SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . to . . . .
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
35 Industrial Way, Rochester, New Hampshire 03867
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (603) 332-9400
Securities registered pursuant to Section 12(b)of the Act:
Title of each class: Common Stock, Name of each exchange on which registered:
$0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g)of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 11, 1998, 164,414,776 shares of the Registrant's common stock were
outstanding. The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of May 11, 1998 was approximately $2.1
billion.
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (229.405) is not contained herein and will not be contained,
to the best of the registrant's knowledge, in definitive proxy for information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Part III Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 1998 Annual Meeting of Stockholders.
<PAGE>
This Amendment on Form 10-K/A amends Items 3, 6, 7, 8 and 14 of the Company's
Annual Report on Form 10-K previously filed for the year ended February 28,
1998. This Annual Report on Form 10-K/A is filed in connection with the
Company's restatement of its financial statements. Financial statement
information and related disclosures included in this amended filing reflect,
where appropriate, changes as a result of the restatements. All other
information contained in this Annual Report on Form 10-K/A is as the date of the
original filing.
TABLE OF CONTENTS
PART I
Item Page(s)
---- -------
3. Legal Proceedings 2
PART II
6. Selected Financial Data 4 - 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 16
8. Consolidated Financial Statements and Supplementary Data 17 - 37
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 10-K 40
<PAGE>
PART I
ITEM 3. 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 complaint also alleges that
certain of the Company's alleged accounting practices resulted in the disclosure
of materially misleading financial results during the same period. More
specifically, the complaint challenged the Company's revenue recognition
policies, accounting for product returns, and the validity of certain sales. The
complaint does 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.
<PAGE>
ITEM 6. Selected Financial Data
CABLETRON SYSTEMS, INC.
Statement of Operations Data:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Net sales ........................... $ 1,377,330 $ 1,406,552 $ 1,100,349 $ 833,218 $ 602,486
Cost of sales ....................... 676,291 595,407 448,699 340,424 246,154
Research and development ............ 181,777 161,674 127,289 89,129 61,456
Selling, general and administrative . 373,789 301,469 223,083 166,649 118,373
Special charges ..................... 234,285 21,724 94,343 --- ---
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ...... (88,812) 326,278 206,935 237,016 176,503
Interest income ..................... 18,578 19,422 17,891 5,572 5,948
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes .......... (70,234) 345,700 224,826 242,588 182,451
Income tax expense (benefit) ........ (35,273) 119,621 80,341 86,014 64,130
----------- ----------- ----------- ----------- -----------
Net income (loss) ................... ($ 34,961) $ 226,079 $ 144,485 $ 156,574 $ 118,321
=========== =========== =========== =========== ===========
Net income (loss) per share - basic . ($ 0.22) $ 1.46 $ 0.95 $ 1.08 $ 0.82
=========== =========== =========== =========== ===========
Net income (loss) per share - diluted ($ 0.22) $ 1.42 $ 0.93 $ 1.07 $ 0.81
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding - basic ............. 157,686 155,207 151,525 145,125 143,692
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding - diluted ........... 157,686 158,933 155,171 147,017 146,567
=========== =========== =========== =========== ===========
</TABLE>
Note: Included in fiscal 1998 results are special charges related to the
in-process research and development expenses for the acquisition of Digital's
Network Products Group and the implementation of a strategic realignment plan
consisting of $121.8 million and $21.5 million, respectively (net of tax).
Included in fiscal 1997 and fiscal 1996 results are $13.5 million and $60.8
million (net of tax) of special charge items related to all acquisitions for
each fiscal year, respectively. Excluding these one-time charges, pro forma net
income and diluted net income per share are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
(in thousands, except per share data) ---------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
-------------- -------------- --------------
(Restated) (Restated)
<S> <C> <C> <C>
Pro forma net income $108,339 $239,579 $205,285
Pro forma diluted net income per share $ 0.68 $ 1.51 $ 1.32
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: February 28, February 28, February 29, February 28, February 28,
(in thousands) 1998 1997 1996 1995 1994
------------ ------------ ----------- ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Working capital $ 593,046 $ 679,056 $485,152 $381,758 $258,463
Total assets 1,682,048 1,310,809 996,908 702,200 502,377
Stockholders' equity 1,085,075 1,085,452 809,886 593,942 425,719
</TABLE>
<PAGE>
As previously reported, in its Form 10-Q filed on October 16, 1998, the Company
received comments from the staff of the Securities & Exchange Commission ("SEC")
on the Company's financial statements, particularly with respect to the
accounting for recent acquisitions. Based upon these comments, the Company has
agreed to make certain revisions to the consolidated financial statements
contained in this Amended Form 10-K for the Company's year ended February 28,
1998. The SEC has indicated that, based upon the revisions the Company has
agreed to make, it has no further comments on the affected consolidated
financial statements. The revisions relate primarily to special charges
associated with the acquisition of the Network Products Group of Digital
Equipment Corporation ("DNPG"), during the fourth quarter of the year ended
February 28, 1998 and special charges associated with the acquisition of
ZeitNet, Inc. ("ZeitNet"), during the second quarter of the year ended February
28, 1997. The Company has also reclassified certain other expenses related to
the DNPG acquisition and to three acquisitions consummated during the year ended
February 28, 1997 (ZeitNet, Network Express, Inc. and Netlink, Inc.) from
special charges to cost of sales and selling, general and administrative
expenses. The reclassifications had no effect on net income (loss).
See Notes 2 (n) and 17 of the Consolidated Financial Statements for additional
information.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides an analysis of Cabletron's financial condition
and results of operations and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report on Form 10-K. 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 "Business Environment and Risk Factors" below.
Results of Operations
This table sets forth Cabletron's net sales, cost of sales, expenses by
category, income (loss) from operations, interest income, income (loss) before
income taxes, income tax expense (benefit) and net income (loss) expressed as
percentages of net sales, for the fiscal years ended February 28, 1998 and 1997
and February 29, 1996:
1998 1997 1996
----- ----- -----
Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales ..................... 49.1 42.3 40.8
----- ----- -----
Gross profit ...................... 50.9 57.7 59.2
Research and development .......... 13.2 11.5 11.6
Selling, general and administrative 27.1 21.5 20.3
Special charges ................... 17.0 1.5 8.6
----- ----- -----
Income (loss) from operations ..... (6.4) 23.2 18.7
Interest income ................... 1.3 1.4 1.6
----- ----- -----
Income (loss) before income taxes . (5.1) 24.6 20.3
----- ----- -----
Income tax expense (benefit)....... (2.6) 8.5 7.2
----- ----- -----
Net income (loss) ................. (2.5%) 16.1% 13.1%
===== ===== =====
Acquisitions
During fiscal 1998 the Company acquired the Network Products Business (NPB) from
Digital Equipment Corporation in February 1998. 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 DNPG products span a wide range of
networking technologies, including Ethernet, Fast Ethernet, FDDI and ATM
switching technologies.
During fiscal 1997 the Company augmented its product line by acquiring: (1)
ZeitNet Inc., a manufacturer of ATM products, in July 1996; (2) Network Express,
Inc., a manufacturer of remote access equipment, in August 1996; (3) Netlink,
Inc., a manufacturer of frame relay products, in December 1996; and (4) The
OASys Group, Inc., a software developer, in February 1997.
During fiscal 1996 the Company acquired the Enterprise Networks Business Unit
(ENBU) 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.
Revenues
Net sales in fiscal 1998 decreased by 2.1% to $1,377.3 million from $1,406.6
million in fiscal 1997. The slight decrease in fiscal 1998 revenue compared to
fiscal 1997 revenue was largely a result of a decrease in sales of the Company's
shared media products (comprised primarily of the MMAC). Sales of the Company's
shared media products decreased 56.6% to $317.6 million in fiscal 1998 compared
to sales of $717.8 million in fiscal 1997. The decline in revenue of shared
media products was a result of both declining unit shipments and lower prices
per product. The Company expects the decrease in sales of its shared media
products to continue in fiscal 1999 as customers continue the migration from
shared media products to switched products. The decrease in sales of shared
media products was offset somewhat by an increase in sales of the Company's
switched products (comprised primarily of the SmartSwitch 9000, 6000 and 2200
products). Sales of switched products increased 129.4% to $686.7 million in
fiscal 1998 compared to sales of $299.3 million in fiscal 1997. The increase in
revenue of switched products was a result of increasing unit sales. Prices per
product decreased slightly for switched products during fiscal 1998, but the
increase in unit shipments offset this slight price decline.
<PAGE>
Sales of diagnostic test instruments, installation and maintenance services, and
other products were $379.1 million or 27.5% of total revenues in fiscal 1998,
compared to $389.5 million or 27.7% of total revenues in fiscal 1997 and $354.4
million or 28.4% of net sales in fiscal 1996. As part of the Company's
acquisition of the DNPG, the Company agreed to appoint Digital as the service
provider for Cabletron products in certain smaller countries. This appointment
may have the effect of limiting the growth of Cabletron's own service and
support organization.
The Company acquired the DNPG on February 7, 1998 and thus the division
contributed to the Company's fiscal 1998 revenues for less than one month. The
Company expects the DNPG to contribute materially towards revenues in fiscal
1999.
The increase in revenue in fiscal 1997 compared to fiscal 1996 was primarily the
result of increased sales of the SmartSwitch product lines. Sales of switched
products increased 566.8% to $299.3 million in fiscal 1997 compared to sales of
$44.9 million in fiscal 1996. This offset the decreased sales of shared media
products. Sales of the Company's shared media products decreased 3.4% to $717.8
million in fiscal 1997 compared to sales of $742.7 million in fiscal 1996.
