,788,030 in long-term debt. The cost of the acquisition,
which has been accounted for as a purchase, totaled approximately $3.9
million. The financial statements include the operating results of the
acquired business from the date of acquisition.
At December 31, 1994 the Company assessed the value of goodwill that arose
as a result of the business combination described in the preceding paragraph.
Based on the assessment, management determined that the future cash flows
expected from the acquisition were not sufficient to justify the carrying
value of any portion of the associated goodwill. Among the factors
contributing to this determination were the continuing actual and projected
losses of the Company after the business combination, the rapid pace of
technological changes in the Company's industry, the quick phase-out of the
products acquired, the subsequent development of unrelated net technologies
and products, and the attendant market re-positioning accomplished by the
Company based upon those new technologies and products. Based on this
analysis, management determined that there had been a permanent impairment in
the value of goodwill and at December 31, 1994 the Company recorded a one-time
charge of $3,925,457 to recognize that impairment.
4. INVENTORIES
Categories of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Components............................... $574,952 $ 976,735 $1,793,702
Finished goods........................... 152,011 151,568 369,360
-------- ---------- ----------
$726,963 $1,128,303 $2,163,062
======== ========== ==========
</TABLE>
5. NOTES PAYABLE
In connection with the acquisition described in Note 3, the Company assumed
long-term debt in the amount of $1,788,030 with an effective interest rate of
15.7% per annum. That debt is secured by all the assets previously
F-9
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
owned by Amnet and is repayable in monthly installments of principal and
interest through March, 1997. At December 31, 1995, the remaining obligations
to the lender were as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1996 payments due, including interest........................... $ 748,343
1997 payments due, including interest........................... 522,871
---------
1,271,214
Less interest included in payments.............................. (150,327)
Less current portion............................................ (614,784)
---------
Long-term debt.................................................. $ 506,103
=========
</TABLE>
In July, 1996 the Company issued a $1,000,000 revolving promissory note and
a $1,500,000 term promissory note to a bank pursuant to certain borrowing
arrangements which expire August 1, 1997 and December 1, 1999, respectively.
As of September 30, 1996 the Company had borrowings outstanding under the term
promissory note in the amount of $608,000. The term promissory note bears
interest at a rate of prime plus 3/4% which is payable monthly through
December 31, 1996. Commencing on January 2, 1997, the Company will begin
repaying the outstanding principal balance in 36 equal monthly installments
plus interest through December 1, 1999. The term promissory note is
collateralized by the equipment which the borrowed funds were used to
purchase. The Company did not have any borrowings outstanding under the
revolving promissory note as of September 30, 1996.
The revolving promissory note and term promissory note agreement requires
the Company to maintain certain financial ratios and limits the Company's
ability to incur additional debt, to repurchase the Company's stock and to pay
dividends. The Company has failed to meet certain financial covenants required
by this loan agreement as of September 30, 1996. Accordingly all amounts
outstanding as of September 30, 1996, have been classified as current on the
balance sheet.
6. SECURED INVESTOR NOTES
On June 14, 1995, the Company entered into a Loan and Warrant Agreement with
certain shareholders (the "Lenders") under which the Company borrowed $993,476
at an interest rate of 10% per annum for a period of one year.
On October 18, 1995 the Company entered into a Loan and Warrant Agreement
with essentially the same Lenders who participated in the June, 1995
transaction, under which the Company borrowed $1,329,589 from the Lenders at
an interest rate of 10% per annum for a period of one year.
Principal balances outstanding as of December 31, 1995 were $993,476 and
$1,329,589 for the June and October agreements, respectively. Under both the
June and October 1995 transactions, the Lenders received warrants at the end
of the respective terms which allowed them to purchase Common Stock of the
Company at $.50 per share. The loans were repaid in full and all vested
warrants with an aggregate exercise price of $725,792 for 1,451,584 shares of
common stock were exercised on February 29, 1996 (see Note 9).
7. RELATED PARTY TRANSACTIONS
Sales to a corporate shareholder totaled approximately $666,000, $143,000
and $63,000 in 1993, 1994 and 1995, respectively.
F-10
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. OPERATING LEASES
The Company conducts all of its operations from facilities leased under
operating leases. Future minimum rental obligations under operating leases as
of December 31, 1995 are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TOTAL
----------------------- ----------
<S> <C>
1996......................................................... $ 409,451
1997......................................................... 364,415
1998......................................................... 249,994
1999......................................................... 74,639
----------
$1,098,499
==========
</TABLE>
Rental expense incurred under all operating leases amount to $227,300,
$216,500 and $531,472 in 1993, 1994 and 1995, respectively.
From May, 1994 through October, 1995, the Company maintained the two primary
facilities which had housed the respective parties prior to the acquisition
described in Note 3. During the period from April, 1995 though October, 1995,
the Company consolidated all of its major functions and activities into the
facility in Framingham, Massachusetts. The facility in Raleigh, North Carolina
remains under lease through June 1999, and efforts are being made to relieve
the Company of that financial obligation which amounts to total remaining
rental payments of approximately $485,000 as of December 31, 1995. In May
1996, the Company was released by the landlord of one-third of its lease
responsibilities, and in September 1996, the Company sublet the remainder of
the facility to a tenant. The related sublease income approximates the
Company's remaining monthly rental payments.
9. COMMON AND PREFERRED STOCK
At December 31, 1995 and 1994, preferred stock totaling 9,196,637 shares for
which no series had been designated were authorized and unissued. At December
31, 1993, 12,696,637 shares of preferred stock for which no series had been
designated were authorized and unissued.
On March 2, 1993, the Company performed a recapitalization in which all
outstanding shares of its Series A, Series B, Series C and Series D
Convertible Preferred Stock were converted into an equal number of shares of
Common Stock, except 1,428,571 shares of the Series B Convertible Preferred
Stock were converted into 1.2 shares of Common Stock for each share of the
Series B. Immediately following this conversion, the Company effected a 20-
for-1 reverse split of all outstanding Common Stock and sold 3,970,030 shares
of its 1993 Series Convertible Preferred Stock for $1.50 per share.
On May 20, 1994, the Company sold 2,207,666 shares of its 1994 Convertible
Preferred Stock in a private placement for $1.80 per share. On May 23, 1994,
in connection with the acquisition of Amnet (see Note 3), the Company issued
1,000,000 shares of 1994 Preferred Stock.
On February 29, 1996, shares totaling 3,500,000 were designated as 1996
Convertible Preferred Stock, and the Company sold 3,482,901 shares of the 1996
Preferred Stock in a private placement for $2.25 per share. Concurrent with
that transaction, the Lenders exercised warrants to purchase 1,451,584 shares
of Common Stock at $.50 per share.
The 1993 Preferred Stock, 1994 Preferred Stock and 1996 Preferred Stock are
noncumulative, are entitled to full voting privileges on all matters, and are
convertible into an equal number of shares of Common Stock at the option of
the holders at any time.
F-11
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Series E Preferred Stock is also noncumulative, is entitled to full
voting privileges on all matters on an "as if converted" basis, and is
convertible into one share of Common Stock for each twenty shares of Series E
Preferred Stock at the option of the holder at any time.
The holders of 1993 Preferred Stock, 1994 Preferred Stock, 1996 Preferred
Stock and Series E Preferred Stock are protected against dilution which may
occur as a result of subsequent equity fundings at prices less than $1.50,
$1.80, $2.25 and $.35 per share, respectively.
10. STOCK OPTIONS AND RESERVED SHARES
The Company maintains an incentive stock option plan whereby shares of the
Company's Common Stock are reserved for issuance to employees and consultants
of the Company pursuant to options granted under the plan. Coincident with the
sale of shares on February 29, 1996 (see Note 9), the number of shares
reserved under the plan was increased from 2,025,729 to 3,266,357.
Information concerning stock option activity since December 31, 1992 and the
status of stock options as of December 31, 1995 and September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
------------------------------------
NON-
QUALIFIED INCENTIVE PRICE PER
# OF SHARES # OF SHARES SHARE
----------- ----------- -----------
<S> <C> <C> <C>
Shares under option at December 31,
1992.................................... -- 2,480,368 $0.25
Granted................................ -- 947,416 $0.25
Canceled............................... -- (2,534,773) $0.25
------- ----------
Shares under option at December 31,
1993.................................... -- 893,011 $0.25
Granted................................ -- 878,104 $0.25
Exercised.............................. -- (23,608) $0.25
Canceled............................... -- (319,395) $0.25
------- ----------
Shares under option at December 31,
1994.................................... -- 1,428,112 $0.25
Granted................................ 111,286 759,083 $0.25
Exercised.............................. -- (4,419) $0.25
Canceled............................... -- (431,715) $0.25
------- ----------
Shares under option at December 31,
1995.................................... 111,286 1,751,061 $0.25
Granted (unaudited).................... 45,000 1,023,074 $0.25-$0.35
Exercised (unaudited).................. -- (16,675) $0.25-$0.35
Canceled (unaudited)................... -- (585,500) $0.25-$0.35
------- ----------
Shares under option at September 30, 1996
(unaudited)............................. 156,286 2,171,960 $0.25-$0.35
======= ==========
Exercisable at December 31, 1995......... 20,866 1,816,673 $0.25-$0.35
======= ==========
Exercisable at September 30, 1996........ 48,688 657,743 $0.25-$0.35
======= ==========
Available for grant at December 31,
1995.................................... 163,382
==========
Available for grant at September 30,
1996.................................... 914,340
==========
</TABLE>
Under the terms of the plan, stock option exercise prices are established at
100% of fair market value of the Common Stock at the date of grant and the
options may be exercised upon terms approved by the Board of Directors of the
Company. The terms of each stock option agreement granted under the plan also
include a feature whereby vesting of all options accelerates immediately in
the event of a change in control of the Company. All options expire ten years
from the date of grant.
F-12
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Shares of common stock reserved for future issuance for conversion of
Preferred Stock and outstanding Common Stock options as of December 31, 1995
and September 30, 1996 are 9,270,092 and 13,969,850, respectively.
11. DEFINED CONTRIBUTION PLAN
On July 1, 1986, the Company instituted a defined contribution retirement
plan under section 401(k) of the Internal Revenue Code of 1954, as amended (the
"401k Plan"). The 401k Plan covers all employees of the Company. The Company's
contributions, if any, are voluntary at the discretion of the Board of
Directors. As of December 31, 1995, the Company had made no contributions to
the 401k Plan.
12. INCOME TAXES
At December 31, 1995, for federal income tax purposes, the Company had net
operating loss carryforwards of approximately $54,921,000, and tax credit
carryforwards of approximately $1,131,000, which will expire beginning in 1999.
Certain changes in stock ownership can result in a limitation on the amount of
net operating loss and tax credit carryovers that can be utilized each year
based on the provisions of Section 382 of the Internal Revenue Code. The
Company determined that such limitation applies due to the purchase of Amnet
(see Note 3). Consequently, aggregate utilization of approximately $30,212,000
of net operating loss carryforwards and the deduction equivalent of
approximately $398,000 of tax credit carryforwards will be limited to
approximately $3,206,000 as of December 31, 1995 or $229,000 per year before
they expire. Because of this limitation, the Company has not recorded any
deferred tax assets for the amount of the net loss and credit carryforwards
which it estimates will not be available because of the limitation. The Company
has recorded a valuation allowance to offset the deferred tax assets related to
its other carryforwards. When and if realized, the tax benefit for these
carryforwards will be reflected in operations as a reduction of income tax
expense.
For financial reporting purposes, the Company has incurred losses totaling
$30,610,991 which have given rise to the federal tax loss carryforwards
discussed above. Differences between financial reporting loss carryforwards and
federal tax loss carryforwards are attributable primarily to timing differences
in the recognition of certain expenses, most significantly, depreciation
expense. The Company has no deferred tax liabilities. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $10,004,549 $10,920,272
Federal income tax credit carryforwards.......... 1,131,000 1,131,000
Inventory obsolescence reserve................... 122,083 78,521
Warranty reserve................................. 86,865 79,181
Bad debt expense................................. 48,721 69,291
Book over tax depreciation....................... 50,941 35,690
Accrued lease termination costs.................. -- 70,416
Other............................................ 52,749 76,808
----------- -----------
Total deferred tax assets.......................... 11,496,908 12,461,179
Valuation allowance for deferred tax assets........ (11,496,908) (12,461,179)
----------- -----------
Net deferred tax assets............................ -- --
----------- -----------
Net deferred taxes................................. $ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE>
NETLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Financial Accounting Standards Board Statement No. 109 (SFAS 109),
"Accounting for Income Taxes," became effective for fiscal years beginning
after December 15, 1992. Under SFAS 109, deferred tax liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities as measured by the enacted statutory rates in
effect at the balance sheet date. Deferred tax expense results from the change
in the liability for deferred taxes. The adoption of SFAS 109 had no material
impact on the 1993 financial statements as the Company has experienced
continuing losses for both financial reporting and tax purposes.
13. SUBSEQUENT EVENTS
On September 26, 1996, the Company signed an Agreement and Plan of Merger
(the "Agreement") with Cabletron Systems, Inc. which outlines the principal
terms by which the Company would be acquired by Cabletron. The Agreement
contemplates consummation of the acquisition no later than February 28, 1997.
The terms of the Agreement require the Company to pay Cabletron a
termination fee of $2.8 million in the event that the acquisition does not
consummate for various specified reasons.
As of September 30, 1996, the Company was in violation of certain
restrictive covenants related to debt payable in the amount of $608,000. The
lender has the right to call for payment of the debt because of the covenant
violations. Management believes the lender will not call the debt due prior to
consummation of the merger when the debt is expected to be renegotiated or
repaid.
Should the merger not be completed, the Company may be required to pay the
termination fee of $2.8 million and also to repay the $608,000 in debt if the
lender calls the debt. Management believes this to be unlikely since it fully
expects the Cabletron acquisition of the Company to proceed as planned.
However, should this not occur, the Company would likely have insufficient
cash resources to fund the required payments. In that event, management plans
to seek another merger partner and/or attempt to obtain additional debt or
equity capital from its existing investors or new investors.
F-14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CABLETRON SYSTEMS, INC.
AND
CABLETRON MERGER, INC.
AND
NETLINK, INC.
DATED AS OF SEPTEMBER 26, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I The Merger....................................................... 1
Section 1.1 The Merger................................................ 1
Section 1.2 Effective Time............................................ 3
Section 1.3 Effect of the Merger...................................... 3
Section 1.4 Certificate of Incorporation, By-Laws..................... 3
Section 1.5 Directors and Officers.................................... 3
Section 1.6 Effect on Capital Stock................................... 3
Section 1.7 Exchange of Certificates.................................. 5
Section 1.8 Stock Transfer Books...................................... 6
Section 1.9 No Further Ownership Rights in Company Common Stock....... 6
Section 1.10 Lost, Stolen or Destroyed Certificates.................... 6
Section 1.11 Tax and Accounting Consequences........................... 6
Section 1.12 Taking of Necessary Action; Further Action................ 6
Section 1.13 Material Adverse Effect................................... 6
ARTICLE II Representations and Warranties of the Company................... 7
Section 2.1 Organization and Qualification; Subsidiaries.............. 7
Section 2.2 Certificate of Incorporation and By-Laws.................. 7
Section 2.3 Capitalization............................................ 7
Section 2.4 Authority Relative to this Agreement...................... 8
Section 2.5 No Conflict; Required Filings and Consents................ 8
Section 2.6 Compliance, Permits....................................... 9
Section 2.7 Financial Statements...................................... 10
Section 2.8 Absence of Certain Changes or Events...................... 10
Section 2.9 No Undisclosed Liabilities................................ 10
Section 2.10 Absence of Litigation..................................... 10
Section 2.11 Employee Benefit Plans, Employment Agreements............. 10
Section 2.12 Labor Matters............................................. 11
Section 2.13 Registration Statement, Proxy Statement/Prospectus........ 12
Section 2.14 Restrictions on Business Activities....................... 12
Section 2.15 Title to Property......................................... 12
Section 2.16 Taxes..................................................... 12
Section 2.17 Environmental Matters..................................... 13
Section 2.18 Intellectual Property..................................... 14
Section 2.19 Interested Party Transactions............................. 15
Section 2.20 Insurance................................................. 15
Section 2.21 Accounts Receivable; Inventories; Fixed Assets............ 15
Section 2.22 Pooling Matters........................................... 16
Section 2.23 Brokers................................................... 16
Section 2.24 Change in Control Payments................................ 16
Section 2.25 Expenses.................................................. 16
Section 2.26 Full Disclosure........................................... 16
ARTICLE III Representations and Warranties of Parent and Merger Sub........ 16
Section 3.1 Organization and Qualification; Subsidiaries.............. 17
Section 3.2 Charter and By-Laws....................................... 17
Section 3.3 Capitalization............................................ 17
Section 3.4 Authority Relative to this Agreement...................... 17
Section 3.5 No Conflict, Required Filings and Consents................ 17
</TABLE>
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<TABLE>
<C> <S> <C>
Section 3.6 SEC Filings; Financial Statements....................... 18
Section 3.7 Registration Statement; Proxy Statement/Prospectus...... 18
Section 3.8 Pooling Matters......................................... 19
Section 3.9 Ownership of Merger Sub; No Prior Activities............ 19
ARTICLE IV Conduct of Business Pending the Merger........................ 19
Section 4.1 Conduct of Business by the Company Pending the Merger... 19
Section 4.2 No Solicitation......................................... 20
ARTICLE V Additional Agreements.......................................... 21
Section 5.1 Proxy Statement/Prospectus; Registration Statement...... 21
Section 5.2 Stockholder Meeting..................................... 21
Section 5.3 Access to Information; Confidentiality.................. 22
Section 5.4 Consents; Approvals..................................... 22
Section 5.5 Agreements with Respect to Affiliates................... 22
Section 5.6 Notification of Certain Matters......................... 22
Section 5.7 Further Action/Tax Treatment............................ 22
Section 5.8 Public Announcements.................................... 23
Section 5.9 Conveyance Taxes........................................ 23
Section 5.10 Accountants' Letters.................................... 23
Section 5.11 Pooling Accounting Treatment............................ 23
Section 5.12 Non-Solicitation........................................ 23
Section 5.13 Benefit Plans........................................... 23
ARTICLE VI Conditions to the Merger...................................... 24
Section 6.1 Conditions to Obligation of Each Party to Effect the
Merger................................................. 24
Section 6.2 Additional Conditions to Obligations of Parent and
Merger Sub............................................. 24
Section 6.3 Additional Conditions to Obligation of the Company...... 25
ARTICLE VII Termination.................................................. 26
Section 7.1 Termination............................................. 26
Section 7.2 Effect of Termination................................... 27
Section 7.3 Fees and Expenses....................................... 27
ARTICLE VIII General Provisions.......................................... 28
Section 8.1 Indemnification......................................... 28
Section 8.2 Survival, Etc........................................... 30
Section 8.3 Notices................................................. 30
Section 8.4 Certain Definitions..................................... 31
Section 8.5 Amendment............................................... 32
Section 8.6 Waiver.................................................. 32
Section 8.7 Headings................................................ 32
Section 8.8 Severability............................................ 32
Section 8.9 Entire Agreement........................................ 32
Section 8.10 Assignment; Guarantee of Merger Sub Obligations......... 32
Section 8.11 Parties in Interest..................................... 32
Section 8.12 Failure or Indulgence Not Waiver; Remedies Cumulative... 32
Section 8.13 Governing Law........................................... 32
Section 8.14 Counterparts............................................ 32
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 26, 1996 (this
"Agreement"), among Cabletron Systems, Inc., a Delaware corporation
("Parent"), Cabletron Merger, Inc., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Netlink, Inc., a Delaware corporation
(the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Parent to enter into a business combination with
the Company upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent and Merger Sub have each approved the merger of Merger Sub with and
into the Company (the "Merger") in accordance with the applicable provisions
of the Delaware General Corporation Law (the "DGCL") upon the terms and
subject to the conditions set forth herein;
WHEREAS, Parent, Merger Sub and the Company intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations promulgated
thereunder; and
WHEREAS, pursuant to the Merger, each outstanding share (a "Share") of the
Company's common stock, $.01 par value (the "Company Common Stock"), shall be
converted into the right to receive the Merger Consideration (as defined in
Section 1.7(b)), upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger.
