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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19366
BAY NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 04-2916246
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
4401 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
TELEPHONE: (408) 988-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, $.01 PER SHARE PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ___ No x
The aggregate market value of voting stock held by non affiliates of the
registrant was approximately $156,567,400 as of August 30, 1996, based upon the
closing sale price per share of the registrant's Common Stock as reported on the
New York Stock Exchange on such date. Shares of Common Stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes. As of August 30, 1996, 188,261,874 shares of
Common Stock, $.01 per share par value, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Bay Networks, Inc. Proxy Statement for the 1996 Annual
Meeting of Stockholders to be held on October 17, 1996 are incorporated by
reference into Part III of this Annual Report on Form 10-K where indicated.
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PART I
ITEM 1. BUSINESS
GENERAL
Bay Networks, Inc. (the "Company") 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.
In October 1994, SynOptics Communications, Inc. ("SynOptics") and Wellfleet
Communications, Inc. ("Wellfleet") effected a strategic combination of the two
companies through the merger of a wholly-owned subsidiary of Wellfleet with and
into SynOptics (the "Combination"). In connection with the Combination,
Wellfleet changed its name to Bay Networks, Inc. On May 15, 1995, the Company
acquired Centillion Networks, Inc. a leading provider of Token Ring and Token
Ring-to-ATM switching products.
On December 15, 1995, the Company acquired Xylogics, Inc. ("Xylogics"), a
technology and market leader in enterprise remote access, offering remote users
and offices transparent corporate-wide access to networking resources. On March
13, 1996, the Company acquired all of the outstanding shares of Performance
Technology, Inc., a privately held company headquartered in San Antonio, Texas
and a leader in developing LAN-to-Internet access technology, providing small
offices and small-to-medium-sized businesses easy, secure access to the
Internet. On March 31, 1996, the Company acquired substantially all of the net
assets of Armon Networking, Ltd., headquartered in Tel Aviv, Israel, a
technology developer of RMON-based distributed analysis tools and multi-segment
LAN probes. In June 1996, the Company signed a definitive agreement to acquire
the Digital Signal Processing (DSP) modem business of Penril DataComm Networks,
Inc., a provider of advanced DSP-based modems and remote access products. The
closing of the transaction is currently expected to be in the quarter ending
December 31, 1996. See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the Consolidated Financial
Statements included herein.
The Company's products connect and interconnect multiple types of LANs,
comprised of computer equipment from the same or different manufacturers, to
form an internetworked system. These products connect computers to form LANs,
interconnect LANs located in a single facility and, through WAN connections, may
connect LANs dispersed around the world. The internetworking of these networks
enables computer users operating different types of equipment in different
locations to communicate, exchange data and share other computing resources.
The Company is a Delaware corporation incorporated in May, 1986. The
Company's principal offices are located at 4401 Great America Parkway, Santa
Clara, California 95054.
Trademarks of Bay Networks, Inc. appear in this document. Other trademarks,
brand, product, or company names may be the property of others.
RECENT DEVELOPMENTS
On September 3, 1996, the Company signed a definitive agreement to acquire
all the outstanding shares of LANcity Corporation ("LANcity"), a provider of
advanced cable modem technology, in exchange for $59.0 million. The acquisition
is subject to LANcity shareholder approval and is scheduled to close during the
quarter ending September 30, 1996. The acquisition will be accounted for as a
purchase. Based on preliminary estimates, the Company expects to allocate
approximately one-half of the purchase price to in-process research and
development, which will be charged to expense upon the closing of the
transaction.
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NETWORKING SOLUTIONS
Organizations are increasingly seeking to internetwork their disparate,
often incompatible, LANs and WANs to share information and computing resources
across the organization for applications such as electronic mail, sharing of
databases, multi-site engineering and product development, transaction
processing and electronic image transfer. Enterprise-wide networks facilitate
efficient and rapid data communications among connected work groups, departments
and locations and provide for more effective utilization of information and
computer resources. In addition, as the computing paradigm migrates to
client-server architectures, enterprise-wide networks are the enabler that
allows those technologies to be implemented by organizations. The
internetworking of LANs and WANs into enterprise-wide networks requires data
communications products which efficiently, reliably, and quickly transmit data
to appropriate locations on different networks, reconcile incompatible LAN and
WAN standards between networks and manage large, complex internetworks.
To meet these internetworking needs, the Company has developed a family of
computer networking products including hubs, routers, switches, and network
management software. The Company's hub products, which reside at the center of
networks and serve as a control and consolidation point for network activity,
integrate connectivity, network management and internetworking products into a
structured network solution that emphasizes network management scalability and
manages complexity across the network.
As network demands continue to increase, switching delivers the performance
required to support the emerging image processing, animation, modeling,
scientific and multimedia applications of the future. The Company's router
products choose the optimal path to interconnect LANs or to route data to the
WAN. These products enhance network segmentation and security, improve
reliability (since alternative paths can be used) and increase bandwidth
utilization (since the best path between source and destination is chosen by a
router).
Organizations are experiencing a shift from departmental-only to
enterprise-wide remote access and the need for applications and network
infrastructure that are remote access-ready as a result of increased business
mobility, the move to telecommuting, reduced cost of ownership of both product
and WAN services, and widespread adoption of remote access standards. Remote and
internet access products extend the backbone network beyond the branch office,
bringing remote users closer to the enterprise and permit connection to the
corporate LAN so users can work anywhere -- at home, in a hotel or in a remote
office -- at any time. Users can access electronic mail, databases and file
servers as if they were directly included within the network.
PRODUCTS
The Company's product lines include a broad family of internetworking
products, including routers, hubs, switches, remote and internet access
solutions, and network management technologies. These products encompass LAN and
WAN components, which allow the Company to offer a solution to communicate
network data worldwide, managed from a single network management software
platform which supports the Company's product lines.
The Company's product strategy is focused on weaving LAN connectivity,
management and internetworking solutions into a flexible network fabric capable
of supporting large, diverse enterprise networks. The center of this strategy is
the intelligent hub, which acts as a central control point for network
connections, management and growth. The intelligent hub incorporates the
hardware and software required to connect computing devices to structured
networks using various cabling types and media-access methods, switches, bridges
and routers that enable the internetworking of various network segments into
enterprise networks. Integrated network management software products facilitate
network operation by diagnosing and solving network problems. The categories of
the Company's product lines are described below.
Connectivity Products, which include intelligent hubs and related host
modules and transceivers, enable computing devices to communicate over networks.
Intelligent hubs provide integrated connectivity and centralized management by
supporting ethernet, token ring and fiber distributed data interface ("FDDI")
protocols, or any combination of the three in the same hub. Transceivers provide
an interface between the
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computing devices and cabling systems and are implemented either as units
external to the computer or as integrated circuits on network cards.
Network Management Products distribute management intelligence throughout
geographically dispersed networks and enable network administrators to monitor
and control the network. The open, standards-based network management products
are comprised principally of intelligent modules which resides within hubs,
sophisticated management software which resides on intelligent modules and
advanced software application programs which reside on network management
computer consoles. Through a combination of hardware and software components,
intelligent network management modules gather network information close to the
source of data activity, reduce it into meaningful information within the hub,
and forward the data to a central network management console attached to the
network. The actual management of data takes place in the hub, relieving the
burden on central network management resources and enabling networks to grow
along with the expansion of the business.
Using the Simple Network Management Protocol ("SNMP"), which ensures
compatibility with other management systems that may already be in place in a
particular networking environment, the Company's network management products
address a wide variety of diverse environments. The Optivity network management
system works with DOS and UNIX network management platforms from International
Business Machines Corporation, Hewlett-Packard Company, Inc., Novell, Inc. and
Sun Microsystems, Inc. Additionally, the Company offers application software
products which automate operational functions and facilitate design and
management of a network. The flexibility of these software products enable them
to interface in an array of multi-vendor environments.
Internetworking Products are modular devices integrated into intelligent
hubs or stand-alone devices which provide links between independent LAN segments
and control the flow of data on the LAN. The devices connect data traffic
between linked networks and forward packets of data destined for other locations
throughout the network. The Company's internetworking product lines include
local and remote bridges, local and remote routers, and switches. Bridges, which
are protocol-independent, are the simplest method of connecting LAN segments.
Bridges sort through all traffic on a network, and decide whether to send it to
the remainder of the network.
As networks grow in both size and complexity, routers provide additional
intelligence in connecting individual networks. Unlike bridges, routers actually
examine the protocol of the data packets which permits protocol filtering and
security control. The Company offers a family of scalable and highly flexible
router products that concurrently provide bridging and multi-protocol routing
functions in modular and stackable forms. The Backbone Node ("BN") products are
designed to satisfy the throughput and/or availability requirements of the most
demanding enterprise internetworks. The Backbone Node provides complete fault
resiliency with redundant processor interconnects, power supplies, and software
image storage in combination with its symmetric multiprocessor architecture.
The Company also offers a modular, stackable router, which is designed to
provide seamless integration of multiple units stacked together, performing as a
single router. This modular product offers scalability for expanding sites
requiring remote, regional or departmental access to the corporate network.
Switching Products interconnect LANs by supporting multiple parallel
communications and eliminating LAN bandwidth congestion. These products offer
connectivity to LAN and WAN technologies such as asynchronous transfer mode
("ATM"), FDDI and token ring, as well as a full suite of networking protocols
for high-speed LAN and switching environments.
In fiscal 1995, the Company introduced BaySIS (Bay Switched Internetworking
Services), a new networking architecture that combines switching technology with
traditional shared-media hub and router technology. The resulting
switched-internetworking architecture permits the customer to migrate from their
existing technology in a controlled, reliable and cost-effective manner.
Remote and Internet Access Products, including Remote Annex analog remote
access servers, Nautica ISDN router products and Instant Internet internet
access server, which are key to on-line access
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to corporate information and services such as the Internet, extend the backbone
network beyond the branch office, bringing remote users closer to the
enterprise.
The Remote Annex family of products, which are highly scalable and are
offered in a variety of configurations, provide users with transparent dial-in
access to Ethernet LANS. Users can access electronic mail, data bases and file
servers residing on Novell NetWare, TCP/IP and AppleTalk LANs as if they were
directly included with the network.
ISDN is a digital telephone connection that accommodates high bandwidth
transmissions such as graphics, images or large text files and provides an
immediate, high speed, reliable connection to network resources. The Nautica
series of ISDN routers support a wide range of routed protocols including Novell
IPX/SPX, TCP/SP, Netbios, Microsoft WINS and Banyan Vines as well as the OSPF
and RIP2 routing protocols. These products provide bandwidth-on-demand,
dial-on-demand, data compression security, configuration and network management
features.
Instant Internet provides small offices and small-to-medium-sized
businesses easy, secure access to the internet, by providing an all-in-one unit
to connect NetWare, Windows '95 and Windows NT users directly to the internet
without requiring any time-consuming changes to LAN clients or servers.
SALES CHANNELS
The Company's global market strategy emphasizes the support of sales and
service through a network of value added resellers ("VARs"), distributors,
networking OEMs and, through its domestic field sales force, directly to major
customers. The goal of the multi-channel strategy is to offer the Company
flexibility to meet specific needs and furnish the Company with broad coverage
of worldwide markets.
Value Added Resellers. VARs integrate the Company's products, along with
products sold by other LAN and WAN vendors, into turnkey networking systems that
are sold directly to end users. VARs also sell the Company's products as
stand-alone units. The Company provides support to the VAR network through its
field sales force and customer service organization, so that in addition to
sales generated independently, VAR sales are also the result of sales leads
generated by the Company's direct marketing efforts. Sales to VARs are made at
discounts based on purchase volumes and other incentive programs. VARs may
choose to procure the the Company products they resell by purchasing directly
from the Company or from its distributors as described below.
Distributors. The Company also sells its products to distributors who
typically resell to VARs or other dealers. Distributors must meet certain
criteria that are substantially different from those which the Company's VARs
must meet. The Company's distributors generally provide a minimal level of
systems integration. Distributors purchase at standard discounts based on
certain incentive programs. The Company offers additional sales and marketing
programs to assist those VARs and dealers who purchase through distributors in
promoting, selling and supporting the Company's products.
The Company's VARs and distributors may carry other products which are
complementary to, or compete with those of the Company, and these non-exclusive
VARs and distributors may choose to give higher priority to products of other
suppliers or competitors.
Field Sales Force. The Company's field sales force manages its sales
activities through multi-channel distribution strategies. The Company's
customers include end-users of large, complex, enterprise-wide networks, who
typically provide their own systems integration. The field sales and technical
support force also provides training and technical support to the Company's
VARs, distributors and end-users.
Marketing. The Company has implemented several marketing programs designed
to support the sale of its products through broad-scale reseller distribution
(two-tier distributors and direct resellers), generate sales leads for its
distribution channels and enhance brand name recognition. The Company's
marketing activities include frequent participation in industry trade shows and
seminars, advertisements in major trade publications worldwide, publications of
technical articles in the trade press, the distribution of sales literature and
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product specifications and ongoing communications with its installed base of
end-user customers. The Company's reseller and distribution programs include
incentives and benefits such as Co-op and reseller marketing programs.
CUSTOMERS AND BACKLOG
The Company's product backlog on June 30, 1996, was approximately $120
million as compared to product backlog on June 30, 1995, of approximately $231
million. The Company includes in its backlog only orders confirmed with a
purchase order for products to be shipped within six months. Because of the
generally short cycle between order and shipment, and occasional customer
changes in delivery schedules or cancellation of orders which are made without
significant penalty, the Company does not believe that its backlog as of any
particular date is necessarily indicative of actual net sales for any future
period. One reseller, Anixter Inc., a wholly-owned subsidiary of Anixter
International, Inc., accounted for approximately 13% ($263.0 million), 14%
($198.0 million) and 14% ($162.0 million) of the Company's revenue in fiscal
1996, fiscal 1995 and fiscal 1994, respectively.
The Company has attempted to reduce its product manufacturing lead times
and its backlog of orders. 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 based on anticipated orders by the market.
CUSTOMER SUPPORT, SERVICE AND WARRANTY
The Company services, repairs and provides technical support for its
products. A significant portion of the Company's service and support activities
is related to software and network configuration and is provided by the
Company's assistance centers. The Company has contracted with third parties to
supplement service provided directly by the Company for on-site hardware
maintenance. International service is provided primarily by distributors,
supplemented with phone support centers in France, Japan and Australia. The
Company sells products to end-users with warranty periods of up to twelve months
from the date of shipment for domestic sales and up to fifteen months from the
date of shipment for international export sales. Following the expiration of the
warranty period, if any, the Company offers services under maintenance contracts
or on a time and materials basis. The Company also provides on-site network
support services such as system installation, network integration services and
technical consulting.
RESEARCH AND DEVELOPMENT
The Company has devoted significant resources to research and development,
spending $213.5 million, $145.3 million and $117.6 million during the fiscal
years ended June 30, 1996, 1995 and 1994, respectively.
During fiscal 1996, the Company continued development of enhancements to
its current products and to the development of new products in the areas of
emerging technologies such as ATM, remote access, switched internetworking
technologies, and the integration of voice, video and data networking. The
Company plans to continue its commitment to research and development in fiscal
1997, as the Company believes that the markets for its products are
characterized by rapid rates of technological innovation for both hardware and
software.
MANUFACTURING
The Company's manufacturing operations are located at its Santa Clara and
Sunnyvale, California; Billerica and Burlington, Massachusetts; Tel Aviv, Israel
and San Antonio, Texas facilities. The Company uses contract manufacturers in
the United Kingdom for its Nautica(TM) product line to meet product demands for
the United Kingdom market.
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The Company's manufacturing process consists of purchasing; automated,
semi-automated and manual assembly; burn in processing; in-circuit testing;
final assembly and test; and inspection.
Most of the components used in the Company's products are available from
more than one supplier. Failure of the Company's vendors to supply required
items could have a material adverse effect upon the Company's business. The
Company seeks to maintain an inventory level sufficient to meet its anticipated
short-term production needs. 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.
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. Specifically, 3Com
Corporation acquired Chipcom Corporation and Cisco Systems, Inc. recently
acquired Stratacom, Inc. Cisco Systems, Inc. also recently announced its
intention to acquire Telebit Corporation. 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.
PROPRIETARY RIGHTS AND LICENSES
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
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Company's operating results, and there is no assurance that the Company will be
able to license such technology.
EMPLOYEES
As of June 30, 1996, the Company employed 5,758 persons, including regular,
temporary and contract employees, none of whom is represented by a labor union.
The Company has experienced no work stoppages and considers its employee
relations to be positive.
ITEM 2. PROPERTIES
The Company's principal executive facility is located at the Company's
corporate headquarters in Santa Clara, California. The Company has eastern
operations located in Billerica and Burlington, Massachusetts. The Company has
administrative, sales and marketing, product development, manufacturing and
support facilities at both locations.
The Santa Clara facilities consist of approximately 1,021,975 square feet
under leases that expire from April, 1999 to November, 2002. The Company has an
option to renew certain of these leases for two additional five-year terms. The
Company's Massachusetts facilities consist of approximately 663,963 square feet
under leases that will expire through February, 2001 and the Company has an
option to renew certain of these leases for various terms. The Company has
additional fiscal year 1997 lease commitments in Billerica, Massachusetts, of
approximately 165,000 square feet.
A subsidiary of the Company has a fifty percent interest in a limited
partnership which owns one of the Company's manufacturing facilities. Of the
above total, the Company leases 118,000 square feet from the limited
partnership. The Company has, also included in the above total, approximately
405,113 square feet of space in other manufacturing buildings in Sunnyvale and
Santa Clara, California, and Billerica, Massachusetts.
The Company acquired additional manufacturing, research and development
operations during fiscal year 1996. Bay Networks Israel (1996) Ltd., which
acquired the business of Armon Networking, Ltd. in Tel Aviv, Israel occupies
27,975 square feet and Performance Technology, Inc. in San Antonio, Texas,
occupies 19,413 square feet.
Some of the Company's manufacturing and distribution facilities, as well as
a portion of the Company's research and development, and sales and
administrative functions, are located in areas of seismic risk. The Company's
future operating results could be materially affected by a major earthquake.
The Company leases and occupies sales and service offices in 36 states
throughout the United States and Puerto Rico and 34 countries worldwide. The
Company's worldwide operations are located in Argentina, Australia, Austria,
Belgium, Brazil, Canada, Cayman Islands, China, Colombia, Denmark, Finland,
France, Germany, Hong Kong, India, Indonesia, Israel, Italy, Japan, Korea,
Malaysia, Mexico, the Netherlands, New Zealand, Norway, Portugal, Russia,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, United
Arab Emirates and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
From time to time, as a normal incidence of the nature of the Company's
business, various claims, charges and litigation are asserted or commenced
against the Company. In the opinion of management, final judgments from such
claims, charges and litigation, if any, against the Company would not have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
At various times the Company has been approached by others claiming to hold
valid patents applicable to its products, who have offered to license the
patented technology. The Company may enter into such licensing agreements or may
vigorously contest such claims, depending upon the specific circumstances.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter ended June 30, 1996.
MANAGEMENT
The executive officers of the Company are as follows:
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NAME/POSITION AGE BUSINESS EXPERIENCE
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Andrew K. Ludwick 50 Mr. Ludwick, a founder of SynOptics, served as President,
President, Chief Chief Executive Officer and a director of the Company
Executive since October 1994 and served as President, Chief
Officer and Director Executive Officer and a director of SynOptics from its
inception 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.
Paul J. Severino 49 Mr. Severino, a founder of Wellfleet, has served as
Chairman of the Board and Chairman of the Board of the Company since October 1994
Director 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).
Ronald V. Schmidt 52 Dr. Schmidt, a founder of SynOptics, has served as the
Executive Vice President, Executive Vice President and Chief Technical Officer of
Chief Technical Officer the Company since October 1994 and as a director since May
and 1996. Dr. Schmidt served as Senior Vice President, Chief
Director 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.
Jeffry R. Allen 44 Mr. Allen has served as Senior Vice President of
Senior Vice President, Operations since November 1995. Mr. Allen most recently
Operations served as Vice President and Controller of the Company
from October 1994 to November 1995. From December 1990 to
October 1994, Mr. Allen held various positions at
SynOptics, the latest of which was Vice President and
Controller. Before joining SynOptics, he held various
positions from December 1973 to November 1990 at
Hewlett-Packard Company, Inc., the latest of which was
Controller of the Information Networks Group.
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<TABLE>
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NAME/POSITION AGE BUSINESS EXPERIENCE
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Lloyd Carney 34 Mr. Carney joined the Company in July 1990 as Director of
Vice President, Worldwide Technical Operations in the manufacturing organization of
Customer Service Wellfleet. He held this position until April 1993 when he
assumed the position of Vice President, Worldwide Customer
Service. Prior to joining the Company, Mr. Carney was Test
Engineering Manager and had new product introduction
responsibilities at Proteon Inc. Prior to Proteon, Mr.
Carney held various engineering and project management
positions at Prime Computer, Inc.
Richard D. Eyestone 50 Mr. Eyestone joined the Company in July 1991 as the
Senior Vice President, Southern Regional Manager. He held the position of
Product and Market Regional Vice President- Southern Region from November
Management, Enterprise 1994 until July 1995 and Vice President of U.S. Sales from
Business Unit July 1995 until May 1996 when Mr. Eyestone assumed the
position of Senior Vice President of Market and Product
Management for the Company's Enterprise Business Unit.
Prior to joining the Company, Mr. Eyestone held various
sales management positions at PictureTel Corporation and
Masscomp, Inc.
Michael J. Grady 47 Mr. Grady joined the Company as Vice President,
Senior Vice President of Engineering, in August 1992 and has served as Senior Vice
Engineering, Enterprise President of Engineering, Enterprise Business Unit since
Business Unit May 1996. From 1980 to July 1992, Mr. Grady held various
positions within the Engineering and Customer Support
areas at Stratus Computer, Inc., the latest of which was
Vice President, Customer Service and Technical Support and
prior to that, Vice President, Major Account Engineering.
Prior to working for Stratus Computer Inc., Mr. Grady held
various positions at Honeywell Information Systems.
Vito E. Palermo 32 Mr. Palermo has served as Vice President and Controller
Vice President since November 1995. He joined the Company in June 1992 as
and Controller Manufacturing and Customer Service Controller, served as
Corporate Accounting and Financial Planning Manager from
October 1993 to September 1994 and was promoted to
Director of Finance, Hub Product Business Unit in October
1994. Prior to joining the Company, Mr. Palermo held
several financial management positions at Digital
Equipment Corporation from September 1986 to May 1992.
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- - ------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Gary Rogers 39 Mr. Rogers joined the Company in 1992 as Director of
Vice President, Reseller Sales. He held the position of Vice President,
International Sales European Operation from March 1994 until July 1996, when
Mr. Rogers assumed position of Vice President,
International Sales. Prior to joining the Company, Mr.
Rogers was Vice President, Sales at Wavetracer, Inc. from
1990 until 1992, and held various sales management
positions at ImagiTex, Inc. from 1987 until 1990, the
latest of which was Vice President U.S. Sales.
William J. Ruehle 54 Mr. Ruehle has served as Executive Vice President and
Executive Vice President Chief Financial Officer of the Company since October 1994
and Chief Financial and served as Vice President and Chief Financial Officer
Officer of SynOptics from July 1987 to October 1994. From January
1979 to June 1987, he served as a Vice President and Chief
Financial Officer of Acrian, Inc., a microwave
semiconductor manufacturer. He began his career in
corporate finance at CBS, Inc.
Bruce I. Sachs 36 Mr. Sachs joined the Company in December 1995 as
Executive Vice President, President, Xylogics Business Unit and as Executive Vice
Internet/Telecom President, Internet/Telecom Business Unit since May 1996.
Business Unit Mr. Sachs served as President and Chief Executive Officer
& President, Xylogics of Xylogics from August 1993 to December 1995. He joined
Business Unit Xylogics in May 1989 as Director of Engineering,
Communications Products, was promoted to Vice President of
Engineering in March 1991 and served as Executive Vice
President from December 1992 to August 1993. From May 1985
to February 1989 he was the Director of Engineering,
Transmission Products at Infinet, Inc.
Gene Wahlberg 43 Mr. Wahlberg joined the Company in October 1990 as a
Vice President, National Account Manager for the Southwest Region. He held
U.S. Sales positions as Southwest Sales Manager, Central Region
Director and Regional Vice President, Central Region
through May 1996 when he assumed the position of Vice
President, U.S. Sales. Prior to joining the Company, Mr.
Wahlberg was a principal in a manufacturing representative
company for 5 years and held various Sales Management
positions at Mostek Corporation.
</TABLE>
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION (UNAUDITED)
The following tables set forth, for the periods indicated, the high and low
closing prices for the Company's common stock as reported by The Nasdaq Stock
Market and the New York Stock Exchange. The Company began trading on the New
York Stock Exchange on February 29, 1996. The prices shown for the period that
the Company's common stock was traded on The Nasdaq Stock Market represent
quotations among dealers without adjustments for retail markups, markdowns, or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1996 HIGH LOW
----------------------------------------------------------------- ------ ------
<S> <C> <C>
First quarter.................................................. $37.33 $27.17
Second quarter................................................. $48.42 $33.58
Third quarter.................................................. $47.88 $28.38
Fourth quarter................................................. $36.75 $25.00
Fiscal Year Ended June 30, 1995 High Low
----------------------------------------------------------------- ------ ------
First quarter.................................................. $16.83 $12.79
Second quarter................................................. $20.33 $12.83
Third quarter.................................................. $25.75 $18.71
Fourth quarter................................................. $27.59 $22.46
</TABLE>
As of June 30, 1996, the Company had approximately 4,332 stockholders of
record. To date, the Company has not paid any cash dividends on its capital
stock, and there can be no assurances that the Company will do so.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED JUNE 30,
In thousands, except per share --------------------------------------------------------------
amounts 1996 1995(1) 1994(1) 1993(1) 1992(1)
- - ------------------------------------ ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue............................. $2,056,634 $1,403,595 $1,136,393 $926,154 $507,013
Income before provision for income
taxes(2).......................... 351,816 220,673 208,221 174,303 86,241
Provision for income taxes.......... 145,491 91,687 83,843 71,023 28,981
Net income.......................... 206,325 128,986 124,378 103,280 57,260
Net income per share................ 1.04 0.69 0.69 0.58 0.34
Total assets........................ 1,506,535 1,155,046 848,496 700,203 374,153
Working capital..................... 816,016 696,085 585,508 479,974 248,980
Long-term debt...................... 110,147 113,430 110,283 110,431 436
Stockholders' equity................ 1,094,695 770,086 583,721 458,025 296,506
</TABLE>
- - ---------------
(1) All amounts and per share data for prior periods have been retroactively
restated to reflect the acquisition of Xylogics, Inc. in a pooling of
interests transaction effective December 15, 1995. (See Note 2 to Notes to
Consolidated Financial Statements.) All per share data applicable to prior
periods have also been retroactively restated to reflect a three-for-two
stock split, in the form of a stock dividend, effective November 24, 1995.
(2) Includes charges of $39.7 million, $6.7 million, $17.9 million and $17.9
million for the years ended June 30, 1996, 1995, 1994 and 1993,
respectively, for in-process research and development charges resulting
from acquisitions and $10.2 million and $63.4 million for the years ended
June 30, 1996 and 1995 for merger related expenses.
11
<PAGE> 13
ITEM 7.
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 consolidated financial statements and related notes
included elsewhere herein as well as the section below 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 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 the forward-looking statements.
Results of Operations
Revenue. Revenue increased 46.5% to $2,056.6 million in fiscal 1996 as
compared to $1,403.6 million in fiscal 1995 and $1,136.4 million in fiscal 1994.
The growth in revenue in fiscal 1996 was attributable to market growth and
strong demand for the Company's products. This growth was a result of worldwide
unit volume increases for virtually all of the Company's product lines. While
sales in all major product areas increased, the highest percentage increase was
in the switching product line; the Company's new products in the remote access
market, including the Xylogics' Nautica line, were particularly well received in
those markets. Revenue from the router product line grew over fiscal 1995 as
sales to the telecommunications industry increased. The increase in revenue in
fiscal 1995 was attributable to growth in market demand for the Company's
products with growth across all of the Company's product lines. The Company has
continued to increase revenue through execution of its multi-channel
distribution strategy and growth in international operations.
International revenue was $716.5 million or 34.8% of total revenue in
fiscal 1996, compared to $458.4 million or 32.7% of total revenue and $345.7
million or 30.4% of total revenue in fiscal 1995 and fiscal 1994, respectively.
