1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19366
----------------------
BAY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2916246
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4401 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
TELEPHONE: (408) 988-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
211,589,659 shares of Common Stock, $.01 par value, as of October 25,
1997
This report on Form 10-Q includes exhibits. The exhibit index is located on page
16 of this report.
================================================================================
2
BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 27, 1997
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 27, 1997
and June 30, 1997 3
Condensed Consolidated Statements of Income - Three Months
Ended September 27, 1997 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended September 27, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Exhibit Index 16
-2-
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 27, JUNE 30,
1997 1997
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 560,374 $ 529,962
Short-term investments 266,262 105,180
Accounts receivable, net of allowance for doubtful
accounts of $7,693 at September 27, 1997 and
$8,477 at June 30, 1997 250,183 277,860
Inventories 144,096 144,468
Deferred income taxes 127,726 121,596
Other current assets 42,383 69,351
---------- ----------
Total current assets 1,391,024 1,248,417
Investments 138,124 146,367
Property and equipment, net 237,225 241,069
Goodwill 107,907 113,811
Other assets 26,125 16,382
---------- ----------
$1,900,405 $1,766,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 112,804 $ 117,596
Accrued expenses 208,705 201,266
Accrued income taxes 36,866 39,269
Deferred revenue 66,939 62,678
---------- ----------
Total current liabilities 425,314 420,809
Long-term debt 110,744 109,995
Stockholders' equity 1,364,347 1,235,242
---------- ----------
$1,900,405 $1,766,046
========== ==========
The accompanying notes are an integral part of these financial statements.
-3-
4
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
THREE MONTHS ENDED
--------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
-------- --------
(unaudited)
Revenue $601,280 $522,654
Cost of sales 294,888 249,915
-------- --------
Gross profit 306,392 272,739
-------- --------
Operating expenses:
Research and development 80,927 54,954
Sales and marketing 135,890 128,215
General and administrative 24,409 19,575
In-process research and development 7,392 42,648
-------- --------
Total operating expenses 248,618 245,392
-------- --------
Income from operations 57,774 27,347
Net interest income and other 8,655 6,025
-------- --------
Income before provision for income taxes 66,429 33,372
Provision for income taxes 25,099 27,747
-------- --------
Net income $ 41,330 $ 5,625
======== ========
Net income per share $ 0.19 $ 0.03
======== ========
Weighted average common shares and equivalents 220,600 196,345
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
5
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents, in thousands)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 30,
1997 1996
--------- ---------
(unaudited)
Cash flows provided by operating activities:
Net income $ 41,330 $ 5,625
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 39,240 25,526
In-process research and development 7,392 42,648
Deferred income taxes (5,608) 2,238
Changes in operating assets and liabilities:
Accounts receivable 27,677 29,099
Inventories 372 26,950
Other current assets 26,968 (16,569)
Accounts payable (4,792) (991)
Accrued expenses (561) 4,926
Accrued income taxes 15,664 22,355
Deferred revenue 4,261 2,799
--------- ---------
Cash flows provided by operating activities 151,943 144,606
--------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (22,530) (23,973)
Consulting expenditures on information technology systems (5,759) (20,679)
Purchases of investments (177,864) (46,384)
Proceeds from maturities of investments 25,025 39,358
Proceeds from sales of investments -- 1,049
Payments for acquisition of LANcity Corporation,
net of cash acquired -- (58,821)
Other assets (4,939) 2,078
--------- ---------
Cash flows used in investing activities (186,067) (107,372)
--------- ---------
Cash flows provided by (used in) financing activities:
Payments of long-term debt -- (67)
Purchase of treasury common stock -- (22,314)
Issuances of common stock 64,536 10,810
--------- ---------
Cash flows provided by (used in) financing activities 64,536 (11,571)
--------- ---------
Net increase in cash and cash equivalents 30,412 25,663
Cash and cash equivalents, beginning of period 529,962 315,064
--------- ---------
Cash and cash equivalents, end of period $ 560,374 $ 340,727
========= =========
The accompanying notes are an integral part of these financial statements.
