<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-46135
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
CABLETRON SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3577 04-2797263
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
35 INDUSTRIAL WAY, ROCHESTER, NH 03867, (603) 332-9400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID J. KIRKPATRICK
DIRECTOR OF FINANCE AND CHIEF FINANCIAL OFFICER
35 INDUSTRIAL WAY, ROCHESTER, NH 03867, (603) 332-9400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID A. FINE, ESQ. ALLISON LEOPOLD TILLEY, ESQ.
ROPES & GRAY PILLSBURY MADISON & SUTRO LLP
ONE INTERNATIONAL PLACE 2550 HANOVER STREET
BOSTON, MASSACHUSETTS 02110 PALO ALTO, CALIFORNIA 94304
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the merger of a wholly owned subsidiary of
the Registrant with and into Yago Systems, Inc., which shall occur as soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of all conditions to closing of such merger as
described in the enclosed Proxy Statement/Prospectus.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If the form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
YAGO SYSTEMS, INC.
795 VAQUEROS AVENUE
SUNNYVALE, CALIFORNIA 94086
March 10, 1998
To the Stockholders of Yago Systems, Inc.:
The Board of Directors of Yago Systems, Inc. ("Yago") has unanimously
approved and is recommending that the Yago stockholders approve the
acquisition of Yago by Cabletron Systems, Inc. ("Cabletron"). In order to act
upon approval of this transaction, Yago is soliciting the written consent of
the holders of the Yago Common Stock, the Yago Series A Preferred Stock and
the Yago Series B Preferred Stock. The record date for determining the Yago
Stockholders entitled to consent in writing to the proposals described in the
accompanying Proxy Statement/Prospectus is January 15, 1998 (the "Yago Record
Date"). Yago has set March 23, 1998 as the last date upon which the written
consent of Yago stockholders of record as of the Yago Record Date may be
submitted to Yago. Yago, however, may consummate the Merger prior to such date
if the requisite consents to approve the Merger are obtained. Your written
consents should be returned to the offices of our counsel, Pillsbury Madison &
Sutro LLP, 2550 Hanover Street, Palo Alto, California, Attention: Colin Morris
(Facsimile: 650-233-4545).
The holders of Yago Common Stock, Yago Series A Preferred Stock and Yago
Series B Preferred Stock will be asked to consent in writing to (i) a proposal
to approve and adopt the Agreement and Plan of Merger dated as of January 14,
1998, among Cabletron, Cabletron Merger, Inc. ("Merger Sub") and Yago, as
amended, (the "Plan of Merger"), and to approve the merger (the "Merger") of
Merger Sub, a wholly owned subsidiary of Cabletron, with and into Yago
pursuant to the Plan of Merger, and to approve the transactions contemplated
thereby, by which Yago would become a wholly owned subsidiary of Cabletron and
(ii) a proposal to adopt the 1998 Stock Option Plan authorizing the grant of
options to purchase up to 4,394,549 shares of Yago Common Stock (the "1998
Stock Option Plan"). In addition, the holders of Yago Series A Preferred Stock
and Yago Series B Preferred Stock are being asked to consent in writing to a
proposal to convert, immediately prior to the Merger, each share of Yago
Series A Preferred Stock and Yago Series B Preferred Stock into one share of
Common Stock of Yago. Upon the effectiveness of the Merger, each outstanding
share of Yago Common Stock will be converted into the right to receive
approximately .45510932 of a share of Cabletron Common Stock. On the Eighteen
Month Anniversary (as defined in the Plan of Merger) of the Merger or, if
earlier, upon a Change of Control (as defined in the Plan of Merger), the Yago
stockholders will be entitled to receive up to an additional 5,500,000 shares
of Cabletron Common Stock, if the average of the daily last sales price for
the Cabletron Common Stock for a specified period prior to such Eighteen Month
Anniversary or Change in Control, as the case may be, is less than $35.00. The
Plan of Merger also provides that approximately ten percent (10%) of the
shares of Cabletron Common Stock initially issued in the Merger will be placed
in escrow for up to eighteen months to reimburse Cabletron for any breaches of
Yago's representations and warranties and certain other obligations in the
Plan of Merger.
THE BOARD OF DIRECTORS OF YAGO HAS UNANIMOUSLY APPROVED THE PLAN OF MERGER,
THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT THE
YAGO STOCKHOLDERS CONSENT IN WRITING TO THE APPROVAL AND ADOPTION OF THE PLAN
OF MERGER, THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD OF
DIRECTORS OF YAGO HAS UNANIMOUSLY APPROVED THE 1998 STOCK OPTION PLAN AND
RECOMMENDS THAT THE YAGO STOCKHOLDERS CONSENT IN WRITING TO THE APPROVAL AND
ADOPTION OF THE 1998 STOCK OPTION PLAN.
THE BOARD OF DIRECTORS OF YAGO ALSO RECOMMENDS THAT HOLDERS OF YAGO SERIES A
PREFERRED STOCK AND YAGO SERIES B PREFERRED STOCK CONSENT IN WRITING TO THE
CONVERSION OF THE PREFERRED STOCK INTO COMMON STOCK.
It is important that you provide your consent in writing to the Plan of
Merger, the Merger and the 1998 Stock Option Plan and, in the case of the
holders of Yago Series A Preferred Stock and Yago Series B Preferred Stock,
provide your consent in writing to the conversion of your shares into Yago
Common Stock. Accordingly, we ask you to please complete, sign and date the
accompanying form of written consent. The details of the
<PAGE>
proposed Merger appear in the accompanying Proxy Statement/Prospectus which is
being furnished to the holders of the Yago Common Stock, Yago Series A
Preferred Stock and Yago Series B Preferred Stock (collectively referred to as
the "Yago Stock"). You should consider carefully the investment considerations
associated with the Merger discussed under "Risk Factors" in the accompanying
Proxy Statement/Prospectus. Please note that one of the conditions to
Cabletron's obligation to consummate the Merger (unless such condition is
waived by Cabletron) is the requirement that the holders of at least 95% of
the Yago Stock shall have consented in writing to approve the Merger.
The approval and adoption of the Plan of Merger will require the written
consent of the holders of a majority of the outstanding shares of Yago Common
Stock and Yago Preferred Stock, acting together as a class, the written
consent of the holders of two-thirds of the outstanding shares of Yago Series
A Preferred Stock, acting as a separate class, and the written consent of the
holders of two-thirds of the outstanding shares of Yago Series B Preferred
Stock, acting as a separate class. The approval of the conversion of all the
shares of Yago Series A Preferred Stock and Yago Series B Preferred Stock will
require the written consent of the holders of two-thirds of the Yago Series A
Preferred Stock and Yago Series B Preferred Stock, respectively.
The management of Yago appreciates the support and confidence that you have
given us. We are very enthusiastic about our acquisition by Cabletron and we
believe it is in the best interest of our stockholders and employees.
Sincerely,
Piyush Patel
President
Sunnyvale, California
<PAGE>
YAGO SYSTEMS, INC.
PROXY STATEMENT
----------------
CABLETRON SYSTEMS, INC.
PROSPECTUS
This Proxy Statement and Prospectus ("Proxy Statement/Prospectus") is being
furnished to the holders of (i) Common Stock, par value $.001 per share ("Yago
Common Stock"), (ii) Series A Preferred Stock, par value $.001 per share (the
"Yago Series A Preferred Stock") and (iii) Series B Preferred Stock, par value
$.001 per share (the "Yago Series B Preferred Stock" and together with the
Yago Series A Preferred Stock, the "Yago Preferred Stock") of Yago Systems,
Inc., a Delaware corporation ("Yago"), in connection with the solicitation of
written consents by Yago from the holders of Yago Common Stock and Yago
Preferred Stock. The last day upon which your written consents may be
submitted to Yago is March 23, 1998; Yago, however, may consummate the Merger
prior to such date if the requisite consents to approve the Merger are
obtained. Written consents should be returned to Pillsbury Madison & Sutro
LLP, Attention: Colin Morris, 2550 Hanover Street, Palo Alto, California 94304
(Facsimile: 650-233-4545) (Telephone: 650-233-4665). The Yago Common Stock,
Yago Series A Preferred Stock and Yago Series B Preferred Stock are referred
to collectively in this Proxy Statement/Prospectus as the "Yago Stock."
This Proxy Statement/Prospectus also constitutes the Prospectus of Cabletron
Systems, Inc., a Delaware corporation ("Cabletron"), with respect to the
issuance of up to 11,600,000 shares of Cabletron common stock, par value $.01
per share ("Cabletron Common Stock"), to the stockholders of Yago in
connection with the Merger described below, including shares issued prior to
the consummation of the Merger upon exercise of outstanding options.
Stockholders of Cabletron will not be voting or consenting in writing to
approve the Merger. Cabletron Common Stock is traded on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol "CS."
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Cabletron Merger, Inc., a Delaware corporation and a wholly owned
subsidiary of Cabletron ("Merger Sub"), with and into Yago, pursuant to an
Agreement and Plan of Merger dated as of January 14, 1998, as amended (the
"Plan of Merger") by and among Cabletron, Merger Sub and Yago. Upon
consummation of the Merger, Yago will become a wholly owned subsidiary of
Cabletron. Consummation of the Merger is subject to various conditions,
including (i) the approval and adoption of the Plan of Merger by the holders
of a majority of the outstanding shares of Yago Common Stock and Yago
Preferred Stock, acting together as a class, (ii) the approval and adoption of
the Plan of Merger by the holders of two-thirds of the outstanding shares of
Yago Series A Preferred Stock, (iii) the approval and adoption of the Plan of
Merger by the holders of two-thirds of the outstanding shares of Yago Series B
Preferred Stock, (iv) the approval and adoption of the Plan of Merger by the
holders of at least 95% of the Yago Stock and (v) the conversion of the Yago
Preferred Stock into Yago Common Stock.
This Proxy Statement/Prospectus and the accompanying form of written consent
are first being mailed to stockholders of Yago on or about March 10, 1998.
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. YAGO STOCKHOLDERS ARE STRONGLY
URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS
ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS" STARTING
ON PAGE 9.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Proxy Statement/Prospectus is March 10, 1998.
<PAGE>
All information contained in this Proxy Statement/Prospectus with respect to
Merger Sub and Cabletron has been provided by Cabletron. All information
contained in this Proxy Statement/Prospectus with respect to Yago has been
provided by Yago.
IN ACCORDANCE WITH THE SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(THE "DGCL") HOLDERS OF YAGO STOCK ARE ENTITLED TO DISSENTERS' RIGHTS IN
CONNECTION WITH THE MERGER. SEE "THE MERGER--DISSENTERS' RIGHTS."
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES
OFFERED BY THIS PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN
ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR INCORPORATED
BY REFERENCE SINCE THE DATE HEREOF.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................................... 1
SUMMARY..................................................................... 2
THE COMPANIES............................................................. 2
The Business of Cabletron............................................... 2
General................................................................ 2
Recent Developments.................................................... 2
The Business of Yago.................................................... 3
THE MERGER................................................................ 3
Conversion of Shares; Options; Contingent Shares........................ 3
Exchange of Certificates; Assumption of Options......................... 4
Listing................................................................. 5
Conditions to the Merger................................................ 5
Escrow Agreement........................................................ 5
Termination............................................................. 5
YAGO STOCKHOLDER ACTIONS.................................................. 5
Last Date for Submission................................................ 5
Record Date; Shares Entitled to Consent in Writing...................... 5
Purposes of the Written Consents........................................ 6
Consent Required........................................................ 6
CONVERSION OF THE YAGO PREFERRED STOCK.................................... 6
RECOMMENDATION OF YAGO'S BOARD OF DIRECTORS............................... 6
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................ 7
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 7
ANTICIPATED ACCOUNTING TREATMENT.......................................... 8
COMPARATIVE RIGHTS OF STOCKHOLDERS........................................ 8
RISK FACTORS.............................................................. 8
EMPLOYMENT AGREEMENTS..................................................... 8
DISSENTERS' RIGHTS........................................................ 8
RISK FACTORS................................................................ 9
SELECTED HISTORICAL FINANCIAL DATA.......................................... 15
Cabletron................................................................. 15
Yago...................................................................... 15
COMPARATIVE PER SHARE DATA.................................................. 16
MARKET PRICE PER SHARE DATA................................................. 17
Cabletron................................................................. 17
Yago...................................................................... 17
Dividend Policy........................................................... 17
Recent Closing Prices..................................................... 17
YAGO........................................................................ 18
Last Date for Submission.................................................. 18
Matters To Be Acted Upon.................................................. 18
Requisite Consent; Record Date............................................ 18
Written Consents.......................................................... 19
</TABLE>
i
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<TABLE>
<S> <C>
THE MERGER.................................................................. 20
General................................................................... 20
Conversion of Shares...................................................... 20
Conversion of Yago Options................................................ 20
Contingent Shares......................................................... 20
Repurchase Rights......................................................... 21
Exchange of Certificates.................................................. 22
Notification Regarding Yago Options....................................... 23
Effective Time............................................................ 23
Background of the Merger; Recommendation of Yago's Board of Directors..... 23
Yago's Reasons for the Merger............................................. 24
Cabletron's Reasons for the Merger........................................ 25
Certain Considerations.................................................... 26
Employment Agreements..................................................... 26
Interests of Certain Persons in the Merger................................ 26
Certain Federal Income Tax Consequences................................... 27
Anticipated Accounting Treatment.......................................... 29
Governmental Filings...................................................... 29
Certain Federal Securities Law Consequences; Affiliate Letters............ 29
Stock Exchange Listing.................................................... 29
Dividends................................................................. 29
Dissenters' Rights........................................................ 29
Appraisal Rights.......................................................... 30
CONVERSION OF THE YAGO PREFERRED STOCK...................................... 32
THE PLAN OF MERGER.......................................................... 33
Representations and Warranties............................................ 33
Conduct of Cabletron's and Yago's Business Prior to the Merger............ 33
No Solicitation........................................................... 35
Conditions to the Merger.................................................. 35
Termination............................................................... 37
Fees and Expenses......................................................... 37
Indemnification........................................................... 37
Escrow.................................................................... 39
BUSINESS OF CABLETRON....................................................... 41
General................................................................... 41
Recent Product Line Acquisitions.......................................... 41
Fiscal 1996 Acquisitions.................................................. 42
Key Personnel............................................................. 42
Products and Services..................................................... 42
Distribution and Marketing................................................ 44
Customers................................................................. 45
Research and Development.................................................. 45
Supply of Components...................................................... 45
Manufacturing............................................................. 45
Intellectual Property..................................................... 45
Backlog................................................................... 46
Inventory and Working Capital............................................. 46
Employees................................................................. 46
Properties................................................................ 46
Legal Proceedings......................................................... 47
</TABLE>
ii
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<TABLE>
<S> <C>
CABLETRON--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION...................................................... 48
Nine Months Ended November 30, 1997 Compared to Nine Months Ended
November 30, 1996....................................................... 49
Fiscal Years Ended February 28, 1997, February 29, 1996 and February 28,
1995.................................................................... 50
Liquidity and Capital Resources.......................................... 52
Quarterly Results and Seasonality........................................ 53
BUSINESS OF YAGO........................................................... 55
General.................................................................. 55
The Market............................................................... 55
Yago Solutions........................................................... 55
Yago Products............................................................ 55
Marketing and Sales...................................................... 56
Product Development...................................................... 56
Competition.............................................................. 56
Employees................................................................ 56
Facilities............................................................... 56
YAGO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 57
General.................................................................. 57
Results of Operations.................................................... 57
Liquidity and Capital Resources.......................................... 57
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
CABLETRON................................................................. 58
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF YAGO... 59
MANAGEMENT--CABLETRON...................................................... 60
Directors and Executive Officers of Cabletron............................ 60
Executive Compensation................................................... 61
Director Compensation.................................................... 62
Employment Agreements.................................................... 62
DESCRIPTION OF CAPITAL STOCK OF CABLETRON.................................. 63
Common Stock............................................................. 63
Preferred Stock.......................................................... 63
COMPARISON OF STOCKHOLDER RIGHTS........................................... 63
Voting Rights............................................................ 63
Voting Requirements and Quorums for Stockholder Meetings................. 64
Stockholder Meetings..................................................... 64
Amendments to Certificate of Incorporation............................... 64
Bylaws................................................................... 65
Number of Directors...................................................... 65
Board Classification..................................................... 65
Nomination and Election of Directors..................................... 65
Removal of Directors..................................................... 66
Newly Created Directorships and Vacancies................................ 66
Vote Required for Mergers and Dissolutions............................... 67
Anti-takeover Provisions................................................. 68
Fiduciary Duties of Directors............................................ 69
Limitation on Directors' Liability....................................... 69
Indemnification.......................................................... 69
Dividends and Other Distributions........................................ 69
</TABLE>
iii
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<TABLE>
<S> <C>
Stockholder Derivative Suits.............................................. 70
Appraisal Rights.......................................................... 70
Inspection of Books and Records........................................... 71
YAGO 1998 STOCK OPTION PLAN................................................. 72
LEGAL MATTERS............................................................... 76
EXPERTS..................................................................... 76
INDEX TO FINANCIAL STATEMENTS............................................... F-1
ANNEXES
A. Agreement and Plan of Merger........................................... A-1
B. Section 262 of the DGCL................................................ B-1
</TABLE>
iv
<PAGE>
AVAILABLE INFORMATION
Cabletron is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
Regional Offices located at: Seven World Trade Center, Suite 1300, New York,
New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained
from the Public Reference Facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, Cabletron is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Cabletron Common Stock is listed on the
NYSE, and such reports, proxy statements and other information concerning
Cabletron may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Cabletron has filed with the Commission a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Proxy Statement/Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in this Proxy
Statement/Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Items and information omitted from this Proxy
Statement/Prospectus but contained in the Registration Statement may be
inspected and copied at the Public Reference Facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
TRADEMARKS
Cabletron Systems and design, IMT, MMAC Plus, Synthesis, SmartSwitch, and DNI
are registered trademarks of Cabletron; MMAC, SPECTRUM, ES/1 ATX, FastNet, and
The Complete Networking Solution are trademarks of Cabletron. Yago, MSR 8000,
MSR 16000, CoreWatch and PowerCast are trademarks of Yago. Other trademarks
used in this Proxy Statement/Prospectus are the property of their respective
owners.
1
<PAGE>
SUMMARY
Reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained in, attached to or incorporated by
reference in this Proxy Statement/Prospectus and the Annexes hereto. Yago
stockholders are urged to read this Proxy Statement/Prospectus and the Annexes
in their entirety.
THE COMPANIES
THE BUSINESS OF CABLETRON
General
Cabletron develops, manufactures, markets, installs and supports a wide range
of standards-based local area network ("LAN") and wide area network ("WAN")
connectivity hardware and software products including intelligent switches and
hubs, remote access devices, and sophisticated management software. Cabletron
delivers products to address the full range of networking technologies,
including Ethernet, Fast Ethernet, Gigabit Ethernet, token ring, fiber
distributed data interface (FDDI), asynchronous transfer mode (ATM), integrated
services digital network (ISDN) and frame relay. Cabletron's networking
strategy, known as Synthesis(R), is a strategic framework which combines
infrastructure products and technologies, automated management tools, and
support services. Synthesis allows the creation of a network with enhanced
performance, capabilities, manageability, and reliability and a lower overall
cost structure. Cabletron's core products include the SmartSwitch hardware
product family and Spectrum network management software. The SmartSwitch
product family, built upon Cabletron's proprietary SmartSwitch ASICs and
architecture, includes the SmartSwitch 9000 product line, Cabletron's
enterprise-level backbone switching chassis and modules, the SmartSwitch 6000
product line, Cabletron's wiring closet-level solution, and the SmartSwitch
2200, a standalone, workgroup-level switch. The Company's hardware products
also include the MMAC, a wiring closet smart hub, and other Ethernet, ISDN, and
frame relay products. All of Cabletron's intelligent networking products are
managed by SPECTRUM(R), Cabletron's sophisticated enterprise-wide network
management system. Cabletron also produces and supports other network products,
such as adapter cards, other interconnection equipment, wiring cables, and file
server products, and provides a wide range of networking services. Cabletron
believes that its broad product line and its ability to provide full service
capabilities enable it to offer its customers "The Complete Networking
Solution."(TM)
Cabletron was incorporated in Delaware in 1988. Cabletron's principal
executive offices are located at 35 Industrial Way, Rochester, New Hampshire
03867 and its telephone number is (603) 332-9400.
Recent Developments
Effective February 7, 1998 Cabletron consummated the acquisition of certain
of the assets of the Network Products Business ("NPB") of Digital Equipment
Corporation ("Digital") pursuant to an asset purchase agreement (the "Asset
Purchase Agreement") dated November 24, 1997, as amended, by and among
Cabletron, Ctron Acquisition Co., Inc., a wholly owned subsidiary of Cabletron,
and Digital. The NPB develops and supplies a wide range of data networking
hardware and software. The purchase price for the acquisition was approximately
$430.0 million, before closing adjustments, consisting of cash and product
credits. The closing on February 7, 1998 extended to the assets and personnel
located in the United States and the inventory worldwide. The remaining
international assets and personnel are expected to be transferred as issues in
individual countries are resolved. The audited and unaudited Statements of
Assets Sold and Statements of Revenue and Direct Operating Expenses of the NPB
and the Notes thereto, as well as the Unaudited Pro Forma Combined Financial
Statements of Cabletron related thereto are included herein beginning on page
F-29.
Cabletron and Digital have also entered into the Reseller Agreement pursuant
to which Digital designated Cabletron as its Strategic Network Products Partner
and was appointed by Cabletron as a reseller of certain Cabletron products
(including the products previously sold by the NPB), Cabletron designated
Digital as its Strategic Network Services Partner, and Cabletron agreed to sell
and Digital agreed to purchase, for resale and internal use, certain minimum
volumes of products during the term of the Reseller Agreement, which extends
2
<PAGE>
through June 30, 2001. The minimum volumes are subject to downward or upward
adjustment in certain instances. During the term of the Reseller Agreement,
Cabletron will operate the NPB under the name "DIGITAL Network Products Group,
a Cabletron Systems, Inc. Company."
On September 1, 1997, S. Robert Levine resigned as President, Chief Executive
Officer and director of Cabletron and Donald B. Reed was appointed to the
positions of President, Chief Executive Officer and director of Cabletron. On
the same date, Craig R. Benson resigned as Chief Operating Officer of
Cabletron. Mr. Benson remains the Chairman of the Board of Directors of
Cabletron.
THE BUSINESS OF YAGO
Yago designs and develops wire-speed routing and Layer-4 switching products
and solutions. Yago's products under development are intended to provide large
scaling capabilities, extensive security mechanisms and user-friendly, device-
level network management for the enterprise and ISP backbone markets that
employ Gigabit Ethernet technology.
Yago is a Delaware corporation founded in September, 1996. Its offices are
located at 795 Vaqueros Avenue, Sunnyvale, CA 94086, telephone (408) 774-2900.
THE MERGER
The Plan of Merger provides for the merger of Merger Sub with and into Yago,
with the result that Yago will become a wholly owned subsidiary of Cabletron.
For the Merger to be consummated it must be approved by the Yago stockholders
and the other conditions specified in the Plan of Merger must be satisfied or
waived. See "The Merger."
Conversion of Shares; Options; Contingent Shares
Upon the consummation of the Merger, each share of Yago Common Stock issued
and outstanding immediately prior to the Merger will be automatically converted
into the right to receive that number of shares of Cabletron Common Stock equal
to a fraction (the "Initial Exchange Ratio"), the numerator of which is (i)
6,100,000 and the denominator of which is the sum of (i) the number of shares
of Yago Common Stock outstanding immediately prior to the Merger and (ii) the
number of shares of Yago Common Stock issuable upon the conversion or exercise
of all options, warrants, preferred stock and other securities of Yago
convertible into or exercisable for shares of Yago Common Stock that are
outstanding immediately prior to the Merger (excluding, however, all such
securities owned by Cabletron and the shares of Yago Common Stock issuable upon
exercise of options granted under the Yago Systems, Inc. 1998 Stock Option Plan
(the "1998 Stock Option Plan")). Based upon the capitalization of Yago on
February 1, 1998, it is currently anticipated that the Initial Exchange Ratio
will be approximately .45510932 of a share of Cabletron Common Stock. At the
Effective Time (as defined herein), each holder of Yago Common Stock shall be
entitled to receive a number of shares of Cabletron Common Stock equal to the
product (rounded up to the nearest whole number) of (i) the number of shares of
Yago Common Stock exchanged by such stockholder and (ii) the Initial Exchange
Ratio. Subject to the issuance of the Contingent Shares (as defined below),
Cabletron will exchange approximately 6,100,000 shares of Cabletron Common
Stock for all the shares of Yago Common Stock outstanding immediately prior to
the Merger, including shares of Yago Common Stock issued upon the conversion of
the Yago Preferred Stock and issuable upon the conversion or exercise of any
option, warrant, preferred stock or other security convertible into or
exercisable for shares of Yago Stock that are outstanding immediately prior to
the Merger (excluding, however, all such securities owned by Cabletron and the
shares of Yago Common Stock issuable upon exercise of options granted under the
1998 Stock Option Plan). Based upon the capitalization of Yago and Cabletron as
of February 1, 1998, the stockholders of Yago will own Cabletron Common Stock
representing less than 4% of the Cabletron Common Stock outstanding immediately
after consummation of the Merger. See "The Merger--Conversion of Shares."
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Upon consummation of the Merger, each then outstanding Yago Option will be
assumed by Cabletron and will automatically be converted into an option to
purchase the number of shares of Cabletron Common Stock (rounded down to the
nearest whole number) determined by multiplying the number of shares of Yago
Common Stock subject to the Yago Option by the Initial Exchange Ratio, at an
exercise price per share equal to the exercise price per share of Yago Common
Stock purchasable pursuant to the Yago Option divided by the Initial Exchange
Ratio. Cabletron will file a Registration Statement on Form S-8 with the
Commission with respect to the shares of Cabletron Common Stock issuable upon
exercise of the assumed Yago Options. As of the date of this Proxy
Statement/Prospectus, 4,616,532 shares of Yago Common Stock were subject to
outstanding Yago Options. Upon the assumption of such Yago Options by Cabletron
upon consummation of the Merger, approximately 2,101,026 shares of Cabletron
Common Stock will be subject to such options. See "The Merger--Conversion of
Yago Options."
On the Eighteen Month Anniversary (as defined herein) of the Merger or, if
earlier, upon a Change of Control (as defined herein) (each an "Issuance
Event"), the Yago stockholders will be entitled to receive, for each share of
Cabletron Common Stock received in the Merger or issued after the Merger upon
exercise of the Yago Options (other than Yago Options granted under the 1998
Stock Option Plan) assumed by Cabletron pursuant to the Plan of Merger, an
additional number of shares (the "Contingent Shares") of Cabletron Common Stock
equal to a fraction (the "Contingent Exchange Ratio") the numerator of which is
(i) $35.00 reduced (but not below zero) by (ii) the average of daily last sales
prices of the Cabletron Common Stock for a specified period prior to such
Issuance Event (the "Average Price"), and the denominator of which is equal to
such Average Price, subject to adjustment as set forth below. In addition, each
Yago Option (other than Yago Options granted under the 1998 Stock Option Plan)
assumed by Cabletron shall be amended such that (x) the number of shares of
Cabletron Common Stock issuable thereunder shall be increased by an amount
equal to the product (rounded down to the nearest whole number) of (A) the
remaining number of shares of Cabletron Common Stock issuable upon exercise in
full of such Yago Option immediately prior to such Issuance Event and (B) the
Contingent Exchange Ratio and (y) the exercise price for each share of
Cabletron Common Stock issuable thereunder shall be reduced to equal (A) the
aggregate exercise price for the remaining shares of Cabletron Common Stock
issuable upon exercise in full of such Yago Option immediately prior to such
Issuance Event divided by (B) the sum of the number of shares of Cabletron
Common Stock issuable upon exercise in full of such Yago Option immediately
prior to such Issuance Event and the number of shares of Cabletron Common Stock
calculated in accordance with clause (x) of this sentence. In the event that
the aggregate number of Contingent Shares issuable in connection with an
Issuance Event would exceed 5,500,000 shares of Cabletron Common Stock, then
the Contingent Exchange Ratio shall be reduced such that the total number of
Contingent Shares issuable upon such Issuance Event equals 5,500,000 shares of
Cabletron Common Stock. Further, in no event shall Contingent Shares be issued
in respect of any share of Cabletron Common Stock repurchased pursuant to the
Repurchase Rights (defined herein) in favor of Cabletron. See " The Merger--
Contingent Shares."
Exchange of Certificates; Assumption of Options
Within two business days after the Effective Time, a letter of transmittal
with instructions will be mailed to each Yago stockholder for use in exchanging
Yago Stock certificates for Cabletron Common Stock certificates. See "The
Merger--Exchange of Certificates." HOLDERS OF YAGO STOCK CERTIFICATES SHOULD
NOT SUBMIT THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER
OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO ABOVE.
Following the Effective Time, Cabletron will issue to each person who,
immediately prior thereto, was a holder of an outstanding Yago Option, a
document evidencing the assumption of such Yago Option by Cabletron. Such
assumption will be automatic and no action will be required on the part of the
option holder to convert such holder's Yago Option into an option to purchase
shares of Cabletron Common Stock. See "The Merger--Notification Regarding Yago
Options."
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Listing
The shares of Cabletron Common Stock to be issued in the Merger will be
authorized for listing and trading on the NYSE.
Conditions to the Merger
The obligations of Cabletron and Yago to consummate the Merger are subject to
the satisfaction of certain conditions, including, but not limited to,
obtaining requisite Yago stockholder approval, the conversion of Yago Preferred
Stock into Yago Common Stock, certain employees of Yago having entered into
employment agreements with Cabletron, holders of at least 95% of the Yago Stock
entitled to vote on the Merger having consented in writing to approve the
Merger, the absence of any injunction prohibiting consummation of the Merger,
the continuing accuracy of the other party's representations and warranties
made in the Plan of Merger on and as of the Effective Time, the other party's
performance of its covenants and the receipt of certain legal opinions to the
effect that the Merger qualifies as a tax-free reorganization. See "The
Merger--Certain Federal Income Tax Consequences" and "The Plan of Merger--
Conditions to the Merger."
Escrow Agreement
Pursuant to an Escrow Agreement to be entered into by Cabletron, Piyush
Patel, as a representative of the holders of Yago Common Stock (the
"Stockholders Representative"), and First Trust of California, N.A. (the
"Escrow Agent") (the "Escrow Agreement"), approximately ten percent (10%) of
the shares of Cabletron Common Stock which the stockholders of Yago are
initially entitled to receive in the Merger will be withheld and deposited in
escrow for eighteen months and will be held and disposed of in accordance with
the terms of the Escrow Agreement. Such shares will be available to reimburse
Cabletron for breaches of representations, warranties or covenants made by Yago
in the Plan of Merger and certain other obligations in the Plan of Merger. See
"The Plan of Merger--Indemnification" and "--Escrow."
Termination
The Plan of Merger is subject to termination by mutual written consent of
Cabletron and Yago and at the option of either Cabletron or Yago if the Merger
is not consummated before March 31, 1998. The Plan of Merger is also subject to
termination upon the occurrence of certain other events. See "The Plan of
Merger--Termination."
YAGO STOCKHOLDER ACTIONS
Last Date for Submission
The last date upon which written consents may be submitted to Yago is March
23, 1998; Yago, however, may consummate the Merger prior to such date if the
requisite consents to approve the Merger are obtained. Written consents should
be delivered to Pillsbury Madison & Sutro LLP, Attention: Colin Morris, 2550
Hanover Street, Palo Alto, California 94304 (Facsimile: 650-233-4545)
(Telephone 650-233-4665).
Record Date; Shares Entitled to Consent in Writing
Holders of record of shares of Yago Stock at the close of business on January
15, 1998 (the "Yago Record Date") are entitled to consent in writing to the
proposals described in this Proxy Statement/Prospectus. On the Yago Record
Date, there were outstanding 10,688,000 shares of Yago Common Stock, 4,266,000
shares of Yago Series A Preferred Stock and 2,578,948 shares of Yago Series B
Preferred Stock. Holders of shares of Yago Stock are entitled to consent in
writing for each such share held by the holder on (i) the proposal to approve
and adopt the Plan of Merger, the Merger and the transactions contemplated
thereby and (ii) the proposal to adopt and approve the 1998 Stock Option Plan.
In addition, holders of record of shares of Yago Series A Preferred
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Stock and Yago Series B Preferred Stock at the close of business on the Yago
Record Date are entitled to consent in writing for each share of Yago Series A
Preferred Stock and Yago Series B Preferred Stock, respectively, held by the
holder on the proposal to convert each share of Yago Series A Preferred Stock
and Yago Series B Preferred Stock, respectively, into one share of Yago Common
Stock. See "Yago Stockholder Actions--Requisite Consent; Record Date."
Purposes of the Written Consents
The holders of Yago Stock are being asked to consent in writing to (i) the
proposal to approve and adopt the Plan of Merger pursuant to which, among other
things, Merger Sub will be merged with and into Yago and Yago will become a
wholly owned subsidiary of Cabletron, and each outstanding share of Yago Common
Stock will be converted into the right to receive (A) shares of Cabletron
Common Stock at the Initial Exchange Ratio and (B) upon an Issuance Event,
shares of Cabletron Common Stock at the Contingent Exchange Ratio and (ii) the
proposal to adopt and approve the 1998 Stock Option Plan. In addition, the
holders of Yago Series A Preferred Stock and Yago Series B Preferred Stock are
being asked to consent in writing to a proposal to convert immediately prior to
the Merger each outstanding share of Yago Series A Preferred Stock and Yago
Series B Preferred Stock, respectively, into one share of Yago Common Stock.
See "Yago Stockholder Actions--Matters To Be Acted Upon."
Consent Required
The approval and adoption by the Yago stockholders of the Plan of Merger, the
Merger and the transactions contemplated thereby will require the written
consent of the holders of a majority of the outstanding shares of Yago Common
Stock and Yago Preferred Stock, acting together as a class, the written consent
of the holders of two-thirds of the outstanding shares of the Series A Yago
Preferred Stock, acting separately as a class, and the written consent of the
holders of two-thirds of the Series B Preferred Stock, acting separately as a
class. See "Yago Stockholder Actions--Requisite Consent; Record Date." In
addition, Cabletron has required as a condition to its obligation to consummate
the Merger that holders of at least 95% of the Yago Stock entitled to vote on
the Merger shall have consented in writing to approve the Merger. The approval
and adoption of the 1998 Stock Option Plan will require the written consent of
the holders of a majority of the Yago Stock.
The conversion of each outstanding share of Yago Series A Preferred Stock
into Yago Common Stock will require the written consent of the holders of two-
thirds of the outstanding shares of the Yago Series A Preferred Stock, acting
separately as a class. The conversion of each outstanding share of Yago Series
B Preferred Stock into Yago Common Stock will require the written consent of
the holders of two-thirds of the outstanding shares of the Yago Series B
Preferred Stock, acting separately as a class. See "Yago Stockholder Actions--
Requisite Consent; Record Date."
CONVERSION OF THE YAGO PREFERRED STOCK
It is a condition to the consummation of the Merger that each share of Yago
Series A Preferred Stock and Yago Series B Preferred Stock be converted into
Yago Common Stock prior to the Effective Time. Each share of Yago Series A
Preferred Stock and Yago Series B Preferred Stock may be converted into Yago
Common Stock at any time, at the election of the holder. In addition, all of
the Yago Series A Preferred Stock and Yago Series B Preferred Stock will
automatically convert into Yago Common Stock upon the written consent of the
holders of two-thirds of the outstanding shares of Yago Series A Preferred
Stock and Yago Series B Preferred Stock, respectively.
RECOMMENDATION OF YAGO'S BOARD OF DIRECTORS
The Board of Directors of Yago has unanimously approved the Plan of Merger,
the Merger and the transactions contemplated thereby, and recommends that
holders of Yago Stock consent in writing to approve
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and adopt the Plan of Merger, the Merger and the transactions contemplated
thereby. See "The Merger--Background of the Merger; Recommendation of Yago's
Board of Directors." The Board of Directors has also unanimously approved the
1998 Stock Option Plan and recommends that holders of the Yago Stock consent in
writing to approve and adopt the 1998 Stock Option Plan. The Board of Directors
of Yago also recommends that holders of Yago Series A Preferred Stock and Yago
Series B Preferred Stock consent in writing to the conversion of the Yago
Series A Preferred Stock and Yago Series B Preferred Stock, respectively, into
Yago Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Yago Board of Directors with respect
to the Plan of Merger, the Merger and the transactions contemplated thereby,
the Yago stockholders should be aware that certain directors and officers of
Yago have entered into employment agreements with Cabletron with respect to
employment following the Merger. The employment arrangements present these
directors and officers with potential conflicts of interest. See "The Merger--
Interests of Certain Persons in the Merger," and "--Employment Agreements."
In addition, as of the Yago Record Date, Cabletron owned 3,732,750 shares, or
87.5%, of the Yago Series A Preferred Stock, and 789,474 shares, or 30.6%, of
the Yago Series B Preferred Stock. Assuming the conversion of the Yago
Preferred Stock and the exercise of all outstanding warrants, Cabletron owned
4,522,224 shares, or 25.5%, of the Yago Common Stock. The directors and
officers of Yago and their affiliates (other than Cabletron) owned 4,900,000
shares, or 45.8%, of the outstanding Yago Common Stock and 1,789,474 shares, or
69.4%, of the Yago Series B Preferred Stock. Assuming the conversion of the
Yago Preferred Stock and the exercise of all outstanding warrants, the
directors and officers of Yago and their affiliates (other than Cabletron)
owned 6,689,474 shares, or 37.8%, of Yago Common Stock. One of the members of
the Board of Directors of Yago is also an officer of Cabletron. In addition,
certain holders of the Yago Common Stock, Yago Series A Preferred Stock and
Yago Series B Preferred Stock have executed an irrevocable proxy in favor of
Cabletron authorizing Cabletron to sign written consents for all the
outstanding shares of Yago Stock over which he, she or it has voting control in
favor of the approval and adoption of the Plan of Merger. After giving effect
to the irrevocable proxies and including its own equity interest in Yago,
Cabletron has the right to sign written consents for (i) 4,900,000 shares, or
45.8%, of the outstanding Yago Common Stock, (ii) 3,732,750 shares, or 87.5%,
of the Yago Series A Preferred Stock and (iii) 2,578,948 shares, or 100%, of
the Yago Series B Preferred Stock. Assuming the conversion of the Yago
Preferred Stock and the exercise of all outstanding warrants, Cabletron has the
right to sign written consents for 11,211,698 shares, or 63.3%, of the Yago
Common Stock. See "The Merger--Interests of Certain Persons in the Merger" and
"Principal Stockholders of Yago."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The transaction effected by the Merger is intended to constitute a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and, accordingly, no gain or loss will be recognized for
federal income tax purposes by a holder of Yago Common Stock upon receipt of
Cabletron Common Stock in exchange for shares of Yago Common Stock pursuant to
the Merger. It is a condition to the Merger that Pillsbury Madison & Sutro LLP
issue an opinion to the effect that the transaction effected by the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
However, Pillsbury Madison & Sutro LLP is not expected to express any opinion
on the federal income tax classification of the transaction effected by the
Merger in the event Contingent Shares are issued prior to the Eighteen Month
Anniversary. Such opinion will be based on various representations,
qualifications and assumptions. Holders of Yago Stock are urged to consult
their own tax advisors concerning the specific tax consequences of the Merger
to them, including any foreign, state or local tax consequences of the Merger.
See "The Merger--Certain Federal Income Tax Consequences."
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ANTICIPATED ACCOUNTING TREATMENT
The transaction effected by the Merger is expected to be accounted for under
the purchase method of accounting in accordance with generally accepted
accounting principles. See "The Merger--Anticipated Accounting Treatment."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of stockholders of Yago are currently governed by the DGCL, Yago's
Restated Certificate of Incorporation and Yago's Bylaws. Upon consummation of
the Merger, stockholders of Yago will become stockholders of Cabletron, and
although their rights as stockholders of Cabletron generally will still be
governed by the DGCL, the Yago stockholders will at such time also become
subject to Cabletron's Restated Certificate of Incorporation and Bylaws. See
"Comparison of Stockholder Rights" for a discussion of various differences
between the Restated Certificate of Incorporation and Bylaws of Yago and the
Restated Certificate of Incorporation and Bylaws of Cabletron.
RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE PLAN OF MERGER, THE MERGER AND THE
TRANSACTIONS CONTEMPLATED THEREBY, YAGO STOCKHOLDERS SHOULD CAREFULLY REVIEW
AND CONSIDER THE INFORMATION CONTAINED BELOW UNDER THE CAPTION "RISK FACTORS."
EMPLOYMENT AGREEMENTS
It is a condition to consummation of the Merger that certain specified
employees of Yago enter into employment agreements with Cabletron, that such
agreements be in full force and effect at the Effective Time and that such
employees be employed by Yago immediately prior to the Effective Time. See "The
Merger--Employment Agreements."
DISSENTERS' RIGHTS
Holders of Yago Stock who object to the Merger may, under certain
circumstances and by following procedures prescribed by the DGCL, exercise
dissenters' rights and receive cash for their shares of Yago Stock in an amount
equal to the fair value of the Yago Stock as determined pursuant to such
procedures. The failure of a dissenting stockholder of Yago to follow the
appropriate procedures will result in the termination or waiver of such rights.
In the event that a Yago stockholder who attempts to exercise dissenters'
rights should fail to make a proper demand for payment or otherwise lose his or
her status as a dissenting stockholder, such Yago stockholder shall be entitled
to receive from Cabletron the same number of shares of Cabletron Common Stock
that such Yago stockholder would have received in the Merger if he or she had
not attempted to exercise dissenters' rights. See "The Merger--Dissenters'
Rights."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING CABLETRON
AND ITS BUSINESS. YAGO STOCKHOLDERS SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS PRIOR TO APPROVING THE MERGER. THIS PROXY STATEMENT/PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
CABLETRON'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY CABLETRON ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO
BELOW.
Competition; Margin. The data networking industry is intensely competitive
and subject to increasing consolidation. Competition in the data networking
industry has increased in recent periods, and Cabletron expects competition to
continue to increase significantly in the future from its current competitors,
as well as from potential competitors that may enter Cabletron's existing or
future markets. Cabletron's competitors include many large domestic and
foreign companies, as well as emerging companies attempting to sell products
to specialized markets such as those addressed by Cabletron. Cabletron's
primary competitors in the data networking industry are Cisco Systems, Inc.,
Bay Networks, Inc. and 3Com Corporation. Several large telecommunications
equipment companies, including Lucent Technologies, Inc., Nokia Corp. and
Northern Telecom Ltd, have begun to compete in the data networking industry
and have recently made investments in or acquired several smaller data
networking companies. Companies in the data networking industry compete upon
the basis of price, technology, and brand recognition. Increased competition
could result in price reductions, reduced margins and loss of market share,
any or all of which could materially and adversely affect Cabletron's
business, financial condition, and operating results and increase fluctuations
in operating results. Competitors may introduce new or enhanced products that
offer greater performance or functionality than Cabletron's products. There
can be no assurance that Cabletron will be successful in selecting,
developing, manufacturing and marketing new products or enhancing its existing
products or that Cabletron will be able to respond effectively to
technological changes, new standards or product announcements by competitors.
Any failure to do so may have a material adverse effect on Cabletron's
business, financial condition and results of operations. As the data
networking industry has grown and matured, customers purchasing decisions have
been increasingly influenced by brand recognition. If Cabletron is unable to
develop competitive brand recognition, Cabletron's business may be adversely
affected.
In addition to the effects of competition, Cabletron's margins may also
decrease as a result of a shift in product mix toward lower margin products,
increased sales through lower margin reseller sales channels, increased
component costs and increased expenses, including increased research and
development and sales, general and administrative costs, which may be
necessary in future periods to meet the demands of greater competition. For
example, as a result of the acquisition of the NPB, Cabletron expects a higher
percentage of its sales to be made through resellers, which may have the
effect of reducing Cabletron's margin on those sales, as well as, to a lesser
extent, Cabletron's overall margins. Margins in any given period may be
adversely affected by additional factors. See "Risk Factors--Fluctuations in
Operating Results."
Cabletron's current and potential competitors have pursued and are
continuing to pursue a strategy of acquiring data networking companies
possessing advanced networking technologies. The acquisition of these
companies allows Cabletron's competitors to offer new products without the
lengthy time delays associated with internal product development. As a
consequence, competitors are able to more quickly meet the demand for advanced
networking capabilities, as well as for so-called "end-to-end" networking
solutions. These acquisitions also permit potential competitors, such as
telecommunications companies, who lack data networking products
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and technologies, to more quickly enter data networking markets. The greater
resources of the competitors engaged in these acquisitions may permit them to
accelerate the development and commercialization of new competitive products
and the marketing of existing competitive products to their larger installed
bases. There is significant competition among Cabletron and its competitors
for the acquisition of data networking companies possessing advanced
technologies. As a consequence of this competition, as well as other factors,
the prices paid to acquire such companies is typically extremely high relative
to the assets and sales of such companies. The greater resources of
Cabletron's current and potential competitors will enable them to compete more
effectively for the acquisition of such companies. In addition to acquiring
other companies, Cabletron's competitors frequently invest in early-stage data
networking companies in order to secure access to advanced technologies under
development by such companies, to enhance the ability to subsequently acquire
such companies and to deter other competitors from obtaining such access or
performing such acquisitions. Cabletron expects that competition will increase
substantially as a result of the continuing industry consolidations.
In the past, Cabletron has relied upon a combination of internal product
development and partnerships with other networking vendors to broaden its
product line to meet the demand for "end-to-end" enterprise-wide solutions.
Acquisitions of or investments in other data networking companies by
Cabletron's competitors may limit Cabletron's access to commercially
significant technologies, and thus its ability to offer products that meet its
customers needs.
Fluctuations in Operating Results. A variety of factors may cause period-to-
period fluctuations in the operating results of Cabletron. Such factors
include, but are not limited to: (i) the rate of growth of the markets for
Cabletron's products, (ii) competitive pressures, including pricing, brand and
technological competition, (iii) availability of components, including unique
integrated circuits, (iv) adverse effects of delays in the establishment of
industry standards, including delays or reductions in customer orders, delays
in new product introductions and increased expenses associated with standards
compliance, (v) delays by Cabletron in the introduction of new or enhanced
products, (vi) changes in product mix, (vii) delays or reductions in customer
purchases in anticipation of the introduction of new products by Cabletron or
its competitors and (viii) instability of the international markets in which
Cabletron sells its products. For example, Cabletron has been experiencing
decreased sales for its older line of so-called "shared media" products. The
period-to-period rate of decrease has been greater in certain periods than in
others and has been difficult to predict. In addition, the financial markets
of Asia have experienced significant turmoil, including the decline in value
of the Japanese Yen and Korean Won. Backlog as of any particular date is not
indicative of future revenue due, in part, to the possibility of order
cancellations, customer requested delivery delays, shifting purchasing
patterns and inventory level variability. In particular, Cabletron has been
experiencing longer sales cycles for its core products as a result of the
increasing dollar amount of customer orders and longer customer planning
cycles. Also, in the recent past, Cabletron has experienced backend loading of
its quarterly sales, making the predictability of the quarterly results highly
speculative. These factors, together with increased competition, have led to
an increase in sales variability and a decrease in Cabletron's ability to
predict aggregate sales demand for any given period. These factors have
increased the possibility that the operating results for a quarter could be
materially adversely affected by the failure to obtain or delays in obtaining
a limited number of large customer orders, due, for example, to cancellations,
delays or deferrals by customers. Cabletron plans to continue to invest in
research and development, sales and marketing and technical support staff in
anticipation of future revenue growth. If growth in Cabletron's revenues in
any quarter fails to match Cabletron's expense levels, its earnings and
margins would be materially adversely affected. In the third quarter of fiscal
1998, the three month period ended November 30, 1997, a shortfall in orders
resulted in a substantial decline in Cabletron's earnings from the prior
quarter. On March 2, 1998, Cabletron announced that it presently expects net
sales for the fourth quarter of fiscal 1998 to be in the range of $305 million
to $320 million, compared to $380.6 million for the fourth quarter of fiscal
1997, and that the primary reasons for the decrease were a shortfall in sales
in certain segments in North America, as well as continued softness in
Cabletron's Federal Government business. See "Cabletron--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
There can be no assurance that net sales will not decrease in future quarters.
Any decrease in net sales could have a material adverse affect on Cabletron's
business, financial condition and results of operations. As expenses are
relatively fixed in the near term, Cabletron may not be able to adjust expense
levels to match any expected shortfall in revenues. As the
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industry becomes more competitive and standards-based, Cabletron is facing
greater price competition from its competitors. If Cabletron does not respond
with lower production costs, pricing pressures could adversely affect future
earnings. Accordingly, past results may not be indicative of future results.
There can be no assurance that the announcement or introduction of new
products by Cabletron or its competitors, or a change in industry standards,
will not cause customers to defer or cancel purchases of Cabletron's existing
products, which could have a material adverse effect on Cabletron's business,
financial condition or results of operations. The market for Cabletron's
products is evolving. The rate of growth of the market and the resulting
demand for Cabletron's recently introduced products is subject to a high level
of uncertainty. If the market fails to grow or grows more slowly than
anticipated, Cabletron's business, financial condition or results of
operations would be materially adversely affected.
Cabletron has announced that it is seeking to better align its business
strategy with its target markets, and that it presently expects to incur a
pre-tax charge in the fourth quarter of fiscal 1998 of approximately $30
million ($18.2 million or $0.12 per share, after-tax, on a fully diluted
basis) related to the realignment. The realignment includes general expense
reductions through the elimination of duplicate facilities, consolidation of
related operations, reallocation of resources, including the elimination of
certain existing projects, and personnel reduction. The pre-tax charge will
have a material adverse effect on Cabletron's operating results for the fourth
quarter of fiscal 1998. Cabletron may encounter difficulties in achieving the
expense reductions intended as a result of the realignment due to, among other
factors, additional costs associated with, for example, relocations and
employee severance, the need to maintain certain essential, but underutilized,
facilities, and delays in implementing planned reductions. Any such
difficulties in achieving expense reductions may result in a failure to
realize the full amount of the annualized cost savings which is intended to be
achieved through the realignment. Any such additional costs may result in
charges related to Cabletron's realignment in future quarters.
In addition to the realignment, Cabletron has defined and is currently
implementing a new management and organizational structure. The new management
structure includes the creation of certain new senior officer positions and
the realignment of certain management reporting structures. A substantial
portion of Cabletron's current senior management team has joined Cabletron
within the last six months. Cabletron has also restructured its sales and
marketing organizations into two business units focused on the enterprise and
service provider markets. The implementation of the new management and
organization structures, the realignment referred to above and Cabletron's
recent acquisitions have required the dedication of the Company's existing
management resources, which has resulted in a temporary disruption of
Cabletron's business activities. There can be no assurance that such
disruption will not continue in future quarters. Any such disruption could
have a material adverse effect on Cabletron's business, operating results or
financial condition. Over time, the loss of the personnel, facilities and
other resources eliminated through the expense reductions may adversely impact
Cabletron's ability to generate expected revenue levels.
Acquisition Strategy. Cabletron has addressed the need to develop new
products, in part, through the acquisition of other companies and businesses.
Acquisitions, such as the acquisition of the NPB from Digital and the proposed
acquisition of Yago, involve numerous risks including difficulties in
assimilating the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business
concerns, risks of entering markets in which competitors have established
market positions, and the potential loss of key employees of the acquired
company. Achieving the anticipated benefits of an acquisition will depend in
part upon whether the integration of the companies' businesses is accomplished
in an efficient and effective manner, and there can be no assurance that this
will occur. The successful combination of companies in the high technology
industry may be more difficult to accomplish than in other industries. The
combination of such companies will require, among other things, integration of
the companies' respective product offerings and coordination of their sales
and marketing and research and development efforts. There can be no assurance
that such integration will be accomplished smoothly or successfully. The
difficulties of such integration may be exacerbated by the necessity of
coordinating geographically separated organizations. The efforts required to
successfully integrate acquired companies require the dedication of management
resources that may temporarily distract attention from the day-to-day business
of Cabletron. The inability of management to successfully integrate the
operations of acquired companies could have a material adverse effect on the
business and results of operations of Cabletron. The acquisition of early
stage companies, such as Yago, poses risks in
11
<PAGE>
addition to those identified above. Such companies often have limited
operating histories, limited or no prior sales, and may not yet have achieved
profitability. In addition, the technologies possessed by such companies are
often unproven. The development and marketing of products based upon such
technologies may require the investment of substantial time and resources and,
despite such investment, may not result in commercially saleable products or
may not yield revenues sufficient to justify Cabletron's investment. Further,
aggressive competitors often undertake initiatives to attract customers and to
recruit key employees of acquired companies through various incentives. In
addition to DNPG and Yago, Cabletron has announced that it has other possible
acquisitions under consideration. Multiple acquisitions during a period
increases the risks identified above, including in particular the difficulty
of integrating the acquired businesses and the distraction of management from
the day-to-day business activities of Cabletron.
Cabletron has recently acquired several product lines previously marketed by
Digital's NPB pursuant to Cabletron's acquisition of the NPB. See "Business of
Cabletron--Recent Product Line Acquisitions." Cabletron's sales of the NPB
products is subject to numerous risks. Cabletron's success will be dependent
upon its continued development of products that are compatible with and meet
the needs of the NPB's installed base of end-user customers, many of whom have
made a substantial investment in existing Digital NPB network infrastructure.
Substantially all of the NPB's revenues have historically been derived from
sales by Digital's worldwide sales force and certain major third party
resellers. Under Digital, the NPB had no direct sales force to end users
(Digital's direct sales force resides in an independent business unit), and
Cabletron is not acquiring any portion of Digital's sales force. Under the
Reseller and Services Agreement dated as of November 24, 1997 between
Cabletron and Digital, Digital has agreed to resell certain Cabletron
products, including the NPB products, and has committed to purchase certain
minimum volumes of Cabletron products for resale and internal use. Based on
historical revenues of Cabletron, it is expected that Digital will account for
substantially in excess of ten percent (10%) of Cabletron's revenues for
fiscal 1999. Any failure by Digital to purchase the committed product volumes,
either because it is unable to sell or utilize such volumes or otherwise,
would have a material adverse impact on Cabletron's business, results of
operations and financial condition. In addition, a substantial portion of the
NPB's revenues have historically been derived from sales through third party
resellers. Cabletron has traditionally derived a smaller portion of its
revenues from sales through resellers and, as a consequence, has less
experience managing reseller relationships. There can be no assurance that the
NPB's resellers will continue to purchase the NPB products from Cabletron or,
if they do, that the volume of such purchases will not decline significantly.
The products to be sold by Cabletron through Digital's sales force and the
NPB's resellers, including the NPB products and certain Cabletron products,
may be sold under the Digital brand name and, in many cases, will be
specifically adapted for use in existing Digital hardware platforms. Cabletron
has limited experience managing the marketing and distribution of a line of
products under a brand name or for hardware platforms other than its own.
There exists no alternative market for such products. A higher than expected
rate of return from resellers, the Company's failure to adequately manage the
marketing and distribution of such products, or the loss of material resellers
or a material decline in sales volume through the NPB resellers, could have a
material adverse effect on Cabletron's business, results of operations or
financial condition.
Retention and Integration of Key Employees. The success of the Merger is
dependent on the retention and integration of the key management, engineering
and other technical employees of Yago. Competition for qualified personnel in
the networking industry is very intense, and competitors often use aggressive
tactics to recruit key employees during the period leading up to a merger and
during the integration phase following a merger. While it is anticipated that
Cabletron will implement retention arrangements for the key employees of Yago,
there can be no assurance that such key employees will remain with Yago
following the Merger. The loss of services of any of such key employees of
Yago could materially and adversely affect Cabletron's business, financial
condition and results of operation.
Volatility of Stock Price. As is frequently the case with the stocks of high
technology companies, the market price of Cabletron's stock has been, and may
continue to be, volatile. Factors such as quarterly fluctuations in results of
operations, increased competition, the introduction of new products by
Cabletron or its competitors, expenses or other difficulties associated with
assimilating the NPB, the business of Yago and other companies or businesses
that have been or may in the future be acquired by Cabletron, changes in the
mix of sales channels, the timing of significant customer orders (the average
dollar amount of customer orders has
12
<PAGE>
increased in recent periods), and macroeconomic conditions generally, may have
a significant impact on the market price of the stock of Cabletron. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations, which have particularly affected the market price for
many high-technology companies and which, on occasion, have appeared to be
unrelated to the operating performance of such companies. Past financial
performance should not be considered a reliable indicator of future
performance and investors should not use historical trends to anticipate
results or trends in future periods. Any shortfall in revenue or earnings from
the levels anticipated by securities analysts could have an immediate and
significant adverse effect on the market price of Cabletron's stock in any
given period.
Dependence on Key Personnel and Management of Change. Cabletron's success
depends upon the continued contributions of certain key personnel, many of
whom would be difficult to replace, including Donald B. Reed, President and
Chief Executive Officer. If these key personnel were to leave Cabletron,
operating results could be adversely affected. The success of Cabletron will
depend on the ability of Cabletron to attract and retain skilled employees,
and on the ability of its officers and key employees to manage change
successfully. S. Robert Levine has resigned as President, Chief Executive
Officer and a director of Cabletron. Craig R. Benson has resigned as Chief
Operating Officer of Cabletron and has reduced his day-to-day involvement in
the operations of Cabletron, although he remains Chairman of the Board of
Directors of Cabletron. The loss of the services of Mr. Levine and Mr. Benson,
who had directed both the day-to-day operations and strategic planning for
Cabletron, may have a material adverse affect on the business, results of
operations and financial condition of Cabletron.
Technological Changes. The market for networking products is subject to
rapid technological change, evolving industry standards and frequent new
product introductions, and therefore requires a high level of expenditures for
research and development. Cabletron may be required to make significant
expenditures to develop such new integrated product offerings. There can be no
assurance that customer demand for products integrating routing, switching,
hub, network management and remote access technologies will grow at the rate
expected by Cabletron, that Cabletron will be successful in developing,
manufacturing and marketing new products or product enhancements that respond
to these customer demands or to evolving industry standards and technological
change, that Cabletron will not experience difficulties that could delay or
prevent the successful development, introduction, manufacture and marketing of
these products (especially in light of the increasing design and manufacturing
complexities associated with the integration of technologies), or that its new
product and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Cabletron's business, operating
results and financial condition may be materially and adversely affected if
Cabletron encounters delays in developing or introducing new products or
product enhancements or if such product enhancements do not gain market
acceptance. In order to maintain a competitive position, Cabletron must also
continue to enhance its existing products and there is no assurance that it
will be able to do so. In addition, the demand for traditional "shared media"
hubs such as Cabletron's basic MMAC product have been experiencing declines
over the last few years, and there can be no assurance that such decline will
not accelerate. A portion of future revenues will come from new products and
services. Cabletron cannot determine the ultimate effect that new products
will have on its revenues, earnings or stock price.
Product Protection and Intellectual Property. Cabletron's success depends in
part on its proprietary technology. Cabletron attempts to protect its
proprietary technology through patents, copyrights, trademarks, trade secrets
and license agreements. Cabletron believes, however, that its success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. There can be no assurance that the steps taken by
Cabletron in this regard will be adequate to prevent misappropriation of its
technology or that Cabletron's competitors will not independently develop
technologies that are substantially equivalent or superior to Cabletron's
technology. In addition, the laws of some foreign countries do not protect
Cabletron's proprietary rights to the same extent as do the laws of the United
States. No assurance can be given that any patents issued to Cabletron will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages.
