<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1996
REGISTRATION NO. 333-06271
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
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
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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. FREDRICK M. MILLER, ESQ.
ROPES & GRAY DYKEMA GOSSETT PLLC
ONE INTERNATIONAL PLACE 400 RENAISSANCE CENTER
BOSTON, MASSACHUSETTS 02110 DETROIT, MICHIGAN 48243-1668
----------------
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 Network Express, 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. [_]
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CABLETRON SYSTEMS, INC.
CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B)
OF REGULATION S-K SHOWING HEADING OR LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-4
<TABLE>
<CAPTION>
ITEM NO. TITLE OF FORM S-4 ITEM LOCATION IN PROXY STATEMENT/PROSPECTUS
-------- ----------------------------- --------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE
TRANSACTION
Item 1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page
Item 2. Inside Front and Outside Back
Cover Pages of Prospectus.... Table of Contents; Available
Information; Incorporation of Certain
Documents By Reference
Item 3. Risk Factors, Ratio of
Earnings to Fixed Charges and
Other Information............ Summary; Risk Factors; Selected
Historical and Unaudited Pro Forma
Combined Selected Financial Data;
Comparative Per Share Data; Unaudited
Pro Forma Combined Condensed Financial
Data
Item 4. Terms of the Transaction..... Summary; The Merger; The Merger
Agreement; Comparison of Stockholder
Rights
Item 5. Pro Forma Financial
Information.................. Summary; Selected Historical and
Unaudited Pro Forma Combined Selected
Financial Data; Unaudited Pro Forma
Combined Condensed Financial Data
Item 6. Material Contracts with the
Company Being Acquired....... Summary; The Merger; The Merger
Agreement
Item 7. Additional Information
Required for the Reoffering
by Persons and Parties Deemed
to be Underwriters........... Not Applicable
Item 8. Interests of Named Experts
and Counsel.................. Not Applicable
Item 9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
B. INFORMATION ABOUT THE
REGISTRANT
Item 10. Information with Respect to
S-3 Registrants.............. Available Information; Incorporation
of Certain Documents by Reference;
Summary; Selected Historical and
Unaudited Pro Forma Combined Selected
Financial Data; Unaudited Pro Forma
Combined Condensed Financial Data
Item 11. Incorporation of Certain
Information by Reference..... Incorporation of Certain Documents by
Reference
Item 12. Information with Respect to
S-2 or S-3 Registrants....... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. TITLE OF FORM S-4 ITEM LOCATION IN PROXY STATEMENT/PROSPECTUS
-------- ---------------------------- --------------------------------------
<C> <S> <C>
Item 13. Incorporation of Certain
Information by Reference.... Not Applicable
Item 14. Information with Respect to
Registrants Other Than S-3
or S-2 Registrants.......... Not Applicable
C. INFORMATION ABOUT THE
COMPANY BEING ACQUIRED
Item 15. Information with Respect to
S-3 Companies............... Not Applicable
Item 16. Information with Respect to
S-2 or S-3 Companies........ Not Applicable
Item 17. Information with Respect to
Companies Other Than S-3 or
S-2 Companies............... Available Information; Incorporation
of Certain Documents by Reference;
Summary; Selected Historical and
Unaudited Pro Forma Combined Selected
Financial Data; Comparative Per Share
Data; Network Express, Inc., Unaudited
Pro Forma Combined Condensed Financial
Data
D. VOTING AND MANAGEMENT
INFORMATION
Item 18. Information if Proxies,
Consents or Authorizations
Are to be Solicited......... Summary; Incorporation of Certain
Documents By Reference; The Network
Special Meeting; The Merger
Item 19. Information if Proxies,
Consents or Authorizations
Are Not to be Solicited in
an Exchange Offer........... Not Applicable
</TABLE>
<PAGE>
[NETWORK EXPRESS, INC. LETTERHEAD]
, 1996
Dear Shareholders:
You are cordially invited to attend the Special Meeting of shareholders of
Network Express, Inc. ("Network"), which will be held on August 1, 1996 at
Network's headquarters, located at 305 East Eisenhower Parkway, Ann Arbor,
Michigan 48108, commencing at 10:00 a.m., local time.
At this important meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement"), by and among Cabletron Systems, Inc. ("Cabletron"), Cabletron
Systems of Michigan, Inc., a wholly-owned subsidiary of Cabletron ("Cabletron
Michigan"), and Network. Upon consummation of the transactions contemplated by
the Merger Agreement, Cabletron Michigan will be merged with and into Network
and Network will become a wholly-owned subsidiary of Cabletron (the "Merger").
In the proposed Merger, each outstanding share of common stock, without par
value per share, of Network (the "Network Common Stock") will be converted
into the right to receive 0.1388 shares of the common stock, par value $.01
per share, of Cabletron (the "Cabletron Common Stock"), and a cash payment in
lieu of any fractional share. The accompanying Proxy Statement/Prospectus
provides details of the proposed Merger and additional related information.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AS BEING FAIR TO, AND IN THE
BEST INTERESTS OF, NETWORK'S SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. The affirmative vote of the holders of a majority of
the outstanding shares of Network Common Stock is necessary to approve and
adopt the Merger Agreement. Therefore, whether or not you plan to attend the
Special Meeting, please complete, sign and date the enclosed proxy and return
it in the enclosed prepaid envelope. If you attend the Special Meeting, you
may vote in person if you wish, even though you previously have returned your
proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Richard P. Eidswick,
President and Chief Executive
Officer
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 1, 1996
To the Shareholders of NETWORK EXPRESS, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of Network
Express, Inc., a Michigan corporation ("Network"), will be held on August 1,
1996 at Network's headquarters, located at 305 East Eisenhower Parkway, Ann
Arbor, Michigan, 48108, commencing at 10:00 a.m., local time ("Network Special
Meeting"), for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger (the "Merger Agreement"), dated May 21, 1996,
by and among Cabletron Systems, Inc. ("Cabletron"), Cabletron Systems of
Michigan, Inc., a wholly-owned subsidiary of Cabletron ("Cabletron
Michigan"), and Network, pursuant to which, among other things, (a)
Cabletron Michigan will be merged with and into Network and Network will
become a wholly-owned subsidiary of Cabletron (the "Merger"), and (b) each
share of common stock, without par value per share, of Network ("Network
Common Stock") outstanding immediately prior to the consummation of the
Merger will be converted into the right to receive 0.1388 shares of common
stock, par value $.01 per share, of Cabletron ("Cabletron Common Stock"),
and a cash payment in lieu of any fractional share; and
(2) To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only holders of record of shares of Network Common Stock at the close of
business on July 2, 1996 will be entitled to notice of, and to vote at, the
Network Special Meeting or any adjournments or postponements thereof (the
"Network Record Date").
The Merger is more completely described in the accompanying Proxy
Statement/Prospectus and the Merger Agreement is attached thereto as Annex A.
The Proxy Statement/Prospectus and the Annexes thereto form a part of this
Notice. The affirmative vote of the holders of a majority of the outstanding
shares of Network Common Stock is necessary to approve and adopt the Merger
Agreement. All shareholders, whether or not they expect to attend the meeting
in person, are requested to complete, sign, date and return the enclosed form
of proxy in the accompanying envelope (which requires no additional postage if
mailed in the United States). Your proxy may be revoked by filing with the
Secretary a written revocation or a proxy bearing a later date at any time
prior to the time it is voted, or by attending the Special Meeting and voting
in person.
By order of the Board of Directors,
John R. Ternes, Secretary
Ann Arbor, Michigan
July 3, 1996
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING POSTAGE PAID AND ADDRESSED ENVELOPE WHETHER OR NOT
YOU INTEND TO BE PRESENT AT THE MEETING. PROXIES MAY BE REVOKED AT ANY TIME
PRIOR TO THE TIME THEY ARE VOTED, AND SHAREHOLDERS WHO ARE PRESENT AT THE
MEETING MAY WITHDRAW THEIR PROXIES AND VOTE IN PERSON IF THEY SO DESIRE.
THE BOARD OF DIRECTORS OF NETWORK UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
NETWORK COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
<PAGE>
NETWORK EXPRESS, INC.
PROXY STATEMENT
----------------
CABLETRON SYSTEMS, INC.
PROSPECTUS
This Proxy Statement and Prospectus ("Proxy Statement/Prospectus") is being
furnished to the holders of common stock, without par value per share
("Network Common Stock"), of Network Express, Inc., a Michigan corporation
("Network"), in connection with the solicitation of proxies by the Board of
Directors of Network for use at the Special Meeting of Shareholders of Network
to be held on Thursday, August 1, 1996 at Network's corporate headquarters,
located at 305 East Eisenhower Parkway, Ann Arbor, Michigan 48108, commencing
at 10:00 A.M., local time, and at any and all adjournments or postponements
thereof (the "Network Special Meeting").
This Proxy Statement/Prospectus also constitutes the Prospectus of Cabletron
Systems, Inc., a Delaware corporation ("Cabletron"), with respect to the
issuance of up to 1,500,000 shares of Cabletron common stock, par value $.01
per share ("Cabletron Common Stock"), to be issued to the shareholders of
Network in connection with the Merger described below, including shares issued
upon exercise prior to the Effective Time of outstanding options to acquire
shares of Network 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 Systems of Michigan, Inc., a Michigan corporation and a
wholly-owned subsidiary of Cabletron ("Cabletron Michigan"), with and into
Network, pursuant to an Agreement and Plan of Merger, dated as of May 21, 1996
(the "Merger Agreement"), by and among Cabletron Michigan, Cabletron and
Network. Upon consummation of the Merger, Network will become a wholly-owned
subsidiary of Cabletron. Consummation of the Merger is subject to various
conditions, including the approval and adoption of the Merger Agreement by the
holders of a majority of the outstanding shares of Network Common Stock at the
Network Special Meeting.
At the Effective Time (as defined below), each share of Network Common Stock
issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive 0.1388 shares of Cabletron Common Stock
(the "Exchange Ratio"). Thus, each holder of Network 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 Network Common
Stock exchanged by such shareholder and (ii) the Exchange Ratio. In addition,
except for certain options to purchase Network Common Stock held by non-
employee directors, each outstanding option to purchase Network Common Stock
(each a "Network 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 Network Common Stock subject to the Network Option by
0.1388, at an exercise price per share equal to the aggregate exercise price
for Network Common Stock purchasable pursuant to the Network Option divided by
the number of shares of Cabletron Stock deemed purchasable pursuant to such
Network Option. See "The Merger--General", "--Conversion of Shares" and
"Conversion of Options."
All information in this Proxy Statement/Prospectus with respect to Cabletron
Michigan and Cabletron has been provided by Cabletron. All information
contained in this Proxy Statement/Prospectus with respect to Network has been
provided by Network.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to shareholders of Network on or about July 3, 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. NETWORK SHAREHOLDERS
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.
----------------
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 July 3, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
SUMMARY................................................................... 3
THE BUSINESS OF CABLETRON............................................... 3
THE BUSINESS OF NETWORK................................................. 3
THE MERGER.............................................................. 4
Conversion of Shares; Options; Employee Stock Purchase Plan........... 4
Exchange of Certificates; Assumption of Options....................... 4
Listing............................................................... 5
Conditions to the Merger.............................................. 5
Termination........................................................... 5
Termination Fee....................................................... 5
NETWORK SPECIAL MEETING................................................. 5
Time, Place and Date.................................................. 5
Record Date; Shares Entitled to Vote.................................. 5
Purposes of the Meeting............................................... 5
Vote Required......................................................... 6
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER PERSONS.............. 6
OPINION OF NETWORK'S FINANCIAL ADVISOR.................................. 6
RECOMMENDATION OF NETWORK'S BOARD OF DIRECTORS.......................... 6
INTERESTS OF CERTAIN PERSONS IN THE MERGER.............................. 6
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. 6
ANTICIPATED ACCOUNTING TREATMENT........................................ 7
COMPARATIVE RIGHTS OF STOCKHOLDERS...................................... 7
RISK FACTORS............................................................ 7
EMPLOYMENT AGREEMENTS................................................... 7
NO APPRAISAL RIGHTS..................................................... 7
ANTITRUST MATTERS; GOVERNMENTAL FILINGS................................. 7
RISK FACTORS.............................................................. 9
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED SELECTED FINANCIAL DATA......................................... 12
COMPARATIVE PER SHARE DATA................................................ 14
MARKET PRICE PER SHARE DATA............................................... 15
Cabletron............................................................... 15
Network................................................................. 15
Dividend Policy......................................................... 16
Recent Closing Prices................................................... 16
NETWORK SPECIAL MEETING................................................... 17
Time, Place and Date.................................................... 17
Matters to Be Considered at the Network Special Meeting................. 17
Voting at the Network Special Meeting; Record Date...................... 17
Proxies................................................................. 17
THE MERGER................................................................ 18
General................................................................. 18
Conversion of Shares.................................................... 18
Conversion of Options................................................... 19
Employee Stock Purchase Plan............................................ 19
Exchange of Certificates................................................ 19
Notification Regarding Options.......................................... 20
Effective Time.......................................................... 20
Background of the Merger; Recommendation of Network's Board of Direc-
tors................................................................... 20
Network's Reasons for the Merger........................................ 22
Cabletron's Reasons for the Merger...................................... 23
Opinion of Network's Financial Advisor.................................. 24
Certain Considerations.................................................. 28
Employment Agreements................................................... 28
Interests of Certain Persons in the Merger.............................. 29
Certain Federal Income Tax Consequences................................. 29
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Anticipated Accounting Treatment........................................ 31
Antitrust Matters; Governmental Filings ................................ 31
Certain Federal Securities Law Consequences; Affiliate Letters ......... 31
Stock Exchange Listing.................................................. 31
Dividends............................................................... 31
No Appraisal Rights..................................................... 32
THE MERGER AGREEMENT...................................................... 32
Representations and Warranties.......................................... 32
Conduct of Cabletron's and Network's Business Prior to the Merger....... 32
No Solicitation......................................................... 33
Conditions to the Merger................................................ 34
Termination............................................................. 35
Termination Fee......................................................... 36
Indemnification and Insurance........................................... 36
NETWORK EXPRESS, INC...................................................... 38
BUSINESS................................................................ 38
Introduction.......................................................... 38
Background............................................................ 38
Risk Factors.......................................................... 38
Products.............................................................. 45
Research and Development.............................................. 48
Sales and Marketing................................................... 48
Manufacturing......................................................... 49
Competition........................................................... 49
Intellectual Property................................................. 49
Government Regulation................................................. 50
Employees............................................................. 50
Properties............................................................ 50
Legal Proceedings..................................................... 50
NETWORK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 51
Overview.............................................................. 51
Results of Operations................................................. 51
Liquidity and Capital Resources....................................... 54
PRINCIPAL SHAREHOLDERS OF NETWORK......................................... 56
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA..................... 57
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 59
Voting Rights........................................................... 59
Amendments to Charter................................................... 59
Bylaws.................................................................. 59
Board Classification.................................................... 59
Removal of Directors.................................................... 59
Newly Created Directorships and Vacancies............................... 60
Vote Required for Mergers............................................... 60
Anti-takeover Provisions................................................ 60
Dissenters' Rights...................................................... 61
Limitation on Directors' Liability...................................... 62
Indemnification......................................................... 62
Stockholder Meetings.................................................... 62
Stockholder Action by Written Consent................................... 63
Payment of Dividends.................................................... 63
SHAREHOLDER PROPOSALS..................................................... 63
OTHER MATTERS............................................................. 63
LEGAL MATTERS............................................................. 63
EXPERTS................................................................... 64
NETWORK EXPRESS, INC.--INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......... F-1
ANNEXES
A. Agreement and Plan of Merger
B. Opinion of Unterberg Harris
</TABLE>
ii
<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 and Network are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file 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. 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. The
Network Common Stock is traded on the Nasdaq National Market and reports,
proxy statements and other information concerning Network may be inspected at
the offices of the National Association of Securities Dealers, Inc., Market
Listing Section, 1735 K Street, N.W., Washington, D.C. 20006.
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 JULY 26, 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 (File No. 1-10228);
2. Cabletron's definitive Annual Meeting Proxy Statement filed with the
Commission on June 12, 1996 (File No. 1-10228);
3. Cabletron's Current Report on Form 8-K dated January 29, 1996 (File
No. 1-10228); and
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 Networking Solution are trademarks of Cabletron. Network has
applied for registration of the trademark NE Link and such application is
currently pending; Network Express, NE Secure, NE Nomad, NE Summit, Universal
Access Architecture, UAA, "N" design logo, NE Fusion, NE ISDN InterHub and NE
ISDN Router are trademarks of Network. This Proxy Statement/Prospectus also
contains the trademarks of other companies.
2
<PAGE>
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. Network
shareholders are urged to read this Proxy Statement/Prospectus and the Annexes
in their entirety.
THE BUSINESS OF CABLETRON
General
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 networking 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 networking products, such as adapter cards, other
interconnection equipment, wiring cables, and file server products, and
provides a wide range of networking 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.
Recent Developments
On June 3, 1996 Cabletron entered into a merger agreement with ZeitNet, Inc.,
a California corporation ("ZeitNet"), pursuant to which Cabletron will acquire
ZeitNet, a provider of hardware and software products for connecting
applications, servers and workgroups to high-performance Asynchronous Transfer
Mode ("ATM") networks. With the addition of ZeitNet, Cabletron will be able to
provide wiring closet and data center ATM products for the growing switched
network market, including products that permit customers to migrate existing
networks to high-speed switching and to allow ATM-connected clients to
seamlessly communicate over both ATM networks and existing LANs. Under the
terms of the merger agreement, 1,924,137 shares of Cabletron Common Stock will
be exchanged for all outstanding shares of ZeitNet on a fully diluted basis.
Consummation of the merger is subject to various conditions, including approval
of the ZeitNet merger agreement by ZeitNet's stockholders.
THE BUSINESS OF NETWORK
General
Network develops, manufactures, markets and supports a wide range of
distributed network access products that enable its customers to communicate
quickly, reliably and economically from geographically dispersed locations
using wide area networking services, including Integrated Services Digital
Network ("ISDN"), analog, Frame Relay, X.25 and dedicated circuits. Network's
products are referred to as "bandwidth-on-demand" products because they permit
the establishment of high-speed connections whose bandwidth, duration and
destination can be adjusted to suit user application needs. Network's product
suite provides end-to-end network access capabilities and can be classified as
(i) central site products, (ii) branch office products, (iii) remote site
products and (iv) leased line backup products. See "Network Express, Inc.--
Business."
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Network was incorporated in Michigan in 1990. Network's principal executive
offices are currently located at 4251 Plymouth Road, Ann Arbor, Michigan 48105
and its telephone number is (313) 761-5005. Effective on or about July 29,
1996, Network's new principal executive offices will be located at 305 East
Eisenhower Parkway, Ann Arbor, Michigan 48108.
Recent Developments
On July 1, 1996, Network entered into a transfer agreement with International
Business Machines Corporation ("IBM"), pursuant to which Network has acquired
certain assets pertaining to IBM's Waverunner product line, including the
"Waverunner" name (with all rights in and to any trademarks and applications
therefor), inventory and specified rights to use technology. The Waverunner
product line consists of three products: (i) the IBM 7845 network terminator
(NT1), which provides an interface between a telephone line and ISDN; (ii) the
Waverunner credit card, which plugs into notebook personal computers and which
provides an interface between a telephone line and ISDN and also acts as a
modem; and (iii) the Waverunner ISA Board, which plugs into desktop personal
computers and which provides an interface between a telephone line and ISDN.
Under the terms of the transfer agreement, the purchase price is $7.0 million,
with $1.5 million in cash paid on July 1, 1996 and, assuming the closing of the
Merger, with the remainder of the purchase price of $5.5 million in cash due on
August 2, 1996. In the event that the Merger does not close, the remainder of
the purchase price is due in two installments (which are unsecured), with the
first installment of $1.5 million (plus interest on $5.5 million at an annual
rate of 8 1/2%) due on December 27, 1996 and with the second installment of
$4.0 million (plus interest thereon at an annual rate of 8 1/2%) due on June
30, 1997.
THE MERGER
The Merger Agreement provides for the merger of Cabletron Michigan, a newly
formed, wholly-owned subsidiary of Cabletron, with and into Network, with the
result that Network would become a wholly-owned subsidiary of Cabletron. For
the Merger to be consummated it must be approved by the Network shareholders
and the other conditions specified in the Merger Agreement must be satisfied or
waived. See "The Merger."
Conversion of Shares; Options; Employee Stock Purchase Plan
Upon the consummation of the Merger, each then outstanding share of Network
Common Stock will automatically be converted into the right to receive 0.1388
shares of Cabletron Common Stock. Cash will be paid in lieu of fractional
shares of Cabletron Common Stock. Based upon the capitalization of Network and
Cabletron as of the date of the Merger Agreement, the shareholders of Network
will own Cabletron Common Stock representing approximately 2% 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 Network 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 Network
Common Stock subject to the Network Option by 0.1388, at an exercise price per
share equal to the aggregate exercise price for Network Common Stock
purchasable pursuant to the Network Option divided by the number of shares of
Cabletron Common Stock deemed purchasable pursuant to such Network Option.
Cabletron will file a Registration Statement on Form S-8, or will file
appropriate amendments to Network's previously filed Registration Statement on
Form S-8, with the Commission with respect to the shares of Cabletron Common
Stock issuable upon exercise of the assumed Network Options. As of the Network
Record Date, 1,042,800 shares of Network Common Stock were subject to
outstanding Network Options of which 271,300 are, or will become prior to the
expected Effective Time, exercisable. Upon the assumption of such Network
Options by Cabletron upon consummation of the Merger, approximately 144,740
shares of Cabletron Common Stock will be subject to such options. See "The
Merger--Conversion of Options."
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Network has agreed to terminate its Employee Stock Purchase Plan ("ESPP")
effective as of the Effective Time. In addition, Network has agreed not to
commence any new "Purchase Periods" as defined under its ESPP. It is expected
that prior to the Effective Time all amounts previously deducted and withheld
under the ESPP pursuant to the Purchase Period commenced February 1, 1996 will
be applied to purchase shares of Network Common Stock and that, upon
consummation of the Merger, such shares will be converted into shares of
Cabletron Common Stock.
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 Network shareholder for use in exchanging
Network Common Stock certificates for Cabletron Common Stock certificates. See
"The Merger--Exchange of Certificates." HOLDERS OF NETWORK COMMON 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 Network Option, a
document evidencing the assumption of such Network 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 Network Option into an option to
purchase shares of Cabletron Common Stock. See "The Merger--Notification
Regarding 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 Network to consummate the Merger are subject
to the satisfaction of certain conditions, including, but not limited to,
obtaining requisite Network shareholder and regulatory approvals, 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 with respect to tax matters
and the receipt and confirmation of certain accountants' letters regarding the
appropriateness of pooling of interests accounting for the Merger 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."
Termination
The Merger Agreement is subject to termination by mutual written consent of
Cabletron and Network and at the option of either Cabletron or Network if the
Merger is not consummated before September 30, 1996. 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,
Network will be required to pay Cabletron a fee of $4,400,000, plus certain
expenses of Cabletron. See "The Merger Agreement--Termination Fee."
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NETWORK SPECIAL MEETING
Time, Place and Date
The Network Special Meeting will be held on August 1, 1996 at Network's
headquarters, located at 305 East Eisenhower Parkway, Ann Arbor, Michigan
48108, commencing at 10:00 a.m., local time.
Record Date; Shares Entitled to Vote
Holders of record of shares of Network Common Stock at the close of business
on July 2, 1996 are entitled to notice of, and to vote at, the Network Special
Meeting (the "Network Record Date"). At such Network Record Date, there were
10,269,214 shares of Network Common Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon or which may properly come
before the Network Special Meeting. The presence of holders of 5,134,608 shares
in person or by proxy is required to constitute a quorum at the Network Special
Meeting. See "Network Special Meeting--Voting at the Network Special Meeting;
Record Date."
Purposes of the Meeting
The purposes of the Network Special Meeting are to consider and vote upon (1)
a proposal to approve and adopt the Merger Agreement, pursuant to which, among
other things, Cabletron Michigan will be merged with and into Network and
Network will become a wholly-owned subsidiary of Cabletron, and each
outstanding share of Network Common Stock will be converted into the right to
receive shares of Cabletron Common Stock at the Exchange Ratio, and (2) such
other matters as may properly be brought before the Network Special Meeting.
Vote Required
The approval and adoption by the Network shareholders of the Merger Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of Network Common Stock. See "Network Special Meeting--
Voting at the Network Special Meeting; Record Date."
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER PERSONS
As of the Network Record Date, directors and executive officers of Network
and their affiliates have the right to vote approximately 14% of the
outstanding shares of Network Common Stock. Each of the directors and executive
officers has advised Network that he or she presently intends to vote or direct
the vote of all the outstanding shares of Network Common Stock over which he or
she has voting control in favor of approval and adoption of the Merger
Agreement. See "The Merger--Interests of Certain Persons in the Merger" and
"Principal Shareholders of Network."
OPINION OF NETWORK'S FINANCIAL ADVISOR
Unterberg Harris has delivered written opinions to the Network Board of
Directors dated May 21, 1996 and July 1, 1996 to the effect that the
consideration to be received by holders of Network Common Stock pursuant to the
Merger Agreement is fair, from a financial point of view, to such holders. The
full text of the opinion of Unterberg Harris dated July 1, 1996 is attached
hereto as Annex B. Network shareholders are urged to read the opinion in its
entirety for the assumptions made, procedures followed, other matters
considered and limits of the review by Unterberg Harris. The summary of the
opinion of Unterberg Harris set forth in this Proxy Statement/Prospectus is
qualified in its entirety by references to the full text of such opinion.
Unterberg Harris' opinions were prepared for the Network Board and are directed
only to the fairness from a financial point of view of the consideration to be
received by holders of shares of Network Common Stock pursuant to the Merger
Agreement and do not constitute a recommendation to any Network shareholder as
to how to vote at the Network Special Meeting. For a discussion of the opinion
of Unterberg Harris, including the payment of fees and prior relationships
between Unterberg Harris and Network, see "The Merger--Opinion of Network's
Financial Advisor."
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RECOMMENDATION OF NETWORK'S BOARD OF DIRECTORS
The Board of Directors of Network has approved the Merger Agreement and the
Merger and unanimously recommends that holders of Network Common Stock approve
and adopt the Merger Agreement and the Merger. See "The Merger--Background of
the Merger; Recommendation of Network's Board of Directors."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Network Board of Directors with
respect to the Merger Agreement and the Merger, the Network shareholders should
be aware that certain directors and officers of Network have interests in the
Merger that present them with potential conflicts of interest. See "The
Merger--Interests of Certain Persons in the Merger."
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 Network Common Stock
upon receipt of Cabletron Common Stock in exchange for shares of Network Common
Stock pursuant to the Merger. It is a condition to the Merger that Cabletron
and Network 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 Network Common
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
Network of a letter from each of KPMG Peat Marwick LLP, independent certified
public accountants of Cabletron, and Arthur Andersen LLP, independent public
accountants of Network, to the effect that the Merger qualifies for pooling of
interests accounting treatment if consummated in accordance with the Merger
Agreement. See "The Merger--Anticipated Accounting Treatment" and "The Merger
Agreement--Conditions to the Merger."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of shareholders of Network currently are governed by the Michigan
Business Corporation Act (the "MBCA"), Network's Articles of Incorporation and
Network's Bylaws. Upon consummation of the Merger, shareholders of Network will
become stockholders of Cabletron, which is a Delaware corporation, and their
rights as stockholders of Cabletron will be governed by the General Corporation
Law of the State of Delaware (the "DGCL"), Cabletron's Restated Certificate of
Incorporation and Cabletron's Bylaws. For a discussion of various differences
between the rights of shareholders of Network 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, NETWORK SHAREHOLDERS SHOULD CAREFULLY REVIEW AND CONSIDER THE
INFORMATION CONTAINED BELOW UNDER THE CAPTION "RISK FACTORS."
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EMPLOYMENT AGREEMENTS
Richard Eidswick, David Hartmann, David Carson, Todd Palgot, Don Taylor,
Keisuke Ito, Glenn Kime, Paul DeVries, Brian Socha, Brian Smith and Timothy
Butler are all currently employees of Network (collectively, the "Network
Employees"). It is a condition to consummation of the Merger that Richard
Eidswick, David Hartmann, David Carson and at least four of the remaining eight
Network Employees have entered into employment agreements with Cabletron and
that such agreements be in force at the Effective Time. Richard Eidswick, David
Hartmann, David Carson, Don Taylor, Keisuke Ito, Glenn Kime, Brian Socha and
Brian Smith have entered into employment agreements with Cabletron. See "The
Merger--Employment Agreements."
NO APPRAISAL RIGHTS
Under the MBCA, holders of Network Common Stock are not entitled to any
dissenters' right of appraisal with respect to the Merger because the shares of
Cabletron Common Stock to be issued in the Merger will be listed on a national
securities exchange. See "The Merger--No Appraisal Rights."
ANTITRUST MATTERS; GOVERNMENTAL FILINGS
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), Cabletron and Network each filed a
Notification and Report Form for review under the HSR Act with the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") on May 31, 1996. The waiting periods under
the HSR Act with respect to such filings are expected to be terminated on or
before June 30, 1996. Even if the HSR Act waiting periods are terminated, the
FTC or the Antitrust Division could take such action under the antitrust laws
as it deems necessary or desirable in the public interest, including seeking
divestiture of substantial assets of Cabletron or Network. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made
or, if such a challenge is made, of the result. Cabletron and Network do not
believe that any additional 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 Department of Commerce of the State of
Michigan in accordance with the MBCA.
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RISK FACTORS
The following risk factors should be considered by holders of Network 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 rapid technological change. 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 include 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.
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
Cabletron's stock may continue to be, volatile. Factors such as quarterly
fluctuations in results of operations, increased competition, announcements of
technological innovations or the introduction of new products by Cabletron or
its competitors, expenses or other difficulties associated with assimilating
Network, ZeitNet and other companies that may be acquired in the future by
Cabletron, changes in the mix of sales channels, the timing of significant
customer orders (the average dollar amount of customer orders has increased in
recent periods), and macroeconomic conditions generally, may have a
significant impact on the market price of the stock of Cabletron. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market price for many high-
technology companies and which, on occasion, have appeared to be unrelated to
the operating performance of such companies. Past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods. Any shortfall in revenue or earnings from the levels anticipated by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Cabletron Common Stock in any given period.
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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 or upgrades 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.
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, 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
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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.
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.
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SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
The following Selected Historical Financial Data of Cabletron and Network
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 Network historical
consolidated financial data as of and for the three months ended March 31,
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
Network'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
Network's December 31, 1995 consolidated 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 Network's results of operations for
the years ended December 31, 1995, 1994 and 1993, respectively. 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 Network Common Stock.
On June 3, 1996 Cabletron entered into a merger agreement with ZeitNet,
pursuant to which 1,924,137 shares of Cabletron Common Stock will be exchanged
for all outstanding shares of ZeitNet on a fully diluted basis. Cabletron
expects to record a pretax charge of approximately $28 to $32 million in the
second quarter ending August 31, 1996 in connection with this transaction.
This range is a preliminary estimate only and is therefore subject to change.
Historical revenues and results of operations of ZeitNet are not material to
the revenues, results of operations or earnings per share of Cabletron.
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................... $1,069,715 $810,684 $598,112 $418,203 $290,543
Income from operations...... 227,562 238,363 177,509 125,301 87,937
Net income.................. 164,418(1) 161,974 119,218 83,454 57,999
Net income per share........ $ 2.29(1) $ 2.27 $ 1.68 $ 1.18 $ 0.83
Weighted average shares
outstanding................ 71,839 71,494 71,018 70,375 69,858
BALANCE SHEET DATA:
Working capital............. $ 476,474 $374,825 $255,752 $233,325 $162,127
Total assets................ 951,269 689,920 499,073 343,214 236,226
Total stockholders' equity.. 777,829 587,520 423,792 288,753 203,614
</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"). Excluding this nonrecurring item, pro forma net income and net
income per share would have been $216,691 and $3.02, respectively.
12
<PAGE>
NETWORK
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ -----------------
1995 1994 1993 1992 1991 1996 1995
------- ------- ------ ------ ------ -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $18,997 $11,113 $4,029 $1,404 $ 220 $ 3,177 $ 4,453
Income (loss) from
operations............. (9,415) 419 (1,011) (1,278) (1,712) (2,293) 380
Net income (loss)....... (8,475)(1) 466 (900) (253) (1,712) (2,154) 374
Net income (loss) per
share.................. $ (0.90)(1) $ 0.07 $(0.21) $(0.10) $(0.96) $ (0.20) $ 0.05
Weighted average shares
outstanding............ 9,369 6,271 4,262 2,544 1,775 10,654 7,926
BALANCE SHEET DATA:
Working capital......... $23,887 $ 3,766 $1,727 $ 424 $ (337) $ 21,448 $ 3,995
Total assets............ 32,280 6,136 3,088 1,303 510 30,301 697
Total shareholders'
equity (deficit)....... 28,053 4,245 1,899 526 (165) 25,598 4,649
</TABLE>
- --------
(1) Net income for 1995 included a net of tax charge of approximately $8.7
million, or $0.92 per share, related to the acquisition of Fivemere
Limited. Excluding this nonrecurring item, pro forma net income and net
income per share would have been $178,000 and $0.02, respectively.