-5-
6
BAY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bay Networks, Inc. (the Company or Bay Networks) develops, manufactures,
markets, sells and supports a comprehensive line of data networking products
and services. The Company provides products that meet the connectivity
requirements of corporate enterprises, network service providers and
telecommunications carriers. The Company offers products such as switches,
routers, shared media hubs, remote and Internet access solutions, Internet
Protocol (IP) services and network management applications, that operate under
open standards. The Company's products provide adaptive networking solutions to
network managers that allow seamless operation of multi-protocol and
multi-vendor networks.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for the in-process
research and development charges incurred during the three month periods ended
September 27, 1997 and September 30, 1996. The results of operations for the
interim periods presented are not necessarily indicative of results for any
future interim period or for the entire fiscal year. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, although the Company believes that the disclosures included
are adequate to make the information presented not misleading. The unaudited
condensed consolidated financial statements and notes included herein should be
read in conjunction with the consolidated financial statements and notes for
the fiscal year ended June 30, 1997, included in the Company's 1997 Annual
Report on Form 10-K.
Beginning with the first quarter of fiscal year 1998, for purposes of
operational efficiency, the Company's fiscal quarters now end on the Saturday
closest to the end of each calendar quarter. Accordingly, for fiscal year 1998,
the fiscal quarters end on September 27, 1997, December 27, 1997, March 28,
1998, and the fiscal year will end on June 27, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
2. CONSOLIDATED BALANCE SHEET INFORMATION
Inventories. Inventories, stated at the lower of cost (first-in, first-out)
or market, consist of:
SEPTEMBER 27, 1997 JUNE 30, 1997
------------------ -------------
(in thousands) (unaudited)
Raw materials $ 24,790 $ 21,068
Work-in-process 38,337 45,140
Finished goods 80,969 78,260
-------- --------
Total inventories $144,096 $144,468
======== ========
-6-
7
Property and Equipment. Property and equipment are stated at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets ranging from two to five years. Leasehold
improvements are recorded at cost and are amortized using the straight-line
method over the remaining lease term or the economic useful life of the related
asset, whichever is shorter.
SEPTEMBER 27, 1997 JUNE 30, 1997
------------------ -------------
(in thousands) (unaudited)
Machinery and equipment $ 429,354 $ 402,192
Furniture and fixtures 46,160 45,188
Leasehold improvements 72,294 76,679
--------- ---------
Total property and equipment 547,808 524,059
Accumulated depreciation and amortization (310,583) (282,990)
--------- ---------
Total property and equipment, net $ 237,225 $ 241,069
========= =========
3. FOREIGN EXCHANGE HEDGING
The Company had $18.3 million of short-term foreign exchange forward
contracts outstanding which approximated the fair value of such contracts and
their underlying transactions at September 27, 1997. These contracts are
denominated in Australian, French, Japanese, Canadian, German and U.K.
currencies. The outstanding contracts have original maturities that do not
exceed two months. The gains and losses on these contracts are included in
earnings when the underlying foreign currency denominated transaction is
recognized. Gains and losses related to these instruments at September 27,
1997, were not material. In addition, the Company has not terminated or
extinguished any foreign exchange forward contracts. The Company does not
anticipate any material adverse effect on its consolidated financial position,
results of operations, or cash flows resulting from the use of these
instruments.
4. INCOME TAXES
The Company's provision for income taxes for the three month period ended
September 27, 1997, is based upon the Company's estimate of the effective tax
rate for fiscal year 1998. The Company's effective tax rate for the three month
period ended September 27, 1997, was 34% excluding the effect of the in-process
research and development charge which was not deductible for income tax
purposes. The Company's accrued income taxes was reduced by a tax benefit from
employee stock option transactions of $18.1 million for the three month period
ended September 27, 1997, which was credited directly to stockholders' equity.
5. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares and dilutive common share equivalents outstanding during the period.
Dilutive common share equivalents consist of stock options using the treasury
stock method.
6. SIGNIFICANT CUSTOMERS
One reseller customer accounted for 12.9% of the Company's revenue in the
first quarter of fiscal year 1998 and another reseller customer accounted for
10.9% in the first quarter of fiscal year 1997.
7. ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company on December 27, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings
per share, the dilutive effect of stock options will be excluded. There is
expected to be an increase in primary earnings per share of $0.01 for the first
quarter of fiscal year 1998 and no impact on primary earnings per share for the
first quarter of fiscal year 1997. There is expected to be no impact on fully
diluted earnings per share for the first quarter of fiscal year 1998 and 1997,
respectively.
-7-
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere herein
as well as the section entitled "Risk Factors That May Affect Future Results."
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, changes in general economic conditions, rapid or unexpected changes in
technologies and uncertain business conditions that affect the data networking
industry. Accordingly, past results and trends should not be used by investors
to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital
Resources" may include forward-looking statements that involve risks and
uncertainties. These statements may differ materially from actual future events
or results. The Company wishes to caution readers that a number of important
factors, including those identified in the section entitled "Risk Factors That
May Affect Future Results," as well as factors discussed elsewhere in this
report and in the Company's other reports filed with the Securities and
Exchange Commission, may affect the Company's actual results and cause actual
results to differ materially from those in any forward-looking statements.
RESULTS OF OPERATIONS
Revenue. Revenue was $601.3 million for the first quarter of fiscal 1998 as
compared to $522.7 million for the first quarter of fiscal 1997, an increase of
15.0%. This increase resulted from increased sales of the Company's switching
products, increased service revenue and continued growth in international
operations. The Company experienced significant growth in its switching
products, due to competitive product offerings in the switching market, entry
into stackable and network center switching products, and market acceptance of
the Company's network manageability solutions for total infrastructure support.
Revenue for the first quarter of fiscal 1998 increased $58.3 million or 10.7%,
compared to revenue of $543.0 million in the fourth quarter of fiscal 1997.
Sales increased from the fourth quarter of fiscal 1997 in all principal product
lines, except for remote access.
International revenue increased 21.8% to $212.6 million for the first
quarter of fiscal 1998, as compared to $174.6 million for the comparable period
of the prior year. International revenue represented approximately 35.4% and
33.4% of total revenue for the first quarter of fiscal 1998 and fiscal 1997,
respectively. The increases in absolute dollars and as a percentage of total
revenue were a result of continued growth in the international markets. The
growth primarily occurred in Japan and Europe due to the strengthening of
distribution channels and improved international standards-based switching and
routing products, respectively. However, this growth was partially offset by
currency devaluation in the Asia/Pacific markets, resulting in a reduction of
capital expenditures from businesses located in these regions. The Company's
international revenue is primarily denominated in U.S. dollars. The effect of
foreign exchange rate fluctuations did not have a significant impact on the
Company's operating results in the periods presented. The effects of foreign
exchange rate fluctuations may adversely impact the Company's operating results
in future periods. Revenue in past periods may not be indicative of future
revenue, which may be affected by other factors discussed elsewhere herein, as
well as other business environment and risk factors.
Gross Profit. Gross profit decreased to 51.0% of revenue for the first
quarter of fiscal 1998, from 52.2% for the comparable period of the prior year.
However, in absolute dollars gross profit increased $33.7 million or 12.3% to
$306.4 million for the first quarter of fiscal 1998, from $272.7 million for
the comparable period of the prior year. The gross profit percentage decline
was a result of a shift in product mix from higher margin shared media and
router products to lower margin router, remote access and switching products,
including stackable LAN and WAN equipment used in small enterprise/small office
environments, and lower prices due to competitive pricing actions taken by the
Company in the later part of fiscal 1997 which have carried over into fiscal
1998. The increase in absolute dollars is attributable to increased unit sales
of the Company's products, primarily driven by the introduction of new products
and enhancements to existing products. Changes in material and labor costs and
distribution channels, may have an adverse effect on gross profit percentages
in the future. For a description of additional risks which may impact gross
profit, see the section entitled "Risk Factors that May Affect Future Results."