(a) Effective Time. At the Effective Time (as defined in Section 1.2), and
subject to and upon the terms and conditions of this Agreement and the DCGL,
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease, and the Company shall continue as the
surviving corporation. The Company as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1 and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the consummation of the Merger will take place as promptly as
practicable (and in any event within two business days) after satisfaction or
waiver of the conditions set forth in Article VI, at the offices of Ropes &
Gray, One International Place, Boston, Massachusetts, unless another date,
time or place is agreed to in writing by the parties hereto.
(c) At the Effective Time, Parent shall deliver to Fleet National Bank, or
any successor escrow agent appointed pursuant to the Escrow Agreement (as
hereinafter defined) (the "Escrow Agent") the number of the Parent Shares
issued to the stockholders pursuant to Section 1.6(a) equal to (i) $10,000,000
divided by (ii) the
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Parent Stock Price, rounded down to the nearest whole share, such shares to be
held and applied in accordance with the Escrow Agreement (the "Escrow
Shares").
(d) The stockholders, by virtue of their approval of the Agreement, will be
deemed to have irrevocably constituted and appointed, effective as of the
Effective Time, Mr. Geoffrey Yang (together with his or its permitted
successors, the "Stockholder Representative"), as their true and lawful agent
and attorney-in-fact to enter into any agreement in connection with the
transactions contemplated by this Agreement and any transactions contemplated
by the Escrow Agreement, to exercise all or any of the powers, authority and
discretion conferred on his or it under any such agreement, to waive any terms
and conditions of any such agreement (other than the Merger Consideration), to
give and receive notices on their behalf and to be their exclusive
representative with respect to any matter, suit, claim, action or proceeding
arising with respect to any transaction contemplated by any such agreement,
including, without limitation, the defense, settlement or compromise of any
claim, action or proceeding for which the Parent or the Merger Sub may be
entitled to indemnification and the Stockholder Representative agrees to act
as, and to undertake the duties and responsibilities of, such agent and
attorney-in-fact. This power of attorney is coupled with an interest and is
irrevocable. The Stockholder Representative shall not be liable for any action
taken or not taken by his or it in connection with his or its obligations
under this Agreement (i) with the consent of stockholders who, as of the date
of this Agreement, owned a majority in number of the outstanding shares of
Common Stock (treating the 1993 Preferred Stock Series, $.01 par value per
share (the "1993 Series"), the 1994 Preferred Stock series, $.01 par value per
share (the "1994 Series"), the 1996 Preferred Stock series, $.01 par value per
share (the "1996 Series"), and the Series E Preferred Stock, $.01 par value
per shares (the "Series E")( the 1993 Series, the 1994 Series, the 1996 Series
and the Series E Preferred Stock are hereinafter collectively referred to as
the "Preferred Stock") on an as-converted basis) or (ii) in the absence of his
or its own gross negligence or wilful misconduct. If the Stockholder
Representative shall be unable or unwilling to serve in such capacity, his or
its successor shall be named by those persons holding a majority of the shares
of Common Stock outstanding (treating the Preferred Stock on an as-converted
basis) at the Effective Time who shall serve and exercise the powers of
Stockholder Representative hereunder.
(e) At the Closing, the Company shall deliver to Parent a certificate, in
form and substance satisfactory to Parent and signed by its Chief Executive
Officer and Director of Finance (the "Company Closing Certificate"),
certifying (i) that all outstanding shares of Preferred Stock have been
converted into shares of Company Common Stock, (ii) the number of outstanding
shares of Company Common Stock, as of the Closing Date and, (iii) the number
of shares of Company Common Stock issuable upon the conversion or exercise of
all options, warrants, Preferred Stock and other securities of the Company
convertible into or exercisable for shares of Company Common Stock that are
outstanding on the Closing Date. The aggregate number of shares of Parent
Common Stock to be issued in the Merger in exchange for each share of Company
Common Stock shall be the result of dividing (i) the number of shares of
Parent Common Stock equal to the result obtained by dividing $140,000,000 by
the Parent Stock Price, rounded down to the nearest whole share by (ii) the
number of shares of Company Common Stock outstanding on the Closing Date, plus
the number of shares of Company Common Stock issuable upon the conversion or
exercise of all options, warrants, Preferred Stock and other securities of the
Company convertible into or exercisable for shares of Company Common Stock
that are outstanding on the Closing Date, in each case as reflected on the
Company Closing Certificate (such result, expressed as a ratio of the number
of shares of Parent Common Stock to be issued in the Merger for each then
outstanding share of Company Common Stock, is hereinafter referred to as the
"Exchange Ratio"). The "Parent Stock Price" means the average, rounded to the
nearest one-thousandth (.001), of the daily closing sales prices of Parent
Common Stock as reported on the New York Stock Exchange Composite Tape (as
reported by the Wall Street Journal or, if not reported thereby, as reported
by another authoritative source as mutually agreed by Parent and the Company)
for the ten consecutive full trading days ending on and including September
18, 1996. The parties acknowledge that, based on the foregoing formula, the
Parent Stock Price is $61.975 per share.
Section 1.2 Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VI, the parties
hereto shall cause the Merger to be consummated by filing a duly executed
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and delivered Certificate of Merger in the form attached hereto as Exhibit 1.2
as contemplated by the DCGL (the "Certificate of Merger"), with the Secretary
of State of the State of Delaware, in such form as required by, and executed
in accordance with the relevant provisions of, the DCGL (the time of such
filing being the "Effective Time").
Section 1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of the DCGL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of the Company and Merger Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of
the Company and Merger Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
Section 1.4 Certificate of Incorporation, By-Laws.
(a) Certificate of Incorporation. Unless otherwise determined by Parent
prior to the Effective Time, at the Effective Time the Certificate of
Incorporation of the Surviving Corporation, as in effect immediately prior to
the Effective Time, shall be amended and restated to read as did the
Certificate of Incorporation of the Merger Sub immediately prior to the
Effective Time, except that the name of the Surviving Corporation will remain
unchanged.
(b) By-Laws. Unless otherwise determined by Parent prior to the Effective
Time, the By-Laws of the Surviving Corporation, as in effect immediately prior
to the Effective Time, shall be amended and restated to read as did the By-
Laws of the Merger Sub immediately prior to the Effective Time, except that
the name of the Surviving Corporation shall remain unchanged.
Section 1.5 Directors and Officers. The directors of Merger Sub immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
Section 1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the Parent, Merger Sub, the
Company or the holders of any of the following securities:
(a) Conversion of Securities. Each Share issued and outstanding
immediately prior to the Effective Time (excluding any Shares to be
canceled pursuant to Section 1.6(b) and Company Dissenting Shares (as
defined in Section 1.6(c)) shall be converted, subject to Section 1.6(f),
into the right to receive validly issued, fully paid and nonassessable
shares ("Parent Shares") of the Common Stock, $.01 par value, of Parent
("Parent Common Stock") equal to the Exchange Ratio. Each outstanding share
of the common stock, $.01 par value, of Merger Sub shall be converted into
one share of common stock, $.01 par value of the Surviving Corporation.
(b) Cancellation. Each Share held in the treasury of the Company and each
Share owned by Parent, Merger Sub or any direct or indirect wholly owned
subsidiary of the Company or Parent immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the
holder thereof, cease to be outstanding, be canceled and retired without
payment of any consideration therefor and cease to exist.
(c) Shares of Dissenting Holders. (a) Notwithstanding anything to the
contrary contained in this Agreement, any holder of Company Common Stock
with respect to which dissenters' rights, if any, are granted by reason of
the merger under the DCGL and who does not vote in favor of the Merger and
who otherwise complies with Section 262 of the DCGL ("Company Dissenting
Shares") shall not be entitled to receive shares of Parent Common Stock
pursuant to Section 1.6(a) hereof, unless such holder fails to perfect,
effectively withdraws or loses his right to dissent from the Merger under
the DCGL. Such holder shall be entitled to receive only the payment
provided for by Section 262 of the DCGL. If any such holder so fails
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to perfect, effectively withdraws or loses his or her dissenters' rights
under the DCGL, his or her Company Dissenting Shares shall thereupon be
deemed to have been converted, as of the Effective Time, into the right to
receive shares of Parent Common Stock pursuant to Section 1.6(a).
(d) Any payments relating to the Company Dissenting Shares shall be made
solely by the Surviving Corporation and no funds or other property have
been or will be provided by Merger Sub or any of Parent's other direct or
indirect subsidiaries for such payment.
(e) Stock Options.
(i) At the Effective Time, each outstanding option to purchase
Company Common Stock (a "Stock Option") granted under the Company's
1993 Stock Option Plan ("Company Stock Option Plan"), whether vested or
unvested, shall be deemed assumed by Parent and deemed to constitute an
option to acquire, on the same terms and conditions as were applicable
under such Stock Option Plan and any stock option agreement applicable
to such Stock Option prior to the Effective Time, the number (rounded
down to the nearest whole number) of Parent Shares as the holder of
such Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior
to the Effective Time (not taking into account whether or not such
option was in fact exercisable), at a price per share equal to (x) the
aggregate exercise price for Company Common Stock otherwise purchasable
pursuant to such Stock Option prior to the Effective Time divided by
(y) the result obtained by multiplying the number of shares of Company
Common Stock otherwise purchasable pursuant to such Stock Option prior
to the Effective Time by the Exchange Ratio. It is the intention of the
parties that Stock Options assumed by Parent shall qualify as incentive
stock options to the extent such options qualified as incentive stock
options immediately prior to the Effective Time, and the parties intend
that the assumption by Parent of Stock Options qualifying for incentive
stock option treatment not constitute a modification of such options.
(ii) As soon as practicable after the Effective Time, Parent shall
deliver to each holder of an outstanding Stock Option an appropriate
notice setting forth such holder's rights pursuant thereto, and such
Stock Option shall continue in effect on the same terms and conditions.
(iii) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of Parent Shares for delivery pursuant to
the terms set forth in this Section 1.6(c).
(iv) Subject to any applicable limitations under the Securities Act
of 1933, as amended, and the rules and regulations thereunder (the
"Securities Act"), Parent shall file a Registration Statement on Form
S-8 (or any successor form), effective as of the Effective Time, with
respect to the shares of Parent Common Stock issuable upon exercise of
the Stock Options, and the Parent shall use all reasonable efforts to
maintain the effectiveness of such registration statement (and maintain
the current status of the prospectus or prospectuses relating thereto)
for so long as such options shall remain outstanding.
(f) Capital Stock of Merger Sub. Each share of common stock, $.01 par
value, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one validly
issued, fully paid and nonassessable share of common stock, $.01 par value,
of the Surviving Corporation.
(g) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split,
reclassification, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock), reorganization,
recapitalization or other like change with respect to Parent Common Stock
occurring after the date hereof and prior to the Effective Time.
(h) Fractional Shares. No certificates or scrip representing less than
one Parent Share shall be issued upon the surrender for exchange of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Shares (the "Certificates"). In lieu of any such
fractional share, each holder of Shares who would otherwise have been
entitled to a fraction of a Parent Share upon surrender of Certificates for
exchange shall be paid upon such surrender cash (without interest)
determined by multiplying (i) the per share closing price on the New York
Stock Exchange of Parent Common Stock on the date of the Effective
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Time by (ii) the fractional interest of Parent Common Stock to which such
holder would otherwise be entitled. As soon as practical after determining
the amount of cash, if any, to be paid to former holders of Company Common
Stock with respect to any fractional shares of Parent Common Stock, the
Exchange Agent shall promptly pay such amounts to such holders in
accordance with Article I. Parent will make available to the Exchange Agent
the cash necessary for this purpose.
Section 1.7 Exchange of Certificates.
(a) Exchange Agent. Parent shall supply, or shall cause to be supplied, to
or for the account of Boston Equiserve, or such other bank or trust company as
shall be designated by Parent (the "Exchange Agent"), in trust for the benefit
of the holders of Company Common Stock, for exchange in accordance with this
Section 1.7, through the Exchange Agent, certificates evidencing the Parent
Shares issuable pursuant to Section 1.6 in exchange for outstanding Shares.
All of the Parent Shares issued in the Merger shall be issued as of and be
deemed to be outstanding as of the Effective Time. Parent shall cause all such
Parent Shares to be issued in connection with the Merger to be duly
authorized, validly issued, fully paid and nonassessable.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Parent will instruct the Exchange Agent to mail to each holder
of record of Certificates (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify that are not inconsistent with the terms of this
Agreement), and (ii) instructions to effect the surrender of the Certificates
in exchange for the certificates evidencing Parent Shares. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter
of transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall
be entitled to receive in exchange therefor (A) certificates evidencing that
number of whole Parent Shares which such holder has the right to receive in
accordance with the Exchange Ratio in respect of the Shares formerly evidenced
by such Certificate, (B) any dividends or other distributions to which such
holder is entitled pursuant to Section 1.7(c), and (C) cash in respect of
fractional shares as provided in Section 1.6(h) (the Parent Shares, dividends,
distributions and cash being, collectively, the "Merger Consideration"), and
the Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Shares which is not registered in the transfer
records of the Company as of the Effective Time, the Merger Consideration may
be issued and paid in accordance with this Article I to a transferee if the
Certificate evidencing such Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
pursuant to this Section 1.7(b) and by evidence that any applicable stock
transfer taxes have been paid. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented Shares of Company
Common Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends and subject to Section
1.6(h), to evidence the ownership of the number of full Parent Shares into
which such shares of Company Common Stock shall have been so converted.
(c) Distributions With Respect to Unexchanged Parent Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the Parent Shares they
are entitled to receive until the holder of such Certificate shall surrender
such Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole Parent Shares issued in exchange therefor, without
interest, at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole Parent Shares.
(d) Transfers of Ownership. If any certificate for Parent Shares is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it will be a condition to the issuance
thereof that the Certificate so surrendered will be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for Parent
Shares in any name other than that of
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the registered holder of the certificate surrendered, or have established to
the satisfaction of Parent or any agent designated by it that such tax has
been paid or is not payable.
(e) No Liability. Neither Parent, Merger Sub nor the Company shall be liable
to any holder of Company Common Stock for any Merger Consideration delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law following the passage of time specified therein.
(f) Withholding Rights. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant
to this Agreement to any holder of Company Common Stock such amounts as Parent
or the Exchange Agent is required to deduct and withhold with respect to the
making of such payment under the Code, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by Parent or the
Exchange Agent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the Shares in respect of
which such deduction and withholding was made by Parent or the Exchange Agent.
Section 1.8 Stock Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed, and there shall be no further
registration of transfers of Company Common Stock thereafter on the records of
the Company.
Section 1.9 No Further Ownership Rights in Company Common Stock. The Merger
Consideration delivered upon the surrender for exchange of Shares in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Shares, and there shall be no
further registration of transfers on the records of the Surviving Corporation
of Shares which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided
in this Article I.
