ITEM 2. Properties
Cabletron owns and occupies a number of buildings in Rochester, New Hampshire, including a 206,000 square-foot manufacturing facility which also accommodates a portion of corporate engineering, buildings totaling 122,000 square-feet which accommodate sales, marketing, administration and technical support personnel, and a warehousing and distribution facility, totaling 221,000 square-feet. Cabletron owns a 114,000 square-foot engineering building in Merrimack, New Hampshire. Cabletron acquired two facilities (totaling 119,372 square-feet) in Acton, Massachusetts in connection with its acquisition of the NPB. Cabletron expects to move the DNPG personnel from Digital's Littleton, Massachusetts facility to a new Andover facility during the next four to six months.
Cabletron leases one manufacturing building totaling 120,000 square feet in Ironton, Ohio, a 120,000 square-foot manufacturing facility in Limerick, Ireland, and a 50,000 square-foot distribution center in Shannon, Ireland, to support its European sales activities. Cabletron also leases a 78,000 square-foot research and development facility in Durham, New Hampshire and a 48,000 square-foot engineering office in Nashua, New Hampshire. Cabletron also occupies facilities in Newington and Nashua, New Hampshire, Andover, Littleton and Framingham, Massachusetts, Ann Arbor, Michigan and Santa Clara, California. Cabletron also leases sales and technical support offices that range from 1,000 to 20,000 square feet at various locations throughout the world.
Cabletron believes that its facilities are adequate to support anticipated sales growth over the next 12 to 18 months. Such growth, however, will require additional production employees and capital equipment. Cabletron believes that adequate supplies of labor are available in the areas where Cabletron's manufacturing operations are located.
Financial information regarding leases and lease commitments are contained in Note 10 of "Notes to the Consolidated Financial Statements" included at page 31 of this document.
ITEM 3.
ITEM 3. Legal Proceedings
Since October 24, 1997, nine stockholder class action lawsuits have been filed against Cabletron and certain officers and directors of Cabletron in the United States District Court for the District of New Hampshire. The complaints allege that Cabletron and several of its officers and directors disseminated materially false and misleading information about Cabletron's operations and acted in violation of Section 10(b) and Rule 10b-5 of the Exchange Act during the period between March 3, 1997 and December 2, 1997. The complaints further allege that certain officers and directors profited from the dissemination of such misleading information by selling shares of Cabletron Common Stock during this period. The complaints do not specify the amount of damages sought on behalf of the class. On March 3, 1998, the United States District Court for the District of New Hampshire granted the motion to consolidate the nine class action complaints against Cabletron and its officers and directors into one class action. The legal costs incurred by Cabletron in defending itself and its officers and directors against this litigation, whether or not it prevails, could be substantial, and in the event that the plaintiffs prevail, Cabletron could be required to pay substantial damages. This litigation may be protracted and may result in a diversion of management and other resources of Cabletron. The payment of substantial legal costs or damages, or the diversion of management and other resources, could have a material adverse effect on Cabletron's business, financial condition or results of operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of the Company's security holders.
ITEM 4a. Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
Craig R. Benson 43 Chairman, President, Chief Executive Officer, Treasurer and Director
John d'Auguste 47 President of Operations
Christopher J. Oliver 37 Executive Vice President Worldwide Engineering and Chief Technology Officer
David J. Kirkpatrick 46 Corporate Executive Vice President of Finance and Chief Financial Officer
Allen L. Finch 37 Senior Vice President, Worldwide Marketing and Corporate Strategy
Guilio M. Gianturco 42 President, DNPG and Channels
Linda H. Pepin 45 Senior Vice President, Human Resources
Craig R. Benson was Director of Operations of Cabletron from November 1984 until April of 1989 and Chairman, Chief Operating Officer and Treasurer of Cabletron from April of 1989 until September 1, 1997. On March 30, 1998 Mr. Benson became President and Chief Executive Officer.
John d'Auguste joined Cabletron in December 1997 as the President of the Enterprise Business Unit and on March 30, 1998 became President of Operations. Before joining Cabletron, Mr. d'Auguste worked for Gateway 2000 as the Vice President of Direct Sales, having previously held the position of Vice President of Operations. Prior to Gateway 2000 he served as the Vice President of Product Business Unit for General Railway Signal.
Christopher J. Oliver has been Executive Vice President Worldwide Engineering and Chief Technology Officer since January 1998. He was Director of Engineering and Manufacturing of the Company from February 1985 until January 1998.
David J. Kirkpatrick has been Corporate Executive Vice President of Finance since March 1998. He has been Director of Finance and Chief Financial Officer of the Company from August 1990 until March 1998. From 1986 to 1990 he was the Vice President of Zenith Data Systems, a subsidiary of Zenith Electronics Corporation.
Allen L. Finch has been Senior Vice President of Worldwide Marketing and Corporate Strategy since March 1998. From June 1997 to March 1998 he was Director, Public Relations. From 1991 to 1997 he was a strategic and communications consultant in Washington, D.C.
Guilio M. Gianturco has been President of the Digital Network Products Group and Channels since February 1998. Prior to joining Cabletron he worked for the last fifteen years in various senior level positions in Digital and AT&T.
Linda H. Pepin has been Senior Vice President of Human Resources since March 1998. From 1989 to 1998 she was Director of Human Resources. Prior to joining Cabletron she has held various positions in personnel management.
Key Personnel
On September 1, 1997, S. Robert Levine resigned as President, Chief Executive Officer and director of Cabletron and Donald B. Reed was appointed to the positions of President, Chief Executive Officer and director of Cabletron. On the same date, Craig R. Benson resigned as Chief Operating Officer of Cabletron but remained as Treasurer and the Chairman of the Board of Directors of Cabletron. On March 30, 1998, Mr. Reed resigned as President, Chief Executive Officer, but remains a director of Cabletron and Mr. Benson assumed the role as President and Chief Executive Officer and continues as Treasurer and Chairman of the Board of Directors of Cabletron. The Company's success is dependent in large part on Mr. Benson and other key technical, sales and management personnel, the loss of one or more of whom would adversely affect Cabletron's business.
PART II
ITEM 5.
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 three fiscal years. As of February 28, 1998, the Company had approximately 3,604 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.
Fiscal 1998 High Low
First quarter $46.50 $27.50 Second quarter 46.13 27.88 Third quarter 36.25 22.94 Fourth quarter $23.50 $12.63
Fiscal 1997 High Low
First quarter $43.56 $31.63 Second quarter 36.06 26.50 Third quarter 41.50 27.56 Fourth quarter $42.50 $28.00
Fiscal 1996 High Low
First quarter $27.88 $19.44 Second quarter 29.81 24.31 Third quarter 43.88 26.00 Fourth quarter $41.63 $32.94
CABLETRON SYSTEMS, INC.
Note: 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 $235.2 million and $21.5 million, respectively (net of tax). Included in fiscal 1997 and fiscal 1996 results are $39.2 million and $60.8 million (net of tax) of special charges items related to all acquisitions for each fiscal year, respectively. Excluding these one-time charges, pro forma net income and diluted net income per share are as follows:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion provides an analysis of Cabletron's financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report on Form 10-K. The discussion below contains certain forward-looking statements relating to, among other things, estimates of economic and industry conditions, sales trends, expense levels and capital expenditures. Actual results may vary from those contained in such forward-looking statements. See "Business Environment and Risk Factors" below.
Results of Operations
This table sets forth Cabletron's net sales, cost of sales, expenses by category, income (loss) from operations, interest income, income (loss) before income taxes and net income (loss) expressed as percentages of net sales, for the fiscal years ended February 28, 1998 and 1997 and February 29, 1996:
1998 1997 1996 ----- ----- -----
Net sales ......................... 100.0% 100.0% 100.0% Cost of sales ..................... 46.9 40.9 40.8 ----- ----- ----- Gross profit ...................... 53.1 59.1 59.2 Research and development .......... 13.2 11.5 11.6 Selling, general and administrative 26.9 20.4 20.3 Special charges ................... 30.3 4.5 8.6 ----- ----- ----- Income (loss) from operations ..... (17.3) 22.7 18.7 Interest income ................... 1.3 1.4 1.6 ----- ----- ----- Income (loss) before income taxes . (16.0) 24.1 20.3 ----- ----- ----- Net income (loss) ................. (9.2%) 15.8% 13.1% ===== ===== =====
Acquisitions
During fiscal 1998 the Company acquired the Network Products Business (NPB) from Digital Equipment Corporation in February 1998. The NPB (now known as the DIGITAL Network Products Group, a Cabletron Systems, Inc. Company (the "DNPG")) develops and supplies a wide range of data networking hardware and software, including LAN and WAN products. The DNPG products span a wide range of networking technologies, including Ethernet, Fast Ethernet, FDDI and ATM switching technologies.
During fiscal 1997 the Company augmented its product line by acquiring: (1) ZeitNet Inc., a manufacturer of ATM products, in July 1996; (2) Network Express, Inc., a manufacturer of remote access equipment, in August 1996; (3) Netlink, Inc., a manufacturer of frame relay products, in December 1996; and (4) The OASys Group, Inc., a software developer, in February 1997.
During fiscal 1996 the Company acquired the Enterprise Networks Business Unit (ENBU) from Standard Microsystems Corporation in January 1996. The acquisition added a line of Fast Ethernet products, as well as switching products for token ring, Ethernet and FDDI.
Revenues
Net sales in fiscal 1998 decreased by 2.1% to $1,377.3 million from $1,406.6 million in fiscal 1997. The slight decrease in fiscal 1998 revenue compared to fiscal 1997 revenue was largely a result of a decrease in sales of the Company's shared media products (comprised primarily of the MMAC). Sales of the Company's shared media products decreased 56.6% to $317.6 million in fiscal 1998 compared to sales of $717.8 million in fiscal 1997. The decline in revenue of shared media products was a result of both declining unit shipments and lower prices per product. The Company expects the decrease in sales of its shared media products to continue in fiscal 1999 as customers continue the migration from shared media products to switched products. The decrease in sales of shared media products was offset somewhat by an increase in sales of the Company's switched products (comprised primarily of the SmartSwitch 9000, 6000 and 2200 products). Sales of switched products increased 129.4% to $686.7 million in fiscal 1998 compared to sales of $299.3 million in fiscal 1997. The increase in revenue of switched products was a result of increasing unit sales. Prices per product decreased slightly for switched products during fiscal 1998, but the increase in unit shipments offset this slight price decline.
Sales of diagnostic test instruments, installation and maintenance services, and other products were $379.1 million or 27.5% of total revenues in fiscal 1998, compared to $389.5 million or 27.7% of total revenues in fiscal 1997 and $354.4 million or 28.4% of net sales in fiscal 1996. As part of the Company's acquisition of the DNPG, the Company agreed to appoint Digital as the service provider for Cabletron products in certain smaller countries. This appointment may have the effect of limiting the growth of Cabletron's own service and support organization.