Although Cabletron does not believe that its products infringe the
proprietary rights of any third parties, third parties have asserted
infringement and other claims against Cabletron, and there can be no assurance
that
13
<PAGE>
such claims will not be successful or that third parties will not assert such
claims against Cabletron in the future. Patents have been granted recently on
fundamental technologies incorporated in Cabletron's products. Since patent
applications in the United States are not publicly disclosed until the patent
issues, applications may have been filed by third parties which, if issued as
patents, could relate to Cabletron's products. In addition, participants in
Cabletron's industry also rely upon trade secret law. Cabletron could incur
substantial costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights which could have a
material adverse effect on Cabletron's business, financial condition and
results of operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other
equitable relief which could effectively block Cabletron's ability to license
its products in the United States or abroad. Such a judgment could have a
material adverse effect on Cabletron's business, financial condition and
results of operations.
Dependence on Suppliers. Cabletron's products include certain components,
including application specific integrated circuits ("ASICs"), that are
currently available from single or limited sources, some of which require long
order lead times. In addition, certain of Cabletron's products and sub-
assemblies are manufactured by single source third parties. With the
increasing technological sophistication of new products and the associated
design and manufacturing complexities, Cabletron anticipates that it may need
to rely on additional single source or limited suppliers for components or
manufacture of products and subassemblies. Any reduction in supply,
interruption or extended delay in timely supply, variances in actual needs
from forecasts for long order lead time components, or change in costs of
components could affect Cabletron's ability to deliver its products in a
timely and cost-effective manner and may adversely impact Cabletron's
operating results and supplier relationships. The NPB products will initially
be manufactured by Digital and a third-party contract manufacturer, SCI
Technologies, Inc. The failure of either party to continue to manufacture the
NPB products or to deliver the NPB products in time for Cabletron to meet its
delivery requirements could have a material adverse effect on Cableton's
business, financial condition and results of operations.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of Yago Common Stock will be converted into the right to
receive .45510932 (the "Initial Exchange Ratio") of a share of Cabletron
Common Stock. Because the Initial Exchange Ratio is fixed by a formula tied to
the capitalization of Yago it will not increase or decrease due to
fluctuations in the market price of Cabletron Common Stock. The specific
dollar value of the consideration to be received by Yago stockholders in the
Merger will depend on the market price of the Cabletron Common Stock at the
Effective Time. In the event that the market price of Cabletron Common Stock
decreases or increases prior to the Effective Time, the market value at the
Effective Time of the Cabletron Common Stock to be received by Yago
stockholders in the Merger would correspondingly decrease or increase.
Cabletron Common Stock historically has been subject to substantial price
volatility. No assurance can be given as to the market prices of Cabletron
Common Stock at any time before the Effective Time or as to the market price
of Cabletron Common Stock at any time thereafter. See "--Volitility of Stock
Price" and "Market Price Per Share Data."
Legal Proceedings. Since October 24, 1997, nine stockholder class action
lawsuits have been filed against Cabletron and certain officers and directors
of Cabletron in the United States District Court for the District of New
Hampshire. Cabletron expects that these lawsuits, which are similar in
material respects, will be consolidated and will proceed as one class action
against Cabletron and certain of its officers and directors. The complaints
allege that Cabletron and several of its officers and directors disseminated
materially false and misleading information about Cabletron's operations and
acted in violation of Section 10(b) and Rule 10b-5 of the Exchange Act during
the period between March 3, 1997 and December 2, 1997. The complaints further
allege that certain officers and directors profited from the dissemination of
such misleading information by selling shares of Cabletron Common Stock during
this period. The complaints do not specify the amount of damages sought on
behalf of the class. The legal costs incurred by Cabletron in defending itself
and its officers and directors against this litigation, whether or not it
prevails, could be substantial, and in the event that the plaintiffs prevail,
Cabletron could be required to pay substantial damages. This litigation may be
protracted and may result in a diversion of management and other resources of
Cabletron. The payment of substantial legal costs or damages, or the diversion
of management and other resources, could have a material adverse effect on
Cabletron's business, financial condition or results of operations.
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Cabletron have been
derived from its Consolidated Financial Statements, and should be read in
conjunction with Cabletron's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Cabletron's Consolidated
Financial Statements and Notes thereto included elsewhere in this Proxy
Statement/Prospectus. The selected financial data of Yago as of December 31,
1997 and for the period from September 6, 1996 (date of inception) to December
31, 1997, and for the year ended December 31, 1997 have been derived from the
Financial Statements of Yago, and should be read in conjunction with Yago's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Yago's Financial Statements and Notes thereto included
elsewhere in this Proxy Statement/Prospectus.
CABLETRON
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED THE LAST DAY OF FEBRUARY, NOVEMBER 30,
------------------------------------------------ ---------------------
1997 1996 1995 1994 1993 1997 1996
---------- ---------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $1,406,552 $1,100,349 $833,218 $602,486 $419,607 $1,065,808 $1,025,997
Income from operations.. 320,278 206,935 237,016 176,503 124,023 192,530 234,842
Net income.............. 222,125 144,485 156,574 118,321 83,201 136,309 161,789
Net income per share.... $ 1.43 $ 0.95 $ 1.08 $ 0.82 $ 0.59 $ 0.87 $ 1.04
Weighted average number
of shares outstanding.. 155,207 151,525 145,125 143,692 141,456 157,527 154,968
BALANCE SHEET DATA:
Working capital......... $ 676,336 $ 485,152 $381,758 $258,463 $234,114 $ 851,893 $ 635,885
Total assets............ 1,306,855 996,908 702,200 502,377 344,517 1,486,844 1,217,406
Total stockholders' eq-
uity................... 1,081,498 809,886 593,942 425,719 289,279 1,238,649 999,631
</TABLE>
Included in fiscal 1997 results are $39.2 million (net of tax) of
nonrecurring items related to acquisitions consummated during the fiscal year.
Excluding these one-time charges, fiscal 1997 net income would have been
$261.4 or $1.68 per share, compared to fiscal 1996 net income of $205.4
million or $1.36 per share before nonrecurring acquisition related expenses of
$60.8 million (net of tax).
YAGO
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 6, 1996)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ -- $ --
Loss from operations.................. 6,172 5,907
Net loss.............................. 6,171 5,911
Net loss per share:
Basic............................... -- $ 0.82
Diluted............................. -- 0.82
Shares used in computing net loss per
share:
Basic............................... -- 7,170
Diluted............................. -- 7,170
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................... -- $ 762
Total assets.......................... -- 3,077
Long-term obligations................. -- 239
Total stockholders' equity............ -- 1,635
</TABLE>
15
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of
Cabletron and Yago and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a purchase accounting basis assuming the
issuance of .45510932 shares of Cabletron Common Stock in exchange for each
share of Yago Common Stock. The additional 5,500,000 shares of Cabletron
Common Stock that may be issued to the Yago stockholders upon an Issuance
Event are not reflected in the unaudited pro forma combined per share data.
The historical Cabletron per share data and the pro forma combined per share
data presented below do not give effect to the Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share," as SFAS 128 is
not effective for Cabletron until its fourth fiscal quarter ending February
28, 1998. The data presented below will not be materially affected by the SFAS
128. This data should be read in conjunction with the Selected Historical
Financial Data and the separate financial statements of Cabletron and Yago
included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma
combined financial data are not necessarily indicative of the operating
results that would have been achieved had the transaction been in effect as of
the beginning of the periods presented and should not be construed as
representative of future operations.
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED YEAR ENDED
NOVEMBER 30, 1997 FEBRUARY 28, 1997
----------------------- -----------------
<S> <C> <C>
HISTORICAL PER CABLETRON SHARE(1):
Net income......................... $0.87 $1.43
Book value......................... $7.83 $6.92
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997
----------------------- -----------------
<S> <C> <C>
HISTORICAL PER YAGO SHARE:
Net income (loss).................. $(0.55) $(0.82)
Book value......................... $ 0.20 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED YEAR ENDED
NOVEMBER 30, 1997 FEBRUARY 28, 1997
----------------------- -----------------
<S> <C> <C>
PRO FORMA COMBINED PER CABLETRON
SHARE (1)(2):
Net income........................ $0.83 $1.41
Book value........................ $7.50 $6.75
<CAPTION>
NINE MONTH PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------- -----------------
<S> <C> <C>
EQUIVALENT PRO FORMA COMBINED PER
YAGO SHARE (1)(3):
Net income........................ $0.38 $0.64
Book value........................ $3.41 $3.07
</TABLE>
- --------
(1) The Historical per Cabletron Share, Pro Forma Combined per Cabletron Share
and Equivalent Pro Forma Combined per Yago Share information do not
include any results from the acquisition of the NPB of Digital. The
audited and unaudited Statements of Assets Sold and Statements of Revenue
and Direct Operating Expenses of the NPB and the Notes thereto, as well as
the Unaudited Pro Forma Combined Financial Statements of Cabletron related
thereto are included herein beginning on page F-29.
(2) The pro forma combined per Cabletron share of Common Stock for the nine
month period ended November 30, 1997 does not include the Yago results for
the three months ended December 31, 1997, but includes the Yago results
for the nine months ended September 30, 1997 so that the combined amounts
include nine months' results for both Cabletron and Yago. The pro forma
combined per Cabletron share of Common Stock for the year ended February
28, 1997 includes the Yago results for the period from the date of
inception to December 31, 1996.
(3) The equivalent pro forma combined per Yago share of Common Stock amounts
are calculated by multiplying the pro forma combined per Cabletron share
amounts by an assumed Initial Exchange Ratio of .45510932 shares of
Cabletron Common Stock for each share of Yago Common Stock, based upon the
capitalization of Yago as of February 1, 1998. The equivalent pro forma
combined per Yago share of Common Stock amounts do not take into account
the 5,500,000 Contingent Shares which may be issuable upon an Issuance
Event.
16
<PAGE>
MARKET PRICE PER SHARE DATA
CABLETRON
Cabletron Common Stock is listed and traded on the New York Stock Exchange
under the symbol "CS." As of February 1, 1998, Cabletron had approximately
3,600 stockholders of record. The following table sets forth the high and low
sales prices per share of Cabletron Common Stock as reported on the NYSE for
the quarterly periods presented below, which periods correspond to Cabletron's
quarterly fiscal periods for financial reporting purposes. The share prices in
the following table have been adjusted to reflect the two-for-one stock split
of Cabletron Common Stock, which took effect on November 26, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED FEBRUARY 29, 1996
First Quarter.................................................. $27.88 $19.44
Second Quarter................................................. 32.94 24.31
Third Quarter.................................................. 43.38 26.00
Fourth Quarter................................................. 41.63 32.94
FISCAL YEAR ENDED FEBRUARY 28, 1997
First Quarter.................................................. $43.56 $31.63
Second Quarter................................................. 36.06 26.50
Third Quarter.................................................. 37.13 31.13
Fourth Quarter................................................. 42.50 28.00
FISCAL YEAR ENDING FEBRUARY 28, 1998
First Quarter.................................................. $46.50 $27.50
Second Quarter................................................. 46.13 27.88
Third Quarter.................................................. 36.25 22.94
Fourth Quarter................................................. 23.56 12.63
FISCAL YEAR ENDING FEBRUARY 28, 1999
First Quarter.................................................. $15.56 $13.25
</TABLE>
YAGO
There is not an established trading market for the Yago Stock. On the Yago
Record Date, there were 54 holders of Yago Common Stock, 2 holders of Yago
Series A Preferred Stock and 2 holders of Yago Series B Preferred Stock.
DIVIDEND POLICY
Neither Cabletron nor Yago has ever paid a cash dividend and each of
Cabletron and Yago currently intends to retain all of its earnings for use in
its business to finance future growth and, accordingly, does not anticipate
paying cash dividends in the foreseeable future.
RECENT CLOSING PRICES
The high and low sale prices per share of the Cabletron Common Stock as
reported on the NYSE on January 13, 1998, the last trading day before the
announcement of the proposed Merger, were $13.50 and $12.875. The last
reported sale price per share of the Cabletron Common Stock on March 9, 1998,
the latest practicable trading day before the printing of this Proxy
Statement/Prospectus, was $13.625. Based upon the last reported sale price of
Cabletron Stock on March 9, 1998, and an assumed Initial Exchange Ratio equal
to approximately .45510932, each share of Yago Stock would be converted in the
Merger into the right to receive Cabletron Common Stock having a market value
of $6.20. The Initial Exchange Ratio is subject to downward adjustment upon
the issuance of additional options, warrants or other securities convertible
into shares of Yago Common Stock (other than options granted under the 1998
Stock Option Plan).
Because the market price of Cabletron Common Stock is subject to
fluctuation, the market value of the shares of Cabletron Common Stock that
holders of Yago Common Stock will receive in the Merger may increase or
decrease prior to and following the Merger. STOCKHOLDERS ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR CABLETRON COMMON STOCK. NO ASSURANCE CAN BE
GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR CABLETRON COMMON STOCK. See "Risk
Factors-- Volatility of Stock Price" and "--Risks Associated with Fixed
Exchange Ratio."
17
<PAGE>
YAGO STOCKHOLDERS ACTION
LAST DATE FOR SUBMISSION
The last date upon which written consents may be submitted to Yago is March
23, 1998 (the "Consent Termination Date"); Yago, however, may consummate the
Merger prior to such date if the requisite consents to approve the Merger are
obtained. Written consents should be delivered to Pillsbury Madison & Sutro
LLP, 2250 Hanover Street, Palo Alto, California 94304, Attention: Colin Morris
(Facsimile: 650-233-4545).
MATTERS TO BE ACTED UPON
Holders of Yago Stock are being asked to consent in writing to (i) a
proposal to approve and adopt the Plan of Merger, the Merger and the
transactions contemplated thereby, by which Yago would become a wholly owned
subsidiary of Cabletron and (ii) a proposal to approve and adopt the 1998
Stock Option Plan. In addition, holders of Yago Series A Preferred Stock and
Yago Series B Preferred Stock are being asked to consent in writing to a
proposal to convert immediately prior to the Merger each outstanding share of
Yago Series A Preferred Stock and Yago Series B Preferred Stock, respectively,
into one share of Yago Common Stock. The Board of Directors of Yago has
unanimously approved the Plan of Merger, the Merger and the transactions
contemplated thereby and recommends the holders of Yago Stock consent in
writing to the approval and adoption of the Plan of Merger, the Merger and the
transactions contemplated thereby. The Board of Directors of Yago has
unanimously approved the 1998 Stock Option Plan and recommends the holders of
Yago Stock consent in writing to the approval and adoption of the 1998 Stock
Option Plan. The Board of Directors of Yago also recommends that the holders
of Yago Series A Preferred Stock and Yago Series B Preferred Stock consent in
writing to convert each outstanding share of Yago Series A Preferred Stock and
Yago Series B Preferred Stock, respectively, into one share of Yago Common
Stock.
REQUISITE CONSENT; RECORD DATE
The Yago Board of Directors has fixed January 15, 1998 as the Yago Record
Date for the determination of the Yago stockholders entitled to consent in
writing to the proposals described in this Proxy Statement/Prospectus.
Accordingly, only holders of record of shares of Yago Stock on the Yago Record
Date will be entitled to consent in writing to the proposals described in this
Proxy Statement/Prospectus. As of such Yago Record Date, there were
outstanding 10,688,000 shares of Yago Common Stock held by 54 holders of
record, and 4,266,000 shares of Yago Series A Preferred Stock held by 2
holders of record, and 2,578,948 shares of Yago Series B Preferred Stock held
by 2 holders of record. Each holder of record of shares of Yago Common Stock
on the Yago Record Date is entitled to grant his or her consent in writing for
each share held on (i) the proposal to approve and adopt the Plan of Merger,
the Merger and the transactions contemplated thereby and (ii) the proposal to
approve and adopt the 1998 Stock Option Plan. Each holder of record of shares
of Yago Preferred Stock on the Yago Record Date is entitled to grant his or
her consent in writing for each share held on (i) the proposal to approve and
adopt the Plan of Merger, the Merger and the transactions contemplated thereby
and (ii) the proposal to approve and adopt the 1998 Stock Option Plan. In
addition, each holder of record of shares of Yago Series A Preferred Stock and
Yago Series B Preferred Stock on the Yago Record Date is entitled to grant his
or her consent in writing to the conversion of each share of Yago Series A
Preferred Stock and Yago Series B Preferred Stock, respectively, into one
share of Yago Common Stock.
The approval and adoption by Yago stockholders of the Plan of Merger, the
Merger and the transactions contemplated thereby will require the written
consent of the holders of a majority of the outstanding shares of Yago Common
Stock and Yago Preferred Stock, acting together as a class, the written
consent of the holders of two-thirds of the outstanding shares of Yago Series
A Preferred Stock, acting separately as a class, and the written consent of
the holders of two-thirds of the outstanding shares of Yago Series B Preferred
Stock, acting separately as a class. In addition, Cabletron has required as a
condition to its obligation to consummate the Merger that holders of at least
95% of the Yago Stock entitled to vote on the Merger shall have consented in
writing to approve the Merger. The approval and adoption of the 1998 Stock
Option Plan will require the written consent of the holders of a majority of
the Yago Stock.
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The conversion of Yago Series A Preferred Stock into Yago Common Stock will
require the written consent of the holders of two-thirds of the outstanding
shares of Yago Series A Preferred Stock, acting separately as a class. The
conversion of Yago Series B Preferred Stock into Yago Common Stock will
require the written consent of the holders of two-thirds of the outstanding
shares of Yago Series B Preferred Stock, acting separately as a class.
Approval of the Plan of Merger, the Merger and the transactions contemplated
thereby, shall constitute approval of the terms of the Escrow Agreement and
the appointment of Mr. Piyush Patel as the representative of the Yago
stockholders under the Escrow Agreement. See "The Plan of Merger--
Indemnification" and "--Escrow."
In addition, as of the Yago Record Date, Cabletron owned 3,732,750 shares,
or 87.5%, of the Yago Series A Preferred Stock, and 789,474 shares, or 30.6%,
of the Yago Series B Preferred Stock. Assuming the conversion of the Yago
Preferred Stock and the exercise of all outstanding warrants, Cabletron owned
4,522,224 shares, or 25.5%, of the Yago Common Stock. The directors and
officers of Yago and their affiliates (other than Cabletron) owned 4,900,000
shares, or 45.8%, of the outstanding Yago Common Stock and (ii) 1,789,474
shares, or 69.4%, of the Yago Series B Preferred Stock. Assuming the
conversion of the Yago Preferred Stock and the exercise of all outstanding
warrants, the directors and officers of Yago and their affiliates (other than
Cabletron) owned 6,689,474 shares, or 37.8%, of Yago Common Stock. One of the
members of the Board of Directors of Yago is also an officer of Cabletron. In
addition, certain holders of the Yago Common Stock, Yago Series A Preferred
Stock and Yago Series B Preferred Stock have executed an irrevocable proxy in
favor of Cabletron, authorizing Cabletron to sign written consents for all the
outstanding shares of Yago Stock over which he, she or it has voting control
in favor of the approval and adoption of the Plan of Merger. After giving
effect to the irrevocable proxies and including its own equity interest in
Yago, Cabletron has the right to sign written consents for (i) 4,900,000
shares, or 45.8%, of the outstanding Yago Common Stock, (ii) 3,732,750 shares,
or 87.5%, of the Yago Series A Preferred Stock and (iii) 2,578,948 shares, or
100%, of the Yago Series B Preferred Stock. Assuming the conversion of the
Yago Preferred Stock and the exercise of all outstanding warrants, Cabletron
has the right to sign written consents for 11,211,698 shares, or 63.33%, of
the Yago Common Stock. See "The Merger--Interests of Certain Persons in the
Merger" and "Principal Stockholders of Yago."
WRITTEN CONSENTS
All shares of Yago Common Stock, Yago Series A Preferred Stock and Yago
Series B Preferred Stock which are entitled to approve and authorize those
actions for which written consent is being sought and whose properly executed
consents are received prior to the Consent Termination Date will grant consent
to such actions in accordance with the instructions indicated on such consent.
If any stockholder has signed and returned a written consent, but no
instructions are indicated, such consents will be deemed granted IN FAVOR of
(i) the Plan of Merger, the Merger and the transactions contemplated thereby,
(ii) the 1998 Stock Option Plan and (iii) if applicable, converting the Yago
Series A Preferred Stock and Yago Series B Preferred Stock, as the case may
be, into Yago Common Stock.
All expenses of this solicitation of written consents will be borne by Yago
and each of Cabletron and Yago will bear their costs of preparing this Proxy
Statement/Prospectus. In addition to solicitation by use of the mails, written
consents may be solicited by directors, officers and employees of Cabletron
and Yago in person or by telephone, telegram or other means of communication.
Such directors, officers and employees will not be additionally compensated,
but may be reimbursed for reasonable out-of-pocket expenses in connection with
such solicitation. Arrangements will also be made with custodians, nominees
and fiduciaries for forwarding of solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries, and
Yago will reimburse such custodians, nominees and fiduciaries for reasonable
expenses incurred in connection therewith.
YAGO STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. YAGO STOCKHOLDERS SHOULD
NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED FORM OF WRITTEN CONSENT.
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THE MERGER
GENERAL
The Plan of Merger provides for the merger of Merger Sub, a wholly owned
subsidiary of Cabletron, with and into Yago, with the result that Yago would
become a wholly owned subsidiary of Cabletron. For the Merger to be
consummated it must be approved by the Yago stockholders and the other
conditions specified in the Plan of Merger must be satisfied or waived. The
discussion in this Proxy Statement/Prospectus of the Merger and the
description of the principal terms and conditions of the Plan of Merger are
subject to and qualified in their entirety by reference to the Plan of Merger,
a copy of which is attached to this Proxy Statement/Prospectus as Annex A and
is incorporated herein by reference. Yago stockholders are urged to read the
Plan of Merger in its entirety.
CONVERSION OF SHARES
Immediately prior to the Merger, it is expected that each share of Yago
Series A Preferred Stock and Yago Series B Preferred Stock will be converted
into one share of Yago Common Stock. Upon the consummation of the Merger, each
then outstanding share of Yago Common Stock will automatically be converted
into the right to receive the number of shares of Cabletron Common Stock equal
to a fraction (the "Initial Exchange Ratio"), the numerator of which is
6,100,000 and the denominator of which is the sum of (i) the number of shares
of Yago Common Stock outstanding immediately prior to the Merger and (ii) the
number of shares of Yago Common Stock issuable upon the conversion or exercise
of all options, warrants, preferred stock and other securities of Yago
convertible into or exercisable for shares of Yago Common Stock that are
outstanding immediately prior to the Merger (excluding, however, all such
securities owned by Cabletron and the shares of Yago Common Stock issuable
upon exercise of options granted under the Yago Systems, Inc. 1998 Stock
Option Plan (the "1998 Stock Option Plan")). Based upon the capitalization of
Yago as of February 1, 1998, it is currently anticipated that the Initial
Exchange Ratio will be approximately .45510932 of a share of Cabletron Common
Stock. No fractional shares of Cabletron Common Stock will be issued in the
Merger. Instead, the total number of shares of Cabletron Common Stock which
each Yago stockholder is entitled to receive will be rounded up to the nearest
whole number. Subject to the issuance of the Contingent Shares (as defined
below), Cabletron will exchange approximately 6,100,000 shares of Cabletron
Common Stock for all the shares of Yago Stock outstanding immediately prior to
the Merger, including shares of Yago Stock issuable upon the conversion or
exercise of any option, warrant, preferred stock or other security convertible
into or exercisable for shares of Yago Stock that are outstanding immediately
prior to the Merger (excluding, however, all such securities owned by
Cabletron and the shares of Yago Common Stock issuable upon exercise of
options granted under the 1998 Stock Option Plan). Based upon the
capitalization of Yago and Cabletron as of February 1, 1998, the stockholders
of Yago will own Cabletron Common Stock representing less than 4% of the
Cabletron Common Stock outstanding immediately after consummation of the
Merger.
CONVERSION OF YAGO OPTIONS
Upon consummation of the Merger, each then outstanding Yago Option will be
assumed by Cabletron and will automatically be converted into an option to
purchase the number of shares of Cabletron Common Stock (rounded down to the
nearest whole number) determined by multiplying the number of shares of Yago
Common Stock subject to the Yago Option by the Initial Exchange Ratio, at an
exercise price per share equal to the exercise price per share of Yago Common
Stock purchasable pursuant to the Yago Option divided by the Initial Exchange
Ratio. The other terms of the Yago Options will remain unchanged. Cabletron
will file a Registration Statement on Form S-8 with the Commission with
respect to the shares of Cabletron Common Stock issuable upon exercise of the
assumed Yago Options.
As of the date of this Proxy Statement/Prospectus, 4,616,532 shares of Yago
Common Stock were subject to outstanding Yago Options. Upon the assumption of
such Yago Options by Cabletron upon consummation of the Merger, approximately
2,101,026 shares of Cabletron Common Stock will be subject to such options.
CONTINGENT SHARES
On the Eighteen Month Anniversary (as defined below) of the Merger or, if
earlier, upon a Change of Control (as defined below) (each an "Issuance
Event"), the Yago stockholders will be entitled to receive, for each share of
Cabletron Common Stock received in the Merger or issued after the Merger upon
exercise of the
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Yago Options (other than Yago Options granted under the 1998 Stock Option
Plan) assumed by Cabletron pursuant to the Plan of Merger, an additional
number of shares (the "Contingent Shares") of Cabletron Common Stock equal to
a fraction (the "Contingent Exchange Ratio") the numerator of which is (i)
$35.00 reduced (but not below zero) by (ii) the average of daily last sales
prices of Cabletron Common Stock for a specified period prior to such Issuance
Event, (the "Average Price"), and the denominator of which is equal to such
Average Price, subject to adjustment as set forth below. In addition, each
Yago Option (other than Yago Options granted under the 1998 Stock Option Plan)
assumed by Cabletron shall be amended such that (x) the number of shares of
Cabletron Common Stock issuable thereunder shall be increased by an amount
equal to the product (rounded down to the nearest whole number) of (A) the
remaining number of shares of Cabletron Common Stock issuable upon exercise in
full of such Yago Option immediately prior to such Issuance Event and (B) the
Contingent Exchange Ratio and (y) the exercise price for each share of
Cabletron Common Stock issuable thereunder shall be reduced to equal (A) the
aggregate exercise price for the remaining shares of Cabletron Common Stock
issuable upon exercise in full of such Yago Option immediately prior to such
Issuance Event divided by (B) the sum of the number of shares of Cabletron
Common Stock issuable upon exercise in full of such Yago Option immediately
prior to such Issuance Event and the number of shares of Cabletron Common
Stock calculated in accordance with clause (x) of this sentence. In the event
that the aggregate number of Contingent Shares issuable in connection with an
Issuance Event would exceed 5,500,000 shares of Cabletron Common Stock, then
the Contingent Exchange Ratio shall be reduced such that the total number of
Contingent Shares issuable upon such Issuance Event equals 5,500,000 shares of
Cabletron Common Stock. Further, in no event shall Contingent Shares be issued
in respect of any share of Cabletron Common Stock repurchased pursuant to the
Repurchase Rights (defined below) in favor of Cabletron. Eighteen Month
Anniversary means the 540th calendar day after the Closing. Change in Control
means the occurrence of any one of the following events: (i) the consummation
of the acquisition of more than fifty percent (50%) of the outstanding voting
stock of Cabletron by one person or by two or more persons acting as a
partnership, limited partnership, syndicate or other group (other than a
tender offer by Cabletron); (ii) the consummation of a merger, consolidation
or other reorganization of Cabletron (other than a reincorporation of
Cabletron in another jurisdiction), as a result of which more than fifty
percent (50%) of Cabletron's outstanding voting stock is transferred to
holders different from those who held the stock immediately prior to such
merger of consolidation; (iii) the sale, transfer or other disposition of all
or substantially all of the assets of Cabletron to a third party who is not an
affiliate (including a parent or subsidiary) of Cabletron; or (iv) the
Bankruptcy (as defined in the Plan of Merger) of Cabletron.
REPURCHASE RIGHTS
Certain of the shares of Yago Common Stock outstanding immediately prior to
the Merger or issuable upon exercise of Yago Options to be assumed by
Cabletron are subject to repurchase by Yago in certain circumstances relating
to the termination of employment (the "Repurchase Rights"). Pursuant to the
Plan of Merger, the shares of Cabletron Common Stock issued in respect of Yago
Common Stock outstanding immediately prior to the Merger or issuable after the
Merger upon the exercise of Yago Options assumed by Cabletron, to the extent
subject to Repurchase Rights, will remain subject to the same Repurchase
Rights, only in favor of Cabletron. In addition, each share of Cabletron
Common Stock, if any, issued as a Contingent Share upon an Issuance Event will
be subject to the same Repurchase Rights in favor of Cabletron as the
underlying share of Cabletron Common Stock for which such Contingent Share was
issued. If the Repurchase Rights are exercised, the price to be paid by
Cabletron pursuant to the Repurchase Rights for each share of Cabletron Common
Stock, if any, repurchased by Cabletron shall equal (A) with respect to shares
of Cabletron Common Stock issued in exchange for shares of Yago Common Stock
outstanding immediately prior to the Merger (i) the price originally paid to
purchase such underlying share of Yago Common Stock divided by (ii) either (x)
if no Contingent Shares have been issued, the Initial Exchange Ratio or (y) if
Contingent Shares shall have been issued, the sum of (aa) the Initial Exchange
Ratio and (bb) the product of the Initial Exchange Ratio and the Contingent
Exchange Ratio and (B) with respect to shares of Cabletron Common Stock issued
pursuant to any Yago Option (other than Yago Options granted under the 1998
Stock Option Plan) after the Effective Time or otherwise issued in respect of
the shares of Cabletron Common Stock issued thereunder, (i) if no Contingent
Shares have been issued or if the purchase of such Cabletron Common Stock
pursuant to the exercise of the Yago Option occurred after an
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Issuance Event, the price paid per share of Cabletron Common Stock at exercise
and (ii) if Contingent Shares have been issued subsequent to the purchase of
the Cabletron Common Stock pursuant to the exercise of the Yago Option, the
price paid per share of Cabletron Common Stock divided by the sum of one plus
the Contingent Exchange Ratio.
EXCHANGE OF CERTIFICATES
Within two business days after the Effective Time (defined below), a letter
of transmittal with instructions will be mailed to each Yago stockholder for
use in exchanging Yago Stock certificates for Cabletron Common Stock
certificates. Upon surrender of a Yago Stock certificate for cancellation to
Boston Equiserve, the exchange agent in connection with the Merger, or such
other agent or agents as may be appointed by Cabletron, together with such
letter of transmittal, duly executed in accordance with the instructions
thereto, the holder of such certificate will be entitled to receive in
exchange therefor a certificate representing the number of whole shares of
Cabletron Common Stock equal to the Initial Exchange Ratio multiplied by the
number of shares of Yago Common Stock subject to the Yago Stock certificate
being exchanged. Pursuant to the terms of the Escrow Agreement, approximately
ten percent (10%) of the shares of Cabletron Common Stock that the Yago
stockholders are initially entitled to receive in the Merger will
automatically be placed in escrow for approximately eighteen months. It is a
condition to the consummation of the Merger that all Yago Series A Preferred
Stock and Yago Series B Preferred Stock convert into Yago Common Stock
immediately prior to the Effective Time. At such time, each outstanding Yago
Series A Preferred Stock certificate and Yago Series B Preferred Stock
certificate shall be deemed to evidence the ownership of the number of whole
shares of Yago Common Stock into which such share of Yago Series A Preferred
Stock or Yago Series B Preferred Stock, as the case may be, shall have been
converted. No Yago Common Stock certificates will be issued as a result of
such conversion. Accordingly, holders of Yago Series A Preferred Stock and
Yago Series B Preferred Stock certificates will exchange such certificates as
herein provided.
Immediately after the Effective Time, each outstanding Yago Stock
certificate will be deemed for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of whole shares of
Cabletron Common Stock into which the shares of Yago Common Stock evidenced by
such Yago Stock certificate shall have been so converted as a result of the
Merger and the right to receive the number of Contingent Shares, if any,
issuable in respect of such whole shares of Cabletron Common Stock upon an
Issuance Event. No fractional shares of Cabletron Common Stock will be issued
in the Merger. Instead, the total number of shares of Cabletron Common Stock
which each Yago stockholder is entitled to receive will be rounded up to the
nearest whole number. No dividends or other distributions with respect to
Cabletron Common Stock with a record date after the Effective Time will be
paid to the holder of any unsurrendered Yago Stock certificate with respect to
the shares of Cabletron Common Stock represented thereby until the holder of
record of such certificate surrenders such certificate. Subject to applicable
law, following surrender of any such Yago Stock certificate, there will be
paid to the record holder of the certificates representing whole shares of
Cabletron Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of any such dividends or other
distributions with a record date after the Effective Time theretofore payable
with respect to such shares of Cabletron Common Stock and at the appropriate
payment date, the amount of dividends or other distributions with a record
date after the Effective Time and a payment date subsequent to such surrender.
If any certificate for shares of Cabletron Common Stock is to be issued in a
name other than that in which the Yago Stock certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance
thereof that the Yago Stock certificate so surrendered be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange have paid to Cabletron or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Cabletron Common Stock in any name other than that of the registered holder of
the Yago Stock certificate surrendered, or established to the satisfaction of
Cabletron or any agent designated by it that such tax has been paid or is not
payable.
HOLDERS OF YAGO STOCK CERTIFICATES SHOULD NOT SUBMIT THEIR CERTIFICATES FOR
EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS
REFERRED TO ABOVE.
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NOTIFICATION REGARDING YAGO OPTIONS
Following the Effective Time, Cabletron will issue, to each person who
immediately prior thereto was a holder of an outstanding Yago Option, a
document evidencing the assumption of such Yago Option by Cabletron. Such
assumption will be automatic and no action will be required on the part of the
option holder to convert such holder's Yago Option into an option to purchase
shares of Cabletron Common Stock.
EFFECTIVE TIME
Consummation of the Merger will occur upon the filing of the Certificate of
Merger (as defined in the Plan of Merger) with the Secretary of State of the
State of Delaware or at such later time as is specified on such certificate
(the "Effective Time"). The filing of the Certificate of Merger will occur as
soon as practicable after the satisfaction or waiver of all conditions to the
closing of the transactions contemplated by the Plan of Merger. The Plan of
Merger may be terminated by any party thereto if the Merger shall not have
been consummated on or before March 31, 1998. The Plan of Merger is also
subject to termination upon the occurrence of certain other events. See "The
Plan of Merger-- Conditions to the Merger" and "--Termination."
BACKGROUND OF THE MERGER; RECOMMENDATION OF YAGO'S BOARD OF DIRECTORS
On September 6, 1996, Yago was incorporated under the laws of the State of
Delaware. On September 10, 1996, a meeting was held at which representatives
of Cabletron and Yago initiated discussions regarding an investment in Yago by
Cabletron. Present at the meeting were Yago founders Piyush Patel, Romulus
Pereira and Nilesh Shah, Cabletron's Chief Financial Officer David
Kirkpatrick, and Cabletron's Director of Product Management Michael Skubisc.
At the meeting the Yago founders presented their business plan that included
product descriptions, pricing models, and staffing plans.
There were no further substantial contacts until November 6, 1996, when Bob
Barber, Cabletron's Director of Financial Planning, contacted Mr. Patel to
discuss the possible issuance of and investment by Cabletron in Yago Series A
Preferred Stock. On November 20, 1996, Yago issued 4,266,000 shares of its
Series A Preferred Stock at $.46875 per share, of which Cabletron purchased an
aggregate of 3,732,750 shares, or 87.5%. Chris Oliver of Cabletron was
subsequently elected to the Board of Directors of Yago on February 28, 1997.
On February 28, 1997 Mr. Patel met with Chris Oliver, Cabletron's Director
of Engineering and Manufacturing, Michael Leland, Cabletron's Director of
Telecommunications Marketing, and Ken Lattimer, Cabletron's Director of
Engineering, in Sunnyvale, California to discuss Yago's technology, business
plan and product development. On April 18, 1997, Mr. Patel, Mr. Oliver, and
Mr. Barber met again, this time at Cabletron, where the parties further
discussed Yago's product development. Mr. Patel, Mr. Oliver, and Mr. Barber
continued these discussions through conference calls held on April 29, 1997
and May 30, 1997. During these meetings, the parties discussed, among other
things, product costs and staffing levels with respect to product development.
On June 9, 1997 Mr. Oliver visited Yago to follow up on the progress of
product development. Mr. Patel visited Cabletron on June 17, 1997 to continue
these discussions.
Cabletron and Yago subsequently explored additional funding options,
including the possible offering of and investment by Cabletron in Yago Series
B Preferred Stock. On September 17, 1997 Yago issued 2,578,948 shares of its
Series B Preferred Stock at $1.90 per share, of which Cabletron purchased
789,474 shares, or 30.6%. Mr. Barber joined the Board of Directors of Yago on
February 28, 1997.
On November 25, 1997 Mr. Barber telephoned Mr. Patel to discuss a possible
acquisition of Yago by Cabletron. Mr. Barber resigned from the Board of
Directors on December 4, 1997. A meeting followed thereafter in which Mr.
Barber met with James Davidson of Hambrecht & Quist LLC to discuss the timing
and the proposed terms of the acquisition. A subsequent meeting was held on
December 5, 1997 in which Mr. Barber met with Mark Zanoli of Hambrecht & Quist
and Mr. Patel.
During November 1997 and December 1997, representatives from Cabletron met
with Yago's management to conduct due diligence on Yago's products, technology
and business and financial operations.
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On December 10, 1997, Mr. Barber, together with legal counsel, met with
several representatives of Yago. Discussions continued through December 12,
1996. These negotiations and discussions focused on various aspects of the
proposed acquisition including (i) developing a mechanism to arrive at the
Initial Exchange Ratio and Contingent Exchange Ratio, (ii) the operation of
Yago pending the closing of the Merger, (iii) the provisions for termination
of the Merger Agreement, (iv) various provisions related to limitations on
transactions with third parties and (v) the extent and nature of
indemnification to be provided by the Yago shareholders and the associated
escrow agreements. Mr. Patel and Mr. Barber finalized the terms and conditions
of the proposed Merger during that visit.
On December 12, 1997 a meeting of the Board of Directors of Yago was held by
telephone conference with all directors participating. The Board of Directors
of Yago weighed the relative merits of the proposal of Cabletron and concluded
that the acquisition of Yago by Cabletron was in the best interests of Yago
stockholders. Accordingly, the Board of Directors of Yago, subject to the
terms and conditions previously negotiated, authorized Mr. Patel to execute a
non-binding letter of intent with Cabletron.
During the following week, Mr. Patel and Mr. Barber, together with their
respective legal advisors, commenced negotiations on the Plan of Merger and
various other ancillary agreements. On January 13, 1998, the Board of
Directors of Cabletron approved the Plan of Merger and the Merger by unanimous
written consent based on its determination that the Merger was advisable and
in the best interests of Cabletron and the stockholders of Cabletron, and that
the terms upon which shares were to be issued under the Plan of Merger were
fair. On January 13, 1998, the Yago Board of Directors also considered the
Plan of Merger, which had previously been distributed to the directors, and
the transactions contemplated thereby, including the proposed consideration to
be paid to Yago stockholders. The Yago Board of Directors reviewed and
considered, among other things, the background of the proposed transaction,
Yago's strategic alternatives, the terms of the Plan of Merger and the other
matters described below under "Yago's Reasons for the Merger." The Yago Board
of Directors then approved the Plan of Merger and the Merger by unanimous
written consent later that same day and, after determining that the Merger and
the consideration to be received by the Yago stockholders was fair and in the
best interest of such Yago stockholders, recommended that the stockholders of
Yago approve the Plan of Merger and the Merger.
The Plan of Merger was executed and announced by Cabletron and Yago on
January 14, 1998. The terms of the Plan of Merger are the result of arm's
length negotiations between representatives of Yago and Cabletron.
YAGO'S REASONS FOR THE MERGER
In approving the Plan of Merger, the Merger and the transactions
contemplated thereby, the Yago Board of Directors considered a number of
significant factors, including:
(i) The business, results of operations, properties and financial
condition of Yago and the competitive nature of the industry in which it
operates, based, in part, upon presentations by management of Yago,
including management's view of the business and financial prospects for
Yago if it were to remain independent, taking into account Yago's continued
losses from operations, its current position in the switching router market
and its size and resources as compared to its competitors.
(ii) Information available to them concerning Cabletron, its business,
size, market characteristics of Cabletron Common Stock and other matters
based, in part, on information provided by management of Yago as a result
of meetings with Cabletron's management.
(iii) The relatively limited breadth of Yago's product offerings at a
time when the market, and many of Yago's competitors, are moving toward a
model of offering fully integrated end-to-end solutions for enterprise
customers.
(iv) The opportunity to access Cabletron's sales channels for the
distribution of Yago's products.
(v) The terms of the Plan of Merger, including the proposed structure of
the Merger as a tax-free reorganization under the Code, and the fact that
the Contingent Exchange Ratio was established based on the average trading
price of Cabletron Common Stock for a specified period prior to the
Issuance Event.
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(vi) The Merger Consideration (as defined in the Plan of Merger)
represented a premium of approximately 300% over the price paid in
September 1997 for the Yago Series B Preferred Stock.
(vii) The exchange of Yago Stock for Cabletron Common Stock will give
current holders of Yago Stock publicly listed shares that trade on the New
York Stock Exchange in place of the illiquid Yago Common Stock and the
opportunity to participate in the potential growth of Cabletron.
(viii) The financial resources of Cabletron, which are significantly
greater than those of Yago.
The Yago Board of Directors also identified and considered a number of
potentially negative factors in its deliberations concerning the Merger,
including, but not limited to: (i) the risk that the potential benefits sought
in the Merger might not be fully realized, if at all; (ii) the possibility
that the Merger would not be consummated;
(iii) the risk that despite the efforts of Cabletron, key technical, marketing
and management personnel might not choose to remain employed by Cabletron; and
(iv) the other risks described above under "Risk Factors." The Yago Board of
Directors believed that certain of these risks were unlikely to occur, while
others could be avoided or mitigated by Cabletron, and that, overall, these
risks were outweighed by the potential benefits of the Merger.
The Board did not assign relative weights to the factors or determine that
any factor was of particular importance. Rather, the Board of Directors viewed
its position and recommendations as being based upon the totality of the
information presented to and considered by them.
CABLETRON'S REASONS FOR THE MERGER
The Cabletron Board of Directors arrived at its unanimous decision to
approve the Plan of Merger after consideration of a number of significant
factors. Among those factors were:
(i)Yago's focus on Layer-3/Layer-4 Gigabit Ethernet switching router
technology is highly complementary to Cabletron's enterprise LAN
technology.
(ii)Cabletron's expectation that the market for switching routers will be
one of the more rapidly growing segments of the LAN/WAN market for the next
several years.
(iii)The ability to leverage the research and development capabilities of
Yago by combining its research and development efforts and personnel with
those of Cabletron to improve and increase product development.
In addition, the Cabletron Board of Directors considered, among other
matters (i) information concerning Cabletron's and Yago's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position; (ii) the consideration to be
received by Yago stockholders in the Merger and the relationship between the
market value of Cabletron Common Stock to be issued in exchange for each share
of Yago Common Stock and Cabletron's per share reported earnings, earnings
before interest and taxes and certain other measures; (iii) a comparison of
selected recent acquisition and merger transactions involving high-technology
companies; (iv) the belief that the terms of the Plan of Merger, including the
parties' respective representations, warranties, and covenants, and the
conditions to their respective obligations, are reasonable; and (v) the
ability of Cabletron to devote management time and energy to the integration
and assimilation of Yago's business and organization should the Merger be
consummated.
The Cabletron Board of Directors also considered negative factors relating
to the Merger, including (i) the risks that the benefits sought in the Merger
would not be fully achieved, (ii) the risk that the Merger would not be
consummated, and (iii) other risks described above under "Risk Factors." The
Cabletron Board of Directors believed that these risks were outweighed by the
potential benefits to be gained by the Merger.
In view of the wide variety of factors considered by the Cabletron Board of
Directors, the Cabletron Board of Directors did not find it practicable to
quantify or otherwise assign relative weight to the specific factors
considered in approving the Plan of Merger and Merger. However, after taking
into account all the factors set
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forth above, the Cabletron Board of Directors determined that the Plan of
Merger and Merger were in the best interests of Cabletron and its stockholders
and that Cabletron should proceed with the Plan of Merger and the Merger.
CERTAIN CONSIDERATIONS
In considering whether to approve the Plan of Merger and the transactions
contemplated thereby, stockholders of Yago should be aware that the stock
price of Cabletron Common Stock at the Effective Time may vary significantly
from the price as of the date of execution of the Plan of Merger, the date
hereof or the date on which stockholders of Yago consent in writing to the
Merger due to changes in the business, operations and prospects of Cabletron,
general market and economic conditions, and other factors. Because the market
price of Cabletron Common Stock is subject to fluctuation, the market value of
the shares of Cabletron Common Stock that holders of Yago Common Stock will
receive in the Merger may increase or decrease prior to and following the
Merger. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
CABLETRON COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OR
MARKETS FOR CABLETRON COMMON STOCK. See "Risk Factors--Volatility of Stock
Price" and "--Risks Associated with Fixed Exchange Ratio."
EMPLOYMENT AGREEMENTS
It is a condition to the consummation of the Merger that certain specified
employees of Yago (the "Yago Employees") enter into employment agreements with
Cabletron, that such agreements be in force at the Effective Time and that
such employees be employed by Yago immediately prior to the Effective Time.
All of the Yago Employees have entered into employment agreements with
Cabletron that take effect at the Effective Time.
The terms of the employment agreements between Cabletron and Piyush Patel,
an officer and director of Yago, Romulus Pereira, an officer and director of
Yago, and Nilesh Shah, an officer of Yago (the "Founder Employment
Agreements"), are substantially identical with the exception of the
compensation arrangements.
Each Founder Employment Agreement begins at the Effective Time, has a term
of eighteen months, and provides that the employee will perform such duties
and responsibilities as the Board of Directors of Cabletron may designate. The
employee is obligated to work for Cabletron on a full-time basis and not to
engage in any other business activity directly related to the business of
Cabletron except as may be approved by Cabletron. The employee is eligible to
participate in Cabletron's employee benefit plans from time to time in effect
for Cabletron employees generally. The employee is obligated to assign all
intellectual property related to the business of Cabletron developed or
conceived by the employee during the employment term to Cabletron and is
restricted by confidentiality provisions. Pursuant to the Founder Employment
Agreement, the employee also agrees, during the term of employment with
Cabletron and for eighteen months thereafter (the "Noncompete Period"), not to
engage in any business activity involving the design, manufacture,
distribution or sale to LAN and/or WAN markets of gigabit ethernet switching
or routing products. In addition, the Founder Employment Agreement obligates
the employee not to solicit employees or customers of Cabletron while he is
employed by Cabletron and during the Noncompete Period. Under the Founder
Employment Agreement, in the event Cabletron terminates the employee without
cause, or in the event the employee terminates his or her employment as a
result of, among other things, a material diminution in the nature or scope of
the employee's responsibilities or duties, the Repurchase Rights in favor of
Cabletron on the shares of Cabletron Common Stock received in the Merger or in
connection with the issuance of Contingent Shares or upon exercise of Yago
Options assumed by Cabletron shall lapse. Further, if the employee is
terminated without cause as part of a general layoff of Cabletron, the
employee will not be bound by the noncompetition provisions of the Founder
Employment Agreement.
The terms of the employment agreements with certain of the remaining Yago
Employees (the "General Employment Agreements") provide for at will employment
at a base salary commensurate with his or her base salary with Yago
immediately prior to the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Yago Board of Directors with
respect to the Merger, stockholders of Yago should be aware that certain
officers and directors of Yago have interests in the Merger, including those
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referred to below, that present them with potential conflicts of interests. In
particular, certain officers of Yago have entered into employment agreements
with Cabletron that take effect at the Effective Time. See "The Merger--
Employment Agreements." One of the members of the Board of Directors of Yago
is also an officer of Cabletron. The Yago Board of Directors was aware of the
potential conflicts associated with these matters and considered them along
with the other matters described in "The Merger--Background of the Merger;
Recommendation of Yago's Board of Directors," "--Yago's Reasons for the
Merger" and "--Employment Agreements."
Pursuant to the Plan of Merger, Cabletron has agreed that all rights to
indemnification or exculpation now existing in favor of the employees, agents,
directors or officers of Yago as provided in its Restated Certificate of
Incorporation or Bylaws shall continue in full force and effect for a period
of not less than six years from the Effective Time.
In addition, as of the Yago Record Date, Cabletron owned 3,732,750 shares,
or 87.5%, of the Yago Series A Preferred Stock, and 789,474 shares, or 30.6%,
of the Yago Series B Preferred Stock. Assuming the conversion of the Yago
Preferred Stock and the exercise of all outstanding warrants, Cabletron owned
4,522,224 shares, or 25.5%, of the Yago Common Stock. The directors and
officers of Yago and their affiliates (other than Cabletron) owned 4,900,000
shares, or 45.8%, of the outstanding Yago Common Stock and 1,789,474 shares,
or 69.4%, of the Yago Series B Preferred Stock. Assuming the conversion of the
Yago Preferred Stock and the exercise of all outstanding warrants, the
directors and officers of Yago and their affiliates (other than Cabletron)
owned 6,689,474 shares, or 37.8%, of Yago Common Stock. One of the members of
the Board of Directors of Yago is also an officer of Cabletron. In addition,
certain holders of the Yago Common Stock, Yago Series A Preferred Stock and
Yago Series B Preferred Stock have executed an irrevocable proxy in favor of
Cabletron, authorizing Cabletron to sign written consents for all the
outstanding shares of Yago Stock over which he, she or it has voting control
in favor of the approval and adoption of the Plan of Merger. After giving
effect to the irrevocable proxies and including its own equity interest in
Yago, Cabletron has the right to sign written consents for (i) 4,900,000
shares, or 45.8%, of the outstanding Yago Common Stock, (ii) 3,732,750 shares,
or 87.5%, of the Yago Series A Preferred Stock and (iii) 2,578,948 shares, or
100%, of the Yago Series B Preferred Stock. Assuming the conversion of the
Yago Preferred Stock and the exercise of all outstanding warrants, Cabletron
has the right to sign written consents for 11,211,698 shares, or 63.3%, of the
Yago Common Stock. See "The Merger--Interests of Certain Persons in the
Merger" and "Principal Stockholders of Yago."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of the
Merger. This summary is not a complete description of all the tax consequences
of the Merger and does not address the tax consequences that may be relevant
to particular categories of stockholders subject to special treatment under
certain federal income tax laws, such as dealers in securities, banks,
insurance companies, foreign individuals and entities, tax-exempt
organizations and stockholders who acquired Yago Common Stock pursuant to an
employee stock option or otherwise as compensation. Each Yago stockholder's
individual circumstances may affect the tax consequences of the Merger to him
or her. No information is provided herein with respect to the tax consequences
of the Merger under foreign, state or local laws or the tax consequences of
transactions effected prior to, concurrently with, or after the Merger
(whether or not such transactions are undertaken in connection with the
Merger). The tax consequences of the Yago Options and Yago Common Stock
subject to Repurchase Rights are not discussed. Moreover, except as provided
below, the tax consequences of the Contingent Shares and Escrow Shares (as
hereinafter defined under the caption "Plan of Merger--Escrow") are not
discussed. The description set forth below is based on existing law and
currently applicable United States Treasury regulations promulgated under the
Code, judicial authority and current published administrative positions of the
Internal Revenue Service, all of which are subject to change either
prospectively or retroactively. Any such changes could adversely affect the
accuracy of the statements and conclusions set forth herein.
It is intended that the transaction effected by the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. It is a condition to the consummation of the
Merger that Pillsbury Madison & Sutro LLP issue an opinion to the effect that
the transaction effected by the Merger will qualify as a reorganization.
However, Pillsbury Madison & Sutro LLP is not expected to express any opinion
on the federal income tax classification of the transaction effected by the
Merger in the event
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Contingent Shares are issued prior to the Eighteen Month Anniversary. Subject
to the limitations and qualifications referred to herein and to the discussion
below with respect to Contingent Shares and Escrow Shares, if the transaction
effected by the Merger qualifies as a reorganization, the following federal
income tax consequences will result:
(i) No gain or loss will be recognized at the Effective Time upon the
exchange of Yago Common Stock for Cabletron Common Stock.
(ii) The aggregate tax basis of the Cabletron Common Stock to be received
by Yago stockholders in exchange for their Yago Common Stock pursuant to
the Merger will be the same as the aggregate tax basis of the Yago Common
Stock surrendered in exchange therefor.
(iii) The holding period of the shares of Cabletron Common Stock to be
received in exchange for their Yago Common Stock pursuant to the Merger by
Yago stockholders will include the period during which the shares of Yago
Common Stock surrendered in exchange therefor were held, provided that such
shares of Yago Common Stock were held as capital assets at the Effective
Time.
(iv) No gain or loss will be recognized by Cabletron, Merger Sub, or Yago
as a result of the Merger.
(v) No gain or loss will be recognized by Yago stockholders upon the
receipt at the Effective Time of a beneficial interest in the Escrow
Shares. A portion of the Yago stockholders' tax basis in their Yago Common
Stock will be allocated to the Escrow Shares. No further federal income tax
consequences will result from the release of Escrow Shares to Yago
stockholders. However, because of the mechanism for determining the number
of Escrow Shares to be returned to Cabletron to satisfy a Cabletron claim
for indemnity, Yago stockholders will recognize gain or loss for federal
income tax purposes upon any such return of Escrow Shares to Cabletron.
(v) In the event Contingent Shares are received following the Eighteen
Month Anniversary, a portion of the Contingent Shares so received will be
taxable as ordinary interest income under the "imputed interest" rules. The
remaining portion of Contingent Shares will generally be received without
recognition of gain or loss. Yago stockholders should consult their tax
advisors regarding application of the imputed interest rules to the
issuance of Contingent Shares following other Issuance Events. Until such
time as the actual number of Contingent Shares to be issued, if any, can be
determined, the Yago stockholders' tax basis in their shares of Cabletron
Common Stock (including Escrow Shares and the portion of Contingent Shares
not constituting interest) will be determined by assuming the Yago
stockholders will receive the maximum number of Contingent Shares (ignoring
Contingent Shares constituting interest) to which they could be entitled.
The tax consequences to a stockholder who exercises dissenters' rights with
respect to a share of Yago Stock and receives payment for such share in cash
will generally not depend on whether the transaction effected by the Merger
qualifies as a reorganization. Such stockholder will generally recognize gain
or loss for federal income tax purposes, measured by the difference between
the holder's tax basis in such share and the amount of cash received (provided
that the payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Code) in which case
such gain or loss will be capital gain or loss provided that the share of Yago
Common Stock was held as a capital asset at the Effective Time.
No advance ruling will be requested or received from the Internal Revenue
Service as to the federal income tax consequences of the Merger. It is a
condition to the consummation of the Merger that Pillsbury Madison & Sutro LLP
issue an opinion to the effect that the transaction effected by the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Code. However, Pillsbury Madison & Sutro LLP is not expected to express any
opinion on the federal income tax classification of the transaction effected
by the Merger in the event Contingent Shares are issued prior to the Eighteen
Month Anniversary. Yago stockholders should be aware that the tax opinion does
not bind the Internal Revenue Service and the Internal Revenue Service is
therefore not precluded from successfully asserting a contrary opinion. In
addition, the tax opinion is subject to certain assumptions and
qualifications, including but not limited to an assumption that certain
representations made by Cabletron, Yago, Merger Sub, and certain Yago
stockholders are true and accurate.
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A successful Internal Revenue Service challenge to the status of the
transaction effected by the Merger as a reorganization under Section 368(a) of
the Code would result in Yago stockholders recognizing taxable gain or loss
with respect to each share of Yago Common Stock surrendered equal to the
difference between the stockholder's tax basis in such share and the fair
market value of the Cabletron Common Stock to be received pursuant to the
Merger. In such event, a stockholder's aggregate tax basis in the Cabletron
Common Stock so received would equal its fair market value.
EACH HOLDER OF SHARES OF YAGO STOCK IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR AS TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO HIM OR HER
(INCLUDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE YAGO OPTIONS, YAGO
COMMON STOCK SUBJECT TO REPURCHASE RIGHTS, CONTINGENT SHARES AND ESCROW
SHARES), AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES.
ANTICIPATED ACCOUNTING TREATMENT
The transaction effected by the Merger is expected to be accounted for under
the purchase method of accounting in accordance with generally accepted
accounting principles. Under the purchase method, the acquiring company
determines the fair value of assets acquired and liabilities assumed; any
premium paid over fair value is reflected on the buyer's balance sheet as an
intangible asset.
GOVERNMENTAL FILINGS
Cabletron and Yago do not believe that any governmental filings in the
United States are required with respect to the Merger, other than the filing
of the Certificate of Merger required to be filed with the Secretary of State
of the State of Delaware in accordance with the DGCL and the filing of the
Registration Statement with the Securities and Exchange Commission of which
this Proxy Statement/Prospectus is a part.
CERTAIN FEDERAL SECURITIES LAW CONSEQUENCES; AFFILIATE LETTERS
The Cabletron Common Stock to be issued in the Merger has been registered
under the Securities Act, thereby allowing those shares to be traded without
restriction, except for those shares held by stockholders of Yago or Cabletron
who are deemed to control or be under common control with Yago or Cabletron,
respectively ("Affiliates"). Affiliates of Yago may not sell their shares of
Cabletron Common Stock acquired in the Merger except pursuant to (i) an
effective registration statement under the Securities Act covering such
shares, (ii) the resale provisions of Rule 145 promulgated under the
Securities Act or (iii) another applicable exemption from the registration
requirements of the Securities Act. Affiliates of Cabletron may not sell any
shares of Cabletron Common Stock except pursuant to an effective registration
statement under the Securities Act covering such shares or an applicable
exemption from the registration requirements of the Securities Act.
STOCK EXCHANGE LISTING
The shares of Cabletron Common Stock to be issued in the Merger will be
authorized for listing and trading on the NYSE.
DIVIDENDS
Yago is not permitted under the terms of the Plan of Merger to declare, set
aside or pay any dividend in cash, stock, property or otherwise in respect of
its capital stock during the period from the date of the Plan of Merger until
the earlier of the termination of the Plan of Merger or the Effective Time.
Further, neither Cabletron nor Yago has ever paid a cash dividend and
Cabletron currently intends to retain all of its earnings for use in its
business to finance future growth and, accordingly, does not anticipate paying
cash dividends in the foreseeable future.
DISSENTERS' RIGHTS
THE FOLLOWING SUMMARY OF APPRAISAL RIGHTS UNDER DELAWARE LAW IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE DGCL, THE COMPLETE TEXT OF
WHICH IS ATTACHED HERETO AS ANNEX B. FAILURE TO FOLLOW STRICTLY THE PROCEDURES
SET FORTH IN SECTION 262 OF THE DGCL MAY RESULT IN THE LOSS, TERMINATION OR
WAIVER OF DISSENTERS' RIGHTS. A YAGO STOCKHOLDER WHO CONSENTS IN WRITING TO
THE APPROVAL OF THE PLAN OF MERGER WILL NOT HAVE A RIGHT TO DISSENT FROM THE
PLAN OF MERGER.
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APPRAISAL RIGHTS
The stockholders of Yago have the right to demand an appraisal of the fair
value of their Yago Stock in accordance with the provisions of Section 262 of
the DGCL ("Section 262"), which sets forth the rights and obligations of Yago
stockholders demanding an appraisal and the procedures to be followed.
Stockholders of Yago who perfect such rights will not be entitled to surrender
their Yago Common Stock for payment of the Merger Consideration in the manner
otherwise described in this Proxy Statement/Prospectus. Yago stockholders
should assume that Yago will take no action to perfect the appraisal rights of
any stockholder. Therefore, to exercise his or her appraisal rights, a
stockholder should strictly comply with the procedures set forth in Section
262 and is urged to consult his or her legal advisor before electing or
attempting to exercise such appraisal rights. Stockholders who consent in
writing to the Merger cannot demand appraisal rights, but stockholders are not
required to vote their shares of Yago Stock against the Merger in order to
obtain appraisal rights. Stockholders who sign and return the written consent
included with this Proxy Statement/Prospectus consenting to the Merger, or
since written consents properly returned without instructions will be voted in
favor of the Merger, with no instructions, will not be entitled to appraisal
rights.