Section 1.10 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof, such Parent
Shares as may be required pursuant to Section 1.6 as well as the other Merger
Consideration as provided in this Article; provided, however, that Parent may,
in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver an
agreement of indemnification in form satisfactory to Parent, or a bond in such
sum as it may reasonably direct if the value of the lost certificate exceeds
$75,000 in value, as indemnity against any claim that may be made against
Parent or the Exchange Agent with respect to the Certificates alleged to have
been lost, stolen or destroyed.
Section 1.11 Tax and Accounting Consequences. It is intended by the parties
hereto that the Merger shall (i) constitute a reorganization within the
meaning of Section 368 of the Code and (ii) qualify for accounting treatment
as a pooling of interests. The parties hereto hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-
3(a) of the United States Treasury Regulations.
Section 1.12 Taking of Necessary Action; Further Action. Each of Parent,
Merger Sub and the Company will take all such reasonable and lawful action as
may be necessary or appropriate in order to effectuate the Merger in
accordance with this Agreement as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and
directors of the Company and Merger Sub immediately prior to the Effective
Time are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action.
Section 1.13 Material Adverse Effect. When used in connection with the
Company or any of its subsidiaries, or Parent or any of its subsidiaries, as
the case may be, the term "Material Adverse Effect" means any change, effect
or circumstance that, individually or when taken together with all other such
changes, effects
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or circumstances that have occurred prior to the date of determination of the
occurrence of the Material Adverse Effect, (a) is or is reasonably likely to
be materially adverse to the business, assets (including intangible assets),
prospects, financial condition or results of operations of the Company and its
subsidiaries or Parent and its subsidiaries, as the case may be, in each case
taken as a whole, or (b) is or is reasonably likely to delay or prevent the
consummation of the transactions contemplated hereby.
ARTICLE II
Representations and Warranties of the Company
The Company hereby represents and warrants to Parent and Merger Sub that,
except as set forth in the written disclosure schedule delivered on or prior
to the date hereof by the Company to Parent that is arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this
Article II (the "Company Disclosure Schedule"), and the disclosure in any
paragraph of the Disclosure Schedule shall qualify only the corresponding
paragraph in this Article II:
Section 2.1 Organization and Qualification; Subsidiaries. The Company and
each of its subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and
has the requisite corporate power and authority necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on
its business as it is now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power and authority
could not reasonably be expected to have a Material Adverse Effect. The
Company and each of its subsidiaries is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, leased or operated
by it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and in
good standing that could not reasonably be expected to have a Material Adverse
Effect. A true and complete list of all of the Company's subsidiaries,
together with the jurisdiction of incorporation of each subsidiary, the
authorized capitalization of each subsidiary, and the percentage of each
subsidiary's outstanding capital stock owned by the Company or another
subsidiary, is set forth in Section 2.1 of the Company Disclosure Schedule.
Except as set forth in Section 2.1 of the Company Disclosure Schedule, the
Company does not directly or indirectly own any equity or similar interest in,
or any interest convertible into or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity, with respect to which interest the
Company has invested or is required to invest $25,000 or more, excluding
securities in any publicly traded company held for investment by the Company
and comprising less than five percent of the outstanding stock of such
company.
Section 2.2 Certificate of Incorporation and By-Laws. The Company has
heretofore furnished to Parent a complete and correct copy of its Certificate
of Incorporation and By-Laws as amended to date, and has furnished or made
available to Parent the Certificate of Incorporation and By-Laws (or
equivalent organizational documents) of each of its subsidiaries (the
"Subsidiary Documents"). Such Certificate of Incorporation, By-Laws and
Subsidiary Documents are in full force and effect. Neither the Company nor any
of subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or By-Laws or Subsidiary Documents.
Section 2.3 Capitalization. The authorized capital stock of the Company
consists of (i) 27,000,000 shares of Company Common Stock and (ii) 18,000,000
shares of the Preferred Stock. As of September 25, 1996, (a) 2,405,964 shares
of Company Common Stock, 3,970,030 shares of the 1993 Series preferred stock,
3,207,666 shares of the 1994 Series preferred stock, 3,482,901 shares of the
1996 Series preferred stock, and 1,333,333 shares of the Series E preferred
stock, respectively, were issued and outstanding, all of which are validly
issued, fully paid and nonassessable, and no shares were held in treasury, (b)
no shares of Company Common Stock were held by subsidiaries of the Company,
and (c) 13,990,822 shares of Company Common Stock were reserved for future
issuance pursuant to outstanding stock options granted under the Company Stock
Option Plan and for conversion of the Preferred Stock. Upon the conversion of
the Preferred Stock there will be outstanding an additional 10,727,264 shares
of Company Common Stock. Other than stock options granted to employees,
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directors or consultants pursuant to the Company Stock Option Plan in the
ordinary course and the exercise of outstanding Stock Options, no change in
such capitalization has occurred between September 25, 1996 and the date
hereof. Except as set forth in Section 2.3 or Section 2.11 of the Company
Disclosure Schedule, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character relating to the
issued or unissued capital stock of the Company or any of its subsidiaries or
obligating the Company or any of its subsidiaries to issue or sell any shares
of capital stock of, or other equity interests in, the Company or any of its
subsidiaries. All shares of Company Common Stock subject to issuance as
aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, shall be duly authorized,
validly issued, fully paid and nonassessable. Except as disclosed in Section
2.3 of the Company Disclosure Schedule, there are no obligations, contingent
or otherwise, of the Company or any of its subsidiaries to repurchase, redeem
or otherwise acquire any shares of Company Common Stock or the capital stock
of any subsidiary or to provide funds to or make any investment (in the form
of a loan, capital contribution, guaranty or otherwise) in any such subsidiary
or any other entity. Except as set forth in Sections 2.1 and 2.3 of the
Company Disclosure Schedule, all of the outstanding shares of capital stock of
each of the Company's subsidiaries is duly authorized, validly issued, fully
paid and nonassessable, and all such shares are owned by the Company or
another subsidiary of the Company free and clear of all security interests,
liens, claims, pledges, agreements, limitations in the Company's voting
rights, charges or other encumbrances of any nature whatsoever (collectively,
"Liens").
Section 2.4 Authority Relative to this Agreement. (a) The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate
action, and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions so
contemplated (other than the Requisite Approvals as hereinafter defined). The
Board of Directors of the Company has determined that it is advisable and in
the best interest of the Company's stockholders for the Company to enter into
a business combination with Parent upon the terms and subject to the
conditions of this Agreement, and has unanimously recommended that the
Company's stockholders approve and adopt this Agreement, the Merger and the
Conversion (as hereinafter defined). This Agreement has been duly and validly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery by Parent and Merger Sub, as applicable, constitutes a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms.
(b) The affirmative vote of the (i) holders of a majority of the outstanding
shares of Company Common Stock and the Series E Preferred Stock, voting as a
class, and (ii) holders of 60% of the outstanding shares of each of the 1993
Series, the 1994 Series and the 1996 Series preferred stock, each voting as a
separate class (collectively, the "Merger Approval") is necessary to approve
this Agreement and the Merger. The affirmative votes of the holders of a
majority of the outstanding shares of each of the 1993 Series, the 1994 Series
and the 1996 Series are the only votes required to automatically convert all
outstanding shares of the 1993 Series, the 1994 Series and the 1996 Series
preferred stock into the Company Common Stock (the "Conversion Approval", and
together with the Merger Approval, the "Requisite Approvals").
Section 2.5 No Conflict; Required Filings and Consents.
(a) Section 2.5(a) of the Company Disclosure Schedule includes a list of (i)
all loan agreements, indentures, mortgages, pledges, conditional sale or title
retention agreements, security agreements, equipment obligations, guaranties,
standby letters of credit, equipment leases or lease purchase agreements to
which the Company or any of its subsidiaries is a party or by which any of
them is bound; and (ii) all contracts, agreements, commitments or other
understandings or arrangements to which the Company or any of its subsidiaries
is a party or by which any of them or any of their respective properties or
assets are bound or affected, but excluding contracts, agreements, equipment
leases, equipment obligations, commitments or other understandings or
arrangements entered into in the ordinary course of business and involving, in
each case, payments or receipts
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by the Company or any of its subsidiaries of less than $50,000 in any single
instance but not more than $150,000 in the aggregate.
(b) Except as disclosed in Section 2.5(b) of the Company Disclosure
Schedule, (i) neither the Company nor any of its subsidiaries has breached, is
in default under, or has received written notice of any breach of or default
under, any of the agreements, contracts or other instruments referred to in
clauses (i) or (ii) of Section 2.5(a), (ii) to the best knowledge of the
Company, no other party to any of the agreements, contracts or other
instrument referred to in clauses (i) or (ii) of Section 2.5 (a) has breached
or is in default of any of its obligations thereunder, and (3) each of the
agreements, contracts and other instruments referred to in clauses (i) or (ii)
of Section 2.5(a) is in full force and effect, except in any such case for
breaches, defaults or failures to be in full force and effect that have not
had and could not reasonably be expected to have a Material Adverse Effect.
(c) Except as set forth in Section 2.5(c) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby will not, (i) conflict with or violate
the Certificate of Incorporation or By-Laws of the Company, (ii) conflict with
or violate any federal, foreign, state or provincial law, rule, regulation,
order, judgment or decree (collectively, "Laws") applicable to the Company or
any of its subsidiaries or by which its or any of their respective properties
is bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default
under), or impair the Company's or any of its subsidiaries' rights or alter
the rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a Lien on any of the properties or assets of the Company or
any of its subsidiaries pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or its or any of their respective
properties is bound or affected, except in any such case for any such
conflicts, violations, breaches, defaults or other occurrences that could not
reasonably be expected to have a Material Adverse Effect.
(d) The execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any federal, foreign, state or provincial governmental or regulatory
authority except (i) for applicable requirements, if any, of the Securities
Act, the Exchange Act, state securities laws ("Blue Sky Laws"), any required
foreign anti-trust or similar filings and the filing and recordation of
appropriate merger or other documents as required by the DCGL, and (ii) where
the failure to obtain such consents, approvals, authorizations or permits, or
to make such filings or notifications, would not prevent or delay consummation
of the Merger, or otherwise prevent or delay the Company from performing its
obligations under this Agreement, or would not otherwise have a Material
Adverse Effect.
Section 2.6 Compliance, Permits.
(a) Except as disclosed in Section 2.6(a) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is in conflict with,
or in default or violation of, (i) any Law applicable to the Company or any of
its subsidiaries or by which its or any of their respective properties is
bound or affected or (ii) any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or its or any of their respective
properties is bound or affected, except for any such conflicts, defaults or
violations which could not reasonably be expected to have a Material Adverse
Effect.
(b) Except as disclosed in Section 2.6(b) of the Company Disclosure
Schedule, the Company and its subsidiaries hold all permits, licenses,
easements, variances, exemptions, consents, certificates, orders and approvals
from governmental authorities which are material to the operation of the
business of the Company and its subsidiaries taken as a whole as it is now
being conducted (collectively, the "Company Permits"). The
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Company and its subsidiaries are in compliance with the terms of the Company
Permits, except where the failure to so comply could not reasonably be
expected to have a Material Adverse Effect.
Section 2.7 Financial Statements.
(a) Attached to the Company Disclosure Schedule are (i) the audited balance
sheets of the Company as of December 31, 1994, and 1995, together with the
related statements of income and cash flows for the periods then ended, all
certified by Ernst & Young the Company's independent public accountants (the
"Audited Financial Statements"), and (ii) the unaudited balance sheets of the
Company as of March 30 and August 3, 1996 and the related statements of income
for the three and six month periods, respectively, then ended (the "Unaudited
Financial Statements", and together with the Audited Financial Statements,
collectively the "Financial Statements").
(b) Each of the Financial Statements (including, in each case, any related
notes thereto) was prepared in accordance with generally accepted accounting
principles ("GAAP"), applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto), and each fairly
presents the financial position of the Company and its subsidiaries as at the
respective dates thereof and the results of its operations and cash flows and
stockholder equity for the periods indicated, except that the Unaudited
Financial Statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount and do
not contain complete footnotes required by generally accepted accounting
principles.
Section 2.8 Absence of Certain Changes or Events. Except as set forth in
Section 2.8 of the Company Disclosure Schedule, since December 31, 1995, the
Company has conducted its business in the ordinary course and there has not
occurred: (a) any Material Adverse Effect; (b) any amendments or changes in
the Certificate of Incorporation or By-laws of the Company; (c) any damage to,
destruction or loss of any asset of the Company (whether or not covered by
insurance) that could reasonably be expected to have a Material Adverse
Effect; (d) any material change by the Company in its accounting methods,
principles or practices; (e) any material revaluation by the Company of any of
its assets, including, without limitation, writing down the value of inventory
or writing off notes or accounts receivable other than in the ordinary course
of business; (f) any other action or event that would have required the
consent of Parent pursuant to Section 4.1 had such action or event occurred
after the date of this Agreement; or (g) any sale of the property or assets of
the Company or any of its subsidiaries, except in the ordinary course of
business.
Section 2.9 No Undisclosed Liabilities. Except as is disclosed in Section
2.9 of the Company Disclosure Schedule, neither the Company nor any of its
subsidiaries has any liabilities (absolute, accrued, contingent or otherwise),
except liabilities (a) in the aggregate adequately provided for on the face of
the Company's audited balance sheet (or adequately described in any related
notes thereto) for the fiscal year ended December 31, 1995 (the "1995 Company
Balance Sheet"), (b) incurred since December 31, 1995 in the ordinary course
of business consistent with past practice, or (c) incurred in connection with
this Agreement.
Section 2.10 Absence of Litigation. Except as set forth in Section 2.10 of
the Company Disclosure Schedule, there are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries, or any properties
or rights of the Company or any of its subsidiaries, before any federal,
foreign, state or provincial court, arbitrator or administrative, governmental
or regulatory authority or body.
Section 2.11 Employee Benefit Plans, Employment Agreements.
(a) Section 2.11 (a) of the Company Disclosure Schedule lists all employee
pension plans (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), all employee welfare plans (as
defined in Section 3(1) of ERISA), and all other bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment, executive compensation, consulting or
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severance agreements, written or otherwise, for the benefit of, or relating
to, any present or former employee (including any beneficiary of any such
employee) of, or any present or former consultant (including any beneficiary
of any such consultant) to the Company, any trade or business (whether or not
incorporated) which is a member of a controlled group including the Company or
which is under common control with the Company (an "ERISA Affiliate") within
the meaning of Section 414 of the Code, or any subsidiary of the Company, (all
such plans, practices and programs are referred to as the "Company Employee
Plans"). There have been made available to Parent copies of (i) the most
recent annual report on Form 5500 series, with accompanying schedules and
attachments, filed with respect to each Company Employee Plan required to make
such a filing, and (ii) the most recent Internal Revenue Service determination
letter with respect to each Company Employee Plan intended to be qualified
under Section 401(a) of the Code.
(b) (i) Except in each case as set forth in Section 2.11(b) of the Company
Disclosure Schedule, none of the Company Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person, and neither
the Company nor any ERISA Affiliate has ever maintained, contributed to, or
been required to contribute to, any plan that is or was a "multiemployer plan"
as such term is defined in Section 3(37) of ERISA, a pension plan subject to
Title IV of ERISA or a plan subject to Part 3 of Title I of ERISA; (ii) there
has been no "prohibited transaction," as such term is defined in Section 406
of ERISA and Section 4975 of the Code, with respect to any Company Employee
Plan, which could result in any material liability of the Company or any of
its subsidiaries; (iii) all Company Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all Laws
(including ERISA and the Code), currently in effect with respect thereto
(including all applicable requirements for notification to participants or the
Department of Labor, Internal Revenue Service (the "IRS") or Secretary of the
Treasury), and the Company and each of its subsidiaries have performed all
material obligations required to be performed by them under, are not in any
material respect in default under or violation of, and have no knowledge of
any default or violation by any other party to, any of the Company Employee
Plans; (iv) each Company Employee Plan intended to qualify under Section
401(a) of the Code and each trust intended to qualify under Section 501(a) of
the Code is the subject of a favorable determination letter from the IRS, and
nothing has occurred which may reasonably be expected to impair such
determination; and (v) there are no lawsuits or other claims (other than
claims for benefits in the ordinary course) pending or, to the best knowledge
of the Company, threatened with respect to any Company Employee Plan.
(c) Section 2.11(c) of the Company Disclosure Schedule sets forth a true and
complete list of each current or former employee, officer or director of the
Company or any of its subsidiaries who holds (i) any option to purchase
Company Common Stock as of the date hereof, together with the number of shares
of Company Common Stock subject to such option, the option price of such
option (to the extent determined as of the date hereof), whether such option
is intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO"), and the expiration date of such option;
(ii) any other right, directly or indirectly, to acquire Company Common Stock,
together with the number of shares of Company Common Stock subject to such
right. Section 2.11(c) of the Company Disclosure Schedule also sets forth the
total number of such ISOs, such nonqualified options and such other rights.
(d) Section 2.11(d) of the Company Disclosure Schedule sets forth a true and
complete list of: (i) all employment agreements with officers of the Company
or any of its subsidiaries; (ii) all agreements with consultants who are
individuals obligating the Company or any of its subsidiaries to make annual
cash payments in an amount exceeding $50,000 (iii) all employees of, or
consultants to, the Company or any of its subsidiaries who have executed a
non-competition agreement with the Company or any of its subsidiaries; (iv)
all severance agreements, programs and policies of the Company or any of its
subsidiaries with or relating to its employees, in each case with outstanding
commitments exceeding $50,000, excluding programs and policies required to be
maintained by law; and (v) all plans, programs, agreements and other
arrangements of the Company or any of its subsidiaries with or relating to its
employees which contain change in control provisions.
