ENTERASYS NETWORKS, INC. PRO FORMA STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

EX-2.1 3 dex21.htm PRESS RELEASE PRESS RELEASE

Exhibit 2.1

FOR IMMEDIATE RELEASE

Enterasys Updates Sales Recognition Model to Reflect Shift to Channel Focus
Announces Results for New Fiscal Third Quarter

Contact:
Kristen Sheppard, Esq.
Senior Director of Investor Relations
(603) 337-1502
***@***

  ROCHESTER, NH - October 29, 2001 - Enterasys Networks, Inc. (NYSE: ETS), a leader in enterprise network solutions, today announced that it has implemented a new sales recognition model to reflect its shift toward a channel-focused, high-touch strategy. In addition, Enterasys announced that it had implemented the previously announced change to a calendar-based year.
       
  "Our new sales recognition policy provides investors with more visibility into sales out activity and better aligns our accounting with our channel strategy," stated Henry Fiallo, Chairman and CEO of Enterasys Networks. "This accounting change does not affect our competitive position and has no impact on future quarters. We remain highly confident in our ability to outperform the market, meet expectations and deliver strong profits even during these challenging economic times."
       
  The Company also announced its financial results for its third quarter ended September 29, 2001. Pro forma revenue and fully diluted, pro forma earnings per share for the third quarter of 2001 were $217 million, or $.05 per share. These pro forma results excluded one-time adjustments relating to the transition to the company's new revenue recognition policy, reserves for excess and obsolete inventory, a charge for contractual penalties to contract manufacturers relating to changes in production plans and other previously disclosed charges relating to the company's transformation. These adjustments are detailed in a separate financial table provided below.
       
  "Although the month of September was extremely challenging in the aftermath of the September 11th tragedy, Enterasys business fundamentals are solid and our sales pipeline has stabilized and improved in October," said Fiallo. "Enterprises continue to elevate the importance of network security, secure remote connectivity and expanded mobility which play into areas of relative strength for Enterasys." Fiallo concluded, "Enterasys will continue to gain market share as we deliver new products in the fourth quarter that will significantly enhance our competitive positioning in the enterprise market.
       
  Enterasys Conference Call Highlights:  
       
  • Enterasys completes transition to new sales out revenue recognition policy: The Company transitioned to its new sales out revenue recognition policy in the third quarter.
  Under this new policy, revenue from products sold through two-tier distribution partners will be recognized upon sale by the distributors to their customers. This accounting change and the one-time adjustments recorded in the third quarter will not impact future quarters. The new sales out recognition policy required minimal long-term contractual changes to distributor agreements and maintains Enterasys' strong relationships with these partners.
     
• Enterasys strengthens product position: Continuing its commitment to network security, Enterasys announced the latest version of its award-winning Dragon Intrusion Detection System, Dragon 5.0. This new release introduces more scalability, availability, and flexibility into the underlying IDS architecture to enhance the security of enterprise networks. In addition, Enterasys will be announcing significant new products in its Matrix Layer 3 Switch line that will dramatically effect its competitive position in the gigabit switching market.
     
• Enterasys transitions to a calendar fiscal year: Enterasys new fiscal year ends December 29, 2001 and will include the ten month period beginning March 4, 2001.
     
• Aprisma spin-off proceeding on schedule, continuing February fiscal year end: As previously announced, the spin-off of the Company's wholly-owned subsidiary, Aprisma Management Technologies, Inc., is proceeding toward completion by the end of the calendar year. Accordingly, Aprisma will retain its February fiscal period reporting schedule and will report its stand-alone third quarter results for the period ending December 1, 2001 in a separate press release in December.

Discontinued Operations:
Riverstone Networks, which was spun off in a tax free distribution of shares on August 6, 2001, is reflected as a discontinued operation. Additionally, the results of Enterasys' wholly owned subsidiary, Aprisma, are also reported as a discontinued operation in the Enterasys consolidated results based on the pending spin-off of that business.

About Enterasys Networks

Enterasys Networks (NYSE:ETS) is a leading worldwide provider of communications infrastructures for enterprise-class customers. Enterasys' networking hardware and software offerings deliver the innovative security, availability and mobility solutions required by Global 2000 organizations coupled with the industry's strongest service and support. For more information, visit www.enterasys.com.