The following is a summary of the procedures to be followed under Section
262, the text of which is attached to this Proxy Statement/Prospectus as ANNEX
B. The summary does not purport to be a complete statement of, and is
qualified in its entirety by reference to, Section 262 and to any amendments
to such section after the date of this Proxy Statement/Prospectus. Failure to
follow any Section 262 procedures may result in termination or waiver of
appraisal rights under Section 262. Any stockholder who desires to exercise
his appraisal rights should review carefully Section 262 and is urged to
consult his legal advisor before electing or attempting to exercise such
rights.
Only a Yago stockholder of record who continuously holds such Yago stock
through the Effective Time is entitled to seek appraisal. The demand for
appraisal must be executed by or for the stockholder of record, fully and
correctly, as such stockholder's name appears on the holder's Yago Stock
certificates. If the Yago Stock is owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, the demand should be made in that
capacity, and if the Yago Stock is owned of record by more than one person, as
in a joint tenancy in common, the demand should be made by or for all owners
of record. An authorized agent, including one or more joint owners, may
execute the demand for appraisal for a stockholder of record; however, such
agent must identify the record owner or owners and expressly disclose in such
demand that the agent is acting as agent for the record owner or owners of
such shares of Yago Stock.
A record stockholder such as a broker who holds shares of Yago Stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of such beneficial owners with respect to
the shares of Yago Stock held for such beneficial owners. In such case, the
written demand for appraisal should set forth the number of shares of Yago
Stock covered by it. Unless a demand for appraisal specifies a number of
shares of Yago Stock, such demand will be presumed to cover all shares of Yago
Stock held in the name of such record owner.
Within ten (10) days after the Effective Time, Yago shall notify each Yago
stockholder who is entitled to appraisal rights of the approval of the Merger
and the Effective Time, which constitutes the notice required under Section
262. Included with this Proxy Statement/Prospectus is a copy of Section 262.
Any holder of Yago Stock entitled to appraisal rights may, within the twenty
(20) day period following the mailing of this Proxy Statement/Prospectus,
demand in writing from Yago an appraisal of his shares of Yago Stock. Such
demand will be sufficient if it reasonably informs Yago of the identity of the
stockholder and that the stockholder intends to demand an appraisal of the
fair value of his shares of Yago Stock. Failure to make such a demand on or
before the end of the twenty (20) day period following the mailing of this
Proxy Statement/Prospectus will foreclose a stockholder's right to appraisal.
The failure of any Yago stockholder to submit a written consent or the
submission of a written consent against the Merger shall not constitute a
demand.
A stockholder may withdraw his demand for appraisal by written request
within sixty (60) days after the Effective Time of the Merger, but thereafter
the approval of Yago is needed for such a withdrawal. Upon withdrawal of an
appraisal demand, a Yago stockholder will be entitled to receive the Merger
Consideration.
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Within 120 days after the Effective Time (the "120-Day Period"), in
compliance with Section 262, any Yago stockholder who has properly demanded an
appraisal and who has not withdrawn his demand as provided above (such Yago
stockholders being referred to collectively as the "Dissenting Stockholders")
and Yago each has the right to file in the Delaware Court of Chancery (the
"Delaware Court") a petition (the "Petition") demanding a determination of the
value of the Yago Stock held by all of the Dissenting Stockholders. If, within
the 120-Day Period, no Petition shall have been filed as provided above, all
rights to appraisal will cease and all of the Dissenting Stockholders who
owned Yago Stock will become entitled to receive the Merger Consideration.
Yago is not obligated and does not intend to file such a Petition. Any
Dissenting Stockholder is entitled, within the 120-Day Period and upon written
request to Yago, to receive from Yago a statement setting forth the aggregate
number of shares of Common Stock not voted in favor of the Merger and with
respect to which demands for appraisal have been received and the aggregate
number of Dissenting Stockholders.
Upon the filing of the Petition by a Dissenting Stockholder, the Delaware
Court may order that notice of the time and place fixed for the hearing on the
Petition be mailed to Yago and all of the Dissenting Stockholders and be
published at least one week before the day of the hearing in a newspaper of
general circulation published in the City of Wilmington, Delaware or in
another publication determined by the Delaware Court. The costs relating to
these notices will be borne by Yago. If a hearing on the Petition is held, the
Delaware Court is empowered to determine which Dissenting Stockholders have
complied with the provisions of Section 262 and are entitled to an appraisal
of their Yago Stock. The Delaware Court may require that Dissenting
Stockholders submit their certificates for notation thereon of the pendency of
the appraisal proceedings. The Delaware Court is empowered to dismiss the
proceedings as to any Dissenting Stockholder who does not comply with such
requirement. Accordingly, Dissenting Stockholders are cautioned to retain
their certificates pending resolution of the appraisal proceedings.
Yago stockholders considering seeking appraisal should have in mind that the
fair value of their shares of Yago Stock determined under Section 262 could be
more, the same, or less than the Merger Consideration.
Dissenting Stockholders are generally permitted to participate in the
appraisal proceedings. No appraisal proceeding in the Delaware Court shall be
dismissed as to any Dissenting Stockholder without the approval of the
Delaware Court, and this approval may be conditioned upon terms which the
Delaware Court deems just.
From and after the Effective Time, Dissenting Stockholders will not be
entitled to vote their Yago Stock for any purpose and will not be entitled to
receive payment of dividends or other distributions in respect of such Yago
Stock payable to stockholders of record thereafter.
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CONVERSION OF THE YAGO PREFERRED STOCK
It is a condition to the consummation of the Merger that all Yago Series A
Preferred Stock and Yago Series B Preferred Stock be converted into Yago
Common Stock prior to the Effective Time. Each share of Yago Series A
Preferred Stock and Yago Series B Preferred Stock may be converted into Yago
Common Stock, at any time, at the election of the holder. In addition, all of
the Yago Series A Preferred Stock, upon the written consent of the holders of
at least two-thirds of the shares of the Yago Series A Preferred Stock, will
convert into shares of Yago Common Stock. In addition, all of the Yago Series
B Preferred Stock, upon the written consent of the holders of at least two-
thirds of the shares of the Yago Series B Preferred Stock, will convert into
shares of Yago Common Stock.
Each share of Yago Series A Preferred Stock and Yago Series B Preferred
Stock converts into a number of shares of Yago Common Stock determined by the
applicable conversion ratios set forth in the Restated Certificate of
Incorporation of Yago. The conversion ratios for the Yago Series A Preferred
Stock and Yago Series B Preferred Stock were initially set at 1:1 subject to
adjustments due to stock splits, recapitalizations, reorganizations and
certain dilutive stock issuances. As of the date of this Proxy
Statement/Prospectus the conversion ratios for both the Yago Series A
Preferred Stock and Yago Series B Preferred Stock are 1:1. Accordingly, each
share of Yago Series A Preferred Stock and Yago Series B Preferred Stock
convert into one share of Yago Common Stock.
The Yago Series A Preferred Stock and Yago Series B Preferred Stock have
certain preferences relative to the Yago Common Stock with respect to the
distribution of assets upon the liquidation or winding up of Yago, as well as
certain protective voting provisions. The rights, preferences and other
characteristics of the Yago Series A Preferred Stock and Yago Series B
Preferred Stock are more fully set forth elsewhere in this Proxy
Statement/Prospectus. See "Comparison of Stockholder Rights" and "Yago Audited
Financial Statements--Note 6."
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THE PLAN OF MERGER
The description of the Plan of Merger set forth below does not purport to be
complete and is qualified in its entirety by reference to the Plan of Merger,
a copy of which is attached to this Proxy Statement/Prospectus as ANNEX A and
incorporated herein by reference. Statements in this Proxy
Statement/Prospectus with respect to the terms of the Merger are qualified in
their entirety by reference to the Plan of Merger. Yago stockholders are urged
to read the full text of the Plan of Merger.
REPRESENTATIONS AND WARRANTIES
The Plan of Merger contains various representations and warranties of the
parties, including representations by Yago relating to (i) its organization
and qualification to do business, (ii) the full force and effect of its
Certificate of Incorporation and Bylaws, (iii) its capitalization, (iv) its
authority relative to the Plan of Merger, (v) the conflicts, required filings
and consents arising from or necessitated by the Merger, (vi) the compliance
and permits necessitated by the Merger, (vii) its financial statements, (viii)
the absence of certain changes or events, (ix) the absence of undisclosed
liabilities, (x) the absence of litigation, (xi) its employee benefit plans
and employment agreements, (xii) its labor matters, (xiii) the accuracy of
information supplied in this Proxy Statement/Prospectus and the Registration
Statement on Form S-4 (the "Registration Statement"), of which it is a part,
relating to Yago, (xiv) the absence of restrictions on its business
activities, (xv) its title to property, (xvi) the payment of its taxes, (xvii)
its environmental matters, (xviii) its intellectual property, (xix) any
interested party transactions, (xx) its insurance, (xxi) its accounts
receivable and inventories, (xxii) its equipment, (xxiii) brokerage, finder's
or other fees or commissions and (xxiv) the absence of change in control
payments. The Plan of Merger also contains representations and warranties of
Cabletron and Merger Sub as to (i) their organization and qualification to do
business, (ii) the full force and effect of their respective Certificates of
Incorporation and Bylaws, (iii) their capitalization, (iv) their authority
relative to the Plan of Merger, (v) the conflicts, required filings and
consents arising from or necessitated by the Merger, (vi) their SEC filings
and financial statements, (vii) the accuracy of information supplied in this
Proxy Statement/Prospectus and the Registration Statement of which it is a
part relating to Cabletron or Merger Sub, (viii) the absence of certain
changes or events, (ix) the absence of undisclosed liabilities, (x) its legal
proceedings, (xi) its employee benefits plan, (xii) its environmental matters
and (xiii) Cabletron's ownership of Merger Sub and the prior activities of
Merger Sub. The representations and warranties made by Cabletron and Merger
Sub and the representations and warranties of Yago (other than representations
and warranties relating to its authority relative to the Plan of Merger,
taxes, and environmental matters) will survive for a period of fifteen months
from the closing date of the Merger.
CONDUCT OF CABLETRON'S AND YAGO'S BUSINESS PRIOR TO THE MERGER
Under the terms of the Plan of Merger, Yago has agreed that, during the
period from the date of the Plan of Merger and continuing until the earlier of
the termination of the Plan of Merger or the Effective Time, unless Cabletron
otherwise agrees in writing, Yago will conduct its business in, and shall not
take any action except in, the ordinary course of business and in a manner
consistent with past practice other than actions taken by Yago in
contemplation of the Merger; and Yago shall use all reasonable commercial
efforts to preserve substantially intact the business organization of Yago, to
keep available the services of the present officers, employees and consultants
of Yago and to preserve the present relationships of Yago with customers,
suppliers and other persons with which Yago has significant business
relations.
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Yago further agreed that it would not, during the period from the date of
the Plan of Merger and continuing until the earlier of the termination of the
Plan of Merger or the Effective Time, directly or indirectly do, or propose to
do, any of the following without the prior written consent of Cabletron: (a)
amend or otherwise change its Restated Certificate of Incorporation or Bylaws;
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of capital stock of
any class, or any options, warrants, convertible securities or other rights of
any kind to acquire any shares of capital stock, or any other ownership
interest (including, without limitation, any phantom interest) in Yago or any
of its affiliates (except for (i) the issuance of shares of Yago Common Stock
issuable pursuant to Yago Options which were granted under the Yago 1996 Stock
Option Plan and 1998 Stock Option Plan (the "Yago Stock Option Plans") or (ii)
in connection with the automatic conversion of all outstanding shares of the
Yago Series A Preferred Stock and Yago Series B Preferred Stock and the shares
of Yago Series A Preferred Stock issuable upon the exercise of the Yago Series
A Preferred Stock Purchase Warrant dated as of June 12, 1997 (the "Warrant")
into Yago Common Stock (the "Conversion")); (c) sell, pledge, dispose of or
encumber any assets of Yago (except for (i) sales of assets in the ordinary
course of business and in a manner consistent with past practice, (ii)
dispositions of obsolete or worthless assets, and (iii) sales of immaterial
assets not in excess of $10,000 in the aggregate); (d) (i) declare, set aside,
make or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of any of its capital stock,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock (except for the
issuance of shares of Yago Common Stock issuable pursuant to (A) Yago Options
which were granted under the Yago Stock Option Plans or (B) the Conversion and
the issuance of shares of Yago Series A Preferred Stock issuable upon the
exercise of the Warrant), or (iii) amend the terms or change the period of
exercisability of, purchase, repurchase, redeem or otherwise acquire any of
its securities, including, without limitation, shares of Yago Common Stock or
any option, warrant or right, directly or indirectly, to acquire shares of
Yago Common Stock, or propose to do any of the foregoing (except for the
repurchase of Yago Common Stock pursuant to the Repurchase Rights); (e) (i)
acquire (by merger, consolidation, or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof;
(ii) incur any indebtedness for borrowed money calling for aggregate payments
in excess of $20,000 or issue any debt securities or assume, guarantee or
endorse or otherwise as an accommodation become responsible for, the
obligations of any person or, except in the ordinary course of business
consistent with past practice, make any loans or advances; (iii) enter into or
amend any material contract or agreement; (iv) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $20,000, or (v) enter into or amend any contract, agreement,
commitment or arrangement to effect any of the matters prohibited by this
clause (e); (f) increase the compensation payable or to become payable to its
officers or employees, or grant any severance or termination pay to, or enter
into any employment or severance agreement with any director, officer or other
employee, or establish, adopt, enter into or amend any collective bargaining,
bonus, profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination, severance
or other plan, agreement, trust, fund, policy or arrangement for the benefit
of any current or former directors, officers or employees, except, in each
case, as may be required by law, provided Yago may increase wages in the
ordinary course of business consistent with Yago's past practice but not more
than five percent (5%) for any individual employee and may grant options under
the Yago Stock Option Plans to new or existing employees; (g) except to the
extent required by law, take any action to change accounting policies or
procedures (including, without limitation, procedures with respect to revenue
recognition, payments of accounts payable and collection of accounts
receivable); (h) make any material tax election inconsistent with past
practice or settle or compromise any material federal, state, local or foreign
tax liability or agree to an extension of a statute of limitations; (i) pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against in
the unaudited balance sheet of Yago as of September 30, 1997, together with
the related statement of operations for the period then ended, or incurred in
the ordinary course of business and consistent with past practice; or (j)
take, or agree in writing or otherwise to take, any of the actions described
in (a) through (i) above.
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NO SOLICITATION
The Plan of Merger provides, subject to certain exceptions, that: (a) Yago
cannot, directly or indirectly, through any officer, director, employee,
representative or agent (i) solicit, initiate or encourage the initiation of
any inquiries or proposals regarding any merger, sale of substantial assets,
sale of shares of capital stock (including without limitation by way of a
tender offer) or similar transactions involving Yago other than the Merger
(each of the foregoing inquiries or proposals referred to herein as an
"Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any nonpublic information to any person relating to,
any Acquisition Proposal or (iii) agree to, approve or recommend any
Acquisition Proposal; (b) Yago shall immediately notify Cabletron after
receipt of any Acquisition Proposal, or any modification of or amendment to
any Acquisition Proposal, or any request for nonpublic information relating to
Yago in connection with an Acquisition Proposal or for access to the
properties, books or records of Yago or by any person or entity that informs
the Board of Directors of Yago that it is considering making, or has made, an
Acquisition Proposal, such notice to Cabletron to be made orally and in
writing; (c) Yago was obligated to immediately cease and cause to be
terminated any existing discussions or negotiations with any persons (other
than Cabletron and Merger Sub) conducted prior to the execution of the Plan of
Merger with respect to any of the foregoing and that Yago would not release
any third party from the confidentiality provisions of any confidentiality
agreement to which Yago is a party; and (d) Yago shall ensure that the
officers, directors and employees of Yago and any investment banker or other
advisor or representative retained by Yago are aware of the restrictions
described in this section.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to, among
other things, the satisfaction prior to the Effective Time of the following
conditions: (a) immediately prior to the Effective Time, the Commission having
declared the Registration Statement of which this Proxy Statement/Prospectus
is a part, effective, with no stop order suspending the effectiveness of the
Registration Statement having been issued by the Commission and no proceedings
for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus having been initiated or threatened by the Commission;
(b) the Plan of Merger and the Merger having received the Requisite Approvals
(as defined below) and exercise of the Warrant and Conversion shall have been
consummated; (c) the absence of any temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger, any pending proceeding brought by any
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing or any
action taken or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation of
the Merger illegal; (d) the absence of any pending or threatened action, suit
or proceeding before any governmental authority, administrative agency or
court of competent jurisdiction, wherein any unfavorable injunction, judgment,
decree, order, ruling or charge would prevent consummation of any of the
transactions contemplated by the Plan of Merger or cause any of the
transactions contemplated by the Plan of Merger to be rescinded following
consummation. Yago shall have received an opinion of Pillsbury Madison & Sutro
LLP to the effect that the transaction effected by the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code.
The obligations of Cabletron and Merger Sub to effect the Merger are also
subject to the following conditions: (a) the accuracy, in all respects, of the
representations and warranties of Yago as of the Effective Time with the same
force and effect as if made at and as of such time and the receipt of a
certificate to such effect signed by the President of Yago; (b) the
performance and compliance by Yago with all agreements and covenants required
by the Plan of Merger to be performed or complied with by Yago at or prior to
the Effective Time and the receipt of a certificate to such effect signed on
behalf of Yago by the President and the Chief Financial Officer; (c) Yago
having obtained all necessary consents, waivers, approvals, authorizations or
orders, and having made all required filings for the due authorization,
execution and delivery of the Plan of Merger and the consummation by Yago of
the transactions contemplated by the Plan of Merger; (d) the receipt by
Cabletron of an opinion from Pillsbury Madison & Sutro LLP, counsel to Yago,
regarding the validity of certain actions
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taken by Yago with respect to the Merger; (e) the receipt by Cabletron and the
continuing full force and effect of a "Rule 145 Agreement" by each person who
is identified as an "affiliate" of Yago; (f) the termination of all existing
registration rights, preemptive rights and rights of first refusal with
respect to the purchase of the capital stock of Yago of holders of Yago Stock
and the receipt of a certificate to such effect signed on behalf of Yago by
the President and the Chief Financial Officer; (g) the execution and delivery
to Cabletron of the Escrow Agreement (described below) by each of the Escrow
Agent, Yago and the Stockholders Representative; (h) certain specified persons
shall have entered into employment agreements with Cabletron, such agreements
shall be in full force and effect as of the Effective Time, such persons shall
be in the employ of Yago immediately prior to the Effective Time and no such
person shall have indicated his or her intention to terminate his or her
employment with Yago following the Effective Time; (i) the Warrant shall have
been exercised in full, all shares of Series A Preferred Stock issuable
pursuant thereto shall have been issued in accordance with the terms of the
Warrant, and the shares of Yago Series A Preferred Stock issued pursuant
thereto shall have been converted into shares of Yago Common Stock; (j) the
Yago Series B Preferred Stock Purchase Warrant dated June 12, 1997 shall have
been terminated and of no further force and effect; (k) the Conversion shall
have been consummated; (l) each of Piyush Patel, Romulus Pereira and Nilesh
Shah (each a "Founding Stockholder") shall have executed the Amended Founder
Stock Purchase Agreement confirming that such Amended Founders Stock Purchase
Agreement shall be enforceable by Cabletron following the Effective Time to
the same extent such agreement was enforceable by Yago prior to the Effective
Time; (m) each of the Founding Stockholders and certain of the holders of Yago
Preferred Stock shall have executed and delivered to Cabletron Participation
Agreements granting an irrevocable proxy to Cabletron to provide written
consents for their shares of Yago Stock in favor of the Plan of Merger, the
Merger and the transactions contemplated thereby; (n) in addition to obtaining
the stockholders approvals required for the Plan of Merger, the Merger and the
Conversion (the "Requisite Approvals"), stockholders of Yago holding not less
than 95% of the Yago Common Stock outstanding immediately prior the Effective
Time (assuming that all shares of Yago Preferred Stock have been converted
into Yago Common Stock) shall have either (i) voted for and approved each of
the Plan of Merger and the Merger or (ii) approved each of the Plan of Merger
and the Merger by written consent; (o) there shall not have occurred any
change, effect or circumstance that is likely to be materially adverse to the
business, assets, prospects, financial condition or results of operations of
Yago or is reasonably likely to delay or prevent the consummation of the
transactions contemplated by the Plan of Merger; (p) Yago shall have delivered
to Cabletron the audited balance sheet of Yago as of December 31, 1997,
together with the related statement of operations for the period then ended;
and (q) certain prior consultants to Yago shall have executed and delivered
Proprietary Information and Inventions Agreement to Yago.
The obligation of Yago to effect the Merger is also subject to the following
conditions: (a) the accuracy, in all respects, of the representations and
warranties of Cabletron and Merger Sub as of the Effective Time with the same
force and effect as if made at and as of such time and Yago shall have
received a certificate to such effect signed by the Chief Financial Officer of
Cabletron; (b) the performance and compliance by Cabletron and Merger Sub in
all material respects with all agreements and covenants required by the Plan
of Merger to be performed or complied with by them on or prior to the
Effective Time, and Yago shall have received a certificate to such effect
signed by the Chief Financial Officer of Cabletron; (c) Cabletron and Merger
Sub having obtained all necessary consents, waivers, approvals, authorizations
or orders, and having made all required filings, for the authorization,
execution and delivery of the Plan of Merger and the consummation by them of
the transactions contemplated by the Plan of Merger; (d) the receipt by Yago
of the written opinion of Ropes & Gray, counsel to Cabletron, regarding the
validity of certain actions taken by Cabletron and Merger Sub with respect to
the Merger; (e) that Cabletron has caused the Cabletron shares to be issued in
the Merger to be approved for quotation, upon official notice of issuance, on
the NYSE; (f) the execution and delivery to Yago of the Escrow Agreement
(described below) by each of the Escrow Agent, Cabletron and the Stockholders
Representative; (g) Cabletron shall have made offers of employment to
employees of Yago at the Effective Time; and (h) there shall not have occurred
any change, effect or circumstance that is likely to be materially adverse to
the business, assets, prospects, financial condition or results of operations
of Cabletron and its subsidiaries or is reasonably likely to delay or present
the consummation of the transactions contemplated by the Plan of Merger.
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TERMINATION
The Plan of Merger may be terminated at any time prior to the Effective
Time, notwithstanding approval thereof by the stockholders of Yago: (a) by
mutual written consent duly authorized by the Boards of Directors of Cabletron
and Yago; (b) by either Cabletron or Yago if the Merger shall not have been
consummated by March 31, 1998 (provided that the right to terminate the Plan
of Merger under this clause (b) shall not be available to any party whose
failure to fulfill any obligation under the Plan of Merger has been the cause
of or resulted in the failure of the Merger to occur on or before such date);
(c) by either Cabletron or Yago if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued a nonappealable final order, decree or ruling or taken any other action
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger (provided that the right to terminate the Plan of
Merger under this clause (c) shall not be available to any party who has not
complied with its obligations under the Plan of Merger with respect to taking
further actions or ensuring the proper tax treatment of the Merger and such
noncompliance materially contributed to the issuance of any such order, decree
or ruling or the taking of such action); (d) by Cabletron or Yago, if the
Requisite Approvals, the exercise of the Warrant and the Conversion shall not
have been completed by March 1, 1998; (e) by Cabletron, if: (i) the Board of
Directors of Yago shall withdraw, modify or change its approval or
recommendation of the Plan of Merger or the Merger in a manner adverse to
Cabletron or shall have resolved to do so; or (ii) the Board of Directors of
Yago shall have recommended to the stockholders of Yago an Alternative
Transaction (as defined below); or (f) by Cabletron or Yago, (i) if any
representation or warranty of Yago or Cabletron, respectively, set forth in
the Plan of Merger shall be untrue when made, or (ii) upon a breach of any
covenant or agreement on the part of Yago or Cabletron, respectively, set
forth in the Plan of Merger, such that the conditions to the requisite
obligations of Cabletron and Merger Sub or Yago, as the case may be, would not
be satisfied (either (i) or (ii) above being a "Terminating Breach"),
provided, that, if such Terminating Breach is curable prior to March 31, 1998
by Yago or Cabletron, as the case may be, through the exercise of its
reasonable best efforts and for so long as Yago or Cabletron, as the case may
be, continues to exercise such reasonable best efforts, neither Cabletron nor
Yago, respectively, may terminate the Plan of Merger under this clause.
In the event of the termination of the Plan of Merger pursuant to the
preceding paragraphs, the Plan of Merger shall forthwith become void and there
shall be no liability on the part of any party thereto or any of its
affiliates, directors, officers or stockholders except (i) for certain
provisions of the Plan of Merger relating to confidentiality and fees and
expenses, which shall survive any termination of the Plan of Merger and (ii)
nothing in the Plan of Merger shall relieve any party from liability for any
breach of the Plan of Merger.
FEES AND EXPENSES
All fees and expenses incurred in connection with the Plan of Merger and the
transactions contemplated by it will generally be paid by the party incurring
such expenses, whether or not the Merger is consummated, except that: (a) in
the event the Merger is consummated, Yago shall pay up to $310,000 of
investment banking fees and up to $400,000 of other fees and expenses
(including legal and accounting fees) incurred by Yago in connection with the
Plan of Merger and the consummation of the Merger (collectively, the "Yago
Expenses") and thereafter the stockholders of Yago (other than Cabletron)
shall be responsible for any fees and expenses incurred in excess of such
amount.
INDEMNIFICATION
Pursuant to the Plan of Merger, the Surviving Corporation agrees that all
rights to indemnification or exculpation now existing in favor of the
employees, agents, directors or officers of Yago (each, a "Yago Indemnified
Party") as provided in its Restated Certificate of Incorporation Bylaws shall
continue in full force and effect for a period of not less than six years from
the Effective Time, except, that, in the event any claim or claims are
asserted or made within such six-year period, all rights to indemnification in
respect of any such claim or claims shall continue until disposition of any
and all such claims. Any determination required to be made with respect to
whether an Yago Indemnified Party's conduct complies with the standards set
forth in the Restated Certificate of Incorporation or Bylaws of Yago or
otherwise shall be made by independent counsel selected by the Yago
Indemnified Party reasonably satisfactory to the Surviving Corporation (whose
fees and expenses shall be paid by the Surviving Corporation).
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The representations and warranties of Yago and Cabletron made in the Plan of
Merger (other than representations and warranties of Yago with respect to its
authority relating to the Plan of Merger, taxes or environmental matters) and
in the documents and certificates delivered in connection with the
satisfaction of its closing conditions will survive the Merger for a period of
fifteen months from the Effective Time and will remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
other party thereto, any person controlling any such party or any of their
officers or directors, whether prior to or after the execution of the Plan of
Merger. The representations and warranties of Yago with respect to its
authority relating to the Plan of Merger, taxes or environmental matters, as
well as claims based upon fraud, will survive until the expiration of the
statutes of limitation applicable to such claims. Claims made within the
applicable time periods described above shall survive to the extent of such
claim until such claim is finally determined and, if applicable, paid.
By approving the Plan of Merger, the stockholders of Yago (other than
Cabletron) agree to indemnify, defend, protect, and hold harmless each of
Cabletron, Merger Sub, the Surviving Corporation and each of their respective
subsidiaries and affiliates (each in its capacity as an indemnified party, a
"Cabletron Indemnitee") at all times from and after the date of the Plan of
Merger from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) (collectively "Damages") incurred by such Cabletron Indemnitee
as a result of or incident to (i) any breach of any representation or warranty
of Yago set forth therein or in any certificate or other document delivered in
connection with the satisfaction of its closing conditions (as such
representation or warranty would read if all qualifications as to knowledge,
materiality and Material Adverse Effect were deleted from it) with respect to
which a claim for indemnification is brought by a Cabletron Indemnitee within
the applicable survival period described above, (ii) any breach or
nonfulfillment by Yago, or any noncompliance by Yago with, any covenant,
agreement, or obligation contained therein or in any certificate or other
document delivered in connection with the satisfaction of its closing
conditions except to the extent waived by Cabletron, (iii) any claim by a
holder or former holder of Yago capital stock or options, warrants or other
securities convertible into or exercisable for shares of Yago capital stock
(the "Convertible Securities") or any other person or entity, seeking to
assert, or based upon: (A) ownership or rights of ownership to any shares of
capital stock of Yago; (B) any rights of a stockholder of Yago (other than the
right to receive the Merger Consideration pursuant to the Plan of Merger or
appraisal rights under the applicable provisions of the DGCL), including any
option, preemptive rights, or rights to notice or to vote; (C) any rights
under the Restated Certificate of Incorporation or Bylaws of Yago.
Notwithstanding anything to the contrary in the foregoing, with respect to the
Yago stockholders' obligation to indemnify a Cabletron Indemnitee against
Damages suffered by such Cabletron Indemnitee in connection with any
infringement of third party intellectual property rights and arising from a
breach of the representations and warranties relating to the intellectual
property rights of Yago, Yago will have no obligation to indemnify such
Cabletron Indemnitee for such Damages to the extent that such infringement (i)
arises out of the combination of any Yago intellectual property rights with
any other components or intellectual property rights where the infringement
would not have occurred but for such combination (other than combinations
developed or designed by Yago prior to the Closing) or (ii) that is caused by
any change or modification made by any Cabletron Indemnitee to any of the Yago
intellectual property rights.
Cabletron has agreed to indemnify the Yago stockholders (other than
Cabletron) (the "Yago Indemnitees") after the Effective Time from and against
any and all Damages incurred or suffered by the Yago Indemnitees as a result
of or incident to (i) any breach of any representation or warranty of
Cabletron set forth in the Plan of Merger or in any certificate or other
document delivered in connection with the satisfaction of its closing
conditions (as such representations or warranty would read if all
qualifications as to knowledge, materiality and Material Adverse Effect were
deleted from it other than the representation and warranty relating to the
absence of certain changes) with respect to which a claim for indemnification
is brought by such Yago Indemnities within the applicable survival period
described above, (ii) any breach or nonfulfillment by Cabletron, or any
noncompliance by Cabletron with, any covenant, agreement, or obligation of
Cabletron contained in the Plan or Merger or in any certificate or other
document delivered in connection with the satisfaction of its closing
conditions except to the extent waived by Yago (the "Stockholder Damages").
Notwithstanding anything to the contrary, the aggregate liability of Cabletron
to the Yago Indemnitees shall not exceed $35,000,000.
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Promptly after a Cabletron Indemnitee has received notice of or has
knowledge of any claim by a person not a party to the Plan of Merger (a "Third
Person") or the commencement of any action or proceeding by a Third Person,
the Cabletron Indemnitee shall, as a condition precedent to a claim with
respect thereto being made against the escrow, give the Stockholders
Representative written notice of such claim or the commencement of such action
or proceeding; provided, however, that the failure to give such notice will
not affect the Cabletron Indemnitee's right to indemnification pursuant to the
Plan of Merger with respect to such claim, action or proceeding, except to the
extent that the Stockholders Representative has, or the stockholders have,
been actually prejudiced as a result of such failure. If the Stockholders
Representative notifies the Indemnitee within 30 days from the receipt of the
foregoing notice that he wishes to defend against the claim by the Third
Person and if the estimated amount of the claim, together with all other
claims made against the Escrow Funds (as defined in the Escrow Agreement) that
have not been settled, is less than the remaining balance of the Escrow Funds,
then the Stockholders Representative shall have the right to assume and
control the defense of the claim by appropriate proceedings with counsel
reasonably acceptable to the Cabletron Indemnitee, and the Stockholders
Representative shall be entitled to reimbursement out of the Escrow Funds for
such defense. The Cabletron Indemnitee may participate in the defense, at its
sole expense, of any such claim for which the Stockholders Representative
shall have assumed the defense pursuant to the preceding sentence; provided,
however, that the Cabletron Indemnitee shall control the defense of any claim
or proceeding that in the Cabletron Indemnitee's reasonable judgment could
have a material and adverse effect on the Cabletron Indemnitee's business
apart from the payment of money damages. The Cabletron Indemnitee shall be
entitled to indemnification for the reasonable fees and expenses of its
counsel for any period during which the Stockholders Representative has not
assumed the defense of any claim. Whether or not the Stockholders
Representative shall have assumed the defense of any claim, neither the
Cabletron Indemnitee nor the Stockholders Representative shall make any
settlement with respect to any such claim, suit or proceeding without the
prior consent of the other, which consent shall not be unreasonably withheld
or delayed. It is understood and agreed that in situations where failure to
settle a claim expeditiously could have an adverse effect on the party wishing
to settle, the failure of the party controlling the defense to act upon a
request for consent to such settlement within five business days of receipt of
notice thereof shall be deemed to constitute consent to such settlement for
purposes of these indemnification provisions, but shall not be dispositive of
the amount of Damages as between the stockholders of Yago and the Cabletron
Indemnitee.
All claims for indemnification by a Cabletron Indemnitee shall be paid
solely from the Escrow Funds. To the extent that Cabletron, Merger Sub, or the
Surviving Corporation or another Cabletron Indemnitee makes a claim against
the Escrow Funds pursuant to the Escrow Agreement, and such claim is paid in
shares of Cabletron Common Stock, then for purposes of such payment, the
shares of Cabletron Common Stock shall be valued at the average of the daily
last sales price of the Cabletron Common Stock on the NYSE for the twenty
consecutive trading days ending on the date of payment.
The stockholders of Yago shall not be required to indemnify any Cabletron
Indemnitee except to the extent that Damages suffered by such Cabletron
Indemnitee, together with Damages suffered with respect to all other claims
for indemnification pursuant to the Plan of Merger, exceeds $667,000 (the
"Threshold"); provided, however, that after such Threshold is reached the Yago
stockholders shall be required to pay 74.98% of all amounts by which such
aggregate amount of Damages exceed $250,000 (the "Indemnity Basket") (net of
any insurance proceeds actually received by Cabletron). Notwithstanding
anything else to the contrary, with respect to any Damages relating to
litigation involving the infringement of the intellectual property rights of
any third party, once the Threshold has been met with respect to all claims
for indemnification under the Plan of Merger the Yago stockholders shall pay
only twenty-five percent (25%) of the legal fees and expenses associated with
such litigation in excess of the Indemnity Basket.
ESCROW
In order to secure the indemnification obligations of the Yago stockholders
under the Plan of Merger, approximately ten percent (10)% of the Cabletron
Common Stock to be issued in the Merger (the "Escrow
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Shares") will be held in escrow. Immediately prior to the Effective Time,
Cabletron, the Stockholders Representative (on behalf of Yago stockholders)
and the Escrow Agent will enter into the Escrow Agreement. Each Yago
stockholder will have voting rights with respect to the Escrow Shares so long
as such Escrow Shares are held in escrow, and Cabletron will take all
reasonable steps necessary to allow the exercise of such rights. While the
Escrow Shares remain in the Escrow Agent's possession pursuant to the Escrow
Agreement, the Yago stockholders will retain and will be able to exercise all
other incidents of ownership of said Escrow Shares which are not inconsistent
with the terms and conditions of the Escrow Agreement. The Escrow Agreement
will remain in effect for a period of eighteen months from the Effective Time.
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BUSINESS OF CABLETRON
GENERAL
Cabletron develops, manufactures, markets, installs and supports a wide
range of standards-based local area network ("LAN") and wide area network
("WAN") connectivity hardware and software products including intelligent
switches and hubs, remote access devices, and sophisticated management
software. Cabletron delivers products to address the full range of networking
technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring,
fiber distributed data interface ("FDDI"), asynchronous transfer mode ("ATM"),
integrated services digital network ("ISDN"), frame relay and network
management software. Cabletron's networking strategy, known as Synthesis(R),
is a strategic framework which combines infrastructure products and
technologies, automated management tools, and support services. Synthesis
allows the creation of a network with enhanced performance and capabilities,
manageability, and reliability and a lower overall cost structure. Cabletron's
core products include the SmartSwitch hardware product family and Spectrum
network management software. The SmartSwitch product family, built upon
Cabletron's proprietary SmartSwitch application specific integrated circuits
("ASICs") and architecture, includes the SmartSwitch 9000 product line,
Cabletron's enterprise-level backbone switching chassis and modules, the
SmartSwitch 6000 product line, Cabletron's wiring closet-level solution, the
SmartSwitch 2000 product line, Cabletron's standalone, workgroup-level
switches, and SmartSTACK, a desktop Ethernet switch. Cabletron's hardware
products also include the MMAC, a wiring closet smart hub, and other Ethernet,
ISDN, and frame relay products. All of Cabletron's intelligent networking
products are managed by SPECTRUM(R), Cabletron's sophisticated enterprise-wide
network management system. Cabletron also produces and supports other network
products, such as adapter cards, other interconnection equipment, wiring
cables, and file server products, and provides a wide range of networking
services. Cabletron believes that its broad product line and its ability to
provide full service capabilities enable it to offer its customers "The
Complete Networking Solution."
Cabletron is a Delaware corporation organized in 1988. The executive offices
of Cabletron are located at 35 Industrial Way, Rochester, New Hampshire 03866
(Telephone: (603) 332-9400).
RECENT PRODUCT LINE ACQUISITIONS
Fiscal 1998 Acquisitions
Effective February 7, 1998, Cabletron consummated the acquisition of certain
of the assets of the Network Products Business ("NPB") of Digital Equipment
Corporation ("Digital") pursuant to an asset purchase agreement (the "Asset
Purchase Agreement") dated November 24, 1997, as amended, by and among
Cabletron, Ctron Acquisition Co., Inc., a wholly owned subsidiary of Cabletron
("Ctron"), and Digital. The NPB, now known as the "DIGITAL Network Products
Group, a Cabletron Systems, Inc. Company" (the "DNPG"), develops and supplies
a wide range of data networking hardware and software, including LAN and WAN
products. The NPB's products span a wide range of networking technologies,
including Ethernet, Fast Ethernet, FDDI and ATM switching technologies. The
purchase price for the acquisition was approximately $430.0 million, before
closing adjustments, consisting of cash and product credits. The acquisition
was accounted for by Cabletron under the purchase method of accounting. The
closing on February 7, 1998 extended to the assets and personnel located in
the United States and the inventory worldwide. The remaining international
assets and personnel are expected to be transferred as issues in individual
countries are resolved. The audited and unaudited Statements of Assets Sold
and Statements of Revenue and Direct Operating Expenses of the NPB and the
Notes thereto, as well as the Unaudited Pro Forma Combined Financial
Statements of Cabletron related thereto are included herein beginning on page
F-29.
Cabletron and Digital have also entered into the Reseller Agreement dated as
of November 24, 1997 (the "Reseller Agreement") pursuant to which Digital
designated Cabletron as its Strategic Network Products Partner and was
appointed by Cabletron as a reseller of certain Cabletron products (including
the products previously sold by the NPB), Cabletron designated Digital as its
Strategic Network Services Partner, and Cabletron agreed
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to sell and Digital agreed to purchase, for internal use and resale, certain
minimum volumes of products during the term of the Reseller Agreement, which
extends through June 30, 2001. The minimum volumes are subject to downward or
upward adjustment in certain instances. During the term of the Reseller
Agreement, Cabletron will operate the NPB under the name "DIGITAL Network
Products Group, a Cabletron Systems, Inc. Company."
Fiscal 1997 Acquisitions
In July 1996, Cabletron acquired ZeitNet Inc. ("ZeitNet"), a privately held
manufacturer and a leader in providing high-quality, low-cost solutions for
connecting applications, servers and workgroups to high-performance ATM
networks. Under the terms of the agreement, Cabletron issued approximately 3.3
million shares of common stock for all of the outstanding shares of ZeitNet
(as well as all shares to be issued pursuant to ZeitNet options assumed by
Cabletron) in a transaction accounted for as a pooling of interests.
In August 1996, Cabletron acquired Network Express, Inc. ("Network
Express"), a publicly held manufacturer and a provider of ISDN high-speed LAN
switched access solutions. Under the terms of the agreement, Cabletron issued
approximately 2.9 million shares of common stock for all of the outstanding
shares of Network Express (as well as all shares to be issued pursuant to
Network Express options assumed by Cabletron) in a transaction accounted for
as a pooling of interests.
In December 1996, Cabletron acquired Netlink, Inc. ("Netlink"), a privately
held manufacturer and supplier of frame relay access solutions for multi-
protocol, mission-critical networks. Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of
the outstanding shares of Netlink (as well as all shares to be issued pursuant
to Netlink options assumed by Cabletron) in a transaction accounted for as a
pooling of interests.
In February 1997, Cabletron acquired The OASys Group, Inc. ("OASys"), a
privately-held developer of software used to manage telecommunications devices
and connections in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
of OASys (as well as all shares to be issued pursuant to OASys options assumed
by Cabletron) in a transaction accounted for as a purchase.
Fiscal 1996 Acquisitions
In order to broaden the range of switching products offered by the Company,
in January 1996 Cabletron acquired the Enterprise Networks Business Unit
("ENBU") of Standard Microsystems Corporation for $85.7 million. The products
acquired from the ENBU include standalone Fast Ethernet switches, as well as a
modular chassis offering several networking technologies. The transaction was
accounted for as a purchase.
KEY PERSONNEL
On September 1, 1997, S. Robert Levine resigned as President, Chief
Executive Officer and director of Cabletron and Donald B. Reed was appointed
to the positions of President, Chief Executive Officer and director of
Cabletron. On the same date, Craig R. Benson resigned as Chief Operating
Officer of Cabletron. In addition, Mr. Benson has reduced his day-to-day
involvement in Cabletron. Mr. Benson remains the Chairman of the Board of
Directors of Cabletron.
PRODUCTS AND SERVICES
Cabletron's products and services are grouped into the areas discussed
below.
SmartSwitches and Hubs, and Related Products
SmartSwitch 9000 (MMAC Plus). The SmartSwitch 9000 (MMAC Plus) is an
enterprise-level backbone switching chassis. The SmartSwitch 9000, with its
high bandwidth (aggregate bandwidth 60 Gbps), switching rate (aggregate
switching rate of 10 million packets/cells per second) and modularity (up to
14 interface
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modules), is designed to operate as the central switching hub for networks
containing large numbers of nodes and multiple disparate networking
technologies. Each SmartSwitch 9000 module supports one or more of the
following technologies: ATM Cell Switching, SecureFast Packet Switching
(Cabletron's own standards-based switching technology), SecureFast Virtual
Networking and network layer routing or standard MAC layer bridging. In
addition to accommodating the latest networking technologies, the SmartSwitch
9000 is designed to integrate customers' legacy systems. The SmartSwitch 9000,
like all members of the SmartSwitch family, is designed to be highly fault
tolerant.
SmartSwitch 6000. The SmartSwitch 6000, based upon Cabletron's SmartSwitch
architecture, is a switch intended primarily for the wiring closet
environment. The SmartSwitch 6000, which principally provides
interconnectivity between Fast Ethernet, ATM or FDDI backbone connections and
local Ethernet connections, accepts up to five SmartSwitch modules, including
a thirteen port 10 Mbps Ethernet module, a two port 100 Mbps Fast Ethernet
module, a single port FDDI module and an ATM module. By allowing virtually any
combination of these modules, the SmartSwitch 6000 provides customers with
substantial flexibility.
SmartSwitch 2200. The SmartSwitch 2200 is a standalone switch that provides
twenty-four 10 Mbps switch ports and two 100 Mbps switch ports and has been
designed specifically for use at the workgroup or desktop level of the
enterprise. The SmartSwitch 2200 offers both high-performance Ethernet
switching and also high-speed backbone connections through either Fast
Ethernet, FDDI, or ATM.
SmartSTACK. The SmartSTACK Ethernet switch is a standalone desktop switch
that provides twenty-five ports of 10Base-T Ethernet connectivity with a fixed
100Base-TX and a modular 100Base-X uplink capacity. The SmartSTACK Fast
Ethernet switch provides sixteen ports of 10/100 Mbps Fast Ethernet switching
with two uplink ports for 100Base-X connections.
MMAC. First introduced in 1988, the Multi Media Access Center ("MMAC")
provides centralized management and connectivity for any standard LAN or WAN
through a variety of networking technologies. The MMAC supports both
previously existing networking technologies such as Ethernet, Token Ring, FDDI
and Systems Network Architecture ("SNA") as well as emerging advancements
including ATM and Cabletron's own SecureFast Switching. With more than one
hundred MMAC interface modules available, customers can custom configure a
network according to their particular needs. As requirements change, the MMAC
can be reconfigured to provide a smooth migration to higher bandwidth
technologies.
ATX. Cabletron's ATX provides high-performance, multiprotocol LAN solutions
for high-capacity backbone or departmental networks. The ATX permits high-
bandwidth switching between Ethernet, Fast Ethernet, Token Ring and FDDI, with
full connectivity to ATM.
Wide Area Networking Products
Cabletron's CyberSWITCH family of products include small office/home office
connectivity, remote solutions, high-density central site platforms and frame
relay solutions. These products have been developed both internally and
through the acquisitions of Network Express and Netlink.
Network Management Software
As enterprise networks grow in number, become more diverse and complex and
incorporate increasing bandwidth capacity, organizations require more
sophisticated network management systems. SPECTRUM, Cabletron's enterprise-
wide network management software, allows network administrators to monitor and
control all of the physical layer components making up a worldwide network.
SPECTRUM, which integrates a graphical user interface and a UNIX-based
client/server architecture, provides powerful network management tools in an
easy-to-use, scaleable and distributed environment. SPECTRUM incorporates
Induction Modeling Technology ("IMT"), a form of artificial intelligence that
provides SPECTRUM with the ability to model every element of the network,
including physical cables, network devices, and applications. SPECTRUM is
designed to enable
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network administrators to view worldwide enterprise networks and diagnose,
actively anticipate and correct problems at many levels, including the
individual node level. Cabletron has developed SPECTRUM modules for a wide
range of network products, including over 110 applications for third-party
products. Cabletron plans to continue to develope SPECTRUM system enhancements
and modules to increase the number of third-party network products for which
SPECTRUM is applicable.
Cabletron believes that SPECTRUM has helped to establish Cabletron as a
leader in the field of network management software and contributes to the
market acceptance of its interconnectivity hardware. SPECTRUM is sold both to
purchasers of Cabletron's LAN and WAN products and on a stand-alone basis as a
network management platform.
Network Interconnection Equipment
Cabletron manufactures a line of a dual-port and multiport stand-alone
repeaters, which are designed to connect up to eight Ethernet/IEEE 802.3
segments together or to an Ethernet backbone. Cabletron also produces Desktop
Network Interface ("DNI") cards, which enable the user to connect directly to
10BASE-T unshielded twisted pair, fiber optic or coaxial cabling via a built-
in transceiver on the card, and provide high-speed Ethernet and Token Ring
data connections for various personal computer platforms.
Service and Support
In addition to manufacturing a broad line of network equipment, Cabletron
also offers a wide range of services for networks, including service
maintenance; consulting, design and configuration; product planning; project
management; training; testing, certification and documentation; and
performance analysis. Cabletron offers comprehensive training programs to
ensure that customers receive the maximum benefit from their networks.
Cabletron's service group forms an integral part of Cabletron's marketing
strategy, as it constitutes a key element of the complete networking solution
offered by Cabletron. Cabletron believes that the combination of its broad
line of networking products, its emphasis on service, and its close
acquaintance with customers' needs enable it to compete effectively.
Other Products
Cabletron's other products include test equipment designed to analyze
networks and protocols and to verify proper installation and operation of the
network, cabling, transceivers, repeaters and other devices. Cabletron also
sells electronically-tested Ethernet coaxial cable, shielded twisted pair
(IBM-type) wire, unshielded twisted-pair wire and optical fiber cut to
specific lengths.
DISTRIBUTION AND MARKETING
Cabletron distributes its products through a substantial direct sales force
that is supplemented by several distributors and other resellers through the
Synergy Plus Program. Cabletron's direct sales are made by approximately 200-
plus sales representatives located in 33 countries around the world. This
direct sales force is supplemented by more than 2,750 people located at
Cabletron's headquarters and regional in-house technical services and sales
support staff. Cabletron believes that its ratio of in-house sales, marketing
and technical services and sales support staff to field sales force is among
the highest in the industry and contributes significantly to the effectiveness
of its field sales force. Cabletron's international locations use various
sales strategies tailored to the preferred channels of distribution for each
country. Such strategies include a direct sales presence, a direct sales force
working with local distributors or a combination of the two. The Synergy Plus
Program is a blueprint for resellers that outlines the building blocks of a
business relationship with Cabletron. The blueprint sets forth the principles
of the relationship, including level of information and training, business
support and services, pricing structure, and levels of organization. Synergy
Plus offers a comprehensive, well-defined business strategy, a clear pricing
policy, and effective support in sales and marketing.
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Cabletron employs several methods to market its products, including regular
participation in trade shows as both a vendor and networker, frequent
advertisement in trade journals, regular attendance by corporate officers at
press briefings and trade seminars, submission of demonstration products to
selected customers for evaluation, and direct mailings and telemarketing
efforts.
CUSTOMERS
Cabletron's end-user customers include commercial, industrial and
manufacturing companies; federal, state and local government agencies;
brokerage and investment banking firms; multinational and international
companies; insurance companies and other financial institutions; universities;
and leading accounting and law firms.
In fiscal 1997, no single customer represented more than 3% of Cabletron's
net sales, and Cabletron's top ten customers represented, in the aggregate,
approximately 13% of its net sales. Net sales to the federal government
accounted for approximately 12% of Cabletron's sales during the last fiscal
year. Most of Cabletron's contracts with the federal government are on a
fixed-price basis. The books and records of Cabletron are subject to audit by
the General Services Administration, the Department of Labor and other
government agencies.
RESEARCH AND DEVELOPMENT
During fiscals years 1997, 1996 and 1995, research and development expenses
were $161.7 million, $127.3 million and $89.1 million, respectively. Cabletron
believes that as networks grow larger and more complex, end-user's evaluation
of network technology will increasingly be based on the software component of
products, particularly in the area of network control management. As of
February 28, 1997 approximately 60% of the personnel in Cabletron's research
and development department consisted of software development personnel. The
remaining personnel were involved in hardware development.
SUPPLY OF COMPONENTS
Cabletron's products include certain components, including ASICs, that are
currently available from single or limited sources, some of which require long
order lead times. In addition, certain of Cabletron's products and sub-
assemblies are manufactured by single source third parties. With the
increasing technological sophistication of new products and the associated
design and manufacturing complexities, Cabletron anticipates that it may need
to rely on additional single source or limited suppliers for components or
manufacture of products and subassemblies. Any reduction in supply,
interruption or extended delay in timely supply, variances in actual needs
from forecasts for long order lead time components, or change in costs of
components could affect Cabletron's ability to deliver its products in a
timely and cost-effective manner and may adversely impact Cabletron's
operating results and supplier relationships.
MANUFACTURING
Since Cabletron manufactures and assembles virtually all of its current
products (excluding the NPB products), it maintains direct control over
production, quality and product availability. By controlling its manufacturing
process, Cabletron is able to maintain a strict quality control program,
respond to changes in market demand and offer its customers modified or
customized products. The NPB products will intially be manufactured by
Digitial and a third-party contract manufacturer.
INTELLECTUAL PROPERTY
Cabletron's success depends in part on its proprietary technology. Cabletron
attempts to protect its proprietary technology through patents, copyrights,
trademarks, trade secrets and license agreements. Cabletron believes, however,
that its success will depend to a greater extent upon innovation,
technological expertise and distribution strength. There can be no assurance
that the steps taken by Cabletron in this regard will be adequate
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to prevent misappropriation of its technology or that Cabletron's competitors
will not independently develop technologies that are substantially equivalent
or superior to Cabletron's technology. In addition, the laws of some foreign
countries do not protect Cabletron's proprietary rights to the same extent as
do the laws of the United States. No assurance can be given that any patents
issued to Cabletron will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide competitive advantages.
BACKLOG
Cabletron's backlog at February 28, 1997 was approximately $125.0 million,
compared with backlog at February 29, 1996 of approximately $129.5 million.
Cabletron's backlog at November 30, 1997 was approximately $120.2 million,
compared with backlog at November 30, 1996 of approximately $129.8 million. In
general, orders included in backlog may be canceled or rescheduled by the
customer without significant penalty. Therefore, backlog as of any particular
date may not be indicative of Cabletron's actual sales for any succeeding
fiscal period.
INVENTORY AND WORKING CAPITAL
Cabletron's policy is to maintain a sufficient inventory of products to
permit the shipping of most customer orders that require rapid delivery within
24 to 48 hours of receipt. This delivery policy requires higher levels of
inventory than those of other companies in the networking industry.
EMPLOYEES
As of February 28, 1998, Cabletron had approximately 7,000 full-time
employees. Cabletron's employees are not represented by a union or other
collective bargaining agent and Cabletron considers its relations with the
employees to be good.
PROPERTIES
Cabletron owns and occupies a number of buildings in Rochester, New
Hampshire, including a 206,000 square-foot manufacturing facility which also
accommodates a portion of corporate engineering, buildings totaling 122,000
square-feet which accommodate sales, marketing, administration and technical
support personnel, and a warehousing and distribution facility, totaling
221,000 square-feet. Cabletron owns a 114,000 square-foot engineering building
in Merrimack, New Hampshire. Cabletron also occupies facilities in Newington
and Nashua, New Hampshire, Andover, Littleton and Framingham, Massachusetts,
Ann Arbor, Michigan and Santa Clara, California. Cabletron acquired two
facilities (totalling 119,372 square-feet) in Acton, Massachusetts in
connection with its acquisition of the NPB. Cabletron expects to move the DNPG
personnel from Digital's Littleton, Massachusetts facility to the Acton
facilities during the next four to six months.
Cabletron leases three manufacturing buildings totaling 87,000 square feet
in Ironton, Ohio, a 100,000 square-foot manufacturing facility in Limerick,
Ireland, and a 50,000 square-foot distribution center in Shannon, Ireland, to
support its European sales activities. Cabletron also leases a 62,000 square-
foot research and development facility in Durham, New Hampshire and a 34,000
square-foot engineering office in Nashua, New Hampshire. Cabletron also leases
sales and technical support offices that range from 1,000 to 20,000 square
feet at various locations throughout the world.
Cabletron believes that its facilities are adequate to support anticipated
sales growth over the next 12 to 18 months. Such growth, however, will require
additional production employees and capital equipment. Cabletron believes that
adequate supplies of labor are available in the areas where Cabletron's
manufacturing operations are located.
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LEGAL PROCEEDINGS
Since October 24, 1997, nine stockholder class action lawsuits have been
filed against Cabletron and certain officers and directors of Cabletron in the
United States District Court for the District of New Hampshire. The complaints
allege that Cabletron and several of its officers and directors disseminated
materially false and misleading information about Cabletron's operations and
acted in violation of Section 10(b) and Rule 10b-5 of the Exchange Act during
the period between March 3, 1997 and December 2, 1997. The complaints further
allege that certain officers and directors profited from the dissemination of
such misleading information by selling shares of Cabletron Common Stock during
this period. The complaints do not specify the amount of damages sought on
behalf of the class. On March 3, 1998, the United States District Court for
the District of New Hampshire granted the motion to consolidate the nine class
action complaints against Cabletron and its officers and directors into one
class action. The legal costs incurred by Cabletron in defending itself and
its officers and directors against this litigation, whether or not it
prevails, could be substantial, and in the event that the plaintiffs prevail,
Cabletron could be required to pay substantial damages. This litigation may be
protracted and may result in a diversion of management and other resources of
Cabletron. The payment of substantial legal costs or damages, or the diversion
of management and other resources, could have a material adverse effect on
Cabletron's business, financial condition or results of operations.
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CABLETRON--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion provides an analysis of Cabletron's financial
condition and results of operations and should be read in conjunction with the
"Selected Historical Financial Data" of Cabletron and the Notes thereto and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Proxy Statement/Prospectus. The discussion below contains certain
forward-looking statements relating to, among other things, estimates of
economic and industry conditions, sales trends, expense levels and capital
expenditures. Actual results may vary from those contained in such forward-
looking statements. See "Risk Factors."
INTRODUCTION
Cabletron develops, manufactures, markets, installs and supports a wide
range of standards-based local area network and wide area network connectivity
hardware and software products including intelligent switches and hubs, remote
access devices, and sophisticated management software.
RECENT DEVELOPMENTS
On March 2, 1998, Cabletron announced that it presently expects net sales
for the fourth quarter of fiscal 1998 to be in the range of $305 million to
$320 million, compared to $380.6 million for the fourth quarter of fiscal
1997. The primary reasons for the decrease were a shortfall in sales in
certain segments in North America, as well as continued softness in
Cabletron's Federal Government business, and lower-than-expected sales in
Latin American and Asian markets. Due in part to the shortfall in sales, as
well as efforts to establish consistent and more stringent channel policies as
Cabletron seeks to grow its channel presence, Cabletron experienced a
correction in channel inventory levels. Cabletron presently expects net income
per share for the fourth quarter of fiscal 1998, on a fully diluted basis and
without giving effect to one-time charges discussed below, to be in the range
of breakeven to a small loss. The primary reasons for the decrease from prior
and comparable periods are the shortfall in sales experienced during the
quarter relative to the level of expenses, operating expenses associated with
the acquisition and integration of the NPB and the adverse margin impact of
lower volume, pricing and some materials related charges. The revenue and per
share numbers discussed above are preliminary and actual numbers could be
materially lower than expected. Among the factors that could cause actual
results to differ are final accounting results, greater than-expected
acquisition-related expenses or greater-than-expected costs associated with
the realignment.
On February 7, 1998, Cabletron consummated the acquisition of certain of the
assets of the NPB. See "Business of Cabletron--Recent Product Line
Acquisitions." Cabletron expects a pre-tax non-recurring charge in the fourth
quarter of fiscal 1998 for in-process research and development of $325 million
($197.5 million, or $1.24 per share, after-tax on a fully diluted basis)
related to the acquisition of the NPB. In addition, Cabletron expects a pre-
tax non-recurring charge in the fourth quarter of fiscal 1998 of approximately
$55 million ($33.4 million, or $0.21 per share, after-tax on a fully diluted
basis) for transaction related expenses related to the acquisition of the NPB
of Digital. The audited and unaudited Statements of Assets Sold and Statements
of Revenue and Direct Operating Expenses of the NPB and the Notes thereto, as
well as the Unaudited Pro Forma Combined Financial Statements of Cabletron
related thereto are included herein beginning on page F-29.
Cabletron announced on December 16, 1997 a global initiative to better align
its business strategy with its focus in the enterprise and service provider
markets. The realignment is intended to better position Cabletron to provide
more solutions-oriented products and services; to increase its distribution of
products through third-party distributors and resellers; to improve its
position internationally, and to develop partnership and acquisition
opportunities. Cabletron expects to incur a pre-tax charge in the fourth
quarter of fiscal 1998 of approximately $30 million ($18.2 million, or $0.12
per share, after-tax on a fully diluted basis) related to the realignment. The
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realignment will include general expense reduction through the elimination of
duplicate facilities, consolidation of related operations, reallocation of
resources, including the elimination of certain existing projects, and
personnel reductions. The expense reductions associated with the realignment
are intended to initially yield approximately $40 million in total annualized
savings, beginning in the fourth quarter of fiscal 1998. In addition, in
connection with the purchase of Yago, Cabletron expects to record a pre-tax
charge for in-process research and development expense. The amount of this
charge has not yet been determined but will represent a majority of the
purchase price.
The statements concerning Cabletron's realignment plans and the intended
expense reductions constitute forward-looking information and actual results
could differ materially. Those factors which could cause Cabletron not to
achieve its intended expense reductions include, among others, additional
costs associated with relocations and employee severance, the need to maintain
certain essential, but underutilized, facilities, and delays in implementing
planned reductions. Difficulties in achieving the expense reductions may
result in Cabletron's failure to realize the full amount of the projected
annualized cost savings or may cause Cabletron to incur additional costs in
future quarters as it takes additional actions to achieve the projected
annualized cost savings.
Cabletron's realignment will require the dedication of management and other
resources, which may result in a temporary disruption of its business
activities. Any such disruption could have a material adverse effect on
Cabletron's business, operating results or financial condition. Over time, the
loss of the personnel, facilities and other resources eliminated through the
expense reductions may adversely impact Cabletron's ability to generate
expected revenue levels.
