SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2797263
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
35 Industrial Way, Rochester, New Hampshire 03867
----------------------------------------------------
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (603) 332-9400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES - X NO -
As of September 30, 1999 there were 180,556,881 shares of the Registrant's
common stock outstanding.
This document contains 27 pages
Exhibit index on page 22
<PAGE>
INDEX
CABLETRON SYSTEMS, INC.
Page(s)
-------
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - August 31, 1999 (unaudited) and
February 28, 1999 3
Consolidated Statements of Operations - Three and six months ended
August 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows - Six months ended
August 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements -
August 31, 1999 (unaudited) 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 18
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders 20
Item 5. Other 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
August 31, 1999 February 28, 1999
---------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ......................................... $ 111,003 $ 159,422
Short-term investments ............................................ 85,689 113,932
Accounts receivable, net .......................................... 230,513 216,793
Inventories, net .................................................. 227,411 229,512
Deferred income taxes ............................................. 53,522 60,252
Prepaid expenses and other assets ................................. 64,650 60,510
----------- -----------
Total current assets ..................................... 772,788 840,421
----------- -----------
Long-term investments ............................................. 207,770 202,984
Long-term deferred income taxes ................................... 155,140 135,197
Property, plant and equipment, net ................................ 160,075 188,479
Intangible assets, net ............................................ 181,311 199,419
----------- -----------
Total assets ............................................. $ 1,477,084 $ 1,566,500
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................. $ 115,339 $ 121,580
Current portion of long-term obligation ........................... 36,198 129,747
Accrued expenses .................................................. 213,787 218,149
----------- -----------
Total current liabilities ................................ 365,324 469,476
----------- -----------
Long-term deferred income taxes ................................... 10,321 7,191
----------- -----------
Total liabilities ........................................ 375,645 476,667
----------- -----------
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
174,811 and 172,184, respectively .......................... 1,748 1,722
Additional paid-in capital ........................................ 575,026 551,232
Retained earnings ................................................. 526,971 536,487
----------- -----------
1,103,745 1,089,441
Accumulated other comprehensive income ............................ (2,306) 392
----------- -----------
Total stockholders' equity ............................... 1,101,439 1,089,833
----------- -----------
Total liabilities and stockholders' equity ............... $ 1,477,084 $ 1,566,500
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ............................................ $356,639 $370,591 $ 706,172 $ 736,338
Cost of sales ........................................ 195,691 198,800 408,306 414,912
-------- -------- --------- ---------
Gross profit ................................ 160,948 171,791 297,866 321,426
-------- -------- --------- ---------
Operating expenses:
Research and development .......................... 46,799 53,941 97,596 108,150
Selling, general and administrative ............... 100,799 106,804 195,801 206,916
Amortization of intangible assets ................. 7,469 6,015 14,829 12,689
Special charges ................................... --- --- 23,736 150,000
--------- -------- --------- ---------
Total operating expenses .................... 155,067 166,760 331,962 477,755
-------- -------- --------- ---------
Income (loss) from operations ........................ 5,881 5,031 (34,096) (156,329)
Other income ......................................... 10,027 --- 10,027 ---
Interest income, net ................................. 3,832 4,081 7,900 7,920
-------- -------- --------- ---------
Income (loss) before income taxes ........... 19,740 9,112 (16,169) (148,409)
Income tax expense (benefit) ......................... 6,731 2,718 (6,653) (234)
-------- -------- --------- ---------
Net income (loss) ........................... $ 13,009 $ 6,394 ($ 9,516) ($148,175)
======== ======== ========== ==========
Net income (loss) per share:
Basic ........................................... $ 0.07 $ 0.04 ($ 0.05) ($ 0.90)
======== ======== ========== ==========
Diluted ......................................... $ 0.07 $ 0.04 ($ 0.05) ($ 0.90)
======== ======== ========== ==========
Weighted average number of shares outstanding:
Basic ........................................... 174,159 164,640 173,624 164,017
======== ======== ========= =========
Diluted ......................................... 186,381 170,462 173,624 164,017
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended
August 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... ($ 9,516) ($148,175)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 57,658 44,557
Provision for losses on accounts receivable ............... (2,088) 2,285
Deferred taxes ............................................ 5,260 (7,439)
Asset impairment .......................................... 7,869 ---
Purchased research and development from acquisition ....... --- 150,000
Other income .............................................. (10,027) ---
Other ..................................................... 698 698
Changes in assets and liabilities:
Accounts receivable .................................... (14,009) (20,938)
Inventories ............................................ 1,964 44,244
Prepaid expenses and other assets ...................... 3,374 (16,020)
Accounts payable and accrued expenses .................. (7,887) 6,650
Current portion of long-term obligation ................ (93,549) (59,047)
--------- ---------
Net cash used in operating activities ............................ (60,253) (3,185)
--------- ---------
Cash flows from investing activities:
Capital expenditures .......................................... (18,299) (24,110)
Cash received in business acquisition ......................... --- 317
Purchases of available-for-sale securities .................... (33,891) (59,830)
Purchases of held-to-maturity securities ...................... (128,465) (57,928)
Maturities of marketable securities ........................... 180,002 98,653
--------- ---------
Net cash used in investing activities ...................... (653) (42,898)
--------- ---------
Cash flows from financing activities:
Proceeds from stock option exercise ........................... 9,489 1,254
Common stock issued to employee stock
purchase plan ............................................... 3,418 2,124
--------- ---------
Net cash provided by financing activities ........................ 12,907 3,378
--------- ---------
Effect of exchange rate changes on cash .......................... (420) 260
--------- ---------
Net decrease in cash and cash equivalents ........................ (48,419) (42,445)
Cash and cash equivalents, beginning of period ................... 159,422 207,078
--------- --------
Cash and cash equivalents, end of period ......................... $111,003 $164,633
========= ========
Cash paid (refunds received) during the period for:
Income taxes .................................................. $ (730) $ 8,366
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and Article 2 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments consisting of normal
recurring accruals necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the entire year. The accompanying financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended February 28, 1999.
Certain prior period balances have been reclassified to conform to the current
period presentation.
2. New Accounting Standards
In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-9, "Modification of Software Revenue Recognition"
which requires recognition of revenue using specific methods and amends SOP 98-4
(Deferral of the Effective Date of a Provision of SOP 97-2) and amends certain
paragraphs of SOP 97-2. The Company adopted SOP 98-9 for its year ending
February 28, 2000, beginning on March 1, 1999. The adoption of SOP 98-9 did not
have a material impact on the Company's results of operations for the three and
six months ended August 31, 1999.
In June 1998, the Financial Accounting Standards Board (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. At this time, management does not expect the impact to be
significant.
3. Inventories
Inventories consist of:
(in thousands)
August 31, February 28,
1999 1999
---------- ------------
Raw materials $ 60,878 $ 64,603
Work in process 12,856 16,033
Finished goods 153,677 148,876
--------- ---------
Total inventories $227,411 $229,512
======== ========
4. Business Combination
On March 17, 1998, Cabletron acquired Yago Systems, Inc. ("Yago"), a privately
held manufacturer of wire speed routing and layer-4 switching products and
solutions. Under the terms of the merger agreement, Cabletron issued 6.0 million
shares of Cabletron common stock to the shareholders of Yago in exchange for all
of the outstanding shares of Yago, not then owned by Cabletron. Prior to the
closing of the acquisition, Cabletron held approximately twenty-five percent of
Yago's capital stock, calculated on a fully diluted basis. Cabletron also
agreed, pursuant to the terms of the merger agreement, to issue up to 5.5
million shares of Cabletron common stock to the former shareholders of Yago in
the event the shares originally issued in the transaction do not attain a market
value of $35 per share eighteen months after the closing of the transaction. On
September 8, 1999, Cabletron issued approximately 5.4 million shares of
Cabletron common stock to the former shareholders of Yago, pursuant to the terms
of the merger agreement.
<PAGE>
Cabletron recorded the cost of the acquisition at approximately $165.7 million,
including direct costs of $2.6 million. This acquisition has been accounted for
under the purchase method of accounting. The cost represents 11.5 million shares
at $14.1875 per share, in addition to direct acquisition costs. Based on an
independent appraisal, $150.0 million of the purchase price was allocated to
in-process research and development. Accordingly, Cabletron recorded special
charges of $150.0 million for this in-process research and development, at the
date of acquisition. The excess of cost over net assets acquired was allocated
to goodwill and other intangible assets. A total of $16.3 million was allocated
to goodwill and other intangible assets and is being amortized on a
straight-line basis over a period of 5 - 10 years. Cabletron's consolidated
results of operations include the operating results of Yago from the acquisition
date.
5. EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and diluted
income (loss) per common share computations for the Company's reported net
income (loss) is as follows:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $13,009 $ 6,394 ($ 9,516) ($148,175)
======= ========= ========= =========
Weighted average shares outstanding - basic 174,159 164,640 173,624 164,017
Dilutive Effect:
Contingent shares per acquisition agreement 5,416 5,500 --- ---
Net additional common shares upon
exercise of common stock options 6,806 322 --- ---
------- -------- -------- ---------
Weighted average shares outstanding -
diluted 186,381 170,462 173,624 164,017
======= ======== ======== =========
Net income (loss) per share - basic $ 0.07 $ 0.04 ($ 0.05) ($ 0.90)
====== ======== ========= ==========
Net income (loss) per share - diluted $ 0.07 $ 0.04 ($ 0.05) ($ 0.90)
====== ======== ========= ==========
</TABLE>
For the six months ended August 31, 1999 and 1998, stock options to purchase
shares of common stock totaling 5.5 million and 0.4 million, respectively, were
outstanding but were not included in the calculation of diluted earnings per
share since the effect was anti-dilutive. In addition, the effect of the 5.4
million shares that were issued, in September 1999, related to the acquisition
of Yago, for the six months ended August 31, 1999 and 1998, was not included
since the effect was anti-dilutive.
6. Comprehensive Income (Loss)
The Company's total comprehensive income (loss) was as follows:
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $13,009 $ 6,394 ($ 9,516) ($148,175)
Other comprehensive income:
Unrealized gain/(loss) on
available-for-sale securities (1,336) --- (1,577) ---
Foreign currency translation
adjustment (1,115) 716 (1,121) 2,064
-------- -------- ---------- ---------
Total comprehensive income (loss) $10,558 $ 7,110 ($ 12,214) ($146,111)
======= ======== ========== ==========
</TABLE>
<PAGE>
7. Restructuring Charges
In the first quarter of fiscal 2000, the Company announced a global
restructuring initiative and recorded special charges of $23.7 million in the
quarter ended May 31, 1999. The restructuring charge consisted of approximately
$7.9 million related to asset impairments, $11.6 million related to employee
termination and severance costs, and $4.2 million related to exit costs. These
charges were recognized to reflect the planned closure of a manufacturing
facility in Ohio, the planned closure or divestiture of approximately 40 sales
offices worldwide, the planned consolidation and outsourcing of certain
manufacturing operations, the write-off of certain assets that would not be
required subsequent to the restructuring and the planned net reduction of
approximately 1,000 individuals from the Company's global workforce. The
reduction in the global workforce is expected to be principally of manufacturing
and distribution personnel and other targeted headcounts impacting most
functions within the Company. These actions are expected to be completed prior
to February 29, 2000. As of August 31, 1999, approximately 380 employees were
terminated in accordance with the plan.
The following table summarizes the recorded accruals and uses of the
restructuring initiative from inception through August 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Asset Severance Exit
Impairments Benefits Costs Total
----------- --------- ---------- ---------
Total charge $7,869 $11,657 $4,210 $23,736
Cash payments since inception --- (4,902) (180) (5,082)
Non-cash items since inception (7,455) --- --- (7,455)
------- ------- ------ --------
Accrual balance as of August 31, 1999 $ 414 $ 6,755 $4,030 $11,199
======= ======= ====== ========
</TABLE>
8. Segment and Geographical Information
The Company provides a broad product line and services for the computer
networking industry. Substantially all revenues result from the sales of
hardware and software products and professional services (training,
installation, maintenance, etc.). The Company's reportable segments are based on
geographic area. All intercompany revenues, profits and expenses are eliminated
in computing revenues and operating income. Operating income excludes other
income, interest income, interest expense, taxes and special charges. Long-lived
assets consist primarily of the net book value of property, plant and equipment,
goodwill and long-term investments. Goodwill and the long-term investments were
attributable to the United States segment. The Other segment includes Canada and
Latin America.
All revenue amounts are based on product shipment destination and asset balances
are based on location. The operating income (loss) amounts for the six month
period ended August 31, 1999 exclude the $23.7 million charge related to the
restructuring initiative announced during the period. The United States
operating income in the six month period ended August 31, 1998 excludes the
$150.0 million of special charges related to the Yago acquisition that was
completed during the quarter ended May 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Three months ended Six months ended
August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers (trade):
United States $ 226,358 $ 234,367 $ 466,391 $ 431,112
Europe 92,649 104,792 171,261 225,655
Pac Rim 29,002 23,191 52,854 58,341
Other 8,630 8,241 15,666 21,230
---------- ---------- ---------- -----------
Total trade sales $ 356,639 $ 370,591 $ 706,172 $ 736,338
---------- ---------- ---------- -----------
Operating income (loss):
United States $ 3,742 $ (45) $ 4,665 $ (28,515)
Europe 918 11,245 (11,697) 27,775
Pac Rim 2,332 (4,129) (678) (2,224)
Other (1,111) (2,040) (2,650) (3,365)
----------- ----------- ----------- ------------
Total operating income (loss) $ 5,881 $ 5,031 $ (10,360) $ (6,329)
---------- ---------- ----------- ------------
August 31, February 28,
1999 1999
---------- ------------
Assets:
United States $1,254,739 $1,326,929
Europe 153,370 173,937
Pac Rim 45,798 37,586
Other 23,177 28,048
---------- ----------
Total assets $1,477,084 $1,566,500
---------- ----------
Long-lived assets:
United States $ 409,770 $ 438,864
Europe 18,202 19,453
Pac Rim 4,960 5,828
Other 2,765 2,503
---------- ----------
Total long-lived assets $ 435,697 $ 466,648
---------- ----------
</TABLE>
9. Other Income
Other income in the second quarter of fiscal 2000 related to the realized gain
on the exchange of a minority stock investment. The gain was computed as the
difference between the book value of the Company's investment and the market
value of the acquiror's securities received in exchange.
10. Subsequent Events
On September 8, 1999, pursuant to the terms of the merger agreement between
Cabletron and Yago, as described in Note 4, Cabletron issued approximately 5.4
million shares of Cabletron common stock to the former shareholders of Yago.
This transaction will result in the reclassification of approximately $54,000
from additional paid-in capital to common stock, on the consolidated balance
sheet.
On September 20, 1999, the Company and Compaq Computer Corporation ("Compaq")
entered into an agreement to replace the existing purchase and reseller
agreements between the two companies and enter into new agreements that reflect
a new business focus at Compaq. In replacing the existing agreements, the
companies agreed to eliminate Compaq's minimum quarterly purchase commitments.
In return, Compaq and the Company are finalizing an agreement that will result
in Compaq making a one-time cash payment for existing inventory and certain
future purchases. In addition, Compaq agreed to make an equity investment in the
Company's SPECTRUM business unit. The two companies intend to transition sales
of legacy Digital branded products from Compaq and its resellers to the Company.
Further, the two companies have agreed to further expand the relationship
between the Company and Compaq's professional services organization.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of the Three Months ended August 31, 1999 vs Three Months ended August
31, 1998
Cabletron Systems' worldwide net sales in the second quarter of fiscal 2000 (the
three month period ended August 31, 1999) were $356.6 million, a decrease of
3.8% from net sales of $370.6 million for the second quarter of fiscal 1999.
Sales remained relatively flat as the Company transitions from older shared
media technology to newer switched technology. Worldwide sales of switched
products increased approximately $23.7 million, or 11.6%, to $227.5 million in
the second quarter of fiscal 2000 compared to $203.8 million in the second
quarter of fiscal 1999. The increase in sales of switched products was largely
due to an increase in the Company's flagship SmartSwitch Router products, which
offset declining sales in older switched products. Despite the increase in
switched product sales, overall sales decreased. The overall decrease was
largely a result of a $34.5 million decrease in sales of shared media products
to $17.4 million in the second quarter of fiscal 2000 compared to $51.9 million
in the same quarter of fiscal 1999, a decline of approximately 66.4%. The
Company expects sales of its shared media products to continue to decrease as
customers migrate from shared media products to the newer switched technology
products. Sales of software and other increased $5.4 million, or 12.7%, to $48.3
million in the second quarter of fiscal 2000 as compared to $42.9 million in the
same quarter of fiscal 1999. An increase in sales of Spectrum products and other
software was partially offset by decreases in remote access products. Revenues
from professional services decreased $8.6 million, or 12.0%, to $63.4 million in
the second quarter of fiscal 2000 as compared to $72.0 million in the same
quarter of fiscal 1999. This decrease was primarily a result of decreased
service maintenance revenues and fewer installations. On September 20, 1999, the
Company and Compaq entered into an agreement to replace the existing purchase
and reseller agreements between the parties and enter into new agreements
reflecting a new business focus at Compaq. In replacing the existing agreements,
the parties agreed to terminate Compaq's binding commitment to purchase certain
minimum quantities of the Company's products each quarter. Further details
regarding the change to the Company's relationship with Compaq are set forth in
Item 5. As a result of terminating Compaq's minimum purchase commitments, the
Company believes that purchases by Compaq will be flat to slightly down over the
next two quarters compared to Compaq's recent purchase levels. There is a risk
that as a result of terminating Compaq's minimum purchase commitments, Compaq's
purchases of the Company's products will decline substantially over the next two
quarters. This would have a material adverse impact on the Company's results of
operations.