-8-
9
Research and Development. Research and development expenses for the first
quarter of fiscal 1998 increased 47.3% to $80.9 million from $55.0 million for
the comparable period of the prior year. As a percentage of revenue, expenses
were 13.5% in the first quarter of fiscal 1998 and 10.5% in the comparable
period of the prior year. The increase in expenses relates to the costs
associated with an increased research and development staff, costs associated
with acquisitions of businesses in the process of developing technologies, and
improving and expanding facilities and depreciation of equipment used in the
development of new products and product enhancements. The Company plans to
continue to increase research and development spending in absolute dollars in
order to pursue its goal of developing a broader range of new products needed
for timely product introductions to the market. As a result of the Company's
research and development efforts, new product sales accounted for 46.7% of
revenue during the first quarter of fiscal 1998, compared to 45.5% of revenue
in the first quarter of fiscal 1997.
The Company plans to continue its commitment to research and development
through internal development and, given that the industry's technology
environment is rapidly changing, through acquisitions of technology in an
effort to bring products to the market more quickly and provide end-to-end
network solutions. There can be no assurance that research and development
efforts or acquisitions of technology will result in commercially successful
new technology and products in the future, or that such technology and products
will be introduced in time to meet market requirements. The Company's research
and development efforts may be adversely affected by other factors noted
elsewhere herein. Research and development expenses may vary in absolute
dollars and as a percentage of revenue in future periods.
Sales and Marketing. Sales and marketing expenses for the first quarter of
fiscal 1998, increased 6.0% to $135.9 million, from $128.2 million in the
comparable period of the prior year. As a percentage of revenue, expenses
decreased to 22.6% for the first quarter of fiscal 1998, from 24.5% in the
comparable period of the prior year. The decline in expenses as a percentage of
revenue was due to improved sales force productivity and utilization of
facilities. The increase in absolute dollars is primarily attributable to
increased commission costs due to higher sales levels in the first quarter of
fiscal 1998, compared to the first quarter of fiscal 1997, costs associated with
equipment used to expand the Company's domestic and international sales presence
in certain markets, and costs associated with recruiting, relocating and
training of personnel. The Company's investment in its sales, marketing and
customer support resources may vary in absolute dollars or as a percentage of
revenue in the future as management intends to effectively market Bay Networks
and its products to the public.
General and Administrative. General and administrative expenses for the
first quarter of fiscal 1998, increased 24.7% to $24.4 million from $19.6
million in the comparable period of the prior year. As a percentage of revenue,
expenses increased to 4.1% for the first quarter of fiscal 1998, from 3.7% in
the comparable period of the prior year. The increase in expenses is primarily
due to the related expenditures associated with the addition of personnel,
including recruiting, relocating and training, and information technology
needed to support the infrastructure required to carry out the Company's global
business strategy. General and administrative expenses may vary in absolute
dollars or as a percentage of revenue in the future although management's
intention is to maintain discretionary spending.
In-Process Research and Development. In December 1996, the Company acquired
NetICs, Inc. (NetICs), a privately held company developing high-performance,
autosensing Fast Ethernet work group switches. Under the terms of the NetICs
acquisition agreement, the Company would pay an additional purchase price
consideration of $8 million for certain commitment targets associated with
revenue milestones achieved by NetICs prior to December 1997. The revenue
milestones were achieved during the first quarter of fiscal 1998; and as a
result, $7.4 million of the additional consideration was allocated to
in-process research and development and charged to operations. The remaining
$0.6 million was allocated to intangible assets, which are being amortized on a
straight-line basis over a five year period. This treatment is consistent with
the Company's previous purchase price allocation related to the acquisition of
NetICs.