Section 2.12 Labor Matters. Except as set forth in Section 2.12 of the
Company Disclosure Schedule: (i) there are no controversies pending or, to the
knowledge of the Company or any of its subsidiaries, threatened, between the
Company or any of its subsidiaries and any of their respective employees; (ii)
neither the Company
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nor any of its subsidiaries is a party to any collective bargaining agreement
or other labor union contract applicable to persons employed by the Company or
its subsidiaries, nor does the Company or any of its subsidiaries know of any
activities or proceedings of any labor union to organize any such employees;
and (iii) neither the Company nor any of its subsidiaries has any knowledge of
any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or
with respect to any employees of the Company or any of its subsidiaries.
Section 2.13 Registration Statement, Proxy Statement/Prospectus. Subject to
the accuracy of the representations of Parent in Section 3.6, the information
supplied by the Company for inclusion in the Registration Statement (as
defined in Section 3.6) shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The information supplied by the
Company for inclusion in the proxy statement/prospectus to be sent to the
Shareholders of the Company in connection with the meeting of the Shareholders
of the Company to consider the Merger (the "Stockholder Meeting") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement/Prospectus"), will not, on the date the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is first
mailed to Shareholders, at the time of the Stockholder Meeting, or at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with
respect to any material fact, or shall omit to state any material fact
necessary in order to make the statements made therein not false or
misleading. If at any time prior to the Effective Time any event relating to
the Company or any of its respective affiliates, officers or directors should
be discovered by the Company which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement/Prospectus, the
Company shall promptly inform Parent and Merger Sub. The Proxy
Statement/Prospectus, including all Financial Statements of the Company
required to be included therein, shall comply in all material respects as to
form with the requirements of the Securities Act, the Exchange Act and the
rules and regulations thereunder. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to any information supplied
by Parent or Merger Sub which is contained in any of the foregoing documents.
Section 2.14 Restrictions on Business Activities. Except for this Agreement
or as set forth in Section 2.14 of the Company Disclosure Schedule, to the
best of the Company's knowledge, there is no agreement, judgement, injunction,
order or decree binding upon the Company or any of its subsidiaries which has
or could reasonably be expected to have the effect of prohibiting or impairing
any business practice of the Company or any of its subsidiaries, any
acquisition of property by the Company or any of its subsidiaries or the
conduct of business by the Company or any of its subsidiaries as currently
conducted or as proposed to be conducted by the Company, except for any
prohibition or impairment as could not reasonably be expected to have a
Material Adverse Effect.
Section 2.15 Title to Property. Except as set forth in Section 2.15 of the
Company Disclosure Schedule, the Company and each of its subsidiaries have
good and defensible title to all of their properties and assets, free and
clear of all liens, charges and encumbrances, except liens for taxes not yet
due and payable and such liens or other imperfections of title, if any, as do
not materially detract from the value of or interfere with the present use of
the property affected thereby or which could not reasonably be expected to
have a Material Adverse Effect; and, to the knowledge of the Company, all
leases pursuant to which the Company or any of its subsidiaries lease from
others material amounts of real or personal property, are in good standing,
valid and effective in accordance with their respective terms, and there is
not, to the knowledge of the Company, under any of such leases, any existing
material default or event of default (or event which with notice or lapse of
time, or both, would constitute a material default), except where the lack of
such good standing, validity and effectiveness or the existence of such
default or event of default could not reasonably be expected to have a
Material Adverse Effect. The Company does not own any real property.
Section 2.16 Taxes.
(a) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees,
levies, duties, tariffs, imposts, and governmental impositions or charges of
any kind in the nature of (or similar to) taxes, payable to
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any federal, state, local or foreign taxing authority, including (without
limitation) (i) income, franchise, profits, gross receipts, ad valorem, net
worth, value added, sales, use, service, real or personal property, special
assessments, capital stock, license, payroll, withholding, employment, social
security (or similar), workers' compensation, unemployment compensation,
disability, utility, severance, production, excise, stamp, occupation,
premiums, windfall profits, environmental (including taxes under Code Section
59A), customs duties, registration, alternative and add-on minimum, estimated,
transfer and gains taxes, or other tax of any kind whatsoever and (ii) in all
cases, including interest, penalties, additional taxes and additions to tax
imposed with respect thereto whether disputed or not; and "Tax Returns" shall
mean returns, reports, declarations, forms and information returns or
statements relating to Taxes including any schedule or attachment thereto
required to be filed with the IRS or any other federal, foreign, state, local
or provincial taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
(b) Other than as disclosed in Section 2.16(b) of the Company Disclosure
Schedule, (i) the Company and its subsidiaries have filed all Tax Returns
required to be filed by them and all such Tax Returns were correct and
complete in all material respects, (ii) the Company and its subsidiaries have
paid and discharged all Taxes due in connection with or with respect to the
periods or transactions covered by such Tax Returns and have paid all other
Taxes as are due, except such as are being contested in good faith by
appropriate proceedings (to the extent that any such proceedings are required)
and with respect to which the Company is maintaining adequate reserves, (iii)
no Tax Return referred to in clause (i) has been the subject of examination by
the Internal Revenue Service ("IRS") or the appropriate state, local or
foreign taxing authority of which written notice was received; (iv) no
deficiencies have been asserted or assessments made as a result of any
examinations of the Tax Returns referred to in clause (i) by the IRS or the
appropriate state, local or foreign taxing authority; (v) no action, suit,
proceeding, audit, claim, deficiency or assessment has been claimed or raised
or is pending with respect to any Taxes of the Company or any of its
subsidiaries; (vi) the Company and its subsidiaries have withheld from their
employees, customers, and other payees (and timely paid to the appropriate
governmental authority) all amounts required by the Tax withholding provisions
of applicable federal, state, local, and foreign laws (including, without
limitation, income, social security, and employment Tax withholding for all
types of compensation, and withholding on payments to non-United States
persons) for all periods; (vii) there has not been filed a consent under Code
section 341(f) concerning collapsible corporations with respect to the Company
or any of its subsidiaries; (viii) none of the Company or its subsidiaries has
made any payment, is obligated to make any payment, or is a party to any
agreement that could obligate it to make any payments that will not be
deductible under Code section 280G or be subject to the excise tax of Code
section 4999; (ix) no claim has ever been made by any authority in a
jurisdiction where any of the Company or its subsidiaries does not file Tax
Returns that it is or may be subject to tax by that jurisdiction; and (x)
there are no other Taxes that would be due if asserted by a taxing authority,
except with respect to which the Company is maintaining reserves to the extent
currently required unless the failure to do so could not reasonably be
expected to have a Material Adverse Effect. Except as does not involve or
would not result in liability to the Company or any of its subsidiaries that
could reasonably be expected to have a Material Adverse Effect: (i) there are
no tax liens on or security interests in any assets of the Company or any
subsidiary thereof; and (ii) neither the Company nor any of its subsidiaries
has granted any waiver of any statute of limitations with respect to, or any
extension of a period for the assessment of, any Tax. The accruals and
reserves for Taxes (including deferred taxes) reflected in the 1995 Company
Balance Sheet are in all material respects adequate to cover all Taxes
required to be accrued through the date thereof (including interest and
penalties, if any, thereon and Taxes being contested) in accordance with
generally accepted accounting principles.
(c) Neither the Company nor any of its subsidiaries is, or has been, a
United States real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code. To the best knowledge of the Company, neither
the Company nor any of its subsidiaries owns any property of a character, the
indirect transfer of which, pursuant to this Agreement, would give rise to any
material documentary, stamp or other transfer tax.
Section 2.17 Environmental Matters. Except as set forth in Section 2.17 of
the Company Disclosure Schedule, and except in all cases as, in the aggregate,
have not had and could not reasonably be expected to
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have a Material Adverse Effect, the Company and each of its subsidiaries: (i)
have obtained all Approvals which are required to be obtained under all
applicable federal, state, foreign or local laws or any regulation, code,
plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder relating to pollution or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic
materials or wastes into ambient air, surface water, ground water, or land or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes by the Company or its
subsidiaries or their respective agents ("ENVIRONMENTAL LAWS"); (ii) are in
compliance with all terms and conditions of such required Approvals, and also
are in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in applicable Environmental Laws; (iii) as of the date hereof, are
not aware of nor have received notice of any past or present violations of
Environmental Laws or any event, condition, circumstance, activity, practice,
incident, action or plan which is reasonably likely to interfere with or
prevent continued compliance with or which would give rise to any common law
or statutory liability, or otherwise form the basis of any claim, action, suit
or proceeding, against the Company or any of its subsidiaries based on or
resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling, or the emission, discharge or
release into the environment, of any pollutant, contaminant or hazardous or
toxic material or waste; and (iv) have taken all actions necessary under
applicable Environmental Laws to register any products or materials required
to be registered by the Company or its subsidiaries (or any of their
respective agents) thereunder.
Section 2.18 Intellectual Property.
(a) The Company, directly or indirectly, owns, or is licensed or otherwise
possesses legally enforceable rights to use, all inventions, patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, maskworks, net lists, schematics, technology, trade secrets,
research and development, know-how, technical data, computer software programs
or applications (in both source code and object code form), and tangible or
intangible proprietary information or material (excluding Commercial Software
as defined in paragraph (e) below) that are material to the business of the
Company and its subsidiaries as currently conducted or as proposed to be
conducted by the Company or its subsidiaries (the "COMPANY INTELLECTUAL
PROPERTY RIGHTS"). All of the Company's employees that have participated in
the development of the Company Intellectual Property have entered into
agreements with the Company assigning all right, title and interest in the
Company Intellectual Property therein to the Company.
(b) Section 2.18(b) of the Company Disclosure Schedule sets forth a complete
list of all patents, trademarks, registered copyrights, trade names and
service marks, and any applications therefor, included in the Company
Intellectual Property Rights, and specifies, where applicable, the
jurisdictions in which each such Company Intellectual Property Right has been
issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners.
(c) Section 2.18(c) of the Company Disclosure Schedule sets forth a complete
list of all material licenses, sublicenses and other agreements as to which
the Company or any of its subsidiaries is a party and pursuant to which the
Company, any of its subsidiaries or any other person is authorized to use any
Company Intellectual Property Right (excluding object code end-user licenses
granted to end-users in the ordinary course of business that permit use of
software products without a right to modify, distribute or sublicense the same
("END-USER LICENSES")) or other trade secret material to the Company or any of
its subsidiaries, and includes the identity of all parties thereto. None of
the Company or any of its subsidiaries is in violation of any license,
sublicense or agreement described on such list except such violations as do
not materially impair the Company's or such subsidiary's rights under such
license, sublicense or agreement. The execution and delivery of this Agreement
by the Company, and the consummation of the transactions contemplated hereby,
will neither cause the Company or any of its subsidiaries to be in violation
or default under any such license, sublicense or agreement, nor entitle any
other party to any such license, sublicense or agreement to terminate or
modify such license, sublicense or agreement, except as set forth on Section
2.18(c) of the Company Disclosure Schedule.
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(d) Except as disclosed in the Company Disclosure Schedule, either the
Company or one of its subsidiaries is the sole and exclusive owner or licensee
of, with all right, title and interest in and to (free and clear of any liens
or encumbrances) the Company Intellectual Property Rights, and has sole and
exclusive rights (and is not contractually obligated to pay any compensation
to any third party in respect thereof) to the use thereof or the material
covered thereby in connection with the services or products in respect of
which the Company Intellectual Property Rights are being used. Except as
disclosed in Section 2.18(d) of the Company Disclosure Schedule, none of the
Company and its subsidiaries has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any intellectual
property rights of third parties, and none of the Company and its subsidiaries
and the directors and officers (and employees with responsibility for Company
Intellectual Property Rights matters) of the Company has ever received any
charge, complaint, claim, demand, or notice which has not been finally and
definitively resolved alleging any such interference, infringement,
misappropriation, or violation (including any claim that the Company must
license or refrain from using any intellectual property rights of any third
party). Except as disclosed in the Company Disclosure Schedule, to the
knowledge of any of the Company and its subsidiaries and the directors and
officers (and employees with responsibility for Company Intellectual Property
Rights matters) of the Company and the subsidiaries, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Company Intellectual Property Rights. All registered
trademarks, service marks and copyrights held by the Company are valid and
subsisting. No Company Intellectual Property Right or product of the Company
or any of its subsidiaries is subject to any outstanding decree, order,
judgment, or stipulation restricting in any manner the licensing thereof by
the Company or any of its subsidiaries. Neither the Company nor any of its
subsidiaries has entered into any agreement under which the Company or its
subsidiaries is restricted from selling, licensing or otherwise distributing
any of its products to any class of customers, in any geographic area, during
any period of time or in any segment of the market. The Company and its
subsidiaries have a policy requiring each employee to execute a
confidentiality agreement substantially in the form previously delivered to
Parent.
(e) "Commercial Software" means packaged commercially available software
programs generally available to the public through retail dealers in computer
software which have been licensed to the Company or any of its subsidiaries
pursuant to end-user licenses and which are used in the Company's or its
subsidiaries' business but are in no way a component of or incorporated in or
specifically required to develop or support any of the Company's or its
subsidiaries' products and related trademarks, technology and know-how.
Section 2.19 Interested Party Transactions. Except as set forth in Section
2.19 of the Company Disclosure Schedule, since December 31, 1995, no event has
occurred that would be required to be reported as a Certain Relationship or
Related Transaction, pursuant to Item 404 of Regulation S-K promulgated by the
SEC.
Section 2.20 Insurance. All material fire and casualty, general liability,
business interruption, product liability, professional liability and sprinkler
and water damage insurance policies maintained by the Company or any of its
subsidiaries are in character and amount at least equivalent to that carried
by persons engaged in similar businesses and subject to the same or similar
perils or hazards, except as could not reasonably be expected to have a
Material Adverse Effect, and all such policies are with reputable insurance
carriers, provide full and adequate coverage for all normal risks incident to
the business of the Company and its subsidiaries and their respective
properties and assets.
Section 2.21 Accounts Receivable; Inventories; Fixed Assets.
(a) The accounts receivable of the Company and its subsidiaries as reflected
in the most recent Financial Statements, to the extent uncollected on the date
hereof and the accounts receivable reflected on the books of the Company and
its subsidiaries are valid and existing and represent monies due, are current
and collectible and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for receivables not collectible
in the ordinary course of business as reflected on the face of the August 3,
1996 Balance Sheet as adjusted for time through the Closing Date in accordance
with past practice and custom, and (subject to the aforesaid reserves) are
subject to no refunds or other adjustments and to no defenses, rights of
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setoff, assignments, restrictions, encumbrances or conditions enforceable by
third parties on or affecting any thereof.
(b) The inventory of the Company as reflected in the most recent Financial
Statements consists of raw materials and supplies, manufactured and purchased
parts, goods in process, and finished goods, all of which is merchantable and
fit or suitable and usable for the production or completion of merchantable
products for sale in the ordinary course of business, and none of which is
slow-moving, obsolete, below standard quality, damaged, or defective, subject
only to the reserve for inventory write down set forth on the face of the
August 3, 1996 Balance Sheet as adjusted for the passage of time through the
Closing Date in accordance with GAAP and the past custom and practice of the
Company and its subsidiaries. Each item of such inventory reflected in the
August 3 Balance Sheet and books and records of the Company is reflected on
the basis of a complete physical count. Since August 3, 1996, no inventory has
been sold or disposed of except through sales in the ordinary course of
business.
(c) The fixed assets of the Company are accurately reflected on the most
recent Financial Statements and consist of furniture and fixtures, computer
equipment, leasehold improvements and demonstration equipment, subject only to
the reserve for depreciation set forth on the face of the August 3, 1996
Balance Sheet as adjusted for the passage of time through the Closing Date in
accordance with GAAP and the past custom and practice of the Company and its
subsidiaries.
Section 2.22 Pooling Matters. Neither the Company nor any of its affiliates
has, to the best of the Company's knowledge and based upon consultation with
its independent accountants, taken or agreed to take any action that could
affect the ability of Parent to account for the business combination to be
effected by the Merger as a pooling of interests. The transaction contemplated
hereunder is to be effected and completed at the Closing Date all as set forth
in this Agreement. If required, the President or Chief Financial Officer of
the Company will execute any documentation on behalf of the Company reasonably
required by Parent's independent public accountants with respect to pooling-
of-interest accounting issues.
Section 2.23 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or its subsidiaries or affiliates.
Section 2.24 Change in Control Payments. Except as set forth on Section
2.11(d) or Section 2.24 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries have any plans, programs or agreements to
which they are parties, or to which they are subject, pursuant to which
payments may be required or acceleration of benefits may be required upon a
change of control of the Company.
Section 2.25 Expenses. Section 2.25 of the Company Disclosure Schedule
attached hereto sets forth a description of the estimated expenses of the
Company and its subsidiaries which the Company expects to incur, or has
incurred, in connection with the transactions contemplated by this Agreement.
Section 2.26 Full Disclosure. No representation or warranty made by the
Company contained in this Agreement and no statement contained in any
certificate or schedule furnished or to be furnished by the Company or its
subsidiaries to Parent or Merger Sub in, or pursuant to the provisions of,
this Agreement, including without limitation the Company Disclosure Schedule,
contains or shall contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary, in the light of the
circumstances under which it was made, in order to make statements herein or
therein not misleading.
ARTICLE III
Representations and Warranties of Parent and Merger Sub
Parent and Merger Sub hereby, jointly and severally, represent and warrant
to the Company that, except as set forth in the written disclosure schedule
delivered on or prior to the date hereof by Parent to the Company
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that is arranged in paragraphs corresponding to the numbered and lettered
paragraphs contained in this Article III (the "PARENT DISCLOSURE SCHEDULE"):
Section 3.1 Organization and Qualification; Subsidiaries. Each of Parent and
its subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority necessary to own, lease and operate
the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority
could not reasonably be expected to have a Material Adverse Effect. Each of
Parent and each of its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of its properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except for such failures to be so duly qualified or licensed and in good
standing that could not reasonably be expected to have a Material Adverse
Effect.