Net sales within the United States (domestic) were $226.4 million or 63.5% of
total net sales in the second quarter of fiscal 2000 compared to $234.4 million
or 63.2% of total net sales in the second quarter of fiscal 1999, a decrease of
$8.0 million or 3.4%. Domestic sales of switched technology products increased
by approximately $8 million or 6%. This increase was largely attributable to a
significant increase in sales of SmartSwitch routers more than offsetting a
decrease in sales of ATM smartswitches and other older switch products. Sales of
shared media products continued to decline as customers transition to switched
products.
Net sales in Europe were $92.6 million or 26.0% of total net sales in the second
quarter of fiscal 2000 compared to $104.8 million or 28.3% of total net sales in
the second quarter of fiscal 1999, a decrease of $12.2 million or 11.6%.
European sales of switched technology products increased by approximately $4
million or 7%. An increase in sales of switched products to resellers and
distributors was more than offset by decreases in shared media products sales
and other.
Net sales in Pac Rim were $29.0 million or 8.1% of total net sales in the second
quarter of fiscal 2000 compared to $23.2 million or 6.3% of total net sales in
the second quarter of fiscal 1999, an increase of $5.8 million or 25.1%. Pac Rim
sales of switched technology products increased by approximately $8 million or
52%. Sales of shared media products are not material while sales of switched
products to distributors continued to increase.
Net sales in Other regions were $8.6 million or 2.4% of total net sales in the
second quarter of fiscal 2000 compared to $8.2 million or 2.2% of total net
sales in the second quarter of fiscal 1999, an increase of $0.4 million or 4.7%.
Service and switched revenues continue to represent a majority of the sales in
the Other region.
Gross profit as a percentage of net sales in the second quarter of fiscal 2000
decreased to 45.1% from 46.4% for the second quarter of fiscal 1999. The
decrease was primarily due to pricing pressures on the Company's older products,
which were partially offset by higher gross margins obtained on many of the
Company's newer products and software sales, and through lower inventory
obsolescence.
<PAGE>
Research and development ("R&D") expenses in the second quarter of fiscal 2000
decreased 13.2% to $46.8 million from $53.9 million in the second quarter of
fiscal 1999. The decrease in research and development spending reflected the
savings achieved through the consolidation of staff and facilities from various
R&D departments accumulated from the acquisitions. Research and development
spending as a percentage of net sales decreased to 13.1% from 14.6%.
Selling, general and administrative ("SG&A") expenses in the second quarter of
fiscal 2000 decreased 5.6% to $100.8 million from $106.8 million in the second
quarter of fiscal 1999. This decrease was largely a result of savings achieved
as a result of the implementation of the Company's cost reduction initiatives.
Amortization of intangible assets increased 24.2% to $7.5 million, in the second
quarter of fiscal 2000, from $6.0 million, in the second quarter of fiscal 1999.
The increase in amortization expense was due to acquisitions completed during
the third quarter of fiscal 1999.
The Company's worldwide operating income was $5.9 million for the second quarter
of fiscal 2000 compared to $5.0 million in the second quarter of fiscal 1999.
Operating income improved due to lower operating expenses being only partially
offset by a decrease in sales and gross profit margin. During the second quarter
of fiscal 2000, domestic income from operations increased by $3.8 million, as
compared to the second quarter of fiscal 1999, largely due to lower R&D
expenses. In Europe, income from operations decreased $10.3 million, between the
second quarter of fiscal 2000 and the comparable quarter of fiscal 1999,
primarily due to lower sales and the related gross profit. An increase of $6.5
million, between the second quarter of fiscal 2000 and the second quarter of
fiscal 1999, of income from operations, resulted in the Pac Rim, largely due to
higher sales and lower SG&A expenses. The loss from operations of the Other
region was reduced by $0.9 million, between the second quarter of fiscal 2000
and the second quarter of fiscal 1999, primarily due to lower operating
expenses.
Other income in the second quarter of fiscal 2000 related to the realized gain
on the exchange of a minority stock investment. The gain was computed as the
difference between the book value of the Company's investment and the market
value of the acquiror's securities received in exchange.
Net interest income in the second quarter of fiscal 2000 decreased $0.3 million
to $3.8 million, as compared to $4.1 million in the same quarter of fiscal 1999.
The decrease reflects lower rates of returns on investments and lower invested
balances.
The Company's effective tax rate was 34.1% for the quarter ended August 31, 1999
compared to 29.8% for the quarter ended August 31, 1998. The lower rate for the
quarter ended August 31, 1998 was a result of the use of certain tax credits.
The Company expects the effective tax rate of future quarters to be more in line
with the effective tax rate for the quarter ended August 31, 1999, as this rate
reflects the Company's normalized effective tax rate.
<PAGE>
Results of the Six Months ended August 31, 1999 vs Six Months ended August 31,
1998
Cabletron Systems' worldwide net sales in the six month period ended August 31,
1999 were $706.2 million, a decrease of 4.1% from net sales of $736.3 million
for the six month period ended August 31, 1998. Sales remained relatively flat
as the Company continues to transition from the older shared media technology to
newer switched technology. Worldwide sales of switched products increased
approximately $54.1 million, or 13.5%, to $455.4 million in the first six months
of fiscal 2000 compared to $401.3 million in the first six months of fiscal
1999. The increase in sales of switched products was largely due to the
SmartSwitch Router products which were introduced during the first three months
of fiscal 1999. Overall sales decreased despite the increase in sales of
switched products, due to a $71.0 million decrease in sales of shared media
products to $35.8 million in the first six months of fiscal 2000 compared to
$106.8 million in the same period of fiscal 1999, a decline of approximately
66.4%. The Company expects sales of its shared media products to continue to
decrease this fiscal year as customers migrate from shared media products to the
newer switched technology products. Sales of software and other decreased $1.0
million to $89.7 million in the first six months of fiscal 2000 as compared to
$90.7 million in the same period of fiscal 1999. An increase in sales of
Spectrum software was more than offset by decreased sales of remote access
products and other miscellaneous products. Revenues from professional services
decreased $12.3 million, or 8.9%, to $125.3 million in the first six months of
fiscal 2000 as compared to $137.6 million in the comparable period of fiscal
1999. This decrease was primarily a result of decreased service maintenance
revenues and fewer installations. As a result of terminating Compaq's minimum
purchase commitments, the Company believes that purchases by Compaq will be flat
to slightly down over the next six months compared to Compaq's recent purchase
levels. However, there is a risk that as a result of terminating Compaq's
minimum purchase commitments, Compaq's purchases of the Company's products will
decline substantially over the remainder of the fiscal year. If such a
substantial decline occurred, it would have a material adverse impact on the
Company's results of operations.
Domestic net sales increased $35.3 million or 8.2% from $431.1 million or 58.5%
of total net sales in the six month period ended August 31, 1998 to $466.4
million or 66.0% of total net sales for the six month period ended August 31,
1999. Domestic sales of switched technology products increased by approximately
$64 million or approximately 27%. The increase was principally related to
increased sales of SmartSwitch routers being partially offset by decreased sales
of some of the older smartswitching products and shared media products.
Net sales in Europe were $171.3 million or 24.3% of total net sales in the first
six months of fiscal 2000 compared to $225.7 million or 30.6% of total net sales
in the first six months of fiscal 1999. European sales of switched technology
products were flat. The decrease was a result of decreased sales across all
remaining product lines.
Net sales in Pac Rim were $52.9 million or 7.5% of total net sales in the first
six months of fiscal 2000 compared to $58.3 million or 7.9% of total net sales
in the first six months of fiscal 1999. Pac Rim sales of switched technology
products increased by approximately $9 million or 28%. Overall sales decreased
primarily as a result of decreased sales across all remaining product lines more
than offsetting the increase in sales of switched technology products.