SAFE HARBOR DISCLOSURE

This press release contains contain projections and other forward-looking statements regarding the future financial performance of the Company or other future events and circumstances, and actual results, events and circumstances could differ materially. These forward-looking statements are not historical facts or guarantees of future performance, and are based on current estimates and numerous assumptions. These estimates and assumptions reflect subjective judgments concerning future events and circumstances and may

be incomplete or incorrect, and unanticipated events or circumstances may occur causing these estimates and assumptions to be wrong. Risks that could cause actual events or results to differ materially from those described in the projections or forward-looking statements include business disruption and market perceptions associated with the recent terrorist activity experienced in the United States and any possible continuation or repercussions thereof or responses thereto, as well as risks associated with the timing and execution of the Company's strategy for Aprisma Management Technologies, Inc., competitive conditions, pricing and margin pressures as a result of product shifts and changes in market dynamics, greater use of, and expenses associate with, distributors and resellers, limited management resources, the Company's acquisition strategy, extension or deterioration of prevailing economic conditions, volatility in the stock markets and market valuations being placed on communications infrastructure and service companies, technological changes, intellectual property protection and related issues, dependence on suppliers and contract manufacturers, and potential volatility in operating results, among others. For a more detailed discussion of these and other risks and uncertainties related to the company's business, please refer to the most recent filings of Enterasys Networks, Inc. and Cabletron Systems Inc. with the Securities and Exchange Commission, including Cabletron's annual report on Form 10-K for the fiscal year ended March 3, 2001 and their other more recent reports on Form 10-Q and Form 8-K.

ENTERASYS NETWORKS, INC.
PRO FORMA STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

                   
(unaudited)
Three months ended  Seven months ended  Nine months ended
September 29,
 2001
December 2,
2000
September 29,
2001
           
December 2,
2000
                           
Net revenues
$
217,383
$
205,814
 
$
457,513
$
572,189
Cost of revenues
110,912
101,600
 
 
247,643
288,769
   
   
 
         Gross margin
106,471
     
104,214
 
 
209,870
283,420
Operating expenses:
 
 
 
   Research and development
23,707
20,223
  
 
51,836
61,309
   Selling, general and administrative
69,694
62,754
 
159,849
195,627
      Income (loss) from operations
13,070
21,237
 
 
(1,815)
26,484
Interest income, net
3,383
2,243
 
 
6,527
4,035
 
      Income from operations before income taxes
16,453
23,480
 
 
4,712
30,519
Income tax expense
5,100
   
7,279
 
1,461
9,461
   
   
 
 
      Net income
$
11,353
$
16,201
 
$
3,251
$
21,058
 
Per common share:
 
 
 
 
 
Basic earnings:
 
 
 
 
 
      Net income $ 0.06
$
 0.09
$
 0.02
$
 0.11
   
   
 
 
Diluted earnings:
 
 
  
 
   Net income
$
0.05
$
0.08
 
$
0.02
$
0.11
   
   
 
 
Weighted average number of common
 
 
 
 
   shares outstanding:
 
 
 
 
      Basic
192,195
184,844
 
 190,377
184,378
      Diluted
210,849
190,630
 
 
200,812
191,187
   
   
 
 

 

ENTERASYS NETWORKS, INC.
RECONCILIATION OF ENTERASYS PRO FORMA STATEMENTS OF OPERATIONS TO CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

   
 
 
(unaudited)
Three months ended
Seven months ended
Nine months ended
 
 
September 29,
2001
December 2,
2000
September 29,
2001
December 2,
2000
Revenue: Non-Enterasys segment and intercompany eliminations
-
(13,955)
-
68,706
Revenue: Transition adjustment to sales out recognition
(111,848)
-
(111,848)
-
Cost of revenue: Non-Enterasys segment, inventory write-offs and intercompany eliminations
10,030
1,140
13,141
70,552
Cost of revenue: Transition adjustment to sales out revenue recognition
(35,097)
-
(35,097)
-
Cost of revenue: Provision for excess, obsolete inventory and penalties
35,294
-
35,294
-
R&D: Non-Enterasys segment
-
(364)
-
2,452
SG&A: Charges related to transformation of the company
59,294
15,201
73,654
60,622
Amortization of intangible assets
10,370
2,846
24,150
28,896
Stock based compensation recorded in connection with the Company's business transformation
25,956
690
27,953
690
Special charges
---
---
---
25,550
Interest income attributable to non-Enterasys segment
112
4,193
5,513
18,164
Other expense
(23,370)
(10,702)
(10,690)
(130,217)
Income tax benefit effect of pro forma adjustments
(13,731)
(7,948)
(1,028)
(68,950)
Loss from discontinued operations, net of tax
(55,101)
(16,617)
(74,402)
(39,076)
Cumulative effect of a change in accounting principle, net of tax
---
---
7,742
---