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)
PRO FORMA COMBINED STATEMENTS OF INCOME DATA:(1)
<S> <C> <C> <C>
Net sales................................ $ 1,088,712 $ 821,797 $ 602,141
Income from operations................... 218,149 238,782 176,498
Net income............................... 155,946 162,440 118,318
Net income per share..................... $ 2.13 $ 2.24 $ 1.65
Weighted average shares outstanding...... 73,139 72,364 71,610
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 29,
1996
------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:(1)
Working capital.................................................... $475,310
Total assets....................................................... 981,053
Stockholders' equity............................................... 797,313
</TABLE>
- --------
(1) Cabletron expects to record charges to operations, currently estimated to
be between $12 to $16 million, in the quarter ending August 31, 1996, the
quarter in which the Merger is expected to be consummated. Such expenses
reflect direct transaction costs, consisting primarily of investment
banking fees and costs associated with combining the operations of the two
companies, the majority of which relates to redundant assets and
facilities. An estimated pretax charge at the midpoint of the above range
of $14 million, $8.6 million on an after-tax basis, is reflected in the
Unaudited Pro Forma Combined Condensed Balance Sheet but has not been
reflected in the Unaudited Pro Forma Combined Condensed Statements of
Income because they are directly attributable to the Merger and are non-
recurring. 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 included elsewhere herein.
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of
Cabletron and Network 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 0.1388 shares of Cabletron Common Stock in exchange
for each share of Network 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 Network 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.............................................. $ 2.29 $2.27 $ 1.68
Book value.............................................. $10.77
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1994 1993
------ ----- ------
<S> <C> <C> <C>
HISTORICAL NETWORK:
Net income (loss)....................................... $(0.90) $0.07 $(0.21)
Book value.............................................. $ 2.72
<CAPTION>
YEAR ENDED LAST DAY
OF FEBRUARY,
--------------------
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
PRO FORMA COMBINED PER CABLETRON SHARE:
Net income.............................................. $ 2.13 $2.24 $ 1.65
Book value(1)........................................... $10.82
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1994 1993
------ ----- ------
<S> <C> <C> <C>
EQUIVALENT PRO FORMA COMBINED PER NETWORK SHARE(2):
Net income.............................................. $ 0.30 $0.31 $ 0.23
Book value.............................................. $ 1.50
</TABLE>
- --------
(1) Cabletron expects to record charges to operations, currently estimated to
be between $12 to $16 million, in the quarter ending August 31, 1996, the
quarter in which the Merger is expected to be consummated. Such expenses
reflect direct transaction costs, consisting primarily of investment
banking fees and costs associated with combining the operations of the two
companies, the majority of which relates to redundant assets and
facilities. An estimated pretax charge at the midpoint of the above range
of $14 million, $8.6 million on an after-tax basis, is reflected in the
Unaudited Pro Forma Combined Condensed Balance Sheet but has not been
reflected in the Unaudited Pro Forma Combined Condensed Statements of
Income because they are directly attributable to the Merger and are non-
recurring. The range is a preliminary estimate only and is therefore
subject to change.
(2) The equivalent pro forma combined per Network share amounts are calculated
by multiplying the pro forma combined per Cabletron share amounts by the
Exchange Ratio of 0.1388 shares of Cabletron Common Stock for each share
of Network Common Stock.
14
<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 May 31, 1996, Cabletron had 2,161 shareholders 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 (through June 17, 1996).......................... 70.63 67.25
</TABLE>
NETWORK
Network Common Stock is traded on the Nasdaq National Market under the
symbol "NETK". As of May 31, 1996, Network had 198 shareholders of record. The
following table sets forth the high and low closing sales prices per share of
Network Common Stock as reported on the Vancouver Stock Exchange ("VSE") and
the Nasdaq National Market, as the case may be, for the quarterly periods
presented below, which periods correspond to Network's quarterly fiscal
periods for financial reporting purposes.
<TABLE>
<CAPTION>
VSE (1) NASDAQ (2)
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1994
Second Quarter (from June 24, 1994)............... $ 2.25 $ 2.10 -- --
Third Quarter..................................... 2.92 2.05 -- --
Fourth Quarter.................................... 4.65 2.25 -- --
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter..................................... $22.50 $ 4.55 $15.88 $ 6.88
Second Quarter (VSE through May 24, 1995)......... 20.25 16.00 15.75 11.75
Third Quarter..................................... -- -- 19.50 13.75
Fourth Quarter.................................... -- -- 15.13 4.88
FISCAL YEAR ENDING DECEMBER 31, 1996
First Quarter..................................... -- -- $ 7.06 $ 3.50
Second Quarter.................................... -- -- 12.25 6.00
</TABLE>
- --------
(1) Stated in Canadian dollars. Network Common Stock began trading on the VSE
under the symbol "NTK" on June 24, 1994, was last traded on May 24, 1995
and was delisted on October 27, 1995 at Network's request.
(2) Network Common Stock traded on the Nasdaq SmallCap Market for the period
from January 24, 1995 until April 24, 1995, and since that date has traded
on the Nasdaq National Market (collectively "Nasdaq") under the symbol
"NETK".
15
<PAGE>
DIVIDEND POLICY
Neither Cabletron nor Network has ever paid a cash dividend and each of
Cabletron and Network 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 following table sets forth the closing price per share of Cabletron
Common Stock as reported on the NYSE and the closing price per share of
Network Common Stock as reported on the Nasdaq National Market on May 21,
1996, the last trading day before the announcement of the proposed Merger, and
on June 27, 1996, the latest practicable trading day before the printing of
this Proxy Statement/Prospectus, as well as the equivalent per share prices
for Network Common Stock based upon the product of the Cabletron Common Stock
prices and the Exchange Ratio:
<TABLE>
<CAPTION>
CABLETRON NETWORK
COMMON COMMON NETWORK
STOCK STOCK EQUIVALENT (1)
--------- ------- --------------
<S> <C> <C> <C>
May 21, 1996................................... $78.88 $12.25 $10.95
June 27, 1996.................................. 68.88 9.31 9.56
</TABLE>
- --------
(1) Represents the equivalent of one share of Network Common Stock calculated
by multiplying the closing price per share of Cabletron Common Stock by
the Exchange Ratio.
The Exchange Ratio is fixed at 0.1388. The market prices of Cabletron Common
Stock and Network Common Stock are subject to fluctuation and, as a result,
the market value of the shares of Cabletron Common Stock that holders of
Network Common Stock will receive in the Merger may increase or decrease prior
to and following the Merger. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR CABLETRON COMMON STOCK AND NETWORK COMMON STOCK. NO ASSURANCE
CAN BE GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR CABLETRON COMMON STOCK OR
NETWORK COMMON STOCK. See "Risk Factors--Volatility of Stock Price."
16
<PAGE>
NETWORK SPECIAL MEETING
TIME, PLACE AND DATE
The Network Special Meeting will be held on August 1, 1996 at Network's
headquarters, located at 305 East Eisenhower Parkway, Ann Arbor, Michigan
48108.
MATTERS TO BE CONSIDERED AT THE NETWORK SPECIAL MEETING
At the Network Special Meeting, holders of shares of Network Common Stock
will consider and vote upon (1) a proposal to approve and adopt the Merger
Agreement, and (2) such other matters as may properly be brought before the
Network Special Meeting. The Directors of Network have approved the Merger
Agreement and unanimously recommend a vote FOR approval and adoption of the
Merger Agreement by the shareholders of Network.
VOTING AT THE NETWORK SPECIAL MEETING; RECORD DATE
The Network Board of Directors has fixed July 2, 1996 as the Network Record
Date for the determination of the Network shareholders entitled to notice of
and to vote at the Network Special Meeting. Accordingly, only holders of
record of shares of Network Common Stock on the Network Record Date will be
entitled to notice of and to vote at the Network Special Meeting. As of such
Network Record Date, there were 10,269,214 shares of Network Common Stock
outstanding, held by approximately 160 holders of record. Each holder of
record of shares of Network Common Stock on the Network Record Date is
entitled to cast one vote per share on each proposal properly submitted for
the vote of the Network shareholders, either in person or by properly executed
proxy, at the Network Special Meeting. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of
Network Common Stock entitled to vote is necessary to constitute a quorum at
the Network Special Meeting.
The approval and adoption by Network shareholders of the Merger Agreement
will require the affirmative vote of the holders of a majority of the
outstanding shares of Network Common Stock. 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. If a broker or nominee holding stock in "street name"
indicates on a proxy that it does not have discretionary authority to vote as
to a particular matter, those shares will not be considered as present and
entitled to vote with respect to such matter, and will not be counted as a
vote cast on such matter. Therefore, abstentions and broker non-votes will
have the same effect as votes against such proposal.
As of the Network Record Date, directors and executive officers of Network
and their affiliates have the right to vote 1,424,298 shares, or approximately
14% of the outstanding shares of Network Common Stock. Each of the directors
and executive officers has advised Network that he or she intends to vote or
direct the vote of all shares of Network Common Stock over which he or she has
voting control FOR approval and adoption of the Merger Agreement. As of the
Network Record Date, neither Cabletron nor any of its subsidiaries owned any
outstanding shares of Network Common Stock.
PROXIES
All shares of Network Common Stock which are entitled to vote and are
represented at the Network Special Meeting by properly executed proxies
received prior to or at the Network Special Meeting, and not revoked, will be
voted at 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. The Board of Directors of
Network knows of no matters to be presented at the Network Special Meeting
other than those described in this Proxy Statement/Prospectus. If any other
matters are properly presented at the Network Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Network 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 Network, at or before the taking of the vote at
17
<PAGE>
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 Network before the taking of
the vote at the Network Special Meeting, or (iii) attending the Network
Special Meeting and voting in person (although attendance at the Network
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 Network Express, Inc., 305 East Eisenhower Parkway, Ann Arbor,
Michigan 48108, Attention: Secretary, or hand delivered to the Secretary of
Network at or before the taking of the vote at the Network Special Meeting.
All expenses of this solicitation will be borne by Network and the costs of
preparing this Proxy Statement/Prospectus will be borne by Cabletron and
Network. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Cabletron and Network 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. Network has retained Morrow & Co., Inc., upon customary
terms, at an estimated cost of $6,000.00, plus reimbursement of expenses, to
assist in its solicitation of proxies from brokers, nominees, institutions and
individuals. 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 Network will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
NETWORK SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. NETWORK SHAREHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
THE MERGER
GENERAL
The Merger Agreement provides for the merger of Cabletron Michigan, a newly
formed, wholly-owned subsidiary of Cabletron, with and into Network, with the
result that Network would become a wholly-owned subsidiary of Cabletron. For
the Merger to be consummated it must be approved by the Network shareholders
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. Network shareholders are
urged to read the Merger Agreement in its entirety.
CONVERSION OF SHARES
Upon the consummation of the Merger, each then outstanding share of Network
Common Stock will automatically be converted into the right to receive shares
of Cabletron Common Stock at the Exchange Ratio. No fractional shares of
Cabletron Common Stock will be issued in the Merger. Instead, each Network
shareholder 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 per share market value of Cabletron Common
Stock (based on 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 shareholder would otherwise be entitled. Based upon
the capitalization of Network and Cabletron as of the date of the Merger
Agreement, the shareholders of Network will own Cabletron Common Stock
representing approximately 2% of the Cabletron Common Stock outstanding
immediately after consummation of the Merger.
18
<PAGE>
CONVERSION OF OPTIONS
Upon consummation of the Merger, each then outstanding Network 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
Network Common Stock subject to the Network Option by 0.1388, at an exercise
price per share equal to the aggregate exercise price for Network Common Stock
purchasable pursuant to such Network Option divided by the number of shares of
Cabletron Common Stock deemed purchasable pursuant to such Network Option. The
other terms of the Network Options, including vesting schedules, will remain
unchanged. Cabletron will file a Registration Statement on Form S-8, or will
file appropriate amendments to Network's previously filed Registration
Statement on Form S-8, with the Commission with respect to the shares of
Cabletron Common Stock issuable upon exercise of the assumed Network Options.
As of the Record Date, 1,042,800 shares of Network Common Stock were subject
to outstanding Network Options of which 271,300 are, or will become prior to
the expected Effective Time, exercisable. Upon the assumption of such options
by Cabletron upon consummation of the Merger, approximately 144,740 shares of
Cabletron Common Stock will be subject to such options.
EMPLOYEE STOCK PURCHASE PLAN
Network has agreed to terminate its ESPP effective as of the Effective Date.
In addition, Network has agreed not to commence any new "Purchase Periods" as
defined under its ESPP. It is expected that prior to the Effective Time all
amounts previously deducted and withheld under the ESPP pursuant to the
Purchase Period commenced February 1, 1996 will be applied to purchase shares
of Network Common Stock on or about July 31, 1996 and that such shares will be
converted into shares of Cabletron Common Stock at the Effective Time.
EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, a letter of transmittal
with instructions will be mailed to each Network shareholder for use in
exchanging Network Common Stock certificates for Cabletron Common Stock
certificates. Upon surrender of a Network Common 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 subject to the Network Common Stock certificate being
exchanged.
Immediately after the Effective Time, each outstanding Network Common Stock
certificate will be deemed for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full shares of
Cabletron Common Stock into which such shares of Network Common 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. 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
Network Common 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 Network Common Stock certificate surrendered
in exchange therefor is registered, it will be a condition of the issuance
thereof that the Network Common 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
19
<PAGE>
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 Network Common 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 NETWORK COMMON STOCK CERTIFICATES SHOULD NOT
SUBMIT THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED
THE LETTER OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO ABOVE.
NOTIFICATION REGARDING OPTIONS
Following the Effective Time, Cabletron will issue to each person who,
immediately prior thereto was a holder of an outstanding Network Option, a
document evidencing the assumption of such Network 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 Network 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 Department of Commerce of the State of Michigan 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 September 30, 1996. 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 NETWORK'S BOARD OF DIRECTORS
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Network and Cabletron.
Contact between the two companies was initiated in October 1995 when Craig
Benson, the Chairman and Chief Operating Officer of Cabletron, telephoned
David Hartmann, the Executive Vice President and Chief Technical Officer of
Network, to discuss Cabletron's desire to obtain a remote access partner as a
result of recent consolidations in the internetworking industry. Mr. Hartmann
indicated that Network could be interested in considering such a relationship.
There were no discussions following Mr. Benson's preliminary inquiry until
March 14, 1996 when Richard Eidswick, the President and Chief Executive
Officer of Network, received a telephone call from a representative of
Robertson Stephens & Co. on behalf of Cabletron. As a result of this call, a
meeting was arranged for March 21, 1996, at which representatives of Cabletron
and Network discussed the possibility of a strategic alliance or business
combination transaction. At this time, the parties executed a non-disclosure
agreement and Network provided Cabletron with certain non-public information.
During this time period, Network was also working with another major
provider of computer networking equipment concerning a possible strategic
partnering arrangement. The possibility of discussing a business combination
transaction with this other party (the "Other Party") was considered by Mr.
Eidswick and he reported these matters to Network's Board of Directors.
On April 11, 1996, Messrs. Hartmann and Eidswick met with Mr. Benson, David
Kirkpatrick, the Director of Finance and Chief Financial Officer of Cabletron,
and Gregory DeMund, the Director, Business Development of Cabletron, in New
Hampshire to further explore the possibility of a business combination between
the two companies.
20
<PAGE>
, The regular quarterly meeting of the Board of Directors of Network was
held on April 12, 1996. Mr. Eidswick reported on the status of discussions
with Cabletron and the Board discussed the merits of considering such a
transaction at that time. Management reported on the prospects of Network as
an independent entity, noting specifically the concerns of being able to
effectively bring to market new products, given the absence of a proven sales
strategy in the United States, and the competitive environment, particularly
in light of increasing consolidation in the internetworking industry. The
Board also discussed Network's substantial reliance since its inception on
sales in Japan, which accounted for approximately 82% of revenues in 1995.
Entering 1996, management had been optimistic about Network's ability to
return to profitability in the latter part of 1996, despite its loss of $10.2
million in the fourth quarter of 1995 (which included a non-recurring charge
of $8.7 million related to the acquisition of Fivemere Limited.). The Board
and management were concerned, however, in light of Network's 29% decline in
sales in the first quarter of 1996 as compared to the same quarter in 1995,
its loss of $2.2 million in that quarter and its negative cash flow of $1.2
million during the quarter. It was determined that Mr. Eidswick should
continue to discuss Cabletron's interest, and that he should also invite the
Other Party to consider a possible business combination transaction. Cabletron
was permitted to continue its due diligence review of Network.
On April 15, 1996, Mr. Eidswick contacted the chief executive officer of the
Other Party to discuss the Other Party's possible interest in Network.
Thereafter, Mr. Eidswick received a telephone call from a representative of
the Other Party, who indicated that the Other Party was not interested in
pursuing discussions with Network at that time. Network has not received
further contact from the Other Party concerning its possible interest since
such conversation.
On April 24, 1996, Chris Oliver, the Director of Engineering and
Manufacturing at Cabletron, Mr. DeMund and Mike Skubisz, the Director of
Product Marketing of Cabletron, visited Network to review Network's
engineering and product marketing plans.
On May 8, 1996, Mr. Benson and Mr. Kirkpatrick met with Mr. Eidswick in Ann
Arbor and expressed Cabletron's interest in acquiring Network in a pooling of
interests transaction intended to be a tax free reorganization under the Code.
Mr. Eidswick advised Mr. Benson that he would discuss Cabletron's interest
with the Board of Directors. After consultation with members of Network's
Board of Directors, Unterberg Harris was engaged to act as Network's financial
advisor in connection with considering Network's strategic alternatives,
including a possible transaction with Cabletron, and legal counsel was
directed to discuss the possible terms, including structure and documentation
of a merger of the two companies, with legal counsel for Cabletron.
On May 15, 1996, following Network's Annual Meeting of Shareholders, the
Network Board of Directors met to review strategic alternatives in light of
the Cabletron proposal and other matters. Legal counsel advised the Board
regarding the discharge of its fiduciary duties when considering strategic
alternatives. Unterberg Harris made a detailed financial presentation, set
forth implied valuations of Network using various valuation methodologies and
reported on Cabletron and the Cabletron Common Stock, indicating that
Unterberg Harris was prepared to render its opinion that the consideration
proposed by Cabletron was fair to Network's shareholders from a financial
point of view. Management of Network presented its view of Network's
competitive outlook and position. As a result of these discussions, the Board
directed management, Unterberg Harris and legal counsel to negotiate the terms
of a possible transaction with Cabletron.
During this period, Network and its legal counsel negotiated the terms of
the definitive Merger Agreement with Cabletron and its legal counsel, and due
diligence activities by both companies and their respective counsel and
financial advisors continued. On May 17, 1996, Confidentiality Agreements,
superseding the prior non-disclosure agreement, were executed by the parties.
On May 17, 1996, a special meeting of the Cabletron Board of Directors was
held by conference telephone call. Mr. Benson reported to the Board on the
status of the negotiations between Cabletron and Network. Mr. Benson discussed
the business of Network and how its products and engineering capabilities
would complement those of Cabletron. The Board discussed information about
Network contained in its 1995 annual report on Form 10-KSB (which included its
annual report to shareholders), in its most recent proxy statement, and in its
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most recent quarterly results. Mr. Benson also reported on Network's
assimilation of its recent acquisition of Fivemere. Legal counsel to Cabletron
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 explained how changes in the price of the two corporations'
stock would affect the total price of the Merger. He also discussed plans to
ensure that certain key employees would continue with Network 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 May 20, 1996, a special meeting of the Network Board of Directors was
held by conference telephone call. Mr. Eidswick advised the Network Board of
certain negotiations with Cabletron's management relative to the draft
documents. Legal counsel reported on the status of the discussions with
Cabletron's counsel and discussed drafts of documents that were distributed to
the Network Board for their review. Representatives of Unterberg Harris
updated the Board on certain due diligence activities and financial market
matters.
A special meeting of the Board of Directors of Network was held by
conference telephone call on May 21, 1996. Legal counsel reported on the
status of discussions with Cabletron and discussed drafts of documents that
were distributed to the directors for their review, including provisions in
the draft documents that would permit Network's Board to consider another
offer for Network subsequent to signing an agreement with Cabletron, the
termination rights of the parties, termination fees and other significant
terms of the proposed agreement, including the Exchange Ratio and that it was
not subject to any adjustment, or to so-called "collars," and the Board's
ability to withdraw its recommendation of the Merger and terminate the Merger
Agreement under certain circumstances. Representatives of Unterberg Harris
presented an update of the analysis they had presented at the May 15 Board
Meeting and delivered that firm's opinion that, as of May 21, 1996, the Merger
was fair to Network's shareholders from a financial point of view. Such
opinion was subsequently confirmed in writing.
After discussion and further analysis, Network's Board, by a unanimous vote
of those participating, decided to proceed with the sale of Network and to
accept Cabletron's proposal, and it then approved the Merger Agreement and the
transactions contemplated thereby and recommended that the shareholders of
Network vote in favor of the approval and adoption of the Merger Agreement.
Cabletron, Cabletron Michigan and Network subsequently executed and
delivered the Merger Agreement and, on May 22, 1996, Cabletron and Network
issued a joint press release announcing the execution of the Merger Agreement.
Subsequently, on July 1, 1996, the Board of Directors of Network held a
special meeting by conference telephone call. At this meeting, legal counsel
reported on the progress made to date with regard to the preparation and
filing with the Commission of the Registration Statement on Form S-4, of which
this Proxy Statement/Prospectus is a part, and advised the Network Board as to
various provisions in the Merger Agreement, including the Network Board's
ability to withdraw its recommendation of the Merger and terminate the Merger
Agreement under certain circumstances. In addition, representatives of
Unterberg Harris presented an update of the analysis used in that firm's
opinion that, as of May 21, 1996, the Merger was fair to Network's
shareholders from a financial point of view, including the activity in the
financial markets in general and the decline in the price per share of the
Cabletron Common Stock since the date of the Merger Agreement in particular,
as well as the terms and conditions relative to Network's acquisition of
certain assets of the IBM Waverunner product line and Cabletron's proposed
acquisition of Zeitnet. Then, Unterberg Harris provided its oral opinions
that, as of July 1, 1996, the Merger was fair to Network's Shareholders from a
financial point of view. Such opinion was subsequently confirmed in writing.
After discussion and further analysis, Network's Board unanimously
reaffirmed its recommendation that the shareholders of Network vote in favor
of the approval and adoption of the Merger Agreement.
NETWORK'S REASONS FOR THE MERGER
In approving the Merger Agreement and the transactions contemplated thereby,
the Network Board of Directors considered a number of factors, including:
(i) The business, results of operations, properties and financial
condition of Network and the competitive nature of the industry in which it
operates, based, in part, upon presentations by management
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of Network, including management's view of the business and financial
prospects for Network if it were to remain independent, taking into account
the disappointing sales during the first four months of 1996 in both Japan
and the United States and the increasing need for research and development
resources, and the presentations by Unterberg Harris on May 15, 1996 and
May 21, 1996.
(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 Network and on
information presented by Unterberg Harris.
(iii) 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 fixed at 0.1388 of a share of Cabletron Common
Stock for each share of Network Common Stock.
(iv) That the terms of the Merger Agreement, including the termination
fee provisions, should not unduly discourage third parties from making a
proposal to acquire Network subsequent to signing the Merger Agreement.
(v) The trading price of the shares of Network Common Stock since
Network's initial public offering and that the Merger Consideration (as
defined in the Merger Agreement) represented a premium of approximately 30%
over the average closing sales price for the shares of Network Common Stock
on the Nasdaq National Market over the 30 trading days preceding the
announcement of the execution of the Merger Agreement, noting specifically
that the price of the shares of Network Common Stock had risen higher than
the value of the Merger Consideration, apparently as the result of market
speculation, and that the last sale price on May 21, 1996 exceeded the
Merger Consideration.
(vi) The presentations by Unterberg Harris on May 15, 1996 and May 21,
1996, and Unterberg Harris' opinion that, as of May 21, 1996 the Merger
Consideration was fair, from a financial point of view, to the Network
shareholders. The opinion of Unterberg Harris, updated as of July 1, 1996,
is attached hereto as Annex B. Shareholders of Network are urged to read
the July 1, 1996 opinion of Unterberg Harris carefully in its entirety.
(vii) That the Merger Agreement permits Network, in the exercise of the
fiduciary duties of the Board of Directors, to furnish nonpublic
information and access in response to requests which were not solicited by
Network 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.
(viii) 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 $4.4 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:
. Network'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 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 Network'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.
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. The ability to leverage the research and development capabilities of
Network 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 Network's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position; (ii) the consideration to be
received by Network stockholders in the Merger and the relationship between
the market value of Cabletron Common Stock to be issued in exchange for each
share of Network 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 Network'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 Network's sales,
operating results, and business relationships, (iv) Network'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 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.
OPINION OF NETWORK'S FINANCIAL ADVISOR
Unterberg Harris has delivered its written opinions to the Network Board of
Directors dated May 21, 1996 and July 1, 1996 to the effect that the
consideration to be received by holders of shares of Network Common Stock
pursuant to the Merger Agreement is fair, from a financial point of view, to
such holders. Such opinions confirmed the oral opinions given by Unterberg
Harris to the Network Board on May 21, 1996 and on July 1, 1996, respectively.
No limitations were imposed by the Network Board upon Unterberg Harris with
respect to the investigations made or the procedures followed by it in
rendering its opinion.
THE FULL TEXT OF THE JULY 1, 1996 OPINION OF UNTERBERG HARRIS IS ATTACHED
HERETO AS ANNEX B. NETWORK SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS
ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY UNTERBERG HARRIS. THE SUMMARY OF THE
OPINION OF UNTERBERG HARRIS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCES TO THE FULL TEXT OF SUCH OPINION.
UNTERBERG HARRIS' OPINIONS WERE PREPARED FOR THE NETWORK BOARD OF DIRECTORS
AND ARE DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES OF NETWORK COMMON STOCK
PURSUANT TO THE MERGER AGREEMENT AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY
NETWORK SHAREHOLDER AS TO HOW TO VOTE AT THE NETWORK SPECIAL MEETING. IT
SHOULD BE UNDERSTOOD THAT, ALTHOUGH SUBSEQUENT DEVELOPMENTS MAY AFFECT THE
JULY 1, 1996 OPINION, UNTERBERG HARRIS DOES NOT HAVE ANY OBLIGATION TO UPDATE,
REVISE OR REAFFIRM SUCH OPINION.
In arriving at its opinions, Unterberg Harris reviewed the Merger Agreement
and financial and other information that was publicly available or furnished
to Unterberg Harris by Network and Cabletron, including financial forecasts,
information relative to Network's acquisition of certain assets of the IBM
Waverunner product line (see "Network Express, Inc.--Business--Recent
Developments" and other information provided during discussions with the
management of Network and Cabletron. In addition, Unterberg Harris compared
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certain financial and securities data of Network and Cabletron with various
other publicly traded companies in the communications industry, reviewed the
historical stock prices and trading volumes of Network Common Stock and
Cabletron Common Stock, reviewed prices and premiums, if any, paid in other
business combinations and conducted such other financial studies, analyses and
investigations as Unterberg Harris deemed appropriate for purposes of
rendering its opinion.
In rendering its opinions, Unterberg Harris assumed, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information that was available to it from public sources and that
was provided to it by Network and Cabletron. With respect to the financial
projections supplied to it, Unterberg Harris assumed that such projections
were reasonably prepared and that they reflected the most accurate currently
available estimates and judgments of the management of Network and Cabletron
as to the future operating and financial performance of their respective
companies. Unterberg Harris did not make any independent evaluation or
appraisal of the assets, liabilities, patents or intellectual property of
Network or Cabletron, nor was any such appraisal or evaluation provided to
Unterberg Harris. Unterberg Harris assumed that the Merger would be accounted
for as a pooling of interests in rendering its opinions.
Unterberg Harris' opinions are necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to it as of, the date of its opinion.
The following presentation summarizes certain financial analyses performed
by Unterberg Harris in arriving at its opinion dated July 1, 1996, which
analyses Unterberg Harris discussed with the Network Board of Directors.
Comparable Companies Analyses. Unterberg Harris compared selected historical
and projected operating information, stock market data and financial ratios
for Network (based on the financial terms of the Merger) to selected
historical and projected operating information, stock market data and
financial ratios of Cabletron and of certain other publicly traded
communications companies. These Companies included Ascend Communications,
Inc., Bay Networks, Inc., Cascade Communications Corporation, Cisco Systems,
Inc., Digi International, Inc., FORE Systems, Inc., Network Equipment
Technologies, Inc., Newbridge Networks Corporation, Optical Data Systems,
Inc., Shiva Corporation, Tellabs, Inc., 3Com Corporation, US Robotics
Corporation and Xylan Corporation. Such data and ratios include multiples of
net market value (defined as market value of equity adjusted by adding long-
term debt and subtracting cash and short-term investments) to historical
revenues, market value to historical and projected net income and earnings per
share and market value to book value. An analysis of net market value to
latest twelve month revenues yielded a range of 1.1 times to 47.6 times
revenues with a median of 8.3 times revenues, compared to 6.3 times for
Network in this transaction. An analysis of current stock price to latest
twelve month earnings per share yielded a range of not meaningful (due to
earnings losses) to 178.9 times earnings, with a median of 35.8 times earnings
(excluding not meaningful ratios), compared to a not meaningful ratio for
Network in this transaction due to an earnings loss for the period. An
analysis of current stock price to projected calendar 1996 earnings per share
yielded a range of not meaningful (due to earnings losses) to 166.1 times
earnings, with a median of 31.6 times earnings (excluding not meaningful
ratios), compared to a not meaningful ratio for Network in this transaction
due to an earnings loss projected for the period. An analysis of market value
to book value yielded a range of 2.4 times to 58.3 times book value, with a
median of 11.0 times book value, compared to 5.9 times book value for Network
in this transaction. Unterberg Harris indicated that the multiples calculated
for Network based on the financial terms of the Merger were within the range
of multiples for the comparable companies analyzed and below the median for
multiples of revenue and book value and above the median for earnings per
share. Unterberg Harris indicated that the consideration to be paid to the
Network shareholders pursuant to the Merger Agreement reflects a premium over
earnings multiples for the comparable companies analyzed.
Unterberg Harris compared selected historical and projected operating and
financial ratios for Cabletron to the corresponding data and ratios of the
same comparable group of publicly traded communications companies. An analysis
of net market value to latest twelve month revenues yielded a range of 1.1
times to 47.6 times revenues, with a median of 8.3 times revenues, compared to
4.2 times revenues for Cabletron. An analysis of current stock price to latest
twelve month earnings per share yielded a range of not meaningful (due to
earnings losses) to 178.9 times earnings, with a median of 35.8 times
earnings, compared to 22.6 times earnings for
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Cabletron. An analysis of current stock price to projected calendar 1996
earnings per share yielded a range of not meaningful to 166.1 times earnings,
with a median of 31.6 times earnings (excluding not meaningful ratios),
compared to 19.9 times earnings for Cabletron. An analysis of market value to
book value yielded a range of 2.4 times to 58.3 times book value, with a
median of 11.0 times book value, compared to 6.0 times book value for
Cabletron. Unterberg Harris indicated that the multiples calculated for
Cabletron were within the range of multiples for comparable companies and
below the median in terms of multiples of revenues, earnings per share and
book value.
Comparable Transactions Analysis. Unterberg Harris reviewed certain mergers
and acquisitions involving technology companies. In examining these
transactions, Unterberg Harris analyzed certain income statement and balance
sheet parameters of the acquired companies relative to the consideration paid.
Multiples analyzed included net transaction value (defined as transaction
value adjusted by adding long-term debt and subtracting cash and short-term
investments) to latest twelve month revenues and transaction value to latest
twelve months net income and book value. This analysis included 35 comparable
communications company transactions that occurred from March 24, 1989 to June
3, 1996 or were pending during such period. Such transactions included
Cabletron's acquisition of Zeitnet, Inc. (pending), Adaptec's acquisition of
Cogent Data Technologies (pending), Cisco Systems' acquisition of Stratacom,
Inc. (pending), FORE Systems, Inc.'s acquisition of Alantec Corporation,
Compaq Computer Corporation's acquisition of Networth Inc., 3Com Corporation's
acquisition of Chipcom Corporation and Madge Network N.V.'s acquisition of
Lannet Data Communications, Ltd. In certain cases, complete financial data was
not publicly available for these transactions and only partial information was
used in such instances. The offer price for Network is based on the Exchange
Ratio and closing price of Cabletron Common Stock as of June 27, 1996. An
analysis of net transaction value to latest twelve month revenues yielded a
range of 0.6 times to 27.5 times revenues, with a median of 3.2 times
revenues, compared to 6.3 times revenues for Network in this transaction. An
analysis of transaction value to latest twelve month net income yielded a
range of not meaningful (due to earnings losses) to 78.9 times net income,
with a median of 34.8 times (excluding not meaningful ratios), compared to not
meaningful ratio for Network in this transaction due to an earnings loss in
the period. An analysis of market value to book value yielded a range of 1.2
times to 81.9 times book value, with a median of 4.9 times book value,
compared to 5.9 times book value for Network in this transaction. Unterberg
Harris indicated that the multiples calculated for Network based on the
financial terms of the Merger were within the range for multiples of
comparable transactions analyzed and, above the median for multiples of
revenues, latest twelve month net income and book value. Unterberg Harris
indicated that the purchase price paid to Network shareholders in the Merger
reflected a premium over earnings multiples paid in the comparable merger and
acquisition transactions analyzed because Network had an earnings loss for the
latest twelve month period and projected an earnings loss for the calendar
year ended December 31, 1996.
Acquisition Premiums Analysis. Unterberg Harris also reviewed the premiums
paid for certain merger and acquisition transactions involving selected
communication companies. Unterberg Harris' analysis indicated that the
percentage premium of offer prices to trading prices on the date prior to the
announcement date ranged from 1.9% to 90.2%, with a median of 31.6%. The
percentage premium of offer prices to trading prices 30 days prior to the
announcement date ranged from 14.8% to 104.3%, with a median of 46.8%.
Unterberg Harris also looked at premiums paid in the transactions where the
consideration paid was in the form of the acquiring company's common stock.
