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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
BAY NETWORKS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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LOGO
September 6, 1996
Dear Stockholder:
This year's annual meeting of stockholders will be held on Thursday,
October 17, 1996 at 9:00 a.m. local time, in The Auditorium, Main Lobby, The
First National Bank of Boston, 100 Federal Street, Boston, Massachusetts. You
are cordially invited to attend.
The Notice of Annual Meeting of Stockholders and a Proxy Statement, which
describe the formal business to be conducted at the meeting, follow this letter.
After reading the Proxy Statement, please promptly mark, sign and return
the enclosed proxy card in the prepaid envelope to assure that your shares will
be represented. Your shares cannot be voted unless you date, sign, and return
the enclosed proxy card or attend the annual meeting in person. Regardless of
the number of shares you own, your careful consideration of, and vote on, the
matters before our stockholders is important.
A copy of the Company's Annual Report to Stockholders is also enclosed for
your information. At the annual meeting we will review Bay Networks' activities
over the past year and our plans for the future. The Board of Directors and
Management look forward to seeing you at the annual meeting.
Very truly yours,
ANDREW K. LUDWICK
President and
Chief Executive Officer
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LOGO
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 17, 1996
TO THE STOCKHOLDERS:
Please take notice that the annual meeting of the stockholders of Bay
Networks, Inc., a Delaware corporation (the "Company"), will be held on October
17, 1996, at 9:00 a.m. in The Auditorium, Main Lobby, The First National Bank of
Boston, 100 Federal Street, Boston, Massachusetts, for the following purposes:
1. To elect two Class II directors to hold office for a three-year
term and until their respective successors are elected and qualified.
2. To consider, approve and ratify the adoption of an increase in the
maximum number of shares that may be issued under the Company's 1994 Stock
Option Plan from 41,700,000 shares to 50,700,000 shares.
3. To consider, approve and ratify the appointment of Ernst & Young
LLP as the Company's independent public auditors for the fiscal year ending
June 30, 1997.
4. To transact such other business as may properly come before the
meeting.
Stockholders of record at the close of business on August 30, 1996, are
entitled to notice of, and to vote at, this meeting and any adjournment or
postponement. For ten days prior to the meeting, a complete list of stockholders
entitled to vote at the meeting will be available for examination by any
stockholder, for any purpose relating to the meeting, during ordinary business
hours at The First National Bank of Boston, High Technology Division, 8th Floor,
100 Federal Street, Boston, Massachusetts.
By order of the Board of Directors
MONTGOMERY KERSTEN
Secretary
Santa Clara, California
September 6, 1996
IMPORTANT: Please fill in, date, sign and promptly mail the enclosed proxy card
in the accompanying postage-paid envelope to assure that your shares are
represented at the meeting. If you attend the meeting, you may choose to vote in
person even if you have previously sent in your proxy card.
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TABLE OF CONTENTS
PAGE
----
SOLICITATION AND VOTING OF PROXIES.................................................... 1
INFORMATION ABOUT BAY NETWORKS........................................................ 1
Stock Ownership of Certain Beneficial Owners and Management......................... 1
Management.......................................................................... 4
EXECUTIVE COMPENSATION AND OTHER MATTERS.............................................. 6
Stock Options Granted in Fiscal 1996................................................ 7
Option Exercises and Fiscal 1996 Year-End Values.................................... 7
Change of Control Arrangements...................................................... 7
Compensation of Directors........................................................... 8
Certain Transactions................................................................ 8
Section 16(a) of the Securities Exchange Act of 1934 -- Beneficial Ownership
Reporting Compliance............................................................. 8
Changes to Benefit Plans............................................................ 8
REPORT OF THE COMPENSATION COMMITTEE.................................................. 10
COMPARISON OF STOCKHOLDER RETURN...................................................... 12
ELECTION OF DIRECTORS................................................................. 14
APPROVAL OF AMENDMENT TO THE BAY NETWORKS, INC. 1994 STOCK OPTION PLAN................ 14
Summary of the Provisions of the 1994 Option Plan................................... 15
Summary of Federal Income Tax Consequences of the 1994 Option Plan.................. 16
Vote Required and Board of Directors' Recommendation................................ 17
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................................... 18
Change in Independent Auditors...................................................... 18
Vote Required and Board of Directors' Recommendation................................ 18
STOCKHOLDER PROPOSALS TO BE PRESENTED................................................. 19
TRANSACTION OF OTHER BUSINESS......................................................... 19
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PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
The accompanying proxy is solicited by the Board of Directors of Bay
Networks, Inc., a Delaware corporation ("Bay Networks" or the "Company"), for
use at its annual meeting of stockholders to be held on October 17, 1996, or any
adjournment or postponement, for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders. The date of this Proxy Statement is
September 6, 1996, the approximate date on which this Proxy Statement and the
accompanying form of proxy were first sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting stockholders by mail and through its employees, the Company will
request banks and brokers, and other custodians, nominees and fiduciaries, to
solicit their customers who have stock of the Company registered in the names of
such persons and will reimburse them for their reasonable, out-of-pocket costs.
The Company may use the services of its officers, directors and others to
solicit proxies, personally or by telephone, without additional compensation. In
addition, the Company has retained Kissel-Blake, Inc., a proxy solicitation
firm, for assistance in connection with the annual meeting at a cost of
approximately $9,000 plus reasonable out-of-pocket expenses.
On August 30, 1996, the Company had outstanding 188,261,874 shares of its
Common Stock, par value $0.01 per share, all of which are entitled to vote with
respect to all matters to be acted upon at the annual meeting. Each stockholder
of record as of that date is entitled to one vote for each share of Common Stock
held by him or her. The Company's Bylaws provide that a majority of all of the
shares of the stock entitled to vote, whether present in person or represented
by proxy, shall constitute a quorum for the transaction of business at the
meeting. Votes for and against, abstentions and "broker non-votes" will each be
counted as present for purposes of determining the presence of a quorum.
All valid proxies received before the meeting will be exercised. All shares
represented by a proxy will be voted, and where a stockholder specifies by means
of his or her proxy a choice with respect to any matter to be acted upon, the
shares will be voted in accordance with the specification so made. If no choice
is indicated on the proxy, the shares will be voted in favor of the proposal. A
stockholder giving a proxy has the power to revoke his or her proxy at any time
before the time it is exercised by delivering to the Secretary of the Company a
written instrument revoking the proxy or a duly executed proxy with a later
date, or by attending the meeting and voting in person.
INFORMATION ABOUT BAY NETWORKS
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1996, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each director and director-nominee of the Company, (ii) the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company as of June 30, 1996, and (iii) all directors and executive officers of
the Company as a group. There were no beneficial owners of more than 5% of the
Company's Common Stock known by the Company as of June 30, 1996.
