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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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
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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.
188,468,183 shares of Common Stock, $.01 par value, as of September 30, 1996
This report on Form 10-Q, including all exhibits, contains 18 pages. The
exhibit index is located on page 16 of this report.
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BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- September 30, 1996 and
June 30, 1996 3
Condensed Consolidated Statements of Income -- Three Months
Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -- Three Months
Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Exhibit Index 16
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 340,727 $ 315,064
Short-term investments 111,200 119,093
Accounts receivable, net of allowance for doubtful accounts
of $8,741 at September 30, 1996 and
$9,683 at June 30, 1996 294,204 320,892
Inventories 214,736 239,725
Deferred income taxes 74,878 74,320
Other current assets 65,394 48,615
----------- -----------
Total current assets 1,101,139 1,117,709
Investments 167,934 154,064
Property and equipment, net 231,243 211,674
Other assets 32,392 23,088
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$ 1,532,708 $ 1,506,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 118,174 $ 116,894
Accrued expenses 138,767 133,352
Accrued income taxes 23,591 4,818
Deferred revenue 49,681 46,629
----------- -----------
Total current liabilities 330,213 301,693
Long-term debt 110,080 110,147
Stockholders' equity 1,092,415 1,094,695
----------- -----------
$ 1,532,708 $ 1,506,535
=========== ===========
The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
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1996 1995
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(unaudited)
Revenue $ 522,654 $ 457,773
Cost of sales 249,915 206,210
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Gross profit 272,739 251,563
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Operating expenses:
Research and development 54,954 48,816
Selling and marketing 128,215 92,984
General and administrative 19,575 17,393
In-process research and development 42,648 --
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Total operating expenses 245,392 159,193
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Income from operations 27,347 92,370
Net interest income and other 6,025 8,400
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Income before provision for income taxes 33,372 100,770
Provision for income taxes 27,747 37,602
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Net income $ 5,625 $ 63,168
========== ==========
Net income per share $ 0.03 $ 0.32
========== ==========
Weighted average common shares and equivalents 196,345 196,803
========== ==========
The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
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1996 1995
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(unaudited)
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 5,625 $ 63,168
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 25,526 15,981
In-process research and development 42,648 --
Benefit from deferred income taxes 2,238 15,767
Changes in operating assets and liabilities:
Accounts receivable 29,099 (52,962)
Inventories 26,950 (54,045)
Other current assets (16,569) 216
Accounts payable (991) 46,984
Accrued expenses 4,926 9,043
Accrued income taxes 22,355 3,530
Deferred revenue 2,799 (1,963)
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Cash flows provided by operating activities 144,606 45,719
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Cash flows from investing activities:
Expenditures for property and equipment (44,652) (26,540)
Purchases of investments (46,384) (110,439)
Proceeds from maturities of investments 39,358 153,792
Proceeds from sales of investments 1,049 5,902
Acquisition of LANcity Corporation, net of cash acquired (58,821) --
Other assets 2,078 (1,433)
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Cash flows (used in) provided by investing activities (107,372) 21,282
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Cash flows from financing activities:
Payments of long-term debt (67) (139)
Purchase of treasury common stock (22,314) (13,053)
Issuance of common stock 10,810 13,226
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Cash flows (used in) provided by financing activities (11,571) 34
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Net increase in cash and cash equivalents 25,663 67,035
Cash and cash equivalents, beginning of period 315,064 283,913
-------- ----------
Cash and cash equivalents, end of period $340,727 $ 350,948
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The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bay Networks, Inc. (the "Company") 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.
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 charge incurred during the three month period ended
September 30, 1996, which the Company believes is 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 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 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):
SEPTEMBER 30, 1996 JUNE 30, 1996
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(unaudited)
Raw materials $ 82,654 $ 98,342
Work-in-process 47,542 54,468
Finished goods 84,540 86,915
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Total inventories $ 214,736 $ 239,725
========== ===========
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)
SEPTEMBER 30, 1996 JUNE 30, 1996
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(unaudited)
Machinery and equipment $340,223 $309,473
Furniture and fixtures 39,926 36,685
Leasehold improvements 67,788 55,327
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Total property and equipment 447,937 401,485
Accumulated depreciation and amortization (216,694) (189,811)
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Total property and equipment, net $231,243 $211,674
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3. BUSINESS COMBINATIONS
On September 24, 1996, the Company acquired all of the outstanding
shares of LANcity Corporation, a provider of advanced cable modem technology,
which has been accounted for as a purchase. The total purchase price of $59.0
million was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of acquisition. This included
approximately $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 charged to in-process research
and development. Pro forma information has not been presented because the
effect of the acquisition was not material to the Company's consolidated
financial position, results of operations, and cash flows.