NINE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED NOVEMBER 30,
1996
Net Sales. Cabletron Systems' worldwide net sales for the three month
period ended November 30, 1997 were $331.8 million, an 8% decrease from net
sales of $361.6 million for the three month period ended November 30, 1996.
The decrease was primarily the result of lower than expected sales in North
America, changes in the order pattern for some U.S. Federal Government
business and lower international sales in the Latin American and Asian
markets. For the nine months ended November 30, 1997, worldwide sales
increased slightly by 4% to $1,065.8 million from $1,026.0 million for the
nine month period ended November 30, 1996.
Gross Profit. Gross profit as a percentage of net sales for the three month
period ended November 30, 1997 decreased to 50.5% from 59.2% for the three
month period ended November 30, 1996. Gross margins for the nine months ended
November 30, 1997 were 55.3% compared with 59.1% for the nine month period
ended November 30, 1996. The decrease reflects the impact of pricing on
margins, some impact from foreign exchange on margins and inventory charges
for the latter period. Cabletron anticipates that industry competitiveness
will remain active in the future and as such could create future pressures on
margin levels.
Research and Development. Research and development expenses for the three
month period ended November 30, 1997 increased 13.4% to $46.6 million from
$41.1 million for the three month period ended November 30, 1996. For the nine
month period ended November 30, 1997, research and development expenses
increased $15.2 million to $134.6 million compared to $119.4 million for the
nine month period ended November 30, 1996. The increase reflects Cabletron's
ongoing research and development efforts, including the further development of
the SmartSwitch family of products, SPECTRUM management software as well as
the increase in the hiring of additional software and hardware engineers and
associated cost related to development of new products. For the three month
period ended November 30, 1997, research and development spending as a
percentage of net sales increased to 14.0% from 11.4% for the three month
period ended November 30, 1996. Research and development expenses increased as
a percentage of net sales primarily as a result of lower than expected sales.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses for the three month period ended November 30, 1997 increased
29.4% to $95.5 million from $73.8 million in the three
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month period ended November 30, 1996. Selling, general and administrative
expenses increased $52.4 million to $261.8 million for the nine month period
ended November 30, 1997 compared to $209.4 million for the nine month period
ended November 30, 1996. The increase in SG&A expenses was due predominately
to the increase in sales and technical personnel, and the opening of
additional office locations. For the three month period ended November 30,
1997, SG&A expenses as a percentage of net sales increased to 28.8% from 20.4%
for the three month period ended November 30, 1996. SG&A increased as a
percentage of net sales primarily as a result of lower than expected sales.
Interest Income. Net interest income for the three month period ended
November 30, 1997 decreased slightly to $4.6 million, as compared to $4.9
million for the three month period ended November 30, 1996. For the first nine
months in both periods, net interest income remained consistent at $14.3
million. Interest income in both periods reflects returns on invested cash,
marketable securities and long-term investments.
Income Before Income Taxes. Income before income taxes for the three month
period ended November 30, 1997 decreased 71.1% to $30.1 million from $104.0
million for the three month period ended November 30, 1996. Income before
income taxes for the nine month period ended November 30, 1997 was $206.8
million as compared with $249.1 million ($292.1 million before nonrecurring
charge) for the nine month period ended November 30, 1996. The decrease in
income before income taxes, as a percentage of net sales for the quarter, was
due primarily to lower than expected sales and gross margins and higher
expenses.
Net Income. Net income for the three month period ended November 30, 1997
was $19.9 million compared to $67.7 million for the three month period ended
November 30, 1996. Net income for the nine month period ended November 30,
1997 was $136.3 million compared with $161.8 million ($188.5 million before
nonrecurring charge) for the nine month period ended November 30, 1996. The
decrease was due primarily to lower sales and gross margins and higher
expenses.
New Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board 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 Cabletron'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. Cabletron expects that basic earnings per share amounts
will not be materially different compared to Cabletron'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 Cabletron in its fiscal
year ending February 28, 1999, is not expected to have a material impact on
the consolidated financial statements of Cabletron.
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. This Statement,
which becomes effective for Cabletron in its fiscal year ending February 28,
1999, is currently not expected to have a material impact on Cabletron's
consolidated financial statements.
FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Acquisitions. During the year ended February 28, 1997, Cabletron acquired:
(1) in July 1996, ZeitNet Inc., a manufacturer and a leader in providing high-
quality, low-cost solutions for connections applications,
50
<PAGE>
servers and workgroups to high performance ATM networks; (2) in August 1996,
Network Express, Inc., a manufacturer and provider of ISDN high-speed LAN
switched access solutions; (3) in December 1996, Netlink Inc., a manufacturer
of frame relay access solutions for multi-protocol, mission-critical networks;
and (4) in February 1997, The OASys Group, Inc., a developer of software used
to manage telecommunications devices and connection in high-speed, fiber-optic
networks. The nonrecurring charges related to these acquisitions were $39.2
million (net of tax). Excluding these one-time charges, net income for the
year ended February 28, 1997 would have been $261.4 million or $1.68 per
share.
During the year ended February 29, 1996 Cabletron acquired the Enterprise
Networks Business Unit from Standard Microsystems Corporation in January 1996.
The acquisition added a line of Fast Ethernet products, as well as switching
products for token ring, Ethernet and FDDI. For the year ended February 29,
1996, net income would have been $205.4 million or $1.36 per share before
acquisition related expenses of $60.8 million (net of tax).
Net Sales. Net sales for the year ended February 28, 1997 increased by
27.8% to $1,406.6 million from $1,100.3 million for the year ended February
29, 1996, a 32.1% increase from $833.2 million for the year ended February 28,
1995. The increases in revenues during these periods were primarily the result
of increases in sales of the MMAC-Plus and the MMAC and, for the year ended
February 28, 1997, the SmartSwitch product lines.
Net sales outside the United States for the year ended February 28, 1997
were $408.2 million, or 29.0% of net sales, compared to $329.2 million, or
29.9% of net sales, for the year ended February 29, 1996 and $242.9 million,
or 29.2% of net sales, for the year ended February 28, 1995. In addition to
its direct international sales force, Cabletron sells its products through
several international distributors. Cabletron currently has 34 foreign
subsidiaries throughout the world. The impact of fluctuations in foreign
exchange rates on operations was not significant for the year ended February
28, 1997.
During the year ended February 28, 1997, growth in net sales was attributed
to the SmartSwitch and the MMAC-Plus product lines and other switching
products, small stackable hubs and SPECTRUM, Cabletron's network management
software. During the year ended February 29, 1996, MMAC-Plus, token ring
management interface modules for the MMAC and the MMAC-Plus, small stackable
hubs, bridges and routers, and network management (SPECTRUM) accounted for the
largest sales growth within the network interconnection products. During the
year ended February 28, 1995, the MMAC, including token ring modules, SPECTRUM
and other network management software, accounted for the largest sales growth
within the network interconnection products.
Net sales of diagnostic test instruments, installation and maintenance
services, and other products were $188.1 million, or 13.4% of net sales, for
the year ended February 28, 1997, compared to $97.8 million, or 8.9% of net
sales, for the year ended February 29, 1996, and $59.7 million, or 7.2% of net
sales, for the year ended February 28, 1995. Sales of diagnostic test
instruments are on a downward trend due to greater functionality being
incorporated into more intelligent devices. Management anticipates diagnostic
test instruments to decrease as a percentage of sales for the year ending
February 28, 1998. Installation and maintenance services are an integral part
of Cabletron's customer development and support activities. Management
anticipates that sales of such services and other products could increase in
absolute sales dollars and as a percentage of Cabletron's product mix in the
future year.
Costs, Expenses and Interest Income. Cost of sales was $575.1 million, or
40.9% of net sales, for the year ended February 28, 1997, compared to $448.7
million, or 40.8% of net sales, for the year ended February 29, 1996 and
$340.4 million, or 40.9% of net sales, for the year ended February 28, 1995.
Cabletron was able to maintain its gross margins during these periods by
introducing and selling products with improved functionality, further
developing its service maintenance program and improving purchasing and
manufacturing efficiencies.
Research and development expenses for the year ended February 28, 1997,
increased to $161.7 million, or 11.5% of net sales, compared to $127.3
million, or 11.6% of net sales, for the year ended February 29, 1996. For the
year ended February 28, 1995, research and development expenses were $89.1
million, or 10.7% of net
51
<PAGE>
sales. The increased research and development spending during the year ended
February 28, 1997 reflected increased hiring of software and hardware
engineers, the addition of engineers through acquisitions and associated costs
related to the development of new products.
Selling, general and administrative expenses were $286.5 million, or 20.4%
of net sales, for the year ended February 28, 1997, compared to $223.1
million, or 20.3% of net sales, for the year ended February 29, 1996, and
$166.6 million, or 20.0% of net sales, for the year ended February 28, 1995.
Increases in selling, general and administrative spending resulted from
expanding the sales and support workforce, establishing additional office
locations domestically and internationally, the addition of administrative
personnel as a result of acquisitions and increased administrative spending
primarily due to increases in volume.
For the year ended February 28, 1997, a $63.0 million nonrecurring charge
(pre-tax) was taken for the acquisitions of ZeitNet, Network Express, Netlink
and The OASys Group. For the year ended February 29, 1996, a $94.3 million
nonrecurring charge (pre-tax) was taken for the purchase of the ENBU of SMC
and Fivemere Limited (purchased by Network Express in 1996).
Interest income for the year ended February 28, 1997 was $19.4 million
compared to $17.9 million for the year ended February 29, 1996 and $5.6
million for the year ended February 28, 1995. The increase in interest income
reflects increased cash and marketable securities acquired from favorable
operating results.
Income. Income before income taxes was $339.7 million, or 24.1% of net
sales, for the year ended February 28, 1997, compared to $224.8 million, or
20.3% of net sales, for the year ended February 29, 1996, and $242.6 million,
or 29.1% of net sales, for the year ended February 28, 1995. For the year
ended February 28, 1997, Cabletron's nonrecurring charges related to
acquisitions was $63.0 million as compared to $94.3 million for the year ended
February 29, 1996. The increase in income before income taxes for the year
ended February 28, 1997 was in part due to the $31.3 million decrease in
nonrecurring charges. The decrease in income before income taxes for the year
ended February 29, 1996 as a percentage of sales was due primarily to expenses
related to the acquisition of the ENBU of SMC and Fivemere (Network Express).
The tax rate for the year ended February 28, 1997 was 34.6%, a 1.1% decrease
from a tax rate of 35.7% for the year ended February 29, 1996, which was due
in part to tax loss carryforwards of the acquired aforementioned acquisitions.
Net income was $222.1 million for the year ended February 28, 1997, compared
to $144.5 million for the year ended February 29, 1996, and $156.6 million for
the year ended February 28, 1995. Excluding the above nonrecurring charges for
the year ended February 28, 1997 and February 29, 1996, Cabletron would have
realized net income of $261.4 million and $205.4 million for the year ended
February 28, 1997 and February 29, 1996, respectively.
Management is aware of the potential software logic anomalies associated
with the year 2000 date change. Cabletron is in the process of evaluating the
potential issue that might need to be addressed in connection with its
operations. Based on preliminary information, costs of addressing the issue
are not expected to have any material effect upon the Company's financial
position, results of operations, or cash flows in future periods.
LIQUIDITY AND CAPITAL RESOURCES.
Accounts receivable, net of allowance for doubtful accounts, were $219.9
million at February 28, 1997 or 52 days of sales outstanding, compared to
$153.3 million or 43 days of sales outstanding in accounts receivable at
February 29, 1996. This increase in receivables reflects timing on shipments
and collections. Accounts receivable increased $78.8 million to $298.7 million
at November 30, 1997 from $219.9 million at February 28, 1997. Average days
sales outstanding were 81 days at November 30, 1997 compared to 52 days at
February 28, 1997. The increase in accounts receivable was a result of
shipment of products shifting towards the latter part of the quarter and lower
than expected sales.
52
<PAGE>
Cabletron has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories were $197.4 million at February 28, 1997 or 109 days of
inventory, compared to $160.8 million or 112 days of inventory at the end of
the preceding fiscal year. The decrease of days in inventory was the result of
improving inventory control procedures. Worldwide inventories at November 30,
1997 were $280.0 million, or 155 days of inventory, compared to $197.4
million, or 112 days of inventory at February 28, 1997. Inventory turnover was
2.4 turns at November 30, 1997, compared to 3.4 turns at February 28, 1997.
The lower inventory turns were due to lower sales in the quarter.
Net cash provided by operating activities was $188.8 million for the year
ended February 28, 1997, compared to $81.1 million for the year ended February
29, 1996 and $149.8 million for the year ended February 28, 1995.
Capital expenditures for the year ended February 28, 1997 of $94.4 million
included $58.9 million for the engineering computer hardware and software and
$3.3 million for leasehold improvements. For the year ended February 29, 1996,
$67.8 million of capital expenditures included $9.8 million for building costs
of which $3.4 million was for the purchase of an engineering building, $21.4
million for engineering computer hardware and software, $5.5 million for
manufacturing and related equipment and $19.0 million for expanding global
sales operations. For the year ended February 28, 1995, capital expenditures
of $66.1 million included approximately $8.2 million for building costs
related to expanding manufacturing and distribution capacities and enlarging
worldwide sales operations, $12.5 million for manufacturing and manufacturing
support equipment and $15.0 million for engineering hardware and software, and
$15.0 million in support of expanded global sales activities. Capital
expenditures for the nine months ended November 30, 1997 were $64.0 million
compared to $69.4 million for the nine months ended November 30, 1996. Capital
expenditures included approximately $34.5 million for equipment costs, of
which $22.2 million was for computer and computer related equipment, and $12.3
million represented systems development costs.
Cash, cash equivalents, marketable securities and long-term investments
increased during the year ended February 28, 1997 to $568.3 million, from
$432.4 million for the year ended February 29, 1996. State and local municipal
bonds of approximately $464.9 million, maturing in three years or less, were
being held by Cabletron at February 28, 1997. Cash and cash equivalents,
marketable securities and long-term investments slightly increased to $570.2
million at November 30, 1997 from $568.3 million at February 28, 1997.
At February 28, 1997, Cabletron did not have any short or long term
borrowing or any significant financial commitments outstanding, other than
those required in the normal course of business.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will prove adequate
to support Cabletron's working capital and capital expenditure requirements
for at least the next twelve months.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly results of
operations data of Cabletron for each of the four quarters in each of the
fiscal years ended February 28, 1997 and February 29, 1996 and for each of the
three quarters in the nine months ended November 30, 1997. Cabletron believes
that this information has been prepared on the same basis as the audited
consolidated financial statements included elsewhere in this Proxy
Statement/Prospectus and that all necessary adjustments, consisting only of
the normal recurring adjustments, have been included to present fairly the
selected quarterly information when read in conjunction with the audited
consolidated financial statements and the notes thereto included elsewhere in
this Proxy Statement/Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
53
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 29,
1995 1995 1995 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................. $247,337 $266,804 $284,193 $302,015
Cost of sales............................. 100,725 108,737 115,980 123,257
-------- -------- -------- --------
Gross profit............................. 146,612 158,067 168,213 178,758
-------- -------- -------- --------
Research and development expense.......... 27,938 30,721 32,562 36,068
General and administrative expense........ 50,626 52,378 57,033 63,046
Nonrecurring expense...................... -- -- -- 94,343
-------- -------- -------- --------
Income from operations................... 68,048 74,968 78,618 (14,699)
Interest income, net...................... 3,566 4,158 5,046 5,121
-------- -------- -------- --------
Income before income taxes............... 71,614 79,126 83,664 (9,578)
Income tax expense (benefit).............. 25,352 27,735 29,379 (2,125)
-------- -------- -------- --------
Net income (loss)........................ $ 46,262 $ 51,391 $ 54,285 $ (7,453)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 29,
1996 1996 1996 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................................. $323,499 $340,940 $361,558 $380,555
Cost of sales.............................. 132,854 138,855 147,598 155,800
-------- -------- -------- --------
Gross profit.............................. 190,645 202,085 213,960 224,755
-------- -------- -------- --------
Research and development expense........... 39,589 38,716 41,139 42,230
General and administrative expense......... 65,384 70,208 73,792 77,085
Nonrecurring expense....................... -- 43,024 -- 20,000
-------- -------- -------- --------
Income from operations.................... 85,672 50,137 99,029 85,440
Interest income, net....................... 4,442 4,880 4,932 5,168
-------- -------- -------- --------
Income before income taxes................ 90,114 55,017 103,961 90,608
Income tax expense......................... 32,975 18,113 36,219 30,268
-------- -------- -------- --------
Net income................................ $ 57,139 $ 36,904 $ 67,742 $ 60,340
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MAY 31, AUG. 31, NOV. 30,
1997 1997 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................... $362,688 $371,293 $331,827
Cost of sales....................................... 153,561 159,032 164,254
-------- -------- --------
Gross profit....................................... 209,127 212,261 167,573
-------- -------- --------
Research and development expense.................... 43,616 44,415 46,552
General and administrative expense.................. 80,915 85,412 95,521
-------- -------- --------
Income from operations............................. 84,596 82,434 25,500
Interest income, net................................ 4,801 4,819 4,648
-------- -------- --------
Income before income taxes......................... 89,397 87,253 30,148
Income tax expense.................................. 30,573 29,666 10,250
-------- -------- --------
Net income......................................... $ 58,824 $ 57,587 $ 19,898
======== ======== ========
</TABLE>
54
<PAGE>
BUSINESS OF YAGO
GENERAL
Yago designs and develops wire-speed routing and Layer-4 switching products
and solutions. Yago's products under development are intended to provide large
scaling capabilities, extensive security mechanisms and user-friendly, device-
level network management for the enterprise and ISP backbone markets that
employ Gigabit Ethernet technology.
Yago is a Delaware corporation founded in September, 1996. Its offices are
located at 795 Vaqueros Avenue, Sunnyvale, CA 94086, telephone (408) 774-2900.
THE MARKET
The market for Yago's technology is driven by the network infrastructure's
demands for higher performance and increased functionality from its various
components. The changing demands on corporate networks, including explosive
traffic growth from bandwidth-demanding applications such as the Internet and
electronic commerce and the centralization of key network resources, all
contribute to the requirements for higher-speed networking technologies to
solve network congestion.
Not only have the demands on corporate networks changed, but so, too, has
their role. Business critical applications are increasingly dependent on
network operations, on-line relationships with suppliers reduce the costs of
transacting business, and electronic commerce offers the opportunity to
sidestep costly middlemen. Yago believes that networks have become business
tools that deliver a competitive advantage. As a result, traffic is increased
across the network backbone beyond the capability of traditional routers.
YAGO SOLUTIONS
Yago believes that its MSR family of switching routers will set a standard
for performance and functionality by delivering wire-speed Layer-2, Layer-3
and Layer-4 functionality. Built for the enterprise and ISP backbone on a
foundation of gigabit ethernet, upon completion of development, Yago's MSR
products are intended to offer large table capacity, a multi-gigabit non-
blocking backplane, low latency and seamless scaling. Yago believes that its
MSR products will be interoperable with other standard-based routers and
switches, although Yago has yet to complete its interoperability testing.
Yago's wire-speed products are designed to provide strong network management
capabilities and to support application-level control intended to facilitate
capacity planning and service-level requirements.
YAGO PRODUCTS UNDER DEVELOPMENT
Yago products currently under development include:
MSR-8000 Switching Router. Currently under development, the MSR-8000
Switching Router is being designed as a high-capacity, Layer-2, Layer-3 and
Layer-4 switching device that provides multi-layer switching on 10/100/1,000
megabits per second Ethernet in a compact, redundant 8-slot chassis. Yago
believes that the MSR-8000 Switching Router's 16 gigabits per second of total
backplane capacity will permit network managers to deliver up to 15 million
packets per second of switched throughput in a Gigabit Ethernet configuration
using all available ports. The MSR 8000 is expected to begin shipping in the
second calendar quarter of 1998.
MSR-16000 Switching Router. Currently under development, the MSR-16000
Switching Router is being designed to double the switching capacity and port
density of the MSR-8000. The Company anticipates that the MSR 16000 will be
available in the third calendar quarter of 1998.
CoreWatch. Yago's CoreWatch, which is intended to be made available with the
MSR-8000 Switching Router, is a Java-based network management graphic user
interface front-end tool designed to provide comprehensive, easy-to-use
screens and prompts for configuring and monitoring the MSR family of switching
routers.
55
<PAGE>
PowerCast. Yago's MSR family of switching routers are built around
PowerCast, a scalable, multi-gigabit non-blocking switching fabric designed to
eliminate backbone interconnect bottlenecks and deliver continuous wire-speed
throughput.
MARKETING AND SALES
Yago has unveiled its MSR family of switching routers at various trade shows
and in several trade publications. Yago is building a team of sales
professionals to make direct sales to its customers.
PRODUCT DEVELOPMENT
Both the MSR 8000 and the MSR 16000 are currently under development,
although there can be no assurances that Yago will be able to complete the
development of its current products with the planned functionality, if at all,
or to identify, develop, market, and support new products or enhancements to
its existing products successfully or on a timely basis, that any new products
will gain market acceptance, or that Yago will be able to respond effectively
to product announcements by competitors, technological changes, or emerging
industry standards.
COMPETITION
There are many companies competing in various segments of the intelligent
hub, switching, router and remote access network markets. Networking and
communications suppliers compete in the following areas: (i) conformity to
existing and emerging industry standards; (ii) interoperability with other
networking products (iii) ability to run Ethernet, Fast Ethernet and Gigabit
Ethernet; (iv) network management capabilities; (v) ease of use; (vi)
scalability; (vii) price performance; (viii) reliability; (ix) product
functionality; (x) technical support; (xi) marketing expertise; and (xii)
product innovation.
Currently, Yago believes its principal competitors include Ascend
Communications, Inc., Cisco Systems, Inc., Digital Equipment Corporation, Fore
Systems, Inc., Hewlett-Packard Company, Inc., International Business Machines
Corporation, 3Com Corporation, Extreme Networks, Packet Engine, Foundary
Networks and Bay Networks, Inc. Several of Yago's competitors, which include
some of the largest and most prominent companies in the data networking
industry, have greater name recognition, more extensive engineering,
manufacturing and marketing capabilities, and substantially greater financial,
technological and personnel resources than those available to Yago. Yago has
never manufactured or marketed any products and has limited personnel and
financial resources. There can be no assurance that Yago will be able to
successfully compete in the data networking industry.
Yago believes that key factors for success in the switching router market
include: rapid rates of technological innovation for both hardware and
software; flexible product mix and market focus; the ability to develop
affiliations with leading market participants which facilitate product
development and distribution; and marketing existing and new products with
service providers, resellers and channel partners. Yago believes that its MSR
family of switching routers provides a superior package of performance,
functionality, scalability and resiliency; Yago, however, faces intense
competition from existing competitors, and may face additional competition
from other companies which chose to enter the switching router market.
EMPLOYEES
As of December 31, 1997, Yago had 49 employees, 42 of which were in
engineering, five of which were in marketing and sales and two of which were
in administration. The continued success of Yago will depend in part on its
ability to attract and retain qualified personnel, some of which possess a
unique combination of skills. Yago believes that it has a good relationship
with its employees.
FACILITIES
Yago leases a 13,710 square foot facility in Sunnyvale, California, under a
month-to-month lease.
56
<PAGE>
YAGO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and related Notes thereto contained elsewhere in this
Proxy
GENERAL
Since its inception in September 1996, Yago has been engaged in the design
and development of high-speed network switching routers based on the gigabit
ethernet technology. Yago has a limited history of operations that, to date,
has consisted primarily of developing products, recruiting personnel,
developing strategic relationships and raising capital. Yago's systems are in
compliance with the year 2000.
RESULTS OF OPERATIONS
Yago has a limited history of operations and has experienced significant
operating losses since inception. As of December 31, 1997, Yago had an
accumulated deficit of $6,171,000. No revenues have been generated since
inception.
During the period from September 6, 1996 (date of inception) through
December 31, 1997, and the year ended December 31, 1997, Yago was a
development stage company.
Research and development expenses were $4,981,000 and $5,195,000 for the
year ended December 31, 1997 and the period since inception through December
31, 1997, respectively. Research and development expenses consisted primarily
of personnel costs, consulting fees and allocated overhead expenses.
Marketing, general and administrative expenses were $926,000 and $977,000
for the year ended December 31, 1997 and the period since inception through
December 31, 1997, respectively. The marketing, general and administrative
expenses related primarily to personnel cost, consulting fees , marketing
activities and allocated overhead costs.
Interest expense (net of interest income) was $4,000 for the year ended
December 31, 1997 and the interest income, (net of interest expense) for the
period since inception was $1,000. Interest expenses consisted of borrowing
costs for equipment financing under its loan agreement with Venture Lending &
Leasing, Inc. and interest under a $1.5 million bridge loan with Cabletron,
offset by interest earned on monies maintained in Yago's Money Market account.
In connection with stock options granted during the year ended December 31,
1997, Yago is recognizing a compensation charge of $1,800,000, amortized over
the vesting period of the options. Compensation charges of $466,000 were
recognized for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1997, Yago has financed its operations
through the private placements of equity securities totaling approximately
$7,806,000. Cash and cash equivalents totaled $1,892,000 at December 31, 1997.
Net cash used in operating activities equaled $4,824,000 and $4,855,000 for
the year ended December 31, 1997 and for the period since inception through
December 31, 1997, respectively, consisted primarily of research, development,
marketing and general administrative expenses.
Yago's principal source of liquidity at December 31, 1997 consisted of cash
and cash equivalents of $1,892,000. Yago also has an equipment financing
arrangement with Venture Lending & Leasing, Inc. to provide equipment
financing up to $2,000,000. At December 31, 1997, Yago had short term and long
term debt of $101,000 and $239,000, respectively, relating to this financing
arrangement.
In the absence of the acquisition of Yago by Cabletron, Yago would not have
sufficient capital to support its operation and would have to raise additional
capital through equity or debt financing. There is no assurance that Yago
would be able to successfully raise additional capital, that such capital
would be available on favorable terms, or at all. Similarly, there can be no
assurance that Yago would be able to achieve and maintain sufficient revenues
to support its operations. Currently, Cabletron is funding Yago's capital
needs through a bridge loan and Cabletron has committed to fund Yago's
operations through December 31, 1998 in accordance with the business plan
previously provided to Cabletron.
57
<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CABLETRON
The following table sets forth certain information with respect to the
beneficial ownership of Cabletron Common Stock as of February 1, 1998, by (i)
each person known by Cabletron to beneficially own more than five percent (5%)
of the outstanding shares of Cabletron Common Stock, (ii) each director of
Cabletron, (iii) all executive officers of Cabletron, and (iv) all directors
and executive officers of Cabletron as a group. Unless otherwise indicated,
the address of the stockholder is c/o Cabletron Systems, Inc., 35 Industrial
Way, Rochester, New Hampshire 03866.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND COMMON STOCK
NAME OF BENEFICIAL OWNER NATURE OF OWNERSHIP(1)(2) OUTSTANDING
- ------------------------ ------------------------- -------------
<S> <C> <C>
Craig R. Benson+....................... 19,266,166(3) 12.2%
Donald B. Reed++....................... -- (4) *
Paul R. Duncan+........................ 53,334(5) *
Donald F. McGuinness+.................. 82,200(5) *
Michael D. Myerow+..................... 268,650(5)(6) *
Christopher J. Oliver+................. 1,803,424 1.1%
David J. Kirkpatrick+.................. 14,975(5) *
S. Robert Levine....................... 9,458,025(7) 5.9%
c/o Armstrong Investments Corporation
Pease International Trade Port
44 Durham Street
Portsmouth, NH 03801
Directors and Executive Officers as a
Group (7 persons)..................... 21,488,751(5) 13.7%
</TABLE>
- --------
+ Director
+ Executive Officer
* Less than 1%
(1) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) For purposes of determining beneficial ownership of Cabletron Common
Stock, owners of options exercisable within sixty days are considered to
be the beneficial owners of the shares of Cabletron Common Stock for which
such securities are exercisable. The percentage ownership of the
outstanding Cabletron Common Stock reported herein is based on the
assumption (expressly required by the applicable rules of the Securities
and Exchange Commission) that only the person whose ownership is being
reported has converted his options into shares of Common Stock.
(3) Includes 1,400 shares of Cabletron Common Stock held in the Benson Family
Charitable Trust.
(4) Mr. Reed's only ownership is in options to purchase Cabletron Common Stock
that do not vest until September, 1998.
(5) Includes options held by Messrs. Duncan, McGuinness, Myerow and
Kirkpatrick exercisable within sixty days of January 31, 1998 in the
amounts of 50,000, 66,000, 35,000 and 14,000 shares of Cabletron Common
Stock, respectively.
(6) Includes 225,000 shares of Cabletron Common Stock held in two trusts for
the benefit of the children of Messrs. Levine and Benson over which Mr.
Myerow has sole voting power. Includes 8,650 shares of Cabletron Common
Stock held by Mr. Myerow's spouse as custodian for their children.
(7) Includes 413,100 shares of Cabletron Common Stock held in two charitable
trusts and 1,329,193 shares of Cabletron Common Stock as to which Mr.
Levine has voting control only.
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<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF YAGO
The following table sets forth certain information with respect to the
beneficial ownership of Yago Common Stock as of December 31, 1997, assuming
the conversion of all Yago Preferred Stock into Yago Common Stock, by (i) each
person known by Yago to beneficially own more than 5% of the outstanding
shares of Yago Common Stock, (ii) each director of Yago, (iii) all executive
officers of Yago, and (iv) all directors and executive officers of Yago as a
group. Unless otherwise indicated, the address of the stockholder is c/o Yago
Systems, Inc., 795 Vaqueros Avenue, Sunnyvale, California 94086.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND COMMON STOCK
NAME OF BENEFICIAL OWNER NATURE OF OWNERSHIP(1)(2) OUTSTANDING(3)
- ------------------------ ------------------------- --------------
<S> <C> <C>
Piyush Patel++ ....................... 1,600,000(4) 9.0%
Romulus Pereira++ .................... 1,600,000 9.0%
Christopher J. Oliver+................ 4,522,224(5) 25.5%
Michael L. Goguen+.................... 1,889,474(6) 10.7%
Nilesh Shah+ ......................... 1,600,000(7) 9.0%
Cabletron Systems, Inc. .............. 4,522,224(8) 25.5%
35 Industrial Way
Rochester, NH 03867
Sequoia Capital Partners, L.P. ....... 1,889,474(9) 10.7%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Directors and Executive Officers as a
Group (5 persons).................... 11,211,698 63.3%
</TABLE>
- --------
+ Director
+ Executive Officer
(1) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) For purposes of determining beneficial ownership of Yago Common Stock,
owners of options or warrants exercisable within sixty days are considered
to be the beneficial owners of the shares of Yago Common Stock for which
such securities are exercisable. The percentage ownership of the
outstanding Yago Common Stock reported herein is based on the assumption
(expressly required by the applicable rules of the Securities and Exchange
Commission) that only the person whose ownership is being reported has
converted his options or warrants into shares of Common Stock.
(3) Includes all Yago Common Stock outstanding and all Common Stock issuable
upon conversion of Yago Series A Preferred Stock and Yago Series B
Preferred Stock and upon exercise of a certain Common Stock Warrant and a
certain Series A Preferred Stock Warrant.
(4) Includes 100,000 shares of Yago Common Stock held by Mr. Patel and his
wife, as trustees of the Patel Children's Trust dated October 27, 1997.
(5) Includes 3,732,750 shares of Yago Series A Preferred Stock and 789,474
shares of Yago Series B Preferred Stock Owned by Cabletron Systems, Inc.,
of which the named individual is an affiliate by virtue of being an
officer of such entity.
(6) Includes 100,000 shares of Yago Common Stock issuable upon exercise of a
certain Common Stock Warrant and 1,789,474 shares of Yago Series B
Preferred Stock owned by certain of the funds of Sequoia Capital Partners,
L.P. of which the named individual is an affiliate by virtue of being a
partner of the general partner or having limited power of attorney over
each of the funds and as to whose shares he disclaims beneficial ownership
of, except to the extent of any individual interest in such entities.
(7) Includes 100,000 shares of Yago Common Stock held by Mr. Shah and his
wife, as trustees of the Shah Children's Trust dated October 27, 1997.
(8) Includes 100,000 shares of Yago Common Stock issuable upon exercise of a
certain Common Stock Warrant and 1,789,474 shares of Yago Series B
Preferred Stock owned by certain of the funds of Sequoia Capital Partners,
L.P. Each share of Yago Series B Preferred Stock is convertible into one
share of Yago Common Stock.
(9) Includes 3,732,750 shares of Yago Series A Preferred Stock and 789,474
shares of Yago Series B Preferred Stock. Each share of Yago Series A
Preferred Stock and Yago Series B Preferred Stock is convertible into one
share of Yago Common Stock.
59
<PAGE>
MANAGEMENT--CABLETRON
DIRECTORS AND EXECUTIVE OFFICERS OF CABLETRON
The directors and executive officers of Cabletron are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Craig R. Benson 43 Director
Donald B. Reed 53 Chief Executive Officer, President and Director
Paul R. Duncan 57 Director
Donald F. McGuinness 65 Director
Michael D. Myerow 49 Director
Christopher J. Oliver 36 Executive Vice President Worldwide Engineering
and Chief Technology Officer
David J. Kirkpatrick 46 Senior Vice President and Chief Financial Officer
John d'Auguste 47 President, Enterprise Business Unit
Giulio Gianturco 42 President, Service Provider Business Unit
</TABLE>
Craig R. Benson was Director of Operations of Cabletron from November 1984
until April of 1989 and Chairman, Chief Operating Officer and Treasurer of
Cabletron from April of 1989 until September 1, 1997. Mr. Benson now serves as
Chairman of the Board.
Donald B. Reed has been Chief Executive Officer, President and a Director
since August, 1997. Prior to joining Cabletron, Mr. Reed was employed by
NYNEX, most recently as President and Group Executive, directing NYNEX's
regional, national, and international government affairs, public policy and
initiatives, legal matters, and public relations. Prior to 1993, Mr. Reed
served as President of NYNEX in New England.
Paul R. Duncan has been a director of Cabletron since 1989. Mr. Duncan has
been Executive Vice President, Special Projects for Reebok International Ltd.
since November 1996. Prior to that time, Mr. Duncan served in several other
positions with Reebok, including President and Chief Operating Officer. Mr.
Duncan also serves as a director of BGS Systems, Inc., a company that designs,
develops, markets and supports performance management and capacity planning
software products.
Donald F. McGuiness has been a Director of Cabletron since 1989. Since
November 1987, Mr. McGuiness has served as Chairman, President and Chief
Executive Officer of Electronic Designs, Inc., a semiconductor memory company.
From December 1983 until January 1987, Mr. McGuinness was Executive Vice
President and Chief Operating Officer of Sprague Electric Company, an
electronic components manufacturer.
Michael D. Myerow has served as a Director of Cabletron since 1989. Since
June 1987, Mr. Myerow has been a partner in the Franklin, Massachusetts law
firm of Myerow & Poitier. He joined the firm in June 1986. From September 1979
to March 1986, Mr. Myerow was General Counsel of Exeter Equities, Inc., a
consulting firm.
Christopher J. Oliver served as Director of Engineering and Manufacturing of
Cabletron from February 1985 until January 1998. Mr. Oliver was appointed
Executive Vice President Worldwide Engineering and Chief Technology Officer in
January 1998.
David J. Kirkpatrick has served as Chief Financial Officer of Cabletron
since August 1990. Mr. Kirkpatrick was appointed Senior Vice President in
January 1998. From August 1990 until January 1998, Mr. Kirkpatrick also served
as Director of Finance. From 1986 to 1990 he was the Vice President of Zenith
Data Systems, a subsidiary of Zenith Electronics Corporation.
John d'Auguste joined Cabletron in December 1997 as the President of the
Enterprise Business Unit. Before joining Cabletron, Mr. d'Auguste worked for
Gateway 2000 as the Vice President of Direct Sales, having previously held the
position of Vice President of Operations. Prior to Gateway 2000 he served as
the Vice
60
<PAGE>
President of Product Business Unit for General Railway Signal. Mr. d'Auguste
holds a Bachelor Science from Polytechnic in New York along with a Masters in
Science from the Milwaukee School of Engineering.
Giulio Gianturco has served as the President of the Service Provider
Business Unit of Cabletron since February, 1998. From August, 1996 until the
time he joined Cabletron, Mr. Gianturco was Vice President for the Americas of
Digital's Net Products Business. From 1983 to 1996 he held a number of senior
sales and marketing positions at AT&T's Global Business Communications Systems
Business Unit (now known as Lucent Technologies).
EXECUTIVE COMPENSATION
The following table below discloses the compensation received by Cabletron's
Chief Executive Officer and the Company's three other executive officers for
the fiscal years ended February 28, 1997, February 29, 1996 and February 28,
1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL -----------------
COMPENSATION SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS
- --------------------------- ---- --------- ------ -----------------
<S> <C> <C> <C> <C>
S. Robert Levine(2)................... 1997 $ 51,039 $ -- --
President and Chief Executive Officer 1996 52,200 -- --
1995 52,000 -- --
Craig R. Benson(2).................... 1997 52,000 -- --
Chairman and Chief Operating Officer 1996 52,000 -- --
1995 52,000 -- --
Christopher J. Oliver................. 1997 275,000 -- --
Executive Vice President Worldwide 1996 275,000 -- --
Engineering and Chief Technology 1995 275,000 -- --
Officer
David J. Kirkpatrick.................. 1997 213,421 80,000 30,000
Senior Vice President and Chief 1996 174,952 65,000 20,000
Financial Officer 1995 161,682 60,000 5,000
</TABLE>
- --------
(1) Amounts shown include cash and non-cash compensation earned and received
by executive officers as well as amounts earned but deferred by certain
executive officers at their election pursuant to the Cabletron Systems,
Inc. 401(k) Saving and Investment Plan.
(2) On September 1, 1997, S. Robert Levine resigned as President, Chief
Executive Officer and director of Cabletron and Donald B. Reed was
appointed to the positions of President, Chief Executive Officer and
director of Cabletron. On the same date, Craig R. Benson resigned as Chief
Operating Officer of Cabletron. Mr. Benson remains the Chairman of the
Board of Directors of Cabletron.
OPTION TABLES
The following table below sets forth, for applicable executive officers in
the Summary Compensation Table, information regarding individual grants of
options made in the last fiscal year, and their potential realizable values.
OPTION GRANTS IN THE FISCAL YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF STOCK
TOTAL OPTIONS PRICE APPRECIATION
NUMBER OF GRANTED TO PER SHARE FOR OPTION TERM (2)
SHARES UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION -------------------
NAME OPTIONS GRANTED (#) FISCAL YEAR PRICE DATE 5% 10%
- ---- ------------------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David J. Kirkpatrick.... 30,000(1) 1% $30.375 10/18/06 $573,080 $1,452,298
</TABLE>
- --------
(1) The option is exercisable in annual increments of 6,000 shares over the
next five years.
(2) These potential realizable values are based on assumed rates of
appreciation required by applicable regulations of the Securities and
Exchange Commission. The potential realizable values stated are not
discounted to present value.
61
<PAGE>
The following table below depicts option exercise activity in the last
fiscal year and fiscal year-end option values with respect to applicable
executive officers named in the Summary Compensation Table. The fair market
value of Cabletron's Common Stock on the New York Stock Exchange at February
28, 1997 was $30.00 per share.
AGGREGATE OPTION EXERCISES IN THE FISCAL YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT
ACQUIRED ON OPTIONS AT 2/28/97 2/28/97
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
(#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
----------- ------------ ------------------ ----------------
<S> <C> <C> <C> <C>
David J. Kirkpatrick.... 24,000 $442,670 7,000/64,000 $21,399/$203,061
</TABLE>
DIRECTOR COMPENSATION
For their services to Cabletron, non-employee directors receive an annual
retainer of $10,000, plus $750 for each Board and committee meeting attended
during the year. Directors who are employed by Cabletron do not receive
compensation for attendance at Board or committee meetings. Outside directors
are reimbursed for any expenses attendant to Board membership.
Pursuant to Cabletron's Directors' Option Plan, Messrs. Duncan, McGuinness
and Myerow were initially granted options to purchase 100,000, 150,000 and
190,000 shares, respectively, of Common Stock upon the consummation of
Cabletron's initial public offering in 1989. Subsequent to 1989, under this
Plan each non-employee director has been automatically granted an option to
purchase 25,000 additional shares of Common Stock on the day after the date of
each Meeting of Stockholders of Cabletron and similar grants will be made to
each eligible director after the next Annual Meeting. Options under the
Directors' Option Plan are granted at their fair market value on the date of
grant, vest over a period of three years and expire six years from the grant
date.
EMPLOYMENT AGREEMENTS
Effective September 1, 1997, Cabletron entered into an employment agreement
(the "Employment Agreement") with Mr. Reed pursuant to which Mr. Reed is
employed as President and Chief Executive Officer of Cabletron. The Employment
Agreement provides for a term of three years at an annual base salary of
$450,000 per year. Pursuant to the Employment Agreement, Mr. Reed was granted
options to purchase 600,000 shares of Cabletron Common Stock. Mr. Reed is also
eligible for a bonus based on pre-established performance criteria. The
Employment Agreement provides that if Mr. Reed's employment is terminated
without "cause" (as defined in the Employment Agreement) or if Mr. Reed
terminates his employment for "good reason" (as defined in the Employment
Agreement), (i) Cabletron shall pay to Mr. Reed the greater of (a) the amount
of his base salary for the remainder of the term of employment and (b)
$450,000, and (ii) all stock options held by Mr. Reed will become immediately
exercisable in full and remain exercisable for a period of three years. In
addition, if Mr. Reed's employment is terminated at the end of the Employment
Agreement, he will be entitled to severance equal to one year base
compensation. If within twenty four months following a Change in Control (as
defined in the Employment Agreement) of Cabletron Mr. Reed's employment is
terminated, Mr. Reed is entitled to a lump sum payment equal to (i) three
times Mr. Reed's base salary at the time of such termination of employment
plus (ii) any bonuses paid or payable to Mr. Reed in respect of the four
fiscal quarters immediately preceding such termination of employment. In
addition, upon termination of employment within the twenty-four month period
following a Change of Control, all stock options held by Mr. Reed will become
immediately exercisable in full and remain exercisable for a period of three
years. The Employment Agreement further provides for a "gross-up" payment
under which, if amounts paid under the Employment Agreement would be subject
to a federal excise tax on "excess parachute payments," Cabletron will pay Mr.
Reed an additional amount of cash, so that after payment of all such taxes by
Mr. Reed, Mr. Reed will have received the amount he would have received in the
absence of any such tax. The Employment Agreement also contains non-
competition and non-solicitation covenants which apply during the employment
term and for a two-year period thereafter.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF CABLETRON
The following description does not purport to be complete and is subject in
all respects to the applicable provisions of Cabletron's Restated Certificate
of Incorporation, as amended, and Bylaws, copies of which are filed as
exhibits to the Registration Statement, of which this Proxy
Statement/Prospectus is a part.
The authorized capital stock of Cabletron consists of 240,000,000 shares of
Cabletron Common Stock, $.01 par value, and 2,000,000 shares of preferred
stock, $1.00 par value.
COMMON STOCK
Subject to the powers, preferences and rights of any preferred stock, the
holders of Cabletron Common Stock are entitled to all powers and voting and
other rights pertaining to the stock of Cabletron and each share of Common
Stock is entitled to one vote. There is no cumulative voting. Holders of
Cabletron Common Stock have no preemptive or other subscription rights, and
there are no conversion, redemption or sinking fund provisions applicable
thereto. The Board of Directors of Cabletron is authorized to issue from time
to time all of the authorized and unissued shares of Cabletron Common Stock.
PREFERRED STOCK
The Cabletron Board of Directors is authorized to issue preferred stock from
time to time in one or more series, each of such series to have such voting
powers, full or limited, or no voting powers, and such designations,
preferences and special rights as shall be determined by the Board of
Directors of Cabletron in a resolution or resolutions providing for the issue
of such preferred stock.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of the material differences between the rights of
holders of Yago Stock and the rights of holders of Cabletron Common Stock.
Both Yago and Cabletron are organized under the Delaware General Corporation
Law (the "DGCL"). Certain differences in stockholder rights arise from
provisions in the Restated Certificate of Incorporation, as amended (the "Yago
Certificate"), and Bylaws, as amended (the "Yago Bylaws"), of Yago and the
Restated Certificate of Incorporation, as amended (the "Cabletron
Certificate"), and Bylaws, as amended (the "Cabletron Bylaws"), of Cabletron.
VOTING RIGHTS
Holders of Yago Common Stock are entitled to one vote per share, in person
or by proxy, at all meetings of the stockholders and on all propositions
before such meetings. The Yago Common Stock is substantially identical to the
Cabletron Common Stock in this respect. Each holder of each class of Yago
Preferred Stock is entitled to vote on all matters and is entitled to the
number of votes equal to the number of shares of Yago Common Stock into which
such shares of Yago Preferred Stock could be converted pursuant to the
conversion provisions in the Yago Certificate relating to Yago Preferred
Stock.
Except as otherwise required by law, or by the Yago Certificate, the holders
of the Yago Preferred Stock and the Yago Common Stock vote together as a
single class on all matters. The Yago Certificate provides that the holders of
Yago Common Stock, as a class, shall be entitled to elect two members of the
board of directors, and that the Series A Preferred holders shall be entitled
to elect two members, voting as a class. Any remaining directors shall be
elected by the Preferred and Common Stockholders voting together as a class
and the Series B Preferred holders shall be entitled to elect one member,
voting as a class.
The Yago Certificate provides that, so long as any shares of Yago Preferred
Stock remain outstanding, Yago may not take certain actions without approval
by vote or written consent of the holders of at least sixty-six and
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<PAGE>
two-thirds percent of the then outstanding shares of Yago Series A Preferred
Stock and Yago Series B Preferred Stock, voting together as a class. These
actions include: (i) any redemption, purchase, or other acquisition for value
(or payment into or setting aside for a sinking fund for such purpose) of any
share or shares of Yago Preferred Stock otherwise than in accordance with the
conversion provisions of the Certificate; (ii) any redemption, purchase or
other acquisition (or payment into or setting aside for a sinking fund for
such purpose) of any Yago Common Stock, other than from employees, officers,
directors, consultants or other persons performing services for Yago or any
subsidiary pursuant to agreements under which Yago has the option to
repurchase such shares, provided that the total amount applied to the
repurchase of shares of Yago Common Stock shall not exceed $100,000 during any
twelve-month period; (iii) any authorization or issuance of, or obligation to
issue, any other equity security (including any security convertible into or
exercisable for any equity security) senior to the Yago Preferred Stock as to
dividend rights, redemption rights or liquidation preferences or voting
rights, provided, however, this shall not limit Yago's rights to issue a
security on parity with the Yago Preferred Stock; (iv) any payment or
declaration of any dividends on any junior securities; and (v) any increase or
decrease in the number of authorized shares of Yago Series A Preferred Stock
or Yago Series B Preferred Stock. Yago further cannot amend the Yago
Certificate or Yago Bylaws without the approval, by vote or written consent,
by the holders of sixty-six and two-thirds percent of a series of Yago
Preferred Stock voting separately as a single class, if such amendment would
change any of the rights, preferences or privileges provided for in the Yago
Certificate for the benefit of any shares of that series of Yago Preferred
Stock in an adverse manner.
VOTING REQUIREMENTS AND QUORUMS FOR STOCKHOLDER MEETINGS
Under the DGCL, a majority of the issued and outstanding stock entitled to
vote, present in person or by proxy, at any meeting of stockholders shall
constitute a quorum for the transaction of business at such meeting, unless
the certificate of incorporation or bylaws specifies a different percentage,
but in no event may a quorum consist of less than one-third of the shares
entitled to vote at the meeting. Neither Cabletron nor Yago have quorum
requirements that differ from the requirements of the DGCL in their
certificate or bylaws.
Under the DGCL, the affirmative vote of the majority of shares present in
person or represented by proxy at a duly held meeting at which a quorum is
present and entitled to vote on the subject matter is deemed to be the act of
the stockholders, unless the DGCL, the certificate of incorporation or the
bylaws specify a different voting requirement. The Cabletron Bylaws provide
that a majority of the votes properly cast upon any question other than an
election to an office will decide the question, except when a larger vote is
required by law, by the certificate of incorporation or by the bylaws. A
plurality of the votes properly cast for election to any office will elect to
such office. The Yago Bylaws conform with the DGCL's majority vote provision
except for the circumstances under "Voting Rights" above, for which a sixty-
six and two-thirds majority is specified.
STOCKHOLDER MEETINGS
Under the DGCL, special meetings of stockholders may be called by the board
of directors and by such person or persons as so authorized by the certificate
of incorporation or the bylaws. The Yago Bylaws provide that special meetings
may be called for any purpose or purposes, unless otherwise prescribed by the
statute or by the Yago Certificate, at the request of the chairman of the
board, the president, or the board of directors. The Cabletron Bylaws provide
that special meetings of stockholders may be called at any time by the
chairman of the board, if any, the president or the board of directors. A
special meeting may also be called by the Cabletron secretary, or in the case
of death, absence, incapacity or refusal of the secretary, by an assistant
secretary or some other officer upon application of a majority of the
directors.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
To amend a certificate of incorporation, the DGCL requires the adoption of a
resolution by the board of directors and the approval of a majority of all
outstanding shares entitled to vote therefor, unless a greater level of
approval is required by the certificate of incorporation. Furthermore, under
the DGCL, the holders of the outstanding shares of a class are entitled to
vote as a class upon any proposed amendment to the certificate of
64
<PAGE>
incorporation if the amendment would increase or decrease the aggregate number
of authorized shares of such class, increase or decrease the par value of the
shares of such class, or alter or change the powers, preferences or special
rights of the shares of such class so as to adversely affect the holders
thereof. The Yago Certificate requires the vote or written consent of sixty-
six and two-thirds percent of a series of Yago Preferred Stock if an amendment
to the certificate of incorporation would change any of the rights,
preferences, or privileges for any shares of that series of stock in an
adverse manner.
The Cabletron Certificate provides that certain of its articles can only be
amended by the affirmative vote of 85% of the total number of votes of the
then outstanding shares of capital stock of Cabletron entitled to vote
generally in the election of directors, voting together as a single class
excluding shares beneficially owned by a Related Person (as defined in the
Cabletron Certificate).
BYLAWS
Under the DGCL, the authority to adopt, amend or repeal the bylaws of a
corporation is held exclusively by the stockholders entitled to vote unless
such authority is conferred upon the board of directors in the corporation's
certificate of incorporation. The Yago Certificate confers upon the board of
directors the power to amend the Bylaws provided that the grant of such power
does not divest the stockholders of nor limit their power to amend the Bylaws.
The Cabletron Certificate grants to its board of directors the power to make,
alter, amend and repeal the Cabletron Bylaws by vote of a majority of the
directors. Stockholders of Cabletron also have the power to adopt, amend or
repeal the Cabletron Bylaws by a two-thirds vote.
NUMBER OF DIRECTORS
Under the DGCL, the minimum number of directors is one. The number of
directors shall be fixed by, or in a manner provided in, the bylaws, unless
the certificate of incorporation fixes the number of directors, in which case
a change in the number of directors shall be made only by an amendment to the
certificate of incorporation. The Cabletron Certificate and Cabletron Bylaws
do not set a number of directors. The Yago Certificate provides that the
number of directors shall be six.
BOARD CLASSIFICATION
The DGCL provides that the directors of any corporation may be divided into
one, two or three classes. The Cabletron Bylaws provide that Cabletron's
directors shall be divided into three equal classes with each class comprised
of one third of the directors being elected to serve until the third
succeeding annual meeting. The Yago Certificate provides that the holders of
Yago Common Stock, as a class, shall be entitled to elect two members of the
board of directors, and that the Yago Series A Preferred Stock and Series B
Preferred Stock shall be entitled to elect two and one members, respectively,
as a class.
NOMINATION AND ELECTION OF DIRECTORS
The DGCL provides that directors shall be elected at an annual meeting of
stockholders held on a date and at a time designated by or in the manner
provided in the bylaws. Elections of directors must be by written ballot,
unless otherwise provided in the certificate of incorporation. The Cabletron
Certificate provides that elections of directors need not be by written
ballot, unless otherwise provided in the Cabletron Bylaws. The Cabletron
Bylaws state that no ballot shall be required for any election unless
requested by a stockholder present or represented at the meeting and entitled
to vote in the election.
Under the DGCL, directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the annual meeting and
entitled to vote on the election of directors. The Cabletron Bylaws provide
that directors are elected by a plurality of the votes properly cast by
stockholders voting in person or by proxy at the annual meeting of
stockholders.
Any Cabletron stockholder entitled to vote for the election of directors at
an annual meeting may nominate persons for election as directors by giving
timely written notice thereof to the secretary accompanied by a petition
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<PAGE>
signed by at least 100 record holders of capital stock of the corporation
which shows the class and number of shares held by each person and which
represent in the aggregate 1% of the outstanding shares entitled to vote in
the election of directors. To be timely, notice must be delivered to or mailed
to and received at the principal executive offices of Cabletron not less than
60 days nor more than 90 days prior to the annual meeting. In the event that
less than 70 days' notice or prior public disclosure of the date of the annual
meeting is given or made to the stockholders, to be timely, notice by the
stockholder must be received at the principal executive offices not later than
the close of business on the tenth day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure was
made. To be in proper written form, a stockholder's notice shall set forth in
writing (i) as to each person nominated by the stockholder to serve as
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the Exchange
Act of 1934, as amended, including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected and (ii) as to the stockholder giving the notice (x) the
name and address of such stockholder, as he, she or it appears on Cabletron's
books and (y) the class and number of shares of the corporation which are
beneficially owned by such stockholder. If any person is nominated by the
board of directors for election as a director, that person, at the request of
the board of directors, shall furnish to the secretary the same information
regarding the nominee as is required of those stockholders submitting notices
of nomination.
The Yago Bylaws stipulate that directors shall be elected at each annual
meeting of stockholders. Neither the Yago Certificate nor the Yago Bylaws
contains provisions regarding the nomination of directors. The Yago
Certificate provides that the Yago Common Stock, voting separately as a class,
shall be entitled to elect two members of the board of directors, that the
Yago Series A Preferred Stock shall be entitled to elect two members, voting
separately as a class, and that the Yago Series B Preferred Stock shall be
entitled to elect one member, voting separately as a class. Any remaining
directors shall be elected by the Yago Common Stock and Yago Preferred Stock
voting together as a class.
REMOVAL OF DIRECTORS
The DGCL provides that any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors, except (i) unless the
certificate of incorporation otherwise provides, in the case of a corporation
with a classified board, stockholders may effect removal only for cause; or
(ii) in the case of a corporation having cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause if the
votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire board of directors, or, if
there be classes of directors, at an election of the class of directors of
which he is a part.
The Cabletron Bylaws provide for removal of directors at any time, but only
for cause and only by the affirmative vote of 85% of the total number of votes
of the then outstanding shares of capital stock of Cabletron entitled to vote
generally in the election of directors, voting together as a single class
excluding shares beneficially owned by a Related Person.
Under the Yago Certificate, a director may be removed from the board of
directors, with or without cause, by the holders of at least a majority of the
shares entitled to elect such director.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under the DGCL, unless otherwise provided in the certificate of
incorporation or bylaws, vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority vote of the directors then in office, even if the number of directors
then in office is less than a quorum, or by a sole remaining director. The
DGCL also provides that, unless the certificate of incorporation or bylaws
otherwise provide, when one or more directors shall resign from the board of
directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
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vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in the DGCL in the filling of other vacancies. In addition,
under the DGCL, if, at the time of filling any vacancy or newly created
directorship, the directors then in office constitute less than a majority of
the entire board of directors, the Delaware Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of shares outstanding at the time and entitled to vote,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office, such election to be conducted in accordance with the
procedures under the DGCL for holding stockholder meetings.
The Cabletron Bylaws provide that vacancies may be filled only by a majority
vote of the remaining directors in office, although less than a quorum, or by
a sole remaining director. Newly created directorships may be filled by the
board of directors, or if not so filled, by the stockholders at the next
annual meeting or at any special meeting called for such purpose.
Under the Yago Bylaws, vacancies in the board of directors may be filled by
a majority of the remaining directors, even if less than a quorum, or by a
sole remaining director unless otherwise provided in the Yago Certificate.
Each director so elected shall hold office until the next annual meeting of
the stockholders and until a successor has been elected and qualified. The
Yago Certificate provides that vacancies with respect to directors elected by
holders of Yago Series A Preferred Stock and Yago Series B Preferred Stock
shall be filled by holders of such Yago Series A Preferred Stock and Yago
Series B Preferred Stock, respectively. Remaining vacancies shall be filled by
the holders of Yago Preferred Stock and Yago Common Stock, voting together as
a class.
VOTE REQUIRED FOR MERGERS AND DISSOLUTIONS
The DGCL generally requires the affirmative vote of a majority of a
corporation's outstanding shares entitled to vote, unless the certificate of
incorporation requires a greater proportion, to authorize a merger,
consolidation, share exchange, dissolution or disposition of all or
substantially all of its assets, except that, unless required by its
certificate of incorporation, no authorizing stockholder vote is required of a
corporation surviving a merger if (i) such corporation's certificate of
incorporation is not amended by the merger; (ii) each share of stock of such
corporation outstanding immediately prior to the effective date of the merger
will be an identical outstanding or treasury share of the surviving
corporation after the effective date of the merger; and (iii) either no shares
of common stock of the surviving corporation and no shares, securities or
obligations convertible into such stock are to be issued or delivered under
the plan of merger, or the authorized unissued shares or the treasury shares
of common stock of the surviving corporation to be issued or delivered under
the plan of merger plus those initially issuable upon conversion of any other
shares, securities or obligations to be issued or delivered under such plan do
not exceed 20% of the shares of common stock of such constituent corporation
outstanding immediately prior to the effective date of the merger. If it
should be deemed advisable in the judgment of the board of directors of any
corporation that it should be dissolved, the board of directors, after the
adoption of a resolution to that effect by a majority of the whole board of
directors at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the
resolution. At the meeting a vote shall be taken upon the proposed
dissolution. If a majority of the outstanding shares of the corporation
entitled to vote thereon shall vote for the proposed dissolution, a
certification of dissolution shall be filed with the Secretary of State of the
State of Delaware. Dissolution of a corporation may also be authorized without
action of the directors if all of the stockholders entitled to vote thereon
shall consent in writing and a certificate of dissolution shall be filed with
the Secretary of State of the State of Delaware pursuant to (S)275(d) of the
DGCL. The Yago Bylaws and Yago Certificate contain no additional provisions
relating to voting for mergers.
The Cabletron Certificate provides that certain transactions, including
mergers, consolidations, issuances of securities, certain asset dispositions,
liquidations or dissolutions between Cabletron and a Related Person must be
approved by the affirmative vote of 85% of the outstanding shares of stock
entitled to vote generally for the election of directors unless (i) the board
of directors of Cabletron has approved a binding agreement with such Related
Person with respect to such transaction or has approved the transaction which
resulted in such party becoming a Related Person, in either case prior to the
time such party became a Related Person and provided that a majority of
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the members of the board of directors voting for the approval of such
transaction were continuing directors or (ii) the business combination (as
defined in the Cabletron Certificate) involves solely Cabletron and a
subsidiary greater than 50% of whose stock is owned by the Cabletron and none
of whose stock is beneficially owned by a related person (as defined in the
Cabletron Certificate) (other than beneficial ownership arising solely because
of control of Cabletron), provided that in the event Cabletron is not the
surviving corporation of such business combination, each stockholder of the
Cabletron receives the same consideration in such transaction in proportion to
his ownership, the provisions of Articles VII, VIII, IX, and XI through XVI of
the Cabletron Certificate are continued in effect or adopted by such surviving
corporation as part of its certificate of incorporation and the provisions of
such certificate of incorporation are not inconsistent with the provisions of
such Articles, and the provisions of the Cabletron By-laws are continued in
effect or adopted by said surviving corporation.