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PERCENT OF
AMOUNT AND NATURE BAY NETWORKS
OF BENEFICIAL COMMON STOCK
NAME OF BENEFICIAL OWNER(1) OWNERSHIP(2) OUTSTANDING
- ----------------------------------------------------------- ----------------- ------------
Directors and Executive Officers:
Arthur Carr(3)............................................. 51,649 *
Shelby H. Carter, Jr.(4)................................... 121,218 *
John S. Lewis(5)........................................... 99,473 *
Benjamin F. Robelen(6)..................................... 99,218 *
Andrew K. Ludwick(7)....................................... 3,435,085 1.8%
Paul J. Severino(8)........................................ 3,115,900 1.7%
Gary J. Bowen(9)........................................... 381,750 *
William J. Ruehle(10)...................................... 722,259 *
Ronald V. Schmidt(11)...................................... 1,401,987 *
Directors and executive officers as a group (15
persons)(12)............................................. 11,135,566 5.7%
- ---------------
* Less than 1%.
(1) The persons named in the table above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and to the
information contained in the footnotes to this table.
(2) In connection with the combination of the Company and SynOptics
Communications, Inc. ("SynOptics") through the merger of a wholly-owned
subsidiary of the Company into SynOptics in October 1994 (the "Merger"),
the 1991 Restated Stock Option Plan of Wellfleet Communications, Inc. (the
Company's name prior to the Merger) was amended and restated and renamed
the Bay Networks, Inc. 1994 Stock Option Plan (the "1994 Option Plan").
Options granted under the 1994 Option Plan prior to the Merger are referred
to in the notes below as options granted under the "Wellfleet 1991 Option
Plan."
(3) Includes 48,649 shares subject to options granted under the Wellfleet
Communications, Inc. 1991 Director Stock Option Plan (the "Wellfleet
Directors Option Plan") or the Bay Networks, Inc. 1994 Outside Directors
Stock Option Plan (the "Bay Networks Directors Option Plan") that may be
exercised within 60 days of June 30, 1996.
(4) Includes 32,081 shares subject to options granted under the Bay Networks
Directors Option Plan that may be exercised within 60 days of June 30,
1996.
(5) Includes 32,081 shares subject to options granted under the Bay Networks
Director Option Plan that may be exercised within 60 days of June 30, 1996.
Also includes 1,304 shares held in trust for the minor children of Mr.
Lewis, of which he disclaims beneficial ownership.
(6) Includes 33,498 shares subject to options granted under the Wellfleet
Directors Option Plan or the Bay Networks Directors Option Plan that may be
exercised within 60 days of June 30, 1996.
(7) Includes 1,823,252 shares subject to immediately exercisable options
granted under the SynOptics Communications, Inc. Amended and Restated 1986
Stock Option Plan (the "SynOptics 1986 Option Plan"), which options were
assumed by the Company in the Merger, and under the 1994 Option Plan. A
portion of these shares are not yet vested, and thus would be subject to
repurchase by the Company at a price equal to the option exercise price, if
the corresponding options were exercised before those shares had vested.
Also includes 50,946 shares held by Mr. Ludwick's spouse as custodian for
his minor children, of which he disclaims beneficial ownership.
(8) Includes 315,000 shares subject to immediately exercisable options granted
under the 1994 Option Plan or issuable upon exercise of outstanding stock
options exercisable within 60 days of June 30, 1996 under the Wellfleet
1991 Option Plan. A portion of these shares are not yet vested, and thus
would be subject
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to repurchase by the Company at a price equal to the option exercise price,
if the corresponding options were exercised before those shares had vested.
Also includes 162,000 shares held by Mr. Severino's spouse, of which he
disclaims beneficial ownership, and 12,000 shares held by or for the
benefit of Mr. Severino's children, of which he disclaims beneficial
ownership.
(9) Includes 366,750 shares subject to immediately exercisable options granted
under the 1994 Option Plan or issuable upon exercise of outstanding stock
options exercisable within 60 days of June 30, 1996 under the Wellfleet
1991 Option Plan. A portion of these shares are not yet vested, and thus
would be subject to repurchase by the Company at a price equal to the
option exercise price, if the corresponding options were exercised before
those shares had vested.
(10) Includes 573,839 shares subject to immediately exercisable options granted
under the SynOptics 1986 Option Plan, which options were assumed by the
Company in the Merger, and under the 1994 Option Plan. A portion of these
shares are not yet vested, and thus would be subject to repurchase by the
Company at a price equal to the option exercise price, if the corresponding
options were exercised before those shares had vested.
(11) Includes 621,079 shares subject to immediately exercisable options granted
under the SynOptics 1986 Option Plan, which options were assumed by the
Company in the Merger, and under the 1994 Option Plan. A portion of these
shares are not yet vested, and thus would be subject to repurchase by the
Company at a price equal to the option exercise price, if the corresponding
options were exercised before those shares had vested.
(12) Includes 5,461,848 shares subject to immediately exercisable options or
issuable upon exercise of outstanding options exercisable within 60 days of
June 30, 1996 beneficially owned by executive officers and directors. A
portion of these shares are not yet vested, and thus would be subject to
repurchase by the Company at a price equal to the option exercise price, if
the corresponding options were exercised before those shares had vested.
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MANAGEMENT
Directors. This section sets forth for the current directors, including
the Class II nominees to be elected at this meeting, and information concerning
their age and background.
DIRECTOR
NAME POSITION WITH THE COMPANY AGE SINCE
- --------------------------------- ---------------------------------------------- --- --------
Class I directors whose term expires at the 1997 Annual Meeting of Stockholders:
Benjamin F. Robelen.............. Director 68 1991
John S. Lewis.................... Director 50 1994
Kathleen A. Cote................. Director 47 1996
Class II directors nominated for election at the 1996 Annual Meeting of Stockholders:
Arthur Carr...................... Director 65 1987
Shelby H. Carter, Jr. ........... Director 65 1994
Class III directors whose term expires at the 1998 Annual Meeting of Stockholders:
Paul J. Severino................. Chairman of the Board 49 1985
Andrew K. Ludwick................ President, Chief Executive Officer and 50 1994
Director
Ronald V. Schmidt................ Executive Vice President, Chief Technical 52 1996
Officer and Director
Mr. Robelen has been a director of the Company since 1991. Mr. Robelen has
been a private investor and business consultant since 1986. He is also a
director of VMARK Software, Inc. Since 1980, Mr. Robelen has served as a board
member of several public and private companies. Prior to that time, Mr. Robelen
served as the Vice President, Finance and Administration of Prime Computer,
Inc., as well as other positions at high technology companies.
Mr. Lewis has served as a director of the Company since October 1994 and
served as a director of SynOptics from August 1986 to October 1994. Since
September 1995, he has been a managing partner of PVG Equity Partners, L.L.C.,
the general partner of Pacific Venture Group, L.P., a venture capital investment
firm. Since July 1989, he has also been a general partner of Paragon Venture
Management Company II, L.P., the general partner of Paragon Venture Partners II,
L.P., a venture capital investment firm. From 1983 to 1994, he was a general
partner of Paragon Venture Management Company, the general partner of Paragon
Partners, a venture capital investment firm. From 1981 to 1983, Mr. Lewis served
as a Vice President of Citicorp Venture Capital Ltd., and from 1973 to 1981, Mr.