This analysis indicated that the percentage premium of offer prices to trading
prices one day prior to the date of announcement of such transactions ranged
from 1.9% to 90.2%, with a median of 25.6%, and the percentage premium 30 days
prior to the date of announcement ranged from 14.8% to 80.8%, with a median of
55.1%. The offer price for Network based on the Exchange Ratio and closing
price of Cabletron Common Stock as of June 27, 1996 was 22.0% below Network's
closing stock price on the day prior to the date of announcement. However, the
offer price as calculated above represented a 44.3% premium to the closing
stock price of Network Common Stock 30 days prior to the date of announcement.
In addition, Unterberg Harris indicated that the offer price for Network
Common Stock represented a 6.2% premium over the closing stock price of
Network Common Stock one week prior to the date of announcement, a 14.0%
premium over the 30 day average of Network Common Stock prior to the date of
announcement and a 28.2% premium over the 60 day average of Network Common
Stock prior to the date of announcement.
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Stock Price Analysis. Unterberg Harris also examined the history of the
trading prices and volume for Network Common Stock and Cabletron Common Stock
separately, in relation to each other, in relation to the Nasdaq National
Market Composite Index and in relation to certain other publicly traded
communications companies. The analysis showed that, when evaluated on an
indexed basis, the daily per share price of Network Common Stock for the last
90 day trading period prior to the date of announcement ranged from 75.7 to
264.9 and ended the period at 264.9, while the daily price per share for
Cabletron Common Stock over the same period prior to the date of announcement
ranged from 86.5 to 118.1 and ended the period at 107.7. The daily composite
price of the selected group of comparable communications companies, for the
same period, ranged from 96.8 to 162.1 and ended the period at 159.5, while
the Nasdaq National Market Composite Index, over the same period, ranged from
100.0 to 126.6 and ended the period at 126.2. For the last 52 week period
prior to the date of the announcement, the analysis showed that, when
evaluated on an indexed basis, the weekly per share price of Network Common
Stock ranged from 27.2 to 143.7 and ended the period at 78.6, while the weekly
per share price of Cabletron Common Stock over the same period ranged from
96.5 to 160.6 and ended the period at 160.6. The composite weekly price of the
selected group of comparable communications companies, when evaluated on an
indexed basis, ranged from 100.0 to 296.8 and ended the period at 296.8, while
the Nasdaq National Market Composite Index ranged from 100.0 to 142.6 and
ended the period at 142.6. Unterberg Harris indicated that for the last 90 day
trading period prior to the date of announcement the price of a share of
Network Common Stock, when evaluated on an indexed basis, showed a greater
percentage increase than the price of a share of Cabletron Common Stock and
the indices analyzed and that the price of a share of Cabletron Common Stock,
when evaluated on an indexed basis, showed a lower percentage increase than
the comparable communications companies and composite indices analyzed. For
the last 52 week period, the price of a share of Network Common Stock, when
evaluated on an indexed basis, showed a lower percentage increase than the
price of a share of Cabletron Common Stock and the comparable communications
companies and composite indices analyzed and that the price of a share of
Cabletron Common Stock, when evaluated on an indexed basis, showed a lower
percentage increase than the comparable communications companies, and a higher
percentage increase than the composite index analyzed. For the last 10 day
trading period prior to the date of announcement, the analysis showed that,
when evaluated on an indexed basis, the daily price per share of Network
Common Stock moved from 100.0 to 150.8, while the daily price per share of
Cabletron Common Stock over the same period moved from 100.0 to 107.7. The
daily composite price of the selected group of comparable communications
companies, for the same period, moved from 100.0 to 105.1, while the Nasdaq
National Market Composite Index moved from 100.0 to 105.2.
Pro Forma Analysis. Unterberg Harris analyzed certain pro forma effects
(excluding transaction costs) resulting from the Merger. For purposes of
comparison, Cabletron's operating results for the fiscal year ending February
28, 1997 were calendarized to a December 31, 1996 year using Cabletron
estimates. The analysis indicated, absent potential synergies, approximately
3.0% dilution on the earnings per share of Cabletron Common Stock (excluding
non-operating charges to income) for the calendar year ending December 31,
1996. The results of such pro forma combination analysis are not necessarily
indicative of future operating results or financial condition for the combined
company. Unterberg Harris also analyzed the contribution of Network and
Cabletron to the pro forma combined company in light of the Network
shareholders' ownership of the combined company being approximately 1.9%. This
analysis showed Network projected to contribute 1.9% of combined revenues for
the year ending December 31, 1996 and that Network would have a negative
effect on earnings due to Network's earnings losses projected for the period.
The summary above does not purport to be a complete description of the
analyses performed by Unterberg Harris in connection with its fairness
opinions. The preparation of a fairness opinion involves various subjective
business determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances, and therefore such an opinion is not readily susceptible to
partial analysis or summary description. Accordingly, notwithstanding the
separate factors summarized above, Unterberg Harris believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
considering individual factors without considering all analyses and factors
could create an incomplete and misleading view of the evaluation process
underlying its opinion. With respect to comparable companies analyses and
comparable transactions analyses, a particular analysis performed by Unterberg
Harris
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is not necessarily indicative of actual values, which may be significantly
higher or lower than suggested by such analyses. The analyses are not
appraisals and do not necessarily reflect the prices for which businesses
actually could be sold or actual values or future results that might be
achieved. Unterberg Harris' analyses were prepared solely as part of Unterberg
Harris' review of the fairness of the consideration to be received by Network
shareholders in connection with the Merger from a financial point of view and
were provided to the Network Board in connection with the delivery of
Unterberg Harris' opinion. In addition, Unterberg Harris' opinion and
presentation to the Network Board was only one of many factors taken into
consideration by the Network Board in making its determination to approve the
Merger.
Pursuant to the terms of the engagement by Network of Unterberg Harris as
its financial advisor in connection with the Merger, upon consummation of the
Merger, Unterberg Harris will receive a fee equal to 1% of the aggregate value
of the consideration received by Network shareholders plus the fair market
value of the Network Options outstanding at the date of the Merger based on
the closing price of the Cabletron Common Stock at the Effective Time. In
addition, Unterberg Harris will be reimbursed for out-of-pocket expenses in
connection with the engagement.
The terms of the fee arrangement were negotiated at arm's length between
Network and Unterberg Harris and approved by the Network Board. The Network
Board, in making its recommendation with respect to the Merger and the Merger
Agreement, was aware of the foregoing fee arrangement. The Network Board
believed that the contingent nature of Unterberg Harris's fee with respect to
the Merger is not an uncommon manner in which financial advisors are
compensated in corporate merger and acquisition transactions and also believed
that any financial incentive that could be viewed to exist as a result did not
preclude Unterberg Harris from rendering independent and objective advice.
Unterberg Harris has provided investment banking services to Network,
including acting as managing underwriter in Network's secondary public
offering in 1995. Unterberg Harris has received customary compensation for its
services. Unterberg Harris is a market maker for Network Common Stock.
Unterberg Harris, as part of its investment banking business, is engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, underwriting, private offerings of securities and valuations
for corporate reorganizations and other purposes. The Network Board selected
Unterberg Harris to act as financial advisor on the basis of Unterberg Harris'
reputation as an investment bank, Network's prior relationship with Unterberg
Harris and Unterberg Harris' familiarity with Network.
CERTAIN CONSIDERATIONS
In considering whether to approve the Merger Agreement and the transactions
contemplated thereby, shareholders of Network should be aware that the
relative stock prices of Cabletron Common Stock and Network Common Stock at
the Effective Time may vary significantly from the prices as of the date of
execution of the Merger Agreement, the date hereof or the date on which
shareholders of Network vote on the Merger due to changes in the business,
operations and prospects of Cabletron or Network, market assessments of the
likelihood that the Merger will be consummated and the timing thereof, general
market and economic conditions, and other factors.
EMPLOYMENT AGREEMENTS
Richard Eidswick, David Hartmann, David Carson, Todd Palgot, Don Taylor,
Keisuke Ito, Glenn Kime, Paul DeVries, Brian Socha, Brian Smith and Timothy
Butler are all currently employees of Network (collectively, the "Network
Employees"). It is a condition to consummation of the Merger that Richard
Eidswick, David Hartmann, David Carson and at least four of the remaining
eight Network Employees have entered into employment agreements with Cabletron
and that such agreements be in force at the Effective Time. Richard Eidswick,
David Hartmann, David Carson, Don Taylor, Keisuke Ito, Glenn Kime, Brian Socha
and Brian Smith have entered into employment agreements with Cabletron.
The terms of Employment Agreements between Cabletron and each of Richard
Eidswick, David Hartmann and David Carson are substantially identical with the
exception of the compensation arrangements for each which are described below.
Each Employment Agreement is for a period of three (3) years and provides that
the
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employee will perform such duties and responsibilities as the Board of
Directors or President of Cabletron may designate. The employee is obligated
to work for 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 Cabletron's employee benefit plans from time to
time in effect for Cabletron employees generally and are 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 Employment Agreement, the employee
also agrees, during his term of employment with Cabletron and for a period of
one (1) year thereafter, not to engage in any business activity which is
competitive with Cabletron and related to computers or computer networks. In
addition the Employment Agreement obligates the employee not to solicit
employees or customers of Cabletron, including former employees and customers
of Network, for a period of one (1) year following termination of the
employee's employment. Under the Employment Agreement, in the event Cabletron
terminates the employee without cause, or in the event the employee terminates
his 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 then current base salary and to participate in Cabletron's employee
benefit plans until the earliest of (i) conclusion of the then-current term of
the Employment Agreement or (ii) a period of twelve (12) months following the
date of termination of employment. Under the terms of his Employment
Agreement, Mr. Eidswick's base salary is $150,000 and he is eligible to
receive up to an additional approximately $150,000 over the three-year term as
bonus compensation and a stock option to purchase up to 30,000 shares of
Cabletron Common Stock. Under the terms of his Employment Agreement, Mr.
Hartmann's base salary is $120,000 and he is eligible to receive up to an
additional approximately $110,000 over the three-year term as bonus
compensation and a stock option to purchase up to 25,000 shares of Cabletron
Common Stock. Under the terms of his Employment Agreement, Mr. Carson's base
salary is $100,000 and he is eligible to receive up to an additional
approximately $102,000 over the three-year term as bonus compensation and a
stock option to purchase up to 20,000 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 Network Board with respect to the
Merger, shareholders of Network should be aware that certain officers and
directors of Network have interests in the Merger, including those referred to
below, that presented them with potential conflicts of interests. The Network
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 Network's Board of Directors" and "--Network's Reasons for
the Merger."
Pursuant to the Merger Agreement, Cabletron has agreed to indemnify, and to
cause Network to indemnify, defend and hold harmless the present and former
officers, directors and employees of Network and any of its subsidiaries
against any costs or expenses (including attorney's fees), judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any claim, action suit, proceeding or investigation, whether
civil, criminal, administrative or investigative (i) arising out of or
pertaining to the transactions contemplated by the Merger Agreement or (ii)
otherwise with respect to any acts or omissions occurring at or prior to the
Effective Time to the fullest extent permitted under applicable law. In
addition, Cabletron has agreed to honor and fulfill the obligations of Network
pursuant to indemnification agreements with Network's directors and officers
existing at or before the Effective Time and has agreed to cause to be
maintained in effect for not less than three years directors' and officers'
liability insurance covering those persons covered by Network's directors' and
officers' liability insurance policy at the date of the Merger Agreement on
terms substantially comparable to such policy. See "The Merger Agreement--
Indemnification and Insurance."
As of the Network Record Date, directors and executive officers of Network
and their affiliates have the right to vote approximately 14% of the
outstanding shares of Network Common Stock. Each of the directors and
executive officers has advised Network that he or she presently intends to
vote or direct the vote of all the outstanding shares of Network Common Stock
over which he or she has voting control in favor of approval and adoption of
the Merger Agreement.
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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 Network Common Stock
pursuant to an employee stock option or otherwise as compensation. Each
Network 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 or after the Merger
(whether or not such transactions are in connection with the Merger).
Moreover, the description set forth below is based on existing law and
currently applicable treasury regulations promulgated under the Code, current
published administrative positions of the Internal Revenue Service contained
in revenue rulings and revenue procedures, and judicial decisions, all of
which are subject to change either prospectively or retroactively.
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) Each of Cabletron, Network and Cabletron Michigan will be a party to
the reorganization within the meaning of the Section 368(b) of the Code so
that none of such parties will recognize gain or loss solely as a result of
the Merger.
(ii) No gain or loss will be recognized by Network shareholders as a
result of the Merger with respect to shares of Network Common Stock
converted solely into Cabletron Common Stock (except with respect to cash,
if any, received by such Network shareholders in lieu of fractional share
interests in Cabletron Common Stock).
(iii) The tax basis in the Cabletron Common Stock received by Network
shareholders in the Merger will be the same as the tax basis in the Network
Common Stock surrendered in exchange therefor reduced by any basis
allocable to fractional share interests in Cabletron Common Stock for which
cash is received.
(iv) The holding period of the shares of Cabletron Common Stock received
in the Merger by Network shareholders will include the period during which
the shares of Network Common Stock surrendered in exchange therefor were
held, provided that such shares of Network Common Stock were held as
capital assets at the Effective Time.
(v) Cash received by a holder of Network Common Stock in lieu of a
fractional share interest in Cabletron Common Stock will result in the
recognition of gain or loss for federal income tax purposes, equal to the
difference between the amount of cash received and the portion of the basis
of the share of Network Common Stock allocable to such fractional share
interest. Such gain or loss will be capital gain or loss, provided that
such share of Network 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
Network Common Stock has been held for more than one year.
No advance ruling will be requested or received from the Internal Review
Service as to the federal income tax consequences of the Merger. It is a
condition to the Merger that Cabletron and Network shall each have received an
opinion of their respective counsel to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
Network 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. The tax opinions are
subject to certain assumptions and qualifications, including but not limited
to the truth and accuracy of certain representations made by Cabletron,
Network, Cabletron Michigan, and certain Network shareholders, including
representations in certain certificates to be delivered to counsel by the
respective management of Cabletron, Network, Cabletron Michigan and certain
Network shareholders.
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EACH HOLDER OF SHARES OF NETWORK COMMON 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 Network
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 Network 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 Network of a
letter from each of KPMG Peat Marwick LLP, independent certified public
accountants of Cabletron, and Arthur Andersen LLP, independent public
accountants of Network, to the effect that the Merger qualifies for pooling of
interests accounting treatment if consummated in accordance with the Merger
Agreement.
ANTITRUST MATTERS; GOVERNMENTAL FILINGS
Pursuant to the requirements of the HSR Act, Cabletron and Network each
filed a Notification and Report Form for review under the HSR Act with the FTC
and the Antitrust Division on May 31, 1996. The waiting periods under the HSR
Act with respect to such filings are expected to be terminated on or before
June 30, 1996. Even if the HSR Act waiting periods are terminated, the FTC or
the Antitrust Division could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking
divestiture of substantial assets of Cabletron or Network. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made
or, if such a challenge is made, of the result. Cabletron and Network do not
believe that any additional 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 Department of Commerce of the State of
Michigan in accordance with the MBCA.
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 shareholders of Network or
Cabletron who are deemed to control or be under common control with Network or
Cabletron, respectively ("Affiliates"). Affiliates of Network 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, Network 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 Network to execute and deliver, prior to the
closing of the Merger, an agreement that such persons will not offer to sell,
sell or otherwise dispose of Cabletron Common Stock or Network 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 Network after the Effective Time have been
published. Thereafter, it is expected that Affiliates of Network 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
Network 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.
NO APPRAISAL RIGHTS
Under the MBCA, the holders of Network Common Stock are not entitled to any
dissenters' right of appraisal with respect to the Merger because the shares
of Cabletron Common Stock to be issued in the Merger will be listed on a
national securities exchange.
THE MERGER AGREEMENT
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety be 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. Network 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 Cabletron, Network and Cabletron
Michigan as to their organization and capitalization, their authority to enter
into the Merger Agreement and to consummate the transactions contemplated
thereby, the existence of certain liabilities and the absence of certain
material undisclosed liabilities and changes in their businesses. Such
representations and warranties will not survive consummation of the Merger.
CONDUCT OF CABLETRON'S AND NETWORK'S BUSINESS PRIOR TO THE MERGER
Under the terms of the Merger Agreement, Network 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, Network will conduct its business and
will cause the businesses of its subsidiaries to be conducted only in, and
Network 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 Network or its subsidiaries in contemplation of the Merger;
and Network will use all reasonable commercial efforts to preserve
substantially intact the business organization of Network and its
subsidiaries, to keep available the services of the present officers,
employees and consultants of Network and its subsidiaries and to preserve the
present relationships of Network and its subsidiaries with customers,
suppliers and other persons with which Network or any of its subsidiaries has
significant business relations.
Network 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 Articles
of Incorporation or By-Laws of Network 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 in
Network, any of its subsidiaries or affiliates; (c) sell, pledge, dispose of
or encumber any assets of Network 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 $150,000 in the aggregate);
(d) (i) declare, set aside, make or pay any dividend or other distribution in
respect of any of its capital stock, except that a wholly-owned subsidiary of
Network may declare and pay a dividend to Network, (ii) split,
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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, 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 Network Common Stock or
any option, warrant or right, directly or indirectly, to acquire shares of
Network Common Stock, or propose to do any of the foregoing; (e) (i) acquire
any corporation, partnership or other business organization or division
thereof, except as previously disclosed to Cabletron; (ii) incur any
indebtedness for borrowed money 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 calling for aggregate payments in
excess of $100,000; (iv) authorize any capital expenditures or purchase of
fixed assets which are, in the aggregate, in excess of $150,000 for Network
and its subsidiaries taken as a whole; 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 Network 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 Network may increase wages in the ordinary
course of business consistent with Network's past practice; (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, 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 contained in Network reports filed with the Commission prior to the
date of the Merger Agreement 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 would make any of the representations or warranties of
Network contained in the Merger Agreement untrue or incorrect or prevent
Network from performing or cause Network not to perform its covenants
hereunder.
Cabletron 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, that, unless Network otherwise agrees in
writing, Cabletron will conduct its business, and cause the businesses of its
subsidiaries to be conducted, in the ordinary course, other than actions taken
by Cabletron or its subsidiaries in contemplation of the Merger, and shall not
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Network: (a) amend or otherwise change its
Certificate of Incorporation or By-Laws; (b) declare, set aside, make or pay
any dividend or other distribution in respect of any of its capital stock,
except that a wholly owned subsidiary of Cabletron may declare and pay a
dividend to Cabletron; or (c) take or agree in writing or otherwise to take
any action which would make any of the representations or warranties of
Cabletron contained in the Merger Agreement untrue or incorrect or prevent
Cabletron from performing or cause Cabletron not to perform its covenants
under the Agreement.
NO SOLICITATION
The Merger Agreement provides, subject to certain exceptions, that Network
cannot, directly or indirectly, through any officer, director, employee,
representative or agent of Network 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 or
similar transactions involving Network or any subsidiaries of Network other
than the Merger (each, an "Acquisition Proposal"), (ii) engage in negotiations
or discussions concerning, or
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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 Network may furnish
or provide such information or consider, negotiate, agree to, approve or
recommend to the shareholders of Network an Acquisition Proposal not solicited
in violation of the Merger Agreement if, in the opinion of the Board of
Directors of Network, it is required in the discharge of its fiduciary duties
under applicable law to furnish or provide such information or to consider,
negotiate, agree to, approve or recommend such an Acquisition Proposal (after
receiving advice from its independent legal counsel to such effect).
Notwithstanding anything to the contrary in the Merger Agreement, Network
may provide access and furnish information (but not encourage the request for
such information) pursuant to a confidentiality agreement at least as
restrictive as the one in effect between Network and Cabletron concerning its
business, properties or assets to any person which has (i) requested such
access and information in connection with an Acquisition Proposal, or (ii)
stated in writing that it has a serious intention to make such an Acquisition
Proposal, in any such case of (i) or (ii) if in the opinion of the Board of
Directors of Network it is required in the discharge of its fiduciary duties
under applicable law to provide such access or furnish such information.
Network may not provide any nonpublic information to such person if it has not
previously or simultaneously provided such information to Cabletron.
Finally, nothing in the Merger Agreement shall prohibit Network from (i)
taking and disclosing to Network's shareholders a position with respect to a
tender offer by a third party pursuant to Rule 14d-9 and Rule 14e-2
promulgated under the Exchange Act, or (ii) making such disclosure to
Network's shareholders which, in the opinion of the Board of Directors of
Network, after consultation with independent legal counsel to Network, may be
required under applicable law.
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 approval of the Merger Agreement and the Merger by the
requisite vote of the shareholders of Network; (b) the Commission having
declared the Registration Statement on Form S-4, of which this Proxy
Statement/Prospectus is a part, effective; (c) the waiting period applicable
to the consummation of the Merger under the HSR Act having expired or been
terminated; (d) the absence of any temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction preventing the consummation of the Merger, the absence of any
pending proceeding brought by any administrative agency, seeking any of the
foregoing be pending, and the absence of 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; (e) the
absence of any instituted, pending or threatened action or proceeding by any
governmental authority or administrative agency or any judgment, decree or
order of any governmental authority or administrative agency seeking to
prohibit or limit Cabletron from exercising all material rights and privileges
pertaining to its ownership of Network 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 Network and its subsidiaries), as a result of the
Merger or the transactions contemplated by the Merger Agreement; and (f) the
receipt by Cabletron and Network of written opinions of their respective
counsel to the effect that, based upon certain representations and assumptions
and subject to certain qualifications, the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code.
The obligations of Cabletron and Cabletron Michigan 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 Network 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 certain
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officers of Network; (b) the performance and compliance by Network in all
material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by Network at or prior to the
Effective Time, and the receipt of a certificate to such effect signed by
certain officers of Network; (c) Network 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 Network of the transactions
contemplated by the Merger Agreement, except where the failure to receive such
consents, etc. could not reasonably be expected to have a Material Adverse
Effect on Network or Cabletron; (d) the receipt by Cabletron of an opinion
from each of KPMG Peat Marwick LLP and Arthur Andersen LLP, independent public
accountants, to the effect that the Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with the Merger Agreement;
(e) the receipt by Cabletron of an "affiliate agreement" from each person who
is identified as an affiliate of Network; (f) the termination of all existing
registration rights of Network shareholders; and (g) that certain specified
persons shall have entered into employment agreements with Cabletron on
mutually acceptable terms, such agreements shall be in full force and effect
as of the Effective Time and such persons shall be in the employ of Network
immediately prior to the Effective Time.
The obligation of Network 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 Cabletron Michigan 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 certain officers of Cabletron; (b) the
performance and compliance by Cabletron and Cabletron Michigan in all material
respects with all agreements and covenants required by the Merger Agreement to
be performed or complied with by them at or prior to the Effective Time, and
the receipt of a certificate to such effect signed by certain officers of
Cabletron; (c) Cabletron and Cabletron Michigan 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 them of the transactions contemplated
by the Merger Agreement, except where the failure to receive such consents,
etc. could not reasonably be expected to have a Material Adverse Effect on
Network or Cabletron; (d) the receipt of a copy of the opinions furnished to
Cabletron from each of KPMG Peat Marwick LLP and Arthur Andersen LLP,
independent public accountants, to the effect that the Merger qualifies for
pooling of interests accounting treatment if consummated in accordance with
the Merger Agreement; (e) that the fairness opinion prepared by the financial
advisor to Network stating that from a financial point of view the Merger is
fair to Network shareholders has not been withdrawn, amended or modified; and
(f) 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 shareholders of Network: (a) by
mutual written consent duly authorized by the Boards of Directors of Cabletron
and Network; (b) by either Cabletron or Network if the Merger shall not have
been consummated by September 30, 1996; (c) by either Cabletron or Network if
a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission has issued a nonappealable final order,
decree or ruling having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger; (d) by Cabletron or Network, if the
requisite vote of the shareholders of Network, have not been obtained by
September 30, 1996; (e) by Cabletron or Network, if (i) the Board of Directors
of Network withdraw, modify or change its approval or recommendation of the
Merger Agreement or the Merger in a manner adverse to Cabletron, (ii) the
Board of Directors of Network shall have recommended to the shareholders of
Network an Alternative Transaction (defined below), or (iii) a tender offer or
exchange offer for 25% or more of the outstanding shares of Network Common
Stock is commenced (other than by Cabletron or an affiliate of Cabletron) and
the Board of Directors of Network recommends that the shareholders of Network
tender their shares in such tender or exchange offer; (f) by Cabletron or
Network, respectively (i) if any representation or warranty of Network or
Cabletron,
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respectively, set forth in the Merger Agreement was untrue when made, or (ii)
upon a breach of any covenant or agreement on the part of Network or
Cabletron, respectively, set forth in the Merger Agreement, (either of (i) or
(ii) being a "Terminating Breach"), provided, that, if such Terminating Breach
is curable prior to September 30, 1996 by Network or Cabletron, as the case
may be, neither Cabletron nor Network, respectively, may terminate the Merger
Agreement under this section; (g) by Cabletron, if any representation or
warranty of Network becomes untrue as of the Effective Time such that the
requisite condition to closing would not be satisfied, or by Network, if any
representation or warranty of Cabletron becomes untrue as of the Effective
Time such that the requisite condition to closing 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 Network; or (i) by Cabletron
or Network, if Network enters into a definitive agreement relating to an
Alternative Transaction.
An "Alternative Transaction" is defined in the Merger Agreement to mean any
of (i) a transaction pursuant to which any person other than Cabletron or its
affiliates (a "Third Party") acquires or would acquire more than 25% of the
outstanding shares of Network, (ii) a merger or other business combination
involving Network pursuant to which any Third Party acquires more than 25% of
the outstanding equity securities of Network 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 of Network
or any of its subsidiaries having a fair market value equal to more than 25%
of the fair market value of all the assets of Network 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 become void and there shall be no liability on the part of any
party to the Merger Agreement or any of its affiliates, directors, officers or
shareholders except (i) certain fees, including termination fee described
below, and certain other obligations including specifically confidentiality
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
Network shall pay Cabletron a fee of $4,400,000 (the "Termination Fee") plus
actual, documented and reasonable out-of-pocket expenses of Cabletron relating
to the transactions contemplated by the Agreement (the "Cabletron Expenses")
upon the occurrence of any one of the following events: (a) the termination of
the Merger Agreement by Cabletron or Network as a result of the failure to
receive the requisite vote for approval and adoption of the Merger Agreement
by the shareholders of Network by September 30, 1996; provided, however, that
Cabletron is entitled only to be paid the Cabletron Expenses if the Board of
Directors of Network has not withdrawn, modified or changed its recommendation
of the Merger in a manner adverse to Cabletron; (b) the termination of the
Merger Agreement by Cabletron or Network because (i) the Board of Directors of
Network has modified its recommendation of the Merger in a manner adverse to
Cabletron, (ii) the Board of Directors of Network has recommended to the
shareholders of Network an Alternative Transaction, or (iii) a tender offer
for 25% or more of the Network Common Stock is commenced and the Board of
Directors of Network recommends that the shareholders of Network tender their
shares; (c) the termination of the Merger Agreement by Cabletron on account of
a Terminating Breach by Network; (d) 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 of Network
provided, however, that Cabletron shall not be entitled to the Termination Fee
or the Cabletron Expenses in this situation unless Network opted out of
chapter 7A, Sections 775 through 784 of the MBCA, or chapter 7B, Sections 790
through 799 of the MBCA; or (e) the termination of the Merger Agreement by
Cabletron or Network because Network entered into a definitive agreement
relating to an Alternative Transaction.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, Network shall, to the fullest extent
permitted under applicable law or under Network's Articles of Incorporation,
By-laws or any applicable indemnification agreements and regardless
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of whether the Merger becomes effective, indemnify, defend and hold harmless,
and, after the Effective Time, Cabletron shall, and shall cause Network as its
wholly-owned subsidiary after the Merger (the "Surviving Corporation"), to the
fullest extent permitted under applicable law, to indemnify, defend and hold
harmless, each present and former director, officer or employee of Network or
any of its subsidiaries (collectively, the "Indemnified Parties") against any
costs or expenses (including attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit proceeding or investigation, whether civil, criminal,
administrative or investigative, (i) arising out of or pertaining to the
transactions contemplated by the Merger Agreement or (ii) otherwise with
respect to any acts or omissions occurring at or prior to the Effective Time.
Any determination required to made with respect to whether an Indemnified
Party's conduct complied with the standards set forth under Michigan law,
Network's Articles of Incorporation, By-laws or indemnification agreements, as
the case may be, shall be made by independent counsel mutually acceptable to
Cabletron and the Indemnified Party.
For a period of not less than three years after the Effective Time,
Cabletron shall, or shall cause the Surviving Corporation to, maintain in
effect, if available, directors' and officers' liability insurance covering
those persons who are currently covered by Network's directors' and officers'
liability insurance policy on terms substantially comparable to those now
applicable to directors and officers of Network; provided, however, that in no
event shall Cabletron or the Surviving Corporation be required to expend in
excess of 200% of the annual premium currently paid by Network for such
coverage; and provided further, that if the premium for such coverage exceeds
such amount, Cabletron or the Surviving Corporation shall purchase a policy
with the greatest coverage available for such 200% of the annual premium.
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NETWORK EXPRESS, INC.
BUSINESS
Introduction
Network develops, manufactures, markets, and supports a wide range of
distributed network access products that enable its customers to communicate
quickly, reliably and economically from geographically dispersed locations
using wide area networking services including ISDN, analog, Frame Relay, X.25
and dedicated circuits. Network's products are referred to as "bandwidth-on-
demand" products because they permit the establishment of high-speed
connections whose bandwidth, duration and destination can be adjusted to suit
user application needs. Network's product suite provides end-to-end network
access capabilities and can be classified as (i) central site products, (ii)
branch office products, (iii) remote site products and (iv) leased line backup
products.
Network historically has offered two core central site products, which
together are known as the NE Series: (a) the NE ISDN InterHub, which uses
Network's proprietary software to connect a specific LAN over ISDN to multiple
individual or networked personal computers, and (b) the NE ISDN Router, which
uses Network's proprietary software to connect different LANs through the ISDN
dial-up network. The NE Series is designed in a modular fashion to provide
flexibility and to simplify technical support and maintenance. The NE Series
is available with several software options, including NE Secure, which
provides for encrypted communications links across wide area networks. In
March 1996, Network introduced the NE Digital Modem, an option for Network's
central site products providing analog modem dial-in support in addition to
ISDN support, both using central site ISDN BRI or PRI lines; and NE Fusion, a
board-level solution which provides ISDN connectivity for Novell, Inc.'s
Netware(R).
The NE Link-1000, introduced in March 1995, is a self-contained system
designed to provide remote network access for a branch office or small central
site. In March 1996, as a result of Network's strategy to provide a complete
end-to-end remote access solution, Network announced the introduction of the
NE Nomad, designed to meet the needs of the small office or home office
("SOHO") user for high speed ISDN connectivity to centralized networks such as
corporate LANs or the Internet.
Network's Fivemere products provide backup and disaster recovery facilities
for leased line circuits using ISDN. Fivemere's products are used for mission-
critical applications where even a minute of down time is unacceptable.
Background
Network was incorporated under the laws of the state of Michigan on March 9,
1990. Its principal executive offices are located at 305 East Eisenhower
Parkway, Ann Arbor, Michigan 48108.
In May 1994, Network established a wholly-owned subsidiary in Japan, Network
Express K.K., and opened a small office in Tokyo that it uses for technical
support, local communications and coordination. Network has opened regional
sales offices in San Ramon, California (June 1994), New York, New York
(January 1995), and Washington, D.C. (June 1995). In October 1995, Network
established a wholly owned subsidiary in Germany, Network Express GmbH, to
support Network's efforts to expand its European sales and marketing presence.
On November 17, 1995, Network acquired Fivemere Limited, a provider of ISDN-
based digital circuit backup products located in Aldershot, England. In
connection with the acquisition, the operations of Network Express Europe
Ltd., Network's wholly-owned subsidiary, were merged into Fivemere effective
January 1, 1996.
Recent Developments
On July 1, 1996, Network entered into a transfer agreement with
International Business Machines Corporation ("IBM"), pursuant to which Network
has acquired certain assets pertaining to IBM's Waverunner product line,
including the "Waverunner" name (with all rights in and to any trademarks and
applications therefor), inventory and specified rights to use technology. The
Waverunner product line consists of three products: (i) the IBM 7845 network
terminator (NT1), which provides an interface between a telephone line and
ISDN; (ii) the Waverunner credit card, which plugs into notebook personal
computers and which provides an interface between a telephone line and ISDN
and also acts as a modem; and (iii) the Waverunner ISA Board, which plugs into
desktop personal computers and which provides an interface between a telephone
line and ISDN. Under the terms of the transfer agreement, the purchase price
is $7.0 million, with $1.5 million in cash paid on July 1, 1996 and, assuming
the closing of the Merger, with the remainder of the purchase price of $5.5
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million in cash due on August 2, 1996. In the event that the Merger does not
close, the remainder of the purchase price is due in two installments (which
are unsecured), with the first installment of $1.5 million (plus interest on
$5.5 million at an annual rate of 8 1/2%) due on December 27, 1996 and with the
second installment of $4.0 million (plus interest thereon at an annual rate of
8 1/2%) due on June 30, 1997.
Risk Factors
Cabletron and Network have entered into the Merger Agreement with the
expectation that the Merger will result in certain beneficial synergies. See
"The Merger--Network's Reasons for the Merger" and "--Cabletron's Reasons for
the Merger." Network's management has begun to take certain actions which are
intended to permit Cabletron and Network to more swiftly achieve the intended
synergies. These actions include suspending Network's search for a new Vice
President of Sales, which it had begun in February 1996, increasing research
and development staffing levels, and redirecting certain research and
development efforts. In general, Network's efforts to prepare for integrating
its operations with Cabletron's following consummation of the Merger have also
focused the attention of Network's management away from the normal day-to-day
business of Network. In addition, under certain circumstances upon termination
of the Merger Agreement, Network will be required to pay Cabletron a
termination fee of $4.4 million, plus certain expenses. In the event that the
Merger is not consummated, Network's results of operations, financial
condition, business and prospects may be materially and adversely affected as a
result of Network's efforts to prepare to integrate its operations with those
of Cabletron or its requirement to pay Cabletron a termination fee and
expenses.