Net Interest Income and Other. Net interest income and other increased
43.7% to $8.7 million for the first quarter of fiscal 1998, compared to $6.0
million for the comparable period of the prior year and increased as a
percentage of revenue to 1.4% in the first quarter of fiscal 1998 from 1.2% in
the comparable period in the prior year. The increase in interest income was
primarily due to higher average invested cash and investment balances which
yielded more interest income in the first quarter of fiscal 1998, compared to
the first quarter of fiscal 1997. The increase in the average invested cash
and investment balances resulted
-9-
10
primarily from increased profitability from the Company's operations, greater
linearity of collections and product shipments, increased inventory turns, and
increased stock option exercise activity during the first quarter of fiscal
1998. The overall increase was partially offset by the continued strengthening
of the U.S. dollar which impacted foreign exchange losses resulting from the
translation of the parent company's accounts receivable from international
subsidiaries from the local currency to the U.S. dollar. However, the impact
from foreign exchange losses was mitigated by the Company's foreign exchange
hedging activities.
Investment Portfolio. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument. The Company
does not expect any material loss with respect to its investment portfolio.
The table below provides information about the Company's investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. The
Company's investment policy requires that all investments mature in five years
or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
(in thousands, except interest rates)
FAIR VALUE AT
FY 1998 FY 1999 FY 2000 FY 2001 TOTAL SEP. 27, 1997
----------- ----------- ---------- --------- ----------- -------------
Cash Equivalents $ 507,071 $ -- $ -- $ -- $ 507,071 $507,468
Average Interest Rate 5.36% -- -- -- 5.36%
Investments $ 197,586 $ 156,919 $ 41,059 $ 9,905 $ 405,469 $404,386
Average Interest Rate 5.37% 5.51% 4.89% 4.20% 5.35%
Total Portfolio $ 704,657 $ 156,919 $ 41,059 $ 9,905 $ 912,540 $911,854
Average Interest Rate 5.36% 5.51% 4.89% 4.20% 5.36%
Impact of Foreign Currency Rate Changes. In the first quarter of fiscal
1998, most currencies in Europe and Asia/Pacific continued to weaken against the
U.S. dollar. Consequently, the translation of the parent company's intercompany
receivables had a negative impact, although not material, on the consolidated
results of the Company. Foreign exchange forward contracts are purchased to
hedge certain intercompany foreign currency denominated balance sheet positions.
These financial instruments may minimize the risks that would otherwise result
from changes in foreign currency exchange rates. Exchange gains and losses did
not have a significant effect on the Company's results of operations for the
first quarter of fiscal 1998.
Foreign Exchange Hedging. The Company enters into foreign exchange forward
contracts to reduce its exposure to currency fluctuations on intercompany
foreign currency denominated balance sheet positions. The objective of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The Company's accounting policy
for these instruments is based on the Company's designation of such instruments
as hedging transactions. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company had $18.3 million
of short-term foreign exchange forward contracts denominated in Australian,
French, Japanese, Canadian, German and U.K. currencies which approximated the
fair value of such contracts and their underlying transactions at the end of
the first quarter of fiscal 1998. The gains and losses on these contracts are
included in earnings when the underlying foreign currency denominated
transaction is recognized. Gains and losses related to these instruments at the
end of the first quarter of fiscal 1998, were not material to the Company.
Looking forward, the Company does not anticipate any material adverse effect on
its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments. There can be no assurance that
these strategies will be effective or that transaction losses can be minimized
or forecasted accurately.
The following table provides information about the Company's foreign
exchange forward contracts at the end of the first quarter of fiscal 1998. The
table presents the value of the contracts in U.S. dollars at the contract
exchange rate as of the contract maturity date. Due to the short-term nature of
these contracts, the contract rate approximates the weighted average
contractual foreign currency exchange rate and the forward
-10-
11
position in U.S. dollars approximates the fair value of the contract at the end
of the first quarter of fiscal 1998.