The increase in each period was primarily due to the Company's international
expansion and growth in the Asia/Pacific market, as well as continued growth in
the European market. The Company continues to emphasize the multi-channel sales
strategy which consists of qualified resellers, distributors and dealers. The
Company's international revenue was 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 any period.
Revenue in past periods may not be indicative of revenue in the future,
which may be affected by other business environment and risk factors previously
discussed, as well as other factors included elsewhere herein.
Gross Profit. Gross profit was $1,111.3 million or 54.0% of revenue in
fiscal 1996, compared to $772.6 million or 55.0% of revenue and $630.7 million
or 55.5% of revenue in fiscal 1995 and fiscal 1994, respectively. The gross
profit increase was due to sequentially higher worldwide unit volume each year.
The gross margin percentage decline in fiscal 1996 was affected by several
factors: a product mix shift towards shared media, including increased volumes
of stackable Ethernet products, and additional reserves for excess inventory as
a result of product transitions that occurred in fiscal 1996. The decline was
partially offset by manufacturing cost reductions, reductions in material
premium charges, and increased router sales which carry higher margins. The
decline in fiscal 1995 was primarily from competitive list price reductions,
product mix shifts toward non-modular products which carry lower margins, and
price increases on certain components.
The Company believes there is a risk that gross margin percentages may
decline if the product mix continues to shift towards non-modular products and
competition continues to increase. The Company expects
12
<PAGE> 14
market emphasis on lower margin routers and high-speed switching products in the
future. Other factors, including changes in material and labor costs and
distribution channels, may also have an adverse effect on gross margin
percentages in the future.
Operating Expenses. Research and development spending grew by 46.9% to
$213.5 million in fiscal 1996 from $145.3 million in fiscal 1995 and 23.6% from
$117.6 million in fiscal 1994 as compared with fiscal 1995, although the
percentage of revenue of 10.4% remained constant for each fiscal year. The
increase in expense relates to the Company's continued development of
enhancements to its current products and to the development of new products and
addition of personnel through hiring and through acquisitions and business
combinations. During the year, the Company continued development of new products
in the areas of emerging technologies such as ATM, remote access, switched
internetworking technologies, and the integration of voice, video and data
networking. The Company plans to continue its commitment to research and
development in fiscal 1997, as the Company believes that the markets for its
products are characterized by rapid rates of technological innovation for both
hardware and software. Research and development expenses may increase in
absolute dollars in future periods, and such expenditures may vary as a
percentage of revenue. 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, and those efforts may be affected by other factors noted
below.
Selling and marketing expenses were $452.3 million or 22.0% of revenue in
fiscal 1996, compared to $302.5 million or 21.6% of revenue and $246.8 million
or 21.7% of revenue in fiscal 1995 and fiscal 1994, respectively. The increase
in expense in both fiscal 1996 and fiscal 1995, as compared with the prior
fiscal year, was primarily related to the increased costs associated with larger
sales and sales support staffs, commission expenses resulting from higher sales
levels, expansion of the Company's sales and marketing programs, and investments
related to new product launches and entry into new markets worldwide. The
Company's investment in its sales, marketing and support staff may vary as a
percentage of revenue in the future.
General and administrative expenses were $72.2 million or 3.5% of revenue
in fiscal 1996, compared to $55.7 million or 4.0% of revenue and $47.5 million
or 4.2% of revenue in fiscal 1995 and fiscal 1994, respectively. The absolute
dollar increase in general and administrative expenses each year related to the
addition of personnel, and expenditures related to both domestic and
international facilities and information technology needed to support the growth
in the Company's business. General and administrative expenses may vary as a
percentage of revenue in the future.
In fiscal 1996, the Company acquired all of the outstanding shares of
Performance Technology, Inc., a developer of LAN-to-Internet access technology,
for a total purchase price of $12.6 million, and substantially all of the net
assets of Armon Networking, Ltd., a technology developer of RMON-based
distributed analysis tools and multi-segment LAN probes, for a total purchase
price of $34.2 million. Approximately $39.7 million was charged to in-process
research and development related to internetworking technologies associated with
these acquisitions.
The Company incurred in-process research and development expenses of $6.7
million and $17.9 million related to the acquisitions of Scorpion Ltd. and Coral
Network Corporation in fiscal 1995 and 1994, respectively.
In June 1996, the Company signed a definitive agreement to acquire the
Digital Signal Processing (DSP) modem business of Penril DataComm Networks,
Inc., a provider of advanced DSP-based modems and remote access products. Based
on preliminary estimates, the Company expects to allocate approximately $60
million to $65 million of the total purchase price, which is based on a fixed
formula, 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.
As a result of the various business combinations in fiscal 1996 and 1995,
the Company has incurred merger related expenses of $16.1 million and $63.4
million, respectively. These merger related expenses related to transaction
costs, severance related expenses, closing of duplicate facilities, write off of
duplicate inventory and other assets and other costs incident to the
transactions. In fiscal 1996, the Company reversed previously accrued merger
costs of $5.9 million associated with the Wellfleet/SynOptics business
combination
13
<PAGE> 15
and the Centillion acquisition. The reduction in the estimated costs were
realized primarily due to the usage of facilities which the Company had
previously planned to vacate. (See Note 2 to the Notes to Consolidated Financial
Statements.)
Net Interest Income and Other. Net interest income and other was $28.5
million, or 1.4% of revenue in fiscal 1996, compared to $21.8 million or 1.6% of
revenue and $7.3 million or 0.6% of revenue in fiscal 1995 and fiscal 1994,
respectively. The increase in absolute dollars in interest income was due to
higher average invested cash and investment balances, which yielded higher
interest income in fiscal year 1996 and 1995.
Income Taxes. The Company's effective income tax rate was 37.5%, 37.8% and
37.6% in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, and excludes
the effect of the in-process research and development charges and certain merger
related expenses which were not deductible for income tax purposes. At June 30,
1996, a valuation allowance of $6.8 million was offset against the net operating
losses and credit carryforwards acquired from Coral Network Corporation,
Centillion Networks, Inc. and Performance Technology, Inc. which are subject to
substantial limitation. Management has concluded that other than the allowance
related to these acquisitions, no valuation allowance is required based on its
assessment that future levels of taxable income will be sufficient to realize
the future tax benefits represented by the deferred income taxes.
Liquidity and Capital Resources. As of June 30, 1996, total cash and
short- and long-term investments totaled $588.2 million, down from $651.6
million at June 30, 1995. Cash generated from operating activities declined to
$105.9 million, compared to $258.1 million and $169.0 million in fiscal 1995 and
fiscal 1994, respectively.
Cash provided from operations decreased from the prior year due to an
increase in income before depreciation and amortization which was more than
offset by increases in accounts receivable and inventory. The increase in
accounts receivable in fiscal 1996 was due to revenue growth, including the
continued expansion in international operations relative to total operations
which typically have longer collection cycles. Days sales outstanding in
receivables were 54 days at June 30, 1996 compared to 40 days at June 30, 1995.
Days sales outstanding may continue to vary, due to, among other things, timing
of product shipments and international expansion. The increase in inventory was
primarily attributable to increasing inventory levels to meet desired
manufacturing lead times and anticipated demand for new product introductions.
The Company used $119.7 million, $298.5 million and $222.3 million for
investing activities in fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
The consumption of cash in fiscal 1996 was due to increases in property, plant
and equipment needed for increased levels of business and the Company's
information technology. The Company expects to spend additional cash related to
additional property, plant and equipment and information technology required to
support the Company's operations in fiscal 1997. Furthermore, the Company
acquired two companies in fiscal 1996, Performance Technology, Inc., for $12.6
million, and Armon Networking, Ltd., for $34.2 million, for the purpose of
entering new markets, including the Internet market. The major investing
activities in fiscal 1995 and fiscal 1994 were primarily attributable to capital
additions to support business operations.
Financing activities provided $44.9 million, $34.3 million and $24.5
million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The cash
generated from financing activities was primarily due to cash received in
connection with the issuance of stock under the Company's stock plans, which
resulted in net proceeds of $45.4 million, $34.0 million and $24.4 million,
respectively.
A subsidiary of the Company has outstanding $110 million of convertible
subordinated debentures which bear interest of 5 1/4% per annum, payable
semi-annually, and mature in May 2003. The debentures are convertible at the
option of the holder into the Company's common stock at a conversion price of
$42.61 per share. The Company has reserved 2,581,725 shares of common stock for
the conversion of these debentures. Beginning May 1996, 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 whether to redeem the debentures.
14
<PAGE> 16
The Company believes that it has the financial resources needed to meet
business requirements, including capital expenditures, working capital
requirements, the 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 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. 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 Margin. The Company's gross margin 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 margin 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 and its backlog of orders. 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.
15
<PAGE> 17
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.
Risks Related to New Markets. During 1996, the Company entered new
markets, including the remote access and Internet markets, primarily through the
acquisition of other businesses. 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. Specifically, 3Com
Corporation acquired Chipcom Corporation and Cisco Systems, Inc. recently
acquired Stratacom, Inc. and announced its intention to acquire Telebit
Corporation, a manufacturer of digital modems. 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.
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
16
<PAGE> 18
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.
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 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.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bay Networks, Inc.
We have audited the accompanying consolidated balance sheets of Bay
Networks, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Wellfleet Communications,
Inc., which statements reflect net income constituting approximately 51% of the
related 1994 consolidated financial statement total. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Wellfleet Communications,
Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for 1994 the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bay
Networks, Inc. at June 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
July 19, 1996
18
<PAGE> 20
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Wellfleet Communications, Inc.
In our opinion, the consolidated statements of income, of stockholders'
equity and of cash flows of Wellfleet Communications, Inc. and its subsidiaries
(not presented separately herein) present fairly, in all material respects, the
results of their operations and their cash flows for the year ended June 30,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Wellfleet
Communications, Inc. for any period subsequent to June 30, 1994.
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 18, 1994
19
<PAGE> 21
BAY NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 315,064 $ 283,913
Short-term investments............................................ 119,093 314,872
Accounts receivable, net of allowance for doubtful accounts of 320,892 177,300
$9,683 at June 30, 1996 and $10,441 at June 30, 1995...........
Inventories....................................................... 239,725 94,600
Deferred income taxes............................................. 74,320 83,260
Other current assets.............................................. 48,615 13,670
---------- ----------
Total current assets........................................... 1,117,709 967,615
Investments......................................................... 154,064 52,864
Property and equipment, net......................................... 211,674 122,179
Other assets........................................................ 23,088 12,388
---------- ----------
Total assets................................................... $1,506,535 $1,155,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 116,894 $ 83,316
Accrued payroll and related costs................................. 63,242 47,573
Accrued expenses.................................................. 23,108 19,784
Accrued marketing costs........................................... 22,019 15,251
Accrued merger costs.............................................. 5,575 15,066
Accrued income taxes.............................................. 4,818 48,968
Accrued warranty.................................................. 19,408 12,495
Deferred revenue.................................................. 46,629 29,077
---------- ----------
Total current liabilities...................................... 301,693 271,530
---------- ----------
Long-term debt...................................................... 110,147 113,430
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value -- Authorized -- 1,000,000
shares:
Issued and outstanding -- none................................. -- --
Common stock, $.01 par value -- Authorized -- 300,000,000 shares:
Issued and outstanding -- 188,537,072 shares at June 30, 1996 1,885 1,810
and 181,086,596 shares at June 30, 1995.......................
Additional paid-in capital........................................ 474,322 322,704
Retained earnings................................................. 618,488 445,572
---------- ----------
Total stockholders' equity..................................... 1,094,695 770,086
---------- ----------
Total liabilities and stockholders' equity.......................... $1,506,535 $1,155,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................................ $2,056,634 $1,403,595 $1,136,393
Cost of sales.......................................... 945,318 630,983 505,666
---------- ---------- ----------
Gross profit......................................... 1,111,316 772,612 630,727
---------- ---------- ----------
Operating expenses:
Research and development............................. 213,521 145,336 117,626
Selling and marketing................................ 452,319 302,496 246,802
General and administrative........................... 72,205 55,734 47,458
In-process research and development.................. 39,713 6,741 17,898
Merger related expenses.............................. 10,231 63,419 --
---------- ---------- ----------
Total operating expenses.......................... 787,989 573,726 429,784
---------- ---------- ----------
Income from operations................................. 323,327 198,886 200,943
Net interest income and other.......................... 28,489 21,787 7,278
---------- ---------- ----------
Income before provision for income taxes............... 351,816 220,673 208,221
Provision for income taxes............................. 145,491 91,687 83,843
---------- ---------- ----------
Net income............................................. $ 206,325 $ 128,986 $ 124,378
========== ========== ==========
Net income per share................................... $ 1.04 $ 0.69 $ 0.69
========== ========== ==========
Weighted average common shares and equivalents......... 198,778 187,659 180,088
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL TOTAL
OF PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JULY 1, 1993........................ 167,151 $1,672 $ 232,326 $224,027 $ 458,025
Shares issued under
stock plans, net......................... 4,811 48 24,309 -- 24,357
Tax benefits from stock plan activity....... -- -- 26,292 -- 26,292
Elimination of SynOptics'
net activity for the
six months ended December 31, 1993....... (1,341) (13) (20,348) (28,970) (49,331)
Net income.................................. -- -- -- 124,378 124,378
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1994....................... 170,621 1,707 262,579 319,435 583,721
Shares issued under
stock plans, net......................... 4,878 48 33,988 -- 34,036
Tax benefits from stock plan activity....... -- -- 13,271 -- 13,271
Shares issued for equity of Centillion...... 5,354 54 11,056 (1,720) 9,390
Shares issued for equity of Scorpion........ 384 3 3,154 -- 3,157
Elimination of Xylogics' net activity for
the three months ended October 31,
1994..................................... (150) (2) (1,344) (1,129) (2,475)
Net income.................................. -- -- -- 128,986 128,986
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1995....................... 181,087 1,810 322,704 445,572 770,086
Shares issued under
stock plans, net......................... 7,450 75 78,721 (33,409) 45,387
Tax benefits from stock plan activity....... -- -- 72,897 -- 72,897
Net income.................................. -- -- -- 206,325 206,325
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1996....................... 188,537 $1,885 $ 474,322 $618,488 $ 1,094,695
======= ====== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows provided by operating activities:
Net income.................................................... $ 206,325 $ 128,986 $ 124,378
Adjustments to reconcile net income to cash flows provided by
operating activities:
Depreciation and amortization............................. 82,795 59,202 44,288
In-process research and development....................... 39,713 6,741 17,898
Benefit from deferred income taxes........................ (13,900) (37,596) (11,192)
Accounts receivable....................................... (141,506) (27,783) (48,291)
Inventories............................................... (144,425) 7,648 856
Other current assets...................................... (34,945) (965) (6,402)
Accounts payable.......................................... 31,366 25,200 (14,094)
Accrued expenses.......................................... 22,338 48,363 13,990
Deferred revenue.......................................... 17,552 18,788 3,755
Accrued income taxes...................................... 40,600 29,475 43,812
--------- --------- ---------
Cash flows provided by operating activities............ 105,913 258,059 168,998
--------- --------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment..................... (170,574) (79,512) (74,598)
Purchases of investments.................................... (422,280) (517,868) (246,131)
Proceeds from maturities of investments..................... 469,320 293,457 118,689
Proceeds from sales of investments.......................... 47,539 15,237 --
Acquisition of Armon Networking Ltd., net assets............ (34,231) -- --
Acquisition of Performance Technology, Inc., net of cash
acquired.................................................. (11,583) -- --
Other assets................................................ 2,111 (9,823) (20,269)
--------- --------- ---------
Cash flows used in investing activities................ (119,698) (298,509) (222,309)
--------- --------- ---------
Cash flows provided by financing activities:
Proceeds (payments) from issuance of long-term debt......... (451) 254 157
Purchase of treasury common stock........................... (57,353) (1,272) (891)
Issuance of common stock.................................... 102,740 35,308 25,248
--------- --------- ---------
Cash flows provided by financing activities............ 44,936 34,290 24,514
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 31,151 (6,160) (28,797)
Net equity of Centillion Networks, Inc. upon combination...... -- 9,390 --
Net equity of Scorpion Ltd. upon acquisition.................. -- 3,157 --
Elimination of SynOptics' net cash activity for the six months
ended December 31, 1993..................................... -- -- 128,700
Elimination of Xylogics, Inc. net cash activity for the three
months ended October 31, 1994............................... -- (2,476) --
Cash and cash equivalents at beginning of year................ 283,913 280,002 180,099
--------- --------- ---------
Cash and cash equivalents at end of year...................... $ 315,064 $ 283,913 $ 280,002
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the year............................... $ 5,927 $ 6,021 $ 6,100
========= ========= =========
Income taxes paid during the year........................... $ 108,881 $ 98,955 $ 51,834
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Bay Networks,
Inc. (Bay Networks or the Company) and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents, Fair Values of Financial Instruments & Concentration of
Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
investments and trade receivables.
All of the Company's cash equivalents and investments are classified as
available-for-sale and are reported at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. The fair value of
investments is based on quoted market prices. Realized gains and losses are
included in net interest income and other. Cash equivalents have original
maturities of three months or less. The Company has cash equivalents and
investments with various high quality institutions and, by policy, limits the
amount of credit exposure to any one institution.
The Company sells its products to customers in diversified industries
worldwide. The Company performs on-going credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for potential credit losses, and such losses have been within
management's expectations and have not been material in any year. The Company's
trade receivables are derived from sales spread across various industries and
various geographical areas.
Foreign Currency Translation
The functional currency of each of the Company's international subsidiaries
is the foreign subsidiary's local currency. Assets and liabilities of the
Company's international operations are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and expense items are
translated at average exchange rates for the period. Accumulated net translation
adjustments were not material. Foreign exchange transaction gains and losses
were not material and are included in the results of operations.
Bay Networks' international business is an important contributor to the
Company's revenue and net profits. However, the majority of Bay Networks'
international sales are denominated in the U.S. dollar, and an increase in the
value of the U.S. dollar relative to foreign currencies could make products sold
internationally less competitive. The operating expenses of Bay Networks'
overseas offices are paid in local currencies and are subject to the effect of
fluctuations in foreign currency exchange rates. The effect of foreign exchange
rate fluctuations did not significantly impact the Company's operating results.
Financial exposure may nonetheless result, primarily from the timing of
transactions and the movement of exchange rates.
24
<PAGE> 26
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
(In thousands) 1996 1995
- - ------------------------------------------------------------------------ -------- -------
<S> <C> <C>
Raw materials........................................................... $ 98,342 $30,988
Work-in-process......................................................... 54,468 38,158
Finished goods.......................................................... 86,915 25,454
-------- -------
Total inventories..................................................... $239,725 $94,600
======== =======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets ranging
from two to five years. Leasehold improvements are recorded at cost and are
amortized using the straight-line method over the remaining lease term or the
economic useful life, whichever is shorter.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
(In thousands) 1996 1995
- - --------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Machinery and equipment.............................................. $ 309,473 $ 214,942
Furniture and fixtures............................................... 36,685 22,769
Leasehold improvements............................................... 55,327 26,086
-------- --------
Total property and equipment....................................... 401,485 263,797
Accumulated depreciation and amortization............................ (189,811) (141,618)
-------- --------
Total property and equipment, net.................................. $ 211,674 $ 122,179
======== ========
</TABLE>
Warranty
Upon shipment to its customers, the Company provides for the estimated cost
to repair or replace products to be returned under warranty. The Company's
warranty period is up to 12 months from the date of shipment for domestic sales
and up to 15 months from the date of shipment for international export sales.
Revenue Recognition
The Company recognizes revenue from product sales and accrues for estimated
returns at the time of shipment. Service revenue is recognized at the time
service is provided or ratably over the contractual service period.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising
expense was $18.2 million, $7.6 million and $8.4 million in 1996, 1995 and 1994,
respectively.
Net Income per Share
Net income per share is calculated 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.
25
<PAGE> 27
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Distribution
On November 24, 1995, the Company effected a stock distribution in the form
of a three-for-two stock split to stockholders of record as of October 30, 1995.
All share and per share amounts applicable to prior periods have been
retroactively restated to reflect the effect of this split.
Effect of New Accounting Standards
In 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The Company will adopt SFAS 121 in the
first quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
The Company accounts for its stock options and its employee stock purchase
plan in accordance with the provisions of the Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. In 1995, the
FASB issued Statement No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. The Company intends to adopt the pro forma disclosure alternative
of SFAS 123 for the Company's fiscal year 1997. The adoption of SFAS 123 is not
expected to have a material effect on consolidated financial position, results
of operations, or cash flows.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
2. BUSINESS COMBINATIONS
On October 21, 1994, SynOptics Communications, Inc. (SynOptics) and
Wellfleet Communications, Inc. (Wellfleet) effected a strategic combination of
the two companies through the merger of a wholly-owned subsidiary of Wellfleet
with and into SynOptics (the Combination). In connection with the Combination,
Wellfleet changed its name to Bay Networks, Inc. and issued 70,612,759 shares of
common stock for all the outstanding stock of SynOptics in a transaction
accounted for as a pooling of interests. The accompanying consolidated financial
statements are presented on a combined basis for all periods presented.
In May 1995, Bay Networks acquired Centillion Networks, Inc. (Centillion)
and issued 5,353,275 shares of common stock for all the outstanding stock of
Centillion in a transaction accounted for as a pooling of interests. As the
results of operations and financial position of Centillion were not material to
Bay Networks' 1995 consolidated financial statements, the prior years' amounts
were not restated.
In December 1995, Bay Networks acquired Xylogics, Inc. (Xylogics), in a
transaction accounted for as a pooling of interests. The Company issued
8,710,865 shares of common stock for all the outstanding stock of Xylogics and
reserved 1,655,275 shares of its common stock for issuance under Xylogics stock
option plans which the Company assumed in the acquisition. The accompanying
consolidated financial statements for prior periods have, accordingly, been
restated to reflect this transaction.
26
<PAGE> 28
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
The following information shows revenue and net income (loss) of the
separate companies through the periods preceding the business combinations and
the combined results following the business combinations.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
(In thousands) 1996 1995 1994
- - ----------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Bay Networks....................................... $2,026,038 $1,042,665 --
Wellfleet.......................................... -- 126,572 $ 384,223
SynOptics.......................................... -- 173,056 701,749
Xylogics........................................... 30,596 61,302 50,421
---------- ---------- ----------
$2,056,634 $1,403,595 $1,136,393
========== ========== ==========
Net income (loss):
Bay Networks....................................... $ 214,383 $ 92,633 --
Wellfleet.......................................... -- 21,576 $ 61,106
SynOptics.......................................... -- 16,790 59,825
Xylogics........................................... (8,058)(1) (2,013) 3,447
---------- ---------- ----------
$ 206,325 $ 128,986 $ 124,378
========== ========== ==========
</TABLE>
- - ---------------
(1) Xylogics' net loss includes a portion of the merger related expenses.
Merger related expenses for these transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
(In thousands) 1996 1995
--------------------------------------------------------------- ------- -------
<S> <C> <C>
Asset write-offs:
Duplicate product line inventory............................. $ 1,000 $ 4,700
Other........................................................ 4,300 4,200
------- -------
5,300 8,900
Accruals (reversals):
Duplicate facilities......................................... (5,900) 15,700
Transaction fees............................................. 7,600 18,800
Severance and related expenses............................... 1,200 8,200
Other........................................................ 2,000 11,800
------- -------
4,900 54,500
------- -------
$10,200 $63,400
======= =======
</TABLE>
Of the total amount for the year ended June 30, 1995, $61.1 million relates
to the Wellfleet/SynOptics combination and $2.3 million relates to the
Centillion acquisition. Of the total amount for the year ended June 30, 1996,
$16.1 million relates to the Xylogics acquisition and $5.9 million represents a
reversal of previously recorded merger related expenses in connection with the
prior year's transactions. Such reduction in the previous estimate was due
primarily to the usage of facilities which the Company had previously planned to
vacate. The remaining $5.5 million accrued at June 30, 1996 allows for accrued
rent and severance related expenses to be paid principally over periods of up to
two years.
The Company has acquired several smaller businesses, each of which has been
accounted for as a purchase. Bay Networks purchased Performance Technology, Inc.
for approximately $12.6 million and Armon
27
<PAGE> 29
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
Networking, Ltd. for approximately $34.2 million in 1996; Scorpion Ltd. for
approximately $9.3 million in 1995; and Coral Network Corporation for
approximately $18.0 million in 1994. The purchase price of each acquired company
was allocated to the acquired assets and liabilities based on their estimated
fair values as of the date of respective acquisition. Amounts allocated to
developed technology, workforce and goodwill are being amortized on a
straight-line basis over a five year period. Amounts allocated to in-process
research and development of approximately $39.7 million, $6.7 million and $17.9
million in 1996, 1995 and 1994, respectively, were expensed upon the closing of
the respective transactions. Pro forma information has not been presented
because the effects of these acquisitions were not material to the Company's
consolidated financial position, results of operations, or cash flows.
On June 16, 1996, Bay Networks 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 according to an exchange value determined by averaging
the Company's closing stock prices over a specified period prior to closing, for
each share of Penril's common stock. (At June 6, 1996, Penril had 10,543,369
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
Penril stockholders' approval. 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.
3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Investments
All of Bay Networks' cash, cash equivalents and investments were classified
as available-for-sale and consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
(In thousands) 1996 1995
- - --------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Estimated Fair Value:
U.S. Treasuries and obligations of U.S. Government agencies.......... $ 158,000 $ 119,331
Obligations of states and political subdivisions..................... 122,338 163,519
Commercial paper..................................................... 101,568 177,084
Short-term money market funds........................................ 132,740 90,817
Bankers' acceptances................................................. -- 16,143
Demand deposits...................................................... 56,150 22,381
Other debt securities................................................ 17,425 62,374
-------- --------
$ 588,221 $ 651,649
======== ========
</TABLE>
28
<PAGE> 30
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of available-for-sale securities by contractual
maturity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
(In thousands) 1996 1995
- - --------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in three months or less.......................................... $ 315,064 $ 283,913
Due through one year................................................. 119,093 314,872
Due after one year through three years............................... 132,547 52,864
Due after three years through five years............................. 21,517 --
-------- --------
$ 588,221 $ 651,649
======== ========
</TABLE>
Both gross unrealized gains and losses as of June 30, 1996 and 1995, and
realized gains and losses on sales of each type of security for the years ended
June 30, 1996 and 1995, were immaterial. At June 30, 1996 and 1995, the fair
market value of available-for-sale investments and cash equivalents approximates
cost. For the purpose of determining gross realized gains and losses, the cost
of securities sold is based upon specific identification.
Long-Term Debt
A subsidiary of the Company has outstanding $110,000,000 of convertible
subordinated debentures which bear interest of 5 1/4% per annum, payable
semi-annually, and mature in May 2003. The debentures are convertible at the
option of the holder into the Company's common stock at a conversion price of
$42.61 per share. Beginning May 1996, the debentures are redeemable at the
option of the Company, initially at approximately 103.7% and at decreasing
prices thereafter to 100% at maturity. The fair value of these debentures is
estimated based on quoted market prices obtained from a third party for similar
debt and is approximately $99.7 million and $101.3 million as of June 30, 1996
and 1995, respectively. The Company has reserved 2,581,725 shares of common
stock for the conversion of these debentures. Interest expense, primarily
related to these debentures, was approximately $5.9 million, $6.0 million and
$5.9 million in 1996, 1995 and 1994, respectively.
4. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its domestic and international facilities under
cancelable, non-cancelable and month-to-month operating leases. Rent expense was
approximately $27.5 million, $22.7 million and $18.4 million in 1996, 1995 and
1994, respectively.
A subsidiary of the Company has a fifty percent interest in a limited
partnership which owns one of the Company's manufacturing facilities. The
Company leases this facility from the limited partnership. Included in the
operating lease commitments table below are $13.7 million related to this
facility.
29
<PAGE> 31
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments as of June 30, 1996, of which $2.1 million
has been accrued as merger related expenses, are as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------------------------------------------------------- OPERATING
YEARS ENDING LEASES
-------------------------------------------------------------------------- ----------
<S> <C>
1997.................................................................... $ 34,442
1998.................................................................... 33,983
1999.................................................................... 29,630
2000.................................................................... 24,016
2001.................................................................... 18,850
Thereafter................................................................ 30,759
--------
Total minimum payments required........................................... $171,680
========
</TABLE>
Legal
From time to time, as a normal incidence of the nature of the Company's
business, various claims, charges and litigation are asserted or commenced
against the Company. In the opinion of management, final judgments from such
claims, charges and litigation, if any, against the Company would not have a
material adverse effect on its consolidated financial position, results of
operations, or cash flows.