Also, as a result of Network's recent acquisition of certain of the assets of
the IBM Waverunner product line, in the event the Merger is not consummated,
Network will need to devote significant sales and marketing resources in order
to realize the potential of the acquisition and Network will be required to
payoff or otherwise refinance the $5.5 million principal amount due in
installments of $1.5 million (plus, applicable interest) on December 27, 1996
and of $4.0 million (plus, applicable interest) on June 30, 1997. See "Network
Express, Inc.--Business--Recent Developments".
In addition, Network's business, without giving effect to the Merger, is
subject to significant risks, including, but not necessarily limited to, the
factors set forth below.
Dependence on Single Customer. In 1995, 1994 and 1993, sales to Soliton
Systems, K.K. ("Soliton"), the exclusive distributor of Network's products in
Japan, accounted for approximately 82%, 88% and 79%, respectively, of Network's
net sales (and approximately 12% of net sales in the first quarter of 1996). A
majority of such net sales were attributable to NE ISDN Router products. Under
Network's agreement with Soliton (the "Soliton Agreement"), Soliton alone may
distribute Network's products in Japan; however, Soliton may sell products of
other companies, including those of Network's competitors. Soliton currently
sells competitive products of Cisco Systems, Inc., Seiko Instruments, Inc.,
3Com Corporation and Shiva Corporation. Further, the Soliton Agreement expires
in April 1997 and there can be no assurance that it will be renewed, or, if
renewed, that its terms will be as favorable to Network as those under the
existing agreement. Any de-emphasis of Network's products by Soliton,
termination of the Soliton Agreement, modifications to terms less favorable to
Network, or any operational or financial failure of Soliton, could have a
material adverse affect on the business, results of operations and financial
condition of Network. Soliton, itself, is the manufacturer of certain competing
products directed at workstation ISDN access.
Network believes Soliton is highly dependent on a limited number of
customers, including Nippon Telephone & Telegraph ("NTT") which Network
believes accounted for over 50% of Soliton's revenue in 1995. Any delays,
changes in purchasing patterns, termination of programs or competition could
have a material adverse affect on Soliton and, in turn, Network. There can be
no assurance that Soliton or its customers will continue to place orders with
Network. In addition, the sales cycles of Network's products are relatively
long and often dependent upon factors such as the size and timing of Soliton's
customers' projects. Network's planned product shipments for a single customer
project can be a significant portion of a quarter's revenue, and delays in the
timing of, or Network's ability to meet, delivery requirements could have a
material adverse affect on Network's results of operations. In addition,
decisions by customers to build inventory and sell from inventory could lead to
reductions in demand, which could have a material adverse affect on Network's
business, financial condition and results of operations.
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Fluctuations in Quarterly Operating Results. Network expects that its
quarterly operating results will fluctuate in the future as the result of
several factors, including Network's ability to develop, introduce and ship new
products, its mix of products sold, the mix of distribution channels employed,
the success of its United States and European sales and marketing initiatives,
the timing of new product announcements and introductions by Network, its major
customers and its competitors, market acceptance of new or enhanced versions of
Network's products, changes in the level of operating expenses, competitive
pricing pressures, the gain or loss of significant customers, increased
research and development expenses associated with new product introductions and
general economic conditions. Network's dependence on a single customer and its
purchasing patterns in Japan also contributes to fluctuations in sales and
unpredictability of future orders, and is expected to continue to do so in the
future. In addition, Network typically operates with little backlog and
quarterly sales and operating results generally depend on the volume and timing
of and ability to fulfill orders received within the quarter. All of the
foregoing factors are difficult for Network to forecast, and these and other
factors can materially and adversely affect Network's business and operating
results for one quarter or for a series of quarters. Network receives a limited
number of large purchase orders from its major customer, which in turn, is
reliant on purchase orders from its major customers. A significant portion of
Network's expense levels is relatively fixed in advance based in large part on
Network's forecasts of future sales. If sales are below expectations in any
given quarter, the adverse impact of the shortfall on Network's operating
results may be magnified by Network's inability to adjust spending to
compensate for the shortfall. Network may also reduce prices or increase
spending in response to competition or to pursue new market opportunities.
Consequently, there can be no assurance that Network will be able to operate
profitably, particularly on a quarter to quarter basis.
Limited History of Operations and Profitability. Network was incorporated in
March 1990 and began shipping products in June 1991. As of December 31, 1995,
Network had an accumulated deficit of $11,384,539. Network has experienced
higher levels of revenue on an annual basis; however, there can be no assurance
that revenue growth will continue. In fact, the fourth quarter of 1995 and the
first quarter of 1996 each represented a decrease in revenue and operating
income due to several of the factors discussed herein.
Technological Change, New Products and Market Acceptance. The data
communications industry is characterized by rapid and significant technological
change, the frequent introduction of new products and services using new
technologies and short product life cycles. The introduction of products
embodying new technologies, the emergence of new industry standards or changes
in communications services offered may adversely affect Network's ability to
sell its products. In addition, customer requirements for products, product
support and services are complex and constantly changing. Network's ability to
anticipate and respond to changes in technology, industry standards and
customer needs and to develop and introduce new (or enhance existing) products
on a timely and cost-effective basis will be a significant factor in its
competitive position and growth prospects. The introduction of new and enhanced
products also requires that Network manage transitions from older products in
order to minimize disruptions in customer orders, avoid excess inventory of old
products and ensure that adequate supplies of new product can be delivered to
meet customer orders. There can be no assurance that Network will be successful
in developing, introducing or managing the transition to new or enhanced
products or that any such products will be responsive to technological changes
or will gain market acceptance in Japan or elsewhere. Network's business and
operating results would be materially and adversely affected if Network were to
be unsuccessful, or to incur significant delays, in developing and introducing
such new products or enhancements.
In the past, Network has experienced delays in product release and
introduction, and there can be no assurance that such delays will not occur in
the future. Network budgets amounts to expend for research and development
based on planned product introductions and enhancements; however, due to
rapidly changing technologies, evolving industry standards, competitive product
introductions and shorter product life cycles, actual expenditures may
significantly differ from budgeted expenditures. In this regard, in 1995, 1994
and 1993, research and development expense was approximately 23%, 20% and 31%,
respectively, of Network's net sales. There can be no assurance as to Network's
ability to bring sufficient funds and talent to bear to meet the challenges
related to rapid technological change.
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Additionally, if technologies or standards supported by the services of
telephone companies using Network's products, or the products themselves,
become obsolete or fail to gain widespread commercial acceptance, Network's
business may be adversely affected. Moreover, complex products such as those
offered by Network may contain undetected or unresolved software errors when
they are first introduced or as new versions are released. There can be no
assurance that, despite extensive testing by Network, software errors will not
be found in new products or upgrades after commencement of commercial
shipments, resulting in delay or loss of market acceptance. Future delays in
the introduction or shipment of new or enhanced products, the inability of such
products to gain market acceptance or problems associated with new product
transitions could adversely affect Network's operating results.
Reliance on ISDN. Network has developed its products principally for use in
connection with the ISDN dial-up service. Accordingly, the acceptance of
Network's products is tied to availability of low-priced ISDN and other digital
services offered by the telephone companies. Should telephone companies in
Network's current or prospective markets decide, for any reason, including
higher governmental pricing requirements, not to pursue or continue the
deployment and low pricing of ISDN, the adverse impact on the operations of
Network would be marked. In addition, remote access can be provided by methods
other than ISDN, such as dedicated private networks, analog networks, cable
networks, frame relay and ATM. Moreover, the cost of dedicated leased lines in
the United States is low and competitive with that of dial-up services, and
this could inhibit the demand for such services and hence for Network's
products. No assurance can be given that ISDN will be the prevailing dial-up
remote access service in Network's current or prospective markets or any other
region.
Competition. The ISDN data communications equipment market is highly
competitive and complex, and it is expected to become even more competitive
through the entry of new firms into the market, and through the expansion of
the product lines of companies currently on the periphery of Network's market
sector. Network believes that it competes primarily on the basis of its
technology, product features, quality, functionality and customer service and
support. Accordingly, breadth of product line and price competition are
expected to be increasingly important and may particularly inhibit Network's
success in the non-Japanese market. In addition, a number of larger competitors
have established customer bases and broad distribution channels, both direct
and indirect. As a result, competition has been increasing and is likely to
continue to increase. The industry is also experiencing consolidation and this
fact, too, has complicated the competitive environment.
Current and potential competitors include several large, well financed
companies with substantial research and development and marketing resources
that could be utilized to develop and release products competing directly with
those of Network. The digital switched service segment of the internetworking
industry is in its early stages of development and Network expects additional
competition from existing competitors and from a number of companies that may
enter Network's existing or future markets. In addition, the delivery of remote
access can be provided by methods other than ISDN, such as dedicated private
networks, analog networks, cable networks, frame relay and ATM, all of which
operate to heighten the competitive nature of the data communications industry.
The additional competition could have a material adverse affect on Network's
business, results of operations and financial condition.
Need to Expand Product Offering. Network believes that in order to be
successful in establishing significant United States sales, it must offer
potential customers a complete end-to-end solution to their distributed network
access needs. A majority of Network's net sales are attributable to NE ISDN
Router products. Because of differences in LAN configurations between the
United States and Japan, and market preference for interoperable products in
the United States, Network believes that sales in the United States, should
such market develop, will be largely dependent upon NE ISDN InterHub products
and other recently announced products. Such products have not to date accounted
for a significant percentage of sales in Japan or elsewhere.
Network believes that its product offerings must be increased to offer
solutions for the large end-user segment of the market which includes scaling
up product connectivity and functionality and scaling down to accommodate
single user remote sites, such as those found in organizations where
telecommuting is important. In addition, Network is exploring the possibility
of selling products manufactured by others, on a private label basis or
otherwise, which could require Network to carry inventory of such products and
expose Network to added risks related thereto. There can be no assurance that
Network's scale-up/scale-down plans will be
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successful, or that the costs of efforts currently underway or planned will be
accomplished at reasonable cost. The failure to successfully implement this
strategy could have a material adverse affect on Network's ability to develop
meaningful United States sales and could adversely affect Network's business,
operations and financial condition.
Network's U.S. sales and marketing initiative fell short of its goals in
1995, due in part to the fact that Network's product offerings did not provide
a complete end-to-end solution for remote-user access. In March 1996, Network
introduced several new products that it believes will enable it to market and
sell a complete internetworking solution including: NE Fusion, an ISDN access
product directly integrated into the Novell NetWare environment; NE Digital
Modem, an option for Network's central site products providing analog modem
dial-in support in addition to ISDN support; and NE Nomad, a remote access
device for the home or small office. There can be no assurance, however, that
the introduction of these new products will result in improved sales in the
United States or elsewhere, or that the products generally will meet the needs
of the marketplace or achieve market acceptance.
Management of Growth. Network has faced growth and expansion which has
placed, and will continue to place, a significant strain on its administrative,
operational and financial resources and increased demands on its systems and
controls, especially as Network attempts to expand its customer base and
becomes less reliant on Soliton, its single customer in Japan. To manage growth
effectively, Network will need to hire, train, motivate and manage its
employees. Significant costs were incurred, for example, in Network's U.S.
sales and marketing initiative in 1995, while revenue fell short of target.
Absent the pending Merger, Network will need to restructure this initiative for
the remainder of 1996 in hopes of improved results; however, there can be no
assurance that this continued commitment of resources will result in increased
sales in the United States or that the attendant increase in expenses related
thereto will not significantly adversely affect Network's results of
operations. Moreover, Network's ability to manage its growth will also require
Network to continue to expand and improve its operational, management and
financial systems and controls. If Network's management is unable to manage
growth effectively, Network's business, results of operations and financial
condition will be materially and adversely affected.
Product Assembly; Dependence on Contract Manufacturers and Single-Source
Suppliers. Network's products utilize components supplied by third party
vendors and are assembled primarily in the United States except for the new NE
Digital Modem product which is supplied by a third party vendor located in
Germany. In the United States, the platforms and other components are provided
to local sub-assemblers, and completed printed circuit board assemblies are
delivered to Network's facilities in Ann Arbor, Michigan for functional
testing, system integration to conform to customer requirements, burn-in, final
testing and shipment to customers. Although Network generally uses standard
parts and components for its products, certain components are presently
available only from a single source or from limited sources. Other components
are purchased from a variety of sources. There can be no assurance that these
independent contractors and suppliers will be able to meet Network's future
requirements for these components. Network generally purchases these components
pursuant to purchase orders and has no guaranteed supply arrangements with
these suppliers. In addition, the availability of many of these components to
Network is dependent in part on Network's ability to provide its suppliers with
accurate forecasts of its future requirements. Network has generally been able
to obtain adequate supplies of components in a timely manner and endeavors to
maintain inventory levels adequate to guard against interruptions in supplies.
Network believes that alternate vendors can be identified if current vendors
are unable to fulfill Network's requirements. Delays or failure to identify
alternate suppliers if required, however, or a reduction or interruption of
supply or a significant increase in the price of components could adversely
affect Network's operating results. From time to time, Network has experienced
slow deliveries of printed circuit boards necessary to assemble its products.
To date, such delays have not adversely affected Network's ability to timely
deliver its products; however, as Network's business grows, the chances of such
effects increase. The reliance on contract manufacturers also reduces Network's
flexibility and responsiveness to change. For example, contract manufacturers
are not as quick as internal manufacturing organizations to react to new
products or changes in product designs or product quantities. This loss of
flexibility can result in shipment delays, which could have a material adverse
affect on Network's business and operating results.
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Network relies on sole suppliers for certain critical components of its
products. The NE 2000-II, NE 4000, NE 5000 and NE 7000 platforms are designed
around a specific computer platform available only from a single manufacturer.
As a result of product transitions by the platform vendor, including
announcement that it will discontinue manufacture of the platform currently
used for the NE 2000-II, Network has found it necessary to purchase and
inventory computer platforms for resale to customers and for the on-going long-
term support of certain Japanese customers. Due to long lead times, the ISDN
circuit boards are purchased pursuant to purchase orders, the quantities under
which are determined based on forecasted sales. The NE Digital Modem product
uses a circuit board purchased from a third party vendor that will require
Network to purchase such boards for inventory.
The situations described above create the possibility that Network may end up
with excess inventory if Network is unable to sell the platforms or circuit
boards. If purchases of computer platforms or other components exceed demand,
Network may be forced to sell its products at reduced prices or incur expenses
for disposing of excess inventory, which may materially and adversely affect
Network's results of operations.
International Operations; Historical Reliance on Sales in
Japan. International sales accounted for approximately 88%, 88% and 79% of
Network's net sales in 1995, 1994 and 1993, respectively (and approximately 89%
of net sales in the first quarter of 1996). Substantially all of these net
sales were in Japan except for the first quarter of 1996 which resulted
primarily from sales of Fivemere products in Europe. Network expects this sales
concentration to continue; however, sales of Fivemere products in the United
Kingdom and continental Europe should moderate the percentage of international
sales attributable to Japan. Although Network's near-term business strategy
involves a commitment to developing the market in the United States, the long-
term business strategy involves not only a continued focus on the market in
Japan, but also a concerted effort in developing the markets in Europe (a step
toward which Network completed with the November 1995 acquisition of Fivemere)
and in Asia. International business, like that conducted by Network, subjects
its participants to added burdens and risks. These burdens and risks include
currency fluctuations, greater uncertainty in political and economic
conditions, unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment
cycles, problems in collecting accounts receivable, potentially adverse tax
consequences and added complexity in complying with legal requirements. By way
of example with regard to regulatory issues, each non-United States and non-
Canadian telephone company requires certification of, and imposes unique rules
with respect to, any products to be attached to that company's equipment.
Although Network has been successful in securing certification for all of its
products in Japan, the United States and Canada, and for its NE Link-1000 and
Primary Rate circuit board in Europe, there can be no assurance that Network
will be similarly successful in other countries or for new products. These
varied requirements increase product-development costs, and, in any particular
country, invite competition.
Manufacturing and Sales Rights in Japan. Network is a party to an agreement
(the "License Agreement"), dated April 1, 1992, with Soliton and Fujikura Ltd.,
a Tokyo, Japan-based firm that is a manufacturer of communication products
("Fujikura") pursuant to which Network has granted Fujikura a non-exclusive
license in Japan to manufacture, sell and distribute, and use and incorporate
software in, Network's products. Fujikura is not currently manufacturing any of
Network's products and is not expected to in the future. However, effective
April 1, 1994, the License Agreement provides Fujikura with the right to
manufacture, market and sell Network's products under Fujikura's brand name in
Japan, subject to (a) the continued use of Network's distribution network,
being Soliton, (b) the purchase of Network's software through Soliton (with
Network realizing a discounted price from Soliton on such software sales to
Fujikura) and (c) the payment to Network of a royalty equal to 5% of the
aggregate net selling price from such sales of hardware. To date, Fujikura has
not exercised this right. If exercised by Fujikura, some Japanese sales of
hardware that would otherwise have been made by Soliton might be made by
Fujikura, resulting in a loss of revenue and an attendant reduction in gross
margin for Network. There can be no assurance that Fujikura will not exercise
its right under the License Agreement to manufacture, market and sell Network's
products under Fujikura's brand name in Japan. In addition, the License
Agreement remains in effect through April 1, 1997, after which Fujikura retains
the right to use certain hardware and software technical information in the
manufacture and sale of Network's products without the payment of further
compensation to Network. The Soliton Agreement provides that, in the event of a
conflict between the Soliton Agreement and the License Agreement, the terms of
the License Agreement would prevail.
43
<PAGE>
Exposure to Currency Exchange Risk. Network is to a large extent insulated
against fluctuations in exchange rates between Japan and the United States,
since all transactions with Network's exclusive Japanese distributor, Soliton,
are U.S. dollar denominated. However, this arrangement might not continue
indefinitely, and no assurance can be given that this arrangement can be
negotiated in other countries in which Network may carry on business.
Fivemere's operations are conducted principally in the United Kingdom. As a
result of the acquisition of Fivemere, it is expected that a significant
portion of Network's consolidated revenue and expenses in the future will be
transacted in British pounds. Additionally, Network has a supply contract with
a German firm to acquire certain product with payment due in German marks.
Fluctuations in the value of the U.S. dollar relative to the Japanese yen, the
British pound and the German mark (or the currencies of other countries in
which Network does, or may carry on, business) could result in lower revenues
and earnings. If, for any reason, exchange or price controls or other
restrictions on foreign currencies are imposed, Network's business and
operating results could be materially and adversely affected.
Tariff and Regulatory Matters. Network's products must meet standards and
receive certification for connection to the public telecommunications network
prior to their sale, some of which are evolving as new technologies, such as
frame relay and ATM, are deployed in the market. In the United States and
Canada, Network's products must comply with standards established by the
telecommunications carriers, while in other countries, Network's products are
subject to a wide variety of governmental review and certification
requirements. At the present time, Network has received the requisite
certifications in Japan, and has satisfied the standards set by the various
United States and Canadian telecommunications carriers with which it does
business. Any future inability to obtain on a timely basis or retain domestic
certification or foreign country regulatory approvals could have a material
adverse affect on Network's business and results of operations.
Government regulatory policies are expected to continue to have a major
impact on the pricing of existing as well as new public network services and,
therefore, are expected to affect demand for such services and the
telecommunications products that support such services. Rates for
telecommunications services are governed by tariffs of licensed carriers that
are subject to regulatory approval. Future changes in these tariffs could have
a material effect on Network's business. For example, if tariffs for public
switched digital services increase in the future relative to tariffs for
private leased services, the cost-effectiveness of Network's products would be
reduced, and its business and results of operations could be adversely
affected. In addition, tariff policies are under continuous review and are
subject to change. User uncertainty regarding future policies may also effect
demand for telecommunications products, including Network's products.
Limited Sales and Distribution in the United States and Europe. Network's
United States distribution arrangements have to date been relatively limited
and largely reliant on the sale of products to, and through, telephone
companies. There can be no assurance that Network's efforts to increase United
States sales will be successful or that increased costs expected in 1996 as a
result of this initiative will not adversely affect Network's results of
operations if revenues in the United States are not sufficient to meet the
additional costs as was the case in 1995. In Europe, Network opened an office
in Germany to support its efforts to expand its European sales and marketing
presence. In the first quarter of 1996, Network entered into non-exclusive
distributor agreements with Raab Karcher Elektronik GmbH and to resell, support
and service Network's products in Germany, Austria, Switzerland, Belgium and
the Netherlands and with Linne Data Delecta to distribute Network's products in
Scandinavia. The foreign distribution arrangements so-far established by
Network are not guaranteed to continue or expand, and Network's success will
depend upon its ability to identify suitable distributors in other markets, to
negotiate satisfactory arrangements with them, and to maintain those
arrangements.
Dependence on Key Personnel. The success of Network has been largely
dependent on the skills, experience and efforts of its President and Chief
Executive Officer, Richard P. Eidswick, and its Executive Vice President and
Chief Technical Officer, David L. Hartmann. The loss of the services of Mr.
Eidswick, Mr. Hartmann or other members of Network's senior management could
adversely affect Network's business and prospects. Network maintains life
insurance policies on Messrs. Eidswick and Hartmann in the amount of $1
44
<PAGE>
million each. Network believes that its future success will also depend on its
ability to attract and retain highly skilled personnel in all areas of its
business, and any inability to do so could have a material and adverse affect
on Network. Competition for such personnel is intense, and there can be no
assurance that Network will be successful in attracting and retaining such
personnel.
Limited Protection of Proprietary Technology; Risk of Third Party Claims of
Infringement. Network's success and ability to compete is dependent in part
upon its proprietary technology. Network has a United States patent covering
the inverse multiplexing technology used in its products, but otherwise relies
upon a combination of trade secret, copyright and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products. Network has applied for international patents on the central inverse
multiplexing technology used in its products. No assurance is given that these
patents will be granted or that Network's technology does not infringe upon the
patents or other intellectual property of others. Network generally enters into
confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to the distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by Network in this regard will be adequate to
prevent misappropriation of its technology or that Network's competitors will
not independently develop technologies that are substantially equivalent or
superior to Network's technology. In addition, the laws of some foreign
countries do not protect Network's proprietary rights to the same extent as do
the laws of the United States. Network is also subject to the risk of adverse
claims and litigation alleging infringement of other parties' proprietary
rights. Third parties may assert infringement claims in the future with respect
to Network's current or future products which may require Network to enter into
license agreements or result in protracted and costly litigation, regardless of
the merits of such claims. No assurances can be given that any necessary
licenses will be available or that, if available, such licenses can be obtained
on commercially reasonable terms. See "Network Express, Inc.--Business--Risk
Factors--Intellectual Property."
Volatility of Stock Price. The trading price of the Network Common Stock has
been and could be subject to wide fluctuations in response to quarterly
variations in Network's operating results, shortfalls in such operating results
from levels forecast by securities analysts, announcements of technological
innovations or new products by Network or its competitors and other events or
factors. In addition, the stock market has, from time to time, experienced
extreme price and volume fluctuations that have particularly affected the
market prices for high technology companies and that have often been unrelated
to the operating performance of such companies. Broad market fluctuations of
this type may adversely affect the future market price of the Network Common
Stock.
Possible Issuance of Preferred Stock; Anti-Takeover Provisions. Network is
authorized to issue up to 100,000 shares of preferred stock. Preferred stock
may be issued in one or more series, the terms of which may be determined at
the time of issuance by the Network Board of Directors, without further action
by shareholders, and may include voting rights (including the right to vote as
a series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions. No preferred
stock is currently outstanding, and Network has no present plan for the
issuance thereof. The issuance of any preferred stock could affect the rights
of the holders of Network Common Stock, thereby reducing the value of the
Network Common Stock and making it less likely that holders of Network Common
Stock would receive a premium upon any future sale of Network Common Stock. The
MBCA also contains provisions which will impede a change of control of Network
not approved by the Network Board of Directors.
Products
Network's products divide high-speed LAN data streams into smaller, lower
speed streams. Such smaller streams may be transmitted via multiple low-speed
telephone connections. In this way, the technology employed by Network creates
high-speed circuits out of multiple lower-speed circuits and thereby meets the
needs of the market for applications requiring high bandwidth in dial-up form.
Accordingly, the customer pays for only the telephone services used instead of
a full-time dedicated line. Network released its first commercial product in
Japan in early 1992, and followed it with a staged release in the United States
later that year.
45
<PAGE>
Network's systems, consisting of both hardware and software, are known
collectively by the trade name "NE Series." The NE Series consists of two core
product lines, the "NE ISDN Router," which connects different LANs through the
dial-up telephone network, and the "NE ISDN InterHub," which connects a
specific LAN over ISDN to multiple individual or networked personal computers.
While the hardware element, which consists of communications platforms and
network interface electronics in the form of plug-in cards for LANs and WANs,
is common to both product lines, each has different software. The NE ISDN
Router is designed to work only with other NE ISDN Routers, while the NE ISDN
InterHub is designed to work with bridges, routers and adapters produced by
other manufacturers. The products are built around multiple microprocessors
purchased by Network from third parties such as Intel Corporation. The NE
Series is configurable by way of network interface hardware. Most product
configurations support one proprietary LAN and a set of proprietary WAN plug-in
cards. The software is designed in a modular fashion to ensure portability and
to simplify technical support and maintenance.
Network's technology is embodied in an architecture designed to address the
special needs of dial-up ISDN internetworking, which requires that data streams
be assigned on a call-by-call basis, while at the same time handling new calls
and connections efficiently. The software that performs this is called the
Universal Access Architecture ("UAA") and is proprietary to Network. Another
special need of dial-up internetworking is the ability to aggregate lower speed
calls into high speed pipes or connections. This speed aggregation function is
called inverse multiplexing, and is also handled efficiently by Network's UAA.
In addition to meeting these special needs, Network's technology operates in
existing data networks, and for this purpose supports a large number of
standard network interfaces.
NE ISDN Router. The NE ISDN Router is used for bridging and routing between
LANs. It is scalable and can be configured to work with a wide range of network
topologies and applications, allowing the user to set different parameters for
determining how and when data will be transferred. The software has been
designed to sense when the users need to transfer data and automatically sets
up and breaks down telephone calls accordingly. The NE ISDN Router routes
TCP/IP, the most commonly used network protocol, and is a bridge for all other
protocols.
The NE ISDN Router utilizes Network's proprietary software, which
automatically establishes an ISDN connection, triggered by various events such
as special packet types, congestion or failure of a dedicated line, failure of
a frame relay connection or congestion of an existing dial-up connection.
Disconnecting dial-up connections is triggered by idle conditions, reduced
traffic flow, or re-establishment of dedicated or frame relay connections. The
system's routing and bridging tables establish which sites (and associated
phone numbers) will be dialed up. Accordingly, as bandwidth is released from
any given location, it can be used for other locations on a channel-by-channel
basis. The NE ISDN Router is designed to adjust bandwidth transparently and
seamlessly without resets or resynchronization, even if some of the channels
are effected by delays due to satellite transmission. If a channel or line
fails, the system is designed to allocate an alternate channel or port without
interruption to the existing connections.
NE ISDN InterHub. The NE ISDN InterHub is designed to work with bridges,
routers and adapters produced by Network and other manufacturers, as well as
the NE ISDN Router. Released in early 1993, it supports major ISDN access
devices, including products by Cisco, Gandalf, IBM, Silicon Graphics, Sun
Microsystems, 3Com and other producers of industry-compatible ISDN devices.
The NE ISDN InterHub is intended to provide a cost-effective solution at the
central site to the problem of increasing the number of small remote locations
having a direct link using ISDN and other dial-up services. It allows the
central site to manage multiple incoming calls in a hunt group using multiple
ISDN lines on a single high performance host.
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<PAGE>
PRODUCT APPLICATIONS AND SPECIFICATIONS
Network offers the NE ISDN Router and the NE ISDN InterHub in several
platforms which can be configured to meet the customer's requirements, as set
forth below.
<TABLE>
<CAPTION>
NE ISDN INTERHUB NE ISDN ROUTER
------------------------- ----------------------
PRODUCT PRODUCT
PLATFORM SLOTS NAME CONNECTIONS NAME CONNECTIONS
-------- ----- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NE 7000.................. 16 InterHub IVx2 96 -- --
NE 5000.................. 8 InterHub IV 48 Router IV 32
NE 4000.................. 6 InterHub III 36 Router III 32
NE 2000-II............... 3 InterHub II 2-16 Router II 2-16
</TABLE>
The NE 2000-II and NE 4000 platforms are small enough in size to be suitable
for an office environment or to fit into a communications rack. The NE 5000
and the NE 7000 are each a chassis designed for mounting in an industry
standard 19 inch equipment rack and may be stacked to accommodate hundreds of
connections to meet the needs of large users.
NE Link-1000. Network introduced the NE Link-1000 in March 1995 as an
internetworking product designed for the branch office or small central site
location. It interoperates with a wide range of ISDN remote access products
and Switched 56 LAN access devices, including terminal adapters, workstations,
bridges and routers. The benefits of the NE Link-1000 include performance
(compression capability, inverse multiplexing and management of WAN
connections and heavy background LAN traffic), reliability (use of protocols
to ensure integrity of software), manageability, security, flexibility
(particularly, interoperability with a wide variety of ISDN and Switched 56
LAN access devices) and economy. Several applications of the NE Link-1000
include telecommuting, Internet access, remote office connectivity, multimedia
and remote X/terminals. The NE Link-1000 utilizes a different platform than
Network's larger products, and is the first product offered by Network that is
designed solely as a telecommunications device. Although more compact, and
capable of fewer connections, due to the sharing of Network's software
technology, the NE Link-1000 shares many of the features of Network's larger
platforms.
NE Nomad. Network introduced the NE Nomad in June 1996. Resulting from
Network's strategy to provide a complete end-to-end remote access solution,
the NE Nomad is a low-end product designed for the small office or home office
environment to provide corporate LAN connectivity or Internet access in a
small desktop chassis. The benefits of NE Nomad include cost effective
connectivity, flexible packaging, high throughput, secure network access,
interoperability with most ISDN access products on the market and centralized
administration. NE Nomad includes a single BRI line, providing up to two
simultaneous remote connections, and is available with up to two standard
phone jacks to allow the ISDN lines to be used with standard analog telephones
or fax machines.
NE Fusion. Introduced in March 1996, NE Fusion is a board level ISDN access
product directly integrated into the Novell NetWare environment. NE Fusion
allows users of Novell's industry leading NetWare network operating system to
directly extend their LANs over cost-effective WANs. NE Fusion provides ISDN
connectivity for Novell's NetWare MultiProtocol Router ("MPR"), which supports
IP, IPX, AppleTalk, and source route bridge network protocols. MPR is a
software option that can run on top of an existing NetWare server, or can
operate on a separate PC providing a standalone router.
NE Digital Modem. Also introduced in March 1996, the NE Digital Modem is a
board level option for NE remote access products providing analog modem dial-
in support in addition to ISDN dial-in support both using central site ISDN
BRI or PRI lines. Companies using the NE Digital Modem can immediately start
realizing the benefits of central site ISDN connectivity while still
supporting remote user dial-in via analog modems. Corporate users and Internet
Service Providers can support both ISDN and analog modem users in a single
product eliminating the need to purchase, install, configure and learn to
manage entirely different products. The
47
<PAGE>
NE Digital Modem includes up to eight V.34 (28.8 Kbps) modems on a single ISA
card. The card is plugged into the NE ISDN remote network access family of
products. The NE Digital Modem uses the widely supported Asynchronous Point-
to-Point Protocol as its link protocol and the industry standard Password
Authentication Protocol and Challenge Authentication Protocol authentication
mechanisms.
KBU 64 and KBU PRM. The KBU 64 and KBU PRM provide backup and disaster
recovery facilities for leased line circuits using ISDN. The leased lines can
be low speed (typical modem speeds) or high speed (in excess of 1 Mbps). The
KBU 64 and KBU PRM come in stand-alone and high density card frames and
include management features to ensure security of operations as well as by-
pass features that are designed to reduce unreliability resulting from the
introduction of additional hardware. Both products utilize basic rate and
primary rate ISDN services to provide an alternative path should the main link
fail, with the option of inverse multiplexing to meet bandwidth requirements.
The KBU 64 is a dual port device which can support two 64 Kbps lines and is
also provided with a basic rate interface. The KBU PRM, released in 1995, is a
primary rate system rack which can be fitted with a range of cards to provide
backup at 64 Kbps or up to 1 Mbps when using inverse multiplexing modules.
Research and Development
Network has a continuing research and development program directed toward
increasing the functionality of existing products and introducing new products
based upon current and anticipated customer needs. With respect to existing
products, Network's development efforts are directed toward increasing
connectivity and functionality. New product development is focused upon
broadening Network's product line to meet the needs of large end-users that
require a single-source solution to their internetworking needs. During 1995,
1994 and 1993, Network spent $4.4 million, $2.3 million and $1.3 million,
respectively, in research and development. Network believes that a significant
commitment of its financial resources and talent will be necessary to maintain
its competitive position in Japan and to penetrate the United States and
European markets in future periods. As of May 31, 1996, Network employed 56
persons in research and development capacities.
Sales and Marketing
Network's sales and marketing efforts in Japan, historically its largest
market, are conducted through Soliton, Network's exclusive Japanese
distributor. In the United States, Network utilizes a direct sales force
consisting of four sales teams deployed in the key market areas of New York,
Washington, D.C., California and Michigan and also sells through various
resellers and distributors. Sales and marketing of Fivemere products is
primarily done through a direct sales force located in the United Kingdom, New
York, and Germany and through resellers. Network maintains a sales office in
Munich Germany with six people to sell to customers and resellers throughout
Europe.
