SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1998
[ ] 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 May 31, 1998 there were 164,428,778 shares of the Registrant's common
stock outstanding.
This document contains 20 pages
Exhibit index on page 14
<PAGE>
INDEX
CABLETRON SYSTEMS, INC.
Page
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - May 31, 1998 (unaudited)
and February 28, 1998 3
Consolidated Statements of Operations - Three ended months
ended May 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows - Three months ended
May 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements - May 31, 1998 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to the Exhibits 14
Exhibit 10.1 - Employment agreement between the Company and
John d'Auguste dated April 1, 1998 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
May 31, February 28,
1998 1998
Assets
Current Assets:
Cash and cash equivalents .............. $ 186,608 $ 207,078
Short-term investments ................. 109,160 116,979
Accounts receivable, net ............... 249,425 241,181
Inventories ............................ 271,470 309,667
Deferred income taxes .................. 77,988 81,161
Prepaid expenses and other assets ...... 88,042 78,084
---------- ----------
Total current assets .............. 982,693 1,034,150
Long-term investments ....................... 122,933 123,272
Long-term deferred income taxes ............. 167,308 167,308
Property, plant and equipment, net .......... 243,132 244,730
Intangible assets ........................... 51,551 36,867
---------- ----------
Total assets ..................... $1,567,617 $1,606,327
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ....................... $ 73,760 $ 79,969
Current portion of long-term obligation 112,790 157,719
Accrued expenses ....................... 234,299 235,062
---------- ----------
Total current liabilities ......... 420,849 472,750
Long-term obligation ........................ 132,500 132,500
Long-term deferred income taxes ............. 12,086 12,057
---------- ----------
Total liabilities ................ 565,435 617,307
---------- ----------
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 164,429 and 158,267,
respectively ......................... 1,644 1,583
Additional paid-in capital ............. 464,887 300,834
Retained earnings ...................... 533,523 685,823
---------- ----------
1,000,054 988,240
Cumulative translation adjustment ...... 2,128 780
---------- ----------
Total stockholders' equity ....... 1,002,182 989,020
---------- ----------
Total liabilities and stockholders'
equity ........................... $1,567,617 $1,606,327
========== ==========
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
May 31,
1998 1997
Net sales ..................................... $ 365,747 $ 362,688
Cost of sales ................................. 209,562 153,561
--------- ---------
Gross profit ............................. 156,185 209,127
--------- ---------
Operating expenses:
Research and development ................. 54,209 43,616
Selling, general and administrative ...... 96,742 80,915
Special charge ........................... 163,550 ---
--------- ---------
Total operating expenses ............. 314,501 124,531
--------- ---------
Income (loss) from operations ................ (158,316) 84,596
Interest income .............................. 3,839 4,801
--------- ---------
Income (loss) from operations before
income taxes.............................. (154,477) 89,397
Income tax expense (benefit) (2,177) 30,573
--------- ---------
Net income (loss) ............................. ($152,300) $ 58,824
========= =========
Net income (loss) per share - basic ........... ($ 0.93) $ 0.38
========= =========
Weighted average number of shares
outstanding - basic ........................... 163,394 156,857
========= =========
Net income (loss) per share - diluted ......... ($ 0.93) $ 0.37
========= =========
Weighted average number of shares
outstanding - diluted ......................... 163,394 159,503
========= =========
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Three Months Ended
May 31,
1998 1997
Cash flows from operating activities:
Net income (loss) ............................. ($152,300) $ 58,824
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ............. 18,937 17,943
Provision for losses on accounts receivable 987 (185)
Deferred taxes............................. 3,218 (494)
Loss (gain) on disposal of property ....... 399 (1,289)
Purchased research and development from
acquisition ................ 150,000 ---
Changes in assets and liabilities:
Accounts receivable (9,898) (69,590)
Inventories 38,095 (38,833)
Prepaid expenses and other assets ...... (6,802) (6,501)
Accounts payable and accrued expenses .. (55,860) 25,014
Income taxes payable (3,152) 22,234
-------- --------
Net cash (used) provided by operating
activities ............................... (16,376) 7,123
-------- --------
Cash flows from investing activities:
Capital expenditures .......................... (13,618) (26,595)
Cash received in business acquisition.......... 317 ---
Purchase of available-for-sale securities ..... (24,528) (35,058)
Purchase of held-to-maturity securities ....... (12,282) (27,228)
Maturities of marketable securities ........... 44,982 28,630
-------- --------
Net cash used in investing activities ...... (5,129) (60,251)
-------- --------
Cash flows from financing activity:
Proceeds from stock option exercise ........... 972 11,611
-------- --------
Net cash provided by financing activity .... 972 11,611
-------- --------
Effect of exchange rate changes on cash .......... 63 (169)
-------- --------
Net decrease in cash and cash equivalents ........ (20,470) (41,686)
Cash and cash equivalents, beginning of period ... 207,078 214,828
-------- --------
Cash and cash equivalents, end of period ......... $186,608 $173,142
======== ========
Cash paid during the year for:
Income taxes .................................. $ 2,131 $ 5,988
======== ========
<PAGE>
NOTES TO CONSOLIDATED 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, 1998.
