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SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
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x
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ANNUAL
REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal
year ended February 29, 2000
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OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
transition period from
to
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Commission File
Number 1-10228
CABLETRON SYSTEMS,
INC.
(Exact name of
registrant as specified in its charter)
| Delaware
(State or other
jurisdiction of
incorporation or
organization)
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04-2797263
(I.R.S.
Employer
identification
no.)
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35 Industrial Way,
Rochester, New Hampshire 03867
(Address of
principal executive offices and zip code)
(603)
332-9400
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each
class: Common Stock,
$0.01 par
value
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|
Name of each
exchange on which registered:
New York Stock
Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy for information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ¨
As of May 5, 2000,
184,535,909 shares of the Registrant’s common stock were outstanding.
The aggregate market value of the registrant’s voting stock held by
non-affiliates of the registrant as of May 5, 2000 was approximately $5.0
billion.
DOCUMENTS
INCORPORATED BY REFERENCE
The following
documents are incorporated by reference:
Certain portions of
the Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 2000 Annual Meeting of Stockholders is incorporated
by reference into Part III of this Form 10-K.
TABLE OF
CONTENTS
PART
I
Item
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Page(s)
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| 1. Business |
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3 |
| 2. Properties |
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12 |
| 3. Legal
Proceedings |
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13 |
| 4. Submission
of Matters to a Vote of Security Holders |
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13 |
|
Executive Officers of the Registrant |
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13-15 |
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| PART
II |
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| 5. Market
for the Registrant’s Common Equity and Related Stockholder
Matters |
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16 |
| 6. Selected
Financial Data |
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17-18 |
| 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
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18-38 |
| 7a. Quantitative and Qualitative Disclosures about Market
Risk |
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39-40 |
| 8. Consolidated Financial Statements and Supplementary
Data |
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41-66 |
| 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
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67 |
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| PART
III |
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| 10. Directors and Executive Officers of the
Registrant |
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67 |
| 11. Executive Compensation |
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67 |
| 12. Security Ownership of Certain Beneficial Owners and
Management |
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67 |
| 13. Certain Relationships and Related
Transactions |
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67 |
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| PART
IV |
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| 14. Exhibits, Financial Statement Schedules and
Reports on Form 10-K |
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68 |
PART
I
ITEM
1. BUSINESS
Introduction
Cabletron
Systems, Inc. (the “Company” or “Cabletron”)
delivers flexible and scalable network access and communications
equipment and software to Global 2000 enterprises, service
providers and small businesses worldwide. Cabletron’s products
include standards-based Ethernet, Fast Ethernet, Token Ring, fiber
distributed data interface (“FDDI”), asynchronous
transfer mode (“ATM”) and wide area networks
(“WAN”) networking solutions. The Company provides
its leading edge business solutions to global customers for
enterprise connectivity, service provider infrastructures, software
and professional services by maintaining significant operations in
the United States, Europe, the Pacific Rim (“Pac Rim”)
and other industrialized areas of the world. Cabletron has
announced its plans to establish four subsidiaries—Aprisma
Management Technologies, Enterasys Networks, GlobalNetwork
Technology Services and Riverstone Networks—to enable it to
focus on the key high-growth areas of the communications
marketplace, including infrastructure management, enterprise
e-business, professional services and service providers. On May 24,
2000, the Company entered into a definitive agreement to sell its
Digital Network Products Group (“DNPG”) to Gores
Technology Group. Cabletron is in the process of evaluating its
strategic options regarding many of its low port count chassis base
switching solutions and its NetVantage branded switch products to
exclusively focus on core, high growth products.
Listed on
the New York Stock Exchange for more than a decade under the symbol
“CS,” Cabletron is an S&P 500 Index Company.
Effective March 1, 2000, the Company changed its fiscal year-end to
the Saturday closest to the last day of February. Fiscal year 2001
will end on March 3, 2001.
A Delaware
corporation organized in 1988, Cabletron’s world headquarters
is located at 35 Industrial Way, Rochester, New Hampshire 03867,
and its telephone number is (603) 332-9400. Its website is located
at http://www.cabletron.com.
Formation
of Operating Companies
On February
10, 2000, Cabletron announced its intentions to transform its
business into four operating subsidiaries to improve the
Company’s focus and agility to capitalize on market
opportunities and better serve its customers. The four subsidiaries
are Aprisma Management Technologies, Enterasys Networks,
GlobalNetwork Technology Services and Riverstone Networks.
In order to fully realize the benefits of this new structure, the
Company has announced that it currently plans to conduct an initial
public offering for each of these subsidiaries, followed by a
distribution of the remaining shares of one or more of the
subsidiaries to the Company’s stockholders. It is likely that
implementation and completion of this plan would take twelve to
eighteen months. The Company has also announced that it intends to
issue securities that are convertible into common stock in each of
these operating subsidiaries to employees of the subsidiaries and
to private investors. The Company may also consider other strategic
opportunities, including a sale of the business, assets and
liabilities associated with one or more of the subsidiaries, if it
determines that such a transaction is more favorable than the
initial public offering/distribution alternative.
The Company
is not obligated to complete any of these strategic transactions
and no assurance can be given as to whether or when any of these
strategic transactions will be approved and implemented. For
example, an initial public offering of any of the subsidiaries will
depend on each of their individual performance, market conditions
and similar considerations. Any distribution of the remaining
shares of a subsidiary to the Company’s stockholders,
following an initial public offering, may depend upon receipt from
the Internal Revenue Service of
a ruling
that such distribution will be tax-free to the Company’s
stockholders and that the transaction would qualify as a tax-free
reorganization. Any such strategic transaction would only be
implemented if the Board of Directors of the Company continues to
believe that it is in the best interest of each of the subsidiaries
and the Company’s stockholders.
The four
subsidiaries and their intended products and services are as
follows:
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·
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Aprisma
Management Technologies, Inc. (“Aprisma”) expects to
focus on delivering infrastructure management software for
service provider and enterprise markets based around the
Company’s flagship Spectrum® software suite. The Company
believes that Aprisma will continue to incorporate new, cutting
edge technology in its offerings of intuitive multi-vendor
management solutions to meet the service level requirements of
enterprise and service provider customers.
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·
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Enterasys
Networks, Inc. (“Enterasys”) expects to focus on
enterprise-class customers. By optimizing enterprise network
solutions for e-business applications, and by providing global
service and support 24 hours per day, 7 days per week, Enterasys
plans to provide its enterprise customers with a competitive
advantage through information technology
infrastructure.
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·
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GlobalNetwork Technologies Services, Inc.
(“GNTS”) expects to provide network infrastructure
solutions that optimize application availability and network
performance through the design, performance, management and
security of complex networks. With consultants in more than 66
locations spanning the globe, GNTS plans to provide network
infrastructure solutions that optimize application availability
and performance to enterprise and service provider
clients.
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·
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Riverstone
Networks, Inc. (“Riverstone”) expects to focus
exclusively on the data center needs of co-location, content
hosting and application service providers (“ASPs”), as
well as the infrastructure needs of internet service providers
(“ISPs”), multi-service operator (“MSOs”) and
metro network providers. Riverstone intends to offer
application-aware switch routers, intelligent load balancers, web
cache redirectors and software tools for provisioning, billing,
accounting, monitoring, fault isolation and service level
management.
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Fiscal 2000
Divestitures
On February
29, 2000, the Company sold its manufacturing and repair services
operations located in Rochester, New Hampshire and Limerick,
Ireland to Flextronics International (“Flextronics”) for
approximately $78.6 million in cash. Flextronics purchased, at net
book value, approximately $18.1 million of the Company’s
manufacturing related fixed assets including buildings, assumed
leases on certain leased buildings, and hired approximately 970 of
the Company’s manufacturing related employees. As part of the
separation agreement with the manufacturing employees, the Company
accelerated certain stock option vesting resulting in a $4.7
million compensation charge. In addition, Flextronics purchased the
Company’s inventory with a cost of approximately $65.1 million
for $60.5 million. Simultaneously, the Company entered into an
agreement with Flextronics to manufacture most of its products as
an original equipment manufacturer (“OEM”).
On December
18, 1999, the Company sold its FlowPoint subsidiary to Efficient
Networks, Inc. (“Efficient”) in exchange for 7.2 million
shares of Efficient common stock and 6,300 shares of Efficient
preferred stock. The common stock is subject to various
restrictions on resale. The preferred stock was converted into 6.3
million shares of common stock following the approval of Efficient
shareholders at a special meeting on April 12, 2000. In connection
with the sale of FlowPoint, Cabletron and Efficient entered into an
OEM agreement under which Cabletron will resell the Efficient and
FlowPoint product lines.
Fiscal 1999
Acquisitions
On September
25, 1998, Cabletron acquired NetVantage, Inc.
(“NetVantage”), a publicly held manufacturer of Ethernet
workgroup switches. Under the terms of the Merger Agreement,
Cabletron issued 6.4 million shares of Cabletron common stock to
the shareholders of NetVantage in exchange for all of the
outstanding shares of stock of NetVantage. In addition, Cabletron
assumed 1,309,000 options, valued at approximately $4.8 million.
Cabletron recorded the cost of the acquisition at approximately
$77.8 million, including direct costs of $4.2 million. This
acquisition has been accounted for under the purchase method of
accounting.
On September
9, 1998, Cabletron acquired all of the outstanding stock of
FlowPoint Corp. (“FlowPoint”), a privately held
manufacturer of digital subscriber line router networking products
for $20.6 million in cash and
common stock, payable in four installments. Prior to the agreement,
Cabletron owned 42.8% of the outstanding shares of FlowPoint. In
addition, Cabletron assumed 494,000 options, valued at
approximately $2.7 million. The first installment was paid in the
form of cash while the remaining 3 installments were paid in the
form of shares of Cabletron common stock. During the year ended
February 29, 2000, the Company issued approximately 1.0 million
shares of common stock pursuant to the installment payments. This
acquisition has been accounted for under the purchase method of
accounting.
On September
1, 1998, Cabletron acquired the assets and assumed certain
liabilities of the DSLAM division of Ariel Corporation
(“Ariel”), a privately held designer and manufacturer of
digital subscriber line access multiplexor products. Cabletron
recorded the cost of the acquisition at approximately $45.1
million, including fees and expenses of $1.1 million related to the
acquisition, which consisted of cash payments of $33.5 million and
other assumed liabilities. This acquisition has been accounted for
under the purchase method of accounting.
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 25% 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 did not attain a market value
of $35 per share eighteen months after the closing of the
transaction. On September 8, 1999, Cabletron issued approximately
5.2 million shares of Cabletron common stock to the former
shareholders of Yago, pursuant to the terms of the merger
agreement. 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.
Fiscal 1998
Acquisitions
Effective
February 7, 1998, Cabletron consummated the acquisition of certain
assets of the Network Products Group (“NPG”) of Digital
Equipment Corporation. The NPG, now known as the “DIGITAL
Network Products Group” (“DNPG”), develops and
supplies a wide range of data networking hardware and software,
including LAN and WAN products. DNPG’s products span a wide
range of networking technologies, including Ethernet, Fast
Ethernet, FDDI and ATM switching technologies. The purchase price
for the acquisition was approximately $439.5 million, before
closing adjustments, consisting of cash, product credits and
assumed liabilities as a result of the acquisition. The acquisition
has been accounted for under the purchase method of
accounting.
Products
and Services
Cabletron’s “smart networking” solutions,
comprised of high-speed, fault-tolerant SmartSwitches;
full-function, wire-speed SmartSwitch routers; and the
fully-distributed, multivendor Spectrum Enterprise Management
platform, work together to create an enterprise solution that is
designed to meet the demands of today’s business environments.
The Company’s products maximize reliability through features
such as fully-redundant power systems, distributed switching,
scalability and superior manageability. All of these products are
backed by the Company’s award-winning global service and
support staff.
During the
year ended February 29, 2000, Cabletron sold all of the products
more particularly described below. In order to present
Cabletron’s business as it will exist following its proposed
transformation, its products and services are organized below by
the operating subsidiary that will sell the particular product or
service following the proposed transformation.
Aprisma Management Technologies,
Inc.
Aprisma will
develop, market and support e-business infrastructure management
software solutions that deliver service assurance capabilities on a
global basis. Spectrum, Aprisma’s flagship product, views the
whole of IT as a system managed in terms of Service Level
Agreements (“SLA”). The Spectrum software suite bridges
the gap between legacy network management platforms and technology
point tools, providing enterprise IT organizations and service
providers visibility and control of the networks, systems and
applications critical to their businesses.
Aprisma’s Spectrum suite of management software offers a
comprehensive solution that shortens the time required to resolve
problems, reduces the number of tools required to accomplish
network management tasks, and addresses the critical need for
ensuring application and e-business response time and service
availability.
Spectrum
offers solutions that include:
Network
Management, which can auto-discover edge, distribution and core
components of the infrastructure including switches, routers, LAN
and WAN components. Networking technologies supported include:
VLANs, ELANs, ATM, Frame Relay and IP. Applications supported
running in the networks include: routing, switching and management
protocols and IP services such as DHCP, DNS, and QoS;
Business
Process Management, to assure service level agreements are
meeting the operation and business needs and requirements of the
customers, partners and employees they are designed to
support;
Systems
Management, to determine server and/or desktop resource
utilization or capacity problems with automated agents proactively
taking corrective action;
Application Management, which support leading ERP
systems, databases and operating systems; intelligent agent
technology is proactive to ensure availability and response
time;
Fault
Management, to pinpoint a problem, prioritize according to
business impact, notify affected users or customers, and identify
the root cause end to end across systems, networks and applications
(advanced applications include Spectrum Alarm Notification Manager
and Spectrum Resolution Expert, or SpectroRx); and
Configuration Management, which simplifies training
requirements by normalizing configurations of specific device types
regardless of the vendor (advanced application includes Spectrum
Enterprise Configuration Manager).
Enterasys Networks,
Inc.
Enterasys
will offer Cabletron’s family of “smart products”,
including SmartSwitches, SmartSwitch Routers (“SSR”),
SmartSTACKs, wireless RoamAbout solutions, and Spectrum Enterprise
Management, to enable users to maximize performance while
cost-effectively migrating to next-generation technologies. This
comprehensive family of solutions is meant to be implemented in
both legacy and newer network environments with minimal disruption
while preserving existing investments and providing genuine
scalability for future networking requirements.
The
SmartSwitch Router, a best-of-breed gigabit switch router,
combines the speed of a switch with the efficiency and security of
a router. The SmartSwitch Router delivers more than 100 times the
performance of traditional routers at a rate of 30 million
packets/cells per second (pps) with zero packet loss and no
degradation in performance when value-added services are
fully-enabled. These products were designed to integrate the
customers’ legacy systems and deliver highly fault tolerant
performance, all at a fraction of the cost of comparable
solutions.
SmartSwitches
combine inherent scalability and manageability with
cost-effectiveness to provide high-end switching capabilities for
all environments, from the workgroup (SmartSTACK and SmartSwitch
2000/2500), to the wiring closet (SmartSwitch 6000/6500) or to the
data center (SmartSwitch 9000/9500) environments. These products
utilize standards-based ASIC chips that are designed to be fully
manageable and interoperable with pre-existing equipment. These
products are available as modular-based chassis systems or in
stand-alone capacity.
Enterasys
will offer a full line of ATM SmartSwitches that provide high-speed
uplinks of LAN workgroups, interconnect data centers, support
bandwidth-heavy multimedia applications and allow access to public
ATM services. A SmartSwitch ATM Administrator is designed to
improve network performance, reduce operational complexity and cut
network ownership costs.
WAN
Products are designed to allow the customer to scale, plan and
manage their central-site solutions to meet specific remote
access/WAN requirements while managing and controlling these remote
sites (including a small office or home office
environment)—all from a single location.
Enterasys
will offer Aprisma’s Spectrum network management software to
enable enterprise customers to manage their complex multivendor IT
infrastructures. Enterasys will offer Spectrum through a reseller
agreement with Aprisma.
Security
Solutions programs provide a line of products for Internet
security applications through an agreement with Nokia that combines
Cabletron’s routing capabilities with Nokia’s IPSOTM
routing operating system and Check PointFireWall-1TM, best-of-breed
firewall software. Enterasys will provide a comprehensive security
solution for Internet access and Virtual Private Networking
(“VPN”).
Service
and Support, in addition to its broad line of network
equipment, Enterasys will offer a wide range of support services,
including maintenance; consulting; design and configuration;
product planning; project management; training; testing;
certification and documentation; and performance analysis.
Enterasys will offer some of these services directly and some
through GNTS. Enterasys will offer comprehensive training programs
to ensure that customers receive the maximum benefit from their
networks. With more than 100 sales and support offices worldwide,
Enterasys’ service and support group constitutes a key element
of the complete networking solution that will be offered by
Enterasys.
GlobalNetwork Technologies,
Inc.
GNTS is the
Company’s professional services group that will focus on
providing network infrastructure solutions that optimize
application availability and network performance for enterprise
customers, service providers and service partners. GNTS offers a
broad range of services using the scalable GNTS Powered Services
model where intellectual property and standard methodology are used
to aid partners and direct resources in the delivery of services.
GNTS area of focus will be Internetworking design, network
assessment and optimization, network management, outsourcing and
information assurance.
GNTS will
provide the following services:
Internetworking Design, to design and build-up of network
solutions in support of e-commerce and other strategic business
initiatives.
Network
Assessment and Optimization, to provide assessment and
optimization of client’s network hardware and design to take
advantage of cost savings opportunities, performance improvement,
reduced downtime, and new technologies.
Network
Management, to provide services aimed at improving the price,
performance and scalability of the client’s network management
application.
Outsourcing, to provide complete outsourced network
solutions that better enable the client to focus on their core
business, while avoiding significant investments in tools, support
infrastructure and internal staff. The Continuous Improvement
Process (“CIP”) is a GNTS service to help meet
clients’ SLA.
Information
Assurance, critical networking solutions for the Internet
community, including e-commerce solutions, Internet connectivity,
security assesment and assurance, security system design and
training.
Riverstone
Networks
Riverstone
is focused on emerging content and infrastructure service providers
in the new metropolitan area network. Riverstone’s solutions
meet the infrastructure needs of ISPs, MSOs and metro network
providers, as well as the data center needs of co-location, content
hosting and ASPs. Riverstone’s products include Internet
routers, application-aware switch routers, intelligent load
balancers, web cache redirectors and software tools for
provisioning, accounting, billing, monitoring, fault isolation and
service level management.
RS8000
and 8600. Formerly known as the SSR 8000
and 8600, Riverstone has re-branded these products the RS 8000 and
RS 8600 and future development will continue to focus on service
provider enhancements to these leading edge products. Built for
service providers, Riverstone Networks’ chassis-based RS
family combines wire-speed routing with integrated LAN/WAN
capability, pinpoint control of application flows, and superior
routing table capacity. Key applications include POP site and NOC
center buildout as well as traffic aggregation or load balancing in
hosting environments. The RS family delivers wire-speed
standards-based IP routing—both unicast and
multicast.
RS 2000
and 2100. Riverstone Networks’
compact RS 2000 and 2100 (formerly known as the SSR 2000 and 2100)
are the leading low-cost wire-speed platform. Key applications
include building out 100 MB to 1 Gigabit Ethernet backbones, and
traffic aggregation for multi-tenant unit opportunities, or for
content and application hosting environments where top performance
is required and space is a premium. Both the RS 2000 and 2100
deliver wire-speed standards-based IP routing—both unicast and
multicast.
The RS 8000
and RS 2000 series’ are the only switch routers proven to
maintain wire-speed layer 2/3 and 4 switching and routing with all
features enabled. Prioritization, filtering or Quality policies can
be extended across the entire network, to allocate appropriate
resources to groups of users, or specific applications. This
feature-rich application-aware platform enables pinpoint control of
bandwidth and is optimized for establishing and policing Service
Level Agreements (SLA’s). Detailed accounting information can
be gathered enabling direct confirmation that SLAs are being met.
Accounting capability is enabled through the standards-based
Lightweight Flow Accounting Protocol.
Internet
Appliance (IA) 1100 and 1200. Designed
for high-performance hosting environments, Riverstone
Networks’ IA 1100 and 1200 provide line rate device load
balancing, traffic load balancing and traffic policing. With the
exponential growth of traffic on the Internet, the IA family
ensures that visitors to an internet site are able to complete
their transactions seamlessly—whether downloading information,
buying products or upgrading account status. The IA family brings a
unique combination of security, reliability, control and
performance to a hosting solution.
Distribution and Marketing
The Company
has strengthened and expanded its relationship with distributors
and resellers over the last several years. These distributors and
resellers commit to focusing on the customers needs and providing
quality professional service support to the end-user in addition to
carrying the Company’s line of products. The Company extends
limited product return and price protection rights to certain
distributors and resellers. These rights are generally limited to a
certain percentage of sales over primarily a three month period. In
addition to the Company’s use of distributors and resellers,
the Company maintains its own direct sales force with
representatives located around the world. The direct sales force is
supplemented by employees located at Cabletron’s headquarters
and regional in-house technical services and sales support staff.
The Company believes that its ratio of in-house sales, marketing
and technical services and sales support staff to field sales staff
contributes significantly to the effectiveness of its field sales
staff.
The
Company’s international locations use various sales strategies
tailored to the preferred channels of distribution for each
country. These strategies include a direct sales presence, a direct
sales force working with local distributors or a combination of the
two.
The
Company’s Synergy Plus Program sets forth the
principles of the relationship between the Company and the
reseller, including information and training, business support and
services, pricing structure, and levels of organization. Synergy
Plus offers a comprehensive, well-defined business strategy, a
clear pricing policy, and effective support in sales and
marketing.
Following
the Company’s transformation into four new companies,
Enterasys will continue to offer its products and services through
the Company’s existing distributors and resellers. Aprisma,
GNTS and Riverstone may offer their products and services through
these existing distributors and resellers, particularly outside the
United States, but will likely develop new partners over time. In
particular, Aprisma, GNTS and Riverstone will initially use
Enterasys itself as a significant reseller both domestically and
internationally.
The Company
employs several methods to market its products, including regular
participation in trade shows, frequent advertisements in trade
journals, regular attendance by corporate officers at press
briefings and trade seminars, submission of demonstration products
to selected customers for evaluation, and direct mailings and
telemarketing efforts. The four new companies will continue to
employ these methods to market their products.
Customers
The
Company’s end-user customers include brokerage, investment
banking firms and other financial institutions; federal, state and
local government agencies; commercial, industrial and manufacturing
companies; multinational and international companies;
telecommunications companies; internet service providers; health
care facilities; insurance companies; universities; and leading
accounting and law firms. The four new companies will continue to
sell to the same customer base with one distinction: Riverstone
will sell its products and services nearly exclusively to service
providers and Enterasys will sell its products and services nearly
exclusively to enterprise customers and not to service
providers.
During the
year ended February 29, 2000, the Company had one customer, Compaq,
which accounted for 16% of net sales and 8% of total accounts
receivable, and the United States federal government accounted for
approximately 14% of net sales. During the year ended February 28,
1999, the Company had one customer, Compaq, which accounted for 11%
of net sales and 7% of total accounts receivable, and the United
States federal government accounted for approximately 14% of net
sales. Cabletron’s top ten customers, excluding the United
States federal government, represented, in the aggregate,
approximately 28% and 22% of its net sales for the years ended
February 29, 2000 and February 28, 1999, respectively. During the
year ended February 29, 2000, the Company and Compaq entered into a
new alliance agreement that is expected to result in lower sales to
Compaq, but may result in higher direct sales to Compaq’s
channel partners. On May 23, 2000, the Company entered into a
definitive agreement to sell DNPG. If this sale is consummated, it
will result in lower overall sales to Compaq’s channel
partners. Most of the Company’s contracts with the United
States federal government are on a fixed-price basis. The books and
records of the Company are subject to audit by the General Services
Administration, the Department of Labor and other government
agencies.
Research
and Development
During the
years ended February 29, 2000, February 28, 1999 and 1998, research
and development expenses (“R&D”) were $184.6 million,
$210.4 million and $181.8 million, respectively. The Company has
consistently invested in R&D, because it believes its future
success will be largely dependent on new product development. The
Company believes that as customers place more reliance on their
networks and those networks grow larger and more complex, customers
will evaluate their network technology more formally, particularly
in the area of network control management; thus the Company has
continued to emphasize its R&D efforts in areas identified as
most valuable to customers.