Short-Term Forward Contracts to Sell Foreign Currencies for U.S. Dollars
Related to Intercompany Receivables:
FORWARD
CONTRACT MATURITY CONTRACT POSITION IN
(in thousands, except contract rates) DATE IN 1997 DATE IN 1997 RATE U.S.DOLLARS
------------ ------------ -------- -----------
Australian Dollar July 25 September 29 1.3534 $3,325
Australian Dollar August 29 November 3 1.3626 $2,202
French Francs August 29 November 3 6.0355 $5,799
Japanese Yen August 29 November 4 119.35 $1,676
Canadian Dollar August 28 September 30 1.3853 $1,083
German Deutschemark August 28 October 2 1.7899 $ 978
U.K. Pound Sterling August 28 October 2 1.6144 $3,229
Income Taxes. The Company's effective income tax rate for the first quarter
of fiscal 1998, was 34.0% compared to 36.5% for the comparable period in the
prior year, excluding the effect of the in-process research and development
charge which was not deductible for income tax purposes. The decrease in the
effective income tax rate was primarily due to the reinstatement of the federal
research and development tax credits.
Effect of New Accounting Standards. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share,
which is required to be adopted by the Company on December 27, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. There is expected to be an increase in primary
earnings per share of $0.01 for the first quarter of fiscal 1998 and no impact
on primary earnings per share for the first quarter of fiscal 1997. There is
expected to be no impact on fully diluted earnings per share for the first
quarter of fiscal 1998 and fiscal 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities increased to $151.9 million for the
first quarter of fiscal 1998, compared to $144.6 million for the comparable
period of the prior year. Cash provided from operations increased from the
prior period primarily as a result of, among other things: decreases in
accounts receivable, other current assets, and an increase in accrued income
taxes; and an increase in income before depreciation and amortization and
in-process research and development charges, partially offset by a decrease in
accounts payable. The decrease in accounts receivable from the prior period was
due to continued focus on collection efforts and a greater linearity of
shipments during the quarter. Days sales outstanding in receivables decreased
to 38 days at the end of the first quarter of fiscal 1998 from 47 days as of
the end of fiscal 1997. Days sales outstanding may continue to vary, due to,
among other things, linearity of product shipments and collections, and
increased international sales.
Cash used in investing activities was $186.1 million for the first quarter of
fiscal 1998, compared to $107.4 million in the comparable period of the prior
year. The consumption of cash in the current year to date resulted from
continued investments in property and equipment and improvements to the
Company's information technology systems required to support the Company's
operations. In addition, the Company continues to invest cash required to
support the Company's operations in fiscal 1998. The Company's portfolio
consisted of more cash equivalents and short-term investments than long-term
investments as of the end of the first quarter of fiscal 1998, compared to the
end of the first quarter of fiscal 1997.
Cash provided by financing activities was $64.5 million in the first quarter
of fiscal 1998, compared to cash used in financing activities of $11.6 million
in the first quarter of fiscal 1997. The cash provided by financing activities
during the first quarter of fiscal 1998 consisted primarily of cash received in
connection with the issuance of stock under the Company's stock option plans.
Cash used in financing activities during the first quarter of fiscal 1997 was
primarily due to the Company's purchase of treasury stock on the open market,
partially offset by cash received in connection with the issuance of stock
under the Company's stock option plans.
-11-
12
A subsidiary of the Company has outstanding $110 million of convertible
subordinated debentures which mature in May 2003. The debentures are
convertible at the option of the holder into the Company's common stock. The
debentures are redeemable at the option of the Company, initially at
approximately 103.7% and at decreasing prices thereafter to 100% at maturity.
To date, the Company's management has made no decision to redeem the
debentures.