5. EQUITY
Employee Stock Option Plans. Bay Networks established a Stock Option Plan
in 1994 under which it authorized 30,000,000 shares of common stock for granting
of either incentive or non-qualified stock options and increased the authorized
shares to 41,700,000 in 1996. Exercisability, option price and other terms are
determined by the Board of Directors, but the option price shall not be less
than the fair market value of the stock at the date of grant. Shares of options
generally vest at the rate of 25% after one year from the date of grant, and
then ratably over the following 36 months. At June 30, 1996, 13,339,025 shares
of common stock were reserved for future grants.
Pursuant to business combinations in 1995, the Company assumed stock option
plans under which options were generally exercisable upon grant and vested at
the rate of 25% after one year from the date of grant, and then ratably over the
following 36 months; however, those shares received upon exercise prior to
vesting were subject to repurchase by the Company. As of June 30, 1996, 60,222
shares were subject to repurchase.
Additionally, on December 15, 1995, pursuant to the acquisition of
Xylogics, Bay Networks assumed 1,655,275 outstanding options originally issued
under various Xylogics stock option plans. The options generally vest at the
rate of 25% per year beginning one year from the date of grant.
Outside Directors Stock Option Plans. Bay Networks established an Outside
Directors Stock Option Plan in 1994 under which it authorized 750,000 shares of
the common stock pursuant to a fixed formula for granting of non-qualified stock
options to directors of the Company who are not employees of the Company
(Outside Directors) at exercise prices not less than the fair market value on
the date of grant. Upon initial election or appointment, an Outside Director
shall automatically receive an option to purchase 52,500 shares of common stock.
An Outside Director is granted an additional 15,000 shares of common stock
automatically on each of the second through seventh anniversary dates of his or
her initial grant. The options granted under the Directors Stock Option Plan
generally vest at a rate of 33 1/3% on the one year anniversary of the date of
30
<PAGE> 32
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUITY (CONTINUED)
grant and then ratably over the following 36 months. As of June 30, 1996,
495,000 shares of common stock were reserved for future grants.
Additional information concerning stock option activity under the various
plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 1994.............................. 27,816,565 $ .02 - $35.06
Granted and assumed....................................... 12,907,410 .18 - 26.42
Exercised................................................. (4,468,013) .02 - 22.99
Canceled.................................................. (2,779,672) .10 - 35.06
---------- --------- ------
Outstanding at June 30, 1995.............................. 33,476,290 .02 - 35.06
Granted................................................... 6,134,745 19.69 - 43.96
Exercised................................................. (8,625,632) .02 - 35.06
Canceled.................................................. (1,902,955) .10 - 43.81
---------- --------- ------
Outstanding at June 30, 1996.............................. 29,082,448 $ .03 - $43.96
========== ========= ======
Exercisable at June 30, 1996.............................. 26,279,561 $ .03 - $43.96
========== ========= ======
</TABLE>
Employee Stock Purchase Plans. Bay Networks has an Employee Stock Purchase
Plan (the Purchase Plan) under which 2,695,812 shares of common stock remain
available for future purchases. Each eligible employee may purchase shares of
common stock through the accumulation of payroll deductions of up to 10% of each
participating employee's gross wages not to exceed a maximum of $5,040 per
purchase period. The Purchase Plan authorizes the purchase of shares of common
stock at the end of semi-annual purchase periods beginning May 1 and November 1
of each year. The purchase price is an amount equal to 85% of its fair market
value determined as of the beginning of an offering period and the end of a
purchase period. In 1996 and 1995, employees purchased 696,712 shares and
613,070 shares and approximately $13.9 million and $8.2 million of proceeds were
recorded to stockholders' equity, respectively. The Purchase Plan will expire
upon either issuance of all shares reserved for issuance or at the discretion of
the Board of Directors. There are no plans to terminate the Purchase Plan at
this time.
Both Wellfleet and SynOptics maintained employee stock purchase plans under
which eligible employees purchased common stock at a price equal to 85% of the
lower of the fair market values as of the beginning of an offering period and
the end of a purchase period. During 1994, 543,658 shares were issued under
these plans and approximately $7.7 million of proceeds were recorded to
stockholders' equity. Pursuant to the Combination, these plans were terminated.
Stock Purchase Rights Plan. Under a preferred stock purchase rights plan,
adopted by the Company's Board of Directors on February 7, 1995, stockholders of
the Company received rights to purchase stock in the Company, or in an acquirer
of the Company, at a discounted price, under certain circumstances and in the
event of particular hostile efforts to acquire control of the Company. The
rights may be redeemed pursuant to the plan by the Board of Directors. The
rights expire on February 7, 2005.
6. EMPLOYEE BENEFIT PLAN
The Company maintains the Bay Networks, Inc. 401(k) Plan (the Plan) to
provide retirement benefits for its employees. As allowed under Section 401(k)
of the Internal Revenue Code, the Plan provides tax deferred salary deductions
for eligible employees. Eligible employees may contribute from 1% to 15% of
their annual compensation to the Plan, limited to a maximum amount as set by the
Internal Revenue Service. The Company will make matching contributions unless
business conditions dictate otherwise, pursuant to a fixed
31
<PAGE> 33
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLAN (CONTINUED)
formula and up to a maximum of $1,500 per year. Bay Networks' matching
contributions to the Plan totaled $3.4 million in 1996 and immaterial in 1995
and 1994.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
(In thousands) 1996 1995 1994
---------------------------------------------------- -------- -------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $131,676 $103,206 $77,200
State............................................. 21,262 19,821 15,592
Foreign........................................... 6,453 6,256 2,243
-------- -------- -------
159,391 129,283 95,035
Deferred:
Federal........................................... (8,346) (31,927) (9,362)
State............................................. (1,171) (5,669) (1,830)
Foreign........................................... (4,383) -- --
-------- -------- -------
(13,900) (37,596) (11,192)
-------- -------- -------
Total provision for income taxes.................... $145,491 $ 91,687 $83,843
======== ======== =======
</TABLE>
The components of the Company's total income (loss) before provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
(In thousands) 1996 1995
--------------------------------------------------------------- -------- --------
<S> <C> <C>
Domestic....................................................... $363,282 $205,273
Foreign........................................................ (11,466) 15,400
-------- --------
Total.......................................................... $351,816 $220,673
======== ========
</TABLE>
For the year ended June 30, 1994, the foreign component of the Company's
income before provision for income taxes was not material.
The Company's effective tax rate was different from the U.S. statutory
income tax rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate........................................ 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit......................... 3.3 3.5 4.0
Tax benefit from Foreign Sales Corporation............................. (1.8) (2.6) (1.6)
Research and development (R&D) tax credits............................. -- -- (0.9)
In-process R&D costs relating to an acquisition........................ -- -- 2.7
Merger related expenses................................................ 1.9 3.5 --
Foreign losses not benefitted.......................................... 1.9 -- --
Other.................................................................. 1.1 2.1 1.1
---- ---- ----
41.4% 41.5% 40.3%
==== ==== ====
</TABLE>
32
<PAGE> 34
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's net
deferred tax assets (net of deferred tax liabilities) are comprised primarily of
the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
(In millions) 1996 1995
- - ------------------------------------------------------------------------- ----- -----
<S> <C> <C>
Reserves not currently deductible for tax purposes....................... $67.8 $59.7
Accrued expenses not currently deductible for tax purposes............... 6.1 3.6
Net operating losses and credit carryforwards acquired from Coral Network
Corporation............................................................ 3.9 4.1
Less valuation reserve against above carryforwards....................... (3.9) (4.1)
Net operating losses and credit carryforwards acquired from Centillion
Networks, Inc.......................................................... 2.6 4.4
Less valuation reserve against above carryforwards....................... (2.4) (2.4)
Net operating losses and credit carryforwards acquired from Performance
Technology, Inc........................................................ 0.5 --
Less valuation reserve against above carryforwards....................... (0.5) --
State income taxes....................................................... 2.5 3.0
Other individually immaterial items...................................... 5.6 --
----- -----
Total.................................................................... $82.2 $68.3
===== =====
</TABLE>
The valuation allowance at June 30, 1994 was $4.3 million related to Coral
Network Corporation. At June 30, 1996, the Company has available the following
acquired tax carryforwards. Utilization of these carryforwards may be subject to
substantial limitations due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
<TABLE>
<CAPTION>
FEDERAL YEARS OF
TYPE OF TAX CARRYFORWARD: COMPANY FROM WHICH ACQUIRED: AMOUNTS EXPIRATION
- - ------------------------------------ ----------------------------- -------------- ----------
<S> <C> <C> <C>
Net operating losses Coral Network Corporation $ 10.6 million 2003-2007
Centillion Networks, Inc. 5.7 million 2007-2009
Performance Technology, Inc. 1.0 million 2004-2009
General Business Tax Credits Coral Network Corporation $ 0.2 million 2003-2007
Centillion Networks, Inc. 0.2 million 2007-2009
Performance Technology, Inc. 0.2 million 2004-2009
</TABLE>
8. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
Bay Networks operates in one industry segment and develops, manufactures,
markets and supports a comprehensive line of data networking products and
services, including high-speed routers, switches, intelligent hubs, remote and
Internet access solutions and sophisticated management software providing
network design and configuration solutions. These products enable end users to
build or enhance their data network systems, including all levels from small
local area networks to large enterprise-wide information infrastructures.
One customer accounted for approximately 13% ($263.0 million), 14% ($198.0
million) and 14% ($162.0 million) of the Company's revenue in 1996, 1995 and
1994, respectively.
33
<PAGE> 35
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)
The Company's foreign operations consist of sales, marketing, and support
activities in subsidiaries throughout the world. The Company's international
export sales represented 34.8%, 32.7% and 30.4% in 1996, 1995 and 1994,
respectively. Substantially all of the export sales each year were denominated
in U.S. dollars.
Operating income generated by the foreign operations of the Company and
their corresponding identifiable assets were not material to the Company in 1995
and 1994, respectively. Revenue classified by major geographic area is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
(In thousands) 1996 1995 1994
- - ----------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues from unaffiliated customers in the United
States................................................... $1,340,136 $ 945,221 $ 790,716
Export sales from the United States:
Europe................................................... 469,762 300,896 211,780
Other.................................................... 246,736 157,478 133,897
---------- ---------- ----------
$2,056,634 $1,403,595 $1,136,393
========== ========== ==========
Operating income (loss):
United States............................................ $ 341,765
Europe................................................... (18,181)
Other.................................................... 5,905
Eliminations............................................. (6,162)
----------
$ 323,327
----------
----------
Identifiable assets:
United States............................................ $1,452,935
Europe................................................... 50,241
Other.................................................... 11,052
Eliminations............................................. (7,693)
----------
$1,506,535
----------
----------
</TABLE>
9. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
(In thousands, except per share amounts) SEPT. 30 DEC. 31 MAR. 31 JAN. 30
- - ------------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
1996:
Revenue............................................... $457,773 $541,601 $521,715 $535,545
Gross profit.......................................... 251,563 293,388 279,428 286,937
Net income before provision for income taxes.......... 100,770 99,270 63,542 88,234
Net income............................................ 63,168 58,826 29,187 55,144
Net income per share.................................. 0.32 0.29 0.15 0.28
1995:
Revenue............................................... $313,661 $328,711 $353,299 $407,924
Gross profit.......................................... 173,382 181,325 193,877 224,028
Income before provision for income taxes.............. 61,589 1,042 66,658 91,384
Net income............................................ 38,151 (4,101) 38,985 55,951
Net income per share.................................. 0.21 (0.02) 0.20 0.29
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
34
<PAGE> 36
PART III
Certain information required by Part III is omitted from this Report in
that the Company will have filed its definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report, and certain information included therein is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of the Company is set forth under the
caption "Information about Bay Networks -- Management" in the Company's
definitive Proxy Statement (the "Proxy Statement") in connection with the Annual
Meeting of Stockholders to be held October 17, 1996. Such information is
incorporated herein by reference. Information relating to the executive officers
of the Company is set forth in Part I of this report under the caption
"Management." Information relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is set forth under the caption "Executive
Compensation and Other Matters -- Section 16(a) of the Securities Exchange Act
of 1934 -- Beneficial Ownership Reporting Compliance" in the Proxy Statement and
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth under the
caption "Executive Compensation and Other Matters -- Stock Options Granted in
Fiscal 1996," "-- Option Exercises and Fiscal 1996 Year-End Values," "-- Change
of Control Arrangements," "-- Compensation of Directors," and "-- Compensation
Committee Interlocks and Insider Participation" in the Proxy Statement. Such
Information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to ownership of equity securities of the Company by
certain beneficial owners and management is set forth under the caption
"Information about Bay Networks -- Stock Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement. Such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information is set forth under the caption "Executive Compensation and
Other Matters -- Certain Transactions" in the Proxy Statement. Such information
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in Item 14(a) are filed as part of this
Form 10-K.
2. Financial Statement Schedule
The financial statement schedule listed in Item 14(a) is filed as part of
this Form 10-K.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1996.
(c) See Exhibit Index of this Form 10-K
(d) See Index to Consolidated Financial Statements and Financial Statement
Schedule of this Form 10-K
35
<PAGE> 37
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Santa Clara, State
of California, on the 5th day of September, 1996.
BAY NETWORKS, INC.
By: /s/ ANDREW K. LUDWICK
------------------------------------
Andrew K. Ludwick
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------------ ------------------------------- ------------------
<C> <S> <C>
/s/ ANDREW K. LUDWICK President, Chief Executive September 5, 1996
- - ------------------------------------------ Officer and Director
Andrew K. Ludwick (Principal Executive Officer)
/s/ WILLIAM J. RUEHLE Executive Vice President and September 5, 1996
- - ------------------------------------------ Chief Financial Officer
William J. Ruehle (Principal Financial Officer)
/s/ VITO E. PALERMO Vice President and Controller September 5, 1996
- - ------------------------------------------ (Principal Accounting Officer)
Vito E. Palermo
/s/ PAUL J. SEVERINO Chairman of the Board September 5, 1996
- - ------------------------------------------
Paul J. Severino
Director , 1996
- - ------------------------------------------
Arthur Carr
/s/ SHELBY H. CARTER, JR. Director September 5, 1996
- - ------------------------------------------
Shelby H. Carter, Jr.
Director , 1996
- - ------------------------------------------
Kathleen A. Cote
/s/ JOHN S. LEWIS Director September 5, 1996
- - ------------------------------------------
John S. Lewis
/s/ BENJAMIN F. ROBELEN Director September 5, 1996
- - ------------------------------------------
Benjamin F. Robelen
/s/ RONALD V. SCHMIDT Director September 5, 1996
- - ------------------------------------------
Ronald V. Schmidt
</TABLE>
36
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 14(A)
Report of Independent Auditors
Report of Independent Accountants
Consolidated balance sheets at June 30, 1996 and June 30, 1995
Consolidated statements of income for the three years ended June 30, 1996, 1995
and 1994
Consolidated statements of stockholders' equity for the three years ended June
30, 1996, 1995 and 1994
Consolidated statements of cash flows for the three years ended June 30, 1996,
1995 and 1994
Notes to consolidated financial statements
Selected quarterly data (unaudited):
Three months ended fiscal years 1996 and 1995
SCHEDULE:
II Valuation Accounts for the years ended June 30, 1996, 1995, and 1994
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the consolidated financial statements or
notes thereto.
<PAGE> 39
SCHEDULE II
BAY NETWORKS, INC.
VALUATION ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGE TO AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS: OF PERIOD EXPENSE WRITE-OFFS OTHER OF PERIOD
- - ------------------------------------ ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
June 30, 1996....................... $ 10,441 $ 1,364 $ (2,122) $ -- $ 9,683
=========== ========== ========== ========== ==========
June 30, 1995....................... $ 10,935 $ 1,482 $ (2,077) $ 101(2) $10,441
=========== ========== ========== ========== ==========
June 30, 1994....................... $ 8,626 $ 3,425 $ (798) $ (318)(1) $10,935
=========== ========== ========== ========== ==========
</TABLE>
- - ---------------
(1) Due to the differing fiscal years of SynOptics and Wellfleet amount
represents the elimination of SynOptics' net allowance for doubtful accounts
activity for the six months ended December 31, 1993.
(2) Due to the differing fiscal years of the Company and Xylogics amount
represents the elimination of Xylogics' net allowance for doubtful accounts
activity for the three months ended October 31, 1994.
<PAGE> 40
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<S> <C>
2.1 Plan and Agreement of Merger dated as of June 16, 1996 and amended on August 5,
1996 by and among the Registrant, Penril DataComm Networks, Inc. and Beta
Acquisition Corp.
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.
10.1 Lease Agreement for real property dated May 31, 1995, between Technology Park VII
Limited Partnership and the Registrant, which is incorporated by reference to
Exhibit 10.1 to the Registrant's Annual Report on Form 10-K dated September 22,
1995.
10.2 Lease Agreement for real property dated November 29, 1994, between SNC LAB SUD and
the Registrant, which is incorporated by reference to Exhibit 10.2 to the
Registrant's Annual Report on Form 10-K dated September 22, 1995.
10.3* Amended and Restated 1994 Stock Option Plan, amended on April 2, 1996.
10.4* Amended and Restated 1994 Outside Directors Stock Option Plan, amended on November
27, 1995.
10.5* 1994 Employee Stock Purchase Plan, which is incorporated herein by reference to
Exhibit 10.5 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.
10.6* 1991 Director Stock Option Plan, which is incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 (File No. 33-41349) filed with the
Securities and Exchange Commission June 21, 1991.
10.7* Form of Stock Option agreements under the SynOptics Communications Inc. Amended and
Restated 1986 Stock Option Plan assumed by the Registrant which is incorporated
herein by reference to Exhibit 10.21 to the 1990 Form 10-K of SynOptics
Communications, Inc.
10.8 Agreement and Plan of Merger dated as of May 9, 1995 among the Registrant, Cent
Merger Co., Inc. and Centillion Networks, Inc., which is incorporated herein by
reference to Exhibit 1 to the Registrant's Report on Form 8-K dated May 11, 1995.
10.9 Agreement and Plan of Merger dated as of September 5, 1995 among the Registrant,
Branch Merger Co., Inc. and Xylogics, Inc. which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Report on Form 8-K dated December 15,
1995.
10.10 Indenture, dated as of April 23, 1993, between SynOptics Communications, Inc. and
The First National Bank of Boston for 5.25% Convertible Subordinated Debentures due
2003, which is incorporated herein by reference to Exhibit 10.2 to the Form 10-Q
for the quarter ended July 2, 1993 of SynOptics Communications, Inc.
10.11 First Supplemental Indenture dated as of October 20, 1994 among SynOptics
Communications, Inc., Wellfleet Communications, Inc., and The First National Bank
of Boston, which is incorporated by reference to Exhibit 10.10 to the Registrant's
Annual Report on Form 10-K dated September 22, 1995.
10.12 Guaranty dated as of October 20, 1994 between Wellfleet Communications, Inc. and
The First National Bank of Boston, which is incorporated by reference to Exhibit
10.11 to the Registrant's Annual Report on Form 10-K dated September 22, 1995.
10.13 Lease Agreement dated June 1, 1990 between the Registrant and Sobrato Interests for
the Company's principal executive offices, which is incorporated by reference to
Exhibit 10.43 of the 1990 Form 10-K of SynOptics Communications, Inc.
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
10.14 Amendment, dated March 2, 1992, to the lease agreement dated June 1, 1990 between
the Registrant and Sobrato Interests for the Registrant's principal executive
offices, which is incorporated by reference to Exhibit 10.12 of the 1991 Form 10-K
of SynOptics Communications, Inc.
10.15 Limited Partnership Agreement dated March 2, 1992 between SynOptics Real Estate,
Inc. and Sobrato Interests to form Astra Real Estate, Inc., which is incorporated
by reference to Exhibit 10.16 of the 1991 Form 10-K of SynOptics Communications,
Inc.
10.16 Guaranty of SynOptics Communications, Inc. of real estate obligations of SynOptics
Real Estate, Inc., which is incorporated by reference to Exhibit 10.17 of the 1991
Form 10-K of SynOptics Communications, Inc.
10.17 Lease Agreement dated March 2, 1992 between the Registrant and Astra Real Estate,
Inc., which is incorporated by reference to Exhibit 10.18 of the 1991 Form 10-K of
SynOptics Communications, Inc.
11.1 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Independent Accountants, Price Waterhouse LLP.
23.3 Report of Independent Accountants on Financial Statement Schedule.
27 Financial Data Schedule.
</TABLE>
- - ---------------
(b) The following financial statement schedule is filed herewith.
II Valuation Account
* Indicates compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 2.1
AMENDMENT AGREEMENT
This Agreement is made and entered into as of the 5th day of
August, 1996, by and among Bay Networks, Inc., a Delaware corporation
(the "Buyer"), Beta Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Buyer (the "Transitory Subsidiary"), and
Penril DataComm Networks, Inc., a Delaware corporation (the "Company").
The Buyer, the Transitory Subsidiary and the Company are referred to
collectively in this Agreement as the "Parties".
WITNESSETH:
WHEREAS, a Plan and Agreement of Merger dated as of June 16, 1996,
was executed and entered into by and among the Parties (the "Merger
Agreement"); and
WHEREAS, the Parties desire to amend the Merger Agreement as
provided herein;
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereby
agree as follows:
1. Amendment to Section 1.2 of the Merger Agreement.
Section 1.2 of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
"1.2 The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take
place at a mutually agreed upon location, commencing at 9:00
a.m. local time on a mutually agreeable date as soon as
practicable after the date on which all of the conditions to
the obligations of the Parties to consummate the transactions
contemplated by this Agreement have been satisfied or waived
(the "Closing Date"), but in no event later than November 25,
1996."
2. Amendment to Section 1.9 of the Merger Agreement.
Section 1.9 of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
"1.9 Fractional Shares. No certificates or
scrip representing fractional Merger Shares
<PAGE> 2
shall be issued to former Company Stockholders upon the
surrender for exchange of Certificates, and such former
Company Stockholders shall not be entitled to any voting
rights, rights to receive any dividends or distributions or
other rights as a stockholder of the Buyer with respect to
any fractional Merger Shares that would otherwise be issued
to such former Company Stockholders. In lieu of any
fractional Merger Shares that would otherwise be issued, each
former Company Stockholder that would have been entitled to
receive a fractional Merger Share shall, upon proper
surrender of such person's Certificates, receive a cash
payment equal to the Buyer Stock Market Price, multiplied by
the fraction of a share that such Company Stockholder would
otherwise be entitled to receive.
3. Amendment to Section 6.1 of the Merger Agreement.
Section 6.1 of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
"6.1 Termination of Agreement. The Parties may terminate this
Agreement prior to the Effective Time (whether before or
after Requisite Stockholder Approval) as provided below:
(a) the Parties may terminate this
Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving
written notice to the Company in the event the Company is in
breach, and the Company may terminate this Agreement by
giving written notice to the Buyer and the Transitory
Subsidiary in the event the Buyer or the Transitory
Subsidiary is in breach, of any material representation,
warranty or covenant contained in this Agreement, and such
breach is not remedied within 10 days of delivery of written
notice thereof;
(c) any Party may terminate this Agreement by giving
written notice to the other Parties at any time after the
Company Stockholders have voted on whether to approve
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<PAGE> 3
this Agreement and the Merger in the event
this Agreement and the Merger failed to
receive the Requisite Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving
written notice to the Company if the Closing shall not have
occurred (i) on or before November 25, 1996, by reason of the
failure of any condition precedent under Section 5.1 or 5.2
hereof (unless the failure results primarily from a breach by
the Buyer or the Transitory Subsidiary of any representation,
warranty or covenant contained in this Agreement);
(e) the Company may terminate this Agreement by giving
written notice to the Buyer and the Transitory Subsidiary if
the Closing shall not have occurred (i) on or before November
25, 1996, by reason of the failure of any condition precedent
under Section 5.1 or 5.3 hereof (unless the failure results
primarily from a breach by the Company of any representation,
warranty or covenant contained in this Agreement); or
(f) any Party may terminate this Agreement if the Board
of Directors of the Company shall have withdrawn or modified
in a manner adverse to the Buyer its approval or
recommendation to the Company Stockholders of this Agreement
or the Merger or shall have approved or recommended to the
Company Stockholders that they accept the terms of any
Acquisition Proposal or shall have resolved to take any of
the foregoing actions; provided, however, that reasonable
delay required to comply with the Company Board Fiduciary
Duties shall not be deemed to be a withdrawal or a
modification adverse to the Buyer.
4. Replacement of Exhibit C to the Merger Agreement.
Exhibit C to the Merger Agreement is replaced in its entirety by
Exhibit C attached hereto.
5. Effect of Modification. In the event of any
inconsistency between the provisions of the Merger Agreement and
the applicable provisions of this Agreement, the provisions of
- 3 -
<PAGE> 4
this Agreement shall control in all respects. Otherwise, the
Merger Agreement shall remain in full force and effect.
6. Successors and Assigns; Governing Law. Subject to the Merger
Agreement as amended hereby, this Agreement shall inure to the benefit
of and bind the respective heirs, personal representatives, successors
and assigns of the parties hereto and shall be governed by and
construed in accordance with the internal laws (and not the law of
conflicts) of the State of Delaware.
7. Severability; Modifications. Should one or more of the
provisions of this Agreement be determined by a court of law to be
illegal or unenforceable, the other provisions shall nevertheless
remain effective and shall be enforceable. This Agreement shall
not be modified without the prior consent of each of the Parties.
8. Execution in Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original but
all of which together shall constitute one and the same instrument.
This Agreement, once executed, may be delivered to either party through
the use of facsimile transmission. In this regard, any and all
signatures of the parties appearing on any facsimile copies of this
Agreement shall be deemed, unless otherwise proved, the lawful and
valid signature of the executing party.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth below.
Effective date of this Agreement: August 5, 1996.
THE BUYER:
BAY NETWORKS, INC.
By:____________________________
Title:_________________________
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<PAGE> 5
THE TRANSITORY SUBSIDIARY:
BETA ACQUISITION CORP.
By:____________________________
Title:_________________________
THE COMPANY:
PENRIL DATACOMM NETWORKS, INC.
By:____________________________
Title:_________________________
Amendment Agreement
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<PAGE> 6
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made and entered
into as of the _____ day of ______________, 1996 between Penril
DataComm Networks, Inc., a Delaware corporation ("Penril"), and [the
Spin-off Company], a Delaware corporation ("Newsub").
WHEREAS, Penril formed Newsub as a wholly-owned subsidiary and, by
action of its Board of Directors, contributed or will contribute
certain assets (the "Spun-off Assets"), and assigned or will assign
certain liabilities (the "Spun-off Liabilities") to Newsub and Newsub
accepted or will accept the Spun-off Assets and assumed or will assume
the Spun-off Liabilities;
WHEREAS, Penril, by action of its Board of Directors, as ratified
by its stockholders, will distribute all of the outstanding capital
stock of Newsub (the "Newsub Stock") to such stockholders in the form
of a dividend (the "Distribution");
WHEREAS, Penril, Beta, Inc., a Delaware corporation ("Buyer"), and
Transitory Subsidiary, wholly-owned subsidiary of Buyer, have entered
into an Plan and Agreement of Merger dated as of June 16, 1996, and as
amended on August 5, 1996 (the "Merger Agreement"), pursuant to which,
following the Distribution, Penril will become a wholly-owned
subsidiary of Buyer and the stockholders of Penril will receive shares
of Buyer stock in exchange for shares of Penril stock (the "Merger");
WHEREAS, until the Distribution, Penril owns 100% of the
issued and outstanding Newsub Stock;
WHEREAS, as consideration for, and in connection with, Penril
making the aforementioned capital contribution to Newsub, Newsub agrees
to indemnify Penril for claims, costs, damages or liabilities incurred
by Penril, and Penril agrees to indemnify Newsub for claims, costs,
damages or liabilities incurred by Newsub, on the terms, and subject to
the conditions, as set forth below.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the parties hereto agree as follows:
<PAGE> 7
1. Indemnification.
(a) Newsub will indemnify and save harmless Penril and its
directors, officers, employees, agents and/or affiliates (each, a
"Newsub Indemnified Party") from any and all costs, expenses,
losses, damages and liabilities ("Claim(s)") incurred or suffered,
directly or indirectly, (including, without limitation, reasonable
legal fees and expenses) resulting from or attributable to (i) the
operation of Newsub from and after the Distribution; (ii) any
claim, suit or other type of proceeding based upon, arising out of
or in connection with the operation of Penril prior to the Merger
other than those based upon, arising out of or in connection with
the Modem Business (as defined in the Merger Agreement), the
Merger, the Merger Agreement, the solicitation of proxies relating
to approval of the Merger and other transactions related to the
Merger, or the tax consequences of the Distribution, but
including, without limitation, any claim, suit or other type of
proceeding based upon, arising out of or in connection with the
sale or transfer [prior to the Merger] of any assets or businesses
of Penril and/or any of its subsidiaries, including, without
limitation, the sale of the assets of Technipower, Inc.