Section 3.2 Charter and By-Laws. Parent has heretofore furnished to the
Company a complete and correct copy of its Articles of Incorporation and By-
Laws, as amended to date. Such Articles of Incorporation and By-Laws are in
full force and effect. Neither Parent nor Merger Sub is in violation of any of
the provisions of its Articles of Incorporation or By-Laws.
Section 3.3 Capitalization. As of August 31, 1996, the authorized capital
stock of Parent consisted of (i) 240,000,000 shares of Parent Common Stock of
which 75,607,974 shares were issued and outstanding, all of which are validly
issued, fully paid and non-assessable, none of which were held in treasury,
14,375,000 shares were reserved for future issuance under Parent's equity
incentive plan, directors option plan and employee stock purchase plan and
(ii) 2,000,000 shares of preferred stock, $.01 par value per share, none of
which was issued and outstanding and none of which was held in treasury. No
material change in such capitalization has occurred between August 31, 1996
and the date hereof. The authorized capital stock of Merger Sub consists of
3,000 shares of common stock, $.01 par value, of which 100 shares are issued
and outstanding.
Section 3.4 Authority Relative to this Agreement. Each of Parent and Merger
Sub has all necessary corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Parent and Merger Sub and the consummation by Parent and Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Merger Sub, and no other
corporate proceedings on the part of Parent or Merger Sub are necessary to
authorize this Agreement or to consummate the transactions contemplated
thereby. This Agreement has been duly and validly executed and delivered by
Parent and Merger Sub and, assuming the due authorization, execution and
delivery by the Company, constitutes a legal, valid and binding obligation of
Parent and Merger Sub enforceable against each of them in accordance with its
terms.
Section 3.5 No Conflict, Required Filings and Consents.
(a) Except as set forth in Section 3.5(c) of the Parent Disclosure Schedule,
the execution and delivery of this Agreement by Parent and Merger Sub do not,
and the performance of this Agreement by Parent and Merger Sub will not, (i)
conflict with or violate the Articles of Incorporation or By-Laws of Parent or
Merger Sub, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or any of its subsidiaries or by which
its or their respective properties are bound or affected, or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or impair Parent's or any of
its subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Parent or any of its subsidiaries pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any of its
subsidiaries is a party or by which Parent or any of its subsidiaries or its
or any of their respective properties are bound or affected, except in any
such case for any such conflicts, violations, breaches, defaults or other
occurrences that could not reasonably be expected to have a Material Adverse
Effect.
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(b) The execution and delivery of this Agreement by Parent and Merger Sub
does not, and the performance of this Agreement by Parent and Merger Sub will
not, require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Securities
Act, the Exchange Act, the Blue Sky Laws, any foreign antitrust or similar
filings and the filing and recordation of appropriate merger or other
documents as required by the DCGL, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent Parent or Merger Sub from performing their respective
obligations under this Agreement, and would not have a Material Adverse
Effect.
Section 3.6 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
with the SEC and has heretofore delivered to the Company, in the form filed
with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years ended
February 29, 1996 and February 28, 1995, (ii) its Report on Form 10-Q for the
quarter ended May 31, 1996, (iii) all proxy statements relating to Parent's
meetings of stockholders (whether annual or special) since January 1, 1995,
(iv) all other reports or registration statements (other than Reports on Form
10-Q) filed by Parent with the SEC since January 1, 1996, and (v) all
amendments and supplements to all such reports and registration statements
filed by Parent with the SEC (collectively, the "PARENT SEC REPORTS"). The
Parent SEC Reports (i) were prepared in all material respects in accordance
with the requirements of the Securities Act or the Exchange Act, as the case
may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. None of Parent's subsidiaries is required to
file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports has been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents in all material
respects the consolidated financial position of Parent and its subsidiaries as
at the respective dates thereof and the consolidated results of its operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
Section 3.7 Registration Statement; Proxy Statement/Prospectus. Subject to
the accuracy of the representations of the Company in Section 2.13, the
registration statement (the "Registration Statement") pursuant to which the
Parent Common Stock to be issued in the Merger will be registered with the SEC
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements included therein, in light of the circumstances
under which they were made, not misleading. The information supplied by Parent
for inclusion in the Proxy Statement/Prospectus will not, on the date the
Proxy Statement/Prospectus (or any amendment or supplement thereto) is first
mailed to Shareholders of the Company, at the time of the Shareholders Meeting
and at the Effective Time, contain any statement which, at such time and in
light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or will omit to state any
material fact necessary in order to make the statements therein not false or
misleading. If at any time prior to the Effective Time any event relating to
Parent, Merger Sub or any of their respective affiliates, officers or
directors should be discovered by Parent or Merger Sub which should be set
forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement/Prospectus, Parent or Merger Sub will promptly inform the
Company. Notwithstanding the foregoing, Parent and Merger Sub make no
representation or warranty with respect to any information supplied by the
Company which is contained in any of the foregoing documents. The Registration
Statement and Proxy Statement/Prospectus shall comply in all material respects
as to form with the requirements of the Securities Act, the Exchange Act and
the rules and regulations thereunder. Notwithstanding the foregoing, Parent
makes no representation or warranty with respect
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to any information supplied by the Company which is contained in, or furnished
in connection with the preparation of, the Registration
Section 3.8 Pooling Matters. Neither Parent nor any of its affiliates has,
to Parent's knowledge and based upon consultation with its independent
accountants, taken or agreed to take any action that could affect the ability
of Parent to account for the business combination to be effected by the Merger
as a pooling of interests.
Section 3.9 Ownership of Merger Sub; No Prior Activities. As of the date
hereof and the Effective Time, except for obligations or liabilities incurred
in connection with its incorporation or organization and the transactions
contemplated by this Agreement and except for this Agreement and any other
agreements or arrangements contemplated by this Agreement, Merger Sub has not
and will not have incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or engaged in any business
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any person.
ARTICLE IV
Conduct of Business Pending the Merger
Section 4.1 Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, during the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, unless Parent, acting through its Chief
Financial Officer and any successor thereto, shall otherwise agree in writing,
the Company shall conduct its business and shall cause the businesses of its
subsidiaries to be conducted only in, and the Company and its subsidiaries
shall not take any action except in, the ordinary course of business and in a
manner consistent with past practice other than actions taken by the Company
or its subsidiaries in contemplation of the Merger and in accordance with the
operations budget attached hereto as Schedule 4.1(e); and the Company shall
use all reasonable commercial efforts to preserve substantially intact the
business organization of the Company and its subsidiaries, to keep available
the services of the present officers, employees and consultants of the Company
and its subsidiaries and to preserve the present relationships of the Company
and its subsidiaries with customers, suppliers and other persons with which
the Company or any of its subsidiaries has significant business relations. By
way of amplification and not limitation, except as contemplated by this
Agreement, neither the Company nor any of its subsidiaries shall, during the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, directly or indirectly
do, or propose to do, any of the following without the prior written consent
of Parent:
(a) amend or otherwise change the Charter or By-Laws of the Company or any
of its subsidiaries;
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of capital stock of
any class, or any options, warrants, convertible securities or other rights of
any kind to acquire any shares of capital stock, or any other ownership
interest (including, without limitation, any phantom interest) in the Company,
any of its subsidiaries or affiliates (except for the issuance of shares of
Company Common Stock issuable pursuant to Stock Options which were granted
under either the Company Stock Option Plans and are outstanding on the date
hereof or in connection with the Conversion or other conversion of the
Preferred Stock into shares of Company Common Stock).
(c) sell, pledge, dispose of or encumber any assets of the Company or any of
its subsidiaries (except for (i) sales of assets in the ordinary course of
business and in a manner consistent with past practice, (ii) dispositions of
obsolete or worthless assets, and (iii) sales of immaterial assets not in
excess of $50,000 in the aggregate);
(d) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, except that a wholly owned subsidiary of the Company
may declare and pay a dividend to its parent, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for
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shares of its capital stock (except for the issuance of shares of Company
Common Stock issuable pursuant to Stock Options which were granted under
either the Company Stock Option Plan and are outstanding on the date hereof or
in connection with the Conversion or other conversion of the Preferred Stock
into shares of Company Common Stock), or (iii) amend the terms or change the
period of exercisability of, purchase, repurchase, redeem or otherwise
acquire, or permit any subsidiary to purchase, repurchase, redeem or otherwise
acquire, any of its securities or any securities of its subsidiaries,
including, without limitation, shares of Company Common Stock or any option,
warrant or right, directly or indirectly, to acquire shares of Company Common
Stock, or propose to do any of the foregoing;
(e) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money calling for
aggregate payments in excess of $100,000 or issue any debt securities or
assume, guarantee or endorse or otherwise as an accommodation become
responsible for, the obligations of any person or, except in the ordinary
course of business consistent with past practice, make any loans or advances;
(iii) enter into or amend any material contract or agreement; (iv) authorize
any capital expenditures or purchase of fixed assets which are, in the
aggregate, in excess of $50,000, for the Company and its subsidiaries taken as
a whole; provided, however, that the Company and its subsidiaries may purchase
inventory in excess of such $50,000 limit if the purchase is in the ordinary
course of business and is contemplated by and in conformity with the
operations budget attached hereto as Schedule 4.1(e) or (v) enter into or
amend any contract, agreement, commitment or arrangement to effect any of the
matters prohibited by this Section 4.1(e);
(f) increase the compensation payable or to become payable to its officers
or employees, or grant any severance or termination pay to, or enter into any
employment or severance agreement with any director, officer or other employee
of the Company or any of its subsidiaries, or establish, adopt, enter into or
amend any collective bargaining, bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, agreement, trust, fund,
policy or arrangement for the benefit of any current or former directors,
officers or employees, except, in each case, as may be required by law
provided the Company may increase wages in the ordinary course of business
consistent with the Company's past practice and timing but not more than 10%
for any individual employee;
(g) take any action to change accounting policies or procedures (including,
without limitation, procedures with respect to revenue recognition, payments
of accounts payable and collection of accounts receivable);
(h) make any material tax election inconsistent with past practice or settle
or compromise any material federal, state, local or foreign tax liability or
agree to an extension of a statute of limitations;
(i) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice of liabilities reflected or reserved against
in the Financial Statements or incurred in the ordinary course of business and
consistent with past practice; or
(j) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1 (a) through (i) above, or any action which to the
Company's knowledge at the time the action is taken will cause any of the
representations or warranties of the Company contained in this Agreement to be
untrue or incorrect or prevent the Company from performing or cause the
Company not to perform its covenants hereunder.
Section 4.2 No Solicitation.
(a) The Company shall not, directly or indirectly, through any officer,
director, employee, representative or agent of the Company or any of its
subsidiaries, (i) solicit, initiate or encourage the initiation of any
inquiries or proposals regarding any merger, sale of substantial assets, sale
of shares of capital stock (including without limitation by way of a tender
offer) or similar transactions involving the Company or any subsidiaries of
the Company other than the Merger (any of the foregoing inquiries or proposals
being referred to herein as an
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"ACQUISITION PROPOSAL"), (ii) engage in negotiations or discussions
concerning, or provide any nonpublic information to any person relating to,
any Acquisition Proposal or (iii) agree to, approve or recommend any
Acquisition Proposal. Nothing contained in this Section 4.2(a) shall prevent
the Board of Directors of the Company from considering, negotiating and
furnishing information (subject to subsection (c) below) in connection with,
or approving, disclosing and recommending to the stockholders of the Company,
a bona fide Acquisition Proposal not solicited in violation of this Agreement,
provided the Board of Directors of the Company has been advised in writing by
its independent counsel that its failure to do so would be a violation of its
fiduciary duties under Delaware law.
(b) The Company shall immediately notify Parent after receipt of any
Acquisition Proposal, or any modification of or amendment to any Acquisition
Proposal, or any request for nonpublic information relating to the Company or
any of its subsidiaries in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company or any subsidiary by
any person or entity that informs the Board of Directors of the Company or
such subsidiary that it is considering making, or has made, an Acquisition
Proposal. Such notice to Parent shall be made orally and in writing, and shall
indicate whether the Company is providing or intends to provide the person
making the Acquisition Proposal with access to information concerning the
Company as provided in Section 4.2(c).
(c) If the Board of Directors of the Company receives a request for material
nonpublic information by a person who makes a bona fide Acquisition Proposal,
and the Board of Directors determines in good faith and upon the advice of
independent counsel that it is required to cause the Company to act as
provided in this Section 4.2(c) in order to discharge properly the directors'
fiduciary duties, then, provided the person making the Acquisition Proposal
has executed a confidentiality agreement substantially similar to the one then
in effect between the Company and Parent, the Company may provide such person
with access to information regarding the Company.
(d) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any persons (other than Parent and
Merger Sub) conducted heretofore with respect to any of the foregoing. The
Company agrees not to release any third party from the confidentiality
provisions of any confidentiality agreement to which the Company is a party.
(e) The Company shall ensure that the officers, directors and employees of
the Company and its subsidiaries and any investment banker or other advisor or
representative retained by the Company are aware of the restrictions described
in this Section 4.2.
ARTICLE V
Additional Agreements
Section 5.1 Proxy Statement/Prospectus; Registration Statement. As promptly
as practicable after the execution of this Agreement, the Company and Parent
shall prepare and file with the SEC preliminary proxy materials which shall
constitute the Proxy Statement/Prospectus and the Registration Statement of
the Parent with respect to the Parent Common Stock to be issued in connection
with the Merger and shall use all reasonable efforts to cause the Registration
Statement to become effective as soon as practicable, and to mail
the Proxy Statement/Prospectus to Company shareholders, as soon thereafter as
practicable. The Proxy Statement/Prospectus shall include the recommendation
of the Boards of Directors of the Company and Parent in favor of the Merger;
provided, that the Board of Directors of the Company may, at any time prior to
the Effective Time, withdraw, modify or change such recommendation if, in the
opinion of the Board of Directors of the Company, it is required to withdraw,
modify or change such recommendation in the discharge of its fiduciary duties
under applicable law (after receiving advice from its independent legal
counsel to such effect).
Section 5.2 Stockholder Meeting. The Company shall call and hold the
Stockholder Meeting as promptly as practicable after the date on which the
Registration Statement becomes effective and in accordance with
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applicable laws for the purpose of obtaining the approval of the Merger, this
Agreement, the Conversion, and the transactions contemplated hereby. The
Company shall use all its best efforts to solicit from (i) all of its
stockholders and the holders of the Preferred Stock proxies in favor of
adoption of the Merger, this Agreement and approval of the transactions
contemplated hereby; (ii) holders of its 1993 Series, 1994 Series and 1996
Series preferred stock approval of the Conversion; and shall take all other
action necessary or advisable to secure the vote or consent of stockholders to
obtain such approvals.
Section 5.3 Access to Information; Confidentiality. Upon reasonable notice
and subject to restrictions contained in confidentiality agreements to which
such party is subject (from which such party shall use reasonable efforts to
be released), the Company and Parent shall each (and shall cause each of their
subsidiaries to) afford to the officers, employees, accountants, counsel and
other representatives of the other, reasonable access, during the period to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, the Company and Parent each shall (and shall
cause each of their subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request, and each shall make available to the other the
appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the other's business, properties and
personnel as either Parent or the Company may reasonably request. In
performing this review, Parent agrees that prior to contacting any employee or
customer of the Company, Parent and the Company will reasonably concur on a
process and procedure in order to preserve ongoing customer and employee
relations. Each party shall keep such information confidential in accordance
with the terms of the confidentiality letter dated September 4, 1996 between
Parent and the Company.
Section 5.4 Consents; Approvals. The Company and Parent shall each use their
reasonable best efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United States and
foreign governmental and regulatory rulings and approvals), and the Company
and Parent shall make all filings (including, without limitation, all filings
with United States and foreign governmental or regulatory agencies) required
in connection with the authorization, execution and delivery of this Agreement
by the Company and Parent and the consummation by them of the transactions
contemplated hereby, in each case as promptly as practicable. The Company and
Parent shall furnish promptly all information required to be included in the
Proxy Statement/Prospectus and the Registration Statement, or for any
application or other filing to be made pursuant to the rules and regulations
of any United States or foreign governmental body in connection with the
transactions contemplated by this Agreement.
Section 5.5 Agreements with Respect to Affiliates. Schedule 5.5 contains a
true and complete list identifying all persons who are, or will be, at the
time of the Company Stockholders Meeting, "affiliates" of the Company for
purposes of Rule 145 under the Securities Act ("RULE 145"). The Company shall
cause each person who is identified as an "affiliate" to deliver to Parent,
prior to the Effective Time, a written agreement (an "AFFILIATE AGREEMENT") in
connection with restrictions on affiliates under Rule 145 and pooling of
interests accounting treatment, in substantially the form of Exhibit 5.5.
Section 5.6 Notification of Certain Matters. The Company shall give prompt
notice to Parent (for purposes of this Section 5.6, notice to or by the Chief
Financial Officer of Parent shall constitute notice to or by Parent), and
Parent shall give prompt notice to the Company, of (i) the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty contained in this Agreement to
become materially untrue or inaccurate, or (ii) any failure of the Company,
Parent or Merger Sub, as the case may be, materially to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice; and provided further that failure to give
such notice shall not be treated as a breach of covenant for the purposes of
Sections 6.2(a) or 6.3(a) unless the failure to give such notice results in
material prejudice to the other party.