Finally, increased sales of service and support products and services (as
discussed above) contributed to the increase in overall revenue from fiscal 1997
compared to fiscal 1996.
Net sales outside the United States in fiscal 1998 were $454.1 million, or 33.0%
of net sales, compared to $408.2 million or 29.0% of net sales in fiscal 1997
and $329.2 million or 29.9% of net sales in fiscal 1996. In addition to its
direct international sales force, the Company sells its products through several
international distributors. The increase in international revenue in fiscal 1998
compared to fiscal 1997 reflects the Company's focus on expansion in growth
areas, such as Latin America. This increase was offset by weaker economic
conditions in the Asia/Pacific region. The increase in international revenue in
fiscal 1997 compared to fiscal 1996 was primarily due to the expansion and
growth of the Latin American markets. The Company's international revenue is
primarily denominated in U.S. dollars. The effect of foreign exchange rate
fluctuations did not have a significant impact on the Company's operating
results in the periods presented.
Costs, Expenses and Interest Income
Cost of sales was $676.3 million or 49.1% of net sales in fiscal 1998, compared
to $595.4 million or 42.3% of net sales in fiscal 1997 and $448.7 million or
40.8% of net sales in fiscal 1996. The increase in cost of sales as a percentage
of net sales is primarily attributable to (i) pricing pressures on the Company's
products, especially in foreign markets which traditionally carried a higher
margin, which resulted in a lower selling price per product and (ii) effects
from inventory write-offs, which increase the cost of sales as a percentage of
net sales. The Company was able to maintain its gross margins in fiscal 1997 and
1996 by introducing and selling products with improved functionality, further
developing its service maintenance program and improving purchasing and
manufacturing efficiencies.
Research and development ("R&D") expenses in fiscal 1998 increased to $181.8
million or 13.2% of net sales, compared to $161.7 million or 11.5% of net sales
in fiscal 1997. In fiscal 1996, R&D expenses were $127.3 million or 11.6% of net
sales. The increased R&D spending in fiscal 1998 reflected the Company'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 costs related to development of new products. R&D spending increased
as a percentage of net sales in fiscal 1998 compared to fiscal 1997 primarily
because net sales were lower than the Company expected in fiscal 1998. The
Company plans to continue to increase R&D spending in absolute dollars in order
to develop new products on a timely basis. The level of increase in R&D spending
may slow, depending on the growth in total revenues, if necessary to reduce R&D
spending as a percentage of net sales more towards the percentage levels in
fiscal 1997 and fiscal 1996.
Selling, general and administrative ("SG&A") expenses were $373.8 million or
27.1% of net sales in fiscal 1998, compared to $301.5 million or 21.4% of net
sales in fiscal 1997 and $223.1 million or 20.3% of net sales in fiscal 1996.
Increases in SG&A 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 anticipated
increases in volume. SG&A expenses increased as a percentage of net sales in
fiscal 1998 primarily as a result of lower than expected sales.
In fiscal 1998 the Company had special charges of $234.3 million, consisting of
(i) in-process research and development of $199.3 million in connection with the
acquisition of the DNPG and (ii) charges relating to the Company's realignment
of $35.0 million. For fiscal 1997, a $21.7 million special charge was taken for
the acquisitions of ZeitNet, Network Express, Netlink and The OASys Group. A
portion of these special charges, incurred during fiscal 1997, related to
employee severance costs related to small planned layoffs in each of the pooled
companies primarily in the areas of office administration, engineering,
marketing and senior management. In fiscal 1996 a $94.3 million special charge
was taken for the purchase of the ENBU of SMC and Fivemere Limited (purchased by
Network Express in fiscal 1996).
<PAGE>
Interest income in fiscal 1998 was $18.5 million compared to $19.4 million in
fiscal 1997 and $17.9 million in fiscal 1996. The slight decrease is primarily
the result of lower interest rates in fiscal 1998 than in fiscal 1997.
Realignment
The Company announced on December 16, 1997 a global initiative to better align
the Company's business strategy with its focus in the enterprise and service
provider markets. The realignment is intended to better position the Company to
provide more solutions-oriented products and service; to increase its
distribution of products through third-party distributors and resellers; to
improve its position internationally, and to aggressively develop partnership
and acquisition opportunities. The Company incurred a pre-tax charge in the
fourth quarter of fiscal 1998 of $35.0 million ($21.5 million net of tax)
related to the realignment. The realignment included general expense reduction
through the reallocation of resources, including the elimination of certain
existing projects, personnel reduction, the elimination of duplicate facilities
and the consolidation of related operations. The employee severance costs relate
to small planned layoffs in each of the pooled companies primarily in the areas
of office administration, engineering, marketing and senior management. Included
in accrued liabilities at February 28, 1998 is $4.8 million relating to
severance costs associated with 350 eliminated positions. The Company has
completed most of these reductions. The expense reductions associated with the
realignment are intended to yield approximately $40 million in total annualized
savings, beginning in the fourth quarter of fiscal 1998.
Income (Loss)
Loss before income taxes was $70.2 million or 5.1% of net sales in fiscal 1998,
compared to income before income taxes of $345.7 million or 24.6% of net sales
in fiscal 1997 and $224.8 million or 20.3% of net sales in fiscal 1996. In
fiscal 1998, the Company had special charges of $234.3 million, compared to
$21.7 million in fiscal 1997 and $94.3 million in fiscal 1996. The decrease in
income before income taxes in fiscal 1998 was due in part to the increase of
$212.6 million in special charges. The increase in income before income taxes in
fiscal 1997 was due in part to the $72.6 million decrease in these special
charges. Excluding special charges, income before income taxes was $164.1
million in fiscal 1998, $367.4 million in fiscal 1997 and $319.2 million in
fiscal 1996. In addition to the special charges, the decrease in income before
income taxes in fiscal 1998 was also due to lower revenues and the higher cost
of sales. The factors affecting revenues and cost of sales are discussed above.
The tax benefit was calculated using an effective tax rate of 50.2%, in fiscal
1998, compared to fiscal 1997 tax expense was calculated using an effective tax
rate of 34.6%. The tax benefit was a result of a loss before income taxes during
fiscal 1998. Loss after taxes was $35.0 million compared to income after taxes
of $226.1 million in fiscal 1997.
1998 Acquisition
In connection with the acquisition of NPG, the Company allocated $199.3 million
of the purchase price to in-process research and development projects. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the incomplete products. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the research
and development ("R&D") in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.
The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of NPG's
next-generation switch, hub, adapter, and internetworking technologies.
The incomplete projects related to switch technology included, among other
efforts, the introduction of Fast Ethernet and OC-12 technology into
GIGAswitch/ATM and GIGAswitch/ FDDI technologies, development of Gigabit and
Fast Ethernet modules for the VNswitch 900 chassis, and the introduction of a
new GIGAswitch/Ethernet platform to provide Gigabit Ethernet technology. In the
internetworking area, the Company had several significant efforts on-going
related to network management software products, new wireless/remote access
offerings, and web gateway technology. The primary developmental efforts related
to the adapter family of products involved the introduction of new ATM and
Gigabit network interface cards. Finally, in the hub family, specific R&D
efforts included the introduction of ATM and Fast Ethernet modules for the
DEChub 900 and the development of advanced layer 3 switching support for the
100Mbps Hub Multiswitch.
<PAGE>
The nature of the efforts to fully develop the acquired in-process technology
into commercially viable products, technologies, and services principally
related to the completion of all planning, designing, prototyping, high-volume
verification, and testing activities that were necessary to establish that the
proposed technologies met their design specifications including functional,
technical, and economic performance requirements. Anticipated completion dates
for the projects in progress were expected to occur over the next one and
one-half years, at which time the Company expected to begin generating economic
benefits from the technologies. Funding for such projects was expected to be
obtained from internally generated sources. As of February 7, 1998, expenditures
to complete these projects were expected to total approximately $61 million for
the remainder of calendar year 1998 and $10 million in calendar year 1999. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors. In the model used to value NPG's in-process
research and development, as of February 7, 1998, NPG' total revenues were
projected to exceed $1.1 billion in 2002, assuming the successful completion and
market acceptance of the major R&D programs. Estimated revenue from NPG's
existing technologies was expected to be $350 million in 1998, with a rapid
decline as existing processes and know-how approached obsolescence. The
estimated revenues for the in-process projects were estimated to peak in 2002
and then decline as other new products and technologies were expected to enter
the market.
In the model used to value NPG's in-process research and development, cost of
sales was estimated based on NPG's historical results and discussions with
management regarding anticipated gross margin improvements. A substantial gross
margin improvement was expected in 1999 due to a restructuring of NPG's cost
structure. Thereafter, gradual improvements were expected due to purchasing
power increases and general economies of scale. Cost of sales averaged
approximately 49.0 percent through 2003. Combined SG&A and R&D expenses were
expected to peak in 1998 at 44.6 percent of sales, decline, and level out at
approximately 35.8 percent of sales in 2001 and remain constant thereafter.
The rates utilized to discount the net cash flows to their present value were
based on cost of capital calculations. Due to the nature of the forecast and the
risks associated with the projected growth, profitability and developmental
projects, a discount rate of 15.0 percent was appropriate for the business
enterprise, 14.0 percent for the existing products and technology, and 30.0
percent for the in-process R&D. These discount rates were selected to reflect
NPG's corporate maturity; the uncertainties in the economic estimates described
above; the inherent uncertainty surrounding the successful development of the
purchased in-process technology; the useful life of such technology; the
profitability levels of such technology; and, the uncertainty of technological
advances that are unknown at this time.
The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. No assurance can be given that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur.
For these reasons, actual results may vary from the projected results.
