<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 MARCH 31, 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.
198,850,559 shares of Common Stock, $.01 par value, as of March 31, 1997
This report on Form 10-Q, including all exhibits, contains 22 pages. The
exhibit index is located on page 20 of this report.
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<PAGE> 2
BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- March 31, 1997
and June 30, 1996 3
Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit Index 20
</TABLE>
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
---------- ----------
(unaudited)
<C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 410,227 $ 315,064
Short-term investments 118,192 119,093
Accounts receivable, net of allowance for doubtful
accounts of $8,561 at March 31, 1997 and
$9,683 at June 30, 1996 295,503 320,892
Inventories 145,210 239,725
Deferred income taxes 102,630 74,320
Other current assets 75,098 48,615
---------- ----------
Total current assets 1,146,860 1,117,709
Investments 134,356 154,064
Property and equipment, net 252,483 211,674
Other assets 83,709 23,088
---------- ----------
$1,617,408 $1,506,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 110,027 $ 116,894
Accrued expenses 185,690 133,352
Accrued income taxes 595 4,818
Deferred revenue 64,458 46,629
---------- ----------
Total current liabilities 360,770 301,693
Long-term debt 109,995 110,147
Stockholders' equity 1,146,643 1,094,695
---------- ----------
$1,617,408 $1,506,535
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 512,893 $ 521,715 $ 1,550,084 $ 1,521,089
Cost of sales 260,231 242,287 795,022 696,710
----------- ----------- ----------- -----------
Gross profit 252,662 279,428 755,062 824,379
----------- ----------- ----------- -----------
Operating expenses:
Research and development 73,290 54,159 196,813 157,618
Selling and marketing 129,518 118,565 409,248 324,305
General and administrative 20,110 16,508 66,115 52,492
Merger related expenses -- (5,944) -- 10,231
In-process research and
development -- 39,713 208,186 39,713
Restructuring/severance
charges 32,188 -- 32,188 --
----------- ----------- ----------- -----------
Total operating expenses 255,106 223,001 912,550 584,359
----------- ----------- ----------- -----------
Income (loss) from operations (2,444) 56,427 (157,488) 240,020
Net interest income and other 2,845 7,115 14,154 23,562
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes 401 63,542 (143,334) 263,582
Provision for income taxes 146 34,355 23,670 112,401
----------- ----------- ----------- -----------
Net income (loss) $ 255 $ 29,187 $ (167,004) $ 151,181
=========== =========== =========== ===========
Net income (loss) per share $ -- $ 0.15 $ (0.87) $ 0.76
=========== =========== =========== ===========
Weighted average common
shares and equivalents 203,079 200,244 192,894 199,033
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $(167,004) $ 151,181
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 88,144 54,191
In-process research and development 208,186 39,713
Restructuring/severance charges 9,833 --
Benefit from deferred income taxes (26,443) (7,151)
Changes in operating assets and liabilities:
Accounts receivable 30,369 (125,083)
Inventories 99,216 (160,943)
Other current assets (26,204) (28,151)
Accounts payable (11,690) 50,634
Accrued expenses 48,495 67,227
Accrued income taxes 6,912 24,493
Deferred revenue 17,276 11,734
--------- ---------
Cash flows provided by operating activities 277,090 77,845
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (128,054) (107,348)
Purchases of investments (153,250) (395,480)
Proceeds from maturities of investments 146,719 394,751
Proceeds from sales of investments 27,140 41,990
Payments for acquisition of Armon Networking
Ltd., net assets -- (34,182)
Payments for acquisition of Performance Technology,
Inc., net of cash acquired -- (12,083)
Payments for acquisition of LANcity Corporation,
net of cash acquired (58,821) --
Payments for acquisition of Penril DSP (37,087) --
Payments for acquisition of NetICs, Inc.,
net of cash acquired (6,549) --
Other assets 13,914 (16,897)
--------- ---------
Cash flows used in investing activities (195,988) (129,249)
--------- ---------
Cash flows from financing activities:
Payments of short-term borrowings related to the
acquisition of Penril DSP (4,165) --
Payments of long-term debt (152) (348)
Issuance of common stock, net 18,378 52,461
--------- ---------
Cash flows provided by financing activities 14,061 52,113
--------- ---------
Net increase in cash and cash equivalents 95,163 709
Cash and cash equivalents, beginning of period 315,064 283,913
--------- ---------
Cash and cash equivalents, end of period $ 410,227 $ 284,622
========= =========
</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") operates in one
industry segment and develops, manufactures, markets and supports a
comprehensive line of data networking products and services, including
high-speed routers, switches, intelligent hubs, remote and Internet access
solutions and sophisticated management software providing network design and
configuration solutions. These products enable end users to build or enhance
their data network systems, including all levels from small local area networks
to large enterprise-wide information infrastructures and telecommunication
carriers.
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 in the first half of
fiscal 1997, the restructuring/severance charges incurred during the three
month period ended March 31, 1997, the merger related expenses incurred during
the second and third quarter of fiscal 1996 and the in-process research and
development charges incurred during the three month period ended March 31,
1996, which the Company believes are infrequent in nature. 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, 1996 included in the
Company's 1996 Annual Report on Form 10-K.