Lewis held various management positions with Citibank N.A. and Citicorp. Mr.
Lewis also serves on the Board of Directors of ArthroCare Corporation and
TopoMetrix Corporation.
Ms. Cote has served as a director of the Company since August 1996. Ms.
Cote is President and Chief Operating Officer of Computervision Corporation and
has been appointed by the Board of Directors of Computervision Corporation to
assume the additional role of Chief Executive Officer of Computervision
Corporation in November 1996. Since 1986, Ms. Cote served in various positions
in Computervision, including Vice President of Manufacturing, Vice President of
Worldwide Service, and Vice President of Marketing and Corporate Communications.
Ms. Cote is also a director of Walden University, Massachusetts High Technology
and Computervision Corporation. She has previously served as a director of
Babson College, the Women's Initiative for Technology Leadership, the Boston
Chapter of the National Urban League, the Massachusetts Private Industry Council
and the Council for Women in Technology, co-sponsored by the Department of Labor
and the University of Massachusetts. She also served as Vice Chairman of the
Massachusetts Council for Advanced Technology Transfer in Manufacturing.
Mr. Carr has served as a director of the Company since 1987. Mr. Carr has
been a private investor since November 1993. Mr. Carr was the President, Chief
Executive Officer and Director of Bytex Corporation from 1991 to 1993.
Previously, he was a Principal of Carr & Associates from 1989 to 1991, and the
President and
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Chief Operating Officer of Stellar Computer, Inc. (later known as Stardent
Computer, Inc.) from 1986 to 1989. Mr. Carr is also a director of Stratus
Computer, Inc.
Mr. Carter has served as a director of the Company since October 1994, and
served as a director and the Chairman of the Board of SynOptics, of which he was
a founder, from its inception in June 1985 to October 1994. Since January 1986,
Mr. Carter has also served as a professor at the University of Texas Graduate
School of Business and College of Business Administration. From December 1986 to
September 1989, he served as an advisory partner at Austin Ventures, L.P., a
venture capital firm. In January 1985, Mr. Carter retired from his positions as
General Sales Manager, Worldwide Operations and Corporate Vice President for
Xerox Corporation, where he had been employed since January 1970; prior to that
he was employed for 15 years by IBM Corporation. Mr. Carter also serves on the
Board of Directors of Input/Output, Inc., TechWorks, Inc. and Pervasive
Software, Inc.
Mr. Severino, a founder of Wellfleet, has served as Chairman of the Board
of the Company since October 1994 and served as President and Chief Executive
Officer and a director from Wellfleet's inception in 1985 to October 1994. Prior
to founding Wellfleet, Mr. Severino was a founder and President of Interlan,
Inc. from 1981 to 1985. Interlan was sold to Micom Systems, Inc. in 1985, at
which time Mr. Severino became a Vice President of Micom. Mr. Severino is also a
director of Data Translation, Inc., a supplier of data acquisition and image
processing products for desktop computers, and the Massachusetts Technology
Development Corporation (MTDC).
Mr. Ludwick, a founder of SynOptics, has served as President, Chief
Executive Officer and a director of the Company since October 1994 and served as
President, Chief Executive Officer and a director of SynOptics from its
inception in June 1985 to October 1994. From June 1969 to June 1985, Mr. Ludwick
served in various positions in marketing, market planning, sales operations, and
corporate strategy at Xerox Corporation.
Dr. Schmidt, a founder of SynOptics, has served as an Executive Vice
President and Chief Technical Officer of the Company since October 1994 and as a
director since May 1996. Dr. Schmidt served as Senior Vice President, Chief
Technical Officer and a director of SynOptics from its inception in June 1985 to
October 1994. Prior to June 1985, he served as a Research Fellow from June 1981
to November 1985 at Xerox Corporation's Palo Alto Research Center (Xerox
"PARC"). Prior to serving at Xerox PARC, Dr. Schmidt spent seven years at AT&T's
Bell Laboratories where he was a member of the technical staff performing
research in fiber communications. He is currently a Fellow of the IEEE.
Meetings of the Board of Directors. During the fiscal year ended June 30,
1996, the Board of Directors of the Company held eight meetings. During that
period the Audit Committee of the Board held three meetings and the Compensation
Committee of the Board held two meetings. The Company has no standing nominating
committee of the Board. No director attended fewer than 75% of the total number
of meetings of the Board and all of the committees of the Board on which such
director served held during that period.
The members of the Audit Committee during fiscal 1996 were Benjamin F.
Robelen and John S. Lewis. The functions of the Audit Committee include, among
others: recommending to the Board the retention of independent public auditors,
subject to stockholder approval; reviewing and approving the planned scope,
proposed fee arrangements and results of the Company's annual audit; reviewing
the adequacy of accounting and financial controls; and reviewing the
independence of the Company's auditors.
The members of the Compensation Committee during fiscal 1996 were Arthur
Carr and Shelby H. Carter, Jr. The Compensation Committee reviews and determines
the salary and bonus criteria of, and stock option grants to, all executive
officers. For additional information about the Compensation Committee, see
"REPORT OF THE COMPENSATION COMMITTEE" and "EXECUTIVE COMPENSATION AND OTHER
MATTERS" below.
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EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company as of June 30, 1996, during the
fiscal years ended June 30, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
ALL OTHER
COMPENSATION(2)
---------------
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS
- --------------------------------- ----- --------- -------- ------------
Andrew K. Ludwick(3)............. 1996 $397,317 $211,500 0 $ 2,652
President and Chief Executive 1995 269,909 170,000 975,000 2,234
Officer 1994 255,819 207,500 146,813 2,196
Paul J. Severino(4).............. 1996 294,220 212,500 0 2,364
Chairman of the 1995 229,723 199,484 225,000 1,867
Board of Directors 1994 155,442 169,533 0 0
Ronald V. Schmidt(5)............. 1996 310,642 211,500 0 2,364
Executive Vice President 1995 264,919 170,000 225,000 2,231
and Chief Technical Officer 1994 265,980 207,500 146,813 2,189
William J. Ruehle(6)............. 1996 249,520 100,625 0 2,220
Executive Vice President 1995 224,993 157,500 150,000 2,136
and Chief Financial Officer 1994 196,822 163,250 119,625 2,064
Gary J. Bowen.................... 1996 250,000 100,625 0 720
Executive Vice President 1995 206,039 160,219 150,000 324
1994 145,404 125,742 0 0
- ---------------
(1) Bonuses are based on performance. See "REPORT OF THE COMPENSATION
COMMITTEE."