ANTI-TAKEOVER PROVISIONS
The DGCL prohibits certain transactions between a Delaware corporation and
an "interested stockholder," which is defined as any person (other than the
corporation and any direct or indirect majority-owned subsidiary of the
corporation) that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior
to the date on which it is sought to be determined whether such person is an
interested stockholder, and (iii) the affiliates and associates of such
persons in clauses (i) and (ii) above; provided, however, that the term
"interested stockholder" shall not include (x) any person who (A) owned shares
in excess of the 15% limitation set forth herein as of, or acquired such
shares pursuant to a tender offer commenced prior to, December 23, 1987, or
pursuant to an exchange offer announced prior to the aforesaid date and
commenced within 90 days thereafter and either (I) continued to own shares in
excess of such 15% limitation or would have but for action by the corporation
or (II) is an affiliate or associate of the corporation and so continued (or
so would have continued but for action by the corporation) to be the owner of
15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether such a person is an interested stockholder or
(B) acquired said shares from a person described in item (A) of this paragraph
by gift, inheritance or in a transaction in which no consideration was
exchanged; or (y) any person whose ownership of shares in excess of the 15%
limitation set forth herein is the result of action taken solely by the
corporation; provided that such person shall be an interested stockholder if
thereafter such person acquires additional shares of voting stock of the
corporation, except as a result of further corporate action not caused,
directly or indirectly, by such person. For the purpose of determining whether
a person is an interested stockholder, the voting stock of the corporation
deemed to be outstanding shall include stock deemed to be owned by a person
through beneficial ownership of stock, a right to acquire stock, or an
arrangement or understanding for the purpose of acquiring stock but shall not
include any other unissued stock of such corporation which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate
value in excess of 10% of the consolidated assets of the corporation, and
certain other transactions) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder became an interested stockholder. However, the prohibition does
not apply if: (i) the business combination resulted in the stockholder
becoming an interested stockholder became an interested stockholder is
approved by the corporation's board of directors prior to the date the
interested stockholder resulted in the stockholder becoming an interested
stockholder became an interested stockholder; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directed and also officers and (y)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) at or subsequent to such time
the business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by
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the interested stockholder. The law applies automatically to a Delaware
corporation unless otherwise provided in its certificate of incorporation or
bylaws or if it has less than 2,000 stockholders of record and does not have
voting stock listed on a national securities exchange or authorized for
quotation with a registered national securities association. Neither the
Certificate nor the Bylaws of Cabletron and Yago exempt either corporation
from the DGCL provision regarding transactions with interested stockholders.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations incorporated or organized under the DGCL have
fiduciary obligations to the corporation and its stockholders. Pursuant to
these fiduciary obligations, the directors must act in accordance with the so-
called duties of "care" and "loyalty." Under the DGCL, the duty of care
requires that the directors act in an informed and deliberative manner and to
inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty may be
summarized as the duty to act in good faith, not out of self-interest and in a
manner that directors reasonably believe to be in the best interest of the
corporation. Directors of both corporations are subject to these fiduciary
duties.
LIMITATION ON DIRECTORS' LIABILITY
The Cabletron and Yago Certificates provide that no director shall be liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that exculpation from
liabilities is not permitted under the DGCL. The DGCL prohibits exculpation
for: (i) any breach of the director's duty of loyalty to the corporation or
its stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law; (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions; or (iv) any
transactions from which the director derived an improper personal benefit.
INDEMNIFICATION
The DGCL provides that a corporation may indemnify a director, officer,
employee or agent of the corporation and certain other persons serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against amounts paid and expenses (including attorneys fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person
in connection with an action, suit or proceeding to which he is or is
threatened to be made a party by reason of such position, if such person shall
have acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe his conduct was
unlawful. However, no indemnification shall be made with respect to any matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court
determines that such indemnification is proper under the circumstances. These
provisions of the DGCL are generally referred to as "statutory
indemnification" provisions. Corporations are permitted to adopt certificate
of incorporation provisions or bylaws which provide for additional
indemnification of directors and officers. These non-exclusive provisions are
generally referred to as "non-statutory indemnification" provisions. Non-
statutory indemnification provisions are generally adopted to expand the
circumstances and liberalize the conditions under which indemnification will
occur. The Cabletron Certificate provides that officers and directors shall be
indemnified to the full extent permitted by the DGCL. The Yago Certificate
does not contain an indemnification provision.
DIVIDENDS AND OTHER DISTRIBUTIONS
Under the DGCL, a corporation may generally pay dividends out of surplus or,
if there is no surplus, out of its net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year, unless the capital
of the corporation has been diminished by depreciation in the value of its
property, losses or otherwise, to an amount less than the aggregate amount of
the capital represented by the issued outstanding stock of all classes having
a preference upon the distribution of assets. Neither the Cabletron
Certificate nor the Cabletron Bylaws place any restrictions on the payment of
dividends, nor do they provide for any preferences upon liquidation.
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Under the Yago Certificate, the holder of Yago Series A Preferred Stock
shall be entitled to receive, when and if declared, $0.05 per share per annum
out of funds legally available therefore prior and in preference to payment of
any dividend with respect to the Yago Common Stock (other than dividends
payable solely in Yago Common Stock). The holders of the Yago Series B
Preferred Stock shall be entitled to receive dividends at the rate of $0.19
per share per annum payable out of funds legally available therefor prior to
and in preference to payment of any dividend with respect to the Yago Common
Stock (other than dividends, paid solely in Yago Common Stock). Such dividends
shall not be cumulative and no right to such dividends shall accrue to holders
of Yago Preferred Stock unless declared by the board of directors. The Yago
Certificate also provides that no dividends or other distributions shall be
made with respect to the Yago Common Stock during any fiscal year unless at
the same time dividends with respect to Yago Preferred Stock for that fiscal
year have been declared and paid or set apart.
A merger or consolidation of Yago with or into any other corporation or
corporations, or the merger of any other corporation or corporations into
Yago, in which consolidation or merger the stockholders of Yago receive
distribution in cash or securities of another corporation as a result, or a
sale of all or substantially all of the assets of Yago, shall be treated as a
liquidation, dissolution, or winding up of Yago. When this occurs, the Yago
Certificate requires distributions to the holders of Yago Series A Preferred
Stock and Yago Series B Preferred Stock in accordance with the liquidation
provisions of the Yago Certificate.
The liquidation provisions of the Yago Certificate state that in the event
of any liquidation, dissolution or winding up of Yago, whether voluntary or
involuntary, the holders of Yago Series A Preferred Stock and Yago Series B
Preferred Stock shall receive prior to any distribution of any of the assets
of surplus funds of Yago to holders of Yago Common Stock, by reason of their
ownership thereof the amount of $0.46875 and $1.90 per share (as adjusted for
any stock dividends combinations or splits with respect to such shares),
respectively, plus all declared but unpaid dividends for each share held by
them. If the assets and funds of the Yago are insufficient to pay this full
amount, the assets and funds of Yago legally available for distribution will
be distributed ratably among the holders of the Yago Series A Preferred Stock
and Yago Series B Preferred Stock in proportion to the amount each such holder
is otherwise entitled to receive. After payment to the holders of the Yago
Series A Preferred Stock and Yago Series B Preferred Stock of the above
amounts, the remaining assets and funds of Yago legally available for
distribution, if any, shall be distributed among the holders of the Yago
Common Stock and the Yago Series A Preferred Stock and Yago Series B Preferred
Stock in proportion to the shares of Yago Common Stock they hold or into which
their shares of Yago Preferred Stock may be converted. Once the holders of
Yago Series A Preferred Stock have received $0.9375 per share and the holders
of Yago Series B Preferred Stock have received $3.80 per share, any additional
distributions shall be paid to the holders of Yago Common Stock.
Yago may not redeem any of the Yago Preferred Stock without a vote or
written request on behalf of 66 2/3% of the holders of Yago Preferred Stock
then outstanding.
STOCKHOLDER DERIVATIVE SUITS
Under the DGCL, a stockholder may bring a derivative action on behalf of the
corporation only if the stockholder was a stockholder of the corporation at
the time of the transaction in question or if his or her stock thereafter
devolved upon him or her by operation of law. A stockholder must also first
make demand on the corporation that it bring suit and have such demand be
refused, unless it is shown that such demand would have been futile. The DGCL
does not have a bonding requirement. Both Cabletron and Yago are subject to
this law.
APPRAISAL RIGHTS
Under the DGCL, a stockholder of a corporation participating in certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under the
DGCL, such fair market value is determined exclusive of any element of
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value arising from the accomplishment or expectation of the merger or
consolidation, and such appraisal rights are not available for the shares of
any class or series of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any shares of stock
of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in (S) 251(f) of the DGCL.
INSPECTION OF BOOKS AND RECORDS
The DGCL allows any stockholder to inspect the stockholder list and other
books and records of the corporation for a purpose reasonably related to such
person's interests as a stockholder. Stockholders of both Cabletron and Yago
possess these rights.
The foregoing discussion of the material differences between the rights of
holders of Yago Common Stock and Yago Preferred Stock and the rights of
holders of Cabletron Common Stock is only a summary of certain provisions and
does not purport to be a complete description of such differences, and is
qualified in its entirety by reference to the DGCL, the common law thereunder
and the full text of the Yago Certificate and Yago Bylaws and the full text of
the Cabletron Certificate and Cabletron Bylaws.
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DESCRIPTION OF THE YAGO SYSTEMS, INC. 1998 STOCK OPTION PLAN
GENERAL
The Yago 1998 Stock Option Plan (the "Plan") was adopted by the Yago Board
of Directors, subject to approval by the stockholders, on January 13, 1998.
The Plan is intended to enhance Yago's ability (i) to attract and retain
employees who are in a position to make significant contributions to the
success of Yago; (ii) reward employees for such contributions; and (iii)
encourage employees to take into account the long-term interests of Yago
through ownership of Yago Common Stock. The total number of shares of Yago
Common Stock that may be issued under the Plan is 4,394,549, subject to
adjustment for stock dividends, stock splits and similar events. To date, Yago
has issued options to purchase 4,394,549 shares of Yago Common Stock under the
Plan at a weighted average exercise price of $6.14 per share.
The Plan is not a pension, profit-sharing or stock bonus plan qualified
under Section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"), nor is it subject to the provisions of the Employee Retirement Income
Security Act of 1974.
The following is a brief description of the Plan. Such description makes use
of terms defined in the Plan, and is qualified by reference to the text of the
Plan.
Administration. The Plan is administered by the Yago Board of Directors. The
Yago Board of Directors has full power to select, from among the employees
eligible for options, the individuals to whom options will be granted, to make
any combination of options to any participants, and to determine the specific
terms of each grant, subject to the provisions of the Plan. The Yago Board of
Directors also has the power to waive compliance by participants with terms
and conditions of options, to cancel options with the participant's consent,
to grant replacement options for options that have been canceled, and to
interpret the Plan and decide any questions and settle all controversies and
disputes that may arise in connection therewith.
Shares Reserved for the Plan. Subject to adjustment for stock dividends,
stock splits and similar events, a total of 4,394,549 shares of Common Stock
are available for issuance under the Plan. Options and shares which are
forfeited, reacquired by Yago, satisfied by a cash payment or otherwise
without the issuance of Yago Common Stock are not counted toward this
limitation. Shares of Yago Common Stock delivered under the Plan may be either
authorized but unissued shares or previously issued shares which have been
acquired by Yago and are held in treasury. The number of options which may be
granted and the amount of Yago Common Stock that may be issued to any eligible
person is subject to the discretion of the Yago Board of Directors, subject to
certain conditions concerning incentive stock options. See "--Option Grants."
Participants. The participants under the Plan are those employees of Yago or
any of its subsidiaries who, in the opinion of the Yago Board of Directors,
are in a position to make a significant contribution to the success of Yago or
its subsidiaries.
Term of Options. The Plan limits the term of options granted under the Plan
to ten years (five years in the case of an incentive stock option granted to a
stockholder beneficially owning ten percent or more of the outstanding Yago
Common Stock) and prohibits the granting of options more than ten years after
the date on which it was adopted by the Yago Board of Directors.
OPTION GRANTS
Stock Options. The Plan permits the granting of non-transferable stock
options that qualify as incentive stock options ("incentive options" or
"ISOs") under the Code and non-transferable stock options that do not qualify
("non-statutory options"). The option exercise price of each option is to be
determined by the Yago Board of Directors but may not be less than 100% of the
fair market value of the shares on the date of grant in the case of incentive
options (110% in the case of an ISO granted to a ten-percent stockholder (as
defined in the Plan)) and not less than 50% of such value in the case of non-
statutory options. Within these limits, the Yago Board of Directors may reduce
the exercise price of an option at any time after the time of grant, but the
option
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will be treated as a new option granted on the date of such reduction. In no
case may the exercise price paid for shares of authorized Yago Common Stock
which are being issued for the first time be less than the aggregate par value
of such shares.
The term of each option is fixed by the Yago Board of Directors but may not
exceed ten years from the date of grant or five years from the date of grant
in the case of an ISO granted to a ten-percent stockholder. The Yago Board of
Directors determines at what time or times each option may be exercised.
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Yago Board of Directors. The option
certificate representing any options granted under the Plan may contain
additional terms of the option grant relating to, among other things, vesting
of the option.
The option exercise price of options granted under the Plan must be paid for
in cash or by check, bank draft or money order, or, if so permitted by the
instrument evidencing the option (or by the Yago Board of Directors at or
after grant in the case of a non-statutory option), (i) through the delivery
of shares of unrestricted Common Stock which have been outstanding for at
least six months and which have a fair market value equal to the exercise
price, (ii) by a delivery of the participant's promissory note to Yago payable
on terms specified by the Yago Board of Directors, (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to delivery promptly to
the Yago Board of Directors sufficient funds to pay the exercise price, or
(iv) some combination of the foregoing.
Upon the exercise of an option, if the aggregate fair market value of the
shares of Yago Common Stock subject to the option is greater than the
aggregate exercise price, the Yago Board of Directors, upon the written
request of the option holder, may in its sole discretion cancel the option and
pay, in lieu thereof, in cash to the holder an amount equal to the difference
between such fair market value and the exercise price.
In the event of termination of a participant's employment by reason of
retirement after age 62 with the consent of Yago, total and permanent
disability, or death, each option then held by the participant will
immediately become exercisable in full and will remain exercisable until the
third anniversary of such termination of employment or the date the option
would have terminated if the participant had remained an employee, whichever
is earlier. If the participant's employment terminates by reason of retirement
or total and permanent disability and thereafter dies while the option is
still exercisable, the option will remain exercisable until three years
following his or her death or until the date the option would have terminated
if the participant had remained an employee, whichever is earlier. If, when
the participant's employment ends, exercise of an option is subject to
performance or other conditions (other than conditions relating to the mere
passage of time and continued employment) which have not been satisfied, the
Yago Board of Directors may remove or modify such conditions or provide that
the option will become exercisable if and when the conditions are subsequently
satisfied. If the Yago Board of Directors does not take such action, such
option will terminate as of the date on which the participant's employment
ended.
If a participant ceases to be an employee of Yago for any reason other than
retirement, total and permanent disability, or death, his or her options, to
the extent then exercisable, will remain exercisable for three months
following termination or until the date on which the option would have
terminated if the participant had remained an employee, whichever is earlier.
Any option not exercisable on the date of such termination of employment will
terminate.
Performance Options. The Yago Board of Directors may also grant non-
transferable performance options entitling the recipient to receive shares of
Yago Common Stock or cash in such combinations as the Yago Board of Directors
may determine. Payment of the option may be conditioned on achievement of
individual or Yago performance goals over a fixed or determinable period and
on such other conditions as the Yago Board of Directors may determine. Except
as otherwise determined by the Yago Board of Directors, rights to which the
participant is not irrevocably entitled under a performance option terminate
upon a participant's termination of employment.
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Loans and Supplemental Grants. In connection with the purchase of stock
under an option or the payment of any Federal income tax in respect of income
recognized as a result of an option, the Yago Board of Directors may authorize
loans from Yago to the participant. Loans, including extensions, may be for up
to 10 years, may be either secured or unsecured and may be with or without
recourse against the participant in the event of default. Each loan shall be
subject to such terms and conditions and shall bear such rate of interest, if
any, as the Committee shall determine. In connection with any award, the
Committee may at the time such award is made or at a later date, provide for
and make a cash payment to the participant not to exceed an amount equal to
(a) the amount of any Federal, state and local income tax on ordinary income
for which the participant will be liable with respect to the award, plus (b)
an additional amount on a grossed upon basis necessary to make him or her
whole after tax. Any such cash payment will be made at the time the
participant incurs Federal income tax liability with respect to the award.
Except as otherwise specified in the grant or agreed to by the Committee,
rights in connection with such cash payments to which the participant has not
become irrevocably entitled will terminate upon a participant's death,
retirement or other termination of employment or other affiliation with the
Company.
No option granted under the Plan (other than an option in the form of an
outright transfer of cash or unrestricted stock) may be transferred other than
by will or by the laws of descent and distribution and during an employee's
lifetime an option requiring exercise may be exercised only by the participant
(or in the event of the participant's incapacity, the person or persons
legally appointed to act on the participant's behalf).
OTHER PLAN PROVISIONS
Dividends and Deferrals; Nature of Rights as Shareholders Under the
Plan. Except as specifically provided by the Plan, the receipt of an option
will not give a participant rights as a stockholder; the participant will
obtain such rights, subject to any limitations imposed by the Plan or the
instrument evidencing the option, upon actual receipt of Common Stock.
Adjustments for Stock Dividends, etc. The Yago Board of Directors will make
appropriate adjustments to the exercise price and maximum number of shares of
Yago Common Stock that may be delivered under the Plan and to outstanding
options to reflect stock dividends, stock splits, and similar events. The Yago
Board of Directors may also make appropriate adjustments to take into account
material changes in law or accounting matters or certain other corporate
changes or events.
Termination of Employment. The Plan provides that the following events shall
not be deemed a termination of employment for purposes of the Plan: (i) a
transfer of employment between Yago and an affiliated company or between
affiliated companies, or to the employment of a corporation issuing or
assuming an option in a transaction to which Section 424 of the Code applies;
or (ii) sick leave or other leave of absence approved for purposes of the Plan
by the Yago Board of Directors, so long as the employee's right to
reemployment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the Yago Board
of Directors otherwise so provides in writing.
Mergers, Consolidations, etc. In the event of a merger or consolidation in
which Yago is not the surviving corporation or which results in the
acquisition of substantially all of Yago's outstanding stock by a single
person or entity or by a group of persons or entities acting in concert, or in
the event of sale or transfer of all or substantially all of Yago's assets (a
"covered transaction"), all outstanding options and stock appreciation rights
may be terminated by Yago Board of Directors as of the effective date of the
covered transaction.
Withholding Requirements. The grant or exercise of options may be subject to
tax withholding requirements, as described below. Where Yago Common Stock may
be delivered under an option, the Yago Board of Directors may require that the
participant or other appropriate person either remit to Yago an amount
necessary to satisfy withholding requirements or make other satisfactory
arrangements (including, if the Yago Board of Directors so permits, the
holding back of shares from payments under the option).
74
<PAGE>
Amendment and Termination. The Yago Board of Directors may at any time
discontinue granting options under the Plan. The Board of Directors may at any
time or times amend the Plan or any outstanding option for any purpose which
may at the time be permitted by law, or may at any time terminate the Plan as
to any further grants of options, provided that (except to the extent
expressly required or permitted by the Plan), no such amendment will, without
the approval of the stockholders of Yago, (i) increase the maximum number of
shares of Yago Common Stock available under the Plan; (ii) change the group of
persons eligible to receive options under the Plan; or (iii) extend the time
within which options may be granted. Furthermore, no amendment or termination
of the Plan may adversely affect the rights of any participant (without his or
her consent) under an option previously granted.
Deferral of Payments. The Yago Board of Directors may agree at any time,
upon request of the participant, to defer the date on which any payment under
an option will be made.
Past Service as Consideration. Where a participant purchases Yago Common
Stock under an option for a price equal to the par value of the Yago Common
Stock, the Yago Board of Directors may determine that the price has been
satisfied by past services rendered by the participant.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is included for general information only and does
not purport to be a complete description of Federal tax consequences in
respect of the Plan. This discussion is based on the law in effect as of the
date of the Prospectus. Each optionee is urged to consult his or her own tax
advisor to determine the particular consequences to him or her of the Plan,
including the effect of state, local and other tax laws.
Incentive Options. No taxable income for regular income tax purposes is
realized by the optionee upon the grant or exercise of an ISO. If no
disposition of shares transferred to an optionee pursuant to the exercise of
an ISO is made by the optionee within two years from the date of grant of the
option nor within one year after the date of transfer then (a) upon sale of
such shares any amount realized in excess of the option price (the amount paid
for the shares) will be taxed to the optionee as a long-term capital gain and
any loss sustained will be a long-term capital loss, and (b) no deduction will
be allowed to Yago.
The exercise of an ISO will result in an increase in the optionee's
alternative minimum taxable income ("AMTI") equal in general to the excess of
the fair market value of the shares acquired upon exercise over the option
price. In certain cases this increase in AMTI may result in alternative
minimum tax liability for the optionee.
If shares of Yago Common Stock acquired upon the exercise of an ISO are
disposed of prior to the expiration of the one-year or two-year holding
periods described above (a "disqualifying disposition"), generally (a) the
optionee will realize ordinary income in the year of disposition in an amount
equal to the excess (if any) of the fair market value of the shares at
exercise (or, if the disposition was a sale to an unrelated party, the amount
realized on a sale of such shares, if less) over the option price thereof, and
(b) Yago will be entitled to deduct such amount. Any further gain realized
will be taxed as short-term or long-term capital gain and will not result in
any deduction for Yago.
Special rules will apply where all or a portion of the exercise price of an
ISO is paid by tendering shares of Common Stock.
If an ISO is exercised at a time when it no longer qualifies for the tax
treatment described above, the option is treated as a nonstatutory stock
option. Generally, an ISO will not be eligible for the tax treatment described
above if it is exercised more than three months following termination of
employment (one year following termination of employment, in the case of
termination by reason of permanent and total disability), except in certain
cases where the ISO is exercised after the death of the optionee. In general,
ISOs will also be treated as
nonstatutory stock options to the extent they first become exercisable by an
optionee in any calendar year for stock having a fair market value (determined
at time of grant) in excess of $100,000.
75
<PAGE>
Nonstatutory Options. No income is realized by the optionee at the time a
nonstatutory option is granted under the Plan. Generally, (a) at exercise,
ordinary income is realized by the optionee in an amount equal to the
difference between the option price and the fair market value of the shares on
the date of exercise, and Yago will be entitled to deduct the same amount
(provided Yago satisfies any applicable withholding requirements), and (b)
upon a subsequent sale or exchange of the shares, appreciation or depreciation
after the date of exercise is treated as capital gain or loss, either short-
term or long-term depending on how long the shares have been held.
Persons Subject to Section 16 of the Exchange Act. Common Stock acquired
pursuant to an option under the Plan by persons subject to the short-swing
profit rules of Section 16(b) of the Exchange Act, where the acquisition
occurs within six months of the option, may be treated for tax purposes as
subject to a substantial risk of forfeiture until the expiration of such six-
month period. In such circumstances, any income that would otherwise be
realized upon acquisition of such shares will be deferred until the expiration
of six months from the date of the option pursuant to which such shares are
acquired, unless the recipient timely elects immediate recognition of income
under Section 83(b) of the Code.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities offered
hereby will be passed upon for Cabletron by Ropes & Gray, Boston,
Massachusetts. Pillsbury Madison & Sutro LLP, Palo Alto, California has
rendered an opinion regarding certain United States Federal income tax
matters.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedule of Cabletron and its subsidiaries as of February 28, 1997
and February 29, 1996, and for each of the years in the three-year period
ended February 28, 1997, have been included herein and in the Registration
Statement, of which this Proxy Statement/Prospectus is a part, in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
The financial statements of Yago Systems, Inc. as of December 31, 1997 and
for the year then ended and for the period from inception (September 6, 1996)
through December 31, 1997 included in this Proxy Statement/Prospectus have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The Statement of Assets Sold as of June 28, 1997 and the Statement of
Revenue and Direct Operating Expenses (the "Statements") for the year ended
June 28, 1997 of the Network Products Business of Digital Equipment
Corporation, (the "Business") included in this Proxy Statement/Prospectus,
have been included herein in reliance on the report which includes an
explanatory paragraph of Coopers & Lybrand L.L.P., independent accountants
given on authority of said firm as experts in auditing and accounting. The
explanatory paragraph states that the Statements were prepared to present the
assets sold by the Business to Cabletron Systems, Inc. and the revenue and
direct operating expenses of the Business and are not intended to be a
complete presentation of the Business' financial position or results of
operations.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONTENTS
CABLETRON SYSTEMS, INC.
<TABLE>
<S> <C>
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Income...................................... F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
YAGO SYSTEMS, INC.
<TABLE>
<S> <C>
Report of Independent Accountants...................................... F-17
Balance Sheet.......................................................... F-18
Statement of Operations................................................ F-19
Statement of Cash Flows................................................ F-20
Statement of Changes in Stockholders' Equity........................... F-21
Notes to Financial Statements.......................................... F-22
</TABLE>
NETWORK PRODUCT BUSINESS OF DIGITAL EQUIPMENT CORPORATION
<TABLE>
<S> <C>
Report of Independent Accountants..................................... F-29
Statement of Revenue and Direct Operating Expenses for the Year Ended
June 28, 1997........................................................ F-30
Statement of Assets Sold as of June 28, 1997.......................... F-31
Unaudited Statement of Revenue and Direct Operating Expenses for the
Three Months Ended
September 27, 1997................................................... F-32
Unaudited Statement of Assets Sold as of September 27, 1997........... F-33
Notes to Financial Statements......................................... F-34
</TABLE>
CABLETRON SYSTEMS, INC.
<TABLE>
<S> <C>
Unaudited Pro Forma Combined Balance Sheet at November 30, 1997....... F-38
Unaudited Pro Forma Combined Statement of Income for the Year Ended
February 28, 1997.................................................... F-40
Unaudited Pro Forma Combined Statement of Income for the Nine Months
Ended
November 30, 1997.................................................... F-41
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CABLETRON SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 28, 1997 and February 29, 1996,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended February 28,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cabletron
Systems, Inc. and subsidiaries as of February 28, 1997 and February 29, 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended February 28, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 21, 1997
F-2
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 206,926 $ 214,828 $106,102
Short-term investments (note 4)....... 214,680 165,396 172,896
Accounts receivable, net of allowance
for doubtful accounts ($16,530,
$15,476 and $6,655, respectively).... 298,672 219,896 153,256
Inventories (note 5).................. 280,021 197,438 160,806
Deferred income taxes (note 9)........ 57,691 57,107 38,315
Prepaid expenses and other assets..... 37,521 35,925 31,711
---------- ---------- --------
Total current assets................ 1,095,511 890,590 663,086
---------- ---------- --------
Long-term investments (note 4).......... 148,554 188,081 153,424
Long-term deferred income taxes (note
9)..................................... 30,756 29,627 23,473
Property and equipment, net (note 6).... 212,023 198,557 153,904
Other assets............................ -- 3,021
---------- ---------- --------
Total assets.......................... $1,486,844 $1,306,855 $996,908
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 69,003 $ 68,604 $ 38,826
Accrued expenses (note 7)............. 169,333 135,208 120,572
Income taxes payable.................. 5,282 10,442 18,536
---------- ---------- --------
Total current liabilities........... 243,618 214,254 177,934
Long-term deferred income taxes (note
9)..................................... 4,577 11,103 9,088
---------- ---------- --------
Total liabilities................... 248,195 225,357 187,022
---------- ---------- --------
Commitments and contingencies (notes 8
and 10 and 13)
Stockholders' equity (notes 11 and 12):
Preferred stock, $1.00 par value.
Authorized 2,000 shares; none issued. -- -- --
Common stock, $0.01 par value.
Authorized 240,000 shares; issued and
outstanding 158,208, 156,305 and
152,892 shares....................... 1,582 1,563 776
Additional paid-in capital............ 287,218 266,829 218,792
Retained earnings..................... 949,194 812,885 591,518
---------- ---------- --------
1,237,994 1,081,277 811,086
Cumulative translation adjustment..... 655 221 (1,049)
Notes receivable, stockholders........ -- -- (151)
---------- ---------- --------
Total stockholders' equity.......... 1,238,649 1,081,498 809,886
---------- ---------- --------
Total liabilities and stockholders'
equity............................. $1,486,844 $1,306,855 $996,908
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30, YEARS ENDED LAST DAY OF FEBRUARY,
------------------- -----------------------------------
1997 1996 1997 1996 1995
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (note 13)...... 1,065,808 1,025,997 $ 1,406,552 $ 1,100,349 $ 833,218
Cost of sales............ 476,847 419,307 575,107 448,699 340,424
--------- --------- ----------- ----------- ---------
Gross profit........... 588,961 606,690 831,445 651,650 492,794
Operating expenses:
Research and
development........... 134,583 119,444 161,674 127,289 89,129
Selling, general and
administrative........ 261,848 209,380 286,469 223,083 166,649
Nonrecurring items
(note 3).............. -- 43,024 63,024 94,343 --
--------- --------- ----------- ----------- ---------
Income from
operations.......... 192,530 234,842 320,278 206,935 237,016
Interest income.......... 14,269 14,254 19,422 17,891 5,572
--------- --------- ----------- ----------- ---------
Income before income
taxes............... 206,799 249,096 339,700 224,826 242,588
Income taxes (note 9).... 70,490 87,307 117,575 80,341 86,014
--------- --------- ----------- ----------- ---------
Net income........... $ 136,309 161,789 $ 222,125 $ 144,485 $ 156,574
========= ========= =========== =========== =========
Net income per common
share................... $ 0.87 $ 1.04 $ 1.43 $ 0.95 $ 1.08
========= ========= =========== =========== =========
Weighted average number
of shares outstanding... 157,527 154,968 155,207 151,525 145,125
========= ========= =========== =========== =========
</TABLE>
see accompanying notes to consolidated financial statements.
F-4
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE NOTES TOTAL
COMMON PAID-IN RETAINED TRANSLATION RECEIVABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS' EQUITY
------ ---------- -------- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 28,
1994................... $ 309 $139,515 $290,888 $(3,171) $(335) $ 427,206
Repayments of notes
receivable,
stockholders........... -- -- -- -- 131 131
Canceled 38 shares upon
employee terminations,
net.................... -- (30) -- -- 30 --
Issuance of common
stock, net............. 19 8,584 -- -- (195) 8,408
Exercise of options for
741 shares of common
stock.................. 3 4,884 -- -- -- 4,887
Tax benefit for options
exercised.............. -- 5,712 -- -- -- 5,712
Issuance of 136 shares
under employee stock
purchase plan.......... -- 2,287 -- -- -- 2,287
Stock dividend from
stock split............ 429 (11) (429) -- -- (11)
Stock repurchased and
retired................ (3) (13,056) -- -- -- (13,059)
Effect of foreign
currency translation... -- -- -- 1,807 -- 1,807
Net income.............. -- -- 156,574 -- -- 156,574
------ -------- -------- ------- ----- ----------
Balance February 28,
1995................... 757 147,885 447,033 (1,364) (369) 593,942
------ -------- -------- ------- ----- ----------
Repayments of notes
receivable,
stockholders........... -- -- -- -- 218 218
Issuance of common
stock, net............. 9 41,765 -- -- -- 41,774
Issuance of common stock
for five more
acquisition............ 1 2,564 -- -- -- 2,565
Exercise of options for
1,453 shares of common
stock.................. 8 17,214 -- -- -- 17,222
Tax benefit for options
exercised.............. -- 7,215 -- -- -- 7,215
Issuance of 154 shares
under employee stock
purchase plan.......... 1 3,322 -- -- -- 3,323
Stock repurchased and
retired................ -- (1,173) -- -- -- (1,173)
Effect of foreign
currency translation... -- -- -- 315 -- 315
Net income.............. -- -- 144,485 -- -- 144,485
------ -------- -------- ------- ----- ----------
Balance at February 29,
1996................... 776 218,792 591,518 (1,049) (151) 809,886
------ -------- -------- ------- ----- ----------
Issuance of common
stock, net............. 15 8,562 -- -- -- 8,577
Exercise of options for
1,345 shares of common
stock.................. 10 18,012 -- -- -- 18,022
Repayment of notes
receivable............. -- -- -- -- 151 151
Issuance of common stock
for The OASys Group
acquisition............ 2 6,955 -- -- -- 6,957
Tax benefit for options
exercised.............. -- 8,302 -- -- -- 8,302
Stock split............. 758 -- (758) -- -- --
Issuance of 197 shares
under employee stock
purchase plan.......... 2 6,206 -- -- -- 6,208
Effect of foreign
currency translation... -- -- -- 1,270 -- 1,270
Net income.............. -- -- 222,125 -- -- 222,125
------ -------- -------- ------- ----- ----------
Balance at February 28,
1997................... 1,563 266,829 812,885 221 -- 1,081,498
------ -------- -------- ------- ----- ----------
Exercise of options for
1,661 shares of common
stock (unaudited)...... 18 17,083 -- -- -- 17,101
Issuance of 97 shares
under employee stock
purchase plan
(unaudited)............ 1 3,306 -- -- -- 3,307
Effect of foreign
currency translation
(unaudited)............ -- -- -- 434 -- 434
Net income (unaudited).. -- -- 136,309 -- -- 136,309
------ -------- -------- ------- ----- ----------
Balance at November 30,
1997 (unaudited)....... $1,582 $287,218 $949,194 $ 655 -- $1,238,649
====== ======== ======== ======= ===== ==========
</TABLE>
On November 27, 1996, the Company's common stock split 2-for-1 and was
distributed as a stock dividend. All share amounts have been adjusted
accordingly.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED LAST DAY
NOVEMBER 30, OF FEBRUARY,
------------------- ----------------------------
1997 1996 1997 1996 1995
-------- --------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................ 136,309 161,789 $222,125 $144,485 $156,574
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 50,205 37,332 49,704 32,739 31,144
Provision for losses on
accounts receivable.... 1,098 7,276 9,140 435 187
Loss on disposal of
property, plant and
equipment.............. (8,239) (19,376) 87 93 174
Deferred income taxes... (446) 83 (22,933) (38,766) (4,434)
Changes in assets and
liabilities:
Accounts receivable... (82,031) (72,431) (74,925) (55,795) (29,623)
Inventories........... (84,233) (18,086) (37,669) (55,597) (23,168)
Prepaid expenses and
other assets......... (1,755) (2,499) (1,709) (18,947) (3,427)
Accounts payable and
accrued expenses..... 39,244 38,337 52,661 68,766 11,873
Income taxes payable.. (4,892) (1,148) (7,653) 3,705 10,476
-------- --------- -------- -------- --------
Net cash provided by
operating
activities......... 45,260 131,277 188,828 81,118 149,776
-------- --------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures.... (64,037) (69,419) (94,368) (67,760) (66,116)
Purchase of available-
for-sale securities.... (86,478) (169,349) (203,667) (124,968) (71,598)
Purchase of held-to-
maturity securities.... (37,228) (170,595) (247,855) (205,852) (282,712)
Sales/maturities of
marketable securities.. 113,943 326,729 424,308 236,393 323,682
-------- --------- -------- -------- --------
Net cash used in
investing
activities......... (73,800) (82,634) (121,582) (162,187) (96,744)
-------- --------- -------- -------- --------
Cash flows from financing
activities:
Repayment of notes
receivable from
stockholders........... -- (2,155) 151 218 131
Repurchase of common
stock.................. -- 544 -- (1,173) (13,070)
Tax benefit of options
exercised.............. -- -- 8,302 7,215 5,712
Proceeds from sale of
common stock........... -- 8,580 8,577 41,774 8,408
Common stock issued to
employee stock purchase
plan................... 3,311 3,019 6,208 3,323 2,287
Proceeds from exercise
of stock options....... 17,097 13,110 18,022 17,222 4,887
-------- --------- -------- -------- --------
Net cash provided by
financing
activities......... 20,408 23,098 41,260 68,579 8,355
-------- --------- -------- -------- --------
Effect of exchange rate
changes on cash.......... 230 49 220 159 712
-------- --------- -------- -------- --------
Net (decrease) increase in
cash and cash
equivalents.............. (7,902) 71,790 108,726 (12,331) 62,099
Cash and cash equivalents,
beginning of year........ 214,828 106,101 106,102 118,433 56,334
-------- --------- -------- -------- --------
Cash and cash equivalents,
end of year.............. 206,926 177,891 $214,828 $106,102 $118,433
======== ========= ======== ======== ========
Cash paid during year for:
Income taxes............ 46,109 101,318 $132,291 $142,733 $ 68,420
======== ========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CABLETRON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) BUSINESS OPERATIONS
The Company develops, manufactures, markets, designs, installs and supports
a broad range of standards-based local and wide area network connectivity
hardware and software products.
NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Cabletron
Systems, Inc. (the "Company") and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) Investments
Held-to-maturity securities are those investments which the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for amortization of premiums and
discounts, which approximates market value. Available-for-sale securities are
also recorded at amortized cost, adjusted for amortization of premiums and
discounts. Due to the nature of the Company's investments and the resulting
low volatility, the difference between fair value and amortized cost is not
material.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are determined
at standard which approximates the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
on straight-line and accelerated methods over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of the lives
of the related assets or the term of the lease. The Company reviews its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If it is
determined that the carrying amount of an asset cannot be fully recovered, an
impairment loss is recognized.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company has reinvested earnings of its foreign subsidiaries and,
therefore, has not provided income taxes which could result from the
remittance of such earnings. The unremitted earnings at February 28, 1997
amounted to approximately $125.7 million. Furthermore, any taxes paid to
foreign governments on those earnings may be used, in whole or in part, as
credits against the US tax on any dividends distributed from such earnings. It
is not practicable to estimate the amount of unrecognized deferred US taxes on
these undistributed earnings.
F-7
<PAGE>
(f) Net Income Per Share
Net income per share of common stock is based on the weighted average number
of shares outstanding during the period. The effect of outstanding stock
options is excluded from the computation because the dilutive effect is not
material.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
128 establishes a different method of computing net income per share then is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic net
income per share and diluted net income per share. The impact on diluted net
income per share is not expected to be material.
The Company plans to adopt SFAS 128 in its fiscal quarter ending February
28, 1998 and at that time all historical net income per share data will be
restated to conform to the provisions of SFAS No. 128.
(g) Foreign Currency Translation and Transaction Gains and Losses
Assets and liabilities of the Company's foreign operations are translated
into US dollars at the exchange rate in effect at the balance sheet date and
revenue and expenses are translated at average rates in effect during the
period. The resultant translation adjustment is reflected as a separate
component of stockholders' equity on the consolidated balance sheets.
Transaction gains (losses) are reflected in the consolidated statements of
income and were not material.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or less.
(i) Revenue Recognition
Sales are recognized upon shipment of products and software. In the case of
design, consulting, installation, support services and evaluations, revenues
are recognized upon completion and acceptance of such products and services.
Revenues from service contracts are recognized ratably over the period the
services are performed. Warranty costs and sales returns and allowances are
accrued at the time of shipment.
(j) Derivatives
The Company uses derivative financial instruments, principally forward
exchange contracts and options in its management of foreign currency exposure.
These financial instruments are designed to minimize exposure and reduce risk
from exchange rate fluctuations in the regular course of the Company's
international business operations. Market value gains and losses are included
in income as incurred and effectively offset gains and losses on foreign
currency assets or liabilities that are hedged.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(l) New Accounting Pronouncement
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Company measures compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Therefore, the adoption of SFAS 123 was not
material to the Company's financial condition or results of operations;
however, the proforma impact on earnings per share has been disclosed in the
Notes to Consolidated Financial Statements as required by SFAS 123.
F-8
<PAGE>
NOTE (3) BUSINESS COMBINATIONS
For acquisitions accounted for under the pooling-of-interests method, all
financial data of Cabletron has been restated to include the historical
financial data of these acquired companies. For acquisitions accounted for as
purchases, Cabletron's consolidated results of operations include the
operating results of the acquired companies from their acquisition dates.
Acquired assets and liabilities were recorded at their estimated fair market
values at the acquisition date and the aggregate purchase price plus costs
directly attributable to the completion of acquisitions have been allocated to
the assets and liabilities acquired.
On July 26, 1996, the Company acquired ZeitNet Inc., a privately held
manufacturer of ATM products. Under the terms of the agreement, Cabletron
issued approximately 3.3 million shares of common stock for all of the
outstanding shares (and all shares issuable upon exercise of options) of
ZeitNet in a transaction accounted for as a pooling of interests. In
connection with the acquisition, the Company recorded nonrecurring charges of
$23.0 million.
On August 1, 1996, the Company acquired Network Express, Inc., a publicly
held manufacturer of ISDN LAN switched access solutions. Under the terms of
the agreement, Cabletron issued approximately 2.9 million shares of common
stock for all of the outstanding shares (and all shares issuable upon exercise
of options) of Network Express in a transaction accounted for as a pooling of
interests. In connection with the acquisition, the Company recorded
nonrecurring charges of $20.0 million.
On December 11, 1996, the Company acquired Netlink Inc., a privately held
manufacturer of frame relay products. Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of
the outstanding shares (and all shares issuable upon exercise of options) of
Netlink in a transaction accounted for as a pooling of interests. In
connection with the acquisition, the Company recorded nonrecurring charges of
$13.0 million.
Revenues, operating income (loss), and net income (loss) of the four
entities during the periods preceding the acquisitions are presented in the
following table.
<TABLE>
<CAPTION>
NINE THREE
MONTHS MONTHS
ENDED ENDED FISCAL FISCAL
11/30/96 5/31/96 1996 1995
---------- -------- ---------- --------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Cabletron Systems,
Inc. ................ $1,025,997 $664,439 $1,069,715 $810,684
ZeitNet, Inc. ........ -- 2,140 4,395 2,879
Network Express, Inc.. -- 3,177 18,997 11,113
Netlink, Inc. ........ 7,935 -- 7,242 8,542
---------- -------- ---------- --------
$1,033,932 $669,756 $1,100,349 $833,218
========== ======== ========== ========
Operating income (loss):
Cabletron Systems,
Inc. ................ $ 234,842 $135,813 $ 227,562 $238,363
ZeitNet, Inc. ........ -- (2,965) (8,890) 171
Network Express,
Inc. ................ -- (2,293) (9,415) 419
Netlink, Inc. ........ (2,856) -- (2,322) (1,937)
---------- -------- ---------- --------
$ 231,986 $130,555 $ 206,935 $237,016
========== ======== ========== ========
Net income (loss):
Cabletron Systems,
Inc. ................ $ 161,789 $ 94,047 $ 164,418 $161,974
ZeitNet, Inc. ........ -- (2,972) (8,938) 155
Network Express, Inc.. -- (2,154) (8,475) 466
Netlink, Inc.......... (2,887) -- (2,520) (6,021)
---------- -------- ---------- --------
$ 158,902 $ 88,921 $ 1144,485 $156,574
========== ======== ========== ========
</TABLE>
F-9
<PAGE>
Note that the fiscal 1997 interim financial information is presented for the
interim periods nearest the dates that the combinations were consummated.
On February 7, 1997, the Company acquired The OASys Group, Inc., a privately
held developer of software targeted at managing telecommunications devices and
connections used in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
(and all shares issuable upon exercise of options) of OASys in a transaction
accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the date of
acquisition. The total purchase price of $7.0 million included $6.7 million
for in-process research and development and $0.3 million for nonrecurring
charges which included adjustments to conform with Cabletron's accounting
policies. The Company's consolidated results of operations include the
operating results of the acquired business from its acquisitions date.
Proforma financial information is not presented as it is not material to the
consolidated financial statements.
On January 12, 1996, the Company acquired the Enterprise Networks Business
Unit from Standard Microsystems Corporation. The acquisition was accounted for
as a purchase and, accordingly, the acquired assets and liabilities were
recorded at their estimated fair market values at the date of the acquisition.
The total purchase price of $85.7 million included $67.8 million for in-
process research and development and $17.9 million for nonrecurring charges
which included adjustments to conform the ENBU accounting policies with the
Company's accounting policies. The Company's consolidated results of
operations include the operating results of the acquired business from its
acquisition date. Proforma financial information is not presented as it is not
material to the consolidated financial statements.
NOTE (4) INVESTMENTS
Investments are summarized as follows at February 28, 1997 and February 29,
1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
LONG LONG
CURRENT TERM TOTAL CURRENT TERM TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity...... $ 84,261 $115,209 $199,470 $130,079 $115,500 $245,579
Available-for-sale.... 81,135 72,872 154,007 42,817 37,924 80,741
-------- -------- -------- -------- -------- --------
Total............. $165,396 $188,081 $353,477 $172,896 $153,424 $326,320
======== ======== ======== ======== ======== ========
</TABLE>
The contractual maturities for the above securities are less than three
years.
NOTE (5) INVENTORIES
Inventories consist of the following at November 30, 1997, (unaudited)
February 28, 1997 and February 29, 1996 (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
1997 1997 1996
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................. $ 93,215 $ 64,685 $ 52,642
Work-in-process............................... 26,035 57,070 39,317
Finished goods................................ 160,771 75,683 68,847
-------- -------- --------
Total..................................... $280,021 $197,438 $160,806
======== ======== ========
</TABLE>
F-10
<PAGE>
NOTE (6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at February 28, 1997
and February 29, 1996:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1997 1996 LIVES
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and land improvements.................... $ 1,751 $ 1,760 --
Buildings and building improvements........... 38,015 37,058 30-40 years
Construction in progress...................... 305 -- --
Equipment..................................... 284,621 194,366 3-5 years
Furniture and fixtures........................ 11,711 14,004 5-7 years
Leasehold improvements........................ 9,448 6,445 3-5 years
Motor vehicles................................ 4,690 3,651 3-5 years
-------- --------
350,541 257,284
Less accumulated depreciation and amortiza-
tion......................................... 151,984 103,380
-------- --------
$198,557 $153,904
======== ========
</TABLE>
NOTE (7) ACCRUED EXPENSES
Accrued expenses consist of the following at February 28, 1997 and February
29, 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Salaries and benefits...................................... $ 15,527 $ 18,625
Deferred revenue........................................... 50,041 38,325
Warranty................................................... 19,315 18,719
Other...................................................... 50,325 44,903
-------- --------
Total.................................................. $135,208 $120,572
======== ========
</TABLE>
NOTE (8) LEASES
The Company leases manufacturing and office facilities under noncancelable
operating leases expiring through the year 2020. The leases provide for
increases based on the consumer price index and increases in real estate
taxes. Rent expense associated with operating leases was approximately
$12,179,000, $10,265,000 and $7,642,000 for the years ended February 28, 1997,
February 29, 1996 and February 28, 1995, respectively.
Total future minimum lease payments under all noncancelable operating leases
as of February 28, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998............................................................... $ 8,108
1999............................................................... 5,163
2000............................................................... 3,538
2001............................................................... 2,720
2002............................................................... 1,853
Thereafter........................................................... 7,825
-------
$29,207
=======
</TABLE>
F-11
<PAGE>
NOTE (9) INCOME TAXES
Income before income taxes is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total US domestic income...................... $313,017 $173,515 $202,620
Total foreign subsidiaries income............. 26,683 51,311 39,968
-------- -------- --------
Total income before income taxes.............. $339,700 $224,826 $242,588
======== ======== ========
Currently payable:
Federal..................................... $117,546 $ 92,109 $ 63,944
State....................................... 21,962 20,807 19,286
Foreign..................................... 1,000 11,519 7,218
Deferred tax benefit.......................... (22,933) (44,094) (4,434)
-------- -------- --------
Total tax expense............................. $117,575 $ 80,341 $ 86,014
======== ======== ========
The following is a reconciliation of the effective tax rates to the statutory
federal tax rate:
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate............. 35.0% 35.0% 35.0%
State income tax (net of federal tax benefit). 3.6 3.8 4.7
Exempt income of foreign sales corporation,
net of tax................................... (0.7) (1.1) (0.7)
Research and experimentation credit........... (0.7) -- (1.1)
Foreign operations............................ (2.7) (1.6) (2.7)
Other......................................... 0.1 (0.4) 0.3
-------- -------- --------
34.6% 37.5% 35.5%
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at February
28, 1997 and February 29, 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable.................................... $ 4,996 $ 2,100
Inventories............................................ 33,859 28,225
Other reserves and accruals............................ 24,149 9,416
Acquired research and development...................... 29,262 26,322
Domestic net operating loss carryforwards.............. 27,213 26,219
Foreign net operating loss carryforwards............... 5,636 3,268
-------- --------
Total gross deferred tax assets...................... 125,115 95,550
Less valuation allowance............................... (38,381) (33,762)
-------- --------
Net deferred tax assets.............................. 86,734 61,788
-------- --------
Deferred tax liabilities:
Property, plant and equipment.......................... (11,033) (9,088)
-------- --------
Total gross deferred liabilities..................... (11,033) (9,088)
-------- --------
Net deferred tax assets................................ $ 75,631 $ 52,700
======== ========
</TABLE>
At February 28, 1997, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $27,213,000 expiring in fiscal 1998 through
fiscal 2010. The NOL carryforwards were acquired from acquisitions of ZeitNet
Inc., Network Express, Inc., Netlink, Inc. and The OASys Group, Inc.
F-12
<PAGE>
The net change in the total valuation allowance for the year ended February
28, 1997 was an increase of $4,619,000. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance at February 28, 1997.
NOTE (10) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company uses derivative financial instruments, principally forward
exchange contracts and options, in its management of foreign currency
exposures arising from its international operations. These contracts primarily
require the Company to purchase or sell certain foreign currencies either with
or for US dollars at contractual rates. The Company's foreign currency hedging
activities are used to minimize adverse foreign exchange movements on the
eventful dollar net cash inflows of its foreign denominated net assets. The
Company does not hold or issue derivative financial instruments for trading
purposes.
At February 28, 1997 and February 29, 1996, the Company had forward exchange
contracts and purchased option contracts, all having maturities less than two
years, in the contractual amount of $69 million (forward contracts $31 million
and option contracts $38 million) and $90 million (forward contracts $49
million and option contracts $41 million), respectively.
Realized and unrealized foreign exchange gains and losses are recognized in
operating income and offset foreign exchange gains and losses on the
underlying exposures. The Company's derivative financial instruments are
revalued at the balance sheet date and the carrying amount approximates the
fair value of the instruments.
Several major international financial institutions are counterparties to the
Company's financial instruments. It is Company practice to monitor the
financial standing of the counterparties and limit the amount of exposure with
any one institution. The Company may be exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but believes that the
risk of such loss is remote and that it would not be material to its financial
position and results of operations.
The carrying amounts of cash, cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of these
financial instruments.
For the year ended February 28, 1997, no single customer represented more
than 3% of net sales. However, sales to the federal government accounted for
approximately 12% of net sales for the year ended February 28, 1997.
With respect to trade receivables, concentration of credit risk is limited,
due to the diverse areas covered by the Company's operations. Any probable bad
debt loss has been provided for in the allowance for doubtful accounts. The
carrying amounts for cash, short-term and long-term investments, receivables,
accounts payable and accrued liabilities approximate fair value because of the
short maturity of these instruments.
NOTE (11) COMMON STOCK
On November 27, 1996, the Company's common stock split 2-for-1 and was
distributed as a stock dividend. On September 12, 1994, the Company's common
stock split 2.5-for-1 and was distributed as a stock dividend. All share and
per share amounts have been adjusted accordingly.
F-13
<PAGE>
NOTE (12) STOCK PLANS
(a) Equity Incentive and Directors Plans
The Company has an Equity Incentive Plan which provides for the availability
of 25,000,000 shares of common stock for the granting of a variety of
incentive awards to eligible employees. As of February 28, 1997, the Company
had issued 19,953,680 stock options under the Equity Incentive Plan, which
were granted at fair market value at the date of grant, vest over a three to
five year period and expire within six to ten years from the date of grant.
The Company has a Directors Option Plan which provides for the availability
of 1,250,000 shares of common stock for purchase by nonemployee directors of
the Company. The Directors Option Plan provides for issuance of options at
their fair market value on the date of grant. The options vest over a period
of three years and expire six years from the date of grant. A total of 381,000
stock options are outstanding under the Directors Option Plan.
A summary of option transactions under the two plans follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE OF
SHARES UNDER
SHARES PLAN
---------- ------------
<S> <C> <C>
Options outstanding at February 28, 1994............... 6,302,028 $12.29
---------- ------
Granted and assumed.................................... 2,736,182 21.18
Exercised.............................................. (740,980) 6.60
Cancelled.............................................. (440,004) 15.96
---------- ------
Options outstanding at February 28, 1995............... 7,857,226 15.72
---------- ------
Granted and assumed.................................... 3,898,112 28.50
Exercised.............................................. (1,453,402) 11.13
Cancelled.............................................. (465,410) 24.28
---------- ------
Options outstanding at February 29, 1996............... 9,836,526 20.02
---------- ------
Granted and assumed.................................... 6,542,663 29.67
Exercised.............................................. (1,345,415) 12.50
Cancelled.............................................. (1,497,219) 24.28
---------- ------
Options outstanding at February 28, 1997............... 13,536,555 $24.96
========== ======
Options exercisable at February 28, 1997............... 3,356,372 $14.88
========== ======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options as of February 28, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF CONTRACTUAL OUTSTANDING AVERAGE
EXERCISE NUMBER LIFE OPTION OPTIONS EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.053-15.00 2,104,815 5.7 $ 5.38 1,681,115 $ 5.14
$15.01-30.00 4,407,408 7.4 24.00 1,268,117 22.67
$30.01-45.00 7,004,068 8.9 31.38 402,075 30.60
$45.01-65.00 20,264 8.0 46.83 5,065 46.83
---------- ---------
13,536,555 3,356,372
========== =========
</TABLE>
F-14
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its stock option and employee stock purchase plans, accordingly, no
compensation expense has been recognized in the consolidated financial
statements for such plans. The following assumptions were used in the
calculation of these values for fiscal years 1996 and 1997, respectively;
volatility of 63.97%, risk free interest rate of 6.18% and expected life of
3.7 years. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, "Accounting
for Stock-based Compensation," the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income:
As reported.......................................... $ 222,125 $ 144,485
Pro forma............................................ 207,109 121,302
Net income per share:
As reported ......................................... $ 1.43 $ 0.95
Pro forma ........................................... 1.33 0.80
</TABLE>
The effect of applying SFAS 123 as shown in the above pro forma disclosure
is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal 1996.
(b) Employee Stock Purchase Plans
The Company has two Employee Stock Purchase Plans (ESPP) which provide for
the combined availability of 4,500,000 shares of common stock to be purchased
by employees who have completed a minimum period of employment. Under the 1989
ESPP, employees must be continuously employed for a period of six months and
under the 1995 ESPP employees must be continuously employed for a period of
two years. Under these plans, options are granted to eligible employees twice
yearly and are exercisable through the accumulation of employee payroll
deductions from two to ten percent of employee compensation as defined in the
plan, to a maximum of $1,904 annually, for each plan, (adjusted to reflect
increases in the consumer price index) which may be used to purchase stock at
85 percent of the fair market value of the common stock at the beginning or
end of the option period, whichever amount is lower. In fiscal 1997, 197,262
shares were purchased at a weighted average price of $31.47 (153,768 at $21.43
and 136,698 at $16.75, for 1996 and 1995, respectively). The remaining balance
of both ESPPs for purchase by employees at February 28, 1997 was 3,514,937
shares.
F-15
<PAGE>
NOTE (13) GEOGRAPHIC AREA INFORMATION
<TABLE>
<CAPTION>
% OF % OF % OF
1997 TOTAL 1996 TOTAL 1995 TOTAL
---------- ----- ---------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
US....................... $ 998,384 71.0% $ 771,179 70.1% $590,331 70.8%
Direct Foreign Export.... 38,457 2.7 35,378 3.2 37,889 4.5
---------- ----- ---------- ----- -------- -----
Total US Source.......... 1,036,841 73.7 806,557 73.3 628,220 75.3
Europe................... 273,972 19.5 215,796 19.6 155,467 18.7
Other(1)................. 95,739 6.8 77,996 7.1 49,531 6.0
---------- ----- ---------- ----- -------- -----
Total Sales............ $1,406,552 100.0% $1,100,349 100.0% $833,218 100.0%
========== ===== ========== ===== ======== =====
Income from Operations:
US....................... $ 282,480 88.2% $ 169,103 81.7% $196,792 83.0%
Europe................... 29,877 9.3 33,834 16.4 39,343 16.6
Other (1)................ 7,921 2.5 3,998 1.9 881 0.4
---------- ----- ---------- ----- -------- -----
Total Income from
Operations............ $ 320,278 100.0% $ 206,935 100.0% $237,016 100.0%
========== ===== ========== ===== ======== =====
Identifiable Assets:
US....................... $1,122,762 85.9% $ 841,979 84.4% $588,028 83.7%
Europe................... 119,527 9.2 115,949 11.7 92,548 13.2
Other (1)................ 64,566 4.9 38,980 3.9 21,624 3.1
---------- ----- ---------- ----- -------- -----
Total Assets........... $1,306,855 100.0% $ 996,908 100.0% $702,200 100.0%
========== ===== ========== ===== ======== =====
</TABLE>
- --------
(1) Includes Australia, Latin America and the Pacific Rim countries.
NOTE (14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
INCOME
GROSS FROM NET NET INCOME
SALES PROFIT OPERATIONS INCOME PER SHARE(A)
---------- -------- ---------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
First Quarter....... $ 323,499 $190,645 $ 85,672 $ 57,139 $ 0.37
Second Quarter...... 340,940 202,085 50,137 36,904(b) 0.24
Third Quarter....... 361,558 213,960 99,029 67,742 0.44
Fourth Quarter...... 380,555 224,755 85,440 60,340(c) 0.39
---------- -------- -------- -------- ------
Total Year........ $1,406,552 $831,445 $320,278 $222,125 $ 1.43
========== ======== ======== ======== ======
1996
First Quarter....... $ 247,337 $146,612 $ 68,048 $ 46,262 $ 0.31
Second Quarter...... 266,804 158,067 74,968 51,391 0.34
Third Quarter....... 284,193 168,213 78,618 54,285 0.36
Fourth Quarter...... 302,015 178,758 (14,699) (7,453)(d) (0.05)
---------- -------- -------- -------- ------
Total Year........ $1,100,349 $651,650 $206,935 $144,485 $ 0.95
========== ======== ======== ======== ======
</TABLE>
- --------
(a) Due to rounding some totals will not add.
(b) Includes $43.0 million nonrecurring charge related to the acquisitions of
ZeitNet and Network Express.
(c) Includes $20.0 million nonrecurring charge related to the acquisitions of
Netlink and OASys.
(d) Includes $94.3 million nonrecurring charge related to acquisitions of SMC's
Enterprise Networks Business Unit and Fivemere (by Network Express)
F-16
<PAGE>
NOTE (15) LEGAL PROCEEDINGS (UNAUDITED)
Since October 24, 1997, nine stockholder class action lawsuits have been
filed against Cabletron and certain officers and directors of Cabletron in the
United States District Court for the District of New Hampshire. The complaints
do not specify the amount of damages sought on behalf of the class. On March
3, 1998, the United States District Court for the District of New Hampshire
granted the motion to consolidate the nine class action complaints against
Cabletron and its officers and directors into one class action. The legal
costs incurred by Cabletron in defending itself against this litigation,
whether or not it prevails, could be substantial, and in the event that the
plaintiffs prevail, Cabletron could be required to pay substantial damages.
(NOTE (16) ACQUISITIONS (UNAUDITED)
Recent Developments
Effective February 7, 1998 Cabletron consummated the acquisition of certain
of the assets of the Network Products Business ("NPB") of Digital Equipment
Corporation ("Digital") pursuant to an asset purchase agreement (the "Asset
Purchase Agreement") dated November 24, 1997 by and among Cabletron, Ctron
Acquisition Co., Inc., a wholly owned subsidiary of Cabletron, and Digital.
The NPB develops and supplies a wide range of data networking hardware and
software. The purchase price for the acquisition was approximately $430.0
million, before closing adjustments, consisting of cash and product credits.