As part of
its March 1999 restructuring initiative and through strategic
decisions, the Company discontinued research on non-core technology
projects and focused on core projects only. Through the elimination
of non-core R&D projects, the Company was able to reduce its
R&D expense by lowering the total number of engineers focused
on research and development efforts. Examples of the streamlining
include the Company’s strategic decision to sell the digital
subscriber line modem business acquired in the FlowPoint
acquisition, the Company’s discontinuation of its research
efforts related to the digital subscriber line access multiplexor
products acquired in the Ariel acquisition, and the Company’s
discontinuation of its research efforts on Fast Ethernet products
acquired in the DNPG acquisition. The Company is currently
reviewing its strategic options regarding the ethernet workgroup
switch technology acquired in the NetVantage acquisition. The
Company continues to develop products from its acquisition of Yago,
including Layer-4 switching products and solutions.
The Company
plans to continue to invest in R&D through investments,
internal efforts and acquisitions in emerging technologies for use
in existing and future products. However, there can be no assurance
that the Company will be able to successfully develop new products
that meet customer needs or that such products will achieve market
acceptance.
Supply of
Components
The
Company’s products include certain components, including
application specific integrated circuits (“ASICs”), that
are currently available from single or limited sources, some of
which require long order lead times. In addition, certain of the
Company’s products and subassemblies are manufactured by
single-source third parties. With the increasing technological
sophistication of new products and the associated design and
manufacturing complexities, the Company anticipates that it may
need to rely on additional single-source or limited suppliers for
components or manufacture of products and subassemblies. Any
reduction in supply, interruption or extended delay in timely
supply, variances in actual needs from forecasts for long order
lead time components, or change in costs of components could affect
Cabletron’s ability to deliver its products in a timely and
cost-effective manner and may adversely impact the Company’s
operating results and supplier relationships. Following the
transformation, the risks associated with component supply
shortages will principally affect Riverstone and Enterasys and not
GNTS or Aprisma.
Manufacturing
From
inception through February 29, 2000, Cabletron manufactured and
assembled most of its products. However, the recent emergence of
credible, third-party OEM manufacturers led the Company to
re-evaluate the manufacture and assembly processes related to its
products. During the year ended February 29, 2000 Cabletron
completed the outsourcing of 100% of its manufacturing activities
to a few OEM manufacturers and sold its manufacturing operations in
Rochester, New Hampshire and Limerick, Ireland to Flextronics (its
primary OEM). The Company believes that these third-party
manufacturers will be able to satisfy Cabletron’s high quality
standards in a timely and cost-effective manner. Following the
transformation, Enterasys and Riverstone will
continue to have their products manufactured by the Company’s
current third party manufacturers. GNTS and Aprisma do not offer
products that require third-party manufacturers.
In
connection with the Company’s sale of its manufacturing
facilities in Rochester, New Hampshire and Limerick, Ireland to
Flextronics, the Company and Flextronics entered into a supply
agreement under which Flextronics will supply the products formerly
manufactured using these assets to the Company. The supply
agreement includes initial pricing for the products that
Flextronics will supply to Cabletron under the agreement and
provides for the periodic repricing of these products, allowing the
Company to benefit from future cost savings. The term of the
agreement is two years.
Competition
The data
networking industry is intensely competitive and subject to
increasing consolidation. Competition in the data networking
industry has increased in recent periods, and Cabletron expects
competition to continue to increase significantly in the future
from its current competitors, as well as from potential competitors
that may enter the Company’s existing or future markets. The
Company’s competitors include many large domestic and foreign
companies, as well as emerging companies attempting to sell
products to specialized markets addressed by Cabletron.
Cabletron’s primary competitors in the data networking
industry are Alcatel, Cisco Systems, Inc., Ericsson, Lucent
Technologies, Inc., Nokia Corp., Northern Telecom Ltd. and Siemens.
Following the transformation, Enterasys will have the same
competitors. Riverstone will primarily compete with these same
competitors and additionally will compete with Extreme Networks,
Foundry Networks and Juniper Networks. Aprisma will compete
primarily with Hewlett Packard’s OpenView, IBM’s Tivoli,
BMC Software, Visual Networks and Micromuse Corp. GNTS will compete
primarily with Predictive Systems, Inc. and with the professional
service organizations of large telecommunications companies such as
Compaq and IBM. These competitors compete upon the basis of price,
technology, and brand recognition. Competitors may introduce new or
enhanced products that offer greater performance or functionality
than the products and services of Aprisma, Enterasys, GNTS and
Riverstone. Increased competition could result in price reductions,
reduced margins and loss of market share, any or all of which could
increase fluctuations in operating results and materially and
adversely affect the business, financial condition and operating
results of Aprisma, Enterasys, GNTS and Riverstone.
Intellectual Property
The
Company’s success depends in part on its proprietary
technology. The Company attempts to protect its proprietary
technology through patents, copyrights, trademarks, trade secrets
and license agreements. There can be no assurance that the steps
taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company’s
competitors will not independently develop technologies that are
substantially equivalent or superior to the Company’s
technology. In addition, the laws of some foreign countries may not
protect the Company’s proprietary rights to the same extent as
do the laws of the United States. The Company has been issued a
number of patents and has other patent applications pending. There
is no assurance that patents will be issued from pending
applications, or that claims allowed on any future patents will be
sufficiently broad to protect the Company’s technology. No
assurance can be given that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages. As part of
the transformation, the Company will assign its proprietary
technology to the applicable new company. The four new companies
will each seek to protect their respective proprietary intellectual
property in a manner similar to the Company.
Backlog
The
Company’s backlog at February 29, 2000 was approximately
$118.0 million, compared with backlog at February 28, 1999 of
approximately $170.0 million. During the year ended February 29,
2000, the Company and Compaq agreed to restructure their
relationship. The new relationship has resulted in the Company
maintaining a lower amount of backlog related to Compaq. In
general, orders included in backlog may be canceled or
rescheduled by the customer without significant penalty. Therefore,
backlog as of any particular date may not be indicative of the
Company’s actual sales for any succeeding fiscal
period.
Inventory
and working capital
The Company
has sold a portion of its inventory to Flextronics, increased its
focus on supply chain management and streamlined its product
offerings which has resulted in inventory levels decreasing from
$229.5 million, at February 28, 1999, to $85.0 million, at February
29, 2000, while still maintaining what the Company believes are
sufficient inventory levels that allow for shipment of most
customer orders in a timely manner. In addition, working capital
increased as a result of the Company’s sale of its FlowPoint
subsidiary and fixed assets that related to manufacturing
operations, as the Company completed its outsourcing of
manufacturing. As of February 29, 2000, working capital was $448.2
million compared to $370.9 million at February 28,
1999.
Employees
As of
February 29, 2000, the Company had approximately 4,456 full-time
employees compared to 5,951 full-time employees as of February 28,
1999. The decrease resulted from the Company’s outsourcing
arrangement with Flextronics, which resulted in approximately 970
employees transferring to Flextronics, and the termination of 418
full-time employees in accordance with the Company’s
restructuring initiative announced in March 1999. The
Company’s employees are not represented by a union or other
collective bargaining agent and the Company considers its relations
with its employees to be good.
See
“Business Environment and Risk Factors” beginning on page
32 for additional information.
Domestic
and Foreign Financial Information
Financial
information concerning foreign and domestic operations is contained
in Note 15 of “Notes to the Consolidated Financial
Statements” included at page 58 of this document.
ITEM
2. PROPERTIES
Cabletron
owns and occupies a number of buildings in Rochester, New
Hampshire, including a 206,000 square-foot manufacturing facility
which houses a portion of corporate engineering, in addition to
manufacturing facilities which are being converted to office use.
Other buildings, totaling 122,000 square-feet, accommodate sales,
marketing, administration and technical support personnel. On
February 29, 2000 another building, which had served as a
warehousing and distribution facility, totaling 208,000 square
feet, was sold to Flextronics. As a result of the Flextronics
arrangement, the Company expects to have sufficient manufacturing
capacity through use of its contract manufacturers.
In addition
to owning numerous buildings, the Company leases other facilities.
Cabletron leases a variety of buildings for R&D and engineering
including a 78,000 square-foot facility in Durham, New Hampshire, a
facility totaling 68,000 square feet in Nashua, New Hampshire and a
152,000 square-foot building in Andover, Massachusetts. The Company
has entered into various leases in Ireland to support its
international sales activities. Through February 29, 2000,
Cabletron occupied a 100,000 square-foot manufacturing facility in
Limerick, Ireland. As part of the outsourcing of manufacturing to
Flextronics, the Company will sublease this facility to
Flextronics. The Company continues to lease a 75,000 square-foot
distribution center in Shannon, Ireland. Cabletron has consolidated
its west coast operations in a 129,000 square-foot facility in
Santa Clara, California. The Company also continues to occupy a
41,000 square-foot facility in Salt Lake City, Utah. Cabletron also
leases sales and technical support offices that range from 1,000 to
25,000 square feet at various locations throughout the
world.
During the
year ended February 29, 2000, the Company consolidated some
facilities and staff as a result of a restructuring plan that was
announced in March 1999. As part of this consolidation, the Company
sold an engineering facility in Merrimac, NH totaling 115,000
square feet, housed on a 54 acre site.
Financial
information regarding leases and lease commitments are contained in
Note 10 of “Notes to the Consolidated Financial
Statements” included at page 55 of this document.
ITEM
3. LEGAL PROCEEDINGS
As
previously disclosed in Cabletron’s annual reports on Form
10-K for the years ended February 28, 1999 and 1998, a consolidated
class action lawsuit purporting to state claims against Cabletron
and certain officers and directors of Cabletron was filed in the
United States District Court for the District of New Hampshire and,
following transfer, is pending in the District of Rhode Island. The
complaint alleges that Cabletron and several of its officers and
directors disseminated materially false and misleading information
about Cabletron’s operations and acted in violation of Section
10(b) and Rule 10b-5 of the Exchange Act during the period between
March 3, 1997 and December 2, 1997. The complaint also alleges that
certain of the Company’s alleged accounting practices resulted
in the disclosure of materially misleading financial results during
the same period. More specifically, the complaint challenged the
Company’s revenue recognition policies, accounting for product
returns, and the validity of certain sales. The complaint does not
specify the amount of damages sought on behalf of the class.
Cabletron and other defendants moved to dismiss the complaint and,
by Order dated December 23, 1998, the District Court expressed its
intention to grant Cabletron’s motion to dismiss unless the
plaintiffs amended their complaint. The Plaintiffs timely served a
Second Consolidation Class Action Complaint, and the Company has
filed a motion to dismiss this second complaint. A ruling on that
motion is not expected earlier than June 2000. The legal costs
incurred by Cabletron in defending itself and its officers and
directors against this litigation, whether or not it prevails,
could be substantial, and in the event that the plaintiffs prevail,
the Company could be required to pay substantial damages. This
litigation may be protracted and may result in a diversion of
management and other resources of the Company. The payment of
substantial legal costs or damages, or the diversion of management
and other resources, could have a material adverse effect on the
Company’s business, financial condition or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
During the
fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of the Company’s security
holders.
Executive
Officers of the Registrant
The
executive officers of the Company are as follows:
Name
|
|
Age
|
|
Position
|
| Thomas D.
Bunce |
|
56 |
|
Executive
Vice President, Product Development |
| Enrique P.
Fiallo |
|
47 |
|
President
of Enterasys Networks |
| Thomas N.
Gleason |
|
36 |
|
Executive
Vice President, North American/South
American Sales |
| Earle S.
Humphreys |
|
54 |
|
President
of GlobalNetwork Technology Services |
| Eric
Jaeger |
|
37 |
|
Executive
Vice President of Corporate Affairs |
| David J.
Kirkpatrick |
|
48 |
|
Corporate
Executive Vice President of Finance and Chief
Financial Officer |
| Piyush
Patel |
|
44 |
|
Chief
Executive Officer and President |
| Romulus S.
Pereira |
|
34 |
|
President
of Riverstone Networks |
| John J.
Roese |
|
30 |
|
Chief
Technology Officer |
| Joseph H.
Solari |
|
58 |
|
President
of Europe, Middle East and Africa |
| Michael A.
Skubisz |
|
33 |
|
President
of Aprisma Management Technologies, Inc. |
| Gary M.
Workman |
|
53 |
|
President
of Operations, Asia Pacific |
Thomas D. Bunce
has been with Cabletron for six years, serving since 1997 as
Executive Vice President of Product Development. Prior to joining
Cabletron, he served as Vice President of Engineering and
Operations for Lucas Duralith. Prior to joining Lucas Duralith, he
served as Vice President of Engineering and Operations for the
Mupac Corporation.
Enrique
P. (Henry) Fiallo has served as President of Enterasys Networks
since February 2000. From November 1998 through February 2000, he
was Executive Vice President and Chief Information Officer of
Cabletron. Prior to joining Cabletron, he served as Senior Vice
President and Chief Information Officer at Entergy Services, Inc.
Prior to joining Entergy, he was Vice President of Logistics
Information Systems at Ryder Systems, Inc., in Miami, Florida,
where he held a variety of senior management positions in IT, MIS
and telecommunications during a 10-year tenure.
Thomas N.
Gleason has served as Executive Vice President of North
American/South American Sales, since September 1999. From April
1999 to September 1999, he served as Regional Vice President of
North America. From November 1990 to March 1999, he held a variety
of sales management positions at Cabletron. Prior to joining
Cabletron, he held various positions at IBM during a 4-year
tenure.
Earle S.
Humphreys has served as President of GlobalNetwork
Technology Services since February 2000. From July 1998 through
February 2000, he was Executive Vice President of Global Services.
Prior to joining Cabletron, he served as Senior Director of
Services Solution Marketing at Compaq Computer Corp. Prior to
joining Compaq, he held a variety of senior management roles,
including Vice President of Consulting Services at Tandem
Computers, during a 10-year tenure.
Eric
Jaeger has served as Executive Vice President of Corporate
Affairs since June 1999. From October 1998 to June 1999, he served
as Senior Vice President and General Counsel. Prior to joining
Cabletron, he was a corporate attorney with the law firm of Ropes
& Gray.
David J.
Kirkpatrick has served as Corporate Executive Vice President of
Finance since March 1998. He served as Director of Finance of the
Company from August 1990 until March 1998 and has served as Chief
Financial Officer since August 1990. From 1986 to 1990, he was the
Vice President of Zenith Data Systems, a subsidiary of Zenith
Electronics Corporation.
Piyush
Patel has served as Chairman of the Board of Directors, Chief
Executive Officer and President since June 1999. From October 1998
to June 1999, he was Senior Vice President of Worldwide
Engineering. From September 1996 to October 1998, he served as
Chief Executive Officer at Yago Systems, Inc. From 1980 to 1996, he
held a variety of senior management positions at Intel, Sun
Microsystems, MIPS computers and QED.
Romulus
S. Pereira has served as President of Riverstone Networks since
February 2000. From June 1999 through February 2000, he was Chief
Operating Officer. From March 1998 to June 1999, he served as
general manager of Cabletron’s service provider business.
Prior to joining Cabletron, he served as Chief Technology Officer
and Vice President of Engineering of Yago Systems. Prior to
co-founding Yago Systems with Piyush Patel, he held various
technical roles at Cisco Systems, Kalpana and Wollongong
Group.
John J.
Roese has served as Chief Technology Officer since October
1999. Since 1991, he has held various positions at Cabletron,
including Senior Technical Director of Engineering, Deputy Chief
Technology Officer, Director of Systems Engineering, Senior Product
Manager and Senior Technical Trainer.
Joseph H.
Solari served as President of Europe, Middle East and Africa
from August 1997 through March 2000, his date of separation from
the Company. Prior to joining Cabletron, he served as President and
CEO of Zenith Data Systems S.A., a division of Groupe Bull. Prior
to joining Zenith, he held a variety of positions in sales and
management within the electronics and computer industries,
including an 18-year tenure at Schlumberger Ltd.
Michael A.
Skubisz has served as President of Aprisma Management
Technologies since July 1999. From September 1998 to July 1999, he
served as Chief Technology Officer. From 1993 to 1998, he served as
Vice President of Product Marketing and Product Management. He has
held various positions at Cabletron, including Regional Manager of
Field Engineering in the New York City office where he began his
career with Cabletron in 1988.
Gary M.
Workman has served as President of Operations in the Asia
Pacific region since January 1999. Prior to joining Cabletron, he
held a variety of senior management positions with Anixter
International, Inc., including Senior Vice President of the Western
Group and President of Asia Pacific, during a 25-year
career.
Key
Personnel
On June 3,
1999, Piyush Patel was appointed to the positions of President,
Chief Executive Officer and Chairman and Craig R. Benson resigned
as President, Chief Executive Officer, Chairman and Treasurer. Mr.
Benson has remained a member of the Company’s Board of
Directors. The Company’s success is dependent in large part on
Mr. Patel and other key technical, sales and management personnel.
The loss of one or more of these individuals could adversely affect
the Company’s business.
PART
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK
PRICE HISTORY
The
following table sets forth the high and low sale prices for the
Company’s Common Stock as reported on the New York Stock
Exchange (symbol—CS) during the last two fiscal years. As of
May 5, 2000, the Company had approximately 2,821 stockholders of
record. The Company has paid no dividends on its Common Stock and
anticipates it will continue to reinvest earnings to finance future
growth.
| |
|
High
|
|
Low
|
| Fiscal
2000 |
|
|
|
|
| First
quarter |
|
$15.31 |
|
$ 7.25 |
| Second
quarter |
|
16.81 |
|
11.94 |
| Third
quarter |
|
24.38 |
|
14.81 |
| Fourth
quarter |
|
$49.00 |
|
$22.00 |
| |
| Fiscal
1999 |
|
|
|
|
| First
quarter |
|
$15.56 |
|
$12.50 |
| Second
quarter |
|
14.31 |
|
6.63 |
| Third
quarter |
|
15.31 |
|
6.63 |
| Fourth
quarter |
|
$14.38 |
|
$ 7.69 |
ITEM
6. SELECTED FINANCIAL DATA
CABLETRON
SYSTEMS, INC.
| |
|
Fiscal
Year Ended
|
| |
|
February 29,
2000
|
|
February 28,
1999
|
|
February 28,
1998
|
|
February 28,
1997
|
|
February 29,
1996
|
| |
|
(in
thousands, except per share data) |
| Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
sales |
|
$1,459,593 |
|
|
$1,411,279 |
|
|
$1,377,330 |
|
|
$1,406,552 |
|
$1,100,349 |
| Cost of
sales |
|
817,844 |
|
|
811,350 |
|
|
676,291 |
|
|
595,407 |
|
448,699 |
| Research
and development |
|
184,614 |
|
|
210,393 |
|
|
181,777 |
|
|
161,674 |
|
127,289 |
| Selling,
general and administrative |
|
400,544 |
|
|
418,254 |
|
|
372,224 |
|
|
301,263 |
|
223,083 |
| Amortization of intangible assets |
|
41,270 |
|
|
27,978 |
|
|
1,565 |
|
|
206 |
|
— |
| Special
charges |
|
21,096 |
|
|
234,920 |
|
|
234,285 |
|
|
21,724 |
|
94,343 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
(5,775 |
) |
|
(291,616 |
) |
|
(88,812 |
) |
|
326,278 |
|
206,935 |
| Interest
income, net |
|
18,587 |
|
|
15,089 |
|
|
18,578 |
|
|
19,422 |
|
17,891 |
| Other
income, net |
|
746,209 |
|
|
— |
|
|
— |
|
|
— |
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
759,021 |
|
|
(276,527 |
) |
|
(70,234 |
) |
|
345,700 |
|
224,826 |
| Income tax
expense (benefit) |
|
294,750 |
|
|
(31,136 |
) |
|
(35,273 |
) |
|
119,621 |
|
80,341 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) |
|
$ 464,271 |
|
|
$ (245,391 |
) |
|
$ (34,961 |
) |
|
$ 226,079 |
|
$ 144,485 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share—basic |
|
$
2.62 |
|
|
$
(1.47 |
) |
|
$
(0.22 |
) |
|
$
1.46 |
|
$
0.95 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share—diluted |
|
$
2.46 |
|
|
$
(1.47 |
) |
|
$
(0.22 |
) |
|
$
1.42 |
|
$
0.93 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
outstanding—basic |
|
177,541 |
|
|
167,432 |
|
|
157,686 |
|
|
155,207 |
|
151,525 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
outstanding—diluted |
|
188,618 |
|
|
167,432 |
|
|
157,686 |
|
|
158,933 |
|
155,171 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Included in fiscal 2000
results are charges related to the write-off related to
discontinuations of several product lines ($9.8 million, net of
tax), amortization of intangible assets related to purchased
acquisitions ($21.2 million, net of tax), the write-off of goodwill
associated with the closing of the Ariel operations ($9.0 million,
net of tax) which is included in amortization of intangible assets,
the implementation of a restructuring plan ($12.9 million, net of
tax), other income and expenses related to the Company’s sale
of its FlowPoint subsidiary ($421.5 million, net of tax), and the
income from its new alliance agreement with Compaq Computer
Corporation (“Compaq”) ($25.8 million, net of tax).
Included in fiscal 1999 results are charges related to amortization
of intangible assets related to purchased acquisitions ($18.3
million, net of tax), special charges ($207.2 million, net of tax)
related to the acquisitions of Yago Systems, Inc., the DSLAM
division of Ariel Corporation, FlowPoint Corp. and NetVantage, Inc.
and $10.4 million, net of tax, related to fixed asset loss for
idle, obsolete and discarded equipment. Included in fiscal 1998
results are special charges related to the acquisition of
Digital’s Network Products Group and the implementation of a
strategic realignment plan consisting of $121.8 million and $21.5
million, net of tax, respectively. Included in fiscal 1997 and
fiscal 1996 results are $13.5 million, net of tax, and $60.8
million, net of tax, of special charge items related to all
acquisitions for each fiscal year, respectively. Excluding the
aforementioned charges, the amortization of intangible assets and
other income, pro forma net income (loss) and pro forma diluted net
income (loss) per share are as follows:
| |
|
Fiscal
Year Ended
|
| |
|
February 29,
2000
|
|
February 28,
1999
|
|
February 28,
1998
|
|
February 28,
1997
|
|
February 29,
1996
|
| |
|
(in
thousands, except per share data) |
| |
|
(Unaudited) |
| Pro forma
net income (loss) |
|
$69,917 |
|
$(9,460 |
) |
|
$108,339 |
|
$239,579 |
|
$205,285 |
Pro forma
diluted net income per share
(loss) |
|
$ 0.37 |
|
$ (0.06 |
) |
|
$ 0.68 |
|
$ 1.51 |
|
$ 1.32 |
| |
|
Fiscal
Year Ended
|
| |
|
February 29,
2000
|
|
February 28,
1999
|
|
February 28,
1998
|
|
February 28,
1997
|
|
February 29,
1996
|
| |
|
(in
thousands) |
| Balance
Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| Working
capital |
|
$ 448,168 |
|
$ 370,945 |
|
$ 593,046 |
|
$ 679,056 |
|
$485,152 |
| Total
assets |
|
3,166,507 |
|
1,566,500 |
|
1,682,048 |
|
1,310,809 |
|
996,908 |
| Stockholders’ equity |
|
$2,147,439 |
|
$1,089,833 |
|
$1,085,075 |
|
$1,085,452 |
|
$809,886 |
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion provides an analysis of Cabletron’s
financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K. The
discussion below contains certain forward-looking statements
relating to, among other things, estimates of economic and industry
conditions, sales trends, expense levels and capital expenditures.
Actual results may vary from those contained in any forward-looking
statements. See “Business Environment and Risk Factors”
below.