As of the end of the first quarter of fiscal 1998, cash and short- and
long-term investments totaled $964.8 million, compared to $781.5 million at the
end of fiscal 1997. The Company believes that it has the financial resources
needed to meet business requirements, including capital expenditures, working
capital requirements, debt obligations outstanding and operating lease
commitments for facilities at least through the next twelve months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition, Bay Networks
identifies the following risk factors which may affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
Risks Related to New Markets. The markets for data networking products are
rapidly changing and highly competitive. If these markets do not continue to
grow, or if the Company's strategies for the data networking markets are
unsuccessful, the Company's consolidated financial position, results of
operations, or cash flows, may be adversely affected.
Risks Related to New Products. The Company's future revenue is dependent on
its ability to successfully develop, acquire, manufacture and market products
for customers in rapidly evolving markets worldwide. To successfully distribute
new products the Company must establish and maintain new distribution channels.
There can be no assurance that the Company's product development and
acquisition efforts will result in timely and commercially successful new
product offerings in the future.
Risks Related to Gross Profit. The Company's gross profit percentage is a
function of the product mix sold in any period. Therefore, gross profit
percentage may fluctuate, affecting the Company's operating results. Factors
such as unit volumes, obsolescence/surplus of inventory, heightened price
competition, changes in channels of distribution, shortages and cost increases
in supplies of parts from vendors, and the availability of skilled labor, also
may cause fluctuations in gross profit percentages.
Risks Relating to Manufacturing Operations. The Company operates
manufacturing facilities and relies upon a number of manufacturing arrangements
worldwide. The Company's manufacturing capability may be affected by factors
impacting the operations of its suppliers. In addition, the Company's ability
to meet customer demand may also be dependent on its ability to adjust
manufacturing levels on short notice based on anticipated orders.
Risks Related to Intellectual Property Rights. The Company relies upon a
combination of patents, copyrights, trademarks and trade secrets to establish
and protect intellectual property rights in its products and technology. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology, or that the Company's competitors
will not develop superior technologies. From time to time it may be necessary
or desirable for the Company to enter into technology licenses, strategic
alliances and cooperative marketing efforts with others. There can be no
assurance that the Company consistently will be able to secure third-party
rights necessary to offer competitive products.
Risks Related to Competition. The data networking industry is highly
competitive. There can be no assurance that the Company will be able to compete
successfully in the future with existing or new competitors. Among the
competitive factors that may adversely affect the Company's future results are
conformity to existing and emerging industry standards; interoperability with
other networking products; network management capabilities; price; performance;
product features; technical support; and distribution.
Risks Related to Acquisitions. To implement its business plans, the Company
may make further acquisitions in the future. Acquisitions require significant
financial and management resources both at the time of the transaction and
during the process of integrating the newly acquired business into the
Company's operations. The Company's results of operations, consolidated
financial position, or cash flows,
-12-
13
may be adversely affected if it is unable to successfully acquire and integrate
such new companies into its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Investment Portfolio" and "Foreign
Exchange Hedging" in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and "Foreign Exchange Hedging" in Note 3
of the Notes to Condensed Consolidated Financial Statements. Such information
is incorporated herein.
-13-
14
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index
are filed as part of this report.
(b) Reports on Form 8-K.
None
-14-
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY NETWORKS, INC.
By /s/ ROB G. SEIM
------------------------------
Rob G. Seim
Vice President and
Corporate Controller
(Authorized Officer and
Principal Accounting Officer)
Date: November 10, 1997
-15-
16
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Restated Certificate of Incorporation of the Registrant,
which is incorporated herein by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-8
(Registration No. 33-92736) filed on May 26, 1995.
3.2 Bylaws, of the Registrant, as amended and restated, which
is incorporated herein by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-4 (File No.
33-83946) filed with the Securities and Exchange Commission
on September 14, 1994.
4.1 Rights Agreement dated as of February 7, 1995 between the
Registrant and The First National Bank of Boston, which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated February 7, 1995.
10.3* Amended and Restated 1994 Stock Option Plan, as amended on
July 29, 1997.
10.5* Amended and Restated 1994 Employee Stock Purchase Plan, as
amended on July 29, 1997.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
______________
* Indicates compensatory plan or arrangement.
-16-