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 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
(unaudited)
<S> <C> <C>
Raw materials $ 37,689 $ 98,342
Work-in-process 27,318 54,468
Finished goods 80,203 86,915
-------- --------
Total inventories $145,210 $239,725
======== ========
</TABLE>
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, whichever is
shorter. (in thousands)
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996
--------------- --------------
(unaudited)
<S> <C> <C>
Machinery and equipment $ 391,632 $ 309,473
Furniture and fixtures 45,706 36,685
Leasehold improvements 73,992 55,327
--------- ---------
Total property and equipment 511,330 401,485
Accumulated depreciation and amortization (258,847) (189,811)
--------- ---------
Total property and equipment, net $ 252,483 $ 211,674
========= =========
</TABLE>
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<PAGE> 7
3. BUSINESS COMBINATIONS
During the nine months ended March 31, 1997, the Company acquired
three businesses described below, each of which has been accounted for as a
purchase. Pro forma results of operations have not been presented because the
effects of these acquisitions were not material to the Company's consolidated
financial position, results of operations, and cash flows.
On December 17, 1996, the Company acquired NetICs, Inc. ("NetICs"), a
privately held company developing high-performance, autosensing Fast Ethernet
switches. The Company exchanged 2,193,709 shares of the Company's common stock
and $36.4 million in cash for all of the outstanding shares of capital stock of
NetICs as of the date of acquisition. Under the terms of the agreement, the
Company may pay an additional $8 million for commitment targets achieved by
NetICs prior to December 1997. The total purchase price of $88.6 million was
allocated to the acquired assets and liabilities based on their estimated fair
values as of the date of acquisition. This included $6.7 million for a
covenant-not-to-compete and other intangible assets, which are being amortized
on a straight-line basis over a five year period. Approximately $80.9 million
was allocated to in-process research and development and charged to operations.
On November 18, 1996, the Company acquired the Digital Signal
Processing (DSP) modem business of Penril DataComm Networks, Inc. (Penril), a
provider of advanced DSP-based modems and remote access products. The Company
exchanged 5,377,028 shares of the Company's common stock for all of the shares
of Penril's common stock at the date of acquisition. Immediately prior to the
closing of this transaction, the remaining non-DSP modem businesses of Penril
were transferred and contributed to Penril stockholders under the corporate
name Access Beyond, Inc. The total purchase price of $136.4 million was
allocated to the acquired assets and liabilities based on their estimated fair
values as of the date of acquisition. This included $47.0 million to goodwill
and $4.0 million to other intangible assets, which are being amortized on a
straight-line basis over a five year period. Approximately $84.6 million was
allocated to in-process research and development and charged to operations.
On September 24, 1996, the Company acquired all of the outstanding
shares of LANcity Corporation, a provider of advanced cable modem technology.
The total cash purchase price of $59.5 million was allocated to the acquired
assets and liabilities based on their estimated fair values as of the date of
acquisition. This included $8.3 million to developed technology and $5.6
million to other intangible assets, which are being amortized on a
straight-line basis over a five year period. Approximately $42.6 million was
allocated to in-process research and development and charged to operations.
4. INCOME TAXES
The Company's provision for income taxes for the three month and nine
month periods ended March 31, 1997 is based upon the Company's estimate of the
effective tax rate for fiscal 1997 and includes the effect of the in-process
research and development and restructuring/severance charges recorded in the
same periods. The Company's effective tax rate for the three month and nine
month periods ended March 31, 1997 was 36.5%, exclusive of the in-process
research and development charge. The Company's accrued income taxes were
reduced by a tax benefit from employee stock option transactions of $5.4
million and $11.1 million for the three month and nine month periods ended
March 31, 1997 which were credited directly to stockholders' equity.
5. PER SHARE DATA
Primary earnings per share were computed using the weighted average
number of common shares and dilutive common share equivalents outstanding
during the period using the treasury stock method.
For the periods in which the Company had a net loss, the net loss per
share data was computed using only the weighted average number of shares
outstanding during the period.
6. FOREIGN EXCHANGE HEDGING
During March 1997, the Company entered into foreign currency forward
contracts to manage its exposure to foreign currency rate changes 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. These contracts are
denominated in Japanese, Australian,
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<PAGE> 8
Swedish and French currencies. 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.
At March 31, 1997, the Company has $11 million of short-term foreign
exchange forward contracts outstanding which approximated the fair value of
such contracts and their underlying transactions at March 31, 1997. The
outstanding forward contracts have original maturities that do not exceed one
month. The gains and losses on forward exchange contracts are included in
earnings when the underlying foreign currency denominated transaction is
recognized. Gains and losses related to these instruments at March 31, 1997
were not material. The Company does not anticipate any material adverse effect
on its consolidated financial position, results of operations, and cash flows
resulting from the use of these instruments.
7. RESTRUCTURING/SEVERANCE CHARGES
During the three month period ended March 31, 1997, the Company
initiated a restructuring program as a result of decisions by its management
team to transform the Company's organizational structure in order to align
resources with a new strategic business model and to lower the Company's cost
structure. The restructuring actions resulted in a charge of $32.2 million and
included a reduction of headcount, executive terminations, and consolidation of
certain facilities. The restructuring provisions, supported by appropriate
levels of specificity for planned actions, were established and approved by the
Company's executive management and its Board of Directors. Actual restructuring
costs will be recognized as reductions in the related restructuring accrual
within the period incurred.
