<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19366
----------------------
BAY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2916246
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4401 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
TELEPHONE: (408) 988-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
211,589,659 shares of Common Stock, $.01 par value, as of October 25,
1997
This report on Form 10-Q includes exhibits. The exhibit index is located on page
16 of this report.
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BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 27, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 27, 1997
and June 30, 1997 3
Condensed Consolidated Statements of Income - Three Months
Ended September 27, 1997 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended September 27, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Exhibit Index 16
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 27, JUNE 30,
1997 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 560,374 $ 529,962
Short-term investments 266,262 105,180
Accounts receivable, net of allowance for doubtful
accounts of $7,693 at September 27, 1997 and
$8,477 at June 30, 1997 250,183 277,860
Inventories 144,096 144,468
Deferred income taxes 127,726 121,596
Other current assets 42,383 69,351
---------- ----------
Total current assets 1,391,024 1,248,417
Investments 138,124 146,367
Property and equipment, net 237,225 241,069
Goodwill 107,907 113,811
Other assets 26,125 16,382
---------- ----------
$1,900,405 $1,766,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 112,804 $ 117,596
Accrued expenses 208,705 201,266
Accrued income taxes 36,866 39,269
Deferred revenue 66,939 62,678
---------- ----------
Total current liabilities 425,314 420,809
Long-term debt 110,744 109,995
Stockholders' equity 1,364,347 1,235,242
---------- ----------
$1,900,405 $1,766,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Revenue $601,280 $522,654
Cost of sales 294,888 249,915
-------- --------
Gross profit 306,392 272,739
-------- --------
Operating expenses:
Research and development 80,927 54,954
Sales and marketing 135,890 128,215
General and administrative 24,409 19,575
In-process research and development 7,392 42,648
-------- --------
Total operating expenses 248,618 245,392
-------- --------
Income from operations 57,774 27,347
Net interest income and other 8,655 6,025
-------- --------
Income before provision for income taxes 66,429 33,372
Provision for income taxes 25,099 27,747
-------- --------
Net income $ 41,330 $ 5,625
======== ========
Net income per share $ 0.19 $ 0.03
======== ========
Weighted average common shares and equivalents 220,600 196,345
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 41,330 $ 5,625
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 39,240 25,526
In-process research and development 7,392 42,648
Deferred income taxes (5,608) 2,238
Changes in operating assets and liabilities:
Accounts receivable 27,677 29,099
Inventories 372 26,950
Other current assets 26,968 (16,569)
Accounts payable (4,792) (991)
Accrued expenses (561) 4,926
Accrued income taxes 15,664 22,355
Deferred revenue 4,261 2,799
--------- ---------
Cash flows provided by operating activities 151,943 144,606
--------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (22,530) (23,973)
Consulting expenditures on information technology systems (5,759) (20,679)
Purchases of investments (177,864) (46,384)
Proceeds from maturities of investments 25,025 39,358
Proceeds from sales of investments -- 1,049
Payments for acquisition of LANcity Corporation,
net of cash acquired -- (58,821)
Other assets (4,939) 2,078
--------- ---------
Cash flows used in investing activities (186,067) (107,372)
--------- ---------
Cash flows provided by (used in) financing activities:
Payments of long-term debt -- (67)
Purchase of treasury common stock -- (22,314)
Issuances of common stock 64,536 10,810
--------- ---------
Cash flows provided by (used in) financing activities 64,536 (11,571)
--------- ---------
Net increase in cash and cash equivalents 30,412 25,663
Cash and cash equivalents, beginning of period 529,962 315,064
--------- ---------
Cash and cash equivalents, end of period $ 560,374 $ 340,727
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
BAY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bay Networks, Inc. (the Company or Bay Networks) develops, manufactures,
markets, sells and supports a comprehensive line of data networking products
and services. The Company provides products that meet the connectivity
requirements of corporate enterprises, network service providers and
telecommunications carriers. The Company offers products such as switches,
routers, shared media hubs, remote and Internet access solutions, Internet
Protocol (IP) services and network management applications, that operate under
open standards. The Company's products provide adaptive networking solutions to
network managers that allow seamless operation of multi-protocol and
multi-vendor networks.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for the in-process
research and development charges incurred during the three month periods ended
September 27, 1997 and September 30, 1996. The results of operations for the
interim periods presented are not necessarily indicative of results for any
future interim period or for the entire fiscal year. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, although the Company believes that the disclosures included
are adequate to make the information presented not misleading. The unaudited
condensed consolidated financial statements and notes included herein should be
read in conjunction with the consolidated financial statements and notes for
the fiscal year ended June 30, 1997, included in the Company's 1997 Annual
Report on Form 10-K.
Beginning with the first quarter of fiscal year 1998, for purposes of
operational efficiency, the Company's fiscal quarters now end on the Saturday
closest to the end of each calendar quarter. Accordingly, for fiscal year 1998,
the fiscal quarters end on September 27, 1997, December 27, 1997, March 28,
1998, and the fiscal year will end on June 27, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
2. CONSOLIDATED BALANCE SHEET INFORMATION
Inventories. Inventories, stated at the lower of cost (first-in, first-out)
or market, consist of:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997 JUNE 30, 1997
------------------ -------------
(in thousands) (unaudited)
<S> <C> <C>
Raw materials $ 24,790 $ 21,068
Work-in-process 38,337 45,140
Finished goods 80,969 78,260
-------- --------
Total inventories $144,096 $144,468
======== ========
</TABLE>
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Property and Equipment. Property and equipment are stated at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets ranging from two to five years. Leasehold
improvements are recorded at cost and are amortized using the straight-line
method over the remaining lease term or the economic useful life of the related
asset, whichever is shorter.
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997 JUNE 30, 1997
------------------ -------------
(in thousands) (unaudited)
<S> <C> <C>
Machinery and equipment $ 429,354 $ 402,192
Furniture and fixtures 46,160 45,188
Leasehold improvements 72,294 76,679
--------- ---------
Total property and equipment 547,808 524,059
Accumulated depreciation and amortization (310,583) (282,990)
--------- ---------
Total property and equipment, net $ 237,225 $ 241,069
========= =========
</TABLE>
3. FOREIGN EXCHANGE HEDGING
The Company had $18.3 million of short-term foreign exchange forward
contracts outstanding which approximated the fair value of such contracts and
their underlying transactions at September 27, 1997. These contracts are
denominated in Australian, French, Japanese, Canadian, German and U.K.
currencies. The outstanding contracts have original maturities that do not
exceed two months. The gains and losses on these contracts are included in
earnings when the underlying foreign currency denominated transaction is
recognized. Gains and losses related to these instruments at September 27,
1997, were not material. In addition, the Company has not terminated or
extinguished any foreign exchange forward contracts. The Company does not
anticipate any material adverse effect on its consolidated financial position,
results of operations, or cash flows resulting from the use of these
instruments.
4. INCOME TAXES
The Company's provision for income taxes for the three month period ended
September 27, 1997, is based upon the Company's estimate of the effective tax
rate for fiscal year 1998. The Company's effective tax rate for the three month
period ended September 27, 1997, was 34% excluding the effect of the in-process
research and development charge which was not deductible for income tax
purposes. The Company's accrued income taxes was reduced by a tax benefit from
employee stock option transactions of $18.1 million for the three month period
ended September 27, 1997, which was credited directly to stockholders' equity.
5. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares and dilutive common share equivalents outstanding during the period.
Dilutive common share equivalents consist of stock options using the treasury
stock method.
6. SIGNIFICANT CUSTOMERS
One reseller customer accounted for 12.9% of the Company's revenue in the
first quarter of fiscal year 1998 and another reseller customer accounted for
10.9% in the first quarter of fiscal year 1997.
7. ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company on December 27, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings
per share, the dilutive effect of stock options will be excluded. There is
expected to be an increase in primary earnings per share of $0.01 for the first
quarter of fiscal year 1998 and no impact on primary earnings per share for the
first quarter of fiscal year 1997. There is expected to be no impact on fully
diluted earnings per share for the first quarter of fiscal year 1998 and 1997,
respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere herein
as well as the section entitled "Risk Factors That May Affect Future Results."
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, changes in general economic conditions, rapid or unexpected changes in
technologies and uncertain business conditions that affect the data networking
industry. Accordingly, past results and trends should not be used by investors
to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital
Resources" may include forward-looking statements that involve risks and
uncertainties. These statements may differ materially from actual future events
or results. The Company wishes to caution readers that a number of important
factors, including those identified in the section entitled "Risk Factors That
May Affect Future Results," as well as factors discussed elsewhere in this
report and in the Company's other reports filed with the Securities and
Exchange Commission, may affect the Company's actual results and cause actual
results to differ materially from those in any forward-looking statements.
RESULTS OF OPERATIONS
Revenue. Revenue was $601.3 million for the first quarter of fiscal 1998 as
compared to $522.7 million for the first quarter of fiscal 1997, an increase of
15.0%. This increase resulted from increased sales of the Company's switching
products, increased service revenue and continued growth in international
operations. The Company experienced significant growth in its switching
products, due to competitive product offerings in the switching market, entry
into stackable and network center switching products, and market acceptance of
the Company's network manageability solutions for total infrastructure support.
Revenue for the first quarter of fiscal 1998 increased $58.3 million or 10.7%,
compared to revenue of $543.0 million in the fourth quarter of fiscal 1997.
Sales increased from the fourth quarter of fiscal 1997 in all principal product
lines, except for remote access.
International revenue increased 21.8% to $212.6 million for the first
quarter of fiscal 1998, as compared to $174.6 million for the comparable period
of the prior year. International revenue represented approximately 35.4% and
33.4% of total revenue for the first quarter of fiscal 1998 and fiscal 1997,
respectively. The increases in absolute dollars and as a percentage of total
revenue were a result of continued growth in the international markets. The
growth primarily occurred in Japan and Europe due to the strengthening of
distribution channels and improved international standards-based switching and
routing products, respectively. However, this growth was partially offset by
currency devaluation in the Asia/Pacific markets, resulting in a reduction of
capital expenditures from businesses located in these regions. 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. The effects of foreign
exchange rate fluctuations may adversely impact the Company's operating results
in future periods. Revenue in past periods may not be indicative of future
revenue, which may be affected by other factors discussed elsewhere herein, as
well as other business environment and risk factors.
Gross Profit. Gross profit decreased to 51.0% of revenue for the first
quarter of fiscal 1998, from 52.2% for the comparable period of the prior year.
However, in absolute dollars gross profit increased $33.7 million or 12.3% to
$306.4 million for the first quarter of fiscal 1998, from $272.7 million for
the comparable period of the prior year. The gross profit percentage decline
was a result of a shift in product mix from higher margin shared media and
router products to lower margin router, remote access and switching products,
including stackable LAN and WAN equipment used in small enterprise/small office
environments, and lower prices due to competitive pricing actions taken by the
Company in the later part of fiscal 1997 which have carried over into fiscal
1998. The increase in absolute dollars is attributable to increased unit sales
of the Company's products, primarily driven by the introduction of new products
and enhancements to existing products. Changes in material and labor costs and
distribution channels, may have an adverse effect on gross profit percentages
in the future. For a description of additional risks which may impact gross
profit, see the section entitled "Risk Factors that May Affect Future Results."
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<PAGE> 9
Research and Development. Research and development expenses for the first
quarter of fiscal 1998 increased 47.3% to $80.9 million from $55.0 million for
the comparable period of the prior year. As a percentage of revenue, expenses
were 13.5% in the first quarter of fiscal 1998 and 10.5% in the comparable
period of the prior year. The increase in expenses relates to the costs
associated with an increased research and development staff, costs associated
with acquisitions of businesses in the process of developing technologies, and
improving and expanding facilities and depreciation of equipment used in the
development of new products and product enhancements. The Company plans to
continue to increase research and development spending in absolute dollars in
order to pursue its goal of developing a broader range of new products needed
for timely product introductions to the market. As a result of the Company's
research and development efforts, new product sales accounted for 46.7% of
revenue during the first quarter of fiscal 1998, compared to 45.5% of revenue
in the first quarter of fiscal 1997.
The Company plans to continue its commitment to research and development
through internal development and, given that the industry's technology
environment is rapidly changing, through acquisitions of technology in an
effort to bring products to the market more quickly and provide end-to-end
network solutions. There can be no assurance that research and development
efforts or acquisitions of technology will result in commercially successful
new technology and products in the future, or that such technology and products
will be introduced in time to meet market requirements. The Company's research
and development efforts may be adversely affected by other factors noted
elsewhere herein. Research and development expenses may vary in absolute
dollars and as a percentage of revenue in future periods.
Sales and Marketing. Sales and marketing expenses for the first quarter of
fiscal 1998, increased 6.0% to $135.9 million, from $128.2 million in the
comparable period of the prior year. As a percentage of revenue, expenses
decreased to 22.6% for the first quarter of fiscal 1998, from 24.5% in the
comparable period of the prior year. The decline in expenses as a percentage of
revenue was due to improved sales force productivity and utilization of
facilities. The increase in absolute dollars is primarily attributable to
increased commission costs due to higher sales levels in the first quarter of
fiscal 1998, compared to the first quarter of fiscal 1997, costs associated with
equipment used to expand the Company's domestic and international sales presence
in certain markets, and costs associated with recruiting, relocating and
training of personnel. The Company's investment in its sales, marketing and
customer support resources may vary in absolute dollars or as a percentage of
revenue in the future as management intends to effectively market Bay Networks
and its products to the public.
General and Administrative. General and administrative expenses for the
first quarter of fiscal 1998, increased 24.7% to $24.4 million from $19.6
million in the comparable period of the prior year. As a percentage of revenue,
expenses increased to 4.1% for the first quarter of fiscal 1998, from 3.7% in
the comparable period of the prior year. The increase in expenses is primarily
due to the related expenditures associated with the addition of personnel,
including recruiting, relocating and training, and information technology
needed to support the infrastructure required to carry out the Company's global
business strategy. General and administrative expenses may vary in absolute
dollars or as a percentage of revenue in the future although management's
intention is to maintain discretionary spending.
In-Process Research and Development. In December 1996, the Company acquired
NetICs, Inc. (NetICs), a privately held company developing high-performance,
autosensing Fast Ethernet work group switches. Under the terms of the NetICs
acquisition agreement, the Company would pay an additional purchase price
consideration of $8 million for certain commitment targets associated with
revenue milestones achieved by NetICs prior to December 1997. The revenue
milestones were achieved during the first quarter of fiscal 1998; and as a
result, $7.4 million of the additional consideration was allocated to
in-process research and development and charged to operations. The remaining
$0.6 million was allocated to intangible assets, which are being amortized on a
straight-line basis over a five year period. This treatment is consistent with
the Company's previous purchase price allocation related to the acquisition of
NetICs.
Net Interest Income and Other. Net interest income and other increased
43.7% to $8.7 million for the first quarter of fiscal 1998, compared to $6.0
million for the comparable period of the prior year and increased as a
percentage of revenue to 1.4% in the first quarter of fiscal 1998 from 1.2% in
the comparable period in the prior year. The increase in interest income was
primarily due to higher average invested cash and investment balances which
yielded more interest income in the first quarter of fiscal 1998, compared to
the first quarter of fiscal 1997. The increase in the average invested cash
and investment balances resulted
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<PAGE> 10
primarily from increased profitability from the Company's operations, greater
linearity of collections and product shipments, increased inventory turns, and
increased stock option exercise activity during the first quarter of fiscal
1998. The overall increase was partially offset by the continued strengthening
of the U.S. dollar which impacted foreign exchange losses resulting from the
translation of the parent company's accounts receivable from international
subsidiaries from the local currency to the U.S. dollar. However, the impact
from foreign exchange losses was mitigated by the Company's foreign exchange
hedging activities.
