SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
35 Industrial Way, Rochester, New Hampshire 03867
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (603) 332-9400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES - X NO - ___
As of September 30, 1997 there were 157,985,255 shares of the Registrant's
common stock outstanding.
This document contains 25 pages
Exhibit index on page 12
<PAGE> 2
INDEX
CABLETRON SYSTEMS, INC.
Page
No.
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - August 31, 1997 (unaudited) and
February 28, 1997 3
Consolidated Statements of Income - Three and six months ended
August 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows - Six months ended
August 31, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements - August 31, 1997 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Index to the Exhibits 12
Exhibit 10.1 - Employment agreement between the company and
Donald B. Reed dated August 6, 1997 13
Exhibit 11.1 - Statement re: Computation of Per Share Earnings 25
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
August 31, February 28,
1997 1997
---------- ------------
Assets
Current Assets:
Cash and cash equivalents ................... $ 193,923 $ 214,828
Short-term investments ...................... 171,417 165,396
Accounts receivable, net .................... 291,712 219,896
Inventories ................................. 272,956 197,438
Deferred taxes .............................. 58,358 57,107
Prepaid expenses and other assets ........... 42,130 35,925
---------- ----------
Total current assets ................... 1,030,496 890,590
---------- ----------
Long-term investments ............................ 176,799 188,081
Property, plant and equipment, net ............... 209,877 198,557
Long-term deferred taxes ......................... 30,780 29,627
---------- ----------
Total assets ..................................... $1,447,952 $1,306,855
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................ $ 78,526 $ 68,604
Accrued expenses ............................ 148,286 135,208
Income taxes payable ........................ 1,444 10,442
---------- ----------
Total current liabilities .............. 228,256 214,254
---------- ----------
Deferred taxes ................................... 5,299 11,103
---------- ----------
Total liabilities ................................ 233,555 225,357
---------- ----------
Stockholders' equity:
Preferred stock, $1.00 par value
Authorized 2,000 shares; none issued ..... -- --
Common stock $0.01 par value
Authorized 240,000 shares; issued and
outstanding 157,835
and 156,305, respectively ................. 1,578 1,563
Additional paid-in capital .................. 283,341 266,829
Retained earnings ........................... 929,296 812,885
---------- ----------
1,214,215 1,081,277
Cumulative translation adjustment ........... 182 221
---------- ----------
Total stockholders' equity ....................... 1,214,397 1,081,498
---------- ----------
Total liabilities and stockholders' equity ....... $1,447,952 $1,306,855
========== ==========
<PAGE> 4
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
1997 1996 1997 1996
---- ---- ---- ----
Net sales .......................... $371,293 $340,940 $733,982 $664,439
Cost of sales ...................... 159,032 138,855 312,593 271,709
-------- -------- -------- --------
Gross profit .................. 212,261 202,085 421,389 392,730
Operating expenses:
Research and development ...... 44,415 38,716 88,032 78,305
Selling, general and
administrative .............. 85,412 70,208 166,327 135,592
Non-recurring items ........... --- 43,024 --- 43,024
-------- -------- -------- --------
Total operating expenses . 129,827 151,948 254,359 256,921
-------- -------- -------- --------
Income from operations ... 82,434 50,137 167,030 135,809
Interest income .................... 4,819 4,880 9,621 9,322
-------- -------- -------- --------
Income before income taxes 87,253 55,017 176,651 145,131
Income taxes ....................... 29,666 18,113 60,240 51,088
-------- -------- -------- --------
Net income ......................... $ 57,587 $ 36,904 $116,411 $ 94,043
======== ======== ======== ========
Net income per common share ........ $ 0.37 $ 0.24 $ 0.74 $ 0.61
======== ======== ======== ========
Weighted average number of shares
outstanding ........................ 157,743 154,997 157,300 154,803
======== ======== ======== ========
<PAGE> 5
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
August 31,
1997 1996
---- ----
Cash flows from operating activities:
Net income ......................................... $116,411 $ 94,043
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 34,876 25,221
Provision for losses on accounts
receivable .................................. (1,202) 2,660
Deferred taxes ................................. (8,209) (15,594)
Gain/loss on disposal of property .............. (489) 80
Changes in assets and liabilities:
Accounts receivable ......................... (74,938) (46,914)
Inventories ................................. (77,008) (3,850)
Prepaid expenses and other assets ........... (6,564) (7,548)
Accounts payable and accrued expenses ....... 29,491 34,168
Income taxes payable ........................ (8,918) (2,080)
-------- --------
Net cash provided by operating activities ....... 3,450 80,186
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (46,517) (52,277)
Purchase of available-for-sale securities .......... (72,884) (95,640)
Purchase of held-to-maturity securities ............ (160,985) (27,228)
Maturities of marketable securities ................ 105,340 269,914
-------- --------
Net cash used in investing activities ........... (41,289) (38,988)
-------- --------
Cash flows from financing activities:
Common stock issued to employee stock
purchase plan ..................................... 3,311 3,019
Net proceeds from sale of stock
(Network Express/ZeitNet) .......................... --- 8,562
Repayment of notes from stockholders ............... --- (2,595)
Proceeds from stock option exercise ................ 13,215 6,719
Repurchases of common stock ........................ --- 544
-------- --------
Net cash provided by financing activities ....... 16,526 16,249
-------- --------
Effect of exchange rate changes on cash ............... 408 76
-------- --------
Net increase (decrease) in cash and cash
equivalents ........................................... (20,905) 57,523
Cash and cash equivalents, beginning of period ........ 214,828 106,101
-------- -------
Cash and cash equivalents, end of period .............. $193,923 $163,624
======== ========
Cash paid during the year for:
Income taxes ....................................... $ 40,151 $ 66,024
======== ========
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 2 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments consisting of
normal recurring accruals necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for the interim periods are not necessarily indicative
of the results to be expected for the entire year. The accompanying
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended February 28, 1997.