 

Note:
This reflects the reconciliation of the Enterasys pro forma statements of operations to the Enterasys consolidated statements of operations.

 

      ENTERASYS NETWORKS, INC.            
    PRO FORMA BALANCE SHEETS            
        (in thousands)            
                    
         (unaudited)  
         September 29, 2001
   March 3, 2001
 
Assets                
                  
Current assets:              
  Cash and cash equivalents   $ 74,934   $  185,853  
  Marketable securities     60,344     —  
  Accounts receivable, net (a)    46,885     147,650  
  Inventories (b)     127,712     83,373  
  Deferred income taxes     63,478     44,723  
  Prepaid expenses and other assets  57,834     33,278  
   
 
 
     Total current assets        431,187     494,877  
   
 
 
Marketable securities    114,240     —  
Investments       131,415     10,500  
Property, plant and equipment, net    62,845     43,183  
Intangible assets, net  155,301     178,893  
   
 
 
     Total assets   $ 894,988   $  727,453  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities:                
  Accounts payable   $ 35,878   $  52,752  
  Accrued expenses     56,366     78,888  
  Deferred revenue     51,589     70,491  
  Income taxes payable   78,677     82,856  
   
 
 
     Total current liabilities     222,510     284,987  
Stockholders' equity      672,478     442,466  
   
 
 
     Total liabilities and stockholders' equity   $  894,988   $  727,453  
   
 
 
                 
  (a) Accounts receivable, net, reflects an offset of $111.8 million in deferred product revenue at September 29, 2001 related to the impact of the change in revenue recognition method.
       
  (b)

Pro forma adjustments reflected in the September 29, 2001 inventory balance include $35 million relating to deferral of revenue from certain distributors and a charge for excess and obsolete inventory.

ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)
Three months ended
Seven months ended
Nine months ended
September 29,
2001
  December 2,
2000
September 29,
2001
December 2,
2000
Net revenues $ 105,535 $ 191,859 $ 345,665 $ 640,895
Cost of revenues (excludes stock-based 121,139
102,740
260,981
359,321
   compensation of $2,456 for the three and seven
   months ended September 29, 2001)  
         Gross margin (15,604 ) 89,119 84,684 281,574
Operating expenses:  
   Research and development (excludes stock-based
      compensation of $11,068 and $13,066 for the
      three and seven months ended September 29, 2001) 23,707 19,859 51,836 63,761
   Selling, general and administrative (excludes
      stock-based compensation of $12,432 for the three
      and seven months ended September 29, 2001) 128,988 77,955 233,503 256,249
   Amortization of intangible assets 10,370 2,846 24,150 28,896
   Stock-based compensation 25,956 690 27,953 690
   Special charges —
—
—
25,550
      Loss from operations (204,625 ) (12,231 ) (252,758 ) (93,572 )
Interest income, net 3,495 6,436 12,040 22,199
Other expense, net (23,370 ) (10,702 ) (10,690 )   (130,217 )
 
   
   
   
 
      Loss from continuing operations before
         income taxes and cumulative effect of a
         change in accounting principle (224,500 ) (16,497 ) (251,408 ) (201,590 )
Income tax expense (benefit) (8,631 ) (669 ) 433 (59,489 )
 
   
   
   
 
      Loss from continuing operations (215,869 ) (15,828 ) (251,841 ) (142,101 )
Discontinued operations:
   Loss from discontinued operations (net of tax expense
      of $1,054, and tax benefits of $73, $4,041 and $15,317,
      respectively)(a) (14,789 ) (16,617 ) (34,090 ) (39,076 )
   Loss on disposal of GNTS (net of $1,189 tax benefit) (40,312 ) — (40,312 ) —
 