Investment Portfolio. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument. The Company
does not expect any material loss with respect to its investment portfolio.
The table below provides information about the Company's investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. The
Company's investment policy requires that all investments mature in five years
or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
(in thousands, except interest rates)
<TABLE>
<CAPTION>
FAIR VALUE AT
FY 1998 FY 1999 FY 2000 FY 2001 TOTAL SEP. 27, 1997
----------- ----------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents $ 507,071 $ -- $ -- $ -- $ 507,071 $507,468
Average Interest Rate 5.36% -- -- -- 5.36%
Investments $ 197,586 $ 156,919 $ 41,059 $ 9,905 $ 405,469 $404,386
Average Interest Rate 5.37% 5.51% 4.89% 4.20% 5.35%
Total Portfolio $ 704,657 $ 156,919 $ 41,059 $ 9,905 $ 912,540 $911,854
Average Interest Rate 5.36% 5.51% 4.89% 4.20% 5.36%
</TABLE>
Impact of Foreign Currency Rate Changes. In the first quarter of fiscal
1998, most currencies in Europe and Asia/Pacific continued to weaken against the
U.S. dollar. Consequently, the translation of the parent company's intercompany
receivables had a negative impact, although not material, on the consolidated
results of the Company. Foreign exchange forward contracts are purchased to
hedge certain intercompany foreign currency denominated balance sheet positions.
These financial instruments may minimize the risks that would otherwise result
from changes in foreign currency exchange rates. Exchange gains and losses did
not have a significant effect on the Company's results of operations for the
first quarter of fiscal 1998.
Foreign Exchange Hedging. The Company enters into foreign exchange forward
contracts to reduce its exposure to currency fluctuations on intercompany
foreign currency denominated balance sheet positions. The objective of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The Company's accounting policy
for these instruments is based on the Company's designation of such instruments
as hedging transactions. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company had $18.3 million
of short-term foreign exchange forward contracts denominated in Australian,
French, Japanese, Canadian, German and U.K. currencies which approximated the
fair value of such contracts and their underlying transactions at the end of
the first quarter of fiscal 1998. The gains and losses on these contracts are
included in earnings when the underlying foreign currency denominated
transaction is recognized. Gains and losses related to these instruments at the
end of the first quarter of fiscal 1998, were not material to the Company.
Looking forward, the Company does not anticipate any material adverse effect on
its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments. There can be no assurance that
these strategies will be effective or that transaction losses can be minimized
or forecasted accurately.
The following table provides information about the Company's foreign
exchange forward contracts at the end of the first quarter of fiscal 1998. The
table presents the value of the contracts in U.S. dollars at the contract
exchange rate as of the contract maturity date. Due to the short-term nature of
these contracts, the contract rate approximates the weighted average
contractual foreign currency exchange rate and the forward
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<PAGE> 11
position in U.S. dollars approximates the fair value of the contract at the end
of the first quarter of fiscal 1998.
Short-Term Forward Contracts to Sell Foreign Currencies for U.S. Dollars
Related to Intercompany Receivables:
<TABLE>
<CAPTION>
FORWARD
CONTRACT MATURITY CONTRACT POSITION IN
(in thousands, except contract rates) DATE IN 1997 DATE IN 1997 RATE U.S.DOLLARS
------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Australian Dollar July 25 September 29 1.3534 $3,325
Australian Dollar August 29 November 3 1.3626 $2,202
French Francs August 29 November 3 6.0355 $5,799
Japanese Yen August 29 November 4 119.35 $1,676
Canadian Dollar August 28 September 30 1.3853 $1,083
German Deutschemark August 28 October 2 1.7899 $ 978
U.K. Pound Sterling August 28 October 2 1.6144 $3,229
</TABLE>
Income Taxes. The Company's effective income tax rate for the first quarter
of fiscal 1998, was 34.0% compared to 36.5% for the comparable period in the
prior year, excluding the effect of the in-process research and development
charge which was not deductible for income tax purposes. The decrease in the
effective income tax rate was primarily due to the reinstatement of the federal
research and development tax credits.
Effect of New Accounting Standards. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share,
which is required to be adopted by the Company on December 27, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. There is expected to be an increase in primary
earnings per share of $0.01 for the first quarter of fiscal 1998 and no impact
on primary earnings per share for the first quarter of fiscal 1997. There is
expected to be no impact on fully diluted earnings per share for the first
quarter of fiscal 1998 and fiscal 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities increased to $151.9 million for the
first quarter of fiscal 1998, compared to $144.6 million for the comparable
period of the prior year. Cash provided from operations increased from the
prior period primarily as a result of, among other things: decreases in
accounts receivable, other current assets, and an increase in accrued income
taxes; and an increase in income before depreciation and amortization and
in-process research and development charges, partially offset by a decrease in
accounts payable. The decrease in accounts receivable from the prior period was
due to continued focus on collection efforts and a greater linearity of
shipments during the quarter. Days sales outstanding in receivables decreased
to 38 days at the end of the first quarter of fiscal 1998 from 47 days as of
the end of fiscal 1997. Days sales outstanding may continue to vary, due to,
among other things, linearity of product shipments and collections, and
increased international sales.
Cash used in investing activities was $186.1 million for the first quarter of
fiscal 1998, compared to $107.4 million in the comparable period of the prior
year. The consumption of cash in the current year to date resulted from
continued investments in property and equipment and improvements to the
Company's information technology systems required to support the Company's
operations. In addition, the Company continues to invest cash required to
support the Company's operations in fiscal 1998. The Company's portfolio
consisted of more cash equivalents and short-term investments than long-term
investments as of the end of the first quarter of fiscal 1998, compared to the
end of the first quarter of fiscal 1997.
Cash provided by financing activities was $64.5 million in the first quarter
of fiscal 1998, compared to cash used in financing activities of $11.6 million
in the first quarter of fiscal 1997. The cash provided by financing activities
during the first quarter of fiscal 1998 consisted primarily of cash received in
connection with the issuance of stock under the Company's stock option plans.
Cash used in financing activities during the first quarter of fiscal 1997 was
primarily due to the Company's purchase of treasury stock on the open market,
partially offset by cash received in connection with the issuance of stock
under the Company's stock option plans.
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A subsidiary of the Company has outstanding $110 million of convertible
subordinated debentures which mature in May 2003. The debentures are
convertible at the option of the holder into the Company's common stock. The
debentures are redeemable at the option of the Company, initially at
approximately 103.7% and at decreasing prices thereafter to 100% at maturity.
To date, the Company's management has made no decision to redeem the
debentures.
As of the end of the first quarter of fiscal 1998, cash and short- and
long-term investments totaled $964.8 million, compared to $781.5 million at the
end of fiscal 1997. The Company believes that it has the financial resources
needed to meet business requirements, including capital expenditures, working
capital requirements, debt obligations outstanding and operating lease
commitments for facilities at least through the next twelve months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition, Bay Networks
identifies the following risk factors which may affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
Risks Related to New Markets. The markets for data networking products are
rapidly changing and highly competitive. If these markets do not continue to
grow, or if the Company's strategies for the data networking markets are
unsuccessful, the Company's consolidated financial position, results of
operations, or cash flows, may be adversely affected.
Risks Related to New Products. The Company's future revenue is dependent on
its ability to successfully develop, acquire, manufacture and market products
for customers in rapidly evolving markets worldwide. To successfully distribute
new products the Company must establish and maintain new distribution channels.
There can be no assurance that the Company's product development and
acquisition efforts will result in timely and commercially successful new
product offerings in the future.