Management expects to continue their support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there has been and will continue to be risk associated with the
completion of the projects and there is no assurance that any will meet with
either technological or commercial success. The Company believes, as it did at
the time of the NPG acquisition, that if NPG did not successfully complete its
outstanding in-process research and development efforts, Cabletron's future
operating results could be materially impacted and the value of the in-process
research and development might never be realized.
Liquidity and Capital Resources
Accounts receivable, net of allowance for doubtful accounts, were $241.2 million
at February 28, 1998 or 78 days of sales outstanding, compared to $219.9 million
or 52 days of sales outstanding in accounts receivable at February 28, 1997.
This increase in receivables reflects timing on shipments and collections. These
trends are expected to continue for the intermediate term.
<PAGE>
The Company has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories were $309.7 million at February 28, 1998 or 157 days of
inventory, compared to $203.4 million or 109 days of inventory at the end of the
preceding fiscal year. The increase of days in inventory was the result of lower
sales and the introduction of a new product line, the SmartSwitch family of
products.
Net cash provided by operating activities was $49.5 million in fiscal 1998,
compared to $188.8 million in fiscal 1997 and $151.3 million in fiscal 1996. The
decrease was primarily a result of higher accounts receivable and inventory. In
the Company's acquisition of the DNPG, part of the purchase price was paid in
$302.5 million of product credits which Digital can use through February 7, 2000
to purchase certain Cabletron products that are ordered under the Reseller
Agreement. As a result of these products credits, net cash provided by operating
activities will not increase at the same rate of growth as net sales through
February 7, 2000. The use of products credits by Digital will not affect the
Company's income statement because the Company will recognize revenue as Digital
uses product credits. See Note 9 (Notes to the Consolidated Financial
Statements) included at page 30 of this document for additional details
regarding the product credits.
During fiscal 1998 capital expenditures were $74.2 million, which included $34.9
million in software and hardware products. Capital expenditures for fiscal 1997
of $94.4 million included $58.9 million for engineering computer hardware and
software and $3.3 million for leasehold improvements. During fiscal 1996, $63.3
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.
Cash, cash equivalents, short and long-term investments decreased during fiscal
1998 to $447.3 million, from $568.3 million in the prior fiscal year. This
decrease in fiscal 1998 reflects the cash used in the acquisition of DNPG. State
and local municipal bonds and bond funds of approximately $373.2 million,
maturing in three years or less, were being held by the Company at February 28,
1998.
On March 7, 1997 the Company obtained a $250 million revolving credit facility
with Chase Manhattan Bank, First National Bank of Chicago and several other
lenders. The facility has a term of three years but the Company has the option
to extend the facility for an additional two years. As of February 28, 1998, the
Company had not drawn down any money under the facility.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and marketable securities will be adequate to
support the Company's working capital and capital expenditure requirements for
both short and long term needs.
Business Environment and Risk Factors
THE FOLLOWING ARE CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company may occasionally make forward-looking statements and estimates such
as forecasts and projections of the Company's future performance or statements
of management's plans and objectives. These forward-looking statements may be
contained in, among other things, SEC filings and press releases made by the
Company and in oral statements made by the officers of the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among others, the factors mentioned below.
<PAGE>
Competition. 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.
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 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.
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
"Business Environment and Risk Factors--Fluctuations in Operating Results."
<PAGE>
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. 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 fourth quarter of fiscal 1998, the three month period ended February 28,
1998, a shortfall in orders resulted in a substantial decline in Cabletron's
earnings from the fourth quarter of fiscal 1997. See "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 shortfall in revenues. As the 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.
Realignment. Cabletron has announced that it is seeking to better align its
business strategy with its target markets. The company has incurred a pre-tax
charge in the fourth quarter of fiscal 1998 of $35.0 million ($21.5 million,
after-tax) 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. 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 structure. The new management structure includes
the creation of certain new senior officer positions and the realignment of
certain management structures. The implementation of the new management
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.
<PAGE>
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
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 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 stated that it will continue to
explore other possible acquisitions in the future. 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. Cabletron's sales
of the NPB products are 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's 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 contractually 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 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.
<PAGE>
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 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.
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 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.
<PAGE>
Dependence on Suppliers. Cabletron's products include certain components,
including application specific integrated circuits ("ASICs"), that are currently
available from single or limited sources, some of which require long order lead
times. In addition, certain of Cabletron's products and sub-assemblies are
manufactured by single source third parties. With the increasing technological
sophistication of new products and the associated design and manufacturing
complexities, Cabletron anticipates that it may need to rely on additional
single source or limited suppliers for components or manufacture of products and
subassemblies. Any reduction in supply, interruption or extended delay in timely
supply, variances in actual needs from forecasts for long order lead time
components, or change in costs of components could affect Cabletron's ability to
deliver its products in a timely and cost-effective manner and may adversely
impact Cabletron's operating results and supplier relationships. 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 Cabletron's business, financial condition and results of operations.
Year 2000-compliance. Historically, certain computer programs have been written
using two digits rather than four digits to define year. This could result in
computers recognizing a date using "00" as the year 1900 rather than the year
2000, resulting in potential major system failures or miscalculations.
To address the above-mentioned Year 2000 issues and concerns, Cabletron has
established a "Year 2000 Task Force" to lead and coordinate all of its global
Year 2000 activities. This task force is accountable to provide the necessary
leadership, tools and knowledge required by all operating units to become Year
2000 compliant. The task force is currently testing all hardware, firmware and
software developed and sold by the Company for Year 2000 Compliance in
accordance with Cabletron's Year 2000 Policy Statement.
In addition, the Year 2000 Task Force is conducting a global assessment of
Cabletron's essential computer systems and is making reasonable efforts to
ensure that Cabletron's information technology infrastructure will not be
adversely affected by the turn of the century.
Currently, Cabletron has no reasonable estimate of the amount of out-of-pocket
costs which may be incurred to address Year 2000 issues for our products and
internal infrastructure. At this time, the company cannot reasonably estimate
the potential impact on its financial position and operations if key suppliers,
customers and other constituents do not become Year 2000-compliant on a timely
basis.
New Accounting Pronouncements
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, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending February 28, 1999, is not expected to have a material
impact on the consolidated financial statements of the Company. The only
additional item to be included in comprehensive income is the Company's
cumulative translation adjustment.
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,
becomes effective for the Company in its fiscal year ending February 28, 1999.
The Company is in the process of determining the impact of SFAS 131 on its
footnote disclosures.
In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which requires
companies to record derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's first quarter of fiscal year ending February 28,
2002. Management is currently evaluating the potential effects of this
pronouncement on its consolidated financial statements. However, management does
not expect the impact to be significant.
<PAGE>
In February 1998, the Company adopted the Financial Accounting Standards Board
Statement No. 128, "Earnings per Share," (SFAS 128). All previously reported net
income (loss) per share data have been restated to conform to the provisions of
SFAS 128. Under SFAS 128, basic net income (loss) per share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares or the period. Diluted net income (loss) per
reflect the maximum diluted that would have resulted from the assumed exercise
and share repurchased related to dilutive stock options and are computed by
dividing net income (loss) by the weighted average number of common shares and
all dilutive securities outstanding.
In fiscal 1998, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. Under SOP 98-1, certain payroll and related costs
for Company employees working on the application of development stage projects
as defined in the SOP for internal use computer software must be capitalized and
amortized over the expected useful life of the software. This is substantially
consistent with the Company's previous treatment, and accordingly, the adoption
of SOP 98-1 did not have a material impact on the Company's results of
operations in fiscal 1998.