2. Inventories
Inventories consist of:
8/31/97 2/28/97
------- -------
Raw materials $ 90,881 $ 64,685
Work in process 30,574 57,070
Finished goods 151,501 75,683
-------- --------
Total inventories $272,956 $197,438
======== ========
3. Derivatives
The Company uses derivative financial instruments, principally forward
exchange contracts and options in its management of foreign currency
exposure. These contracts primarily require the Company to exchange or sell
certain foreign currencies either with or for US dollars at contractual
rates. The Company's foreign currency hedging activities are used to
minimize adverse foreign exchange movements on the eventual dollar net cash
inflows of its foreign denominated net assets. The Company does not hold or
issue derivative financial instruments for speculative or trading purposes.
Realized and unrealized foreign exchange gains and losses are recognized in
operating income and offset foreign exchange gains and losses on the
underlying exposures. Premiums paid on forward exchange contracts are
amortized over the life of the contract. Premiums paid on options are
expensed immediately. The Company's derivative financial instruments are
marked to market at the balance sheet date and the carrying amount
approximates the fair value of the instruments.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cabletron Systems' worldwide net sales in the second quarter of fiscal 1998
(the three month period ended August 31, 1997) were $371.3 million, a 9%
increase over net sales of $340.9 million for the second quarter of fiscal
1997. The increase was primarily the result of higher sales of the Company's
more recent, higher-end products, including the MMAC Plus-6, the SmartSwitch
6000 and SPECTRUM, the Company's network management software product. As a
percentage of net sales, international sales in the second quarter of fiscal
1998 increased to 29.4% from 29.1% in the second quarter of fiscal 1997.
Gross margins as a percentage of net sales in the second quarter of fiscal
1998 decreased to 57.2% from 59.3% for the second quarter of fiscal 1997 and
from 57.5% for the first quarter of fiscal 1998. The decrease reflects a
shift in product mix between shared and switch technologies, product pricing
and lower than expected European sales, which typically carry higher margins
than sales in the United States.
Research and development ("R&D") expenses in the second quarter of fiscal
1998 increased 14.7% to $44.4 million from $38.7 million in the second
quarter of fiscal 1997. The increase in research and development spending
reflected the hiring of additional software and hardware engineers and
associated cost related to development of new products. Research and
development spending as a percentage of net sales increased to 12.0% from
11.4% in the second quarter of fiscal 1997.
Selling, general and administrative ("SG&A") expenses in the second quarter
of fiscal 1998 increased 21.7% to $85.4 million from $70.2 million in the
second quarter of fiscal 1997. The increase in SG&A expenses was due
predominately to the increase in sales and technical personnel and additional
office locations. SG&A expenses as a percentage of net sales increased to
23.0% from 20.6% in the second quarter of fiscal 1997. SG&A increased as a
percentage of sales primarily as a result of lower than expected sales.
Net interest income in the second quarter of fiscal 1998 decreased slightly
to $4.8 million, from $4.9 million in the second quarter of fiscal 1997.
Interest income in both periods reflects returns on invested cash, marketable
securities and investments..
Income before income taxes in the second quarter of fiscal 1998 increased
58.7% to $87.3 million from $55.0 million in the second quarter of fiscal
1997. The increase in income before income taxes was due primarily to a
nonrecurring charge of $43.0 million resulting from the acquisitions of
Network Express and ZeitNet taken in the second quarter of fiscal 1997.
Without such nonrecurring charge, income before income taxes decreased 10.9%
to $87.3 million from $98.0 million in the second quarter of fiscal 1997.
The decrease in income before income taxes (exclusive of the nonrecurring
charge) was due primarily to the lower gross profit as a percentage of net
sales and higher R&D and SG&A expenses as a percentage of net sales for the
second quarter of fiscal 1998.