Results of
Operations
This table
sets forth the Company’s net sales, cost of sales, expenses by
category, income (loss) from operations, interest income, net,
other income, net, income (loss) before income taxes and net income
(loss), each expressed as percentages of net sales, for the fiscal
years ended February 29, 2000 and February 28, 1999 and
1998:
| |
|
2000
|
|
1999
|
|
1998
|
| Net
sales |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
| Cost of
sales |
|
56.0 |
|
|
57.5 |
|
|
49.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
44.0 |
|
|
42.5 |
|
|
50.9 |
|
| Research
and development |
|
12.6 |
|
|
14.9 |
|
|
13.2 |
|
| Selling,
general and administrative |
|
27.4 |
|
|
29.6 |
|
|
27.0 |
|
| Amortization of intangible assets |
|
2.8 |
|
|
2.0 |
|
|
0.1 |
|
| Special
charges |
|
1.4 |
|
|
16.6 |
|
|
17.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(0.2 |
) |
|
(20.6 |
) |
|
(6.4 |
) |
| Interest
income, net |
|
1.3 |
|
|
1.1 |
|
|
1.3 |
|
| Other
income, net |
|
51.1 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
52.2 |
|
|
(19.5 |
) |
|
(5.1 |
) |
| |
|
|
|
|
|
|
|
|
|
| Income tax
expense (benefit) |
|
20.2 |
|
|
(2.1 |
) |
|
(2.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
31.8 |
% |
|
(17.4 |
)% |
|
(2.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
Net Sales
Net sales
for the year ended February 29, 2000 increased by 3.4% to $1,459.6
million from $1,411.3 million for the year ended February 28, 1999
and compared to $1,377.3 million in the year ended February 28,
1998. Sales increased primarily as a result of increased sales of
the Company’s Layer-3 and Layer-4 switched technology
products. Worldwide sales of switched products increased
approximately $138.2 million, or 17.1%, to $948.4 million in the
year ended February 29, 2000 compared to $810.2 million in the year
ended February 28, 1999. The increase in sales of switched products
was principally due to an increase in sales of the Company’s
SmartSwitch Router products, which offset declining sales of older
switched products. The sales increase has been as a result of the
Company’s success in penetrating the WAN segment of the
Layer-3 switching market, creation of Layer-4 switching technology
products and continuation of customers migrating from the older
shared media technology products. Secondarily, sales increased as a
result of increased sales to Compaq in connection with the
transition from an OEM agreement between Compaq and the Company,
with minimum purchase commitments, to an alliance agreement. As
part of this transition, Compaq purchased $85.0 million ($48.7
million in the fourth quarter of fiscal 2000) of existing inventory
that was in the Company’s manufacturing pipeline and paid the
Company $11.7 million as a pricing rebate for Compaq’s failure
to meet its minimum purchase commitments in the year ended February
29, 2000. Sales of switched products increased 19.0% to $810.2
million in the year ended February 28, 1999 compared to sales of
$680.6 million in the year ended February 28, 1998. The increase in
sales of switched products was a result of increasing unit sales,
primarily related to the SmartSwitch 6000 products. Prices per
product decreased slightly for some of the older switched products
during the year ended February 28, 1999, but shipments of new
products offset this slight price decline. The year ended February
28, 1999 included a full year of DNPG/Compaq sales, largely
contributing to the increase in sales of switched products,
compared to the year ended February 28, 1998 which included just
three weeks of sales. Sales of shared media products decreased by
approximately $99.5 million, or 60.0%, to $66.3 million in the year
ended February 29, 2000 from $165.8 million in the year ended
February 28, 1999 and sales of $317.6 million in the year ended
February 28, 1998. Sales of shared media products steadily
decreased throughout the years ended February 29, 2000 and February
28, 1999 as a result of both declining unit shipments and lower
prices per product. The Company is evaluating its options regarding
products that utilize shared media technology including exiting
this line of business. Sales of other various legacy products and
Spectrum increased by approximately $11.7 million, or 7.1%, to
$177.0 million in the year ended February 29, 2000 compared to
$165.3 million in the year ended February 28, 1999. This increase
was largely a result of customers purchasing various legacy
products that enable them to maintain their existing systems.
Revenues from professional services and maintenance remained
relatively flat at approximately $267.9 million in the year ended
February 29, 2000 and $270.0 million in the year ended February 28,
1999. As a result of terminating Compaq’s minimum purchase
commitments, the Company believes that future purchases by Compaq
will be significantly lower than recent purchase levels. Under the
alliance agreement, sales to Compaq are expected to be lower than
recent levels, but may result in higher direct sales to
Compaq’s channel partners. These revenue sources have more
risk than the minimum purchase commitments which previously
existed. Further, the new revenue sources are subject to execution
risk in obtaining such sales. In summary, 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 in the year ending March 3, 2001 as compared to the
year ended February 29, 2000. This would have a materially adverse
impact on the Company’s results of operations. Additionally,
on May 23, 2000, the Company entered into a definitive agreement to
sell its DNPG subsidiary. The sale of DNPG is expected to
materially reduce net sales in the year ending March 3, 2001.
Further, the discontinuation of other product lines and other
actions taken in connection with the transformation are expected to
decrease overall net sales in the year ending March 3,
2001.
Net sales
within the United States (“domestic”) in the year ended
February 29, 2000 were $951.3 million or 65.2% of net sales,
compared to $829.4 million or 58.8% of net sales in the year ended
February 28, 1999 and $923.3 million or 67.0% of net sales in the
year ended February 28, 1998. Domestic net sales increased in the
year ended February 29, 2000 compared to the year ended February
28, 1999, largely due to sales of switched media products
increasing by more than 29% domestically and sales of products in
the Company’s manufacturing pipeline to Compaq. Sales
decreased in the year ended February 28, 1999 compared to the year
ended February 28, 1998
due to pricing competitiveness that resulted in lower prices and
decreased sales of shared media products as the Company
transitioned to switched technology products.
Net sales in
Europe were $342.2 million or 23.4% of total net sales in the year
ended February 29, 2000 compared to $430.3 million or 30.5% of
total net sales in the year ended February 28, 1999 and $323.7
million or 23.5% of net sales in the year ended February 28, 1998.
The decrease in sales was a result of decreases across a majority
of the product lines, including a $39.5 million, or 66.1%, from the
year ended February 28, 1999 to the year ended February 29, 2000,
decrease in shared media products and a $10.3 million, or 4.0%,
from the year ended February 28, 1999 to the year ended February
29, 2000, decrease in sales of switched products. Sales decreased
in the year ended February 29, 2000 compared to February 28, 1999
as sales of DNPG/Compaq products began to decline. Sales increased
in the year ended February 28, 1999 compared to the year ended
February 28, 1998 as the Company had a full year of sales of DNPG
products.
Net sales in
the Pac Rim were $116.4 million or 8.0% of total net sales in the
year ended February 29, 2000 compared to $114.2 million or 8.1% of
total net sales in the year ended February 28, 1999 and $77.6
million or 5.6% of net sales in the year ended February 28, 1998.
Sales of switched products increased $21.6 million, or 31.9%, from
the year ended February 28, 1999 to the year ended February 29,
2000, but were offset by decreases in sales across a majority of
the other product lines, including a $8.6 million, or 61.7%,
decrease in service revenues. Sales increased in the year ended
February 28, 1999 compared to the year ended February 28, 1998 as
the Company had a full year of DNPG/Compaq activity and the Company
placed a greater emphasis on its Pac Rim operations.
Net sales in
other regions were $49.7 million, or 3.4%, of total net sales in
the year ended February 29, 2000 compared to $37.4 million, or
2.7%, of total net sales in the year ended February 28, 1999 and
$52.7 million, or 3.8%, of net sales in the year ended February 28,
1998. Sales increased primarily due to increased sales of switched
products, which increased $14.5 million, or 76.1%, from the year
ended February 28, 1999 to the year ended February 29, 2000. The
decrease in sales during the year ended February 28, 1999 compared
to February 28, 1998 was primarily due to decreased sales in Latin
America.
The effect
of foreign exchange rate fluctuations did not have a significant
impact on the Company’s operating results in the periods
presented.
Gross Profit, Expenses and
Interest Income
Gross profit
was $641.7 million, or 44.0% of net sales, in the year ended
February 29, 2000 compared to $599.9 million, or 42.5% of net
sales, in the year ended February 28, 1999 and compared to $701.0
million, or 50.9% of net sales, in the year ended February 28,
1998. The improvement in gross profit during the year ended
February 29, 2000, as compared to the year ended February 28, 1999,
reflects lower materials costs associated with streamlined product
offerings. The decrease in gross profit in the year ended February
28, 1999, as compared to the year ended February 28, 1998, as a
percentage of net sales reflects the impact on pricing from
increased sales to channel resellers and independent distributors,
rather than selling directly to end-users, and a more competitive
pricing environment. Additionally, the shift from shared media to
switched products resulted in higher inventory obsolescence. In the
future, the Company’s gross profit may be affected by the same
factors as the year ended February 29, 2000, including the price
per product sold, inventory obsolescence, the distribution channels
used, price competition, the mix of products sold, the acquisition
of newer products at different margins and the result of the
anticipated savings recognized through its outsourcing of the
manufacturing process.
Research and
development (“R&D”) expenses in the year ended
February 29, 2000 decreased to $184.6 million, or 12.6% of net
sales, compared to $210.4 million, or 14.9% of net sales, in the
year ended February 28, 1999 and $181.8 million, or 13.2% of net
sales, in the year ended February 28, 1998. R&D decreased, in
the year ended February 29, 2000 compared to the year ended
February 28, 1999, as a result of the elimination of staff and
facilities from various R&D departments and refocused efforts
on core projects identified in the restructuring initiative.
R&D increased in the year ended February 28, 1999 compared to
the year ended
February 28, 1998 as a result of higher spending on the addition of
software and hardware engineering personnel, directly hired and as
a result of the Company’s acquisitions, and the associated
costs related to development of new products and the next
generation of existing products. The Company plans to continue
emphasizing research and development as a critical strategy point.
The Company plans to continue to develop new products through a
combination of internal development efforts and acquisitions. There
can be no assurance that research and development efforts or
acquisitions of technology will result in commercially successful
new technology and products in the future, or that such technology
and products will be introduced in time to meet market
requirements. The Company’s research and development efforts
may be adversely affected by other factors discussed more fully
below in “Business Environment and Risk
Factors.”
Selling,
general and administrative (“SG&A”) expenses were
$400.5 million, or 27.4% of net sales, in the year ended February
29, 2000 compared to $418.3 million, or 29.6% of net sales, in the
year ended February 28, 1999 and compared to $372.2 million, or
27.0% of net sales, in the year ended February 28, 1998. The
decrease in SG&A expenses, as a percentage of net sales in the
year ended February 29, 2000 compared to the year ended February
28, 1999, was primarily a result of reductions in sales offices and
staff. The increase in the year ended February 28, 1999 compared to
the year ended February 28, 1998 was a result of an increase in
sales and technical personnel, incentive payments to employees
added through acquisitions and increased marketing programs. The
Company expects to focus more of the future SG&A expenditures
on core spending, advertising and marketing to potential customers
for revenue generation, and that other components of SG&A will
remain approximately constant, in absolute dollars, in the upcoming
year.
Amortization
of intangible assets expenses was $41.3 million, or 2.8% of net
sales, in the year ended February 29, 2000 compared to $28.0
million, or 2.0% of net sales, in the year ended February 28, 1999
and $1.6 million, or 0.1% of net sales, in the year ended February
28, 1998. The change in amortization expense was a result of
acquisitions completed during the years ended February 28, 1999 and
February 28, 1998. The February 29, 2000 amount includes a writeoff
of $12.1 million of goodwill related to Ariel.
In the year
ended February 29, 2000, the Company recorded $21.1 million of
special charges for the restructuring initiative undertaken during
March 1999. These charges reflect the closure of the Company’s
manufacturing facility in Ohio, the planned closure of 40 sales
offices worldwide (37 closed through February 29, 2000), the
consolidation and outsourcing of various manufacturing operations,
the write-off of certain assets that were not required subsequent
to the restructuring and the planned reduction of approximately
1,000 individuals from the Company’s global workforce. The
reduction in the global workforce was principally manufacturing and
distribution personnel but also included targeted reductions
impacting most functions within the Company. The exit costs which
the Company expects to incur relate primarily to long-term lease
commitments and repayments of economic development grants resulting
from the closing of the Ohio facility. This initiative was intended
to reduce the expense structure of the Company; reduce 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. 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 when expected, or ever. In the year ended
February 28, 1999, special charges were taken for in-process
research and development related to the acquisition of Yago
Systems, Inc. ($150.0 million), Ariel ($26.0 million), FlowPoint
($12.0 million) and NetVantage ($29.4 million). Also in the year
ended February 28, 1999, the Company performed a physical inventory
of manufacturing equipment and fixtures in preparation for the
planned outsourcing of its manufacturing operations. As a result of
this physical inventory, the Company wrote off approximately $17.6
million of assets. The write-off consisted of equipment and
fixtures that could not be located and equipment identified as
idled with no future value. In the year ended February 28, 1998,
special charges were taken for in-process research and development
related to the acquisition of the DNPG ($199.3 million) and the
implementation of a realignment plan ($35.0 million), totaling
$234.3 million. The December 16, 1997 realignment plan was intended
to better align the Company’s business strategy with its focus
in the enterprise and service provider markets. The realignment was
intended to better position the Company to provide more
solutions-oriented products and service; to increase its
distribution of
products through third-party distributors and resellers; to improve
its position internationally and to aggressively develop
partnership and acquisition opportunities. The realignment included
general expense reduction through the elimination of duplicate
facilities, consolidation of related operations, reallocation of
resources, including the elimination of certain existing projects,
and personnel reduction. During the year ended February 28, 1999,
the Company completed the reductions required to better align its
global initiative.
Net interest
income in the year ended February 29, 2000 was $18.6 million
compared to $15.1 million in the year ended February 28, 1999 and
compared to $18.6 million in the year ended February 28, 1998. The
increase in net interest income in the year ended February 29, 2000
as compared to the year ended February 28, 1999 was due to higher
invested balances and generally higher interest rates. The decrease
of net interest income in the year ended February 28, 1999 as
compared to fiscal 1998 is a result of lower cash available for
short-term investments caused by Compaq’s utilization of
product credits in place of cash to settle accounts receivable and
cash used to fund acquisitions.
Net other
income in the year ended February 29, 2000 was $746.2 million. Of
this total $705.1 million relates to the gain from the sale of a
subsidiary, FlowPoint, $37.2 million relates to the transitioning
of the Company’s relationship with Compaq and $3.9 million
relates to the sales of corporate equities.
Income (Loss) Before Income
Taxes
Income
before income taxes was $759.0 million in the year ended February
29, 2000, compared to a loss before income taxes of $276.5 million
in the year ended February 28, 1999 and a loss before income taxes
of $70.2 million in the year ended February 28, 1998. In the year
ended February 29, 2000, the Company recorded $746.2 million of
other income and a $21.1 million restructuring charge. In the year
ended February 28, 1999, the Company recorded special charges of
$234.9 million for in-process research & development, arising
out of the acquisitions of NetVantage for $29.4 million, FlowPoint
for $12.0 million, Ariel for $26.0 million and Yago for $150.0
million and a fixed asset loss of $17.5 million. In fiscal 1998,
the Company recorded special charges of $234.3 million, consisting
of in process research and development of $199.3 million in
connection with the acquisition of the DNPG, and charges relating
to the Company’s realignment of $35.0 million. The improvement
from a loss before income taxes, in the year ended February 28,
1999, to income before income taxes, in the year ended February 29,
2000, was primarily due to the Company’s sale of its FlowPoint
subsidiary and income related to its restructured relationship with
Compaq as well as higher gross profit margins and lower operating
expenses. The increase in loss before taxes in the year ended
February 28, 1999 was due to lower gross profit margins as the
Company continued its migration from shared media products to
switched products and higher personnel costs in R&D
departments. Excluding amortization of intangible assets, other
income, net and special charges, income before income taxes was
$75.2 million compared to loss before income taxes of $28.7 million
in the year ended February 28, 1999 and to income before income
taxes of $165.6 million in the year ended February 28, 1998. The
Company expects income before income taxes to decrease in the year
ending on March 3, 2001, due to the pending sale of DNPG, the
discontinuation of other product lines and other actions taken in
connection with the transformation.
Income Tax Expense
(Benefit)
The
Company’s effective tax rate was 38.8% for the year ended
February 29, 2000 compared to 11.3% for the year ended February 28,
1999 and 50.2% for the year ended February 28, 1998. The income tax
expense was $294.8 million in the year ended February 29, 2000
compared to an income tax benefit of $31.1 million in the year
ended February 28, 1999 and an income tax benefit of $35.3 million
in the year ended February 28, 1998. The tax expense in the year
ended February 29, 2000 included other income items, which in
total, were taxed at higher tax rates than normal operating income
and expenses. The tax benefit for the year ended February 28, 1999
included large non-deductible in-process research and development
charges and acquisition costs and tax benefits related to the Ariel
acquisition, fixed asset loss and a loss from operations, which
produced a higher tax rate than normal operating income and
expenses. The year ended February 29, 2000 income tax expense
included a $277.0 million tax charge related to the sale of
FlowPoint, a $13.3 million tax charge related to the Compaq
alliance agreement, a $9.1 million tax benefit related to the
amortization of purchased acquisition costs, a $8.2 million tax
benefit related to the write-off of product lines and a $6.5
million tax benefit related to the manufacturing divestiture. The
year ended February 28, 1999 income tax benefit included a $10.2
million tax benefit related to the acquisition of Ariel and a $6.8
million tax benefit related to the fixed asset loss. The year ended
February 28, 1998 income tax benefit included $77.5 million related
to the acquisition of the DNPG and $13.5 million related to the
Company’s realignment. Net income in the year ended February
19, 2000 was $464.3 million compared to a net loss of $245.4
million in the year ended February 28, 1999 and a net loss of $35.0
million in the year ended February 28, 1998.
Business
Combinations
During the
year ended February 29, 2000, the Company made the strategic
decision to pursue divesting itself of the manufacturing process,
certain non-core product lines and non-core subsidiaries. The
Company sold most of its manufacturing related assets and
inventories to Flextronics and simultaneously entered into an
agreement to purchase a significant amount of its products from
Flextronics. The Company intends to divest itself of non-core
product lines and subsidiaries through selling those identified
assets to a third party buyer or in some other manner that is yet
to be determined. In addition, the Company has made the strategic
decision to transform the Company into four separate operating
subsidiaries. The Company expects that by having four separate
operating subsidiaries it will provide increased flexibility to
better develop and implement other strategic transactions that are
based on specific products or services and customer
bases.
Fiscal
2000 Divestitures
On January
18, 2000, the Company and Flextronics entered into a definitive
agreement for Cabletron to divest its manufacturing and repair
services operations located in Rochester, New Hampshire and
Limerick, Ireland to Flextronics. Flextronics acquired the
Company’s manufacturing assets, inventories and manufacturing
personnel. Simultaneously with this transaction, the Company
contracted with Flextronics as an OEM to produce most of its
products. In anticipation of this divestiture, the Company recorded
a charge of $4.6 million related to lowering its carrying value of
inventory as cost of goods sold and recorded a $4.7 million charge
related to personnel costs as SG&A expense. The Company
received $60.5 million for inventory that it sold to Flextronics
and $18.1 million which reflected the net book value for
manufacturing related fixed assets, including
buildings.
On December
18, 1999, the Company sold its FlowPoint subsidiary to Efficient
Networks, Inc. (“Efficient”) in exchange for 7.2 million
shares of Efficient common stock and 6,300 shares of Efficient
preferred stock. The common stock is subject to various
restrictions on resale. The preferred stock was converted into 6.3
million shares of common stock following the approval of Efficient
shareholders at a special meeting on April 12, 2000. In connection
with the sale of FlowPoint, Cabletron and Efficient entered into an
OEM agreement under which Cabletron will resell the Efficient and
FlowPoint product lines.
Fiscal
1999 Acquisitions
Yago Systems,
Inc.
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 25% 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
5.2 million shares of Cabletron common stock to the former
shareholders of Yago, pursuant to the terms of the merger
agreement. 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.
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
R&D in progress had no alternative future uses. Accordingly,
the Company expensed these costs 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.
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 next two
years.
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. 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 are expected through calendar year 2000.
Thereafter, gross margins are expected to gradually decline as
competition increases. Cost of sales was projected to average
approximately 47.5% through 2003. SG&A expenses (including
depreciation), was projected to remain constant as a percentage of
sales at approximately 23.0%. 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% of sales, decline, and then level out at 5.0% 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% 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.
The
forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believed to be
reasonable but which, at the time, were inherently uncertain and
unpredictable. At the time such forecast was made, it was uncertain
whether the underlying assumptions used to estimate expected
project sales, development costs or profitability, or the events
associated with such projects, would transpire as estimated. The
Company’s assumptions may have been 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.
DSLAM division of Ariel
Corporation
On September
1, 1998, Cabletron acquired the assets and liabilities of Ariel.
Cabletron recorded the cost of the acquisition at approximately
$45.1 million, including fees, expenses and other costs related to
the acquisition. Cabletron’s consolidated results of
operations include the operating results of the DSLAM division of
Ariel Corporation from the acquisition date.
In
connection with the acquisition of Ariel, the Company allocated
$26.0 million ($15.8 million, net of tax) of the purchase price to
in-process research and development projects. The valuation of the
in-process research and development (“IPR&D”)
incorporated the guidance on IPR&D valuation methodologies
promulgated by the Securities and Exchange Commission
(“SEC”). These methodologies incorporate the notion that
cash flows attributable to development efforts, including the
effort to be completed on the development effort underway, and
development of future versions of the product that have not yet
been undertaken, should be excluded in the valuation of IPR&D.
This allocation represents 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 was 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 Ariel’s
next-generation DSLAM technology.
The nature
of the efforts to develop the acquired IPR&D into commercially
viable products principally relate to the completion of all
planning, designing, prototyping, high-volume verification, and
testing activities that are necessary to establish that the
proposed technologies meet their design specifications including
functional, technical, and economic performance
requirements.
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 is 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.
For purposes
of the IPR&D valuation, the total revenues attributable to
Ariel were projected to exceed $195 million within 5 years,
assuming the successful completion and market acceptance of the
major R&D efforts. As of the valuation date, Ariel had no
existing products and accordingly all revenue growth in the first
several years are related to the in-process technologies. For
purposes of the IPR&D valuation, it was estimated that revenues
for the in-process projects would peak in 2004 and then decline as
other new products and technologies were expected to enter the
market.
Cost of
sales was estimated based on Ariel’s internally generated
projections and discussions with management regarding anticipated
gross margin improvements. Due to the market opportunities in the
network equipment arena and Ariel’s unique technology
architecture, substantial gross margins were estimated through the
forecast period. Cost of sales as a percentage of sales was
forecasted to decline until 2001 and then remain constant at 55%.
SG&A expenses (including depreciation) as a percentage of sales
were projected to decline slightly until 2003 and then remain
constant at 26%. R&D expenditures as a percentage of sales were
projected to remain constant at 8% over the projection
period.
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, a discount rate of 27.5%
was determined to be appropriate for the in-process R&D. These
discount rates were commensurate with Ariel’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
were unknown at the time of acquisition.
The Company
believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. During the fourth
quarter of fiscal 2000, the Company determined to abandon its
efforts regarding DSL-related technology. The Company’s DSL
efforts were largely a result of technology acquired in the
acquisitions of Ariel and FlowPoint. The Company finalized its
decision to abandon R&D on DSL technology when it sold its
FlowPoint subsidiary, thus the Company expensed the remainder of
the Ariel goodwill.
FlowPoint Corp.
On September
9, 1998, Cabletron acquired FlowPoint, Corp., a privately held
manufacturer of digital subscriber line router networking products
for $20.6 million, payable in four installments. Prior to the
Agreement, Cabletron owned 42.8% of the outstanding shares of
FlowPoint stock. The first installment was paid in the form of cash
while the remaining 3 installments were paid in the form of
Cabletron common stock. During the year ended February 29, 2000,
the Company issued approximately 1.0 million shares of common stock
pursuant to the installment payments. In addition, Cabletron
assumed 494,000 options, valued at approximately $2.7
million.
Cabletron
recorded the cost of the acquisition at approximately $25.0
million, including direct costs of the acquisition.
Cabletron’s consolidated results of operations include the
operating results of FlowPoint, Corp. from the acquisition
date.
In
connection with the acquisition of FlowPoint, the Company recorded
special charges of $12.0 million for in-process research and
development projects. The valuation of the IPR&D incorporated
the guidance on IPR&D valuation methodologies promulgated by
the SEC. These methodologies incorporate the notion that cash flows
attributable to development efforts, including the effort to be
completed on the development effort underway, and development of
future versions of the product that have not yet been undertaken,
should be excluded in the valuation of IPR&D. This allocation
represents 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
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 FlowPoint’s
next-generation Router technologies.
The nature
of the efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion
of all planning, designing, prototyping, high-volume verification,
and testing activities that are necessary to establish that the
proposed technologies meet their design specifications including
functional, technical, and economic performance
requirements.
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 is 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.
For purposes
of the in-process R&D valuation, the total revenues
attributable to FlowPoint were projected to exceed $150.0 million
within 5 years, assuming the successful completion and market
acceptance of the major R&D efforts. As of the valuation date,
FlowPoint had a few existing products, which lacked the
technological breadth and depth necessary in the evolving
networking equipment market. Accordingly, for purposes of the in-
process R&D valuation, it was estimated that significant revenue
growth in the first several years would be primarily related to the
in-process technologies. The estimated revenues for the in-process
projects were projected to peak in 2007 and then decline as other
new products and technologies were expected to enter the
market.