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
February 28, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
(Restated) (Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 207,078 $ 214,828
Short-term investments (note 4) ........................................ 116,979 165,396
Accounts receivable, net of allowance for
doubtful accounts ($21,043 and $15,476 in 1998
and 1997, respectively) .............................................. 241,181 219,896
Inventories (note 5) ................................................... 309,667 203,438
Deferred income taxes (note 11) ........................................ 81,161 55,061
Prepaid expenses and other assets ...................................... 89,396 34,691
---------- ----------
Total current assets ............................................... 1,045,462 893,310
---------- ----------
Long-term investments (note 4) ............................................. 123,272 188,081
Long-term deferred income taxes (note 11) .................................. 107,094 29,627
Property, plant and equipment, net (note 6) ................................ 244,730 198,557
Intangible assets, net .................................................... 161,490 1,234
---------- ----------
Total assets ....................................................... $1,682,048 $1,310,809
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ....................................................... $ 79,969 $ 68,604
Current portion of long-term obligation (note 9) ....................... 157,719 ---
Accrued expenses (note 8) .............................................. 214,728 135,208
Income taxes payable ................................................... --- 10,442
---------- ----------
Total current liabilities .......................................... 452,416 214,254
Long-term obligation (note 8) .......................................... 132,500 ---
Long-term deferred income taxes (note 11) .............................. 12,057 11,103
---------- ----------
Total liabilities .................................................. 596,973 225,357
---------- ----------
Commitments and contingencies (notes 10 and 12)
Stockholders' equity:
Preferred stock, $1.00 par value. Authorized
2,000 shares; none issued --- ---
Common stock, $0.01 par value. Authorized
240,000 shares; issued and outstanding 158,267
and 156,305 shares in 1998 and 1997, respectively
1,583 1,563
Additional paid-in capital ............................................. 300,834 266,829
Retained earnings ...................................................... 781,878 816,839
---------- ----------
1,084,295 1,085,231
Cumulative translation adjustment ...................................... 780 221
---------- ----------
Total stockholders' equity ......................................... 1,085,075 1,085,452
---------- ----------
Total liabilities and stockholders' equity ......................... $1,682,048 $1,310,809
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C>
Net sales ...................................................................... $ 1,377,330 $ 1,406,552 $ 1,100,349
Cost of sales .................................................................. 676,291 595,407 448,699
----------- ----------- -----------
Gross profit .............................................................. 701,039 811,145 651,650
Operating expenses:
Research and development .................................................. 181,777 161,674 127,289
Selling, general and administrative ....................................... 373,789 301,469 223,083
Special charges (note 3) .................................................. 234,285 21,724 94,343
----------- ----------- -----------
Income (loss) from operations ........................................ (88,812) 326,278 206,935
Interest income ................................................................ 18,578 19,422 17,891
----------- ----------- -----------
Income (loss) before income taxes ..................................... (70,234) 345,700 224,826
Income tax expense (benefit) (note 11) ......................................... (35,273) 119,621 80,341
----------- ----------- -----------
Net income (loss) ..................................................... ($ 34,961) $ 226,079 $ 144,485
=========== =========== ===========
Net income (loss) per share - basic ............................................ ($ 0.22) $ 1.46 $ 0.95
=========== =========== ===========
Net income (loss) per share - diluted .......................................... ($ 0.22) $ 1.42 $ 0.93
=========== =========== ===========
Weighted average number of shares outstanding - basic .......................... 157,686 155,207 151,525
=========== =========== ===========
Weighted average number of shares outstanding - diluted ........................ 157,686 158,933 155,171
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended February 28, 1998 and 1997 and February 29, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares) ADDITIONAL CUMULATIVE NOTES TOTAL
COMMON PAID-IN RETAINED TRANSLATION RECEIVABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT 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
Fivemere 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 --- --- --- 315 --- 315
translation
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 (Restated) --- --- 226,079 --- --- 226,079
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997* 1,563 266,829 816,839 221 --- 1,085,452
- ----------------------------------------------------------------------------------------------------------------------------
Exercise of options for 1,751
shares of common stock 18 17,291 --- --- --- 17,309
Tax benefit for options exercised --- 10,469 --- --- --- 10,469
Issuance of 231 shares under
employee
stock purchase plan 2 6,245 --- --- --- 6,247
Effect of foreign currency --- --- --- 559 --- 559
translation
Net loss (Restated) --- --- (34,961) --- --- (34,961)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998* $1,583 $300,834 $781,878 $780 --- $1,085,075
- ---------------------------------------------------------------------------------------------------------------------------
* Restated
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... ($ 34,961) $ 226,079 $ 144,485
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .......................................... 66,358 49,704 32,738
Provision for losses on accounts receivable ............................ 5,668 9,140 435
Loss (gain) on disposal of property, plant and equipment ............... (285) 87 93
Purchased research and development from acquisitions ................... 199,300 --- 67,750
Deferred income taxes .................................................. (111,425) (22,933) (38,766)
Changes in assets and liabilities:
Accounts receivable ................................................. (31,847) (74,925) (55,795)
Inventories ......................................................... (91,412) (41,623) (46,500)
Prepaid expenses and other assets ................................... 1,213 (1,709) (17,508)
Accounts payable and accrued expenses ............................... 83,471 52,661 60,688
Income taxes payable ................................................ (36,591) (7,653) 3,705
--------- --------- ---------
Net cash provided by operating activities ........................ 49,489 188,828 151,325
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ................................................... (74,264) (94,368) (63,322)
Cash portion of business acquisition ................................... (129,107) --- (74,645)
Purchase of available-for-sale securities .............................. (118,919) (203,667) (124,968)
Purchase of held-to-maturity securities ................................ (37,228) (247,855) (205,852)
Sales/maturities of marketable securities .............................. 269,344 424,308 236,393
--------- --------- ---------
Net cash used in investing activities ............................ (90,174) (121,582) (232,394)
--------- --------- ---------
Cash flows from financing activities:
Repayment of notes receivable from stockholders ........................ --- 151 218
Repurchase of common stock ............................................. --- --- (1,173)
Tax benefit of options exercised ....................................... 10,469 8,302 7,215
Proceeds from sale of common stock ..................................... --- 8,577 41,774
Common stock issued to employee stock purchase plan .................... 6,247 6,208 3,323
Proceeds from exercise of stock options ................................ 17,309 18,022 17,222
--------- --------- ---------
Net cash provided by financing activities ........................ 34,025 41,260 68,579
--------- --------- ---------
Effect of exchange rate changes on cash ................................... (1,090) 220 159
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ...................... (7,750) 108,726 (12,331)
Cash and cash equivalents, beginning of year .............................. 214,828 106,102 118,433
--------- --------- ---------
Cash and cash equivalents, end of year .................................... $ 207,078 $ 214,828 $ 106,102
========= ========= =========
Cash paid during the year for:
Income taxes ........................................................... $ 57,941 $ 132,291 $ 142,733
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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. The
Company's investments consist principally of high grade obligations of the
United States government and various state, county, and municipal government
notes and bonds. 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, 1998 amounted to approximately
$152.2 million. Furthermore, any taxes paid to foreign governments on those
earnings may be used, in whole for in part, as credits against the US tax on any
dividends distributed from such earnings. It is not practicable to estimate the
amount unrecognized deferred US taxes on these undistributed earnings.
(f) Net Income (Loss) Per Share
In February 1998, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share," (FAS 128). All previously reported
earnings per share information presented has been restated to reflect the impact
of adopting FAS 128.
Under SFAS 128, basic net income (loss) per common share is computed by dividing
net income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income (loss) per
common share reflect the maximum dilution that would have resulted from the
assumed exercise and share repurchase related to dilutive stock options and is
computed by dividing net income (loss) by the weighted average number of common
shares and all dilutive securities outstanding.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reconciliation of the denominators of the basic and diluted net income
(loss) per common share computations for the Company's reported net income
(loss) is as follows:
1998 1997 1996
---- ---- ----
Weighted average number of
shares outstanding - basic 157,686 157,207 151,525
Incremental shares from the
assumed exercise of stock options --- 3,726 3,646
-------- -------- --------
Weighted average number of
shares outstanding - diluted 157,686 158,933 155,171
======== ======== ========
(g) Foreign Currency Translation and Transaction Gains and Losses
The Company's international revenues are denominated in either U.S. dollars or
local currencies. For those international subsidiaries which use their local
currency as their functional currency, assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Where the U.S. dollar is the functional currency, amounts are recorded
at the exchange rates in effect at the time of the transaction, any resulting
translation adjustments, which were not material, are recorded in income.
(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 enters into foreign exchange forward and option contracts to
minimize the impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward and option contracts are designated as a
hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on the contracts are
reflected in operating results and offset foreign exchange gains or losses from
the revaluation of inter-company balances or other current assets and
liabilities denominated in currencies other than the functional currency of the
reporting entity. Gains and losses on the contracts are calculated using
published foreign exchange rates to determine fair value. The gain or loss that
results from the early termination of a contract is reflected in operating
results.
(k) Reclassifications
Prior year financial statements have been reclassified to conform to the 1998
presentation.
(l) 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(m) New Accounting Pronouncements
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, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending February 28, 1999, is not expected to have a material
impact on the consolidated financial statements of the Company. The only
additional item to be included in comprehensive income is the Company's
cumulative translation adjustment.
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,
becomes effective for the Company in its fiscal year ending February 28, 1999.
The Company is in the process of determining the impact of SFAS 131 on its
footnote disclosures.
In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which requires
companies to record derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's first quarter of fiscal year ending February 28,
2002. Management is currently evaluating the potential effects of this
pronouncement on its consolidated financial statements. However, management does
not expect the impact to be significant.
In October 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition" which provides
guidance on applying generally accepted accounting principles in recognizing
revenue for licensing, selling, leasing or otherwise marketing computer software
and supersedes SOP 91-1. The Company will adopt SOP 97-2 for its fiscal year
ended February 28, 1999 and does not anticipate any material impact on revenues
or results from operations.
In fiscal 1998, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. Under SOP 98-1, certain payroll and related costs
for Company employees working on the application of development stage projects
as defined in the SOP for internal use computer software must be capitalized and
amortized over the expected useful life of the software. This is substantially
consistent with the Company's previous treatment, and accordingly, the adoption
of SOP 98-1 did not have a material impact on the Company's results of
operations in fiscal 1998.
(n) Restatements and Reclassifications
The accompanying consolidated financial statements have been restated to reflect
the impact of adjustments made by the Company to reduce its previously reported
special charges associated with the acquisition of the Network Products Group of
Digital Equipment Corporation ("DNPG"), during the fourth quarter of the year
ended February 28, 1998 and to its previously reported special charges
associated with the acquisition of ZeitNet, Inc. ("ZeitNet"), during the second
quarter of the year ended February 28, 1997. The Company has also reclassified
certain other expenses related to the DNPG acquisition and to three acquisitions
consummated during the year ended February 28, 1997 (ZeitNet, Network Express,
Inc. and Netlink, Inc.) from special charges to cost of sales and selling,
general and administrative expenses. The reclassifications had no effect on net
income (loss).
<PAGE>
These restatements and reclassifications were made to address comments made by
the Securities and Exchange Commission ("SEC") in letters to the Company on
accounting issues related to the amount of the DNPG purchase price allocated by
the Company to in-process research and development and to the timing of the
recognition and the classification of certain expenses included in special
charges.