<PAGE> 8
Net income in the second quarter of fiscal 1998 increased 56.1% to $57.6
million from $36.9 million in the second quarter of fiscal 1997. Excluding
the one time nonrecurring charge in the second quarter of fiscal 1997, net
income decreased 10% to $57.6 million from $64.0 million in the second
quarter of fiscal 1997. The decrease in net income was due primarily to
the lower gross profit as a percentage of net sales and higher R&D and SG&A
expenses as a percentage of net sales for the second quarter of fiscal 1998.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investments
decreased 4.8% to $542.1 million at August 31, 1997 from $568.3 million at
February 28, 1997 primarily as the result of timing of collections of
accounts receivable.
Net accounts receivable increased $71.8 million to $291.7 million at August
31, 1997 from $219.9 million at February 28, 1997. Average days sales
outstanding were 72 days at August 31, 1997 compared to 52 days at February
28, 1997. The increase was a result of shipment of products shifting towards
the latter part of the quarter.
The Company has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories at August 31, 1997 were $273.0 million, or 147 days of
inventory, compared to $197.4 million, or 109 days of inventory at February 28,
1997. Inventory turnover was 2.5 turns at August 31, 1997, compared to 3.4 turns
at February 28, 1997. The lower inventory turns were due to lower sales in the
three month period ended August 31, 1997. Finished goods increased 100% from
February 28, 1997 to August 31, 1997. This increase was due to the introduction
of a new product line (the SmartSwitch 6000 and the SmartSwitch 2200) announced
in the first quarter of fiscal 1998 and the receipt of raw material earlier than
expected which resulted in an increase in the finished goods of that new product
line.
Capital expenditures for the first six months of fiscal 1998 were $46.5
million compared to $52.3 million for the same period of the preceding year.
Capital expenditures included approximately $32.5 million for equipment
costs, of which $20.2 million was for computer and computer related
equipment, and $12.3 million represented systems development costs.
Current liabilities at August 31, 1997 were $228.3 million compared to $214.3
million at the end of the prior fiscal year. This increase was mainly due to
the growth in operations and the timing of disbursements.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will prove
adequate to support the Company's working capital and capital expenditure
requirements for the next twelve months.
<PAGE> 9
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share." This Statement establishes and simplifies standards for
computing and presenting earnings per share. SFAS 128 will be effective for
the Company's fourth quarter of fiscal 1998, and requires restatement of all
previously reported earnings per share data that are presented. Early
adoption of this Statement is not permitted. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company expects that basic earnings per share amounts will be accretive
compared to the Company's non-dilutive earnings per share amounts, and
diluted earnings per share amounts will not be materially different from the
Company's fully diluted earnings per share amounts.
In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Under this concept, all
revenues, expenses, gains and losses recognized during the period are
included in income, regardless of whether they are considered to be results
of operations of the period. SFAS 130, which becomes effective for the
Company in its fiscal year ending February 28, 1999, is not expected to have
a material impact on the consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131, which
becomes effective for the Company in its fiscal year ending February 28,
1999, is currently not expected to have a material impact on the Company"s
consolidated financial statements and disclosures as the Company does not
have multiple reportable operating segments.
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On October 7, 1996 a lawsuit was filed by Fred S. Havenick et al. Against
Network Express, Inc., a wholly-owned subsidiary of the Company, certain former
officers and directors of Network Express, Inc., two investment bankig firms and
the Company (see the Company's quarterly report on Form 10-Q for the quarter
ended August 31, 1996 for more details). On September 30, 1997 the Federal
District Court for the Eastern District of Michigan granted defendants' Motion
to Dismiss the Complaint, and entered judgment on behalf of the Company and all
other defendants, dismissing plaintiffs complaint in its entirety with
prejudice. Plaintiffs must file any notice of appeal to the United States Court
of Appeals for the Sixth Circuit within 30 days after entry of judgment, no
later than October 30, 1997.
Item 6. Exhibits and Reports on Form 8-K.
[a] Exhibit 10.1 - Employment Agreement between the Company and Donald B.
Reed dated as of August 6, 1997 (page 13 of this report)
Exhibit 11.1 - Statement re: Computation of Per Share Earnings (page 25 of
this report)
[b] There were no reports on Form 8-K filed during the quarter ended
August 31, 1997.
<PAGE> 11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABLETRON SYSTEMS, INC.
-----------------------
(Registrant)
October 15, 1997 /s/ Craig R. Benson
- - ---------------- ------------------------------------
Date Craig R. Benson
Chairman of the Board and Treasurer
October 15, 1997 /s/ David J. Kirkpatrick
- - ---------------- ------------------------------------
Date David J. Kirkpatrick
Director of Finance and Chief
Financial Officer
<PAGE> 12
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
10.1 Employment Agreement between the company
and Donald B. Reed dated August 6, 1997 13
11.1 Statement regarding computation of per share earnings 25
<PAGE> 13
Exhibit 10.1
EMPLOYMENT AGREEMENT
This is an agreement (the "Agreement") between Cabletron Systems, Inc.