Section 5.7 Further Action/Tax Treatment. Upon the terms and subject to the
conditions hereof each of the parties hereto shall use all reasonable efforts
to take, or cause to be taken, all actions and to do, or cause to
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be done, all other things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by
this Agreement, to obtain in a timely manner all necessary waivers, consents
and approvals and to effect all necessary registrations and filings, and
otherwise to satisfy or cause to be satisfied all conditions precedent to its
obligations under this Agreement. The foregoing covenant shall not include any
obligation by Parent to agree to divest, abandon, license or take similar
action with respect to any assets (tangible or intangible) of Parent or the
Company. Each of Parent, Merger Sub and the Company shall use its best efforts
to cause the Merger to qualify, and will not (both before and after
consummation of the Merger) take any actions which to its knowledge could
reasonably be expected to prevent the Merger from qualifying, as a
reorganization under the provisions of Section 368 of the Code.
Section 5.8 Public Announcements. Parent and the Company shall consult with
each other before issuing any press release with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that Parent may, without the prior
consent of the Company, issue such press release or make such public statement
as may upon the advice of counsel be required by law or the rules and
regulations of the New York Stock Exchange if it has used all reasonable
efforts to consult with the other party prior thereto.
Section 5.9 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding any real property transfer or
gains, sales, use, transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar taxes which
become payable in connection with the transactions contemplated hereby that
are required or permitted to be filed at or before the Effective Time.
Section 5.10 Accountants' Letters. The Company and Parent shall cause Ernst
& Young LLP, in the case of the Company, or KPMG Peat Marwick L.L.P, in the
case of Parent, to deliver to the other party, a letter, dated on or before
the date the Proxy Statement/Prospectus is mailed to the Company's
stockholders in connection with the Stockholders Meeting, covering such
matters as are requested by Parent or the Company, as the case may be, and as
are customarily addressed in accountant's "comfort" letters.
Section 5.11 Pooling Accounting Treatment. Each of Parent and the Company
agrees not to take any action that to its knowledge could reasonably be
expected to adversely affect the ability of Parent to treat the Merger as a
pooling of interests, and each of Parent and the Company agrees to take such
action as may be reasonably required to negate the impact of any past actions
which to its knowledge could reasonably be expected to adversely impact the
ability of Parent to treat the Merger as a pooling of interests. The taking by
Parent or the Company of any action prohibited by the previous sentence, or
the failure of Parent or the Company to take any action required by the
previous sentence, shall, if the Merger is not able to be accounted for as a
pooling of interests, constitute a breach of this Agreement by Parent or the
Company, as the case may be, for the purposes of Section 7.1(f).
Section 5.12 Non-Solicitation. If the transactions contemplated by this
Agreement are not consummated, Parent and its affiliates shall not, for a
period of one year from the date of this Agreement, directly or indirectly
solicit any consultant listed on Schedule 5.12 or any employee of the Company
or any of its subsidiaries to terminate such consultant's agreement with the
Company or such employee's employment with the Company or any of its
subsidiaries. Nothing herein shall prevent Parent from hiring any such
employee or consultant provided Parent has not violated the first sentence of
this Section 5.12.
Section 5.13 Benefit Plans. All welfare benefit plans of Parent or the
Surviving Corporation in which the Company's employees participate after the
Effective Time shall (i) recognize expenses and claims that were incurred by
the Company's employees in the year in which the Effective Time occurs and
entitle Company employees to applicable copayments and deductibles, if any, at
a rate not higher than that in effect under the corresponding welfare benefit
plan of the Company in effect at the Effective Time and (ii) provide coverage
for pre-existing health conditions to the extent covered under the applicable
plans or programs of the Company as of the Effective Time. In addition, for
eligibility and vesting purposes (but not for benefit computation or accrual
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purposes) under plans of the Surviving Corporation or the Parent, service by
an Employee for the Company prior to the Effective Time shall be taken into
account to the same extent as service for the Parent; provided, that nothing
herein shall require the inclusion of any such Employee in any such plan prior
to the Effective Time; and further provided, that in determining the amount of
vacation pay owed to any such Employee from and after the Effective Time under
the applicable terms of the vacation pay plan of the Surviving Corporation or
the Parent (which terms need not be comparable to the terms of the vacation
plan or policy of the Company), credit shall be given for such Employee's
service for the Company prior to the Effective Time.
ARTICLE VI
Conditions to the Merger
Section 6.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Effectiveness of the Registration Statement. The Registration Statement
shall have been declared effective by the SEC under the Securities Act. No
stop order suspending the effectiveness of the Registration Statement shall
have been issued by the SEC and no proceedings for that purpose and no similar
proceeding in respect of the Proxy Statement/Prospectus shall have been
initiated or threatened by the SEC;
(b) Requisite Approvals; Conversion of Series E Preferred Stock. This
Agreement, the Merger and the Conversion shall have received the Requisite
Approvals, the holders of the Series E Preferred Stock shall have converted
such shares into shares of the Company's Common Stock and the required
shareholders of the Company shall have approved, pursuant to Section 280G of
the Code, any payments that could be treated as "excess 280G payments"
occurring as a result of the Merger;
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect, nor shall any proceeding
brought by any administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, seeking any of the
foregoing be pending; and there shall not be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to
the Merger, which makes the consummation of the Merger illegal; and
(d) Governmental Actions. There shall not have been instituted, pending or
threatened any action or proceeding (or any investigation or other inquiry
that might result in such an action or proceeding) by any governmental
authority or administrative agency before any governmental authority,
administrative agency or court of competent jurisdiction, nor shall there be
in effect any judgment, decree or order of any governmental authority,
administrative agency or court of competent jurisdiction, in either case,
seeking to prohibit or limit Parent from exercising all material rights and
privileges pertaining to its ownership of the Surviving Corporation or the
ownership or operation by Parent or any of its subsidiaries of all or a
material portion of the business or assets of Parent or any of its
subsidiaries, or seeking to compel Parent or any of its subsidiaries to
dispose of or hold separate all or any material portion of the business or
assets of Parent or any of its subsidiaries (including the Surviving
Corporation and its subsidiaries), as a result of the Merger or the
transactions contemplated by this Agreement.
Section 6.2 Additional Conditions to Obligations of Parent and Merger
Sub. The obligations of Parent and Merger Sub to effect the Merger are also
subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
respects at and as of the Effective Time as if made at and as of such time,
except for (i) changes contemplated by this Agreement, (ii) those
representations and warranties which
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address matters only as of a particular date (which shall have been true and
correct as of such date, subject to clause (iii)), and (iii) where the failure
to be true and correct could not reasonably be expected to have a Material
Adverse Effect, with the same force and effect as if made at and as of the
Effective Time, and Parent and Merger Sub shall have received a certificate to
such effect signed by the President and the Chief Financial Officer of the
Company;
(b) Agreements and Covenants. The Company shall have performed or complied
with all agreements and covenants required by this Agreement to be performed
or complied with by it at or prior to the Effective Time and Parent and Merger
Sub shall have received a certificate to such effect signed on behalf of the
Company by the President and the Chief Financial Officer of the Company;
(c) Consents Obtained. All consents, waivers, approvals, authorizations or
orders required to be obtained, and all filings required to be made, by the
Company for the due authorization, execution and delivery of this Agreement
and the consummation by it of the transactions contemplated hereby shall have
been obtained and made by the Company except as set forth on Section 2.5 of
the Company Disclosure Schedule;
(d) Opinion of Counsel to the Company. Parent shall have received an opinion
of Testa, Hurwitz & Thibeault, counsel to the Company in form and substance as
set forth on Exhibit 6.2(d) attached hereto;
(e) Tax Opinion. Parent shall have received an opinion of Ropes & Gray, in
form and substance reasonably satisfactory to Parent, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368 of
the Code;
(f) Letters of Accountant. Parent shall have received letters of each of
KPMG Peat Marwick LLP and Ernst & Young LLP, independent certified public
accountants, to the effect that the Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with this Agreement;
(g) Affiliate Agreements. Parent shall have received from each person who is
identified in Schedule 5.5 as an "affiliate" of the Company, an Affiliate
Agreement, and such Affiliate Agreement shall be in full force and effect;
(h) Registration Rights. All existing registration rights of holders of
Company securities shall have been terminated and Parent and Merger Sub shall
have received a certificate to such effect signed on behalf of the Company by
the President and the Chief Financial Officer of the Company;
(i) Escrow Agreement. Each of Escrow Agent, the Company and the Stockholder
Representative shall have executed and delivered to Parent an Escrow Agreement
substantially in the form of Exhibit 6.2(i); and
(j) Employment Agreements. (i) Each of the persons listed on Exhibit
6.2(j)(1) shall have entered into employment/non-competition agreements with
Parent in substantially the form attached as Exhibit 6.2(j)(2), such
agreements shall be in full force and effect as of the Effective Time and such
persons shall be in the employ of the Company immediately prior to the
Effective Time and (ii) each of the persons listed on Exhibit 6.2(j)(3) shall
have entered into employment and non-competition agreements with Parent in
substantially the form attached as Exhibit 6.2(j)(4), such agreements shall be
in full force and effect as of the Effective Time and such persons shall be in
the employ of the Company immediately prior to the Effective Time.
(k) Company Dissenting Shares. The number of Company Dissenting Shares shall
not exceed 10% of the number of outstanding shares of Company Common Stock at
the Effective Time.
Section 6.3 Additional Conditions to Obligation of the Company. The
obligation of the Company to effect the Merger is also subject to the
following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct in
all respects on and as of the Effective Time, except for
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(i) changes contemplated by this Agreement, (ii) those representations and
warranties which address matters only as of a particular date (which shall
have been true and correct as of such date, subject to clause (iii)), and
(iii) where the failure to be true and correct could not reasonably be
expected to have a Material Adverse Effect, with the same force and effect as
if made on and as of the Effective Time, and the Company shall have received a
certificate to such effect signed by the Chairman and the Chief Financial
Officer of Parent;
(b) Agreements and Covenants. Parent and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Effective, and the Company shall have received a certificate to such effect
signed by the Chairman and the Chief Financial Officer of Parent;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by Parent and Merger Sub for the authorization, execution and
delivery of this Agreement and the consummation by them of the transactions
contemplated hereby shall have been obtained and made by Parent and Merger
Sub;
(d) Tax Opinions. The Company shall have received a written opinion of
Testa, Hurwitz & Thibeault, in form and substance reasonably satisfactory to
the Company, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Code;
(e) Opinion of Counsel to Parent. The Company shall have received an opinion
of Ropes & Gray, counsel to Parent, in form and substance as set forth on
Exhibit 6.3(e) attached hereto;
(f) Letters of Accountant. The Company shall have received a copy of the
letters referred to in Section 6.2(f) above; and
(g) Listing of Parent Shares. Parent shall cause the Parent Shares to be
issued in the Merger to be approved for quotation, upon official notice of
issuance, on the New York Stock Exchange.
ARTICLE VII
Termination
Section 7.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, notwithstanding approval thereof by the stockholders of
the Company or Parent:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and the Company; or
(b) by either Parent or the Company if the Merger shall not have been
consummated by February 28, 1997 (provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of
or resulted in the failure of the Merger to occur on or before such date); or
(c) by either Parent or the Company if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued a nonappealable final order, decree or ruling or taken any other action
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger (provided that the right to terminate this Agreement
under this Section 7.1(c) shall not be available to any party who has not
complied with its obligations under Section 5.7 and such noncompliance
materially contributed to the issuance of any such order, decree or ruling or
the taking of such action); or
(d) by Parent or the Company, if the Requisite Approvals and the conversion
of the shares of the Series E Preferred Stock into shares of the Company's
Common Stock shall not have been obtained by February 28, 1997; or
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(e) by Parent, if: (i) the Board of Directors of the Company shall withdraw,
modify or change its approval or recommendation of this Agreement, the Merger
or the Conversion Proposal in a manner adverse to Parent or shall have
resolved to do so; (ii) the Board of Directors of the Company shall have
recommended to the stockholders of the Company an Alternative Transaction (as
defined below); or (iii) a tender offer or exchange offer for 25% or more of
the outstanding shares of Company Common Stock is commenced (other than by
Parent or an affiliate of Parent) and the Board of Directors of the Company
recommends that the stockholders of the Company tender their shares in such
tender or exchange offer; or
(f) by Parent or the Company, (i) if any representation or warranty of the
Company or Parent, respectively, set forth in this Agreement shall be untrue
when made, or (ii) upon a breach of any covenant or agreement on the part of
the Company or Parent, respectively, set forth in this Agreement, such that
the conditions set forth in Section 6.2(a) or 6.2(b), or Section 6.3(a) or
6.3(b), as the case may be, would not be satisfied (either (i) or (ii) above
being a "Terminating Breach"), provided, that, if such Terminating Breach is
curable prior to February 28, 1997 by the Company or Parent, as the case may
be, through the exercise of its reasonable best efforts and for so long as the
Company or Parent, as the case may be, continues to exercise such reasonable
best efforts, neither Parent nor the Company, respectively, may terminate this
Agreement under this Section 7.1(f); or
(g) by Parent, if any representation or warranty of the Company shall have
become untrue such that the condition set forth in Section 6.2(a) would not be
satisfied, or by the Company, if any representation or warranty of Parent
shall have become untrue such that the condition set forth in Section 6.3(a)
would not be satisfied, in either case other than by reason of a Terminating
Breach;
(h) by Parent, if any person (or "group", as defined in Section 13(d)(3) of
the Exchange Act) other than Parent or its affiliates is or becomes the
beneficial owner of 25% or more of the outstanding Shares; or
(i) by Parent or the Company, if the Company enters into a definitive
agreement relating to an Alternative Transaction.
As used herein, "Alternative Transaction" means any of (i) a transaction
pursuant to which any person (or group of persons) other than Parent or its
affiliates (a "Third Party") acquires or would acquire more than 25% of the
outstanding Shares, whether from the Company or pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger or other business combination
involving the Company pursuant to which any Third Party acquires more than 25%
of the outstanding equity securities of the Company or the entity surviving
such merger or business combination, or (iii) any other transaction pursuant
to which any Third Party acquires or would acquire control of assets
(including for this purpose the outstanding equity securities of subsidiaries
of the Company, and the entity surviving any merger or business combination
including any of them) of the Company or any of its subsidiaries having a fair
market value (as determined by the Board of Directors of the Company in good
faith) equal to more than 25% of the fair market value of all the assets of
the Company and its subsidiaries, taken as a whole, immediately prior to such
transaction.
Section 7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto or any of its
affiliates, directors, officers or stockholders except (i) as set forth in
Section 7.3 and Section 8.1 hereof, and (ii) nothing herein shall relieve any
party from liability for any breach hereof.
Section 7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated; provided, however, that the Parent shall pay the fees and
expenses, incurred in connection with the printing of the Proxy
Statement/Prospectus (including any preliminary materials related thereto and
including any registration fees payable to the SEC) and any amendments or
supplements thereto, and, in the event the Merger is consummated, the
Surviving Corporation shall be responsible for the legal and
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accounting fees of the Company in an amount not to exceed $85,000 and the
stockholders will be responsible for any balance (the "Excess Fees and
Expenses").
(b) The Company shall pay Parent a fee of $2,800,000 (the "Fee"), plus
actual, documented and reasonable out-of-pocket expenses of Parent relating to
the transactions contemplated by this Agreement (including, but not limited
to, fees and expenses of Parent's counsel, accountants and financial
advisers), upon the first to occur of the following events:
(i) the termination of this Agreement by Parent or the Company pursuant
to Section 7.1(d) as a result of the failure to receive the requisite vote
for approval and adoption of the Merger Agreement by the Shareholders of
the Company by February 28, 1997 or the failure of the holders of the
shares of the Series E Preferred Stock to convert such shares into shares
of the Company's Common Stock by such date; provided, however, that Parent
shall only be entitled to be paid the Fee under this Section 7.3(b)(i) if
the Board of Directors of the Company has withdrawn, modified or changed
its recommendation of the Merger in a manner adverse to Parent or if the
Company enters into an Alternative Transaction within nine months of the
date of termination by Parent;
(ii) the termination of this Agreement by Parent pursuant to Section
7.1(e); or
(iii) the termination of this Agreement by Parent or the Company pursuant
to Section 7.1(f) on account of a Terminating Breach by the Company, but
only if the Company enters into an Alternative Transaction within nine
months of the date of termination by Parent; or
(iv) the termination of this Agreement by Parent pursuant to Section
7.1(h); or
(v) the termination of this Agreement by the Parent or the Company
pursuant to Section 7.1(i).
(c) The Fee and related expenses payable pursuant to Section 7.3(b) shall be
paid within one business day after the first to occur of any of the events
described in Section 7.3(b)(i)-(v).
ARTICLE VIII
General Provisions
Section 8.1 Indemnification.
(a) Charters and By-Laws. Parent agrees that all rights to indemnification
or exculpation now existing in favor of the employees, agents, directors or
officers of the Company (the "Company Indemnified Parties") as provided in its
charter or By-Laws shall continue in full force and effect for a period of not
less than six years from the Closing Date; provided, however, that, in the
event any claim or claims are asserted or made within such six-year period,
all rights to indemnification in respect of any such claim or claims shall
continue until disposition of any and all such claims. Any determination
required to be made with respect to whether a Company Indemnified Party's
conduct complies with the standards set forth in the charter or By-Laws of the
Company or otherwise shall be made by independent counsel selected by the
Company Indemnified Party reasonably satisfactory to the Surviving Corporation
(whose fees and expenses shall be paid by the Surviving Corporation). From and
after the Effective Time, the Parent shall guarantee the obligations of the
Surviving Corporation under this Section 8.1.
(b) Survival of Representations and Warranties.