Japan. Network sold its first routers in Japan in 1992 and the market has
expanded rapidly since that time. Network's exclusive distributor, Soliton,
has developed customers and has installed more than 6,000 of Network's systems
across several industries, including manufacturing, telecommunications, retail
banking and engineering. Japanese customers are using Network's products in
mission-critical ISDN networks. Applications range from client/server networks
for accounting and administration systems to engineering networks that connect
remote laboratories. In some networks, hundreds of Network's smaller systems
are interconnected. Other systems use a central-site solution to connect
networks. In 1994, Network, through Soliton, began to work on larger network
applications that will use the NE ISDN InterHub products to provide access by
telephone companies and banks to large numbers of remote locations using ISDN.
Competitors, such as Cisco, Ascend and Seiko, are also expanding their product
offerings in this area. See "Network Express, Inc.--Business--Risk Factors--
Dependence on Single Customer."
United States. In the United States, Network has developed customers in
several industries and, with the market for ISDN steadily growing through the
deployment of the network infrastructure, Network expects this trend to
continue. See "Network Express, Inc.--Business--Risk Factors--Reliance on
ISDN." These customers
48
<PAGE>
include the federal government and companies involved in semiconductors,
research and development, software, financial services, manufacturing,
computer, education, realty, high tech, industrial communications, automotive
and publishing. Network's products are used in many applications, including
telecommuting, access to the Internet, graphics/pre-press production and
videoconferencing.
Due to its past focus on the Japanese market and in part to the relatively
recent emergence of ISDN connectivity in the United States, Network's United
States distribution arrangements have been relatively limited, and
substantially reliant upon selling products to and through telephone companies
and others. Network's United States sales strategy is to focus on enhancing
relationships with telecommunications carriers, value-added resellers and
potential original equipment manufacturers, while continuing and expanding
upon existing relationships with large government users of internetworking and
Fortune 1000 corporations. In June 1995, Network entered into a non-exclusive
distributor agreement with IntelliCom Solutions, Inc., a wholly-owned
subsidiary of Intelligent Electronics, whereby IntelliCom will add the NE
Series of bridging and routing products to its offering of ISDN solutions.
Network expects to sell its new NE Fusion products through Gold and Platinum
Novell dealers.
Europe. With the acquisition of Fivemere, Network has strengthened its sales
and marketing presence in the United Kingdom, as well as the rest of Europe.
Fivemere is a leader in the United Kingdom for ISDN-based digital circuit
backup equipment and also sells product in Europe and Asia through a network
of system integrators and distributors. Fivemere's customers include leading
financial information and reporting services. Network has begun to market
Fivemere products through its offices in New York and Germany. In October
1995, Network opened an office in Munich, Germany to sell to customers and
resellers throughout continental Europe. Network plans to use distributors in
connection with the sale of its products in Europe and, to that end, in the
first quarter of 1996, Network entered into non-exclusive distributor
agreements with Raab Karcher Elektronik GmbH to resell, support and service
Network's products in Germany, Austria, Switzerland, Belgium and the
Netherlands and with Linne Data Delecta to distribute Network's products in
Scandinavia.
Manufacturing
Network's products utilize components supplied by third party vendors and
are assembled primarily in the United States. In the United States, the
platforms and other components are provided to local sub-assemblers, and
completed printed circuit board assemblies are delivered to Network's
facilities in Ann Arbor, Michigan for functional testing, system integration
to conform to customer requirements, burn-in, final testing and shipment to
customers.
Network has sophisticated testing equipment and employs procedures to ensure
product quality. It dispatches technical support personnel to customer
locations when necessary for assembly, system integration or de-bugging. To
date, Network has not experienced significant product defects or customer
returns; however, problems with systems have not been identified in certain
instances until installation at a customer location.
Competition
The ISDN data-communications equipment market is both highly competitive and
complex, and can be expected to become even more competitive through the entry
of new firms into the market, and through the expansion of the product lines
of companies currently on the periphery of Network's market sector. See
"Network Express, Inc.--Business--Risk Factors--Competition."
Intellectual Property
Network's success and ability to compete is dependent in part upon its
proprietary technology. See "Network Express, Inc.--Business--Risk Factors--
Limited Protection of Proprietary Technology; Risk of Third Party Claims of
Infringement."
49
<PAGE>
Government Regulation
Network and others in its industry must adapt their products to the
differing standards for connection established by each European country in
which business is conducted. This process, known as "homologation," entails
testing and certification by each such country. Network's NE Link-1000 and PRI
products have been certified in the European Community and in Sweden, the
United Kingdom and Germany. Network has no assurance that certification will
be granted in any country in which an application may be made to sell any of
Network's products.
In Japan, a governmental agency known as JATE regulates the access of
Network's products (and those of its competitors) to the Japanese telephone
system. Network has received approval from JATE for the hook-up of all of
Network's current products. No assurance can be given that Network's new
products will receive the necessary certification, that compliance standards
will not change or that Network will be able to respond to any such new
standards.
In the United States, Network's products must comply with certain
regulations of the Federal Communications Commission (the "FCC"), including
Part 15(a) (industrial equipment) and Part 15(b) (residential equipment) and,
to date, all of Network's products have so complied. In Canada, Network's
products must comply with the standards adopted by the Canadian Standards
Authority and, to date, Network believes that all of its products have so
complied. Moreover, Network must independently assure the telephone companies
in each of those two nations that Network's products are compatible with the
utilities' equipment. Such assurance has been given by Network and has been
accepted by the relevant telephone companies.
In addition, government regulatory policies have and are expected to
continue to have a major impact on the pricing of existing as well as new
public network services and, therefore, are expected to affect demand for such
services and the telecommunications products, such as Network's products,
which support such services. Rates for telecommunications services are
governed by tariffs of licensed carriers that are subject to regulatory
approval.
Employees
As of May 31, 1996, Network employed 134 full-time employees, including 56
in research and development, 49 in sales and marketing, 13 in production, and
16 in finance and administration. None of Network's employees is represented
by a labor union or is subject to a collective bargaining agreement. Network
has experienced no work stoppages and considers its relations with its
employees to be excellent.
The competition for qualified personnel in Network's industry is intense.
Network believes that its future success will depend in part on its continued
ability to hire, assimilate and retain qualified personnel.
Properties
Network's corporate headquarters and virtually all of its property, plant
and equipment for its U.S. operations are currently located at 4251 Plymouth
Road, Ann Arbor, Michigan, where Network leases approximately 12,000 square
feet of space under a lease which, since May 1996, is on a month-to-month
basis. Effective on or about July 29, 1996, Network's new headquarters, as
well as such property, plant and equipment, will be located at 305 East
Eisenhower Parkway, Ann Arbor, Michigan, 48108 where Network will lease
approximately 22,000 square feet of space under a four-year lease that will
commence in July, 1996. In addition, Network maintains a small office in
Tokyo, Japan that it uses for local communications and coordination and it
maintains offices in New York, New York; Iselin, New Jersey; San Ramon and
Gardena, California, Washington, D.C. and Munich, Germany that it uses for
sales and service. Fivemere's headquarters are located at 161 High Street,
Aldershot, Hampshire, England, in an approximately 2,000 square foot office
building it owns. Fivemere also leases approximately 8,000 square feet of
space in buildings in proximity to its headquarters. These leases expire in
1997 and 1998.
Legal Proceedings
Network is not a party to, nor are any of its properties the subject of, any
material pending legal proceedings.
50
<PAGE>
NETWORK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
From its inception in March 1990 through 1991, Network was principally
engaged in product research and development. In early 1992, Network released
its first commercial product in Japan and followed with a release in the
United States later that year. Since that time, Network's sales have increased
due primarily to market acceptance of Network's products in Japan, which are
sold through a sole distributor, Soliton. Network initially achieved
profitability in the first quarter of 1994 and was profitable in each
subsequent quarter until the fourth quarter of 1995 when Network incurred a
loss. The net loss for the fourth quarter of 1995 was $10.2 million, or $0.97
per share, which included a non-recurring charge for acquired in-process
research and development of $8.7 million resulting from the acquisition of
Fivemere Limited. Excluding the non-recurring charge, the net loss for the
fourth quarter would have been $1.6 million, or $0.15 per share.
On November 17, 1995, Network acquired Fivemere Limited located in the
United Kingdom. Fivemere is principally engaged in the design, development,
marketing and support of ISDN based backup products for leased line networks
used by large businesses and organizations in the financial information
services market. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of Fivemere are included in Network's
consolidated financial statements since November 17, 1995.
Results of Operations
Three Months Ended March 31, 1996 and 1995.
The following table sets forth, for the periods indicated, certain financial
data stated as a percentage of net sales.
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Net sales............................. 100.0% 100.0%
Gross profit.......................... 49.0 47.1
Research and development.............. 52.8 19.0
Sales and marketing................... 50.2 14.1
General and administrative............ 18.2 5.6
Income (loss) from operations......... (72.2) 8.4
Other income.......................... 7.9 0.8
Net income (loss)..................... (67.8)% 8.2%
</TABLE>
Net Sales. Net sales for the quarter ended March 31, 1996 were $3.2 million,
a decrease of 30% from net sales of $4.5 million for the quarter ended March
31, 1995. Sales of Network's products in Japan represented $388,000 or 12% of
net sales for the quarter ended March 31, 1996 compared with sales of $4.2
million or 93% of net sales for the same period in 1995. Sales in Europe,
resulting primarily from the sale of Fivemere products, represented $2.4
million or 77% of net sales in the quarter ended March 31, 1996, with the
balance of net sales in both quarters derived primarily from the United
States.
The decrease in sales to Japan was primarily due to the completion in the
fourth quarter of 1995 of a large internal networking project at Nippon
Telephone & Telegraph, the principal Japanese telecommunications carrier. The
project accounted for over 50% of Network's sales to Japan in 1995.
Additionally, Soliton had sufficient inventory to cover its customer needs
during the first quarter of 1996.
Network's United States and European sales initiatives are in the early
stages of development. Network anticipates that sales costs will continue to
increase in future periods as the United States and European sales channels
are developed. Network continues to attempt to enhance the breadth and scope
of its product offerings
51
<PAGE>
to better appeal to its customers in all markets. There can be no assurance
that Network will be successful in these efforts or that the expected increase
in costs from these initiatives will not adversely affect Network's results of
operations if the resulting revenues are not sufficient to meet the additional
costs.
Gross Profit. Gross profit as a percentage of net sales increased to 49.0%
for the quarter ended March 31, 1996 from 47.1% for the same period in 1995.
The increase in gross profit as a percentage of net sales was the result of
the sale of a larger proportion of Fivemere products which have a higher gross
margin. The increase was partially offset by lower gross profit on sales in
the United States and Japan due to lower volumes, mix of products sold and
reduced pricing on current products in anticipation of new product pricing.
The gross profit in any particular period is dependent upon the mix and
volume of products sold and the channels of distribution. As a result, gross
profit can vary within a wide range. Because of a favorable mix of variables
during the quarter, margins are at the high end of the range when compared to
prior periods. Gross margins earned in the future may not be maintained at
this level and increased inventories resulting from lower sales in the fourth
quarter of 1995 and first quarter of 1996 may require price reductions which
would unfavorably impact gross profit.
Research and Development. Research and development expense was $1.7 million
and $863,000, or 52.8% and 19.0% of net sales in the quarters ended March 31,
1996 and 1995, respectively. The absolute dollar increase in research and
development expenditures was principally attributable to product development
work undertaken to respond to needs of the marketplace. The primary components
of such increase were the addition of full-time personnel, the use of
consultants in connection with product development and the purchase of
computer hardware and software used for product development. Under generally
accepted accounting principles, Network's research and development costs were
expended as incurred. Network anticipates that it will continue to commit
substantial additional resources to research and development in the future.
Sales and Marketing. Sales and marketing expense was $1.6 million and
$640,000, or 50.2% and 14.1% of net sales in the quarters ended March 31, 1996
and 1995, respectively. The absolute dollar increase in sales and marketing
expense was primarily attributable to staff additions made to accelerate
market penetration in the United States and Europe. Sales and marketing
expense is expected to increase in absolute dollars in 1996. For example, four
new employees were hired for Network's sales office in Munich, Germany; and
Network has hired a new Vice President of Sales for Asia to develop non-
Japanese markets.
General and Administrative. General and administrative expense was $577,000
and $256,000, or 18.2% and 5.6% of net sales in the quarters ended March 31,
1996 and 1995, respectively. The absolute dollar increase in general and
administrative expense was primarily due to increases in administrative
personnel necessary to support the growth of Network and in professional fees
and other expenses associated with being a public company.
Other Income. Other income of $249,000 and $35,000 for the quarters ended
March 31, 1996 and 1995, respectively, consists primarily of interest earned
on investment of the proceeds of Network's public offerings of Common Stock in
June 1994 and May 1995.
Income Taxes. The income tax provision for the quarter ended March 31, 1996
relates primarily to foreign taxes incurred as a result of income earned in
foreign locations.
52
<PAGE>
Fiscal Years Ended December 31, 1995, 1994 and 1993.
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 53.1 57.6 59.7
------- ------- -------
Gross profit....................................... 46.9 42.4 40.3
------- ------- -------
Operating expenses:
Research and development......................... 23.3 20.4 31.4
Sales and marketing.............................. 20.0 10.3 18.3
General and administrative....................... 7.6 8.0 15.7
Acquired in-process research and development..... 45.6 0.0 0.0
------- ------- -------
Total operating expenses....................... 96.5 38.7 65.4
------- ------- -------
Operating income (loss)............................ (49.6) 3.7 (25.1)
Other income....................................... 5.7 0.6 2.8
------- ------- -------
Income (loss) before income taxes.................. (43.9) 4.3 (22.3)
Provision for income taxes......................... 0.7 0.1 0.0
------- ------- -------
Net income (loss).................................. (44.6)% 4.2% (22.3)%
======= ======= =======
</TABLE>
Net Sales. Net sales increased 71% to $19.0 million in 1995 from $11.1
million in 1994, and increased 176% in 1994 from $4.0 million in 1993. Sales
of Network's products in Japan represented $15.6 million or 82% of net sales
in 1995, $9.8 million or 88% of net sales in 1994 and $3.2 million or 79% of
net sales in 1993. The balance of net sales in each year was derived primarily
from the United States except for 1995 which included $1.1 million of sales in
Europe. The overall sales increase resulted from customer acceptance and
continued deployment of Network's products, new software and product releases,
Soliton's success in penetrating the Japanese market, increased efforts in
domestic sales and marketing and the acquisition of Fivemere in November 1995.
Sales in Japan, which since September 1992 have resulted solely from Soliton
purchase orders, increased in every quarter, except the fourth quarter of
1995, as Soliton responded to the demand in its market. Some of these products
may have been purchased for demonstration, inventory or internal use, but most
were resold to customers or other distributors. Sales to Japan are denominated
in U.S. dollars and, accordingly, the effect of changes in the exchange rates
have not been significant to Network's results of operations.
The increase in Japan was primarily due to sales of Network's products to
support a large international networking project at NTT, the principal
Japanese telecommunications carrier. The project accounted for over 50% of
Network's sales to Soliton in 1995. For the fourth quarter of 1995, sales to
Japan were approximately $600,000 which represented 4% of total Japanese sales
for the year. The lower fourth quarter sales in Japan were due to the
completion of the networking project at NTT. Additionally, Soliton had
sufficient inventory to cover its customer needs in the fourth quarter.
Network expects sales in Japan for 1996 to be about half of 1995 sales which
were influenced by the large NTT project.
Sales in the United States comprised 12% of worldwide net sales for 1995 and
1994, and 20% for 1993. European sales of $1.1 million for 1995, included
$917,000 from the sale of Fivemere products.
Gross Profit. Gross profit for products sold in Japan was 47%, 41%, and 37%
of net sales in 1995, 1994 and 1993, respectively. The gross profit for
products assembled in Japan is lower than for those assembled in the U.S. due
to the terms of agreements with contract assemblers. During 1995, less than 1%
of the products sold in Japan were assembled in Japan compared with 13% in
1994 and 49% in 1993, which when combined with the
53
<PAGE>
mix of products sold and offset by introductory pricing on the NE Link-1000,
primarily accounts for the increase in gross profit in Japan. The gross profit
for products sold in the United States was 46%, 52% and 53% in 1995, 1994 and
1993, respectively. The decrease was due to lower selling prices and the mix
of products sold. For 1995, the gross profit for products sold in Europe was
54%.
Research and Development. Research and development expense was $4.4 million,
$2.3 million and $1.3 million in 1995, 1994 and 1993, respectively, or 23.3%,
20.4% and 31.4% of net sales in those years, respectively. The absolute dollar
increase in research and development expense each year was primarily
attributable to product development work undertaken to respond to the needs of
the marketplace. The primary components of such increase were the addition of
full-time personnel, the use of consultants in connection with product
development and the purchase of equipment. Under generally accepted accounting
principles, Network's research and development costs were expended as
incurred. Network anticipates that it will continue to commit substantial
additional resources to research and development in the future.
Sales and Marketing. Sales and marketing expense was $3.8 million, $1.1
million and $737,000 in 1995, 1994 and 1993, respectively, or 20.0%, 10.3% and
18.3% of net sales in those years, respectively. The absolute dollar increase
in sales and marketing expense each year was primarily attributable to staff
additions made to accelerate market penetration in the United States and
Europe. Network established subsidiaries in Japan (May 1994) to respond to the
continued expansion of Network's business in that market; and in the United
Kingdom (September 1994) and Germany (October 1995) to provide local sales and
support functions. Sales and marketing expense is expected to increase both in
absolute dollars and as a percentage of sales in 1996.
General and Administrative. General and administrative expense was $1.4
million, $890,000 and $633,000 in 1995, 1994 and 1993, respectively, or 7.6%,
8.0% and 15.7% of net sales in those years, respectively. The absolute dollar
increase in general and administrative expense for both years was primarily
due to increases in administrative personnel necessary to support the growth
of Network and to professional fees and other expenses associated with being a
public company.
Acquired In-process Research and Development. In connection with the
acquisition of Fivemere, approximately $8.7 million was assigned to the value
of Fivemere's in-process research and development projects. This amount was
charged to operations during the fourth quarter of 1995.
Other Income. Other income of $1.1 million in 1995 and $62,000 in 1994
consists primarily of interest earned on investment of the proceeds of
Network's public offerings of common stock in June 1994 and May 1995. Other
income of $111,000 in 1993 represents the net proceeds from a project for a
customer under which Network procured specialized communications equipment.
Income Taxes. The income tax provision includes federal alternative minimum
taxes and utilization of $1,069,000 and $542,000 of net operating loss
carryforwards for 1995 and 1994, respectively. Network has net operating loss
carryforwards of approximately $357,000 available for tax reporting purposes
which can be used to offset future taxable income through the year 2008.
Network made no income tax provision for 1993 due to operating losses in that
year.
Liquidity and Capital Resources
In May 1995, Network completed a public offering of 2,210,000 shares of
Common Stock from which it received net proceeds of approximately $27.0
million. In June 1995, Network sold an additional 129,353 shares of Common
Stock from which it received net proceeds of approximately $1.6 million
pursuant to a partial exercise of the over-allotment option granted to the
underwriters in connection with the public offering. In connection with the
public offering, warrants for the purchase of 450,000 shares of Network Common
Stock were exercised from which Network received proceeds of approximately
$750,000. At March 31, 1996, Network's principal sources of liquidity included
cash, cash equivalents and short-term investments totaling $16.8 million; and
Network had no bank indebtedness.
54
<PAGE>
For the quarter ended March 31, 1996, Network used $3.6 million in cash to
fund operating activities, primarily as a result of operating losses and
increased inventories. The increase in inventories was mainly the result of
lower than expected net sales in the fourth quarter of 1995 and first quarter
of 1996 which caused inventories of certain products to be higher than
planned. The increase in inventories was also due to the purchase of computer
platforms for resale to customers and for the on-going long-term support of
certain Japanese customers occasioned by the announcement by Network's sole
source supplier of such platforms that it was discontinuing production of the
platform. For the quarter ended March 31, 1995, cash of $647,000 was generated
by operating activities primarily as a result of income from operations and a
decrease in inventories. The decrease in inventories was due to Network's
increased use of contract manufacturers.
Cash used in operations was $408,000, $101,000 and $1.8 million in 1995,
1994 and 1993 respectively. For 1995, cash was used in operations primarily
due to increased inventories, offset by decreased accounts receivable and
increased current liabilities. The increase in inventories and decrease in
accounts receivable at December 31, 1995 was mainly the result of lower than
expected net sales in the fourth quarter of 1995 which caused Inventory of the
NE Link-1000 to be higher than planned. The increase in inventory was also due
to the purchase of computer platforms for resale to customers and for the on-
going long-term support of certain Japanese customers occasioned by the
announcement by Network's sole source supplier of such platform that it was
discontinuing production of the platform. For 1994 and 1993, cash was used in
operations primarily due to increased accounts receivable and inventory and to
a net loss in 1993, offset by increased current liabilities and by net income
in 1994. The increase in accounts receivable and inventory for 1994 and 1993
was due to increased sales.
In October 1995, Network established a new wholly-owned subsidiary in
Germany, Network Express GmbH, to support Network's efforts to expand its
European sales and marketing presence. On November 17, 1995, Network acquired
Fivemere Limited, a leading provider of ISDN internetworking products based in
Aldershot, England for $10 million cash and 475,000 newly issued shares of
Network Common Stock.
Network expects that developing a market for its products in Europe, as well
as other international markets, will require investment of capital to develop
the potential for sales growth, which it presently expects to finance from its
existing cash and from cash generated from operations. International business
subjects its participants to added burdens and risks, including currency
fluctuations, unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment
cycles and added complexity in complying with legal requirements. Fivemere's
operations are conducted principally in the United Kingdom. As a result of the
acquisition of Fivemere it is expected that a significant portion of Network's
consolidated revenue and expenses in the future will be transacted in British
pounds. Additionally, Network has a supply contract with a German
manufacturing firm to acquire certain products with payment due in German
marks. Although it is impossible to predict future exchange rate fluctuations
between the U.S. dollar and other currencies, it can be anticipated that to
the extent the U.S. dollar strengthens or weakens against other currencies,
Network's reported results of operations will be correspondingly lower or
higher than they would have been with a stable foreign currency relationship.
Network believes that cash generated from operations and its current cash
and cash equivalents will provide sufficient cash resources to finance its
operations and currently projected capital expenditures through December 31,
1996.
55
<PAGE>
PRINCIPAL SHAREHOLDERS OF NETWORK
The following table sets forth certain information with respect to the
beneficial ownership of Network Common Stock by (i) each person who is known
by Network to own beneficially more than 5% of the outstanding shares of
Network Common Stock, (ii) each of Network's directors, (iii) each of the
executive officers of Network named as such in Network's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995, and (iv) all of Network's
executive officers and directors, as a group. Unless otherwise indicated, each
person has sole voting and investment power with respect to all shares owned
by such persons.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
NETWORK COMMON STOCK SHARES OUTSTANDING
NAME OF BENEFICIALLY OWNED AS OF AS OF JUNE 12,
BENEFICIAL OWNER JUNE 12, 1996(1) 1996(2)
---------------- ------------------------ ------------------
<S> <C> <C>
Richard P. Eidswick............. 514,683(3) 5.0%
David L. Hartmann............... 222,950(4) 2.2%
Kevin N. Kalkhoven.............. 5,000(5) *
Thomas C. Kinnear............... 170,000 1.7%
David J. G. Mushens............. 470,750(6) 4.6%
Brian Sullivan.................. 60,000 *
Stephen A. Swanson.............. 97,200 *
Brian F. Barton................. -0- *
David L. Carson................. 26,000(7) *
John R. Ternes.................. 39,715(8) *
Directors and executive officers
as a group (10 persons) ....... 1,606,298(9) 15.4%
</TABLE>
- --------
* Less than 1% of class
(1) The column sets forth shares of Network Common Stock which are deemed to
be "beneficially owned" by the persons named in the table under Rule 13d-3
of the Exchange Act, including shares issuable under options or warrants
exercisable within 60 days of June 12, 1996. The address of all directors
and officers is the Network's address.
(2) For purposes of calculating the percentage of Network Common Stock
beneficially owned, the shares issuable to such person under stock options
or warrants exercisable within 60 days of June 12, 1996 are considered
outstanding and added to the shares of Network Common Stock actually
outstanding.
(3) Includes options to purchase an aggregate of 48,250 shares of Network
Common Stock which are presently exercisable or exercisable within 60 days
of June 12, 1996.
(4) Includes options to purchase an aggregate of 96,250 shares of Network
Common Stock which are presently exercisable or exercisable within 60 days
of June 12, 1996.
(5) Includes options to purchase an aggregate of 5,000 shares of Network
Common Stock which are presently exercisable or exercisable within 60 days
of June 12, 1996.
(6) Includes 4,750 shares held by D. J. G. Mushens Settlement dated October 1,
1987, of which Mr. Mushens is a trustee.
(7) Includes options to purchase an aggregate of 20,000 shares of Network
Common Stock which are presently exercisable or exercisable within 60 days
of June 12, 1996.
(8) Includes options to purchase an aggregate of 12,500 shares of Network
Common Stock which are presently exercisable or exercisable within 60 days
of June 12, 1996.
(9) Includes a total 182,000 shares which may be acquired pursuant to options.
See also footnotes (3) to (8) above.
56
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following Unaudited Pro Forma Combined Condensed Financial Data assumes
a business combination between Cabletron and Network 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 Network'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 Network's
results of operations for the years ended December 31, 1995, 1994 and 1993,
respectively. The unaudited pro forma financial data for Cabletron's fiscal
years ended in 1993 and 1992 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.
On June 3, 1996 Cabletron entered into a merger agreement with ZeitNet,
pursuant to which 1,924,137 shares of Cabletron Common Stock will be exchanged
for all outstanding shares of ZeitNet on a fully diluted basis. Cabletron
expects to record a pretax charge of approximately $28 to $32 million in the
second quarter ending August 31, 1996 in connection with this transaction.
This range is a preliminary estimate only and is therefore subject to change.
Historical revenues and results of operations of ZeitNet are not material to
the revenues, results of operations or earnings per share of Cabletron.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
CABLETRON NETWORK
FEBRUARY 29, DECEMBER 31, COMBINED
1996 1995 ADJUSTMENTS(1) PRO FORMA
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 98,713 $ 2,733 $ -- $101,446
Short-term investments.... 154,827 18,069 -- 172,896
Accounts receivable....... 147,934 2,131 (2,355) 147,710
Inventories............... 153,625 4,825 (3,720) 154,730
Deferred taxes............ 38,315 -- 3,579 41,894
Prepaid expenses and other
assets................... 30,930 356 -- 31,286
-------- -------- ------- --------
Total current assets.... 624,344 28,114 (2,496) 649,962
Long-term investments...... 153,424 -- -- 153,424
Long-term deferred taxes... 23,473 -- -- 23,473
Property, plant and equip-
ment...................... 150,028 1,498 -- 151,526
Goodwill and other assets.. -- 2,668 -- 2,668
-------- -------- ------- --------
Total assets............ $951,269 $ 32,280 $(2,496) $981,053
======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........... $ 32,811 $ 2,218 $ 2,625 $ 37,654
Accrued expenses........... 113,005 2,009 5,476 120,490
Income taxes payable....... 18,536 -- (2,028) 16,508
-------- -------- ------- --------
Total current
liabilities............ 164,352 4,227 6,073 174,652
Deferred taxes............. 9,088 -- -- 9,088
-------- -------- ------- --------
Total liabilities....... 173,440 4,227 6,073 183,740
-------- -------- ------- --------
Stockholders' equity:
Common stock (2).......... 722 1,290 (1,275) 737
Additional paid-in
capital.................. 135,943 38,314 1,275 175,532
Note receivable from
officer.................. -- (151) -- (151)
Retained earnings
(accumulated deficit).... 642,197 (11,384) (8,569) 622,244
Cumulative translation
adjustment............... (1,033) (16) -- (1,049)
-------- -------- ------- --------
Total stockholders'
equity................. 777,829 28,053 (8,569) 797,313
-------- -------- ------- --------
Total liabilities and
stockholders' equity... $951,269 $ 32,280 $(2,496) $981,053
======== ======== ======= ========
</TABLE>
57
<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........................ $1,088,712 $821,797 $602,141
Cost of goods sold............... 443,860 336,240 245,975
Gross profit................... 644,852 485,557 356,166
Operating expenses:
Research and development....... 119,444 86,664 61,456
Selling, general and adminis-
trative....................... 212,916 160,111 118,212
Nonrecurring items............. 94,343 -- --
---------- -------- --------
Income from operations....... 218,149 238,782 176,498
Interest income.................. 18,138 9,659 5,949
---------- -------- --------
Income before income taxes... 236,287 248,441 182,447
Income taxes..................... 80,341 86,001 64,129
---------- -------- --------
Net income ...................... $ 155,946 $162,440 $118,318
========== ======== ========
Net income per common share...... $ 2.13 $ 2.24 $ 1.65
========== ======== ========
Weighted average shares outstand-
ing(2).......................... 73,139 72,364 71,610
========== ======== ========
</TABLE>
- --------
Notes To Unaudited Pro Forma Combined Condensed Financial Data
(1) Cabletron expects to record charges to operations, currently estimated to
be between $12 to $16 million, in the quarter ending August 31, 1996, the
quarter in which the Merger is expected to be consummated. Such expenses
reflect direct transaction costs, consisting primarily of investment
banking fees and costs associated with combining the operations of the two
companies, the majority of which relates to redundant assets and
facilities. An estimated pretax charge at the midpoint of the above range
of $14 million, $8.6 million on an after-tax basis, is reflected in the
Unaudited Pro Forma Combined Condensed Balance Sheet but has not been
reflected in the Unaudited Pro Forma Combined Condensed Statements of
Income because they are directly attributable to the Merger and are non-
recurring. The range is a preliminary estimate only and is therefore
subject to change.
(2) The Unaudited Pro Forma Combined Condensed Financial Data reflects the
issuance of 0.1388 shares of Cabletron Common Stock for each share of
Network 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 Network Common Stock that are then outstanding.
(3) Certain amounts have been reclassified to conform to the pro forma
presentation.
58
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of the material differences between the rights of
holders of Network Common Stock and the rights of holders of Cabletron Common
Stock. Since Network is organized under the Michigan Business Corporation Act
("MBCA") and Cabletron is organized under the Delaware General Corporation Law
("DGCL"), these differences arise from various provisions of the corporate
laws of such states as well as from various differences in the provisions of
the Articles of Incorporation, as amended, (the "Network Articles") and Bylaws
(the "Network Bylaws") of Network and the Restated Certificate of
Incorporation, as amended, (the "Cabletron Certificate") and Bylaws (the
"Cabletron Bylaws") of Cabletron.
VOTING RIGHTS
Holders of Network 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 Network Common Stock does not have
cumulative voting rights in the election of directors. The Network Common
Stock is substantially identical to the Cabletron Common Stock in these
respects.
AMENDMENTS TO CHARTER
The Network Articles may be amended, altered, changed or repealed in the
manner prescribed by applicable law. To amend articles of incorporation, the
MBCA generally requires approval of the holders of a majority of all
outstanding shares entitled to vote thereon at a meeting of shareholders. The
Cabletron Certificate may be altered, amended, changed or repealed in the
manner prescribed by statute. To amend a certificate of incorporation, the
DGCL requires the affirmative recommendation of the Board of Directors of
Cabletron and the approval of a majority of all outstanding shares entitled to
vote therefor. Furthermore, under the MBCA and the DGCL, the holders of the
outstanding shares of a class are entitled to vote as a class upon any
proposed amendment to the articles or certificate of incorporation, as the
case may be, 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 (with respect to the DGCL), or alter or change the
powers, preferences or special rights of the shares of such class so as to
adversely affect the holders thereof.
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 Cabletron Certificate
expressly 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. The MBCA provides that the shareholders or the Board may adopt,
amend or repeal the bylaws unless such power is expressly reserved to the
shareholders in the corporation's articles of incorporation or bylaws. Neither
the Network Articles nor the Network Bylaws reserve such power exclusively to
the shareholders.
BOARD CLASSIFICATION
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.
Network's Board of Directors is elected each year to serve until the next
annual meeting.
REMOVAL OF DIRECTORS
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 (defined in Cabletron
Certificate). The Network Bylaws provide that
59
<PAGE>
directors may be removed, with or without cause, by the holders of a majority
of the shares entitled to vote at an election of directors.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
The Network Bylaws provide that newly created directorships resulting from
an increase in the number of directors or the death, resignation or removal of
a director 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) unless
filled by proper action of the shareholders. Each director chosen to fill such
directorship or vacancy shall hold office only until the next election of
directors by shareholders. 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. 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. 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 crated 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.
VOTE REQUIRED FOR MERGERS
The MBCA and the DGCL generally require the affirmative vote of a majority
of a corporation's outstanding shares entitled to vote, unless the articles or
certificate of incorporation, as applicable, require a greater proportion
(neither the Network Articles nor the Cabletron Certificate require 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 an
identical share of the surviving corporation after the merger; and (iii) in
Delaware, 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, under the
DGCL, a dissolution must be approved by all stockholders entitled to vote
thereon. Therefore, following the Merger, it may be more difficult for former
Network shareholders to effect a dissolution.
The Cabletron Certificate provides that certain transactions, including
mergers, consolidations, issuances of securities, certain asset dispositions,
liquidations or dissolutions between Cabletron and an interested stockholder
(as defined in the Cabletron Certificate) 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 interested stockholder with respect to
such transaction or has approved the transaction which resulted in such
stockholder becoming an interested stockholder, in either case prior to the
time such stockholder became an interested stockholder 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 interested stockholder
is a majority-owned subsidiary of Cabletron.
ANTI-TAKEOVER PROVISIONS
The MBCA provides that "control shares" of Network acquired in a control
share acquisition have no voting rights except as granted by the shareholders
of Network. "Control shares" are shares that, when added to
60
<PAGE>
shares previously owned by a shareholder, increase such shareholder's
ownership of Network voting stock to 20% or more, 33-1/3% or more or a
majority of the outstanding voting power of Network. A control share
acquisition must be approved by a majority of the votes cast by holders of
Network stock entitled to vote excluding shares owned by the acquiror and
certain Network officers and directors. No such approval is required, however,
for gifts or acquisitions pursuant to a merger to which Network is a party.