Cost of
sales was estimated based on FlowPoint’s internally generated
projections and discussions with management regarding anticipated
gross margin improvements. Due to the market opportunities in the
network equipment arena and FlowPoint’s unique technology
architecture, substantial gross margins were projected through the
forecast period. Cost of sales as a percentage of sales was
forecasted to decline until 2003 and then remain constant at 55%.
SG&A expenses (including depreciation) as a percentage of sales
were projected to remain constant at 23%. R&D expenditures as a
percentage of sales were projected to decline significantly from
30% in 1999 to 10% in 2001 and remain constant at 10%
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, a discount rate of 27.5%
was determined to be appropriate for the in-process R&D. These
discount rates were commensurate with FlowPoint’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 were unknown at
the time of the acquisition.
The Company
believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. During the fourth
quarter of its year ended February 29, 2000, the Company sold its
FlowPoint division to Efficient Networks. Consequently, the Company
expensed the remainder of the goodwill associated with this
acquisition which resulted in decreasing the realized gain from the
sale of FlowPoint.
NetVantage, Inc.
On September
25, 1998, Cabletron acquired NetVantage, Inc., a publicly held
manufacturer of ethernet workgroup switches. Under the terms of the
Merger Agreement, Cabletron issued 6.4 million shares of Cabletron
common stock to the shareholders of NetVantage in exchange for all
of the outstanding shares of stock of NetVantage.
Cabletron
recorded the cost of the acquisition at approximately $77.8
million, including direct costs of the acquisition. The cost
represents 6.4 million shares at $9.9375 per share, in addition to
direct acquisition costs. Cabletron’s consolidated results of
operations include the operating results of NetVantage, Inc. from
the acquisition date.
In
connection with the acquisition of NetVantage, the Company recorded
special charges of $29.4 million for in-process research and
development projects. The valuation of the IPR&D incorporated
the guidance on IPR&D valuation methodologies promulgated by
the SEC. These methodologies incorporate the notion that cash flows
attributable to development efforts, including the effort to be
completed on the development effort underway, and development of
future versions of the product that have not yet been undertaken,
should be excluded in the valuation of IPR&D. This allocation
represents 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
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 values
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 NetVantage’s
next-generation Ethernet technologies.
The nature of the
efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion
of all planning, designing, prototyping, high-volume verification,
and testing activities that are necessary to establish that the
proposed technologies meet their design specifications including
functional, technical, and economic performance
requirements.
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.
For purposes
of the IPR&D valuation, the total revenues attributable to
NetVantage were projected to exceed $250.0 million within 5 years,
assuming the successful completion and market acceptance of the
major R&D efforts. As of the valuation date, NetVantage had a
few existing products, which lacked the technological breadth and
depth necessary in the evolving networking equipment market.
Accordingly, it was estimated that the significant revenue growth
in the first several years would be primarily related to the
in-process technologies. The estimated revenues for the in-process
projects were expected to peak in 2004 and then decline as other
new products and technologies were expected to enter the market. To
date, actual revenues have been substantially similar to those
projected.
Cost of
sales was estimated based on NetVantage’s internally generated
projections and discussions with management regarding anticipated
gross margin improvements. Due to the market opportunities in the
network equipment arena and NetVantage’s unique technology
architecture, substantial gross margins were projected through the
forecast period. Cost of sales as a percentage of sales was
forecasted to remain constant at 57.5%. SG&A expenses
(including depreciation) as a percentage of sales was projected to
decline slightly in 2001 and then remain constant at 23%. R&D
expenditures as a percentage of sales were projected to decline
slightly in 2000 and remain constant at 10% over the projection
period.
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, a discount rate of 25.0%
was determined to be appropriate for the in-process R&D. These
discount rates are commensurate with NetVantage’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 were unknown at
the time of the acquisition.
The
forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believed to be
reasonable but which, at the time, were inherently uncertain and
unpredictable. At the time such forecasts were made, it was
uncertain whether the underlying assumptions used to estimate
expected project sales, development costs or profitability. The
Company’s assumptions may have been incomplete or inaccurate,
and unanticipated events and circumstances were likely to occur.
For these reasons, actual results may vary from the projected
results.
The Company
believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be
given, however, 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.
For these reasons, actual results may vary from the projected
results.
NetVantage’s in-process research and development value
is comprised of several significant individual on-going projects.
Remaining development efforts for these projects include various
phases of design, development and testing. Anticipated completion
dates for the projects in progress are estimated to occur over the
next year. The Company began recognizing the economic benefits from
the technologies in the fourth quarter of the year
ended February 28, 1999. Funding for such projects was estimated to
be obtained from internally generated sources. The estimated
expenditures to complete these projects appear to be reasonable as
compared to actual expenditures incurred. These estimates are
subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these
estimates will not occur.
The Company
believes that the foregoing assumptions used in the forecasts were
reasonable at the time of acquisition. The Company is presently
evaluating strategic options regarding the NetVantage projects,
including selling the entire subsidiary. This evaluation is
expected to be completed prior to June 30, 2000.
Fiscal
1998 Acquisitions
Effective
February 7, 1998, Cabletron consummated the acquisition of certain
assets of the Network Products Group (“NPG”) of Digital
Equipment Corporation. The NPG, now known as the “DIGITAL
Network Products Group” (“DNPG”), develops and
supplies a wide range of data networking hardware and software,
including LAN and WAN products. DNPG’s products span a wide
range of networking technologies, including Ethernet, Fast
Ethernet, FDDI and ATM switching technologies. The purchase price
for the acquisition was approximately $439.5 million, before
closing adjustments, consisting of cash, product credits and
assumed liabilities as a result of the acquisition. The acquisition
was accounted for by Cabletron under the purchase method of
accounting.
In
connection with the acquisition of NPG, the Company allocated
$199.3 million of the purchase price to in-process research and
development projects. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete
products. At the date of acquisition, the development of these
projects had not yet reached technological feasibility and the
R&D in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.
The Company
used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value
assigned to these assets were determined by identifying significant
research projects for which technological feasibility had not been
established, including development, engineering and testing
activities associated with the introduction of NPG’s
next-generation switch, hub, adapter, and internetworking
technologies.
The
incomplete projects related to switch technology included, among
other efforts, the introduction of Fast Ethernet and OC-12
technology into GIGAswitch/ATM and GIGAswitch/ FDDI technologies,
development of Gigabit and Fast Ethernet modules for the VNswitch
900 chassis, and the introduction of a new GIGAswitch/Ethernet
platform to provide Gigabit Ethernet technology. In the
internetworking area, the Company had several significant efforts
on-going related to network management software products, new
wireless/remote access offerings, and web gateway technology. The
primary developmental efforts related to the adapter family of
products involved the introduction of new ATM and Gigabit network
interface cards. Finally, in the hub family, specific R&D
efforts included the introduction of ATM and Fast Ethernet modules
for the DEChub 900 and the development of advanced layer 3
switching support for the 100Mbps Hub Multiswitch.
The nature
of the efforts to fully develop the acquired in-process technology
into commercially viable products, technologies, and services
principally related to the completion of all planning, designing,
prototyping, high-volume verification, and testing activities that
were necessary to establish that the proposed technologies met
their design specifications including functional, technical, and
economic performance requirements. Anticipated completion dates for
the projects in progress were expected to occur over the next one
and one-half years, at which time the Company expected to begin
generating economic benefits from the technologies. Funding for
such projects was expected to be obtained from internally generated
sources. As of February 7, 1998, expenditures to complete these
projects were expected to total approximately $61.0 million for the
remainder of calendar year 1998 and $10.0 million in calendar year
1999. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not
occur.
The value
assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology
into commercially viable products, estimating the resulting net
cash flows from the projects and discounting the net cash flows to
their present value. The revenue projection used to value the
in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product
introductions by the Company and its competitors. In the model used
to value NPG’s in-process research and development, as of
February 7, 1998, NPG’s total revenues were projected to
exceed $1.1 billion in 2002, assuming the successful completion and
market acceptance of the major R&D programs. Estimated revenue
from NPG’s existing technologies was expected to be $350.0
million in 1998, with a rapid decline as existing processes and
know-how approached obsolescence. The estimated revenues for the
in-process projects were estimated to peak in 2002 and then decline
as other new products and technologies were expected to enter the
market.
In the model
used to value NPG’s in-process research and development, cost
of sales was estimated based on NPG’s historical results and
discussions with management regarding anticipated gross margin
improvements. A substantial gross margin improvement was expected
in 1999 due to a restructuring of NPG’s cost structure.
Thereafter, gradual improvements were expected due to purchasing
power increases and general economies of scale. Cost of sales
averaged approximately 49.0% through 2003. Combined SG&A and
R&D expenses were expected to peak in 1998 at 44.6% of sales,
decline, and level out at approximately 35.8% of sales in 2001 and
remain constant thereafter.
The rates
utilized to discount the net cash flows to their present value were
based on cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth,
profitability and developmental projects, a discount rate of 15.0%
was appropriate for the business enterprise, 14.0% for the existing
products and technology, and 30.0% for the in-process R&D.
These discount rates were selected to reflect NPG’s corporate
maturity; the uncertainties in the economic estimates described
above; the inherent uncertainty surrounding the successful
development of the purchased in-process technology; the useful life
of such technology; the profitability levels of such technology;
and, the uncertainty of technological advances that are unknown at
this time.
The
forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believed to be
reasonable but which, at that time, were inherently uncertain and
unpredictable. At the time such forecasts were made, it was
uncertain whether the underlying assumptions used to estimate
expected project sales, development costs or profitability. The
Company’s assumptions may have been incomplete or inaccurate,
and unanticipated events and circumstances were likely to occur.
For these reasons, actual results may vary from the projected
results.
On May 23,
2000, the Company entered into a definitive agreement to sell the
DNPG division. The Company believes, as it did at the time of the
NPG acquisition, that if NPG did not successfully complete its
outstanding in-process research and development efforts,
Cabletron’s future operating results could be materially
impacted and the value of the in-process research and development
might never be realized.
Liquidity and Capital
Resources
Cash, cash
equivalents and short and long-term investments increased to
$2,476.8 million at February 29, 2000 from $476.3 million at
February 28, 1999. The balance at February 29, 2000 includes
$1,665.5 million, recorded as long-term investments, related to the
Company’s investment in Efficient Networks. This amount is
subject to change based on market conditions and the market value
of Efficient Networks stock. Net cash provided by operating
activities was $190.4 million in the year ended February 29, 2000
compared to $83.9 million in the year ended February 28, 1999 and
compared to $49.5 million in the year ended February 28, 1998. The
increase in net cash provided by operating activities during the
year ended February 29, 2000 compared to
the year ended February 28, 1999 was a result of increased focus on
supply chain management and lower inventory due to the use of
contract manufacturers. The increase in net cash provided by
operating activities during the year ended February 28, 1999 was a
result of improved inventory controls that resulted in a reduction
in inventory and improved collections from customers, which were
partially offset by Compaq’s utilization of product credits
received in the Company’s acquisition of the DNPG. Compaq had
been allowed to use the product credits through February 7, 2000 to
purchase certain Cabletron products that were ordered under the
Reseller Agreement. See Note 9 (Notes to the Consolidated Financial
Statements) included at page 54 of this document for additional
details regarding the product credits. Net cash used in investing
activities increased to $67.3 million in the year ended February
29, 2000 compared to net cash used in investing activities of
$139.9 million in the year ended February 28, 1999. The increase in
cash from investing activities was largely due to the
Company’s sale of its FlowPoint subsidiary. On April 24, 2000,
the Company’s Board of Directors authorized the Company to
purchase up to $400.0 million of the Company’s outstanding
shares of common stock. The Company expects to use cash as it
repurchases some of its outstanding shares of common stock. In
connection with its stock repurchase program, the Company may enter
into various hedging transactions and derivative contracts designed
to manage its cash and the costs of the program.
Accounts
receivable, net of allowance for doubtful accounts, were $228.4
million, or 54 days of sales outstanding, at February 29, 2000
compared to $216.8 million at February 28, 1999, or 57 days sales
outstanding. The decrease in days of sales outstanding was a result
of the Company’s focused sales efforts through resellers and
distributors. The Company has been able to monitor these
relationships and has improved collection efficiency, as there are
fewer resellers and distributors than end-users the Company shipped
to during the year ended February 28, 1999.
Worldwide
inventories were $85.0 million at February 29, 2000, or 36 days of
inventory, compared to $229.5 million, or 107 days of inventory, at
February 28, 1999. The decrease of days in inventory was due to the
use of contract manufacturers and increased focus on supply chain
management. The February 29, 2000 balance excludes items purchased
by Flextronics on February 29, 2000. The Company expects inventory
levels to decrease further as it realizes the full benefit from
outsourcing its manufacturing process.
During the
year ended February 29, 2000, capital expenditures totaled $44.4
million and were principally related to upgrades of computer
related equipment and investments in technology to improve
productivity. During the year ended February 28, 1999, capital
expenditures totaled $44.8 million and were primarily related to
upgrades of computers, computer related equipment and manufacturing
equipment. Capital expenditures for the year ended February 28,
1998 totaled $74.3 million and were primarily related to software
and hardware products and upgrades of computers.
On March 31,
2000, the Company’s $250.0 million revolving credit facility
with Chase Manhattan Bank, First National Bank of Chicago and
several other lenders expired. The Company had not drawn down any
money under the facility. The Company has chosen not to enter into
a new revolving credit facility.
In the
opinion of management, internally generated funds from operations
and existing cash, cash equivalents and marketable securities will
provide adequate funds to support the Company’s working
capital, capital expenditure requirements and stock repurchase
program for the next twelve months.
Business Environment and Risk
Factors
THE
FOLLOWING ARE CAUTIONARY STATEMENTS FOR PURPOSES OF THE “SAFE
HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The Company
may occasionally make forward-looking statements and estimates such
as forecasts and projections of the Company’s future
performance or statements of management’s plans and
objectives. These forward-looking statements may be contained in,
among other things, SEC filings and press releases made by the
Company and in oral statements made by the officers of the Company.
Actual results could differ materially from
those in such forward-looking statements. Therefore, no assurances
can be given that the results in such forward-looking statements
will be achieved. Important factors that could cause the
Company’s actual results to differ from those contained in
such forward-looking statements include, among others, the factors
mentioned below.
Transformation. The Company has
announced its intentions, subject to shareholder approval at the
July 2000 Annual Meeting of Shareholders, to transform its business
by creating four operating subsidiaries and transferring a portion
of the Company’s operating assets and related liabilities to
the four subsidiaries. The Company currently plans to conduct an
initial public offering for each of the operating subsidiaries,
followed by a distribution of the remaining shares of one or more
of the subsidiaries to the Company’s stockholders. In
addition, the Company may also consider other strategic
alternatives, including the sale of one or more of the operating
subsidiaries.
In
connection with this transformation, the Company has announced its
plans to discontinue several product lines to allow each of the new
subsidiaries to focus on its core competencies and next generation
technologies. The discontinuance of these products will cause the
Company’s overall revenue to decrease. Also, the creation of
four independent operating companies may lead to increases in
expenses for the build-up of management and administrative capacity
at each subsidiary to satisfy the demands of operation as a public
company. Any decrease in revenue or increase in costs associated
with the transformation could adversely affect the Company’s
operating results.
The Company
currently plans to realize the value of the operating subsidiaries
through an initial public offering, then subsequent spin-off of
each or through private sales of the subsidiaries. Recently, the
public market for technology stocks has experienced a significant
downturn, with many such stocks suffering price declines of 50 to
75% or more. Trading in these stocks has become extremely volatile.
If current market conditions persist, the Company may be unable or
unwilling to complete initial public offerings or private sales of
any of its operating subsidiaries, which may inhibit the
Company’s ability to realize the value of its planned
transformation.
The Company
is not obliged to complete any of these strategic transactions and
no assurance can be given as to whether or when any of these
strategic transactions will be approved and implemented. For
example, an initial public offering of any of the subsidiaries will
depend on each of their individual performance, market conditions
and similar considerations. Any distribution of the remaining
shares of a subsidiary to the Company’s stockholders,
following an initial public offering, may depend upon receipt from
the Internal Revenue Service of a ruling that such distribution
will be tax-free to the Company’s stockholders and that the
transaction would qualify as a tax-free reorganization or other
regulatory approvals. Any such strategic transaction would only be
implemented if the Board of Directors of the Company continues to
believe that it is in the best interests of each of the
subsidiaries and the Company’s stockholders.
Competition. The data networking
industry is intensely competitive and subject to increasing
consolidation. Competition in the data networking industry has
increased in recent periods, and Cabletron expects competition to
continue to increase significantly in the future from its current
competitors, as well as from potential competitors that may enter
Cabletron’s existing or future markets. Cabletron’s
competitors include many large domestic and foreign companies, as
well as emerging companies attempting to sell products to
specialized markets addressed by Cabletron. Cabletron’s
primary competitors in the data networking industry are Cisco
Systems, Inc., Lucent Technologies, Inc., Northern Telecom Ltd.,
3Com Corporation, Extreme Networks, Foundry Networks and Juniper
Networks. Several large telecommunications equipment companies,
including Nokia Corp., Alcatel, Ericsson and Siemens have begun to
compete in the data networking industry and have recently made
investments in or acquired several smaller data networking
companies. Companies in the data networking industry compete upon
the basis of price, technology, and brand recognition. Increased
competition could result in price reductions, reduced margins and
loss of market share, any or all of which could increase
fluctuations in operating results and materially and adversely
affect Cabletron’s business, financial condition, and
operating results. Competitors may introduce new or enhanced
products that offer greater performance or functionality than
Cabletron’s products. There can be no assurance that Cabletron
will be successful in selecting, developing, manufacturing and
marketing new products or enhancing its existing products or that
Cabletron will
be able to respond effectively to technological changes, new
standards or product announcements by competitors. Any failure to
do so may have a material adverse effect on Cabletron’s
business, financial condition and results of operations. As the
data networking industry has grown and matured, customers
purchasing decisions have been increasingly influenced by brand
recognition. If Cabletron is unable to develop and maintain
competitive brand recognition, Cabletron’s business may be
adversely affected.
Cabletron’s current and potential competitors have
pursued and are continuing to pursue a strategy of acquiring data
networking companies possessing advanced networking technologies.
The acquisition of these companies allows Cabletron’s
competitors to offer new products without the lengthy time delays
associated with internal product development. As a consequence,
competitors are able to more quickly meet the demand for advanced
networking capabilities, as well as for so-called
“end-to-end” networking solutions. These acquisitions
also permit potential competitors, such as telecommunications
companies, who lack data networking products and technologies, to
more quickly enter data networking markets. The greater resources
of the competitors engaged in these acquisitions may permit them to
accelerate the development and commercialization of new competitive
products and the marketing of existing competitive products to
their larger installed bases. There is significant competition
among Cabletron and its competitors for the acquisition of data
networking companies possessing advanced technologies. As a
consequence of this competition, as well as other factors, the
prices paid to acquire such companies is typically extremely high
relative to the assets and sales of such companies. The greater
resources of Cabletron’s current and potential competitors may
enable them to compete more effectively for the acquisition of such
companies. In addition to acquiring other companies,
Cabletron’s competitors frequently invest in early-stage data
networking companies in order to secure access to advanced
technologies under development by such companies, to enhance the
ability to subsequently acquire such companies and to deter other
competitors from obtaining such access or performing such
acquisitions. Cabletron expects that competition will increase
substantially as a result of the continuing industry
consolidation.
In the past,
Cabletron has relied upon a combination of internal product
development and partnerships with other networking vendors to
broaden its product line to meet the demand for
“end-to-end” enterprise-wide solutions. Acquisitions of
or investments in other data networking companies by
Cabletron’s competitors may limit Cabletron’s access to
commercially significant technologies, and thus its ability to
offer products that meet its customers needs.
Margin
pressure. Cabletron’s margins may
decrease as a result of a shift in product mix toward lower margin
products, increased sales through lower margin distributor and
reseller sales channels, increased component costs and increased
expenses, which may be necessary in future periods to meet the
demands of greater competition and if the expected cost savings
from outsourcing the manufacturing process does not occur. For
example, as a result of various acquisitions completed during
fiscal 1999, the Company acquired products that contribute a lower
gross margin than the Company’s core products have
historically contributed. Additionally, as a result of the DNPG
acquisition and other business strategy initiatives, Cabletron
makes a higher percentage of its sales through resellers, which
reduces Cabletron’s margin on those sales, as well as, to a
lesser extent, Cabletron’s overall margins. Margins in any
given period may be adversely affected by additional factors. See
“Fluctuations in Operating Results.”
Fluctuations in Operating
Results. A variety of factors may cause
period-to-period fluctuations in the operating results of
Cabletron. Such factors include, but are not limited to: (i) the
rate of growth of the markets for Cabletron’s products, (ii)
competitive pressures, including pricing, brand and technological
competition, (iii) availability of components, including unique
integrated circuits, (iv) adverse effects of delays in the
establishment of industry standards, including delays or reductions
in customer orders, delays in new product introductions and
increased expenses associated with standards compliance, (v) delays
by Cabletron in the introduction of new or enhanced products, (vi)
changes in product mix, (vii) delays or reductions in customer
purchases in anticipation of the introduction of new products by
Cabletron or its competitors and (viii) instability of the
international markets in which Cabletron sells its products.
Backlog as of any particular date is not indicative of future
revenue due, in part, to the possibility of order cancellations,
customer requested delivery delays, shifting purchasing patterns
and inventory level variability. In particular, Cabletron has been
experiencing
longer sales cycles for its core products as a result of the
increasing dollar amount of customer orders and longer customer
planning cycles. Further, Cabletron has recently increased its
sales to service providers. Although sales to the service provider
market have grown, this market is characterized by large, and often
sporadic purchases. Sales activity in this industry depends upon
various factors, including the stage of completion of expanding
network infrastructures and the availability of funding. A decline
or delay in sales orders from this industry could have a material
adverse effect on Cabletron’s business, operating results and
financial condition. Also, Cabletron has experienced back-end
loading of its quarterly sales, making the predictability of the
quarterly results very difficult. These factors, together with
increased competition, have led to an increase in sales variability
and a decrease in Cabletron’s ability to predict aggregate
sales demand for any given period. These factors have increased the
possibility that the operating results for a quarter could be
materially adversely affected by the failure to obtain or delays in
obtaining a limited number of large customer orders, due, for
example, to cancellations, delays or deferrals by customers. If
growth in Cabletron’s revenues in any quarter fails to match
Cabletron’s expectations, its earnings and margins would be
materially adversely affected.
As the
Company transforms its business, there can be no assurance that net
sales will not decrease in future periods. Any decrease in net
sales could have a material adverse affect on the Company’s
business, financial condition and results of operations. As
expenses are relatively fixed in the near term, Cabletron may not
be able to adjust expense levels to match any shortfall in
revenues. As the industry becomes more competitive and
standards-based, Cabletron is facing greater price competition from
its competitors. If Cabletron does not respond with lower
production costs, pricing pressures could adversely affect future
earnings. Accordingly, past results may not be indicative of future
results. There can be no assurance that the announcement or
introduction of new products by Cabletron or its competitors, or a
change in industry standards, will not cause customers to defer or
cancel purchases of Cabletron’s existing products, which could
have a material adverse effect on Cabletron’s business,
financial condition or results of operations. The market for
Cabletron’s products is evolving. The rate of growth of the
market and the resulting demand for Cabletron’s recently
introduced products is subject to a high level of uncertainty. If
the market fails to grow or grows more slowly than anticipated,
Cabletron’s business, financial condition or results of
operations would be materially adversely affected. In addition,
because of the global nature of Cabletron’s business, a
variety of uncontrollable and changing factors including foreign
exchange rates, political and economic factors, foreign regulators
and natural disasters could have a material adverse effect on
future results. See “Quantitative and Qualitative Disclosures
About Market Risks.”
Competition for Key Personnel; Management
Structure. During the year ended
February 29, 2000, the Company implemented a new management
structure, which included the creation of new senior officer
positions and the realignment of management structures. The
implementation of these new management structures and
Cabletron’s planned transformation have required the
dedication of the Company’s existing management resources and
provided distractions from the day-to-day demands of running
Cabletron’s business. This distraction of management’s
attention may negatively impact the Company’s operating
results.