The Company acquired the DNPG on February 7, 1998 and thus the division contributed to the Company's fiscal 1998 revenues for less than one month. The Company expects the DNPG to contribute materially towards revenues in fiscal 1999.
The increase in revenue in fiscal 1997 compared to fiscal 1996 was primarily the result of increased sales of the SmartSwitch product lines. Sales of switched products increased 566.8% to $299.3 million in fiscal 1997 compared to sales of $44.9 million in fiscal 1996. This offset the decreased sales of shared media products. Sales of the Company's shared media products decreased 3.4% to $717.8 million in fiscal 1997 compared to sales of $742.7 million in fiscal 1996. Finally, increased sales of service and support products and services (as discussed above) contributed to the increase in overall revenue from fiscal 1997 compared to fiscal 1996.
Net sales outside the United States in fiscal 1998 were $454.1 million, or 33.0% of net sales, compared to $408.2 million or 29.0% of net sales in fiscal 1997 and $329.2 million or 29.9% of net sales in fiscal 1996. In addition to its direct international sales force, the Company sells its products through several international distributors. The increase in international revenue in fiscal 1998 compared to fiscal 1997 reflects the Company's focus on expansion in growth areas, such as Latin America. This increase was offset by weaker economic conditions in the Asia/Pacific region. The increase in international revenue in fiscal 1997 compared to fiscal 1996 was primarily due to the expansion and growth of the Latin American markets. The Company's international revenue is primarily denominated in U.S. dollars. The effect of foreign exchange rate fluctuations did not have a significant impact on the Company's operating results in the periods presented.
Costs, Expenses and Interest Income
Cost of sales was $645.8 million or 46.9% of net sales in fiscal 1998, compared to $575.1 million or 40.9% of net sales in fiscal 1997 and $448.7 million or 40.8% of net sales in fiscal 1996. The increase in cost of sales as a percentage of net sales is primarily to (i) presessures on the Company's products, especially in foreign markets which traditonally carried a higher margin, which resulted in a lower selling price per product and (ii) effects from inventory write-offs, which increase the cost of sales as a percentage of net sales. The Company was able to maintain its gross margins in fiscal 199 and 1996 by introducing and selling products with improved functionality, further developing its service maintenance program and improving purchasing and manufacturing efficiencies.
Research and development ("R&D") expenses in fiscal 1998 increased to $181.8 million or 13.2% of net sales, compared to $161.7 million or 11.5% of net sales in fiscal 1997. In fiscal 1996, R&D expenses were $127.3 million or 11.6% of net sales. The increased R&D spending in fiscal 1998 reflected the Company's ongoing research and development efforts, including the further development of the SMARTSwitch family of products, SPECTRUM management software as well as the increase in the hiring of additional software and hardware engineers and associated costs related to development of new products. R&D spending increased as a percentage of net sales in fiscal 1998 compared to fiscal 1997 primarily because net sales were lower than the Company expected in fiscal 1998. The Company plans to continue to increase R&D spending in absolute dollars in order to develop new products on a timely basis. The level of increase in R&D spending may slow, depending on the growth in total revenues, if necessary to reduce R&D spending as a percentage of net sales more towards the percentage levels in fiscal 1997 and fiscal 1996.
Selling, general and administrative ("SG&A") expenses were $371.2 million or 26.9% of net sales in fiscal 1998, compared to $286.5 million or 20.4% of net sales in fiscal 1997 and $223.1 million or 20.3% of net sales in fiscal 1996. Increases in SG&A spending resulted from expanding the sales and support workforce, establishing additional office locations domestically and internationally, the addition of administrative personnel as a result of acquisitions and increased administrative spending primarily due to anticipated increases in volume. SG&A expenses increased as a percentage of net sales in fiscal 1998 primarily as a result of lower than expected sales.
In fiscal 1998 the Company had special charges of $417.7 million, consisting of (i) in process research and development of $325 million ($200.0 million net of tax) in connection with the acquisition of the DNPG, (ii) one-time acquisition related expenses of $57.7 million ($35.5 million net of tax) in connection with the acquisition of the DNPG, and (iii) charges relating to the Company's realignment of $35.0 million ($21.5 million net of tax).For fiscal 1997 a $63.0 million special charge was taken for the acquisitions of ZeitNet, Network Express, Netlink and The OASys Group. In fiscal 1996 a $94.3 million special charge was taken for the purchase of the ENBU of SMC and Fivemere Limited (purchased by Network Express in fiscal 1996).
Interest income in fiscal 1998 was $18.5 million compared to $19.4 million in fiscal 1997 and $17.9 million in fiscal 1996. The slight decrease is primarily the result of lower interest rates in fiscal 1998 than in fiscal 1997.
Realignment
The Company announced on December 16, 1997 a global initiative to better align the Company's business strategy with its focus in the enterprise and service provider markets. The realignment is intended to better position the Company to provide more solutions-oriented products and service; to increase its distribution of products through third-party distributors and resellers; to improve its position internationally, and to aggressively develop partnership and acquisition opportunities. The Company incurred a pre-tax charge in the fourth quarter of fiscal 1998 of $35.0 million ($21.5 million net of tax) related to the realignment. The realignment included general expense reduction through the reallocation of resources, including the elimination of certain existing projects, personnel reduction, the eilimination of duplicate facilities and the consolidation of related operations. Included in accrued liabilities at February 28, 1998 is $4.8 million relating to severence costs associated with 350 eliminated positions. The Company has completed most of these reductions. The expense reductions associated with the realignment are intended to yield approximately $40 million in total annualized savings, beginning in the fourth quarter of fiscal 1998.
Income (Loss)
Loss before income taxes was $220.5 million or 6.0% of net sales in fiscal 1998, compared to income before income taxes of $339.7 million or 24.1% of net sales in fiscal 1997 and $224.8 million or 20.3% of net sales in fiscal 1996. In fiscal 1998 the Company had special charges of $417.7 million, compared to $63.0 million in fiscal 1997 and $94.3 million in fiscal 1996. The decrease in income before income taxes in fiscal 1998 was due in part to the increase of $354.7 million in special charges. The increase in income before income taxes in fiscal 1997 was due in part to the $31.3 million decrease in these special charges. Excluding special charges, income before income taxes was $197.2 million in fiscal 1998, $402.7 million in fiscal 1997 and $319.2 million in fiscal 1996. In addition to the special charges, the decrease in income before income taxes in fiscal 1998 was also due to lower revenues and the higher cost of sales. The factors affecting revenues and cost of sales are discussed above. The tax (benefit) rate for fiscal 1998 was (42.4%) compared to a tax rate of 34.6% in fiscal 1997. The decrease was because the Company had a loss before income taxes. during the year. Loss after taxes was $127.1 million compared to income after taxes of $222.1 million in fiscal 1997.
Liquidity and Capital Resources
Accounts receivable, net of allowance for doubtful accounts, were $241.2 million at February 28, 1998 or 78 days of sales outstanding, compared to $219.9 million or 52 days of sales outstanding in accounts receivable at February 28, 1997. This increase in receivables reflects timing on shipments and collections. These trends are expected to continue for the intermediate term.
The Company has historically maintained higher levels of inventory than its competitors in the networking industry in order to implement its policy of shipping most orders requiring immediate delivery within 24 to 48 hours. Worldwide inventories were $309.7 million at February 28, 1998 or 157 days of inventory, compared to $197.4 million or 109 days of inventory at the end of the preceding fiscal year. The increase of days in inventory was the result of lower sales and the introduction of a new product line, the SmartSwitch family of products.
Net cash provided by operating activities was $49.5 million in fiscal 1998, compared to $188.8 million in fiscal 1997 and $81.1 million in fiscal 1996. The decrease was primarily a result of higher accounts receivable and inventory. In the Company's acquisition of the DNPG, part of the purchase price was paid in $302.5 million of product credits which Digital can use through February 7, 2000 to purchase certain Cabletron products that are ordered under the Reseller Agreement. As a result of these products credits, net cash provided by operating activities will not increase at the same rate of growth as net sales through February 7, 2000. The use of products credits by Digital will not affect the Company's income statement because the Company will recognize revenue as Digital uses product credits. See Note 9 (Notes to the Consolidated Financial Statements) included at page 30 of this document for additional details regarding the product credits.
During fiscal 1998 capital expenditures were $74.2 million, which included $34.9 million in software and hardware products. Capital expenditures for fiscal 1997 of $94.4 million included $58.9 million for engineering computer hardware and software and $3.3 million for leasehold improvements. During fiscal 1996, $67.8 million of capital expenditures included $9.8 million for building costs of which $3.4 million was for the purchase of an engineering building, $21.4 million for engineering computer hardware and software, $5.5 million for manufacturing and related equipment and $19.0 million for expanding global sales operations.
Cash, cash equivalents, marketable securities and long-term investments decreased during fiscal 1998 to $447.3 million, from $568.3 million in the prior fiscal year. This decrease in fiscal 1998 reflects the cash used in the acquisition of DNPG. State and local municipal bonds and bond funds of approximately $373.2 million, maturing in three years or less, were being held by the Company at February 28, 1998.
On March 7, 1997 the Company obtained a $250 million revolving credit facility with Chase Manhattan Bank, First National Bank of Chicago and several other lenders. The facility has a term of three years but the Company has the option to extend the facility for an additional two years. As of February 28, 1998 the Company had not drawn down any money under the facility.
In the opinion of management, internally generated funds from operations and existing cash, cash equivalents and marketable securities will be adequate to support the Company's working capital and capital expenditure requirements for both short and long term needs.
Business Environment and Risk Factors
THE FOLLOWING ARE CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company may occasionally make forward-looking statements and estimates such as forecasts and projections of the Company's future performance or statements of management's plans and objectives. These forward-looking statements may be contained in, among other things, SEC filings and press releases made by the Company and in oral statements made by the officers of the Company. Actual results could differ materially from those in such forward-looking statements. Therefore, no assurances can be given that the results in such forward-looking statements will be achieved. Important factors that could cause the Company's actual results to differ from those contained in such forward-looking statements include, among others, the factors mentioned below.
Competition. The data networking industry is intensely competitive and subject to increasing consolidation. Competition in the data networking industry has increased in recent periods, and Cabletron expects competition to continue to increase significantly in the future from its current competitors, as well as from potential competitors that may enter Cabletron's existing or future markets. Cabletron's competitors include many large domestic and foreign companies, as well as emerging companies attempting to sell products to specialized markets such as those addressed by Cabletron. Cabletron's primary competitors in the data networking industry are Cisco Systems, Inc., Bay Networks, Inc. and 3Com Corporation. Several large telecommunications equipment companies, including Lucent Technologies, Inc., Nokia Corp. and Northern Telecom Ltd, have begun to compete in the data networking industry and have recently made investments in or acquired several smaller data networking companies. Companies in the data networking industry compete upon the basis of price, technology, and brand recognition. Increased competition could result in price reductions, reduced margins and loss of market share, any or all of which could materially and adversely affect Cabletron's business, financial condition, and operating results and increase fluctuations in operating results. Competitors may introduce new or enhanced products that offer greater performance or functionality than Cabletron's products. There can be no assurance that Cabletron will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products or that Cabletron will be able to respond effectively to technological changes, new standards or product announcements by competitors. Any failure to do so may have a material adverse effect on Cabletron's business, financial condition and results of operations. As the data networking industry has grown and matured, customers purchasing decisions have been increasingly influenced by brand recognition. If Cabletron is unable to develop competitive brand recognition, Cabletron's business may be adversely affected.