The DGCL has no similar provision.
The MBCA also prohibits Michigan corporations, the shares of which are
listed on a national securities exchange, from purchasing any of its shares
from any person who holds 3% or more of its shares unless an offer to
repurchase is made to all shareholders at the same price, its shareholders
authorize the purchase, the shares have been held for at least two years, the
purchase is made in the open market, the price is not greater than the average
market price during the previous 30 business days or the purchase is otherwise
authorized by the MBCA. The DGCL has no similar provision.
The MBCA provides that business combinations between a Michigan corporation
which elects to be subject to the relevant statute and a beneficial owner of
10% or more of the voting power of such corporation require the approval of
90% of the votes of each class of stock entitled to be cast and at least 2/3
of the votes of each class of stock entitled to be cast other than shares
owned by such 10% owner. Such requirements will not apply if (i) the
corporation's board of directors approves the transaction prior to the time
the 10% owner becomes such or (ii) the transaction satisfies certain fairness
standards, certain other conditions are met and the 10% owner has been such
for at lest five years. The relevant statute applies to Network generally but
not to the Merger because the Merger was approved by the Boards of Directors
of Network and Cabletron was not at the time of such approval, and is not
currently, a 10% owner of Network.
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 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. Neither the Cabletron Certificate
nor the Cabletron Bylaws exempts Cabletron from this provision.
DISSENTERS' RIGHTS
Under the MBCA and the DGCL, holders of shares have the right, in certain
circumstances, to dissent from certain extraordinary corporate transactions as
to which they have voting rights by demanding payment in cash for their shares
equal to the fair value of such shares, as determined by agreement with the
corporation or by a court in an action timely brought by the corporation or
the dissenters.
Unlike the MBCA, the DGCL grants dissenters' appraisal rights only in the
case of certain mergers and not in certain transactions involving a sale or
transfer of assets, a share exchange, a charter amendment or control share
acquisition and certain other transactions. The DGCL does not extend appraisal
rights in a merger to holders of shares listed on a national securities
exchange or designated as a national market system security on
61
<PAGE>
an inter-dealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders if
stockholders are required to accept as consideration in the merger only stock
of the surviving corporation, shares of stock of another corporation which at
the effective date will be listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 stockholders, cash in lieu of fractional shares or a
combination of the above. The MBCA does not extend appraisal rights in most
situations where the shares held are listed on a national securities exchange
or held of record by 2,000 or more shareholders or where the consideration
received is cash or a combination of cash and shares listed on a national
securities exchange or held of record by 2,000 or more shareholders.
LIMITATION ON DIRECTORS' LIABILITY
The Network Articles limit the liability of Network's directors to Network
or its shareholders to the fullest extent permitted by the MBCA. Directors
would not be personally liable to Network or its shareholders for any breach
of duty as a director, except for (i) a breach of the director's duty of
loyalty; (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law; (iii) a violation of Section 551(l) of
the MBCA (involving unlawful distributions to shareholders and loans to
directors, officers or employees); or (iv) a transaction from which the
director derived an improper personal benefit.
The Cabletron Certificate provides that no director of Cabletron shall be
liable to Cabletron 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 of 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
Both the MBCA and DGCL contain provisions setting forth conditions under
which a corporation may indemnify its directors and officers. These provisions
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 statutory indemnification provisions under the
MBCA and the DGCL are substantially the same, although the MBCA's non-
statutory provisions may be slightly broader with respect to indemnification
in suits brought by or in the right of the corporation since the MBCA
expressly permits indemnification of amounts paid in settlement in connection
with such suits while the DGCL does not expressly permit such indemnification
(except for payment of expenses incurred in connection with such suit). As a
result, directors, officers, employees or agents who agree to a settlement in
a derivative suit brought on behalf of Network may be indemnified by Network
for the amount paid in settlement as well as expenses incurred in connection
with the suit if the standard set forth in the MBCA and the Network Bylaws are
met. The Network By-laws provide that its officers, directors, employees and
agents shall be indemnified to the fullest extent authorized or permitted by
the MBCA. The Cabletron Certificate provides that its officers and directors
shall be indemnified to the full extent permitted by the DGCL.
STOCKHOLDER MEETINGS
The MBCA provides that if a corporation's annual meeting is not held for 90
days after the date designated therefor or for 15 months after its last annual
meeting, a court may order the meeting or election to be held upon application
by a shareholder. Under the DGCL, if an annual meeting is not held within 30
days of the date designated for such meeting, or if not held for a period of
13 months after the last annual meeting, the Delaware Court of Chancery may
summarily order a meeting to be held upon the application of any stockholder
or director.
62
<PAGE>
Under the MBCA and 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 Network Bylaws provide that special meetings of
shareholders may be called at any time by the Board of Directors, the Chairman
or the President. 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 MBCA, any shareholder action required or permitted to be taken by
shareholder vote may be taken with the unanimous written consent of
shareholders. The articles of incorporation may provide that such shareholder
action may be taken upon the written consent of less than all outstanding
shares. The Network Articles do not so provide. 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. The Cabletron Certificate does not provide otherwise.
PAYMENT OF DIVIDENDS
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 MBCA permits Network to pay
dividends and make other distributions unless, as a result, Network would
become insolvent or its assets would be less than its liabilities (each as
valued as provided in the MBCA) plus any preferential rights.
The foregoing is a summary of the material differences between the rights of
holders of Network Common Stock and Cabletron Common Stock under, and is
qualified in its entirety by reference to, the MBCA and the DGCL,
respectively, and the Network Articles and Bylaws and the Cabletron
Certificate and Bylaws.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be presented at Network's 1997 Annual
Meeting, to be held only in the event the Merger is not consummated, must be
received by Network no later than December 18, 1996.
OTHER MATTERS
It is not expected that any matters other than those described in this Proxy
Statement/Prospectus will be brought before the Network Special Meeting. If
any other matters are presented, however, it is the intention of the persons
named in the Network 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 Network by Dykema Gossett PLLC, Detroit, Michigan.
63
<PAGE>
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 reports 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 consolidated financial statements of Network Express, Inc. included in
this Proxy Statement/Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving such reports.
Representatives of Arthur Andersen LLP expect to be present at the Network
Special Meeting, and while they do not plan to make a statement at the Network
Special Meeting, such representatives will be available to respond to
appropriate questions from shareholders in attendance.
64
<PAGE>
NETWORK EXPRESS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Shareholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Express, Inc.:
We have audited the accompanying consolidated balance sheets of NETWORK
EXPRESS, INC. (a Michigan corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Express, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Ann Arbor, Michigan,
January 31, 1996, except
with respect to the matter
discussed in Note 11, as to
which the date is July 1,
1996.
F-2
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1995 1994 1996
------- ------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 2,733 $ 2,223 $ 1,507
Short-term investments.......................... 18,069 -- 15,319
Accounts receivable, net of allowance for
doubtful
accounts of $92, $29 and $111 at December 31,
1995
and 1994 and March 31, 1996, respectively...... 2,131 2,264 2,603
Inventories...................................... 4,825 1,156 6,455
Prepaid expenses and other....................... 356 13 267
------- ------- -------
Total current assets........................... 28,114 5,656 26,151
Property and equipment, net...................... 1,498 411 1,576
Goodwill......................................... 2,540 -- 2,435
Other assets..................................... 128 69 139
------- ------- -------
$32,280 $ 6,136 $30,301
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 2,218 $ 1,180 $ 2,602
Accrued liabilities............................. 2,009 711 2,101
------- ------- -------
Total current liabilities...................... 4,227 1,891 4,703
------- ------- -------
Shareholders' equity:
Preferred stock, no par value, 100 shares
authorized, none outstanding................... -- -- --
Common stock, no par value, $.125 stated value,
20,000 shares authorized; 10,322, 6,706 and
10,230 shares issued and outstanding at
December 31, 1995 and 1994 and March 31,
1996, respectively............................. 1,290 838 1,278
Additional paid-in capital...................... 38,314 6,511 37,922
Note receivable from officer.................... (151) (195) --
Cumulative translation adjustment............... (16) -- (64)
Accumulated deficit............................. (11,384) (2,909) (13,538)
------- ------- -------
Total shareholders' equity..................... 28,053 4,245 25,598
------- ------- -------
$32,280 $ 6,136 $30,301
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
DECEMBER 31, MARCH 31,
----------------------- ---------------
1995 1994 1993 1996 1995
------- ------- ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $18,997 $11,113 $4,029 $3,177 $4,543
Cost of sales........................ 10,084 6,397 2,407 1,621 2,404
------- ------- ------ ------- ------
Gross profit..................... 8,913 4,716 1,622 1,556 2,139
------- ------- ------ ------- ------
Operating expenses:
Research and development........... 4,427 2,260 1,264 1,677 863
Sales and marketing................ 3,803 1,146 736 1,595 640
General and administrative......... 1,445 891 633 577 256
Acquired in-process research and
development....................... 8,653 -- -- -- --
------- ------- ------ ------- ------
Total operating expenses......... 18,328 4,297 2,633 3,849 1,759
------- ------- ------ ------- ------
Income (loss) from operations.... (9,415) 419 (1,011) (2,293) 380
Interest income...................... 1,076 51 13 249 34
Other income......................... -- 11 98 -- --
------- ------- ------ ------- ------
Income (loss) before income
taxes........................... (8,339) 481 (900) (2,044) 414
Provision for income taxes........... 136 15 -- 110 40
------- ------- ------ ------- ------
Net income (loss).................... $(8,475) $ 466 $ (900) $(2,154) $ 374
======= ======= ====== ======= ======
Net income (loss) per common and
common equivalent share............. $ (0.90) $ 0.07 $(0.21) $ (0.20) $ 0.05
======= ======= ====== ======= ======
Weighted average number of common and
common equivalent shares
outstanding......................... 9,369 6,271 4,262 10,654 7,926
======= ======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OFFICER CUMULATIVE
-------------- PAID-IN NOTE TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
------ ------ ---------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31,
1992................... 2,991 $ 374 $ 2,676 $ -- $-- $ (2,524) $ 526
Issuance of common stock
for cash............... 1,719 215 1,799 -- -- -- 2,014
Issuance of common stock
for services........... 60 8 49 -- -- -- 57
Exercise of stock
options and warrants... 326 40 323 -- -- -- 363
Cancellation of stock
options................ -- -- -- -- -- 16 16
Repricing of stock
options................ -- -- -- -- -- 33 33
Stock issuance costs.... -- -- (210) -- -- -- (210)
Net loss................ -- -- -- -- -- (900) (900)
------ ------ ------- ----- ---- -------- -------
Balance--December 31,
1993................... 5,096 637 4,637 -- -- (3,375) 1,899
Issuance of common stock
for cash............... 1,510 188 1,991 -- -- -- 2,179
Issuance of common stock
for note receivable.... 100 13 182 (195) -- -- --
Stock issuance costs.... -- -- (299) -- -- -- (299)
Net income.............. -- -- -- -- -- 466 466
------ ------ ------- ----- ---- -------- -------
Balance--December 31,
1994................... 6,706 838 6,511 (195) -- (2,909) 4,245
Issuance of common stock
for cash............... 2,339 293 28,598 -- -- -- 28,891
Exercise of stock
options and warrants... 802 100 1,043 -- -- -- 1,143
Issuance of common stock
for Fivemere
acquisition............ 475 59 2,506 -- -- -- 2,565
Stock issuance costs.... -- -- (344) -- -- -- (344)
Repayment of note
receivable............. -- -- -- 44 -- -- 44
Translation adjustment.. -- -- -- -- (16) -- (16)
Net loss................ -- -- -- -- -- (8,475) (8,475)
------ ------ ------- ----- ---- -------- -------
Balance--December 31,
1995................... 10,322 1,290 38,314 (151) (16) (11,384) 28,053
Exercise of stock
options (unaudited).... 8 1 10 -- -- -- 11
Translation adjustment
(unaudited)............ -- -- -- -- (48) -- (48)
Repayment of note
receivable
(unaudited)............ -- -- -- 151 -- -- 151
Repurchase of common
stock (unaudited)...... (100) (13) (402) -- -- -- (415)
Net loss (unaudited).... -- -- -- -- -- (2,154) (2,154)
------ ------ ------- ----- ---- -------- -------
Balance--March 31, 1996
(unaudited)............ 10,230 $1,278 $37,922 $ -- $(64) $(13,538) $25,598
====== ====== ======= ===== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------------
1995 1994 1993 1996 1995
-------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........... $ (8,475) $ 466 $ (900) $(2,154) $ 374
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............. 404 135 120 181 53
Goodwill amortization..... 62 -- -- 131 --
Acquired in-process
research and
development.............. 8,653 -- -- -- --
Issuance of common stock
and
stock options for
services................. -- -- 224 -- --
Change in operating assets
and liabilities:
Accounts receivable..... 993 (1,466) (669) (493) (170)
Inventories............. (2,267) (50) (850) (1,792) 263
Prepaid expenses and
other.................. (187) 5 (18) 85 (17)
Other assets............ (62) (42) -- (16) (14)
Accounts payable........ 530 286 458 383 197
Accrued liabilities..... (59) 565 (122) 107 (39)
-------- ------- ------- ------- ------
Net cash provided by (used
in) operating
activities............... (408) (101) (1,757) (3,568) 647
-------- ------- ------- ------- ------
Cash flows from investing
activities:
Purchase of property and
equipment.................. (696) (399) (118) (140) (213)
Net cash used for
acquisition of Fivemere
Limited.................... (10,043) -- -- (26) --
Purchases of short-term
investments................ (45,541) -- -- (200) --
Sales of short-term
investments................ 27,471 -- -- 2,950 --
-------- ------- ------- ------- ------
Net cash provided by (used
in) investing
activities............... (28,809) (399) (118) 2,584 (213)
-------- ------- ------- ------- ------
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net.......... 28,547 1,730 1,955 -- --
Proceeds from exercise of
stock options and
warrants................... 1,143 -- 171 11 28
Repurchase of common stock.. -- -- -- (415) --
Repayment of officer note
receivable................. 44 -- -- 151 1
-------- ------- ------- ------- ------
Net cash provided by (used
in) financing
activities............... 29,734 1,730 2,126 (253) 29
Effect of exchange rate
changes on cash.............. (7) -- -- 11 --
-------- ------- ------- ------- ------
Increase (decrease) in cash
and cash equivalents......... 510 1,230 251 (1,226) 463
Cash and cash equivalents,
beginning of year............ 2,223 993 742 2,733 2,223
-------- ------- ------- ------- ------
Cash and cash equivalents, end
of year...................... $ 2,733 $ 2,223 $ 993 $ 1,507 $2,686
======== ======= ======= ======= ======
Supplemental disclosure of
cash flow information:
Taxes paid.................. $ 38 $ -- $ -- $ 60 $ 25
======== ======= ======= ======= ======
</TABLE>
Supplemental disclosure of noncash financing activities:
During 1994, common stock was issued in exchange for a note receivable of
$195,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS
Network Express, Inc. ("Network") commenced operations in March 1990.
Network designs, develops and markets communications software and hardware
products used to link together local area computer networks, both domestically
and internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Network and its wholly-owned subsidiaries, Network Express K.K. (established
May 1994), Network Express Europe Ltd. (September 1994), Network Express GmbH
(October 1995) and Fivemere Limited (subsequent to its acquisition by Network
on November 17, 1995). All significant intercompany accounts and transactions
have been eliminated.
Interim Financial Information
The consolidated financial statements for the quarters ended March 31, 1996
and 1995 are unaudited but include all adjustments (consisting of normal
recurring entries) which Network considers necessary for fair presentation.
Operating results for the quarter ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any future period.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
Network considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents, and investments with
original maturities of greater than 90 days to be short-term investments.
Effective January 1, 1995, Network adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"), which requires investments in debt and equity
securities to be classified as either held to maturity, trading or available
for sale. At December 31, 1995, short-term investments consist of $9.0 million
of corporate debt securities, $6.8 million of Federal agency securities and
$2.3 million of other debt securities. These securities are all classified as
available for sale and have a weighted average maturity of 134 days. In
accordance with SFAS 115, securities available for sale are recorded at fair
market value and any unrealized gains or losses are reported as a separate
component of shareholders' equity. At December 31, 1995 and March 31, 1996,
estimated fair value equaled cost. Realized gains and losses are included in
interest income and are not material.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and purchased parts......... $ 367,641 $ 385,788 $1,055,371
Work in process........................... 91,879 531,837 79,790
Finished goods............................ 4,365,020 237,954 5,320,242
---------- ---------- ----------
$4,824,540 $1,155,579 $6,455,403
========== ========== ==========
</TABLE>
Finished goods include $513,136, $122,506 and $758,943 of inventory in the
hands of customers for evaluation at December 31, 1995 and 1994 and March 31,
1996, respectively.
F-7
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the useful lives of the related assets estimated
to be 25 years for buildings, three years for computer equipment and three to
ten years for other property and equipment. Property and equipment consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
MARCH 31,
1995 1994 1996
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings.............................. $ 398,827 $ -- $ 392,850
Computer equipment.............................. 1,918,194 782,419 2,165,547
Other........................................... 510,265 17,036 507,015
---------- -------- ----------
2,827,286 799,455 3,065,412
Less accumulated depreciation................... 1,329,700 389,455 1,488,868
---------- -------- ----------
$1,497,586 $410,000 $1,576,544
========== ======== ==========
</TABLE>
Foreign Currency Translation
Assets and liabilities of Network's foreign subsidiaries are translated at
the current exchange rate as of the balance sheet date. Revenue and expenses
are translated at the average exchange rates prevailing during the year. The
resulting translation adjustments are excluded from net earnings and recorded
as a separate component of shareholders' equity. Foreign currency transaction
gains and losses are included in results of operations in the periods in which
they occur, and are immaterial for all periods presented.
Revenue Recognition
Network recognizes revenues from product sales upon shipment of product.
Service revenues are deferred and recognized ratably over the contractual
periods.
Warranty
Network generally warrants its products for periods ranging from 90 days to
one year. Estimated future warranty obligations related to certain products
are provided by charges to operations in the period in which the related
revenue is recognized.
Concentration of Credit Risk and Major Customers
The majority of Network's revenues are derived from product sales to
Japanese companies in the high technology industry. Accordingly, Network's
accounts receivable are concentrated with respect to both geography and
industry. Network performs ongoing credit evaluations of its customers and
generally does not require collateral.
Network sold approximately $15,634,000, $9,812,000 and $3,190,000 of
products to Soliton Systems K.K., during the years ended December 31, 1995,
1994 and 1993, respectively. These sales accounted for approximately 82%, 88%
and 79% of sales for 1995, 1994 and 1993, respectively. The unpaid balance of
$421,044 and $1,934,030 is included in accounts receivable at December 31,
1995 and 1994, respectively.
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The
establishment of technological
F-8
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement
after consideration of the above factors were immaterial and, therefore, no
software development costs have been capitalized by Network to date.
Income Taxes
Network applies the policies of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, which requires use of the asset and
liability method of accounting for income taxes. Under this method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities.
Net Income (Loss) Per Share
Net income (loss) per common and common equivalent share is computed using
the weighted average number of outstanding shares of common stock and dilutive
common equivalent shares from stock options using the treasury stock method.
Reclassifications
Certain amounts is the consolidated financial statements of the prior
periods have been reclassified in order to conform with the current
presentation.
3. ACQUISITION OF FIVEMERE LIMITED
On November 17, 1995, Network acquired the entire share capital of Fivemere
Limited located in Aldershot, England. Fivemere is principally engaged in the
development, marketing and support of ISDN based back-up products for leased-
line networks used by businesses and organizations in the financial
information services market. The total purchase price of $13,482,623 included
a cash payment of $10 million, the issuance of 475,000 shares of Network
Common Stock and acquisition costs of $917,623. The acquisition has been
accounted for by the purchase method of accounting and, accordingly, the
accompanying consolidated financial statements include the results of
operations of Fivemere subsequent to the acquisition date.
The fair value of the net assets and acquired in-process research and
development was $2,227,276 and $8,653,000, respectively. Because the
technological feasibility of the acquired in-process research and development
had not yet been established and the in-process technology had no alternative
use, this amount was immediately charged to operations in the fourth quarter
of 1995. The excess of $2,602,347 of the acquisition price over such fair
value has been recorded as goodwill and is being amortized over its estimated
useful life of 5 years. At December 31, 1995 accumulated amortization was
$62,742.
The following unaudited pro forma summary presents the consolidated results
of operations of Network as if the acquisition of Fivemere had occurred as of
January 1, 1994 and does not purport to be indicative of the results that
would have been reported had the acquisition been made as of such date or the
results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales............................................ $26,451,557 $19,340,085
Net income........................................... $97,971 $725,287
Net income per share................................. $.01 $.11
</TABLE>
F-9
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
MARCH 31,
1995 1994 1996
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Compensation and related costs.................. $ 538,231 $254,633 $ 427,914
Income taxes.................................... 476,004 39,000 528,468
Warranty........................................ 233,254 25,000 227,318
Deferred revenue................................ 246,827 -- 210,409
Other........................................... 514,978 392,387 706,600
---------- -------- ----------
$2,009,294 $711,020 $2,100,709
========== ======== ==========
</TABLE>
5. STOCK PLANS
Employee Stock Option Plans
Network's 1991 Stock Option and 1995 Omnibus Equity plans (the "Employee
Plans") authorize the granting of options to employees to purchase up to an
aggregate of 1,000,000 and 440,000 shares of Network Common Stock,
respectively. Under the Employee Plans, options generally are granted at the
closing market price on the date of grant; become exercisable at the rate of
25% at the end of each of the years following the anniversary of the grant;
and, if not exercised, expire in five to ten years from the date of grant. The
Omnibus Equity Plan provides for the grant of stock awards and stock purchase
rights. Activity under the Employee Plans was as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ------------
<S> <C> <C>
Balance at December 31, 1992......................... 388,800 $0.25-$ 1.38
Granted............................................ 484,000 $0.25-$ 1.50
Exercised.......................................... (196,400) $0.25-$ 1.25
Canceled........................................... (16,000) $0.25
--------- ------------
Balance at December 31, 1993......................... 660,400 $0.94-$ 1.50
Granted............................................ 214,500 $1.50-$ 2.33
Canceled........................................... (35,000) $1.25-$ 1.55
--------- ------------
Balance at December 31, 1994......................... 839,900 $0.94-$ 2.33
Granted............................................ 573,000 $3.26-$17.50
Exercised.......................................... (237,100) $0.94-$ 1.92
Canceled........................................... (149,250) $1.25-$ 9.88
--------- ------------
Balance at December 31, 1995......................... 1,026,550 $0.94-$17.50
Granted (unaudited)................................ 432,500 $5.00-$ 7.00
Exercised (unaudited).............................. (7,750) $0.94-$ 1.92
Canceled (unaudited)............................... (343,375) $1.84-$17.50
--------- ------------
Balance at March 31, 1996 (unaudited)................ 1,107,925 $0.94-$17.50
========= ============
Exercisable at March 31, 1996 (unaudited)............ 279,675 $0.94-$ 7.38
========= ============
</TABLE>
In February 1996, options to purchase 307,500 shares of Network Common Stock
at prices ranging from $7.38 to $17.50 per share were cancelled and new
options were granted at $5.00 per share.
F-10
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
Non-Employee Directors Stock Option Plan
On May 18, 1995, the shareholders approved the Non-Employee Directors Stock
Option Plan (the "Director Plan") which provided for the granting of options
to non-employee directors to purchase up to an aggregate of 60,000 shares of
Network Common Stock. Under the Director Plan, each non-employee director who
has been elected by the shareholders and is serving on the Board will receive
an annual automatic grant option to purchase 2,000 shares of Network Common
Stock. Options are granted at the closing market price on the date of grant;
become exercisable at the rate of 33% at the end of each of the three years
following the anniversary of the grant; and, if not exercised, expire in ten
years from the date of grant. No grants have been made to date under the
Directors Plan.
In July 1995, the Board of Directors granted options to a newly appointed
director to purchase an aggregate of 20,000 shares of Network Common Stock at
$13.75 per share, the closing market price on the date of grant. The options
become exercisable at the rate of 25% at the end of each of the four years
following the anniversary of the grant; and, if not exercised, expire in ten
years from the date of the grant.
Employee Stock Purchase Plan
On May 18, 1995, the shareholders approved the 1995 Employee Stock Purchase
Plan which enables eligible employees to purchase an aggregate of 250,000
shares of Network Common Stock. Under the Employee Stock Purchase Plan,
eligible employees may purchase Network Common Stock during six-month purchase
periods commencing February 1 and August 1 of each year at a price per share
of 85% of the closing market price on the first day of the purchase period. As
of December 31, 1995, no stock has been purchased under the Plan.
6. EMPLOYEE BENEFIT PLAN
Network has a 401(k) savings plan covering all domestic employees. Employees
may make contributions equal to a percentage of salary, subject to Internal
Revenue Service limitations. Network has not contributed to the plan to date.
7. COMMITMENTS
Network leases its headquarters, other office facilities and equipment under
noncancelable, long-term operating leases. Total expense was approximately
$445,000, $224,000 and $98,000 for the years ended December 31, 1995, 1994 and
1993, respectively. The future minimum lease payments required under these
operating leases for the years ending December 31 are as follows:
<TABLE>
<S> <C>
1996............................ $521,000
1997............................ 300,000
1998............................ 160,000
--------
$981,000
========
</TABLE>
F-11
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Federal statutory provision (benefit)... $(2,835,000) $ 163,500 $(306,100)
Losses without tax benefit.............. 183,000 -- 300,400
Permanent differences................... 2,978,000 20,900 5,700
Decrease in valuation reserve due to
utilization of tax benefits............ (172,800) (184,400) --
Utilization of alternative minimum tax
credits................................ (15,000) -- --
Rate differences........................ (1,911) -- --
Increase in valuation allowance due to
alternative minimum tax................ -- 15,000 --
----------- --------- ---------
Total provision for income taxes.... $ 136,289 $ 15,000 $ --
=========== ========= =========
</TABLE>
Network has net operating loss ("NOL") carryforwards of approximately
$357,000 available for tax reporting purposes which can be used to offset
future taxable income through the year 2008.
The significant components of the net deferred income tax asset (liability)
as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accrued liabilities.................................... $ 145,500 $ 66,000
Inventories............................................ 149,200 25,600
Accounts receivable.................................... 12,100 9,800
Valuation allowance.................................... (306,800) (101,400)
--------- ---------
Net current deferred income taxes.................. $ -- $ --
========= =========
NOL carryforwards...................................... $ 121,400 $ 541,300
Software costs......................................... 96,100 --
Unamortized start-up costs............................. 12,900 51,600
Alternative minimum tax credit carryforward............ -- 15,000
Other.................................................. (13,600) (12,900)
Valuation allowance.................................... (216,800) (595,000)
--------- ---------
Net long-term deferred income taxes................ $ -- $ --
========= =========
</TABLE>
9. SHAREHOLDERS' EQUITY
In May 1995, Network completed a public offering of 2,210,000 shares of
Network Common Stock and received net proceeds of approximately $27.0 million.
In June 1995, Network issued 129,353 shares of Network Common Stock and
received proceeds of approximately $1.6 million pursuant to partial exercise
of the over-allotment option granted to the underwriters in connection with
the public offering. In connection with the public offering, warrants for the
aggregate purchase of 450,000 shares of Network Common Stock were exercised
from which Network received proceeds of approximately $750,000.
On June 30, 1994, Network completed its initial public offering of 1,500,000
shares of Network Common Stock on the Vancouver Stock Exchange and received
net proceeds of approximately $1.7 million.
F-12
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
At December 31, 1995, Network had a note receivable of $151,050 that was
made to enable an officer of Network to purchase 100,000 shares of Network's
Common Stock. The note, including accrued interest thereon, was paid in full
during the quarter ended March 31, 1996.
10. GEOGRAPHIC SEGMENT INFORMATION
The following table sets forth information concerning the geographic
segmentation in which the Network operates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Net sales:
Japan................................... $15,634,347 $ 9,811,661 $3,189,776
United States........................... 2,285,372 1,300,945 822,550
Europe.................................. 1,077,561 -- 16,740
----------- ----------- ----------
Total................................. $18,997,280 $11,112,606 $4,029,066
=========== =========== ==========
Gross profit:
Japan................................... $ 7,277,535 $ 4,037,217 $1,181,449
United States........................... 1,050,806 678,301 432,508
Europe.................................. 584,306 -- 7,963
----------- ----------- ----------
Total................................. $ 8,912,647 $ 4,715,518 $1,621,920
=========== =========== ==========
Identifiable assets:
Japan................................... $ 530,379 $ 2,029,245 $ 678,825
United States........................... 26,860,311 4,008,241 2,405,244
Europe.................................. 4,889,680 98,329 4,039
----------- ----------- ----------
Total................................. $32,280,370 $ 6,135,815 $3,088,108
=========== =========== ==========
</TABLE>
11.SUBSEQUENT EVENT
On July 1, 1996, Network acquired certain assets and rights pertaining to
the "Waverunner" product line of IBM Corporation for approximately $7
million. Network has accounted for this acquisition under the purchase
method.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CABLETRON SYSTEMS, INC.
CABLETRON SYSTEMS OF MICHIGAN, INC.
AND
NETWORK EXPRESS, INC.
DATED AS OF MAY 21, 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.......................................... 2
Section 1.3 Effect of the Merger.................................... 2
Section 1.4 Articles of Incorporation, By-Laws...................... 2
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.................................... 7
Section 1.9 No Further Ownership Rights in Company Common Stock..... 7
Section 1.10 Lost, Stolen or Destroyed Certificates.................. 7
Section 1.11 Tax and Accounting Consequences......................... 7
Section 1.12 Taking of Necessary Action; Further Action.............. 7
Section 1.13 Material Adverse Effect................................. 8
ARTICLE II Representations and Warranties of the Company................ 8
Section 2.1 Organization and Qualification; Subsidiaries............ 8
Section 2.2 Certificate of Incorporation and By-Laws................ 9
Section 2.3 Capitalization.......................................... 9
Section 2.4 Authority Relative to this Agreement.................... 10
Section 2.5 No Conflict; Required Filings and Consents.............. 10
Section 2.6 Compliance, Permits..................................... 12
Section 2.7 SEC Filings; Financial Statements....................... 12
Section 2.8 Absence of Certain Changes or Events.................... 13
Section 2.9 No Undisclosed Liabilities.............................. 13
Section 2.10 Absence of Litigation................................... 14
Section 2.11 Employee Benefit Plans, Employment Agreements........... 14
Section 2.12 Labor Matters........................................... 15
Section 2.13 Registration Statement, Joint Proxy
Statement/Prospectus.................................... 16
Section 2.14 Restrictions on Business Activities..................... 16
Section 2.15 Title to Property....................................... 17
Section 2.16 Taxes................................................... 17
Section 2.17 Environmental Matters................................... 18
Section 2.18 Intellectual Property................................... 19
Section 2.19 Interested Party Transactions........................... 21
Section 2.20 Insurance............................................... 21
Section 2.21 Pooling Matters......................................... 21
Section 2.22 Opinion of Financial Advisor............................ 21
Section 2.23 Brokers................................................. 21
Section 2.24 Change in Control Payments.............................. 21
Section 2.25 Expenses................................................ 22
ARTICLE III Representations and Warranties of Parent and Merger Sub..... 22
Section 3.1 Organization and Qualification; Subsidiaries............ 22
Section 3.2 Charter and By-Laws..................................... 22
Section 3.3 Capitalization.......................................... 22
Section 3.4 Authority Relative to this Agreement.................... 23
Section 3.5 No Conflict, Required Filings and Consents.............. 23
Section 3.6 Compliance; Permits..................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Section 3.7 SEC Filings; Financial Statements....................... 25
Section 3.8 Absence of Certain Changes or Events.................... 26
Section 3.9 No Undisclosed Liabilities.............................. 26
Section 3.10 Absence of Litigation................................... 26
Section 3.11 Employee Benefit Plans; Employment Agreements........... 27
Section 3.12 Labor Matters........................................... 28
Section 3.13 Registration Statement; Joint Proxy
Statement/Prospectus.................................... 28
Section 3.14 Restrictions on Business Activities..................... 28
Section 3.15 Title to Property....................................... 29
Section 3.16 Insurance............................................... 29
Section 3.17 Pooling Matters......................................... 29
Section 3.21 Brokers................................................. 30
Section 3.22 Interested Party Transactions........................... 31
Section 3.23 Ownership of Merger Sub; No Prior Activities............ 31
ARTICLE IV Conduct of Business Pending the Merger....................... 31
Section 4.1 Conduct of Business by the Company Pending the Merger... 31
Section 4.2 No Solicitation......................................... 33
Section 4.3 Conduct of Business by Parent Pending the Merger........ 35
ARTICLE V Additional Agreements......................................... 35
Section 5.1 HSR Act................................................. 35
Section 5.2 Joint Proxy, Statement Prospectus; Registration
Statement............................................... 35
Section 5.3 Stockholder Meeting..................................... 36
Section 5.4 Access to Information; Confidentiality.................. 36
Section 5.5 Consents; Approvals..................................... 36
Section 5.6 Agreements with Respect to Affiliates................... 37
Section 5.7 Indemnification and Insurance........................... 37
Section 5.8 Notification of Certain Matters......................... 38
Section 5.9 Further Action/Tax Treatment............................ 38
Section 5.10 Public Announcements.................................... 39
Section 5.11 Conveyance Taxes........................................ 39
Section 5.12 Accountants' Letters.................................... 39
Section 5.13 Pooling Accounting Treatment............................ 39
Section 5.14 Nasdaq Listing.......................................... 40
Section 5.15 Listing of Parent Shares................................ 40
ARTICLE VI Conditions to the Merger...................................... 40
Section 6.1 Conditions to Obligation of Each Party to Effect the
Merger.................................................. 40
Section 6.2 Additional Conditions to Obligations of Parent and
Merger Sub.............................................. 41
Section 6.3 Additional Conditions to Obligation of the Company...... 42
ARTICLE VII Termination................................................. 43
Section 7.1 Termination............................................. 43
Section 7.2 Effect of Termination................................... 45
Section 7.3 Fees and Expenses....................................... 45
ARTICLE VIII General Provisions......................................... 46
Section 8.1 Effectiveness of Representations, Warranties and
Agreements; Knowledge, Etc.............................. 46
Section 8.2 Notices................................................. 47
Section 8.3 Certain Definitions..................................... 48
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
Section 8.4 Amendment................................................ 49
Section 8.5 Waiver................................................... 49
Section 8.6 Headings................................................. 49
Section 8.7 Severability............................................. 49
Section 8.8 Entire Agreement......................................... 50
Section 8.9 Assignment; Guarantee of Merger Sub...................... 50
Section 8.10 Parties in Interest...................................... 50
Section 8.11 Failure or Indulgence Not Waiver; Remedies Cumulative.... 50
Section 8.12 Governing Law............................................ 50
Section 8.13 Counterparts............................................. 50
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 21, 1996 (this "Agreement"),
among Cabletron Systems, Inc., a Delaware corporation ("Parent"), Cabletron
Systems of Michigan, Inc., a Michigan corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Network Express, Inc., a Michigan
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 Shareholders 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 Michigan Business Corporation Act (the "MBCA") and the Board of
Directors of the Company has approved the Merger in accordance with the
applicable provisions of the MBCA, and 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, without 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 MBCA,
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.