Net sales in Other regions were $15.7 million or 2.2% of total net sales in the
first six months of fiscal 2000 compared to $21.2 million or 2.9% of total net
sales in the first six months of fiscal 1999. The decrease was a result of
decreased sales across all product lines.
Gross profit as a percentage of net sales in the first six months of fiscal 2000
decreased to 42.2% from 43.7% for the first six months of fiscal 1999. The
decrease was primarily due to a $15.2 million inventory write-off related to the
discontinuations of several product lines. The negative effect of the inventory
write-off and decreased sales of other services and other miscellaneous products
on the gross profit margin was partially offset by an increase of domestic
sales, at higher margins than were achieved in the comparable period of the
preceding year, and increased sales of software products at higher margins.
Research and development expenses in the first six months of fiscal 2000
decreased 9.8% to $97.6 million from $108.1 million in the same period of fiscal
1999. The decrease in research and development spending reflected the savings
achieved through the consolidation of staff and facilities from various R&D
departments accumulated from the acquisitions. Research and development spending
as a percentage of net sales decreased to 13.8% from 14.7%.
Selling, general and administrative expenses in the first six months of fiscal
2000 decreased 5.4% to $195.8 million from $206.9 million in the same period of
fiscal 1999. This decrease was a result of limited reductions in many expense
categories as a result of the Company's cost reduction initiatives.
Amortization of intangible assets increased 16.9% to $14.8 million, in the first
six months of fiscal 2000, from $12.7 million, in the first six months of fiscal
1999. The increase in amortization expense was due to acquisitions completed
during the third quarter of fiscal 1999.
<PAGE>
The Company's worldwide loss from operations was $34.1 million for the first six
months of fiscal 2000 compared to $156.3 million in the comparable period of
fiscal 1999. Excluding the impact of a special charge of $23.7 million related
to the restructuring initiative, loss from operations was $10.4 million for the
first six months of fiscal 2000 and excluding the impact of a special charge of
$150.0 million related to purchased in-process research and development, loss
from operations was $6.3 million for the comparable period of fiscal 1999. The
higher loss from operations, excluding special charges, was due to lower sales
and lower gross profit margins resulting during the first six months of fiscal
2000. During the first six months of fiscal 2000, domestic income from
operations increased by $33.2 million, as compared to domestic loss from
operations for the first six months of fiscal 1999, largely due to higher sales
and lower R&D costs. In Europe, a loss from operations of $11.7 million resulted
as compared to income from operations of $27.8 million for the first six months
of fiscal 1999, a decrease of $39.5 million. The decrease in Europe was
primarily due to lower sales and the related gross profit. The loss from
operations in the Pac Rim decreased $1.5 million between the first six months of
fiscal 2000 and the comparable period of fiscal 1999 due to lower operating
expenses. The loss from operations of the Other region improved by $0.7 million
between the first six months of fiscal 2000 and the comparable period of fiscal
1999 primarily due to lower operating expenses.
Special charges of $23.7 million were recorded in the first six months of fiscal
2000 that related to the restructuring initiative that was undertaken during
March 1999. These charges were recognized to reflect the planned closure of a
manufacturing facility in Ohio, the planned closure or divestiture of
approximately 40 sales offices worldwide, the planned consolidation and
outsourcing of certain manufacturing operations, the write-off of certain assets
that would not be required subsequent to the restructuring and the planned net
reduction of approximately 1,000 individuals from the Company's global
workforce. The reduction in the global workforce is expected to be principally
manufacturing and distribution personnel and other targeted headcounts impacting
most functions within the Company. This initiative is intended to reduce the
expense structure of the Company; lower cost of goods sold; increase cash
reserves; provide higher return on assets and revenue per employee; enable
aggressive asset reduction and consolidation initiatives and increase net
income. These actions are expected to be completed prior to February 29, 2000.
There is no assurance that the Company will achieve the intended benefits of the
restructuring initiative. The benefits are subject to numerous risks that could
impair the Company's ability to realize the expected benefits as soon as
expected, or ever. These risks include the possibility that the Company may
encounter delays in consolidating certain facilities and in implementing planned
workforce reductions; there may be additional unforeseen costs associated with
relocations and employee severance and the need to maintain certain essential
but underutilized facilities. These initiatives will require the dedication of
management and other resources, which may result in a temporary disruption of
the Company's business activities. Any such disruption could have a material
adverse effect on the Company's results of operations. In addition, during the
first six months of fiscal 1999, the Company recorded a special charge of $150.0
million for in-process research and development, in connection with the
acquisition of Yago. For additional information related to the acquisition of
Yago, refer to the section titled Yago Systems, Inc. on page 14.
Other income in the second quarter of fiscal 2000 related to the realized gain
on the exchange of a minority stock investment. The gain was computed as the
difference between the book value of the Company's investment and the market
value of the acquiror's securities received in exchange.
Net interest income in the first six months of fiscal 2000 and fiscal 1999
remained constant at approximately $7.9 million.
Excluding the net effects of the amortization of intangibles, special charges
and other income, the Company's effective tax rate was 28.2% for the six month
period ended August 31, 1999 compared to 26.2% for the six month period ended
August 31, 1998. The Company did not record any tax benefit associated with the
$150.0 million of special charges, recorded in the six month period ended August
31, 1998, as these charges related to non-deductible in-process research and
development.
Liquidity and Capital Resources
Cash, cash equivalents, short and long-term investments decreased to $404.5
million at August 31, 1999 from $476.3 million at February 28, 1999. Net cash
used in operating activities was $60.3 million in the six month period ended
August 31, 1999, compared to $3.2 million in the comparable period of fiscal
1999. The change in net cash used in operating activities at August 31, 1999 was
primarily due to the utilization of product credits and the timing of payments
of vendor invoices. In the Company's acquisition of the networking division
(DNPG) of Digital Equipment Corporation, the Company granted Digital $302.5
million (which was subsequently adjusted to $288.4 million) of product credits
to be used by Digital to purchase products from the Company. In April 1998,
Compaq Computer Corporation acquired Digital and Compaq assumed these product
credits. When Digital, or its successor Compaq, uses product credits, the
Company recognizes revenue but no cash is exchanged; rather the outstanding
product credits are reduced. This has the effect of reducing the Company's cash
provided by operating activities. The Company anticipates that Compaq will
utilize the remaining product credits by November 1999 and as a result the
Company's ability to generate cash from operating activities should improve
during the next quarter.
<PAGE>
Net cash used in investing activities was $0.7 million in the six month period
ended August 31, 1999, compared to $42.9 million in the comparable period of
fiscal 1999. This improvement was a result of lower capital expenditures and net
proceeds from sales/purchases of securities.
Net accounts receivable increased $13.7 million, to $230.5 million at August 31,
1999 from $216.8 million at February 28, 1999. Average day sales outstanding
were 58 and 57 days at August 31, 1999 and February 28, 1999, respectively. The
change in the average day sales outstanding was primarily due to the timing of
sales.
Worldwide inventories at August 31, 1999 were $227.4 million, or 105 days of
sales, compared to $229.5 million, or 107 days of sales at the end of the prior
fiscal year. Inventory turnover was 3.5 turns at August 31, 1999, compared to
3.4 turns at February 28, 1999. Inventory levels decreased from the impact of
discontinuing certain product lines somewhat offset by increased levels of new
products within core product lines.
Capital expenditures for the first six months of fiscal 2000 were $18.3 million
compared to $24.1 million for the same period of the preceding year. Fewer
expenditures were required, in fiscal 2000, as the Company closed and
consolidated facilities. Capital expenditures were principally related to
purchases of computer and computer related equipment and upgrades to
manufacturing equipment.
Current liabilities at August 31, 1999 were $365.3 million compared to $469.5
million at the end of the prior fiscal year. This decrease was mainly due to
Compaq's use of its product credits. The remaining product credits legally
expire on February 7, 2000, but the Company anticipates that Compaq will utilize
all product credits by November 1999. As of August 31, 1999, $36.2 million of
product credits remained compared to $129.7 million of product credits at
February 28, 1999.
On September 20, 1999, the Company and Compaq entered into an agreement to
replace the existing purchase and reseller agreements between the two companies
and enter into new agreements that reflect a new business focus at Compaq. In
replacing the existing agreements, the companies agreed to eliminate Compaq's
minimum quarterly purchase commitments. In return, Compaq and the Company are
finalizing an agreement that will result in Compaq making a one-time cash
payment for existing inventory and certain future purchases. In addition, Compaq
agreed to make an equity investment in the Company's SPECTRUM business unit. The
two companies intend to transition sales of legacy Digital branded products from
Compaq and its resellers to the Company. Further, the two companies have agreed
to further expand the relationship between the Company and Compaq's professional
services organization. All of these events will have the effect of increasing
the Company's cash balance.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will prove adequate
to support the Company's working capital and capital expenditure requirements
for the next twelve months.