Risks Related to Gross Profit. The Company's gross profit percentage is a
function of the product mix sold in any period. Therefore, gross profit
percentage may fluctuate, affecting the Company's operating results. Factors
such as unit volumes, obsolescence/surplus of inventory, heightened price
competition, changes in channels of distribution, shortages and cost increases
in supplies of parts from vendors, and the availability of skilled labor, also
may cause fluctuations in gross profit percentages.
Risks Relating to Manufacturing Operations. The Company operates
manufacturing facilities and relies upon a number of manufacturing arrangements
worldwide. The Company's manufacturing capability may be affected by factors
impacting the operations of its suppliers. In addition, the Company's ability
to meet customer demand may also be dependent on its ability to adjust
manufacturing levels on short notice based on anticipated orders.
Risks Related to Intellectual Property Rights. The Company relies upon a
combination of patents, copyrights, trademarks and trade secrets to establish
and protect intellectual property rights in its products and technology. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology, or that the Company's competitors
will not develop superior technologies. From time to time it may be necessary
or desirable for the Company to enter into technology licenses, strategic
alliances and cooperative marketing efforts with others. There can be no
assurance that the Company consistently will be able to secure third-party
rights necessary to offer competitive products.
Risks Related to Competition. The data networking industry is highly
competitive. There can be no assurance that the Company will be able to compete
successfully in the future with existing or new competitors. Among the
competitive factors that may adversely affect the Company's future results are
conformity to existing and emerging industry standards; interoperability with
other networking products; network management capabilities; price; performance;
product features; technical support; and distribution.
Risks Related to Acquisitions. To implement its business plans, the Company
may make further acquisitions in the future. Acquisitions require significant
financial and management resources both at the time of the transaction and
during the process of integrating the newly acquired business into the
Company's operations. The Company's results of operations, consolidated
financial position, or cash flows,
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<PAGE> 13
may be adversely affected if it is unable to successfully acquire and integrate
such new companies into its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Investment Portfolio" and "Foreign
Exchange Hedging" in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and "Foreign Exchange Hedging" in Note 3
of the Notes to Condensed Consolidated Financial Statements. Such information
is incorporated herein.
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<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index
are filed as part of this report.
(b) Reports on Form 8-K.
None
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<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY NETWORKS, INC.
By /s/ ROB G. SEIM
------------------------------
Rob G. Seim
Vice President and
Corporate Controller
(Authorized Officer and
Principal Accounting Officer)
Date: November 10, 1997
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<PAGE> 16
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Restated Certificate of Incorporation of the Registrant,
which is incorporated herein by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-8
(Registration No. 33-92736) filed on May 26, 1995.
3.2 Bylaws, of the Registrant, as amended and restated, which
is incorporated herein by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-4 (File No.
33-83946) filed with the Securities and Exchange Commission
on September 14, 1994.
4.1 Rights Agreement dated as of February 7, 1995 between the
Registrant and The First National Bank of Boston, which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated February 7, 1995.
10.3* Amended and Restated 1994 Stock Option Plan, as amended on
July 29, 1997.
10.5* Amended and Restated 1994 Employee Stock Purchase Plan, as
amended on July 29, 1997.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
______________
* Indicates compensatory plan or arrangement.
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<PAGE> 1
BAY NETWORKS, INC.
1994 STOCK OPTION PLAN
(As Amended by the Board through July 29, 1997)
1. Establishment and Purpose.
(a) Establishment. The Wellfleet Communications, Inc. 1988 Stock Option
Plan was adopted on January 20, 1988 (the "Initial Plan"). The Initial Plan was
amended and restated on May 16, 1991 and was renamed the Wellfleet
Communications, Inc. 1991 Restated Stock Option Plan (the "Prior Plan"). In
connection with the combination of Wellfleet Communications, Inc. ("Wellfleet")
and SynOptics Communications, Inc. ("SynOptics") pursuant to the Agreement and
Plan of Merger dated as of July 4, 1994, as amended, by and among Wellfleet,
SynOptics, and a wholly owned subsidiary of Wellfleet, Wellfleet intends to
change its name to Bay Networks, Inc. The Prior Plan, as amended, is amended and
restated in its entirety and renamed the Bay Networks, Inc. 1994 Stock Option
Plan (the "Plan").
(b) Purpose. The purpose of the Plan is to secure for Bay Networks, Inc.
(the "Company") and its stockholders the benefits arising from capital stock
ownership by employees and officers of, and consultants or advisors to, the
Company and its parent and subsidiary corporations who are expected to
contribute to the Company's future growth and success. Except where the context
otherwise requires, the term "Company" shall include the parent and all present
and future subsidiaries of the Company as defined in Sections 424(e) and 424(f)
of the Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that term is defined
in the Plan).
2. Administration.
(a) Administration by Board and/or Committee. The Plan shall be
administered by the Board of Directors of the Company (the "Board of Directors")
and/or by a duly appointed committee of the Board of Directors having such
powers as shall be specified by the Board of Directors. Any subsequent
references herein to the Board of Directors shall also mean the committee if
such committee has been appointed and, unless the powers of the committee have
been specifically limited, the committee shall have all of the powers of the
Board of Directors granted herein, including, without limitation, the power to
terminate or amend the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law. All questions of interpretation of
the Plan or of any options granted under the Plan (an "Option") shall be
determined by the Board of Directors, and such determinations shall be final and
binding upon all persons having an interest in the Plan and/or any Option.
(b) Disinterested Administration. With respect to the participation in
the Plan of employees who are also officers or directors of the Company subject
to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Plan shall be
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<PAGE> 2
administered by the Board of Directors in compliance with the "disinterested
administration" requirement of Rule 16b-3, as promulgated under the Exchange Act
and amended from time to time or any successor rule or regulation ("Rule
16b-3").
(c) Compliance with Section 162(m) of the Code. In the event a
Participating Company is a "publicly held corporation" as defined in paragraph
(2) of Section 162(m) of the Code, as amended by the Revenue Reconciliation Act
of 1993 (P.L. 103-66), and the regulations promulgated thereunder ("Section
162(m)"), the Company may establish a committee of outside directors meeting the
requirements of Section 162(m) to approve the grant of Options which might
reasonably be anticipated to result in the payment of employee remuneration that
would otherwise exceed the limit on employee remuneration deductible for income
tax purposes pursuant to Section 162(m).
(d) Options Authorized. Options may be either incentive stock options as
defined in Section 422(a) of the Code ("Incentive Stock Options") or
nonstatutory options which are not intended to meet the requirements of Section
422 of the Code.
(e) Authority of Officers. Any officer of a Participating Company shall
have the authority to act on behalf of the Company with respect to any matter,
right, obligation, or election which is the responsibility of or which is
allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
3. Eligibility.
Options may be granted to persons who are employees or officers of, or
consultants or advisors to, the Company. For purposes of the foregoing sentence,
"employees" or "officers" shall include prospective employees or officers to
whom Options are granted in connection with written offers of employment with
the Company and "consultants" or "advisors" shall include prospective
consultants or advisors to whom Options are granted in connection with written
consulting or advising offers with the Company. However, Incentive Stock Options
may be granted only to persons who are employees of the Company at the time of
the grant. A person who has been granted an option may, if he or she is
otherwise eligible, be granted additional options if the Board of Directors
shall so determine.
4. Stock Subject to Plan.
Options shall be for the purchase of shares of the authorized but
unissued Common Stock or treasury shares of Common Stock of the Company. Subject
to adjustment as provided in Section 15 below, the maximum number of shares of
Common Stock of the Company which may be issued and sold under the Plan is
sixty-six million two hundred thousand (66,200,000) shares. Subject to
adjustment as provided in Section 15 below, at any such time as the Company is a
"publicly held corporation" as defined in paragraph 2 of Section 162(m), no
person shall be granted within any fiscal year of the Company Options which in
the aggregate cover more than seven hundred fifty thousand (750,000) shares;
provided, however, that the foregoing limit shall be one million five hundred
thousand (1,500,000) shares with respect to
2
<PAGE> 3
Options granted to any person during the first fiscal year of such person's
employment with the Company or upon the promotion of any person to an executive
office of the Company (the "Per Optionee Limit"). If an option granted under the
Plan shall expire or terminate for any reason without having been exercised in
full and/or shares of Common Stock subject to repurchase are repurchased by the
Company, the unpurchased shares subject to such option or such repurchased
shares shall again be available for subsequent option grants under the Plan.