The following is an analysis of the components of the restructuring
charge recorded in the third quarter of fiscal 1997 (in thousands):
<TABLE>
<CAPTION>
Total Cash paid in the
Restructuring Non-Cash third quarter of Accruals as of
Costs Costs fiscal 1997 March 31, 1997
----- ----- ----------- --------------
<S> <C> <C> <C> <C>
Severance, taxes and
benefits ...................... $15,145 $ 9,833 $ 1,563 $ 3,749
Facilities .................... 17,043 -- 291 16,752
------- ------- ------- -------
Total ..................... $32,188 $ 9,833 $ 1,854 $20,501
======= ======= ======= =======
</TABLE>
The 1997 provision for severance, taxes and benefits was for payments
related to the reduction of work force and executive terminations including
employment agreements with the former Chief Executive Officer and President,
Chairman of the Board, and Chief Technology Officer. The 1997 provision included
termination benefits for approximately 161 employees, of which approximately 84%
were based in the United States and the remainder in Europe. Approximately 86%
of the planned terminations were in sales, marketing, and service/support
functions, with the balance coming from manufacturing and administrative
functions. The severance payments will be paid out over the next two years, with
a majority extending over the next nine months. The non-cash cost of $9.8
million represent the Black-Scholes valuation for certain individuals that were
granted stock option vesting beyond their last day worked. This non-cash charge
was recorded as additional paid in capital in stockholders' equity.
The 1997 provision for facilities included primarily lease payments,
fixed costs, and lease-hold impairments, offset by estimated sub-lease income,
associated with plans to permanently exit excess space associated with the
sales, support, and administrative operations in approximately 24 leased
facilities throughout the United States, one in Europe and one in Hong Kong. The
Company plans to vacate substantially all of these facilities by December 31,
1997. The above leases have remaining terms ranging from four to nine years and
as such, the related future minimum lease payments will be paid out over periods
of up to nine years.
8. SIGNIFICANT CUSTOMERS
No one customer accounted for more than 10% of the Company's revenue in
the three month or nine month periods ended March 31, 1997. One reseller
customer accounted for 10.5% ($54.9 million) and 13.6% ($206.3 million) in the
three month and nine month periods ended March 31, 1996, respectively.
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<PAGE> 9
9. ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement Number 128 (SFAS 128), Earnings Per Share, which is required
to be adopted by the Company on December 31, 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 primary earnings per share, the dilutive effect of stock options
will be excluded. There is expected to be no impact on primary earnings per
share for the three months ended March 31, 1997 and an expected increase in
primary earnings per share of $0.01 per share for the three months ended March
31, 1996. The Company has not yet determined what the impact of SFAS 128 will
be on the calculation of fully diluted earnings per share.
10. LEGAL PROCEEDINGS
On March 4, 1997, the Company announced that stockholders filed two
separate lawsuits against the Company and ten of the Company's current and
former officers and directors. One lawsuit has been filed in the United States
District Court for the Northern District of California and alleges violations
of the federal securities laws. The other lawsuit has been filed in California
Superior Court, County of Santa Clara, and alleges violations of the California
Corporations Code. Both lawsuits purport to seek damages on behalf of a class
of stockholders who purchased the Company's common stock during the period of
July 25, 1995 through October 14, 1996. Both cases are in the initial stages of
litigation and no trial dates have been set.
11. SUBSEQUENT EVENTS
On April 18, 1997, a stockholder filed a lawsuit in Santa Clara
County, California Superior Court alleging violations of the federal securities
laws and California Corporations Code by the Company and nine of its current
and former officers and directors. The lawsuit purports to seek damages on
behalf of a class of stockholders who acquired the Company's common stock
pursuant to the Registration Statement and Prospectus that became effective on
November 15, 1995. This case is in the initial stages of litigation.
On April 22, 1997, the Company acquired ISOTRO Network Management Inc.
(ISOTRO), a privately held Canada-based vendor of standards- based Domain
Naming Service (DNS) and Dynamic Host Configuration Protocol (DHCP) technology.
The Company paid approximately $11.5 million in cash for all outstanding shares
of ISOTRO. Based on preliminary estimates, the Company expects that a
substantial portion of the total purchase price will be allocated to in-process
research and development and will be charged to operations during the quarter
ended June 30, 1997.
-9-
<PAGE> 10
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 under the heading "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.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends.
The matters discussed herein may include forward-looking statements
that involve risks and uncertainties. The Company wishes to caution readers
that a number of important factors, including those identified in such sections
and 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, could 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 $512.9 million for the three month period ended
March 31, 1997 as compared to $521.7 million for the three month period ended
March 31, 1996, a decrease of 1.7%. For the nine month periods ended March 31,
1997 and 1996, revenue was $1,550 million and $1,521 million, respectively, an
increase of 1.9%. The decline in fiscal 1997 third quarter revenue resulted
from the full quarter effect of pricing actions taken by the Company in its
second fiscal quarter and an industry wide decline in demand on shared media
LAN products. However, the Company experienced an overall increase in its
switching nodes and remote access businesses, as the Company responds to the
growth in Internet and Intranet usage. Revenue for the third quarter of fiscal
1997 decreased $1.6 million compared to the second quarter of fiscal 1997.
Generally, revenues were consistent from the second quarter to the third
quarter of fiscal 1997.
International revenue decreased 16.6% to $181.3 million for the three
month period ended March 31, 1997, as compared to $217.3 million for the
comparable period of the prior year. International revenue represented
approximately 35.3% and 41.7% of total revenue for the three month periods
ended March 31, 1997 and 1996, respectively. The geographic mix of third
quarter fiscal 1997 revenue is consistent with previous quarters in fiscal
1997. For the nine month period ended March 31, 1997, international revenue
decreased 3.1% to $541.8 million, as compared to $559.1 million for the
comparable period of the prior year. International revenue represented
approximately 35.0% and 36.8% of total revenue for the nine month periods ended
March 31, 1997 and 1996, respectively. The decreases in absolute dollars and
as a percentage of total revenue were a result of weaker economic conditions in
international markets and markets that are only beginning to adopt networking
technologies. 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.