Cabletron's current and potential competitors have pursued and are continuing to pursue a strategy of acquiring data networking companies possessing advanced networking technologies. The acquisition of these companies allows Cabletron's competitors to offer new products without the lengthy time delays associated with internal product development. As a consequence, competitors are able to more quickly meet the demand for advanced networking capabilities, as well as for so-called "end-to-end" networking solutions. These acquisitions also permit potential competitors, such as telecommunications companies, who lack data networking products and technologies, to more quickly enter data networking markets. The greater resources of the competitors engaged in these acquisitions may permit them to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases. There is significant competition among Cabletron and its competitors for the acquisition of data networking companies possessing advanced technologies. As a consequence of this competition, as well as other factors, the prices paid to acquire such companies is typically extremely high relative to the assets and sales of such companies. The greater resources of Cabletron's current and potential competitors will enable them to compete more effectively for the acquisition of such companies. In addition to acquiring other companies, Cabletron's competitors frequently invest in early-stage data networking companies in order to secure access to advanced technologies under development by such companies, to enhance the ability to subsequently acquire such companies and to deter other competitors from obtaining such access or performing such acquisitions. Cabletron expects that competition will increase substantially as a result of the continuing industry consolidations.
In the past, Cabletron has relied upon a combination of internal product development and partnerships with other networking vendors to broaden its product line to meet the demand for "end-to-end" enterprise-wide solutions. Acquisitions of or investments in other data networking companies by Cabletron's competitors may limit Cabletron's access to commercially significant technologies, and thus its ability to offer products that meet its customers needs.
In addition to the effects of competition, Cabletron's margins may also decrease as a result of a shift in product mix toward lower margin products, increased sales through lower margin reseller sales channels, increased component costs and increased expenses, including increased research and development and sales, general and administrative costs, which may be necessary in future periods to meet the demands of greater competition. For example, as a result of the acquisition of the NPB, Cabletron expects a higher percentage of its sales to be made through resellers, which may have the effect of reducing Cabletron's margin on those sales, as well as, to a lesser extent, Cabletron's overall margins. Margins in any given period may be adversely affected by additional factors. See "Business Environment and Risk Factors--Fluctuations in Operating Results."
Fluctuations in Operating Results. A variety of factors may cause period-to-period fluctuations in the operating results of Cabletron. Such factors include, but are not limited to: (i) the rate of growth of the markets for Cabletron's products, (ii) competitive pressures, including pricing, brand and technological competition, (iii) availability of components, including unique integrated circuits, (iv) adverse effects of delays in the establishment of industry standards, including delays or reductions in customer orders, delays in new product introductions and increased expenses associated with standards compliance, (v) delays by Cabletron in the introduction of new or enhanced products, (vi) changes in product mix, (vii) delays or reductions in customer purchases in anticipation of the introduction of new products by Cabletron or its competitors and (viii) instability of the international markets in which Cabletron sells its products. For example, Cabletron has been experiencing decreased sales for its older line of so-called "shared media" products. The period-to-period rate of decrease has been greater in certain periods than in others and has been difficult to predict. Backlog as of any particular date is not indicative of future revenue due, in part, to the possibility of order cancellations, customer requested delivery delays, shifting purchasing patterns and inventory level variability. In particular, Cabletron has been experiencing longer sales cycles for its core products as a result of the increasing dollar amount of customer orders and longer customer planning cycles. Also, in the recent past, Cabletron has experienced backend loading of its quarterly sales, making the predictability of the quarterly results highly speculative. These factors, together with increased competition, have led to an increase in sales variability and a decrease in Cabletron's ability to predict aggregate sales demand for any given period. These factors have increased the possibility that the operating results for a quarter could be materially adversely affected by the failure to obtain or delays in obtaining a limited number of large customer orders, due, for example, to cancellations, delays or deferrals by customers. Cabletron plans to continue to invest in research and development, sales and marketing and technical support staff in anticipation of future revenue growth. If growth in Cabletron's revenues in any quarter fails to match Cabletron's expense levels, its earnings and margins would be materially adversely affected. In the fourth quarter of fiscal 1998, the three month period ended February 28, 1998, a shortfall in orders resulted in a substantial decline in Cabletron's earnings from the fourth quarter of fiscal 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." There can be no assurance that net sales will not decrease in future quarters. Any decrease in net sales could have a material adverse affect on Cabletron's business, financial condition and results of operations. As expenses are relatively fixed in the near term, Cabletron may not be able to adjust expense levels to match any shortfall in revenues. As the industry becomes more competitive and standards-based, Cabletron is facing greater price competition from its competitors. If Cabletron does not respond with lower production costs, pricing pressures could adversely affect future earnings. Accordingly, past results may not be indicative of future results. There can be no assurance that the announcement or introduction of new products by Cabletron or its competitors, or a change in industry standards, will not cause customers to defer or cancel purchases of Cabletron's existing products, which could have a material adverse effect on Cabletron's business, financial condition or results of operations. The market for Cabletron's products is evolving. The rate of growth of the market and the resulting demand for Cabletron's recently introduced products is subject to a high level of uncertainty. If the market fails to grow or grows more slowly than anticipated, Cabletron's business, financial condition or results of operations would be materially adversely affected.
Realignment. Cabletron has announced that it is seeking to better align its business strategy with its target markets. The company has incurred a pre-tax charge in the fourth quarter of fiscal 1998 of $35.0 million ($21.5 million, after-tax) related to the realignment. The realignment includes general expense reductions through the elimination of duplicate facilities, consolidation of related operations, reallocation of resources, including the elimination of certain existing projects, and personnel reduction. Cabletron may encounter difficulties in achieving the expense reductions intended as a result of the realignment due to, among other factors, additional costs associated with, for example, relocations and employee severance, the need to maintain certain essential, but underutilized, facilities, and delays in implementing planned reductions. Any such difficulties in achieving expense reductions may result in a failure to realize the full amount of the annualized cost savings which is
intended to be achieved through the realignment. Any such additional costs may result in charges related to Cabletron's realignment in future quarters.
In addition to the realignment, Cabletron has defined and is currently implementing a new management structure. The new management structure includes the creation of certain new senior officer positions and the realignment of certain management structures. The implementation of the new management structures, the realignment referred to above and Cabletron's recent acquisitions have required the dedication of the Company's existing management resources, which has resulted in a temporary disruption of Cabletron's business activities. There can be no assurance that such disruption will not continue in future quarters. Any such disruption could have a material adverse effect on Cabletron's business, operating results or financial condition. Over time, the loss of the personnel, facilities and other resources eliminated through the expense reductions may adversely impact Cabletron's ability to generate expected revenue levels.
Acquisition Strategy. Cabletron has addressed the need to develop new products, in part, through the acquisition of other companies and businesses. Acquisitions, such as the acquisition of the NPB from Digital and the acquisition of Yago, involve numerous risks including difficulties in assimilating the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which competitors have established market positions, and the potential loss of key employees of the acquired company. Achieving the anticipated benefits of an acquisition will depend in part upon whether the integration of the companies' businesses is accomplished in an efficient and effective manner, and there can be no assurance that this will occur. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. The combination of such companies will require, among other things, integration of the companies' respective product offerings and coordination of their sales and marketing and research and development efforts. There can be no assurance that such integration will be accomplished smoothly or successfully. The difficulties of such integration may be exacerbated by the necessity of coordinating geographically separated organizations. The efforts required to successfully integrate acquired companies require the dedication of management resources that may temporarily distract attention from the day-to-day business of Cabletron. The inability of management to successfully integrate the operations of acquired companies could have a material adverse effect on the business and results of operations of Cabletron. The acquisition of early stage companies, such as Yago, poses risks in addition to those identified above. Such companies often have limited operating histories, limited or no prior sales, and may not yet have achieved profitability. In addition, the technologies possessed by such companies are often unproven. The development and marketing of products based upon such technologies may require the investment of substantial time and resources and, despite such investment, may not result in commercially saleable products or may not yield revenues sufficient to justify Cabletron's investment. Further, aggressive competitors often undertake initiatives to attract customers and to recruit key employees of acquired companies through various incentives. In addition to DNPG and Yago, Cabletron has stated that it will continue to explore other possible acquisitions in the future. Multiple acquisitions during a period increases the risks identified above, including in particular the difficulty of integrating the acquired businesses and the distraction of management from the day-to-day business activities of Cabletron.
Cabletron has recently acquired several product lines previously marketed by Digital's NPB pursuant to Cabletron's acquisition of the NPB. Cabletron's sales of the NPB products are subject to numerous risks. Cabletron's success will be dependent upon its continued development of products that are compatible with and meet the needs of the NPB's installed base of end-user customers, many of whom have made a substantial investment in existing Digital's NPB network infrastructure. Substantially all of the NPB's revenues have historically been derived from sales by Digital's worldwide sales force and certain major third party resellers. Under Digital, the NPB had no direct sales force to end users (Digital's direct sales force resides in an independent business unit), and Cabletron is not acquiring any portion of Digital's sales force. Under the Reseller and Services Agreement dated as of November 24, 1997 between Cabletron and Digital, Digital has agreed to resell certain Cabletron products, including the NPB products, and has contractually committed to purchase certain minimum volumes of Cabletron products for resale and internal use. Based on historical revenues of Cabletron, it is expected that Digital will account for substantially in excess of ten percent (10%) of Cabletron's revenues for fiscal 1999. Any failure by Digital to purchase the committed product volumes would have a material adverse impact on Cabletron's business, results of operations and financial condition. In addition, a substantial portion of the NPB's revenues have historically been derived from sales through third party resellers. Cabletron has traditionally derived a smaller portion of its revenues from sales through resellers and, as a consequence, has less experience managing reseller relationships. There can be no assurance that the NPB's resellers will continue to purchase the NPB products from Cabletron or, if they do, that the volume of such purchases will not decline significantly. The products to be sold by Cabletron through Digital's sales force and the NPB's resellers, including the NPB products and certain Cabletron products, may be sold under the Digital brand name and, in many cases, will be specifically adapted for use in existing Digital hardware platforms. Cabletron has limited experience managing the marketing and distribution of a line of products under a brand name or for hardware platforms other than its own. There exists no alternative market for such products. A higher than expected rate of return from resellers, the Company's failure to adequately manage the marketing and distribution of such products, or the loss of material resellers or a material decline in sales volume through the NPB resellers, could have a material adverse effect on Cabletron's business, results of operations or financial condition.