2. New Accounting Standard
Effective March 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. For the Company, comprehensive
income includes net income and unrealized gains and losses from currency
translation. Prior periods presented for comparative purposes have been
formatted to comply with the requirements of FAS 130.
3. Inventories
Inventories consist of:
May 31, February 28,
1998 1998
Raw materials $ 57,241 $105,099
Work in process 10,165 34,247
Finished goods 204,064 170,321
-------- --------
Total inventories $271,470 $309,667
======== ========
4. Business Combination
On March 17, 1998 Cabletron acquired Yago Systems, Inc. ("Yago"), a privately
held manufacturer of wire speed routing and layer-4 switching products and
solutions. Under the terms of the merger agreement, Cabletron issued 6.0 million
shares of Cabletron common stock to the shareholders of Yago in exchange for all
of the outstanding shares of stock of Yago not then owned by Cabletron. In
addition, Cabletron assumed Yago stock options for approximately 2.1 million
shares of Cabletron common stock. Prior to the closing of the acquisition,
Cabletron held approximately twenty-five percent of Yago's capital stock,
calculated on a fully-diluted basis. Cabletron also agreed, pursuant to the
terms of the merger agreement, to issue up to 5.5 million shares of Cabletron
common stock to the former shareholders of Yago in the event the shares
originally issued in the transaction do not attain a market value of $35 per
share eighteen months after the closing of the transaction.
<PAGE>
Cabletron recorded the cost of the acquisition at $165.7 million. This
represents 11.5 million shares at $14.1875 per share for a total of $163.1
million, in addition to direct acquisition costs of $2.6 million. In connection
with the acquisition, Cabletron recorded special charges of $163.6 million
($150.0 million for in-process research and development and $13.6 million for
integration costs). Cabletron's consolidated results of operations include the
operating results of Yago from the acquisition date.
5. EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and diluted
income (loss) per common share computations for the Company's reported net
income (loss) is as follows: (in thousands, except per share amounts)
Per
Net Share
Period ended May 31, 1998 income (Loss) Shares Amount
- ------------------------------- ------------ ------ ------
Basic net loss per share ($152,300) 163,394 ($0.93)
Net additional common shares
upon exercise of common stock
options ---
-------
Diluted net loss per share ($152,300) 163,394 ($0.93)
======== ======= =====
Period endee May 31, 1997
- -------------------------------
Basic net income per share $58,824 156,857 $0.38
Net additional common shares
upon exercise of common stock
options 2,646
-------
Diluted net income per share $58,824 159,503 $0.37
======= ======= =====
At May 31, 1998, stock options outstanding were not included in the calculations
of diluted earnings (loss) per share because the effects were anti-dilutive.
6. Comprehensive Income
The Company's total of comprehensive income (loss) was as follows: (in
thousands)
Period ended
May 31, 1998 May 31, 1997
Net income (loss) ($152,300) $58,824
Other comprehensive income:
Currency translation adjustment 1,347 (132)
-------- -------
Total comprehensive income (loss) ($150,953) $58,692
======== =======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cabletron Systems' worldwide net sales in the first quarter of fiscal 1999 (the
three month period ended May 31, 1998) were $365.7 million, a 1 percent increase
over net sales of $362.7 million for the first quarter of fiscal 1998. The
slight increase was primarily the result of sales of products from the Digital
Network Products Group ("DNPG"), a division the Company acquired from Digital
Equipment Corporation ("Digital") on February 7, 1998 and which did not
contribute to revenues in the first quarter of fiscal 1998. Sales of switched
products increased approximately $41.8 million, or 27%, to $197.5 million in the
first quarter of fiscal 1999 compared to $155.7 million in the first quarter of
fiscal 1998. This increase substantially offset a $53.7 million decrease in
sales of shared media products to $54.9 million in the first quarter of fiscal
1999 compared to $108.6 million in the same quarter of fiscal 1998, a decline of
approximately 50%. The increase in sales of switched products in the quarter was
driven primarily by increased sales of the SmartSwitch 6000 and sales of the DEC
MultiSwitch 900, which was acquired in the Company's acquisition of the DNPG and
thus did not contribute to sales in the first quarter of fiscal 1998. These
sales were partially offset by decreased sales of some older switched products.