Yago Systems, Inc.
In connection with the acquisition of YAGO, the Company allocated $150.0 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 YAGO's
next-generation switching router family of products and technologies.
At the time of its acquisition, YAGO was a development stage company that had
spent approximately $5.6 million on research and development focused on the
development of advanced gigabit switching technology. In fact, all of Yago's
efforts since the company's inception had been directed towards the introduction
of an advanced gigabit layer-2, layer-3, and layer-4 switching and router
product family. YAGO had no developed products or technology and had not
generated any revenues as of its acquisition date. At the time, YAGO was testing
the technology related to the MSR8000, its first product to be released, and was
developing its MSR16000/8600 family of products. These two primary development
efforts were made up of six significant research and development components,
which were ongoing at the acquisition date. These component efforts included
continued MSR8000 development and testing, research and development of the
MSR2000 (a desktop version of the MSR8000), development of the MSR8600,
development of Wide Area Network interfaces for its switching products, routing
software research and development, and device management software research and
development.
<PAGE>
At the time of YAGO's acquisition, the Company believed that the MSR product
family of switching routers would set a new standard for performance and
functionality by delivering wire-speed layer-2, layer-3 and layer-4
functionality. Designed for the enterprise and ISP backbone markets, upon
completion of their development, the MSR products were intended to offer large
table capacity, a multi-gigabit non-blocking backplane, low latency and seamless
calling. YAGO also intended to develop its MSR products to be interoperable with
other standard-based routers and switches. As of the acquisition date,
management expected the development of the MSR product family would be the only
mechanism to fuel YAGO's revenue growth and profitability in the future. Despite
the incomplete state of YAGO's technology, the Company felt that the projected
size and growth of the market for the MSR product, YAGO's demonstrated promise
in the development of the MSR product family and the consideration paid by
Cabletron's competitors to acquire companies comparable to YAGO all warranted
the consideration paid by Cabletron for YAGO.
The nature of the efforts to develop the acquired in-process technology into
commercially viable products 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 two years following the acquisition and
the Company expected to begin generating the economic benefits from the
technologies in the second half of 1998. Funding for such projects was expected
to be obtained from internally generated sources. Expenditures to complete the
MSR technology were expected to total approximately $10.0 million over the two
year period.
To date, YAGO's results have not differed significantly from the forecast
assumptions. YAGO released a fully featured MSR8000 in July 1998. The Company's
R&D expenditures since the YAGO acquisition have not differed materially from
expectations. The Company continues to work toward the completion of the
projects underway at YAGO at the time of the acquisition. Most of the projects
are on schedule (within 2 to 3 months of planned releases). The risks associated
with these efforts are still considered significant and no assurance can be made
that YAGO's upcoming products will meet market expectations.
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 in-process research and development in the YAGO
acquisition, as of March 17, 1998, total revenues attributable to YAGO were
projected to exceed $900 million in 2002, assuming the successful completion and
market acceptance of the major R&D efforts. As of the valuation date, YAGO had
no existing products and accordingly all revenue growth in the first several
years were related to the in-process technologies. The estimated revenues for
the in-process were projected to peak in 2003 and then decline as other new
products and technologies were projected to enter the market.
Cost of sales was estimated based on YAGO's internally generated projections and
discussions with management regarding anticipated gross margin improvements. Due
to the market opportunities in the Gigabit Ethernet arena and YAGO's unique
product architecture substantial gross margins were expected through 2000.
Thereafter, gross margins were expected to gradually decline as competition
increased. Cost of sales was projected to average approximately 47.5 percent
through 2003. SG&A expenses (including depreciation), was projected to remain
constant as a percentage of sales at approximately 23 percent. R&D expenditures
were projected to decrease as a percentage of sales as the in-process projects
were completed. R&D expenditures were expected to peak in 1998 at 7.1 percent of
sales, decline, and then level out at 5.0 percent of sales in 2000 and
thereafter.
The rates utilized to discount the net cash flows to their present value were
based on venture capital rates of return. Due to the nature of the forecast and
the risks associated with the projected growth, profitability and developmental
projects, discount rates of 45.0 to 50.0 percent were used for the business
enterprise and for the in-process R&D. The Company believes these rates were
appropriate because they were commensurate with YAGO's stage of development; 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.
<PAGE>
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 is 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 YAGO acquisition,
that if YAGO does not successfully complete its outstanding in-process research
and development efforts, Cabletron's future operating results would be
materially adversely impacted and the value of the in-process research and
development might never be realized.
Other acquisitions
The Company has previously disclosed its methodology used in determining the
value of in-process research and development acquired in certain of its
acquisitions. The Company used numerous assumptions in valuing the acquired
technologies. Where significant, the Company intends to periodically provide
updates to these assumptions.
The Company continues to derive significant revenue from products acquired in
the DNPG acquisition; however, the Company now believes that it is likely the
revenue from the in-process technologies will not meet the forecast assumptions
used to value the in-process research and development.
Year 2000
The Year 2000 problem generally results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
Absent corrective measures, a computer program that has date-sensitive software
may recognize the date using "00" as 1900 instead of 2000, which may create
processing ambiguities that can cause errors and system failures. As is true for
most companies, the Year 2000 problem creates a risk for the Company. If
Cabletron's products, internal systems or the systems of its suppliers do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on the Company's operations.
The Company initiated a Year 2000 project (the Project) to analyze the impact of
the Year 2000 date change on the Company's family of networking products and its
mission-critical business processes. "Mission-critical" business processes are
those functions whose loss would cause an immediate stoppage of or significant
impairment to the Company's operations. Implementation of the Project is
supervised by a dedicated Year 2000 Project Management Office, which reports its
progress to an Executive Steering Committee. Each operating division of the
Company is applying procedures specific to it that are part of the overall
Project. Cabletron also has engaged outside consultants and external resources
to help formulate and evaluate the Project.
The Company is actively implementing the Project, which will be modified as
events warrant. The Project uses a five phase approach to address and evaluate
Year 2000 issues: 1) conducting an inventory of Year 2000 items; 2) assigning
priorities to identified items and assessing the effects of Year 2000 problems
on the mission-critical functions of the Company; 3) remediation of systems,
software and embedded systems not Year 2000 ready; 4) testing mission-critical
systems; and 5) designing and implementing contingency plans.
The Project has identified four areas of exposure within the Company with
respect to the Year 2000: the internal information technology systems used to
run the Company's business; production, manufacturing, design and engineering
equipment and facilities; the Company's Key Suppliers; and Cabletron Products.
<PAGE>
Internal Information Technology Systems
The Company has completed the inventory and assessment phases of its internal
information technology, including its main financial, manufacturing and order
processing systems. Cabletron expects to complete remediation and testing of
these systems by the end of October 1999, and does not currently expect any
significant issues to be identified during the completion of these phases.
Cabletron has developed a change management process for controlling changes and
additions to Cabletron's critical information systems, so that Year 2000 risks
inherent in any change or addition are understood. However, the failure of any
internal system to achieve Year 2000 readiness could disrupt the Company's
ability to conduct its business or record transactions, which could adversely
affect results of operations or financial condition.
Equipment and Facilities
The Company has largely completed the inventory and assessment phases of its
mission-critical equipment, including manufacturing, designing and engineering
equipment. The remediation and testing phases were substantially completed by
the end of September 1999. Failure of equipment caused by a Year 2000 problem
could result in disruptions in the Company's manufacturing, design, production
and shipping capabilities and could adversely affect the Company's results of
operations and financial condition.
The Company is also assessing the Year 2000 readiness of the facilities it
occupies, with priority being placed on the facilities it owns and the leased
property that house large numbers of Cabletron employees. The Company
substantially completed its remediation efforts by September 1999. These
facilities are critical to operations and any delays in achieving Year 2000
readiness with respect to these facilities could adversely affect the Company's
results of operations or financial condition.
Key Suppliers
The Project realizes that outside suppliers that provide mission-critical
services and supplies ("Key Suppliers") have the potential to adversely affect
the Company's business. Cabletron does not have control of these Key Suppliers.