("Technipower") pursuant to the Asset Purchase Agreement dated as
of July 8, 1996, by and among Technipower, Penril and Power
Designs, Inc. ("PDI") or the sale of the assets of Constant Power,
Inc. ("Constant Power") pursuant to an Asset Purchase Agreement
dated as of July 8, 1996, by and among Constant Power, Penril and
PDI; (iii) any claim, suit or other type of proceeding relating to
the termination of employment of any employees of Penril other
than those set forth on Schedule 2.20 to the Merger Agreement; and
(iv) any claim, suit or other type of proceeding based upon,
arising out of or in connection with any information concerning
Newsub in the Registration Statement (as defined in the Merger
Agreement) that was furnished by Penril and/or Newsub for
inclusion in the Registration Statement or any part thereof. In
furtherance thereof, Newsub acknowledges and agrees that (ii)
above includes, but is not limited to, all suits, actions or
administrative hearings existing on the date hereof to which
Penril is a party (or which have been assigned by Penril to Newsub
and assumed by Newsub) other than those based upon, arising out of
or in connection with the Modem Business (collectively, the
"Newsub Existing Litigation", as listed on Exhibit A hereto). This
Agreement will constitute notice, in accordance with Paragraph 2
hereof, of Newsub's election to conduct the defense (or to
prosecute, as the case may be) of all claims in connection
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<PAGE> 8
with the Newsub Existing Litigation. Other than certain rights
retained pursuant to Paragraph 2 hereof Penril acknowledges and
agrees that Newsub will have all rights to, and title and interest
in any such claim, suit or proceeding for which Newsub is
providing indemnification.
(b) Penril will indemnify and save harmless Newsub and its
directors, officers, employees, agents and/or affiliates (each, a
"Penril Indemnified Party" and, together with each Newsub
Indemnified Party, without distinction, an "Indemnified Party")
from any and all Claims incurred or suffered, directly or
indirectly, (including, without limitation, reasonable legal fees
and expenses) resulting from or attributable to (i) the operation
of Penril from and after the Distribution; (ii) any claim, suit or
other type of proceeding based upon, arising out of or in
connection with the operation of the Modem Business prior to the
Merger; and (iii) any claim, suit or other type of proceeding
relating to the Merger, the Merger Agreement, the solicitation of
proxies relating to approval of the Merger and the other
transactions related to the Merger other than those based upon,
arising out of or in connection with the Newsub Registration
Statement on Form S-1 filed with the Securities and Exchange
Commission to register the Newsub Stock in connection with the
Distribution or any information concerning Newsub in the
Registration Statement that was furnished by Penril and/or Newsub
for inclusion in the Registration Statement. In furtherance
thereof, Penril acknowledges and agrees that (ii) above includes,
but is not limited to, all suits, actions or administrative
hearings existing on the date hereof to which Penril is a party
(none of which have been assigned by Penril to Newsub or assumed
by Newsub) which are based upon, arising out of or in connection
with the Modem Business (collectively, the "Penril Retained
Existing Litigation", as listed on Exhibit B hereto, and, together
with the Newsub Existing Litigation, the "Existing Litigation").
This Agreement will constitute notice, in accordance with
Paragraph 2 hereof, of Penril's election to conduct the defense
(or to prosecute, as the case may be) of all claims in connection
with the Penril Retained Existing Litigation. Other than certain
rights retained pursuant to Paragraph 2 hereof Newsub acknowledges
and agrees that Penril will have all rights to, and title and
interest in any such claim, suit or proceeding for which Penril is
providing indemnification.
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<PAGE> 9
2. Defense of Claim.
(a) In the event an Indemnified Party receives notice of any
claim asserted or any action or administrative or other proceeding
commenced in respect of a Claim for which indemnity may be
properly sought under this Agreement against Newsub or Penril, as
the case may be (the "Indemnifying Party"), the Indemnified Party
shall give notice in writing to the Indemnifying Party within
thirty (30) days of its receipt of such notice. Within thirty (30)
days after the earlier of (a) receipt by the Indemnifying Party of
such notice from the Indemnified Party, or (b) receipt of actual
notice by the Indemnifying Party from sources other than the
Indemnified Party, the Indemnifying Party may give the Indemnified
Party written notice of its election to conduct the defense of
such claim, action or proceeding at its own expense. If the
Indemnifying Party has given the Indemnified Party such notice of
election to conduct the defense, the Indemnifying Party may
conduct the defense at its expense, but the Indemnified Party
shall nevertheless have the right to participate in the defense,
provided such participation is solely at the expense of the
Indemnified Party, without a right of further reimbursement. If
the Indemnifying Party has not so notified the Indemnified Party
in writing within the time period provided above of its election
to conduct the defense of such Claim, the Indemnified Party may,
but need not, conduct, at the Indemnifying Party's expense, the
defense of such claim, action or proceeding. The Indemnified Party
may at any time notify the Indemnifying Party of its intention to
settle, compromise or satisfy any such claim, action or proceeding
(the defense of which the Indemnifying Party has not previously
elected to conduct) and, with the prior written consent of the
Indemnified Party (which consent will not be unreasonably
withheld), may make such settlement, compromise or satisfaction,
at the Indemnifying Party's expense, provided, however, that the
Indemnifying Party may make such settlement, compromise or
satisfaction without the prior written consent of the Indemnified
Party if such settlement, compromise or satisfaction constitutes a
release of the Indemnified Party in respect of such Claim.
(b) Any settlement, compromise or satisfaction, or any final
judgment or decree entered in, any Claim or Existing Litigation
defended in accordance with the provisions of this Paragraph 2
shall be final and binding on the parties hereto.
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<PAGE> 10
(c) The Indemnified Party and the Indemnifying Party shall
use all reasonable efforts to cooperate fully with respect to the
defense of any Claim or Existing Litigation in accordance with the
provisions of this Paragraph 2.
3. Notice. All notices and other communications required or
permitted to be given under this Indemnification Agreement shall be
dated and in writing and shall be deemed to have been duly given when
(a) personally delivered, (b) upon delivery of a telephonic facsimile
transmission with a confirmed telephonic transmission answered back,
(c) three days after being deposited in the United States mail,
registered or certified, return receipt requested, postage prepaid, or
(d) one day after having been dispatched by a nationally recognized
overnight courier service, addressed to the party or parties to this
Agreement to whom it is directed:
If to Penril:
Penril DataComm Networks, Inc.
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878
Attn: President
Facsimile No.: (301) 948-5761
with a copy to:
Attn:
Facsimile No.:
If to Newsub:
Attn:
Facsimile No.:
with a copy to:
Attn:
Facsimile No.:
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<PAGE> 11
or to such other address as may be designated by a party hereto by
notice delivered to the other parties.
4. Cooperation. In connection with any Claim that is the subject
of indemnification, each party shall afford to the Indemnifying Party
and its accountants, counsel and other designated representatives
reasonable access during normal business hours to all records, books,
contracts, instruments, computer data and other information insofar as
such access is reasonably required by the indemnifying party in
connection with the defense of any Claim pursuant to Paragraph 2
hereof. In addition, each party shall use reasonable efforts to make
available to the Indemnifying Party, upon written request, its
officers, directors, employees and agents as witnesses to the extent
that any such person may reasonably be required in connection with the
defense or prosecution of any Claim.
5. Waiver. The waiver by any party hereto of the breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any preceding or succeeding breach and no failure by any
party to exercise any right or privilege hereunder shall be deemed a
waiver of such party's rights or privileges or shall be deemed a waiver
of such party's rights hereunder to exercise the same at any subsequent
time or times.
6. Amendment. This Agreement may be amended, modified or
supplemented only by written instrument executed by the party
against whom enforcement is sought.
7. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of
Delaware.
8. Severability. The invalidity, illegality or unenforceability of
one or more of the provisions of this Agreement in any jurisdiction
shall not affect the validity, legality or enforceability of the
remainder of this Agreement in such jurisdiction or the validity,
legality and enforceability of this Agreement, including any such
provision, in any other jurisdiction, it being intended that all rights
and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.
9. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the
same instrument.
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<PAGE> 12
10. Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, and
the Indemnified Parties and each of their respective successors
and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
on the day and year first above written.
PENRIL:
PENRIL DATACOMM NETWORKS, INC.
By:
Its:
NEWSUB:
[THE SPIN-OFF COMPANY]
By:
Its:
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<PAGE> 13
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is made and entered into as of June 16,
1996 by and between PENRIL DATACOMM NETWORKS, INC., a corporation
existing under the laws of Delaware, which has offices at 1300 Quince
Orchard Boulevard, Gaithersburg, Maryland 20878 ("Licensor") and BAY
NETWORKS, INC., a corporation existing under the laws of Delaware,
which has offices at 4401 Great America Parkway, Santa Clara,
California 95052 ("Licensee").
WHEREAS, Licensor possesses certain intellectual and indus-
trial property rights; and
WHEREAS, Licensor is willing to grant, and Licensee desires to
acquire a license of such rights as provided herein.
NOW, THEREFORE, in consideration of the payment of $4,500,000 as
set forth in Section 4 hereof, the parties do hereby agree as follows:
1. DEFINITIONS.
As used herein, the following terms shall have the following
definitions.
1.1 Affiliates. "Affiliates" of a party hereto shall mean (i)
companies the majority of whose voting shares are now or hereafter
owned or controlled directly or indirectly by such party; (ii)
companies which now or hereafter own or control directly or indirectly
a majority of the voting shares of such party; and (iii) companies a
majority of whose voting shares are now or hereafter owned or
controlled directly or indirectly by any company mentioned in (i) or
(ii) of this definition. A company shall be considered an "Affiliate"
for only so long as such ownership or control exists. For the purposes
of this definition, partnerships or similar entities where a
majority-in-interest of its partners or owners are a party hereto
and/or Affiliates of such party shall also be deemed to be Affiliates
of such party.
1.2 Confidential Information. "Confidential Information" shall
mean that part of the Technical Information, whether written or oral,
which is (i) not publicly known and (ii) annotated as "confidential" or
"proprietary." Any information which is not annotated as "confidential"
or "proprietary" shall be deemed to be in the public domain. In
addition, "Confidential Information" shall include all source code for
all software and other computer programs delivered by Licensor to
Licensee hereunder and all information disclosed by either party to the
other party in accordance with Section 2.5 (Modifications and/or
Improvements of
<PAGE> 14
Products) hereof. Such Confidential Information shall not be considered
Confidential Information at such time as it becomes publicly known by
any means other than a violation of the terms of this Agreement.
1.3 Effective Date. "Effective Date" shall mean the date
first written above.
1.4 Licensed Technology. "Licensed Technology" shall mean
the Rights, Products, Trademarks and Technical Information.
1.5 Product. "Product" shall mean the V.34+ Xylogics Octal Modem
Card further described in Exhibit A attached hereto and any and all
products, software, equipment, components, parts, tools and test
equipment listed in Exhibit A attached hereto.
1.6 Rights. "Rights" shall mean:
(a) the patents and patent applications listed on Exhibit B-1
attached hereto, and any and all continuations, divisions, reissues,
extensions and other filings that Licensor may file with the U.S.
Patent and Trademark Office with respect to such patents and patent
applications described in this Section 1.6 above (and corresponding
applications and patents in countries and jurisdictions other than the
United States);
(b) the copyrights listed as Exhibit B-2 attached
hereto;
(c) the mask work rights listed on Exhibit B-3 attached
hereto;
(d) any and all patents, patent applications, copyrights,
mask work rights and other intellectual property rights with respect to
any inventions pertaining to the Licensed Technology, which patents,
patent applications, copyrights, mask work rights and other rights (i)
are granted or to be granted to Licensor (either directly or through
its Affiliates, successors, assigns, agents or employees) (ii) with
respect to which Licensor (either directly or through its Affiliates,
successors, assigns, agents or employees) shall have the right to grant
licenses, sublicenses and rights of the type described in Article 2
below, except that nothing in this section shall grant to Licensee any
rights under U.S. Patent No. 5,388,124 (University of Maryland -
Tretter et al.); and
(e) to the extent that Licensor enters into cross licensing
agreements with third parties involving the University of Maryland
patent referred to in Section 1.6(d) above, the right to utilize any
such cross licensed technology or rights at the same cash royalty
rates, if any, [on a per unit basis or on an incremented basis above
the rates otherwise available to Licensor] and on the same terms as
Licensor, either as a sublicensee of
-2-
<PAGE> 15
Licensor or directly. Although Licensee acknowledges that some cross
licensors may be unwilling to grant such pass-through rights, Licensor
agrees to use its best efforts to obtain for Licensee rights equivalent
to those obtained by Licensor for its own business.
1.7 Technical Information. "Technical Information" shall mean all
trade secrets, know-how, computer programs (including copyrights in
said software), knowledge, technology, means, methods, processes,
practices, formulas, techniques, procedures, technical assistance,
designs, drawings, apparatus, written and oral rectifications of data,
specifications, assembly procedures, schematics and other valuable
information of whatever nature, whether confidential or not, and
whether proprietary or not, which is now in (or hereafter during the
term of this Agreement comes into) the possession of Licensor and which
is relevant to the manufacture, assembly, sale, distribution, use,
installation, servicing or testing of any Product, including without
limitation the materials identified in Exhibit C below. Nothing in this
section shall grant to Licensee any rights under U.S. Patent No.
5,388,124 (University of Maryland - Tretter et al.).
2. GRANT OF RIGHTS AND LICENSES.
Subject to all of the terms and conditions set forth in this
Agreement:
2.1 Use of Rights. Licensor hereby grants to Licensee a
nonexclusive, worldwide, right and license to practice the Rights in
order to make, use, market, sell and distribute the Products. This
right and license includes, without limitation, the rights: (a) to
maintain the Products; and (b)(i) to practice the methods and processes
involved in the use of the Products; (ii) to make and have made, to use
and have used, and to maintain machines, tools, instrumentalities and
materials; and (iii) to use and have used methods and processes,
insofar as such machines, tools, instrumentalities, materials, methods
and processes are involved in or incidental to the development,
manufacture, sale, marketing, distribution, installation, testing or
repair of the Products.
2.2 Use of Technical Information.
(a) Licensor grants to Licensee a nonexclusive, worldwide,
right to use the Technical Information during the term hereof in
connection with Licensee's exercise of its rights and licenses granted
hereunder.
(b) Simultaneously with the execution of this Agreement,
Licensor shall provide to Licensee all of the Technical Information and
all patent or other searches and prior art relating to the Licensed
Technology.
-3-
<PAGE> 16
2.3 Right to Sublicense or Assign. Licensee shall have the right
to sublicense or assign any of the rights or licenses granted hereunder
in connection with the manufacture and wholesale or retail sale solely
by Licensee of the Products, provided that Licensee shall not deliver
or make available to any other party any of the source code provided by
Licensor hereunder.
2.4 Software and Computer Programs in Rights, Technical
Information or Products.
(a) Licensor and Licensee agree that any and all software and
other computer programs included in the Rights, or the Technical
Information or the Products are being licensed by Licensor to Licensee
in source code and machine readable object code form on a nonexclusive
basis as set forth in Sections 2.1 (Use of Rights) and 2.2 (Use of
Technical Information) above, and are not being sold by Licensor or
purchased by Licensee. Licensor shall retain title to all of such
software and computer programs. Licensee shall have the right to
sublicense to third parties any rights or licenses to use individual
copies of such software in the operation of the Products.
(b) Licensee agrees not to copy or reproduce any of such
software or computer programs except during the term of this Agreement
and, provided that, Licensor's copyright and proprietary notices which
appear on such software or computer programs are properly included on
such copies and reproductions.
2.5 Modifications and/or Improvements of Products. Licensee shall
have the right to modify and improve the Products and to apply each
such modification or improvement to the Products, without payment to or
the consent of the Licensor. Any such modification or improvement shall
be the property of Licensee.
3. OBLIGATIONS OF LICENSOR.
3.1 Development Project. Immediately upon the execution and
delivery of this License, Licensor shall commence development work on
the Product described in Exhibit A hereto, assigning all necessary or
appropriate resources to pursuing such development no less actively
than Licensor shall pursue its own primary development projects. At a
minimum, Licensor shall assign the five employees listed on Exhibit D
to this effort and Jonathan Sieg for such time as he may remain in the
employ of Licensor as Vice President of Engineering shall supervise the
project as a primary priority.
3.2 Product Information and Literature. Licensor shall provide
Licensee with catalogues, maintenance manuals and other descriptive
literature with respect to the Products which Licensor has previously
generated, as well as which Licensor otherwise generates during the six
month term of this Agreement, all at no expense to Licensee.
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<PAGE> 17
3.3 Training and Technical Assistance. To assist Licensee in
exercising its rights hereunder, Licensor agrees to provide appropriate
training and technical assistance to Licensee, its employees and its
permitted sublicensees, so that Licensee will be able to practice the
Patents and use the Licensed Technology to its full potential. Such
training and assistance shall be rendered by Licensor at no expense to
Licensee; provided, however, that Licensor shall not be required to
devote more than 80 man-hours during the term of this Agreement in
rendering such training and technical assistance to Licensee. The
parties hereto shall from time to time determine whether particular
training and assistance shall be rendered at Licensor's facilities or
at Licensee's facilities. Travel costs, lodging and all related
expenses incurred by one party in connection with sending its employees
or permitted sublicensees to the other party's location shall be paid
in full by the party sending such individuals.
3.4 Evaluations. Licensor shall provide Licensee free of charge
with evaluations of Licensee's manufacturing, assembly, service,
testing, installation and technical proposals; provided, however, that
Licensor shall not be required to devote more than 80 man-hours during
the term of this Agreement in rendering such evaluations to Licensee.
Licensor shall use its best efforts to deliver each evaluation to
Licensee within ten (10) days after Licensee's request of such
evaluation.
3.5 Written Inquiries. Licensor shall, at no additional cost to
Licensee, answer all written inquiries from Licensee directly
concerning the manufacture, assembly, installation, testing, use and
servicing of the Products; provided, however, that Licensor shall not
be required to devote more than 80 man-hours during the term of this
Agreement in responding to such written inquiries.
3.6 Locating Sources for Components. Licensor shall use its best
efforts, free of charge, to identify suppliers of components, parts,
tools and test equipment for Products, and to then assist Licensee in
negotiating supply agreements with such suppliers; provided, however,
that Licensor shall not be required to devote more than 80 man-hours
during the term of this Agreement in assisting Licensee pursuant to
this provision.
3.7 Additional Services.
(a) Licensor shall use its reasonable efforts to provide
Licensee with any and all additional assistance reasonably requested by
Licensee, including without limitation: producing technical, sales,
advertising and other reports and information for Licensee which
Licensee believes might be useful in selling the Products manufactured
hereunder; and assisting Licensee in attempting to obtain from third
parties technical information, drawings, plans, specifications and
other data which are not proprietary to Licensor and which Licensor
does not otherwise have
-5-
<PAGE> 18
the right to use, in order to enable Licensee to respond to requests of
any potential customer.
(b) Licensor shall bill Licensee for any such services not
expressly provided free of charge in Section 2.2(b) (Use of Technical
Information) or in one of the earlier provisions of this Article 3 at
prices to be agreed in advance by the parties hereto. In all cases the
prices charged by Licensor for the services that it provides to
Licensee shall not exceed the prices that it charges its best customer
or licensee, as the case may be, for the same or similar services, if
any. Licensor shall not commence performance of any part of any
services hereunder until such prices are established in writing by the
parties hereto.
4. COMPENSATION PAYABLE TO LICENSOR.
In consideration of the rights granted to Licensee with respect to
the Licensed Technology and for the services to be rendered by Licensor
under this Agreement during the six months term, Licensee shall pay
Licensor simultaneously with the execution of this Agreement the sum of
Four Million Five Hundred Thousand Dollars ($4,500,000.00) in
immediately available funds.
5. INVENTIONS.
If Licensor formulates, makes or conceives a patentable invention
or develops any other intellectual property rights which constitutes a
modification and/or improvement of a Product, Licensor may apply, at
its or his own expense and discretion, for appropriate patent and other
intellectual property right registrations of such invention or rights
in any and all jurisdictions. In each jurisdiction where Licensor does
not apply for such patent or registration within ninety (90) days after
having formulated, made or conceived and reduced to practice such
patentable invention or developed such right and after notice from
Licensee to Licensor of Licensee's desire to have such application or
registration made, then Licensee may either: (i) apply for such patent
or registration in such jurisdiction, at its own expense; or (ii)
request Licensor to apply for such patent or registration in such
jurisdiction and then assign all of its or his rights in such
applications to Licensee, all at Licensee's expense. Licensor shall, at
the request of the Licensee, both during and after the term of this
Agreement, execute such documents and render such assistance as may be
appropriate to enable Licensee to maintain or obtain registrations of
patents or intellectual property rights in any jurisdiction in
accordance with this Article 5.
6. CONFIDENTIAL INFORMATION.
6.1 Confidentiality Maintained. Each party agrees that the
other party hereto has a proprietary interest in its Confidential
Information. During the term of this Agreement and for a period of
three years thereafter, all disclosures of Confidential Information
-6-
<PAGE> 19
to the receiving party, its agents and employees shall be held in
strict confidence by such receiving party, its agents and employees,
and such receiving party shall disclose the Confidential Information
only to those of its agents and employees to whom it is necessary in
order properly to carry out their duties as limited by the terms and
conditions hereof. During the term of this Agreement and for a period
of three years thereafter the receiving party shall not use the
Confidential Information except for the purposes of exercising its
rights and carrying out its duties hereunder. Upon the expiration or
earlier termination of this Agreement, each party shall return to the
other all Confidential Information and all copies thereof, and shall
not at any time thereafter use any of such Confidential Information for
any purpose. The provisions of this Section 6.1 shall also apply to any
consultants or subcontractors during the term of this Agreement and for
three years thereafter that the receiving party may engage in
connection with its obligations under this Agreement. Before providing
any Confidential Information to any such consultant or subcontractor,
the receiving party shall obtain a signed undertaking in which such
consultant or subcontractor agrees to be bound by and comply with terms
substantially equivalent to and to the same effect as this Article 6.
6.2 Liability for Disclosure. Notwithstanding anything contained
in this Agreement to the contrary, neither party shall be liable for a
disclosure of the other party's Confidential Information if the
information so disclosed:
(a) was in the public domain at the time it was dis-
closed by the disclosing party to the receiving party; or
(b) was known to or contained in the records of the
receiving party from a source other than the disclosing party at the
time of disclosure by the disclosing party to the receiving party and
can be so demonstrated; or
(c) was independently developed by the receiving party
and is so demonstrated promptly upon receipt of the documentation
and technology by the receiving party; or
(d) becomes known to the receiving party from a source other
than the disclosing party without breach of this Agreement by the
receiving party and can be so demonstrated; or
(e) if in writing, was not identified as Confidential
Information in accordance with Section 1.2 (Definition of
Confidential Information) hereof; or
(f) must be disclosed pursuant to a contract or subcon-
tract with a governmental agency in order to obtain/retain a
procurement contract; or
-7-
<PAGE> 20
(g) was disclosed pursuant to court order or as otherwise
compelled by law.
7. "AS IS" CONDITION.
"AS IS CONDITION". LICENSOR MAKES NO WARRANTY WITH RESPECT TO THE
OPERATING CAPABILITIES AND FUNCTIONALITY OF THE PRODUCTS AND LICENSEE
ACKNOWLEDGES THAT SAME IS BEING LICENSED HEREUNDER "AS IS" WITHOUT
REPRESENTATION OR WARRANTY OF ANY KIND. THE FOREGOING PROVISIONS ARE IN
LIEU OF ANY WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL
(INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE). LICENSOR SHALL HAVE NO LIABILITY ARISING OUT OF THIS
AGREEMENT, THE LICENSE OF THE LICENSED TECHNOLOGY OR THE MANUFACTURE,
LICENSING, SALE OR SUPPLYING OF THE PRODUCTS OR THEIR USE OR
DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE.
IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE OR ANY OTHER PERSON OR
ENTITY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT
NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES)
ARISING OUT OF THIS AGREEMENT, THE LICENSE OF THE LICENSED TECHNOLOGY
OR THE MANUFACTURE, LICENSING, SALE OR SUPPLYING OF THE PRODUCTS.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Each of Licensor and Licensee hereby represents, warrants and
covenants to the other as follows:
8.1 Right, Power and Authority. It has full right, power and
authority to enter into this Agreement and there is nothing which would
prevent it from performing its obligations under the terms and
conditions imposed on it by this Agreement.
8.2 Binding Obligation. This Agreement has been duly authorized by
all necessary corporate and stockholder action of Licensor and
Licensee, respectively, and constitutes a valid and binding obligation
on Licensor and Licensee, respectively, enforceable in accordance with
the terms hereof.
8.3 Corporate Good Standing. Licensor or Licensee, as the case may
be, is a corporation duly organized and validly existing and in good
standing under the laws of its jurisdiction of incorporation and is
duly qualified and authorized to do business wherever the nature of its
activities or properties requires such qualification or authorization.
8.4 No Government Approvals Needed. No registration with or
approval of any government agency or commission of any jurisdiction is
necessary for the execution, delivery or performance by it of any of
the terms of this Agreement, or for the validity and enforceability
hereof or with respect to its obligations hereunder.
-8-
<PAGE> 21
8.5 No Provisions Contravened. There is no provision in its
company or corporate charter, articles of incorporation, By-Laws or
equivalent governing documents, and no provision in any existing
mortgage, indenture, contract or agreement binding on it which would be
contravened by the execution, delivery or performance by it of this
Agreement.
8.6 No Consent of Third Parties Needed. No consent of any
trustee or holder of any of its indebtedness is or shall be re-
quired as a condition to the validity of this Agreement.
8.7 No Law Contravened. Neither its execution nor its delivery of
this Agreement nor its fulfillment of or compliance with the terms and
provisions hereof shall contravene any provision of the laws of any
jurisdiction, including, without limitation, any statute, rule,
regulation, judgment, decree, order, franchise or permit applicable to
it.
8.8 Licensed Technology. Licensor has the right to use, and to
grant licenses to use, the Licensed Technology. Licensor has not, and
shall not in the future during the term of this Agreement, grant rights
or licenses to any other person or entity which prevents Licensee from
practicing under the Licensed Technology hereunder.
8.9 Validity of Patents. Licensor is aware of no patents or any
other prior art which invalidate or would invalidate any of the patents
included in the Licensed Technology, or issuance of any of those
patents in any country. To Licensor's knowledge, each patent included
in the Licensed Technology was validly issued under the laws of the
country which issued it.
8.10 Continued Effect of Representations and Warranties. It
covenants and agrees that its representations and warranties contained
in this Agreement shall remain true in all respects for a period of one
year after the Effective Date with the same effect as though such
representations and warranties had been made on and as of each such
subsequent date.
9. TERMINATION OR EXPIRATION.
9.1 Termination. The term of this Agreement shall commence on the
date hereof and shall expire six (6) months therefrom. From and after
the termination of this Agreement, Licensee shall not use any of the
Licensed Technology for any purpose.
9.2 Survival. The obligations of the parties pursuant to Article 6
and Exhibit C of this Agreement shall survive any termination or
expiration of this Agreement.
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<PAGE> 22
10. MISCELLANEOUS.
10.1 Assignments. This Agreement shall be binding upon, and inure
to the benefit of, Licensor and Licensee and their respective
successors and permitted assigns. Neither party hereto may assign
rights or obligations hereunder except as permitted by Section 2.3.
10.2 Governing Law. This Agreement shall be governed, interpreted
and construed in accordance with the laws of the Commonwealth of
Massachusetts applicable to agreements made and to be fully performed
therein.
10.3 Waiver. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other
breaches of the same or other provisions of this Agreement.
10.4 Relationship of the Parties. The parties hereto are
independent contractors. Nothing herein contained shall be deemed to
create a joint venture, agency or partnership relationship between the
parties hereto. Neither party shall have any power to enter into any
contracts or commitments in the name of, or on behalf of, the other
party, or to bind the other party in any respect whatsoever.