Volatility of Stock Price. As is frequently the case with the stocks of high technology companies, the market price of Cabletron's stock has been, and may continue to be, volatile. Factors such as quarterly fluctuations in results of operations, increased competition, the introduction of new products by Cabletron or its competitors, expenses or other difficulties associated with assimilating the NPB, the business of Yago and other companies or businesses that have been or may in the future be acquired by Cabletron, changes in the mix of sales channels, the timing of significant customer orders (the average dollar amount of customer orders has increased in recent periods), and macroeconomic conditions generally, may have a significant impact on the market price of the stock of Cabletron. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market price for many high-technology companies and which, on occasion, have appeared to be unrelated to the operating performance of such companies. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant adverse effect on the market price of Cabletron's stock in any given period.
Technological Changes. The market for networking products is subject to rapid technological change, evolving industry standards and frequent new product introductions, and therefore requires a high level of expenditures for research and development. Cabletron may be required to make significant expenditures to develop such new integrated product offerings. There can be no assurance that customer demand for products integrating routing, switching, hub, network management and remote access technologies will grow at the rate expected by Cabletron, that Cabletron will be successful in developing, manufacturing and marketing new products or product enhancements that respond to these customer demands or to evolving industry standards and technological change, that Cabletron will not experience difficulties that could delay or prevent the successful development, introduction, manufacture and marketing of these products (especially in light of the increasing design and manufacturing complexities associated with the integration of technologies), or that its new product and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Cabletron's business, operating results and financial condition may be materially and adversely affected if Cabletron encounters delays in developing or introducing new products or product enhancements or if such product enhancements do not gain market acceptance. In order to maintain a competitive position, Cabletron must also continue to enhance its existing products and there is no assurance that it will be able to do so. In addition, the demand for traditional "shared media" hubs such as Cabletron's basic MMAC product have been experiencing declines over the last few years, and there can be no assurance that such decline will not accelerate. A portion of future revenues will come from new products and services. Cabletron cannot determine the ultimate effect that new products will have on its revenues, earnings or stock price.
Product Protection and Intellectual Property. Cabletron's success depends in part on its proprietary technology. Cabletron attempts to protect its proprietary technology through patents, copyrights, trademarks, trade secrets and license agreements. Cabletron believes, however, that its success will depend to a greater extent upon innovation, technological expertise and distribution strength. There can be no assurance that the steps taken by Cabletron in this regard will be adequate to prevent misappropriation of its technology or that Cabletron's competitors will not independently develop technologies that are substantially equivalent or superior to Cabletron's technology. In addition, the laws of some foreign countries do not protect Cabletron's proprietary rights to the same extent as do the laws of the United States. No assurance can be given that any patents issued to Cabletron will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages.
Although Cabletron does not believe that its products infringe the proprietary rights of any third parties, third parties have asserted infringement and other claims against Cabletron, and there can be no assurance that such claims will not be successful or that third parties will not assert such claims against Cabletron in the future. Patents have been granted recently on fundamental technologies incorporated in Cabletron's products. Since patent applications in the United States are not publicly disclosed until the patent issues, applications may have been filed by third parties which, if issued as patents, could relate to Cabletron's products. In addition, participants in Cabletron's industry also rely upon trade secret law. Cabletron could incur substantial costs and diversion of management resources with respect to the defense of any claims relating to proprietary rights which could have a material adverse effect on Cabletron's business, financial condition and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief which could effectively block Cabletron's ability to license its products in the United States or abroad. Such a judgment could have a material adverse effect on Cabletron's business, financial condition and results of operations.
Dependence on Suppliers. Cabletron's products include certain components, including application specific integrated circuits ("ASICs"), that are currently available from single or limited sources, some of which require long order lead times. In addition, certain of Cabletron's products and sub-assemblies are manufactured by single source third parties. With the increasing technological sophistication of new products and the associated design and manufacturing complexities, Cabletron anticipates that it may need to rely on additional single source or limited suppliers for components or manufacture of products and subassemblies. Any reduction in supply, interruption or extended delay in timely supply, variances in actual needs from forecasts for long order lead time components, or change in costs of components could affect Cabletron's ability to deliver its products in a timely and cost-effective manner and may adversely impact Cabletron's operating results and supplier relationships. The NPB products will initially be manufactured by Digital and a third-party contract manufacturer, SCI Technologies, Inc. The failure of either party to continue to manufacture the NPB products or to deliver the NPB products in time for Cabletron to meet its delivery requirements could have a material adverse effect on Cabletron's business, financial condition and results of operations.
Year 2000-compliance. Historically, certain computer programs have been written using two digits rather than four digits to define year. This could result in computers recognizing a date using "00" as the year 1900 rather than the year 2000, resulting in potential major system failures or miscalculations.
To address the above-mentioned Year 2000 issues and concerns, Cabletron has established a "Year 2000 Task Force" to lead and coordinate all of its global Year 2000 activities. This task force is accountable to provide the necessary leadership, tools and knowledge required by all operating units to become Year 2000 compliant. The task force is currently testing all hardware, firmware and software developed and sold by the Company for Year 2000 Compliance in accordance with Cabletron's Year 2000 Policy Statement.
In addition, the Year 2000 Task Force is conducting a global assessment of Cabletron's essential computer systems and is making reasonable efforts to ensure that Cabletron's information technology infrastructure will not be adversely affected by the turn of the century.
Currently, Cabletron has no reasonable estimate of the amount of out-of-pocket costs which may be incurred to address Year 2000 issues for our products and internal infrastructure. At this time, the company cannot reasonably estimate the potential impact on its financial position and operations if key suppliers, customers and other constituents do not become Year 2000-compliant on a timely basis.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement 130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Under this concept, certain revenues, expenses, gains and losses recognized during the period are included in comprehensive income, regardless of whether they are considered to be results of operations of the period. SFAS 130, which becomes effective for the Company in its fiscal year ending February 28, 1999, is not expected to have a material impact on the consolidated financial statements of the Company. The only additional item to be included in comprehensive income is the Company's cumulative translation adjustment.
In June 1997, the Financial Accounting Standards Board issued Statement 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement, becomes effective for the Company in its fiscal year ending February 28, 1999. The Company is in the process of determining the impact of SFAS 131 on its footnote disclosures.
In February 1998, the Company adopted the Financial Accounting Standards Board Statement No. 128, "Earnings per Share," (SFAS 128). All previously reported net income (loss) per share data have been restated to conform to the provisions of SFAS 128. Under SFAS 128, basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares or the period. Diluted net income (loss) per reflect the maximum diluted that would have resulted from the assumed exercise and share repurchased related to dilutive stock options and are computed by dividing net income (loss) by the weighted average number of common shares and all dilutive securities outstanding.
In fiscal 1998, the Company adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. Under SOP 98-1, certain payroll and related costs for Company employees working on the application of development stage projects as defined in the SOP for internal use computer software must be capitalized and amortized over the expected useful life of the software. This is substantially consistent with the Company's previous treatment, and accordingly, the adoption of SOP 98-1 did not have a material impact on the Company's results of operations in fiscal 1998.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK MANAGEMENT
As the Company's international sales grow as a percentage of total sales, exposure to volatility in exchange rates could have a material impact on the Company's financial results.
The Company uses foreign currency forward and option contracts to manage the risk of exchange fluctuations. The Company uses these derivative instruments to reduce its exchange risk by essentially creating offsetting market exposures. The instruments are not held for trading or speculative purposes.
Based on the Company's overall currency rate exposure at February 28, 1998 including derivative and other foreign currency sensitive instruments, a near-term change in currency rates based on historic currency rate movements, would not materially affect the consolidated financial position, results of operations, or cash flows of the Company.
The success of the hedging program depends on forecasts of transaction activity in various currencies. To the extent that these forecasts of are over or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses.
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities of various issuers, types and maturities. The securities that are classified as held to maturity are recorded on the balance sheet at amortized cost. A portion of the investments are classified as available for sale. These instruments are not held for purposes of trading. The securities are recorded at amortized cost which approximates market value. Unrealized gains or losses associated with these securities are not material. Due to the average maturity and conservative nature of the investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS February 28, 1998 and 1997 (in thousands, except per share amounts)
Assets 1998 1997 ---------- ----------
Current assets: Cash and cash equivalents ......................... $ 207,078 $ 214,828 Short-term investments (note 4) ................... 116,979 165,396 Accounts receivable, net of allowance for doubtful accounts ($21,043 and $15,476 in 1998 and 1997, respectively) ......................... 241,181 219,896 Inventories (note 5) .............................. 309,667 197,438 Deferred income taxes (note 11) ................... 81,161 57,107 Prepaid expenses and other assets ................. 78,084 34,691 ---------- ---------- Total current assets ......................... 1,034,150 889,356 ---------- ---------- Long-term investments (note 4) ....................... 123,272 188,081 Long-term deferred income taxes (note 11) ............ 167,308 29,627 Property, plant and equipment, net (note 6) .......... 244,730 198,557 Intangible assets, net (note7) ....................... 36,867 1,234 ---------- ---------- Total assets ................................. $1,606,327 $1,306,855 ========== ==========
Liabilities and Stockholders' Equity
Current liabilities: Accounts payable .................................. $ 79,969 $ 68,604 Current portion of long-term obligation (note 9) .. 157,719 --- Accrued expenses (note 8) ......................... 235,062 135,208 Income taxes payable .............................. --- 10,442 ---------- ---------- Total current liabilities .................... 472,750 214,254 Long-term obligation (note 9) ..................... 132,500 --- Long-term deferred income taxes (note 11) ......... 12,057 11,103 ---------- ---------- Total liabilities ............................ 617,307 225,357 ---------- ----------
Commitments and contingencies (notes 10, 12 and 13)
Stockholders' equity (note 14): Preferred stock, $1.00 par value. Authorized 2,000 shares; none issued --- --- Common stock, $0.01 par value. Authorized 240,000 shares; issued and outstanding 158,267 and 156,305 shares in 1998 and 1997, respectively 1,583 1,563 Additional paid-in capital ........................ 300,834 266,829 Retained earnings ................................. 685,823 812,885 ---------- ---------- 988,240 1,081,277 Cumulative translation adjustment ................. 780 221 ---------- ---------- Total stockholders' equity ................... 989,020 1,081,498 ---------- ---------- Total liabilities and stockholders' equity ... $1,606,327 $1,306,855 ========== ==========
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended February 28, 1998 and 1997 and February 29, 1996 (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended February 28, 1998 and 1997 and February 29, 1996
See accompanying notes to consolidated financial statements.
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended February 28, 1998 and 1997 and February 29, 1996 (in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note (1) Business Operations
The Company develops, manufactures, markets, designs, installs and supports a broad range of standards-based local and wide area network connectivity hardware and software products.