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 certificate of
merger as contemplated by the MBCA (the "Certificates of Merger"), together
with any required related certificates, with the Department of Commerce of the
State of Michigan, in such form as required by, and
A-1
<PAGE>
executed in accordance with the relevant provisions of the MBCA (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 MBCA. 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 Articles of Incorporation, By-Laws.
(a) Articles of Incorporation. Unless otherwise determined by Parent prior
to the Effective Time, at the Effective Time the Articles of Incorporation of
the Company, as in effect immediately prior to the Effective Time, shall be
the Articles of Incorporation of the Surviving Corporation until thereafter
amended in accordance with the MBCA and such Articles of Incorporation.
(b) By-Laws. Unless otherwise determined by Parent prior to the Effective
Time, the By-Laws of the Company, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended in accordance with the MBCA, the Articles of Incorporation
of the Surviving Corporation and such By-Laws.
Section 1.5 Directors and Officers. The Board of Directors of Merger Sub
immediately prior to the Effective Time shall be the initial Board of
Directors of the Surviving Corporation, each member to hold office in
accordance with the Articles 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)) shall be converted, subject to Section
1.6(f), into the right to receive 0.1388 shares (the "Exchange Ratio") of
validly issued, fully paid and nonassessable shares ("Parent Shares") of
the Common Stock, $.01 par value, of Parent ("Parent Common Stock").
(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) Stock Options; Employee Stock Purchase Plan.
(i) At the Effective Time, each outstanding option to purchase
Company Common Stock (a "Stock Option") granted under (A) the Company's
1995 Omnibus Equity Plan, (B) the Company's 1991 Stock Option Plan or
(C) the individual stock option granted by the Company to Mr.
Kalkhoven, in July 1995 (collectively, the "Company Stock Option
Plans"), 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 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
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Stock otherwise purchasable pursuant to such Stock Option divided by
(y) the number of Parent Shares deemed purchasable pursuant to such
Stock Option. The Company shall not commence any "Purchase Periods"
under its Employee Stock Purchase Plan ("ESPP") after February 1, 1996,
shall apply all amounts deducted and withheld thereunder to purchase
shares of the Company Common Stock in accordance with the provisions
thereof, and shall terminate the ESPP as of the Effective Time. Parent
shall have no duty or obligation in respect of the ESPP or the rights
granted thereunder. In the event the Effective Time occurs prior to the
end of the "Purchase Period" which commenced February 1, 1996, each
Stock Option granted to an individual under the ESPP shall be deemed
assumed by Parent and deemed to constitute an option to acquire, on the
same terms and conditions (except as hereinafter set forth) as were
applicable under such Stock Option immediately prior to the Effective
Time, the number (rounded down to the nearest whole number) of Parent
Shares purchasable by applying the amount of plan-related payroll
deductions standing to the credit of the individual on the last
business day of the Purchase Period (as that term is defined in the
ESPP) in which the Effective Time occurs (the "purchase date") toward
the purchase of Parent Shares on the purchase date at a per-share price
equal to the lesser of (I) 85% of the fair market value of a share of
Company Common Stock at the beginning of such Purchase Period divided
by the Exchange Ratio and (II) 85% of the fair market value of a Parent
Share on the purchase date.
(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 either (A) 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, or (B) file any necessary
amendments to the Company's previously-filed Registration Statement on
Form S-8 in order that the Parent will be deemed a "successor
registrant" thereunder, and, in either event 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.
(d) Capital Stock of Merger Sub. Each share of common stock, without 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, without par
value, of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be equitably
adjusted to reflect fully the effect of any reclassification, stock split,
reverse split, 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.
(f) 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 Time by
(ii) the fractional interest of Parent Common Stock to which such holder
would otherwise be entitled. As soon as practicable 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.
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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 and reasonably satisfactory to the Company (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.
(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 and the Company may reasonably specify), 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(f) (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(f), to evidence the ownership of the number of full Parent Shares into
which such shares of Company Common Stock shall have been so converted. Parent
Shares issued in the Merger shall be issued as of and deemed to be outstanding
as of the Effective Time. Parent shall cause all such Parent Shares issued in
accordance with the Merger to be duly authorized, validly issued, fully paid
and nonassessable.
(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, (i) 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 and (ii) at the appropriate payment
date, the amount of dividend or other distributions with a record date after
the Effective Time and a payment date subsequent to such surrender.
(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 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.
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(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 a
bond in such sum as it may reasonably direct 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 practicable, unless in the case
of the Company, in the opinion of the Board of Directors of the Company,
refraining from the taking of such action is required in the discharge of its
fiduciary duties under applicable law (after receiving advice from its
independent legal counsel to such effect). 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 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), 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
prevent the consummation of the transactions contemplated hereby.
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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"):
Section 2.1 Organization and Qualification; Subsidiaries. Each of 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, authority and Approvals could not reasonably be expected to have a
Material Adverse Effect. Each of 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
$100,000 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 Articles of
Incorporation and By-Laws as amended to date, and has furnished or made
available to Parent the Articles of Incorporation and By-Laws (or equivalent
organizational documents) of each of its subsidiaries (the "Subsidiary
Documents"). Such Articles of Incorporation, By-Laws and Subsidiary Documents
are in full force and effect. Neither the Company nor any of its subsidiaries
is in violation of any of the provisions of its Articles of Incorporation or
By-Laws or Subsidiary Documents, except for immaterial violations of the
Subsidiary Documents which may exist.
Section 2.3 Capitalization. The authorized capital stock of the Company
consists of (1) 20,000,000 shares of Company Common Stock and (2) 100,000
shares of preferred stock, without par value, none of which is issued and
outstanding and none of which is held in treasury. As of March 31, 1996, (i)
10,230,089 shares of Company Common Stock were issued and outstanding, all of
which are validly issued, fully paid and nonassessable, and no shares were
held in treasury, (ii) no shares of Company Common Stock were held by
subsidiaries of the Company, and (iii) 1,061,050 shares of Company Common
Stock were reserved for future issuance pursuant to outstanding stock options
granted under the Company Stock Option Plans. No material change in such
capitalization has occurred between March 31, 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
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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"). There are no outstanding options under the Company's 1991 Stock
Option Plan for Non-Employee Directors and Consultants. There are no vested
options outstanding under the Company's 1995 Non-Employee Stock Option Plan,
and no outstanding options are scheduled to vest prior to May 14, 1997. Upon
the Effective Time pursuant to the terms of the Agreement, the service of all
current directors of the Company who are not directors of Merger Sub will
terminate and all outstanding options under the 1995 Non-Employee Stock Option
Plan granted to such directors will terminate pursuant to the terms of such
plan without further action by the Company.
Section 2.4 Authority Relative to this Agreement. 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 approval of this Agreement by the holders of at
least a majority of the outstanding shares of Company Common Stock entitled to
vote in accordance with the MBCA and the Company's Articles of Incorporation
and By-Laws). The Board of Directors of the Company has determined that it is
advisable and in the best interest of the Company's Shareholders 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 Shareholders approve and adopt this Agreement and the
Merger. 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.
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, 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, other
than office equipment and vehicle leases in an aggregate amount not exceeding
$200,000; (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, commitments or other
understandings or arrangements entered into in the ordinary course of business
and involving, in each case, payments or receipts by the Company or any of its
subsidiaries of less than $100,000 in any single instance; and (iii) all
agreements which, as of the date hereof, are required to be filed as "material
contracts" with the Securities Exchange Commission ("SEC") pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, and the SEC's
rules and regulations thereunder (the "Exchange Act").
(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), (ii) or (iii) 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), (ii) or (iii) of Section 2.5 (a) has
breached or is in default of any of its obligations thereunder, and (iii) each
of the agreements, contracts and other instruments referred to in clauses
(i), (ii) or (iii) of Section 2.5(a) is in full force and effect, except in
any such case under clauses (i), (ii) or (iii) of
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this Section 2.5(b) for breaches, defaults or failures to be in full force and
effect that has 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 Articles 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 under clauses (i),
(ii) or (iii) of this Section 2.5(c) 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"), the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), any required foreign anti-trust or
similar filings and the filing and recordation of appropriate merger or other
documents as required by the MBCA, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent consummation of the Merger, or otherwise
prevent the Company from performing its obligations under this Agreement, or
would not otherwise have a Material Adverse Effect. As provided by Section
762(2)(b) of the MBCA, no shareholder is entitled to dissent from the Merger.
Neither the Articles of Incorporation or Bylaws provide the shareholders with,
nor has the board provided, pursuant to resolution or otherwise, the
shareholders with, a right to dissent from the Merger in accordance with the
provisions of Section 762 of the MBCA.
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 in any such case under clauses (i) or
(ii) of this Section 2.6(a) 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 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.
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Section 2.7 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to be
filed with the SEC and has made available to Parent (i) its Annual Reports on
Form 10-KSB for the fiscal years ended December 31, 1995 and 1994, (ii) its
Quarterly Reports on Form 10-QSB for the periods ended September 30, 1994,
March 31, 1995, June 30, 1995, September 30, 1995, and March 31, 1996 and
(iii) its Registration Statement on Form SB-2, No. 33-77694 as declared
effective by the SEC on May 13, 1994, its Registration Statement on Form SB-2,
No. 33-83552 as declared effective by the SEC on October 14, 1994 and its
Registration Statement on Form S-1, No. 33-91140 as declared effective by the
SEC on May 17, 1995, (iv) all proxy statements relating to the Company's
meetings of Shareholders (whether annual or special) since January 1, 1994 (v)
all other reports or registration statements filed by the Company with the
SEC, and (vi) all amendments and supplements to all such reports and
registration statements filed by the Company with the SEC (collectively, the
"Company SEC Reports"). Except as disclosed in Section 2.7 of the Company
Disclosure Schedule, the Company 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 the
Company'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 Company SEC Reports was 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 the Company and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows and stockholder equity for the periods indicated, except that the
unaudited interim financial statements may not include footnotes and were or
are subject to normal and recurring year-end adjustments which were not or are
not expected to be material in amount.
Section 2.8 Absence of Certain Changes or Events. Except as set forth in
Section 2.8 of the Company Disclosure Schedule or the Company SEC Reports,
since January 1, 1996, 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 Articles 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 a material
amount of 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 or the Company's SEC Reports, neither
the Company nor any of its subsidiaries has any liabilities required to be
disclosed or provided for in a balance sheet (or in the notes thereto)
prepared in accordance with generally accepted accounting principles
(absolute, accrued, contingent or otherwise), except liabilities (a) in the
aggregate adequately provided for in the Company's audited balance sheet
(including any related notes thereto) for the fiscal year ended December 31,
1995 contained in the Company's Annual Report on Form 10-KSB (the "1995
Company Balance Sheet"), (b) incurred since December 31, 1995 in the ordinary
course of business consistent with past practice, (c) incurred in connection
with this Agreement, or (d) which could not reasonably be expected to have a
Material Adverse Effect.
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
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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 that could reasonably be expected
to have a Material Adverse Effect.
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 material bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar fringe or employee benefit plans, programs or
arrangements, and any employment, executive compensation, consulting or
severance agreements, written or otherwise, for the benefit of, or relating
to, any current or former employee (including any beneficiary of any such
employee) of, or any current 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 under
which the Company currently has a liability, as well as each plan with respect
to which the Company or an ERISA Affiliate could incur liability under Section
4069 (if such plan has been or were terminated) or Section 4212(c) of ERISA
(all such plans, practices and programs are referred to as the "Company
Employee Plans"). There have been made available to Parent copies of (i) each
such written Company Employee Plan (other than those referred to in Section
4(b)(4) of ERISA), and (ii) 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.
(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 "multi-employer
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; (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 2.3 or 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 2.3 or 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.
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(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 $150,000; (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 $150,000, 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,
which controversies have or could reasonably be expected to have a Material
Adverse Effect; (ii) neither the Company 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, Joint Proxy
Statement/Prospectus. Subject to the accuracy of the representations of Parent
in Section 3.13, the information supplied by the Company for inclusion in the
Registration Statement (as defined in Section 3.13) 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 joint 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 joint proxy statement/prospectus as
amended or supplemented is referred to herein as the "Joint Proxy
Statement/Prospectus"), will not, on the date the Joint 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 Joint Proxy
Statement/Prospectus, the Company shall promptly inform Parent and Merger Sub.
The Joint 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, 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
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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, except as set forth in Section 2.15 of
the Company Disclosure Schedule 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.
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 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,
workers' compensation, unemployment compensation, utility, severance,
production, excise, stamp, occupation, premiums, windfall profits, transfer
and gains taxes, and (ii) interest, penalties, additional taxes and additions
to tax imposed with respect thereto; and "Tax Returns" shall mean returns,
reports, and information statements with respect to Taxes required to be filed
with the IRS or any other federal, foreign, state 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 timely filed all Tax
Returns required to be filed by them, (ii) the Company and its subsidiaries
have paid and discharged all Taxes due and have withheld all Taxes required to
be withheld with respect to employees 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, and
(iii) 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 any assets of the Company or any subsidiary thereof; (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; (iii) neither the Company nor any of its subsidiaries
has received any written notice of any Tax deficiency outstanding, proposed or
assessed against the Company or any of its subsidiaries, or of any audit or
other examination threatened, proposed or currently in progress of any Tax
Return of the Company or any of its subsidiaries; (iv) there is no contract,
agreement plan or arrangement, including but not limited to the provisions of
the Agreement, covering any employee or former employee of the Company or any
of its subsidiaries that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Section 280G or
subject to the excise tax pursuant to Section 4999 of the Code; (v) neither
the Company nor any of its subsidiaries is a party to or bound by any tax
indemnity, tax sharing or tax allocation agreements; (vi) neither the Company
nor any of its subsidiaries has filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to
any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company; and (vii) except for the group of which the
Company and its subsidiaries are now presently members, neither the Company
nor any of its subsidiaries has ever been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code. The accruals and
reserves for Taxes (including deferred taxes) reflected in the 1995 Company
Balance Sheet are 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.
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(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 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) Subject to 2.18(d), the Company, directly or indirectly, owns, or is
licensed or otherwise possesses legally enforceable rights to use, all
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
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").
(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, a
description of the nature and subject matter thereof, the applicable royalty
(if any) and the term thereof. None of the Company or any of its subsidiaries
is in violation of any license, sublicense or
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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 in any such case where the foregoing
would not reasonably be expected to have a Material Adverse Effect.
(d) 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, except as set forth in Section 2.18(c)
of the Company Disclosure Schedule, 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 set forth in Section 2.18(d) of the Company Disclosure Schedule, no
claims with respect to the Company Intellectual Property Rights have been
asserted or, to the knowledge of the Company, are threatened by any person nor
are there any valid grounds, to the knowledge of the Company, for any bona
fide claims (i) to the effect that the manufacture, sale, licensings or use of
any of the products of the Company or any of its subsidiaries as now
manufactured, sold or licensed or used or proposed for manufacture, use, sale
or licensing by the Company or any of its subsidiaries infringes on any
copyright, patent, trade mark, service mark or trade secret, (ii) against the
use by the Company or any of its subsidiaries of any trademarks, service
marks, trade names, trade secrets, copyrights, patents, technology, know-how
or computer software programs and applications used in the business of the
Company and its subsidiaries as currently conducted or as proposed to be
conducted, or (iii) challenging the ownership by the Company of any of its
subsidiaries, validity or effectiveness of any of the Company Intellectual
Property Rights. All registered trademarks, service marks and copyrights held
by the Company are valid and subsisting. To the knowledge of the Company,
there is no unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property Rights by any third party, including any
employee or former employee of the Company or any of its subsidiaries. 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.
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Section 2.21 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.
Section 2.22 Opinion of Financial Advisor. The Company has been advised by
its financial advisor, Unterberg Harris, that in its opinion, as of the date
hereof, the Exchange Ratio set forth herein is fair to the holders of Shares
from a financial point of view.
Section 2.23 Brokers. No broker, finder or investment banker (other than
Unterberg Harris, the fees and expenses of whom will be paid by the Company)
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. The Company has heretofore furnished to Parent a complete and
correct copy of all agreements between the Company and Unterberg Harris
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated hereunder.
Section 2.24 Change in Control Payments. Except as set forth on Section
2.11(d) or Section 2.25 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 2.26 of the Company Disclosure Schedule
attached hereto sets forth a description of the 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.
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 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 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 and Approvals
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. A true and complete list as of the date hereof of all of Parent's
subsidiaries, together with the jurisdiction of incorporation of each
subsidiary and the percentage of each subsidiary's outstanding capital stock
owned by Parent or another subsidiary, is set forth in Section 3.1 of the
Parent Disclosure Schedule.
Section 3.2 Charter and By-Laws. Parent has heretofore furnished to the
Company a complete and correct copy of its Certificate of Incorporation and
By-Laws, as amended to date. Such Certificate 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 Certificate of Incorporation or Articles of
Incorporation, respectively, or By-Laws.
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Section 3.3 Capitalization. As of March 31, 1996, the authorized capital
stock of Parent consisted of (i) 240,000,000 shares of Parent Common Stock of
which 72,253,751 shares were issued and outstanding, all of which are validly
issued, fully paid and non-assessable, none of which were held in treasury,
6,501,269 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, $1.00 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 March 31, 1996 and
the date hereof. The authorized capital stock of Merger Sub consists of 60,000
shares of common stock without par value of which 1,000 shares are issued and
outstanding. Except as set forth in Section 3.3 of the Parent Disclosure
Schedule, as of the date hereof there are no options, warrants or other
rights, agreements, arrangements or commitments of any character relating to
the issued or unissued capital stock of Parent or any of its subsidiaries or
obligating Parent or any of its subsidiaries to issue or sell any shares of
capital stock of, or other equity interests in, Parent or any of its
subsidiaries. All shares of Parent 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 set forth in Section
3.3 or Section 3.11 of the Parent Disclosure Schedule as of the date hereof,
there are no obligations, contingent or otherwise, of Parent or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of Parent
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 or otherwise)
in any such subsidiary or any other entity. Except as set forth in Section 3.1
or 3.3 of the Parent Disclosure Schedule, all of the outstanding shares of
capital stock of each of Parent's subsidiaries is duly authorized, validly
issued, fully paid and nonassessable and all such shares are owned by Parent
or another subsidiary of Parent free and clear of all security interests,
liens, claims, pledges, agreements, limitations in Parent's voting rights,
charges or other encumbrances of any nature whatsoever.
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 disclosed in Section 3.5(a) of the Parent Disclosure Schedule,
(i) neither the Parent nor any of its subsidiaries has breached, or is in
default under or has received written notice of any breach of or default
under, any 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 Parent or any of its subsidiaries is a party or by which
any of them is bound, each in an amount equal to or exceeding $1,000,000, but
excluding any such agreement between Parent and its wholly-owned subsidiaries
or between two or more wholly-owned subsidiaries of Parent or all agreements
which, as of the date hereof, are required to be filed with the SEC pursuant
to the requirements of the Exchange Act as "material contracts,"
(collectively, the "Material Agreements"), (ii) to the best knowledge of
Parent, no party to any of the Material Agreements has breached or is in
default of any of its obligations thereunder, and (iii) each of the Material
Agreements is in full force and effect, except in any such case under clause
(i), (ii) or (iii) of this Section 3.5(a) for breaches, defaults or failures
to be in full force and effect that could not reasonably be expected to have a
Material Adverse Effect.
(b) Except as set forth in Section 3.5(b) 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
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Sub will not, (i) conflict with or violate the Certificate of Incorporation or
By-Laws of Parent or Merger Sub, (ii) conflict with or violate any Law
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 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 under
clause (i), (ii) or (iii) of this Section 3.5(b) for any such conflicts,
violations, breaches, defaults or other occurrences that could not reasonably
be expected to have a Material Adverse Effect.
(c) 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, the pre-merger notification
requirements of the HSR Act, or any foreign antitrust or similar filings and
the filing and recordation of appropriate merger or other documents as
required by the MBCA, and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent 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 Compliance; Permits.
(a) Except as disclosed in Section 3.6 of the Parent Disclosure Schedule,
neither Parent nor any of its subsidiaries is in conflict with, or in default
or violation of, (i) any Law applicable to Parent 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 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 is bound or affected, except in any
such case under clauses (i) or (ii) of this Section 3.6(a) 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 3.6 of the Parent Disclosure Schedule,
Parent 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 Parent
and its subsidiaries taken as a whole as it is now being conducted
(collectively, the "Parent Permits"). Parent and its subsidiaries are in
compliance with the terms of the Parent Permits, except where the failure to
so comply could not reasonably be expected to have a Material Adverse Effect.
Section 3.7 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) Reports on Form 10-Q for the
quarters ended November 30, 1995, August 31, 1995 and May 31, 1995, (iii) all
proxy statements relating to Parent's meetings of Shareholders (whether annual
or special) since January 1, 1994, (iv) all other reports or registration
statements (other than Reports on Form 10-Q) filed by Parent with the SEC, 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
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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 may not include footnotes and were or are subject to
normal and recurring year-end adjustments which were not or are not expected
to be material in amount.
Section 3.8 Absence of Certain Changes or Events. Except as set forth in
Section 3.8 of the Parent Disclosure Schedule or in the Parent SEC Reports,
since February 29, 1996, Parent has conducted its business in the ordinary
course and there has not occurred: (i) any Material Adverse Effect; (ii) any
amendments or changes in the Certificate of Incorporation or By-Laws of
Parent; (iii) any damage to, destruction or loss of any assets of the Parent
(whether or not covered by insurance) that could have a Material Adverse
Effect; (iv) any material change by Parent in its accounting methods,
principles or practices; (v) any material revaluation by Parent 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; (vi) any other action or event that would have required the consent
of the Company pursuant to Section 4.3 had such action or event occurred after
the date of this Agreement; or (vii) any sale of a material amount of assets
of Parent or any of its subsidiaries except in the ordinary course of
business.
Section 3.9 No Undisclosed Liabilities. Except as is disclosed in Section
3.9 of the Parent Disclosure Schedule or in the Parent SEC Reports, neither
Parent nor any of its subsidiaries has any liabilities required to be
disclosed or provided for in a balance sheet (or in the notes thereto)
(absolute, accrued, contingent or otherwise), except liabilities (i)
adequately provided for in Parent's balance sheet (including any related notes
thereto) as of February 29, 1996 included in the Parent's 1996 Annual Report
on Form 10-K (the "Parent Balance Sheet"), (ii) incurred in the ordinary
course of business and not required under generally accepted accounting
principles to be reflected on the Parent Balance Sheet, (iii) incurred since
February 29, 1996 in the ordinary course of business and consistent with past
practice, (iv) incurred in connection with this Agreement, or (v) which could
not reasonably be expected to have a Material Adverse Effect.
Section 3.10 Absence of Litigation. Except as set forth in Section 3.10 of
the Parent Disclosure Schedule, there are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the Parent,
threatened against the Parent or any of its subsidiaries, or any properties or
rights of the Parent or any of its subsidiaries, before any court, arbitrator
or administrative, governmental or regulatory authority or body, domestic or
foreign, that could reasonably be expected to have a Material Adverse Effect.
Section 3.11 Employee Benefit Plans; Employment Agreements.
(a) Except as set forth in Section 3.11(a) of the Parent Disclosure
Schedule, none of the employee pension plans (as defined in Section 3(2) of
ERISA), employee welfare plans, (as defined in Section 3(1) of ERISA) and
other bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance and other similar fringe or employee
benefit plans, programs or arrangements, or any current or former employment,
executive compensation or severance agreements, written or otherwise, for the
benefit of, or relating to, any employee of or consultant to Parent, any trade
or business (whether or not incorporated) which is a member of a controlled
group including Parent or which is under common control with Parent (a "Parent
ERISA Affiliate") within the meaning of Section 414 of the Code, or any
subsidiary of Parent, or other plan with respect to which Parent or a Parent
ERISA Affiliate could incur liability under Section 4069 (if such plan has
been or were terminated) or Section 4212(c) of ERISA (all such plans,
practices, and programs are referred to herein as the "Parent Employee Plans")
promises or provides retiree welfare benefits to any person, and
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neither the Parent nor any Parent 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; (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 Parent Employee
Plan, which could result in any material liability of Parent or any of its
subsidiaries; (iii) all Parent Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all statutes
(including ERISA and the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all applicable
requirements for notification to participants or the Department of Labor, IRS,
Pension Benefit Guaranty Corporation ("PBGC") or Secretary of the Treasury),
and Parent 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 Parent Employee Plans; (iv)
each Parent 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; (v)
all contributions required to be made to any Parent Employee Plan pursuant to
Section 412 of the Code, or the terms of the Parent Employee Plan or any
collective bargaining agreement, have been made on or before their due dates;
(vi) with respect to each Parent Employee Plan, no "reportable event" within
the meaning of Section 4043 of ERISA (excluding any such event for which the
30 day notice requirement has been waived under the regulations to Section
4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA
has occurred; and (vii) neither Parent nor any Parent ERISA Affiliate has
incurred, nor reasonably expects to incur, any liability under Title IV of
ERISA (other than liability for premium payments to the PBGC arising in the
ordinary course).
Section 3.12 Labor Matters. Except as set forth in Section 3.12 of the
Parent Disclosure Schedule: (i) there are no controversies pending or, to the
knowledge of Parent or any of its subsidiaries, threatened, between Parent or
any of its subsidiaries and any of their respective employees, which
controversies have or could reasonably be expected to have a Material Adverse
Effect; (ii) neither Parent nor any of its subsidiaries is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by Parent or its subsidiaries, nor does Parent or any of its
subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; and (iii) neither Parent 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 Parent or
any of its subsidiaries which could reasonably be expected to have a Material
Adverse Effect.
Section 3.13 Registration Statement; Joint 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 Joint
Proxy Statement/Prospectus will not, on the date the Joint 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 Joint 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
Joint 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 to any information supplied by the
Company which is contained in, or furnished in connection with the preparation
of, the Registration Statement.
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Section 3.14 Restrictions on Business Activities. Except for this Agreement
or as set forth in Section 3.14 of the Parent Disclosure Schedule, to the best
of Parent's knowledge, there is no agreement, judgment, injunction, order or
decree binding upon Parent or any of its subsidiaries which has or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of Parent or any of its subsidiaries, any
acquisition of property by Parent or any of its subsidiaries or the conduct of
business by Parent or any of its subsidiaries as currently conducted or as
proposed to be conducted by Parent, except for any prohibition or impairment
as could not reasonably be expected to have a Material Adverse Effect.
Section 3.15 Title to Property. Except as disclosed in Section 3.15 of the
Parent Disclosure Schedule, Parent 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 Parent's knowledge, all leases pursuant to
which Parent or any of its subsidiaries lease from other 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
Parent, 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.
Section 3.16 Insurance. All material fire and casualty, general liability,
business interruption, product liability, professional liability and sprinkler
and water damage insurance policies maintained by Parent or any of its
subsidiaries are with reputable insurance carriers, provide full and adequate
coverage for all normal risks incident to the business of Parent and its
subsidiaries and their respective properties and assets and are in character
and amount at least equivalent to that carried by entities 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.
Section 3.17 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 3.18 Share Ownership. Neither Parent, Merger Sub nor any of their
affiliates own any shares of Company Common Stock.
Section 3.19 Intellectual Property. Except as disclosed in Section 3.19 of
the Parent Disclosure Schedule, the Parent and its subsidiaries own are
licensed to use or otherwise possess, or can acquire on reasonable terms,
legally enforceable rights to use the patents, patent rights, inventions,
licenses, copyrights, know-how (including trade secrets and other
unpatented/unpatentable proprietary or confidential information, systems or
procedures), trademarks, servicemarks and tradenames presently employed by
them in connection with the business of the Parent as presently conducted, and
neither the Parent nor any of its subsidiaries has knowledge of any
infringement of or conflict with asserted rights of others with respect to any
of the foregoing, which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.
Section 3.20 Taxes. Other than as disclosed in Section 3.20 of the Parent
Disclosure Schedule, (i) Parent and its subsidiaries have timely filed all Tax
Returns required to be filed by them, (ii) Parent and its subsidiaries have
paid and discharged all Taxes due and have withheld all Taxes required to be
withheld with respect to employees 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 Parent is maintaining adequate reserves, and (iii)
there are no other Taxes that would be due if asserted by a taxing authority,
except with respect
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to which Parent 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 Parent or any of its subsidiaries that could reasonably be
expected to have a Material Adverse Effect: (i) there are no tax liens on any
assets of Parent or any subsidiary thereof; (ii) neither Parent 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; (iii) neither
Parent nor any of its subsidiaries has received any written notice of any Tax
deficiency outstanding, proposed or assessed against Parent or any of its
subsidiaries, or of any audit or other examination threatened, proposed or
currently in progress of any Tax Return of Parent or any of its subsidiaries;
(iv) there is no contract, agreement, plan or arrangement, including but not
limited to the provisions of the Agreement, covering any employee or former
employee of Parent or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Section 280G or subject to the excise tax pursuant to
Section 4999 of the Code; (v) neither Parent nor any of its subsidiaries is a
party to or bound by any tax indemnity, tax sharing or tax allocation
agreements; (vi) neither Parent nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341 (f)(4) of the Code) owned by Parent; and (vii) except
for the group of which Parent and its subsidiaries are now presently members,
neither Parent nor any of its subsidiaries has ever been a member of an
affiliated group of corporations within the meaning of Section 1504 of the
Code. The accruals and reserves for Taxes (including deferred taxes) reflected
in the Parent Balance Sheet are adequate to cover all Taxes required to be
accrued through the date thereon (including interest and penalties, if any,
thereon and Taxes being contested) in accordance with generally accepted
accounting principles.
Section 3.21 Brokers. No broker, finder or investment banker (other than
Robertson Stephens & Company, the fees and expenses of which will be paid by
Parent) 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 Parent or Merger Sub.
Section 3.22 Interested Party Transactions. Except as set forth in Section
3.22 of the Parent Disclosure Schedule, since February 28, 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 3.23 Ownership of Merger Sub; No Prior Activities.
(a) Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Agreement.
(b) 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 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;
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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 Articles of Incorporation 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, the Director Option Plans, or the
ESPP and are outstanding on the date hereof).
(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 $150,000 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 shares of its capital 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, except as described in Section 2.8 of the Company Disclosure
Schedule; (ii) incur any indebtedness for borrowed money 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 calling
for aggregate payments in excess of $100,000; (iv) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $150,000 (other than for office furnishings in an amount in the
aggregate not to exceed $200,000) for the Company and its subsidiaries taken
as a whole; 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;
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(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 contained in the Company SEC Reports filed prior
to the date of this Agreement 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 would
make any of the representations or warranties of the Company contained in this
Agreement 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 "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 the Company may furnish or provide such information or
consider, negotiate, agree to, approve or recommend to the Shareholders of the
Company an Acquisition Proposal not solicited in violation of this Agreement
if, in the opinion of the Board of Directors of the Company, it is required in
the discharge of its fiduciary duties under applicable law to furnish or
provide such information or to consider, negotiate, agree to, approve or
recommend such an Acquisition Proposal (after receiving advice from its
independent legal counsel to such effect).
(b) The Company shall notify Parent as soon as practical 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) Notwithstanding anything to the contrary in this Agreement, the Company
may provide access and furnish information (but not encourage the request for
such information) pursuant to a confidentiality agreement at least as
restrictive as the one then in effect between Company and Parent concerning
its business, properties or assets to any person which has (i) requested such
access and information in connection with an Acquisition Proposal, or (ii)
stated in writing that it has a serious intention to make such an Acquisition
Proposal, in any such case of (i) or (ii) if in the opinion of the Board of
Directors of the Company, it is required in the discharge of its fiduciary
duties under applicable law to provide such access or furnish such information
(after receiving advice from its independent legal counsel to such effect).
The Company may not provide any nonpublic information to such person if it has
not prior to the date thereof or simultaneously provided such information to
Parent.
(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
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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) Nothing contained in this Section 4.2 shall prohibit the Company from
(i) taking and disclosing to the Company's Shareholders a position with
respect to a tender offer by a third party pursuant to Rule 14d-9 and Rule
14e-2 promulgated under the Exchange Act, or (ii) making such disclosure to
the Company's Shareholders which, in the opinion of the Board of Directors of
the Company, after consultation with independent legal counsel to the Company,
may be required under applicable law.
(f) 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.