Such 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 by $26.8 million or 9.6% to
$252.7 million or 49.3% of revenue for the three month period ended March 31,
1997, from $279.4 million or 53.6% of revenue for the comparable period of the
prior year. For the nine month period ended March 31, 1997, gross profit
decreased by $69.3 million or 8.4% to $755.1 million or 48.7% of revenue from
$824.4 million or 54.2% of revenue for the comparable period of the prior year.
The gross profit decline was a result of continued competitive price reductions
and product mix shift towards lower margin products, including stackable LAN
and WAN equipment used in small enterprise/small office environments. In
addition, the Company charged to operations $20.5 million of inventory in
connection with the consolidation of certain product lines in December 1996.
This charge was part of the Company's effort to more closely align its
operations with its core business going forward. Gross profit increased,
however, by $23 million or 10.0% during the third quarter from the second
quarter of fiscal 1997. The increase was primarily due to improved switching
margins as a result of the shift to higher margin switching products. Gross
profit may continue to decline compared to the comparable period in the prior
year if the Company's product mix continues to shift
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<PAGE> 11
towards stackable products, desktop switching and lower margin router products,
and the Company continues to take competitive pricing actions. Other factors,
including changes in material and labor costs, may also have an adverse effect
on gross profit in the future.
Manufacturing Facilities. The Company maintains manufacturing
facilities in Santa Clara, California, Billerica, Massachusetts and Andover,
Massachusetts. The Company also relies on support located throughout the world
for raw materials and subcomponents. In addition, the Company began
manufacturing and distribution in Limerick, Ireland during the quarter ended
March 31, 1997.
Operating Expenses. Research and development expenses for the three
month period ended March 31, 1997 increased 35.3% to $73.3 million from $54.2
million for the comparable period of the prior year. As a percentage of
revenue, expenses were 14.3% in the third quarter of fiscal 1997 and 10.4% in
the comparable period of the prior year. Research and development expenses for
the nine month period ended March 31, 1997 increased 24.9% to $196.8 million
from $157.6 million for the comparable period of the prior year. As a
percentage of revenue, expenses were 12.7% for the current year to date
compared to 10.4% in the comparable period of the prior year. The increase
relates to improving and expanding facilities and depreciation of equipment for
the development of new products, the associated costs to enhance current
product offerings in order to continue the life cycle of such products to meet
customer demand and the addition of personnel through hiring as well as the
acquisition of technologies. In addition, the Company incurred expenses
associated with acquisitions by aligning accounting practices/policies of
acquired companies with those of the Company in December 1996. 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 which may bring products to the
market more quickly. The Company continues to focus on providing end-to-end
networking solutions to customers of all sizes, ranging from small and home
offices to large enterprises, Internet service providers and telephone
companies. Acquisitions are very important to the Company to achieve end to
end user solutions. The Company plans to continue to increase research and
development spending in absolute dollars in order to pursue its goal of
developing an infrastructure of new products needed for timely product
introductions to the market. 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.
Selling and marketing expenses for the three month period ended March
31, 1997 increased 9.2% to $129.5 million, from $118.6 million in the
comparable period of the prior year. As a percentage of revenue, expenses
increased to 25.3% for the three month period ended March 31, 1997, from 22.7%
in the comparable period of the prior year. For the nine month period ended
March 31, 1997, selling and marketing expenses increased 26.2% to $409.2
million, from $324.3 million in the comparable period of the prior year. As a
percentage of revenue, expenses increased to 26.4% for the current year to date
compared to 21.3% in the comparable period of the prior year. The increase in
selling and marketing expenses was related to, among other things: the costs
associated with an increased sales and customer support staff and related
commissions; expansion of the Company's domestic and international sales
presence in certain markets; and investments related to marketing programs
associated with new product introductions. Furthermore, in December 1996, the
Company incurred expenses related to a reduction in certain excess office space
in connection with the Company's effort to more closely align its operations
with its core business going forward. From the second quarter to the third
quarter of fiscal 1997, selling and marketing expenses decreased by $22.0
million or 14.5%. This decrease is primarily attributable to decreases in
headcount, facilities, and travel related spending as a result of the
organizational realignment that took place in February 1997 and cost saving
initiatives implemented. 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's intent is to effectively market Bay
Networks and its products to the public.
General and administrative expenses for the three month period ended
March 31, 1997 increased 21.8% to $20.1 million from $16.5 million in the
comparable period of the prior year. As a percentage of revenue, expenses
increased to 3.9% for the three month period ended March 31, 1997, from 3.2% in
the comparable period of the prior year. General and administrative expenses
for the nine month period ended March 31, 1997 increased 26.0% to $66.1 million
from $52.5 million in the comparable period of the prior
-11-
<PAGE> 12
year. As a percentage of revenue, expenses increased to 4.3% for the current
year to date compared to 3.5% in the comparable period of the prior year. The
increase in expenses is primarily due to costs incurred in aligning accounting
practices/policies of acquired companies with those of the Company, information
technology needed to support the infrastructure required to carry out the
Company's global business strategy, and expenditures related to both
rearranging and retooling of domestic and international facilities. General and
administrative expenses decreased by $6.3 million or 23.9% from the second
quarter to the third quarter of fiscal 1997. This decrease is primarily
attributable to a decline in headcount, facilities and travel related expenses
resulting from the organizational restructuring. 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.
Current year to date, the Company has acquired three businesses for a
total purchase price of $284.5 million. Of the aggregate purchase price, $208.2
million was allocated to in-process research and development related to
internetworking technologies and charged to operations.