(the "Company") and Donald B. Reed of Palm Beach Gardens, Florida (the
"Executive"),
is made and entered into this day of August, 1997.
WHEREAS, the Company wishes to ensure direction and leadership in all
areas of its business; and
WHEREAS, the Executive has experience and expertise that qualify him to
provide that direction and leadership, and the Company therefore wishes to
employ him as its President and Chief Executive Officer, and he wishes to
accept such employment,
NOW, THEREFORE, the parties agree as follows:
1. Employment. Subject to the terms and conditions set forth in
this Agreement, the Company hereby offers and the Executive hereby accepts
employment.
2. Term. Subject to earlier termination as provided in paragraph 5
below, the term of the Executive's employment hereunder (the "Term of
Employment") shall be a period of three years starting on September 1, 1997
(the "Effective Date"), and shall continue thereafter for successive periods
of one year unless, not less than 60 days prior to the third or any
subsequent anniversary of the Effective Date, the Company or the Executive,
as the case may be, gives notice to the other that this Agreement shall
terminate upon such anniversary. The term of this Agreement, as from time to
time extended or renewed, is hereafter referred to as "the Term of
Employment" or "the term hereof."
3. Capacity and Performance. During the Term of Employment, the
Executive shall:
(a) serve the Company on a full-time basis as its President and Chief
Executive Officer;
(b) have all powers and duties consistent with the position of
president and chief executive officer of public companies of similar size,
subject to the direction and control of the Company's Board of Directors (the
"Board"), and shall perform such other duties and responsibilities
commensurate with such position on behalf of the Company as may reasonably be
designated from time to time by the Board;
<PAGE> 14
(c) devote his full business time to the discharge of his duties and
responsibilities under this Agreement, and, except as set forth on Schedule
1, he shall not engage in any other business activity or serve in any
industry, trade, professional, governmental or academic position during the
Term of Employment, except as may be expressly approved in writing in advance
by the Board. However, Executive may attend to personal investments and
community and charitable service, provided that such activities are not
competitive with the business of the Company and do not materially interfere
with the performance of the Executive's duties to the Company. This
provision shall not prohibit Executive from owning up to 1% of any publicly
traded security.
4. Compensation and Benefits.
(a) Signing Bonus. The Company shall pay to the Executive a cash
bonus of $250,000 promptly after the Effective Date.
(b) Base Salary. During the Term of Employment the Company shall pay
the Executive base salary at a rate of $450,000 per year, in accordance with
the Company's payroll practice for executives, and subject to increase from
time to time by the Board or a compensation committee of the Board, in its
sole discretion. Such base salary, as from time to time increased, is
hereafter referred to as the "Base Salary." Executive's Base Salary shall
not be decreased from the annual rate then in effect.
(c) Bonuses. During the Term of Employment, the Company shall pay the
Executive quarterly cash bonuses based on increases in the Company's earnings
per share ("EPS") from a fiscal quarter of one year to the corresponding
fiscal quarter of the next year ("EPS Growth") (with appropriate adjustments
for stock splits, dividends and the like, and excluding the effect of charges
for acquisitions and non-recurring one-time charges), as follows:
If EPS Growth is: the quarterly bonus is:
Less than 15% $0
15% $50,000
20% $150,000
25% $250,000
30% $300,000
If EPS Growth exceeds 30%, the quarterly bonus will increase by $50,000 for
each five (5) percentage point increase in EPS Growth above 30% up to a
maximum quarterly bonus of $500,000. The quarterly bonus will increase
proportionately between the percentage benchmarks. EPS for a quarter shall
be as reported in the Company's report on Form 10-Q or Form 10-K (as the case
may be) filed with the Securities and Exchange Commission ("SEC") in respect
of such quarter, reduced by charges for acquisitions and non-recurring
one-time charges. The quarterly bonus for a quarter in which the Term of
Employment begins or ends shall be appropriately pro-rated. The quarterly
bonus shall be paid within five business days following the filing of the
relevant Form 10-K or Form 10-Q.
<PAGE> 15
(d) Stock Option. As of the Effective Date, the Executive shall be
granted an option under the Company's 1989 Equity Incentive Plan (the "Plan")
to purchase 600,000 shares of common stock of the Company (with appropriate
adjustments for stock splits, dividends and the like) at an exercise price
equal to the lower of (i) the fair market value of the stock on the trading
trade prior to the date on which the Company announces by press release
Executive's employment with the Company, or (ii) the fair market value of the
stock on the second trading day following the date on which the Company
announces by press release its financial results for the fiscal quarter ended
August 31, 1997. The option will become exercisable with respect to 150,000
shares on each of the first, second and third anniversaries of the Effective
Date and with respect to 75,000 shares on each of the fourth and fifth
anniversaries of the Effective Date. Once exercisable, the option shall
remain exercisable until the earlier of the tenth anniversary of the
Effective Date or, except as provided in Sections 5(a), (b), (d), (e), (f)
and (g), 90 days following termination of the Executive's employment with the
Company.