Section 4.3 Conduct of Business by Parent Pending the Merger. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, Parent covenants and
agrees that, unless the Company shall otherwise agree in writing, Parent shall
conduct its business, and cause the businesses of its subsidiaries to be
conducted, in the ordinary course, other than actions taken by Parent or its
subsidiaries in contemplation of the Merger, and shall not directly or
indirectly do, or propose to do, any of the following without the prior
written consent of the Company:
(a) amend or otherwise change Parent's Certificate or By-Laws;
(b) 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 Parent may
declare and pay a dividend to its parent; or
(c) take or agree in writing or otherwise to take any action which would
make any of the representations or warranties of Parent contained in this
Agreement untrue or incorrect or prevent Parent from performing or cause
Parent not to perform its covenants hereunder.
ARTICLE V
Additional Agreements
Section 5.1 HSR Act. As promptly as practicable after the date of the
execution of this Agreement, the Company and Parent shall file notifications
under and in accordance with the HSR Act and any applicable antitrust or
similar acts in connection with the Merger and the transactions contemplated
hereby and to respond as promptly as practicable to any inquiries received
from the Federal Trade Commission (the "FTC"), the Antitrust Division of the
Department of Justice (the "ANTITRUST DIVISION"), and any applicable foreign
agencies or authorities having jurisdiction for additional information or
documentation and to respond as promptly as practicable to all inquiries and
requests received from any State Attorney General or other governmental
authority in connection with antitrust matters.
Section 5.2 Joint 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 Joint 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 Joint Proxy Statement/Prospectus to Company shareholders, as soon
thereafter as practicable. The Joint 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).
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Section 5.3 Stockholder Meeting. The Company shall call and hold the
Stockholder Meeting as promptly as practicable and in accordance with
applicable laws for the purpose of voting upon the approval of the Merger and
as soon as practicable after the date on which the Registration Statement
becomes effective. The Company shall use all reasonable efforts to solicit
from its Shareholders proxies in favor of adoption of this Agreement and
approval of the transactions contemplated hereby and shall take all other
action necessary or advisable to secure the vote or consent of Shareholders to
obtain such approvals, provided, that the Company shall not be obligated to
hold the Stockholder Meeting or to take any other action under this Section
5.3 if the Board of Directors of the Company has withdrawn, modified or
changed its recommendation as set forth in Section 5.2.
Section 5.4 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. Each party
shall keep such information confidential in accordance with the terms of the
respective confidentiality letters, dated May 17, 1996 and May 17, 1996 (the
"CONFIDENTIALITY LETTERS"), between Parent and the Company.
Section 5.5 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
Joint 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 5.6 Agreements with Respect to Affiliates. The Company shall deliver
to Parent, prior to the date the Registration Statement becomes effective
under the Securities Act, a letter (the "AFFILIATE LETTER") identifying all
persons who are, at the time of the Company Shareholders Meeting, "affiliates"
of the Company for purposes of Rule 145 under the Securities Act ("RULE 145").
The Company shall use its reasonable efforts to cause each person who is
identified as an "affiliate" in the Affiliate Letter 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 5.6.
Section 5.7 Indemnification and Insurance.
(a) The By-laws of the Surviving Corporation shall contain the provisions
with respect to indemnification set forth in the By-laws of the Company, which
provisions shall not be amended, repealed or otherwise modified for a period
of six years from the Effective Time in any manner that would adversely affect
the rights thereunder of individuals who at the Effective Time were directors,
officers, employees or agents of the Company, unless such modification is
required by law.
(b) The Company shall, to the fullest extent permitted under applicable law
or under the Company's Articles of Incorporation, By-laws or any applicable
indemnification agreements and regardless of whether the Merger becomes
effective, indemnify, defend and hold harmless, and, after the Effective Time,
the Parent shall, and shall cause the Surviving Corporation, to the fullest
extent permitted under applicable law, to indemnify,
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defend and hold harmless, each present and former director, officer or
employee of the Company or any of its subsidiaries (collectively, the
"Indemnified Parties") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, (x)
arising out of or pertaining to the transactions contemplated by this
Agreement or (y) otherwise with respect to any acts or omissions occurring at
or prior to the Effective Time. Any determination required to made with
respect to whether an Indemnified Party's conduct complied with the standards
set forth under Michigan law, the Company's Articles of Incorporation, By-laws
or indemnification agreements, as the case may be, shall be made by
independent counsel mutually acceptable to Parent and the Indemnified Party.
(c) Parent shall and shall cause the Surviving Corporation to honor and
fulfill in all respects the obligations of the Company pursuant to
indemnification agreements with the Company's directors and officers existing
at or before the Effective Time.
(d) For a period of not less than three year after the Effective Time,
Parent shall, or shall cause the Surviving Corporation to, maintain in effect,
if available, directors' and officers' liability insurance covering those
persons who are currently covered by the Company's directors' and officers'
liability insurance policy (a copy of which has been made available to Parent)
on terms substantially comparable to those now applicable to directors and
officers of the Company; provided, however, that in no event shall Parent or
the Surviving Corporation be required to expend in excess of 200% of the
annual premium currently paid by the Company for such coverage; and provided
further, that if the premium for such coverage exceeds such amount, Parent or
the Surviving Corporation shall purchase a policy with the greatest coverage
available for such 200% of the annual premium.
(e) This Section shall survive the consummation of the Merger at the
Effective Time, is intended to benefit the Company, the Surviving Corporation
and the Indemnified Parties, shall be binding on all successors and assigns of
the Surviving Corporation and shall be enforceable by the Indemnified Parties.
Section 5.8 Notification of Certain Matters. The Company shall give prompt
notice to 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 5.9 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 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; provided, however, that none of the parties shall be obligated to
use all reasonable efforts to take, or cause to be taken, any actions pursuant
to this Section 5.9 if, in the opinion of its Board of Directors, refraining
from using such efforts or taking such actions would be required in the
discharge of its fiduciary duties under applicable law (after receiving advice
of its independent legal counsel to such effect). The foregoing covenant shall
not include any obligation by Parent or the Company 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.
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Section 5.10 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 a party may, without the prior
consent of the other party, 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 or the Nasdaq Stock Market
National Market ("Nasdaq"), if it has used all reasonable efforts to consult
with the other party prior thereto.
Section 5.11 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 5.12 Accountants' Letters. Upon reasonable notice from the other,
the Company or Parent shall use their respective best efforts to cause Arthur
Andersen LLP or KPMG Peat Marwick L.L.P, respectively, to deliver to Parent or
the Company, as the case may be, a letter, dated within 2 business days of the
Effective Date of the Registration Statement 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 5.13 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, unless the
Board of Directors of the Company has withdrawn, modified or changed its
recommendation as set forth in Section 5.2. 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 5.14 Nasdaq Listing. The Company shall use its best efforts to
continue the quotation of the Company Common Stock on the Nasdaq National
Market during the term of this Agreement.
Section 5.15 Listing of Parent Shares. Parent shall use its best efforts to
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.
Section 5.16 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
recognize for purposes of computing deductible amounts and copayments under
the Company's plans as of 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,
employees of the Surviving Corporation shall receive credit for their prior
service with the Company and its subsidiaries for eligibility and vesting
purposes and for vacation accrual purposes.
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:
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(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 Joint Proxy Statement/Prospectus shall have been
initiated or threatened by the SEC;
(b) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the Shareholders of the Company;
(c) HSR Act. The waiting period applicable to the consummation of the Merger
under the HSR Act and any applicable foreign antitrust or similar acts shall
have expired or been terminated;
(d) 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
(e) 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 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
in all material respects 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 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 where the failure to receive
such consents, etc. could not reasonably be expected to have a Material
Adverse Effect on the Company or Parent;
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(d) Opinion of Counsel. Parent shall have received a written opinion from
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;
(e) Opinion of Accountant. Parent shall have received an opinion of each of
KPMG Peat Marwick LLP and Arthur Andersen 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;
(f) Affiliate Agreements. Parent shall have received from each person who is
identified in the Affiliate Letter as an "affiliate" of the Company, an
Affiliate Agreement, and such Affiliate Agreement shall be in full force and
effect;
(g) Registration Rights. All existing registration rights of holders of
Company securities shall have been terminated; and
(h) Employment Agreements. All of the persons listed on Exhibit 6.2(i)(1)
and at least four of the persons listed on Exhibit 6.2(i)(2) shall have
entered into employment agreements with Parent on mutually acceptable terms,
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.
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 (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 Time, 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, except where the failure to receive such consents, etc. could not
reasonably be expected to have a Material Adverse Effect on the Company or
Parent;
(d) Tax Opinions. The Company shall have received a written opinion of
Dykema Gossett, PLLC 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 Accountant. The Company shall have received a copy of the
opinions referred to in Section 6.2(e) above;
(f) Fairness Opinion. The fairness opinion referred to in Section 2.22 shall
not have been withdrawn, amended or modified; and
(g) Listing of Parent Shares. The Parent Shares to be issued in the Merger
and such other shares required to be reserved for issuance in connection with
the Merger shall have been authorized for listing on the New York Stock
Exchange, subject to notice of official issuance.
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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 Shareholders 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 September 30, 1996 (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 5.9 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 vote of the Shareholders of
the Company, shall not have been obtained by September 30, 1996; or
(e) by Parent or the Company, if: (i) the Board of Directors of the Company
shall withdraw, modify or change its approval or recommendation of this
Agreement or the Merger 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 Shareholders 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 Shareholders of the Company tender their shares in such tender or exchange
offer; or
(f) by Parent or the Company, respectively (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 in either case of (i) or (ii) above 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
September 30, 1996 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%
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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 Shareholders 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 Parent and the Company shall share
equally all fees and expenses, other than accountants' and attorneys' fees,
incurred in connection with the printing and filing of the Joint Proxy
Statement/Prospectus (including any preliminary materials related thereto) and
the Registration Statement (including financial statements and exhibits) and
any amendments or supplements thereto.
(b) The Company shall pay Parent a fee of $4,400,000 (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)
(collectively, "Parent Expenses") 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 September 30, 1996; provided, however, that Parent shall be
entitled only to be paid the Parent Expenses under this Section 7.3(b)(i)
if the Board of Directors of the Company has not withdrawn, modified or
changed its recommendation of the Merger in a manner adverse to Parent; or
(ii) the termination of this Agreement by Parent or the Company pursuant
to Section 7.1(e); or
(iii) the termination of this Agreement by Parent pursuant to Section
7.1(f) on account of a Terminating Breach by the Company; or
(iv) the termination of this Agreement by Parent pursuant to Section
7.1(h) provided, however, that Parent shall not be entitled to the Fee or
the Parent Expenses under this Section 7.3(b)(v) unless the Company shall
have opted out of chapter 7A, Sections 775 through 784 of the MBCA, or
chapter 7B, Sections 790 through 799 of the MBCA; or
(v) the termination of this Agreement by the Parent or the Company
pursuant to Section 7.1(i).
(c) The Fee and 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), (ii), (iii), (iv) or (v).
ARTICLE VIII
General Provisions
Section 8.1 Effectiveness of Representations, Warranties and Agreements;
Knowledge, Etc.
(a) Except as otherwise provided in this Section 8.1, the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on
A-31
<PAGE>
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, warranties and agreements in this
Agreement shall terminate at the Effective Time or upon the termination of
this Agreement pursuant to Section 7.1, as the case may be, except that the
agreements set forth in this Section 8.1 shall survive independently and
Article I and Sections 5.7 and 5.16 shall survive the Effective Time
indefinitely and those set forth in Section 7.3 shall survive such termination
indefinitely. The Confidentiality Letters shall survive termination of this
Agreement as provided therein.
(b) Notwithstanding anything to the contrary contained in this Agreement,
any of the Exhibits, the Company Disclosure Schedule or the Parent Disclosure
Schedule, any information disclosed in one section of this Agreement, an
Exhibit, the Company Disclosure Schedule or the Parent Disclosure Schedule
shall be deemed to be disclosed with respect to this Agreement, the Exhibits
and all sections of the Company Disclosure Schedule or the Parent Disclosure
Schedule, as the case may be, into which they are specifically incorporated by
reference.
Section 8.2 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
Telecopier No.: (603) 332-4616
Telephone No.: (603) 332-9400
Attention: David Kirkpatrick
With a copy to:
Douglass N. Ellis, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
Telecopier No.: (617) 951-7050
Telephone No.: (617) 951-7374
A-32
<PAGE>
(b)If to the Company:
Network Express, Inc.
4251 Plymouth Road
Ann Arbor, MI 48105
Telecopier No.: (313) 995-1114
Telephone No.: (313) 761-5005
Attention: President
With a copy to:
Fredrick M. Miller, Esq.
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243-1668
Telecopier No.: (313) 568-6975
Telephone No.: (313) 568-6915
Section 8.3 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 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.
A-33
<PAGE>
Section 8.4 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 Shareholders of the Company, no amendment may be made which
by law requires further approval by such Shareholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
Section 8.5 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 8.6 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 8.7 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 8.8 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 8.9 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 subsidiary
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 8.10 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 Sections 5.7 and 5.16 (which is intended to be for the
benefit of the Indemnified Parties and may be enforced by such Indemnified
Parties).
Section 8.11 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 8.12 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 8.13 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.
[This space intentionally left blank.]
A-34
<PAGE>
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
Cabletron Systems of Michigan, Inc.
/s/ Craig R. Benson
By: _________________________________
Name: Craig R. Benson
Title: President
Network Express, Inc.
/s/ Richard P. Eidswick
By: _________________________________
Name: Richard P. Eidswick
Title: President and Chief
Executive Officer
A-35
<PAGE>
ANNEX B
(PASTE-UP LETTERHEAD)
July 1, 1996
Board of Directors
Network Express, Inc.
4251 Plymouth Road
Ann Harbor, MI 48105
Dear Sirs:
We understand that Network Express, Inc. ("Network" or the "Company"),
Cabletron Systems of Michigan, Inc. and Cabletron Systems, Inc. ("Cabletron")
have entered into an Agreement and Plan of Merger, dated May 21, 1996 (the
"Merger Agreement") pursuant to which Network will become a wholly owned
subsidiary of Cabletron (the "Merger"). In connection with the Merger,
Cabletron will issue 0.1388 shares of its Common Stock for each share of
Network's Common Stock and the vested and non-vested options will be assumed
by Cabletron based on the terms of the Merger (the "Merger Consideration").
You have requested our opinion with respect to the fairness of the Merger
Consideration, from a financial point of view, to the shareholders of Network.
This opinion updates, and is based upon facts and circumstances which are more
current than those used and analyzed in connection with, Unterberg Harris' May
21, 1996 opinion on this same matter. It should be understood that, although
subsequent developments may affect this opinion, Unterberg Harris does not
have any obligation to update, revise or reaffirm this opinion.
In connection with our review, we have, among other things:
(i) reviewed the Merger Agreement dated May 21, 1996 and the Registration
Statement on Form S-4 filed by Cabletron with the Securities and Exchange
Commission on June 19, 1996 relative to the Merger;
(ii) reviewed publicly available financial information with respect to the
business operations of the Company including, but not limited to, audited
financial statements for the fiscal years ended December 31, 1993, 1994 and
1995 and unaudited financial statements for the quarterly period ended
March 31, 1996;
(iii) reviewed publicly available financial information with respect to the
business operations of Cabletron including, but not limited to, audited
financial statements for the fiscal years ended February 28, 1994, 1995 and
February 29, 1996 and the unaudited financial statements for the quarter
ended May 31, 1996;
(iv) reviewed certain internal financial and operating information relating to
Network and Cabletron (including financial projections) prepared by the
respective managements of each company;
(v) held discussions with certain members of both Network and Cabletron senior
management concerning their past and current operations, financial
condition and business prospects and the potential financial effect of the
Merger of Network and Cabletron if the Merger were consummated;
(vi) reviewed a comparison of operating results and other financial
information of Network and Cabletron with other companies which we deemed
appropriate;
(vii) reviewed the historical market prices and reported trading activity of
Network and Cabletron Common Stock;
(viii) compared the financial terms of the Merger and the premium paid over
the Company's current, historical and average stock price with the terms
and premiums paid of certain other merger, acquisition and business
combination transactions which we deemed appropriate; and
(ix) considered such other information, financial studies and analyses as we
deemed relevant and performed such analyses, studies and investigations as
we deemed necessary.
B-1
<PAGE>
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us. With respect to
any financial projections, we assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
the respective future financial performances of Network and Cabletron and the
future financial performance of the combined company. We have also assumed
that the Merger will be accounted for as a pooling-of-interests.
We have not conducted a physical inspection of the properties or facilities
of Network or Cabletron or made any independent valuation or appraisal of the
assets, liabilities, patents or intellectual property of Network and
Cabletron, nor have we been furnished with any such valuations or appraisals.
We were not requested to and did not approach any parties other than Cabletron
with respect to a business combination involving the Company. Our opinion is
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to us, as of the date of this letter.
We understand that in considering the Merger, the Board of Directors of the
Company has considered a wide range of financial and non-financial factors,
many of which are beyond the scope of this letter. This letter is not intended
to substitute for the Board's exercise of its own business judgement in
reviewing the Merger. This opinion is delivered to you based on your
understanding that it is for the benefit and use of the Board of Directors of
the Company in considering the Merger and that the Company will not use this
opinion for any other purpose and will not reproduce, disseminate or refer to
this opinion without our prior written consent.
We are expressing no opinion herein as to the prices at which the shares of
the Company or Cabletron will actually trade at any time. Our opinion does not
constitute a recommendation to any shareholder as to how such shareholder
should vote on the Merger.
Based upon and subject to the foregoing considerations, it is our opinion as
financial advisors that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to the shareholders of Network.
Very truly yours,
UNTERBERG HARRIS
B-2
<PAGE>
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 reasonable 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 reasonable 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, Cabletron
Systems of Michigan, Inc. and Network Express, Inc. ("Network"), dated
as of May 21, 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 Network 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 Company's Registration Statement on Form S-1, No. 33-28055.
3.2 Certificate of Correction of the Company's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2 of
the Company's Registration Statement on Form S-1, No. 33-42534.
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Cabletron Systems, Inc., incorporated by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-3, No. 33-54466.
3.4 Amended bylaws of Cabletron Systems, Inc. which is incorporated by
reference to Exhibit 3.2 of the Company'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 Dykema Gossett PLLC 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 and 8.1).
23.2 Consent of Dykema Gossett PLLC (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 Arthur Andersen LLP with respect to Network's financial
statements.
23.5 Consent of Unterberg Harris.
*24.1 Power of Attorney.
99 Form of Proxy to be used by Network in connection with the Network
Special Meeting.
</TABLE>
- --------
*Previously filed.
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 AMENDMENT NO. 1 TO THE 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.
*/s/ S. Robert Levine
By __________________________________
S. Robert Levine
President and Chief Executive
Officer
Dated: June 28, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JUNE 28, 1996 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE CAPACITY
President, Chief Executive Officer
*/s/ S. Robert Levine (principal executive officer) and
- ------------------------------------- Director
S. ROBERT LEVINE
Director of Finance and Chief
*/s/ David J. Kirkpatrick Financial Officer (principal
- ------------------------------------- financial and accounting officer)
DAVID J. KIRKPATRICK
Chairman, Chief Operating Officer
*/s/ Craig R. Benson and Director
- -------------------------------------
CRAIG R. BENSON
Secretary and Director
*/s/ Michael D. Myerow
- -------------------------------------
MICHAEL D. MYEROW
Director
*/s/ Paul R. Duncan
- -------------------------------------
PAUL R. DUNCAN
Director
*/s/ Donald F. McGuiness
- -------------------------------------
/s/ David J. Kirkpatrick
DONALD F. MCGUINESS
By: ____________________________
DAVID J. KIRKPATRICK
*ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*2.1 Agreement and Plan of Merger by and among the Registrant, Cabletron
Systems of Michigan, Inc. and Network Express, Inc. ("Network"), dated
as of May 21, 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 Network 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 Company's Registration Statement on Form S-1, No. 33-28055.
3.2 Certificate of Correction of the Company's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2 of
the Company's Registration Statement on Form S-1, No. 33-42534.
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Cabletron Systems, Inc., incorporated by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-3, No. 33-54466.
3.4 Amended bylaws of Cabletron Systems, Inc. which is incorporated by
reference to Exhibit 3.2 of the Company'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 Dykema Gossett PLLC 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 and 8.1).
23.2 Consent of Dykema Gossett PLLC (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 Arthur Andersen LLP with respect to Network's financial
statements.
23.5 Consent of Unterberg Harris.
*24.1 Power of Attorney.
99 Form of Proxy to be used by Network in connection with the Network
Special Meeting.
</TABLE>
- --------
*Previously filed.
<PAGE>
EXHIBIT 8.1
FORM OF OPINION OF ROPES & GRAY
[DATE]
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 Michigan (the "Merger") of Cabletron Systems of Michigan, Inc. ("Merger
Sub"), a Michigan corporation and a wholly-owned subsidiary of Cabletron, and
Network Express, Inc., a Michigan corporation ("Network Express") pursuant to an
Agreement and Plan of Merger dated May 21, 1996 (the "Merger Agreement") by and
among Cabletron, Merger Sub and Network Express. 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(d) of the
Merger Agreement. All capitalized terms used herein, unless otherwise
specified, have the meanings assigned to them in the Proxy Statement-Prospectus
of Cabletron and Network Express issued with respect to the Merger (the "Proxy
Statement-Prospectus").
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 Proxy Statement-Prospectus, 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 representattions made by
executives of Cabletron and Network Express, and representations made by certain
shareholders of Network Express, 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 copies, the authenticity of the
originals of such documents and that there has been (or will be by the
<PAGE>
Cabletron Systems, Inc. [DATE]
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 Proxy
Statement-Prospectus. 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.
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.
This opinion represents and is based upon our best judgement 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 statuses,
regulations, judicial decisions and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
material 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. We hereby consent, however, to the use of this opinion as an
exhibit to the Proxy Statement-Prospectus and further consent to the use of our
name whenever appearing in the Proxy Statement-Prospectus and any amendments
thereto.
<PAGE>
Cabletron Systems, Inc. [DATE]
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
FORM OF OPINION OF DYKEMA GOSSETT PLLC
(as to certain income tax to consequences of the Merger)
August __, 1996
Network Express, Inc.
305 East Eisenhower Parkway
Ann Arbor, Michigan 48108
Gentlemen:
We have acted as counsel to Network Express, Inc., a Michigan corporation
("Network"), in connection with the contemplated merger under the laws of the
State of Michigan (the "Merger") of Cabletron Systems of Michigan, Inc.
("Cabletron Michigan"), a Michigan corporation and a wholly-owned subsidiary of
Cabletron Systems, Inc., a Delaware corporation ("Cabletron"), with and into
Network pursuant to an Agreement and Plan of Merger, dated as of May 21, 1996,
(the "Merger Agreement"), by and among Cabletron, Cabletron Michigan and
Network. 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 6.3(d) of the Merger Agreement. All capitalized terms
used herein, unless otherwise specified, have the meanings assigned to them in
the Proxy Statement/Prospectus, dated July 2, 1996, prepared by Cabletron and
Network in connection with the Merger (the "Proxy Statement/Prospectus").
In rendering our opinion, we have examined and relied upon 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 Proxy Statement/Prospectus, 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
<PAGE>
Network Express, Inc.
August __, 1996
Page 2
executives of Cabletron and Network, 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 copies and the authenticity of the
originals of such documents. We have also assumed that the Merger will be
consummated in accordance with the Merger Agreement and as described in the
Proxy Statement/Prospectus.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder, pertinent judicial authorities, interpretive rulings of
the Internal Revenue Service (the "Service") and such other authorities as we
have considered relevant. 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 material change
in the authorities upon which our opinion is based could affect our conclusion.
DESCRIPTION OF THE ACQUISITION
The following is a summary of the material terms of the Merger, the details
of which are more fully described in the Proxy Statement/Prospectus.
The Merger Agreement provides that, subject to the satisfaction or waiver
of the conditions set forth therein, Cabletron Michigan will merge with and into
Network pursuant to the Michigan Business Corporation Act ("MBCA"). Upon
consummation of the Merger, each outstanding share of Network Common Stock will
be converted into 0.1388 shares of Cabletron Common Stock. Network Express has
only one class of outstanding stock, the Network Common Stock.
<PAGE>
Network Express, Inc.
June , 1996
Page 3
No fractional shares of Cabletron Common Stock will be issued. Each holder
who would otherwise be entitled to a fractional share of Cabletron Common Stock
will receive a cash payment equal to the product of the fractional interest and
the closing price of Cabletron Common Stock on the New York Stock Exchange, Inc.
on the date of the Effective Time.
OPINION
Based solely upon the foregoing, we are of the opinion that under current
law:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and Cabletron, Network and Cabletron Michigan
will each be a party to the reorganization within the meaning of Section
368(b) of the Code;
(ii) no gain or loss will be recognized by the shareholders of Network
upon their receipt of Cabletron Common Stock in exchange for their Network
Common Stock, except that shareholders will recognize gain or loss
realized, if any, on the receipt of cash for fractional shares, and such
gain or loss will constitute capital gain or loss to a Network shareholder
if he holds his Network Common Stock as a capital asset at the Effective
Time;
(iii) the tax basis in the shares of Cabletron Common Stock received
by the holders of Network Common Stock will be the same as the tax basis in
their Network Common Stock exchanged therefor, decreased by the amount of
tax basis allocated to any fractional interest for which cash was paid; and
(iv) the holding period of the Cabletron Common Stock in the hands of
the Network shareholders will include the holding period of their Network
Common Stock exchanged therefor, provided such Network Common Stock is held
as a capital asset at the Effective Time.
<PAGE>
Network Express, Inc.
June , 1996
Page 4
Discussion
Continuity of Interest. In order to qualify as a reorganization under
Section 368(a) of the Code, the Merger must satisfy, among other tests, the
judicial and regulatory requirement that former shareholders of Network obtain a
sufficient "continuity of interest" in the equity of Cabletron. The "continuity
of interest" doctrine requires that the continuing stock interest of the former
owners of an acquired corporation, considered in the aggregate, must represent a
substantial part of the value of their former interest, and provide them with a
definite and substantial interest in the affairs of an acquiring corporation.
For purposes of issuing a favorable advance ruling, the Service requires that
the stock of the acquiring corporation used as consideration be equal in value,
as of the Effective Time, to at least 50 percent of the value of all the
formerly outstanding stock of the acquired corporation as of the same date. This
advance ruling guideline is generally somewhat more restrictive than the
judicial authorities, and does not purport to establish as a matter of law the
lower limit of stock consideration necessary for qualification as a
reorganization. The Service's guidelines indicate, in relevant part, that for
this purpose, shares of acquired corporation stock exchanged for cash will be
treated as outstanding acquired corporation stock on the date of the
transaction, as well as shares of acquired corporation stock and shares of
acquiring corporation stock held by acquired corporation shareholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the transaction.
Under the terms of the Merger Agreement, each issued and outstanding share of
Network Common Stock will be converted at the Effective Time into the right to
receive 0.1388 shares of newly issued Cabletron Common Stock (the "Exchange
Ratio"). The President and Chief Executive Officer of Network, on behalf of
Network's management, has made the representation that there is no plan or
intention by the shareholders of Network who own 5 percent or more of the stock
of Network and, to the best of management's knowledge, there is no plan or
intention on the part of the remaining shareholders of Network to dispose of
Cabletron Common Stock received in the Merger in an amount that would reduce the
Network shareholders' Cabletron Common Stock to a number of shares having a
value, as of the Effective Time of the Merger, of less than 50 percent of the
value of all
<PAGE>
Network Express, Inc.
June , 1996
Page 5
of the formerly outstanding stock of Network as of the same date. Based upon
these facts, we believe that the Cabletron Common Stock received by Network
shareholders in the Merger will be sufficient to satisfy the continuity of
shareholder interest requirement of a reorganization under Section 368(a).
CONTINUITY OF BUSINESS ENTERPRISE. In addition to the continuity of
interest requirement discussed above, the Treasury Regulations under Section 368
provide that for a reorganization to qualify under Section 368(a), a "continuity
of business enterprise" test must be satisfied. The Treasury Regulations require
the acquiring corporation either to continue the historic business of the
acquired corporation or to use a significant portion of the acquired
corporation's historic business assets in a business after the completion of the
reorganization. Cabletron has represented that Cabletron intends to cause
Network to continue its historic business or use a significant portion of its
historic business assets in a business following the consummation of the Merger,
and does not intend to cause Network to dispose of any of its assets other than
in the ordinary course of business. Accordingly, we believe that the continuity
of business enterprise test set forth in the Treasury Regulations will be
satisfied.
STATUTORY REQUIREMENTS
(a) MERGER UNDER STATE LAW. In addition to the general tests of continuity
of interest and continuity of business enterprise, the Merger also must satisfy
the specific requirements of Section 368(a)(2)(E). First, Section 368(a)(2)(E)
requires that the Merger qualify as a merger under the applicable laws of the
State of Michigan. We understand that the Merger will qualify under the MBCA.
(b) SUBTANTIALLY ALL ASSETS. Second, after the transaction, Network must
hold substantially all of its assets and substantially all of the assets of
Cabletron Michigan. In this regard, we rely upon the representations made by
Network and Cabletron to the effect that, after the Merger, Network will hold at
least 90 percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets of each of Network and
<PAGE>
Network Express, Inc.
June , 1996
Page 6
Cabletron Michigan actually held at the Effective Time. This complies with the
current advance ruling standards of the Service which, as stated above,
generally are more restrictive than the judicial authorities.
(c) CONTROL ACQUIRED. Third, Section 368(a)(2)(E)(ii) requires that the
shareholders of the acquired corporation exchange for voting stock of the
controlling corporation an amount of stock in the acquired corporation which
constitutes control thereof. Control is defined in Section 368(c) as "at least
80 percent of the total combined voting power of all classes of stock entitled
to vote" and "at least 80 percent of the total number of shares of all other
classes of stock." The Merger Agreement provides that the only non-stock
consideration to be received by Network shareholders for their Network voting
stock is cash for fractional shares. Cabletron has represented that it expects
this cash to amount to less than 1 percent of the total consideration in the
exchange. There are no shares of Network capital stock outstanding other than
shares of Network Common Stock. Therefore, at least 80 percent of the Network
Common Stock will be exchanged for Cabletron voting stock. Accordingly, we
believe that Network shareholders will exchange Network Common Stock which
constitutes control solely in exchange for voting stock of Cabletron.
* * *
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.
We hereby consent to the inclusion of this opinion as Exhibit 8.2 of the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Proxy Statement/Prospectus constituting a part of the
Registration Statement. In giving such consent, we do not concede that we are
experts within the meaning of the Securities Act of 1933, as amended (the
"Act"), or the rules or regulations thereunder or that this consent is required
by Section 7 of the Act.
Sincerely,
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cabletron Systems, Inc.:
We consent to the use of our reports dated March 20, 1996, which are included
in the February 29, 1996 Annual Report to Stockholders on Form 10-K of Cabletron
Systems, Inc., incorporated by reference in the registration statement on Form
S-4 of Cabletron Systems, Inc., and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
June 28, 1996
<PAGE>
Exhibit 23.4
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 31, 1996 (except with respect to the matter discussed in Note 11,
as to which the date is July 1, 1996) and to all references to our Firm included
in this registration statement. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1995, or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Ann Arbor, Michigan,
June 18, 1996.
<PAGE>
EXHIBIT 23.5
UNTERBERG HARRIS
Swiss Bank Tower
10 East 50th Street
New York, New York 10022
(212)572-8000 FAX (212) 888-8611
CONSENT OF UNTERBERG HARRIS
We hereby consent to the use of our names and to the description of our
opinion letter, dated July 1, 1996, under the captions "Summary - Opinion of
Network's Financial Advisor" and "The Merger - Opinion of Network's Financial
Advisor" in, and to the inclusion of such opinion letter as Annex B to, the
Proxy Statement/Prospectus of Cabletron Systems, Inc. and Network Express, Inc.,
which Proxy Statement/Prospectus is part of the Registration Statement on Form
S-4 (File Number 333-06271) of Cabletron Systems, Inc. By giving such consent
we do not thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "expert" as used in, or
that we come within the category of persons whose consent is required under, the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
UNTERBERG HARRIS
By: /s/ Jody C. Owen
----------------
Jody C. Owen
July 1, 1996
<PAGE>
EXHIBIT 99
NETWORK EXPRESS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF NETWORK EXPRESS, INC.
Discretionary authority is hereby conferred as to any other matters as may
properly come before the meeting. The undersigned acknowledges receipt of the
Notice of Special Meeting of Shareholders and the Proxy Statement/Prospectus
(with all enclosures and attachments) dated July 3, 1996 and ratifies all that
the proxies or either of them or their substitutes may lawfully do or cause to
be done by virtue hereof and revokes all former proxies.
The undersigned hereby constitutes and appoints RICHARD P. EIDSWICK and DAVID
L. HARTMANN, and each of them, attorneys, agents and proxies with power of
substitution to vote all the shares of Common Stock (the "Network Common Stock")
of Network Express, Inc. ("Network") that the undersigend is entitled to vote at
the Special Meeting of Shareholders of Network to be held on Thursday,
August 1, 1996 at 10:00 a.m., local time, at 305 East Eisenhower Parkway, Ann
Arbor, Michigan 48108, and any and all adjournments thereof, as follows:
(To be Signed on Reverse Side)
<PAGE>
[X]Please mark your
votes as in this
example.
FOR AGAINST ABSTAIN
1. Proposal to approve and adopt the Agreement [_] [_] [_]
and Plan of Merger, dated May 21, 1996, among
Cabletron Systems, Inc., Cabletron Systems of
Michigan, Inc. and Network Express, Inc.
(the "Merger Agreement")
SIGNATURE(S) _________________________________________ DATE ____________
NOTE: Please sign exactly as your name appears. If acting as attorney, executor,
trustee or in other representative capacity, sign name and title. THIS PROXY
WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS
MADE, A PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