The
Company’s success depends to a significant extent upon a
number of key employees and management, including the
president’s of the four new companies. The loss of the
services of key employees could adversely affect Cabletron’s
business, operating results or financial condition. Recruiting and
retaining skilled personnel, including engineers, is highly
competitive. If Cabletron cannot successfully recruit and retain
skilled personnel, particularly engineers and sales personnel, its
ability to compete may be adversely affected and it may have
difficulty managing its business and meeting key objectives on
time. In addition, the Company must carefully balance the growth of
its employees commensurate with its anticipated sales growth. If
the Company’s sales growth or attrition levels vary
significantly, its results of operations or financial condition
could be adversely affected. Further, Cabletron’s common stock
price has been, and may continue to be extremely volatile. When the
Cabletron common stock price is less than the exercise price of
stock options granted to employees, turnover is likely to increase,
which could adversely affect the Company’s results of
operations or financial condition.
Acquisition Strategy. Cabletron
has addressed the need to develop new products, in part, through
the acquisition of other companies and businesses. Acquisitions,
such as the acquisition of NetVantage, Ariel, Yago and the DNPG,
involve numerous risks including difficulties in assimilating the
operations, technologies and
products of the acquired companies, the diversion of
management’s attention from other business concerns, risks of
entering markets in which competitors have established market
positions, and the potential loss of key employees of the acquired
company. Achieving the anticipated benefits of an acquisition will
depend in part upon whether the integration of the companies’
businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The successful
combination of companies in the high technology industry may be
more difficult to accomplish than in other industries. The
combination of such companies will require, among other things,
integration of the companies’ respective product offerings and
coordination of their sales and marketing and research and
development efforts. For example, during the year ended February
29, 2000, the Company abandoned the projects associated with the
DSL technology related to Ariel and wrote off the remaining
goodwill. There can be no assurance that such integration will be
accomplished smoothly or successfully. The difficulties of such
integration may be exacerbated by the necessity of coordinating
geographically separated organizations. The efforts required to
successfully integrate acquired companies require the dedication of
management resources that may temporarily distract attention from
the day-to-day business of Cabletron. The inability to successfully
integrate the operations of acquired companies could have a
material adverse effect on the business and results of operations
of Cabletron. The acquisition of early stage companies, such as
NetVantage, Ariel and Yago, poses risks in addition to those
identified above. Such companies often have limited operating
histories, limited or no prior sales, and may not yet have achieved
profitability. In addition, the technologies possessed by such
companies are often unproven. The development and marketing of
products based upon such technologies may require the investment of
substantial time and resources and, despite such investment, may
not result in commercially saleable products or may not yield
revenues sufficient to justify Cabletron’s investment.
Further, aggressive competitors often undertake initiatives to
attract customers and to recruit key employees of acquired
companies through various incentives. In addition to NetVantage,
Ariel, Yago and the DNPG, Cabletron has stated that it will
continue to explore other possible acquisitions in the future.
Multiple acquisitions during a period increases the risks
identified above, including in particular the difficulty of
integrating the acquired businesses and the distraction of
management from the day-to-day business activities of
Cabletron.
Near the end
of the year ended February 28, 1998, the Company acquired certain
assets of the Network Products Group of Digital Equipment
Corporation. With this acquisition, Digital Equipment Corporation
(“Digital”) entered into a reseller agreement with the
Company pursuant to which Digital committed to purchase from the
Company a minimum amount of product bearing the Digital brand name.
The reseller agreement was scheduled to expire on June 30, 2001. On
June 11, 1998, Digital was acquired by Compaq. On May 25, 1999,
Compaq entered into an OEM agreement with the Company pursuant to
which Compaq committed to purchase from the Company a minimum
amount of networking product bearing the Compaq brand name as well
as product bearing the Digital brand name. The OEM agreement
contained, among other things, a pricing rebate that compensated
the Company for Compaq purchase shortfalls. The OEM agreement was
scheduled to expire on June 30, 2001. Compaq/Digital accounted for
approximately 16.0% of Cabletron’s revenues in the year ended
February 29, 2000. On September 20, 1999, Compaq and the Company
agreed to terminate the OEM agreement and enter into a new alliance
agreement. Under the alliance agreement, 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 expand the relationship between the Company and
Compaq’s professional services organization and Cabletron will
continue to resell, and Compaq is expected to continue servicing,
Digital branded products. Further, Compaq is continuing as a
reseller of Cabletron-branded networking hardware and
Cabletron’s Spectrum network management software. In
terminating the OEM agreement, Compaq agreed to pay the Company
approximately $85.0 million, in November 1999, as a final purchase
of Compaq and Digital branded products in the Company’s
manufacturing pipeline. Finally, the Company entered into a
definitive agreement to sell its DNPG business to Gores Technology
Group, on May 23, 2000. If this divestiture is completed, the
Company will no longer sell Digital branded products and as a
result will have lower overall sales.
There can be
no assurance that Compaq will be an effective reseller of the
Company’s products or that the volume of such purchases will
not decline significantly. A higher than expected rate of return
from resellers, the Company’s failure to adequately manage the
marketing and distribution of such products, or the loss of material
resellers or a material decline in sales volume through the third
party resellers, could have a material adverse effect on the
Company’s business, results of operations or financial
condition.
Volatility of Stock Price. As is
frequently the case with the stocks of high technology companies,
the market price of the Company’s stock has been, and may
continue to be, volatile. Factors such as quarterly fluctuations in
results of operations, increased competition, the introduction of
new products by the Company or its competitors, delays or
difficulties in completing the transformation into four new
companies, changes in the mix of sales channels, the timing of
significant customer orders (the average dollar amount of customer
orders has increased in recent periods), and macroeconomic
conditions generally, may have a significant impact on the market
price of the stock of Cabletron. In addition, the stock market has
from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market price for
many high-technology companies and which, on occasion, have
appeared to be unrelated to the operating performance of such
companies. Past financial performance should not be considered a
reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future
periods. Any shortfall in revenue or earnings from the levels
anticipated by securities analysts could have an immediate and
significant adverse effect on the market price of Cabletron’s
stock in any given period.
Technological Changes. The market
for networking products is subject to rapid technological change,
evolving industry standards and frequent new product introductions,
and therefore requires a high level of expenditures for research
and development. Cabletron may be required to make significant
expenditures to develop such new integrated product offerings.
There can be no assurance that customer demand for products
integrating routing, switching, network management and remote
access technologies will grow at the rate expected by Cabletron,
that Cabletron will be successful in developing, manufacturing and
marketing new products or product enhancements that respond to
these customer demands or to evolving industry standards and
technological change, that Cabletron will not experience
difficulties that could delay or prevent the successful
development, introduction, manufacture and marketing of these
products (especially in light of the increasing design and
manufacturing complexities associated with the integration of
technologies), or that its new product and product enhancements
will adequately meet the requirements of the marketplace and
achieve market acceptance. Cabletron’s business, operating
results and financial condition may be materially and adversely
affected if Cabletron encounters delays in developing or
introducing new products or product enhancements or if such product
enhancements do not gain market acceptance. In order to maintain a
competitive position, Cabletron must also continue to enhance its
existing products and there is no assurance that it will be able to
do so. A portion of future revenues will come from new products and
services. Cabletron cannot determine the ultimate effect that new
products will have on its revenues, earnings or stock
price.
Customer
Credit Risk. As Cabletron’s sales
to emerging service providers increases, it is experiencing
increased demands for customer financing and leasing solutions.
This demand is coming particularly from competitive local exchange
carriers (“CLECs”) and metropolitan backbone providers.
These customers typically finance significant networking
infrastructure deployments through alternative forms of financing,
including leasing, through the Company or through third parties in
which the Company guarantees a significant portion of the lease to
the third party. Although Cabletron has programs in place to
monitor and mitigate the associated risk, there can be no assurance
that such programs will alleviate all of its credit risk. Although
Cabletron has not experienced significant losses due to customers
failing to meet their obligations to date, such losses, if
incurred, could harm the Company’s business and have a
material adverse effect on its operating results and financial
condition.
Product
Protection and Intellectual
Property. Cabletron’s success
depends in part on its proprietary technology. Cabletron attempts
to protect its proprietary technology through patents, copyrights,
trademarks, trade secrets and license agreements. There can be no
assurance that the steps taken by Cabletron in this regard will be
adequate to prevent misappropriation of its technology or that
Cabletron’s competitors will not independently develop
technologies that are substantially equivalent or superior to
Cabletron’s technology. In addition, the laws of some foreign
countries do not protect Cabletron’s proprietary rights to the
same extent as do the laws of the United States. No assurance can
be given that any patents issued to Cabletron will not be
challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages.
Although Cabletron
does not believe that its products infringe the proprietary rights
of any third parties, third parties have asserted infringement and
other claims against Cabletron, and there can be no assurance that
such claims will not be successful or that third parties will not
assert such claims against Cabletron in the future. Patents have
been granted recently on fundamental technologies incorporated in
Cabletron’s products. Since patent applications in the United
States are not publicly disclosed until the patent is issued,
applications may have been filed by third parties which, if issued
as patents, could relate to Cabletron’s products. In addition,
participants in Cabletron’s industry also rely upon trade
secret law. Cabletron could incur substantial costs and diversion
of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse
effect on Cabletron’s business, financial condition and
results of operations. Furthermore, parties making such claims
could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief which could effectively block
Cabletron’s ability to license its products in the United
States or abroad. Such a judgment could have a material adverse
effect on Cabletron’s business, financial condition and
results of operations.
Dependence on
Suppliers. Cabletron’s products
include certain components, including application specific
integrated circuits (“ASICs”), that are currently
available from single or limited sources, some of which require
long order lead times. In addition, certain of Cabletron’s
products and sub-assemblies are manufactured by single source third
parties. With the increasing technological sophistication of new
products and the associated design and manufacturing complexities,
Cabletron anticipates that it may need to rely on additional single
source or limited suppliers for components or manufacture of
products and subassemblies. Any reduction in supply, interruption
or extended delay in timely supply, variances in actual needs from
forecasts for long order lead time components, or change in costs
of components could affect Cabletron’s ability to deliver its
products in a timely and cost-effective manner and may adversely
impact Cabletron’s operating results and supplier
relationships. Nearly all of the Company’s products, and the
products of its subsidiaries, will be manufactured by third-party
contract manufacturers, beginning in fiscal 2001. The failure of a
third-party manufacturer to manufacture the products or to deliver
the products in time for Cabletron to meet its delivery
requirements could have a material adverse effect on
Cabletron’s business, financial condition and results of
operations.
Year 2000
The
Company’s Year 2000 initiative was an overall success. No
significant interruptions to the Company’s business processes
occurred, and no material problems are expected. The project’s
actual spending approximated the budgeted amount.
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
ended February 29, 2000. The adoption of SOP 98-9 did not have a
material impact on the Company’s results of operations in the
year ended February 29, 2000.
In June
1998, the FASB issued Financial Accounting Standard No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133) which requires companies to record
derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. SFAS 133 will be effective for the Company’s
first quarter of fiscal year ending February 28, 2002. Management
is currently evaluating the potential effects of this pronouncement
on its consolidated financial statements. However, management does
not expect the impact to be significant.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The
following discussion about the Company’s market risk
disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking
statements. The Company is exposed to market risk related to
changes in interest rates, foreign currency exchange rates and the
share price of corporate equities. The hedging activity of the
Company is intended to offset the impact of currency fluctuations
on certain nonfunctional currency assets and liabilities, and the
Company does not use derivative financial instruments for trading
or speculative purposes. The Company’s investment portfolio
also includes minority equity investments in some publicly traded
companies, the values of which are subject to market price
volatility.
Interest
Rate Sensitivity. The Company maintains
an investment portfolio consisting partly of debt securities of
various issuers, types and maturities. The securities that the
Company classifies as held-to-maturity are recorded on the balance
sheet at amortized cost, which approximates market value.
Unrealized gains or losses associated with these securities are not
material. The securities that the Company classifies as
available-for-sale are recorded on the balance sheet at fair market
value with unrealized gains or losses reported as part of
accumulated other comprehensive income, net of tax as a component
of stockholders’ equity. A hypothetical 50 or 100 basis point
increase in interest rates would result in an approximate $0.3
million or $3.9 million decrease, respectively (approximately 0.1
percent or 0.7 percent, respectively) in the fair market value of
the securities. The Company has the ability to hold its fixed
income investments until maturity, and therefore the Company does
not expect its operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
Foreign
Currency Exchange Risk. The Company, as
a result of its global operating and financial activities, is
exposed to changes in foreign currency exchange rates which may
adversely affect its results of operations and financial position.
In order to minimize the potential adverse impact, the Company uses
foreign currency forward and option contracts to hedge the currency
risk inherent in global operations. The Company does not utilize
financial instruments for trading or other speculative purposes.
Gains and losses on the contracts are largely offset by gains and
losses on the underlying assets or liabilities. At February 29,
2000, the Company had purchased forwards with a notional value of
approximately $3.9 million and options with a notional value of
approximately $28.0 million. A hypothetical 10 percent appreciation
or depreciation of the U.S. Dollar from February 29, 2000 market
rates would not result in a material decrease in fair market value,
earnings or cash flows. Also, any gains or losses on the contracts
are largely offset by the gains or losses on the underlying
transactions and consequently a sudden or significant change in
foreign exchange rates would not have a material impact on future
net income or cash flows associated with the contracts.
Equity
Risk Sensitivity. At February 29, 2000, Cabletron held
approximately 5.2 million shares of common stock of Efficient and
6,300 shares of preferred stock of Efficient, which were converted
into 6.3 million shares of Efficient common stock on April 12,
2000. Cabletron received this stock as consideration for the sale
of its FlowPoint subsidiary on December 18, 1999. At February 29,
2000, Cabletron’s holdings of Efficient stock, accounted for
under the cost method, totaled $1,665.5 million and represented
52.6% of Cabletron’s total assets.
The trading
price of Efficient’s common stock has been highly volatile
since Efficient’s initial public offering in 1999, from a low
of approximately $29.25 per share to a high of approximately
$187.75 per share. Based on its holdings at February 29, 2000, a
hypothetical $10.00, $50.00 or $100.00 change in the trading price
of Efficient common stock causes the value of Cabletron’s
holdings to change by approximately $115.9 million, $833.1 million
and $1,147.6 million, respectively.
Cabletron
has entered into a Standstill and Disposition Agreement with
Efficient which among other things, limits Cabletron’s ability
to sell its shares of Efficient common stock. The restrictions
contained in this agreement, combined with a protracted decline in
the market value of Efficient’s common stock, could materially
reduce the value of Cabletron’s holdings in Efficient Stock
and Cabletron’s total assets. Cabletron intends, to the extent
permitted by the Standstill and Disposition Agreement and market
conditions permitting,
to reduce its current exposure to changes in the price of Efficient
common stock by selling a portion of its position in the year ended
March 3, 2001.
Euro
Conversion
Effective
January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their
existing sovereign currencies (the “legacy currencies”)
and one common currency (the “Euro”). The participating
countries adopted the Euro as their common legal currency on that
date (the “Euro Conversion”). Since that date, the Euro
began trading on currency exchanges and has been used in business
transactions. On January 1, 2002, participating countries will
issue new Euro-denominated bills and coins. The legacy currencies
will be withdrawn from circulation as legal tender effective
January 1, 2002. During the period from January 1, 1999 to June 30,
2002, parties may use either the Euro or a participating
country’s legacy currency as legal tender.
During the
year ended February 28, 1999, the Company formed a Euro Committee.
The Euro Committee analyzed the impact of the Euro conversion on
the Company in a number of areas, including the Company’s
information systems, product pricing, finance and banking
resources, foreign exchange management, contracts, accounting and
tax policies. The Company has made certain adjustments to its
business and operations to accommodate the Euro
conversion.
ITEM
8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
CABLETRON
SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
February
29, 2000 and February 28, 1999
| |
|
2000
|
|
1999
|
| |
|
(in
thousands, except per
share amounts) |
| Assets |
|
|
|
|
| Current
assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ 350,980 |
|
$ 159,422 |
|
Short-term investments (note 4) |
|
221,981 |
|
113,932 |
Accounts receivable, net of allowance for doubtful
accounts ($21,684 and
$23,260 in 2000 and 1999,
respectively) |
|
228,372 |
|
216,793 |
|
Inventories (note 5) |
|
85,016 |
|
229,512 |
|
Deferred income taxes (note 11) |
|
82,813 |
|
60,252 |
|
Prepaid expenses and other assets |
|
38,211 |
|
60,510 |
| |
|
|
|
|
|
Total current assets |
|
1,007,373 |
|
840,421 |
| |
|
|
|
|
| Long-term
investments (note 4) |
|
1,903,858 |
|
202,984 |
| Long-term
deferred income taxes (note 11) |
|
— |
|
135,197 |
| Property,
plant and equipment, net (note 6) |
|
124,992 |
|
188,479 |
| Intangible
assets, net (note 7) |
|
130,284 |
|
199,419 |
| |
|
|
|
|
|
Total assets |
|
$3,166,507 |
|
$1,566,500 |
| |
|
|
|
|
| Liabilities and Stockholders’
Equity |
|
|
|
|
| Current
liabilities: |
|
|
|
|
|
Accounts payable |
|
$ 117,631 |
|
$ 121,580 |
|
Accrued expenses (note 8) |
|
132,701 |
|
124,126 |
|
Deferred revenue |
|
119,011 |
|
94,023 |
|
Deferred gain (note 3) |
|
189,862 |
|
— |
|
Other obligations (note 9) |
|
— |
|
129,747 |
| |
|
|
|
|
|
Total current liabilities |
|
559,205 |
|
469,476 |
|
Long-term deferred income taxes (note 11) |
|
459,863 |
|
7,191 |
| |
|
|
|
|
|
Total liabilities |
|
1,019,068 |
|
476,667 |
| |
|
|
|
|
| Commitments and contingencies (notes 10, 14 and
16) |
|
|
|
|
| |
| Stockholders’ equity (note 17): |
|
|
|
|
|
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 183,585 and 172,184
shares in 2000 and 1999, respectively |
|
1,836 |
|
1,722 |
|
Additional paid-in capital |
|
630,155 |
|
551,232 |
|
Retained earnings |
|
1,000,758 |
|
536,487 |
|
Accumulated other comprehensive income |
|
514,690 |
|
392 |
| |
|
|
|
|
|
Total stockholders’ equity |
|
2,147,439 |
|
1,089,833 |
| |
|
|
|
|
|
Total liabilities and stockholders’
equity |
|
$3,166,507 |
|
$1,566,500 |
| |
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years
Ended February 29, 2000, February 28, 1999 and 1998
(in
thousands, except per share amounts)
| |
|
2000
|
|
1999
|
|
1998
|
| Net
sales |
|
$1,459,593 |
|
|
$1,411,279 |
|
|
$1,377,330 |
|
| Cost of
sales |
|
817,844 |
|
|
811,350 |
|
|
676,291 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
641,749 |
|
|
599,929 |
|
|
701,039 |
|
| Operating
expenses: |
|
Research and development |
|
184,614 |
|
|
210,393 |
|
|
181,777 |
|
|
Selling, general and administrative |
|
400,544 |
|
|
418,254 |
|
|
372,224 |
|
|
Amortization of intangible assets |
|
41,270 |
|
|
27,978 |
|
|
1,565 |
|
|
Special charges (notes 3, 6 and 18) |
|
21,096 |
|
|
234,920 |
|
|
234,285 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(5,775 |
) |
|
(291,616 |
) |
|
(88,812 |
) |
| Interest
income, net |
|
18,587 |
|
|
15,089 |
|
|
18,578 |
|
| Other
income, net (notes 3 and 19) |
|
746,209 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
759,021 |
|
|
(276,527 |
) |
|
(70,234 |
) |
| Income tax
expense (benefit) (note 11) |
|
294,750 |
|
|
(31,136 |
) |
|
(35,273 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ 464,271 |
|
|
$ (245,391 |
) |
|
$ (34,961 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share: |
|
Basic |
|
$
2.62 |
|
|
$
(1.47 |
) |
|
$
(0.22 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$
2.46 |
|
|
$
(1.47 |
) |
|
$
(0.22 |
) |
| |
|
|
|
|
|
|
|
|
|
| Weighted
average number of shares outstanding: |
|
Basic |
|
177,541 |
|
|
167,432 |
|
|
157,686 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
188,618 |
|
|
167,432 |
|
|
157,686 |
|
| |
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
Years
ended February 29, 2000, February 28, 1999 and 1998
(in
thousands, except number of shares)
| |
|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
|
| BALANCE AT
FEBRUARY 28, 1997 |
|
156,305,312 |
|
|
$1,563 |
|
$266,829 |
|
$ 816,839 |
|
|
$ 221 |
|
|
$1,085,452 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss): |
| Net loss |
|
— |
|
|
— |
|
— |
|
(34,961 |
) |
|
— |
|
|
(34,961 |
) |
| Other comprehensive
income: |
| Effect of foreign currency
translation |
|
— |
|
|
— |
|
— |
|
— |
|
|
559 |
|
|
559 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
comprehensive income |
|
— |
|
|
— |
|
— |
|
— |
|
|
559 |
|
|
(34,402 |
) |
| Retirement
of treasury stock |
|
(32,209 |
) |
|
— |
|
— |
|
— |
|
|
— |
|
|
— |
|
Exercise
of options for shares of common
stock |
|
1,762,565 |
|
|
18 |
|
17,291 |
|
— |
|
|
— |
|
|
17,309 |
|
| Tax
benefit for options exercised |
|
— |
|
|
— |
|
10,469 |
|
— |
|
|
— |
|
|
10,469 |
|
Issuance
of shares under employee stock
purchase plan |
|
231,326 |
|
|
2 |
|
6,245 |
|
— |
|
|
— |
|
|
6,247 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE AT
FEBRUARY 28, 1998 |
|
158,266,994 |
|
|
1,583 |
|
300,834 |
|
781,878 |
|
|
780 |
|
|
1,085,075 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss): |
| Net loss |
|
— |
|
|
— |
|
— |
|
(245,391 |
) |
|
— |
|
|
(245,391 |
) |
| Other comprehensive
income: |
Unrealized gain/(loss) on
available-for-sale
securities, net of
tax |
|
— |
|
|
— |
|
— |
|
— |
|
|
1,186 |
|
|
1,186 |
|
| Effect of foreign currency
translation |
|
— |
|
|
— |
|
— |
|
— |
|
|
(1,574 |
) |
|
(1,574 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
comprehensive income |
|
— |
|
|
— |
|
— |
|
— |
|
|
(388 |
) |
|
(245,779 |
) |
Exercise
of options for shares of common
stock |
|
497,696 |
|
|
5 |
|
2,761 |
|
— |
|
|
— |
|
|
2,766 |
|
Issuance
of common stock for purchased
acquisitions |
|
12,757,395 |
|
|
127 |
|
239,621 |
|
— |
|
|
— |
|
|
239,748 |
|
Issuance
of common stock for minority
interests |
|
89,921 |
|
|
1 |
|
1,117 |
|
— |
|
|
— |
|
|
1,118 |
|
| Tax
benefit for options exercised |
|
— |
|
|
— |
|
1,521 |
|
— |
|
|
— |
|
|
1,521 |
|
Issuance
of shares under employee stock
purchase plan |
|
572,087 |
|
|
6 |
|
5,378 |
|
— |
|
|
— |
|
|
5,384 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE AT
FEBRUARY 28, 1999 |
|
172,184,093 |
|
|
1,722 |
|
551,232 |
|
536,487 |
|
|
392 |
|
|
1,089,833 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss): |
| Net income |
|
— |
|
|
— |
|
— |
|
464,271 |
|
|
— |
|
|
464,271 |
|
| Other comprehensive
income: |
Unrealized gain/(loss) on
available-for-sale
securities, net of
tax |
|
— |
|
|
— |
|
— |
|
— |
|
|
515,339 |
|
|
515,339 |
|
| Effect of foreign currency
translation |
|
— |
|
|
— |
|
— |
|
— |
|
|
(1,041 |
) |
|
(1,041 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
comprehensive income |
|
— |
|
|
— |
|
— |
|
— |
|
|
514,298 |
|
|
978,569 |
|
Exercise
of options for shares of common
stock |
|
4,158,603 |
|
|
42 |
|
44,265 |
|
— |
|
|
— |
|
|
44,307 |
|
Issuance
of common stock for purchased
acquisitions |
|
6,198,779 |
|
|
62 |
|
10,233 |
|
— |
|
|
— |
|
|
10,295 |
|
| Tax
benefit for options exercised |
|
— |
|
|
— |
|
16,612 |
|
— |
|
|
— |
|
|
16,612 |
|
Issuance
of shares under employee stock
purchase plan |
|
1,043,962 |
|
|
10 |
|
7,813 |
|
— |
|
|
— |
|
|
7,823 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE AT
FEBRUARY 29, 2000 |
|
183,585,437 |
|
|
$1,836 |
|
$630,155 |
|
$1,000,758 |
|
|
$514,690 |
|
|
$2,147,439 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
Ended February 29, 2000, February 28, 1999 and 1998
(in
thousands)
| |
|
2000
|
|
1999
|
|
1998
|
| Cash flows
from operating activities: |
|
Net income (loss) |
|
$ 464,271 |
|
|
$(245,391 |
) |
|
$ (34,961 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities: |
|
Depreciation and amortization |
|
123,466 |
|
|
114,679 |
|
|
66,358 |
|
|
Provision for losses on accounts
receivable |
|
(1,576 |
) |
|
2,240 |
|
|
5,668 |
|
|
Deferred income taxes |
|
220,509 |
|
|
(6,475 |
) |
|
(111,425 |
) |
|
Asset impairment |
|
7,869 |
|
|
17,570 |
|
|
— |
|
|
Loss (gain) on disposal of property, plant and
equipment |
|
1,589 |
|
|
781 |
|
|
(285 |
) |
|
Purchased research and development from
acquisitions |
|
— |
|
|
217,350 |
|
|
199,300 |
|
|
Gain on sale of FlowPoint |
|
(705,090 |
) |
|
— |
|
|
— |
|
|
Other income (non-cash) |
|
(16,330 |
) |
|
— |
|
|
— |
|
|
Changes in assets and liabilities: |
|
Accounts receivable |
|
(12,543 |
) |
|
(9,059 |
) |
|
(31,847 |
) |
|
Inventories |
|
96,979 |
|
|
88,682 |
|
|
(91,412 |
) |
|
Prepaid expenses and other assets |
|
29,044 |
|
|
(7,527 |
) |
|
1,213 |
|
|
Accounts payable and accrued expenses |
|
4,627 |
|
|
(88,992 |
) |
|
46,880 |
|
|
Deferred revenue |
|
24,988 |
|
|
— |
|
|
— |
|
|
Deferred gain on sale of FlowPoint |
|
(47,363 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
190,440 |
|
|
83,858 |
|
|
49,489 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities: |
|
Capital expenditures |
|
(44,373 |
) |
|
(44,773 |
) |
|
(74,264 |
) |
|
Cash paid for business acquisitions, net |
|
— |
|
|
(32,193 |
) |
|
(129,107 |
) |
|
Proceeds from sale of fixed assets |
|
6,680 |
|
|
24,531 |
|
|
— |
|
|
Outsourcing of manufacturing |
|
78,613 |
|
|
— |
|
|
— |
|
|
Purchase of available-for-sale securities |
|
(392,130 |
) |
|
(101,331 |
) |
|
(118,919 |
) |
|
Purchase of held-to-maturity securities |
|
(302,168 |
) |
|
(121,740 |
) |
|
(37,228 |
) |
|
Sales/maturities of marketable securities |
|
586,048 |
|
|
135,648 |
|
|
269,344 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
(67,330 |
) |
|
(139,858 |
) |
|
(90,174 |
) |
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities: |
|
Common stock issued to employee stock purchase
plan |
|
7,823 |
|
|
5,384 |
|
|
6,247 |
|
|
Tax benefit of options exercised |
|
16,612 |
|
|
1,510 |
|
|
10,469 |
|
|
Proceeds from exercise of stock options |
|
44,307 |
|
|
2,766 |
|
|
17,309 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
68,742 |
|
|
9,660 |
|
|
34,025 |
|
| |
|
|
|
|
|
|
|
|
|
| Effect of
exchange rate changes on cash |
|
(294 |
) |
|
(1,316 |
) |
|
(1,090 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
(decrease) increase in cash and cash equivalents |
|
191,558 |
|
|
(47,656 |
) |
|
(7,750 |
) |
| Cash and
cash equivalents, beginning of year |
|
159,422 |
|
|
207,078 |
|
|
214,828 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents, end of year |
|
$ 350,980 |
|
|
$ 159,422 |
|
|
$ 207,078 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash paid
(refunds received) during the year for: |
|
Income taxes |
|
$ (5,349 |
) |
|
$ (28,706 |
) |
|
$ 57,941 |
|
| |
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
(1) Business Operations
Cabletron
Systems, Inc. (“the Company”) has established four
subsidiaries; Aprisma Management Technologies, Enterasys Networks,
GlobalNetwork Technology Services and Riverstone Networks;
to focus on providing solutions for specific customer needs in the
infrastructure management software market, the enterprise network
solutions market, professional services and consulting and service
provider network solutions customers.