10.5 Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request,
demand, claim or other communication hereunder shall be deemed duly
delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service,
in each case to the intended recipient as set forth below:
If to the Licensor: Copy to:
Penril Datacomm Networks, Inc. Benesch, Friedlander, Coplan &
1300 Quince Orchard Boulevard Aronoff, P.L.L.
Gaithersburg, Maryland 20878 2300 BP America Building
Attn.: Chairman 200 Public Square
Telecopier: (301) 921-9149 Cleveland, Ohio 44114-2378
Attn.: Irv Berliner, Esq.
Telecopier: (216) 363-4588
If to the Licensee: Copy to:
Bay Networks, Inc. Bay Networks, Inc.
4401 Great America Parkway 4401 Great America Parkway
Santa Clara, California 95052 Santa Clara, California 95052
Attn.: President Attn.: Montgomery Kersten, Esq.
Telecopier: (408) 764-1799 Telecopier: (408) 764-1991
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<PAGE> 23
Any party may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice, request, demand,
claim or other communication shall be deemed to have been duly given
unless and until it actually is received by the party for whom it is
intended. Any party may change the address to which notices, requests,
demands, claims and other communications hereunder are to be delivered
by giving the other party notice in the manner set forth in this
Agreement.
10.6 Entire Understanding. This Agreement embodies the entire
understanding between the parties relating to the subject matter hereof
and there are no prior representations, warranties or agreements
between the parties, whether written or oral, not contained in this
Agreement.
10.7 Invalidity. If any provision of this Agreement is declared
invalid or unenforceable by a court having competent jurisdiction, it
is mutually agreed that this Agreement shall endure except for the part
declared invalid or unenforceable by order of such court. The parties
shall consult and use their best efforts to agree upon a valid and
enforceable provision which shall be a reasonable substitute for such
invalid or unenforceable provision in light of the intent of this
Agreement.
10.8 Amendments. Any amendment or modification of any provision of
this Agreement must be in writing, dated and signed by both parties
hereto.
10.9 Fees Payable. Licensor and Licensee acknowledge that there
are no broker's commissions, finder's fees or other amounts payable
with regard to this transaction, and Licensor and Licensee agree to
indemnify and hold the other harmless from and against all liabilities,
claims, demands, damages or costs of any kind arising from or connected
with any broker's or finder's commission, fee or other amount claimed
to be due any person arising from the indemnitor's conduct with respect
to this Agreement and the transactions contemplated herein.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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<PAGE> 24
10.11 Exhibits. All exhibits referred to in this Agreement
are attached hereto and incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be created on the day and year first above written.
PENRIL DATACOMM NETWORKS, INC., as
Licensor
By_______________________________
Name:
Title:
BAY NETWORKS, INC., as Licensee
By_______________________________
Name:
Title:
License Agreement
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<PAGE> 25
EXHIBITS
A Products
B-1 Patents and Patent Applications
B-2 Copyrights
B-3 Mask Work Rights
C Technical Information
D List of Five Employees
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<PAGE> 26
Exhibit A
Products
Licensor will develop for Licensee an 8 Digital Modem Card that
conforms to the attached "V.34+ Xylogics Octal Modem Card Statement of
Work". Such modem architecture shall be compatible with and deliver the
functions and capabilities contained within such Statement of Work,
which is attached herein as part of this Exhibit A.
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<PAGE> 27
Exhibit B-1, B-2, B-3
B1: Patents and Patent Applications
B2: Copyright Rights
None
B3: Mask Work Rights
None
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<PAGE> 28
EXHIBIT C
Technical Information
Licensor shall provide Licensee with all Technical Information,
including but not limited to source code, as it pertains to Licensor's
existing ALX V.34 modems, digital modem architectures, T1 channel bank
hardware and software architectures, Series 6000 software architecture,
and NETMUX hardware and software architectures. Licensor shall update
such information at the end of each quarterly period of this Agreement
by supplying Licensee with updated materials for those items that
Licensor has changed. Notwithstanding the foregoing, such Technical
Information shall not include Technical Information pertaining to
custom work being performed specifically on behalf of another customer
of Licensor.
Upon the expiration or earlier termination of this Agreement, each
party shall return to the other all Technical Information and all
copies thereof, and shall not at any time thereafter use any of such
Technical Information for any purpose.
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<PAGE> 29
Exhibit D
List of Five Employees
Jonathan Sieg
Dave Burger
Michael Livshits
Ali Hashmi
Alex Purkovic
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<PAGE> 30
PLAN AND AGREEMENT OF MERGER
This Plan and Agreement of Merger entered into as of June 16, 1996
by and among Bay Networks, Inc., a Delaware corporation (the "Buyer"),
Beta Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Buyer (the "Transitory Subsidiary"), and Penril
DataComm Networks, Inc., a Delaware corporation (the "Company"). The
Buyer, the Transitory Subsidiary and the Company are referred to
collectively in this Agreement as the "Parties".
This Agreement contemplates a merger of the Transitory Subsidiary
into the Company, which merger will qualify as a tax-free
reorganization described in Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"). In such merger, the
stockholders of the Company will receive solely voting capital stock of
the Buyer in exchange for their capital stock of the Company.
The Parties acknowledge that in the event that the transactions
contemplated by this Agreement are not consummated, the Company would
experience a substantial loss and hardship; therefore, to minimize the
potential for such (i) failure to consummate the transactions and (ii)
loss and hardship, the Parties have knowingly agreed not to include in
this Agreement many otherwise normal conditions to closing the
transaction, including but not limited to, a condition that there shall
be no material adverse change prior to the Effective Time (as defined
below) to the Company, its business, financial condition, results of
operations, or prospects, to the Company's industry or to the general
business conditions.
Now, therefore, in consideration of the representations,
warranties and covenants in this Agreement contained, the Parties agree
as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of
this Agreement, the Transitory Subsidiary shall merge with and into the
Company (with such merger referred to in this Agreement as the
"Merger") at the Effective Time (as defined below). From and after the
Effective Time, the separate corporate
<PAGE> 31
existence of the Transitory Subsidiary shall cease and the Company
shall continue as the surviving corporation in the Merger (the
"Surviving Corporation"). The "Effective Time" shall be the time at
which the Company and the Transitory Subsidiary file the certificate of
merger or other appropriate documents prepared and executed in
accordance with the relevant provisions of the Delaware General
Corporation Law (the "Certificate of Merger") with the Secretary of
State of the State of Delaware. The Merger shall have the effects set
forth in Section 259 of the Delaware General Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at a mutually agreed
upon location, commencing at 9:00 a.m. local time on a mutually
agreeable date as soon as practicable after the date on which all of
the conditions to the obligations of the Parties to consummate the
transactions contemplated by this Agreement have been satisfied or
waived (the "Closing Date"), but in no event later than 150 days from
the date hereof.
1.3 Actions at the Closing. At the Closing, (a) the Company shall
deliver to the Buyer and the Transitory Subsidiary the various
certificates, instruments and documents referred to in Section 5.2, (b)
the Buyer and the Transitory Subsidiary shall deliver to the Company
the various certificates, instruments and documents referred to in
Section 5.3, (c) the Company and the Transitory Subsidiary shall file
with the Secretary of State of the State of Delaware the Certificate of
Merger, and (d) the Buyer shall deliver a certificate for the Merger
Shares (as defined below) to a bank, trust company or other entity
reasonably satisfactory to the Company appointed by the Buyer to act as
the exchange agent (the "Exchange Agent") in accordance with Section
1.7.
1.4 Additional Action. The Surviving Corporation may, at any time
after the Effective Time, take any action, including executing and
delivering any document, in the name and on behalf of either the
Company or the Transitory Subsidiary, in order to consummate the
transactions contemplated by this Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of any Party or the holder of
any of the following securities:
(a) Each share of common stock, $0.01 par value per share, of
the Company ("Company Shares") issued and outstanding immediately prior
to the Effective Time (other than Company Shares owned beneficially by
the Buyer or the Transitory Subsidiary,
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<PAGE> 32
Dissenting Shares (as defined below) and Company Shares held in the
Company's treasury) shall be converted into and represent the right to
receive (subject to the provisions of Section 1.9) such number of
shares of common stock, $0.01 par value per share, of the Buyer ("Buyer
Common Stock") as is equal to the Conversion Ratio (as defined below).
The "Conversion Ratio" shall mean the number determined by dividing (i)
$10.00 (ii) by the Buyer Stock Market Price. The "Buyer Stock Market
Price" shall mean the average of the closing prices of the Buyer's
Common Stock on the New York Stock Exchange (the "NYSE") five (5)
consecutive trading days immediately preceding the second business day
immediately preceding to the Closing Date. Stockholders of record of
the Company ("Company Stockholders") shall be entitled to receive
immediately all of the shares of Buyer Common Stock into which their
Company Shares were converted pursuant to this Section 1.5(a) (the
"Merger Shares").
(b) Each Company Share held in the Company's treasury
immediately prior to the Effective Time and each Company Share owned
beneficially by the Buyer or the Transitory Subsidiary shall be
cancelled and retired without payment of any consideration therefor.
(c) Each share of common stock, $0.01 par value per share, of
the Transitory Subsidiary issued and outstanding immediately prior to
the Effective Time shall be converted into and thereafter evidence one
share of common stock, $0.01 par value per share, of the Surviving
Corporation.
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means
Company Shares held as of the Effective Time by a Company Stockholder
who has not voted such Company Shares in favor of the adoption of this
Agreement and the Merger and with respect to which appraisal shall have
been duly demanded and perfected in accordance with Section 262 of the
Delaware General Corporation Law and not effectively withdrawn or
forfeited prior to the Effective Time. Dissenting Shares shall not be
converted into or represent the right to receive Merger Shares, unless
such Company Stockholder shall have forfeited his right to appraisal
under the Delaware General Corporation Law or withdrawn, with the
consent of the Company, his demand for appraisal. If such Company
Stockholder has so forfeited or withdrawn his right to appraisal of
Dissenting Shares, then (i) as of the occurrence of such event, such
holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive the Merger
Shares issuable in respect of such Company Shares pursuant to Section
1.5(a), and (ii) promptly following the
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<PAGE> 33
occurrence of such event, the Buyer shall deliver to the Exchange Agent
a certificate representing the Merger Shares to which such holder is
entitled pursuant to Section 1.5(a).
(b) The Company shall give the Buyer (i) prompt notice of any
written demands for appraisal of any Company Shares, withdrawals of
such demands, and any other instruments that relate to such demands
received by the Company and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal
under the Delaware General Corporation Law. The Company shall not,
except with the prior written consent of the Buyer, make any payment
with respect to any demands for appraisal of Company Shares or offer to
settle or settle any such demands.
1.7 Exchange of Shares
(a) Prior to the Effective Time, the Buyer shall appoint the
Exchange Agent to effect the exchange for the Merger Shares of
certificates that, immediately prior to the Effective Time, represented
Company Shares converted into Merger Shares pursuant to Section 1.5
(including any Company Shares referred to in the last sentence of
Section 1.6(a)) ("Certificates"). On the Closing Date, the Buyer shall
deliver to the Exchange Agent, in trust for the benefit of holders of
Certificates, a stock certificate (issued in the name of the Exchange
Agent or its nominee) representing the Merger Shares, as described in
Section 1.5(a). As soon as practicable after the Effective Time, the
Buyer shall cause the Exchange Agent to send a notice and a transmittal
form to each holder of a Certificate (other than those surrendered and
paid for at the Closing) advising such holder of the effectiveness of
the Merger and the procedure for surrendering to the Exchange Agent
such Certificate in exchange for the Merger Shares issuable pursuant to
Section 1.5(a). Each holder of a Certificate, upon proper surrender
thereof to the Exchange Agent in accordance with the instructions in
such notice, shall be entitled to receive in exchange therefor (subject
to any taxes required to be withheld) the Merger Shares issuable
pursuant to Section 1.5(a). Until properly surrendered, each such
Certificate shall be deemed for all purposes to evidence only the right
to receive the Merger Shares issuable pursuant to Section 1.5(a).
Holders of Certificates shall not be entitled to receive certificates
for the Merger Shares to which they would otherwise be entitled until
such Certificates are properly surrendered.
(b) If any Merger Shares are to be issued in the name of a
person other than the person in whose name the Certificate surrendered
in exchange therefor is registered, it shall be a condition to the
issuance of such Merger Shares that (i) the Certificate so surrendered
shall be transferable, and shall be
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<PAGE> 34
properly assigned, endorsed or accompanied by appropriate stock powers,
(ii) such transfer shall otherwise be proper and (iii) the person
requesting such transfer shall pay to the Exchange Agent any transfer
or other taxes payable by reason of the foregoing or establish to the
satisfaction of the Exchange Agent that such taxes have been paid or
are not required to be paid. Notwithstanding the foregoing, neither the
Exchange Agent nor any Party shall be liable to a holder of Company
Shares for any Merger Shares issuable to such holder pursuant to
Section 1.5(a) that are delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed, the
Buyer shall issue in exchange for such lost, stolen or destroyed
Certificate the Merger Shares issuable in exchange therefor pursuant to
Section 1.5(a). The Board of Directors of the Buyer may, in its
discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificate to give
the Buyer a bond in such sum as it may reasonably direct as indemnity
against any claim that may be made against the Buyer with respect to
the Certificate alleged to have been lost, stolen or destroyed.
(d) Promptly following the date which is six months after the
Closing Date, the Exchange Agent shall return to the Buyer all Merger
Shares in its possession, and the Exchange Agent's duties shall
terminate. Thereafter, each holder of a Certificate may surrender such
Certificate to the Buyer and, subject to applicable abandoned property,
escheat and similar laws, receive in exchange therefor the Merger
Shares issuable with respect thereto pursuant to Section 1.5(a).
1.8 Dividends. No dividends or other distributions that are
payable to the holders of record of Buyer Common Stock as of a date on
or after the Closing Date shall be paid to former Company Stockholders
entitled by reason of the Merger to receive Merger Shares until such
holders surrender their Certificates in accordance with Section 1.7.
Upon such surrender, the Buyer shall pay or deliver to the persons in
whose name the certificates representing such Merger Shares are issued
any dividends or other distributions that are payable to the holders of
record of Buyer Common Stock as of a date on or after the Closing Date
and which were paid or delivered between the Effective Time and the
time of such surrender; provided that no such person shall be entitled
to receive any interest on such dividends or other distributions.
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<PAGE> 35
1.9 Fractional Shares. No certificates or scrip representing
fractional Merger Shares shall be issued to former Company Stockholders
upon the surrender for exchange of Certificates, and such former
Company Stockholders shall not be entitled to any voting rights, rights
to receive any dividends or distributions or other rights as a
stockholder of the Buyer with respect to any fractional Merger Shares
that would otherwise be issued to such former Company Stockholders. In
lieu of any fractional Merger Shares that would otherwise be issued,
each former Company Stockholder that would have been entitled to
receive a fractional Merger Share shall, upon proper surrender of such
person's Certificates, receive a cash payment equal to the closing
price per share of the Buyer Common Stock on the NYSE, on the business
day immediately preceding the business day prior to the Closing Date,
multiplied by the fraction of a share that such Company Stockholder
would otherwise be entitled to receive. The fractional share interests
of each Company Stockholder will be aggregated, and no Company
Stockholder will receive cash in an amount equal to or greater than the
value of one full share of Buyer Common Stock.
1.10 Options and Rights.
(a) As of the Effective Time, all obligations of the Company
with respect to options to purchase Company Shares issued by the
Company to the employees of the Company listed on Schedule 1.10
pursuant to its stock option plans ("Options"), whether vested or
unvested, shall be assumed by the Buyer.
(b) Immediately after the Effective Time, each Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire, on the same terms and conditions as
were applicable under such Option at the Effective Time, such number of
shares of Buyer Common Stock as is equal to the number of Company
Shares subject to the unexercised portion of such Option multiplied by
the Conversion Ratio (with any fraction resulting from such
multiplication to be rounded up or down to the nearest whole number or,
in the case of .5, to the nearest odd number). The exercise price per
share of each such Option shall be equal to the exercise price of such
Option immediately prior to the Effective Time, divided by the
Conversion Ratio. The term, exercisability, vesting schedule, status as
an "incentive stock option" under Section 422 of the Code, if
applicable, and all of the other terms of the Options shall otherwise
remain unchanged. In addition to the foregoing, the applicable
provisions of each award agreement for Options to be outstanding after
the Effective Time will be equitably adjusted after the Spin-off
Transaction and prior to the Closing by the Company's Board of
Directors to reflect the Spin-off Transaction (as defined herein).
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<PAGE> 36
(c) As soon as practicable after the Effective Time, the
Buyer or the Surviving Corporation shall deliver to the holders of
Options appropriate notices setting forth such holders' rights pursuant
to such Options, as amended by this Section 1.10, and the agreements
evidencing such Options shall continue in effect on the same terms and
conditions (subject to the amendments provided for in this Section 1.10
and such notice).
(d) The Buyer shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Buyer Common
Stock for delivery upon exercise of the Options. As soon as practicable
after the Effective Time, the Buyer shall file a Registration Statement
on Form S-8 (or any successor form) under the Securities Act of 1933,
as amended (the "Securities Act") with respect to all shares of Buyer
Common Stock subject to such Options that may be registered on a Form
S-8, and shall use its best efforts to maintain the effectiveness of
such Registration Statement for so long as such Options remain
outstanding.
(e) The Company shall obtain, prior to the Closing, the
consent from each holder of an Option to the adjustment or amendment,
as the case may be, of such Option or Right pursuant to this Section
1.10 (unless such consent is not required under the terms of the
applicable agreement, instrument or plan).
1.11 Certificate of Incorporation. The Certificate of
Incorporation of the Surviving Corporation shall be the same as the
Certificate of Incorporation of the Transitory Subsidiary immediately
prior to the Effective Time, except that the name of the corporation
set forth therein shall be changed to the name of the Company.
1.12 By-laws. The By-laws of the Surviving Corporation shall be
the same as the By-laws of the Transitory Subsidiary immediately prior
to the Effective Time, except that the name of the corporation set
forth therein shall be changed to the name of the Company.
1.13 Directors and Officers. The directors of the Transitory
Subsidiary shall become the directors of the Surviving Corporation as
of the Effective Time. The officers of the Company shall remain as
officers of the Surviving Corporation after the Effective Time,
retaining their respective positions, except as specified by the Buyer
pursuant to Section 5.2(g).
1.14 No Further Rights. From and after the Effective Time, no
Company Shares shall be deemed to be outstanding, and holders of
Certificates shall cease to have any rights with respect thereto,
except as provided in this Agreement or by law.
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1.15 Closing of Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of
Company Shares shall thereafter be made. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange
Agent, they shall be cancelled and exchanged for Merger Shares in
accordance with Section 1.5(a), subject to applicable law in the case
of Dissenting Shares.
1.16 Tax-Free Reorganization. The Parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the
Merger in accordance with the provisions of Section 368(a)(1)(B) of the
Code. The Buyer represents and covenants that:
(a) The Surviving Corporation will pay its dissenting
stockholders the value of their Dissenting Shares out of its own funds.
No funds will be supplied for that purpose, directly or indirectly, by
the Buyer, nor will the Buyer directly or indirectly reimburse the
Surviving Corporation for any payments for Dissenting Shares.
(b) The Buyer presently intends, and at the Effective Time it
will intend, to continue the Company's historic business or use a
significant portion of the Company's historic business assets in a
business.
(c) The Buyer has no plan or intention to liquidate the
Surviving Corporation; to merge the Surviving Corporation into another
corporation; to cause the Surviving Corporation to sell or otherwise
dispose of any of its assets, except for dispositions made in the
ordinary course of the Surviving Corporation's business; or to sell or
otherwise dispose of any of the Company Shares acquired in the Merger,
except for transfers described in Section 368(a)(2)(C) of the Code.
(d) The Buyer has no plan or intention to reacquire any Buyer
Common Stock issued in the Merger.
(e) Neither the Buyer nor the Transitory Subsidiary is an
investment company as defined in Section 368(a)(2)(F)(iii) and (iv)) of
the Code.
(f) The payment of cash in lieu of fractional shares of Buyer
Common Stock is solely for the purpose of avoiding the expense and
inconvenience to the Buyer of issuing fractional shares and shall not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the transaction to the Company
Stockholders instead of issuing fractional shares of Buyer Common Stock
will not exceed one
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percent of the total consideration that will be issued in the Merger to
the Company Stockholders in exchange for their Company Shares. The
fractional share interests of each Company Stockholder will be
aggregated, and no Company Stockholder will receive cash in an amount
equal to or greater than the value of one full share of Buyer Common
Stock.
(g) The Transitory Subsidiary is solely and directly
owned by the Buyer.
(h) Neither the Buyer nor an affiliate of the Buyer has
acquired Company Shares since June 1, 1991. The Buyer and its
affiliates own no Company Shares. During the period from the date of
this Agreement to the Effective Time, other than pursuant to this
Agreement, neither the Buyer nor any affiliate of the Buyer shall
acquire any Company Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the
statements contained in this Article II are true and correct, except as
set forth in the disclosure schedule attached hereto (the "Disclosure
Schedule"). The Disclosure Schedule shall be initialed by the Parties
and shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article II, and the disclosures
in any paragraph of the Disclosure Schedule shall qualify only the
corresponding paragraph in this Article II.
2.1 Organization, Qualification and Corporate Power. The Company
is a corporation duly organized, validly existing and in corporate and
tax good standing under the laws of the state of its incorporation. The
Company is duly qualified to conduct business and is in corporate and
tax good standing under the laws of each jurisdiction in which the
nature of the business described on Section 2.1 of the Disclosure
Schedule (the "Modem Business") or the ownership or leasing of its
properties relating to the Modem Business requires such qualification
except where the failure to be so qualified would not have a material
adverse effect on the Company and its Modem Subsidiaries (as defined
below) taken as a whole. The Company has all requisite corporate power
and authority to carry on the Modem Business in which it is engaged and
to own and use the properties owned and used by it in the Modem
Business. The Company has furnished to the Buyer true and complete
copies of its Certificate of Incorporation and By-laws, each as amended
and as in effect on the date hereof. The Company
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is not in violation of any provision of its Certificate of
Incorporation or By-laws.
2.2 Capitalization. The authorized capital stock of the Company
consists of 20,100,000 shares, comprised of 20,000,000 shares of common
stock, $.01 par value per share, of which 10,543,369 shares are issued
and outstanding and no shares are held in the treasury of the Company,
all as of June 6, 1996, and 100,000 shares of preferred stock, $0.01
par value per share, of which no shares are designated or outstanding.
Section 2.2 of the Disclosure Schedule sets forth a complete and
accurate list as of June 6, 1996, of (i) all stockholders of record of
the Company, indicating the number of Company Shares held by each
stockholder, and (ii) all holders of Options, indicating the number of
Company Shares subject to Options held by such holders. All of the
issued and outstanding Company Shares are, and all Company Shares that
may be issued upon exercise of Options in accordance with the terms
thereof will be, duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. There are no
outstanding or authorized options, warrants, rights, agreements or
commitments to which the Company is a party or which are binding upon
the Company providing for the issuance, disposition or acquisition of
any of its capital stock, other than as listed in Section 2.2 of the
Disclosure Schedule. There are no outstanding or authorized stock
appreciation, phantom stock or similar rights with respect to the
Company. Except pursuant to this Agreement or the Affiliate Agreement
(as defined herein), there are no agreements, voting trusts, proxies,
or understandings with respect to the voting, or registration under the
Securities Act, of any Company Shares other than as set forth in
Section 2.2 of the Disclosure Schedule. All of the issued and
outstanding Company Shares were issued in compliance with applicable
federal and state securities laws.
2.3 Authorization of Transaction. The Company has all requisite
power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this
Agreement and, subject to the adoption of this Agreement and the
approval of the Merger by a majority of the votes represented by the
outstanding Company Shares entitled to vote on this Agreement and the
Merger (the "Requisite Stockholder Approval"), the performance by the
Company of this Agreement and the consummation by the Company of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action on the part of the
Company. This Agreement has been duly and validly executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms.
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2.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities
laws, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act"), the filing of the Certificate of
Merger as required by the Delaware General Corporation Law, and the
filing of requisite forms relating to the transfer of certain
intellectual property rights of the Company (as contemplated by this
Agreement) neither the execution and delivery of this Agreement by the
Company, nor the consummation by the Company of the transactions
contemplated by this Agreement (and, for clauses (b) and (d) of this
Section 2.4, other than Spin-off Transaction), will (a) conflict with
or violate any provision of the charter or By-laws of the Company, (b)
require on the part of the Company or any corporation with respect to
which the Company, directly or indirectly, has the power to vote or
direct the voting of sufficient securities to elect a majority of the
directors (a "Subsidiary") any filing with, or any permit,
authorization, consent or approval of, any court, arbitrational
tribunal, administrative agency or commission or other governmental or
regulatory authority or agency (a "Governmental Entity"), other than
any filing, permit, authorization, consent or approval which if not
obtained or made would not have a material adverse effect on the
assets, business, financial condition, results of operations or future
prospects of the Company and its Subsidiaries relating to the Modem
Business, taken as a whole, or on the ability of the Parties to
consummate the transactions contemplated by this Agreement, (c), except
as set forth in Section 2.4 to the Disclosure Schedule, conflict with,
result in a breach of, constitute (with or without due notice or lapse
of time or both) a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, lease,
sublease, license, sublicense, franchise, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security
Interest (as defined below) or other arrangement to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary
is bound or to which any of their assets is subject, other than any
conflict, breach, default, acceleration, termination, modification or
cancellation which individually or in the aggregate would not have a
material adverse effect on the assets, business, financial condition,
results of operations or future prospects of the Company and its
Subsidiaries, taken as a whole, or on the ability of the Parties to
consummate the transactions contemplated by this Agreement, (d) result
in the imposition of any Security Interest upon any assets of the
Company or any Subsidiary relating to the Modem Business or (e) violate
any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, any
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Subsidiary or any of their properties or assets relating to the Modem
Business. For purposes of this Agreement, "Security Interest" means any
mortgage, pledge, security interest, encumbrance, charge, or other lien
(whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under
worker's compensation, unemployment insurance, social security,
retirement, and similar legislation, and (iii) liens on goods in
transit incurred pursuant to documentary letters of credit, in each
case arising in the ordinary course of business consistent with past
custom and practice (including with respect to frequency and amount)
("Ordinary Course of Business") of the Company and not material to the
Company.
2.5 Subsidiaries. Section 2.5 of the Disclosure Schedule lists
each Subsidiary and each Modem Subsidiary and sets forth for each Modem
Subsidiary (a) its jurisdiction of incorporation, (b) the number of
shares of authorized capital stock of each class of its capital stock,
(c) the number of issued and outstanding shares of each class of its
capital stock, the names of the holders thereof and the number of
shares held by each such holder, (d) the number of shares of its
capital stock held in treasury, and (e) its directors and officers.
Each Modem Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation. Each Modem Subsidiary is duly qualified to conduct
business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification
except where the failure to be so qualified would not have a material
adverse effect on the Company and the Modem Subsidiaries taken as a
whole. Each Modem Subsidiary has all requisite corporate power and
authority to carry on the Modem Business in which it is engaged and to
own and use the properties owned and used by it in the Modem Business.
The Company has delivered or made available to the Buyer correct and
complete copies of the charter and By-laws of each Modem Subsidiary, as
amended to date. No Modem Subsidiary is in violation of any provision
of its charter or By-laws. All of the issued and outstanding shares of
capital stock of each Modem Subsidiary are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights. All
shares of each Modem Subsidiary that are held of record or owned
beneficially by either the Company or any Modem Subsidiary are held or
owned free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws or as
set forth in Section 2.5 of the Disclosure Schedule), claims, Security
Interests, options, warrants, rights, contracts, calls, commitments,
equities and demands. There are no outstanding or authorized options,
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warrants, rights, agreements or commitments to which the Company or any
Modem Subsidiary is a party or which are binding on any of them
providing for the issuance, disposition or acquisition of any capital
stock of any Modem Subsidiary. There are no outstanding stock
appreciation, phantom stock or similar rights with respect to any Modem
Subsidiary. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of any capital stock of any
Modem Subsidiary, except as set forth in Section 2.5 of the Disclosure
Schedule. The Company does not control directly or indirectly or have
any direct or indirect equity participation in any corporation,
partnership, trust, or other business association which is not a
Subsidiary.