On June 16, 1996, the Company signed a definitive agreement to acquire the
Digital Signal Processing (DSP) modem business of Penril DataComm Networks, Inc.
(Penril), a provider of advanced DSP-based modems and remote access products.
Under terms of the agreement, the Company will exchange $10 payable in the
Company's common stock for each share of Penril's common stock according to an
exchange value determined by averaging the Company's closing stock prices over a
specified period prior to closing. At July 31, 1996, Penril had 10,849,647
shares of common stock outstanding. Immediately prior to the closing of this
transaction, the remaining non-DSP modem businesses of Penril will be spun off
to Penril stockholders. This acquisition is subject to regulatory approval and
approval of Penril stockholders. The acquisition will be accounted for as a
purchase. Based on preliminary estimates, the Company expects to allocate
approximately $60 million to $65 million to in-process research and development,
which will be charged to expense upon the closing of the transaction, currently
expected to be in the quarter ending December 31, 1996.
The following summary, prepared on a pro forma basis, combines the results
of operations as if the Penril DSP modem business had been acquired as of the
beginning of the period presented. It is based on the three months ended
September 30, 1996 for the Company and the three months ended July 31, 1996 for
the Penril DSP modem business. The summary includes the impact of certain
adjustments such as goodwill amortization, elimination of an intercompany
license fee and the related income tax effect (in thousands, except per-share
amounts):
THREE MONTHS ENDED
SEPTEMBER 30, 1996
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(unaudited)
Revenue $526,789
Net income $ 2,205
Net income per share $ 0.01
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented. In addition, it is not necessarily indicative of results for any
future period and does not reflect any synergy that might be achieved from the
combined operations.
4. INCOME TAXES
The Company's provision for income taxes for the three month period ended
September 30, 1996 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 charge recorded in the same period. The Company's effective tax rate
for the three month period ended September 30, 1996 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 $3.6
million for the three months ended September 30, 1996 which was 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.
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6. SIGNIFICANT CUSTOMERS
One reseller accounted for 10.9% ($57.2 million) of the Company's revenue in
the first quarter of fiscal 1997 and 14.0% ($64.0 million) in the same quarter
of fiscal 1996.
7. SUBSEQUENT EVENTS
The Board of Directors approved a one for one exchange of eligible
stock options granted on or after January 1, 1995, under the Bay Networks 1994
Stock Option Plan for replacement stock options. The new grant will have the
same number of shares as the number of shares unexercised in the grant being
exchanged. These new stock options were granted on October 28, 1996, with an
exercise price of $19.50, the closing market price of October 25, 1996. The
exchange of stock options may have a negative impact on the Company's earnings
per share in future periods. Since the replacement stock option represents a
new stock option grant, and not a reduction in price of an existing option, the
grants vest on a new vesting schedule, whether or not shares were previously
vested under the original grant. The grants being exchanged vested as follows:
one-fourth vested one year after the grant date (or the hire date in the case of
new hire grants) and 1/48th per month for the next 36 months. Those options
exchanged will vest at the rate of 12/54th one year after the commencement of
the original option being exchanged and the balance at the rate of 1/54th per
month over the next 42 months.
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. These include, among
other factors, changes in general economic conditions, rapid or unexpected
changes in technologies and uncertain business conditions that affect the data
networking industry. Accordingly, past results and trends should not be used by
investors to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. 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.
Bay Networks' President and Chief Executive Officer, Andrew K. Ludwick,
resigned effective October 14, 1996, but will continue as a Director of the
Company. Paul J. Severino, Bay Networks' Chairman, assumed the position of
acting CEO and President, pending the completion of a search for a permanent
successor. On October 30, 1996, the Company announced that David L. House had
been named Chairman, President and Chief Executive Officer of Bay Networks,
Inc. Mr. Severino has relinquished his duties as Chairman, acting CEO and
President and will continue as a Director of the Company. On November 7, 1996,
the Company announced that Dave Shrigley had been named Executive Vice
President for Sales, Service and Marketing.