Notwithstanding the foregoing, any such shares shall be made subject to a new
Option only if the grant of such new Option and the issuance of such shares
pursuant to such new Option would not cause the Plan or any Option granted under
the Plan to contravene Rule 16b-3.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be approved by the Board of Directors. Such option
agreements may differ among recipients.
6. Purchase Price.
(a) General. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors, provided,
however, that the exercise price shall not be less than 100% of the fair market
value of such stock, as determined by the Board of Directors, at the time of
grant of such option, or less than 110% of such fair market value in the case of
options described in Section 11(b).
(b) Payment of Purchase Price. Options granted under the Plan may
provide for the payment of the exercise price by delivery of cash or a check to
the order of the Company in an amount equal to the exercise price of such
options, or, to the extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company already owned
by the optionee having a fair market value equal in amount to the exercise price
of the options being exercised, (ii) by any other means (including, without
limitation, by delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board of Directors
determines are consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board) or (iii) by any
combination of such methods of payment. The fair market value of any shares of
the Company's Common Stock or other non-cash consideration which may be
delivered upon exercise of an option shall be determined by the Board of
Directors.
7. Option Period.
Each option and all rights thereunder shall expire on such date as shall
be set forth in the applicable option agreement, except that, in the case of an
Incentive Stock Option, such date shall not be later than ten years after the
date on which the option is granted and, in all cases, options shall be subject
to earlier termination as provided in the Plan.
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<PAGE> 4
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
Unless otherwise provided by the Board of Directors at the time of
grant, during the lifetime of the optionee, the Option shall be exercisable only
by the optionee and no Option shall be assignable or transferable by the
optionee, either voluntarily or by operation of law, except by will or the laws
of descent and distribution; provided, however, that nonstatutory options may be
transferred pursuant to a qualified domestic relations order (as defined in Rule
16b-3).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's employment or other relationship
with the Company or (ii) the death or disability of the optionee. Such periods
shall be set forth in the agreement evidencing such option.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Stockholder. If any employee to whom an Incentive Stock Option
is to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value of
one share of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed five years from the
date of grant.
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<PAGE> 5
(c) Dollar Limitation. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the Company
(or within such lesser period as may be specified in the applicable option
agreement), provided, that the agreement with respect to such option may
designate a longer exercise period and that the exercise after such three-month
period shall be treated as the exercise of a non-statutory option under the
Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is transferred
by will or the laws of descent and distribution within the period of one year
after the date of death (or within such lesser period as may be specified in the
applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within the
period of one year after the date the optionee ceases to be such an employee
because of such disability (or within such lesser period as may be specified in
the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors may, in its
sole discretion, include additional provisions in option agreements covering
options granted under the Plan, including without limitation, restrictions on
transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange
for or guaranty loans or to transfer other property to optionees upon exercise
of options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock
5
<PAGE> 6
Option granted under the Plan to fail to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
(b) Acceleration, Extension. Etc. The Board of Directors may, in its
sole discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. Compliance With Securities Laws.
Each option shall be subject to the requirement that if, at any time,
counsel to the Company shall determine that the listing, registration or
qualification of the shares subject to such option upon any securities exchange
or under any state or federal law, or the consent or approval of any
governmental or regulatory body, or that the disclosure of non-public
information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction or
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
14. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder with
respect to any shares covered by the option (including, without limitation, any
rights to receive dividends or non-cash distributions with respect to such
shares) until the date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related Transactions.
(a) General. If, through or as a result of any merger, consolidation,
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (1) the maximum number
and kind of shares reserved for issuance under the Plan, (2) the maximum number
and kind of shares described in the Per Optionee Limit, (3) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (4) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable.
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<PAGE> 7
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 15 if such adjustment would cause the Plan to fail to comply with
Section 422 of the Code or with Rule 16b-3.
(b) Board Authority to Make Adjustments. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 424(a) of the Code, (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified period following the date of such notice, (iii)
in the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) Substitute Options. The company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment at any time or to increase or decrease the
compensation of the optionee.
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<PAGE> 8
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect, provided, however, that without the
approval of the Company's stockholders, there shall be (i) no increase in the
total number of shares of Stock covered by the Plan (except by operation of the
provisions of paragraph 9 above), (ii) no change in the class of persons
eligible to receive Incentive Stock Options, and (iii) no expansion in the class
of persons eligible to receive nonstatutory options. In addition to the
foregoing, if at any time the approval of the stockholders of the Company is
required under Section 422 of the Code or any successor provision with respect
to Incentive Stock Options, or in order to comply with Rule 16b-3, the Board of
Directors may not effect such modification or amendment without such approval.
(b) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding
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obligation shall be determined by the Company as of the date that the amount of
tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a person required to
file reports under Section 16(a) of the Exchange Act, no election to use shares
for the payment of withholding taxes shall be effective unless made in
compliance with any applicable requirements of Rule 16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
canceled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Termination of the Plan.
Unless sooner terminated in accordance with Section 16, the Plan shall
terminate, with respect to Incentive Stock Options, upon the earlier of (i) May
15, 2001, or (ii) the date on which all shares available for issuance under the
Plan have been issued pursuant to the exercise or cancellation of options
granted under the Plan. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate with respect to options which are not Incentive Stock
Options on the date specified in (ii) above. If the date of termination is
determined under (i) above, then options outstanding on such date shall continue
to have force and effect in accordance with the provisions of the instruments
evidencing such options.
Notwithstanding any other provision to the contrary, the Initial Plan
and the Prior Plan shall remain in effect in accordance with their terms and
apply to Options granted pursuant to the Initial Plan and the Prior Plan,
respectively.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
9
<PAGE> 10
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing is the Bay Networks, Inc. 1994 Stock Option Plan as duly
adopted by the Board on August 17, 1994 and amended by the Board through July
29, 1997.
--------------------------------------
10
<PAGE> 1
BAY NETWORKS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
(As Amended by the Board through July 29, 1997)
1. Purpose. The Bay Networks, Inc. 1994 Employee Stock Purchase Plan (the
"Plan") is established to provide eligible employees of Bay Networks, Inc. ("Bay
Networks"), and any current or future parent or subsidiary corporations of Bay
Networks which the Board of Directors of Bay Networks (the "Board") determines
should be included in the Plan (collectively referred to as the "Company"), with
an opportunity to acquire a proprietary interest in the Company by the purchase
of common stock of Bay Networks. (Bay Networks and any parent or subsidiary
corporation designated by the Board as a participating corporation shall be
individually referred to herein as a "Participating Company." For purposes of
the Plan, a parent corporation and a subsidiary corporation shall be as defined
in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended
(the "Code").
It is intended that the Plan shall qualify as an "employee stock purchase
plan" under section 423 of the Code (including any future amendments or
replacements of such section), and the Plan shall be so construed. Any term not
expressly defined in the Plan but defined for purposes of section 423 of the
Code shall have the same definition herein.
An employee participating in the Plan (a "Participant") may withdraw such
Participant's accumulated payroll deductions (if any) therein at any time during
an Offering Period (as defined below). Accordingly, each Participant is, in
effect, granted an option pursuant to the Plan (a "Purchase Right") which may or
may not be exercised at the end of a Purchase Period and which is intended to
qualify as an option described in section 423 of the Code.