Note (2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Cabletron Systems, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Investments
Held-to-maturity securities are those investments which the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for amortization of premiums and discounts, which approximates market value. Available-for-sale securities are also recorded at amortized cost, adjusted for amortization of premiums and discounts. Due to the nature of the Company's investments and the resulting low volatility, the difference between fair value and amortized cost is not material.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are determined at standard which approximates the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lives of the related assets or the term of the lease. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the carrying amount of an asset cannot be fully recovered, an impairment loss is recognized.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company has reinvested earnings of its foreign subsidiaries and, therefore, has not provided income taxes which could result from the remittance of such earnings. The unremitted earnings at February 28, 1998 amounted to approximately $152.2 million. Furthermore, any taxes paid to foreign governments on those earnings may be used, in whole for in part, as credits against the US tax on any dividends distributed from such earnings. It is not practicable to estimate the amount unrecognized deferred US taxes on these undistributed earnings.
(f) Net Income (Loss) Per Share
In February 1998, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," (FAS 128). All previously reported earnings per share information presented has been restated to reflect the impact of adopting FAS 128.
Under SFAS 128, basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share reflect the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the weighted average number of common shares and all dilutive securities outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reconciliation of the denominators of the basic and diluted net income (loss) per common share computations for the Company's reported net income (loss) is as follows:
1998 1997 1996 ---- ---- ---- Weighted average number of shares outstanding - basic 157,686 157,207 151,525
Incremental shares from the assumed exercise of stock options --- 3,726 3,646 -------- -------- --------
Weighted average number of shares outstanding - diluted 157,686 158,933 155,171 ======== ======== ========
(g) Foreign Currency Translation and Transaction Gains and Losses
The Company's international revenues are denominated in either U.S. dollars or local currencies. For those international subsidiaries which use their local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. Where the U.S. dollar is the functional currency, amounts are recorded at the exchange rates in effect at the time of the transaction, any resulting translation adjustments, which were not material, are recorded in income.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less.
(i) Revenue Recognition
Sales are recognized upon shipment of products and software. In the case of design, consulting, installation, support services and evaluations, revenues are recognized upon completion and acceptance of such products and services. Revenues from service contracts are recognized ratably over the period the services are performed. Warranty costs and sales returns and allowances are accrued at the time of shipment.
(j) Derivatives
The Company utilizes derivative financial instruments to reduce financial market risks. These instruments are used to hedge foreign currency exposures of underlying assets, liabilities and other obligations. The Company does not use derivative financial instruments for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. Gains and losses on currency forward contracts and options are recognized in income as incurred. Gains on option contracts are recognized in income when the contract matures, is terminated or is sold.
(k) Reclassifications
Prior year financial statements have been reclassified to conform to the 1998 presentation.
(l) Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(m) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement 130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Under this concept, certain revenues, expenses, gains and losses recognized during the period are included in comprehensive income, regardless of whether they are considered to be results of operations of the period. SFAS 130, which becomes effective for the Company in its fiscal year ending February 28, 1999, is not expected to have a material impact on the consolidated financial statements of the Company. The only additional item to be included in comprehensive income is the Company's cumulative translation adjustment.
In June 1997, the Financial Accounting Standards Board issued Statement 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement, becomes effective for the Company in its fiscal year ending February 28, 1999. The Company is in the process of determining the impact of SFAS 131 on its footnote disclosures.
In fiscal 1998, the Company adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. Under SOP 98-1, certain payroll and related costs for Company employees working on the application of development stage projects as defined in the SOP for internal use computer software must be capitalized and amortized over the expected useful life of the software. This is substantially consistent with the Company's previous treatment, and accordingly, the adoption of SOP 98-1 did not have a material impact on the Company's results of operations in fiscal 1998.
Note (3) Business Combinations
For acquisitions accounted for under the pooling-of-interests method, all financial data of Cabletron has been restated to include the historical financial data of these acquired companies. For acquisitions accounted for as purchases, Cabletron's consolidated results of operations include the operating results of the acquired companies from their acquisition dates. Acquired assets and liabilities were recorded at their estimated fair market values at the acquisition date and the aggregate purchase price plus costs directly attributable to the completion of acquisitions has been allocated to the assets and liabilities acquired.
On July 26, 1996, the Company acquired ZeitNet Inc., a privately held manufacturer of ATM products. Under the terms of the agreement, Cabletron issued approximately 3.3 million shares of common stock for all of the outstanding shares (and all shares issuable upon exercise of options) of ZeitNet in a transaction accounted for as a pooling of interests. In connection with the acquisition, the Company recorded special charges of $23.0 million.
On August 1, 1996, the Company acquired Network Express, Inc., a publicly held manufacturer of ISDN LAN switched access solutions. Under the terms of the agreement, Cabletron issued approximately 2.9 million shares of common stock for all of the outstanding shares (and all shares issuable upon exercise of options) of Network Express in a transaction accounted for as a pooling of interests. In connection with the acquisition, the Company recorded special charges of $20.0 million.
On December 11, 1996, the Company acquired Netlink Inc., a privately held manufacturer of frame relay products. Under the terms of the agreement, Cabletron issued approximately 3.8 million shares of common stock for all of the outstanding shares (and all shares issuable upon exercise of options) of Netlink in a transaction accounted for as a pooling of interests. In connection with the acquisition, the Company recorded special charges of $13.0 million.
On January 12, 1996, the Company acquired the Enterprise Networks Business Unit (ENBU) from Standard Microsystems Corporation. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values at the date of the acquisition. The cash portion of the purchase price was $74.6 million. In connection, with the acquisition, the Company recorded special charges of $85.7 million, consisting of the write-off of $67.8 million of in-process research and development and $17.9 million of other special charges which included adjustments to conform the ENBU accounting policies with the Company's accounting policies. The Company's consolidated results of operations include the operating results of the acquired business from its acquisition date. Pro forma financial information is not presented as it is not material to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (3) Business Combinations (continued)
On February 7, 1997, the Company acquired The OASys Group, Inc., a privately held developer of software targeted at managing telecommunications devices and connections used in high-speed, fiber-optic networks. Cabletron issued approximately 226,000 shares of common stock for all of the outstanding shares (and all shares issuable upon exercise of options) of OASys in a transaction accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values at the date of acquisition. The total purchase price of $7.0 million included $6.7 million for in-process research and development and $0.3 million for special charges which included adjustments to conform the OASys accounting policies with the Company's accounting policies. The Company's consolidated results of operations include the operating results of the acquired business from its acquisition date. Pro forma financial information is not presented as it is not material to the consolidated financial statements.
On February 7, 1998, the Company acquired certain assets of the Network Products Group of Digital Equipment Corporation. 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. In connection with the acquisition, the Company recorded special charges of $382.7 million ($325.0 million for in-process research and development and $57.7 million for integration costs). The Company's consolidated results of operations include the operating results of the acquired business from its acquisition date. The following unaudited pro forma combined results of operations for fiscal 1998 and fiscal 1997 have been prepared by combining the operational results of the two separate business units for these entire years. Accordingly, the special expenses totaling $382.7 million are not included in the results as these are unusual and not indicative of normal operating results. The following unaudited pro forma financial information is not necessarily indicative of results of operations that would have occurred had the transaction taken place at the beginning each fiscal year or of the future results of the combined companies.
(in thousands) 1998 1997 ---- ----
Net Sales $1,859,715 $2,004,586 Operating income 199,916 344,696
The purchase price has been allocated to assets acquired and liabilities assumed based on fair market value at the date of acquisition. The purchase price is summarized as follows:
Cash paid for acquisition $129,107 Product credits granted 302,500 Discount on product credits (11,691) Accrued acquisition costs 19,581 -------- Purchase price $439,497 ========
The following are supplemental disclosures of noncash transactions in connection with the DNPG acquisition.
Fair value of assets acquired $126,188 In-process research and development 325,000 Accrued acquisition costs (19,581) Product credits (302,500) -------- Cash portion of acquisition $129,107 ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (4) Investments
Investments are summarized as follows at February 28, 1998 and 1997:
(in thousands) 1998 1997 ---------------------------- ---------------------------- Long Long Current Term Total Current Term Total -------- -------- ------- -------- -------- --------
Held-to-maturity $ 57,506 $ 14,896 $ 72,402 $ 84,261 $115,209 $199,470 Available-for-sale 59,473 108,376 167,849 81,135 72,872 154,007 -------- -------- -------- -------- -------- -------- Total $116,979 $123,272 $240,251 $165,396 $188,081 $353,477 ======== ======== ======== ======== ======== ========
The contractual maturities for the above securities are less than three years.
Note (5) Inventories
Inventories consist of the following at February 28, 1998 and 1997:
(in thousands) 1998 1997 ---- ----
Raw materials $105,099 $ 64,685 Work-in-process 34,247 57,070 Finished goods 170,321 75,683 -------- -------- Total $309,667 $197,438 ======== ========
Note (6) Property, Plant and Equipment
Property, plant and equipment consist of the following at February 28, 1998 and 1997: Estimated useful (in thousands) 1998 1997 lives ---- ---- ----------------
Land and land improvements $ 3,093 $ 1,751 15 years Buildings and building improvements 61,699 38,015 30-40 years Construction in progress 236 305 --- Equipment 357,216 284,621 3-5 years Furniture and fixtures 18,261 11,711 5-7 years Leasehold improvements 15,030 9,448 3-5 years Motor vehicles 4,751 4,690 3-5 years
-------- -------- 460,286 350,541 Less accumulated depreciation and amortization 215,556 151,984 -------- -------- $244,730 $198,557 ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (7) Intangible Assets
Intangible assets consist of the following at February 28, 1998 and 1997.
Estimated (in thousands) 1998 1997 Useful Lives ---- ---- ------------
Goodwill $ 6,060 $1,439 7 - 10 years Assembled work force acquired in business acquisition 6,500 --- 7 - 10 years Patents and technologies acquired in business acquisition 25,000 --- 3 - 5 years ------- ------ 37,560 1,439 Less accumulated amortization 693 205 ------- ------ $36,867 $1,234 ======= ======
Note (8) Accrued Expenses
Accrued expenses consist of the following at February 28, 1998 and 1997:
(in thousands) 1998 1997 ---- ----
Salaries and benefits $ 25,152 $ 15,527 Deferred revenue 74,414 50,041 Warranty 18,669 19,315 Other 116,827 50,325 --------- -------- Total $235,062 $135,208 ======== ========
Note (9) Long-Term Obligation
Long-term obligation consists of the following at February 28, 1998:
(in thousands)
Unused product credits $290,219 less current portion (157,719) -------- Long-term obligation $132,500 ========
As a term of the Asset Purchase Agreement between the Company and Digital Equipment Corp., Digital received product credits of $302.5 million. These product credits may be used by Digital to purchase products that are ordered under the Reseller Agreement. First year product credits, of $170 million, may be used during the period beginning on the closing date (February 7, 1998) and ending on the first anniversary of the closing date (February 7, 1999). A total of $12.3 million of the first year product credits were used from closing date of the acquisition to the end of the fiscal year. The remaining $157.7 million must be used before February 7, 1999. Any first year product credits not expended in accordance with the preceding shall automatically expire and be of no further force or effect. Second year product credits of $132.5 million, may be used during the period beginning on the first anniversary of the closing date (February 7, 1999) and ending on the second anniversary of the closing date (February 7, 2000) requesting delivery at any time until thirty days after the end of the second year. Any second year product credits not expended shall automatically expire and be of no further force or effect immediately following the end of the second year.