(2) Represents (i) matching contributions by the Company to the named officers'
401(k) savings and incentive plans in the following amounts for the
Company's 1996, 1995 and 1994 fiscal years, respectively: Ludwick ($1,500,
$1,500, $1,500), Severino ($1,500, $1,500, $0), Schmidt ($1,500, $1,500,
$1,500), Ruehle ($1,500, $1,500, $1,500) and Bowen ($0, $0, $0), and (ii)
insurance premiums paid by the Company with respect to term life insurance
for the benefit of the named officers in the following amounts for the
Company's 1996, 1995 and 1994 fiscal years, respectively: Ludwick ($1,152,
$734, $696), Severino ($864, $367, $0), Schmidt ($864, $731, $689), Ruehle
($720, $636, $564) and Bowen ($720, $324, $0).
(3) Mr. Ludwick was appointed President and Chief Executive Officer of the
Company in October 1994 in connection with the Merger. Prior to that time
he served as President and Chief Executive Officer of SynOptics.
Compensation received from SynOptics prior to October 1994 is included in
Mr. Ludwick's compensation for fiscal 1995 and 1994.
(4) Mr. Severino was appointed Chairman of the Board of Directors of the Company
in October 1994 in connection with the Merger. Prior to that time, he served
as President and Chief Executive Officer of the Company.
(5) Dr. Schmidt was appointed Executive Vice President and Chief Technical
Officer of the Company in October 1994 in connection with the Merger. Prior
to that time, he served as Senior Vice President and Chief Technical Officer
of SynOptics. Compensation received from SynOptics prior to October 1994 is
included in Dr. Schmidt's compensation for fiscal 1995 and 1994. Dr. Schmidt
was appointed to the Board of Directors of the Company in May 1996.
(6) Mr. Ruehle was appointed Executive Vice President and Chief Financial
Officer of the Company in October 1994 in connection with the Merger. Prior
to that time, he served as Vice President and Chief Financial Officer of
SynOptics. Compensation received from SynOptics prior to October 1994 is
included in Mr. Ruehle's compensation for fiscal 1995 and 1994.
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STOCK OPTIONS GRANTED IN FISCAL 1996
There were no grants of options to purchase the Company's Common Stock to
the persons named in the Summary Compensation table during the fiscal year ended
June 30, 1996.
OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock in the fiscal year ended June
30, 1996, and unexercised options held as of June 30, 1996, by the persons named
in the Summary Compensation Table above. A portion of the shares subject to
these options are not yet vested, and thus would be subject to repurchase by the
Company at a price equal to the option exercise price, if the corresponding
options were exercised before those shares had vested.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT JUNE 30, 1996 AT JUNE 30, 1996
ON VALUE ------------------------------ ------------------------------
NAME EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- ------------------------ -------- ----------- -------------- ------------- -------------- -------------
Andrew K. Ludwick....... -- $ -- 1,823,252 -- $ 18,735,341 $ --
Paul J. Severino........ -- -- 315,000 60,000 2,970,000 580,000
Ronald V. Schmidt....... 376,048 11,188,158 621,079 -- 5,661,416 --
William J. Ruehle....... 40,000 1,387,979 573,839 -- 6,436,684 --
Gary J. Bowen........... 98,250 3,385,067 366,750 60,000 5,529,588 580,000
- ---------------
(1) Stock options granted under the 1994 Option Plan and the SynOptics 1986
Option Plan are generally immediately exercisable at the date of grant, but
shares received upon exercise of unvested options are subject to repurchase
by the Company.
(2) The exercise price of these underlying options was below the market price of
the Company's Common Stock on June 30, 1996. The value shown is for all
outstanding exercisable in-the-money options regardless of vesting
restrictions.
CHANGE OF CONTROL ARRANGEMENTS
Options granted to officers of Bay Networks under its 1994 Option Plan
provide that such officers will receive an advancement of the vesting schedule
by 12 months under certain circumstances upon a "change of control" as defined
under the 1994 Option Plan. See "APPROVAL OF AMENDMENT TO BAY NETWORKS, INC.
1994 STOCK OPTION PLAN -- Summary of the Provisions of the 1994 Option Plan."
Options granted to officers of SynOptics under the SynOptics 1986 Option
Plan also provided that such officers would receive an advancement of the
vesting schedule by 12 months under certain circumstances upon a "change of
control" as defined in the SynOptics 1986 Option Plan. The Merger constituted a
"change of control" for SynOptics, and therefore, the vesting schedule of
outstanding options granted to officers of SynOptics under the SynOptics 1986
Option Plan was advanced by 12 months upon the Merger. All outstanding options
granted under the SynOptics 1986 Option Plan were assumed by the Company in
connection with the Merger.
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COMPENSATION OF DIRECTORS
The Company's non-employee directors receive $1,500 for each meeting of the
Board of Directors they attend and $1,000 for each committee meeting they
attend. In addition, each non-employee director receives an annual retainer of
$21,000. During the 1996 fiscal year, each of the Company's non-employee
directors also received an option to purchase 15,000 shares of the Company's
Common Stock (which gives effect to a three-for-two share stock dividend
declared in October 1995) under the Company's 1994 Outside Directors Stock
Option Plan (the "Directors Option Plan"). The Company's directors who are also
officers of the Company did not receive any compensation for their services as
members of the Board of Directors.
CERTAIN TRANSACTIONS
In March 1994, SynOptics guaranteed a loan in the principal amount of
$750,000 from Bank of America on behalf of Dominic Orr, Senior Vice President of
the Company, to assist in the purchase of a primary residence in connection with
his recruitment and relocation. SynOptics' guaranty, assumed by the Company in
connection with the Merger, is secured by a deed of trust on Dr. Orr's
residence. In connection with the guaranty, the Company pays an amount
sufficient to cover the interest payments on the loan, increased to offset the
tax effect to Dr. Orr. Such payments were approximately $10,000 per month on
average in fiscal 1996. On June 24, 1996 Dr. Orr repaid against the loan,
reducing the principal amount to $150,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such person.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with, except that one
report of changes in beneficial ownership for Mr. Ruehle, the Company's Chief
Financial Officer, was amended to include the exercise of an option for 1,500
shares of Common Stock.
CHANGES TO BENEFIT PLANS
1994 Option Plan. The Board of Directors of the Company has adopted,
subject to stockholder approval, an amendment to the 1994 Option Plan to
increase the maximum number of shares that may be issued under the 1994 Option
Plan from 41,700,000 shares to 50,700,000. See "APPROVAL OF AMENDMENT TO THE BAY
NETWORKS, INC. 1994 STOCK OPTION PLAN." As of September 6, 1996, no grant of
options had been made to any employee conditioned on stockholder approval of an
increase in the share reserve under the 1994 Option Plan. Non-employee directors
are not eligible to participate in the 1994 Option Plan.
The following table sets forth grants of stock options under the 1994
Option Plan during the fiscal year ended June 30, 1996, to (1) the Chief
Executive Officer of the Company and the four other most highly compensated
executive officers of the Company as of June 30, 1996; (2) all current executive
officers as a group; (3) all current directors who are not executive officers as
a group; and (4) all employees, including all officers who are not executive
officers, as a group. Grants under the 1994 Option Plan are made at the
discretion of the Board of Directors. ACCORDINGLY, FUTURE GRANTS UNDER THE 1994
OPTION PLAN ARE NOT YET DETERMINABLE.