2. Administration. The Plan shall be administered by the Board and/or by a
duly appointed committee of the Board having such powers as shall be specified
by the Board. Any subsequent references to the Board shall also mean the
committee if a committee has been appointed. The Board shall have the sole and
absolute discretion to determine from time to time what parent corporations
and/or subsidiary corporations shall be Participating Companies. All questions
of interpretation of the Plan or of any Purchase Right shall be determined by
the Board and shall be final and binding upon all persons having an interest in
the Plan and/or any Purchase Right. Subject to the provisions of the Plan, the
Board shall determine all of the relevant terms and conditions of Purchase
Rights granted pursuant to the Plan; provided, however, that all Participants
granted Purchase Rights pursuant to the Plan shall have the same rights and
privileges within the meaning of section 423(b)(5) of the Code. All expenses
incurred in connection with the administration of the Plan shall be paid by the
Company.
3. Share Reserve. The maximum number of shares which may be issued under
the Plan shall be five million two hundred fifty thousand (5,250,000) shares of
the authorized but unissued common stock of Bay Networks (the "Shares"). In the
event that any Purchase Right
1
<PAGE> 2
for any reason expires or is canceled or terminated, the Shares allocable to the
unexercised portion of such Purchase Right may again be subjected to a Purchase
Right.
4. Eligibility. Any employee of a Participating Company is eligible to
participate in the Plan except the following:
(a) employees who are customarily employed by the Company for less than
twenty (20) hours a week;
(b) employees whose customary employment is for not more than five (5)
months in any calendar year; and
(c) employees who own or hold options to purchase or who, as a result of
participation in this Plan, would own or hold options to purchase, stock of the
Company possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of any one of the corporations referred to as
the Company within the meaning of section 423(b)(3) of the Code; and
5. Offerings.
(a) Offering Periods. Effective for Offerings beginning on and after
November 1, 1996, the Plan shall be implemented by offerings (individually an
"Offering") of twenty-four (24) months duration (an "Offering Period"). An
Offering shall commence on May 1 and November 1 of each year. The Offering
commencing on May 1 shall end on April 30 of the second following year. The
Offering commencing on November 1 shall end on October 31 of the second
following year. Notwithstanding the foregoing, the Board may establish a
different term for one or more Offerings and/or different commencing and/or
ending dates for such Offerings. The first day of an Offering shall be the
"Offering Date" for such Offering.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
consecutive purchase periods of six (6) months duration (the "Purchase Period").
The last day of each Purchase Period shall be the "Purchase Date" for such
Purchase Period. A Purchase Period commencing on May 1 shall end on the next
October 31. A Purchase Period commencing on November 1 shall end on the next
April 30. The Board may establish a different term for one or more Purchase
Periods and/or different commencing dates and/or Purchase Dates for such
Purchase Periods. In the event a Purchase Date is not a business day, the
Company shall specify the business day that will be deemed the Purchase Date.
(c) Governmental Approval; Shareholder Approval. Notwithstanding any
other provision of the Plan to the contrary, any Purchase Right granted pursuant
to the Plan shall be subject to (i) obtaining all necessary governmental
approvals and/or qualifications of the sale and/or issuance of the Purchase
Rights and/or the Shares, and (ii) obtaining shareholder approval of the Plan.
Notwithstanding the foregoing, shareholder approval shall not be necessary in
order to grant any Purchase Right granted on the Offering Date of the Plan's
initial Offering Period; provided, however, that the exercise of any such
Purchase Right shall be subject to obtaining shareholder approval of the Plan.
2
<PAGE> 3
6. Participation in the Plan.
(a) Initial Participation. An eligible employee shall become a
participant in the Plan (a "Participant") on the first Offering Date after
satisfying the eligibility requirements and delivering to the Company's payroll
office two (2) weeks prior to such Offering Date or as may be established by the
Company from time to time (the "Subscription Date") a subscription agreement
indicating the employee's election to participate in the Plan and authorizing
payroll deductions. An eligible employee who does not deliver a subscription
agreement to the Company on or before the Subscription Date shall not
participate in the Plan for that Offering or for any subsequent Offering unless
such eligible employee subsequently enrolls in the Plan by complying with the
provisions of paragraph 4 and by filing a subscription agreement with the
Company on or before the Subscription Date for such subsequent Offering. An
employee who becomes eligible to participate in the Plan after an Offering has
commenced shall not be eligible to participate in such Offering but may
participate in any subsequent Offering provided such employee is still eligible
to participate in the Plan as of the commencement of any such subsequent
Offering.
(b) Continued Participation. Participation in the Plan shall continue
until (i) the Participant ceases to be eligible as provided in paragraph 4, (ii)
the Participant withdraws from the Plan pursuant to paragraph 11, or (iii) the
Participant terminates employment or dies as provided in paragraphs 11(e) and
11(f). If a Participant is automatically withdrawn from an Offering at the end
of the first Purchase Period of such Offering pursuant to paragraph 11(c), then
the Participant shall automatically participate in the Offering Period
commencing concurrently with or immediately after the termination of such
Purchase Period. At the end of an Offering Period, each Participant in such
terminating Offering Period shall automatically participate in the first
subsequent Offering Period according to the same elections contained in the
Participant's subscription agreement effective for the Offering Period which has
just ended, provided such Participant is still eligible to participate in the
Plan as provided in paragraph 4. However, a Participant may file a subscription
agreement with respect to such subsequent Offering Period if the Participant
desires to change any of the Participant's elections contained in the
Participant's then effective subscription agreement.
7. Maximum Right to Purchase Shares.
(a) Except as set forth in subparagraph (b) below, during an Offering
Period each Participant shall have a Purchase Right consisting of the right to
purchase that number of whole Shares which may be purchased at the applicable
Offering Exercise Price (as defined in paragraph 8, below), with amount of the
Participant's accumulated payroll deductions for such Offering Period, up to a
maximum equal to that number of whole Shares arrived at by dividing twenty
thousand one hundred sixty dollars ($20,160) by eighty-five percent (85%) of the
fair market value of the Shares, as determined in accordance with paragraph 8,
below on the Offering Date.
(b) Notwithstanding any other provision of the Plan, no Participant
shall be entitled to purchase Shares under the Plan at a rate which exceeds
$25,000 in fair market value, determined as of the Offering Date for each
Offering Period (or such other limit as may be imposed by the Code), for each
calendar year in which the Participant participates in the Plan.
3
<PAGE> 4
8. Purchase Price. The purchase price at which Shares may be acquired at
the end of a Purchase Period pursuant to the exercise of all or any portion of a
Purchase Right granted under the Plan (the "Offering Exercise Price") shall be
eighty-five percent (85%) of the lesser of (a) the fair market value of the
Shares on the Offering Date of such Offering or (b) the fair market value of the
Shares on the Purchase Date or such higher price as may be set by the Board
prior to the commencement of an Offering. The fair market value of the Shares on
the Offering Date will be the closing price quoted on the New York Stock
Exchange (the "NYSE") on the last trading day prior to the Offering Date and the
fair market value of the Shares on the Purchase Date will be the closing price
quoted on the NYSE on the Purchase Date.
9. Payroll Deductions and Payment of Purchase Price.
(a) Payroll Deductions. Shares which are acquired pursuant to the
exercise of all or any portion of a Purchase Right for a given Offering Period
may be paid for only by means of payroll deductions from the Participant's
Compensation accumulated during the Offering Period. For purposes of the Plan, a
Participant's "Compensation" with respect to an Offering shall include all
amounts paid in cash and includable as "wages" subject to tax under section
3101(a) of the Code without applying the dollar limitation of section 3121(a) of
the Code. Accordingly, Compensation shall include, without limitation, salaries,
commissions, bonuses, and overtime. Compensation shall not include
reimbursements of expenses, allowances, or any amount deemed received without
the actual transfer of cash or any amounts directly or indirectly paid pursuant
to the Plan or any other stock purchase or stock option plan. Except as set
forth below, the amount of Compensation to be withheld from a Participant's
Compensation during each pay period shall be determined by the Participant's
subscription agreement.