The decrease in sales of shared media products was a result of declining unit
shipments and lower prices per product for the MMAC and components for the MMAC.
The Company expects sales of its shared media products to continue to decrease
this fiscal year as customers continue to migrate from shared media products to
switched products.
International sales were $169.0 million or 46.2% of net sales in the first
quarter of fiscal 1999 as compared to $97.7 million or 27% of net sales for the
same period in fiscal 1998. The increase in international sales was largely a
result of sales by the DNPG, which has a large percentage of its sales in
European and Pacific Rim countries.
Gross profit as a percentage of net sales in the first quarter of fiscal 1999
decreased to 42.7% from 57.7% for the first quarter of fiscal 1998. The decrease
was primarily due to pricing pressures on the Company's products, especially in
foreign markets which traditionally carry a higher margin than products sold in
the United States. Other secondary factors causing a decrease in the Company's
gross profit margin in the quarter were (i) inventory expenses associated with
management's recent decision to narrow the Company's product offerings, and (ii)
sales of DNPG products which carry a lower margin than the Company's products.
Research and development expenses in the first quarter of fiscal 1999 increased
24.3% to $54.2 million from $43.6 million in the first quarter of fiscal 1998.
The increase in research and development spending reflected the additional
software and hardware engineers gained in the recent DNPG acquisition and
associated costs related to development of new products. Research and
development spending as a percentage of net sales increased to 14.8% from
12.0% in the first quarter of fiscal 1998.
Selling, general and administrative ("SG&A") expenses in the first quarter of
fiscal 1999 increased 19.5% to $96.7 million from $80.9 million in the first
quarter of fiscal 1998. The increase in SG&A expenses was due predominately to
the increase in sales and technical personnel. In comparison to the fourth
quarter of fiscal 1998, SG&A expense decreased by 11.5% or $12.6 million due to
realignment of duplicate functions.
<PAGE>
In connection with the acquisition of Yago, the Company recorded a special
charge of $163.6 million ($150.0 million for in-process research and development
and $13.6 million for integration costs).
Net interest income in the first quarter of fiscal 1999 decreased $1.0 million
to $3.8 million, as compared to $4.8 million in the same quarter of fiscal 1998.
The decrease reflects lower cash balances due to cash spent in the acquisition
of DNPG.
Loss before income taxes was $154.5 million in the first quarter of fiscal 1999
compared to income before income taxes of $89.4 million in the first quarter of
fiscal 1998. The decrease in income before income taxes was due primarily to the
special charge of $163.6 million for the acquisition of Yago Systems and
secondarily, lower margins and higher expenses. Excluding the special charge,
income before income taxes was $9.1 million in the quarter. The decrease in
income before taxes to $9.1 million from $89.4 million in the comparable quarter
in fiscal 1998 was a result of lower margins and higher expenses.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investments
decreased to $418.7 million at May 31, 1998 from $447.3 million at February 28,
1998. Net cash used by operating activities was $16.4 million in the quarter,
compared to net cash provided by operating activities of $7.1 million in the
first quarter of fiscal 1998. The decrease in cash and equivalents in the
quarter was primarily the result of cash used in operating activities in the
quarter. The Company's operating activities lost cash in the quarter primarily
because of Digital's use of products credits. In the Company's acquisition of
the DNPG, Digital acquired $302.5 million of product credits which Digital can
use, subject to annual limits and other conditions and in lieu of paying cash,
to purchase certain Cabletron products through February 7, 2000. The Company's
efforts to manage inventory levels and improve accounts receivable collections
slightly offset the effects of Digital's use of product credits on net cash
provided by operating activities in the quarter. The Company expects that net
cash provided by operating activities will not increase at the same rate of
growth as net sales through February 7, 2000 due to Digital's use of product
credits.
Net accounts receivable increased slightly by $8.2 million to $249.4 million at
May 31, 1998 from $241.2 million at February 28, 1998. Average day sales
outstanding were 61 days at May 31, 1998 compared to 78 days at February 28,
1998. The decrease in day sales outstanding was due primarily to the use of
product credits by Digital and, secondarily, to the increased collection efforts
of the Company. Digital's use of product credits reduces day sales outstanding
because the Company deems purchases paid in product credits collected
immediately.