As a result, the Company reduced the amount of its charge for in-process
research and development in connection with the acquisition of DNPG from $325.0
million to $199.3 million and, correspondingly, increased the amounts allocated
to intangible assets by $125.7 million. The $125.7 million increase to
intangible assets was allocated as follows ($97.0 million for customer
relations, $14.1 million for goodwill and $14.6 million for developed
technology) and is being amortized by a non-cash charge to income over a period
of 5 - 10 years. The impact for the year end was February 28, 1998 was a
decrease to special charges of $125.7 million and increased tax expense of $49.9
million. The impact of this additional amortization expense for the year ended
February 28, 1998 was increased SG&A of $1.1 million and increased tax benefit
of $0.4 million.
The Company has also reduced the amount of its special charges recorded in the
fourth quarter of the year ended February 28, 1998 in connection with the
acquisition of DNPG by $33.2 million. The reduction of special charges related
to expenses recorded for contract employee benefits and contract compensation
write-offs of $12.5 million, software licenses and software tools costs of $7.0
million, professional fees and some facility costs reclassified to purchase
price of $3.2 million, customer warranty and stock rotation costs of $3.0
million and other costs reductions in estimates and classifications of $7.5
million. The impact for the year ended February 28, 1998 was decreased special
charges by $33.2 million and increased tax expense of $11.3 million.
To the extent that a portion of these costs were incurred in the year ended
February 28, 1998, the amounts are included in the restated results for this
year. The impact for the year ended February 28, 1998 was increased SG&A of $1.5
million and increased tax benefit of $0.5 million.
<PAGE>
The Company has also reduced the amount of its write down of inventory recorded
in the year ended February 28, 1997 relating to the ZeitNet acquisition by $6.0
million and has recorded the write down in the year ended February 28, 1998,
upon disposal of the inventory. The impact for the year ended February 28, 1998
was an increase to cost of sales of $6.0 million and a tax benefit of $2.0
million. The impact for the year ended February 28, 1997 was a decrease of
special charges of $6.0 million and an increase to tax expense of $2.0 million.
The Company has reclassified certain expenses relating to its business
combinations from special charges to cost of sales and selling, general and
administrative expense. For the year ended February 28, 1998, $24.5 million
relating to the write down of Company inventory made redundant and discontinued
as a result of the acquisition of DNPG has been reclassified from special
charges to cost of sales. For the year ended February 28, 1997, the amount of
special charges reclassified to cost of sales represented the write down of
$20.3 million of inventory that was duplicative and/or rendered obsolete as a
result of the acquisitions of ZeitNet, Network Express and Netlink. The amounts
reclassified to selling, general and administrative expenses represented $3.4
million for customer warranty costs, $2.8 million for contract termination, $1.5
million for stay bonuses and $7.3 million for other costs that were attributable
to the businesses acquired during the year ended February 28, 1997. These
reclassifications had no impact on net income (loss) for the years ended
February 28, 1998 and 1997.
The following is a summary of the effects of the restatements and
reclassifications on special charges and net income (loss):
(in thousands) 1998 1997
---- ----
Special charges, as originally reported $417,685 $63,024
Reduction of in-process research and
development charge, related to the
acquisition of DNPG (125,700) ---
Reduction of special charges, related
to the acquisition of DNPG and
ZeitNet, respectively (33,200) (6,000)
Reclassification to cost of sales related
to the acquisition of DNPG (24,500) ---
Reclassification to cost of sales related
to the acquisitions of ZeitNet, Network
Express and Netlink --- (20,300)
Reclassification to selling, general and
administrative expenses related to the
acquisitions of ZeitNet, Network Express
and Netlink --- (15,000)
-------- -------
Special charges, as restated $234,285 $21,724
======== =======
Net income (loss), as originally reported ($127,062) $222,125
Reduction of in-process research and
development charge, related to the
acquisition of DNPG, net of tax
expense of $49.9 million 75,838 ---
Increase in amortization charges, related
to the acquisition of DNPG, of
intangible assets, net of tax benefit
of $0.4 million (659) ---
Reduction of special charges, related to
the acquisition of DNPG, net of tax
expense of $11.3 million 21,899 ---
Recognition of costs as incurred, related
to the acquisition of DNPG, net of tax
benefit of $0.5 million (1,023) ---
Recognition of ZeitNet inventory writedown,
net of tax benefit of $2.0 million (3,954) ---
Reduction of special charges, related to
the acquisition of ZeitNet, net of tax
expense $2.0 million --- 3,954
-------- --------
Net income (loss), as restated ($34,961) $226,079
======== ========
Net income (loss) per share - basic, ($0.81) $1.43
as originally reported ======= =====
Net income (loss) per share - diluted, ($0.81) $1.40
as originally reported ======= =====
Net income (loss) per share - basic, ($0.22) $1.46
as restated ======= =====
Net income (loss) per share - diluted, ($0.22) $1.42
as restated ======= =====
<PAGE>
The effect of the restatement on the consolidated balance sheet as of February
28, 1998 is as follows:
As Originally As
(in thousands) Reported Restated
------------- -----------
Prepaid expenses and other assets $ 78,084 $ 89,396
Total current assets 1,034,150 1,045,462
Long-term deferred income taxes 167,308 107,094
Intangible assets 36,867 161,490
Total assets 1,606,327 1,682,048
Accrued expenses 235,062 214,728
Total current liabilities 472,750 452,416
Total liabilities 617,307 596,973
Retained earnings 685,823 781,878
Total stockholders' equity 989,020 1,085,075
Total liabilities and stockholders' equity $1,606,327 $1,682,048
The effect of the restatement on the consolidated balance sheet as of February
28, 1997 is as follows:
As Originally As
(in thousands) Reported Restated
------------- -----------
Inventories $ 197,438 $ 203,438
Deferred income taxes 57,107 55,061
Total current assets 889,356 893,310
Total assets 1,306,855 1,310,809
Retained earnings 812,885 816,839
Total stockholders' equity 1,081,498 1,085,452
Total liabilities and stockholders' equity $1,306,855 $1,310,809
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 has been allocated to the assets
and liabilities acquired.
On February 7, 1998, the Company acquired certain assets of the Network Products
Group of Digital Equipment Corporation ("DNPG"). Under the terms of the
agreement, the purchase price was approximately $439.5 million, consisting of
cash, product credits and liabilities resulting from the acquisition. Based on
an independent appraisal, approximately $199.3 million of the purchase price was
allocated to in-process research and development. Accordingly, Cabletron
recorded special charges of $199.3 million for this in-process research and
development at the date of acquisition. The excess of cost over the estimated
fair value of $161.8 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a period of 5 to 10
years. The Company's consolidated results of operations include the operating
results of the acquired business from the acquisition date.
On February 7, 1997, the Company acquired The OASys Group, Inc. ("OASys"), 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 special charges
which included adjustments to conform the OASys 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. Pro forma financial information is not presented as it is not material to
the consolidated financial statements.
<PAGE>
On December 11, 1996, the Company acquired Netlink Inc. ("Netlink"), 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 special charges of $1.8 million for
professional fees and $0.2 million for employee severance. The employee
severance costs relate to small planned layoffs primarily in the areas of office
administration, engineering, marketing and senior management.
On August 1, 1996, the Company acquired Network Express, Inc., ("Network
Express") 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 special charges of $5.5 million for in-process research and
development, $3.1 million for professional fees and $1.7 million for employee
severance. The employee severance costs relate to small planned layoffs
primarily in the areas of office administration, engineering, marketing and
senior management.
On July 26, 1996, the Company acquired ZeitNet Inc., ("ZeitNet") 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 special charges of $1.8 million for
professional fees and $0.6 million for employee severance. The employee
severance costs relate to small planned layoffs primarily in the areas of office
administration, engineering, marketing and senior management.
On January 12, 1996, the Company acquired the Enterprise Networks Business Unit
(ENBU) 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 cash portion of the purchase price was $74.6 million. In connection, with
the acquisition, the Company recorded special charges of $85.7 million,
consisting of the write-off of $67.8 million of in-process research and
development and $17.9 million of other special 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.
Net sales, operating income (loss) and net income (loss) of Cabletron, ZeitNet,
Network Express and Netlink for the periods preceding the acquisitions are
presented in the following table:
<TABLE>
<CAPTION>
(in thousands) (unaudited)
Fiscal 1997 Fiscal 1996
------------------------------- -------------
Nine months Six months Twelve months
ended 11/30/96 ended 8/31/96 ended 2/29/96
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
Cabletron $1,025,997 $664,439 $1,069,715
ZeitNet --- 2,140 4,395
Network Express --- 3,177 18,997
Netlink 7,935 --- 7,242
---------- -------- ----------
Pro forma total net sales $1,033,932 $669,756 $1,110,349
========== ======== ==========
Operating income (loss):
Cabletron $234,842 $135,813 $ 227,562
ZeitNet --- (2,965) (8,890)
Network Express --- (2,293) (9,415)
Netlink (2,856) --- (2,322)
-------- -------- ----------
Pro forma total operating income $231,986 $130,555 $ 206,935
======== ======== ==========
Net income (loss):
Cabletron $161,789 $94,047 $ 164,418
ZeitNet --- (2,972) (8,938)
Network Express --- (2,154) (8,475)
Netlink (2,887) --- (2,520)
-------- ------- ----------
Pro forma total net income $158,902 $88,921 $ 144,485
======== ======= ==========
</TABLE>
<PAGE>
Note: the fiscal 1997 interim information is presented for the interim periods
nearest the dates that the combinations were consummated.
(in thousands) 1998 1997
---- ----
Net Sales $1,878,476 $2,004,586
Operating income 136,937 350,696
The purchase price for each acquisition, completed during the year ended
February 28, 1998, has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of acquisition. The purchase price is
summarized as follows:
Cash paid for acquisition $129,107
Product credits granted 302,500
Discount on product credits (11,691)
Assumed liabilities 19,581
------------
Purchase price $439,497
============
The following are supplemental disclosures of noncash transactions in connection
with the DNPG acquisition.