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NEW PLAN BENEFITS
1994 STOCK OPTION PLAN(1)
----------------------------
EXERCISE PRICE NUMBER OF
NAME AND POSITION (PER SHARE) SHARES
------------------------------------------------------- -------------- ---------
Andrew K. Ludwick...................................... N/A 0
President and Chief Executive Officer
Paul J. Severino....................................... N/A 0
Chairman of the Board
Ronald V. Schmidt...................................... N/A 0
Executive Vice President and Chief Technical Officer
William J. Ruehle...................................... N/A 0
Executive Vice President and Chief Financial Officer
Gary J. Bowen.......................................... N/A 0
Executive Vice President
Executive Group (11 persons)........................... $ 27.58-41.33 342,500
Non-Executive Director Group(2)(4 persons)............. N/A 0
Non-Executive Officer Employee Group................... $26.375-43.958 5,542,466
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(1) Only employees, employee-directors and consultants to the Company are
eligible to participate in the 1994 Option Plan.
(2) Non-executive directors are not eligible to participate in the 1994 Option
Plan.
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REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is comprised of Arthur
Carr and Shelby H. Carter, Jr. The Compensation Committee is responsible for
setting and administering the policies governing cash compensation of and grants
of stock options to the Company's executive officers. In carrying out its
duties, the Committee reviews information regarding salary, bonus and stock
options provided by the Vice President of Human Resources. This information
includes compensation surveys focused on companies in similar industries and of
comparable size.
The goals of the Committee's compensation program are to align executive
compensation with the Company's performance, and to attract, retain and reward
executive officers who contribute to the Company's success. The compensation
philosophy of the Committee is that annual compensation should be significantly
leveraged on the basis of the Company's performance. To achieve this leverage,
executive compensation is comprised of salary, contingent bonus and stock
options. The annual compensation mix for the Company's executive officers is
generally comprised of lower base salaries than comparable companies, which when
combined with contingent bonuses, provide annual cash compensation generally
equal to the average offered by comparable companies, if the Company achieves
its financial plan, as well as the incentive of higher annual compensation than
the average offered by comparable companies if the Company performs above plan.
Except with regard to Messrs. Ludwick, Schmidt and Severino, thirty percent of
the annual bonuses for executive officers is based on individual executive
officer performance compared to predetermined goals, determined by consultation
between Mr. Ludwick and each of the executive officers and which are intended to
support achievement of the Company's operating plan for the year, and seventy
percent on the Company's revenue and earnings per share meeting or exceeding
goals set for the Company's operating plan by the Board of Directors. In the
event that either individual performance goals or the revenue or earnings per
share are not met, the portion of the bonus associated with such goals or target
is not paid. In its 1996 fiscal year, the Company exceeded the minimum revenue
performance target and met the minimum earnings per share performance target and
the appropriate percentage of the portion of the bonus corresponding to earnings
per share and revenue was awarded to executive officers for fiscal 1996.
Messrs. Ludwick's, Schmidt's, and Severino's bonuses are wholly contingent
on the Company's meeting or exceeding the annual revenue and earnings per share
goals. In fiscal 1996, the Company exceeded the minimum revenue performance
target and met the minimum earnings per share performance target and the
appropriate percentage of the portion of the bonus corresponding to earnings per
share and revenue was awarded to these officers for fiscal 1996.
The Compensation Committee strives to maintain the equity position of all
executive officers at competitive levels with comparable companies. The
Compensation Committee believes that employee equity ownership provides critical
additional motivation to executive officers to maximize value for the Company's
stockholders, and therefore makes periodic grants of stock options under the
1994 Option Plan. Option grants are based upon the relative positions and
responsibilities of each executive officer, the historical and expected
contributions of that officer to the Company and previous grants to that
officer. To assist the Company in retaining and motivating key employees, option
grants generally vest over a four-year period from the date of grant. In
addition, beginning in fiscal 1997, Performance Stock Options will be granted to
certain executives judged to have key influence on the Company's results.
Performance Stock Options will vest over six years at five percent per year for
each of the first three years, and twenty percent, thirty percent, and
thirty-five percent over years four, five, and six, respectively, rather than
conventional four-year vesting schedule. Performance Stock Option vesting may be
incrementally accelerated in accordance with the judgment of the Board or the
Chief Executive Officer, as appropriate, based on the recipient's achievement of
specified performance goals. With exceptional individual performance, vesting
could be increased to twenty-five percent per year over four years. Although the
options are immediately exercisable, option shares are subject to repurchase by
the Company at the exercise price of the option until vesting restrictions have
lapsed. Stock options are granted at the prevailing market price and will only
have value if the Company's stock price increases over the exercise price.
Therefore, the Compensation Committee believes that stock options serve to align
the interests of
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executive officers closely with other stockholders because of the direct benefit
executive officers receive through improved stock performance. However, there
were no grants of options to purchase the Company's Common Stock to the persons
named in the Summary Compensation table during the fiscal year ended June 30,
1996.
COMPENSATION COMMITTEE
ARTHUR CARR
SHELBY H. CARTER, JR.
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COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the cumulative
total return of the Standard & Poor's 500 Stock Index(1), the Nasdaq Market
Index (U.S. and foreign companies), the Nasdaq Computer Manufacturers Index and
the Standard and Poor's High Technology Index(2) for the period commencing on
July 31, 1991(3) and ending on June 30, 1996.(4)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JULY 31, 1991(3) THROUGH JUNE 30,
1996(4):
BAY NETWORKS, INC., STANDARD & POOR'S 500 STOCK INDEX,
NASDAQ MARKET INDEX, NASDAQ COMPUTER MANUFACTURERS INDEX
AND STANDARD AND POOR'S HIGH TECHNOLOGY INDEX
NASDAQ COM-
MEASUREMENT PERIOD BAY NET- NASDAQ MAR- PUTER MFG S&P'S 500 S&P'S HIGH
(FISCAL YEAR COVERED) WORKS, INC. KET INDEX INDEX STOCK INDEX TECH INDEX
7/31/91 100 100 100 100 100
6/30/92 182 113 108 108 102
6/30/93 574 143 133 123 120
6/30/94 588 144 109 125 129
6/30/95 974 190 195 157 211
6/30/96 909 243 279 198 251
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(1) In prior years, the Company compared the cumulative total return on its
Common Stock with the cumulative total return of the Nasdaq Market Index
(U.S. and foreign companies). Prior to February 29, 1996, the Company's
Common Stock was traded on The Nasdaq Stock Market. Since February 29, 1996,
the Company's Common Stock has been listed on the New York Stock Exchange.
In addition, since February 9, 1996 the Company has been included in the
Standard & Poor's 500 Stock Index, and accordingly, under the rules of the
Securities and Exchange Commission ("SEC"), the Company is required to
provide a comparison to the Standard & Poor's 500 Stock Index in its
Comparison of
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Stockholder Return. Because this is the transitional year in which the
Company is beginning to use the Standard & Poor's 500 Stock Index instead of
the Nasdaq Market Index, the Company is required, under the rules of the
SEC, to also include the Nasdaq Market Index in its Comparison of
Stockholder Return for the 1996 fiscal year.