   
   
   
 
      Loss from discontinued operations (55,101 ) (16,617 ) (74,402 ) (39,076 )
Cumulative effect of a change in accounting
   principle (net of $4,949 tax expense) — — 7,742 —
 
   
   
   
 
         Net loss ($ 270,970 ) ($ 32,445 ) ($ 318,501 ) ($ 181,177 )
                               
Dividend effect of beneficial conversion feature to
   Series D and Series E Preferred Stockholders — — — (16,854 )
Accretive Dividend of Series D and Series E
   Preferred Shares (3,109 ) (3,007 ) (7,208 ) (3,007 )
 
   
   
   
 
      Net loss to common shareholders ($ 274,079 ) ($ 35,452 ) ($ 325,709 ) ($ 201,038 )
Basic and diluted common shares:
   Loss from continuing operations and dividends
      related to Series D and Series E Preferred Shares ($ 1.14 ) ($ 0.10 ) ($ 1.36 ) ($ 0.88 )
   Loss from discontinued operations ($ 0.29 ) ($ 0.09 ) ($ 0.39 ) ($ 0.21 )
   Cumulative effect of a change in accounting principle — — $ 0.04 —
   Net loss attributable to common
      shareholders ($ 1.43 ) ($ 0.19 ) ($ 1.71 ) ($ 1.09 )
Weighted average number of basic and diluted common
   shares outstanding 192,195 184,844 190,377 184,378
 
   
   
   
 

(a) Includes discontinued operations of Aprisma, Riverstone and GNTS.

ENTERASYS NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

(unaudited)
September 29, 2001
March 3, 2001
Assets          
 
Current assets:
    Cash and cash equivalents $ 77,858 $ 47,589
    Marketable securities 78,818 406,633
    Accounts receivable, net (a) 46,885 151,392
     Inventories (b) 127,712 86,742
    Deferred income taxes 95,307 139,340
    Prepaid expenses and other assets 67,088 74,456
    Net assets of discontinued operations 99,355 343,753
Total current assets 593,023 1,249,905
Marketable securities 120,213 159,012
Investments 131,415 143,358
Property, plant and equipment, net 62,845 69,220
Intangible assets, net 155,301 178,893
Total assets $ 1,062,797 $ 1,800,388
Liabilities and Stockholders' Equity
 
Current liabilities:
    Accounts payable $ 37,847 $ 59,104
    Accrued expenses 92,066 149,042
    Deferred revenue 51,589 84,159
    Income taxes payable 53,401 51,394
Total current liabilities 234,903 343,699
 
    Deferred income taxes 915 57,065
Total liabilities 235,818 400,764
 
Contingent redemption value of common stock put options 842 —
 
Redeemable convertible preferred stock,$1.00 par value, 45 shares of
    Series C were designated, issued and outstanding at March 3, 2001, and
    65 shares of Series D and 25 shares of Series E were designated, issued
    and outstanding at March 3 and September 29, 2001 (aggregate liquidation
    preference of Series D and E, $58,652 and $22,558, respectively) 74,390 109,589
 
Commitments and contingencies
 
Stockholders' equity:
    Undesignated preferred stock, $1.00 par value. Authorized 1,859 shares — —
    Common stock, $0.01 par value. Authorized 450,000 shares; issued
        196,488 and 190,611 shares, respectively 1,965 1,906
    Additional paid-in capital 1,098,994 990,157
    Retained earnings (accumulated deficit) (283,439 ) 371,857
    Unearned stock-based compensation (3,842 ) (16,673 )
    Treasury stock, at cost (2,653 and 2,100 shares, respectively) (62,403 ) (56,479 )
751,275 1,290,768
Accumulated other comprehensive income 472 (733 )
Total stockholders' equity 751,747 1,290,035
Total liabilities and stockholders' equity $ 1,062,797 $ 1,800,388

(a) Accounts receivable, net, reflects an offset of $111.8 million in deferred product revenue at September 29, 2001 related to the impact of the change in revenue recognition method.
   
(b) Pro forma adjustments reflected in the September 29, 2001 inventory balance include $35 million relating to deferral of revenue from certain distributors and a charge for excess and obsolete inventory.