(e) Living and Relocation Expenses. The Company will reimburse
Executive for up to $25,000 in temporary living expense in New Hampshire and
will pay the reasonable out-of-pocket costs of Executive's move from New York
to the New Hampshire, plus an additional payment (the "additional payment")
to compensate Executive for any federal and state income taxes attributable
to such reimbursements and payments and federal and state income taxes
attributable to the additional payment.
(f) Other Benefits. During the Term of Employment the Executive shall
be entitled to a minimum of 15 days vacation, and to participate in all other
employee benefit plans (including insurance plans) of the Company that cover
executives of the Company generally. The Executive's participation shall be
subject to (i) the terms of the applicable plan documents, (ii) generally
applicable Company policies and (iii) appropriate discretion of the Board or
any administrative committee contemplated by such plan, provided that
Executive shall be deemed immediately eligible to fully participate in all
such plans (other than tax qualified plans) notwithstanding any eligibility
criteria or waiting periods. The Company may alter, modify, supplement or
delete its employee benefit plans at any time as it sees fit, without
recourse by the Executive.
(g) Certain Expenses. The Company shall pay or reimburse the
Executive for all reasonable, customary business expenses incurred or paid by
the Executive in the performance of the duties and responsibilities of his
position and to such reasonable substantiation and documentation as may be
required by the Company.
<PAGE> 16
5. Termination of Employment.
(a) Death. If the Executive dies during the Term of Employment, the
Company shall pay to the Executive's estate Base Salary through the end of
the calendar month of his death and any other compensation hereunder,
including bonus compensation described in Section 4(c), that has been earned
but not paid. In addition, 50% of any unvested options shall immediately
vest and all options shall remain exercisable for a period of three years
from the date of death. The Company shall have no further obligations under
this Agreement.
(b) Disability. The Company may terminate the Executive's employment
by written notice in the event that, for any reason, he becomes disabled,
either physically or psychologically, and is unable to perform substantially
all of his material duties and responsibilities under this Agreement for a
period of 180 consecutive days. In the event of such a termination, the
Company shall pay to the Executive Base Salary through the end of the
calendar month of his termination and any other compensation hereunder,
including bonus compensation described in Section 4(c), that has been earned
but not paid. In addition, 50% of any unvested options shall immediately
vest and all options shall remain exercisable for a period of three years
from the date of such termination. The Company shall have no further
obligations under this Agreement.
(c) Termination by the Company for Cause. The Company may terminate
the Executive's employment hereunder for Cause at any time upon written
notice setting forth in reasonable detail the nature of the Cause. The
following will constitute Cause:
(i) the Executive's willful failure to attempt to perform, or
gross negligence in the performance of, his material duties and
responsibilities to the Company and the continuance of such failure or
gross negligence for a period of thirty (30) days after notice to
Executive; or
(ii) material fraud, embezzlement or other material dishonesty
by the Executive with respect to the Company or the Executive's
conviction of, or plea of nolo contendere to, a felony (excluding
traffic violations and other immaterial violations, and felonies that
the Executive is liable for solely because of actions or inactions of
the Company that were not authorized by the Executive or of which he
did not have knowledge were illegal).
Upon termination of the Executive's employment for Cause, the Company shall
have no further obligations under this Agreement other than to pay to the
Executive any Base Salary that has been earned but not paid.
(d) Termination by the Company Other Than for Cause. The Company may
terminate the Executive's employment hereunder other than for Cause at any
time upon written notice. In the event of such termination:
<PAGE> 17
(i) the Company shall pay to the Executive in a lump sum cash
payment at the time of termination the greater of (A) the amount of his
Base Salary for the remainder of the Term of Employment and (B)
$450,000;
(ii) the Company shall either continue to contribute to the cost
of the Executive's participation in the Company's medical and life
insurance arrangements during the remainder of the Term of Employment
or pay to him the present value of such cost in a lump sum;
(iii) the Company shall pay to Executive any other compensation
hereunder, including bonus compensation described in Section 4(c), that
has been earned but not paid; and
(iv) all stock options granted to the Executive will become
immediately exercisable in full and shall remain exercisable for a
period of three years.
(e) Termination by the Executive for Good Reason.