(i) The representations and warranties of the Company made in this
Agreement and in the documents and certificates delivered in connection
herewith, except for the representations and warranties of the Company made
in Sections 2.7 and 2.21 of this Agreement, shall survive the Merger for a
period of one year from the Closing Date and shall remain operative and in
full force and effect regardless of any investigation made by or on behalf
of any other party hereto, any person controlling any such party or any of
their officers or directors, whether prior to or after the execution of
this Agreement. The representations and warranties of the Company made in
Sections 2.7 and 2.21 of this Agreement shall survive the Merger until the
earlier of (i) one year from the Closing Date or (ii) the release by Parent
of the combined audited financial statements of Parent and the Company.
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(ii) No claim for indemnification under this Section 8.1 for breach of a
representation or warranty may be commenced after the first anniversary of
the Closing Date, provided, however, that claims made within the applicable
time period shall survive to the extent of such claim until such claim is
finally determined and, if applicable, paid.
(c) Indemnification of the Parent and Merger Sub. By their approval of this
Agreement and their acceptance of the Merger Consideration, the stockholders
agree that the Escrow Account established under the Escrow Agreement shall be
available to indemnify, defend, protect, and hold harmless each of Parent,
Merger Sub, the Surviving Corporation and each of their respective
subsidiaries and affiliates (each in its capacity as an indemnified party, an
"Indemnitee") at all times from and after the date of this Agreement from and
against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
(collectively "Damages") incurred by such Indemnitee as a result of or
incident to (i) any breach of any representation or warranty of the Company
set forth herein or in any certificate or other document delivered in
connection herewith (as such representation or warranty would read if all
qualifications as to knowledge and materiality were deleted from it) with
respect to which a claim for indemnification is brought by an Indemnitee
within the applicable survival period, if any, described in Section 8.1(b),
(ii) any breach or nonfulfillment by the Company, or any noncompliance by the
Company with, any covenant, agreement, or obligation contained herein or in
any certificate or other document delivered in connection herewith except to
the extent waived by Parent, (iii) any claim by a stockholder or former
stockholder of the Company or any other person, firm, corporation or entity,
seeking to assert, or based upon: (A) ownership or rights of ownership to any
shares of capital stock of the Company; (B) any rights of the stockholder
(other than the right to receive the Merger Consideration pursuant to this
Agreement or appraisal rights under the applicable provisions of the DGCL),
including any option, preemptive rights, or rights to notice or to vote; (C)
any rights under the charter or bylaws of the Company; or (D) any claim that
his, her or its shares were wrongfully repurchased by the Company, regardless
of whether an action, suit or preceding can or has been made against the
Company, (iv) any Excess Fees and Expenses or (v) any matter listed on
Schedule 8.1(c).
(d) Third Person Claims. Promptly after an Indemnitee has received notice of
or has knowledge of any claim by a person not a party to this Agreement
("Third Person") or the commencement of any action or proceeding by a Third
Person, the Indemnitee shall, as a condition precedent to a claim with respect
thereto being made against the Escrow Agreement, give the Stockholders'
Representative written notice of such claim or the commencement of such action
or proceeding; provided, however, that the failure to give such notice will
not effect the Indemnities' right to indemnification hereunder with respect to
such claim, action or proceeding, except to the extent that the Stockholders'
Representative has, or the stockholders have, been actually prejudiced as a
result of such failure. If the Stockholder Representative notifies the
Indemnitee within 30 days from the receipt of the foregoing notice that he
wishes to defend against the claim by the Third Person and if the estimated
amount of the claim, together with all other claims made against the Escrow
Funds that have not been settled, is less than the remaining balance of the
Escrow Funds, then the Stockholder Representative shall have the right to
assume and control the defense of the claim by appropriate proceedings with
counsel reasonably acceptable to Indemnitee, and the Stockholder
Representative shall be entitled to reimbursement out of the Escrow Funds for
such defense. The Indemnitee may participate in the defense, at its sole
expense of any such claim for which the Stockholder Representative shall have
assumed the defense pursuant to the preceding sentence, provided that counsel
for the Stockholder Representative shall act as lead counsel in all matters
pertaining to the defense or settlement of such claims, suit or proceedings;
provided, however, that Indemnitee shall control the defense of any claim or
proceeding that in Indemnitee's reasonable judgment could have a material and
adverse effect on Indemnitee's business apart from the payment of money
damages. The Indemnitee shall be entitled to indemnification for the
reasonable fees and expenses of its counsel for any period during which the
Stockholder Representative has not assumed the defense of any claim. Whether
or not the Stockholder Representative shall have assumed the defense of any
claim, neither the Indemnitee nor the Stockholder Representative shall make
any settlement with respect to any such claim, suit or proceeding without the
prior consent of the other, which consent shall not be unreasonably withheld
or delayed. It is understood and agreed that in situations where failure to
settle a claim expeditiously could have an adverse effect on the party wishing
to settle, the failure of the party
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controlling the defense to act upon a request for consent to such settlement
within five business days of receipt of notice thereof shall be deemed to
constitute consent to such settlement for purposes of this Section 8.1.
(e) Limitations on Indemnification. No Indemnified Party shall be entitled
to indemnification under this Section 8.1 for Damages relating to breaches of
representations and warranties set forth herein or in any certificate or
document delivered in connection herewith all as provided in Section
8.1(c)(i), until the aggregate amount of Damages incurred by such Person or
Persons exceeds $250,000, in which event such Persons shall be entitled to
indemnification for all Damages. The limitation provided in this Section
8.1(e) on an Indemnified Party's right to indemnification under Section 8.1
shall not apply to Damages for any matters set forth in Sections 8.1(c)(ii)-
(iv). Notwithstanding any provision in this Agreement to the contrary, all
Damages shall be net of any insurance proceeds actually received that are
attributable to such Damages.
(f) Method of Payment. The aggregate liability of the stockholders of the
Company with respect to the matters set forth in Section 8.1 shall not exceed
the aggregate amount available in the Escrow Account and all claims for
indemnification shall be paid solely from the Escrow Account. No stockholder
shall have any personal obligation to indemnify Parent, or Merger Sub or
Surviving Corporation under this Section 8.1. To the extent that Parent,
Merger Sub, or the Surviving Corporation makes a claim against the Escrow
Account pursuant to the Escrow Agreement, and such claim is paid in shares of
Parent Common Stock, then for purposes of such payment, the shares of Parent
Common Stock shall be valued at the Parent Stock Price.
Section 8.2 Survival, Etc.
(a) The agreements set forth in Section 8.1 shall survive independently and
Article I and Section 5.7 shall survive the Effective Time indefinitely and
those set forth in Section 7.3 shall survive such termination indefinitely.
(b) Any disclosure made with reference to one or more sections of the
Company Disclosure Schedule or the Parent Disclosure Schedule shall be deemed
disclosed only with respect to such section or sections.
Section 8.3 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly
given or made if and when delivered personally or by overnight courier to the
parties at the following addresses or sent by electronic transmission, with
confirmation received, to the telecopy numbers specified below (or at such
other address or telecopy number for a party as shall be specified by like
notice):
(a) If to Parent or Merger Sub:
Cabletron Systems, Inc.
35 Industrial Way
Rochester, NH 03866-5005
Telecopier No.: (603) 332-4616
Telephone No.: (603) 332-9400
Attention: Chief Financial Officer
With a copy to:
David A. Fine, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
Telecopier No.: (617) 951-7050
Telephone No.: (617) 951-7000
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(b) If to the Company:
Netlink, Inc.
1881 Worcester Road
Framingham, MA 01701
Telecopier No.: (508) 872-8136
Telephone No.: (508) 370-9514
Attention: President
With a copy to:
John M. Hession, Esq.
Testa, Hurwitz & Thibeault
125 High Street
Boston, MA 02110
Telecopier No.: (617) 248-7000
Telephone No.: (617) 248-7100
Section 8.4 Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliates" means a person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person; including, without limitation, any
partnership or joint venture in which the first mentioned person (either
alone, or through or together with any other subsidiary) has, directly or
indirectly, an interest of 5% or more;
(b) "beneficial owner" with respect to any shares of Company Common Stock
means a person who shall be deemed to be the beneficial owner of such shares
(i) which such person or any of its affiliates or associates (as such term is
defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such person or any of its affiliates or associates has,
directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (B) the right
to vote pursuant to any agreement, arrangement or understanding, or (iii)
which are beneficially owned, directly or indirectly, by any other persons
with whom such person or any of its affiliates or associates has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any shares;
(c) "business day" means any day other than a Saturday or Sunday or any day
on which banks in The Commonwealth of Massachusetts are required or authorized
to be closed;
(d) "control" (including the terms "controlled by" and "under common control
with") means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the management or policies of
a person, whether through the ownership of stock, as trustee or executor, by
contract or credit arrangement or otherwise;
(e) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d)(3) of the Exchange Act); and
(f) "subsidiary" or "subsidiaries" of the Company, Parent or any other
person means any corporation, partnership, joint venture or other legal entity
of which the Company, the Surviving Corporation, Parent or such other person,
as the case may be (either alone or through or together with any other
subsidiary), owns, directly or indirectly, more than 50% of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
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Section 8.5 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of
the Merger by the stockholders of the Company, no amendment may be made which
by law requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
Section 8.6 Waiver. At any time prior to the Effective Time, any party
hereto may with respect to any other party hereto (a) extend the time for the
performance of any of the obligations or other acts, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, or (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid only if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
Section 8.7 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 8.8 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to
the fullest extent possible.
Section 8.9 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and undertakings (other than the
Confidentiality Letters), both written and oral, among the parties, or any of
them, with respect to the subject matter hereof.
Section 8.10 Assignment; Guarantee of Merger Sub Obligations. This Agreement
shall not be assigned by operation of law or otherwise, except that Parent and
Merger Sub may assign all or any of their rights hereunder to any affiliate
thereof provided that no such assignment shall relieve the assigning party of
its obligations hereunder. Parent guarantees the full and punctual performance
by Merger Sub of all the obligations hereunder of Merger Sub or any such
assignees.
Section 8.11 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement, including, without limitation, by way of
subrogation, other than Section 8.1(a) (which is intended to be for the
benefit of the Indemnified Parties and may be enforced by such Indemnified
Parties).
Section 8.12 Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
any other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
Section 8.13 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware
applicable to contracts executed and fully performed within the State of
Delaware.
Section 8.14 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
Cabletron Systems, Inc.
/s/ Craig R. Benson
By: _________________________________
Name: Craig R. Benson
Title: Chairman and Chief
Operating Officer
Attest:
/s/ Michael D. Myerow
By: _________________________________
Michael D. Myerow
Secretary
Cabletron Merger, Inc.
/s/ Craig R. Benson
By: _________________________________
Name: Craig R. Benson
Title: Chairman and Chief
Operating Officer
Attest:
/s/ Michael D. Myerow
By: _________________________________
Michael D. Myerow
Secretary
Netlink, Inc.
/s/ Nina F. Saberi
By: _________________________________
Name: Nina F. Saberi
Title: President & CEO
Attest:
/s/ Jerry M. Joyner
By: _________________________________
Jerry M. Joyner
Secretary
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ANNEX B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW--APPRAISAL RIGHTS
(S) 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
"stock" and "share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to
subsection (g) of Section 251), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or
(S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision,
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the procedures of this section, including those set forth in subsections (d)
and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section, provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty day after the date of
mailing such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholders and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holders shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value
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of the stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or consolidation,
any stockholder shall have the right to withdraw his demand for appraisal and
to accept the terms offered upon the merger or consolidation.Within 120 days
after the effective date of the merger or consolidation, any stockholder who
has complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative (other than an
action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor, against expenses actually and reasonably incurred in connection with
the defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interest of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or such other court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to include in its certificate of incorporation a
provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law
(relating to unlawful payment of dividends and unlawful stock purchase and
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.
The Registrant's Restated Certificate of Incorporation provides that the
Registrant's Directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
the Delaware General Corporation Law as in effect at the time such liability
is determined. The Restated Certificate of Incorporation further provides that
the Registrant shall indemnify its directors and officers to the full extent
permitted by the law of the State of Delaware.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed with, or incorporated by reference in,
this Registration Statement:
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger by and among the Registrant, Merger Sub,
Inc. and Netlink, Inc. ("Netlink"), dated as of September 26, 1996
(the "Merger Agreement") (attached as Annex A to the Proxy
Statement/Prospectus contained in this Registrant Statement). The
Exhibits to the Merger Agreement and the Disclosure Schedules of the
Registrant and of Netlink are not included with the Merger Agreement.
A list briefly identifying the contents of such omitted schedules is
included herein. The Registrant agrees to furnish supplementally to
the Commission, upon request, a copy of such Exhibits and Disclosure
Schedules.
3.1 Restated Certificate of Incorporation of Cabletron Systems, Inc., a
Delaware corporation, which is incorporated by reference to Exhibit
3.1 of the Registrant's Registration Statement on Form S-1,
No. 33-28055.
3.2 Certificate of Correction of the Registrant's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2 of
the Registrant's Registration Statement on Form S-1, No. 33-42534.
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Cabletron Systems, Inc., incorporated by reference to Exhibit 4.3
of the Registrant's Registration Statement on Form S-3,
No. 33-54466.
3.4 Amended bylaws of Cabletron Systems, Inc. which is incorporated by
reference to Exhibit 3.2 of the Registrant's Registration Statement on
Form S-1, No. 33-42534.
4.1 Specimen stock certificate representing Cabletron Common Stock which
is incorporated by reference to Exhibit 4.1 of Cabletron's
Registration Statement on Form S-1, No. 33-28055.
5.1 Opinion of Ropes & Gray as to the legality of the securities being
issued.
8.1 Form of Opinion of Ropes & Gray as to certain federal income tax
consequences of the Merger.
8.2 Form of Opinion of Testa, Hurwitz & Thibeault LLP as to certain
federal income tax consequences of the Merger.
23.1 Consent of Ropes & Gray (included in its opinions filed as Exhibits
5.1).
23.2 Consent of Testa, Hurwitz & Thibeault LLP (included in its opinion
filed as Exhibit 8.2).
23.3 Consent of KPMG Peat Marwick LLP with respect to the Registrant's
financial statements.
23.4 Consent of Ernst & Young LLP with respect to Netlink's financial
statements.
24.1 Power of Attorney (part of signature page of this Registration
Statement).
99 Form of Proxy to be used by Netlink in connection with the Netlink
Special Meeting.
</TABLE>
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated
by reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) That every prospectus (i) that is filed pursuant to the immediately
preceding paragraph, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(7) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling
II-3
<PAGE>
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF ROCHESTER, STATE OF NEW
HAMPSHIRE.
Cabletron Systems, Inc.
By: /s/ S. Robert Levine
----------------------------
S. ROBERT LEVINE PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: October 22, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON OCTOBER 22, 1996 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY AUTHORIZES S. ROBERT LEVINE, CRAIG R. BENSON AND DAVID J.
KIRKPATRICK AND EACH WITH FULL POWER OF SUBSTITUTION, TO EXECUTE IN THE NAME
AND ON BEHALF OF SUCH PERSON ANY AMENDMENT OR ANY POST-EFFECTIVE AMENDMENT TO
THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH EXHIBITS THERETO, AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, MAKING SUCH CHANGES IN THIS
REGISTRATION STATEMENT AS THE REGISTRANT DEEMS APPROPRIATE, AND APPOINTS EACH
OF S. ROBERT LEVINE, CRAIG R. BENSON AND DAVID J. KIRKPATRICK, EACH WITH FULL
POWER OF SUBSTITUTION, ATTORNEY-IN-FACT TO SIGN ANY AMENDMENT AND ANY POST-
EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH.
SIGNATURE CAPACITY
/s/ S. Robert Levine President, Chief Executive Officer
- ------------------------------------- (principal executive officer) and
S. ROBERT LEVINE Director
/s/ David J. Kirkpatrick Director of Finance and Chief Financial
- ------------------------------------- Officer (principal financial and
DAVID J. KIRKPATRICK accounting officer)
/s/ Craig R. Benson Chairman, Chief Operating Officer and
- ------------------------------------- Director
CRAIG R. BENSON
/s/ Michael D. Myerow Secretary and Director
- -------------------------------------
MICHAEL D. MYEROW
/s/ Paul R. Duncan Director
- -------------------------------------
PAUL R. DUNCAN
/s/ Donald F. McGuiness Director
- -------------------------------------
DONALD F. MCGUINESS
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
2.1 Agreement and Plan of Merger by and among the Registrant,
Cabletron Merger, Inc. and Netlink, Inc. ("Netlink"), dated as
of September 26, 1996 (the "Merger Agreement") (attached as
Annex A to the Proxy Statement/Prospectus contained in this
Registrant Statement). The Exhibits to the Merger Agreement and
the Disclosure Schedules of the Registrant and of Netlink are
not included with the Merger Agreement. A list briefly
identifying the contents of such omitted schedules is included
herein. The Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of such Exhibits and
Disclosure Schedules.
5.1 Opinion of Ropes & Gray as to the legality of the securities
being issued.
8.1 Form of Opinion of Ropes & Gray as to certain federal income
tax consequences of the Merger.
8.2 Form of Opinion of Testa, Hurwitz & Thibeault, LLP as to
certain federal income tax consequences of the Merger.
23.1 Consent of Ropes & Gray (included in its opinions filed as
Exhibits 5.1).
23.2 Consent of Testa, Hurwitz & Thibeault, LLP (included in its
opinion filed as Exhibit 8.2).
23.3 Consent of KPMG Peat Marwick LLP with respect to the
Registrant's financial statements.
23.4 Consent of Ernst & Young LLP with respect to Netlink's
financial statements.
24.1 Power of Attorney (part of signature page of this Registration
Statement).