2.6 Reports and Financial Statements. The Company has previously
furnished or made available to the Buyer complete and accurate copies,
as amended or supplemented, of its (a) Annual Report on Form 10-K for
the fiscal years ended July 31, 1994, and July 31, 1995, as filed with
the Securities and Exchange Commission (the "SEC"), (b) proxy
statements relating to all meetings of its stockholders (whether annual
or special) since July 31, 1994, and (c) all other reports or
registration statements, other than Registration Statements on Form
S-8, filed by the Company with the SEC since July 31, 1994 (such annual
reports, proxy statements, registration statements and other filings,
together with any amendments or supplements thereto, are collectively
referred to in this Agreement as the "Company Reports"). The Company
Reports constitute all of the documents filed or required to be filed
by the Company with the SEC since July 31, 1994, other than any
Registration Statement on Form S-8. As of their respective dates, the
Company Reports filed since July 31, 1994, did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
The audited financial statements and unaudited interim financial
statements of the Company included in the Company Reports filed since
July 31, 1994 (together, the "Financial Statements"), (i) comply as to
form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto, (ii) have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered thereby (except as may
be indicated therein or in the notes thereto, and in the case of
quarterly financial statements, as permitted by Form 10-Q under the
Exchange Act), (iii) fairly present the consolidated financial
condition, results of operations and cash flows of the Company and the
Subsidiaries as of the respective dates thereof and for the periods
referred to
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therein, and (iv) are consistent with the books and records of the
Company and the Subsidiaries.
2.7 Undisclosed Liabilities. As of the date hereof, none of the
Company and its Subsidiaries has any material liability (whether known
or unknown, whether absolute or contingent, whether liquidated or
unliquidated and whether due or to become due), except for (a)
liabilities shown on the balance sheet included in the Company's most
recent Quarterly Report on Form 10-Q filed with the SEC on March 15,
1996 (the "Most Recent Balance Sheet"), (b) liabilities which have
arisen since January 31, 1996, in the Ordinary Course of Business, (c)
contractual liabilities incurred in the Ordinary Course of Business
which are not required by GAAP to be reflected on a balance sheet and
(d) liabilities disclosed in Section 2.18 of the Disclosure Schedule.
As used in this Section 2.7, "material liability" is deemed to mean a
liability in excess of $100,000.
2.8 Tax Matters.
(a) Each of the Company and the Subsidiaries has filed all
material Tax Returns (as defined below) that it was required to file
(taking into account extensions) and to the knowledge of the Company no
material position is reflected in a Tax Return for which there was not
substantial authority (as defined in Section 6662 of the Code) or
comparable foreign, federal, state or local law. Each of the Company
and the Subsidiaries has paid all Taxes (as defined below) that are
shown to be due on any such Tax Returns. The unpaid Taxes of the
Company and the Subsidiaries for tax periods through the date of the
Most Recent Balance Sheet are appropriately accrued or reserved for on
the Most Recent Balance Sheet. Neither the Company nor any Subsidiary
has any actual or potential liability for any Tax obligation of any
taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company or any
Subsidiary during a prior period) other than the Company and the
Subsidiaries. All material Taxes that the Company or any Subsidiary is
or was required by law to withhold or collect have been duly withheld
or collected and, to the extent required, have been paid to the proper
Governmental Entity. For purposes of this Agreement, "Taxes" means all
taxes, charges, fees, levies or other similar assessments or
liabilities, including without limitation income, gross receipts, ad
valorem, premium, value-added, excise, real property, personal
property, sales, use, transfer, withholding, employment, payroll and
franchise taxes imposed by the United States of America or any state,
local or foreign government, or any agency thereof, or other political
subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting
from,
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attributable to or incurred in connection with any tax or any contest
or dispute thereof. For purposes of this Agreement, "Tax Returns" means
all reports, returns, declarations, statements or other information
required to be supplied to a taxing authority in connection with Taxes.
(b) The Company has delivered to the Buyer correct and
complete copies of all federal income Tax Returns, examination reports
and statements of deficiencies assessed against or agreed to by any of
the Company or any Subsidiary between January 1, 1989 and the date
hereof. The federal income Tax Returns of the Company have been audited
by the Internal Revenue Service (the "IRS") or are closed by the
applicable statute of limitations for all taxable years through July
31, 1986. As of the date hereof, no federal or state income tax
examination or audit of any Tax Returns of the Company or any
Subsidiary by any Governmental Entity is currently in progress or, to
the knowledge of the Company and the Subsidiaries, threatened or
contemplated. As of the date hereof, neither the Company nor any
Subsidiary has waived any statute of limitations with respect to taxes
or agreed to an extension of time with respect to a tax assessment or
deficiency.
(c) Neither the Company nor any Subsidiary is a "consenting
corporation" within the meaning of Section 341(f) of the Code and none
of the assets of the Company or the Subsidiaries are subject to an
election under Section 341(f) of the Code. Neither the Company nor any
Subsidiary has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
Neither the Company nor any Subsidiary is a party to any Tax allocation
or sharing agreement.
(d) Neither the Company nor any Subsidiary is or has ever
been a member of an "affiliated group" of corporations (within the
meaning of Section 1504 of the Code), other than a group of which only
the Company and the Subsidiaries are members. Neither the Company nor
any Subsidiary has made an election under Treasury Reg. Section
1.1502-20(g). Neither the Company nor any Subsidiary is or has been
required to make a basis reduction pursuant to Treasury Reg. Section
1.1502-20(b) or Treasury Reg. Section 1.337(d)-2T(b).
2.9 Assets. Each of the Company and the Subsidiaries owns or
leases all tangible assets necessary for the conduct of the Modem
Business as presently conducted and as presently proposed by the
Company to be conducted. Each such tangible asset is free from material
defects, has been maintained in accordance with normal industry
practice, is in good operating condition and
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repair (subject to normal wear and tear) and is suitable for the
purposes for which it presently is used. Except as set forth in
Section 2.9 of the Disclosure Schedule, no material asset of the
Company (tangible or intangible) is subject to any Security Interest.
2.10 Owned Real Property. Neither the Company nor any Modem
Subsidiary owns any real property.
2.11 Intellectual Property.
(a) Each of the Company and the Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights under all
patents and patent applications listed in Section 2.11 of the
Disclosure Schedule and the right to use all trademarks, trade names,
service marks, copyrights, and any applications for such trademarks,
trade names, service marks and copyrights, schematics, technology,
know-how, computer software programs or applications and tangible or
intangible proprietary information or material listed in Section 2.11
of the Disclosure Schedule that are used to conduct its Modem Business
as currently conducted or as currently planned by the Company to be
conducted (collectively, "Intellectual Property") and, except as
qualified by or disclosed in Section 2.11 of the Disclosure Schedule,
is aware of no intellectual property right of any third party that may
prevent the Company or its Subsidiaries from conducting its Modem
Business as currently conducted or as planned by the Company to be
conducted. Section 2.11 of the Disclosure Schedule lists (i) all
patents and patent applications and all trademarks, registered
copyrights, trade names and service marks which are both owned by and
used in the Modem Business, including the jurisdictions in which each
such Intellectual Property right has been issued or registered or in
which any such application for such issuance or registration has been
filed, (ii) all material written licenses, sublicenses and other
agreements to which the Company or a Subsidiary is a party and pursuant
to which any person is authorized to use any Intellectual Property
rights, and (iii) all material written licenses, sublicenses and other
agreements as to which the Company or a Subsidiary is a party and
pursuant to which the Company or a Subsidiary is authorized to use any
third party patents, trademarks or copyrights, including software,
which are used in the Modem Business or which form a part of any
product or service relating to the Modem Business ("Third Party
Intellectual Property Rights"). Neither the Company nor any Subsidiary
is a party to any oral license, sublicense or agreement which, if
reduced to written form, would be required to be listed in Section 2.11
of the Disclosure Schedule under the terms of this Section 2.11.
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(b) Neither the Company nor any of the Subsidiaries is, nor
will any of them be as a result of the execution and delivery of this
Agreement or the performance of the Company's obligations under this
Agreement, knowingly infringing upon any intellectual property rights
of others or in breach of any license, sublicense or other agreement
relating to the Intellectual Property or Third Party Intellectual
Property Rights, except as qualified by or disclosed in Section 2.11 of
the Disclosure Schedule.
(c) Except as set forth in Section 2.11 of the Disclosure
Schedule, neither the Company nor any of the Subsidiaries has been
named in any suit, action or proceeding which involves a claim of
infringement of any Intellectual Property right of any third party.
Except as qualified by or disclosed in Section 2.11 of the Disclosure
Schedule, the manufacturing, marketing, licensing or sale of the
products or performance of the service offerings of the Company and the
Subsidiaries relating to the Modem Business do not infringe any
Intellectual Property right of any third party; and to the knowledge of
the Company and the Subsidiaries, the Intellectual Property rights of
the Company and the Subsidiaries are not being infringed by activities,
products or services of any third party.
2.12 Inventory. All inventory of the Company and the Subsidiaries
relating to the Modem Business, whether or not reflected on the Most
Recent Balance Sheet, consists of a quality and quantity usable and
saleable in the Ordinary Course of Business, except for obsolete items
and items of below-standard quality, all of which were, as of the date
of the Most Recent Balance Sheet, written-off or written-down to net
realizable value or for which reserves were established and set forth
on the Most Recent Balance Sheet or which became such in the Ordinary
Course of Business after the date of the Most Recent Balance Sheet.
2.13 Real Property Leases. Section 2.13 of the Disclosure Schedule
lists and describes briefly all real property leased or subleased to
the Company or any Subsidiary and lists the term of such lease, any
extension and expansion options, and the rent payable thereunder. The
Company has delivered or made available to the Buyer correct and
complete copies of the leases and subleases (as amended to the date
hereof) listed in Section 2.13 of the Disclosure Schedule.
2.14 Contracts. Section 2.14 of the Disclosure Schedule lists the
following written arrangements (including without limitation written
agreements) to which the Company or any Subsidiary is a party:
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(a) any written arrangement (or group of related written
arrangements) for the lease of personal property from or to third
parties providing for lease payments in excess of $200,000.00 per
annum;
(b) any written arrangement (or group of related written
arrangements) relating to the Modem Business for the purchase or sale
of raw materials, commodities, supplies, products or other personal
property or for the furnishing or receipt of services (i) which calls
for performance over a period of more than one year, (ii) which
involves more than the sum of $200,000.00, to be paid from and after
the date hereof as to any part or item for the Modem Business or (iii)
in which the Company or any Subsidiary has granted manufacturing
rights, "most favored nation" pricing provisions or marketing or
distribution rights relating to any products or territory related to
the Modem Business or has agreed to purchase a minimum quantity of
goods or services or has agreed to purchase goods or services related
to the Modem Business exclusively from a certain party;
(c) any written arrangement establishing a partnership
or joint venture;
(d) any written arrangement (or group of related written
arrangements) under which it has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease obligations) involving more than
$200,000.00 or under which it has imposed (or may impose) a Security
Interest on any of its assets, tangible or intangible;
(e) any written arrangement concerning noncompetition
relating to the Modem Business;
(f) any written arrangement with any affiliates, as
defined in Rule 12b-2 under the Exchange Act, of the Company
("Affiliates");
(g) any other written arrangement (or group of related
written arrangements) relating to the Modem Business not entered into
in the Ordinary Course of Business; and
(h) any other written arrangement (or group of related
arrangements) involving more than $200,000.00 per annum to be paid from
and after the date hereof, other than contracts, records and documents
not relating to the Modem Business that the Company reasonably and in
good faith determines is of a confidential and competitive nature.
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The Company has delivered or made available to the Buyer a correct and
complete copy of each written arrangement (as amended to the date
hereof) listed in Section 2.14 of the Disclosure Schedule. With respect
to each written arrangement so listed: (i) the written arrangement is
legal, valid, binding and enforceable and in full force and effect as
to the Company, and (ii) neither the Company nor, to the Company's
knowledge, the other parties thereto is in breach or default, and no
event has occurred which with notice or lapse of time would constitute
a breach or default or permit termination, modification, or
acceleration, by the Company or, to the Company's knowledge, by the
other parties thereto, under the written arrangement. Neither the
Company nor any Subsidiary is a party to any oral contract, agreement
or other arrangement which, if reduced to written form, would be
required to be listed in Section 2.14 of the Disclosure Schedule under
the terms of this Section 2.14.
2.15 Accounts Receivable. All accounts receivable of the
Company and the Subsidiaries relating to the Modem Business
reflected on the Most Recent Balance Sheet arose in the Ordinary
Course of Business.
2.16 Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of the Company or any Modem
Subsidiary.
2.17 Insurance. Section 2.17 of the Disclosure Schedule lists all
insurance policies of the Company relating to the Modem Business.
Neither the Company nor any Subsidiary has incurred any loss, damage,
expense or liability relating to the Modem Business covered by any such
insurance policy for which it has not properly asserted a claim under
such policy. Each of the Company and the Modem Subsidiaries is covered
by insurance in scope and amount customary and reasonable for the Modem
Business.
2.18 Litigation. Section 2.18 of the Disclosure Schedule
identifies, and contains a brief description of, (a) any unsatisfied
judgement, order, decree, stipulation or injunction and (b) any claim,
complaint, action, suit, proceeding, hearing or investigation of or in
any Governmental Entity or before any arbitrator to which the Company
or any Subsidiary is a party or, to the knowledge of the Company and
the Subsidiaries, is threatened to be made a party.
2.19 Product Warranty. No product manufactured, sold, leased,
licensed or delivered by the Company or any Subsidiary relating to the
Modem Business is subject to any guaranty, warranty, right of return or
other indemnity beyond in any material respect the applicable standard
terms and conditions of
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sale or lease, which are set forth in Section 2.19 of the
Disclosure Schedule.
2.20 Employees. Part I of Section 2.20 of the Disclosure Schedule
contains a list of all employees of the Company and each Subsidiary who
are employed in connection with the Modem Business, along with the
position. The Company has delivered to the Buyer a list setting forth
the annual compensation of each such person. Each employee of the
Company and each Subsidiary listed in Part II of Section 2.20 of the
Disclosure Schedule has entered into an agreement relating to the
confidentiality and/or assignment of inventions with the Company or a
Subsidiary set forth opposite the employee's name, a copy of which has
previously been delivered to the Buyer. Neither the Company nor any
Subsidiary is a party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances,
claims of unfair labor practices or other collective bargaining
disputes within the last two years. The Company and the Subsidiaries
have no knowledge of any organizational effort made or threatened,
either currently or within the past two years, by or on behalf of any
labor union with respect to employees of the Company or any Subsidiary
who are employed in connection with the Modem Business.
2.21 Employee Benefits.
(a) Section 2.21(a) of the Disclosure Schedule contains a
complete and accurate list of all Employee Benefit Plans (as defined
below). For purposes of this Agreement, "Employee Benefit Plan" means
any "employee pension benefit plan" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
any "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA), and any other written or oral plan, agreement or arrangement
involving direct or indirect severance benefits, disability benefits,
deferred compensation, bonuses, stock options, stock purchase, phantom
stock, stock appreciation or other forms of incentive compensation or
post-retirement compensation maintained or contributed by the Company,
any Subsidiary or any ERISA Affiliate (as defined below). For purposes
of this Agreement, "ERISA Affiliate" means any entity which is a member
of (i) a controlled group of corporations (as defined in Section 414(b)
of the Code), (ii) a group of trades or businesses under common control
(as defined in Section 414(c) of the Code), or (iii) an affiliated
service group (as defined under Section 414(m) of the Code or the
regulations under Section 414(o) of the Code), any of which includes
the Company or a Subsidiary. Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, (iii) all related
trust agreements, insurance contracts and summary plan descriptions,
and
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(iv) all annual reports filed on IRS Form 5500, 5500C or 5500R for the
last three plan years for each Employee Benefit Plan, have been
delivered or made available to the Buyer. Each Employee Benefit Plan
has been administered in all material respects in accordance with its
terms and each of the Company, the Subsidiaries and the ERISA
Affiliates has in all material respects met its obligations with
respect to such Employee Benefit Plan and has made all required
contributions thereto. The Company has made no commitments to make any
voluntary contributions to or to voluntarily fund any Employee Benefit
Plans with the exception of 401(k) matching contribution commitments
previously communicated to employees. The Company and all Employee
Benefit Plans are in compliance in all material respects with the
currently applicable provisions of ERISA and the Code and the
regulations thereunder.
(b) There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits
payable in the normal operation of the Employee Benefit Plans and
proceedings with respect to qualified domestic relations orders), suits
or proceedings against or involving any Employee Benefit Plan or
asserting any rights or claims to benefits under any Employee Benefit
Plan that could give rise to any material liability.
(c) All the Employee Benefit Plans that are intended to be
qualified under Section 401(a) of the Code have received determination
letters from the Internal Revenue Service to the effect that such
Employee Benefit Plans are qualified and the plans and the trusts
related thereto are exempt from federal income taxes under Sections
401(a) and 501(a), respectively, of the Code, no such determination
letter has been revoked and, to the knowledge of the Company, such
revocation has not been threatened, and no such Employee Benefit Plan
has been amended since the date of its most recent determination letter
or application therefor in any respect, and, to the knowledge of the
Company, no act or omission has occurred, that would adversely affect
its qualification or materially increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA
Affiliate has, during the six years preceding the Effective Time,
maintained an Employee Benefit Plan subject to Section 412 of the Code
or Title IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA
Affiliate been obligated to contribute to any "multi-employer plan" (as
defined in Section 4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any
Employee Benefit Plan providing benefits after termination of
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employment to any employee of the Company or any Subsidiary (or to any
beneficiary of any such employee), including but not limited to retiree
health coverage and deferred compensation, but excluding continuation
of health coverage required to be continued under Section 4980B of the
Code or state insurance law.
(g) To the knowledge of the Company, no act or omission has
occurred and no condition exists with respect to any Employee Benefit
Plan maintained by the Company, any Subsidiary or any ERISA Affiliate
that would subject the Company, any Subsidiary or any ERISA Affiliate
to any material fine, penalty, tax or liability of any kind imposed
under ERISA or the Code.
(h) Except as set forth on Section 2.21(h) of the Disclosure
Schedule, no Employee Benefit Plan is funded by, associated with, or
related to a "voluntary employee's beneficiary association" within the
meaning of Section 501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or
agreement, summary plan description or other written communication
distributed generally to employees by its terms prohibits the Company
or, if applicable, the Subsidiary or ERISA Affiliate, from amending or
terminating any such Employee Benefit Plan.
(j) Section 2.21(j) of the Disclosure Schedule discloses
each: (i) agreement with any director, executive officer or other key
employee of the Company or any Subsidiary (A) the benefits of which are
contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company or any Subsidiary of
the nature of any of the transactions contemplated by this Agreement,
(B) providing any term of employment or compensation guarantee or (C)
providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii)
agreement, plan or arrangement under which any person may receive
payments from the Company or any Subsidiary that may be subject to the
tax imposed by Section 4999 of the Code or included in the
determination of such person's "parachute payment" under Section 280G
of the Code; and (iii) agreement or plan binding the Company or any
Subsidiary, including without limitation any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan,
severance benefit plan, or any Employee Benefit Plan, any of the
benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of
which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
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2.22 Environmental Matters.
(a) Each of the Company and the Subsidiaries has complied
with all applicable Environmental Laws (as defined below), except for
violations of Environmental Laws that do not, individually or in the
aggregate, have a material adverse effect on the assets, business,
financial condition, or results of operations of the Company and the
Subsidiaries. To the knowledge of the Company and the Subsidiaries,
there are no pending, threatened civil or criminal litigation, written
notice of violation, formal administrative proceeding, or
investigation, inquiry or information request by any Governmental
Entity, relating to any Environmental Law involving the Company or any
Subsidiary, except for litigation, notices of violations, formal
administrative proceedings or investigations, inquiries or information
requests that will not, individually or in the aggregate, have a
material adverse effect on the assets, business, financial condition or
results of operations of the Company and the Subsidiaries. For purposes
of this Agreement, "Environmental Law" means any federal, state or
local law, statute, rule or regulation or the common law currently in
existence and relating to the environment or occupational health and
safety, including without limitation any statute, regulation or order
pertaining to (i) treatment, storage, disposal, generation and
transportation of toxic or hazardous substances or solid or hazardous
waste; (ii) air, water and noise pollution; (iii) groundwater and soil
contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous substances, or solid or
hazardous waste, including without limitation emissions, discharges,
injections, spills, escapes or dumping of pollutants, contaminants or
chemicals; (v) the protection of wild life, marine sanctuaries and
wetlands; (vi) underground and other storage tanks or vessels; and
(vii) manufacture, processing, use, distribution, treatment, storage,
disposal, transportation or handling of pollutants, contaminants,
chemicals or toxic or hazardous substances or oil or petroleum products
or solid or hazardous waste. As used in this Section 2.22, the terms
"release" and "environment" shall have the meaning set forth in the
federal Comprehensive Environmental Compensation, Liability and
Response Act of 1980 ("CERCLA").
(b) Except as disclosed in Section 2.22(b) of the Disclosure
Schedule, to the knowledge of the Company and the Subsidiaries, there
have been no releases of any Materials of Environmental Concern (as
defined below) into the environment at any parcel of real property or
any facility formerly or currently owned, operated or controlled by the
Company or a Subsidiary. With respect to any such releases of Materials
of Environmental Concern, the Company or such Subsidiary has given all
required
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notices to Governmental Entities (copies of which have been provided to
the Buyer). Neither the Company nor any Subsidiary has any knowledge of
any releases of Materials of Environmental Concern at any adjacent,
adjoining or contiguous parcels of real property or facilities that
could reasonably be expected to have a material adverse effect on the
real property or facilities owned, operated or controlled by the
Company or a Subsidiary. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid
wastes and hazardous wastes (as such terms are defined under the
federal Resources Conservation and Recovery Act), toxic materials, oil
or petroleum and petroleum products, or any other material subject to
regulation under any Environmental Law.
(c) Set forth in Section 2.22(c) of the Disclosure Schedule
is a list of all formal, written environmental reports, investigations
and audits relating to premises currently or previously owned or
operated by the Company or a Subsidiary (whether conducted by or on
behalf of the Company or a Subsidiary or a third party, and whether
done at the initiative of the Company or a Subsidiary or directed by a
Governmental Entity or other third party) which were issued or
conducted during the past five years and which the Company has
possession of. Complete and accurate copies of each such report, or the
results of each such investigation or audit, have been provided to the
Buyer and any reliance by the Buyer on such reports, investigations or
audits is at the Buyer's sole risk.
2.23 Legal Compliance. Each of the Company and the Modem
Subsidiaries, and the conduct and operations of their respective
businesses, are in compliance with each law (including rules and
regulations thereunder) of any federal, state, local or foreign
government, or any Governmental Entity, which (a) affects or relates to
this Agreement or the transactions contemplated by this Agreement or
(b) is applicable to the Company or such Modem Subsidiary or such
business, except for any violation of or default under a law referred
to in clause (b) above which reasonably may be expected not to have a
material adverse effect on the assets, business, financial condition,
results of operations or future prospects of the Company and the Modem
Subsidiaries taken as a whole.
2.24 Permits. Section 2.24 of the Disclosure Schedule sets forth a
list of all permits, licenses, registrations, certificates, orders or
approvals from any Governmental Entity (including without limitation
those issued or required under Environmental Laws and those relating to
the occupancy or use of owned or leased real property) ("Permits")
issued to or held by
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the Company or any Subsidiary relating to the Modem Business. Such
listed Permits are the only Permits that are required for the Company
and the Subsidiaries to conduct the Modem Business as presently
conducted or as proposed by the Company to be conducted, except for
those the absence of which would not have any material adverse effect
on the assets, business, financial condition, results of operations or
future prospects of the Company and the Modem Subsidiaries taken as a
whole. Each such Permit is in full force and effect and, to the best of
the knowledge of the Company or any Subsidiary, no suspension or
cancellation of such Permit is threatened and there is no basis for
believing that such Permit will not be renewable upon expiration. Each
such Permit will continue in full force and effect following the
Closing.
2.25 Certain Business Relationships With Affiliates. Except as set
forth in Section 2.25 of the Disclosure Schedule, no Affiliate of the
Company (a) owns any property or right, tangible or intangible, which
is used in the Modem Business, (b) has any claim or cause of action
against the Company or any Modem Subsidiary other than in the Ordinary
Course of Business, or (c) owes any money to the Company or any Modem
Subsidiary. Section 2.25 of the Disclosure Schedule describes any
transactions or relationships other than in the Ordinary Course of
Business between the Company and any Affiliate thereof which are not
reflected in the statements of operations of the Company included in
the Financial Statements.
2.26 Brokers' Fees. Except for the obligations of the Company to
Broadview Associates, L.L.C. ("Broadview") pursuant to that certain
Letter Agreement dated March 18, 1996, neither the Company nor any
Subsidiary has any liability or obligation to pay any fees or
commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
2.27 Books and Records. The minute books and other similar records
of the Company and each Modem Subsidiary contain true and complete
records of all actions taken at any meetings of the Company's or such
Subsidiary's stockholders, Board of Directors or any committee thereof
and of all written consents executed in lieu of the holding of any such
meeting. The books and records of the Company and each Modem Subsidiary
accurately reflect in all material respects the assets, liabilities,
business, financial condition and results of operations of the Company
or such Subsidiary and have been maintained in accordance with good
business and bookkeeping practices.
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2.28 Company Action.
(a) The Board of Directors of the Company, at a meeting duly
called and held, has by the requisite vote of the directors (i)
determined that the Merger is fair and in the best interests of the
Company and its stockholders, (ii) adopted this Agreement in accordance
with the provisions of the Delaware General Corporation Law, and (iii)
directed that this Agreement and the Merger be submitted to the Company
Stockholders for their adoption and approval and resolved to recommend
that Company Stockholders vote in favor of the adoption of this
Agreement and the approval of the Merger.
(b) The Company has received the written opinion of
Broadview, dated the date hereof, to the effect that the consideration
to be received by the Company Stockholders in the Merger is fair from a
financial point of view to the Company Stockholders. A copy of such
opinion has been previously furnished to the Buyer.
2.29 Disclosure. No representation or warranty by the Company
contained in this Agreement, and no statement contained in the
Disclosure Schedule or any other document, certificate or other
instrument delivered to or to be delivered by or on behalf of the
Company pursuant to this Agreement, and no other written statement made
by the Company or any of its representatives in connection with this
Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was or will be made, in order
to make the statements in this Agreement or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary, jointly and severally,
represent and warrant to the Company as follows:
3.1 Organization. Each of the Buyer and the Transitory Subsidiary
is a corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation.
3.2 Capitalization. The authorized capital stock of the Buyer
consists of 300,000,000 shares of Buyer Common Stock, of which
188,452,729 shares were issued and outstanding and 21,620 shares were
held in the treasury of the Buyer as of May 31, 1996. All of the issued
and outstanding shares of Buyer Common Stock are
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duly authorized, validly issued, fully paid, nonassessable and free of
all preemptive rights. All of the Merger Shares will be, when issued in
accordance with this Agreement, duly authorized, validly issued, fully
paid, nonassessable and free of all preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the
Transitory Subsidiary has all requisite power and authority to execute
and deliver this Agreement and to perform its obligations hereunder.
The execution and delivery of this Agreement by the Buyer and the
Transitory Subsidiary and the performance of this Agreement and the
consummation of the transactions contemplated by this Agreement by the
Buyer and the Transitory Subsidiary have been duly and validly
authorized by all necessary corporate action on the part of the Buyer
and Transitory Subsidiary. This Agreement has been duly and validly
executed and delivered by the Buyer and the Transitory Subsidiary and
constitutes a valid and binding obligation of the Buyer and the
Transitory Subsidiary, enforceable against them in accordance with its
terms.
3.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities
laws, the Exchange Act, the Hart-Scott-Rodino Act and the filing of the
Certificate of Merger as required by the Delaware General Corporation
Law, neither the execution and delivery of this Agreement by the Buyer
or the Transitory Subsidiary, nor the consummation by the Buyer or the
Transitory Subsidiary of the transactions contemplated by this
Agreement, will (a) conflict or violate any provision of the charter or
By-laws of the Buyer or the Transitory Subsidiary, (b) require on the
part of the Buyer or the Transitory Subsidiary any filing with, or
permit, authorization, consent or approval of, any Governmental Entity,
other than any filing, permit, authorization, consent or approval which
if not obtained or made would not have a material adverse effect on the
assets, business, financial condition, results of operations or future
prospects of the Buyer or on the ability of the Parties to consummate
the transactions contemplated by this Agreement, (c) conflict with,
result in breach of, constitute (with or without due notice or lapse of
time or both) a default under, result in the acceleration of, create in
any party any right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement
or mortgage for borrowed money, instrument of indebtedness, Security
Interest or other arrangement to which the Buyer or Transitory
Subsidiary is a party or by which either is bound or to which any of
their assets are subject, other than any conflict, breach, default,
acceleration, termination, modification or cancellation which
individually or in the aggregate would not have a material adverse
effect on the assets, business, financial
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condition, results of operations or future prospects of the Buyer or on
the ability of the Parties to consummate the transactions contemplated
by this Agreement, or (d) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Buyer or the Transitory
Subsidiary or any of their properties or assets.