Fair value of assets acquired $251,888
In-process research and development 199,300
Assumed liabilities (19,581)
Product credits (302,500)
-------------
Cash portion of acquisition $129,107
=============
Note (4) Investments
Investments are summarized as follows at February 28, 1998 and 1997:
(in thousands) 1998 1997
---------------------------- ----------------------------
Long Long
Current Term Total Current Term Total
-------- -------- ------- -------- -------- --------
Held-to-maturity $ 57,506 $ 14,896 $ 72,402 $ 84,261 $115,209 $199,470
Available-for-sale 59,473 108,376 167,849 81,135 72,872 154,007
-------- -------- -------- -------- -------- --------
Total $116,979 $123,272 $240,251 $165,396 $188,081 $353,477
======== ======== ======== ======== ======== ========
The Company's investments consist principally of high grade obligations of the
United States government and various state, county, and municipal government
notes and bonds. The contractual maturities for the above securities are less
than three years.
Note (5) Inventories
Inventories consist of the following at February 28, 1998 and 1997:
(in thousands) 1998 1997
---- ----
Raw materials $ 70,415 $ 64,685
Work-in-process 24,521 57,070
Finished goods 214,731 81,683
-------- --------
Total $309,667 $203,438
======== ========
<PAGE>
Note (6) Property, Plant and Equipment
Property, plant and equipment consist of the following at February 28, 1998 and
1997:
Estimated useful
(in thousands) 1998 1997 lives
---- ---- ----------------
Land and land improvements $ 3,093 $ 1,751 15 years
Buildings and building
improvements 61,699 38,015 30-40 years
Construction in progress 236 305 ---
Equipment 357,216 284,621 3-5 years
Furniture and fixtures 18,261 11,711 5-7 years
Leasehold improvements 15,030 9,448 3-5 years
Motor vehicles 4,751 4,690 3-5 years
-------- --------
460,286 350,541
Less accumulated depreciation
and amortization 215,556 151,984
-------- --------
$244,730 $198,557
======== ========
Note (7) Intangible Assets
Intangible assets consist of the following at February 28, 1998 and 1997.
Estimated
(in thousands) 1998 1997 Useful Lives
---- ---- ------------
Goodwill $20,160 $1,439 7 - 10 years
Customer relations 97,000 --- 8 years
Assembled work force acquired
in business acquisition 6,500 --- 7 - 10 years
Patents and technologies acquired
in business acquisition 39,600 --- 3 - 5 years
------- ------
163,260 1,439
Less accumulated amortization (1,770) 205
------- ------
$161,490 $1,234
======== ======
Note (8) Accrued Expenses
Accrued expenses consist of the following at February 28, 1998 and 1997:
(in thousands) 1998 1997
---- ----
Salaries and benefits $ 25,152 $ 15,527
Deferred revenue 74,414 50,041
Warranty 18,669 19,315
Other 96,493 50,325
-------- --------
Total $214,728 $135,208
======== ========
Note (9) Long-Term Obligation
Long-term obligation consists of the following at February 28, 1998:
(in thousands)
Unused product credits $290,219
less current portion (157,719)
--------
Long-term obligation $132,500
========
<PAGE>
As a term of the Asset Purchase Agreement between the Company and Digital
Equipment Corp., Digital received product credits of $302.5 million. These
product credits may be used by Digital to purchase products that are ordered
under the Reseller Agreement. First year product credits, of $170 million, may
be used during the period beginning on the closing date (February 7, 1998) and
ending on the first anniversary of the closing date (February 7, 1999). A total
of $12.3 million of the first year product credits were used from closing date
of the acquisition to the end of the fiscal year. The remaining $157.7 million
must be used before February 7, 1999. Any first year product credits not
expended in accordance with the preceding shall automatically expire and be of
no further force or effect. Second year product credits of $132.5 million, may
be used during the period beginning on the first anniversary of the closing date
(February 7, 1999) and ending on the second anniversary of the closing date
(February 7, 2000) requesting delivery at any time until thirty days after the
end of the second year. Any second year product credits not expended shall
automatically expire and be of no further force or effect immediately following
the end of the second year.
Note (10) 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 $14,568,000,
$12,179,000 and $10,265,000 for the years ended February 28, 1998 and 1997 and
February 29, 1996, respectively.
Total future minimum lease payments under all noncancelable operating leases as
of February 28, 1998, are as follows:
(in thousands) Year
1999 $ 8,108
2000 5,163
2001 3,538
2002 2,720
2003 1,853
Thereafter 7,825
-------
$29,207
=======
Note (11) Income Taxes
Income (loss) before income taxes is summarized as follows:
(in thousands) 1998 1997 1996
---- ---- ----
Total US domestic income (loss) ($36,343) $319,017 $173,515
Total foreign subsidiaries income (loss) (33,891) 26,683 51,311
-------- -------- --------
Total income (loss) before income taxes ($70,234) $345,700 $224,826
======== ======== ========
Tax expense (benefit) is summarized as follows:
Currently payable:
Federal $ 55,782 $117,546 $92,109
State 10,689 21,962 20,807
Foreign 956 1,000 11,519
Deferred tax benefit (102,700) (20,887) (44,094)
-------- -------- -------
Tax expense (benefit) ($ 35,273) $119,621 $80,341
======== ======== =======
The following is a reconciliation of the effective tax rates to the statutory
federal tax rate:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate (35.0%) 35.0% 35.0%
State income tax, net of federal tax benefit (3.3) 3.6 3.8
Exempt income of foreign sales corporation,
net of tax (10.9) (0.7) (1.1)
Research and experimentation credit (5.9) (0.7) ---
Municipal income (8.9) (2.0) ---
Rate differential on foreign operations 14.0 (2.5) (1.6)
Nondeductible goodwill & intangibles 1.7 --- ---
Other (1.9) 1.9 (0.4)
----- ----- -----
(50.2%) 34.6% 35.7%
===== ===== =====
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at February 28, 1998 and
1997 are presented below:
(in thousands) 1998 1997
---- ----
Deferred tax assets:
Accounts receivable $ 6,166 $ 4,996
Inventories 37,415 31,813
Property, plant and equipment 200 ---
Other reserves and accruals 34,382 24,149
Acquired research and development 105,078 29,262
Domestic net operating loss carryforwards 27,213 27,213
Foreign net operating loss carryforwards 23,715 5,636
-------- --------
Total gross deferred tax assets 234,169 123,069
Less valuation allowance (45,914) (38,381)
-------- --------
Net deferred tax assets 188,255 84,688
-------- --------
Deferred tax liabilities:
Property, plant and equipment (12,057) (11,103)
-------- --------
Total gross deferred liabilities (12,057) (11,103)
-------- --------
Net deferred tax assets $176,198 $73,585
======== ========
At February 28, 1998, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $63,775,000 and tax credit carryforwards of
$1,219,000 expiring in fiscal 1999 through fiscal 2010. The NOL and credit
carryforwards were acquired in the acquisitions of ZeitNet Inc., Network
Express, Inc., Netlink, Inc. and The OASys Group, Inc. Approximately $28,200,000
of the above stated NOL amount is subject to a 382 limitation due to a prior
ownership change and it is management's estimation that $24,800,000 will expire
unused.
The net change in the total valuation allowance for the year ended February 28,
1998 was an increase of $7,533,000. The net change in total valuation allowance
for the year ended February 28, 1997 was an increase of $4,619,000. In assessing
the realizability of net 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, 1998.
Note (12) 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 eventual 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, 1998 and 1997, the Company had forward exchange contracts and
purchased option contracts, all having maturities less than two years, in the
contractual amount of $43 million (forward contracts $14 million and option
contracts $29 million) and $69 million (forward contracts $31 million and option
contracts $38 million), respectively.
The estimated fair value of the Company's option and forward contracts reflects
the estimated amounts the Company would receive or pay to terminate the
contracts at the reporting dates, thereby taking into account the current
unrealized gains and losses on open contracts. These contracts did not have a
material fair value at February 28, 1998 and 1997.
<PAGE>
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, short-term investments, trade
receivables, and current liabilities approximate fair value because of the short
maturity of these financial instruments. Other assets include investments in
other companies which are carried at the lower of cost or net realizable value.
For the year ended February 28, 1998, no single customer represented more than
4% of net sales. However, sales to the federal government accounted for
approximately 13% of net sales for the year ended February 28, 1998. For fiscal
1997 and fiscal 1996 no single customer represented more than 3% and 4% net of
sales, respectively. Net sales to the federal government in fiscal 1997 and
fiscal 1996 accounted for approximately 12% and 15% net of sales, respectively.
Note (13) 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 complaint also alleges that
certain of the Company's alleged accounting practices resulted in the disclosure
of materially misleading financial results during the same period. More
specifically, the complaint challenged the Company's revenue recognition
policies, accounting for product returns, and the validity of certain sales. The
complaint does 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.
Note (14) 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, 1998, the Company had issued
23,363,254 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 376,000 stock
options are outstanding under the Directors Option Plan at February 28, 1998.