99 Form of Proxy to be used by Netlink in connection with the
Netlink Special Meeting.
</TABLE>
<PAGE>
EXHIBIT 2.1
NETLINK, INC.
DISCLOSURE SCHEDULE
INDEX
Schedule No. Title
- ------------ -----
2.1 Subsidiaries
2.3 Capitalization
2.5(a) Agreements
2.5(b) Breaches
2.5(c) Conflicts with Transaction Agreement
2.6(a) Compliance
2.6(b) Company Permits
2.7 Financial Statements
2.8 Certain Changes of Events
2.9 Liabilities
2.10 Litigation
2.11(a) Employee Benefit Plans
2.11(b) Retiree Benefits
2.11(c) Options and Other Rights
2.11(d) Employment Agreements
2.12 Labor Matters
2.14 Restrictions on Business Activities
2.15 Title to Property
2.16(b) Taxes
2.17 Environmental Matters
2.18(b) Intellectual Property
2.18(c) Use of Intellectual Property
2.18(d) Intellectual Property Claims
2.19 Interested Party Transactions
2.20 Insurance
2.21 Accounts Receivable; Inventories; Fixed Assets
2.22 Pooling Matters
2.23 Brokers
2.24 Change in Control Payments
2.25 Expenses
<PAGE>
EXHIBITS
--------
1.2 Certificate of Merger of Cabletron Merger, Inc., a Delaware
corporation with and into Netlink, Inc., a Delaware corporation.
4.1(e) Operating Budget of Netlink, Inc.
5.5 Form of Affiliate Agreement.
6.2(d) Form of Opinion of Testa, Hurwitz & Thibeault, L.L.P., Counsel
to Netlink
6.2(i) Escrow Agreement.
6.2(j)(1) List of Employees who have entered into Employment Agreements
with Netlink, Inc. and Cabletron Systems, Inc.
6.2(j)(2) Form of Employment Agreement by and among Employees and Netlink,
Inc. and Cabletron Systems, Inc.
6.2(j)(3) List of Employees who have entered into Employment Agreements
with Netlink, Inc. Cabletron Systems, Inc.
6.2(j)(4) Form of Employment Agreement by and among Employees and Netlink,
Inc. and Cabletron Systems, Inc.
6.3(e) Form of Opinion of Ropes & Gray, Counsel to Cabletron.
SCHEDULES
---------
5.5 Affiliates of Netlink, Inc.
5.12 Consultants
8.1(c) Certain matters for which the stockholders of Netlink provide
indemnification.
<PAGE>
EXHIBIT 5.1
ROPES & GRAY
One International Place
Boston, Massachusetts 02110-2624
(617) 951-7000
Fax: (617) 951-7050
October 24, 1996
Cabletron Systems, Inc.
35 Industrial Way
Rochester, New Hampshire 03867
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 2,258,975 shares of Common Stock, $0.01 par
value per share (the "Shares"), of Cabletron Systems, Inc., a Delaware
corporation (the "Company"). The Shares are to be issued in exchange for shares
of common stock, $.01 par value per share, of Netlink, Inc. ("Netlink") pursuant
to an Agreement and Plan of Merger dated as of September 26, 1996, as amended
(the "Merger Agreement") among the Company, Netlink and Cabletron Merger, Inc.
("Sub"), a wholly-owned subsidiary of the Company and a Delaware corporation.
The Merger Agreement provides for Sub to merge with and into Netlink (the
"Merger") and for Netlink to survive the Merger as a wholly-owned subsidiary of
the Company.
We have acted as counsel for the Company in connection with the issuance
of the Shares pursuant to the Merger. For purposes of our opinion, we have
examined and relied upon such documents, records, certificates and other
instruments as we have deemed necessary.
Based upon the foregoing, we are of the opinion that the Shares being
issued by the Company have been duly authorized and, when issued in accordance
with the Merger Agreement, will be fully paid and nonassessable.
We hereby consent to the filing of this opinion as part of the
Registration Statement and to the use of our name therein and in the related
joint proxy statement/prospectus under the caption "Legal Matters."
This opinion is to be used only in connection with the issuance of the
Shares while the Registration Statement is in effect.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
<PAGE>
EXHIBIT 8.1
[R&G Letterhead]
October 24, 1996
Cabletron Systems, Inc.
35 Industrial Way
Rochester, NH 03867
Ladies and Gentlemen:
We have acted as counsel to Cabletron Systems, Inc., a Delaware corporation
("Cabletron"), in connection with the contemplated merger under the laws of the
State of Delaware (the "Merger") of Cabletron Merger, Inc. ("Merger Sub"), a
Delaware corporation and a wholly-owned subsidiary of Cabletron, with and into
Netlink, Inc., a Delaware corporation ("Netlink") pursuant to an Agreement and
Plan of Merger dated as of September 26, 1996, as amended (the "Merger
Agreement") by and among Cabletron, Merger Sub and Netlink. The delivery of an
opinion on the Effective Time, substantially to the effect and in substantially
the form set forth below, is a condition to the Merger pursuant to Section
6.2(e) of the Merger Agreement. All capitalized terms used herein, unless
otherwise specified, have the meanings assigned to them in the Merger Agreement.
In rendering this opinion, we have examined and relied upon (without any
independent investigation or review thereof) the accuracy and completeness of
the facts, information, covenants and representations contained in originals or
copies, certified or otherwise identified to our satisfaction, of the Merger
Agreement, the Registration Statement on Form S-4 filed by Cabletron with the
Securities and Exchange Commission (which contains a Proxy Statement/Prospectus)
(the "Registration Statement"), and such other documents as we have deemed
necessary or appropriate as a basis for the opinion set forth below. In
addition, we have relied upon certain statements and representations made by
executives of Cabletron and Netlink, and representations made by certain
shareholders of Netlink, as well as other statements, representations and
assumptions. Our opinion is conditioned on, among other things, the initial and
continuing accuracy of such facts, information, covenants, representations and
assumptions.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic
<PAGE>
Cabletron Systems, Inc. -2- October __, 1996
copies, the authenticity of the originals of such documents and that there has
been (or will be by the Effective Time of the Merger) due execution and delivery
of all documents where due execution and delivery are prerequisites to
effectiveness thereof. We have assumed that the Merger will be consummated
pursuant to applicable state law in accordance with the Merger Agreement and as
described in the Registration Statement. We have also assumed that any
representation or statement made "to the best of knowledge" or similarly
qualified is correct without such qualification. As to all matters in which a
person or entity making a representation referred to above has represented that
such person or entity either is not a party to, does not have, or is not aware
of, any plan or intention, understanding or agreement, we have assumed that
there is in fact no such plan, intention, understanding or agreement.
Of particular importance is our reliance upon the truth and accuracy of
representations made by certain Netlink shareholders holding 1% or more of the
outstanding Netlink stock that each such shareholder has no current plan or
intention to sell or otherwise dispose (by short sale or otherwise) of Cabletron
shares it receives in the Merger, and the representation by Netlink management
that, to the best of its knowledge, there is no plan or intention on the part of
the shareholders that would reduce the Netlink shareholders' ownership of
Cabletron stock to a number of shares having a value, as of the Effective Time
of the Merger, of less than 50% of the value of all of the formerly outstanding
stock of Netlink immediately prior to the Merger. We rely on these
representations in concluding that the Merger meets the "continuity of interest"
requirement for reorganization treatment under Section 368(a) of the Code. To
satisfy this requirement, Netlink shareholders must not, pursuant to a plan or
intent existing at or prior to the Merger, dispose of or transfer so much of
either (i) their Netlink stock in anticipation of the Merger (including upon
exercise of dissenters' rights) or (ii) Cabletron shares received in the Merger,
such that Netlink shareholders as a group would no longer hold, after the
Merger, Cabletron shares having a value equal to a percentage of the value of
total outstanding Netlink stock prior to the Merger, that represents a
significant equity interest. Although the precise percentage of stock that
constitutes a significant equity interest in an enterprise is uncertain, the
Internal Revenue Service has published a revenue procedure indicating that the
Internal Revenue Service would issue a ruling that 50% continuity meets this
requirement.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that for federal income tax purposes, the Merger will constitute
a "reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below.
<PAGE>
Cabletron Systems, Inc. -3- October __, 1996
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, Treasury
Regulations promulgated thereunder, pertinent judicial authorities, interpretive
rulings of the Internal Revenue Service and such other authorities as we have
considered relevant. Our opinion is not binding upon the Internal Revenue
Service or the courts, and the Internal Revenue Service is not precluded from
successfully asserting a contrary position. It should be noted that statutes,
regulations, judicial decisions and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
change in the authorities upon which our opinion is based could affect our
conclusion.
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the Merger or of any
transactions related thereto. We undertake no responsibility to update this
opinion for changes in the law or relevant facts subsequent to the date of this
letter. This opinion is solely for your benefit and is not to be used,
circulated, quoted or otherwise referred to for any purpose without our express
written permission.
In the event any one of the statements, representations, warranties or
assumptions upon which we have relied to issue this opinion is incorrect, our
opinion might be adversely affected and may not be relied upon.
Very truly yours,
ROPES & GRAY
<PAGE>
EXHIBIT 8.2
DRAFT 10/23/96
---------------
[TH&T Letterhead]
[Date]
Netlink, Inc.
1881 Worcester Road
Framingham, Massachusetts 01701
Ladies and Gentlemen:
We have acted as counsel for Netlink, Inc., a Delaware corporation
("Netlink"), in connection with the preparation and execution of the Agreement
and Plan of Merger dated as of September 26, 1996, as amended (the "Merger
Agreement") by and among Netlink, Cabletron Systems Inc., a Delaware corporation
("Cabletron"), and Cabletron Merger, Inc., a wholly-owned subsidiary of
Cabletron incorporated in Delaware ("Merger Sub"). Pursuant to the Merger
Agreement, Merger Sub will merge with and into Netlink (the "Merger"), and
Netlink will become a wholly-owned subsidiary of Cabletron. Unless otherwise
defined, capitalized terms referred to herein have the meanings set forth in the
Merger Agreement. All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the Registration Statement on Form S-4 filed by Cabletron with the
Securities and Exchange Commission (which contains a proxy statement/prospectus)
(the "Registration Statement"), the Merger Agreement (including Exhibits),
certificates of officers of Netlink and Cabletron respectively (the "Officers'
Certificates"), certificates of certain shareholders of Netlink (the
"Shareholders' Certificates") and such other documents pertaining to the Merger
as we have deemed necessary or appropriate.
We have also relied upon the truth and accuracy of representations made
by certain Netlink shareholders that each such shareholder has no current plan
or intention to sell or otherwise dispose of Cabletron shares received in the
Merger, or dispose of Netlink stock prior to the Merger. We rely on these
representations and certain representations contained in the officers'
certificates in concluding that the Merger meets the "continuity of interest"
requirement for reorganization treatment under Section 368(a) of the
<PAGE>
Netlink, Inc.
[Date]
Page 2
Code. In order to satisfy this requirement, which is necessary for the Merger to
constitute a reorganization under Section 368(a) of the Code, Netlink
shareholders must not have an existing plan or intent to dispose of an amount of
Cabletron Common Stock to be received in the Merger (or to dispose of Netlink
capital stock in anticipation of the Merger) such that the shareholders of
Netlink will not receive and retain, through ownership of Cabletron Common
Stock, a substantial proprietary stake in the Netlink business being conducted
by Cabletron. The precise percentage of Cabletron Common Stock which represents
a substantial proprietary stake in the Netlink business being conducted by
Cabletron is unclear. Pursuant to Internal Revenue Service published guidance,
the continuity of interest requirement generally will be satisfied if Netlink
shareholders do not have a plan or intent existing at the time of the Merger to
dispose of Cabletron Common Stock issued in the Merger representing more than
fifty percent (50%) of the value of Netlink capital stock at the Effective Time.
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof.
2. Any statement made in any of the documents referred to herein, "to the
best of the knowledge" of any person or party is correct without such
qualification.
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been (or will be) taken which are
inconsistent with such representations.
4. The Merger will be reported by Cabletron and Netlink on their
respective federal income tax returns in a manner consistent with the opinion
set forth below.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications Based on our
examination of the foregoing items and subject to the assumptions, exceptions,
limitations and qualifications set forth herein, we are of the opinion that, if
the Merger is consummated in accordance with the Merger Agreement (and without
any waiver, breach or amendment of any of the provisions thereof) and the
statements set forth in the Officers' Certificates and the Shareholders'
Certificates are true and correct at the Effective Time, then for federal income
tax purposes, the Merger will qualify as a "reorganization" as defined in
Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will
<PAGE>
Netlink, Inc.
[Date]
Page 3
not successfully assert a contrary position. Furthermore, no assurance can be
given that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion addresses only the matters set forth above, and does not
address any other federal, state, local or foreign tax consequences that may
result from the Merger or any other transaction (including any transaction
undertaken in connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the represen-
tations, warranties, statements and assumptions upon which we relied are not
true and accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
This opinion has been delivered to you for the purposes of being included
as an exhibit to the Registration Statement and satisfying the requirements of
Section 6.3(d) of the Merger Agreement; it may not be relied upon for any other
purpose or by any other person or entity without our prior written consent. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cabletron Systems, Inc.:
We consent to the use of our report dated October 22, 1996, which is included
in the Form 8-K of Cabletron Systems, Inc., incorporated by reference in the
Proxy Statement/Prospectus on Form S-4 of Cabletron Systems, Inc., and to the
reference to our firm under the heading "Experts" in the Proxy
Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
October 28, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts", and to
the use of our report dated April 19, 1996 (except Note 13, as to which the
date is October 1, 1996), with respect to the financial statements of Netlink,
Inc., included in the Registration Statement (Form S-4 No. 333-00000) and
related Prospectus of Cabletron Systems, Inc. for the registration of
2,258,975 shares of its common stock.
/s/ Ernst & Young
Ernst & Young LLP
Raleigh, North Carolina
October 25, 1996
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EXHIBIT 99
NETLINK, INC.
Proxy for Special Meeting of Stockholders
________________ __, 1996
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Nina F. Saberi and Jerry M. Joyner, and each of
them, proxies, with full power of substitution, to vote all shares of stock of
Netlink, Inc. ("Netlink") which the undersigned is entitled to vote at the
Special Meeting of Stockholders of Netlink to be held at 10:00 a.m., Eastern
time, on __________,____, 1996, at the office of Netlink's counsel, Testa,
Hurwitz & Thibeault, LLP at 125 High Street, Boston, Massachusetts 02110, and at
any adjournments thereof, upon matters set forth in the Notice of Special
Meeting of Stockholders and Proxy Statement dated _____________ __, 1996, a copy
of which has been received by the undersigned. Execution of a proxy will not in
any way affect a stockholder's right to attend the meeting and vote in person.
The proxies are further authorized to vote, in their discretion, upon such other
business as may properly come before the meeting or any adjournments thereof.
VOTING INSTRUCTION - ALL STOCKHOLDERS SHOULD VOTE ON ITEM 1. IN ADDITION,
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HOLDERS OF 1993 PREFERRED STOCK SHOULD VOTE ON ITEMS 2 AND 5, HOLDERS OF 1994
PREFERRED STOCK SHOULD VOTE ON ITEMS 3 AND 5 AND HOLDERS OF 1996 PREFERRED STOCK
SHOULD VOTE ON ITEMS 4 AND 5. WHERE A SEPARATE VOTE OF ANY PARTICULAR CLASS OF
STOCK OF THE COMPANY IS REQUIRED, THIS PROXY SHALL BE VOTED AS A CLASS VOTE.
Please return your completed proxy to:
Jerry M. Joyner, Secretary, Netlink, Inc., 1881 Worcester Road, Framingham,
MA 01701
A postage-paid return envelope has been included for your convenience.
SEE REVERSE SIDE
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[X] Please mark votes as in this example.
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") dated as of September 26, 1996 among Cabletron Systems, Inc.
("Cabletron"), Cabletron Merger, Inc. ("Merger Sub") and Netlink, and to
approve the merger (the "Merger") of Merger Sub, a wholly owned
subsidiary of Cabletron, with and into Netlink pursuant to the Merger
Agreement by which Netlink would become a wholly owned subsidiary of
Cabletron.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. To convert immediately prior to the Merger each share of Netlink 1993
Preferred Stock into one share of Common Stock of Netlink.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To convert immediately prior to the Merger each share of Netlink 1994
Preferred Stock into one share of Common Stock of Netlink.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. To convert immediately prior to the Merger each share of Netlink 1996
Preferred Stock into one share of Common Stock of Netlink.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. To amend immediately prior to the Merger the 1996 Preferred Stock
Purchase Agreement dated February 29, 1996 among Netlink and certain
holders of Netlink 1993 Preferred Stock, Netlink 1994 Preferred Stock
and Netlink 1996 Preferred Stock (the "Netlink Preferred Stock
Agreement") to delete Articles IV, V and VI of the Netlink Preferred
Stock Agreement (relating to certain covenants, registration rights and
rights of first refusal).
FOR AGAINST ABSTAIN
[_] [_] [_]
6. To transact such other business as may properly come before the meeting
and any adjournment thereof.
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THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN, WILL BE VOTED "FOR" THE PROPOSALS IN ITEMS 1,2,3,4 AND 5
AND AUTHORITY WILL BE DEEMED GRANTED UNDER ITEM 6 ABOVE.
[_] MARK HERE FOR ADDRESS [_] MARK HERE IF YOU PLAN
CHANGE AND NOTE BELOW TO ATTEND THE MEETING
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If signing as attorney, executor, trustee or guardian, please give your full
title as such. If stock is held jointly, each owner should sign.
Print Name: Print Name:
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Signature Date Signature Date