3.5 Reports and Financial Statements. The Buyer has previously
furnished to the Company complete and accurate copies, as amended or
supplemented, of its (a) Annual Report on Form 10-K for the fiscal
years ended June 30, 1994, and June 30, 1995, as filed with the SEC,
and (b) all other reports or statements filed by the Buyer under
Section 13 or 14 of the Exchange Act with the SEC since June 30, 1994
(such reports are collectively referred to in this Agreement as the
"Buyer Reports"). The Buyer Reports constitute all of the documents
required to be filed by the Buyer under Section 13 or 14 of the
Exchange Act with the SEC since June 30, 1994. As of their respective
dates, the Buyer Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
financial statements and unaudited interim financial statements of the
Buyer included in the Buyer Reports (i) comply as to form in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, (ii)
have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby (except as may be
indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-Q under the Exchange
Act), (iii) fairly present the consolidated financial condition,
results of operations and cash flows of the Buyer as of the respective
dates thereof and for the periods referred to therein, and (iv) are
consistent with the books and records of the Buyer.
3.6 Brokers' Fees. Except for the obligations of the Buyer to
Alex. Brown & Sons, Inc., neither the Buyer nor the Transitory
Subsidiary has any liability or obligation to pay any fees or
commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
3.7 Disclosure. No representation or warranty by the Buyer
contained in this Agreement, and no statement contained in any other
document, certificate or other instrument delivered to or to be
delivered by or on behalf of Buyer pursuant to this Agreement, and no
other written statement made by the Buyer or any of its representatives
in connection with this Agreement, contains or will contain any untrue
statement of a material fact or omits or
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will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements in this Agreement or therein not misleading.
ARTICLE IV
COVENANTS
4.1 Best Efforts. Subject to the Company Board Fiduciary Duties
(as defined below), each of the Parties shall use its best efforts to
take all actions and to do all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement; provided,
however, that notwithstanding anything in this Agreement to the
contrary, the Buyer shall not be required to sell or dispose of or hold
separately (through a trust or otherwise) any assets or businesses of
the Buyer or its Affiliates.
4.2 Notices and Consents. Each of the Parties shall use its best
efforts to obtain, at its expense, all such waivers, permits, consents,
approvals or other authorizations from third parties and Governmental
Entities, and to effect all such registrations, filings and notices
with or to third parties and Governmental Entities, as may be required
by or with respect to such Party in connection with the transactions
contemplated by this Agreement.
4.3 Spin-off Transaction; Closing Balance Sheet.
(a) Following the execution of this Agreement and prior to
the Closing, the Company shall (i) transfer to one or more third
parties or to one of its Subsidiaries (the "Spin-off Company") (other
than to Penril International, Ltd. and Penril DataComm, Ltd. (such two
Subsidiaries being collectively referred to as the "Modem
Subsidiaries")) any and all assets, whether tangible or intangible, and
liabilities of the Company related to all of its businesses except for
the Modem Business (provided, however, it is acknowledged that the
stock or assets of Electro-Metrics, Inc., Constant Power, Inc. and
Technipower, Inc., may be transferred to the Spin-off Company or, in
the alternative, may be sold, liquidated or otherwise transferred by
the Company prior to the Closing upon terms and conditions consented to
by the Buyer, which consent will not be unreasonably withheld), (ii)
acquire from its Subsidiaries (other than the Modem Subsidiaries) any
and all assets, whether tangible or intangible, and liabilities of such
Subsidiaries related solely to the Modem Business and (iii) distribute
and transfer to its stockholders, in a transaction intended to be a tax
free transaction, all of the capital stock of
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the Spin-off Company, which owns at that time all of the assets of the
Company and its Subsidiaries not related to the Modem Business
(collectively, the "Spin-off Transaction"). The assets and liabilities
that the Company shall transfer to the Spin-off Company in connection
with the Spin-off Transaction are more fully described by the Company
on Schedule 4.3(a). In connection with the Spin-off Transaction, the
Spin-off Company and its subsidiaries shall have the right to employ
all employees of the Company except as set forth on Section 4.3(a) of
the Disclosure Schedule.
(b) The assets and liabilities of the Modem Business after
the Spin-off Transaction are more fully described by the Company on
Schedule 4.3(b).
(c) Five business days prior to the Closing, the Company
shall deliver to the Buyer an unaudited balance sheet of the Company as
at the Closing Date and reflecting the consummation of the Spin-off
Transaction (the "Closing Balance Sheet"). The Closing Balance Sheet
shall be accompanied by a certificate of the chief financial officer of
the Company stating that the Closing Balance Sheet was prepared in
accordance with GAAP (except as noted) and will fairly present the
financial condition of the Company at the Closing Date. The Company
agrees that the Closing Balance Sheet shall reflect that, on the basis
of the book value of the assets and liabilities retained by the Company
on the Closing Date, the Company shall have a tangible net worth of not
less than One Dollar ($1).
4.4 Special Meeting, Prospectus/Proxy Statement and
Registration Statement.
(a) The Buyer and the Company shall jointly prepare, and the
Company shall file with the SEC under the Exchange Act, preliminary
proxy materials for the purpose of soliciting proxies from Company
Stockholders to vote in favor of the adoption of this Agreement
(including without limitation the matters referred to in Article VI)
and the approval of the Merger and the approval of the Spin-off
Transaction at a special meeting of Company Stockholders to be called
and held for such purpose (the "Special Meeting"). Such proxy materials
shall be in the form of a prospectus/proxy statement to be used for the
purpose of offering the Merger Shares to Company Stockholders and
soliciting such proxies from Company Stockholders (such
prospectus/proxy statement, together with any accompanying letter to
stockholders, notice of meeting and form of proxy, shall be referred to
in this Agreement as the "Prospectus/ Proxy Statement"). The Company,
with the assistance of the Buyer, shall promptly respond to any SEC
comments on the Prospectus/Proxy Statement and shall otherwise use its
best efforts to resolve as
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promptly as practicable all SEC comments to the satisfaction of
the SEC.
(b) Promptly following the resolution to the satisfaction of
the SEC of all SEC comments on the Prospectus/ Proxy Statement (or the
expiration of the ten-day period under Rule 14a-6(a) under the Exchange
Act, if no SEC comments are received by such date), the Company shall
distribute the Prospectus/Proxy Statement to its stockholders and,
pursuant thereto, solicit proxies from Company Stockholders to vote in
favor of the adoption of this Agreement and the approval of the Merger
at the Special Meeting and shall hold the Special Meeting in accordance
with the Delaware General Corporation Law.
(c) Promptly following the resolution to the satisfaction of
the SEC of all SEC comments on the Prospectus/ Proxy Statement (or the
expiration of the ten-day period under Rule 14a-6(a) under the Exchange
Act, if no SEC comments are received by such date), the Buyer shall
file with the SEC under the Securities Act a Registration Statement on
Form S-4 (the "Registration Statement"), which shall include the
Prospectus/ Proxy Statement as a part thereof. The Buyer, with the
assistance of the Company, shall promptly respond to any SEC comments
on the Registration Statement and shall otherwise use its best efforts
to cause the Registration Statement to be declared effective as
promptly as practicable. The Buyer shall also take any and all such
actions as may be necessary or as it may deem advisable for the purpose
of complying with all applicable state securities laws in connection
with the offering and issuance of the Merger Shares.
(d) The Company shall comply with all applicable provisions
of and rules under the Exchange Act and all applicable provisions of
the Delaware General Corporation Law in the preparation, filing and
distribution of the Prospectus/Proxy Statement, the solicitation of
proxies thereunder, and the calling and holding of the Special Meeting.
Without limiting the foregoing, the Company shall ensure that the
Prospectus/Proxy Statement does not, as of the date on which it is
distributed to Company Stockholders, and as of the date of the Special
Meeting, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not
misleading (provided that the Company shall not be responsible for the
accuracy or completeness of any information furnished by the Buyer in
writing for inclusion in the Prospectus/Proxy Statement, as to which
information the Buyer shall ensure that the Prospectus/Proxy Statement
does not, as of the date on which the Prospectus/Proxy Statement is
distributed to Company Stockholders, and as of the date of the Special
Meeting, contain any untrue
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statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which they were made, not misleading).
(e) The Buyer shall comply with all applicable provisions of
and rules under the Securities Act and state securities laws in the
preparation and filing of the Registration Statement and the offering
and issuance of the Merger Shares. Without limiting the foregoing, the
Buyer shall ensure that the Registration Statement does not, as of its
effective date, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (provided that the Buyer
shall not be responsible for the accuracy or completeness of any
information furnished by the Company in writing for inclusion in the
Registration Statement, as to which information the Company shall
ensure that the Registration Statement does not, as of its effective
date, contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading).
(f) Subject to the Company Board Fiduciary Duties (as defined
below), the Company, acting through its Board of Directors, shall
include in the Prospectus/Proxy Statement the recommendation of its
Board of Directors that the Company Stockholders vote in favor of the
adoption of this Agreement and the approval of the Merger, and shall
otherwise use its best efforts to obtain the Requisite Stockholder
Approval.
4.5 Hart-Scott-Rodino Act. Each of the Parties shall promptly file
any Notification and Report Forms and related material that it may be
required to file with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice under the
Hart-Scott-Rodino Act, shall use its best efforts to obtain an early
termination of the applicable waiting period, and shall make any
further filings or information submissions pursuant thereto that may be
necessary, proper or advisable.
4.6 Operation of Business. Except as contemplated by this
Agreement or related to the Spin-off Transaction or as set forth in
Section 4.6 of the Disclosure Schedule, during the period from the date
of this Agreement to the Effective Time, the Company shall (and shall
cause each Subsidiary to) conduct its operations in the Ordinary Course
of Business and in compliance with all applicable laws and regulations
and, to the extent consistent therewith, use all reasonable efforts,
solely as to the Modem Business (i) to preserve intact its current
business organization,
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(ii) keep its physical assets in good working condition, (iii) keep
available the services of its current employees listed on Section 4.6
of the Disclosure Schedule, and (iv) preserve its relationships with
customers, suppliers and others having business dealings with it to the
end that its goodwill and ongoing business relating to the Modem
Business shall not be impaired in any material respect. Without
limiting the generality of the foregoing, prior to the Effective Time,
neither the Company nor any Modem Subsidiary shall, without the written
consent of the Buyer (except as contemplated by this Agreement or
related to the Spin-off Transaction or as set forth in Section 4.6 of
the Disclosure Schedule), which consent shall not be unreasonably
withheld:
(a) issue, sell, deliver or agree or commit to issue, sell or
deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or
authorize the issuance, sale or delivery of, or redeem or repurchase,
any stock of any class or any other securities or any rights, warrants
or options to acquire any such stock or other securities (except
pursuant to the conversion or exercise of convertible securities or
Options outstanding on the date hereof), or amend any of the terms of
any such convertible securities or Options (other than in connection
with a sale, liquidation or transfer referred to and in accordance with
clause (e) below);
(b) split, combine or reclassify any shares of its capital
stock; declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock;
(c) create, incur or assume any debt not currently
outstanding that would cause or result in the debt reflected on the
Closing Balance Sheet to exceed $4,000,000; assume, guarantee, endorse
or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person or
entity; or make any loans, advances (other than in the Ordinary Course
of Business) or capital contributions to, or investments in, any other
person or entity in an amount greater than $200,000.00;
(d) enter into, adopt or amend any Employee Benefit Plan or
any employment or severance agreement or arrangement of the type
described in Section 2.22(j) or (except for normal increases in the
Ordinary Course of Business) materially increase in any manner the
compensation or fringe benefits of, or materially modify the employment
terms of, its directors, officers or employees, generally or
individually, or pay any benefit not
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required by the terms in effect on the date hereof of any existing
Employee Benefit Plan;
(e) acquire, sell, lease, encumber or dispose of any assets
or property (including without limitation any shares or other equity
interests in or securities of any Modem Subsidiary), other than
purchases and sales of assets in the Ordinary Course of Business;
provided, however, that the Company may sell, liquidate or otherwise
transfer the stock or assets of Technipower, Inc., Electro-Metrics,
Inc. and Constant Power, Inc. (or any portion thereof) upon terms and
conditions consented to by the Buyer, which consent shall not be
unreasonably withheld;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods,
principles or practices, except insofar as may be required by a
generally applicable change in GAAP or by the SEC;
(h) discharge or satisfy any Security Interest or pay any
material obligation or liability related to the Modem Business other
than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets relating
to the Modem Business or take any action that subjects any such assets
to any Security Interest;
(j) sell, assign, transfer or license any Intellectual
Property relating to the Modem Business, other than (i) sales of
tangible products through resellers in the Ordinary Course of Business,
(ii) as consented to by the Buyer, which consent shall not be
unreasonably withheld and (iii) pursuant to a license agreement between
the Company and the Spin-off Company, substantially in the form of
Exhibit A hereto;
(k) enter into, amend, terminate, take or omit to take any
action that would constitute a violation of or default under, or waive
any rights under, any material contract or agreement relating to the
Modem Business if such action would have a material adverse effect on
the Modem Business;
(l) make or commit to make any capital expenditure
relating to the Modem Business in excess of $50,000.00 per item;
(m) take any action or fail to take any action permitted by
this Agreement with the knowledge that such action or failure to take
action would result in (i) any of the representations and warranties of
the Company contained in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.7, 2.8,
2.10, 2.16 and 2.26 of
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this Agreement becoming untrue or (ii) any of the conditions of
the Merger set forth in Article V not being satisfied; or
(n) agree in writing or otherwise to take any of the
foregoing actions.
4.7 Full Access.
The Company shall (and shall cause each Subsidiary to) permit
representatives of the Buyer to have full access (at all reasonable
times, upon prior notice and in a manner so as not to interfere with
the normal business operations of the Company and the Subsidiaries) to
all premises, properties, financial and accounting records, contracts,
other records and documents, and personnel, of or pertaining to the
Company and each Subsidiary other than contracts, records and documents
not relating to the Modem Business that the Company reasonably and in
good faith determines is of a confidential and competitive nature. The
Buyer shall hold, and shall cause its respective employees and agents
to hold, in confidence all such information in accordance with the
terms of the Confidentiality Agreement dated March 18, 1996 between the
Buyer and the Company.
4.8 Notice of Breaches. The Company shall promptly deliver to the
Buyer written notice of any event or development that would (a) render
any representation or warranty of the Company contained in Sections
2.1, 2.2, 2.3, 2.4, 2.5, 2.7, 2.8, 2.10, 2.16, and 2.26 (including the
Disclosure Schedule) inaccurate or incomplete in any material respect,
or (b) constitute or result in a breach by the Company of, or a failure
by the Company to comply with, any agreement or covenant in this
Agreement applicable to such party. The Buyer or the Transitory
Subsidiary shall promptly deliver to the Company written notice of any
event or development that would (i) render any statement,
representation or warranty of the Buyer or the Transitory Subsidiary in
this Agreement inaccurate or incomplete in any material respect, or
(ii) constitute or result in a breach by the Buyer or the Transitory
Subsidiary of, or a failure by the Buyer or the Transitory Subsidiary
to comply with, any agreement or covenant in this Agreement applicable
to such party. No such disclosure shall be deemed to avoid or cure any
such misrepresentation or breach.
4.9 Exclusivity. The Company shall not, and the Company shall use
its best efforts to cause its Affiliates and each of its officers,
directors, employees, representatives and agents not to, directly or
indirectly, (a) encourage, solicit, initiate, engage or participate in
discussions or negotiations with any person or entity (other than the
Buyer) concerning any merger, consolidation, sale or license of
material assets or property
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relating to the Modem Business, tender offer, recapitalization,
accumulation of Company Shares, proxy solicitation or other business
combination involving the Company, any Modem Subsidiary or any division
of the Company or any Subsidiary, in each case relating to the Modem
Business or (b) provide any non-public information concerning the
business, properties or assets of the Company or any Subsidiary
relating to the Modem Business to any person or entity (other than (i)
to the Buyer, (ii) as contemplated by this Agreement, or (iii) as
required by law or court order). Notwithstanding the foregoing or any
other provision of this Agreement, neither the provisions contained in
this Section 4.9 or elsewhere in this Agreement shall prohibit the
Board of Directors of the Company from (i) furnishing information to or
entering into discussions or negotiations with, any person or entity
that makes an unsolicited bona fide written proposal to acquire the
Company (or the Modem Business) pursuant to a merger, consolidation,
share exchange, purchase of a substantial portion of the assets,
business combination or other similar transaction, if the Board of
Directors of the Company determines in good faith, based as to legal
matters on the advice of counsel, that such action is required for the
Board of Directors to comply with its fiduciary duties to stockholders
imposed by law (the "Company Board Fiduciary Duties") and (ii)
complying with Rule 14c-2 of the Exchange Act with regard to any
Acquisition Proposal, if applicable, "Acquisition Proposal" shall mean
any proposed (A) merger, consolidation or similar transaction involving
the Company, (B) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of
assets of the Company or the Subsidiaries representing 30% or more of
the Modem Business or of the consolidated assets of the Company and the
Subsidiaries, (C) issue, sale, or other disposition of (including by
way of merger, consolidation, share exchange or any similar
transaction) securities (or options, rights or warrants to purchase, or
securities convertible into, such securities) representing 30% or more
of the voting power of the Company or (D) transaction in which any
person shall acquire beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act), or the right to acquire beneficial
ownership, or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership, of 30% or more of the outstanding Company
Common Stock. The exercise of the Company Board Fiduciary Duties,
notwithstanding any other provision of this Agreement, shall not
constitute a breach or violation of any provision of this Agreement.
The Company shall immediately notify the Buyer of, and shall disclose
to the Buyer all details of, any inquiries, discussions or negotiations
of the nature described in this Section 4.9.
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4.10 Agreements from Certain Affiliates of the Company.
Concurrently with or prior to the execution of this Agreement, the
Company shall deliver to the Buyer a list of all persons or entities
who are at such time "affiliates" of the Company as that term is used
in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Company Affiliates"). In order to help ensure that the issuance of
Merger Shares will comply with the Securities Act and that the Merger
will be treated as a tax-free reorganization, the Company shall use all
reasonable efforts to cause each Company Affiliate to execute and
deliver to the Buyer, prior to the distribution of the Prospectus/Proxy
Statement in accordance with Section 4.4(b), a written agreement
substantially in the form attached hereto as Exhibit B (the "Affiliate
Agreement"). If any Company Affiliate fails to execute and deliver an
Affiliate Agreement, the Buyer shall be entitled to place appropriate
legends on the certificates evidencing the Merger Shares to be issued
to such person or entity and any other shares of Buyer Common Stock
issued to such person or entity upon exercise of an Option or Other
Right, and to issue appropriate stock transfer instructions to the
transfer agent for the Buyer Common Stock, to the effect that such
shares may be sold publicly only in compliance with Rule 145 under the
Securities Act.
4.11 Listing of Merger Shares. The Buyer shall list the
Merger Shares on the NYSE.
4.12 Indemnification; Release.
(a) From and after the Effective Time, the Buyer shall
indemnify, defend and hold harmless the officers, directors and
employees of the Company and the Subsidiaries (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties")
against all losses, expenses, claims, damages or liabilities ("Claims")
based on the fact that such person is or was such officer, director or
employee of the Company or the Subsidiaries (including arising out of
the transactions contemplated by this Agreement) to the fullest extent
permitted or required under applicable law; provided, however, that no
Indemnified Party shall be entitled to indemnification pursuant to this
Section 4.12 for Claims based on the fact that such person is or was a
stockholder of the Company. The Buyer agrees that all rights to
indemnification existing in favor of the directors, officers or
employees of the Company as provided in the Company's or the
Subsidiaries' respective Articles or Certificate of Incorporation or
By-Laws or Code of Regulations, as in effect as of the date hereof,
with respect to matters occurring through the Effective Time, shall
survive the Merger and shall continue in full force and effect for a
period of not less than six years from the Effective Time and the Buyer
hereby guaranties unconditionally the
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satisfaction of all such rights to indemnification (and shall pay
expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the fullest extent permitted
under Delaware law, upon receipt from the Indemnified Party to whom
expenses are advanced of the undertaking to repay such advances
contemplated by Section 145(e) of the Delaware General corporation
Law). Without limiting the foregoing, in the event any Claim is brought
against any Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time (i) the Indemnified Parties
may retain the Company's regularly engaged independent legal counsel or
other independent legal counsel satisfactory to them, provided that
such other counsel shall be reasonably acceptable to the Buyer, (ii)
the Buyer shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are
received and (iii) the Buyer shall use its reasonable efforts to assist
in the defense of any such matter, provided that the Buyer shall not be
liable for any settlement of any Claim effected without its written
consent, which consent shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section
4.12, upon learning of any such Claim shall notify the Buyer (although
the failure to so notify the Buyer shall not relieve the Buyer from any
liability which the Buyer may have under this Section 4.12, except to
the extent such failure materially prejudices the Buyer) and shall
deliver to the Buyer the undertaking contemplated by Section 145(e) of
the Delaware General Corporation Law. The Indemnified Parties as a
group may retain no more than one law firm (in addition to local
counsel) to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct (as
determined by counsel to the Indemnified Parties), a conflict on any
significant issue between the positions of any two or more Indemnified
Parties, in which event such additional counsel as may be required may
be retained by the Indemnified Parties and will be paid by the Buyer.
(b) The Buyer hereby remises and releases the directors,
officers and employees of the Company from any and all claims it may
have against them, other than claims based solely on fraud.
(c) The Company hereby remises and releases the directors,
officers and employees of the Buyer from any and all claims it may have
against them, other than claims based solely on fraud.
4.13 Employee Matters.
(a) With respect to benefit plans available to
employees of the Company or the Modem Subsidiaries generally, for
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at least one year from and after the Effective Time, the Buyer shall
cause the Surviving Corporation to either (i) maintain all employee
benefits of the Company or the Modem Subsidiary, as the case may be,
including, without limitation, benefits under employee benefit plans,
policies and arrangements, existing on the Effective Time or (ii)
provide benefits to employees of the Surviving Corporation that are,
taken as a whole, substantially equivalent to or better than the
benefits offered to such persons by the Company or applicable Modem
Subsidiary, as the case may be, immediately prior to the Effective
Time.
(b) The Parties acknowledge and agree that the Surviving
Corporation and the Modem Subsidiaries shall have the benefit of any
confidentiality and/or nondisclosure agreement executed by employees of
the Company or the Modem Subsidiaries. The Parties shall cause any
employee of the Surviving Corporation who was an employee of the
Company immediately prior to the Spin- off to agree to hold in
confidence and to not use contrary to the interests of the Spin-off
Company any confidential information concerning the Spin-off Company
that is in such individual's possession at the Effective Time as a
result of such individual's employment by the Company. The Surviving
Corporation agrees to release any employee of the Spin-off Company who
was an employee of the Surviving Corporation immediately prior to the
Spin-off from any agreement not to compete with the Surviving
Corporation or from any agreement that would prohibit such employee
from being employed by the Spin-off Company.
4.14 Corporate Name. From and after the Closing Date, the Buyer
shall not, and shall cause the Surviving Corporation and all other
Affiliates of the Buyer to not, use the name "Penril" other than in the
Modem Business.
4.15 Non-Interference.
(a) The Company agrees to cause the Spin-off Company to agree
that between the date hereof and the Closing, and for eighteen (18)
months after the Closing, it will not and will cause its Affiliates to
not, induce any person who is, on the date hereof, or who becomes after
the date hereof, an employee, officer or agent of the Buyer or any
Affiliate of the Buyer (i) to terminate such relationship or (ii) to
employ, or assist in employing, directly or indirectly, any such
person.
(b) The Buyer agrees that between the date hereof and the
Closing, with respect to the Company and its respective Affiliates, and
for eighteen (18) months after the Closing with
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respect to the Spin-off Company, the Buyer will not and will cause its
Affiliates to not, induce any person who is, on the date hereof, or who
becomes after the date hereof, an employee, officer or agent of the
Company or the Spin-off Company and their respective Affiliates (i) to
terminate such relationship or (ii) to employ or assist in employing,
directly or indirectly, any such person.
4.16 Vote of Company Shares. The Buyer covenants and agrees to
vote, and to cause its Affiliates to vote, all Company Shares held or
controlled by them in favor of approval of this Agreement and the
Merger, and the transactions contemplated hereby at the Special
Meeting.
4.17 Non-Solicitation. The Buyer hereby covenants and agrees to
request that its direct sales force not solicit any business from any
of the resellers listed on Schedule 4.17 for a period of 18 months
after the Closing, which business relates to the business to be
transferred by the Company to the Spin-off Company in the Spin-off
Transaction
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective
obligations of each Party to consummate the Merger are subject to
the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have received
the Requisite Stockholder Approval;
(b) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or
otherwise been terminated;
(c) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and remain in effect;
(d) no Party hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each Party
agrees to use its best efforts to have any such order or injunction
lifted; and
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(e) the Spin-off Transaction shall have been consummated in
accordance with Section 4.3 and with Schedule 4.3(a) and Schedule
4.3(b).
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory
Subsidiary to consummate the Merger is subject to the satisfaction of
the following additional conditions:
(a) the Company and the Subsidiaries shall have obtained all
of the waivers, permits, consents, approvals or other authorizations,
and effected all of the registrations, filings and notices, referred to
in Section 4.2, except for any which if not obtained or effected would
not have a material adverse effect on the assets, business, financial
condition, results of operations or future prospects of the Company and
the Modem Subsidiaries, taken as a whole, or on the ability of the
Parties to consummate the transactions contemplated by this Agreement;
(b) the representations and warranties of the Company set
forth in Article II shall be true and correct when made on the date
hereof and, solely as to those contained in Sections 2.1, 2.2, 2.3,
2.4, 2.5, 2.7, 2.8, 2.10, 2.16 and 2.26, shall be true and correct in
all material respects as of the Effective Time as if made as of the
Effective Time;
(c) the Company shall have performed or complied with in all
material respects its agreements and covenants required to be performed
or complied with under this Agreement as of or prior to the Effective
Time;
(d) There shall have been no material breach of the
representations and warranties of the Company contained in Article II
of which officers of the Company had knowledge prior to the date
hereof;
(e) the Company shall have delivered to the Buyer and the
Transitory Subsidiary a certificate (without qualification as to
knowledge or materiality or otherwise) to the effect that each of the
conditions specified in clauses (a) and (e) of Section 5.1 and clauses
(a) through (d) of this Section 5.2 is satisfied in all respects;
(f) the Buyer shall have received a "cold comfort" letter
dated as of a date not more than two days prior to the date that the
Registration Statement is declared effective and shall have received a
subsequent similar letter dated as of a date not more than two days
prior to the Effective Time, from Deloitte &
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Touche LLP, auditors for the Company, addressed to the Buyer in a
customary form reasonably satisfactory to the Buyer;
(g) the Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Effective Time, of each
director and officer of the Company and the Modem Subsidiaries
specified by the Buyer in writing on or prior to the Closing; and
(h) the Company and the Spin-off Company shall have executed
and delivered an indemnification agreement substantially in the form of
Exhibit C.
5.3 Conditions to Obligations of the Company. The obligation of
the Company to consummate the Merger is subject to the satisfaction of
the following additional conditions:
(a) the Buyer and the Transitory Subsidiary shall have
obtained all of the waivers, permits, consents, approvals or other
authorizations, and effected all of the registrations, filings and
notices, referred to in Section 4.2, except for any which if not
obtained or effected would not have a material adverse affect on the
assets, business, financial condition, results of operations or future
prospects of the Buyer or on the ability of the Parties to consummate
the transactions contemplated by this Agreement.
(b) the representations and warranties of the Buyer and the
Transitory Subsidiary set forth in Article III and Section 1.16 shall
be true and correct when made on the date hereof and shall be true and
correct in all material respects as of the Effective Time as if made as
of the Effective Time, except for representations and warranties made
as of a specific date, which shall be true and correct as of such date;
(c) each of the Buyer and the Transitory Subsidiary shall
have performed or complied with in all material respects its agreements
and covenants required to be performed or complied with under this
Agreement as of or prior to the Effective Time;
(d) each of the Buyer and the Transitory Subsidiary shall
have delivered to the Company a certificate (without qualification as
to knowledge or materiality or otherwise) to the effect that each of
the conditions specified in clause (c) of Section 5.1 and clauses (a)
through (c) of this Section 5.3 is satisfied in all respects; and
(e) the Merger Shares shall have been authorized for listing
on the NYSE upon official notice of issuance.