Restructuring/Severance Charges. During the three month period ended
March 31, 1997, the Company initiated a restructuring program as a result of
decisions by its management team to transform the Company's organizational
structure in order to align resources with a new strategic business model and
to lower the Company's cost structure. The restructuring actions resulted in a
charge of $32.2 million and included a reduction of headcount, executive
terminations and consolidation of certain facilities.
The following is an analysis of the components of the restructuring
charge recorded in the third quarter of fiscal 1997 (in thousands):
<TABLE>
<CAPTION>
Total Cash paid in the
Restructuring Non-Cash third quarter of Accruals as of
Costs Costs fiscal 1997 March 31, 1997
----- ----- ----------- --------------
<S> <C> <C> <C> <C>
Severance, taxes and
benefits ........................... $15,145 $ 9,833 $ 1,563 $ 3,749
Facilities ......................... 17,043 -- 291 16,752
------- ------- ------- -------
Total .......................... $32,188 $ 9,833 $ 1,854 $20,501
======= ======= ======= =======
</TABLE>
The 1997 provision for severance, taxes and benefits was for payments
related to the reduction of work force and executive terminations including
employment agreements with the former Chief Executive Officer and President,
Chairman of the Board, and Chief Technology Officer. The 1997 provision
included termination benefits for approximately 161 employees, of which
approximately 84% were based in the United States and the remainder in Europe.
Approximately 86% of the planned terminations were in sales, marketing, and
service/support functions, with the balance coming from manufacturing and
administrative functions. The severance payments will be paid out over the next
two years, with a majority extended over the next nine months. The non-cash
cost of $9.8 million represent the Black-Scholes valuation for certain
individuals that were granted stock option vesting beyond their last day
worked. This non-cash charge was recorded to additional paid in capital in
stockholders' equity.
The 1997 provision for facilities included primarily lease payments,
fixed costs, and lease-hold impairments, offset by estimated sub- lease income,
associated with plans to permanently exit excess space associated with the
sales, support, and administrative operations in approximately 24 leased
facilities throughout the United States, one in Europe and one in Hong Kong.
The Company plans to vacate substantially all of these facilities by December
31, 1997. The above leases have remaining terms ranging from four to nine years
and as such the related future minimum lease payments will be paid out over
periods of up to nine years.
Net Interest Income and Other. Net interest income and other decreased
60.0%, to $2.8 million for the three month period ended March 31, 1997,
compared to $7.1 million for the comparable period of the prior year and
decreased as a percentage of revenue to 0.6% in the third quarter of fiscal
1997 from 1.4% in the comparable period in the prior year. Current year to
date, net interest income and other decreased 39.9%, to $14.2 million compared
to $23.6 million for the comparable period of the prior year and decreased as a
percentage of revenue to 0.9% for the current year to date from 1.5% in the
comparable period of the prior year. The interest income from cash and
investments was consistent for the periods presented, however, the overall
decrease was due to the strengthening of the U.S. dollar which impacted foreign
exchange gain/loss
-12-
<PAGE> 13
resulting from the translation of the parent company's accounts receivable from
international subsidiaries from the local currency to the U.S. dollar.
Foreign exchange hedging. The Company entered into foreign currency
forward contracts to manage its exposure to currency fluctuations on
intercompany foreign currency denominated balance sheet positions during March
1997. 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. At
March 31, 1997, the Company has $11 million of short-term foreign exchange
forward contracts outstanding in Japanese, Australian, Swedish and French
denominated currencies which approximated the fair value of such contracts and
their underlying transactions at March 31, 1997. Gains and losses related to
these instruments at March 31, 1997 were not material. The Company does not
anticipate any material adverse effect on its financial position, results of
operations, and cash flows resulting from the use of these instruments.
Impact of foreign currency rate changes. During the nine months ended
March 31, 1997, most currencies in Europe and Asia weakened against the U.S.
dollar. Consequently, the translation of the parent company's intercompany
receivable had a negative impact, although not material, on the consolidated
results of the Company's operating expenses, partially offset by the
translation of the operating expenses of the Company's international
subsidiaries. As a result, forward exchange contracts were 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. There can be no assurance that
these strategies will be effective or that transaction losses can be minimized
or forecasted accurately. Exchange gains and losses did not have a significant
effect on the Company's results of operations for the three month period and
the nine month period ended March 31, 1997, respectively.
Income Taxes. The Company's effective income tax rates for the three
month and nine month periods ended March 31, 1997 were 36.5% compared to 37.5%
and 37.4% for the comparable periods in the prior year, respectively, excluding
the effect of the in-process research and development charge and merger related
expenses which are not deductible for income tax purposes. The decrease in the
effective income tax rate was primarily related to a decrease in the state
income taxes.
Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement Number 128 (SFAS 128), Earnings Per
Share, which is required to be adopted by the Company on December 31, 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 primary earnings per share, the dilutive effect of
stock options will be excluded. There is expected to be no impact on primary
earnings per share for the three months ended March 31, 1997 and an expected
increase in primary earnings per share of $0.01 per share for the three months
ended March 31, 1996. The Company has not yet determined what the impact of
SFAS 128 will be on the calculation of fully diluted earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities increased to $277.1 million
for the nine month period ended March 31, 1997, compared to $77.8 million for
the comparable period of the prior year. Cash provided from operations
increased from the prior period primarily due to decreases in accounts
receivable and inventory, and an increase in accrued expenses, partially offset
by a decrease in accounts payable, an increase in other current assets, and a
decrease in income before depreciation and amortization, in-process research
and development charges, and restructuring/severance charges. The decrease in
accounts receivable from March 31, 1996 to March 31, 1997, was due to increased
focus on collections efforts although timing of shipments during the period
were skewed towards the last month of the period, more so than the comparable
period in the prior year. Days sales outstanding in receivables decreased to 52
days at March 31, 1997, from 54 days as of June 30, 1996. Days sales
outstanding may continue to vary, due to, among other things, timing of product
shipments and increased international sales. The decrease in inventory
resulted from a reduction in manufacturing lead times and the consolidation of
certain product lines, as the Company continues to focus on inventory
management, balancing inventory levels between anticipated orders by the market
versus the obsolescence of inventory.