The Project has assessed its mission critical suppliers and sent surveys to all
of its identified Key Suppliers. The evaluation process includes compliance
inquiries and reviews of published materials and websites, and discussions of
Year 2000 readiness plans. As of August 1999, substantially all Key Suppliers
have been evaluated. A remaining small number of providers will continue to be
monitored throughout the remainder of 1999. Where issues are identified with a
particular Key Supplier, contingency plans will be developed. Even where
assurances are received from third parties, there remains a risk that failure of
systems and products of other companies on which Cabletron relies could have a
material adverse effect on the Company. Further, if these Key Suppliers fail to
address the Year 2000 issue adequately for the products they provide to
Cabletron, critical materials, products and services may not be delivered in a
timely manner, which could adversely affect the Company's results of operations
or financial condition. Consequently, the Company will continue to monitor and
assess the potential impact of the Year 2000 on the products and services
provided by Key Suppliers.
Cabletron Products
The Company has conducted extensive work regarding the status of its current,
developing and installed base of products. The Company has published a list of
its major products indicating their Year 2000 compliance status. This list is
available on the Company's World Wide Web page
(http://www.cabletron.com/year-2000) and is updated periodically. The Company
believes that substantially all of its current hardware products are Year 2000
compliant. The Company believes that its older hardware products that are not
Year 2000 compliant will continue to perform all essential and material
functions after the year 2000 but may, in limited circumstances, incorrectly
report the date of events (i.e., events on the network that are reported to a
network management software package) after the year 2000. The Company believes
that its current versions of Spectrum (Version 5.0), its network management
platform, is Year 2000 compliant. Older versions of Spectrum are not Year 2000
compliant. The Company is offering upgrades for some, but not all, of the
non-compliant products (both hardware and software) previously sold by the
Company. For those non-compliant products with no upgrade available, the Company
is offering customers the opportunity to purchase equipment offering equivalent
functionality. Given that most non-compliant products previously sold will
continue to perform their standard functions, the Company expects that many
customers will decide not to replace those products. Despite the Company's
efforts to date to identify the Year 2000 compliance of its current and
installed base of products and the effects of any non-compliance, the Company
cannot be sure that it has identified all areas of non-compliance or that any
solutions it implements to address the non-compliance will prove satisfactory.
Further, since all customer situations cannot be anticipated, particularly those
involving third party products, the Company may experience an increase in
warranty and other claims as a result of the Year 2000 transition. For these
reasons, the impact of customer claims could have a material adverse impact on
the Company's results of operations or financial condition.
<PAGE>
As used in this section, "Year 2000 compliant" means, with respect to
information technology, that the information technology, where applicable,
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it.
Costs
The Company has incurred approximately $12 million of costs and estimates it
will incur between an additional $3 million to $6 million, of which
approximately 25% of the total costs will be for capital expenditures, in
connection with its Year 2000 efforts. This estimate is based on information
gathered to date, and may be materially revised. If implementation of
replacement systems is delayed, or if significant new non-compliance issues are
identified, the Company's results of operations or financial condition could be
materially adversely affected. Expectations about future Year 2000-related costs
are subject to various uncertainties that could cause the actual results to
differ materially from the Company's expectations, including the success of the
company in identifying systems and programs that are not Year 2000 ready, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the availability, rate and magnitude of related labor and
consulting costs and the success of the Company's business partners, vendors and
clients in addressing the Year 2000 issue.
Contingency Plans
Contingency plans are being developed in mission-critical areas, to ensure that
any potential material business interruptions caused by the Year 2000 issue are
mitigated. The Company is preparing business resumption contingency plans as
well as event plans to prepare for potential systems failures at critical dates,
failures of critical third parties and any other anticipated events that could
arise with the date change. Preliminary contingency plans will be updated as the
Project continues to refine and assess risk.
The foregoing statements are based upon management's best estimates at the
present time which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. The Company has taken and will continue to
take corrective action to mitigate any significant Year 2000 problems. There can
be no guarantee that the Company will not experience significant business
disruptions or loss of business due to the Year 2000 issue. Specific factors may
later become known which could result in a material adverse impact on the
Company's results of operations or financial condition.
New Accounting Pronouncements
In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-9, "Modification of Software Revenue Recognition"
which requires recognition of revenue using specific methods and amends SOP 98-4
(Deferral of the Effective Date of a Provision of SOP 97-2) and amends certain
paragraphs of SOP 97-2. The Company adopted SOP 98-9 for its year ending
February 28, 2000, beginning on March 1, 1999. The adoption of SOP 98-9 did not
have a material impact on the Company's results of operations for the three and
six months ended August 31, 1999.
In June 1998, the Financial Accounting Standards Board (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. At this time, management does not expect the impact to be
significant.
<PAGE>
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company continues to be exposed to changes in interest rates and foreign
currency exchange rates which may adversely affect its results of operations and
financial position. Refer to the Company's Form 10-K for the year ended February
28, 1999 for additional information regarding quantitative and qualitative
disclosures about market risk.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
The Company held its annual meeting of shareholders on July 13, 1999. At such
meeting the following actions were voted upon with the accompanying results:
<TABLE>
<CAPTION>
Number of Votes Number of
Number of Number of Withheld Broker
Votes FOR Votes AGAINST Authority Non-Votes
----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
1. Election of Director:
Michael D. Myerow 122,341,323 --- 4,193,879 ---
2. Amendment to the Company's 1989
Employee Stock Purchase Plan. 121,154,110 4,721,612 659,480 ---
3. Amendment to the Company's 1998
Equity Incentive Plan. 91,594,561 34,219,370 697,871 23,400
</TABLE>
Item 5. Other
On September 20, 1999, the Company and Compaq entered into an agreement to
replace the existing purchase and reseller agreements between the two companies
and enter into new agreements that reflect a new business focus at Compaq. In
replacing the existing agreements, the companies agreed to eliminate Compaq's
minimum quarterly purchase commitments. In return, Compaq and the Company are
finalizing an agreement that will result in Compaq making a one-time cash
payment for existing inventory and certain future purchases. In addition, Compaq
agreed to make an equity investment in the Company's SPECTRUM business unit. The
two companies intend to transition sales of legacy Digital branded products from
Compaq and its resellers to the Company. Further, the two companies have agreed
to further expand the relationship between the Company and Compaq's professional
services organization.
Item 6. Exhibits and Reports on Form 8-K.
[a] Exhibit 10.21 Change-in-control severance benefit plan for Key employees.
[b] The Registrant filed one report on Form 8-K during the quarter for which
this report is filed. On June 16, 1999, the Registrant announced the resignation
of Craig R. Benson as Chairman of the Board of Directors, Chief Executive
Officer, President and Treasurer and the election, by the Board of Directors, of
Piyush Patel as Chairman of the Board of Directors, Chief Executive Officer and
President.
[c] The Registrant filed on report on Form 8-K/A during the quarter for which
this report is filed. On July 23, 1999, the Registrant announced an amendment to
a previously filed Form 8-K regarding its acquisition of the Network Products
Business of Digital Equipment Corporation.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABLETRON SYSTEMS, INC.
(Registrant)
October 15, 1999 /s/ Piyush Patel
- ---------------- -------------------------------
Date Piyush Patel
Chairman, President, and
Chief Executive Officer
October 15, 1999 /s/ David J. Kirkpatrick
- ---------------- ------------------------------
Date David J. Kirkpatrick
Corporate Executive Vice President of
Finance and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit Page(s)
- ------- ------- -------
10.21 Change-in-control severance benefit plan for Key employees 23 - 27
11.1 Included in notes to consolidated financial statements ---
<PAGE>
Exhibit 10.21
CABLETRON SYSTEMS, INC.
Change-in-Control Severance Benefit
Plan for Key Employees
July 13, 1999
Cabletron Systems, Inc. (including any "Successor Entity" as defined in Section
8, the "Company") adopts this plan (the "Plan") with the intent of assuring that
it and its direct and indirect subsidiaries (together with the Company, the
"Employer") will have the benefit of continuity of management in the event of
any actual or threatened change in control.
1. Eligibility. The Board of Directors of the Company (the "Board") shall from
time to time designate participants in the Plan ("Participants") from among the
Employer's key employees. An employee once designated a Participant shall
continue to be a Participant (subject to satisfaction of the requirements set
forth in Section 2 below) until the earlier of (a) the date (not later than the
180th day preceding a "Change in Control" as hereinafter defined) on which the
Board determines that he or she is no longer eligible to participate in the
Plan, and (b) the date he or she ceases to be employed by the Employer;
provided, that a Participant who ceases to be employed by the Employer under
circumstances giving rise to benefits under the Plan shall continue to be
treated as a Participant with respect to such benefits until they have been paid
or provided in full.