If the Executive terminates his employment during the Term of
Employment because:
(i) the Company has breached this Agreement by failing to pay
Base Salary in accordance with paragraph 4(b) or failing to pay other
compensation as contemplated by paragraph 4 and such failure is not
promptly remedied by the Company after notice to the Company;
(ii) the Company shall have assigned to the Executive any duties
materially inconsistent with Executive's title, position, authorities,
duties or responsibilities as President and chief executive officer, or
any other action by the Company which results in a diminution in such
title, position, authorities, duties or responsibilities, excluding an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive,
(iii) the securities of the Company or a successor or affiliate
of which the Executive is serving as President and Chief Executive
Officer shall no longer be publicly traded,
(iv) the Company requires the Executive to be based at any office
or location in an area or location more than a 100 miles from
Rochester, New Hampshire, or
(v) the Executive shall not be elected or continue as a member of
the Board of Directors of the Company;
the termination shall, for purposes of this Agreement, be treated as a
termination by the Company other than for cause and governed by
paragraph 5(d).
<PAGE> 18
If the Executive terminates his employment with the Company for any
other reason, the Company shall have no further obligations under this
Agreement other than to pay to the Executive any Base Salary, and any bonus
compensation described in Section 4(c) hereunder, that has been earned but
not paid.
(f) Failure to Renew. If the Company gives notice of termination of
this Agreement pursuant to paragraph 2 hereof, such notice shall be treated
as a termination by the Company of Executive's employment other than for
Cause and shall be governed by the provisions of Section 5(d), except that
in lieu of the lump sum payment provided by Section 5(d)(i), the Company
shall pay to the Executive on the last day of the Term of Employment a lump
sum cash severance payment of $450,000.
(g) Termination Following a Change of Control. (i) Notwithstanding
the provisions of any other subsection of this Section 5, and in lieu of any
payment or benefit provided thereby, if, within 24 months following a Change
of Control Executive's employment with the Company is terminated by the
Company (including a non-renewal of this Agreement) for any reason other than
Cause as provided in Section 5(c), or disability as provided in Section 5(b),
or the Executive terminates his employment for Good Reason as provided in
Section 5(e):
(A) the Company shall pay to the Executive in a lump sum cash
payment at the time of termination in an amount equal to three times
the sum of (1) the Executive's Base Salary at the rate required to be
in effect immediately prior to the termination of employment, plus (2)
the bonus paid or payable to the Executive in respect of the four
fiscal quarters immediately preceding the termination of employment;
(B) the Company shall either continue to contribute to the cost
of the Executive's participation in the Company's medical and life
insurance arrangements for a period of one year from the date of
termination of employment or pay to him the present value of such cost
in a lump sum;
(C) the Company shall pay to Executive any other compensation
hereunder, including bonus compensation described in Section 4(c), that
has been earned but not paid; and
(D) all stock options granted to the Executive will become
immediately exercisable in full and shall remain exercisable for a
period of three years notwithstanding any provision to the contrary of
the options.
(ii) If any payment or benefit received by Executive pursuant to
Section 5(g)(i), but determined without regard to any additional payments
required under this paragraph 5(g)(ii), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties are incurred by the Executive with
respect to such excise tax) the Company will pay to Executive an additional
amount in cash (the "Additional Amount") equal to the amount necessary to
cause the aggregate payments and benefits received by Executive, including
such Additional Amount (net of all federal, state, and local income and
payroll taxes and all taxes payable as a result of the application of
<PAGE> 19
Sections 28OG and 4999 of the Code and including any interest and penalties
with respect to such taxes) to be equal to the aggregate payments and
benefits Executive would have received, excluding such Additional Amount (net
of all federal, state and local income and payroll taxes) as if Sections 28OG
and 4999 of the Code (and any successor provisions thereto) had not been
enacted into law.
Following the termination of Executive's employment, Executive may
submit to the Company a written opinion (the "Opinion") of a nationally
recognized accounting firm, employment consulting firm, or law firm selected
by Executive setting forth a statement and a calculation of the Additional
Amount. The determination of such firm concerning the extent of the
Additional Amount (which determination need not be free from doubt), shall be
final and binding on both Executive and the Company. The Company will pay to
Executive the Additional Amount not later than 10 days after such firm has
rendered the Opinion. The Company agrees to pay the fees and expenses of
such firm in preparing and rendering the opinion.
If, following the payment to Executive of the Additional Amount,
Executive's liability for the excise tax imposed by Section 4999 of the Code
on the payments and benefits received by Executive is finally determined (at
such time as the Internal Revenue Service is unable to make any further
adjustment to the amount of such liability) to be less than the amount
thereof set forth in the Opinion, the Executive shall promptly file for a
refund with respect thereof, and the Executive shall promptly pay to the
Company the amount of such refund when received (together with any interest
paid or credited thereon after taxes applicable thereto). If, following the
payment to Executive of the Additional Amount, Executive's liability for the
excise tax imposed by Section 4999 of the Code on the payments and benefits
received by Executive is finally determined (at such time as the Internal
Revenue Service is unable to make any further adjustment to the amount of
such liability) to be more than the amount thereof set forth in the Opinion
and the Executive thereafter is required to make a further payment of any
such excise tax, the Company shall promptly pay to or for the benefit of the
Executive an additional Additional Amount in respect of such underpayment.