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<PAGE> 14
Cash used in investing activities was $196.0 million for the nine
month period ended March 31, 1997, compared to $129.2 million in the comparable
period of the prior year. The consumption of cash in the current year to date
resulted from the startup costs associated with the Limerick, Ireland
manufacturing and distribution center, continued investments in property and
equipment and improvements to the Company's information technology systems
required to support the Company's operations in fiscal 1997. In addition, the
Company acquired three businesses during the first nine months of fiscal 1997
as part of the Company's effort to position itself in the emerging cable modem
marketplace, to build on its 10/100 Ethernet switch market, and to enhance its
modem technology. The cash portions of the purchase prices for such
transactions aggregated approximately $102.5 million. Furthermore, as a result
of interest rate fluctuations, the Company's portfolio consisted of more cash
equivalents than investments as of March 31, 1997 compared to March 31, 1996.
Cash provided by financing activities was $14.1 million in the first
nine months of fiscal 1997, compared to $52.1 million in the comparable period
of the prior year. Cash provided by financing activities during the nine months
ended March 31, 1997 consisted primarily of cash received in connection with
the net issuance of stock under the Company's stock plans, offset by the
payment of short-term borrowings related to the acquisition of Penril DSP. Cash
generated by the issuance of employee stock options in the nine month period
ended March 31, 1997 decreased from the prior period due to a lower stock
price, although the Company repriced stock option grants to $19.50 on October
28, 1996.
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 March 31, 1997, total cash and short- and long-term investments
totaled $662.8 million, up from $588.2 million at June 30, 1996. 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 discussions may include forward-looking
statements that involve risks and uncertainties. In addition to those risk
factors discussed elsewhere in this report, Bay Networks identifies the
following risk factors which could affect the Company's actual results and
cause actual results to differ materially from those in the forward-looking
statements.
Risks Related to New Products. The Company's future revenue is
dependent on its ability to successfully develop, manufacture and market
products for customers worldwide. In this regard, future growth is dependent on
the Company's ability to timely and successfully develop and introduce new
products, establish new distribution channels, develop affiliations with leading
market participants which facilitate product development and distribution, and
market existing and new products with service providers, resellers and channel
partners, and others. Also, future revenue may be affected in part by factors
which influence the business of the Company's direct and indirect resellers,
such as the resellers' organization structure, purchasing patterns and inventory
levels.
The Company believes that the markets for its products are
characterized by rapid rates of technological innovation for both hardware and
software. Rapid rates of technological change, in turn, may lead to shorter or
more unpredictable product life cycles. There can be no assurance that the
Company's research and development efforts will result in commercially
successful new technology and products in the future. As the technical
complexity of new products increases, it may become increasingly difficult to
introduce new products quickly and according to schedule. In addition, due to
development in the market, the Company may need to adjust its product mix and
market focus.
Recent Management Transitions and Restructuring. The Company has
appointed a new President, Chief Executive Officer and Chairman of the Board, a
new Executive Vice President of Sales, Service, and Marketing and a new
Executive Vice President and Chief Financial Officer in fiscal 1997. In
addition, the Company has reorganized its business groups and realigned its
resources and some employees in order to better serve its customers, strengthen
its product development and marketing abilities. The Company's
-14-
<PAGE> 15
success will depend on its ability to effect a smooth transition to its new
structure and new management team with minimal disruption in operations. These
changes, as well as future changes, may adversely impact the Company's
operating results or cash flows.
Dependence on Key Personnel. The Company's success depends upon the
continued contributions of its personnel, many of whom would be difficult to
replace. The loss of services of any of the Company's key employees could have
a material adverse effect on the Company. The Company's success will depend in
large part on its ability to attract and retain highly-skilled, managerial,
sales and marketing personnel and to motivate key employees and officers.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in retaining its key technical and management
personnel and in attracting and retaining the personnel it requires to continue
to grow.
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 could fluctuate, affecting the Company's operating results. Other
factors such as unit volumes, obsolescence/surplus of inventory, heightened
price competition, changes in channels of distribution, shortages in components
due to shortages or delays in supplies of parts from vendors, the ability to
obtain items at reasonable prices, and the availability of skilled labor, may
also continue to affect the cost of sales and the fluctuation in gross profit
percentages in future periods. In the past, the Company has paid premiums to
secure adequate supplies of components, and it could become necessary to make
such payments again in the future.
Risks Related to Timing of Product Shipments. A substantial portion of
the Company's revenue in any period may result from shipments during the latter
part of a period. Because the Company establishes its operating expense level
based on its operational goals, if shipments in any period do not meet goals,
net profits may be adversely affected. In addition, if the Company is
successful in reducing its inventory levels there is a greater risk relating to
efficient timing of manufacturing and product shipments.
Risks Relating to Manufacturing Operations. The Company has a variety
of manufacturing facilities and arrangements, both domestically and
internationally. There is a risk that the Company's manufacturing abilities
could be affected by the operations of its manufacturing suppliers, suppliers'
prices and capacity, and suppliers' quality control activities.