The closing on February 7, 1998 extended to the assets and personnel located
in the United States and the inventory worldwide. The remaining international
assets and personnel are expected to be transferred as issues in individual
countries are resolved.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Yago Systems, Inc. (a development stage Company):
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Yago Systems, Inc.
(a development stage Company) at December 31, 1997, and the results of its
operations and its cash flows for the year then ended and for the period from
inception (September 6, 1996) through December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
January 26, 1998
F-18
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 1,892
Prepaid expenses and other current assets..................... 73
-------
Total current assets........................................ 1,965
Property and equipment, net..................................... 1,112
-------
$ 3,077
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 783
Notes payable................................................. 101
Accrued expenses.............................................. 319
-------
Total current liabilities................................... 1,203
Notes payable--long term........................................ 239
-------
1,442
-------
Commitments (Note 10)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,060,000
shares authorized;
6,844,948 shares issued and outstanding at December 31, 1997. 7
Common Stock, $0.001 par value; 25,000,000 shares authorized;
10,588,000 shares issued and outstanding at December 31,
1997......................................................... 11
Capital in excess of par...................................... 7,788
Deficit accumulated during the development stage.............. (6,171)
-------
Total stockholders' equity.................................. 1,635
-------
$ 3,077
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 6,
1996)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1997
------------ -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Costs and expenses:
Research and development....................... $4,981 $5,195
Marketing, general and administrative.......... 926 977
------ ------
Total cost and expenses...................... 5,907 6,172
------ ------
Loss from operations............................. 5,907 6,172
Interest expense (income), net................... 4 (1)
------ ------
Net loss......................................... $5,911 $6,171
====== ======
Net loss per share:
Basic.......................................... $0.82
Diluted........................................ 0.82
Shares used in computing net loss per share:
Basic.......................................... 7,170
Diluted........................................ 7,170
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
DEFICIT
ACCUMULATED
DURING THE TOTAL
CAPITAL IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EXCESS OF PAR STAGE EQUITY
--------- ------ ---------- ------ ------------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued to
founders............... -- $ -- 4,800,000 $ 5 $ 19 $ -- $ 24
Proceeds from sale of
preferred stock, net... 4,266,000 4 -- -- 2,034 -- 2,038
Net loss................ -- -- -- -- -- (260) (260)
--------- ----- ---------- ----- ------ ------- ------
Balance at December 31,
1996................... 4,266,000 4 4,800,000 5 2,053 (260) 1,802
Exercise of stock
options, net........... -- -- 5,788,000 6 873 -- 879
Proceeds from sale of
preferred stock, net... 2,578,948 3 -- -- 4,862 -- 4,865
Net loss................ -- -- -- -- -- (5,911) (5,911)
--------- ----- ---------- ----- ------ ------- ------
Balance at December 31,
1997................... 6,844,948 $ 7 10,588,000 $ 11 $7,788 $(6,171) $1,635
========= ===== ========== ===== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 6,
1996)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(5,911) $(6,171)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization.................... 270 287
Increase in prepaid expenses and other assets ... (15) (73)
Increase in accounts payable and accrued
expenses........................................ 832 1,102
------- -------
Net cash used in operating activities........... (4,824) (4,855)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (1,102) (1,399)
------- -------
Net cash used in investing activities........... (1,102) (1,399)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle repayments under revolving line of
credit........................................... (58) (58)
Proceeds from revolving line of credit............ 398 398
Proceeds from issue of promissory note............ 1,500 1,500
Repayment of promissory note...................... (1,500) (1,500)
Proceeds from issuance of common stock............ -- 24
Proceeds from issuance of preferred stock......... 4,865 6,903
Proceeds from exercise of options................. 879 879
------- -------
Net cash provided by financing activities....... 6,084 8,146
------- -------
Net increase in cash and cash equivalents.......... 158 1,892
Cash and cash equivalents at beginning of period... 1,734 --
------- -------
Cash and cash equivalents at end of period......... $ 1,892 $ 1,892
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Yago Systems, Inc. (the "Company" or "Yago") was incorporated in California
on September 6, 1996. The Company was formed for the purpose of the design,
development, manufacture and sale of high-speed computer networking equipment.
Since inception, the Company has concentrated on the design and development of
high-speed network switching routers based on Gigabit Ethernet technology.
Thus far, the Company has developed and commenced marketing the "MSR-8000",
Yago's first multi-layered advanced network routing switching device. The
Company has entered into contracts to outsource the majority of production and
assembly of the MSR-8000.
The Company has funded operations since inception through the sale of equity
securities and the issuance of debt. The Company expects to commence shipping
products to its customers sometime in 1998. On January 14, 1998, the Company
entered into an "Agreement and Plan of Merger" with Cabletron Inc.
("Cabletron"), under which Cabletron will acquire the Company in a transaction
to be accounted for as a purchase. Cabletron is an existing shareholder of the
Company and owned approximately 26% of the outstanding voting shares of the
Company at December 31, 1997. Under terms of the merger agreement, Cabletron
will issue approximately 0.455 shares of its common stock for every one share
of the Company's outstanding capital stock. Cabletron will also exchange
options to purchase its common stock for outstanding options to purchase the
Company's capital stock at the same ratio. In the event Cabletron's stock
price is below a certain level at the end of the eighteen month period
beginning on the closing date of the merger or, if earlier, upon a Change of
Control (as defined in the Agreement and Plan of Merger), additional shares of
Cabletron Common Stock will be issued.
The Company has incurred cumulative losses from inception through December
31, 1997. To enable the Company to continue its operations during 1998, the
Company will require additional financing and support. The Company has
received a commitment from Cabletron to provide funding, if necessary, to
enable the Company to continue operations through 1998, providing such funding
is in accordance with the business plan of the Company previously provided to
Cabletron.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of expenses during
the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Fair value of financial instruments
The carrying amount of cash and cash equivalents and other current assets
and liabilities as presented in the financial statements, approximates fair
value based on the short-term nature of these investments. The recorded amount
of long term debt approximates fair value.
F-23
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents. The Company by policy
limits the amount of credit exposure to any one financial institution and
restricts placement of cash equivalents to financial institutions evaluated as
highly credit-worthy.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three years. Leasehold
improvements are amortized over the life of the lease or the estimated useful
life, which ever is shorter.
Income taxes
The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109 "Accounting For
Income Taxes". Under this method, deferred tax assets and liabilities, net of
valuation allowance, are recognized for the expected future tax consequences
of temporary differences between the carrying amounts and the tax basis of
assets and liabilities.
Research and Development expense
Research and development expenditures are charged to expense as incurred.
Stock Compensation
The Company accounts for stock-based compensation using the intrinsic value
method, prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. The Company
provides additional pro-forma disclosures as required under the Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" (see Note 8).
New accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS
130) and No. 131 "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). The Company does not believe that FAS 130 and FAS 131
will have any material impact on its financial statement reporting
requirements.
NOTE 3--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Furniture............................................... $ 83
Equipment............................................... 870
Software................................................ 446
-------
1,399
Less: accumulated depreciation.......................... (287)
-------
$ 1,112
=======
</TABLE>
F-24
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INCOME TAXES
No provision or benefit for income taxes has been recognized as the Company
has incurred net operating losses for income tax purposes and has no carryback
availability.
Deferred tax assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Net operating loss carryforwards and capitalized
start-up costs....................................... $2,226
Research and development credit carryforwards......... 300
------
Total deferred tax assets............................. 2,526
Valuation allowance................................... (2,526)
------
Net deferred tax assets............................... $ --
======
</TABLE>
Based on a number of factors, including the lack of a history of profits and
the fact that the Company competes in a developing market that is
characterized by rapidly changing technology, management believes that the
weight of available evidence indicates that it is more likely than not that
the Company will not be able to recognize its deferred tax assets and thus a
full valuation allowance has been provided at December 31, 1997.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $4.9 million. The federal net operating loss carryforwards
expire from 2008 to 2012. Under the Tax Reform Act of 1986, the amount of and
the benefit from net operating losses that can be carried forward may be
limited in certain circumstances including, but not limited to, a cumulative
stock ownership change of more than 50% over a three-year period, as defined.
NOTE 5--NOTES PAYABLE AND EQUIPMENT FINANCING ARRANGEMENTS
On June 3, 1997, the Company entered into a financing arrangement with a
Lender to provide equipment financing of up to $2,000,000. The financing
arrangement will expire on June 30, 1998.
Borrowings under this arrangement carry interest at an effective rate of 9%,
are repayable over 36 months and are also secured with the assets purchased.
In conjunction with this financing arrangement, the Company issued warrants to
purchase 170,666 shares of Series A Convertible Preferred Stock at an exercise
price of $0.46875 per share for financings provided up to $1,000,000. These
warrants expire 7 years from the date of their issuance. The Company valued
these warrants using the Black Scholes model at approximately $48,000 and is
amortizing the cost over the term of the related borrowings.
For cumulative financing drawn by Yago above $1,000,000 up to $2,000,000,
the Lender is entitled to warrants to purchase 44,210 shares of Series B
Preferred Stock at an exercise price of $1.90 per share. At December 31, 1997
the Series B warrants were considered contingently issuable as the Company did
not utilize this additional financing line.
On July 18, 1997, the Company borrowed $1,500,000 under a convertible demand
promissory note from Cabletron. Interest was payable at a rate of 10%. On
September 17, 1997 the promissory note was converted to 789,474 shares of
Series B Preferred stock and the interest liability was paid off.
F-25
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 10,060,000 shares of Convertible
Preferred Stock at $.001 par value per share of which 4,436,666 shares have
been designated Series A and 2,623,158 shares have been designated as Series
B. In November 1996, the Company issued 4,266,000 shares of Series A
Convertible Preferred Stock at $0.46875 per share for cash. In September 1997,
the Company issued 2,578,948 shares of Series B Convertible Preferred Stock at
$1.90 per share for cash.
Dividends
The holders of Convertible Preferred Stock are entitled to receive non-
cumulative dividends in the amount of $0.05 per share for Series A and $0.19
for Series B (as adjusted for any stock dividends, combinations or splits with
respect to such shares) per annum. These dividends are only payable when, and
if, declared by the Board of Directors. Dividends may only be paid, if
declared for both Series A and B. No rights shall accrue to holders of
Convertible Preferred Shares by reason that dividends are not declared nor
shall unpaid dividends accrue interest.
Liquidation preference
In the event of any voluntary or involuntary liquidation of the Company, the
holders of Series A and Series B Convertible Preferred Stock shall be entitled
to a distribution, prior to any liquidating distribution to the common
stockholders, in the amount of $0.46875 and $1.90 per share, respectively,
plus all undeclared but unpaid dividends on such shares for each share of
Series A and Series B Convertible Preferred Stock held by them. The Series A
and Series B Convertible Preferred Stock shall rank on parity as to the
receipt of the respective preferred amounts for each series upon liquidation.
If the funds of the Company on liquidation are insufficient to enable full
payment of the above amounts, the entire assets and funds of the Company will
be distributed ratably amongst the holders of Series A and Series B
Convertible Preferred Stock.
After payment to the holders of Series A and Series B Convertible Preferred
Stock of the above amounts and under the terms described, any remaining assets
and funds of the Company, if any, will be distributed amongst the holders of
Common Stock and Convertible Preferred Stock on a pro-rata basis until such
time that the Series A and Series B Convertible Preferred Stockholders have
received the amounts of $0.9375 and $3.80 per share respectively, in addition
to the above mentioned distributions. Thereafter, distributions are payable to
Common Stock holders only. If the assets and funds are insufficient to pay
these preferred amounts, then the amounts available for distribution shall be
apportioned ratably by the number of Common and Convertible Preferred Stock.
Directors and Voting Rights
Holders of Convertible Preferred Stock shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock could be converted. The holders of Series A
Convertible Preferred Stock are entitled to elect two directors to the Board
and the holders of Series B Convertible Preferred Stock are entitled to elect
one director.
Conversion
At the option of the Convertible Preferred Stockholders, their shares may be
converted to Common Stock at a rate equal to $0.46875 and $1.90 for Series A
and Series B Convertible Preferred Stock, respectively, per share of
Convertible Preferred Stock divided by a conversion price of $0.46875 and
$1.90 for Series A and Series B Convertible Preferred Stock, respectively--
adjusted for issuance of additional shares of Common Stock. The Convertible
Preferred Stock shall automatically convert into Common Stock upon the public
offering of the Company's Common Stock if the Gross Proceeds exceed $15
million.
F-26
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--COMMON STOCK
On incorporation the Company issued 4,800,000 shares of Common Stock to its
founders at a price of $.005 per share of which 900,000 shares were vested on
issuance and the remaining shares vest over a period of four years, subject to
acceleration in certain circumstances. At December 31, 1997, approximately
2,200,000 shares of the founders stock were vested.
In conjunction with issuance of Series B Company Preferred Stock (see Note
6) in September 1997 the Company issued warrants to purchase 100,000 shares of
Common Stock exercisable at $0.19 per share and expiring September 17, 1999.
These warrants were exercised on January 9, 1998.
NOTE 8--STOCK OPTIONS
The Company has a 1996 Stock Option and Stock Purchase Plan for employees
and consultants. Under this plan the Company may grant incentive stock options
and non statutory stock options to purchase up to 6,885,124 shares of Common
Stock at an exercise price of not less than 85% of the fair value of the stock
as determined by the Company's Board of Directors. The options become
exercisable over periods of between one and four years and expire ten years
from the date of grant.
On January 13, 1998 the Directors of the Company approved the adoption of
the 1998 Stock Option Plan. Under this plan, the Company has reserved
4,394,549 shares of Common Stock for issuance to its employees. The 1998 Stock
Option Plan is subject to approval by the Stockholders of the Company.
Stock option activity for the period was:
<TABLE>
<CAPTION>
SHARES SUBJECT WEIGHTED
TO OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Balance at December 31, 1996.................. -- --
----------
Granted..................................... 6,154,000 $0.0797
Exercised................................... (5,788,000) $0.0713
Canceled.................................... (144,017) $0.19
----------
Balance at December 31, 1997.................. 221,983 $0.23
==========
Options vested at December 31, 1997........... 14,983
==========
Options available for future grants at
December 31, 1997............................ 875,141
==========
</TABLE>
As of December 31, 1997, approximately 5,227,585 shares issued upon exercise
of options were unvested and subject to the Company's right of repurchase upon
termination of employment prior to vesting.
With respect to certain options granted in 1997, the Company is recognizing
a compensation charge of $1.8 million. The Company has recognized
approximately $466,000 of the said amount as a compensation charge in the year
ended December 31, 1997. The Company will recognize the balance of this
deferred compensation over the related vesting periods of the options. The
future compensation charges are subject to reduction for any employee who
terminates employment prior to the expiration of such employee's option
vesting period.
Significant option groups outstanding at December 31, 1997 and related
average exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------------------- ----------- ------------------- -------------------
(IN YEARS)
<S> <C> <C> <C>
$0.05-$0.19............. 154,983 9.8 $0.15
$0.40................... 67,000 9.9 $0.40
-------
221,983
=======
</TABLE>
F-27
<PAGE>
YAGO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
MINIMUM VALUE DISCLOSURES
Had compensation cost for the Company's Stock Option Plan been determined
based on the minimum value of such options at the grant dates as prescribed by
FAS 123, the Company's net loss would have been $5,947,000 and $6,207,000 for
the year ended December 31, 1997 and for the period from inception
(September 6, 1996) through December 31, 1997, respectively.
NOTE 9--NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128). FAS 128 requires the presentation of both
Basic EPS and Diluted EPS on the face of the Statement of Operations. Basic
EPS is computed by dividing net income/loss available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Basic EPS excludes the dilutive effect of
stock options. Diluted EPS gives effect to all dilutive potential common
shares outstanding during a period.
Following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations (in thousands, except per share
data):
<TABLE>
<S> <C>
Numerator
Net loss........................................................ $5,911
Dividends allocable to preferred stockholders
Series A...................................................... --
Series B ..................................................... --
------
Net loss allocable to common stockholders....................... $5,911
======
Denominator
Weighted average common stock shares outstanding................ 7,170
======
Basic and diluted net loss per share.............................. $ 0.82
======
</TABLE>
The net loss per share calculations do not reflect dividends allocable to
preferred stockholders, as such dividends are non cumulative and have not been
declared by the Company's board of directors. The diluted net loss per share
calculation excluded the convertible preferred stock shares (see note 6),
employee stock options (see note 8), common stock warrants (see note 7) and
preferred stock warrants (see note 5) outstanding because these securities
were anti-dilutive in view of the loss incurred by the Company in 1997.
NOTE 10--COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases with various expiration dates through 2000. Future lease commitments
for operating leases of twelve months or more are as follows at December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
COMMITMENT
----------
<S> <C>
1998........................................................... $ 62
1999........................................................... $ 41
2000........................................................... $ 20
----
Total.......................................................... $123
====
</TABLE>
Rent expenses under all operating leases was approximately $222,000 and
$242,000 during 1997 and the period from inception (September 6, 1996) through
December 31, 1997, respectively.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE DIRECTORS OF
DIGITAL EQUIPMENT CORPORATION:
We have audited the accompanying statement of assets sold, of the Network
Products Business of Digital Equipment Corporation (the "Business") as of June
28, 1997, and the related statement of revenue and direct operating expenses,
for the fiscal year ended June 28, 1997. The statement of assets sold and
statement of revenue and direct operating expenses are the responsibility of
Digital Equipment Corporation's management. Our responsibility is to express
an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets sold and
statement of revenue and direct operating expenses are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statement of assets sold and the statement of revenue and direct operating
expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statements were prepared to present the assets sold to
Cabletron Systems, Inc. of the Business and the revenue and direct operating
expenses of the Business pursuant to the acquisition agreement described in
Note 1, and are not intended to be a complete presentation of the Business'
financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets sold of the Business as of June 28, 1997, and
its revenue and direct operating expenses for the year then ended, pursuant to
the acquisition agreement described in Note 1, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
February 19, 1998
Boston, Massachusetts
F-29
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
STATEMENT OF REVENUE AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
JUNE 28,
1997
----------
<S> <C>
Revenue:
External.......................................................... $187,993
Affiliates........................................................ 293,778
--------
Total revenue................................................... 481,771
Direct operating expenses:
Cost of external revenues......................................... 131,132
Cost of affiliates revenues....................................... 180,154
Research and engineering.......................................... 83,770
Selling, general and administrative............................... 124,361
--------
Total direct operating expenses................................. 519,417
--------
Excess revenue over direct operating expenses/(excess direct
operating expenses over revenue)................................... $(37,646)
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
STATEMENT OF ASSETS SOLD
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28,
1997
--------
<S> <C>
ASSETS
Inventory.............................................................. $62,499
Net property, plant and equipment...................................... 25,637
Prepaid license........................................................ 6,250
Other investment....................................................... 5,000
-------
Total assets sold.................................................... $99,386
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
STATEMENT OF REVENUE AND DIRECT OPERATING EXPENSES
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 27,
1997
-------------
<S> <C>
Revenue:
External....................................................... $44,844
Affiliates..................................................... 82,134
-------
Total revenue................................................ 126,978
Direct operating expenses:
Cost of external revenues...................................... 26,525
Cost of affiliates revenues.................................... 43,203
Research and engineering....................................... 19,370
Selling, general and administrative............................ 28,827
-------
Total direct operating expenses.............................. 117,925
-------
Excess revenue over direct operating expenses/(excess direct
operating expenses over revenue)................................ $ 9,053
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
STATEMENT OF ASSETS SOLD
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
-------------
<S> <C>
ASSETS
Inventory......................................................... $58,086
Net property, plant and equipment................................. 25,216
Prepaid license................................................... 5,000
Other investment.................................................. 5,000
-------
Total assets sold............................................... $93,302
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
INFORMATION AS OF SEPTEMBER 27, 1997 AND FOR THE THREE MONTHS THEN ENDED, IS
UNAUDITED
1. BACKGROUND:
Pursuant to an Asset Purchase Agreement (the "Agreement") between Digital
Equipment Corporation ("Digital") and Cabletron Systems, Inc. ("Cabletron"),
dated November 24, 1997 and amended February 7, 1998, Digital sold to
Cabletron certain assets consisting principally of Property, plant and
Equipment and inventory of the Network Products Business of Digital (the
"Business"). Digital and Cabletron are also entering into certain related
service and supply agreements.
The Network Products Business is involved in the design, production and
marketing of computer networking products.
2. BASIS OF PRESENTATION:
The statement of assets sold and the statement of revenue and direct
operating expenses (the "Statements") are derived from the historical books
and records of Digital and present assets sold and revenue and direct
operating expenses of the Business. With the exception of plant, property and
certain equipment as specified in the Agreement, the assets and the revenue
and direct operating expenses in the Statements represent the assets and the
revenues and direct operating expenses of the Business sold pursuant to the
Agreement. Certain direct operating expenses presented in these statements
have been allocated based on management's estimates of the cost of services
provided to the Business by Digital. Such expenses include manufacturing costs
such as distribution and logistics and corporate overhead. Management believes
that these allocations are based on assumptions that are reasonable under the
circumstances. The Business is not a separate taxable entity for federal,
state or local income tax purposes. The Business' operations are included in
the consolidated Digital tax returns. No income tax provision/(benefit) has
been allocated. As a result of the foregoing, the Statements presented may not
be indicative of the results of operations that would have been achieved had
the Business been operated as a nonaffiliated entity.
The Statements of the Business as of September 27, 1997 and for the three
months then ended are unaudited. All adjustments (consisting only of normal
recurring adjustments) have been made which, in the opinion of management, are
necessary for a fair presentation. Results of operations for the three months
ended September 27, 1997 are not necessarily indicative of the results that
may be expected for any future period.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following policies were followed in the Statements presented:
Use of Estimates
The preparation of the Statements requires management to make estimates and
judgments that affect the reported assets sold of the Business and its
revenues and direct operating expense related disclosures. Such estimates
include inventory reserves and allowance for sales returns. Actual results
could differ from those estimates.
Fiscal Year
The fiscal year of Digital is the fifty-two/fifty-three week period ending
the Saturday nearest the last day of June. The fiscal year ended June 28, 1997
included 52 weeks.
F-34
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(TABLES IN THOUSANDS)
INFORMATION AS OF SEPTEMBER 27, 1997 AND FOR THE THREE
MONTHS THEN ENDED, IS UNAUDITED
Translation of Foreign Currencies
For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at current exchange rates. Nonmonetary assets and liabilities
such as inventories and property, plant and equipment are translated at
historical rates. Income and expense items are translated at average exchange
rates prevailing during the year, except that inventories and depreciation
charged to operations are translated at historical rates.
Revenue Recognition
Revenue from external sales is recognized at the time the product is
shipped. Provisions for product sales returns and allowances are recorded in
the same period as the related revenue.
Revenue from affiliates is recognized at the point of transfer to affiliates
at a transfer price negotiated by the business units of Digital.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories are routinely subject to changes in value, resulting from rapid
technological change, intense price competition and changes in customer demand
patterns. While Digital has provided for estimated declines in market value of
inventories, no estimate can be made of the rate of amounts of loss that are
reasonably possible under various competitive conditions.
<TABLE>
<CAPTION>
SEPTEMBER 27, JUNE 28,
1997 1997
------------- --------
<S> <C> <C>
Raw materials....................................... $ 4,645 $ 5,422
Finished goods...................................... 53,441 57,077
------- -------
Total inventories................................. $58,086 $62,499
======= =======
</TABLE>
Research and Engineering Costs
Research and engineering costs are charged to expense when incurred.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, subject to review for
impairment for significant assets whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
<TABLE>
<CAPTION>
SEPTEMBER 27, JUNE 28,
1997 1997
------------- --------
<S> <C> <C>
Land................................................ $ 1,783 $ 1,783
Buildings........................................... 17,423 17,365
Machinery and equipment............................. 53,836 53,126
------- -------
Total property, plant and equipment................. 73,042 72,274
Less accumulated depreciation....................... 47,826 46,637
------- -------
Net property, plant and equipment................... $25,216 $25,637
======= =======
</TABLE>
F-35
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(TABLES IN THOUSANDS)
INFORMATION AS OF SEPTEMBER 27, 1997 AND FOR THE THREE
MONTHS THEN ENDED, IS UNAUDITED
Depreciation expense was approximately $1,500,000 and $5,950,000 for the
three months ended September 27, 1997 and the year ended June 28, 1997,
respectively.
Depreciation expense is computed principally on the following bases:
<TABLE>
<CAPTION>
CLASSIFICATION DEPRECIATION LIVES AND METHODS
-------------- ------------------------------
<S> <C>
Buildings.................. 33 years (straight-line)
Leasehold improvements..... Life of assets or term of lease whichever
is shorter (straight-line)
Machinery and equipment.... 2 to 10 years (principally accelerated methods)
</TABLE>
When assets are retired, or otherwise disposed of, the assets and related
accumulated depreciation are removed from the accounts. Resulting gains and
losses are included in income.
4. POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS:
Pension Plans
The Business participates in Digital's defined benefit and defined
contribution pension plans (the "Retirement Plan") covering substantially all
employees. Those Digital Employees who accept employment with Cabletron will
terminate from Digital and will maintain their vested rights in the Retirement
Plan, with liability remaining with Digital. The benefits are based on years
of service and compensation during the employee's career. Pension cost is
based on estimated benefit payment formulas. It is Digital's policy to make
tax-deductible contributions to the plans in accordance with local laws. The
projected benefit obligation was determined using discount rates of 7.75% for
both the three months ended September 27, 1997 and the year ended June 28,
1997. For the U.S. pension plan, there was no contribution in the fiscal year.
The assets of the plans include corporate equity and debt securities,
government securities and the real estate.
The statement of revenue and direct operating expenses includes allocated
costs as fringe benefits based upon an average cost per employee for the
Retirement Plan of approximately $701,000 and $2,757,000 for the three months
ended September 27, 1997 and the year ended June 28, 1997, respectively. These
costs are reported as cost of sales for direct labor and selling, general and
administrative for indirect labor. The measurement dates for all plans were
within 90 days of year-end.
Postretirement Benefits Other Than Pensions
The Business participates in Digital's defined benefit postretirement plans
that provide medical and dental benefits for U.S. retirees and their eligible
dependents. Substantially all of Digital's U.S. employees may become eligible
for postretirement benefits if they reach retirement age while working for
Digital. During the second quarter of fiscal 1997, Digital amended its U.S.
postretirement medical plan to provide full retiree medical benefits only to
employees working ten years after age 45. As a result of the amendment,
Digital recognized a one-time curtailment gain. The majority of Digital's non-
U.S. subsidiaries do not offer postretirement benefits other than pensions to
retirees.
Digital's postretirement benefit plans other than pensions are funded as
costs are incurred. The postretirement benefit obligation was determined using
discount rates of 7.75% for both the three months ended September 27, 1997 and
the year ending June 28, 1997.
F-36
<PAGE>
NETWORK PRODUCTS BUSINESS OF DIGITAL EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(TABLES IN THOUSANDS)
INFORMATION AS OF SEPTEMBER 27, 1997 AND FOR THE THREE
MONTHS THEN ENDED, IS UNAUDITED
The statement of revenue and direct operating expenses includes allocated
costs/(credits) of fringe benefits (based upon an average cost/(credit) per
employee) for the postretirement benefits of approximately $(417,000) and
$(3,208,000) the three months ended September 27, 1997 and the year ended June
28, 1997, respectively.
5. INTEREST EXPENSE:
There was no direct interest expense incurred by the Business. However, the
interest expense reflected in the statement of revenue and direct operating
expenses is an allocation of Digital's worldwide interest expense based upon
the ratio of the Business' assets sold to total Digital assets as of September
27, 1997 and June 28, 1997. Management believes that this method provides a
reasonable basis for allocation within the Business' historical statement of
revenue and direct operating expenses.
6. DEPENDENCE ON CONTRACT ASSEMBLY MANUFACTURER:
The Business currently relies on a single contract manufacturer to assemble
certain products including switches. Although a number of contract
manufacturers exist, the interruption or termination of the Business' current
manufacturing relationship could have a short-term adverse effect on its
operations. Under the Agreement, all of Digital's rights associated with this
contract manufacturer are assigned to Cabletron.
7. SUBSEQUENT EVENTS:
In December 1997, the Business sold its other investment to a third party
for $5,000,000. The agreement was amended to include in the assets sold to
Cabletron, the proceeds from the sale of the investment.
Digital is also selling to Cabletron a certain building with a net book
value of $8,845,000 as of December 27, 1997. The building was occupied under
an operating lease at June 28, 1997 and was purchased by Digital in November
1997.
F-37
<PAGE>
CABLETRON SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AT NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
11/30/97 9/27/97 PRO FORMA PRO FORMA
CABLETRON DIGITAL NPB ADJUSTMENTS COMBINED(H)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents...... 208,926 (129,107)(a) 77,819
Short-term investments......... 214,680 214,680
Accounts receivable............ 298,672 298,672
Inventories.................... 280,021 58,086 (18,102)(e) 298,005
(22,000)(l)
Deferred income taxes.......... 57,691 149,200 (o) 206,891
Prepaid expenses and other
assets........................ 37,521 10,000 (5,000)(j) 37,521
(5,000)(c)
Total current assets....... 1,095,511 68,086 (30,009) 1,133,588
Long-term investments.......... 148,554 148,554
Property, plant and equipment.. 212,023 25,216 10,800 (i) 248,039
Other long-term assets......... 3,166 (b) 29,416
20,750 (g)
5,500 (h)
Long term deferred income
taxes......................... 30,756 30,756
Total assets............... 1,486,844 93,302 10,207 1,590,353
========= ====== ========= =========
Liabilities and stockholders'
equity
Accounts payable............... 69,003 69,003
Accrued expenses............... 169,332 7,000 (n) 214,702
5,000 (m)
33,370 (k)
Other short-term liabilities... 165,633 (d) 165,633
Income taxes payable........... 5,282 5,282
Total current liabilities.. 243,617 0 211,003 454,620
Long-term liabilities.......... 123,676 (d) 123,676
Deferred income taxes.......... 4,577 4,577
Total liabilities.......... 248,194 0 334,679 582,873
Total stockholders' equity. 1,238,650 (325,000)(f) 1,007,480
149,200 (o)
(33,370)(k)
(22,000)(l)
Total liabilities and
stockholders' equity...... 1,486,844 0 103,509 1,590,353
========= ====== ========= =========
</TABLE>
- --------
(a) Purchase price of $430,107. Cash payments were made in the amount of
$129,107 (including acquisition costs of $500.) The remainder of the price
consisted of product credits of $289,309, net of $11,691 net present value
discount.
(b) Record goodwill $3,166
(c) Adjust for assets received in cash, $5,000
(d) Record short term product credits ($165,633 net of $2,867 net percent
value discount) and long term product credits ($123,676 net of $8,824 net
present value discount)
(e) Write down of Digital NPB inventory due to product overlap as a result of
the combined product line and adjustment of reserves to conform to
Cabletron's policies.
F-38
<PAGE>
(f) In-process research and devlopment costs of $325,000 were written off in
connection with the acquisition. The charge to operations for such
acquired technology in process is excluded from the unaudited Pro Forma
Combined Statements of Income as it is non-recurring and unusual and
relates directly to the acquisition.
(g) Record fair value of existing patents and technologies acquired.
(h) Record fair value of assembled work force acquired.
(i) Record fair value of building acquired.
(j) Write off of software licenses.
(k) To record effect of acquisition related expenses including:
<TABLE>
<S> <C>
Personnel related..................................................... 14,200
Information systems................................................... 7,000
Marketing related..................................................... 5,000
Professional fees..................................................... 3,150
Manufacturing related................................................. 2,000
Facilities and relocation............................................. 1,300
Miscellaneous taxes................................................... 720
------
33,370
======
</TABLE>
The charges to operations for the above expenses are excluded from the
unaudited Pro Forma Combined Statements of Income as these are non-
recurring and unusual and relate directly to the acquisition.
(l) Adjustment of Cabletron's inventory rendered obsolete and excess due to
product overlap. The charge to operations for such inventory is excluded
from the unaudited Pro Forma Combined Statements of Income as it is non-
recurring and unusual and relates directly to the acquisition.
(m) Record liability associated with cancellation of vendor commitments as a
result of a change in production plans.
(n) Severance and relocation expenses.
(o) Tax effect of expenses (f),(k), and (L) at Cabletron's marginal tax rate
of 39.225%.
F-39
<PAGE>
CABLETRON SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT
OF INCOME FOR THE YEAR ENDED
FEBRUARY 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
2/28/97 12/29/96 PRO FORMA PRO FORMA
CABLETRON DIGITAL NPB ADJUSTMENTS COMBINED
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales....................... $1,406,552 598,034 2,004,586
Cost of sales................... 575,107 344,577 919,684
Gross profit.................... 831,445 253,457 0 1,084,902
Research and development........ 161,674 84,305 245,979
Selling, general and administra-
tive........................... 286,469 139,485 396(b) 429,992
2,594(c)
360(e)
688(d)
Nonrecurring items.............. 63,024 63,024
Total operating expense......... 511,167 223,790 4,038 738,995
Operating income................ 320,278 29,667 (4,038) 345,907
Interest income................. 19,422 (5,810)(a) 13,612
Income before income taxes...... 339,700 29,667 (9,848) 359,519
Income taxes.................... 117,575 (3,863)(g) 125,349
11,637 (f)
Net income...................... 222,125 29,667 (17,622) 234,170
Earnings per share.............. 1.43 1.51
Shares outstanding.............. 155,207 155,207
</TABLE>
(a) Reduction of interest income due to cash portion of the purchase price of
$129,107 from available cash at Cabletron's historical investment rate of
return of 4.5%.
(b) Amortization related to goodwill.
(c) Amortization related to existing patents and technologies.
(d) Amortization related to assembled workforce.
(e) Depreciation on building acquired.
(f) Tax effect of DNPG operating income at Cabletron's marginal tax rate of
39.225%.
(g) Tax effect of (a), (b), (c), (d), and (e) at Cabletron's marginal tax rate
of 39.225%.
(h) Not included in the Pro Forma Combined Statements of Income are non-
recurring expenses of $380,370 (pre-tax) as disclosed in the Pro Forma
Balance Sheet as these are unusual and relate directly to the acquisition.
NOTE: The above Statement of Income combines Cabletron's fiscal year ended
February 28, 1997 and Digital NPB's twelve months ended December 29, 1996.
F-40
<PAGE>
CABLETRON SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
INCOME FOR THE NINE MONTHS
ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
11/30/97 9/27/97 PRO FORMA PRO FORMA
CABLETRON DIGITAL NPB ADJUSTMENTS COMBINED(H)
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales..................... $1,065,808 393,717 1,459,525
Cost of sales................. 476,847 230,489 707,336
Gross profit.................. 588,961 163,228 0 752,189
Research and development...... 134,583 60,666 195,249
Selling, general and adminis-
trative...................... 261,848 89,958 297 (b) 354,835
270 (e)
1,946 (c)
516 (d)
Total operating expense....... 396,431 150,624 3,029 550,084
Operating income.............. 192,530 12,604 (3,029) 202,105
Interest income............... 14,269 (4,357)(a) 9,912
Income before income taxes.... 206,799 12,604 (7,386) 212,017
Income taxes.................. 70,490 (2,897) (g) 72,537
4,944 (f)
Net income.................... 136,309 12,604 (5,339) 139,480
Earnings per share............ 0.87 0.88
Shares outstanding............ 157,527 157,527
</TABLE>
- --------
(a) Reduction of interest income due to cash portion of the purchase price of
$129,107 from available cash at Cabletron's historical investment rate of
return of 4.5%.
(b) Amortization related to goodwill.
(c) Amortization related to existing patents and technologies.
(d) Amortization related to assembled workforce.
(e) Depreciation on building acquired.
(f) Tax effect of DNPG operating income at Cabletron's marginal tax rate of
39.225%.
(g) Tax effect of (a), (b), (c), (d) and (e) at Cabletron's marginal tax rate
of 39.225%.
(h) Not included in the Pro Forma Combined Statements of Income are non-
recurring expenses of $380,370 (pre-tax) as disclosed in the Pro Forma
Balance Sheet as these are unusual and relate directly to the acquisition.
NOTE: The above Statement of Income Combines Cabletron's nine months ended
November 30, 1997 and Digital NPB's nine months ended September 27, 1997.
F-41
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CABLETRON SYSTEMS, INC
AND
CABLETRON MERGER, INC.
AND
YAGO SYSTEMS, INC.
DATED AS OF JANUARY 14, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER................................................................ 1
SECTION 1.1 The Merger................................................. 1
SECTION 1.2 Effective Time............................................. 2
SECTION 1.3 Effect of the Merger....................................... 3
SECTION 1.4 Certificate of Incorporation, By-Laws...................... 3
SECTION 1.5 Directors and Officers..................................... 3
SECTION 1.6 Effect on Capital Stock.................................... 3
SECTION 1.8 Stock Transfer Books....................................... 7
SECTION 1.9 No Further Ownership Rights in Company Common Stock........ 7
SECTION 1.10 Lost, Stolen or Destroyed Certificates..................... 7
SECTION 1.11 Tax Consequences........................................... 7
SECTION 1.12 Taking of Necessary Action; Further Action................. 8
SECTION 1.13 Material Adverse Effect.................................... 8
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 8
SECTION 2.1 Organization and Qualification; Subsidiaries............... 8
SECTION 2.2 Certificate of Incorporation and By-Laws................... 8
SECTION 2.3 Capitalization............................................. 8
SECTION 2.4 Authority Relative to this Agreement....................... 9
SECTION 2.5 Contracts; No Conflict; Required Filings and Consents...... 10
SECTION 2.6 Compliance, Permits........................................ 11
SECTION 2.7 Financial Statements....................................... 11
SECTION 2.8 Absence of Certain Changes or Events....................... 11
SECTION 2.9 No Undisclosed Liabilities................................. 11
SECTION 2.10 Absence of Litigation...................................... 12
SECTION 2.11 Employee Benefit Plans, Employment Agreements.............. 12
SECTION 2.12 Labor Matters.............................................. 12
SECTION 2.13 Registration Statement, Proxy Statement/Prospectus......... 13
SECTION 2.14 Restrictions on Business Activities........................ 13
SECTION 2.15 Title to Property.......................................... 13
SECTION 2.16 Taxes...................................................... 13
SECTION 2.17 Environmental Matters...................................... 14
SECTION 2.18 Intellectual Property...................................... 15
SECTION 2.19 Interested Party Transactions.............................. 16
SECTION 2.20 Insurance.................................................. 16
SECTION 2.21 Accounts Receivable; Inventories........................... 16
SECTION 2.22 Equipment.................................................. 16
SECTION 2.23 Brokers.................................................... 17
SECTION 2.24 Change in Control Payments................................. 17
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.................. 17
SECTION 3.1 Organization and Qualification; Subsidiaries............... 17
SECTION 3.2 Charter and By-Laws........................................ 17
SECTION 3.3 Capitalization............................................. 17
SECTION 3.4 Authority Relative to this Agreement....................... 18
SECTION 3.5 No Conflict, Required Filings and Consents................. 18
SECTION 3.6 SEC Filings; Financial Statements.......................... 19
SECTION 3.7 Absence of Certain Changes or Events....................... 19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 3.8 Absence of Undisclosed Liabilities........................ 19
SECTION 3.9 Registration Statement; Proxy Statement/Prospectus........ 19
SECTION 3.10 Legal Proceedings......................................... 20
SECTION 3.11 Employee Benefit Plans; ERISA............................. 20
SECTION 3.12 Ownership of Merger Sub; No Prior Activities.............. 20
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER.................................. 21
SECTION 4.1 Conduct of Business by the Company Pending the Merger..... 21
SECTION 4.2 No Solicitation........................................... 22
ARTICLE V
ADDITIONAL AGREEMENTS................................................... 23
SECTION 5.1 Proxy Statement/Prospectus; Registration Statement........ 23
SECTION 5.2 Stockholder Meeting....................................... 23
SECTION 5.3 Access to Information..................................... 23
SECTION 5.4 Consents; Approvals....................................... 24
SECTION 5.5 Agreements with Respect to Affiliates. ................... 24
SECTION 5.6 Notification of Certain Matters........................... 24
SECTION 5.7 Further Action/Tax Treatment.............................. 24
SECTION 5.8 Public Announcements. .................................... 24
SECTION 5.9 Conveyance Taxes.......................................... 25
SECTION 5.10 Accountants' Letters...................................... 25
SECTION 5.11 Listing of Parent Shares.................................. 25
ARTICLE VI
CONDITIONS TO THE MERGER................................................ 25
SECTION 6.1 Conditions to Obligation of Each Party to Effect the
Merger................................................................ 25
SECTION 6.2 Additional Conditions to Obligations of Parent and Merger
Sub................................................................... 26
SECTION 6.3 Additional Conditions to Obligation of the Company........ 27
ARTICLE VII
TERMINATION............................................................. 28
SECTION 7.1 Termination............................................... 28
SECTION 7.2 Effect of Termination..................................... 29
SECTION 7.3 Fees and Expenses......................................... 29
SECTION 7.4 Confidentiality........................................... 29
ARTICLE VIII
GENERAL PROVISIONS...................................................... 30
SECTION 8.1 Indemnification........................................... 30
SECTION 8.2 Notices................................................... 33
SECTION 8.3 Cross Reference Table..................................... 34
SECTION 8.4 Certain Definitions....................................... 35
SECTION 8.5 Amendment................................................. 37
SECTION 8.6 Waiver.................................................... 38
SECTION 8.7 Headings.................................................. 38
SECTION 8.8 Severability.............................................. 38
SECTION 8.9 Entire Agreement.......................................... 38
SECTION 8.10 Assignment................................................ 38
SECTION 8.11 Parties in Interest....................................... 38
SECTION 8.12 Failure or Indulgence Not Waiver; Remedies Cumulative..... 38
SECTION 8.13 Governing Law............................................. 38
SECTION 8.14 Counterparts.............................................. 38
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE/EXHIBIT SECTION
- ---------------- -------
<S> <C>
Company Disclosure Schedule........... Article II
Parent Disclosure Schedule............ Article III
Schedule 1.6(a)....................... Initial Exchange Ratio
Schedule 5.5.......................... Rule 145 Affiliates List
Schedule 6.2(h)(i).................... Founder Employee List
Schedule 6.2(h)(ii)................... General Employee List
Schedule 6.2(k)....................... Participation Agreement List
Exhibit A............................. Amended Founders Stock Purchase Agreement
Exhibit 5.5........................... Rule 145 Representation Letter
Exhibit 6.2(d)........................ Pillsbury, Madison & Sutro LLP Opinion
Exhibit 6.2(g)........................ Escrow Agreement
Exhibit 6.2(h)(i)..................... Founder Employment Agreement
Exhibit 6.2(h)(ii).................... General Employment Agreement
Exhibit 6.2(k)........................ Participation Agreement
Exhibit 6.3(d)........................ Ropes & Gray Opinion
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 14, 1998 (this
"AGREEMENT"), among Cabletron Systems, Inc., a Delaware corporation
("PARENT"), Cabletron Merger, Inc., a Delaware corporation and a wholly owned
subsidiary of Parent ("MERGER SUB"), and Yago Systems, Inc., a Delaware
corporation (the "COMPANY").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Parent to enter into a business combination with
the Company upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent and Merger Sub have each approved the merger of Merger Sub with and
into the Company (the "MERGER") in accordance with the applicable provisions
of the Delaware General Corporation Law (the "DGCL") upon the terms and
subject to the conditions set forth herein;
WHEREAS, Parent has formed Merger Sub as a transitory subsidiary solely for
the purpose of effecting the Merger, and Parent, Merger Sub and the Company
intend this Agreement to constitute a plan of reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE"), and the regulations promulgated thereunder;
WHEREAS, Parent, Merger Sub and the Company intend that the transaction
effected through the Merger constitute a reorganization within the meaning of
Section 368(a) of the Code;
WHEREAS, pursuant to the Merger, each outstanding share of the Company's
common stock, $.001 par value (the "COMPANY COMMON STOCK"), shall be converted
into the right to receive the Merger Consideration (as defined in Section
1.7(b)), upon the terms and subject to the conditions set forth herein; and
WHEREAS, certain shares of Company Common Stock held by employees of the
Company are currently subject to repurchase rights by the Company pursuant to
the terms of the 1996 Company Stock Option Plan (as defined herein) and 1996
Stock Option Agreements (as defined herein), and it is the intent of the
parties hereto that such repurchase rights be transferred to Parent with
respect to the shares of Parent Common Stock issued to such employees in the
Merger; and
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
I THE MERGER
1.1 The Merger.
(a) Effective Time. At the Effective Time (as defined in Section 1.2),
and subject to and upon the terms and conditions of this Agreement
and the DGCL, Merger Sub shall be merged with and into the Company,
the separate corporate existence of Merger Sub shall cease, and the
Company shall continue as the surviving corporation. The Company as
the surviving corporation after the Merger is hereinafter referred
to as the "SURVIVING CORPORATION."
(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant
to Section 7.1 and subject to the satisfaction or waiver of the
conditions set forth in Article VI, the consummation of the Merger
(the "CLOSING") will take place as promptly as practicable (and in
any event within two (2) business days) after satisfaction or
waiver of the conditions set forth in Article VI, at the offices of
Ropes & Gray, One International Place, Boston, Massachusetts,
unless another date, time or place is agreed to in writing by the
parties hereto, provided that the parties presently expect that the
persons necessary to conduct the Closing will be able to
participate via telephone, video conference or other electronic
means.
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(c) At the Effective Time, Parent shall deliver to an escrow agent
mutually agreeable to the parties, or any successor escrow agent
appointed pursuant to the Escrow Agreement (as hereinafter defined)
(the "ESCROW AGENT"), ten percent (10%) of the Initial Shares (as
hereinafter defined) issuable to each Stockholder of the Company
pursuant to Section 1.6(a) (the "ESCROW SHARES"); provided,
however, that with respect to each stockholder of the Company
holding Unvested Shares at the Effective Time, the Escrow Shares
relating to such stockholder shall be comprised, first, of Unvested
Shares held by such stockholder having the latest final vesting
dates pursuant to the 1996 Stock Option Agreement and 1996 Company
Stock Option Plan (each as hereinafter defined) governing such
Initial Shares, and, second, to the extent necessary, of Vested
Shares. After the Effective Time, the Escrow Shares shall be held
and issued by the Escrow Agent pursuant to the terms of the Escrow
Agreement. The right of stockholders of the Company to receive
Escrow Shares pursuant to the terms of this Agreement shall not be
transferable or assignable except upon death or by operation of
law.
(d) The stockholders of the Company, by virtue of their approval of
this Agreement, will be deemed to have irrevocably constituted and
appointed, effective as of the Effective Time, Piyush Patel
(together with his permitted successors, the "STOCKHOLDER
REPRESENTATIVE"), as their true and lawful agent and attorney-in-
fact to enter into any agreement in connection with the
transactions contemplated by this Agreement and any transactions
contemplated by the Escrow Agreement, to exercise all or any of the
powers, authority and discretion conferred on him under any such
agreement, to waive any terms and conditions of any such agreement
(other than the Merger Consideration), to give and receive notices
on their behalf and to be their exclusive representative with
respect to any matter, suit, claim, action or proceeding arising
with respect to any transaction contemplated by any such agreement,
including, without limitation, the defense, settlement or
compromise of any claim, action or proceeding for which the Parent
or the Merger Sub may be entitled to indemnification, and the
Stockholder Representative agrees to act as, and to undertake the
duties and responsibilities of, such agent and attorney-in-fact.
This power of attorney is coupled with an interest and is
irrevocable. The Stockholder Representative shall not be liable for
any action taken or not taken by him in connection with his
obligations under this Agreement (i) with the consent of
stockholders who, as of the date of this Agreement, owned a
majority in number of the outstanding shares of Company Common
Stock, on a fully diluted basis or (ii) in the absence of his own
gross negligence or wilful misconduct. If the Stockholder
Representative shall be unable or unwilling to serve in such
capacity, his successor shall be named by those persons holding a
majority of the shares of Company Common Stock outstanding on a
fully diluted basis at the Effective Time who shall serve and
exercise the powers of Stockholder Representative hereunder.
(e) At the Closing, the Company shall deliver to Parent a certificate,
in form and substance satisfactory to Parent and signed by its
Chief Executive Officer and Chief Financial Officer (the "COMPANY
CLOSING CERTIFICATE"), certifying (i) that all outstanding shares
of the Company's Series A Preferred Stock, $.001 par value
(the"SERIES A PREFERRED STOCK"), and Series B Preferred Stock,
$.001 par value (the "SERIES B PREFERRED STOCK" and together with
the Series A Preferred Stock, the "PREFERRED STOCK") (including
shares of Preferred Stock issuable upon the exercise of the Series
A Warrant (as defined below)), have been converted into shares of
Company Common Stock, (ii) the number of outstanding shares of
Company Common Stock and all options, warrants, and other
securities of the Company convertible into or exercisable for
shares of Company Common Stock as of the date of the Closing, (iii)
the Initial Exchange Ratio, and (iv) the Company Expenses (as
defined in Section 7.3).
1.2 Effective Time. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in Article VI, the parties hereto
shall cause the Merger to be consummated by filing a duly executed and
delivered Certificate of Merger (the "CERTIFICATE OF MERGER") with the
Secretary of State of the
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State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL (the time of such
filing being the "EFFECTIVE TIME").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of the DGCL. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Time all the
property, rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation, By-Laws.
(a) Certificate of Incorporation. Unless otherwise determined by Parent
prior to the Effective Time, at the Effective Time the Certificate
of Incorporation of the Surviving Corporation, as in effect
immediately prior to the Effective Time, shall be amended and
restated to read as did the Certificate of Incorporation of the
Merger Sub immediately prior to the Effective Time, except that the
name of the Surviving Corporation will remain unchanged.
(b) By-Laws. Unless otherwise determined by Parent prior to the
Effective Time, the By-Laws of the Surviving Corporation, as in
effect immediately prior to the Effective Time, shall be amended and
restated to read as did the By-Laws of the Merger Sub immediately
prior to the Effective Time, except that the name of the Surviving
Corporation shall remain unchanged.
1.5 Directors and Officers. The directors of Merger Sub immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the
officers of Merger Sub immediately prior to the Effective Time shall be
the initial officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and
qualified.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of the Parent, Merger Sub, the
Company or the holders of any of the following securities:
(a) Conversion of Securities. Subject to the provisions of this Section
1.6, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the
Merger and without any further action on the part of the holders
thereof, be converted into the right to receive a number of duly
authorized, validly issued, fully paid and nonassessable shares of
Parent Common Stock equal to the Initial Exchange Ratio.
(b) Cancellation of Treasury Stock and Parent Stock. Each share of
Company Common Stock held in the treasury of the Company and each
share of Company Common Stock owned by Parent, Merger Sub or any
direct or indirect wholly owned subsidiary of the Company or Parent
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof,
cease to be outstanding, be canceled and retired without payment of
any consideration therefor and cease to exist.
(c) Shares of Dissenting Holders. (a) Notwithstanding anything to the
contrary contained in this Agreement, any holder of Company Common
Stock with respect to which dissenters' rights, if any, are granted
by reason of the Merger under the DGCL and who does not vote in
favor of the Merger and who otherwise complies with Section 262 of
the DGCL ("COMPANY DISSENTING SHARES") shall not be entitled to
receive Parent Shares pursuant to this Section 1.6, unless such
holder fails to perfect, effectively withdraws or loses his, her or
its right to dissent from the Merger under the DGCL. Such holder
shall be entitled to receive only the payment provided for by
Section 262 of the DGCL. If any such holder so fails to perfect,
effectively withdraws or loses his, her or its dissenters' rights
under the DGCL, such holder's Company Dissenting Shares shall
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thereupon be deemed to have been converted, as of the Effective Time,
into the right to receive Initial Shares pursuant to Section 1.6(a)
and Contingent Shares, if any, pursuant to Section 1.6(h).
(d) Any payments relating to the Company Dissenting Shares shall be made
solely by the Company and no funds or other property have been or
will be provided by Parent, Merger Sub or any of Parent's other
direct or indirect subsidiaries for such payment.
(e) Stock Options; Repurchase Rights. Certain employees of the Company
have been granted options to purchase Company Common Stock pursuant
to: (i) Incentive Stock Option Agreements (as amended as set forth
below, each a "1996 STOCK OPTION AGREEMENT") under the Company's
1996 Stock Option and Stock Purchase Plan (the "1996 COMPANY STOCK
OPTION PLAN") and, (ii) Incentive Stock Option Agreements (each a
"1998 STOCK OPTION AGREEMENT," together with the 1996 Stock Option
Agreements, the "STOCK OPTION AGREEMENTS") under the Company's 1998
Stock Option Plan (the "1998 COMPANY STOCK OPTION PLAN," together
with the 1996 Company Stock Option Plan, the "COMPANY STOCK OPTION
PLANS").
(i) At the Effective Time, the Company Stock Option Plans shall be
assumed by Parent. At the Effective Time, by virtue of the
Merger and without any further action on the part of the holders
thereof each Stock Option Agreement shall be assumed by Parent,
and shall constitute an option to acquire the number (rounded
down to the nearest whole number) of shares of Parent Common
Stock equal to the product of (aa) the number of shares of
Company Common Stock issuable upon exercise of such Stock Option
Agreement immediately prior to the Effective Time (not taking
into account whether or not such Stock Option Agreement was in
fact exercisable, but excluding any Company Common Stock issued
prior to the Effective Time pursuant to such Stock Option
Agreement), multiplied by (bb) the Initial Exchange Ratio, at a
price per share equal to (1) the exercise price per share for
the shares of Company Common Stock issuable upon exercise of
such Stock Option Agreement immediately prior to the Effective
Time divided by (2) the Initial Exchange Ratio.
(ii) Pursuant to the 1996 Stock Option Agreements and the Founder
Stock Purchase Agreements, any Parent Shares (A) issued in
exchange for shares of Company Common Stock issued prior to the
Effective Time pursuant to 1996 Stock Option Agreements or
subject to Founder Stock Purchase Agreements and (B) issued
after the Effective Time pursuant to the 1996 Stock Option
Agreements, shall be subject to the repurchase rights granted
to the Company and transferred to the Parent under such Founder
Stock Purchase Agreements or such 1996 Stock Option Agreements,
as the case may be (the "REPURCHASE RIGHTS"). The Repurchase
Rights shall lapse in accordance with the vesting schedules set
forth in such Founder Stock Purchase Agreements or 1996 Stock
Option Agreements. Parent Shares with respect to which the
Repurchase Rights have lapsed are referred to herein as "VESTED
SHARES;" Parent Shares with respect to which the Repurchase
Rights have not lapsed are referred to herein as "UNVESTED
SHARES." The price to be paid by Parent pursuant to the
Repurchase Rights for each Parent Share repurchased shall equal
(A) with respect to Parent Shares issued in exchange for shares
of Company Common Stock issued prior to the Effective Time, (1)
the price originally paid to purchase such underlying share of
Company Common Stock pursuant to the applicable Founder Stock
Purchase Agreement or 1996 Stock Option Agreement, as the case
may be, divided by (2) either (x) the Initial Exchange Ratio or
(y) if any Contingent Shares shall have been issued, the sum of
(aa) the Initial Exchange Ratio and (bb) the product of the
Initial Exchange Ratio and the Contingent Exchange Ratio and
(B) with respect to Parent Shares issued pursuant to a 1996
Stock Option Agreement after the Effective Time, the price paid
per Parent Share.
(iii) At the Effective Time, Parent shall deliver to each holder of
an outstanding Stock Option Agreement an appropriate notice
setting forth such holder's rights pursuant thereto.
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(iv) At the Effective Time, each of the Founders Stock Purchase
Agreements referenced in Section 6.2(p) shall be deemed to be
amended to read in its entirety as set forth in Exhibit A
(except with respect to the name of the Purchaser (as defined
therein)) and shall be assumed by Parent.
(v) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of Parent Shares for delivery
pursuant to the terms set forth in this Section 1.6(e) and in
the Stock Option Agreements.
(vii) Subject to any applicable limitations under the Securities Act
of 1933, as amended, and the rules and regulations thereunder
(the "SECURITIES ACT"), Parent shall file a Registration
Statement on Form S-8 (or any successor form), effective as of
the Effective Time, with respect to the shares of Parent
Common Stock issuable upon exercise of the Stock Option
Agreements, and the Parent shall use all reasonable efforts to
maintain the effectiveness of such registration statement (and
maintain the current status of the prospectus or prospectuses
relating thereto) for so long as such options shall remain
outstanding.
(f) Capital Stock of Merger Sub. Each share of common stock, $.01 par
value, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and exchanged for one
validly issued, fully paid and nonassessable share of common stock,
$.01 par value, of the Surviving Corporation.
(g) Adjustments to Exchange Ratio. The Initial Exchange Ratio and the
Contingent Exchange Ratio shall be adjusted to reflect fully the
effect of any stock split, reverse split, reclassification, stock
dividend (including any dividend or distribution of securities
convertible into Parent Common Stock), reorganization,
recapitalization or other like change with respect to Parent Common
Stock occurring after the date hereof.
(h) Contingent Shares.
(i) Subject to this Section 1.6(h) and the other provisions of this
Agreement, in the event an Issuance Event shall occur, each
Initial Holder shall be entitled to receive, in respect of each
share of Parent Common Stock constituting an Initial Share
originally issued to such Initial Holder pursuant to Section
1.6(a) hereof or upon exercise (in whole or in part) of a 1996
Stock Option Agreement referred to in Section 1.6(e), a number
of shares of Parent Common Stock equal to the Contingent
Exchange Ratio. Upon such Issuance Event, by virtue of such
Issuance Event and without any further action on the part of the
holders thereof, each 1996 Stock Option Agreement referred to in
Section 1.6(e) hereof shall be deemed amended such that (A) the
holder thereof shall be entitled to receive an additional number
of shares of Parent Common Stock thereunder equal to the product
of (1) the remaining number of shares of Parent Common Stock
issuable upon exercise in full of such 1996 Stock Option
Agreement at the time of the Issuance Event and (2) the
Contingent Exchange Ratio and (B) the exercise price for each
share of Parent Common Stock thereunder shall be reduced to
equal (1) the aggregate exercise price for the remaining shares
of Company Common Stock issuable upon exercise in full of such
1996 Stock Option Agreement immediately prior to such Issuance
Event divided by (y) the sum of the number of shares of Company
Common Stock issuable upon exercise in full of such 1996 Stock
Option Agreement immediately prior to such Issuance Event and
the number of shares of Parent Common Stock calculated in
accordance with clause (A) above.
(ii) Any Contingent Shares issued in respect of Initial Shares that
are Unvested Shares shall initially be Unvested Shares.
(iii) No Initial Holder shall be entitled to receive any Contingent
Shares in respect of any Initial Shares that have been
repurchased pursuant to Repurchase Rights, it being expressly
agreed to and understood that any such Contingent Shares shall
not be issued by Parent and shall
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not be treated as outstanding for any purpose whatsoever. Parent
shall have no further obligation to any such Initial Holder
respecting such Contingent Shares relating to the repurchased
Initial Shares.
(iv) No Initial Holder shall be entitled to assign or transfer the
right to receive Contingent Shares.
1.7 Exchange of Certificates
(a) Exchange Agent. Parent shall supply, or shall cause to be supplied,
to or for the account of Boston Equiserve, or such other bank or
trust company as shall be designated by Parent (the "EXCHANGE
AGENT"), in trust for the benefit of the holders of Company Common
Stock, for exchange in accordance with this Section 1.7, through the
Exchange Agent, certificates evidencing the shares of Parent Common
Stock issuable pursuant to Section 1.6(a) in exchange for
certificates evidencing the outstanding shares of Company Common
Stock (the "CERTIFICATES"). All of the shares of Parent Common Stock
issued in the Merger shall be issued as of and be deemed to be
outstanding as of the Effective Time. Parent shall cause all such
shares of Parent Common Stock to be issued in connection with the
Merger to be duly authorized, validly issued, fully paid and
nonassessable. In addition, promptly after an Issuance Event, Parent
shall also supply, or shall cause to be supplied, to or for the
account of the Exchange Agent, in trust for the benefit of the
Initial Holders, certificates evidencing the shares of Parent Common
Stock, if any, issuable pursuant to Section 1.6(h) in respect of the
Initial Shares. All of the shares of Parent Common Stock issued upon
such Issuance Event shall be issued as of and be deemed to be
outstanding as of such Issuance Event. Parent shall cause all shares
of Parent Common Stock to be issued in connection with such Issuance
Event to be duly authorized, validly issued, fully paid and
nonassessable.