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 $14,568,000, $12,179,000 and $10,265,000 for the years ended February 28, 1998 and 1997 and February 29, 1996, respectively.
Total future minimum lease payments under all noncancelable operating leases as of February 28, 1998, are as follows:
(in thousands) Year
1999 $ 8,108 2000 5,163 2001 3,538 2002 2,720 2003 1,853 Thereafter 7,825 ------- $29,207 =======
Note (11) Income Taxes
Income (loss) before income taxes is summarized as follows:
(in thousands) 1998 1997 1996 ---- ---- ----
Total US domestic income (loss) ($186,612) $313,017 $173,515 Total foreign subsidiaries income (loss) (33,891) 26,683 51,311 -------- -------- -------- Total income (loss) before income taxes ($220,503) $339,700 $224,826 ======== ======== ========
Tax expense (benefit) is summarized as follows:
Currently payable: Federal $ 55,782 $117,546 $92,109 State 10,689 21,962 20,807 Foreign 956 1,000 11,519 Deferred tax benefit (160,868) (22,933) (44,094) -------- -------- ------- Tax expense (benefit) ($ 93,441) $117,575 $80,341 ======== ======== =======
The following is a reconciliation of the effective tax rates to the statutory federal tax rate:
1998 1997 1996 ---- ---- ----
Statutory federal income tax rate (35.0%) 35.0% 35.0% State income tax, net of federal tax benefit (3.7) 3.6 3.8 Exempt income of foreign sales corporation, net of tax (1.2) (0.7) (1.1) Research and experimentation credit (1.9) (0.7) --- Foreign operations 4.4 (2.7) (1.6) Other (5.0) 0.1 (0.4) ----- ----- ----- (42.4%) 34.6% 35.7% ===== ===== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (11) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at February 28, 1998 and 1997 are presented below:
(in thousands) 1998 1997 ---- ---- Deferred tax assets: Accounts receivable $ 6,166 $ 4,996 Inventories 37,415 33,859 Property, plant and equipment 200 --- Other reserves and accruals 34,382 24,149 Acquired research and development 165,292 29,262 Domestic net operating loss carryforwards 27,213 27,213 Foreign net operating loss carryforwards 23,715 5,636 -------- -------- Total gross deferred tax assets 294,383 125,115 Less valuation allowance (45,914) (38,381) -------- -------- Net deferred tax assets 248,469 86,734 -------- -------- Deferred tax liabilities: Property, plant and equipment (12,057) (11,103) -------- -------- Total gross deferred liabilities (12,057) (11,103) -------- -------- Net deferred tax assets $236,412 $75,631 ======== ========
At February 28, 1998, the Company had domestic net operating loss (NOL) carryforwards for tax purposes of $63,775,000 and tax credit carryforwards of $1,219,000 expiring in fiscal 1999 through fiscal 2010. The NOL and credit carryforwards were acquired in the acquisitions of ZeitNet Inc., Network Express, Inc., Netlink, Inc. and The OASys Group, Inc. Approximately $28,200,000 of the above stated NOL amount is subject to a 382 limitation due to a prior ownership change and it is management's estimation that $24,800,000 will expire unused.
The net change in the total valuation allowance for the year ended February 28, 1998 was an increase of $7,533,000. The net change in total valuation allowance for the year ended February 28, 1997 was an increase of $4,619,000. In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at February 28, 1998.
Note (12) Financial Instruments and Concentration of Credit Risk
The Company uses derivative financial instruments, principally forward exchange contracts and options, in its management of foreign currency exposures arising from its international operations. These contracts primarily require the Company to purchase or sell certain foreign currencies either with or for US dollars at contractual rates. The Company's foreign currency hedging activities are used to minimize adverse foreign exchange movements on the eventual dollar net cash inflows of its foreign denominated net assets. The Company does not hold or issue derivative financial instruments for trading purposes.
At February 28, 1998 and 1997, the Company had forward exchange contracts and purchased option contracts, all having maturities less than two years, in the contractual amount of $43 million (forward contracts $14 million and option contracts $29 million) and $69 million (forward contracts $31 million and option contracts $38 million), respectively.
The estimated fair value of the Company's option and forward contracts reflects the estimated amounts the Company would receive or pay to terminate the contracts at the reporting dates, thereby taking into account the current unrealized gains and losses on open contracts. These contracts did not have a material fair value at February 28, 1998 and 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (12) Financial Instruments and Concentration of Credit Risk (continued)
Several major international financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and limit the amount of exposure with any one institution. The Company may be exposed to credit loss in the event of nonperformance by the counterparties to these contracts, but believes that the risk of such loss is remote and that it would not be material to its financial position and results of operations.
The carrying amounts of cash, cash equivalents, short-term investments, trade receivables, and current liabilities approximate fair value because of the short maturity of these financial instruments. Other assets include investments in other companies which are carried at the lower of cost or net realizable value.
For the year ended February 28, 1998, no single customer represented more than 4% of net sales. However, sales to the federal government accounted for approximately 13% of net sales for the year ended February 28, 1998. For fiscal 1997 and fiscal 1996 no single customer represented more than 3% and 4% net of sales,respectively. Net sales to the federal government in fiscal 1997 and fiscal 1996 accounted for approximately 12% and 15% net of sales, respectively.
Note (13) Legal Proceedings
Since October 24, 1997, nine stockholder class action lawsuits have been filed against Cabletron and certain officers and directors of Cabletron in the United States District Court for the District of New Hampshire. The complaints allege that Cabletron and several of its officers and directors disseminated materially false and misleading information about Cabletron's operations and acted in violation of the Exchange Act during the period between March 3, 1997 and December 2, 1997. The complaints do not specify the amount of damages sought on behalf of the class. On March 3, 1998, the United States District Court for the District of New Hampshire granted the motion to consolidate the nine class action complaints against Cabletron and its officers and directors into one class action. Currently the Company does not have any estimate of the amount of damages or legal costs or damages (if any) that could be incurred in connection with this case. Note (14) Stock Plans
(a) Equity Incentive and Directors Plans
The Company has an Equity Incentive Plan which provides for the availability of 25,000,000 shares of common stock for the granting of a variety of incentive awards to eligible employees. As of February 28, 1998, the Company had issued 23,363,254 stock options under the Equity Incentive Plan, which were granted at fair market value at the date of grant, vest over a three to five year period and expire within six to ten years from the date of grant.
The Company has a Directors Option Plan which provides for the availability of 1,250,000 shares of common stock for purchase by nonemployee directors of the Company. The Directors Option Plan provides for issuance of options at their fair market value on the date of grant. The options vest over a period of three years and expire six years from the date of grant. A total of 376,000 stock options are outstanding under the Directors Option Plan at February 28, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (14) Stock Plans (continued)
A summary of option transactions under the two plans follows:
Weighted-Average Shares Exercise Price ---------- ---------------- Options outstanding at February 28, 1995 7,857,226 $15.71 ----------- Granted and assumed 3,898,312 25.61 Exercised (1,453,402) 11.13 Cancelled (464,210) 21.97 ----------- Options outstanding at February 29, 1996 9,837,926 20.02 ----------- Granted and assumed 6,619,763 29.67 Exercised (1,345,415) 12.50 Cancelled (1,516,856) 24.59 ----------- Options outstanding at February 28, 1997 13,595,418 20.02 ----------- Granted and assumed 5,015,000 23.11 Exercised (1,751,391) 10.40 Cancelled (1,979,936) 29.45 ----------- Options outstanding at February 28, 1998 14,879,091 $25.45 =========== Options exercisable at February 28, 1998 4,134,623 $22.99 ===========
The following table summarizes information concerning currently outstanding and exercisable options as of February 28, 1998:
Weighted- average Weighted- Weighted- remaining average average Range of Options contractual exercise Options exercise exercise prices Outstanding life(years) price exercisable price --------------- ----------- ------------- -------- ----------- --------- $0.00 - 6.30 282,555 4.5 $ 2.32 230,563 $ 2.50 6.30 - 12.61 582,424 3.8 9.52 580,754 9.51 12.601 - 18.91 1,827,992 9.6 14.71 30,886 17.97 18.91 - 25.22 2,473,212 5.6 22.51 1,539,323 22.40 25.22 - 31.52 8,703,164 8.2 29.09 1,616,135 30.58 31.52 - 37.82 577,660 8.9 32.99 35,590 34.04 37.82 - 44.13 406,320 8.1 40.43 91,240 40.40 44.13 - 50.43 25,764 7.8 45.93 10,132 46.06 ---------- --- ------ --------- ------ 14,879,091 7.7 $25.45 4,134,623 $22.99 ========== === ====== ========= ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (14) Stock Plans (continued)
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option and employee stock purchase plans, accordingly, no compensation expense has been recognized in the consolidated financial statements for such plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS 123, "Accounting for Stock-based Compensation," the Company's net income (loss) would have been reduced (increased) to the pro forma amounts indicated below:
(in thousands) 1998 1997 1996 ---- ---- ----
Net income (loss) As reported ($127,062) 222,125 $144,485 Pro forma ($152,684) 207,109 $121,302
The effect of applying SFAS 123 as shown in the above pro forma disclosure is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal 1996.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions used for grants in fiscal 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ----
Risk-free interest rates 6.13% 6.18% 6.18% Expected option lives 3.8 years 3.7 years 3.7 years Expected volatility 60.37% 63.97% 63.97% Expected dividend yields 6.06% 6.42% 6.42%
In February 1998, employees holding outstanding stock options with a value exceeding $14.6875 per option were given the right to have their stock options canceled and repriced to $14.6875 per option. The repriced options will vest over a period of one to five years from December 4, 1997. At February 28, 1998, the Company had not received sufficient responses from the option holders to reasonably estimate the number of options that will be canceled and repriced.
(b) Employee Stock Purchase Plans
The Company has two Employee Stock Purchase Plans (ESPP) which provide for the combined availability of 4,500,000 shares of common stock to be purchased by employees who have completed a minimum period of employment. Under the 1989 ESPP, employees must be continuously employed for a period of six months and under the 1995 ESPP employees must be continuously employed for a period of two years. Under these plans, options are granted to eligible employees twice yearly and are exercisable through the accumulation of employee payroll deductions from two to ten percent of employee compensation as defined in the plan, to a maximum of $4,068 annually, for each plan, (adjusted to reflect increases in the consumer price index) which may be used to purchase stock at 85 percent of the fair market value of the common stock at the beginning or end of the option period, whichever amount is lower. In fiscal 1998, 231,326 shares were purchased at a weighted average price of $27.00 (197,262 at $31.47 and 153,768 at $21.43, for fiscal 1997 and fiscal 1996, respectively). The remaining balance of both ESPPs for purchase by employees at February 28, 1998 was 3,381,743 shares.