For purposes of this Section 5(g), the term "Change of Control" shall
mean: the occurrence of any of the following events: (a) the Company is a
party to, or the stockholders approve, a merger, consolidation or
reorganization with another corporation (other than a merger, consolidation
or reorganization that would result in the voting power immediately before to
continue to represent either by remaining outstanding or by being converted
into securities of the surviving entity, more than 50% of the voting power
thereafter); (b) a sale of all, or substantially all, of the assets of the
Company; (c) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity, or any syndicate or group
deemed to be a person under Section 14(d)(2) of the Exchange Act, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange
Act), directly or indirectly, of shares of Common Stock representing 40% or
more of the voting power of the Company's then outstanding securities
entitled to vote in the election of directors of the Company; (d) during any
<PAGE> 20
period of two consecutive years, individuals who at the beginning of such
period constituted the Board, and any new directors whose election by the
Board or nomination for election by the Company's stockholders was approved
by a vote of at least three-quarters of the directors then still in office
who either were directors at the beginning of the period or whose selection
or nomination for election was previously so approved, cease for any reason
to constitute a majority thereof; or (e) the Company is dissolved or
liquidated; provided, however, that a change in control under clause (a),
(b), (c), or (e) shall not be deemed to be a Change in Control as a result of
an acquisition of securities of the Company by an employee benefit plan
maintained by the Company for its employees.
(h) There shall be no requirement on the part of Executive to seek
other employment or otherwise mitigate damages in order to be entitled to the
full amount of benefits to which Executive is entitled under this Agreement
and the amount of such benefits shall not be reduced by any compensation or
benefits received by Executive from other employment.
6. Nondisclosure. During the Term of Employment, the Executive may
become aware of information which is nonpublic, confidential or proprietary
in nature with respect to the Company or with respect to other companies,
persons, entities, ventures or business opportunities in which the Company
has, or, if it were disclosed to the Company, the Company might have, an
interest ("Confidential Information"). All Confidential Information will be
kept strictly confidential by the Executive and the Executive shall not: (a)
copy, reproduce, distribute or disclose any Confidential Information to any
third party except in the course of his employment by the Company; (b) use
any Confidential Information for any purpose other than in connection with
his employment by the Company; or (c) use any Confidential Information in any
way that is detrimental to the Company. The term Confidential Information
shall not include any information that is generally available to the public
other than as a result of disclosure by the Executive.
Upon termination of the Executive's employment, he shall immediately
return or destroy all Confidential Information, including all notes, copies,
reproductions, summaries, analyses, or extracts thereof, then in his
possession. Such return or destruction shall not abrogate the continuing
obligations of the Executive under this Agreement.
In the event that the Executive is requested or required (by
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process) to disclose any Confidential
Information, he shall provide the Company with prompt written notice so that
it may seek a protective order or other appropriate remedy.
The obligations of Executive stated in this paragraph 6 shall, except
where expressly limited as to time, continue without limit as to time and
without regard to the employment status of Executive.
7. Competition and Solicitation. In consideration for the
benefits provided under this Agreement, the Executive agrees that, during the
Term of Employment and for a period of one year following termination of
employment (unless such termination of employment is by the Company other
than for Cause or by the Executive for Good Reason), (the "Term of
Noncompetition"), he shall be bound by the provisions of this paragraph 7 and
that such provisions shall apply within North America and Europe. For
purposes of this paragraph 7, the term "Company" shall include affiliates of
the Company.
<PAGE> 21
(a) The Executive shall not directly or indirectly, as a director,
officer, partner, employee, agent, consultant, salesman, distributor or
otherwise, provide services to or engage in any business that is competitive
with the business of the Company. For purposes of this paragraph 7(a), the
"business of the Company" is defined as the computer networking business.
Notwithstanding the foregoing, Executive may serve as a director, officer,
partner, employee, agent, consultant, salesman, distributor or otherwise for
an entity that includes a business that is competitive with the business of
the Company, provided that, during the Term of Noncompetition, no more than
10% of the consolidated assets or revenues are attributable to a activity
that is competitive with the business of the Company.
(b) The Executive shall not engage, or suggest or assist in or
influence the engagement or hiring by any competing organization of, any
employee or any exclusive salesperson, distributor, contractor or supplier of
the Company, or otherwise cause or encourage any person or entity having a
business relationship with the Company to sever or alter such relationship
with the Company, provided that nothing herein shall prohibit Executive from
responding to unsolicited third party reference requests.
8. Survival of Covenants. Notwithstanding any other provision of
this Agreement, if the Agreement is terminated for any reason, paragraphs 6
and 7 of the Agreement shall survive and continue to bind the Executive to
the extent provided therein.