(b) Exchange/Issuance Procedures. Within two (2) business days after the
Effective Time, Parent shall cause the Exchange Agent to mail to
each holder of record of Certificates (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably
specify that are not inconsistent with the terms of this Agreement),
and (ii) instructions to effect the surrender of the Certificates in
exchange for the certificates evidencing shares of Parent Common
Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly
executed, and such other customary documents as may be required
pursuant to such instructions, the holder of such Certificate shall
be entitled to receive in exchange therefor (A) certificates
evidencing that number of whole shares of Parent Common Stock which
such holder has the right to receive in accordance with the Initial
Exchange Ratio in respect of the shares of Company Common Stock
formerly evidenced by such Certificate and (B) any dividends or
other distributions to which such holder is entitled pursuant to
Section 1.7(c) (the shares of Parent Common Stock issued and
constituting Initial Shares, any dividends and distributions, the
right to receive the Contingent Shares pursuant to Section 1.6(h)
hereof and the Stock Option Agreements being, collectively, the
"MERGER CONSIDERATION"), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of
shares of Company Common Stock which is not registered in the
transfer records of the Company as of the Effective Time, the Merger
Consideration may be issued and paid in accordance with this Article
I to a transferee if the Certificate evidencing such shares of
Company Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer
pursuant to this Section 1.7(b) and by evidence that any applicable
stock transfer taxes have been paid. Notwithstanding the foregoing,
the right to receive Escrow Shares and Contingent Shares cannot be
transferred or assigned. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of
Company Common Stock will be deemed from and after the Effective
Time, for all corporate purposes, other than the payment of
dividends and subject to
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Section 1.7(f), to evidence the ownership of the number of full
shares of Parent Common Stock into which such shares of Company
Common Stock shall have been so converted. In addition, within two
(2) Business Days after an Issuance Event, Parent shall cause the
Exchange Agent to mail to each Initial Holders certificates
representing the Contingent Shares.
(c) Distributions With Respect to Unexchanged Parent Shares. No
dividends or other distributions declared or made after the
Effective Time with respect to shares of Parent Common Stock with a
record date after the Effective Time shall be paid to the holder of
any unsurrendered Certificate with respect to the shares of Parent
Common Stock they are entitled to receive until the holder of record
of such Certificate shall surrender such Certificate in accordance
with this Section 1.7. Subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Parent
Common Stock.
(d) No Liability. None of Parent, Merger Sub or the Company shall be
liable to any holder of Company Common Stock for any Merger
Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law following the
passage of time specified therein.
(e) Withholding Rights. Parent or the Exchange Agent shall be entitled
to deduct and withhold from the Merger Consideration otherwise
payable pursuant to this Agreement to any holder of Company Common
Stock such amounts as Parent or the Exchange Agent is required to
deduct and withhold with respect to the making of such payment under
the Code, or any provision of federal, state, local or foreign tax
law. To the extent that amounts are so withheld by Parent or the
Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the
shares of Company Common Stock in respect of which such deduction
and withholding was made by Parent or the Exchange Agent.
1.8 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further
registration of transfers of Company Common Stock thereafter on the
records of the Company.
1.9 No Further Ownership Rights in Company Common Stock. The Merger
Consideration delivered upon the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof shall be
deemed to have been issued at the Effective Time in full satisfaction
of all rights pertaining to such shares of Company Common Stock. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates,
upon the making of an affidavit of that fact by the holder thereof,
such shares of Parent Common Stock as may be required pursuant to
Section 1.6(a) as well as the other Merger Consideration as provided
in this Article; provided, however, that Parent may, in its discretion
and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver an
agreement of indemnification in form satisfactory to Parent, or a bond
in such sum as Parent may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with
respect to the Certificates alleged to have been lost, stolen or
destroyed.
1.11 Tax Consequences. For federal income tax purposes it is intended by
the parties hereto that the transaction effected through the Merger
shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-
3(a) of the United States Treasury Regulations.
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1.12 Taking of Necessary Action; Further Action. Each of Parent, Merger Sub
and the Company will take all such reasonable and lawful action as may
be necessary or appropriate in order to effectuate the Merger in
accordance with this Agreement as promptly as possible. If, at any
time after the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all
assets, property, rights, privileges, powers and franchises of the
Company and Merger Sub, the officers and directors of the Company and
Merger Sub immediately prior to the Effective Time are fully
authorized in the name of their respective corporations or otherwise
to take, and will take, all such lawful and necessary action to
effectuate the Merger in accordance with this Agreement.
1.13 Material Adverse Effect. When used in this Agreement in reference to
the Company or Parent or any of its subsidiaries, as the case may be,
the term "MATERIAL ADVERSE EFFECt" means any change, effect or
circumstance that, individually or when taken together with all other
such changes, effects or circumstances that have occurred prior to the
date of determination of the occurrence of the Material Adverse
Effect, (a) is or is reasonably likely to be materially adverse to the
business, assets (including intangible assets), prospects, financial
condition or results of operations of the Company or Parent and its
subsidiaries, as the case may be, in each case taken as a whole, or
(b) is or is reasonably likely to materially delay or prevent the
consummation of the transactions contemplated hereby.
II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that,
except as set forth in the written disclosure schedule delivered on or prior
to the date hereof by the Company to Parent that is arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this
Article II (the "COMPANY DISCLOSURE SCHEDULE") (disclosure in any paragraph of
the Disclosure Schedule shall qualify only the corresponding paragraph in this
Article II), the statements contained in this Article II are true and correct
as of the date of this Agreement and, unless a date is specified in such
representation or warranty, will be true and correct as of the date of Closing
(as though made on and as of the date of Closing):
2.1 Organization and Qualification; Subsidiaries. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. The Company has the requisite
corporate power and authority necessary to own, lease and operate the
properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to be
so organized, existing and in good standing or to have such power and
authority could not reasonably be expected to have a Material Adverse
Effect. The Company is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, leased or
operated by it or the nature of its activities makes such qualification
or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that could not reasonably be
expected to have a Material Adverse Effect. The Company does not have
any subsidiaries and does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable
or exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
2.2 Certificate of Incorporation and By-Laws. The Company has heretofore
furnished to Parent a complete and correct copy of its Certificate of
Incorporation and By-Laws as amended to date. Such Certificate of
Incorporation and By-laws are in full force and effect. The Company is
not in violation of any of the provisions of its Articles of
Incorporation or By-laws.
2.3 Capitalization. The authorized capital stock of the Company consists of
25,000,000 shares of Company Common Stock and 10,060,000 shares of
Preferred Stock. As of the date hereof, (a) 10,606,000 shares of
Company Common Stock, 4,266,000 shares of Series A Preferred Stock and
2,578,948 shares of Series B Preferred Stock, respectively, were issued
and outstanding, all of which
are validly issued, fully paid and nonassessable, and no shares were
held in treasury, (b) (i) 303,983 shares of Company Common Stock were
reserved for future issuance pursuant to outstanding stock
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options granted under the 1996 Company Stock Option Plan, (ii) 4,394,549
shares of Company Common Stock were reserved for future issuance
pursuant to outstanding stock options granted under the 1998 Company
Stock Option Plan, (c) 7,059,824 shares of Company Common Stock were
reserved for issuance pursuant to the conversion of the shares of
Preferred Stock outstanding on the date hereof and the shares of
Preferred Stock issuable upon the exercise of the Series A Warrant and
the Series B Warrant (as defined below) and (d) 170,666 shares of Series
A Preferred Stock were reserved for issuance pursuant to the Series A
Preferred Stock Purchase Warrant dated as of June 12, 1997 (the "SERIES
A WARRANT"). Upon the conversion of the shares of Preferred Stock
outstanding on the date hereof and the shares of Preferred Stock
issuable upon the exercise of the Series A Warrant, there will be
outstanding 17,621,614 shares of Company Common Stock. As of the date
hereof, 44,210 shares of Series B Preferred Stock were reserved for
issuance pursuant to the Series B Preferred Stock Purchase Warrant dated
as of June 12, 1997 (the "Series B. Warrant"). Except as set forth in
Section 2.3 of the Company Disclosure Schedule, there are no options,
warrants or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of the
Company or obligating the Company or any of its subsidiaries to issue or
sell any shares of capital stock of, or other equity interests in, the
Company. All shares of the capital stock of the Company subject to
issuance as aforesaid, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, shall
be duly authorized, validly issued, fully paid and nonassessable. Except
as disclosed in Section 2.3 of the Company Disclosure Schedule, there
are no obligations, contingent or otherwise, of the Company to
repurchase, redeem or otherwise acquire any shares of Company Common
Stock or to provide funds to or make any investment (in the form of a
loan, capital contribution, guaranty or otherwise) in any other entity.
The vesting schedules of the Repurchase Rights under the Stock Option
Agreements granted under the 1996 Stock Option Plan are as set forth in
the copies of the Stock Option Agreements previously provided to Parent.
The options under the 1998 Stock Option Agreements shall vest 1/48th per
month for the first three years after the date of grant and 1/12 on the
fourth anniversary of the grant date. The exercise price per share of
Company Common Stock pursuant to the 1998 Stock Option Agreements is
$6.14. All of the 1998 Stock Option Agreements and the 1998 Company
Stock Option Plan are identical (other than with respect to the name of
the optionee and the number of shares) to the form of Parent stock
option agreement and stock option plan previously provided by Parent to
Company, subject to any mutually agreeable changes. All of the 1996
Stock Option Agreements are identical (other than with respect to the
name of the optionee and the number of shares) to the forms of 1996
Stock Option Agreements previously provided to Parent.
2.4 Authority Relative to this Agreement. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all
necessary corporate action, and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to
consummate the transactions so contemplated (other than the approval of
the stockholders of the Company as contemplated herein (the "REQUISITE
APPROVAL"). The Board of Directors of the Company has determined that
it is advisable and in the best interest of the Company's stockholders
for the Company to enter into a business combination with Parent upon
the terms and subject to the conditions of this Agreement, and has
unanimously recommended that the Company's stockholders approve and
adopt this Agreement, the Merger and the Conversion (as hereinafter
defined). This Agreement has been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution
and delivery by Parent and Merger Sub, as applicable, constitutes a
legal, valid and binding obligation of the Company enforceable against
the Company in accordance with its terms except as enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors rights
generally and by equitable principles (regardless of whether such
enforcement is considered in a proceeding in equity or at law).
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2.5 Contracts; No Conflict; Required Filings and Consents.
(a) Section 2.5(a) of the Company Disclosure Schedule includes a list
of (i) all loan agreements, notes, indentures, mortgages, pledges,
conditional sale or title retention agreements, security
agreements, equipment obligations, guaranties, standby letters of
credit, equipment leases or lease purchase agreements to which the
Company is a party or by which it is bound; and (ii) all contracts,
agreements, commitments or other understandings or arrangements to
which the Company is a party or by which it or any of its
properties or assets is bound or affected, but excluding contracts,
agreements, equipment leases, equipment obligations, commitments or
other understandings or arrangements entered into in the ordinary
course of business and involving, in each case, payments or
receipts by the Company of less than $5,000 in any single instance
but not more than $20,000 in the aggregate.
(b) Except as disclosed in Section 2.5(b) of the Company Disclosure
Schedule, (i) the Company has not breached, is not in default
under, and has not received written notice of any breach of or
default under, any of the agreements, contracts or other
instruments referred to in clauses (i) or (ii) of Section 2.5(a),
(ii) to the best knowledge of the Company, no other party to any of
the agreements, contracts or other instrument referred to in
clauses (i) or (ii) of Section 2.5 (a) has breached or is in
default of any of its obligations thereunder, and (iii) each of the
agreements, contracts and other instruments referred to in clauses
(i) or (ii) of Section 2.5(a) is in full force and effect, except
in any such case for breaches, defaults or failures to be in full
force and effect that have not had and could not reasonably be
expected to have a Material Adverse Effect.
(c) Except as set forth in Section 2.5(c) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the
Company and the consummation of the transactions contemplated
hereby will not, (i) conflict with or violate the Certificate of
Incorporation or By-Laws of the Company, (ii) conflict with or
violate any federal, foreign or state law, rule, regulation, order,
judgment or decree (collectively, "LAWS") applicable to the Company
or by which its properties is bound or affected, or (iii) result in
any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default under), or impair
the Company's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the
creation of any security interests, liens, claims, pledges,
agreements, limitations in the Company's voting rights, charges or
other encumbrances of any nature whatsoever (collectively, "LIENS")
on any of the properties or assets of the Company pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to
which the Company is a party or by which the Company or any of its
properties is bound or affected, except in any such case for any
such conflicts, violations, breaches, defaults or other occurrences
that could not reasonably be expected to have a Material Adverse
Effect.
(d) The execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not,
require any consent, approval, authorization or permit of, or
filing with or notification to, any federal, foreign, state or
provincial governmental or regulatory authority except (i) for
applicable requirements, if any, of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), state securities laws ("BLUE
SKY LAWS"), any required foreign anti-trust or similar filings and
the filing and recordation of appropriate merger or other documents
as required by the DGCL, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or materially delay
consummation of the Merger, or otherwise prevent or materially
delay the Company from performing its obligations under this
Agreement, or would not otherwise have a Material Adverse Effect.
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2.6Compliance, Permits.
(a) Except as disclosed in Section 2.6(a) of the Company Disclosure
Schedule, the Company is not in conflict with, and is not in
default or violation of, (i) any Law applicable to the Company or
by which its properties are bound or affected or (ii) any note,
bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the
Company is a party or by which the Company or its properties is
bound or affected, except for any such conflicts, defaults or
violations which could not reasonably be expected to have a
Material Adverse Effect.
(b) Except as disclosed in Section 2.6(b) of the Company Disclosure
Schedule, the Company holds all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals
from governmental authorities which are material to the operation
of the business of the Company as it is now being conducted
(collectively, the "COMPANY PERMITS"). The Company is in compliance
with the terms of the Company Permits, except where the failure to
so comply could not reasonably be expected to have a Material
Adverse Effect.
2.7Financial Statements.
(a) Attached to the Company Disclosure Schedule is the balance sheet of
the Company as of September 30,1997 (the "BALANCE SHEET"), together
with the related statements of income for the nine (9) month period
then ended (the "FINANCIAL STATEMENTS").
(b) As of the date hereof, each of the Financial Statements and, as of
and after the delivery to Parent of the Audited Financial
Statements pursuant to Section 5.13, the Audited Financial
Statements (including, in each case, any related notes thereto) was
prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto),
are complete and correct and each fairly presents the financial
position of the Company as at the respective dates thereof and the
results of its operations and cash flows and stockholder equity for
the periods indicated, and are consistent with the books and
records of the Company.
2.8 Absence of Certain Changes or Events. Except as set forth in the
Financial Statements or Section 2.8 of the Company Disclosure Schedule,
since date of the Balance Sheet, the Company has conducted its business
in the ordinary course and there has not occurred: (a) any change in
the business, operating results, assets, properties or condition
(financial or otherwise) of the Company which could reasonably be
expected to result in a Material Adverse Effect; (b) any amendments or
changes in the Certificate of Incorporation or By-laws of the Company;
(c) any damage to, destruction or loss of any asset of the Company
(whether or not covered by insurance) that could reasonably be expected
to have a Material Adverse Effect; (d) any material change by the
Company in its accounting methods, principles or practices; (e) any
material revaluation by the Company of any of its assets, including,
without limitation, writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of
business; (f) any other action or event that would have required the
consent of Parent pursuant to Section 4.1 had such action or event
occurred after the date of this Agreement; or (g) any sale of the
property or assets of the Company, except in the ordinary course of
business.
2.9 No Undisclosed Liabilities. Except as is disclosed in Section 2.9 of
the Company Disclosure Schedule, the Company does not have any
liabilities (absolute, accrued, contingent or otherwise), except
liabilities (a) in the aggregate adequately provided for on the face of
the Company's Financial Statements, (b) incurred in the ordinary course
of business consistent with past practice, or (c) incurred in
connection with this Agreement.
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2.10 Absence of Litigation. Except as set forth in Section 2.10 of the
Company Disclosure Schedule, there are no claims, actions, suits,
proceedings or investigations pending, nor has the Company received
notice (oral or written) of any claims, actions, suits, proceedings or
investigations threatened, against the Company or any properties or
rights of the Company before any federal, foreign, state or provincial
court, arbitrator or administrative, governmental or regulatory
authority or body, nor, to the knowledge of the Company, is there any
basis therefor.
2.11 Employee Benefit Plans, Employment Agreements.
(a) Section 2.11 (a) of the Company Disclosure Schedule lists all
employee pension plans (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), all
employee welfare plans (as defined in Section 3(1) of ERISA), and
all other employee benefit plans, programs or arrangements, and any
current or former employment, executive compensation, consulting or
severance agreements, written or otherwise, for the benefit of, or
relating to, any present or former employee (including any
beneficiary of any such employee) of, or any present or former
consultant (including any beneficiary of any such consultant) to,
the Company (all such plans, practices and programs are referred to
as the "COMPANY EMPLOYEE PLANS").
(b) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person, and the
Company has never maintained, contributed to, or been required to
contribute to, any plan that is or was a "multiemployer plan" as
such term is defined in Section 3(37) of ERISA; (ii) there has been
no "prohibited transaction," as such term is defined in Section 406
of ERISA and Section 4975 of the Code, with respect to any Company
Employee Plan, which could result in any material liability of the
Company; (iii) all Company Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all
Laws (including ERISA and the Code) currently in effect with
respect thereto, and the Company has performed all material
obligations required to be performed by them under, is not in any
material respect in default under or violation of, and has no
knowledge of any default or violation by any other party to, any of
the Company Employee Plans; and (iv) there are no lawsuits or other
claims (other than claims for benefits in the ordinary course)
pending or, to the best knowledge of the Company, threatened with
respect to any Company Employee Plan.
(c) Section 2.11(c) of the Company Disclosure Schedule sets forth a
true and complete list of each current or former employee, officer
or director of the Company who holds (i) any option to purchase
Company Common Stock as of the date hereof, together with the
number of shares of Company Common Stock subject to such option,
the option price of such option (to the extent determined as of the
date hereof), whether such option is intended to qualify as an
incentive stock option within the meaning of Section 422(b) of the
Code (an "ISO"), and the expiration date of such option and (ii)
any other right, directly or indirectly, to acquire Company Common
Stock, together with the number of shares of Company Common Stock
subject to such right. Section 2.11(c) of the Company Disclosure
Schedule also sets forth the total number of such ISOs, such
nonqualified options and such other rights.
(d) Section 2.11(d) of the Company Disclosure Schedule sets forth a
true and complete list of: all plans, programs, agreements and
other arrangements of the Company with or relating to its employees
which contain change in control provisions.
2.12 Labor Matters. Except as set forth in Section 2.12 of the Company
Disclosure Schedule: (i) there are no controversies pending or, to the
knowledge of the Company, threatened, between the Company and any of
its employees; (ii) the Company is not a party to any collective
bargaining agreement or other labor union contract applicable to
persons employed by the Company, nor does the Company have knowledge
of any activities or proceedings of any labor union to organize any
such employees; and (iii) the Company has no knowledge of any strikes,
slowdowns, work stoppages, lockouts, or threats thereof, by or with
respect to any employees of the Company.
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2.13 Registration Statement, Proxy Statement/Prospectus. Subject to the
accuracy of the representations of Parent in Section 3.7, the
information supplied in writing by the Company for inclusion in the
Registration Statement (as defined in Section 3.7) shall not at the
time the Registration Statement is declared effective by the SEC
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which
they were made, not misleading. The information supplied in writing by
the Company for inclusion in the proxy statement/prospectus to be sent
to the Stockholders in connection with the meeting of the stockholders
of the Company to consider the Merger (the "STOCKHOLDER MEETING")
(such proxy statement/prospectus as amended or supplemented is
referred to herein as the "PROXY STATEMENT/PROSPECTUS"), will not, on
the date the Proxy Statement/Prospectus (or any amendment thereof or
supplement thereto) is first mailed to Stockholders, at the time of
the Stockholder Meeting, or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under
which it shall be made, is false or misleading with respect to any
material fact, or shall omit to state any material fact necessary in
order to make the statements made therein not false or misleading. If
at any time prior to the Effective Time any event relating to the
Company or any of its respective affiliates, officers or directors
should be discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement/Prospectus, the Company shall promptly inform Parent and
Merger Sub. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by
Parent or Merger Sub which is contained in any of the foregoing
documents.
2.16 Restrictions on Business Activities. Except for this Agreement or as
set forth in Section 2.14 of the Company Disclosure Schedule, to the
best of the Company's knowledge, there is no agreement, judgement,
injunction, order or decree binding upon the Company which has or
could reasonably be expected to have the effect of prohibiting or
impairing any business practice of the Company, any acquisition of
property by the Company or the conduct of business by the Company as
currently conducted or as directly related to the Company's MSR8000 or
MSR16000 products as presently proposed, except for any prohibition or
impairment as could not reasonably be expected to have a Material
Adverse Effect.
2.15 Title to Property. Except as set forth in Section 2.15 of the Company
Disclosure Schedule, the Company has good and defensible title to all
of its properties and assets, free and clear of all liens, charges and
encumbrances, except liens for taxes not yet due and payable and such
liens or other imperfections of title, if any, as do not materially
detract from the value of or interfere with the present use of the
property affected thereby or which could not reasonably be expected to
have a Material Adverse Effect; and, to the knowledge of the Company,
all leases pursuant to which the Company leases from others material
amounts of real or personal property, are in good standing, valid and
effective in accordance with their respective terms, and there is not,
to the knowledge of the Company, under any of such leases, any
existing material default or event of default (or event which with
notice or lapse of time, or both, would constitute a material
default), except where the lack of such good standing, validity and
effectiveness or the existence of such default or event of default
could not reasonably be expected to have a Material Adverse Effect.
The Company does not own any real property.
2.16 Taxes.
(a) For purposes of this Agreement, "TAX" or "TAXES" shall mean taxes,
fees, levies, duties, tariffs, imposts, and governmental
impositions or charges of any kind in the nature of (or similar to)
taxes, payable to any federal, state, local or foreign taxing
authority, including (without limitation) (i) income, franchise,
profits, gross receipts, ad valorem, net worth, value added, sales,
use, service, real or personal property, special assessments,
capital stock, license, payroll, withholding, employment, social
security (or similar), workers' compensation, unemployment
compensation, disability, utility, severance, production, excise,
stamp, occupation, premiums, windfall profits, environmental
(including taxes under Code Section 59A), customs duties,
registration, alternative
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and add-on minimum, estimated, transfer and gains taxes, or other tax
of any kind whatsoever and (ii) in all cases, including interest,
penalties, additional taxes and additions to tax imposed with respect
thereto whether disputed or not; and "TAX RETURNS" shall mean
returns, reports, declarations, forms and information returns or
statements relating to Taxes including any schedule or attachment
thereto required to be filed with the Internal Revenue Service
("IRS") or any other federal, foreign, state, local or provincial
taxing authority, domestic or foreign, including, without limitation,
consolidated, combined and unitary tax returns.
(b) Other than as disclosed in Section 2.16(b) of the Company Disclosure
Schedule, (i) the Company has filed all Tax Returns required to be
filed by it and all such Tax Returns were correct and complete in
all material respects, (ii) the Company has paid and discharged all
Taxes due and payable in connection with or with respect to the
periods or transactions covered by such Tax Returns and has paid all
other Taxes as are due, except such as are being contested in good
faith by appropriate proceedings (to the extent that any such
proceedings are required) and with respect to which the Company is
maintaining adequate reserves in accordance with GAAP, (iii) no Tax
Return referred to in clause (i) has been the subject of examination
by the IRS or the appropriate state, local or foreign taxing
authority of which written notice was received; (vii) no
deficiencies have been asserted or assessments made as a result of
any examinations of the Tax Returns referred to in clause (i) by the
IRS or the appropriate state, local or foreign taxing authority;
(iv) no action, suit, proceeding, audit, claim, deficiency or
assessment has been claimed or raised or is pending with respect to
any Taxes of the Company; (v) the Company has withheld from their
employees, customers, and other payees (and timely paid to the
appropriate governmental authority) all amounts required by the Tax
withholding provisions of applicable federal, state, local, and
foreign laws (including, without limitation, income, social
security, and employment Tax withholding for all types of
compensation, and withholding on payments to non-United States
persons) for all periods; (vi) there has not been filed a consent
under Code section 341(f) concerning collapsible corporations with
respect to the Company; (vii) the Company has not made any payment,
is not obligated to make any payment, and is not a party to any
agreement that could obligate it to make any payments that will not
be deductible under Code section 280G or be subject to the excise
tax of Code section 4999; (viii) no claim has ever been made by any
authority in a jurisdiction where the Company does not file Tax
Returns that it is or may be subject to tax by that jurisdiction;
and (ix) the Company does not have any liability for the Taxes of
any other person under Section 1.1502-6 of the Treasury Regulations
(or any similar provision of state, local or foreign law) as a
transferee or successor, by contract, or otherwise. There are no tax
liens on or security interests in any assets of the Company; and the
Company has not granted any waiver of any statute of limitations
with respect to, or any extension of a period for the assessment of,
any Tax. The accruals and reserves for Taxes (including deferred
taxes) reflected in the Financial Statements are in all material
respects adequate to cover all Taxes required to be accrued through
the date thereof (including interest and penalties, if any, thereon
and Taxes being contested) in accordance with GAAP.
(c) The Company is not, and has not been, a United States real property
holding corporation (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code. To the best knowledge of the Company, the Company does
not own any property of a character, the indirect transfer of which,
pursuant to this Agreement, would give rise to any material
documentary, stamp or other transfer tax.
2.17 Environmental Matters. Except as set forth in Section 2.17 of the
Company Disclosure Schedule, and except in all cases as, in the
aggregate, have not had and could not reasonably be expected to have a
Material Adverse Effect, the Company (i) has obtained all Company
Permits and other approvals which are required to be obtained under
all applicable federal, state, foreign or local laws or any
regulation, code, plan, order, decree, judgment, notice or demand
letter issued, entered, promulgated or approved thereunder relating to
pollution or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials
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or wastes into ambient air, surface water, ground water, or land or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes by the Company or
its respective agents ("ENVIRONMENTAL LAWS"); (ii) is in compliance with
all terms and conditions of such required Company Permits and approvals,
and also is in compliance with all other applicable limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in applicable
Environmental Laws; and (iii) as of the date hereof, is not aware of nor
has received notice of any past or present violations of Environmental
Laws or any event, condition, circumstance, activity, practice,
incident, action or plan which is reasonably likely to interfere with or
prevent continued compliance with applicable Environmental Laws, or
which would give rise to any common law or statutory liability based on
or resulting from the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling, or the emission,
discharge or release into the environment, of any pollutant, contaminant
or hazardous or toxic material or waste.
2.18Intellectual Property.
(a) To the Company's knowledge, the Company, directly or indirectly,
owns, or is licensed or otherwise possesses legally enforceable
rights to use, all inventions, patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks,
network protocols, schematics, technology, trade secrets, research
and development, know-how, technical data, computer software
programs or applications (in both source code and object code form),
and tangible or intangible proprietary information or material
(excluding Commercial Software as defined in paragraph (e) below)
that are material to the business of the Company as currently
conducted or as directly related to the Company's MSR8000 or
MSR16000 products lines (including chassis and cards) as presently
proposed by the Company (the "COMPANY INTELLECTUAL PROPERTY
RIGHTS"). All of the employees, consultants and independent
contractors of the Company that have participated in the development
of the Company Intellectual Property, or any portion thereof, in any
way have entered into agreements with the Company in the form
provided to Parent.
(b) The Company has no patents, registered trademarks or service marks
or registered copyrights of any pending applications therefor.
(c) Section 2.18(c) of the Company Disclosure Schedule sets forth a
complete list of all material licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which
the Company or any other person is authorized to use any Company
Intellectual Property Right (excluding object code end-user licenses
granted to end-users in the ordinary course of business that permit
use of software products without a right to modify, distribute or
sublicense the same ("END-USER LICENSES")) or other trade secret
material to the Company, and includes the identity of all parties
thereto. The Company is not in violation of any license, sublicense
or agreement described on such list except such violations as do not
materially impair the Company's or such subsidiary's rights under
such license, sublicense or agreement. The execution and delivery of
this Agreement by the Company, and the consummation of the
transactions contemplated hereby, will not cause the Company to be
in violation or default under any such license, sublicense or
agreement, nor entitle any other party to any such license,
sublicense or agreement to terminate or modify such license,
sublicense or agreement, except as set forth on Section 2.18(c) of
the Company Disclosure Schedule.
(d) The Company has not sold, licensed or otherwise transferred any of
the Company Intellectual Property Rights, and has not entered into
any agreements, oral or written, pursuant to which it has agreed
that another party has rights in any of the Company Intellectual
Property Rights. The Company is not obligated to pay any
compensation to any third party as a result of the use of any of the
Company Intellectual Property Rights. Except as disclosed in Section
2.18(d) of the
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Company Disclosure Schedule, to the knowledge of the Company, the
Company has not interfered with, infringed upon or misappropriated
any intellectual property rights of third parties, and none of the
Company and the directors and officers (and employees with
responsibility for Company Intellectual Property Rights matters) of
the Company has ever received any charge, complaint, claim, demand,
or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that the Company
must license or refrain from using any intellectual property rights
of any third party). To the knowledge of any of the Company and the
directors and officers (and employees with responsibility for Company
Intellectual Property Rights matters) of the Company, no third party
has interfered with, infringed upon or misappropriated any Company
Intellectual Property Rights. No Company Intellectual Property Right
or product of the Company is subject to any outstanding decree,
order, judgment, or stipulation restricting in any manner the
licensing thereof by the Company. The Company has not entered into
any agreement under which the Company is restricted from selling,
licensing or otherwise distributing any of its products to any class
of customers, in any geographic area, during any period of time or in
any segment of the market. The Company has a policy requiring each
employee to execute a confidentiality agreement substantially in the
form previously delivered to Parent.
(e) "Commercial Software" means packaged commercially available software
programs generally available to the public through retail dealers in
computer software which have been licensed to the Company pursuant
to end-user licenses and which are used in the Company's business
but are in no way a component of or incorporated in or specifically
required to develop or support any of the Company's products and
related trademarks, technology and know-how.
2.19 Interested Party Transactions. Except as set forth in Section 2.19 of
the Company Disclosure Schedule, since January 1, 1997, no event has
occurred that would be required to be reported as a Certain
Relationship or Related Transaction, pursuant to Item 404 of
Regulation S-K promulgated by the SEC assuming the monetary threshold
for reporting such relationships and transactions under such Item was
$20,000.
2.20 Insurance. Section 2.20 of the Company Disclosure Schedule sets forth
an accurate and complete list of all policies of insurance maintained,
owned or held by the Company on the date hereof, and the Company has
previously provided copies of all such policies to Parent.
2.21Accounts Receivable; Inventories.
(a) The Company does not have any accounts receivable.
(b) The inventory of the Company as reflected in the Financial
Statements consists of a quality and quantity usable and saleable in
the ordinary course of business, and none of which is slow-moving,
obsolete, below standard quality, damaged, or defective, subject
only to the reserve for inventory write down set forth on the face
of the Balance Sheet (rather than in any notes thereto) as adjusted
for the passage of time through the Closing Date in accordance with
GAAP and the past custom and practice of the Company. Each item of
such inventory reflected in the Balance Sheet and books and records
of the Company is reflected on the basis of a complete physical
count. Since the date of the Balance Sheet, no inventory has been
sold or disposed of except through sales in the ordinary course of
business.
2.22 Equipment. All of the tangible personal property of the Company other
than inventory (the "EQUIPMENT") is in good working order, operating
condition and state of repair, ordinary wear and tear excepted.
Section 2.22 of the Company Disclosure Schedule lists each lease or
other contractual obligation (including all amendments) under which
any Equipment having a cost or aggregate capital lease obligations in
excess of $10,000 is held or used (the "LEASES") (indicating for each
Lease (i) a description of the property leased thereunder, including
location and (ii) whether any consents are required under such Lease
in connection with the transactions contemplated by this Agreement).
The
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Company has previously delivered to Parent true and complete copies of
each Lease and any and all other material contractual obligations
relating to any of the Leases, in each case as in effect on the date
hereof and as it will be in effect at the Closing, including, without
limitation, all amendments.
2.23 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company or its affiliates other than
Hambrecht & Quist in the amount of $310,000.
2.24 Change in Control Payments. Except as set forth on Section 2.11(d) or
Section 2.24 of the Company Disclosure Schedule, the Company has no
plans, programs or agreements to which it is a party, or to which it
is subject, pursuant to which payments may be required or acceleration
of benefits may be required upon a change of control of the Company.
IN THE EVENT THE MERGER IS CONSUMMATED, THE SOLE AND EXCLUSIVE REMEDY FOR
ANY CLAIMS ARISING OUT OF OR RELATING TO A BREACH OF ONE OR MORE OF THE
REPRESENTATIONS OR WARRANTIES SET FORTH IN THIS SECTION 2 SHALL BE DAMAGES,
SUBJECT TO THE LIMITATIONS AND PROCEDURES SET FORTH IN SECTION 8
(INDEMNIFICATION) BELOW.
III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby, jointly and severally, represent and warrant
to the Company that, except as set forth in the written disclosure schedule
delivered on or prior to the date hereof by Parent to the Company that is
arranged in paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article III (the "PARENT DISCLOSURE SCHEDULE") (disclosure
in any paragraph of the Disclosure Schedule shall qualify only the
corresponding paragraph in this Article III), the statements contained in this
Article III are true and correct as of the date of this Agreement and, unless
a date is specified in such representation or warranty, will be true and
correct as of the date of Closing (as though made on and as of the date of
Closing):
3.1 Organization and Qualification; Subsidiaries. Each of Parent and its
subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation
and has the requisite corporate power and authority necessary to own,
lease and operate the properties it purports to own, operate or lease
and to carry on its business as it is now being conducted, except where
the failure to be so organized, existing and in good standing or to
have such power, authority could not reasonably be expected to have a
Material Adverse Effect. Each of Parent and each of its subsidiaries is
duly qualified or licensed as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its
properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except for
such failures to be so duly qualified or licensed and in good standing
that could not reasonably be expected to have a Material Adverse
Effect.
3.2 Charter and By-Laws. Parent has heretofore furnished to the Company a
complete and correct copy of its Certificate of Incorporation and By-
Laws, as amended to date. Such Certificate of Incorporation and By-Laws
are in full force and effect. Neither Parent nor Merger Sub is in
violation of any of the provisions of its Certificate of Incorporation
or By-Laws.
3.3 Capitalization. (a) As of August 31, 1997, the authorized capital stock
of Parent consisted of (i) 240,000,000 shares of Parent Common Stock of
which 157,835,000 shares were issued and outstanding, all of which are
validly issued, fully paid and non-assessable, none of which were held
in treasury, and (ii) 2,000,000 shares of preferred stock, par value
$1.00 per share, none of which was issued and outstanding and none of
which was held in treasury. The authorized capital stock of Merger Sub
consists of 1,000 shares of common stock, $.01 par value, of which 100
shares are issued and
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outstanding. All of the issued and outstanding shares of Parent Common
Stock are, and all shares reserved for issuance will be upon issuance in
accordance with the terms specified in the instruments or agreements
pursuant to which they are issuable (including pursuant to this
Agreement), duly authorized, validly issued, fully paid and
nonassessable.
(b) All of the outstanding shares of capital stock of Merger Sub are duly
authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by Parent, free and clear of any Liens. Except as
disclosed in Section 3.3 of the Parent Disclosure Schedule or in the Parent
SEC Reports, all of the outstanding shares of capital stock of each subsidiary
of Parent are duly authorized, validly issued, fully paid and nonassessable
and are owned, beneficially and of record, by Parent or a subsidiary wholly
owned, directly or indirectly, by Parent, fee and clear of any Liens.
3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub has
all necessary corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder and to consummate
the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by Parent and Merger Sub and the
consummation by Parent and Merger Sub of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate
action on the part of Parent and Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub are necessary to
authorize the execution, delivery and performance of this Agreement or
to consummate the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by each of Parent and
Merger Sub and, assuming the due authorization, execution and delivery
by the Company, constitutes a legal, valid and binding obligation of
each of Parent and Merger Sub enforceable against each of them in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors rights generally and by
equitable principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law).
3.5No Conflict, Required Filings and Consents.
(a) Except as set forth in Section 3.5(c) of the Parent Disclosure
Schedule, the execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance of this Agreement by each of
Parent and Merger Sub will not, (i) conflict with or violate the
Certificate of Incorporation or By-Laws of Parent or Merger Sub,
(ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or any of its subsidiaries
or by which its or their respective properties are bound or
affected, or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become
a default) under, or impair Parent's or any of its subsidiaries'
rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration
or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent or any of
its subsidiaries pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or any of its subsidiaries
is a party or by which Parent or any of its subsidiaries or its or
any of their respective properties are bound or affected, except in
any such case for any such conflicts, violations, breaches, defaults
or other occurrences that could not reasonably be expected to have a
Material Adverse Effect.
(b) The execution and delivery of this Agreement by Parent and Merger
Sub does not, and the performance of this Agreement by Parent and
Merger Sub will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
regulatory authority, domestic or foreign, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act, the
Blue Sky Laws, any foreign antitrust or similar filings and the
filing and recordation of appropriate merger or other documents as
required by the DGCL, all of which shall be completed prior to the
effective time and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or
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materially delay consummation of the Merger, or otherwise prevent
Parent or Merger Sub from performing their respective obligations
under this Agreement.
3.6 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be
filed with the SEC (collectively, the "PARENT SEC REPORTS"). The
Parent SEC Reports (i) complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act, as
the case may be, (ii) were timely filed and (iii) did not at the
time they were filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under
which they were made, not misleading. None of Parent's subsidiaries
is required to file any forms, reports or other documents with the
SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) (the "PARENT FINANCIAL STATEMENTS")
contained in the Parent SEC Reports has been prepared in accordance
with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and each
fairly presents in all material respects the consolidated financial
position of Parent and its subsidiaries as at the respective dates
thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be,
individually or in the aggregate, materially adverse to Parent and
its subsidiaries taken as a whole.
3.7 Absence of Certain Changes or Events. Except as disclosed in the Parent
SEC Reports filed and as otherwise publicly disclosed prior to the date
of this Agreement, since the date of the Parent's most recent Form 10-Q
filed with the SEC, there has not been any change, event or development
which reasonably could be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent and its subsidiaries
taken as a whole.
3.8 Absence of Undisclosed Liabilities. Except for matters reflected or
reserved against in the balance sheet included in the Parent Financial
Statements or as disclosed in Section 3.8 of the Parent Disclosure
Schedule, neither Parent nor any of its subsidiaries had at such date,
or has incurred since that date, any liabilities or obligations
(whether absolute, accrued, contingent, fixed or otherwise, or whether
due or to become due) of any nature that would be required by GAAP to
be reflected on a consolidated balance sheet of Parent and its
consolidated subsidiaries (including the notes thereto), except
liabilities or obligations (i) which were incurred in the ordinary
course of business consistent with past practice or (ii) which could
not be reasonably expected, individually or in the aggregate, to have a
Material Adverse Effect on Parent and its subsidiaries taken as a
whole.
3.9 Registration Statement; Proxy Statement/Prospectus. Subject to the
accuracy of the representations of the Company in Section 2.13, the
registration statement (the "REGISTRATION STATEMENT") pursuant to which
the Parent Common Stock to be issued in the Merger will be registered
with the SEC shall not, at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective
by the SEC, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
included therein, in light of the circumstances under which they were
made, not misleading. The information supplied by Parent for inclusion
in the Proxy Statement/Prospectus will not, on the date the Proxy
Statement/Prospectus (or any amendment or supplement thereto) is first
mailed to Stockholders, at the time of the Stockholder Meeting and at
the Effective Time, contain any statement which, at such time and in
light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or will omit to state any
material fact necessary in order to make the statements therein not
false or misleading. If at any time prior to the Effective Time any
event relating to Parent, Merger Sub or any of their respective
affiliates, officers or directors should be discovered by Parent or
Merger Sub which should be set forth
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in an amendment to the Registration Statement or a supplement to the
Proxy Statement/Prospectus, Parent or Merger Sub will promptly inform
the Company. Notwithstanding the foregoing, Parent and Merger Sub make
no representation or warranty with respect to any information supplied
by the Company or the Company stockholders which is contained in any of
the foregoing documents. The Registration Statement and Proxy
Statement/Prospectus shall comply in all material respects as to form
with the requirements of the Securities Act, the Exchange Act and the
rules and regulations thereunder.
3.10 Legal Proceedings. Except as disclosed in the Parent SEC Reports filed
prior to the date of this Agreement or in Section 3.9 of the Parent
Disclosure Schedule, there are no claims, actions, suits, proceedings
or investigations pending or, to the knowledge of Parent and its
subsidiaries, threatened against Parent or any of its subsidiaries or
any of their respective assets and properties before any federal,
foreign, state or provincial court, arbitrator or administrative,
governmental or regulatory authority or body which individually or in
the aggregate is or could be reasonably expected to result in a
Material Adverse Effect.
3.11 Employee Benefit Plans; ERISA. Except as disclosed in the Parent SEC
Reports filed prior to the date of this Agreement or as set forth in
Section 3.10 of the Parent Disclosure Schedule, Parent and its
subsidiaries are in compliance in all material respects with the
provisions of ERISA and all of their respective employee benefit
plans, except where the failure to so comply would not have a Material
Adverse Effect on the business or financial condition of Parent and
its subsidiaries taken as a whole.
3.12 Ownership of Merger Sub; No Prior Activities. As of the date hereof
and the Effective Time, except for obligations or liabilities incurred
in connection with its incorporation or organization and the
transactions contemplated by this Agreement and except for this
Agreement and any other agreements or arrangements contemplated by
this Agreement, Merger Sub has not and will not have incurred,
directly or indirectly, through any subsidiary or affiliate, any
obligations or liabilities or engaged in any business activities of
any type or kind whatsoever or entered into any agreements or
arrangements with any person.
3.13 Environmental Matters. Except as set forth in Section 3.13 of the
Parent Disclosure Schedule and the Parent SEC Reports, the Parent is
in material compliance with all applicable Environmental Laws except
where such noncompliance could not reasonably be expected to have a
Material Adverse Effect.
3.14Intellectual Property.
(a) To the knowledge of the Parent, the Parent, directly or indirectly,
owns, or is licensed or otherwise possesses legally enforceable
rights to use, all inventions, patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks,
network protocols, schematics, technology, trade secrets, research
and development, know-how, technical data, computer software
programs or applications (in both source code and object code form),
and tangible or intangible proprietary information or material
(excluding Commercial Software as defined in paragraph (b) below)
that are material to the business of the Parent as currently
conducted or as proposed to be conducted by the Parent (the "PARENT
INTELLECTUAL PROPERTY RIGHTS"). Except as disclosed in Section 3.14
of the Parent Disclosure Schedule, to the knowledge of the Parent,
the Parent has not interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any intellectual property
rights of third parties, which interference, infringement,
misappropriation or conflict could reasonably be expected to have a
Material Adverse Effect.
(b) "Commercial Software" means packaged commercially available software
programs generally available to the public through retail dealers in
computer software which have been licensed to the Parent pursuant to
end-user licenses and which are used in the Parent's business but
are in no way a component of or incorporated in or specifically
required to develop or support any of the Parent's products and
related trademarks, technology and know-how.
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IV CONDUCT OF BUSINESS PENDING THE MERGER
4.1 Conduct of Business by the Company Pending the Merger. The Company
covenants and agrees that, during the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, unless Parent shall otherwise agree in
writing, the Company shall conduct its business only in, and the
Company shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice other than
actions taken by the Company in contemplation of the Merger; and the
Company shall use all reasonable commercial efforts to preserve
substantially intact the business organization of the Company, to keep
available the services of the present officers, employees and
consultants of the Company and to preserve the present relationships of
the Company with customers, suppliers and other persons with which the
Company has significant business relations. By way of amplification and
not limitation, except as contemplated by this Agreement, the Company
shall not, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or
the Effective Time, directly or indirectly do, or propose to do, any of
the following without the prior written consent of Parent:
(a) amend or otherwise change the Charter or By-Laws of the Company;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares
of capital stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any
shares of capital stock, or any other ownership interest
(including, without limitation, any phantom interest) in the
Company or any affiliates (except for the issuance of shares of
Company Common Stock issuable pursuant to Stock Option Agreements
which were granted under the Company Stock Option Plans, or in
connection with the conversion of the Preferred Stock into shares
of Company Common Stock, or shares of Preferred Stock issued upon
the exercise of the Warrants); provided, however, this Section
4.1(a) shall not prohibit transfer of stock to family members or
affiliates provided that contemporaneously with any such transfer
such family member or affiliate agrees to be bound by the terms of
any agreement relating to such stock by which such transferring
stockholder is bound.
(c) sell, pledge, dispose of or encumber any assets of the Company
except for (i) sales of assets in the ordinary course of business
and in a manner consistent with past practice, (ii) dispositions of
obsolete or worthless assets, and (iii) sales of immaterial assets
not in excess of $10,000 in the aggregate;
(d) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of any of its capital stock, (ii) split,
combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital
stock (except for the issuance of shares of Company Common Stock
issuable pursuant to (A) Stock Option Agreements which were granted
under the Company Stock Option Plans, (B) conversion of the
Preferred Stock into shares of Company Common Stock and the
issuance of shares of Preferred Stock issuable upon the exercise of
the Warrants), or (iii) amend the terms or change the period of
exercisability of, purchase, repurchase, redeem or otherwise
acquire any of its securities, including, without limitation,
shares of Company Common Stock or any option, warrant or right,
directly or indirectly, to acquire shares of Company Common Stock,
or propose to do any of the foregoing; provided, however, the
Company may repurchase shares of capital stock upon termination of
employment in accordance with the terms of any Founder Stock
Purchase Agreements or Stock Option Agreements;
(e) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization
or division thereof; (ii) incur any indebtedness for borrowed money
calling for aggregate payments in excess of $20,000 or issue any
debt securities
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or assume, guarantee or endorse or otherwise as an accommodation
become responsible for, the obligations of any person or, except in
the ordinary course of business consistent with past practice, make
any loans or advances; (iii) enter into or amend any material
contract or agreement outside the ordinary course of business; (iv)
authorize any capital expenditures or purchase of fixed assets which
are, in the aggregate, in excess of $20,000 for the Company; or (v)
enter into or amend any contract, agreement, commitment or
arrangement to effect any of the matters prohibited by this Section
4.1(e);
(f) increase the compensation payable or to become payable to its
officers or employees, or grant any severance or termination pay to,
or enter into any employment or severance agreement with any
director, officer or other employee of the Company, or establish,
adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors,
officers or employees, except, in each case, as may be required by
law provided the Company may increase wages in the ordinary course
of business consistent with the Company's past practice by not more
than five percent (5%) for any individual employee and the Company
may grant stock options to new employees under the 1996 Plan or new
and existing employees under the 1998 Plan;
(g) except to the extent required by law, take any action to change
accounting policies or procedures (including, without limitation,
procedures with respect to revenue recognition, payments of accounts
payable and collection of accounts receivable);
(h) make any material tax election inconsistent with past practice or
settle or compromise any material federal, state, local or foreign
tax liability or agree to an extension of a statute of limitations;
(i) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of
liabilities reflected or reserved against in the Financial
Statements or incurred in the ordinary course of business and
consistent with past practice; or
(j) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1 (a) through (i) above.
4.2 No Solicitation.
(a) The Company shall not, directly or indirectly, through any officer,
director, employee, representative or agent of the Company, (i)
solicit, initiate or encourage the initiation of any inquiries or
proposals regarding any merger, sale of substantial assets, sale of
shares of capital stock (including without limitation by way of a
tender offer) or similar transactions involving the Company other than
the Merger (any of the foregoing inquiries or proposals being referred
to herein as an "ACQUISITION PROPOSAL"), (ii) engage in negotiations or
discussions concerning, or provide any nonpublic information to any
person relating to, any Acquisition Proposal or (iii) agree to, approve
or recommend any Acquisition Proposal.
(b) The Company shall immediately notify Parent after receipt of any
Acquisition Proposal, or any modification of or amendment to any
Acquisition Proposal, or any request for nonpublic information relating
to the Company in connection with an Acquisition Proposal or for access
to the properties, books or records of the Company by any person or
entity that informs the Board of Directors of the Company that it is
considering making, or has made, an Acquisition Proposal. Such notice
to Parent shall be made orally and in writing.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any persons (other than
Parent and Merger Sub) conducted heretofore with respect to
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any of the foregoing. The Company agrees not to release any third party
from the confidentiality provisions of any confidentiality agreement to
which the Company is a party.
(d) The Company shall ensure that the officers, directors and employees of
the Company and any investment banker or other advisor or
representative retained by the Company are aware of the restrictions
described in this Section 4.2 and shall direct such parties to comply
in all respects with such restrictions.
V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement. (a) As promptly as
practicable after the execution of this Agreement, the Company and
Parent shall prepare and file with the SEC preliminary proxy materials
which shall constitute the Proxy Statement/Prospectus and the
Registration Statement of the Parent with respect to the Parent Common
Stock to be issued in connection with the Merger and shall use all
reasonable efforts to cause the Registration Statement to become
effective as soon as practicable, and to mail the Proxy
Statement/Prospectus to Stockholders, as soon thereafter as
practicable. The Proxy Statement/Prospectus shall include the
recommendation of the Board of Directors of the Company in favor of the
Merger.
(b) The Company shall furnish Parent with all information, including without
limitation financial statements and financial information in any form
reasonably requested by Parent, concerning the Company and/or the holders of
its capital stock and shall take such further action as Parent may reasonably
request in connection with the Proxy Statement/Prospectus and the issuance of
the Parent Common Stock. Parent shall provide the Company with two (2)
Business Days' notice prior to the effectiveness of the Registration Statement
or prior to the mailing of any Proxy Statement/Prospectus (or any amendment
thereof or supplement thereto) and provide the Company with the opportunity to
update the information set forth therein. If at any time prior to the
Effective Time any event or circumstance relating to the Company, Parent or
any of their respective subsidiaries, affiliates, officers or directors should
be discovered by such party which should be set forth in an amendment or a
supplement to the Proxy Statement/Prospectus, such party shall promptly inform
the other thereof and take appropriate action in respect thereof.
5.2 Stockholder Meeting. The Company shall call and hold the Stockholder
Meeting as promptly as practicable and in accordance with applicable
laws for the purpose of obtaining the approval of the Merger (or, at
its option, obtain the written consent of at least a majority of its
outstanding shares of Common Stock on a fully diluted basis), this
Agreement, the Conversion, and the transactions contemplated hereby.
The Company shall use all its best efforts to solicit from (i) all of
its stockholders and the holders of the Preferred Stock proxies in
favor (or if by consent, approvals) of adoption of the Merger, this
Agreement and approval of the transactions contemplated hereby and (ii)
holders of its Preferred Stock proxies in favor (or if by consent,
approvals) of the Conversion; and shall take all other action necessary
or advisable to secure the vote or consent of stockholders to obtain
such approvals.
5.3 Access to Information. Upon reasonable notice and during business
hours, the Company shall afford to the officers, employees,
accountants, counsel and other representatives of Parent, reasonable
access, during the period to the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, the
Company shall furnish promptly to Parent all information concerning its
business, properties and personnel as Parent may reasonably request,
and shall make available to the Parent the appropriate individuals
(including attorneys, accountants and other professionals) for
discussion of the Company's business, properties and personnel as
Parent may reasonably request. Upon reasonable notice and during
business hours, the Parent shall afford to the Stockholder
Representative and his agents, for purposes reasonably related to the
rights and obligations of stockholders of the Company under this
Agreement, reasonable access, to all of the Company's properties,
books, contracts, commitments and records existing as of the date
hereof.
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5.4 Consents; Approvals. The Company and Parent shall each use their
reasonable best efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United
States and foreign governmental and regulatory rulings and approvals),
and the Company and Parent shall make all filings (including, without
limitation, all filings with United States and foreign governmental or
regulatory agencies) required in connection with the authorization,
execution and delivery of this Agreement by the Company and Parent and
the consummation by them of the transactions contemplated hereby, in
each case as promptly as practicable. The Company and Parent shall
furnish promptly all information required to be included in the Proxy
Statement/Prospectus, or for any application or other filing to be made
pursuant to the rules and regulations of any United States or foreign
governmental body in connection with the transactions contemplated by
this Agreement.
5.5 Agreements with Respect to Affiliates. Schedule 5.5 contains a true
and complete list identifying all persons who, in the Company's
reasonable judgment, are, or will be, at the time of the Stockholder
Meeting (or at the time of the effectiveness of any written consent),
"affiliates" of the Company within the meaning of Rule 145 under the
Securities Act ("RULE 145"). The Company shall cause each person who is
identified as an "affiliate" to deliver to Parent, prior to the
Effective Time, a written agreement (a "RULE 145 AGREEMENT") in
connection with restrictions on affiliates under Rule 145, in
substantially the form of Exhibit 5.5.
5.6 Notification of Certain Matters. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i)
the occurrence or nonoccurrence of any event the occurrence or
nonoccurrence of which would be likely to cause any representation or
warranty contained in this Agreement to become materially untrue or
inaccurate or (ii) any failure of the Company, Parent or Merger Sub, as
the case may be, materially to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant
to this Section shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice; and provided
further that failure to give such notice shall not be treated as a
breach of covenant for the purposes of Sections 6.2(a) or 6.3(a) unless
the failure to give such notice results in material prejudice to the
other party.
5.7 Further Action/Tax Treatment. Upon the terms and subject to the
conditions hereof each of the parties hereto shall use all reasonable
efforts to take, or cause to be taken, all actions and to do, or cause
to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, to obtain in a timely
manner all necessary waivers, consents and approvals and to effect all
necessary registrations and filings, and otherwise to satisfy or cause
to be satisfied all conditions precedent to its obligations under this
Agreement. The foregoing covenant shall not include any obligation by
Parent to agree to divest, abandon, license or take similar action with
respect to any assets (tangible or intangible) of Parent or the
Company. None of Parent, Merger Sub and the Company will knowingly
(both before and after consummation of the Merger) take any actions,
other than those contemplated by this Agreement, which would prevent
the transaction effected through the Merger from qualifying as a
reorganization under the provisions of Section 368 of the Code.
Notwithstanding the foregoing, Parent shall not have any liability for
the Taxes of any stockholder of the Company (other than Parent)
resulting from the failure of the Merger to qualify as a reorganization
under the provisions of Section 368 of the Code.
5.8 Public Announcements. Parent shall consult with the Company before
issuing any press release with respect to the Merger or this Agreement
and shall not issue any such press release or make any such public
statement without the prior written consent of the Company, which shall
not be unreasonably withheld; provided, however, that Parent may,
without the prior consent of the Company, issue such press release or
make such public statement (i) upon the execution of this Agreement or
(ii) any time thereafter as may upon the advice of counsel otherwise be
required by law or the rules and regulations of the New York Stock
Exchange if it has used all reasonable efforts to consult with the
Company.
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5.9 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding any real property transfer
or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees, and any
similar taxes (collectively, "TRANSFER TAXES") which become payable in
connection with the transactions contemplated hereby that are required
or permitted to be filed at or before the Effective Time. Neither the
Company nor Parent anticipate that there will be any Transfer Taxes.
5.10 Accountants' Letters. The Company and Parent shall cause Price
Waterhouse LLP, in the case of the Company, or KPMG Peat Marwick
L.L.P, in the case of Parent, to deliver to the other party, a letter,
dated on or before the date the Proxy Statement/Prospectus is mailed
to the Company's stockholders in connection with the Stockholder
Meeting, covering such matters as are requested by Parent or the
Company, as the case may be, and as are customarily addressed in
accountant's "comfort" letters.
5.11 Listing of Parent Shares. Parent shall cause the Parent Shares to be
issued in the Merger or upon an Issuance Event to be approved for
quotation, upon official notice of issuance, on the New York Stock
Exchange prior to any such issuance.
5.12 Employees. Parent agrees, based upon information provided by the
Company to date, to offer employment to the persons listed on
Schedules 6.2(h)(i) and 6.2(h)(ii) on the terms set forth in Exhibit
6.2(h)(i) and Exhibit 6.2(h)(ii), respectively, and at least the same
salary and the same or substantially similar benefits as such person
presently receives as set forth in the materials previously provided
to Parent. All Company employees retained by Parent shall receive at
least the same salary and same or substantially similar benefits as
such person presently receives, and shall receive credit for time
employed by the Company for purposes of determining such benefits. All
Company employees retained by Parent shall be entitled to retain up to
two weeks of accrued but untaken vacation.
5.13 Audited Financial Statements. The Company agrees to deliver to the
Parent prior to Closing an audited balance sheet of the Company as of
December 31, 1997, together with the related statements of income and
cash flows for the twelve (12) month period then ended (the "AUDITED
FINANCIAL STATEMENTS"), which shall be attached to the Company
Disclosure Schedule.
5.14 Tax Certificates. Except as may otherwise be agreed by the Company
and Parent prior to Closing, the Company shall use reasonable efforts
to cause each of the Stockholders of the Company other than Parent to
deliver to Parent, prior to the Closing Date, an affidavit (in form
and substance reasonably satisfactory to Parent) meeting the
requirements necessary to establish that it is eligible for the
exemption from withholding provided by Section 1445(b)(2) of the Code.
5.15 Employee Inventions and Confidentiality Agreements. The Company shall
use its reasonable best efforts to cause each employee of the Company
other than those identified in Schedules 6.2(h)(i) and 6.2(h)(ii) to
execute and deliver to Parent an Employee Inventions and
Confidentiality Agreement in the form included in Exhibit 6.2(h)(ii).
VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Effectiveness of Registration Statement; Listing of Shares. The
Registration Statement shall have been declared effective by the
SEC under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued
by the SEC and no proceedings for that purpose and no similar
proceeding in respect of the Proxy
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Statement/Prospectus shall have been initiated or threatened by the
SEC. The shares of Parent Common Stock to be issued in connection
with the Merger shall have been approved for listing on the New York
Stock Exchange.
(b) Requisite Approvals; Warrant Exercise; Conversion. This Agreement
and the Merger shall have received the Requisite Approval and the
Warrant Exercise and Conversion shall have been completed.
(c) No Litigation, Injunctions or Restraints; Illegality. No action,
suit or proceeding shall be pending or threatened before any court
or quasi-judicial or administrative agency of any federal, state,
local or foreign jurisdiction wherein an unfavorable injunction,
judgment, order, decree, ruling or charge would prevent consummation
of any of the transactions contemplated by this Agreement or cause
any of the transactions contemplated by this Agreement to be
rescinded following consummation. No temporary restraining order,
preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in
effect, nor shall any proceeding brought by any administrative
agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing
be pending; and there shall not be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal; and
(d) Tax Opinion. The Stockholders shall have received a written opinion
of Pillsbury Madison & Sutro LLP, in form and substance reasonably
satisfactory to the Company and the Parent, to the effect that the
transaction effected by the Merger will constitute a reorganization
within the meaning of Section 368 of the Code. In rendering such
opinion, counsel may rely upon such reasonable representations and
certificates of Parent, Merger Sub, the Company and certain
stockholders of the Company as the parties may agree, and the
parties to this Agreement agree to make, and to use reasonable
efforts to cause such stockholders of the Company to make, such
representations and deliver such certificates.