2. Agreement of Participants. As a precondition to participation in the Plan,
each individual who is designated a Participant must enter into a written
agreement (each, a "Plan Agreement") in accordance with procedures prescribed by
and in a form acceptable to the Board. Each Plan Agreement shall contain:
(a) the Participant's binding commitment to the effect that once any Person
other than the Company, a direct or indirect subsidiary of the Company, or
an employee benefit plan of the Company or any such subsidiary begins a
tender or exchange offer or a solicitation of proxies from the Company's
security holders or takes other actions to effect a "Change in Control" as
hereinafter defined, the Participant will not voluntarily terminate his or
her employment with the Employer until such Person has abandoned or
terminated such efforts to effect a Change in Control or until a Change in
Control has occurred (for purposes of the Plan, a "Person" means any
individual, entity or other person, including a group within the meaning of
Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934
("Exchange Act")); and
(b) such other terms, if any, as the Board may specify, which may (if the Board
so provides) deviate from the terms generally set forth in the Plan.
As applied to any Participant, the term "Plan" means the terms and provisions of
the Plan set forth herein as modified by the terms and provisions of the
Participant's Plan Agreement.
3. Change in Control. For purposes of the Plan, a "Change in Control" shall be
deemed to have occurred upon the occurrence of any of the events described in
subsections (a), (b), (c) or (d) below:
(a) Any Person acquires beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 30% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting Securities"); provided, that
for purposes of this subsection (a) the following acquisitions shall not
constitute a Change in Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the
Employer, or (iv) any Business Combination (but except as provided in
subsection (c) of this Section 3 a Business Combination may nevertheless
constitute a Change in Control under that subsection); and provided
further, that an acquisition by a Person of 30% or more but less than 50%
of the Outstanding Company Common Stock or of the combined voting power of
the Outstanding Company Voting Securities shall not constitute a Change in
Control under this subsection (a) if within 15 days of being advised that
such ownership level has been reached, a majority of the "Incumbent
Directors" (as hereinafter defined) then in office adopt a resolution
approving the acquisition of that level of securities ownership by such
Person; or
(b) Individuals who, as of July 13, 1999, constituted the Board (the "Incumbent
Directors") cease for any reason to constitute at least a majority of the
Board; provided, that any individual who becomes a member of the Board
subsequent to July 13, 1999 and whose election or nomination for election
was approved by a vote of at least two-thirds of the Incumbent Directors
shall be treated as an Incumbent Director unless he or she assumed office
as a result of an actual or threatened election contest with respect to the
election or removal of directors; or
(c) There is consummated a reorganization, merger or consolidation involving
the Company, or a sale or other disposition of all or substantially all of
the assets of the Company (a "Business Combination"), in each case unless,
following such Business Combination, (i) the Persons who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and of the combined voting power of the Outstanding Company Voting
Securities immediately prior to the Business Combination beneficially own,
directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the entity resulting from
such Business Combination in substantially the same proportions as their
ownership immediately prior to such Business Combination of the Outstanding
Company Common Stock and of the combined voting power of the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding
any entity resulting from such Business Combination or any employee benefit
plan (or related trust) of the Employer or of such corporation resulting
from such Business Combination) beneficially owns, directly or indirectly,
30% or more of, respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, except to the
extent that such ownership existed prior to the Business Combination and
(iii) at least a majority of the members of the Board resulting from such
Business Combination were Incumbent Directors at the time of the execution
of the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) The shareholders of the Company approve a complete liquidation or
dissolution of the Company.
4. Severance Benefit. If during the period of eighteen (18) months following a
Change in Control, either (i) the employment of a Participant is terminated by
the Employer for any reason other than for "Cause" (as defined in Section 5
below), or (ii) the Participant terminates his or her employment with the
Employer for "Good Reason" (as defined in Section 6 below):
(a) The Company shall pay to the Participant in cash, within five (5) days of
the date of termination, the sum of (i) all salary earned by the
Participant as of the date of termination but not yet paid, (ii) the
Participant's accrued vacation earned through the date of termination, and
(iii) an amount equal to the Participant's annual target incentive bonus
for the year in which termination occurs, multiplied times a fraction, the
numerator of which is the number of days elapsed between the beginning of
such year and the date of termination and the denominator of which is 365;
(b) The Company shall also pay to the Participant in cash, within ten (10) days
of the date of termination, the sum of the Participant's Base Salary and
Bonus. "Base Salary" for this purpose means the Participant's annual rate
of base salary as determined immediately prior to the date of termination
(or, if higher, his or her annual rate of base salary as determined
immediately prior to the Change in Control), and "Bonus" means the highest
amount of bonus or incentive compensation paid in cash to the Participant
(or that would have been so paid absent deferral) for any one of the three
most recent annual bonus periods ended prior to such termination (or, if
higher, the Participant's target bonus for the year in which the Change in
Control occurs).
(c) The portion of each stock option and each other stock-based right held by
the Participant on the date of termination that is not yet vested or
exercisable but that would have become vested or exercisable, as calculated
pursuant to this Section 4(c), through the date 18 months following the
date of such Participant's termination of employment, shall be treated as
having vested (and, to the extent relevant, as having become exercisable)
immediately prior to the Participant's termination of employment. The
formula for determining what portion of an option or right would have
become vested or exercisable through the date 18 months following the date
of such Participant's termination of employment is as follows: Daily
Vesting Rate multiplied by the number of days in the Acceleration Period
(rounded down to the nearest whole number). The "Acceleration Period" shall
mean the period beginning with the date following the last date a portion
of such option became exercisable (the "Start Date") and ending on and
including the date 18 months following the date of such Participant's
termination of employment. The "Daily Vesting Rate" shall equal the number
of shares for which the option remains unvested or unexercisable on the
date of such Participant's termination of employment (not taking into
account the accelerated vesting provided by this Section 4(c)) divided by
the total number of days in the period beginning with the Start Date and
ending on and including the last day upon which such option could become
exercisable or vested for any portion of such option. Except as provided in
this Section 4(c), all stock options and stock-based rights held by the
Participant on the date of termination shall be administered in accordance
with their terms and the terms of the applicable plan. The following
illustrates the effect of this paragraph: Assume a Participant (1) was
granted an option to purchase 1,000 shares of the Company's common stock on
January 1, 1999 that became exercisable with respect to 25% of the
underlying shares on January 1 of each of the following four years and (2)
was terminated after a change in control on April 30, 2000 without cause
(as defined herein). Start Date = January 2, 2000. Acceleration Period:
January 2, 2000 through October 31, 2001 = 669 days. Daily Vesting Rate:
750 shares / 1,096 days = .684. Total exercisable shares: 250 [vested on
January 1, 2000] + 457 shares [669 days x .684] for a total of 707.
(d) The Participant, together with his or her dependents, will continue for the
duration of the "coverage continuation period" (as hereinafter defined) to
be eligible to participate at the Employer's expense (subject to any
applicable waiting periods or similar requirements to the extent such
requirements had not been satisfied prior to the date of termination, and
subject to the payment by the Participant or his or her dependents of
premiums, co-pays or similar amounts at rates not greater than those
applicable immediately prior to the Change in Control to active employees
and their dependents) in all medical, dental and life insurance plans or
programs maintained or sponsored by the Employer immediately prior to the
Change in Control; provided, that if such continued participation is
impracticable because such plans or programs are no longer generally
available, the Participant and his or her dependents will be entitled to
substantially equivalent coverage on substantially equivalent terms or to
the full value thereof paid promptly in cash. For purposes of this
subsection, the "coverage continuation period" means the one (1) year
period following the Participant's termination of employment; provided,
that if the plan or program in question, or applicable law, provides for a
longer period of coverage following termination of employment, such longer
period shall constitute the "coverage continuation period" with respect to
that plan or program. If the coverage continuation period with respect to a
plan or program exceeds one (1) year following the Participant's
termination of employment, the terms and conditions of coverage following
the first-year anniversary of the date of the Participant's termination of
employment shall be as set forth in the plan or program or as prescribed by
applicable law. Notwithstanding the foregoing provisions of this
subsection, if the Participant becomes reemployed by another employer and
is eligible (together with his or her dependents) for medical, dental or
life-insurance coverage that is substantially equivalent to the coverage of
the same type that he or she (and his or her dependents) were entitled to
receive under this subsection, the Employer's obligation to the Participant
and his or her dependents under this subsection shall cease with respect to
that type of coverage.