Risks Related to Backlog. The Company has reduced its product
manufacturing lead times. Without short lead times, the Company's customers may
cancel, or not place, orders if shorter lead times are available from other
manufacturers. If backlog is reduced during any particular period, it could
result in variability and less predictability in the Company's quarter to
quarter revenue and operating results. In addition, the Company's ability to
meet customer demand may also be dependent on the ability of the Company to
increase manufacturing levels for new products to volumes required based on
anticipated orders by the market.
Risks Related to Intellectual Property Rights. The Company currently
relies upon a combination of patents, copyrights, trademarks and trade secret
laws to establish and protect its proprietary rights in its products. The
Company maintains as proprietary the software and other portions of the
technology incorporated in its network management and other products, and may
license that technology to others as necessary. There can be no assurance that
the steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. The Company has a number of patents and may
apply for additional patents. There can be no assurance that patents will issue
from any applications filed by the Company or that, if patents do issue, the
claims will be sufficiently broad to protect the technology invented by the
Company. In addition, no assurance can be given that any patents issued to the
Company will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages.
Because of the existence of a large number of patents in the
networking field and the rapid rate of issuance of new patents or new standards
that may issue or to obtain important technology, it may be necessary for the
Company to enter into technology licenses from others. Such licenses could
impact the Company's operating results, and there is no assurance that the
Company will be able to license such technology.
-15-
<PAGE> 16
The Company has announced a number of strategic technology alliances
and cooperative marketing efforts. There can be no assurance that such
alliances will lead to standards acceptable to the market, or competitive
products.
Legal Proceedings. As with other companies in the networking industry,
the Company is subject to the risk of adverse claims and litigation on a
variety of matters, including intellectual property and securities law matters.
See "--Legal Proceedings" discussed elsewhere in this report. Major litigation
may result in substantial costs and expenses to the Company and significant
diversion of efforts by the Company's technical and management personnel. In
addition, an adverse ruling in a major litigation could have a material adverse
effect on the Company's future operating results, financial position, and cash
flows.
Risks Related to New Markets. During the past several quarters, the
Company entered new markets, including the remote access and Internet markets,
primarily through the acquisition of other businesses. The market for Internet
and Intranet access and switching products is new and evolving, and it is
difficult to predict its size or future growth rate. The revenue or net profits
from these new markets and businesses has not been material in the past. At
present, these new markets are undeveloped, rapidly changing, and highly
competitive. If these markets do not develop, or if the Company's strategies
for these markets are unsuccessful, the Company's operating results may be
adversely affected.
Revenue Fluctuations and Competition. The data networking industry has
grown in the past few years. However, the Company's revenue may fluctuate year
over year or any quarter over quarter based on competition and customers
waiting for anticipated product introductions. This industry is highly
competitive and competition is expected to intensify and could adversely affect
the Company's future results. Networking and communications suppliers compete
in areas such as: conformity to existing and emerging industry standards;
interoperability with other networking products; the ability to run Ethernet,
token ring and FDDI networks on most common cabling systems; network management
capabilities; ease of use; scalability; price; performance; reliability;
product features; technical support; marketing expertise; and product
innovation. Increasingly, there has been greater competition in the pricing of
networking products.
There are many companies competing in various segments of the
intelligent hub, switching, router and remote access network markets. The
Company's principal competitors include Ascend Communications, Cabletron
Systems, Inc., Cascade Communications, Cisco Systems, Inc., Digital Equipment
Corporation, Fore Systems, Inc., Hewlett-Packard Company, Inc., International
Business Machines Corporation and 3Com Corporation, among others. Several of
the Company's competitors have greater name recognition, more extensive
engineering, manufacturing and marketing capabilities, and greater financial,
technological and personnel resources than those available to the Company. In
addition, certain companies in the networking industry have expanded their
product lines or technologies in recent years as a result of acquisitions. See
"Industry Consolidation." There can be no assurance that the Company will be
able to compete successfully in the future with existing or new competitors.
With industry standards established and new standards emerging, more
companies have developed standards-based products and have sought to compete on
the basis of price. Pressures from competitors offering lower priced products
could result in future price reductions for the Company's products.
Industry Consolidation. Certain of the Company's competitors have
expanded their product lines or technologies in recent years as a result of
acquisitions. 3Com Corporation recently entered into an agreement to acquire
U.S. Robotics Corporation and Ascend Communications, Inc. recently entered into
an agreement to acquire Cascade Communications Corporation. Such consolidations
by competitors are likely to create entities with increased market shares,
customer bases, technology and marketing expertise, sales forces, or
proprietary technology in product markets in which the Company competes.
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 operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. There can be no assurance that any acquired products,
technologies or businesses will contribute at anticipated levels to the
Company's sales or earnings, or that sales and earnings from combined businesses
will not be adversely affected by the integration process. Certain acquisitions
or strategic transactions may be subject to approval by the other
-16-
<PAGE> 17
party's board or shareholders, domestic or foreign governmental agencies, or
other third parties. Accordingly, there is a risk that important acquisitions
or transactions could fail to be concluded as planned. Future acquisitions by
the Company could also result in issuances of equity securities or the rights
associated with the equity securities, which could potentially dilute earnings
per share. In addition, future acquisitions could result in the incurrence of
additional debt, taxes, or contingent liabilities, amortization expenses
related to goodwill and other intangible assets and expenses incurred to align
the accounting policies and practices of the acquired companies with those of
the Company. These factors could adversely affect the Company's future
operating results, financial position, and cash flows. As the Company's
competitors have pursued a strategy of growth through acquisition, there is a
risk that future acquisitions could be more expensive due to competition among
bidders for target companies.