(b) Election to Increase or Decrease Withholding. During an Offering
Period, except as provided in subparagraph 9(b)(ii), below, a Participant may
elect to increase or decrease the amount withheld from his or her Compensation
by filing an amended subscription agreement with the Company on or before the
Change Notice Date. The "Change Notice Date" shall initially be two (2) weeks
prior to the end of the first pay period for which such election is to be
effective; however, the Company may change such Change Notice Date from time to
time.
(c) Limitations on Payroll Withholding.
(i) The amount of payroll withholding with respect to the Plan for
any Participant during any pay period shall not exceed ten percent (10%) of the
Participant's Compensation for such pay period. Amounts shall be withheld in
whole percentages only and shall be reduced by any amounts contributed by the
Participant and applied to the purchase of Company stock pursuant to any other
employee stock purchase plan qualifying under section 423 of the Code.
(ii) The maximum amount of payroll deductions for any Purchase
Period may not exceed five thousand forty dollars ($5,040).
4
<PAGE> 5
(d) Payroll Withholding. Payroll deductions shall commence on the first
payday following the Offering Date and shall continue to the end of the Offering
Period unless sooner altered or terminated as provided in the Plan.
(e) Participant Accounts. Individual accounts shall be maintained for
each Participant. All payroll deductions from a Participant's Compensation shall
be credited to such account and shall be deposited with the general funds of the
Company. All payroll deductions received or held by the Company may be used by
the Company for any corporate purpose.
(f) No Interest Paid. Except as otherwise required by applicable law,
interest shall not be paid on sums withheld from a Participant's Compensation.
10. Exercise of Purchase Right.
(a) Automatic Exercise of Purchase Right. On each Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Offering or
whose participation in the Offering has not terminated on or before such last
day and each beneficiary who has elected to exercise a deceased Participant's
Purchase Right (pursuant to paragraph 11(f) below) shall automatically acquire
pursuant to the exercise of the Participant's Purchase Right the number of whole
Shares arrived at by dividing the total amount of the Participant's accumulated
payroll deductions for the Purchase Period by the Offering Exercise Price;
provided, however, in no event shall the number of Shares purchased by the
Participant or the beneficiary exceed the limitations set forth in paragraph 7.
Except as provided in paragraph 11(f) below, no Shares shall be purchased on
behalf of a Participant whose participation in the Offering or the Plan has
terminated on or before the date of such exercise.
(b) Return of Cash Balance. Any cash balance remaining in the
Participant's account shall be refunded to the Participant as soon as practical
after the Purchase Date. In the event the cash to be returned to a Participant
pursuant to the preceding sentence is an amount less than the amount necessary
to purchase a whole Share, the Company may establish procedures whereby such
cash is maintained in the Participant's account and applied toward the purchase
of Shares in the subsequent Purchase or Offering Period.
(c) Withholding. At the time the Purchase Right is exercised, in whole
or in part, or at the time some or all of the Shares are disposed of, the
Company shall withhold from the Participant's Compensation the amount, if any,
necessary to satisfy the foreign, federal and state tax withholding obligations
of the Company which may arise upon exercise of the Purchase Right and/or upon
disposition of Shares, unless the Participant makes other arrangements with the
Company to meet such withholding obligations.
(d) Company Established Procedures. The Company may, from time to time,
establish (A) a minimum required withholding amount for participation in any
Offering, (B) limitations on the frequency and/or number of changes in the
amount withheld during an Offering, (C) an exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, (D) payroll withholding in
excess of or less than the amount designated by a Participant in order to adjust
for delays or mistakes in the Company's processing of subscription agreements,
5
<PAGE> 6
and/or (E) such other limitations or procedures as deemed advisable by the
Company in the Company's sole discretion which are consistent with the Plan.
(e) Allocation of Shares. In the event the number of Shares which might
be purchased by all Participants in the Plan exceeds the number of Shares
available in the Plan, the Company shall make a pro rata allocation of the
remaining Shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable.
(f) Expiration of Purchase Right. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of such
Offering Period.
11. Withdrawal and Termination of Employment.
(a) Voluntary Withdrawal From an Offering. A Participant may withdraw
from an Offering by signing a written notice of withdrawal on a form provided by
the Company for such purpose and delivering such notice to the Company at any
time prior to the end of an Offering Period; however, if a Participant withdraws
after the Purchase Date for the first Purchase Period of an Offering, the
withdrawal shall not affect Shares acquired by the Participant in the prior
Purchase Period. A Participant may not thereafter resume participation in the
same Offering upon withdrawal from such Offering. Unless otherwise indicated by
the Participant, withdrawal from an Offering shall not result in a withdrawal
from the Plan or any succeeding Offering therein. The Company may, from time to
time, impose a requirement that the notice of withdrawal be on file with the
Company for a reasonable period prior to the effectiveness of the Participant's
withdrawal from an Offering.
(b) Voluntary Withdrawal from the Plan. A Participant may withdraw from
the Plan by signing a written notice of withdrawal on a form provided by the
Company for such purpose and delivering such notice to the Company. Withdrawals
made after the first Purchase Date of an Offering Period shall not affect shares
acquired by the Participant on such Purchase Date. In the event a Participant
voluntarily elects to withdraw from the Plan, the Participant may not resume
participation in the Plan during the same Offering Period, but may participate
in any subsequent Offering under the Plan by again satisfying the requirements
of paragraphs 4 and 6. The Company may impose, from time to time, a requirement
that the notice of withdrawal be on file with the Company for a reasonable
period prior to the effectiveness of the Participant's withdrawal from the Plan.
(c) Automatic Withdrawal From an Offering. If the fair market value of
the Shares on a Purchase Date (other than the last Purchase Date of an Offering)
is less than the fair market value of the Shares on the Offering Date for such
Offering, then every Participant shall automatically (i) be withdrawn from the
Offering at the close of the Purchase Date and after the acquisition of Shares
for such Purchase Period, and (ii) be enrolled in the Offering commencing
concurrently with or immediately after the termination of such Purchase Period.
(d) Waiver of Withdrawal Right. The Company may, from time to time,
establish a procedure pursuant to which a participant may elect (an "Irrevocable
Election"), prior to the commencement of an Offering Period or Purchase Period,
to have all payroll deductions
6
<PAGE> 7
accumulated in his or her Plan account as of the Purchase Date applied to
purchase shares under the Plan and (i) to waive his or her right to withdraw
from the Offering or the Plan pursuant to this paragraph 11, and (ii) to waive
his or her right to increase, decrease, or cease payroll deductions from his or
her compensation for such Offering during the time such election is in effect.
Such election shall be made in writing on a form provided by the Company for
such purpose and must be delivered to the Company not later than the close of
business on the day prior to the first day of the Offering Period or the
Purchase Period for which such election is to first be effective.
(e) Termination of Employment. Termination of a Participant's employment
with the Company for any reason, including retirement, other than death while in
the employ of the Company, shall terminate the Participant's participation in
the Plan immediately. A Participant whose participation has been so terminated
may again become eligible to participate in the Plan by again satisfying the
requirements of paragraphs 4 and 6.
(f) Death of a Participant. Upon termination of the Participant's
employment with the Company because of death, his or her beneficiary (as defined
in paragraph 13) shall have the right to elect, by written notice given to the
Company prior to the first to occur of (A) the expiration of the period of sixty
(60) days commencing with the date of the death of the Participant, or (B) the
Purchase Date next following the date of the Participant's death, either
(i) to withdraw all of the payroll deductions credited to the
Participant's account under the Plan; or
(ii) to exercise the Participant's Purchase Right on the Purchase
Date next following the date of the Participant's death for the purchase of the
number of whole Shares which the accumulated payroll deductions in the
Participant's account at the applicable Offering Exercise Price, and any excess
in such account will be returned to said beneficiary.
In the event that no such written notice of election shall be duly received by
the Company, the beneficiary shall automatically be deemed to have elected to
withdraw the payroll deductions credited to the Participant's account at the
date of the Participant's death.