5. Cause. "Cause" means only: (a) the Participant's conviction of, or a plea of
nolo contendere with respect to, a crime involving moral turpitude or a felony;
(b) the Participant's refusal to perform, or gross negligence in the performance
of, his or her duties to the Company; or (c) an act of willful misfeasance by
the Participant that is intended to result in substantial personal enrichment of
the Participant at the expense of the Employer.
6. Voluntary Termination for Good Reason. A Participant shall be deemed to have
voluntarily terminated his or her employment for Good Reason if he or she leaves
the employ of the Employer for any of the following reasons:
(a) Any action by the Company which results in a material diminution in
Participant's position, authority, duties or responsibilities immediately
prior to the Change in Control, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
the Participant; provided, however, that a sale or transfer of some or all
of the business of the Company or any of its subsidiaries or other
reduction in its business or that of its subsidiaries, or the fact that the
Company shall become a subsidiary of another company or the securities of
the Company shall no longer be publicly traded, shall not constitute "Good
Reason" hereunder
(b) Any reduction in the Participant's rate of annual base salary for any
fiscal year to less than the greater of 100% of the rate of annual base
salary paid to him or her in the completed fiscal year immediately
preceding the Change in Control or 100% of the rate at which annual base
salary was being paid to the Participant immediately prior to such
reduction; or
(c) Any failure of the Company to continue or cause to be continued in effect
any retirement, life, medical, dental, disability, accidental death or
travel insurance plan in which the Participant was participating
immediately prior to the Change in Control unless the Company provides the
Participant with a plan or plans that provide substantially equivalent
benefits, or the taking of any action by the Employer that would adversely
effect the Participant's participation in or materially reduce the
Participant's benefits under any of such plans or deprive the Participant
of any material fringe benefit enjoyed by the Participant immediately prior
to the Change in Control, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Employer promptly after receipt of notice thereof given by the Participant;
or
(d) The Company requires the Participant to be based at any office or location
that is more than 50 miles distant from the Participant's base office or
work location immediately prior to the Change in Control; or
(e) Any failure by the Company to comply with and satisfy Section 8 of the
Plan.
7. Certain Tax-Related Payments.
(a) If any "payment in the nature of compensation" (hereinafter "Payment") as
that term is used in Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), including but not limited to payments and benefits
under the Plan (other than payments pursuant to this Section 7), is
determined to be subject to the excise tax imposed by Section 4999 of the
Code (the "Section 4999 tax"), the Company will pay to the Participant an
additional amount in cash (the "Gross-Up Payment") which, after reduction
for all taxes (including, but not limited to, the Section 4999 tax with
respect to such Additional Amount), is sufficient to pay the Section 4999
tax and all related interest and penalties, if any, with respect to the
Payment. All determinations under this Section shall be made at the
Company's expense by a nationally recognized accounting firm selected by
the Company.
(b) If there is a determination by the Internal Revenue Service (the "IRS")
with respect to Participant that is inconsistent with a determination
pursuant to Section 7(a) and that if sustained would result in a Section
4999 tax (or a greater Section 4999 tax) or in interest or penalties (or
increased interest or penalties) with respect to any such tax (an "initial
IRS determination"), the determination under Section 7(a) shall be deemed
automatically modified to conform to the initial IRS determination and the
Company, upon receipt from the IRS of the initial IRS determination or of
written notice from the Participant setting forth the initial IRS
determination, shall promptly pay to the Participant the additional
Gross-Up Payment required by such modification (the "Additional Gross-Up
Payment"). The Company may elect to contest at its expense any initial IRS
determination in respect of which the Company has made an Additional
Gross-Up Payment, in which case such Additional Gross-Up Payment shall be
considered an interest-free loan (the "Loan") to Participant until such
time as the IRS' determination is withdrawn or modified or otherwise
becomes final (a "final IRS determination"). Upon a final IRS determination
that is no longer subject to modification or judicial review and that
results in a Section 4999 tax and related interest and penalties lower than
those in respect of which the Additional Gross-Up Payment was made, the
Participant shall repay to the Company so much of the Loan, if any, as
shall leave the Participant on an after-tax basis in the same position he
or she would have been in had the initial IRS determination never been
made. The Participant shall cooperate reasonably with the Company in any
effort by the Company to contest an IRS determination under this paragraph,
including by the making of such filings and appeals as the Company may
reasonably require, but nothing herein shall be construed as requiring
Participant to bear any cost or expense of such a contest or in connection
therewith to compromise any tax item (including without limitation any
deduction or credit) other than the Section 4999 tax and related interest
and penalties, if any, that are the subject of the contested IRS
determination.
8. Pooling-of-Interests Accounting. If the Company proposes to engage in an
acquisition intended to be accounted for as a pooling-of-interests, and in the
event that Section 4(c) of this Plan is determined by the Company's independent
public accountants to cause such acquisition to fail to be accounted for as a
pooling-of-interests, then (i) Section 4(c) shall be deleted from this Plan and
the vesting or exercise of options held by the Participant shall not be
accelerated hereunder and (ii) under Section 4(b), the Company shall pay to the
Participant in cash, within ten (10) days of the date of termination, two (2)
times the sum of the Participant's Base Salary and Bonus (instead of one times).
9. Binding Effect on Successor Entity. If the Company is merged or consolidated
into or with any other entity (whether or not the Company is the surviving
entity), or if substantially all of the assets thereof are transferred to
another entity, the provisions of the Plan will be binding upon and inure to the
benefit of the entity resulting from such merger or consolidation or the
acquiror of such assets (the "Successor Entity"). The Company will require any
such Successor Entity to assume expressly and agree to perform the provisions of
the Plan (including any Plan Agreements) in the same manner and to the same
extent that the Company would have been required to perform if no such
transaction had taken place.
10. Payment Obligations Absolute. Upon termination of employment described in
Section 4, the Company's obligations to pay the Severance Benefits described in
Section 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Employer may have against any
Participant. In no event shall a Participant be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to a Participant under any of the provisions of the Plan and, except as
otherwise provided in Section 4(d), in no event shall the amount of any payment
hereunder be reduced by any compensation earned by a Participant as a result of
employment by another employer.
11. Limited Effect. Nothing herein or in any Plan Agreement shall be construed
as giving any Participant a right of continued employment or as limiting the
Employer's right to terminate a Participant's employment, subject, in the case
of any such termination described in Section 4, to the payment of the benefits
described in Section 4.
12. Amendment and Termination. The Board may amend the Plan at any time and from
time to time, and may terminate the Plan at any time; provided, that no action
purporting to amend or terminate the Plan that is approved by the Board within
the one hundred eighty (180) day period immediately preceding a Change in
Control and that, if effective, would adversely affect the rights of any
Participant hereunder, shall affect the rights of such Participant without his
or her express written consent.
13. Withholding. All payments and benefits hereunder shall be subject to
reduction for applicable tax withholdings.
14. Indemnification. Employer agrees to pay all costs and expenses incurred by
any Participant in connection with efforts to enforce his or her rights under
this Plan and will indemnify and hold harmless Participant from and against any
damages, liabilities and expenses (including without limitation reasonable fees
and expenses of counsel) incurred by any Participant in connection with any
litigation or threatened litigation, including any regulatory proceedings,
arising out of the making, performance or enforcement of this Plan.
15. Source of Payment. Nothing herein shall be construed as establishing a trust
or as requiring the Company to set aside funds to meet its obligations
hereunder. Notwithstanding the foregoing, if the Board in its discretion so
determines the Company may establish a so-called "rabbi trust" or similar
arrangement to assist it in meeting any such obligations that it may have.
16. Governing Law. The Plan and agreements made with Participants hereunder
shall be governed by the laws of the State of New Hampshire.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and the
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending August 31, 1999, and is qualified in its entirety by references to
such financial statements.
</LEGEND>
<CIK> 0000846909
<NAME> Cabletron Systems, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 111,003
<SECURITIES> 85,689
<RECEIVABLES> 251,626
<ALLOWANCES> 21,113
<INVENTORY> 227,411
<CURRENT-ASSETS> 772,788
<PP&E> 300,125
<DEPRECIATION> 140,050
<TOTAL-ASSETS> 1,477,084
<CURRENT-LIABILITIES> 365,324
<BONDS> 0
0
0
<COMMON> 1,748
<OTHER-SE> 1,099,691
<TOTAL-LIABILITY-AND-EQUITY> 1,477,084
<SALES> 706,172
<TOTAL-REVENUES> 706,172
<CGS> 408,306
<TOTAL-COSTS> 331,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,927
<INCOME-PRETAX> (16,169)
<INCOME-TAX> (6,653)
<INCOME-CONTINUING> (9,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,516)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