(2) In prior years, the Company compared the cumulative total return on its
Common Stock with the cumulative total return of the Nasdaq Computer
Manufacturers Index. Since the Company's Common Stock is no longer traded on
The Nasdaq Stock Market and has been listed on the New York Stock Exchange
since February 29, 1996, and since the Standard & Poor's High Technology
Index includes companies whose products are more similar to the Company's
than those of the companies on the Nasdaq Computer Manufacturers Index, the
Company has decided to change its published industry index, as required by
the rules of the SEC, to the Standard & Poor's High Technology Index.
Because this is the transitional year in which the Company is beginning to
use the Standard & Poor's High Technology Index instead of the Nasdaq
Computer Manufacturers Index, the Company is required, under the rules of
the SEC, to also include the Nasdaq Computer Manufacturers Index in its
Comparison of Stockholder Return for the 1996 fiscal year.
(3) The Company's initial public offering commenced on July 31, 1991.
(4) Assumes that $100.00 was invested on July 31, 1991, at the Company's initial
public offering price, in the Company's Common Stock and each index. No cash
dividends have been declared on the Company's Common Stock. Stockholder
returns over the indicated period should not be considered indicative of
future stockholder returns.
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ELECTION OF DIRECTORS
Bay Networks has a classified Board of Directors consisting of three Class
I directors (Benjamin F. Robelen, John S. Lewis and Kathleen A. Cote), two Class
II directors (Arthur Carr and Shelby H. Carter, Jr.), and three Class III
directors (Paul J. Severino, Andrew K. Ludwick and Ronald V. Schmidt) who will
serve until the annual meetings of stockholders to be held in 1997, 1996 and
1998, respectively, and until their respective successors are duly elected and
qualified. At each annual meeting of stockholders, directors are elected for a
term of three years to succeed those directors whose terms expire at the annual
meeting dates.
The terms of the Class II directors will expire on the date of the upcoming
annual meeting. Accordingly, two persons are to be elected to serve as Class II
directors of the Board of Directors at the meeting. Management's nominees for
election by the stockholders to those two positions are Arthur Carr and Shelby
H. Carter, Jr., the current Class II members of the Board of Directors. Please
see "INFORMATION ABOUT BAY NETWORKS -- Management" above for information
concerning the nominees. If elected, the nominees will serve as directors until
Bay Networks' annual meeting of stockholders in 1999 and until their successors
are elected and qualified. If any of the nominees declines to serve or becomes
unavailable for any reason, or if a vacancy occurs before the election (although
the Company knows of no reason to anticipate that this will occur), the proxies
may be voted for such substitute nominees as the Company may designate.
If a quorum is present and voting, the two nominees for Class II director
receiving the highest number of votes will be elected as Class II directors.
Abstentions and broker non-votes have no effect on the vote.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED ABOVE.
APPROVAL OF AMENDMENT TO THE
BAY NETWORKS, INC. 1994 STOCK OPTION PLAN
The Wellfleet Communications, Inc. 1991 Restated Stock Option Plan was
adopted by the Board in May 1991 and approved by the stockholders in June 1991,
and in connection with the Merger, was renamed the Bay Networks, Inc. 1994 Stock
Option Plan. As of July 31, 1996, a total of 41,700,000 shares of Common Stock
were authorized for issuance under the 1994 Option Plan, of which 10,868,432
shares have been issued and remain outstanding following the exercise of
corresponding stock options, and of which 23,785,975 shares are reserved for
issuance upon the exercise of previously granted stock options. Accordingly,
there remain only 7,045,593 shares available for future grants under the 1994
Option Plan.
The 1994 Option Plan was created in order to assist the Company in the
recruitment, retention and motivation of key employees who are experienced,
highly qualified and in a position to make material contributions to Bay
Networks' success. The computer networking market is increasingly competitive.
As more companies enter the market the very limited number of skilled and
experienced employees are in demand by a growing number of competitors. The
Company believes that stock options are critical in attracting and retaining
these key contributors. The 1994 Option Plan is intended to offer a significant
incentive by enabling key employees to acquire options to purchase Common Stock
at a price equal to its fair market value on the date the option is granted. The
options will become valuable to the recipients only if the price of the
Company's Common Stock appreciates following the grant and when such options
have vested. By providing key employees with the opportunity to acquire an
equity interest in the Company over time and because benefit is only received
through improved stock performance, the Company believes that stock options
serve to align the interests of key employees closely with other stockholders.
The Company believes that an adequate reserve of shares for issuance under
the 1994 Option Plan is necessary to enable it to successfully compete with
other companies and is essential to the Company's ability to retain experienced
employees and to recruit additional qualified individuals. During fiscal 1996,
the Company granted options under the 1994 Option Plan at a greater than
anticipated rate due to revenue growth and the resulting need to hire new
employees that exceeded expectations. In addition, the number of employees
increased as a result of the acquisition of Xylogics, Inc. in December 1995, and
Performance
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Technology, Inc. and Armon Networking Ltd., in March 1996, and is anticipated to
increase further as a result of the pending acquisition of Penril DataComm
Networks, Inc. In addition, the Company may continue to acquire additional
companies, further increasing the number of its employees. If growth in hiring
continues through fiscal 1997, the remaining share reserve under the 1994 Option
Plan may not be adequate for the number of option grants to employees required
during the coming year. At a meeting held in July 1996, subject to stockholder
approval being received at the annual meeting, the Board of Directors
unanimously adopted an amendment to the 1994 Option Plan to increase the number
of shares of Common Stock reserved for issuance upon the exercise of options
granted under the 1994 Option Plan by 9,000,000 shares to a total of 50,700,000
shares.
SUMMARY OF THE PROVISIONS OF THE 1994 OPTION PLAN
The following summary of the 1994 Option Plan, including the proposed
amendment requiring stockholder approval, is qualified in its entirety by the
specific language of the 1994 Option Plan, a copy of which is available to any
stockholder upon request.
The 1994 Option Plan is administered by the Board of Directors or a duly
appointed committee of the Board of Directors. Options granted under the 1994
Option Plan may be either incentive stock options, that is, options which are
intended to satisfy the requirements of Section 422 of the Internal Revenue Code
of 1986 (the "Code"), or nonqualified stock options. The Board of Directors or
the committee of the Board of Directors, if appointed, determines the criteria
upon which options are granted. The criteria typically include job
classification for grants to new employees, and job classification, performance
and length of employment for grants to existing employees. No employee may be
granted options to purchase in excess of 750,000 shares per fiscal year. The
Company may, however, make a one-time grant of options to purchase up to
1,500,000 shares to a newly-hired employee or a plan participant on promotion to
an executive office. Company grants typically have not approached these limits.