6.2 Additional Conditions to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger are also
subject to the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct
in all respects at and as of the Effective Time, unless another time
is specified therein, with the same force and effect as if made at
and as of such time, and Parent shall have received a certificate to
such effect signed by the President of the Company;
(b) Agreements and Covenants. The Company shall have performed or
complied with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the
Effective Time and Parent and Merger Sub shall have received a
certificate to such effect signed on behalf of the Company by the
President and the Chief Financial Officer of the Company;
(c) Consents Obtained. All consents, waivers, approvals, authorizations
or orders required to be obtained, and all filings required to be
made, by the Company for the due authorization, execution and
delivery of this Agreement and the consummation by it of the
transactions contemplated hereby shall have been obtained and made
by the Company;
(d) Opinion of Counsel to the Company. Parent shall have received an
opinion of Pillsbury, Madison & Sutro LLP, counsel to the Company in
form and substance as set forth on Exhibit 6.2(d) attached hereto;
(e) Rule 145 Agreements. Parent shall have received from each person
who is identified in Schedule 5.6 as an "affiliate" of the Company,
a Rule 145 Agreement, and such Rule 145 Agreement shall be in full
force and effect;
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(f) Registration and Other Rights. All existing registration rights,
preemptive rights and rights of first refusal with respect to the
purchase of the capital stock of the Company of holders of Company
securities shall have been terminated and Parent and Merger Sub
shall have received a certificate to such effect signed on behalf
of the Company by the President and the Chief Financial Officer of
the Company;
(g) Escrow Agreement. Each of Escrow Agent, the Company and the
Stockholder Representative shall have executed and delivered to
Parent an Escrow Agreement substantially in the form of Exhibit
6.2(g);
(h) Employment Agreements. (i) Each of the persons listed on Schedule
6.2(h)(i) shall have entered into employment agreements with Parent
in substantially the form attached as Exhibit 6.2(h)(i) and (ii)
each of the persons listed on Schedule 6.2(h)(ii) shall have
entered into employment agreements with Parent in substantially the
form attached as Exhibit 6.2(h)(ii). Such agreements shall be in
full force and effect as of the Effective Time and such persons
shall be in the employ of the Company immediately prior to the
Effective Time and no such person shall have indicated his or her
intention to terminate his or her employment with the Surviving
Corporation following the Effective Time. Notwithstanding the
foregoing, the conditions set forth in this Section 6.2(h)(ii)
shall be deemed satisfied if such conditions are satisfied with
respect to at least 90 percent of the persons set forth on Schedule
6.2(h)(ii) (rounded down);
(i) Exercise of Warrants; Conversion. (i) The Series A Warrant shall
have been exercised in full and all shares issuable pursuant
thereto shall have been issued in accordance with the terms thereof
(the "WARRANT EXERCISE") (ii) the Series B Warrant shall have been
terminated and be of no further force and effect and (iii) any
shares of Preferred Stock issued pursuant to the Warrant Exercise
or outstanding as of the date hereof shall have been converted into
shares of Company Common Stock (the "CONVERSION");
(j) [Intentionally Left Blank].
(k) Participation Agreements. Each of the founders and certain other
stockholders of the Company listed on Schedule 6.2(k) shall have
executed and delivered to Parent a Participation Agreement in the
form attached as Exhibit 6.2(k) hereto;
(l) Stockholder Consent. In addition to obtaining the Requisite
Approval, Stockholders of the Company holding not less than 95% of
the Company Common Stock that will be outstanding immediately prior
the Effective Time (assuming that all shares of Preferred Stock and
the Warrants have been converted into Company Common Stock) shall
have either (i) voted for and approved each of this Agreement and
the Merger or (ii) approved each of this Agreement and the Merger
by written consent;
(m) Adverse Effect. Since the date of this Agreement, there shall not
have occurred a Material Adverse Effect with respect to the
Company;
(n) [Intentionally Left Blank].
(o) Assignment of Invention Agreements. The Company shall have
delivered executed Proprietary Information and Inventions
Agreements from each of the individuals listed on Schedule
2.11(d)(ii) of the Company Disclosure Schedule.
(p) Amendments to Founder Stock Purchase Agreements. Each of Piyush
Patel, Romulus Pereira and Nilesh Shah shall have executed and
delivered to the Company the Amended Founder Stock Purchase
Agreements in the form attached hereto as Exhibit A.
6.3 Additional Conditions to Obligation of the Company. The obligation of
the Company to effect the Merger is also subject to the following
conditions:
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(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub contained in this Agreement shall be true
and correct in all respects on and as of the Effective Time, unless
another time is specified therein, with the same force and effect
as if made at and as of such time, and the Company shall have
received a certificate to such effect signed by the Chief Financial
Officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements
and covenants required by this Agreement to be so performed or
complied with by them on or prior to the Effective Time, and the
Company shall have received a certificate to such effect signed by
the Chairman and the Chief Financial Officer of Parent.
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings
required to be made, by Parent and Merger Sub for the due
authorization, execution and delivery of this Agreement and the
consummation by them of the transactions contemplated hereby shall
have been obtained and made by Parent and Merger Sub.
(d) Opinion of Counsel to the Parent. The Company and the Stockholders
shall have received an opinion of Ropes & Gray, counsel to the
Parent in form and substance as set forth in Exhibit 6.3(d)
attached hereto;
(e) Escrow Agreement. Each of Escrow Agent and Parent shall have
executed and delivered to the Company an Escrow Agreement
substantially in the form of Exhibit 6.2(g).
(f) Employee Offers. Cabletron shall have made offers of employment as
set forth in Section 5.12 and shall not have withdrawn such offers
of employment.
(g) Adverse Effect. Since the date of this Agreement, there shall not
have occurred a Material Adverse Effect with respect to Parent and
its subsidiaries taken as a whole.
VII
TERMINATION
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the stockholders of
the Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of each of Parent and the Company; or
(b) by either Parent or the Company if the Merger shall not have been
consummated by March 31, 1998 (provided that the right to terminate
this Agreement under this Section 7.1(b) shall not be available to
any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either Parent or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency
or commission shall have issued a nonappealable final order, decree
or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the
Merger (provided that the right to terminate this Agreement under
this Section 7.1(c) shall not be available to any party who has not
complied with its obligations under Section 5.8 and such
noncompliance materially contributed to the issuance of any such
order, decree or ruling or the taking of such action); or
(d) by Parent or the Company, if the Requisite Approval and the Warrant
Exercise and Conversion shall not have been obtained or completed,
as the case may be, by March 1, 1998; or
(e) by Parent, if: (i) the Board of Directors of the Company shall
withdraw, modify or change its approval or recommendation of this
Agreement or the Merger in a manner adverse to Parent or
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shall have resolved to do so; or (ii) the Board of Directors of the
Company shall have recommended to the stockholders of the Company an
Alternative Transaction (as defined below); or
(f) by Parent, (i) if any representation or warranty of the Company set
forth in this Agreement shall be untrue when made, or (ii) upon a
breach of any covenant or agreement on the part of the Company set
forth in this Agreement, such that the conditions set forth in
Section 6.2(a) or 6.2(b) would not be satisfied, except for in each
case any untrue representation or warranty or breach of a covenant
or agreement that could not reasonably be expected to have a
Material Adverse Effect, (each a "COMPANY TERMINATING BREACH"),
provided, that, if such Company Terminating Breach is curable prior
to the date set forth in Section 7.1(b) by the Company through the
exercise of its reasonable best efforts and for so long as the
Company continues to exercise such reasonable best efforts, Parent
may not terminate this Agreement under this Section 7.1(f); or
(g) by the Company, (i) if any representation or warranty of Parent set
forth in this Agreement shall be untrue when made, or (ii) upon a
breach of any covenant or agreement on the part of Parent set forth
in this Agreement, such that the conditions set forth in Section
6.3(a) or 6.3(b) would not be satisfied, except for in each case any
untrue representation or warranty or breach of a covenant or
agreement that could not reasonably be expected to have a Material
Adverse Effect, (each a "PARENT TERMINATING BREACH"), provided that,
if such Parent Terminating Breach is curable prior to the date set
forth in Section 7.1(b) by Parent through the exercise of its
reasonable best efforts and for so long as Parent continues to
exercise such reasonable best efforts, the Company may not terminate
this Agreement under this Section 7.1(g).
7.2 Effect of Termination. In the event of the valid termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith
become null and void and there shall be no liability or obligation on
the part of any party hereto or any of its affiliates, directors,
officers or stockholders except (i) for the provisions of Sections 7.3
and 7.4 which shall survive any termination of this Agreement, and (ii)
nothing herein shall relieve any party from liability for any breach
hereof.
7.3Fees and Expenses.
Except as set forth in this Section 7.3, all fees and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that in the event the Merger is consummated,
the Company shall pay up to $310,000 of investment banking fees and up to
$400,000 of other fees and expenses (including legal and accounting fees)
incurred by the Company in connection with this Agreement and the consummation
of the Merger (collectively, the "COMPANY EXPENSES") and thereafter the
stockholders of the Company (other than Parent) shall be responsible for any
fees and expenses incurred in excess of such amount.
7.4 Confidentiality. In the event of the termination of this Agreement,
Parent will treat and hold as such all of the Confidential Information,
refrain from using any of the Confidential Information and deliver
promptly to the Company or destroy, at the request of the Company, all
tangible embodiments (and all copies) of the Confidential Information
which are in its personal possession. In the event that Parent is
requested or legally required (by oral question or request for
information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose
any Confidential Information, Parent will notify the Company promptly
of the request or requirement so that the Company may seek an
appropriate protective order or waive compliance with the provisions of
this Section 7.4. If, in the absence of a protective order or the
receipt of a waiver hereunder, Parent is, on the advise of counsel,
compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, Parent may disclose the Confidential
Information to the tribunal; provided, however, that Parent shall use
its best effort to obtain, at the request of the Company, an order or
other assurance that confidential treatment will be accorded to such
portion of the Confidential Information
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required to be disclosed as the Company shall designate. The Company
understands that Parent develops and acquires technology which may be
similar to that to be disclosed by the Company hereunder for its own
products, and that existing or planned technology independently
developed or acquired by Parent may contain ideas and concepts similar
or identical to those contained in the Company's Confidential
Information. The Company agrees that entering this Agreement shall not
preclude Parent from developing or acquiring technology similar to the
Company's, without obligation to the Company, provided Parent does not
breach its obligations to the Company under this Agreement or use the
Confidential Information to develop such technology. "Confidential
Information" means any and all information concerning the businesses and
affairs of the Company other than that information which is already
generally or readily obtainable by the public or is publicly known or
becomes publicly known through no fault of Parent.
VIII
GENERAL PROVISIONS
8.1 Indemnification.
(a) Charters and By-Laws. The Surviving Corporation agrees that all
rights to indemnification or exculpation now existing in favor of
the employees, agents, directors or officers of the Company (the
"COMPANY INDEMNIFIED PARTIES") as provided in its Charter or By-Laws
shall continue in full force and effect for a period of not less
than six years from the Closing Date; provided, however, that, in
the event any claim or claims are asserted or made within such six-
year period, all rights to indemnification in respect of any such
claim or claims shall continue until disposition of any and all such
claims. Any determination required to be made with respect to
whether a Company Indemnified Party's conduct complies with the
standards set forth in the charter or By-Laws of the Company or
otherwise shall be made by independent counsel selected by the
Company Indemnified Party reasonably satisfactory to the Surviving
Corporation (whose fees and expenses shall be paid by the Surviving
Corporation).
(b) Survival of Representations and Warranties. The representations and
warranties of the Company made in this Agreement (except for those
contained in Sections 2.4, 2.16 or 2.17) and in the documents and
certificates delivered pursuant to Article 6 and the representations
and warranties of Parent made in this Agreement and in the documents
and certificates delivered pursuant to Article 6 shall survive the
Merger for a period of fifteen (15) months from the Closing Date and
shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any other party hereto,
any person controlling any such party or any of their officers or
directors, whether prior to or after the execution of this
Agreement. Claims made within the applicable time periods set forth
above shall survive to the extent of such claim until such claim is
finally determined and, if applicable, paid. The representations and
warranties of the Company made in Sections 2.4, 2.16 and 2.17, as
well as claims by a Parent Indemnitee based upon fraud, shall
survive and continue in full force and effect until expiration of
the statutes of limitations applicable to the underlying claim.
(c) Indemnification of the Parent and Merger Sub. Subject to the
provisions of this Section 8.1, by their approval of this Agreement
and their acceptance of the Merger Consideration, the stockholders
of the Company other than the Parent (collectively, the
"INDEMNITORS") agree to indemnify, defend, protect, and hold
harmless each of Parent, Merger Sub, the Surviving Corporation and
each of their respective subsidiaries and affiliates (each in its
capacity as an indemnified party, a "PARENT INDEMNITEE") at all
times from and after the date of this Agreement from and against all
claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without
limitation, reasonable attorneys' fees and expenses of
investigation) (collectively "DAMAGES") incurred by such Parent
Indemnitee as a result of or incident to (i) any breach of any
representation or warranty of the
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Company set forth herein or in any certificate or other document
delivered pursuant to Article 6 (as such representation or warranty
would read if all qualifications as to knowledge, materiality and
Material Adverse Effect were deleted from it other than the
representations and warranties set forth in Section 2.8(a)) with
respect to which a claim for indemnification is brought by a Parent
Indemnitee within the applicable survival period described in Section
8.1(b), (ii) any breach or nonfulfillment by the Company, or any
noncompliance by the Company with, any covenant, agreement, or
obligation of the Company contained herein or in any certificate or
other document delivered pursuant to Article 5 or Article 6 except to
the extent waived by Parent, (iii) any claim by a holder or former
holder of the Company's capital stock or options, warrants or other
securities convertible into or exercisable for shares of the
Company's capital stock (the "CONVERTIBLE SECURITIES") or any other
person or entity, seeking to assert, or based upon: (A) ownership or
rights of ownership to any shares of capital stock of the Company;
(B) any rights of a stockholder of the Company (other than the right
to receive the Merger Consideration pursuant to this Agreement or
appraisal rights under the applicable provisions of the DGCL),
including any option, preemptive rights, or rights to notice or to
vote; or (C) any rights under the charter or bylaws of the Company.
Notwithstanding anything to the contrary in the foregoing, with
respect to Indemnitors' obligation to indemnify Parent Indemnitees
against Damages suffered by Parent Indemnitees in connection with any
infringement of third party intellectual property rights and arising
from a breach of the representations and warranties set forth in
Section 2.18, Indemnitors will have no obligation to indemnify Parent
Indemnitees for such Damages to the extent that such infringement (i)
arises out of the combination of any Company Intellectual Property
Rights with any other components or intellectual property rights
where the infringement would not have occurred but for such
combination (other than combinations developed or designed by Yago
prior to the Closing); or (ii) that is caused by any change or
modification made by Parent Indemnitees to any of the Company
Intellectual Property Rights.
(d) Escrow Fund. The shares to be held in Escrow (the "ESCROW SHARES")
shall be registered in the names of the stockholders of the Company,
but shall be deposited (together with assignments in blank executed
by the registered holder(s) of the Company) with the Escrow Agent,
such deposits to constitute, respectively, an escrow fund to be
governed by the terms set forth herein and in the Escrow Agreement
(the "ESCROW FUND"). The adoption and approval of this Agreement by
the Company's stockholders shall constitute approval of the Escrow
Agreement and of all of the arrangements relating thereto, including
without limitation the placement of the Escrow Shares in escrow and
the appointment of the Stockholder Representative to act for and on
behalf of the stockholders of the Company to give and receive
notices and communications, to authorize delivery of any of the
Escrow Shares from the Escrow Fund in satisfaction of claims by
Parent, to object to such deliveries, to agree to, negotiate and
enter into settlements and compromises of, and demand arbitration
and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions necessary or
appropriate in the judgment of such representative for the
accomplishment of the foregoing.
(e) Indemnification by Parent. Subject to the provisions of this Section
8.1, Parent agrees to indemnify the stockholders of the Company
(other than Parent) (the "STOCKHOLDER INDEMNITEES") after the
Effective Time from and against any and all Damages incurred or
suffered by the Stockholder Indemnitees as a result of or incident
to (i) any breach of any representation or warranty of Parent set
forth herein or in any certificate or other document delivered
pursuant to Article 6 (as such representation or warranty would read
if all qualifications as to knowledge, materiality and Material
Adverse Effect were deleted from it other than the representations
and warranties set forth in Section 3.7) with respect to which a
claim for indemnification is brought by such stockholders within the
applicable survival period described in Section 8.1(b), (ii) any
breach or nonfulfillment by Parent, or any noncompliance by Parent
with, any covenant, agreement, or obligation of Parent contained
herein or in any certificate or other document delivered pursuant to
Article 5 or Article 6 except to the extent waived by the Company
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(the "STOCKHOLDER DAMAGES"). Parent shall reimburse the Stockholder
Indemnitees for any Stockholder Damages to which this Section 8.1
relates only if a claim for indemnification is made by the
Stockholder Indemnitees within the survival period described in
Section 8.1(b); provided, however, that the aggregate liability of
Parent shall not exceed $35,000,000 (the "MAXIMUM LIABILITY").
(f) Third Person Claims. Promptly after an Parent Indemnitee has
received notice of or has knowledge of any claim by a person not a
party to this Agreement ("Third Person") or the commencement of any
action or proceeding by a Third Person, the Parent Indemnitee shall,
as a condition precedent to a claim with respect thereto being made
against the Escrow Agreement, give the Stockholder Representative
written notice of such claim or the commencement of such action or
proceeding; provided, however, that the failure to give such notice
will not effect the Parent Indemnities' right to indemnification
hereunder with respect to such claim, action or proceeding, except
to the extent that the Stockholder Representative has, or the,
Indemnitors have, been actually prejudiced as a result of such
failure. If the Stockholder Representative notifies the Parent
Indemnitee within thirty (30) days from the receipt of the foregoing
notice that he wishes to defend against the claim by the Third
Person and if the estimated amount of the claim, together with all
other claims made against the Escrow Funds that have not been
settled, is less than the remaining balance of the Escrow Funds,
then the Stockholder Representative shall have the right to assume
and control the defense of the claim by appropriate proceedings with
counsel reasonably acceptable to Parent Indemnitee, and the
Stockholder Representative shall be entitled to reimbursement out of
the Escrow Funds for such defense. The Parent Indemnitee may
participate in the defense, at its sole expense of any such claim
for which the Stockholder Representative shall have assumed the
defense pursuant to the preceding sentence; provided, however, that
the Parent Indemnitee shall control the defense of any claim or
proceeding that in the Parent Indemnitee's reasonable judgment could
have a material and adverse effect on the Parent Indemnitee's
business apart from the payment of money damages. The Parent
Indemnitee shall be entitled to indemnification for the reasonable
fees and expenses of its counsel for any period during which the
Stockholder Representative has not assumed the defense of any claim.
Whether or not the Stockholder Representative shall have assumed the
defense of any claim, neither the Parent Indemnitee nor the
Stockholder Representative shall make any settlement with respect to
any such claim, suit or proceeding without the prior consent of the
other, which consent shall not be unreasonably withheld or delayed.
It is understood and agreed that in situations where failure to
settle a claim expeditiously could have an adverse effect on the
party wishing to settle, the failure of the party controlling the
defense to act upon a request for consent to such settlement within
five business days of receipt of notice thereof shall be deemed to
constitute consent to such settlement for purposes of this Section
8.1, but shall not be dispositive of the amount of Damages as
between the stockholders of the Company and the Parent Indemnitee.
(g) Method of Payment. All claim by Parent Indemnitees for
indemnification shall be paid solely from the Escrow Funds and no
Parent Indemnitee shall have any rights other than to the Escrow
Funds. To the extent that Parent, Merger Sub, or, the Surviving
Corporation or another Parent Indemnitee makes a claim against the
Escrow Account pursuant to the Escrow Agreement, then for purposes
of such payment, the shares of Parent Common Stock shall be valued
at the average of the daily last sale price of the Parent Common
Stock on the New York Stock Exchange for the twenty consecutive
trading days ending on the date of payment.
(h) Limitations. The Indemnitors shall not be required to indemnify any
Parent Indemnitee except to the extent that Damages suffered by such
Parent Indemnitee, together with Damages suffered with respect to
all other claims for indemnification pursuant to this Agreement,
exceeds $667,000 (the "THRESHOLD"), provided, however, that after
such event the Indemnitors shall be required to pay 74.98% of all
amounts by which such aggregate amount of Damages exceed $250,000
(the "INDEMNITY BASKET") (net of any insurance proceeds actually
received by Parent).
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Notwithstanding the proviso in the immediately preceding sentence,
with respect to any Damages relating to litigation involving the
infringement of the intellectual property rights of any third party,
once the Threshold has been met with respect to all claims for
indemnification under this Section 8 the Indemnitors shall pay
twenty-five percent (25%) of the legal fees and expenses associated
with such litigation in excess of the Indemnity Basket; it being
expressly understood, however, that all other Damages relating to or
incurred in connection with such litigation shall be subject to the
immediately preceding sentence of this Section 8.1(h).
(i) No Contribution; Mitigation. The Indemnitors acknowledge and agree
that they shall not have and shall not exercise or assert any right
of contribution, indemnification, subrogation or other remedy or
right against the Surviving Corporation in connection with any
indemnification obligation or other liability to which they may
become subject under or in connection with this Agreement, the
Participation Agreement or any certificate or other document
delivered in connection herewith or therewith. The Parent
Indemnitees shall use all reasonable efforts to mitigate any
Damages. The Parent Indemnitees agree that the aggregate liability
of Indemnitors for Damages shall be the value of the Escrow Shares.
The Stockholder Indemnitees agree that the aggregate liability of
Parent for Stockholder Damages shall not exceed the Maximum
Liability. This Section 8 shall provide the sole and exclusive
remedy for any and all Damages or other liability sustained or
incurred by the Parent Indemnitees or by the Stockholder Indemnitees
or their successors and assigns in connection with this Agreement or
the transactions contemplated hereby, other than for equitable
action.
8.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given
or made if and when delivered personally or by overnight courier to the
parties at the following addresses or sent by electronic facsimile,
with confirmation received, to the telecopy numbers specified below (or
at such other address or telecopy number for a party as shall be
specified by like notice):
(a) If to Parent or Merger Sub:
Cabletron Systems, Inc.
35 Industrial Way
Rochester, NH 03866-5005
Telecopier No.: (603) 332-4616
Telephone No.: (603) 332-9400
Attention: Chief Financial Officer
With a copy to:
David A. Fine, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
Telecopier No.: (617) 951-7050
Telephone No.: (617) 951-7000
(b) If to the Company:
Yago Systems, Inc.
795 Vagueros Avenue
Sunnyvale, CA 94086
Attention: Piyush Patel
Telecopier No.: (408)774-2907
Telephone No.: (408)774-2900
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<PAGE>
With a copy to:
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, CA 95306
Attn: Allison Leopold Tilley, Esq.
Telecopier No.: (650)233-4545
Telephone No.: (650)233-4518
8.3 Cross Reference Table. The following terms defined elsewhere in this
Agreement in the Sections set forth shall have the respective meanings
therein defined:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
1996 Company Stock Option Plan............................... Section 1.6(e)
1996 Stock Option Agreements................................. Section 1.6(e)
1998 Company Stock Option Plan............................... Section 1.6(e)
1998 Stock Option Agreements................................. Section 1.6(e)
Acquisition Proposal......................................... Section 4.2(a)
Agreement.................................................... Preamble
Audited Financial Statements................................. Section 5.13
Balance Sheets............................................... Section 2.7(a)
Blue Sky Laws................................................ Section 2.5(d)
Certificate of Merger........................................ Section 1.2
Certificates................................................. Section 1.7(a)
Closing...................................................... Section 1.1(b)
Common Stock Warrant Section................................. 2.3
Company Common Stock......................................... Recitals
Company...................................................... Preamble
Company Identified Parties................................... Section 8.1(a)
Company Closing Certificate.................................. Section 1.1(e)
Company Disclosure Schedule.................................. Article II
Company Intellectual Property Rights......................... Section 2.18(a)
Company Terminating Breach................................... Section 7.1(f)
Company Employee Plans....................................... Section 2.11(a)
Company Permits.............................................. Section 2.6(b)
Company Dissenting Shares.................................... Section 1.6(c)
Company Expenses............................................. Section 7.3
Company Stock Option Plans................................... Section 1.6(e)
Conversion................................................... Section 6.2(i)
Convertible Securities....................................... Section 8.1(c)
Damages...................................................... Section 8.1(c)
Effective Time............................................... Section 1.2
End-User Licenses............................................ Section 2.18(b)
Environmental Laws........................................... Section 2.17
Equipment.................................................... Section 2.22
ERISA........................................................ Section 2.11(a)
Escrow Shares................................................ Section 8.1(d)
Escrow Agent................................................. Section 1.1(c)
Escrow Fund.................................................. Section 8.1(d)
Escrow Agent................................................. Section 1.1(c)
Exchange Agent............................................... Section 1.7(a)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Exchange Act.............................................. Section 2.5(d)
Financial Statements...................................... Section 2.7(a)
GAAP...................................................... Section 2.7(b)
Parent Indemnitee......................................... Section 8.1(c)
Indemnitors............................................... Section 8.1(c)
IRS....................................................... Section 2.16(a)
ISO....................................................... Section 2.11(c)
Laws...................................................... Section 2.5(c)
Leases.................................................... Section 2.22
Liens..................................................... Section 2.5(c)
Material Adverse Effect................................... Section 1.13
Maximum Liability......................................... Section 8.1(e)
Merger Sub................................................ Preamble
Merger.................................................... Preamble
Merger Consideration...................................... Section 1.7(b)
Parent.................................................... Preamble
Parent Terminating Breach................................. Section 7.1(g)
Parent Intellectual Property Rights....................... Section 3.14(a)
Parent Disclosures Schedules.............................. Article III
Parent Financial Statements............................... Section 3.6(b)
Parent SEC Reports........................................ Section 3.6(a)
Preferred Stock........................................... Section 1.1(e)
Proxy Statement/Prospectus................................ Section 2.13
Registration Statement.................................... Section 3.9
Repurchase Rights......................................... Section 1.6(e)(ii)
Requisite Approval........................................ Section 2.4
Rule 145.................................................. Section 5.5
Rule 145 Agreement........................................ Section 5.5
Securities Act............................................ Section 1.6(e)(v)
Securities Act............................................ Section 2.5(d)
Series A Warrant.......................................... Section 2.3
Series B Warrant.......................................... Section 2.3
Series B Preferred Stock.................................. Section 1.1(e)
Series A Preferred Stock.................................. Section 1.1(e)
Stock Option Agreements................................... Section 1.6(e)
Stockholder Damages....................................... Section 8.1(e)
Stockholder Representative................................ Section 1.1(d)
Surviving Corporation..................................... Section 1.1(a)
Tax....................................................... Section 2.16(a)
Tax Returns............................................... Section 2.16(a)
Taxes..................................................... Section 2.16(a)
Transfer Taxes............................................ Section 5.9
Unvested Shares........................................... Section 1.6(e)(ii)
Vested Shares............................................. Section 1.6(e)(ii)
Warrant Exercise.......................................... Section 6.2(i)
</TABLE>
8.4 Certain Definitions. The following terms shall have the following meanings
and, unless the context otherwise requires, words in the singular number
shall include the plural, and words in the plural numbers shall include
the singular:
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<PAGE>
(a) "affiliates" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person; including, without
limitation, any partnership or joint venture in which the first
mentioned person (either alone, or through or together with any other
subsidiary) has, directly or indirectly, an interest of 5% or more.
(b) "Average Price" means the average of the daily last sale prices for the
shares of Parent Common Stock during the Trading Period (as reported by
The Wall Street Journal or, if not reported thereby, any other
authoritative source selected by Parent and agreed to by the
Stockholder Representative).
(c) "Bankruptcy" shall mean (a) the filing by an entity of a voluntary
petition seeking liquidation under any applicable United States or
other insolvency law, or such entity's filing an answer consenting to
or acquiescing in any such petition; (b) the making by such entity of
any assignment for the benefit of its creditors; or (c) the expiration
of sixty (60) days after the filing of an application for the
appointment of a receiver for the assets of such entity or an
involuntary petition seeking liquidation, reorganization, arrangement
or readjustment of its debts under any applicable United States or
other insolvency law, provided that the same shall not have been
vacated, set aside or stayed within such sixty-day period.
(d) "beneficial owner" with respect to any shares of Company Common Stock
means a person who shall be deemed to be the beneficial owner of such
shares (i) which such person or any of its affiliates or associates (as
such term is defined in Rule 12b-2 of the Exchange Act) beneficially
owns, directly or indirectly, (ii) which such person or any of its
affiliates or associates has, directly or indirectly, (A) the right to
acquire (whether such right is exercisable immediately or subject only
to the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding, or (iii) which
are beneficially owned, directly or indirectly, by any other persons
with whom such person or any of its affiliates or associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares.
(e) "business day" means any day other than a Saturday or Sunday or any day
on which banks in The Commonwealth of Massachusetts or the State of
California are required or authorized to be closed.
(f) "Change in Control" means a "Change of Control" transaction shall be
defined as the occurrence of any one of the following events: (i) the
consummation of the acquisition of more than fifty percent (50%) of the
outstanding voting stock of Parent by one person or by two or more
persons acting as a partnership, limited partnership, syndicate or
other group (other than a tender offer by Parent); (ii) the
consummation of a merger, consolidation or other reorganization of
Parent (other than a reincorporation of Parent in another
jurisdiction), as a result of which more than fifty percent (50%) of
Parent's outstanding voting stock is transferred to holders different
from those who held the stock immediately prior to such merger of
consolidation; (iii) the sale, transfer or other disposition of all or
substantially all of the assets of Parent to a third party who is not
an affiliate (including a parent or subsidiary) of Parent; or (iv) the
Bankruptcy of Parent.
(g) "Contingent Exchange Ratio" equals the ratio of (i) $35.00 reduced (but
not below zero) by the Average Price divided by (ii) the Average Price;
provided, however, that in the event that the total number of
Contingent Shares issuable would exceed 5,500,000 shares (assuming for
purposes hereof that any and all shares of Parent Common Stock
repurchased pursuant to Repurchase Rights of Parent are outstanding in
making such determination), the Contingent Exchange Ratio shall be
reduced such that the total number of Contingent Shares issuable upon
such Issuance Event equals 5,500,000 shares of Parent Common Stock.
(h) "Contingent Shares" means collectively the shares of Parent Common
Stock issuable pursuant to the first sentence of Section 1.6(h) and the
additional shares of Parent Common Stock that are issuable under the
1996 Stock Option Agreements pursuant to the second sentence of Section
1.6(h); provided, however, that the number of Contingent Shares shall
not in any event exceed 5,500,000 shares of Parent Common Stock.
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<PAGE>
(i) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership
of stock, as trustee or executor, by contract or credit arrangement or
otherwise.
(j) "Eighteen Month Anniversary" means the 540th calendar day after the
Closing.
(k) "Founder Stock Purchase Agreement" means any of the Founder's Stock
Purchase Agreements entered into between the Company and Piyush Patel,
Romulus Pereira or Nilesh Shah, respectively, and dated on or about
September 10, 1996.
(l) "Initial Exchange Ratio" shall be calculated as set forth on Schedule
1.6(a) hereto.
(m) "Initial Holder" means a person to whom Initial Shares were directly
issued by Parent pursuant to Section 1.6(a)(i) or, following the
Effective Time, were issuable pursuant to 1996 Stock Option Agreements.
(n) "Initial Shares" means the shares of Parent Common Stock issuable
pursuant to Section 1.6(a) and the shares of Parent Common Stock that
are issuable under the 1996 Stock Option Agreements pursuant to Section
1.6(e)(i) immediately following the Effective Time, provided, however
that the number of Initial Shares shall not in any event exceed
6,100,000 shares of Parent Common Stock.
(o) "Issuance Event" means the earliest to occur of the following two
events: (i) on the Eighteen Month Anniversary, the Average Price of the
Parent Common Stock on the New York Stock Exchange is less than $35.00
and (ii) on a date after the Effective Time but prior to the Eighteen
Month Anniversary, a Change of Control of Parent occurs.
(p) "Parent Common Stock" means the Common Stock, $.01 par value, of
Parent.
(q) "Parent Shares" means the Initial Shares and, if applicable, the
Contingent Shares.
(r) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined
in Section 13(d)(3) of the Exchange Act).
(s) "Stockholder" means a holder of outstanding shares of Company Common
Stock at the Effective Time.
(t) "Trading Period" means, for an Issuance Event described in Section
8.4(m)(i), the twenty (20) consecutive trading days on which shares of
Parent Common Stock are actually traded on the New York Stock Exchange
(or any other exchange or stock market on which the Parent Common Stock
is traded) ending on the Eighteen Month Anniversary (or, if such date
is not a trading day, the next trading day thereafter), and for an
Issuance Event described in Section 8.4(m)(ii), the forty (40)
consecutive trading days on which shares of Parent Common Stock are
actually traded on the New York Stock Exchange ending on the date that
Parent publicly announces such Change in Control (or, if such date is
not a trading day, the next trading day thereafter).
(u) "subsidiary" or "subsidiaries" of the Parent or any other person means
any corporation, partnership, joint venture or other legal entity of
which the Surviving Corporation, Parent or such other person, as the
case may be (either alone or through or together with any other
subsidiary), owns, directly or indirectly, more than 50% of the stock
or other equity interests the holders of which are generally entitled
to vote for the election of the board of directors or other governing
body of such corporation or other legal entity.
8.5 Amendment. This Agreement may be amended by the parties hereto by action
taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of
the Merger by the stockholders of the Company, no amendment may be made
which by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
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<PAGE>
8.6 Waiver. At any time prior to the Effective Time, any party hereto may
with respect to any other party hereto (a) extend the time for the
performance of any of the obligations or other acts, (b) waive any
inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto, or (c) waive compliance with any
of the agreements or conditions contained herein. Any such extension or
waiver shall be valid only if set forth in an instrument in writing signed
by the party or parties to be bound thereby.
8.7 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.8 Severability. If any term or other provision of this Agreement is deemed
invalid, illegal or incapable of being enforced by any rule of law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in
an acceptable manner to the end that the transactions contemplated hereby
are fulfilled to the fullest extent possible.
8.9 Entire Agreement. This Agreement and all Schedules and exhibits hereto
constitute the entire agreement and supersedes all prior agreements and
undertakings, both written and oral, among the parties, or any of them,
with respect to the subject matter hereof.
8.10 Assignment. This Agreement shall not be assigned by operation of law or
otherwise, except that Parent and Merger Sub may assign all or any of
their rights hereunder to any affiliate thereof provided that no such
assignment shall relieve the assigning party of its obligations
hereunder.
8.11 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of and is enforceable by each party hereto, and
nothing in this Agreement, express or implied, is intended to or shall
confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, including, without
limitation, by way of subrogation, other than Section 8.1(a) (which is
intended to be for the benefit of the Indemnified Parties and may be
enforced by such Indemnified Parties).
8.12 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or of any other right. All
rights and remedies existing under this Agreement are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
8.13 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware applicable to
contracts executed and fully performed within the State of Delaware.
8.14 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CABLETRON SYSTEMS, INC.
/s/ Donald B. Reed
By:__________________________________
Name: Donald B. Reed
Title: Chief Executive Officer and
President
CABLETRON MERGER, INC.
/s/ David J. Kirkpatrick
By:_________________________________
Name: David J. Kirkpatrick
Title: Treasurer
YAGO SYSTEMS, INC.
/s/ Piyush Patel
By:__________________________________
Name: Piyush Patel
Title: President
A-39
<PAGE>
Schedule 1.6(a)
CALCULATION OF INITIAL EXCHANGE RATIO
At the Effective Time, each Initial Holder shall be entitled to receive that
number of Initial Shares (rounded up to the nearest whole number) in exchange
for each share of Company Common Stock owned by such Initial Holder, which
shall be equal to X (the "Initial Exchange Ratio") in the following formula:
X = 6,100,000
-----------------
Y
Where Y = Total number of shares of Company Common Stock outstanding at the
Effective Time, assuming the prior conversion of all outstanding options,
warrants, preferred stock and other securities convertible, exchangeable or
exercisable into shares of Company Common Stock, but excluding all such
securities owned by Parent and all shares of Company Common Stock issuable
upon exercise of the 1998 Stock Option Agreements.
In no event will the total number of Initial Shares issued by Parent exceed
6,100,000 shares.
All terms used herein but not otherwise defined herein shall have the
meanings set forth in the Merger Agreement.
A-40
<PAGE>
AMENDMENT NO. 1
dated March 2, 1998
to
AGREEMENT AND PLAN OF MERGER
dated January 14, 1998
by and among
CABLETRON SYSTEMS, INC.,
a Delaware corporation ("Parent"),
CABLETRON MERGER, INC.,
a Delaware corporation ("Merger Sub"),
and
YAGO SYSTEMS, INC.,
a Delaware corporation ("Yago"),
INTRODUCTION
This Amendment No. 1 is to the Agreement and Plan of Merger (the "Plan of
Merger") dated January 14, 1998, by and among Cabletron Systems, Inc., a
Delaware corporation ("Parent"), Cabletron Merger, Inc., a Delaware
corporation ("Merger Sub"), and Yago Systems, Inc. (the "Company").
WHEREAS, the parties hereto wish to amend the Plan of Merger pursuant to
Section 8.5 to more accurately reflect the Repurchase Rights of Cabletron and
the representations and warranties of the Company and to make certain other
changes as set forth therein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Stock Options; Repurchase Rights. Section 1.6(e)(ii) of the Plan of Merger
is hereby amended and restated in its entirety to read as follows:
"(ii) Pursuant to the 1996 Stock Option Agreements and the Founder Stock
Purchase Agreements, any Parent Shares (A) issued in exchange for shares of
Company Common Stock issued prior to the Effective Time pursuant to 1996
Stock Option Agreements or subject to Founder Stock Purchase Agreements and
(B) issued after the Effective Time pursuant to the 1996 Stock Option
Agreements, shall be subject to the repurchase rights granted to the
Company and transferred to the Parent under such Founder Stock Purchase
Agreements or such 1996 Stock Option Agreements, as the case may be (the
"REPURCHASE RIGHTS"). The Repurchase Rights shall lapse in accordance with
the vesting schedules set forth in such Founder Stock Purchase Agreements
or 1996 Stock Option Agreements. Parent Shares with respect to which the
Repurchase Rights have lapsed are referred to herein as "VESTED SHARES;"
Parent Shares with respect to which the Repurchase Rights have not lapsed
are referred to herein as "UNVESTED SHARES." The price to be paid by Parent
pursuant to the Repurchase Rights for each Parent Share repurchased shall
equal (A) with respect to Parent Shares issued in exchange for shares of
Company Common Stock issued prior to the Effective Time, (1) the price
originally paid to purchase such underlying share of Company Common Stock
A-41
<PAGE>
pursuant to the applicable Founder Stock Purchase Agreement or 1996 Stock
Option Agreement, as the case may be, divided by (2) either (x) the Initial
Exchange Ratio or (y) if any Contingent Shares shall have been issued, the
sum of (aa) the Initial Exchange Ratio and (bb) the product of the Initial
Exchange Ratio and the Contingent Exchange Ratio and (B) with respect to
Parent Shares issued pursuant to a 1996 Stock Option Agreement after the
Effective Time and Contingent Shares issued in respect of the shares of
Parent Common Stock issued thereunder, (i) if no Contingent Shares have
been issued or if the purchase of such Parent Shares pursuant to the
exercise of the 1996 Stock Option Agreement occurred after the date of
issuance of any Contingent Shares, the price paid per Parent Share and (ii)
if Contingent Shares have been issued subsequent to the purchase of the
Parent Shares pursuant to the exercise of the 1996 Stock Option Agreement,
the price paid per Parent Share divided by the sum of one plus the
contingent Exchange Ratio."
2. Stock Options; Repurchase Rights. Section 1.6(h)(i) of the Plan of Merger
is hereby amended and restated in its entirety to read as follows:
"(i) Subject to this Section 1.6(h) and the other provisions of this
Agreement, in the event an Issuance Event shall occur, each Initial Holder
shall be entitled to receive, in respect of each share of Parent Common
Stock constituting an Initial Share originally issued to such Initial
Holder pursuant to Section 1.6(a) hereof or upon exercise (in whole or in
part) of a 1996 Stock Option Agreement referred to in Section 1.6(e), a
number of shares of Parent Common Stock equal to the Contingent Exchange
Ratio. Upon such Issuance Event, by virtue of such Issuance Event and
without any further action on the part of the holders thereof, each 1996
Stock Option Agreement referred to in Section 1.6(e) hereof shall be deemed
amended such that (A) the holder thereof shall be entitled to receive an
additional number of shares of Parent Common Stock thereunder equal to the
product (rounded down to the nearest whole number) of (1) the remaining
number of shares of Parent Common Stock issuable upon exercise in full of
such 1996 Stock Option Agreement at the time of the Issuance Event and (2)
the Contingent Exchange Ratio and (B) the exercise price for each share of
Parent Common Stock thereunder shall be reduced to equal (1) the aggregate
exercise price for the remaining shares of Company Common Stock issuable
upon exercise in full of such 1996 Stock Option Agreement immediately prior
to such Issuance Event divided by (y) the sum of the number of shares of
Company Common Stock issuable upon exercise in full of such 1996 Stock
Option Agreement immediately prior to such Issuance Event and the number of
shares of Parent Common Stock calculated in accordance with clause (A)
above."
3. Exchange of Certificates. The last sentence of Section 1.7(b) of the Plan
of Merger is hereby amended and restated in its entirety to read as follows:
"In addition, Parent shall cause the Exchange Agent to mail to each Initial
Holder certificates representing the Contingent Shares (i) with respect to an
Issuance Event other than a Change in Control, within two (2) Business Days
after such Issuance Event and (ii) with respect to an Issuance Event as a
result of a Change in Control, immediately prior to such Issuance Event."
4. Representation and Warranties; Capitalization. Section 2.3 of the Plan of
Merger is hereby amended and restated in its entirety to read as follows:
"The authorized capital stock of the Company consists of 25,000,000 shares of
Company Common Stock and 10,060,000 shares of Preferred Stock. As of the
date hereof, (a) 10,688,000 shares of Company Common Stock, 4,266,000
shares of Series A Preferred Stock and 2,578,948 shares of Series B
Preferred Stock, respectively, were issued and outstanding, all of which
are validly issued, fully paid and nonassessable, and no shares were held
in treasury, (b) (i) 221,983 shares of Company Common Stock were reserved
for future issuance pursuant to outstanding stock options granted under the
1996 Company Stock Option Plan, (ii) 4,394,549 shares of Company Common
Stock were reserved for future issuance pursuant to outstanding stock
options granted under the 1998 Company Stock Option Plan, (c) 7,059,824
shares of Company Common Stock were reserved for issuance pursuant to the
conversion of the shares of Preferred
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<PAGE>
Stock outstanding on the date hereof and the shares of Preferred Stock
issuable upon the exercise of the Series A Warrant and the Series B Warrant
(as defined below) and (d) 170,666 shares of Series A Preferred Stock were
reserved for issuance pursuant to the Series A Preferred Stock Purchase
Warrant dated as of June 12, 1997 (the "SERIES A WARRANT"). Upon the
conversion of the shares of Preferred Stock outstanding on the date hereof
and the shares of Preferred Stock issuable upon the exercise of the Series
A Warrant, there will be outstanding 17,703,614 shares of Company Common
Stock. As of the date hereof, 44,210 shares of Series B Preferred Stock
were reserved for issuance pursuant to the Series B Preferred Stock
Purchase Warrant dated as of June 12, 1997 (the "SERIES B. WARRANT").
Except as set forth in Section 2.3 of the Company Disclosure Schedule,
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital
stock of the Company or obligating the Company or any of its subsidiaries
to issue or sell any shares of capital stock of, or other equity interests
in, the Company. All shares of the capital stock of the Company subject to
issuance as aforesaid, upon issuance on the terms and conditions specified
in the instruments pursuant to which they are issuable, shall be duly
authorized, validly issued, fully paid and nonassessable. Except as
disclosed in Section 2.3 of the Company Disclosure Schedule, there are no
obligations, contingent or otherwise, of the Company to repurchase, redeem
or otherwise acquire any shares of Company Common Stock or to provide funds
to or make any investment (in the form of a loan, capital contribution,
guaranty or otherwise) in any other entity. The vesting schedules of the
Repurchase Rights under the Stock Option Agreements granted under the 1996
Stock Option Plan are as set forth in the copies of the Stock Option
Agreements previously provided to Parent. The options under the 1998 Stock
Option Agreements shall vest 1/48th per month for the first three years
after the date of grant and 1/4 on the fourth anniversary of the grant
date. The exercise price per share of Company Common Stock pursuant to the
1998 Stock Option Agreements is $6.14. All of the 1998 Stock Option
Agreements and the 1998 Common Stock Option Plan are identical (other than
with respect to the name of the optionee and the number of shares) to the
form of Parent stock option agreement and stock option plan previously
provided by Parent to Company, subject to any mutually agreeable changes.
All of the 1996 Stock Option Agreements are identical (other than with
respect to the name of the optionee and the number of shares) to the forms
of 1996 Stock Option Agreements previously provided to Parent."
5. Indemnification by Parent. Section 8.1(e) of the Plan of Merger is hereby
amended by adding to the end thereof the following sentence:
"All payments by Parent to the Stockholder Indemnitees pursuant to this
Section 8.1(e) shall be made solely in shares of Parent Common Stock, such
shares of Parent Common Stock to be valued at the average of the daily last
sale price of the Parent Common Stock on the New York Stock Exchange for the
twenty consecutive trading days ending on the date of payment."
6. Further Action/Tax Treatment. Section 5.7 of the Plan of Merger is hereby
amended by adding as the penultimate sentence thereto the following sentence:
"In additional, Parent shall use all reasonable efforts to take, or cause to
be taken, all actions, if any, which are necessary to maintain the
qualification of the transaction effected by the Merger as a reorganization
under the provisions of Section 368 of the Code."
7. Notices. The address of the Company in Section 8.2 of the Plan of Merger
is hereby amended and restated in its entirety to read as follows:
Yago Systems, Inc.
795 Vaqueros Avenue
Sunnyvale, CA 94086
Attention: Piyush Patel
8. Governing Law. This Amendment shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware.
A-43
<PAGE>
9. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
10. Miscellaneous. Except as specifically provided herein, this Amendment
shall not be construed to amend, waive, modify or otherwise compromise any
rights of any of the parties under the Plan of Merger.
11. Counterparts. This Amendment may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
instrument, and any one of the parties hereto may execute this Amendment by
signing any counterpart.
IN WITNESS WHEREOF, the parties have caused this Amendment, which shall be
effective upon execution by (i) the Company, (ii) Parent and (iii) Merger Sub.
COMPANY:
YAGO SYSTEMS, INC.
By /s/ Piyush Patel
_______________________________
Name: Piyush Patel
Title: President
PARENT:
CABLETRON SYSTEMS, INC.
By /s/ David J. Kirkpatrick
_______________________________
Name: David J. Kirkpatrick
Title: Chief Financial Officer
MERGER SUB:
CABLETRON MERGER, INC.
By /s/ David J. Kirkpatrick
_______________________________
Name: David J. Kirkpatrick
Title: Treasurer
A-44
<PAGE>
ANNEX B
(S) 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
"stock" and "share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to
subsection (g) of Section 251), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or
(S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except: (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository
receipts in respect thereof; (ii) shares of stock of any other corporation,
or depository receipts in respect thereof, which shares of stock or
depository receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders; (iii) cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs (i) and (ii)
of this paragraph; or (iv) any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs (i), (ii) and
(iii) of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
B-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section, provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty day after the date of
mailing such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholders and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holders shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
B-2
<PAGE>
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation.Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation
B-3
<PAGE>
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
B-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative (other than an
action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful. Section 145 further provides that a corporation similarly may
indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses actually and reasonably incurred in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such
other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to include in its certificate of incorporation a
provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law
(relating to unlawful payment of dividends and unlawful stock purchase and
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.
The Registrant's Restated Certificate of Incorporation provides that the
Registrant's Directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
the Delaware General Corporation Law as in effect at the time such liability
is determined. The Restated Certificate of Incorporation further provides that
the Registrant shall indemnify its directors and officers to the full extent
permitted by the law of the State of Delaware.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following Exhibits are filed with, or incorporated by reference in,
this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1+ Agreement and Plan of Merger by and among the Registrant, Cabletron
Merger, Inc. and Yago Systems, Inc. ("Yago") dated as of January 14,
1998 (the "Merger Agreement") (ANNEX A to the Proxy
Statement/Prospectus contained in this Registrant Statement). The
Exhibits to the Merger Agreement and the Disclosure Schedules of the
Registrant and of Yago are not included with the Merger Agreement.
2.2 Amendment No. 1 to the Merger Agreement by and among the Registrant,
Cabletron Merger, Inc. and Yago dated as of March 2, 1998 (ANNEX A to
the Proxy Statement/Prospectus contained in this Registration
Statement).
3.1 Restated Certificate of Incorporation of Cabletron Systems, Inc., a
Delaware corporation (Incorporated by Reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1,No. 33-28055).
3.2 Certificate of Correction of the Registrant's Restated Certificate of
Incorporation (Incorporated by Reference to Exhibit 3.1.2 of the
Registrant's Registration Statement on Form S-1, No. 33-42534).
3.3 Certificate of Amendment of the Restated Certificate of Incorporation
of Cabletron Systems, Inc. (Incorporated by Reference to Exhibit 4.3
of the Registrant's Registration Statement on Form S-3, No. 33-54466).
3.4 Amended Bylaws of Cabletron Systems, Inc. (Incorporated by Reference
to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1,
No. 33-42534).
4.1 Specimen Stock Certificate of Cabletron Common Stock (Incorporated by
Reference to Exhibit 4.1 of Cabletron's Registration Statement on Form
S-1, No. 33-28055).
5.1+ Opinion of Ropes & Gray.
8.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1 Asset Purchase Agreement among the Registrant, Ctron Acquisition, Inc.
and Digital Equipment Corporation ("Digital") dated as of November 24,
1997 (the "Asset Purchase Agreement") (Incorporated by Reference to
Exhibit 2.1 of the Registrant's Form 10-Q of January 14, 1998).
10.2 Reseller and Services Agreement dated as of November 24, 1997 between
the Registrant and Digital (the "Reseller Agreement") (Incorporated by
Reference to Exhibit 10.1 of the Registrant's Form 10-Q of January 14,
1998).
10.3 Employment Agreement between the Registrant and Donald B. Reed dated
as of August 6, 1997 (Incorporated by Reference to Exhibit 10.1 of the
Registrant's Form 10-Q of October 15, 1997).
10.4 Asset Purchase Agreement Among the Registrant, Cabletron Systems
Acquisition, Inc., SMC Enterprise Networks, Inc., and Standard
Microsystems Corporation dated as of January 9, 1996 (Incorporated by
Reference to Exhibit 2.1 of the Registrant's Form 8-K of January 12,
1996).
10.5 First Amendment to Asset Purchase Agreement dated as of February 7,
1998 by and among the Registrant, Ctron Acquisition, Inc. and Digital
(Incorporated by Reference to Exhibit 2.2 of the Registrant's Form 8-
K/A of March 4, 1998).
10.6 Amendment No. One to Reseller Agreement dated as of February 7, 1998
by and between the Registrant and Digital (Incorporated by Reference
to Exhibit 10.2 of the Registrant's Form 8-K/A of March 4, 1998).
23.1+ Consent of Ropes & Gray (Exhibit 5.1).
23.2+ Consent of Pillsbury Madison & Sutro LLP (Exhibit 8.1).
23.3 Consent of KPMG Peat Marwick LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of Coopers & Lybrand L.L.P.
24+ Power of Attorney.
99.1 Form of Written Consent.
</TABLE>
- --------
+ Previously Filed.
(b) The following Financial Statement Schedules of the Registrant for the
Three Years Ended February 28, 1997 are included in this Registration
Statement:
Schedule II - Valuation and Qualifying Accounts of Cabletron Systems, Inc.
for the three years ended February 28, 1997. All other schedules are omitted
because they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to the immediately preceding paragraph, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(4) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(5) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWN OF ROCHESTER, STATE OF NEW HAMPSHIRE.
Cabletron Systems, Inc.
By: /s/ David J. Kirkpatrick
_____________________________________
David J. Kirkpatrick
Senior Vice President and Chief
Financial Officer
Dated: March 9, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MARCH 9, 1998 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
* President, Chief Executive Officer (Principal
____________________________________ Executive Officer) and Director
Donald B. Reed
/s/ David J. Kirkpatrick Senior Vice President and Chief Financial
____________________________________ Officer (Principal Financial and Accounting
Officer)
David J. Kirkpatrick
* Chairman and Director
____________________________________
Craig R. Benson
* Director
____________________________________
Michael D. Myerow
* Director
____________________________________
Paul R. Duncan
* Director
____________________________________
Donald F. McGuinness
*By: /s/ David J. Kirkpatrick
_______________________________
DAVID J. KIRKPATRICK, ATTORNEY-
IN-FACT
</TABLE>
II-4
<PAGE>
SCHEDULE II
CABLETRON SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNTS
ATTRIBUTABLE
BALANCE TO CHANGES BALANCE
AT IN FOREIGN AMOUNTS AT END
BEGINNING CHARGED TO CURRENCY WRITTEN OF
DESCRIPTION OF PERIOD EXPENSE RATES OFF PERIOD
- ----------- --------- ---------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful ac-
counts
February 28, 1997.......... $6,655 $10,698 $(1) $(1,876) $15,476
February 29, 1996.......... $6,190 $ 2,725 $ 1 $(2,261) $ 6,655
February 28, 1995.......... $6,066 $ 124 -- -- $ 6,190
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1+ Agreement and Plan of Merger by and among the Registrant, Cabletron
Merger, Inc.. and Yago Systems, Inc. ("Yago") dated as of January 14,
1998, as amended (the "Merger Agreement") (ANNEX A to the Proxy
Statement/Prospectus contained in this Registrant Statement). The
Exhibits to the Merger Agreement and the Disclosure Schedules of the
Registrant and of Yago are not included with the Merger Agreement.
2.2 Amendment No. 1 to the Merger Agreement by and among the Registrant,
Cabletron Merger, Inc. and Yago dated as of March 2, 1998 (ANNEX A to
the Proxy Statement/Prospectus contained in this Registration
Statement).
5.1+ Opinion of Ropes & Gray.
8.1 Opinion of Pillsbury Madison & Sutro LLP.
23.1+ Consent of Ropes & Gray (Exhibit 5.1).
23.2+ Consent of Pillsbury Madison & Sutro LLP (Exhibit 8.1).
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of Coopers & Lybrand L.L.P.
24+ Power of Attorney.
99.1 Form of Written Consent.
</TABLE>
- --------
+Previously Filed.
<PAGE>
EXHIBIT 8.1
OPINION OF PILLSBURY MADISON & SUTRO LLP
March 9, 1998
Yago Systems, Inc.
795 Vaqueros Avenue
Sunnyvale, CA 94086
Cabletron Systems, Inc.
35 Industrial Way
Rochester, New Hampshire 03867
Ladies and Gentlemen:
With reference to Amendment No. 1 to the Registration Statement on Form S-4
(as amended by Amendment No. 1, the "Registration Statement") being filed by
Cabletron Systems, Inc., a Delaware corporation ("Cabletron"), with the
Securities and Exchange Commission in connection with the registration under
the Securities Act of 1933, as amended, of shares of Cabletron's common stock,
par value $0.01 per share, to be issued incident to the merger described in
the Registration Statement (the "Merger") of Cabletron Merger, Inc., a
Delaware corporation, with and into Yago Systems, Inc., a Delaware
corporation, in our opinion the discussion under the caption "The Merger--
Certain Federal Income Tax Consequences" in the Registration Statement sets
forth the material United States federal income tax considerations generally
applicable to the Merger.
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the use of our name in the Registration
Statement and in the Proxy Statement/Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
Pillsbury Madison & Sutro LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cabletron Systems, Inc.:
We consent to the use of our report included in the Registration Statement
on Form S-4 of Cabletron Systems, Inc., and to the reference to our firm under
the heading "Experts" in the related Proxy Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 9, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of Cabletron Inc. of our
report dated January 26, 1998 relating to the financial statements of Yago
Systems Inc., which appears in such Proxy Statement/Prospectus. We also
consent to the reference to us under the headings "Experts".
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Jose, California
March 10, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Proxy Statement/Prospectus constituting
part of this registration statement of Cabletron Systems, Inc. ("Cabletron")
on Amendment No. 1 to Form S-4 (File No. 333-46135 as filed on March 10, 1998)
of our report, which includes an explanatory paragraph, dated February 19,
1998, on our audit of the Statement of Assets Sold and Statement of Revenue
and Direct Operating Expenses (the "Statements") of the Network Products
Business of Digital Equipment Corporation (the "Business"), which report is
included in this Proxy Statement/Prospectus. The explanatory paragraph states
that the Statements were prepared to present the assets sold by the Business
to Cabletron and the revenue and direct operating expenses of the Business and
are not intended to be a complete presentation of the Business' financial
position or results of operations. We also consent to the reference to our
firm under the heading "Experts" in the Proxy Statement/Prospectus which is a
part of this registration.
Coopers & Lybrand
L.L.P.
Boston, Massachusetts
March 10, 1998
<PAGE>
EXHIBIT 99.1
YAGO SYSTEMS, INC.
WRITTEN CONSENT
The undersigned stockholders of Yago Systems, Inc. ("Yago") hereby consents
to the proposals set forth below in the manner indicated.
VOTING INSTRUCTION--ALL STOCKHOLDERS SHOULD VOTE ON ITEMS 1, 2 AND 3. IN
ADDITION, HOLDERS OF YAGO SERIES A PREFERRED STOCK SHOULD VOTE ON ITEM 4 AND
HOLDERS OF YAGO SERIES B PREFERRED STOCK SHOULD VOTE ON ITEM 5. WHERE A
SEPARATE VOTE OF ANY PARTICULAR CLASS OF STOCK OF YAGO IS REQUIRED, THIS
CONSENT SHALL BE TREATED AS A CLASS VOTE.
PLEASE RETURN YOUR COMPLETED PROXY TO: PIYUSH PATEL OR
PILLSBURY MADISON & SUTRO LLP; ATTENTION COLIN MORRIS
(FACSIMILE: 650-233-4545) A POSTAGE-PAID RETURN ENVELOPE HAS
BEEN INCLUDED FOR YOUR CONVENIENCE.
TO ALL YAGO STOCKHOLDERS, PLEASE MARK VOTES, AS IN THIS
EXAMPLE [X]
1. To approve and adopt the Agreement and Plan of Merger, as amended (the
"Plan of Merger"), dated as of January 14, 1998 by and among Cabletron
Systems, Inc. ("Cabletron"), Cabletron Merger, Inc. ("Merger Sub") and
Yago, and to approve the merger (the "Merger") of Merger Sub, a wholly
owned subsidiary of Cabletron, with and into Yago pursuant to the Plan of
Merger by which Yago would become a wholly owned subsidiary of Cabletron.
[_] FOR [_] AGAINST
2. To approve and adopt the Escrow Agreement and appoint Piyush Patel as the
Stockholder Representative.
[_] FOR [_] AGAINST
3. To approve and adopt the Yago 1998 Stock Option Plan.
[_] FOR [_] AGAINST
4. To convert immediately prior to the Merger each share of Yago Series A
Preferred Stock into one share of Yago Common Stock.
[_] FOR [_] AGAINST
5. To convert immediately prior to the Merger each share of Yago Series B
Preferred Stock into one share of Yago Common Stock.
[_] FOR [_] AGAINST
THE SHARES REPRESENTED BY THIS CONSENT WILL BE TREATED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN AND THIS CONSENT IS PROPERLY SIGNED AND DELIVERED TO YAGO,
WILL BE TREATED AS CONSENTING "IN FAVOR" OF THE PROPOSALS IN ITEMS 1, 2, 3, 4
AND 5, AS APPLICABLE.
[_] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW
_______________________________________________________________
_______________________________________________________________
If signing as attorney, executor, trustee or guardian, please give your full
title as such. If stock is held jointly, each owner should sign.
Dated: March , 1998
- ------------------------------------- -------------------------------------
(Please Type or Print Name) (Please Type or Print Name)
- ------------------------------------- -------------------------------------
(Signature) (Signature)