Note
(2) Summary of Significant Accounting
Policies
(a) Principles of
Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b)
Investments
Held-to-maturity securities are those investments which the
Company has the ability and intent to hold until maturity.
Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization and accretion of premiums and discounts.
Due to the nature of the Company’s investments and the
resulting low volatility, the difference between fair value and
amortized cost is not material. Available-for-sale securities are
recorded at fair value. Unrealized gains and losses net of the
related tax effect on available-for-sale securities are reported in
accumulated other comprehensive income, a component of
stockholders’ equity, until realized. The estimated market
values of investments are based on quoted market prices as of the
end of the reporting period.
(c)
Inventories
Inventories
are stated at the lower of cost or market. Costs are determined at
standard which approximates the first-in, first-out (FIFO)
method.
(d) Property, Plant
and Equipment
Property,
plant and equipment are stated at cost. Depreciation is provided on
a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of
the lives of the related assets or the term of the lease. The
Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If it is determined that
the carrying amount of an asset cannot be fully recovered, an
impairment loss is recognized.
(e) Intangible
Assets
Intangible
assets consist of goodwill and other intangible assets acquired in
business combinations at cost less accumulated amortization.
Amortization of these intangible assets is provided on a
straight-line basis over the respective useful lives which range
from three to ten years. Purchased in-process research and
development without alternative future use is expensed when
acquired. The carrying amount of intangible assets is reviewed
quarterly for impairment or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. The measurement of possible impairment is based
primarily on an evaluation of undiscounted projected cash flows
through the remaining amortization period.
CABLETRON
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(f) Income
Taxes
The Company
accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of
a change in tax rates on deferred tax assets and liabilities of a
change in tax rates is recognized in income during the period that
includes the enactment date. A valuation allowance is recognized if
it is anticipated that some or all of a deferred tax asset may not
be realized.
The Company
has reinvested earnings of its foreign subsidiaries and, therefore
has not provided income taxes that could result from the remittance
of such earnings. The unremitted earnings at February 29, 2000 and
February 28, 1999 amounted to approximately $184.6 million and
$175.1 million, respectively. Furthermore, any taxes paid to
foreign governments on those earnings may be used, in whole or in
part, as credits against US tax on any dividends distributed from
such earnings. It is not practicable to estimate the amount of
unrecognized deferred US taxes on these undistributed
earnings.
(g) Net Income (Loss)
Per Share
Basic net
income (loss) per common share is computed by dividing net income
(loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income
(loss) per common share reflect the maximum dilution that would
have resulted from the assumed exercise and share repurchase
related to dilutive stock options and is computed by dividing net
income (loss) by the weighted average number of common shares and
all dilutive securities outstanding.
(h) Foreign Currency
Translation and Transaction Gains and Losses
The
Company’s international revenues are denominated in either
U.S. dollars or local currencies. For those international
subsidiaries which use their local currency as their functional
currency, assets and liabilities are translated at exchange rates
in effect at the balance sheet date and income and expense accounts
at average exchange rates during the year. Resulting translation
adjustments are reported in accumulated other comprehensive income,
a component of stockholders’ equity. Where the U.S. dollar is
the functional currency, amounts are recorded at the exchange rates
in effect at the time of the transaction, any resulting translation
adjustments, which were not material, are recorded in
income.
(i) Statements of Cash
Flows
Cash and
cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or
less.
(j) Revenue
Recognition
The Company
generally recognizes revenue upon shipment of products. In the case
of design, consulting, installation and support services, revenues
are recognized upon completion and acceptance of such products and
services. The Company recognizes software revenue after the
delivered software no longer requires significant production,
modification, or further customization and collection of the
related receivable is deemed probable. Revenues from service
contracts are deferred and recognized ratably over the period the
services are performed. Estimated warranty costs and sales returns
and allowances are accrued at the time of shipment based on
contractual rights and historical experience. The Company extends
limited product return and price protection
rights to certain distributors and resellers. Such rights are
generally limited to a certain percentage of sales over primarily a
three month period.
(k)
Reclassifications
Certain
prior year balances have been reclassified to conform to the
current year presentation.
(l)
Derivatives
The Company
utilizes derivative financial instruments to reduce foreign
currency exchange risks. The Company enters into foreign exchange
forward and option contracts to minimize the impact of foreign
currency fluctuations on assets and liabilities denominated in
currencies other than the functional currency of the reporting
entity. All foreign exchange forward and option contracts are
designated as a hedge and are highly inversely correlated to the
hedged item as required by generally accepted accounting
principles. Gains and losses on the contracts are reflected in
operating results and offset foreign exchange gains or losses from
the revaluation of inter-company balances or other current assets
and liabilities denominated in currencies other than the functional
currency of the reporting entity. Gains and losses on the contracts
are calculated using published foreign exchange rates to determine
fair value. The gain or loss that results from the early
termination of a contract is reflected in operating
results.
(m) Use of
Estimates
The
preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
(n) 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 revenue 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
ended February 29, 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 year ended February 29,
2000.
In June
1998, the FASB issued Financial Accounting Standard No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133) which requires companies to record
derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. SFAS 133 will be effective for the Company’s
first quarter of fiscal year ending March 2, 2002. Management is
currently evaluating the potential effects of this pronouncement on
its consolidated financial statements. However, management does not
expect the impact to be significant.
CABLETRON
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(3) Business Combinations
Acquisitions
For
acquisitions accounted for as purchases, the Company’s
consolidated results of operations include the operating results of
the acquired companies from their acquisition dates. Acquired
assets and liabilities were recorded at their estimated fair market
values at the acquisition date and the aggregate purchase price
plus costs directly attributable to the completion of acquisitions
has been allocated to the assets and liabilities
acquired.
On September
25, 1998, Cabletron acquired NetVantage, Inc.,
(“NetVantage”) a publicly held manufacturer of ethernet
workgroup switches. Under the terms of the Merger Agreement,
Cabletron issued 6.4 million shares of Cabletron common stock to
the shareholders of NetVantage in exchange for all of the
outstanding shares of stock of NetVantage. In addition, Cabletron
assumed 1,309,000 options, valued at approximately $4.8
million.
Cabletron
recorded the cost of the acquisition at approximately $77.8
million, including direct costs of $4.2 million. This acquisition
has been accounted for under the purchase method of accounting. The
cost represents 6.4 million shares at $9.9375 per share, in
addition to assumed options and direct acquisition costs. Based on
an independent appraisal, approximately $29.4 million of the
purchase price was allocated to in-process research and
development. Accordingly, Cabletron recorded a special charge of
$29.4 million for this in-process research and development, at the
date of acquisition. The excess of cost over the estimated fair
value of net assets acquired of $35.6 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
NetVantage, Inc. from the acquisition date.
On September
9, 1998, Cabletron acquired all of the outstanding stock of
FlowPoint Corp., (“FlowPoint”) a privately held
manufacturer of digital subscriber line router networking products.
Prior to the agreement, Cabletron owned 42.8% of the outstanding
shares of stock. Pursuant to the terms of the agreement, $20.6
million was to be paid in four installments, within nine months
after the merger date. Each installment would be paid in either
cash or Cabletron common stock, as determined by Cabletron
management at the time of distribution. During the year ended
February 28, 1999, the Company paid the first installment in the
form of cash and issued approximately 0.4 million shares of common
stock in payment of the second installment. During the year ended
February 29, 2000, the Company issued approximately 1.0 million
shares of common stock in payment of the third and fourth
installments. In addition, Cabletron assumed 494,000 options,
valued at approximately $2.7 million.
Cabletron
recorded the cost of the acquisition at approximately $25.0
million, including direct costs of $0.4 million. This acquisition
has been accounted for under the purchase method of accounting.
Based on an independent appraisal, approximately $12.0 million of
the purchase price was allocated to in-process research and
development. Accordingly, Cabletron recorded a special charge of
$12.0 million for this in-process research and development, at the
date of acquisition. The excess of cost over the estimated fair
value of net assets acquired of $11.9 million was allocated to
goodwill and other intangible assets, and was amortized on a
straight-line basis over a period of 5-10 years. Cabletron’s
consolidated results of operations include the operating results of
FlowPoint from the acquisition date through December 18, 1999, the
date that FlowPoint was sold to Efficient Networks, Inc. (see
below)
On September
1, 1998, Cabletron acquired the assets and assumed certain
liabilities of the DSLAM division of Ariel Corporation
(“Ariel”), a privately held designer and manufacturer of
digital subscriber line network access products. Under the terms of
the agreement, Cabletron paid $33.5 million and assumed certain
liabilities.
Cabletron
recorded the cost of the acquisition at approximately $45.1
million, including direct costs of $1.1 million related to the
acquisition, which consisted of cash payments of $33.5 million and
other assumed
liabilities. This acquisition has been accounted for under the
purchase method of accounting. Based on an independent appraisal,
approximately $26.0 million of the purchase price was allocated to
in-process research and development. Accordingly, Cabletron
recorded a special charge of approximately $26.0 million ($15.8
million, net of tax) for this in-process research and development,
at the date of acquisition. The excess of cost over the estimated
fair value of net assets acquired of $18.2 million was allocated to
goodwill, and was amortized on a straight-line basis over a period
of 10 years. Cabletron’s consolidated results of operations
include the operating results of the DSLAM division of Ariel
Corporation from the acquisition date. Cabletron ceased operations
of the Ariel division in the fourth quarter of the year ended
February 29, 2000. (see below)
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 25% 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
5.2 million shares of Cabletron common stock to the former
shareholders of Yago, pursuant to the terms of the merger
agreement.
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 11.2 million shares at $14.1875 per share, in
addition to direct acquisition costs. Based on an independent
appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. Accordingly,
Cabletron recorded a special charge of $150.0 million for this
in-process research and development, at the date of acquisition.
The excess of cost over the estimated fair value of net assets
acquired 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.
On February
7, 1998, the Company acquired certain assets of the Network
Products Group of Digital Equipment Corporation (“DNPG”).
Under the terms of the agreement, the purchase price was
approximately $439.5 million, consisting of cash, product credits
and liabilities resulting from the acquisition. Based on an
independent appraisal, approximately $199.3 million of the purchase
price was allocated to in-process research and development.
Accordingly, Cabletron recorded a special charge of $199.3 million
for this in-process research and development at the date of
acquisition. The excess of cost over the estimated fair value of
$161.8 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a
period of 5 to 10 years. The Company’s consolidated results of
operations include the operating results of the acquired business
from the acquisition date. During the third quarter of the year
ended February 28, 1999, the Company sold buildings that it had
purchased in the acquisition for $24.5 million. The gain from the
sale of the buildings of $2.5 million was recorded as a reduction
in goodwill.
CABLETRON
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following
unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had
the aforementioned transactions taken place at the beginning of
each fiscal year or of the future results of the combined
companies. The special charges, related to these acquisitions, were
not included in the results as these charges are unusual and not
indicative of results of normal operating results.
| |
|
1999
|
|
1998
|
| |
|
(in
thousands)
(unaudited) |
| Net
sales |
|
$1,426,322 |
|
|
$1,878,476 |
| Operating
income (loss) |
|
(107,651 |
) |
|
136,937 |
The purchase
price for each acquisition, completed during the years ended
February 28, 1999 and 1998, was allocated to assets acquired and
liabilities assumed based on fair market value at the date of each
acquisition. The total cost of acquisitions completed during the
years ended February 28, 1999 and 1998, is summarized as
follows:
| |
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Cash paid
for acquisitions |
|
$ 38,656 |
|
$129,107 |
|
| Less cash
acquired |
|
6,463 |
|
— |
|
| |
|
|
|
|
|
| Net cash
paid for acquisitions |
|
32,193 |
|
129,107 |
|
| Product
credits granted |
|
— |
|
302,500 |
|
| Discount
on product credits |
|
— |
|
(11,691 |
) |
| Common
stock issued |
|
239,748 |
|
— |
|
| Installment payments and assumed options |
|
15,239 |
|
— |
|
| Assumed
liabilities |
|
26,391 |
|
19,581 |
|
| |
|
|
|
|
|
|
Purchase price |
|
$313,571 |
|
$439,497 |
|
| |
|
|
|
|
|
The
following are supplemental disclosures of noncash transactions in
connection with the NetVantage, FlowPoint, Ariel, Yago and DNPG
acquisitions.
| |
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Fair value
of assets acquired |
|
$ 80,982 |
|
|
$ 251,888 |
|
| In-process
research and development |
|
217,350 |
|
|
199,300 |
|
| Assumed
liabilities |
|
(26,391 |
) |
|
(19,581 |
) |
| Common
stock issued |
|
(239,748 |
) |
|
— |
|
| Product
credits |
|
— |
|
|
(302,500 |
) |
| |
|
|
|
|
|
|
|
Cash portion of acquisition |
|
$ 32,193 |
|
|
$ 129,107 |
|
| |
|
|
|
|
|
|
Dispositions
On December
17, 1999, the Company sold its FlowPoint subsidiary to Efficient
Networks, Inc. (“Efficient”). From March 1, 1999 through
the date of the sale, FlowPoint’s net sales were approximately
$34.5 million. Under the terms of the sale, the Company received
7.2 million shares of Efficient common stock and 6,300 shares of
Efficient convertible preferred stock, in exchange for all of the
outstanding capital stock of FlowPoint. The preferred and common
stock are subject to various restrictions on resale.
CABLETRON
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Based upon an
independent valuation of the Efficient stock (which resulted in a
10% discount from the closing price of the Efficient stock on the
Nasdaq as of the sale date), the transaction was valued at
approximately $946.2 million, resulting in a pre-tax gain of
approximately $893.7 million. As a result of this transaction
Cabletron held approximately 24% of the outstanding common stock of
Efficient on an as converted basis. Accordingly, Cabletron deferred
24% of the pre-tax gain ($235.9 million) since through its
ownership percentage of Efficient, it effectively still had a 24%
interest in FlowPoint. Because the Company has irrevocably
relinquished its voting rights on all but 10% of Efficient’s
common stock, the Efficient stock has been classified as an
available-for-sale security (Note 4). As the company sells the
Efficient shares, this deferred gain will be recognized into income
adjusted for any unrealized gain or loss in proportion to
Cabletron’s reduction in its percentage ownership of
Efficient. On February 8, 2000, the Company sold approximately 2.0
million shares of Efficient common stock for net proceeds of
approximately $135.3 million and recognized approximately $47.3
million of the deferred gain into income.
During the
fourth quarter of the year ended February 29, 2000, the Company
finalized its decision to abandon research and development on
digital subscriber line technology. This decision resulted in the
aforementioned sale of FlowPoint and the abandonment of research
and development efforts acquired in the Ariel acquisition. The
cessation of the Ariel operations resulted in the write-off of the
remaining $12.2 million of goodwill recorded from the Ariel
acquisition.
Other
transactions
On February
29, 2000, the Company sold its manufacturing and repair services
operations located in Rochester, New Hampshire and Limerick,
Ireland to Flextronics International (“Flextronics”) for
approximately $78.6 million in cash. Flextronics purchased, at net
book value, approximately $18.1 million of the Company’s
manufacturing related fixed assets including buildings, assumed
leases on certain leased buildings, and hired approximately 970 of
the Company’s manufacturing related employees. As part of the
separation agreement with the manufacturing employees, the Company
accelerated certain stock option vesting resulting in a $4.7
million compensation charge. In addition, Flextronics purchased the
Company’s inventory with a cost of approximately $65.1 million
for $60.5 million. Simultaneously, the Company entered into an
agreement with Flextronics to manufacture most of its products as
an original equipment manufacturer (“OEM”).
Subsequent events
On May 23,
2000, the Company entered into a definitive agreement to sell DNPG.
The agreement is subject to customary closing
conditions.
On April 12,
2000, the 6,300 shares of Efficient preferred stock were converted
into 6.3 million shares of Efficient common stock.
The market
for shares of Efficient common stock has been volatile. As of May
23, 2000, the shares of Efficient have decreased to $38.43 per
share from a per share price of $161.25 at February 29, 2000. The
Company had 11.5 million shares of Efficient common stock as of May
15, 2000.
CABLETRON
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(4) Investments
Investments
are summarized as follows at February 29, 2000 and February 28,
1999:
| |
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
| |
|
(in
thousands) |
| February 29, 2000 |
|
|
| U.S.
Government and Agency Obligations |
|
$ 199,655 |
|
$
70 |
|
$ (169 |
) |
|
$ 199,556 |
| U.S.
Corporate Obligations |
|
5,596 |
|
2 |
|
(50 |
) |
|
5,548 |
| Asset-Backed Securities |
|
4,468 |
|
— |
|
(13 |
) |
|
4,455 |
State,
Municipal and County Government Notes and
Bonds |
|
200,101 |
|
81 |
|
(873 |
) |
|
199,309 |
| Corporate
Equity Securities |
|
804,331 |
|
861,383 |
|
— |
|
|
1,665,714 |
| Foreign
Deposits |
|
12,000 |
|
— |
|
— |
|
|
12,000 |
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$1,226,151 |
|
$861,536 |
|
$(1,105 |
) |
|
$2,086,582 |
| |
|
|
|
|
|
|
|
|
|
| |
|
| |
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
| February 28, 1999 |
|
|
State,
Municipal and County Government Notes and
Bonds |
|
$ 282,386 |
|
$ 2,001 |
|
$ (43 |
) |
|
$ 284,344 |
| Foreign
Deposits |
|
12,647 |
|
— |
|
— |
|
|
12,647 |
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ 295,033 |
|
$ 2,001 |
|
$ (43 |
) |
|
$ 296,991 |
| |
|
|
|
|
|
|
|
|
|
The
contractual maturities of debt securities at February 29,
2000:
| |
|
Amortized
Cost
|
|
Fair
Value
|
| |
|
(in
thousands) |
| Less than
one year |
|
$222,029 |
|
$221,982 |
| Due in
1-2 years |
|
153,959 |
|
153,304 |
| Due in
2-3 years |
|
45,832 |
|
45,581 |
| |
|
|
|
|
|
Total |
|
$421,820 |
|
$420,867 |
| |
|
|
|
|
Actual
maturities may differ from contractural maturities because some
borrowers have the right to call or prepay
obligations.
| |
|
Current
|
|
Long-Term
|
|
Total
|
| |
|
(in
thousands) |
| February 29, 2000 |
|
|
| Held-to-Maturity |
|
$199,341 |
|
$ 39,312 |
|
$ 238,653 |
| Available-for-Sale |
|
22,640 |
|
1,825,289 |
|
1,847,929 |
| |
|
|
|
|
|
|
|
Total |
|
$221,981 |
|
$1,864,601 |
|
$2,086,582 |
| |
|
|
|
|
|
|
|
| |
|
Current
|
|
Long-Term
|
|
Total
|
| February 28, 1999 |
|
|
| Held-to-Maturity |
|
$ 61,255 |
|
$ 87,376 |
|
$ 148,631 |
| Available-for-Sale |
|
52,677 |
|
95,683 |
|
148,360 |
| |
|
|
|
|
|
|
|
Total |
|
$113,932 |
|
$ 183,059 |
|
$ 296,991 |
| |
|
|
|
|
|
|
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net unrealized
gains (net of tax) on available-for-sale investments are reported
as a separate component of stockholders’ equity until
realized and amounted to $516.5 million and $1.2 million at
February 29, 2000 and February 28, 1999, respectively.
The Company
also has investments in certain non-public companies accounted for
using the cost method of accounting. The carrying amount of these
investments was $39.2 million and $21.9 million at February 29,
2000 and February 28, 1999, respectively. These investments are
reflected in long-term investments in the accompanying
consolidated balance sheets.
The fair
value of the February 29, 2000 corporate equity securities,
$1,665.5 million, relates to the Company’s investment in
Common and Preferred Stock of Efficient Networks, Inc.
Note
(5) Inventories
Inventories
consist of the following at February 29, 2000 and February 28,
1999:
| |
|
2000
|
|
1999
|
| |
|
(in
thousands) |
| Raw
materials |
|
$20,503 |
|
$ 64,603 |
| Work-in-process |
|
3,416 |
|
16,033 |
| Finished
goods |
|
61,097 |
|
148,876 |
| |
|
|
|
|
|
Total |
|
$85,016 |
|
$229,512 |
| |
|
|
|
|
The
reduction in inventory was partially a result of the outsourcing
of manufacturing to Flextronics (Note 3).