All options must be granted, if at all, prior to May 15, 2001.
All employees (including prospective employees under certain circumstances
and officers and directors who are employees) and consultants (including
prospective consultants) of the Company and its present or future parent and/or
subsidiary corporations are eligible to participate in the 1994 Option Plan.
Non-employee directors of Bay Networks are not eligible to participate in the
1994 Option Plan. As of July 31, 1996, approximately 5,800 employees and
consultants were eligible to participate in the 1994 Option Plan.
The exercise price of any option granted under the 1994 Option Plan may not
be less than 100% of the fair market value of the Common Stock of Bay Networks
on the date of grant; provided, however, that any incentive stock option granted
to a person who owns stock possessing more than 10% of the total combined voting
power of all classes of stock of Bay Networks shall have an exercise price not
less than 110% of the fair market value of the Common Stock of Bay Networks on
the date of grant. On August 30, 1996, the closing sales price per share of Bay
Networks' Common Stock as reported on the New York Stock Exchange was $27.50.
Shares subject to an option granted under the 1994 Option Plan may be
purchased for cash, by check or in cash equivalent, by tender of shares of
Common Stock owned by the optionee having a fair market value not less than the
option price, by any other means as may be determined by the Board of Directors
to be consistent with the purpose of the 1994 Option Plan and with applicable
laws and regulations, or by any combination of these methods.
Under the 1994 Option Plan, options are immediately exercisable. Unless
otherwise provided by the Board, specific option grants generally will vest one
fourth on a date specified by the Board of Directors (usually one year after
commencing employment or one year from the date of grant) and vest one
forty-eighth per month thereafter for each full month of the optionee's
continuous employment with the Company. In the event of termination of
employment or an optionee's attempted disposition of unvested shares of Common
Stock, Bay Networks may repurchase the unvested shares at the optionee's
original exercise price. The 1994 Option Plan does not permit the grant of an
incentive stock option which has a term of greater than 10 years from the date
such option is granted. Any incentive stock option or nonqualified stock option
granted under the 1994 Option Plan after October 19, 1995 will have a term not
to exceed eight years from the date such option is granted.
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If an optionee ceases to be an employee of Bay Networks for any reason,
except death, disability or "for cause," the optionee may generally exercise his
or her option (to the extent unexercised and vested on the date of termination)
within three months after the date of termination, but in any event not later
than the expiration of the option term. If an optionee ceases to be an employee
of Bay Networks due to willful misconduct or willful failure to perform his or
her responsibilities in the best interests of the Company ("for cause"), the
right to exercise generally terminates with the cessation of employment. If an
optionee ceases to be an employee of Bay Networks due to death or disability,
the optionee (or his or her legal representative) may exercise the option (to
the extent unexercised and vested on the date of termination) within 12 months
after the date of termination, but in any event not later than the expiration of
the option term. For consultants who are granted an option, termination of
status as a consultant constitutes termination of employment.
During the lifetime of the optionee, an option may be exercised only by the
optionee, unless otherwise provided by the Board of Directors at the time of
grant and may not be transferred or assigned, except by will or the laws of
descent and distribution; provided, however, that nonqualified stock options may
be transferred pursuant to a qualified domestic relations order.
Generally, in the event of a transfer of control of Bay Networks, the Board
of Directors may arrange for the surviving, successor or acquiring entity to
assume such options. Alternatively, the Board of Directors may provide that any
or all outstanding options shall become fully vested prior to the transfer of
control or in the event of a cash out merger, provide for the cash payment of
the difference between the cash payment received for each share of Bay Networks'
Common Stock and the exercise price of the options. The stock option agreements
entered into with officers of Bay Networks provide that such officers will
receive an additional 12 months of vesting in the event of a transfer of control
of Bay Networks.
The Board of Directors may terminate or amend the 1994 Option Plan at any
time. However, without stockholder approval, the Board of Directors may not
amend the 1994 Option Plan to increase the total number of shares of Common
Stock covered by the 1994 Option Plan or change the class of persons eligible to
receive options.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1994 OPTION PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law with respect to
participation in the 1994 Option Plan and does not attempt to describe all
possible federal or other tax consequences of such participation. Furthermore,
the tax consequences of options are complex and subject to change, and a
taxpayer's particular situation may be such that some variation of the described
rules is applicable.
Optionees are advised to consult their own tax advisors before the exercise
of any option and before the disposition of any shares of Common Stock acquired
upon the exercise of an option.
Incentive Stock Options. Options designated as incentive stock options are
intended to fall within the provisions of Section 422 of the Code. An optionee
recognizes no taxable income as the result of the grant or exercise of such an
option.
For optionees who do not dispose of their shares for two years following
the date the option was granted nor within one year following the transfer of
the shares upon exercise of the option, the gain on sale of the shares (which is
defined to be the difference between the sale price and the purchase price of
the shares) will be taxed as long-term capital gain. If an optionee is entitled
to long-term capital gain treatment upon a sale of the stock, Bay Networks will
not be entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares within two years after the date of grant or within one year
from the date of exercise (a "disqualifying disposition"), the difference
between the option price and the fair market value of the shares on the
determination date, which is generally the date of exercise (not to exceed the
gain realized on the sale if the disposition is a transaction with respect to
which a loss, if sustained, would be recognized), will be taxed at ordinary
income rates at the time of disposition. Any gain in excess of that amount will
be a capital gain. If a loss is recognized, there will be no ordinary income,
and such loss will be a capital loss. A capital gain or loss will be long-term
if the optionee's holding period is more than 12 months. Any ordinary income
recognized by
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the optionee upon the disposition of the stock should be deductible by Bay
Networks for federal income tax purposes.
The difference between the option price and the fair market value of the
shares on the determination date of an incentive stock option (which is
generally the date of exercise -- see discussion below regarding definition of
determination date and Section 83(b) election) is an adjustment in computing the
optionee's alternative minimum taxable income and may be subject to an
alternative minimum tax which is paid if such tax exceeds the regular tax for
the year. Special rules may apply with respect to certain subsequent sales of
the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonqualified Stock Options. Nonqualified stock options have no special tax
status. An optionee generally recognizes no taxable income as the result of the
grant of such an option. Upon exercise of an option, the optionee normally
recognizes ordinary income in the amount of the difference between the option
price and the fair market value of the shares on the determination date (which
is generally the date of exercise). If the optionee is an employee, such
ordinary income generally is subject to withholding of income and employment
taxes. The "determination date" is the date on which the option is exercised
unless the shares are not vested and/or the sale of the shares at a profit would
subject the optionee to suit under Section 16(b) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), in which case the determination date
is the later of (i) the date on which the shares vest, or (ii) the date on which
the sale of the shares at a profit would no longer subject the optionee to suit
under Section 16(b) of the Exchange Act. (Section 16(b) of the Exchange Act
generally is applicable only to officers, directors and beneficial owners of
more than 10% of the Common Stock of Bay Networks.) If the determination date is
after the exercise date, the optionee may elect, pursuant to Section 83(b) of
the Code, to have the exercise date be the determination date by filing an
election with the Internal Revenue Service not later than thirty days after the
date the option is exercised.