Note (15) Realignment
On December 16, 1997 the Company announced a global initiative to better align the Company's business strategy with its focus in the enterprise and service provider markets. The realignment is intended to better position the Company to provide more solutions-oriented products and service; to increase its distribution of products through third-party distributors and resellers; to improve its position internationally, and to aggressively develop partnership and acquisition opportunities. The Company incurred a charge in the fourth quarter of fiscal 1998 of $35.0 million ($21.5 million, net of tax) related to the realignment. The realignment included general expense reduction through the elimination of duplicate facilities, consolidation of related operations, reallocation of resources, including the elimination of certain existing projects, and personnel reduction. The Company has completed most of these reductions. Accrued liabilities at February 28, 1998 includes $4.8 million relating to severence costs associated with 350 eliminated positions. The expense reductions associated with the realignment are intended to yield approximately $40 million in total annualized savings, beginning the fourth quarter of fiscal 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (16) Geographic Area Information (in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note (17) Quarterly Financial Data (unaudited)
(in thousands, except per share amounts)
(a) Due to rounding some totals will not add. (b) Includes $417.7 million special charge related to the acquisition of Digitial's Network Products Group and the strategic alignment plan, $382.7 million and $35.0 million, respectively. (c) Includes $43.0 million special charge related to the acquisitions of ZeitNet and Network Express. (d) Includes $20.0 million special charge related to the acquisitions of Netlink and OASys. (d) Includes $20.0 million special charge related to the acquisitions of Netlink and OASys.
Note (18) Subsequent Event
On March 17, 1998 the Company acquired Yago Systems, Inc. ("Yago"), a privately held manufacturer of wire speed routing and layer-4 switching products and solutions. Under the terms of the merger agreement, the Company issued 6.1 million shares of Cabletron common stock to the former shareholders of Yago in exchange for all of the outstanding shares of stock of Yago not then owned by the Company. In addition, the Company assumed stock options for approximately 2.1 million shares of its common stock. Prior to the closing of the acquisition, Cabletron held approximately twenty-five percent of Yago's capital stock. The Company also agreed, pursuant to the terms of the merger agreement, to issue up to 5.5 million shares of Cabletron common stock to the former shareholders of Yago in the event the shares originally issued in the transaction do not attain a market value of $35 per share eighteen months after the closing of the transaction.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Cabletron Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended February 28, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts March 23, 1998
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Information relating to the Directors of the Company is set forth in the section entitled "Election of Directors," appearing in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders ("Proxy Statement"), which is incorporated herein by reference. Information relating to the executive officers of the Company is included in Item 4a, "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.
ITEM 11. Executive Compensation
See the information set forth in the section entitled "Executive Compensation," appearing in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
See the information set forth in the section entitled "Election of Directors - Beneficial Ownership," appearing in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 13.
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 1998 Annual Meeting of Stockholders, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
(a) Documents filed as part of this report:
1. Consolidated financial statements (see item 8)
The consolidated financial statements of Cabletron Systems, Inc. can be found in this document on the following pages:
page(s)
Independent Auditors' Report 38
Consolidated Balance Sheets at February 28, 1998 and February 28, 1997 21
Consolidated Statements of Operations for fiscal years 1998, 1997 and 1996 22 Consolidated Statements of Stockholders' Equity for fiscal years 1998, 1997 and 1996 23
Consolidated Statements of Cash Flows for fiscal years 1998, 1997 and 1996 24 Notes to Consolidated Financial Statements 25-37
2. Consolidated financial statement schedule
The consolidated financial statement schedule of Cabletron Systems, Inc. is included in Part IV of this report:
Independent Auditors' Report 38
Schedule II - Valuation and Qualifying Accounts 44
All other schedules have been omitted since they are not required, not applicable or the information has been included in the consolidated financial statements or the notes thereto.
3. Exhibits
The following exhibits unless herein filed are incorporated by reference.
3.1 Restated Certificate of Incorporation of Cabletron Systems, Inc., a Delaware corporation, which is incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, No.33-28055, (the First Form S-1). 3.2 Certificate of Correction of the Company's Restated Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1.2 of the Company's Registration Statement on Form S-1, No. 33-42534 (the Third Form S-1). 3.3 Certificate of Amendment of the Restated Certificate of Incorporation of Cabletron Systems, Inc., incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on For S-3, No. 33-54466, (the First Form S-3). 3.4 Amended bylaws of Cabletron Systems, Inc., which is incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on the Third Form S-1. 4.1 Specimen stock certificate of Cabletron Stock (incorporated by reference to Exhibit 4.1 of Cabletron's Registration Statement on Form S-1, No.33-28055. 10.1 1989 Restricted Stock Purchase Plan, which is incorporated by reference to Exhibit 10.1 of the First Form S-1. 10.2 1989 Restricted Stock Plan, which is incorporated by reference to Exhibit 10.2 of the First Form S-1. 10.3 1989 Equity Incentive Plan, as amended, which is incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-8, No. 33-50454. 10.4 1989 Employee Stock Purchase Plan, as amended, which is incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8, No. 33-31572. 10.5 1989 Stock Option Plan for Directors, as amended, which is incorporated by reference to Exhibit 10.5 of the Third Form S-1. 10.6 Agency Agreement between the Registrant and International Cable Networks Inc., which is incorporated by reference to Exhibit 10.6 of the First Form S-1. 10.7 Modification dated October 1990, of the Blue, Inc. Lease, relating to leased premises in Ironton, Ohio, which is incorporated by reference to Exhibit 10.8 of the First Form S-3. 10.8 Lease dated October 19, 1992 between the Registrant and Heidelberg Harris, Inc., relating to leased premises in Durham, New Hampshire, which is incorporated by reference to Exhibit 10.9 of the First Form S-3. 10.9 Lease dated December 1, 1991 between the Registrant and George L. Beattie, Ruth V. Blomstedt and Dan A. Wooley, as trustees of the Execpark Realty Trust, relating to leased premises in Merrimack, New Hampshire, which is incorporated by reference to Exhibit 10.10 of the First Form S-3. 10.10 Lease dated July 3, 1992 between the Registrant and Shannon Free Airport Development Company Limited, relating to leased premises in Limerick, Ireland, which is incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on the First Form S-3. 10.11 Lease dated July 15, 1996 between the Registrant and the Lawrence County Economic Development Corporation, relating to leased premises in Ironton, Ohio (Incorporated by Reference to Exhibit 10.11 of the Registrant's Form 10-K of May 30, 1997). 10.12 Credit Agreement dated March 7, 1997, between the Registrant and the Chase Manhattan Bank, as administrative agent, the First National Bank of Chicago, as syndication agent and certain other lenders relating to the Company's $250,000,000 revolving credit facility (Incorporated by Reference to Exhibit 10.11 of the Registrant's Form 10-K of May 30, 1997). 10.13 Asset Purchase Agreement among the Registrant, Ctron Acquisition, Inc. and Digital Equipment Corporation ("Digital") dated as of November 24, 1997 (the "Asset Purchase Agreement") (Incorporated by Reference to Exhibit 2.1 of the Registrant's Form 10-Q of January 14, 1998). 10.14 Reseller and Services Agreement dated as of November 24, 1997 between the Registrant and Digital (the "Reseller Agreement") (Incorporated by Reference to 10.1 of the Registrant's Form 10-Q of January 14, 1998). 10.15 Employment Agreement between the Registrant and Donald B. Reed dated as of August 6, 1997 (Incorporated Reference to Exhibit 10.1 of the Registrant's Form 10-Q of October 15, 1997). 10.16 First Amendment to Asset Purchase Agreement dated as of February 7, 1998 by and among the Registrant, Ctron Acquisition, Inc. and Digital (Incorporated by Reference to Exhibit 2.2 of the Registrant's Form 8-K/A of March 4, 1998). 10.17 Amendment No. One to Reseller Agreement dated as of February 7, 1998 by and between the Registrant and Digital (Incorporated by Reference to Exhibit 10.2 of the Registrant's Form 8-K/A of March 4, 1998). 10.18 Letter agreement between the Registrant and Donald B. Reed dated as of March 30, 1998. 11.1 Statement regarding computation of per share earnings. 22.1 Subsidiaries of Cabletron Systems, Inc. 23.1 Consent of Independent Auditors. 27 Financial Data Schedule
(b) The Registrant filed on form 8-K during the last quarter of the fiscal year ended February 28, 1998, as follows:
The Company filed this report on form 8-K to disclose certain information related to its acquisition of Network Products Business Unit of Digital Equipment Corporation.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Cabletron Systems, Inc.:
Under date of March 23, 1998, we reported on the consolidated balance sheets of Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended February 28, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in item 14(a)2 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts March 23, 1998
SCHEDULE II
CABLETRON SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands)
Signatures
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CABLETRON SYSTEMS, Inc.
Date: May 28, 1998 By: /s/ Craig R. Benson ------------ ------------------- Craig R. Benson Chairman, President, Chief Executive Officer and Treasurer
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/ Craig R. Benson Chairman, President, May 28, 1998 - ------------------------ Chief Executive Officer, ------------ Craig R. Benson Treasurer and Director
/s/ David J. Kirkpatrick Corporate Executive Vice President May 28, 1998 - ------------------------ of Finance and Chief Financial ------------ David J. Kirkpatrick Officer
/s/ Michael D. Myerow Secretary and Director May 28, 1998 - ------------------------ ------------ Michael D. Myerow
/s/ Paul R. Duncan Director May 28, 1998 - ------------------------ ------------ Paul R. Duncan
/s/ Donald F. McGuinness Director May 28, 1998 - ------------------------ ------------ Donald F. McGuinness
/s/ Donald B. Reed Director May 28, 1998 - ------------------------ ------------ Donald B. Reed
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
10.18 Letter agreement between Registrant and Donald B. Reed dated march 30, 1998 55
11.1 Statement regarding computation of per share income (loss) 47
22.1 Subsidiaries of Cabletron Systems, Inc. 48
23.1 Consent of Independent Auditors 49
27 Financial Data Schedule 54
EXHIBIT 22.1
SUBSIDIARIES OF CABLETRON SYSTEMS, INC.