12. Repayment of Payroll Deductions. In the event a Participant's interest
in the Plan or any Offering therein is terminated for any reason, the balance
held in the Participant's account balance shall be returned as soon as practical
after such termination to the Participant (or, in the case of the Participant's
death, to the Participant's beneficiary) and all of the Participant's rights
under the Plan shall terminate except as otherwise provided herein. Such account
balance may not be applied to any other Offering under the Plan. Except as
otherwise required by applicable law, no interest shall be paid on sums returned
to a Participant pursuant to this paragraph 12.
13. Designation of Beneficiary.
(a) Each Participant shall have the right to designate on forms provided
by the Company a beneficiary to receive the Shares and/or cash upon the
Participant's death as provided in paragraph 11(f).
7
<PAGE> 8
(b) If, upon the death of a Participant, former Participant or
beneficiary, there is no valid designation of beneficiary on file with the
Company, or if the designated beneficiary is not then living, the Company shall
designate as the Beneficiary, in order of priority:
(i) the surviving spouse;
(ii) surviving children, including adopted children;
(iii) surviving parents; or
(iv) the Participant's estate, provided that at all times the
Company shall have the right to designate as beneficiary the Participant's
estate irrespective of said order of priority.
The determination of the Company as to which persons, if any, qualify within the
aforementioned categories shall be final and conclusive upon all persons.
14. Transfer of Control. A "Transfer of Control" shall be deemed to have
occurred in the event any of the following occurs with respect to the Control
Company. For purposes of applying this paragraph 14, the "Control Company" shall
mean the Participating Company whose stock is subject to the Purchase Right.
(a) a merger in which the shareholders before such merger do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Control Company; or
(b) the sale or exchange of all or substantially all of the Control
Company's assets (other than a sale or transfer to a subsidiary of the Company
as defined in section 424(f) of the Code).
In the event of a Transfer of Control, the Board, in its sole
discretion, shall either (i) provide that Purchase Rights granted under the Plan
shall be fully exercisable to the extent of each Participant's account balance
for the Offering Period as of a date prior to the Transfer of Control, as the
Board so determines or (ii) arrange with the surviving, continuing, successor,
or purchasing corporation, as the case may be, that such corporation assume the
Company's rights and obligations under the Plan. All Purchase Rights shall
terminate effective as of the date of the Transfer of Control to the extent that
the Purchase Right is neither exercised as of the date of the Transfer of
Control nor assumed by the surviving, continuing, successor, or purchasing
corporation, as the case may be.
15. Capital Changes. In the event of changes in the common stock of the
Company due to a stock split, reverse stock split, stock dividend, combination,
reclassification, or like change in the Company's capitalization, or in the
event of any merger, sale or other reorganization, appropriate adjustments shall
be made by the Company in the Plan's share reserve, the number of Shares subject
to a Purchase Right and in the purchase price per share. Furthermore, in the
event of any such change the Board may terminate any outstanding Offering
effective on or after the effective date of any such change; provided, however,
the date of such
8
<PAGE> 9
termination shall be deemed a Purchase Date and shall be not sooner than thirty
(30) days after giving notice of such termination to the Participants.
16. Rights as a Stockholder and Employee. A Participant shall have no
rights as a stockholder by virtue of the Participant's participation in the Plan
until the date of the issuance of a stock certificate(s) for the Shares being
purchased pursuant to the exercise of the Participant's Purchase Right. No
adjustment shall be made for cash dividends or distributions or other rights for
which the record date is prior to the date such stock certificate(s) are issued.
Nothing herein shall confer upon a Participant any right to continue in the
employ of the Company or interfere in any way with any right of the Company to
terminate the Participant's employment at any time.
17. Reports. Each Participant who exercised all or part of the
Participant's Purchase Right for a Purchase Period shall receive as soon as
practical after the last day of such Purchase Period a report of such
Participant's account setting forth the total payroll deductions accumulated,
the number of Shares purchased and the remaining cash balance to be refunded or
retained in the Participant's account pursuant to paragraph 9(b), if any.
18. Plan Term. This Plan shall continue until terminated by the Board or
until all of the Shares reserved for issuance under the Plan have been issued,
whichever shall first occur.
19. Restriction on Issuance of Shares. The issuance of shares pursuant to
the Purchase Right shall be subject to compliance with all applicable
requirements of federal or state law with respect to such securities. The
Purchase Right may not be exercised if the issuance of shares upon such exercise
would constitute a violation of any applicable federal or state securities laws
or other law or regulations. In addition, no Purchase Right may be exercised
unless (i) a registration statement under the Securities Act of 1933, as
amended, shall at the time of exercise of the Purchase Right be in effect with
respect to the shares issuable upon exercise of the Purchase Right, or (ii) in
the opinion of legal counsel to the Company, the shares issuable upon exercise
of the Purchase Right may be issued in accordance with the terms of an
applicable exemption from the registration requirements of said Act. As a
condition to the exercise of the Purchase Right, the Company may require the
Participant to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
20. Legends. The Company may at any time place legends or other identifying
symbols referencing any applicable federal and/or state securities restrictions
and any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to effectuate the
provisions of this paragraph 20.
21. Non-Transferability. During the lifetime of the Participant, the
Purchase Right shall be exercisable only by said Participant. No Purchase Right
shall be assignable or transferable by the Participant, except by will or by the
laws of descent and distribution. The Company, in its absolute discretion, may
impose such restrictions on the transferability of the shares purchasable upon
the exercise of a Purchase Right as it deems appropriate and any such
9
<PAGE> 10
restriction shall be set forth in the respective subscription agreement and may
be referred to on the certificates evidencing such shares. The Company may
require the employee to give the Company prompt notice of any disposition of
shares of stock acquired by exercise of a Purchase Right within two years from
the date of granting such Purchase Right or one year from the date of exercise
of such Purchase Right. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
22. Amendment or Termination of the Plan. The Board may at any time amend
or terminate the Plan, except that such termination shall not affect Purchase
Rights previously granted under the Plan, nor may any amendment make any change
in a Purchase Right previously granted under the Plan which would adversely
affect the right of any Participant (except as otherwise specifically provided
in this Plan or as may be necessary to qualify the Plan as an employee stock
purchase plan pursuant to section 423 of the Code). In addition, an amendment to
the Plan must be approved by the stockholders of the Company, within the meaning
of section 423 of the Code, within twelve (12) months of the adoption of such
amendment if such amendment would authorize the sale of more shares than are
authorized for issuance under the Plan or would change the definition of the
corporations that may be designated by the Board as a corporation the employees
of which are eligible to participate in the Plan. In addition to the foregoing,
the approval of the Company's stockholders shall be sought for any amendment to
the Plan for which the Board deems stockholder approval necessary in order to
comply with Rule 16b-3 promulgated under the Exchange Act, and amended from time
to time or any successor rule or regulation.
10
<PAGE> 1
EXHIBIT 11
BAY NETWORKS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
-------------- -------------
(unaudited)
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $ 41,330 $ 5,625
======== ========
Shares:
Weighted average shares outstanding: 209,487 188,270
Add: Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 11,113 8,075
-------- --------
Weighted average common shares and
equivalents outstanding 220,600 196,345
======== ========
Primary earnings per share $ 0.19 $ 0.03
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
FULLY DILUTED EARNINGS PER SHARE (A):
Net income $ 41,330 $ 5,625
======== ========
Shares:
Weighted average shares outstanding 209,487 188,270
Add: Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 12,663 9,321
-------- --------
Weighted average common shares and
equivalents outstanding 222,150 197,591
======== ========
Fully diluted earnings per share $ 0.19 $ 0.03
======== ========
</TABLE>
_________________
(A) This calculation is submitted in accordance with Securities Exchange Act of
1934, Regulation S-K Item 601, although not required by Footnote 2 to
Paragraph 14 of "Accounting Principles Board Option No. 15" because it
results in dilution of less than 3%.
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-END> SEP-27-1997
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0
0
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</TABLE>