9. Conflicting Agreements. The Executive hereby represents and
warrants that the execution of this Agreement and the performance of his
obligations hereunder will not breach or be in conflict with any other
agreement to which he is a party or is bound and that he is not now subject
to any covenants against competition or similar covenants that would affect
the performance of his obligations hereunder. The Executive will not, and
the Company will not request the Executive to, disclose to or use on behalf
of the Company any proprietary information of a third party without such
party's consent.
10. Withholding. All payments made by the Company under this
Agreement shall be reduced by any tax or other amounts required to be
withheld by the Company under applicable law.
11. Assignment. Except as provided in this paragraph 11, neither
the Company nor the Executive may make any assignment of this Agreement or
any interest herein, by operation of law or otherwise, without the prior
written consent of the other. The Company may without the consent of the
Executive assign its rights and obligations under this Agreement to any
corporation or other business entity into which the Company has merged or
with which it has consolidated or which has acquired substantially all of the
Company's assets. This Agreement shall inure to the benefit of and be
binding upon the Company and the Executive, their respective successors,
executors, administrators, heirs and permitted assigns.
12. Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
<PAGE> 22
If to the Executive: Donald B. Reed
13241 Oakmead
Palm Beach Gardens, FL 33418
If to the Company: Cabletron Systems, Inc.
35 Industrial Way
Rochester, NH 03867
Attention: Chairman of the Board
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
13. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes all prior communications,
agreements and understandings, written or oral, with respect to the terms and
conditions of the Executive's employment.
14. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by an expressly authorized
representative of the Company.
15. Governing Law. This is a New Hampshire contract and shall be
construed and enforced under and be governed in all respects by the internal
laws of the State of New Hampshire, but without regard to any conflict of law
principles that would cause the internal law of any other jurisdiction to
apply.
15. Arbitration. Any dispute under this Agreement (other than an
action seeking equitable remedies) shall be subject to binding arbitration in
Concord, New Hampshire, before the American Arbitration Association. The
results of any such arbitration shall be final and binding and the decision
of the arbitrator may be entered into any court of competent jurisdiction for
enforcement. The Company authorizes Executive from time to time to retain
counsel of his choice to represent Executive in connection with any
arbitration, whether by or against the Company which may affect Executive's
rights under this Agreement. In connection with any arbitration proceeding,
if the dispute is resolved in favor of the Executive (as determined by the
arbitrator), the Company agrees (i) to pay the fees and expenses of such
counsel, and (ii) to pay the cost of such arbitration and/or judicial
proceeding.
<PAGE> 23
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company, by its duly authorized representative, and by the
Executive, each as of the date first above written.
CABLETRON SYSTEMS, INC.
________________________________ By: _____________________________
DONALD B. REED Title
By: _____________________________
Title
<PAGE> 24
SCHEDULE 1
[List of Permitted Activities]
Board Member and Chair of The New England Council
Vice Chair, and Chair of Policy Committee, of the US--Thailand Business
Council
<PAGE> 25
<TABLE>
EXHIBIT 11.1
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For periods ended August 31, 1997 and 1996
(in thousands, except per share amounts)
<CAPTION>
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income Per Common Share -(non-dilutive)
Net income ............................... $ 57,587 $ 36,904 $116,411 $ 94,043
======== ======== ======== ========
Weighted average common shares outstanding 157,743 154,997 157,300 154,803
======== ======== ======== ========
Reported net income per common share ..... $ 0.37 $ 0.24 $ 0.74 $ 0.61
======== ======== ======== ========
Net Income Per Common Share - (full
dilution)
Net income ............................... $ 57,587 $ 36,904 $116,411 $ 94,043
======== ======== ======== ========
Weighted average common shares outstanding 157,743 154,997 157,300 154,803
Add net additional common shares upon
exercise of common stock options ........ 2,124 2,440 2,213 2,356
-------- -------- -------- --------
Adjusted average common shares outstanding 159,867 157,437 159,513 157,159
======== ======== ======== ========
Net income per common share - (full ......
dilution) ................................ $ 0.36 $ 0.23 $ 0.73 $ 0.60
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending August 31, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000846909
<NAME> CABLETRON SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 193,823
<SECURITIES> 171,417
<RECEIVABLES> 291,712
<ALLOWANCES> 14,207
<INVENTORY> 272,956
<CURRENT-ASSETS> 1,030,496
<PP&E> 392,505
<DEPRECIATION> 182,628
<TOTAL-ASSETS> 1,447,952
<CURRENT-LIABILITIES> 228,256
<BONDS> 0
0
0
<COMMON> 1,578
<OTHER-SE> 1,214,397
<TOTAL-LIABILITY-AND-EQUITY> 1,447,952
<SALES> 733,982
<TOTAL-REVENUES> 733,982
<CGS> 312,593
<TOTAL-COSTS> 312,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 176,651
<INCOME-TAX> 60,240
<INCOME-CONTINUING> 116,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,411
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
</TABLE>