Cabletron Systems de Argentina S.A. (Argentina) Cabletron Systems Pty. Limited (Australia) Ctron Acquisition, Inc. dba Digital Network Products Group, A Cabletron Systems, Inc. Company (Delaware) Cabletron Systems do Brasil Representacoes Ltda. (Brazil) Cabletron Systems of Canada Limited (Canada) Cabletron Systems Chile (Chile) Cabletron Systems de Colombia Ltda. (Colombia) Cabletron Systems Inc. - Organizaoni Slozka (Czech Republic) Cabletron Systems Acquisition, Inc. (Delaware) Cabletron Systems Government Sales, Inc. (Delaware) Cabletron Insurance Company (Vermont) Cabletron Systems Sales & Service, Inc. (Delaware) Cabletron Systems, Inc. of USA (China) Cabletron Systems Ltd. (England) Cabletron Systems S.A. (France) International Cable Networks, Inc. (Virgin Islands) Cabletron Systems, GmbH (Germany) Cabletron Systems Limited (Bermuda) Cabletron Systems (Distribution) Limited (Ireland) Cabletron Systems Inc. (Hong Kong) Cabletron Systems S.r.l. (Italy) Cabletron Systems, K.K. (Japan) Cabletron Systems, Pte Ltd (Korea) Cabletron Systems Sdn Bhd (Malaysia) Cabletron Systems, S.A. de C. V. (Mexico) Cabletron Systems Benelux, B.V. (Netherlands) Netlink, Inc. (Delaware) Netlink, Ltd (UK) Network Express, Inc. (Michigan) Network Express GmbH (Germany) Network Express K.K. (Japan) Network Express Europe Limited (UK) The OASys Group, Inc. (California) Cabletron Systems, Pte Ltd. (Singapore) Cabletron Systems S.A. (Spain) Cabletron Systems, A.B. (Sweden) Cabletron Systems AG (Switzerland) Cabletron Systems de Venezuela C.A. (Venezuela) Fivemere Ltd (UK) Fivemere Asia-Pacific Singapore Limited Fivemere Developments Limited ZeitNet Inc. (California), a Cabletron Systems, Inc Company ZeitNet India Private Limited (India) Twister Acquisitions, Inc. Yago Systems, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors Cabletron Systems, Inc.:
We consent to incorporation by reference in the registration statements (Nos. 33-50454, 33-31572, 33-50753, 33-21391, 33-17557, 33-09403, 33-09029, 33-96060, 33-96058, 33-33454 and 33-42490) on Form S-8 of Cabletron Systems, Inc. of our reports dated March 23, 1998, relating to the consolidated balance sheets of Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows and the related schedule for each of the years in the three-year period ended February 28, 1998, which reports are included in the February 28, 1998 Annual Report to Stockholders on Form 10-K of Cabletron Systems, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts May 29, 1998
DIRECTORS AND OFFICERS
Board of Directors Officers
Craig R. Benson Craig R. Benson Chairman of the Board, President, Chairman of the Board, President, Chief Executive Officer and Treasurer Chief Executive Officer and Treasurer Cabletron Systems, Inc. John d'Auguste Michael D. Myerow President of Operations Partner in law firm of Myerow & Poirier Christopher J. Oliver Paul R. Duncan Executive Vice President Worldwide Executive Vice President Engineering and Chief Technology Officer Reebok International, Ltd David J. Kirkpatrick Donald F. McGuinness Corporate Executive Vice President of Chairman of the Board, Finance and Chief Financial Officer Electronic Designs, Inc. Allen L. Finch Donald B. Reed Senior Vice President, Marketing and Consultant Corporate Strategy
Guilio M. Gianturco President, Digital Network Products Group and Channels
Linda H. Pepin Senior Vice President, Human Resources
Michael D. Myerow Secretary
STOCKHOLDER INFORMATION
Annual Meeting of Stockholders Transfer Agent The Annual Meeting of Stockholders will State Street Bank and Trust Company is take place at 10:00 a.m. on Thursday, the Transfer Agent and Registrar of the July 9, 1998 at the Frank Jones Center, Company's common stock. Inquiries 400 Route One By-Pass, Portsmouth, regarding lost certificates, change of NH 03801. address, name or ownership should be addressed to: Stockholder Inquiries BankBoston, NA Inquiries relating to financial Boston EquiServe informationof Cabletron Systems, Inc. P.O. Box 8040 should be addressed to: Boston, MA 02266-8040 Cabletron Systems, Inc. Investor Relations Independent Auditors PO Box 5005 KPMG Peat Marwick LLP Rochester, NH 03866-5005 99 High Street Telephone: (603) 337-4225 Boston, MA 02110 Facsimile: (603) 332-4004 Legal Counsel Listing Ropes & Gray Cabletron Systems, Inc. common stock is One International Place traded on the New York Stock Exchange - Boston, MA 02110 symbol CS.
WORLDWIDE LOCATIONS
Corporate Headquarters
Cabletron Systems, Inc. Rochester, NH Phone: (603) 332-9400
North America
ALABAMA Birmingham Phone: (205) 733-1772
ALASKA Anchorage Phone: (907) 563-5679
ARIZONA Phoenix Phone: (602) 953-8500
CALIFORNIA Los Angeles Phone: (310) 966-1918
Irvine Phone: (714) 852-4126
Los Gatos Phone: (408) 872-0203
Sacramento Phone: (916) 449-9622
San Diego Phone: (619) 497-2546
San Jose Phone: (408) 383-1550
Santa Clara Phone: (408) 986-9100
COLORADO Denver Phone: (303) 331-0990
CONNECTICUT Hartford Phone: (860) 947-7684
FLORIDA Ft. Lauderdale Phone: (954) 928-0028
Tallahassee Phone: (904) 309-0212
Tampa Phone: (813) 282-1227
GEORGIA Atlanta Phone: (770) 395-9909
HAWAII Honolulu Phone: (808) 532-9830
IDAHO Post Falls Phone: (208) 773-1711
ILLINOIS Chicago Phone: (773) 399-6000
INDIANA Indianapolis Phone: (317) 587-1600
KANSAS Overland Park Phone: (913) 327-1207
LOUISIANA New Orleans Phone: (504) 836-5526
MARYLAND Baltimore Phone: (410) 385-5224
MICHIGAN Ann Arbor Phone: (313) 761-5005
MINNESOTA Minnetonka Phone: (612) 449-5214
MISSOURI St. Louis Phone:( 314) 542-3142
NEBRASKA Omaha Phone: (402) 496-9390
NEVADA Las Vegas Phone: (702) 892-3775
NEW YORK New York Phone: (212) 643-9560
Albany Phone: (518) 432-1798
Pittsford Phone: (16) 249-4604
NORTH CAROLINA Durham Phone: (919) 484-8381
Charlotte Phone: (704) 329-0003
Greensboro Phone: (910) 299-2928
OHIO Cincinnati Phone: (513) 762-7646
Cleveland Phone: (216) 573-3709
Columbus Phone: (614) 785-6416
Dayton Phone: (937) 438-9709
OKLAHOMA Tulsa Phone: (918) 492-2895
OREGON Lake Oswego Phone: (503) 968-6919
PENNSYLVANIA Erie Phone: (814) 454-5755
Philadelphia Phone: (215) 239-2200
Pittsburgh Phone: (412) 928-4999
RHODE ISLAND Lincoln Phone: (401) 334-1600
SOUTH CAROLINA Columbia Phone: (803) 788-0120
TENNESSEE Nashville Phone: (615) 859-7797
TEXAS Austin Phone: (512) 794-9166
Dallas Phone: (972) 661-1049
Houston Phone: (713) 871-3134
San Antonio Phone: (210) 344-7241
UTAH Salt Lake City Phone: (801) 350-9480
WORLDWIDE LOCATIONS CONTINUED
VIRGINIA Herndon Phone: (703) 736-9100
Richmond Phone: (804) 323-0291
WASHINGTON Bellevue Phone: (206) 637-2977
WISCONSIN Milwaukee Phone: (414) 221-0475
Madison Phone: (608) 273-9192
PUERTO RICO Guaynabo Phone: (787) 273-6770
Canada
CALGARY Calgary Phone: (403) 231-2802
VANCOUVER Vancouver Phone: (604) 688-2550
OTTAWA Ottawa Phone: (613) 782-2320
TORONTO Mississauga Phone: (905) 673-8807
MONTREAL Montreal Phone: (514) 395-4949
EUROPE
BELGIUM Brussells Phone: 011-32-2467-3050
CZECH REPUBLIC Praha Phone: 011-42-2-2423-8123
ENGLAND Berkshire Phone: 011-44-1635-580000
London Phone: 011-44-171-312-0210
Cheshire Phone: 011-44-1928-579013
FRANCE Paris Phone: 011-33-148-947072
GERMANY Berlin Phone: 011-49-30-399-79598
Dusseldorf Phone: 011-49-211-965-680
Frankfurt Phone: 011-49-610-39910
Heidelberg Phone: 011-46-6221-163544
Munich Phone: 011-46-89-3177450
HUNGARY Budapest Phone: 011-36-1226-1803
ITALY Assago Phone: 011-39-2-892-2021
NETHERLANDS Woerden Phone: 011-31-348-486777
POLAND Warsaw Phone: 011-48-22644-0618
RUSSIA Moscow Phone: 011-7501-258-7673
SCOTLAND Sterling Phone: 011-44-1786-449-264
SPAIN Madrid Phone: 011-34-1326-4320
SWEDEN Taby Phone: 011-46-8792-6040
SWITZERLAND Zurich Phone: 011-41-1308-3610
TURKEY Istanbul Phone: 011-90-212-213-1690
Latin America
ARGENTINA Buenos Aires Phone: 011-54-13-42777
BRASIL Sao Paulo Phone: 011-55-11-5506-2888
Rio de Janeiro Phone: 011-55-21-532-1504
Curitiba Phone: 011-55-41-232-7154
Centro Empresarial Phone: 011-55-61-314-1371
CHILE Santiago Phone: 011-56-2203-3733
COLUMBIA Santa fe de Bogata Phone: 011-571-623-7272
MEXICO Mexico City Phone: 011-525-490-3400
Monterrey Phone: 011-528-335-9230
VENEZUELA Caracas Phone: 011-582-793-8385
Pacific Rim
AUSTRALIA Melbourne Phone: 011-61-3526-3639
Milton Phone: 011-61-7367-1750
Turner Phone: 011-61-6-257-2422
Sydney Phone: 011-61-29950-5900
CHINA Beijing Phone: 011-86-10-6849-2748
Shanghai Phone: 011-86-21-6248-1120
WORLDWIDE LOCATIONS CONTINUED
HONG KONG Wanchai Phone: 011-852-539-6882
INDIA Bangalore Phone: 011-91-80-2273130
Bombay Phone: 011-91-22-835-2124
New Delhi Phone: 011-91-11-462-1586
JAPAN Tokyo Phone: 011-81-3-3240-1981
KOREA Seoul Phone: 011-822-649-0700
MALAYSIA Penang Phone: 011-604-657-4937
Selangor Phone: 011-60-3754-4388
NEW ZEALAND Auckland Phone: 011-649-273-5060
Wellington Phone: 011-644-384-5186
SINGAPORE The Cavendish Phone: 011-65-775-5355
TAIWAN Taipei Hsien Phone: 011-886-2-648-7641
THAILAND Bangkok Phone: 011-662-661-9238
Middle East
SAUDI ARABIA Phone: 011-9661-462-0101
Africa
SOUTH AFRICA Johannesburg Phone: 011-27-11-706-8480