<PAGE>
A summary of option transactions under the two plans follows:
Weighted-Average
Shares Exercise Price
---------- ----------------
Options outstanding at February 28, 1995 7,857,226 $15.71
-----------
Granted and assumed 3,898,312 25.61
Exercised (1,453,402) 11.13
Cancelled (464,210) 21.97
-----------
Options outstanding at February 29, 1996 9,837,926 20.02
-----------
Granted and assumed 6,619,763 29.67
Exercised (1,345,415) 12.50
Cancelled (1,516,856) 24.59
-----------
Options outstanding at February 28, 1997 13,595,418 20.02
-----------
Granted and assumed 5,015,000 23.11
Exercised (1,762,565) 10.40
Cancelled (1,968,762) 29.45
-----------
Options outstanding at February 28, 1998 14,879,091 $25.45
===========
Options exercisable at February 28, 1998 4,134,623 $22.99
===========
The following table summarizes information concerning currently outstanding and
exercisable options as of February 28, 1998:
Weighted-
average Weighted- Weighted-
remaining average average
Range of Options contractual exercise Options exercise
exercise prices Outstanding life (years) price exercisable price
--------------- ----------- ------------- -------- ----------- ---------
$0.00 - 6.30 282,555 4.5 $ 2.32 230,563 $ 2.50
6.30 - 12.61 582,424 3.8 9.52 580,754 9.51
12.601 - 18.91 1,827,992 9.6 14.71 30,886 17.97
18.91 - 25.22 2,473,212 5.6 22.51 1,539,323 22.40
25.22 - 31.52 8,703,164 8.2 29.09 1,616,135 30.58
31.52 - 37.82 577,660 8.9 32.99 35,590 34.04
37.82 - 44.13 406,320 8.1 40.43 91,240 40.40
44.13 - 50.43 25,764 7.8 45.93 10,132 46.06
---------- --- ------ --------- ------
14,879,091 7.7 $25.45 4,134,623 $22.99
========== === ====== ========= ======
The weighted average estimated fair values of stock options granted and assumed
during fiscal 1998, 1997 and 1996 were $9.19, $12.01 and $12.08 per share,
respectively.
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option and employee stock purchase plans, accordingly, no compensation
expense has been recognized in the consolidated financial statements for such
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, "Accounting for
Stock-based Compensation," the Company's net income (loss) would have been
reduced (increased) to the pro forma amounts indicated below:
(in thousands) 1998 1997 1996
---- ---- ----
Net income (loss) As reported ($ 34,961) 226,079 $144,485
Pro forma ($ 60,583) 211,063 $121,302
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.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions used for
grants in fiscal 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Risk-free interest rates 6.13% 6.18% 6.18%
Expected option lives 3.8 years 3.7 years 3.7 years
Expected volatility 60.37% 63.97% 63.97%
Expected dividend yields 6.06% 6.42% 6.42%
In February 1998, employees holding outstanding stock options with a value
exceeding $14.6875 per option were given the right to have their stock options
canceled and repriced to $14.6875 per option. The repriced options will vest
over a period of one to five years from December 4, 1997. At February 28, 1998,
the Company had not received sufficient responses from the option holders to
reasonably estimate the number of options that will be canceled and repriced.
(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 $4,068 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 1998, 231,326 shares were purchased
at a weighted average price of $27.00 (197,262 at $31.47 and 153,768 at $21.43,
for fiscal 1997 and fiscal 1996, respectively). The remaining balance of both
ESPPs for purchase by employees at February 28, 1998 was 3,381,743 shares.
Note (15) Realignment
On December 16, 1997 the Company announced a global initiative to better align
the Company's business strategy with its focus in the enterprise and service
provider markets. The realignment is intended to better position the Company to
provide more solutions-oriented products and service; to increase its
distribution of products through third-party distributors and resellers; to
improve its position internationally, and to aggressively develop partnership
and acquisition opportunities. The Company incurred a charge in the fourth
quarter of fiscal 1998 of $35.0 million ($21.5 million, net of tax) related to
the realignment. The realignment included 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 reduction. The Company has completed most of these
reductions. Accrued liabilities at February 28, 1998 includes $4.8 million
relating to severance costs associated with 350 eliminated positions. The
expense reductions associated with the realignment are intended to yield
approximately $40 million in total annualized savings, beginning the fourth
quarter of fiscal 1998.
<PAGE>
Note (16) Geographic Area Information
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
% of % of % of
1998 Total 1997 Total 1996 Total
---- ----- ---- ----- ---- -----
(Restated) (Restated)
Net Sales:
US .............................. $ 923,285 67.0% $ 998,406 71.0% $ 771,179 70.1%
Direct Foreign Export ........... 59,759 4.3 38,435 2.7 35,378 3.2
---------- ----- ---------- ----- ---------- -----
Total US Source ................. 983,044 71.4 1,036,841 73.7 806,557 73.3
Europe .......................... 281,224 20.4 273,972 19.5 215,796 19.6
Other (1) ....................... 113,062 8.2 95,739 6.8 77,996 7.1
---------- ----- ---------- ----- ---------- -----
Total Sales ................ $1,377,330 100.0% $1,406,552 100.0% $1,100,349 100.0%
========== ===== =========== ===== ========== =====
Income (loss) from Operations:
US .............................. ($ 57,164) 64.4% $288,480 88.4% $169,103 81.7%
Europe .......................... (5,026) 5.7 29,877 9.2 33,834 16.4
Other (1) ....................... (26,622) 29.9 7,921 2.4 3,998 1.9
--------- ----- -------- ------ -------- -----
Total Income (loss) from
Operations .............. ($ 88,812) 100.0% $326,278 100.0% $206,935 100.0%
======== ===== ======== ===== ======== =====
Identifiable Assets:
US .............................. $1,073,891 83.0% $1,126,716 85.9% $841,979 84.4%
Europe .......................... 510,515 11.0 119,527 9.2 115,949 11.7
Other(1) ........................ 97,642 6.0 64,566 4.9 38,980 3.9
---------- ----- ---------- ----- -------- -----
Total Assets ............... $1,682,048 100.0% $1,310,809 100.0% $996,908 100.0%
========== ===== ========== ===== ======== =====
(1) Includes Australia, Latin America and the Pacific Rim countries.
</TABLE>
Note (17) Quarterly Financial Data (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Income
(Loss) Net
Net Gross from Income Income (Loss)
Sales Profit Operations (Loss) Per Share (a)
1998
First Quarter (Restated)..... $ 362,688 $203,127 $ 78,596 $ 54,870 $0.34
Second Quarter .............. 371,293 212,261 82,434 57,587 0.36
Third Quarter ............... 331,827 167,573 25,500 19,898 0.12
Fourth Quarter (Restated) ... 311,522 118,078 (275,342) (167,316) (b) (1.06)
---------- -------- -------- --------- -----
Total Year .................. $1,377,330 $701,039 ($ 88,812) ($ 34,961) ($0.22)
========== ======== ======== ========= =====
1997
First Quarter ............... $ 323,499 $190,645 $ 85,672 $ 57,139 $0.37
Second Quarter (Restated).... 340,940 186,285 56,141 40,862 (c) 0.26
Third Quarter ............... 361,558 213,959 99,029 67,742 0.44
Fourth Quarter (Restated).... 380,555 220,256 85,436 60,336 (d) 0.36
---------- -------- -------- -------- -----
Total Year .................. $1,406,552 $811,145 $326,278 $226,079 $1.42
========== ======== ======== ======== =====
</TABLE>
(a) Due to rounding some totals will not add.
(b) Includes $234.3 million of in-process research and development charges
related to the acquisition of Digital's Network Products Group and the
strategic alignment plan, $199.3 million and $35.0 million, respectively.
(c) Includes $12.7 million special charge related to the acquisitions of ZeitNet
and Network Express.
(d) Includes $9.0 million special charge related to the acquisitions of Netlink
and OASys.
<PAGE>
The first and fourth quarters of the year ended February 28, 1998 have been
restated, see Note 2. First quarter gross profit and income from operations have
been reduced by $6.0 million and net income has been reduced by $3.9 million
($.03 per share) from amounts previously reported. This restatement relates to
the ZeitNet inventory write-off. Fourth quarter gross profit has been reduced by
$24.5 million as a result of a reclassification of an inventory write-off from
special charges to cost of sales. This reclassification had no effect on net
income. Fourth quarter loss from operations has been reduced by $156.3 million
and net loss has been reduced by $96.1 million ($.60 per share) from amounts
previously reported. This restatement relates to the in-process research and
development and special charges relating to the DNPG acquisition.
The first quarter of the year ended February 28, 1997 has been restated. First
quarter gross profit decreased by $20.3 million as a result of a
reclassification of special charges to cost of sales. Based on inventory
disposals through February 28, 1997, special charges decreased $6.0 million and
tax expense of $2.0 million was recorded, in the year ended February 28, 1997.
The restated information reflects adjustments needed to record the amortization
on the increase in the DNPG intangible assets and to expense as incurred the
reversal of DNPG special charges that had been previously recorded in the fourth
quarter of the year ended February 28, 1998.
Note (18) Subsequent Event
On March 17, 1998 the Company acquired Yago Systems, Inc. ("Yago"), a
privately held manufacturer of wire speed routing and layer-4 switching products
and solutions. Under the terms of the merger agreement, the Company issued 6.1
million shares of Cabletron common stock to the former shareholders of Yago in
exchange for all of the outstanding shares of stock of Yago not then owned by
the Company. In addition, the Company assumed stock options for approximately
2.1 million shares of its common stock. Prior to the closing of the
acquisition, Cabletron held approximately twenty-five percent of Yago's capital
stock. The Company also agreed, pursuant to the terms of the merger agreement,
to issue up to 5.5 million shares of Cabletron common stock to the former
shareholders of Yago in the event the shares originally issued in the
transaction do not attain a market value of $35 per share eighteen months after
the closing of the transaction.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cabletron Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended February 28, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended February 28, 1998, in conformity with generally accepted accounting
principles.
The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).