The Company has historically maintained higher levels of inventory than its
competitors in the LAN industry in order to implement its policy of shipping
most orders requiring immediate delivery within 24 to 48 hours. Worldwide
inventories at May 31, 1998 were $271.5 million, or 117 days of inventory,
compared to $309.7 million, or 157 days of inventory at the end of the prior
fiscal year. Inventory turnover was 3.1 turns at May 31, 1998, compared to
2.3 turns at February 28, 1998. Inventories decreased and inventory
turnover increased due both to improved inventory control performance and
increasing reserves for inventory in connection with reducing the scope of
the Company's product offerings.
Capital expenditures for the first three months of fiscal 1999 were $12.2
million compared to $26.6 million for the same period of the preceding year.
Capital expenditures included approximately $8.3 million for equipment costs, of
which $5.4 million was for computer and computer related equipment, and $1.8
million represented upgrades to manufacturing.
<PAGE>
Current liabilities at May 31, 1998 were $420.8 million compared to $472.8
million at the end of the prior fiscal year. This decrease was mainly due to the
use of product credits by Digital (which are recorded as a liability by the
Company) 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.
.
Market Risk
FOREIGN EXCHANGE RISK MANAGEMENT
As the Company's international sales grow as a percentage of total sales,
exposure to volatility in exchange rates could have a material impact on the
Company's financial results.
The Company uses foreign currency forward and option contracts to manage the
risk of exchange fluctuations. The Company uses these derivative instruments to
reduce its exchange risk by essentially creating offsetting market exposures.
The instruments are not held for trading or speculative purposes.
Based on the Company's overall currency rate exposure at May 31, 1998 including
derivative and other foreign currency sensitive instruments, a near-term change
in currency rates based on historic currency rate movements, would not
materially affect the consolidated financial position, results of operations, or
cash flows of the Company.
The success of the hedging program depends on forecasts of transaction activity
in various currencies. To the extent that these forecasts of are over or
understated during periods of currency volatility, the Company could experience
unanticipated currency gains or losses.
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. A portion
of the investments are classified as available for sale. These instruments are
not held for purposes of trading. The securities are recorded at amortized cost
which approximates market value. Unrealized gains or losses associated with
these securities are not material. Due to the average maturity and conservative
nature of the investment portfolio, a sudden change in interest rates would not
have a material effect on the value of the portfolio.
YEAR 2000-COMPLIANCE
Historically, certain computer programs have been written using two digits
rather than four digits to define year. This could result in computers
recognizing a date using "00" as the year 1900 rather than the year 2000,
resulting in potential major system failures or miscalculations.
<PAGE>
To address the above-mentioned Year 2000 issues and concerns, Cabletron has
established a "Year 2000 Task Force" to lead and coordinate all of its global
Year 2000 activities. This task force is accountable to provide the necessary
leadership, tools and knowledge required by all operating units to become Year
2000 compliant. The task force is currently testing all hardware, firmware and
software developed and sold by the Company for Year 2000 Compliance in
accordance with Cabletron's Year 2000 Policy Statement.
In addition, the Year 2000 Task Force is conducting a global assessment of
Cabletron's essential computer systems and is making reasonable efforts to
ensure that Cabletron's information technology infrastructure will not be
adversely affected by the turn of the century.
Currently, Cabletron has no reasonable estimate of the amount of out-of-pocket
costs which may be incurred to address Year 2000 issues for its products and
internal infrastructure. At this time, the company cannot reasonably estimate
the potential impact on its financial position and operations if key suppliers,
customers and other constituents do not become Year 2000-compliant on a timely
basis.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
[a] There were no reports on Form 8-K filed during the quarter ended May 31,
1998.
[b] Exhibit 10.1 Employment agreement for John d'Auguste (page 15 of this
report)
<PAGE>
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)
July 15, 1998 /s/ Craig R. Benson
- ------------- -------------------------------------
Date Craig R. Benson
Chairman, President , Chief Executive
Officer and Treasurer
July 15, 1998 /s/ David J. Kirkpatrick
- ------------- -------------------------------------
Date David J. Kirkpatrick
Corporate Executive Vice President of
Finance and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Page
Exhibit No.
No.
11.1 Included in notes to consolidated financial statements ---
10.1 Employment agreement between the Company and
John d'Auguste dated April 1, 1998 15
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
This is an agreement (the "Agreement") between Cabletron Systems, Inc.
(the "Company") and John d'Auguste of Exeter Falls, New Hampshire (the
"Executive"), is made and entered into as of the first day of April, 1998.