RESULTS OF OPERATIONS
Revenue. Revenue for the three month period ended September 30, 1996 was
$522.7 million as compared to $457.8 million for the three month period ended
September 30, 1995, an increase of 14.2%. The increase in revenue in this period
was due to increasing unit sales of various Company products through its
domestic direct sales force and multi-channel distribution strategy. The highest
sales percentage increases were in the router and switching product lines.
Revenue for the first quarter of fiscal 1997 decreased $12.9 million compared to
revenue of $535.5 million in the fourth quarter of fiscal 1996. Sales were
generally down in all principal product lines from one quarter to the next.
Also, the decrease was caused in part by pricing actions taken by the Company
and seasonal slowness during the quarter.
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International revenue increased 18.0% to $174.6 million for the three month
period ended September 30, 1996, as compared to $147.9 million for the
comparable period of the prior year. International revenue represented
approximately 33.4% and 32.3% of total revenue for the three month periods ended
September 30, 1996 and 1995, respectively. International revenue increased as
the result of growth in both the Asia/Pacific and the European markets. The
Company's international revenue is primarily denominated in U.S. dollars. The
effect of foreign exchange rate fluctuations did not have a significant impact
on the Company's operating results in the periods presented. Revenue in past
periods may not be indicative of future revenue, which may be affected by other
factors discussed elsewhere herein, as well as other business environment and
risk factors.
Gross Profit. Gross profit decreased to 52.2% of revenue for the three
month period ended September 30, 1996, from 55.0% for the comparable period of
the prior year. However, in absolute dollars gross profit increased $21.2
million or 8.4% to $272.7 million for the three month period ended September
30, 1996, from $251.6 million for the comparable period of the prior year. The
gross profit percentage decline was a result of competitive price reductions
and product mix shift towards lower margin products, including non-modular
products. The increase in absolute dollars in gross profit resulted from
increased unit sales of the Company's products. Gross profit may continue to
decline if there is a continuance of the shift of the Company's product mix
towards non-modular products, desktop switching and lower margin router
products and continued competitive pricing actions. Other factors, including
the Company's shift towards a turnkey manufacturing process, and changes in
material and labor costs, may also have an effect on gross profit in the
future.
Operating Expenses. Research and development spending for the three month
period ended September 30, 1996 increased 12.6% to $55.0 million from $48.8
million for the comparable period of the prior year. As a percentage of revenue,
research and development expenses were 10.5% in the current period and 10.7% in
the comparable period of the prior year. The increase relates to the development
of new products, the enhancement of current product offerings and the addition
of personnel through hiring and acquisitions, resulting, in part, from an
increased focus on remote access, network management and switched
internetworking technologies. 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 bring products to the market more quickly. 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. Research and development efforts may be affected by other
factors noted elsewhere herein. Research and development expenses may increase
in absolute dollars in future periods, and may vary as a percentage of revenue.
Selling and marketing expenses for the three month period ended September
30, 1996 increased 37.9% to $128.2 million, from $93.0 million in the comparable
period of the prior year. As a percentage of revenue, selling and marketing
expenses increased to 24.5% for the three month period ended September 30, 1996,
from 20.3% in the comparable period of the prior year. The increase in spending
was related to, among other things: the costs associated with an increase in the
number of sales and customer support staff; continued expansion of its domestic
and international sales presence; and investments related to marketing
programs associated with new product introductions. The Company's investment in
its sales, marketing and customer support staff may vary as a percentage of
revenue in the future.
General and administrative expenses for the three month period ended
September 30, 1996 increased 12.5% to $19.6 million from $17.4 million in the
comparable period of the prior year. As a percentage of revenue, general and
administrative expenses decreased to 3.7% for the three month period ended
September 30, 1996, from 3.8% in the comparable period of the prior year. The
absolute dollar increase in general and administrative expenses related to the
additional personnel and expenditures related to both domestic and international
facilities and information technology needed to support the infrastructure
required to carry out the Company's global business strategy. The decrease in
general and administrative expenses as a percentage of revenue was due to
increases in productivity and economies of scale. General and administrative
expenses may vary as a percentage of revenue in the future.
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In September 1996, the Company acquired all of the outstanding shares of
LANcity Corporation, a provider of advanced cable modem technology for a total
purchase price of $59.0 million. Of the aggregate purchase price, approximately
$42.6 million was charged to in-process research and development related to
internetworking technologies.