Upon the sale of stock acquired by the exercise of a nonqualified stock
option, any gain or loss, based on the difference between the sale price and the
fair market value on the date of recognition of income, will be taxed as capital
gain or loss. A capital gain or loss will be long-term if the optionee's holding
period is more than 12 months from the date of recognition of income. No tax
deduction is available to Bay Networks with respect to the grant of the option
or the sale of the stock acquired pursuant to such grant. Bay Networks should be
entitled to a deduction equal to the amount of ordinary income recognized by the
optionee as a result of the exercise of the option.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast on the proposal, at
the annual meeting at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present, either in person or by proxy,
is required for approval of this proposal. Votes for and against, abstentions
and broker non-votes will each be counted as present for purposes of determining
the presence of a quorum. Neither abstentions nor broker non-votes will have any
effect on the outcome of this vote.
The Board believes that the proposed amendment of the 1994 Option Plan is
in the best interests of the Company and its stockholders for the reasons stated
above. THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK OF THE COMPANY
RESERVED FOR ISSUANCE UNDER THE 1994 OPTION PLAN FROM 41,700,000 TO 50,700,000
SHARES.
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RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Ernst & Young LLP as
independent auditors to audit the financial statements of the Company for the
fiscal year ending June 30, 1997. Ernst & Young LLP has acted in such capacity
since its appointment in fiscal year 1995. A representative of Ernst & Young LLP
is expected to be present at the annual meeting with the opportunity to make a
statement if the representative desires to do so, and is expected to be
available to respond to appropriate questions.
CHANGE IN INDEPENDENT AUDITORS
On November 17, 1994, the Company's Board of Directors, based on the
recommendation of the Audit Committee of the Company, approved a change in the
Company's independent auditors for the fiscal year ending June 30, 1995 from
Price Waterhouse LLP to Ernst & Young LLP, SynOptics' independent auditors prior
to the Merger, subject to management's satisfaction that certain criteria for
the appointment were met. On December 8, 1994, the Company changed its
independent auditors from Price Waterhouse LLP to Ernst & Young LLP.
The reports of Price Waterhouse LLP for the fiscal years ended June 30,
1993 and June 30, 1994 contained no adverse opinion, disclaimer of opinion or
qualification or modification as to uncertainty, audit scope or accounting
principles. During the fiscal years ended June 30, 1993 and June 30, 1994, and
the interim period from July 1, 1994 through December 8, 1994, there were no
disagreements between the Company and Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of Price
Waterhouse LLP would have caused it to make reference to the subject matter of
the disagreement in connection with its report. No event described in paragraph
(a)(1)(v) of Item 304 of Regulation S-K promulgated under the Securities Act of
1933, as amended, occurred within the Company's fiscal years ending June 30,
1993 or June 30, 1994, or the period from July 1, 1994 through December 8, 1994.
The Company has provided Price Waterhouse LLP with a copy of the disclosure
contained in the preceding two paragraphs and the response of Price Waterhouse
LLP to such disclosure is contained in the Company's Amendment No. 1 to Current
Report on Form 8-K/A filed on December 22, 1994.
The Company has not consulted with Ernst & Young LLP during the fiscal
years ended June 30, 1993 and June 30, 1994, and the period from July 1, 1994
through December 8, 1994, on the application of accounting principles to a
specified transaction, either completed or proposed, or the type of opinion that
might be rendered on the Company's financial statements or on any matter which
was the subject of any disagreement or any reportable event.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast affirmatively or
negatively at the annual meeting of stockholders at which a quorum representing
a majority of all outstanding shares of Common Stock of the Company is present
and voting, either in person or by proxy, is required for approval of this
proposal. Votes for and against, abstentions and broker non-votes will each be
counted as present for purposes of determining the presence of a quorum. Neither
abstentions nor broker non-votes will have any effect on the outcome of the
proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF ERNST &
YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC AUDITORS FOR THE FISCAL YEAR
ENDING JUNE 30, 1997.
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STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next annual
meeting of the stockholders of the Company must be received by the Company at
its offices at 4401 Great America Parkway, Santa Clara, California 95054, no
later than May 9, 1997, and satisfy the conditions established by the Securities
and Exchange Commission for stockholder proposals to be included in the
Company's proxy statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the Board of Directors knows of no
other business that will be conducted at the 1996 annual meeting of stockholders
of Bay Networks other than as described in this Proxy Statement. If any other
matter or matters are properly brought before the meeting, or any adjournment or
postponement of the meeting, it is the intention of the persons named in the
accompanying form of proxy to vote the proxy on such matters in accordance with
their best judgment.
By Order of the Board of Directors
MONTGOMERY KERSTEN
Secretary
September 6, 1996
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BAY NETWORKS, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 17, 1996
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Paul J. Severino and Andrew K. Ludwick,
and each of them, with full power of substitution, to represent the undersigned
and to vote all of the shares of stock in Bay Networks, Inc., a Delaware
corporation (the "Company"), which the undersigned is entitled to vote at the
Annual Meeting of Stockholders of the Company to be held in the Auditorium, Main
Lobby, The First National Bank of Boston, 100 Federal Street, Boston,
Massachusetts on October 17, 1996 at 9:00 a.m., local time, and at any
adjournment or postponement thereof (1) as hereinafter specified upon the
proposals listed on the reverse side and as more particularly described in the
Proxy Statement of the Company dated September 6, 1996 (the "Proxy
Statement"), receipt of which is hereby acknowledged, and (2) in their
discretion upon such other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1 THROUGH 3.
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CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
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Please mark votes as in this example.
[X] WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED
TO SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT
YOUR STOCK MAY BE REPRESENTED AT THE MEETING.
A vote FOR the following proposals is recommended by the Board of
Directors:
1. To elect the following two (2) persons as Class II directors to hold
office for a three-year term and until their respective successors are elected
and qualified:
[ ] FOR [ ] WITHHELD
[ ] FOR BOTH NOMINEES
EXCEPT AS NOTED ABOVE.
Arthur Carr
Shelby H. Carter, Jr.
2. Consider, approve and ratify the adoption of an increase in the
maximum number of shares of Common Stock that may be issued under the Company's
1994 Stock Option Plan from 41,700,000 shares to 50,700,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To consider, approve and ratify the appointment of Ernst & Young LLP
as independent public auditors for the Company for the fiscal year ending June
30, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE IF [ ] MARK HERE [ ]
YOU PLAN TO FOR ADDRESS
ATTEND THE CHANGE AND
MEETING NOTE AT LEFT
PLEASE SIGN HERE. If shares of stock are held jointly, both or
all of such persons should sign. Corporate or partnership
proxies should be signed in full corporate or partnership name
by an authorized person. Persons signing in a fiduciary
capacity should indicate their full titles in such capacity.
Signature: ________________________ Date: ____________
Signature: ________________________ Date: ____________
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