WHEREAS, the Company wishes to provide for direction and leadership in
the operations area 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 of Operations, 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 (3) years starting on the date of this Agreement (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 of Operations,
subject to the direction and control of the Company's chief executive officer,
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 chief executive officer or the Board of Directors (the "Board");
(b) devote his full business time to the discharge of his duties and
responsibilities under this Agreement, and he shall not engage in any other
business activity or serve in any industry,
<PAGE>
10Q1FY99
-19-
trade, professional, governmental or academic position during the Term of
Employment, except as may be expressly approved in writing in advance by the
chief executive officer or the Board. This provision shall not prohibit
Executive from owning up to 1% of any publicly traded security.
4. Compensation and Benefits.
(a) Base Salary. During the Term of Employment the Company shall pay the
Executive base salary at a rate of $300,000 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.
(b) Performance Based Bonus. During the Term of Employment, the Company
shall pay the Executive a quarterly bonus of up to $37,500 in accordance with
the following provisions. Prior to the commencement of each fiscal quarter
during the Term of Employment, Executive and chief executive officer of the
Company will agree upon objectives to be achieved by the Executive during such
fiscal quarter. The amount of Executive's quarterly bonus (up to $37,500) will
be determined by the chief executive officer of the Company in his sole
discretion based upon the chief executive officer's determination of the
Executive's level of achievement of the objectives established for such fiscal
quarter. The amount of such quarterly bonus shall be determined by the chief
executive officer within 15 days following completion of each fiscal quarter.
(c) Earnings Based Quarterly Bonus. During the Term of Employment, the
Company shall pay the Executive quarterly cash bonuses calculated pursuant to
the following formula:
(A-(B x .10)) x .0025, where: A = Pre-tax earnings
for such fiscal quarter B = Net sales for such quarter.(note 1)
The quarterly bonus for a quarter in which the Term of Employment begins or ends
shall be appropriately prorated. The quarterly bonus shall be paid within five
business days following the filing of the relevant Form 10-K or Form 10-Q.
- --------------
Note 1 Example: Pre-tax earnings equal $120 million
Net sales equal $400 million
($120 million - ($400 million x .10) x .0025 = $200,000)
<PAGE>
(d) Other Benefits. During the Term of Employment the Executive shall be
entitled to participate in all 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.
(e) 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.
5. Termination of Employment; Other Payments.
(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(b), that has been earned but not paid.
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
days in any calendar year. 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(b), that has been earned but not paid. The Company shall
have no further obligations under this Agreement.
(c) Termination by the Company. The Company may terminate the Executive's
employment hereunder at any time upon written notice.
(i) except as provided below in Section 5(d), the Company shall pay
to the Executive in a lump sum cash payment at the time of termination an
amount equal to $600,000;
(ii) the Company shall pay to Executive any other compensation
hereunder, including bonus compensation described in Section 4(b), that
has been earned but not paid through the date of such termination; and
(iii) the stock option granted to the Executive on March 31, 1998 to
purchase 100,000 shares of the Company's Common Stock will become
immediately exercisable in full and shall remain exercisable for the
period described in such option grant.
<PAGE>
(d) In the event that any person other than Executive or Craig R. Benson
shall be hired as President of the Company, the Company shall pay Executive a
lump sum cash payment equal to $600,000. If Executive receives such payment
pursuant to this Section 5(d), in the event Executive's employment is terminated
by the Company pursuant to Section 5(c), Executive shall not be entitled to the
payment contemplated by Section 5(c)(i).
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>
(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 an 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>
21
If to the Executive: Mr. John d'Auguste
20 Exeter Falls Drive
Exeter Falls, NH 03833
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.
16. 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.
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.
/s/ JOHN d'AUGUSTE By: /s/ CRAIG R. BENSON
- ------------------ ----------------------------------
John d'Auguste Title: Chairman, President
and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operation and consolidated
statement of cash flows included in the Company's Form 10-Q for the period
ending May 31, 1998, 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> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 186,608
<SECURITIES> 109,160
<RECEIVABLES> 271,449
<ALLOWANCES> 22,024
<INVENTORY> 271,470
<CURRENT-ASSETS> 982,693
<PP&E> 469,506
<DEPRECIATION> 231,374
<TOTAL-ASSETS> 1,567,617
<CURRENT-LIABILITIES> 420,849
<BONDS> 0
0
0
<COMMON> 1,644
<OTHER-SE> 1,000,054
<TOTAL-LIABILITY-AND-EQUITY> 1,567,617
<SALES> 365,747
<TOTAL-REVENUES> 365,747
<CGS> 209,562
<TOTAL-COSTS> 209,562
<OTHER-EXPENSES> 314,501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,839
<INCOME-PRETAX> (154,477)
<INCOME-TAX> (2,177)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,300)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