Reliance on Resellers and Distributors. VAR and distributor networks
have continued to represent an important part of the Company's overall sales
and distribution strategy. While the Company is not dependent on any single VAR
or distributor, the loss of, or changes in the relationship with or performance
by, several VARs or distributors nevertheless could have a material adverse
effect on the Company's revenue and operating results. The loss of, or changes
in the relationship with or performance by, one or more international
distributors could have a material adverse effect on the Company's revenue and
operating results.
Risks Related to Customer Support and Service. The market for the
Company's products increasingly demands high levels of customer support and
service. As a result, the Company aims to provide competitive levels of support
and service, as well as product warranties. There is a risk that the Company or
its contractors may be unable to provide a level of service that is acceptable
to its customers. There is also a risk that the Company may incur substantial
costs related to warranties or service claims.
Risks Related to International Sales and Manufacturing. International
sales and manufacturing may be an increasingly important contributor to the
Company's revenue and net profits. As a result, operating results are
increasingly affected by the risks of such activities, including economic
conditions in the international markets in which the Company sells and
manufactures its products, political and economic instability, fluctuations in
currency exchange rates, changes in international regulatory requirements,
international staffing and employment issues, tariffs and other trade barriers,
import and export controls and the burden of complying with foreign laws. Sales
into developing nations may fluctuate to a greater extent than sales to
customers in developed nations, as those markets are only beginning to adopt
new technologies and establish purchasing practices. These risks may adversely
affect the Company's future operating results, financial position, and cash
flows.
Foreign Currency Rate Changes. Weaker foreign currency values relative
to the U.S. dollar may render the Company's products relatively more expensive
to customers in a particular country and may lead to a reduction in sales or
profitability in that country, or result in foreign exchange losses on the
conversion to U.S. dollars of foreign currency accounts receivable resulting
from international operations. The Company remains subject to the transaction
exposures that arise from foreign exchange movements between dates. There can
be no assurance that the Company's current or any future exchange strategy will
be successful in avoiding exchange related losses or that any of the factors
listed above will not have a material adverse effect on the Company's future
operating results, financial position, and cash flows.
Risks Related to Government Regulations and Product Certification. The
Company's operations are also subject to laws, regulations, government
policies, and product certification requirements worldwide. Changes in such
laws, regulations, policies, or requirements could affect the demand for the
Company's products or result in the need to modify products, which may involve
substantial costs or delays in sales and could have an adverse effect on the
Company's future operating results. In addition, there is a risk that the
Company's earnings may fluctuate due to changes in the Company's tax rate.
Risks of Stock Volatility and Absence of Dividends. In recent years,
the stock market in general and the market for technology stocks in particular,
including the Company's common stock, have experienced extreme price
fluctuations. There is a risk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock could
affect the Company's ability to successfully attract and retain qualified
personnel or complete necessary business combinations or other transactions in
the future. The Company has never paid any cash dividends on its capital stock,
and there can be no assurance that the Company will do so.
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<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 4, 1997, the Company announced that stockholders had
filed two separate lawsuits against the Company and ten of the
Company's current and former officers and directors. One
lawsuit has been filed in the United States District Court for
the Northern District of California and alleges violations of
the federal securities laws. The other lawsuit has been filed
in California Superior Court, County of Santa Clara, and
alleges violations of the California Corporations Code. Both
lawsuits purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during
the period of July 25, 1995 through October 14, 1996. Both
cases are in the initial stages of litigation and no trial
dates have been set.
On April 18, 1997, a stockholder filed a lawsuit in Santa
Clara County, California Superior Court alleging violations of
the federal securities laws and California Corporations Code
by the Company and nine of its current and former officers and
directors. The lawsuit purports to seek damages on behalf of a
class of stockholders who acquired the Company's common stock
pursuant to the Registration Statement and Prospectus that
became effective on November 15, 1995. This case is in the
initial stages of litigation.
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> 19
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/ DAVID J. RYNNE
-----------------------------
David J. Rynne
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date: May 8, 1997
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<PAGE> 20
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.
11 Statement Regarding Computation of Per Share Earnings 21
27 Financial Data Schedule 22
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<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 Nine Months Ended
March 31, March 31,
(Unaudited) (Unaudited)
----------------------- ------------------------
<S> <C> <C> <C> <C>
Primary Earnings per Share: 1997 1996 1997 1996
--------- --------- --------- ---------
Net income (loss) $ 255 $ 29,187 $(167,004) $ 151,181
========= ========= ========= =========
Shares:
Weighted average shares outstanding: 198,292 186,292 192,894 184,029
Add: Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 4,787 13,952 -- 15,004
--------- --------- --------- ---------
Weighted average common shares and equivalents outstanding 203,079 200,244 192,894 199,033
========= ========= ========= =========
Primary earnings (loss) per share $ -- $ 0.15 $ (0.87) $ 0.76
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
(Unaudited) (Unaudited)
------------------------ -------------------------
Fully Diluted Earnings per Share (A): 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 255 $ 29,187 $(167,004) $ 151,181
========= ========= ========= =========
Shares:
Weighted average shares outstanding 198,292 186,292 192,894 184,029
Add: Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 4,783 13,974 -- 15,564
--------- --------- --------- ---------
Weighted average common shares and equivalents outstanding 203,075 200,266 192,894 199,593
========= ========= ========= =========
Fully diluted earnings (loss) per share $ -- $ 0.15 $ (0.87) $ 0.76
========= ========= ========= =========
</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%.
-21-
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<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
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0
0
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<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
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