Note
(6) Property, Plant and
Equipment
Property,
plant and equipment consist of the following at February 29, 2000
and February 28, 1999:
| |
|
2000
|
|
1999
|
|
Estimated
useful lives
|
| |
|
(in
thousands) |
| Land and
land improvements |
|
$ 1,699 |
|
|
$ 1,855 |
|
|
15
years |
| Buildings
and building improvements |
|
25,342 |
|
|
40,177 |
|
|
30-40
years |
| Construction in progress |
|
1,654 |
|
|
841 |
|
|
— |
| Equipment |
|
258,872 |
|
|
325,021 |
|
|
3-5
years |
| Furniture
and fixtures |
|
13,710 |
|
|
13,333 |
|
|
5-7
years |
| Leasehold
improvements |
|
15,553 |
|
|
17,751 |
|
|
3-5
years |
| |
|
|
|
|
|
|
| |
|
316,830 |
|
|
398,978 |
|
| Less
accumulated depreciation and amortization |
|
(191,838 |
) |
|
(210,499 |
) |
| |
|
|
|
|
|
|
| |
|
$ 124,992 |
|
|
$ 188,479 |
|
| |
|
|
|
|
|
|
For the
years ended February 29, 2000, February 28, 1999 and 1998,
depreciation expense was $78.1 million, $87.5 million and $64.8
million, respectively.
The
reduction in property, plant and equipment at February 29, 2000
compared to February 28, 1999 was partially a result of the
outsourcing of manufacturing to Flextronics (Note 3).
In the
fourth quarter of the year ended February 28, 1999, the Company
performed a physical inventory of manufacturing equipment and
fixtures in preparation for the planned outsourcing of its
manufacturing operations. As a result of this inventory, the
Company wrote off approximately $17.6 million of net book value of
assets. The writeoff consisted of equipment and fixtures that
could not be located and equipment that had been recently idled
and of no future use. The writeoff was recorded in the caption
special charges in the consolidated statements of
operations.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(7) Intangible Assets
Intangible
assets consist of the following at February 29, 2000 and February
28, 1999:
| |
|
2000
|
|
1999
|
|
Estimated
useful lives
|
| |
|
(in
thousands) |
| Goodwill |
|
$ 38,912 |
|
|
$ 82,358 |
|
|
7-10
years |
| Customer
relations |
|
97,000 |
|
|
97,000 |
|
|
8
years |
| Assembled
work force |
|
7,380 |
|
|
7,380 |
|
|
3-10
years |
| Patents
and technologies acquired in business acquisitions |
|
41,200 |
|
|
41,652 |
|
|
3-5
years |
| |
|
|
|
|
|
|
| |
|
184,492 |
|
|
228,390 |
|
| Less
accumulated amortization |
|
(54,208 |
) |
|
(28,971 |
) |
| |
|
|
|
|
|
|
|
Total |
|
$130,284 |
|
|
$199,419 |
|
| |
|
|
|
|
|
|
The
reduction in goodwill was a result of the Company’s sale of
FlowPoint, its decision to close all of the operations acquired in
the Ariel acquisition (Note 3) and utilization of acquired net
operating losses in purchase transactions (Note 11).
Note
(8) Accrued Expenses
Accrued
expenses consist of the following at February 29, 2000 and
February 28, 1999:
| |
|
2000
|
|
1999
|
| |
|
(in
thousands) |
| Salaries
& benefits |
|
$ 31,724 |
|
$ 27,777 |
| Other |
|
100,977 |
|
96,349 |
| |
|
|
|
|
|
Total |
|
$132,701 |
|
$124,126 |
| |
|
|
|
|
Note
(9) Other Obligations
As a term
of the Asset Purchase Agreement between the Company and Digital
Equipment Corp., Digital received product credits of $302.5
million, which were subsequently adjusted to $288.4 million with
the final valuation of the assets acquired. In April 1998, Compaq
Corporation (“Compaq”) acquired Digital and Compaq
assumed these product credits. The product credits were used by
Compaq to purchase products that were ordered under a reseller
agreement. At February 29, 2000 all product credits had been
consumed, while $129.7 million of product credits remained at
February 28, 1999.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(10) Leases
The Company
leases manufacturing and office facilities under noncancelable
operating leases expiring through the year 2020. The leases
provide for increases based on the consumer price index and
increases in real estate taxes. Rent expense associated with
operating leases was approximately $22.7 million, $18.1 million
and $14.6 million for the years ended February 29, 2000, February
28, 1999 and 1998, respectively.
Total
future minimum lease payments under all noncancelable operating
leases as of February 29, 2000, are as follows:
Year
|
|
(in
thousands) |
| 2001 |
|
$15,409 |
| 2002 |
|
12,119 |
| 2003 |
|
11,031 |
| 2004 |
|
9,789 |
| 2005 |
|
9,628 |
| Thereafter |
|
18,187 |
| |
|
|
| |
|
$76,163 |
| |
|
|
Note
(11) Income Taxes
Income
(loss) before income taxes is summarized as follows:
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Total US
domestic income (loss) |
|
$730,784 |
|
$(315,428 |
) |
|
$ (36,343 |
) |
| Total
foreign subsidiaries income (loss) |
|
28,237 |
|
38,901 |
|
|
(33,891 |
) |
| |
|
|
|
|
|
|
|
|
| Total
income (loss) before income taxes |
|
$759,021 |
|
$(276,527 |
) |
|
$ (70,234 |
) |
| |
|
|
|
|
|
|
|
|
| |
| Tax
expense (benefit) is summarized as follows: |
| |
| Currently
payable: |
|
Federal |
|
$ 32,483 |
|
$ (29,939 |
) |
|
$ 55,782 |
|
|
State |
|
6,400 |
|
— |
|
|
10,689 |
|
|
Foreign |
|
5,951 |
|
13,254 |
|
|
956 |
|
| Deferred
tax expense (benefit) |
|
249,916 |
|
(14,451 |
) |
|
(102,700 |
) |
| |
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$294,750 |
|
$ (31,136 |
) |
|
$ (35,273 |
) |
| |
|
|
|
|
|
|
|
|
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a
reconciliation of the effective tax rates to the statutory federal
tax rate:
| |
|
2000
|
|
1999
|
|
1998
|
| Statutory
federal income tax (benefit) rate |
|
35.0 |
% |
|
(35.0 |
)% |
|
(35.0 |
)% |
| State
income tax, net of federal tax benefit |
|
4.9 |
|
|
(1.9 |
) |
|
(3.3 |
) |
| Exempt
income of foreign sales corporation, net of tax |
|
— |
|
|
(1.7 |
) |
|
(10.9 |
) |
| Research
and experimentation credit |
|
(0.4 |
) |
|
(0.7 |
) |
|
(5.9 |
) |
| Municipal
income |
|
(0.4 |
) |
|
(1.6 |
) |
|
(8.9 |
) |
| Rate
differential on foreign operations |
|
(0.5 |
) |
|
(1.2 |
) |
|
14.0 |
|
| Nondeductible goodwill & intangibles |
|
0.5 |
|
|
27.5 |
|
|
1.7 |
|
| Other |
|
(0.3 |
) |
|
3.3 |
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
38.8 |
% |
|
(11.3 |
)% |
|
(50.2 |
)% |
| |
|
|
|
|
|
|
|
|
|
The tax
effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
February 29, 2000 and February 28, 1999 are presented
below:
| |
|
2000
|
|
1999
|
| |
|
(in
thousands) |
| Deferred
tax assets: |
|
|
|
|
|
|
|
Accounts receivable |
|
$ 2,107 |
|
|
$ 7,450 |
|
|
Inventories |
|
34,282 |
|
|
44,125 |
|
|
Property, plant and equipment |
|
3,806 |
|
|
— |
|
|
Other reserves and accruals |
|
38,806 |
|
|
12,521 |
|
|
Acquired research and development |
|
104,521 |
|
|
113,367 |
|
|
Domestic net operating loss carryforwards |
|
12,854 |
|
|
31,675 |
|
|
Foreign net operating loss carryforwards |
|
23,079 |
|
|
18,585 |
|
| |
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
219,455 |
|
|
227,723 |
|
|
Less valuation allowance |
|
(26,672 |
) |
|
(34,644 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets |
|
192,783 |
|
|
193,079 |
|
| Deferred
tax liabilities: |
|
|
|
|
|
|
|
Financial basis in excess of tax basis in
available-for-sale securities |
|
(569,833 |
) |
|
— |
|
|
Property, plant and equipment |
|
— |
|
|
(4,821 |
) |
| |
|
|
|
|
|
|
|
Total gross deferred liabilities |
|
(569,833 |
) |
|
(4,821 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax (liabilities)
assets |
|
$(377,050 |
) |
|
$188,258 |
|
| |
|
|
|
|
|
|
At February
29, 2000, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $33.6 million expiring in fiscal
2005 through fiscal 2018. Almost all of the above stated NOL
amount is subject to a §382 limitation due to prior ownership
changes.
The net
change in the total valuation allowance for the year ended
February 29, 2000 was a decrease of $8.0 million, of which $11.7
million of the gross decrease represented a reduction to goodwill
due to utilization of acquired net operating losses in purchase
transactions. The net change in total valuation allowance for the
year ended February 28, 1999 was a decrease of $11.3 million.
Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at February
29, 2000.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(12) Comprehensive Income
(Loss)
The
Company’s total comprehensive income (loss) was as
follows:
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Net
income (loss) |
|
$ 464,271 |
|
|
$(245,391 |
) |
|
$(34,961 |
) |
| Other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on available-for-sale
securities |
|
858,473 |
|
|
1,958 |
|
|
— |
|
|
Foreign currency translation adjustment |
|
(1,041 |
) |
|
(1,574 |
) |
|
559 |
|
|
Income tax expense |
|
(343,134 |
) |
|
(772 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ 978,569 |
|
|
$(245,779 |
) |
|
$(34,402 |
) |
| |
|
|
|
|
|
|
|
|
|
Income tax
expense in the years ended February 29, 2000 and February 28,
1999, respectively, relate to unrealized gain on
available-for-sale securities.
Note
(13) Net Income (Loss) per
Share
The
Company’s reported net income (loss) per share was as
follows:
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
(in
thousands, except
per share amounts) |
| |
| Weighted
average number of shares outstanding—basic |
|
177,541 |
|
167,432 |
|
|
157,686 |
|
| Dilutive
effect: |
|
|
|
|
|
|
|
|
|
Contingent shares per acquisition
agreement |
|
2,672 |
|
— |
|
|
— |
|
|
Incremental shares upon exercise of common stock
options |
|
8,405 |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Weighted
average number of shares outstanding—diluted |
|
188,618 |
|
167,432 |
|
|
157,686 |
|
| |
|
|
|
|
|
|
|
|
| Net
income (loss) |
|
$464,271 |
|
$(245,391 |
) |
|
$(34,961 |
) |
| |
|
|
|
|
|
|
|
|
| Basic
income (loss) per share amount |
|
$ 2.62 |
|
$ (1.47 |
) |
|
$ (0.22 |
) |
| |
|
|
|
|
|
|
|
|
| Diluted
income (loss) per share amount |
|
$ 2.46 |
|
$ (1.47 |
) |
|
$ (0.22 |
) |
| |
|
|
|
|
|
|
|
|
For 1999
and 1998, stock options to purchase shares of common stock
totaling 4.5 million and 4.1 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 5.5 million shares that were
contingently issuable related to the acquisition of Yago, as of
the end of the years ended February 28, 1999 and 1998, was not
included since the effect was anti-dilutive.
Note
(14) Financial Instruments and
Concentration of Credit Risk
The Company
utilizes derivative financial instruments, principally forward
exchange contracts and options, to reduce financial currency
exposures arising from its international operations. All foreign
exchange forward and option contracts are designated as a hedge
and are highly inversely correlated to the hedged item as required
by generally accepted accounting principles. These contracts
primarily require the Company to purchase or sell certain foreign
currencies either with or for US dollars at contractual rates.
Gains and losses on the contracts are reflected in operating
results and offset foreign exchange gains or losses from the
revaluation of inter-company balances or
other current assets and liabilities denominated in currencies other
than the functional currency of the reporting entity. Gains and
losses on the contracts are calculated using published foreign
exchange rates to determine fair value. The gain or loss that
results from the early termination of a contract is reflected in
operating results.
At February
29, 2000 and February 28, 1999, the Company had forward exchange
contracts and purchased option contracts, all having maturities
less than two years, with a notional amount of $31.9 million
(forward contracts were $3.9 million and option contracts were
$28.0 million) and $47.0 million (forward contracts were $8.0
million and option contracts were $39.0 million),
respectively.
The
estimated fair value of the Company’s option and forward
contracts reflects the estimated amounts the Company would receive
or pay to terminate the contracts at the reporting dates, thereby
taking into account the current unrealized gains and losses on
open contracts. These contracts did not have a material fair value
at February 29, 2000 and February 28, 1999.
Several
major international financial institutions are counterparties to
the Company’s financial instruments. It is Company practice
to monitor the financial standing of the counterparties and limit
the amount of exposure with any one institution. The Company may
be exposed to credit loss in the event of nonperformance by the
counterparties to these contracts, but believes that the risk of
such loss is remote and that it would not be material to its
financial position and results of operations.
The
carrying amounts of cash, cash equivalents, short-term
investments, trade receivables, and accounts payable and accrued
expenses approximate fair value because of the short maturity of
these financial instruments.
For the
year ended February 29, 2000, one customer, Compaq, accounted for
approximately 16% of net sales and sales to the United States
federal government accounted for approximately 14% of net sales.
For the year ended February 28, 1999, one customer, Compaq,
accounted for approximately 11% of net sales and sales to the
United States federal government accounted for approximately 15%
of net sales. For the year ended February 28, 1998 no single
customer represented more than 4% of net sales, however, sales to
the United States federal government accounted for approximately
13% of net sales.
Note
(15) 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.). During the year ended
February 29, 2000, sales of switched products were $948.4 million,
sales of shared media products were $66.3 million, sales of other
older legacy products and Spectrum were $177.0 million and sales
from professional services and maintenance were $267.9 million
compared to sales of switched products of $810.2 million, sales of
shared media products of $165.8 million, sales of other various
legacy products and Spectrum of $165.3 million and sales from
professional services of $270.0 million during the year ended
February 28, 1999. During the year ended February 28, 1998, sales
of switched products were $680.6 million, sales of shared media
products were $317.6 million and sales of software, professional
services and other were $379.1 million. The Company’s
reportable segments are based on geographic area. All intercompany
revenues and expenses are eliminated in computing revenues and
operating income. Operating income excludes other income (net),
interest income, interest expense, taxes and special charges.
Long-lived assets consist primarily of the net book value of
property, plant and equipment, long-term investments and goodwill.
The long-term investments and goodwill were attributable to the
United States. 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 United States operating income
amount for the year ended February 29, 2000 excludes the $21.1
million of
special charges related to the restructuring recorded during that
fiscal year. The United States operating income amount for the
year ended February 28, 1999 excludes special charges of $17.6
million related to fixed asset loss and the $217.4 million related
to acquisitions completed during that fiscal year. The United
States operating income in the year ended February 28, 1998
excludes the $199.3 million of special charges related to
acquisitions completed during that fiscal year and the $35.0
million of special charges related to the realignment.
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Sales to
unaffiliated customers (trade): |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ 951,319 |
|
|
$ 829,381 |
|
|
$ 923,285 |
|
|
Europe |
|
342,226 |
|
|
430,283 |
|
|
323,681 |
|
|
Pac Rim |
|
116,417 |
|
|
114,174 |
|
|
77,594 |
|
|
Other |
|
49,631 |
|
|
37,441 |
|
|
52,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total trade sales |
|
$1,459,593 |
|
|
$1,411,279 |
|
|
$1,377,330 |
|
| |
|
|
|
|
|
|
|
|
|
| Operating
income (loss): |
|
|
|
|
|
|
|
|
|
|
United States |
|
$
1,648 |
|
|
$ (68,027 |
) |
|
$ 140,646 |
|
|
Europe |
|
15,913 |
|
|
32,829 |
|
|
19,907 |
|
|
Pac Rim |
|
(2,905 |
) |
|
(7,422 |
) |
|
(16,541 |
) |
|
Other |
|
665 |
|
|
(14,076 |
) |
|
1,461 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ 15,321 |
|
|
$ (56,696 |
) |
|
$ 145,473 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
| |
|
February 29,
2000
|
|
February 28,
1999
|
| Assets: |
|
|
|
|
|
|
|
United States |
|
$2,941,082 |
|
|
$1,326,929 |
|
|
Europe |
|
154,672 |
|
|
173,937 |
|
|
Pac Rim |
|
44,620 |
|
|
37,586 |
|
|
Other |
|
26,133 |
|
|
28,048 |
|
| |
|
|
|
|
|
|
|
Total assets |
|
$3,166,507 |
|
|
$1,566,500 |
|
| |
|
|
|
|
|
|
| Long-lived assets: |
|
|
|
|
|
|
|
United States |
|
$2,035,246 |
|
|
$ 438,864 |
|
|
Europe |
|
15,560 |
|
|
19,453 |
|
|
Pac Rim |
|
3,784 |
|
|
5,828 |
|
|
Other |
|
2,233 |
|
|
2,503 |
|
| |
|
|
|
|
|
|
|
Total long-lived assets |
|
$2,056,823 |
|
|
$ 466,648 |
|
| |
|
|
|
|
|
|
The Company
has announced that it plans to establish four separate operating
subsidiaries during the year ended March 3, 2001. During the years
ended February 29, 2000, February 28, 1999 and February 28, 1998
information was not available for each of these new operating
subsidiaries. The Company is in the process of completing a
historical carve-out of financial information for these operating
subsidiaries. The Company expects to provide such information in
future filings.
Note
(16) Legal Proceedings
As
previously disclosed in Cabletron’s annual reports on Form
10-K for the years ended February 28, 1999 and 1998, a
consolidated class action lawsuit purporting to state claims
against Cabletron and certain officers
and directors of Cabletron was filed in the United States District
Court for the District of New Hampshire and, following transfer,
is pending in the District of Rhode Island. The complaint alleges
that Cabletron and several of its officers and directors
disseminated materially false and misleading information about
Cabletron’s operations and acted in violation of Section
10(b) and Rule 10b-5 of the Exchange Act during the period between
March 3, 1997 and December 2, 1997. The complaint also alleges
that certain of the Company’s alleged accounting practices
resulted in the disclosure of materially misleading financial
results during the same period. More specifically, the complaint
challenged the Company’s revenue recognition policies,
accounting for product returns, and the validity of certain sales.
The complaint does not specify the amount of damages sought on
behalf of the class. Cabletron and other defendants moved to
dismiss the complaint and, by Order dated December 23, 1998, the
District Court expressed its intention to grant Cabletron’s
motion to dismiss unless the plaintiffs amended their complaint.
The Plaintiffs timely served a Second Consolidation Class Action
Complaint, and the Company has filed a motion to dismiss this
second complaint. A ruling on that motion is not expected earlier
than June 2000. The legal costs incurred by Cabletron in defending
itself and its officers and directors against this litigation,
whether or not it prevails, could be substantial, and in the event
that the plaintiffs prevail, the Company could be required to pay
substantial damages. This litigation may be protracted and may
result in a diversion of management and other resources of the
Company. The payment of substantial legal costs or damages, or the
diversion of management and other resources, could have a material
adverse effect on the Company’s business, financial condition
or results of operations.
In
addition, the Company is involved in various other legal
proceedings and claims arising in the ordinary course of business.
Management believes that the disposition of these matters will not
have a materially adverse effect on the financial condition or
results of operations of the Company.
Note
(17) Stock Plans
(a) Equity Incentive
and Directors Plans
The Company
has an Equity Incentive Plan which provides for the availability
of 25,000,000 shares of common stock for the granting of a variety
of incentive awards to eligible employees. As of February 29,
2000, the Company had issued 9,132,816 stock options under the
Equity Incentive Plan, which were granted at fair market value at
the date of grant, vest over a three to five year period and
expire within six to ten years from the date of grant. In
addition, the Company has assumed approximately 7.0 million of
stock options related to certain business acquisitions. (Note
3)
Prior to
February 28, 1999, the Company maintained a Directors Option Plan
which provided for 2,500,000 shares of common stock for purchase
by nonemployee directors of the Company. The Directors Option Plan
provided for issuance of options at their fair market value on the
date of grant. The options vest over a period of three years and
expire six years from the date of grant. A total of 435,000 stock
options are outstanding under the Directors Option Plan at
February 29, 2000. Since March 1, 1999, the nonemployee directors
of the Company were granted options to purchase shares of common
stock in accordance with the Company’s 1998 Equity Incentive
Plan.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of
option transactions under the two plans follows:
| |
|
Number
of
Options
|
|
Weighted-Average
Exercise Price
|
| Options
outstanding at February 28, 1997 |
|
13,595,418 |
|
|
$20.02 |
|
| |
|
|
|
|
|
|
| Options
exercisable at February 28, 1997 |
|
3,356,372 |
|
|
14.88 |
|
| |
|
|
|
|
|
|
| Granted
and assumed |
|
5,015,000 |
|
|
23.11 |
|
| Exercised |
|
(1,762,565 |
) |
|
10.40 |
|
| Cancelled |
|
(1,968,762 |
) |
|
29.45 |
|
| |
|
|
|
|
|
|
| Options
outstanding at February 28, 1998 |
|
14,879,091 |
|
|
25.45 |
|
| |
|
|
|
|
|
|
| Options
exercisable at February 28, 1998 |
|
4,134,623 |
|
|
22.99 |
|
| |
|
|
|
|
|
|
| Granted
and assumed |
|
20,023,369 |
|
|
7.69 |
* |
| Exercised |
|
(497,696 |
) |
|
5.58 |
|
| Cancelled |
|
(15,421,085 |
) |
|
16.43 |
* |
| |
|
|
|
|
|
|
| Options
outstanding at February 28, 1999 |
|
18,983,679 |
|
|
9.67 |
|
| |
|
|
|
|
|
|
| Options
exercisable at February 28, 1999 |
|
4,518,681 |
|
|
13.32 |
|
| |
|
|
|
|
|
|
| Granted |
|
6,030,560 |
|
|
16.25 |
|
| Exercised |
|
(4,158,603 |
) |
|
10.66 |
|
| Cancelled |
|
(4,857,380 |
) |
|
16.43 |
|
| |
|
|
|
|
|
|
| Options
outstanding at February 29, 2000 |
|
15,998,256 |
|
|
$11.16 |
|
| |
|
|
|
|
|
|
| Options
exercisable at February 29, 2000 |
|
2,916,651 |
|
|
$10.26 |
|
| |
|
|
|
|
|
|
*In
September 1998, employees holding outstanding stock options with a
value exceeding $7.25 per option were given the right to have
their options canceled and repriced to $7.25 per option. The
repriced options will vest over a period of four to six years. In
December 1997, employees holding outstanding stock options with a
value exceeding $14.6875 per option were given the right to have
their stock options canceled and repriced to $14.6875 per option.
The repriced options will vest over a period of one to five
years.
The
following table summarizes information concerning currently
outstanding and exercisable options as of February 29,
2000:
Range
of
exercise prices
|
|
Options
Outstanding
|
|
Weighted-average
remaining
contractual life
(years)
|
|
Weighted-average
exercise price
|
|
Options
exercisable
|
|
Weighted-average
exercise price
|
| $ 0.00 – 6.30 |
|
175,450 |
|
5.8 |
|
$ 0.78 |
|
107,164 |
|
$ 1.06 |
| 6.31 – 7.85 |
|
8,656,435 |
|
7.0 |
|
7.25 |
|
1,721,549 |
|
7.25 |
| 7.86 – 9.85 |
|
1,055,252 |
|
7.5 |
|
8.77 |
|
239,350 |
|
8.73 |
| 9.86 – 11.85 |
|
620,256 |
|
6.6 |
|
10.54 |
|
278,623 |
|
10.44 |
| 11.86 – 13.85 |
|
2,900,654 |
|
9.0 |
|
13.43 |
|
170,968 |
|
12.93 |
| 13.86 – 23.85 |
|
934,765 |
|
8.4 |
|
16.73 |
|
151,715 |
|
16.42 |
| 23.86 – 33.85 |
|
1,482,084 |
|
8.4 |
|
26.26 |
|
232,642 |
|
30.16 |
| 33.86 – 56.74 |
|
173,360 |
|
9.5 |
|
36.38 |
|
14,640 |
|
40.34 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
15,998,256 |
|
7.6 |
|
$11.16 |
|
2,916,651 |
|
$10.26 |
| |
|
|
|
|
|
|
|
|
|
|
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted
average estimated fair values of stock options granted and assumed
during the years ended February 29, 2000 and February 28, 1999 and
1998 were $16.25, $7.69 and $9.19 per share,
respectively.