Net Interest Income and Other. Net interest income and other decreased
28.3%, to $6.0 million for the three month period ended September 30, 1996,
compared to $8.4 million for the comparable period of the prior year and
decreased as a percentage of revenue to 1.2% in the first three months of fiscal
1996 from 1.8% in the first three months of fiscal 1995. The decrease in
interest income was due to lower average invested cash and investment balances
which yielded lower interest income in the first quarter of fiscal 1997,
compared to the first quarter of fiscal 1996.
Income Taxes. The Company's effective income tax rate for the three month
period ended September 30, 1996 was 36.5% compared to 37.3% for the comparable
period in the prior year, respectively, excluding the effect of the in-process
research and development charge which is not deductible for income tax purposes.
The decrease in the effective income tax rate was primarily related to a
decrease in the state income tax liabilities. The Company does not anticipate
any material change to the effective tax rate for the remainder of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities increased to $144.6 million
for the three month period ended September 30, 1996, compared to $45.7 million
for the comparable period of the prior year. Cash provided from operations
increased from the prior period as a decrease in income before depreciation and
amortization was more than offset by decreases in accounts receivable and
inventory. The decrease in accounts receivable in the three month period ended
September 30, 1996 was due to focus on collections efforts and timing of
shipments during the period. Days sales outstanding in receivables were 51 days
at September 30, 1996 compared to 54 days at 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 continued transition to
turnkey manufacturing processes.
Cash used in investing activities was $107.4 million in the first quarter of
fiscal 1997, compared to cash provided by investing activities of $21.3 million
in the first quarter of fiscal 1996. The consumption of cash in the first
quarter of fiscal 1997 was primarily due to increases in property, plant and
equipment needed for expansion of domestic and international facilities and
improvements to the Company's information technology systems. The Company
continues to invest cash required to support the Company's operations in fiscal
1997. Furthermore, the Company acquired LANcity Corporation for $59.0 million in
the first quarter of fiscal 1997 as part of the Company's effort to position
itself in the emerging cable modem marketplace and deliver access solutions for
telecommunication companies, service providers and cable operators.
Cash used in financing activities was $11.6 million in the first quarter of
fiscal 1997, compared to cash provided by financing activities of $34 thousand
in the first quarter of fiscal 1996. Cash used by financing activities was
primarily due to the Company's purchase of treasury stock on the open market,
and offset by cash received in connection with the issuance of stock under the
Company's stock plans.
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 September 30, 1996, total cash and short- and long-term investments
totaled $619.9 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.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS.
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition 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. In addition, as the technical complexity
of new products increases, it may become increasingly difficult to introduce new
products quickly and according to schedule.
Risks Related to Recent Developments. The Company recently announced an
internal reorganization and implemented a new information system which it
believes will better serve its customers and the market overall. There can be no
assurances that these actions will achieve the Company's objectives.
Dependence on Personnel. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will depend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
Risks Related to Gross Profit. The Company's gross profit percentage is a
function of the product mix sold in any period. Other factors such as unit
volumes, obsolescence of inventory, heightened price competition, changes in
channels of distribution, shortages in components due to timely supplies of
parts from vendors or ability to obtain items at reasonable prices, and
availability of skilled labor, also may 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. One of the risks potentially
affecting the Company's operating results is the fact that 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.
Risks Related to Backlog. The Company has attempted to reduce its product
manufacturing lead times. To the extent that backlog is reduced during any
particular period, it could result in more variability and less predictability
in the Company's quarter to quarter revenue and operating results. If
manufacturing lead times are not reduced, the Company's customers may cancel, or
not place, orders if shorter lead times are available from other manufacturers.
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.
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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.
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.
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. In addition, the Company announced
the formation of a subsidiary, NETGEAR, which focuses on developing and
marketing products for the small office and home office market. 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 and rapidly changing. 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. The networking 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.
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. 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.
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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. Certain
acquisitions or strategic transactions may be subject to approval by the other
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, and amortization expenses
related to goodwill and other intangible assets. These factors could adversely
affect the Company's future operating results and financial position. As our
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. International sales 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 its products and 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 and financial
position.
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.
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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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index
are filed as part of this report.
(b) Reports on Form 8-K.
None
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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/ William J. Ruehle
----------------------
William J. Ruehle
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date: November 12, 1996
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ---------- ----------- --------
11 Statement Regarding Computation of Per
Share Earnings 17
27 Financial Data Schedule 18
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