KPMG LLP
Boston, Massachusetts
March 23, 1998, except for Notes 2 (n) and 17,
as to which the date is May 25, 1999
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
(a) Documents filed as part of this report:
1. Consolidated financial statements (see item 8)
The consolidated financial statements of Cabletron Systems, Inc.
can be found in this document on the following pages:
page(s)
Independent Auditors' Report 38
Consolidated Balance Sheets at February 28, 1998
and February 28, 1997 21
Consolidated Statements of Operations for fiscal years
1998, 1997 and 1996 22
Consolidated Statements of Stockholders' Equity for
fiscal years 1998, 1997 and 1996 23
Consolidated Statements of Cash Flows for fiscal years
1998, 1997 and 1996 24
Notes to Consolidated Financial Statements 25-37
2. Consolidated financial statement schedule
The consolidated financial statement schedule of Cabletron Systems,
Inc. is included in Part IV of this report:
Independent Auditors' Report 38
Schedule II - Valuation and Qualifying Accounts 44
All other schedules have been omitted since they are not required, not
applicable or the information has been included in the consolidated
financial statements or the notes thereto.
<PAGE>
3. Exhibits
The following exhibits unless herein filed are incorporated by
reference.
3.1 Restated Certificate of Incorporation of Cabletron Systems,
Inc., a Delaware corporation, which is incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, No.33-28055, (the First Form S-1).
3.2 Certificate of Correction of the Company's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2 of
the Company's Registration Statement on Form S-1, No. 33-42534 (the
Third Form S-1). 3.3 Certificate of Amendment of the Restated
Certificate of Incorporation of Cabletron Systems, Inc., incorporated
by reference to Exhibit 4.3 of the Company's Registration Statement on
For S-3, No. 33-54466, (the First Form S-3).
3.4 Amended bylaws of Cabletron Systems, Inc., which is
incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on the Third Form S-1.
4.1 Specimen stock certificate of Cabletron Stock (incorporated by
reference to Exhibit 4.1 of Cabletron's Registration Statement on
Form S-1, No.33-28055.
10.1 1989 Restricted Stock Purchase Plan, which is incorporated by reference
to Exhibit 10.1 of the First Form S-1.
10.2 1989 Restricted Stock Plan, which is incorporated by reference to
Exhibit 10.2 of the First Form S-1.
10.3 1989 Equity Incentive Plan, as amended, which is incorporated by
reference to Exhibit 4 of the Company's Registration Statement on
Form S-8, No. 33-50454.
10.4 1989 Employee Stock Purchase Plan, as amended, which is
incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-8, No. 33-31572.
10.5 1989 Stock Option Plan for Directors, as amended, which is
incorporated by reference to Exhibit 10.5 of the Third Form S-1.
10.6 Agency Agreement between the Registrant and International Cable
Networks Inc., which is incorporated by reference to Exhibit 10.6 of the
First Form S-1.
10.7 Modification dated October 1990, of the Blue, Inc. Lease,
relating to leased premises in Ironton, Ohio, which is incorporated by
reference to Exhibit 10.8 of the First Form S-3.
10.8 Lease dated October 19, 1992 between the Registrant and Heidelberg
Harris, Inc., relating to leased premises in Durham, New Hampshire,
which is incorporated by reference to Exhibit 10.9 of the First
Form S-3.
10.9 Lease dated December 1, 1991 between the Registrant and George
L. Beattie, Ruth V. Blomstedt and Dan A. Wooley, as trustees of
the Execpark Realty Trust, relating to leased premises in
Merrimack, New Hampshire, which is incorporated by reference to
Exhibit 10.10 of the First Form S-3.
10.10 Lease dated July 3, 1992 between the Registrant and Shannon
Free Airport Development Company Limited, relating to leased
premises in Limerick, Ireland, which is incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement on the First Form S-3.
10.11 Lease dated July 15, 1996 between the Registrant and the Lawrence
County Economic Development Corporation, relating to leased premises in
Ironton, Ohio (Incorporated by Reference to Exhibit 10.11 of the
Registrant's Form 10-K of May 30, 1997).
10.12 Credit Agreement dated March 7, 1997, between the Registrant and
the Chase Manhattan Bank, as administrative agent, the First National
Bank of Chicago, as syndication agent and certain other lenders
relating to the Company's $250,000,000 revolving credit facility
(Incorporated by Reference to Exhibit 10.11 of the Registrant's
Form 10-K of May 30, 1997).
10.13 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).
10.14 Reseller and Services Agreement dated as of November 24, 1997
between the Registrant and Digital (the "Reseller Agreement")
(Incorporated by Reference to 10.1 of the Registrant's Form 10-Q of
January 14, 1998). 10.15 Employment Agreement between the Registrant
and Donald B. Reed dated as of August 6, 1997
(Incorporated Reference to Exhibit 10.1 of the Registrant's
Form 10-Q of October 15, 1997).
10.16 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).
10.17 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).
10.18 Letter agreement between the Registrant and Donald B. Reed dated
as of March 30, 1998.
11.1 Statement regarding computation of per share earnings.
22.1 Subsidiaries of Cabletron Systems, Inc.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule
<PAGE>
(b) The Registrant filed on form 8-K during the last quarter of the fiscal year
ended February 28, 1998, as follows:
The Company filed this report on form 8-K to disclose certain information
related to its acquisition of Network Products Business Unit of Digital
Equipment Corporation.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cabletron Systems, Inc.:
Under date of March 23, 1998, we reported on the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended February 28, 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedule as listed in item 14(a)2 of this Form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).
KPMG LLP
Boston, Massachusetts
March 23, 1998, except for Notes 2 (n) and 17,
as to which the date is May 25, 1999
<PAGE>
SCHEDULE II
CABLETRON SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Amounts
attributable
Balance at to changes in Balance
beginning Charged to foreign Amounts at end
Description of period expense currency rates written off of period
Allowance for
doubtful accounts
February 28, 1998 $15,476 $11,615 ($81) ($5,967) $21,043
February 28, 1997 $6,655 $10,698 ($1) ($1,876) $15,476
February 29, 1996 $6,190 $2,725 $1 ($2,261) $6,655
</TABLE>
<PAGE>
Signatures
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CABLETRON SYSTEMS, Inc.
Date: July 23, 1999 By: /s/ Piyush Patel
------------ -------------------
Piyush Patel
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Titles Date
- --------- ------ ----
/s/ Piyush Patel July 23, 1999
- ---------------------------- Chairman, President, and -------------
Piyush Patel Chief Executive Officer
/s/ David J. Kirkpatrick July 23, 1999
- --------------------------- Corporate Executive Vice President of Finance -------------
David J. Kirkpatrick and Chief Financial Officer
/s/ Michael D. Myerow Secretary and Director July 23, 1999
- -------------------------- ------------
Michael D. Myerow
/s/ Paul R. Duncan Director July 23, 1999
- ----------------------------- ------------
Paul R. Duncan
/s/ Donald F. McGuinness Director July 23, 1999
- ------------------------ ------------
Donald F. McGuinness
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Page No.
11.1 Statement regarding computation of per share
income (loss) 47
23.1 Consent of Independent Auditors 49
27 Financial Data Schedule 54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
CABLETRON SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
For Years Ended February 28, 1998 and 1997 and February 29, 1996
<S> <C> <C> <C>
1998 1997 1996
------- ------- -------
(in thousands, except per share data)
Net Income (Loss) Per Common Share - (basic)
Net income (loss) ($ 34,961) $226,079 $144,485
======== ======== ========
Weighted average number of common shares
outstanding 157,686 155,207 151,525
========= ======== ========
Net income (loss) per common share ($ 0.22) $ 1.46 $ 0.95
========= ======== ========
Net Income (Loss) Per Common Share - (diluted)
Net income (loss) ($ 34,961) $226,079 $144,485
======== ======== ========
Weighted average number of common shares
outstanding 157,686 155,207 151,525
Add net additional common shares upon exercise of
common stock options --- 3,726 3,646
------- -------- --------
Adjusted average common shares outstanding 157,686 158,933 155,171
======== ======= ========
Net income (loss) per common share ($ 0.22) $ 1.42 $ 0.93
======== ======= ========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cabletron Systems, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-50454, 33-31572, 33-50753, 33-21391, 33-17557, 33-09403, 33-09029, 33-96060,
33-96058, 33-33454 and 33-42490) on Form S-8 of Cabletron Systems, Inc. of our
reports dated March 23, 1998, except for Notes 2 (n) and 17, relating to the
consolidated balance sheets of Cabletron Systems, Inc. and subsidiaries as of
February 28, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows and the related schedule for
each of the years in the three-year period ended February 28, 1998, which
reports are included in the February 28, 1998 Annual Report to Stockholders on
Form 10-K of Cabletron Systems, Inc.
The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).
KPMG LLP
Boston, Massachusetts
July 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
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<NAME> CABLETRON SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<EXCHANGE-RATE> 1.00
<CASH> 207,078
<SECURITIES> 116,979
<RECEIVABLES> 262,224
<ALLOWANCES> 21,043
<INVENTORY> 309,667
<CURRENT-ASSETS> 1,045,462
<PP&E> 455,774
<DEPRECIATION> 211,044
<TOTAL-ASSETS> 1,682,048
<CURRENT-LIABILITIES> 452,416
<BONDS> 0
0
0
<COMMON> 1,583
<OTHER-SE> 1,083,492
<TOTAL-LIABILITY-AND-EQUITY> 1,682,048
<SALES> 1,377,330
<TOTAL-REVENUES> 1,377,330
<CGS> 676,291
<TOTAL-COSTS> 676,291
<OTHER-EXPENSES> 789,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,578
<INCOME-PRETAX> (70,234)
<INCOME-TAX> (35,273)
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> (34,961)
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<EPS-DILUTED> (0.22)
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