The Company
applies Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” and related
interpretations in accounting for its stock option and employee
stock purchase plans. Had compensation cost for the Company’s
stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed under SFAS 123, “Accounting for
Stock-based Compensation,” the Company’s net income
(loss) would have been reduced (increased) to the pro forma
amounts indicated below:
| |
|
2000
|
|
1999
|
|
1998
|
| |
|
(in
thousands) |
| Net
income (loss) |
|
|
|
|
|
|
|
|
|
As reported |
|
$464,271 |
|
$(245,391 |
) |
|
$(34,961 |
) |
|
Pro forma |
|
$413,280 |
|
$(299,654 |
) |
|
$(60,583 |
) |
| Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
As reported |
|
$ 2.46 |
|
$ (1.47 |
) |
|
$ (0.22 |
) |
|
Pro forma |
|
$ 2.19 |
|
$ (1.79 |
) |
|
$ (0.38 |
) |
The effect
of applying SFAS 123 as shown in the above pro forma disclosure is
not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants made prior to fiscal
1996.
The fair
value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model, with the following
assumptions used for grants in the years ended February 29, 2000,
February 28, 1999 and 1998:
| |
|
2000
|
|
1999
|
|
1998
|
| Risk-free
interest rates |
|
6.59% |
|
5.1% |
|
6.13% |
| Expected
option lives |
|
3.7
Years |
|
3.7
years |
|
3.8
years |
| Expected
volatility |
|
70.14% |
|
76.32% |
|
60.37% |
| Expected
dividend yields |
|
0.0% |
|
0.0% |
|
0.0% |
(b) Employee Stock
Purchase Plans
The Company
maintains a broad-based employee stock purchase program to
encourage employee ownership of Common Stock on a tax-benefited
basis. Participation is generally open to all employees as of the
first participation period enrollment subsequent to date of hire.
The program permits participants to apply up to 20% of pay,
accumulated through payroll deductions, toward the purchase of
shares at a discount to market price at the end of each six-month
participation period. Shares are issued under two
shareholder-approved plans which together make up the program.
Purchases for each participation period are subject to a maximum
dollar amount divided by the value of a share of stock at the
beginning of the participation period. In the year ended February
29, 2000, 1,043,962 shares were purchased at a weighted average
price of $7.49 (572,087 at $9.41 and 231,326 at $27.00, for the
years ended February 28, 1999 and 1998, respectively). The
remaining balance of both ESPPs for purchase by employees at
February 29, 2000 was 3,100,558 shares.
Note
(18) Restructuring
In the year
ended February 29, 2000, the Company recorded $21.1 million of
special charges for the restructuring initiative undertaken during
March 1999. These charges reflect the closure of the Company’s
manufacturing facility in Ohio, the planned closure of 40 sales
offices worldwide (37 of which were closed as of February 29,
2000), the consolidation and outsourcing of manufacturing
operations, the write-off of certain assets that were not required
subsequent to the restructuring and the planned 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 but will also
include targeted reductions impacting most functions within the
Company. The exit costs which the Company expects to incur relate
primarily to long-term lease commitments and repayments of
economic development grants resulting from the closing of the Ohio
facility. 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. As of February 29,
2000, 418 employees have been terminated in accordance with the
plan and an additional 260 employees were terminated under the
plan subsequent to February 29, 2000. An adjustment to the
original severance benefits charge was required, because the
Company signed an agreement to outsource its manufacturing assets
to a different OEM than originally planned. This OEM, Flextronics,
hired more personnel than originally estimated.
The
following table summarizes the recorded accruals and uses of the
restructuring initiative from inception through February 29,
2000:
| |
|
Asset
Impairments
|
|
Severance
Benefits
|
|
Exit
Costs
|
|
Total
|
| |
|
(in
thousands) |
| Total
charge |
|
$ 7,869 |
|
|
$11,657 |
|
|
$ 4,210 |
|
|
$23,736 |
|
| Cash
payments since inception |
|
— |
|
|
(6,634 |
) |
|
(1,162 |
) |
|
(7,796 |
) |
| Non-cash
items since inception |
|
(7,947 |
) |
|
— |
|
|
— |
|
|
(7,947 |
) |
| Adjustments to original charge |
|
78 |
|
|
(2,939 |
) |
|
221 |
|
|
(2,640 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance as of February 29, 2000 |
|
$ — |
|
|
$ 2,084 |
|
|
$ 3,269 |
|
|
$ 5,353 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The
December 16, 1997 realignment plan was intended to better align
the Company’s business strategy with its focus in the
enterprise and service provider markets. The realignment was
intended to better position the Company to provide more
solutions-oriented products and service; to increase its
distribution of products through third-party distributors and
resellers; to improve its position internationally and to
aggressively develop partnership and acquisition opportunities.
The Company incurred a charge in the year ended February 28, 1998
of $35.0 million related to the realignment. The realignment
included general expense reduction through the elimination of
duplicate facilities, consolidation of related operations,
reallocation of resources, including the elimination of certain
existing projects, and personnel reduction. During the year ended
February 28, 1999, all initiatives and cash payments required
under the realignment were completed.
Note
(19) Compaq Agreement
As
previously discussed in Note 3, the Company acquired certain
assets of the Network Products Group of Digital Equipment
Corporation, on February 7, 1998. With this acquisition, Digital
Equipment Corporation (“Digital”) entered into a
reseller agreement with the Company pursuant to which Digital
committed to purchase from the Company a minimum amount of product
bearing the Digital brand name. The reseller agreement was
scheduled to expire on June 30, 2001. On June 11, 1998, Digital
was acquired by Compaq Computer Corporation (“Compaq”).
On May 25, 1999, Compaq entered into an OEM agreement with the
Company pursuant to which Compaq committed to purchase from the
Company a minimum amount of networking product bearing the Compaq
brand name as well as product bearing the Digital brand name. The
OEM agreement contained, among other things, a pricing rebate that
compensated the Company for Compaq purchase shortfalls. The OEM
agreement was scheduled to expire on June 30, 2001.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On September 20,
1999, Compaq and the Company agreed to terminate the OEM agreement
and enter into a new alliance agreement. Under the alliance
agreement, 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 expand the
relationship between the Company and Compaq’s professional
services organization and Cabletron will continue to resell, and
Compaq is expected to continue servicing, Digital branded
products. Further, Compaq is continuing as a reseller of
Cabletron-branded networking hardware and Cabletron’s
Spectrum network management software. In terminating the OEM
agreement, Compaq agreed to pay the Company approximately $85.0
million, in November 1999, as a final purchase of Compaq and
Digital branded products in the Company’s manufacturing
pipeline. As of February 29, 2000, all such product in the
pipeline was accepted by Compaq and recorded in sales by the
Company. $48.7 million was recorded in sales in the three months
ended February 29, 2000 and $36.3 million was recorded in sales
for the three months ended November 30, 1999 relating to such
product in the pipeline.
In
addition, Compaq paid the Company $25.0 million to eliminate
Compaq’s quarterly purchase commitments going forward. This
$25.0 million has been recorded in other income since the payment
is not refundable under any circumstances.
Additionally, as part of the transition from the OEM
agreement, Compaq has returned to the Company certain networking
product inventory, previously purchased and paid for, that can be
reworked and resold as Cabletron branded product. The Company has
no further obligation to compensate Compaq for this returned
product. The original cost, less estimated rework, of this
inventory is $12.2 million and has been recorded as other
income.
As part of
the alliance agreement, Compaq has agreed to continue to act as a
reseller of Cabletron hardware and software products over the next
two years; pursuant to this agreement, Compaq issued $34.0 million
of prepaid purchase orders for Company product of which $8.2
million has been shipped by February 29, 2000. The remaining $25.8
million has been recorded as deferred revenue as of February 29,
2000 and will be recorded in sales as Compaq accepts the product
over the next two-year period.
In
addition, the parties have agreed to pursue a strategic alliance
focused on Cabletron’s Spectrum network management software.
Compaq, in furtherance of this alliance, has committed to make a
$14.0 million equity investment in Cabletron’s recently
formed subsidiary, Aprisma, which markets Spectrum
products.
CABLETRON SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
(20) Quarterly Financial Data
(unaudited)
| |
|
Net
Sales
|
|
Gross
Profit
|
|
Income
(Loss) from
Operations
|
|
Net
Income
(Loss)
|
|
Net
Income
(Loss) Per
Share(a)
|
| |
|
(in
thousands, except per share amounts) |
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| First
Quarter |
|
$ 349,533 |
|
$136,918 |
|
$ (39,977 |
)(b) |
|
$ (22,525 |
)(b) |
|
$(0.13 |
) |
| Second
Quarter |
|
356,639 |
|
160,948 |
|
5,881 |
|
|
13,009 |
|
|
0.07 |
|
| Third
Quarter |
|
371,653 |
|
172,517 |
|
20,239 |
|
|
42,598 |
|
|
0.22 |
|
| Fourth
Quarter |
|
381,768 |
|
171,366 |
|
8,082 |
(c) |
|
431,189 |
(c) |
|
2.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year |
|
$1,459,593 |
|
$641,749 |
|
$ 6,374 |
|
|
$ 464,271 |
|
|
$ 2.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| First
Quarter |
|
$ 365,747 |
|
$149,635 |
|
$(161,360 |
)(d) |
|
$(154,569 |
)(d) |
|
$(0.95 |
) |
| Second
Quarter |
|
370,591 |
|
171,791 |
|
5,030 |
|
|
6,393 |
|
|
0.04 |
|
| Third
Quarter |
|
329,868 |
|
126,627 |
|
(113,027 |
)(e) |
|
(84,477 |
)(e) |
|
(0.50 |
) |
| Fourth
Quarter |
|
345,073 |
|
151,876 |
|
(22,259 |
)(f) |
|
(12,738 |
)(f) |
|
(0.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year |
|
$1,411,279 |
|
$599,929 |
|
$(291,616 |
) |
|
$(245,391 |
) |
|
$(1.47 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Due to
rounding some totals may not add.
|
The
following items were included in special charges, in the
corresponding fiscal quarter:
(b)
|
Includes
$23.7 million related to the restructuring initiative that was
announced in March 1999.
|
(c)
|
Includes
$2.6 million adjustment to decrease the aforementioned
restructuring initiative.
|
(d)
|
Includes
$150.0 million of in-process research and development charges
related to the acquisition of Yago.
|
(e)
|
Includes
$67.4 million of in-process research and development charges
related to the acquisitions of Ariel, FlowPoint and
NetVantage.
|
(f)
|
Includes
$17.6 million related to fixed asset loss for idle, obsolete and
discarded equipment.
|
INDEPENDENT AUDITORS’ REPORT
The Board
of Directors and Stockholders
Cabletron
Systems, Inc.:
We have
audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 29, 2000 and
February 28, 1999, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of
the years in the three-year period ended February 29, 2000. These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of Cabletron Systems, Inc. and subsidiaries as of February 29,
2000 and February 28, 1999, and the results of their operations
and their cash flows for each of the years in the three-year
period ended February 29, 2000, in conformity with generally
accepted accounting principles.
Boston,
Massachusetts
March 28,
2000, except for the last three paragraphs of Note 3, as to which
the date is May 23, 2000
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information
relating to the Directors of the Company is set forth in the
section entitled “Proposal 1: Election of Class II
Directors,” appearing in the Company’s Proxy Statement
for its 2000 Annual Meeting of Stockholders (“Proxy
Statement”), which is incorporated herein by reference.
Information relating to the executive officers of the Company is
included in the section titled “Executive Officers of the
Registrant,” appearing in Part I hereof. Information with
respect to directors and executive officers who failed to timely
file reports required by Section 16(a) of the Securities Exchange
Act of 1934 may be found in the Proxy Statement under the caption
“Section 16(a) Beneficial Ownership Reporting
Compliance.” Such information is incorporated herein by
reference.
ITEM
11. EXECUTIVE COMPENSATION
See the
information set forth in the section entitled “Executive
Compensation,” appearing in the Company’s Proxy
Statement for its 2000 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
See the
information set forth in the section entitled “Securities
Ownership of Certain Beneficial Owners and Management,”
appearing in the Company’s Proxy Statement for its 2000
Annual Meeting of Stockholders, which is incorporated herein by
reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
See the
information set forth in the section entitled “Certain
Transactions,” appearing in the Company’s Proxy
Statement for its 2000 Annual Meeting of Stockholders, which is
incorporated herein by reference.
PART
IV
ITEM
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 10-K
(a)
Documents filed as part of this report:
|
1. Consolidated financial statements (see
item 8)
|
|
The
consolidated financial statements of Cabletron Systems, Inc. can
be found in this document on the following pages:
|
| |
|
page(s)
|
| Independent Auditors’ Report |
|
66 |
| Consolidated Balance Sheets at February 29, 2000 and
February 28, 1999 |
|
41 |
| Consolidated Statements of Operations for fiscal years
2000, 1999 and 1998 |
|
42 |
| Consolidated Statements of Stockholders’ Equity for
fiscal years 2000, 1999 and 1998 |
|
43 |
| Consolidated Statements of Cash Flows for fiscal years
2000, 1999 and 1998 |
|
44 |
| Notes to
Consolidated Financial Statements |
|
45-65 |
|
2. Consolidated financial statement
schedule
|
|
The
consolidated financial statement schedule of Cabletron Systems,
Inc. is included in Part IV of this report:
|
| |
|
page(s)
|
| Independent Auditors’ Report |
|
66 |
| Schedule
II—Valuation and Qualifying Accounts |
|
70 |
|
All other
schedules have been omitted since they are not required, not
applicable or the information has been included in the
consolidated financial statements or the notes
thereto.
|
|
The
following exhibits unless herein filed are incorporated by
reference.
|
| 3.6 |
|
Amended
and Restated By-Laws of Cabletron Systems, Inc. |
| 10.25 |
|
Promissory Note with Piyush Patel |
| 10.26 |
|
Promissory Note with Earle S. Humphreys |
| 10.27 |
|
Promissory Note with Enrique P. (Henry) Fiallo |
| 10.28 |
|
Promissory Note with Enrique P. (Henry) Fiallo |
| 22.1 |
|
Subsidiaries of Cabletron Systems, Inc. |
| 23.1 |
|
Consent
of Independent Auditors |
| 27 |
|
Financial
Data Schedule |
(b)
The Company filed one report on Form 8-K during the
last quarter of the fiscal year ended February 29, 2000. On
January 14, 2000, the Company announced that it had entered into
Agreement and Plan of Merger and Reorganization with Efficient
Networks, Inc., a Delaware corporation (“Efficient”),
Fire Acquisition Corporation, a California corporation and
wholly-owned subsidiary of Efficient, and FlowPoint Corporation, a
California corporation and wholly-owned subsidiary of the Company,
pursuant to which, on December 17, 1999, FlowPoint merged with and
into Merger Sub and became a wholly-owned subsidiary of
Efficient.
INDEPENDENT AUDITORS’ REPORT
The Board
of Directors and Stockholders
Cabletron
Systems, Inc.:
Under date
of March 28, 2000, except for the last three paragraphs of Note 3,
as to which the date is May 23, 2000, we reported on the
consolidated balance sheets of Cabletron Systems, Inc. and
subsidiaries as of February 29, 2000 and February 28, 1999, and
the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years in
the three-year period ended February 29, 2000. In connection with
our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated
financial statement schedule as listed in item 14(a)2 of this Form
10-K. This consolidated financial statement schedule is the
responsibility of the Company’s management. Our
responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.
In our
opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Boston,
Massachusetts
March 28,
2000
CABLETRON SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For
Years Ended February 29, 2000, February 28, 1999 and
1998
(in
thousands)
Description
|
|
Balance at
beginning
of period
|
|
Charged to
expense
|
|
Amounts
attributable
to changes in
foreign
currency rates
|
|
Amounts
written off
|
|
Balance
at end
of period
|
| Allowance
for doubtful accounts |
|
February 29, 2000 |
|
$23,260 |
|
$17,650 |
|
$— |
|
|
$(19,226 |
) |
|
$21,684 |
|
February 28, 1999 |
|
$21,043 |
|
$10,784 |
|
$— |
|
|
$ (8,567 |
) |
|
$23,260 |
|
February 28, 1998 |
|
$15,476 |
|
$11,615 |
|
$(81 |
) |
|
$ (5,967 |
) |
|
$21,043 |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CABLETRON
SYSTEMS
, INC
.
|
|
Chairman, President and Chief Executive
Officer
|
May 30,
2000
Date
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
Signature
|
|
Titles
|
|
Date
|
|
|
/S
/ PIYUSH
PATEL
Piyush Patel |
|
Chairman, President and Chief
Executive Officer |
|
May 30,
2000 |
|
|
/S
/ DAVID
J. KIRKPATRICK
David J. Kirkpatrick |
|
Corporate Executive Vice
President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
|
May 30,
2000 |
|
|
/S
/ MICHAEL
D. MYEROW
Michael D. Myerow |
|
Secretary and Director |
|
May 30,
2000 |
|
|
/S
/ PAUL
R. DUNCAN
Paul
R. Duncan |
|
Director |
|
May 30,
2000 |
|
|
/S
/ DONALD
F. MC
GUINNESS
Donald F. McGuinness |
|
Director |
|
May 30,
2000 |
EXHIBIT INDEX
Exhibit No.
|
|
Exhibit Description
|
| 3.1 |
|
Restated Certificate of Incorporation of Cabletron
Systems, Inc., a Delaware corporation,
which is incorporated by reference to Exhibit 3.1 of the
Company’s Registration
Statement on Form S-1, No. 33-28055, (the First Form
S-1). |
|
|
| 3.2 |
|
Certificate of Correction of the Company’s
Restated Certificate of Incorporation, which is
incorporated by reference to Exhibit 3.1.2 of the Company’s
Registration Statement on
Form S-1, No. 33-42534 (the Third Form S-1). |
|
|
| 3.3 |
|
Certificate of Amendment of the Restated Certificate of
Incorporation of Cabletron
Systems, Inc., incorporated by reference to Exhibit 4.3 of the
Company’s Registration
Statement on Form S-3, No. 33-54466, (the First Form
S-3). |
|
|
| 3.5 |
|
Certificate of Amendment of the Restated Certificate of
Incorporation of Cabletron
Systems, Inc. filed with the Secretary of State of the State of
Delaware on July 7, 1995 |
|
|
| 3.6 |
|
Amended
and Restated By-laws of Cabletron Systems, Inc. |
|
|
| 4.1 |
|
Specimen stock certificate of Cabletron Stock
(incorporated by reference to Exhibit 4.1 of
Cabletron’s Registration Statement on Form S-1, No.
33-28055. |
|
|
| 10.1 |
|
1989
Restricted Stock Purchase Plan, which is incorporated by
reference to Exhibit 10.1
of the First Form S-1. |
|
|
| 10.2 |
|
1989
Restricted Stock Plan, which is incorporated by reference to
Exhibit 10.2 of the First
Form S-1. |
|
|
| 10.3 |
|
1989
Equity Incentive Plan, as amended, which is incorporated by
reference to Exhibit 4
of the Company’s Registration Statement on Form S-8, No.
33-50454. |
|
|
|
| 10.5 |
|
1989
Stock Option Plan for Directors, as amended, which is
incorporated by reference to
Exhibit 10.5 of the Third Form S-1. |
|
|
| 10.6 |
|
1998
Equity Incentive Plan, which is incorporated by reference to
Exhibit 4.1 of the
Company’s Form S-8 filed on July 29, 1999. |
|
|
| 10.7 |
|
Agency
Agreement between the Registrant and International Cable
Networks Inc., which
is incorporated by reference to Exhibit 10.6 of the First Form
S-1. |
|
|
| 10.8 |
|
Lease
dated October 19, 1992 between the Registrant and Heidelberg
Harris, Inc., relating
to leased premises in Durham, New Hampshire, which is
incorporated by reference to
Exhibit 10.9 of the First Form S-3. |
|
|
|
| 10.17 |
|
Amendment No. One to Reseller Agreement dated as of
February 7, 1998 by and between
the Registrant and Digital (Incorporated by Reference to Exhibit
10.2 of the Registrant’s
Form 8-K/A of March 4, 1998). |
|
|
| 10.19 |
|
Employment Agreement with Piyush Patel, which is
incorporated by reference to Exhibit
10.19 of the Form 10-Q filed on July 15, 1999. |
|
|
| 10.20 |
|
Employment Agreement with Romulus Pereira, which is
incorporated by reference to
Exhibit 10.20 of the Form 10-Q filed on July 15,
1999. |
|
|
| 10.21 |
|
Change-in-control severance benefit plan for key
employees, which is incorporated by
reference to Exhibit 10.21 of the Form 10-Q filed on October 15,
1999. |
Exhibit No.
|
|
Exhibit Description
|
|
|
| 10.22 |
|
Standstill and Disposition Agreement, dated as of
December 17, 1999, between Efficient
Networks, Inc. and the Company, which is incorporated by
reference to Exhibit 2.4 of
the Company’s Current Report on Form 8-K, No.
001-10228. |
|
|
|
|
| 10.23 |
|
Manufacturing Services Agreement (the “Flextronics
Agreement”), dated as of February
29, 2000, between the Company and Flextronics International USA,
Inc. |
|
|
|
|
| 10.24 |
|
Agreement by Cabletron Systems, Inc. to Furnish Copies
of Omitted Schedules and
Exhibits to the Flextronics Agreement. |
|
|
|
|
| 10.25 |
|
Promissory Note with Piyush Patel. |
|
|
|
|
| 10.26 |
|
Promissory Note with Earl S. Humphreys. |
|
|
|
|
| 10.27 |
|
Promissory Note with Enrique P. (Henry)
Fiallo. |
|
|
|
|
| 10.28 |
|
Promissory Note with Enrique P. (Henry)
Fiallo. |
|
|
|
|
| 22.1 |
|
Subsidiaries of Cabletron Systems,
Inc.
|
|
|
|
|
| 23.1 |
|
Consent
of Independent
Auditors
|
|
|
|
|
| 27 |
|
Financial Data Schedule |
|
|
DIRECTORS AND OFFICERS
Board of Directors
Piyush
Patel
Chairman
of the Board, President
and Chief
Executive Officer
Craig
R. Benson
Director
Paul
R. Duncan
Executive
Vice President
Reebok
International, Ltd.
Donald
F. McGuinness
Chairman
of the Board
Electronic Designs, Inc.
Michael D. Myerow
Partner
in law firm of Myerow & Poirier
Officers
Thomas
D. Bunce
Executive
Vice President, Product Development
Enrique P. Fiallo
President
of Enterasys Networks and former Senior Vice President and Chief
Information Officer
Thomas
N. Gleason
Executive
Vice President, North American/South American Sales
Earle
S. Humphreys
President
of GlobalNetwork Technology Services and former Executive
Vice President, Global Services
Eric
Jaeger
Executive
Vice President of Corporate Affairs
David
J. Kirkpatrick
Corporate
Executive Vice President of Finance and Chief Financial
Officer
Piyush
Patel
Chief
Executive Officer and President
Romulus S. Pereira
President
of Riverstone Networks and former Chief Operating
Officer
John
J. Roese
Chief
Technology Officer
Joseph
H. Solari
President
of Europe, Middle East and Africa
Michael A. Skubisz
President
of Aprisma Management Technologies, Inc. and former Chief
Technology Officer
Gary
M. Workman
President
of Operations, Asia Pacific
STOCKHOLDER INFORMATION
Annual
Meeting of Stockholders
The
Annual Meeting of Stockholders will take place at 10:00 a.m. on
Tuesday, July 11, 2000 at the Frank Jones Center, 400 Route One
By-Pass, Portsmouth, NH 03801.
Stockholder Inquiries
Inquiries
relating to financial information of Cabletron Systems, Inc.
should be addressed to:
|
Telephone: (603) 337-2247
|
|
Facsimile: (603) 337-2654
|
Listing
Cabletron
Systems, Inc. common stock is traded on the New York Stock
Exchange—symbol CS.
Transfer Agent
State
Street Bank and Trust Company is the Transfer Agent and
Registrar of the Company’s common stock. Inquiries
regarding lost certificates, change of address, name or
ownership should be addressed to:
Independent Auditors
KPMG
LLP
99 High
Street
Boston,
MA 02110
Legal
Counsel
Ropes
& Gray
One
International Place
Boston,
MA 02110