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ARTICLE VI
TERMINATION
6.1 Termination of Agreement. The Parties may terminate this
Agreement prior to the Effective Time (whether before or after
Requisite Stockholder Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual
written consent;
(b) the Buyer may terminate this Agreement by giving written
notice to the Company in the event the Company is in breach, and the
Company may terminate this Agreement by giving written notice to the
Buyer and the Transitory Subsidiary in the event the Buyer or the
Transitory Subsidiary is in breach, of any material representation,
warranty or covenant contained in this Agreement, and such breach is
not remedied within 10 days of delivery of written notice thereof;
(c) any Party may terminate this Agreement by giving written
notice to the other Parties at any time after the Company Stockholders
have voted on whether to approve this Agreement and the Merger in the
event this Agreement and the Merger failed to receive the Requisite
Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving written
notice to the Company if the Closing shall not have occurred (i) on or
before the 120th day following the date of this Agreement by reason of
the failure of any condition precedent under Section 5.1 (other than
Sections 5.1(c) and 5.1(e)) or 5.2 hereof or (ii) on or before the
150th day following the date of this Agreement by reason of the failure
of any condition under Sections 5.1(c) and 5.1(e) hereof (in either
case (i) or (ii) above, unless the failure results primarily from a
breach by the Buyer or the Transitory Subsidiary of any representation,
warranty or covenant contained in this Agreement);
(e) the Company may terminate this Agreement by giving
written notice to the Buyer and the Transitory Subsidiary if the
Closing shall not have occurred (i) on or before the 120th day
following the date of this Agreement by reason of the failure of any
condition precedent under Section 5.1 (other than Sections 5.1(c) and
5.1(e)) or 5.3 hereof or (ii) on or before the 150th day following the
date of this Agreement by reason of the failure of any condition under
Sections 5.1(c) and 5.1(e) hereof (in either case (i) or (ii) above,
unless the failure results primarily from a breach by the Company of
any representation, warranty or covenant contained in this Agreement);
or
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(f) any Party may terminate this Agreement if the Board of
Directors of the Company shall have withdrawn or modified in a manner
adverse to the Buyer its approval or recommendation to the Company
Stockholders of this Agreement or the Merger or shall have approved or
recommended to the Company Stockholders that they accept the terms of
any Acquisition Proposal or shall have resolved to take any of the
foregoing actions; provided, however, that reasonable delay required to
comply with the Company Board Fiduciary Duties shall not be deemed to
be a withdrawal or a modification adverse to the Buyer.
6.2 Effect of Termination. If any Party terminates this Agreement
pursuant to Section 6.1, all obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except
for any liability of any Party for willful breaches of this Agreement
and except as provided in the last sentence of Section 4.7), provided,
however, (i) that if the Merger is not consummated as a result of a
termination of this Agreement pursuant to Sections 6.1(a), 6.1(c),
6.1(d) (but solely as it relates to Sections 5.1(a), 5.2(c) (but solely
as it relates to a Special Breach (as defined below) with respect to
the certain covenants contained in clauses (a), (c) through (j) and (l)
of Section 4.6 (the "Section 4.6 Covenants")), 5.2(d) and 5.2(h)) or
6.1(f), then, without further action or consideration on the part of
any party or person, the license agreement in the form of Exhibit D
hereto shall become effective and (ii) that if the Merger is not
consummated as a result of a termination of this Agreement pursuant to
Section 6.1(d) (but solely as it relates to Sections 5.1(b), 5.1(c) or
5.1(e)), then, without further action on the part of any party or
person, the license agreement in the form of Exhibit D hereto shall
become effective upon the payment by the Buyer within 10 business days
after the giving of notice of termination of this Agreement pursuant to
Section 6.1(d) of Fifty Million Dollars ($50,000,000.00) to the Company
in immediately available funds. Notwithstanding the foregoing, if
within 180 days after the date hereof and prior to termination of this
Agreement pursuant to Section 6.1(d) (but solely as it relates to
Sections 5.2(a) or 5.2(c)), the Company has received, participated in
or encouraged inquiries, discussions or negotiations of the nature
described in Section 4.9 and the Board of Directors of the Company
shall have approved or recommended to the Company Stockholders that
they accept the terms of any Acquisition Proposal or shall have
resolved to take any of the foregoing actions, with a party with whom
they had discussions during such period, then, without further action
or consideration on the part of any party or person, the license
agreement in the form of Exhibit D hereto shall become effective. For
purposes of this Section 6.2, "Special Breach" shall mean (i) any
material breach of clauses (a), (d), (f), (g), (h), (i), (j) and (l) of
the
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Section 4.6 Covenants; (ii) any material breach of clause (c) of the
Section 4.6 Covenants related solely to loans, advances, capital
contributions to, or investments in, any other person or entity and
(iii) any material breach of clause (e) of the Section 4.6 Covenants
related to the Modem Business.
ARTICLE VII
DEFINITIONS
The Section references for the defined terms used in this
Agreement are set forth on Schedule VII to this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1 Press Releases and Announcements. No Party shall issue any
press release or public disclosure relating to the acquisition of the
Modem Business by the Buyer subject matter of this Agreement without
the prior written approval of the other Parties; provided, however,
that any Party may make any public disclosure it believes in good faith
is required by law or regulation (in which case the disclosing Party
shall advise the other Parties and provide them with a copy of the
proposed disclosure prior to making the disclosure).
8.2 No Third Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns; provided, however, the
provisions in Article I concerning issuance of the Merger Shares and
the provisions of Section 1.16 are intended for the benefit of the
Company Stockholders; (ii) the provisions of the last sentence of
Section 4.10 are intended for the benefit of the Company Affiliates;
(iii) the provisions of Section 4.12 are intended for the benefit of
the Indemnified Parties and the officers, directors and employees of
the Company and of the Buyer; (iv) the provisions of Section 4.13(a)
are intended for the benefit of the employees of the Company and the
Modem Subsidiaries; (v) the provisions of Section 4.13(b) are intended
for the benefit of the Modem Subsidiaries; and (vi) the provisions of
Sections 4.13(b), 4.14, 4.15 and 4.17 are intended for the benefit of
the Spin-off Company
8.3 Entire Agreement. This Agreement (including the
documents referred to in this Agreement) constitutes the entire
agreement among the Parties and supersedes any prior
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understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
8.4 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named in this Agreement
and their respective successors and permitted assigns. No Party may
assign either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the other
Parties; provided that the Transitory Subsidiary may assign its rights,
interests and obligations hereunder to an Affiliate of the Buyer.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This
Agreement, once executed, may be delivered to either party through the
use of facsimile transmission. In this regard, any and all signatures
of the parties appearing on any facsimile copies of this Agreement
shall be deemed, unless otherwise proved, the lawful and valid
signature of the executing party.
8.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
8.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be deemed duly
delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service,
in each case to the intended recipient as set forth below:
If to the Company: Copy to:
Penril DataComm Networks, Inc. Benesch, Friedlander, Coplan &
1300 Quince Orchard Boulevard Aronoff, P.L.L.
Gaithersburg, Maryland 20878 2300 BP America Building
Attn.: Chairman 200 Public Square
Telecopier: (301) 921-9149 Cleveland, Ohio 44114-2378
Attn.: Irv Berliner, Esq.
Telecopier: (216) 363-4588
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If to the Buyer: Copy to:
Bay Networks, Inc. Bay Networks, Inc.
4401 Great America Parkway 4401 Great America Parkway
Santa Clara, California 95052 Santa Clara, California 95052
Attn.: President Attn.: Montgomery Kersten, Esq.
Telecopier: (408) 764-1799 Telecopier: (408) 764-1991
If to the Transitory Copy to:
Subsidiary:
Beta Acquisition Corporation Bay Networks, Inc.
c/o Bay Networks, Inc. 4401 Great America Parkway
4401 Great America Parkway Santa Clara, California 95052
Santa Clara, California 95052 Attn.: Montgomery Kersten
Attn.: President Telecopier: (408) 764-1991
Telecopier: (408) 764-1799
Any Party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail, or electronic mail), but no such notice, request,
demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the party for whom it
is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner in this
Agreement set forth.
8.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of
conflicts) of the State of Delaware.
8.9 Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time;
provided, however, that any amendment effected subsequent to the
Requisite Stockholder Approval shall be subject to the restrictions
contained in the Delaware General Corporation Law. No amendment of any
provision of this Agreement shall be valid unless the same shall be in
writing and signed by all of the Parties. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty
or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
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8.10 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction declares
that any term or provision hereof is invalid or unenforceable, the
Parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
area of the term or provision, to delete specific words or phrases, or
to replace any invalid or unenforceable term or provision with a term
or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
8.11 Expenses. The Buyer and the Company shall each bear its own
costs and expenses (including legal fees and expenses) incurred in
connection with this Agreement and the transactions contemplated by
this Agreement. The fees and expenses of the Company shall be accrued
prior to the Closing Date and reflected on the Closing Balance Sheet.
The fees and expenses of the Transitory Subsidiary shall be borne by
the Buyer.
8.12 Specific Performance. Each of the Parties acknowledges and
agrees that one or more of the other Parties would be damaged
irreparably in the event any of the provisions of this Agreement are
not performed in accordance with their specific terms or otherwise are
breached. Accordingly, each of the Parties agrees that the other
Parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state
thereof having jurisdiction over the Parties and the matter (subject to
the provisions of Section 8.13), in addition to any other remedy to
which it may be entitled, at law or in equity.
8.13 Submission to Jurisdiction. Each of the Parties (a) submits to
the jurisdiction of any state or federal court sitting in Delaware in
any action or proceeding arising out of or relating to this Agreement,
(b) agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court, and (c) agrees not to bring
any action or proceeding arising out of or relating to this Agreement
in any other court. Each of the Parties waives any defense of
inconvenient forum to the maintenance of any action or proceeding so
brought and waives
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any bond, surety or other security that might be required of any other
Party with respect thereto. Any Party may make service on another Party
by sending or delivering a copy of the process to the Party to be
served at the address and in the manner provided for the giving of
notices in Section 8.7. Nothing in this Section 8.13, however, shall
affect the right of any Party to serve legal process in any other
manner permitted by law.
8.14 Construction. The language used in this Agreement shall be
deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no rule of strict construction shall be applied
against any Party. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires
otherwise.
8.15 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated in this
Agreement by reference and made a part hereof.
8.16 Non-Survival of Representations, Warranties and Agreements. No
representations, warranties or agreements in this Agreement shall
survive the Closing, except for those contained in Article I and
Sections 4.10 (the last sentence only), 4.12, 4.13, 4.14, 4.15 and 4.17
and, to the extent relating to such specified provisions, those
contained in this Article VIII.
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<PAGE> 79
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
THE BUYER:
BAY NETWORKS, INC.
By:________________________________
Title:_____________________________
THE TRANSITORY SUBSIDIARY:
BETA ACQUISITION CORP.
By:________________________________
Title:_____________________________
THE COMPANY:
PENRIL DATACOMM NETWORKS, INC.
By:________________________________
Title:_____________________________
Merger Agreement
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FORM OF OLD
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made and entered
into as of the _____ day of ______________, 1996 between Penril
DataComm Networks, Inc., a Delaware corporation ("Penril"), and [the
Spin-off Company], a Delaware corporation
("Newsub").
WHEREAS, Penril formed Newsub as a wholly-owned subsidiary and, by
action of its Board of Directors, contributed or will contribute
certain assets (the "Spun-off Assets"), and assigned or will assign
certain liabilities (the "Spun-off Liabilities") to Newsub and Newsub
accepted or will accept the Spun-off Assets and assumed or will assume
the Spun-off Liabilities;
WHEREAS, Penril, by action of its Board of Directors, as ratified
by its stockholders, will distribute all of the outstanding capital
stock of Newsub (the "Newsub Stock") to such stockholders in the form
of a dividend (the "Distribution");
WHEREAS, Penril, Beta, Inc., a Delaware corporation ("Buyer"), and
Transitory Subsidiary, wholly-owned subsidiary of Buyer, have entered
into an Plan and Agreement of Merger dated as of June 16, 1996, and as
amended on August __, 1996 (the "Merger Agreement"), pursuant to which,
following the Distribution, Penril will become a wholly-owned
subsidiary of Buyer and the stockholders of Penril will receive shares
of Buyer stock in exchange for shares of Penril stock (the "Merger");
WHEREAS, until the Distribution, Penril owns 100% of the
issued and outstanding Newsub Stock;
WHEREAS, as consideration for, and in connection with, Penril
making the aforementioned capital contribution to Newsub, Newsub agrees
to indemnify Penril for claims, costs, damages or liabilities incurred
by Penril, and Penril agrees to indemnify Newsub for claims, costs,
damages or liabilities incurred by Newsub, on the terms, and subject to
the conditions, as set forth below.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the parties hereto agree as follows:
<PAGE> 81
1. Indemnification.
(a) Newsub will indemnify and save harmless Penril and its
directors, officers, employees, agents and/or affiliates (each, a
"Newsub Indemnified Party") from any and all costs, expenses,
losses, damages and liabilities ("Claim(s)") incurred or suffered,
directly or indirectly, (including, without limitation, reasonable
legal fees and expenses) resulting from or attributable to (i) the
operation of Newsub from and after the Distribution; (ii) any
claim, suit or other type of proceeding based upon, arising out of
or in connection with the operation of Penril prior to the Merger
other than those based upon, arising out of or in connection with
the Modem Business (as defined in the Merger Agreement), the
Merger, the Merger Agreement, the solicitation of proxies relating
to approval of the Merger and other transactions related to the
Merger, the tax consequences of the Distribution; (iii) any claim,
suit or other type of proceeding relating to the termination of
employment of any employees of Penril other than those set forth
on Schedule 2.20 to the Merger Agreement; and (iv) any claim, suit
or other type of proceeding based upon, arising out of or in
connection with any information concerning Newsub in the
Registration Statement (as defined in the Merger Agreement) that
was furnished by Penril and/or Newsub for inclusion in the
Registration Statement. In furtherance thereof, Newsub
acknowledges and agrees that (ii) above includes, but is not
limited to, all suits, actions or administrative hearings existing
on the date hereof to which Penril is a party (or which have been
assigned by Penril to Newsub and assumed by Newsub) other than
those based upon, arising out of or in connection with the Modem
Business (collectively, the "Newsub Existing Litigation", as
listed on Exhibit A hereto). This Agreement will constitute
notice, in accordance with Paragraph 2 hereof, of Newsub's
election to conduct the defense (or to prosecute, as the case may
be) of all claims in connection with the Newsub Existing
Litigation. Other than certain rights retained pursuant to
Paragraph 2 hereof Penril acknowledges and agrees that Newsub will
have all rights to, and title and interest in any such claim, suit
or proceeding for which Newsub is providing indemnification.
(b) Penril will indemnify and save harmless Newsub and its
directors, officers, employees, agents and/or affiliates (each, a
"Penril Indemnified Party" and, together with each Newsub
Indemnified Party, without distinction, an "Indemnified Party")
from any and all Claims incurred or suffered, directly or
indirectly, (including, without
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limitation, reasonable legal fees and expenses) resulting from or
attributable to (i) the operation of Penril from and after the
Distribution; (ii) any claim, suit or other type of proceeding
based upon, arising out of or in connection with the operation of
the Modem Business prior to the Merger; and (iii) any claim, suit
or other type of proceeding relating to the Merger, the Merger
Agreement, the solicitation of proxies relating to approval of the
Merger and the other transactions related to the Merger other than
those based upon, arising out of or in connection with the
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission to register the Newsub Stock in connection
with the Distribution. In furtherance thereof, Penril acknowledges
and agrees that (ii) above includes, but is not limited to, all
suits, actions or administrative hearings existing on the date
hereof to which Penril is a party (none of which have been
assigned by Penril to Newsub or assumed by Newsub) which are based
upon, arising out of or in connection with the Modem Business
(collectively, the "Penril Retained Existing Litigation", as
listed on Exhibit B hereto, and, together with the Newsub Existing
Litigation, the "Existing Litigation"). This Agreement will
constitute notice, in accordance with Paragraph 2 hereof, of
Penril's election to conduct the defense (or to prosecute, as the
case may be) of all claims in connection with the Penril Retained
Existing Litigation. Other than certain rights retained pursuant
to Paragraph 2 hereof Newsub acknowledges and agrees that Penril
will have all rights to, and title and interest in any such claim,
suit or proceeding for which Penril is providing indemnification.
2. Defense of Claim.
(a) In the event an Indemnified Party receives notice of any
claim asserted or any action or administrative or other proceeding
commenced in respect of a Claim for which indemnity may be
properly sought under this Agreement against Newsub or Penril, as
the case may be (the "Indemnifying Party"), the Indemnified Party
shall give notice in writing to the Indemnifying Party within
thirty (30) days of its receipt of such notice. Within thirty (30)
days after the earlier of (a) receipt by the Indemnifying Party of
such notice from the Indemnified Party, or (b) receipt of actual
notice by the Indemnifying Party from sources other than the
Indemnified Party, the Indemnifying Party may give the Indemnified
Party written notice of its election to conduct the defense of
such claim, action or
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proceeding at its own expense. If the Indemnifying Party has given
the Indemnified Party such notice of election to conduct the
defense, the Indemnifying Party may conduct the defense at its
expense, but the Indemnified Party shall nevertheless have the
right to participate in the defense, provided such participation
is solely at the expense of the Indemnified Party, without a right
of further reimbursement. If the Indemnifying Party has not so
notified the Indemnified Party in writing within the time period
provided above of its election to conduct the defense of such
Claim, the Indemnified Party may, but need not, conduct, at the
Indemnifying Party's expense, the defense of such claim, action or
proceeding. The Indemnified Party may at any time notify the
Indemnifying Party of its intention to settle, compromise or
satisfy any such claim, action or proceeding (the defense of which
the Indemnifying Party has not previously elected to conduct) and,
with the prior written consent of the Indemnified Party (which
consent will not be unreasonably withheld), may make such
settlement, compromise or satisfaction, at the Indemnifying
Party's expense, provided, however, that the Indemnifying Party
may make such settlement, compromise or satisfaction without the
prior written consent of the Indemnified Party if such settlement,
compromise or satisfaction constitutes a release of the
Indemnified Party in respect of such Claim.
(b) Any settlement, compromise or satisfaction, or any final
judgment or decree entered in, any Claim or Existing Litigation
defended in accordance with the provisions of this Paragraph 2
shall be final and binding on the parties hereto.
(c) The Indemnified Party and the Indemnifying Party shall
use all reasonable efforts to cooperate fully with respect to the
defense of any Claim or Existing Litigation in accordance with the
provisions of this Paragraph 2.
3. Notice. All notices and other communications required or
permitted to be given under this Indemnification Agreement shall be
dated and in writing and shall be deemed to have been duly given when
(a) personally delivered, (b) upon delivery of a telephonic facsimile
transmission with a confirmed telephonic transmission answered back,
(c) three days after being deposited in the United States mail,
registered or certified, return receipt requested, postage prepaid, or
(d) one day after having been dispatched by a nationally recognized
overnight courier service, addressed to the party or parties to this
Agreement to whom it is directed:
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<PAGE> 84
If to Penril:
Penril DataComm Networks, Inc.
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878
Attn: President
Facsimile No.: (301) 948-5761
with a copy to:
Attn:
Facsimile No.:
If to Newsub:
Attn:
Facsimile No.:
with a copy to:
Attn:
Facsimile No.:
or to such other address as may be designated by a party hereto by
notice delivered to the other parties.
4. Cooperation. In connection with any Claim that is the subject
of indemnification, each party shall afford to the Indemnifying Party
and its accountants, counsel and other designated representatives
reasonable access during normal business hours to all records, books,
contracts, instruments, computer data and other information insofar as
such access is reasonably required by the indemnifying party in
connection with the defense of any Claim pursuant to Paragraph 2
hereof. In addition, each party shall use reasonable efforts to make
available to the Indemnifying Party, upon written request, its
officers, directors, employees and agents as witnesses to the extent
that any such person may reasonably be required in connection with the
defense or prosecution of any Claim.
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5. Waiver. The waiver by any party hereto of the breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any preceding or succeeding breach and no failure by any
party to exercise any right or privilege hereunder shall be deemed a
waiver of such party's rights or privileges or shall be deemed a waiver
of such party's rights hereunder to exercise the same at any subsequent
time or times.
6. Amendment. This Agreement may be amended, modified or
supplemented only by written instrument executed by the party against
whom enforcement is sought.
7. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of
Delaware.
8. Severability. The invalidity, illegality or unenforceability of
one or more of the provisions of this Agreement in any jurisdiction
shall not affect the validity, legality or enforceability of the
remainder of this Agreement in such jurisdiction or the validity,
legality and enforceability of this Agreement, including any such
provision, in any other jurisdiction, it being intended that all rights
and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.
9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
10. Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, and the
Indemnified Parties and each of their respective successors and
assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
on the day and year first above written.
PENRIL:
PENRIL DATACOMM NETWORKS, INC.
By:
Its:
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NEWSUB:
[THE SPIN-OFF COMPANY]
By:
Its:
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<PAGE> 87
PERPETUAL LICENSE AGREEMENT
Penril Datacomm Networks, Inc., a Delaware corporation with a
principal place of business at 1300 Quince Orchard Boulevard,
Gaithersburg, Maryland 20878, as "Licensor", and Bay Networks, Inc., a
Delaware corporation with a principal place of business at 4401 Great
America Parkway, Santa Clara, California 95052, as "Licensee" hereby
agree to the following terms and conditions of license of the Licensed
Technology, as defined below.
1. DEFINITIONS.
As used herein, the following terms shall have the following
definitions.
1.1 Affiliates. "Affiliates" of a party hereto shall mean (i)
companies the majority of whose voting shares are now or hereafter
owned or controlled directly or indirectly by such party; (ii)
companies which now or hereafter own or control directly or indirectly
a majority of the voting shares of such party; and (iii) companies a
majority of whose voting shares are now or hereafter owned or
controlled directly or indirectly by any company mentioned in (i) or
(ii) of this definition. A company shall be considered an "Affiliate"
for only so long as such ownership or control exists. For the purposes
of this definition, partnerships or similar entities where a
majority-in-interest of its partners or owners are a party hereto
and/or Affiliates of such party shall also be deemed to be Affiliates
of such party.
1.2 Confidential Information. "Confidential Information" shall
mean that part of the Technical Information, whether written or oral,
which is (i) not publicly known and (ii) annotated as "confidential" or
"proprietary." Any information which is not annotated as "confidential"
or "proprietary" shall be deemed to be in the public domain. In
addition, "Confidential Information" shall include all source code for
all software and other computer programs delivered by Licensor to
Licensee hereunder and all information disclosed by either party to the
other party in accordance with Section 2.5 (Modifications and/or
Improvements of Products) hereof. Such Confidential Information shall
not be considered Confidential Information at such time as it becomes
publicly known by any means other than a violation of the terms of this
Agreement.
1.3 Effective Date. "Effective Date" shall mean the date
this License comes into effect in accordance with the provisions
of Section 6.2 of the Merger Agreement, but no earlier than
December 16, 1996. In the event of a good-faith dispute as to
whether this License comes into effect in accordance with such
<PAGE> 88
provision of the Merger Agreement, Licensee may not make any sales
of any Product in connection herewith.
1.4 Licensed Technology. "Licensed Technology" shall mean
the Rights, Products, Trademarks and Technical Information.
1.5 Merger Agreement. "Merger Agreement" shall mean the
Agreement and Plan of Merger entered into by Licensor and Licensee
dated June 16, 1996.
1.6 Product. "Product" shall mean any and all devices, articles,
products or implements which Licensee may choose to develop using the
Licensed Technology and any and all products, software, equipment,
components, parts, tools and test equipment appurtenant there to, and
includes the V.34+ Xylogics Octal Modem Card further described in
Exhibit A hereto.
1.7 Rights. "Rights" shall mean:
(a) the patents and patent applications listed on Exhibit B-1
attached hereto, and any and all continuations, divisions, reissues,
extensions and other filings that Licensor may file with the U.S.
Patent and Trademark Office with respect to such patents and patent
applications described in this Section 1.6 above (and corresponding
applications and patents in countries and jurisdictions other than the
United States);
(b) the copyrights listed as Exhibit B-2 attached hereto;
(c) the mask work rights listed on Exhibit B-3 attached
hereto;
(d) any and all patents, patent applications, copyrights,
mask work rights and other intellectual property rights with respect to
any inventions pertaining to the Licensed Technology, which patents,
patent applications, copyrights, mask work rights and other rights (i)
are granted or to be granted to Licensor (either directly or through
its Affiliates, successors, assigns, agents or employees) (ii) with
respect to which Licensor (either directly or through its Affiliates,
successors, assigns, agents or employees) shall have the right to grant
licenses, sublicenses and rights of the type described in Article 2
below, except that nothing in this section shall grant to Licensee any
rights under U.S. Patent No. 5,388,124 (University of Maryland -
Tretter et al.); and
(e) to the extent that Licensor enters into cross licensing
agreements with third parties involving the University of Maryland
patent referred to in Section 1.7(d) above, the right to utilize any
such cross licensed technology or rights at the same cash royalty
rates, if any, on a per unit basis or on an incremented basis above the
rates otherwise available to Licensor
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<PAGE> 89
and on the same terms as Licensor, either as a sublicensee of Licensor
or directly. Although Licensee acknowledges that some cross licensors
may be unwilling to grant such pass-through rights, Licensor agrees to
use its best efforts to obtain for Licensee rights equivalent to those
obtained by Licensor for its own business.
1.8 Technical Information. "Technical Information" shall mean all
trade secrets, know-how, computer programs (including copyrights in
said software), knowledge, technology, means, methods, processes,
practices, formulas, techniques, procedures, technical assistance,
designs, drawings, apparatus, written and oral rectifications of data,
specifications, assembly procedures, schematics and other valuable
information of whatever nature, whether confidential or not, and
whether proprietary or not, which is now in (or hereafter during the
term of this Agreement comes into) the possession of Licensor and which
is relevant to the manufacture, assembly, sale, distribution, use,
installation, servicing or testing of any Product, including without
limitation the materials identified in Exhibit C below. Nothing in this
section shall grant to Licensee any rights under U.S. Patent No.
5,388,124 (University of Maryland - Tretter et al.).
2. GRANT OF RIGHTS AND LICENSES.
Subject to all of the terms and conditions set forth in this
Agreement:
2.1 Use of Rights. Licensor hereby grants to Licensee a
nonexclusive, worldwide, right and license to practice the Rights in
order to make, use, market, sell and distribute the Products. This
right and license includes, without limitation, the rights: (a) to
maintain the Products; and (b)(i) to practice the methods and processes
involved in the use of the Products; (ii) to make and have made, to use
and have used, and to maintain machines, tools, instrumentalities and
materials; and (iii) to use and have used methods and processes,
insofar as such machines, tools, instrumentalities, materials, methods
and processes are involved in or incidental to the development,
manufacture, sale, marketing, distribution, installation, testing or
repair of the Products.
2.2 Use of Technical Information.
(a) Licensor grants to Licensee a nonexclusive, worldwide,
right to use the Technical Information during the term hereof in
connection with Licensee's exercise of its rights and licenses granted
hereunder.
(b) Simultaneously with the execution of this Agreement,
Licensor shall provide to Licensee all of the Technical Information and
all patent or other searches and prior art relating to the Licensed
Technology.
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<PAGE> 90
2.3 Right to Sublicense or Assign. Licensee shall have the right
to sublicense or assign any of the rights or licenses granted hereunder
in connection with the manufacture and wholesale or retail sale solely
by Licensee of the Products, provided that Licensee shall not deliver
or make available to any other party any of the source code provided by
Licensor hereunder.
2.4 Software and Computer Programs in Rights, Technical
Information or Products.
(a) Licensor and Licensee agree that any and all software and
other computer programs included in the Rights, or the Technical
Information or the Products are being licensed by Licensor to Licensee
in source code and machine readable object code form on a nonexclusive
basis as set forth in Sections 2.1 (Use of Rights) and 2.2 (Use of
Technical Information) above, and are not being sold by Licensor or
purchased by Licensee. Licensor shall retain title to all of such
software and computer programs. Licensee shall have the right to
sublicense to third parties any rights or licenses to use individual
copies of such software in the operation of the Products.
(b) Licensee agrees not to copy or reproduce any of such
software or computer programs except during the term of this Agreement
and, provided that, Licensor's copyright and proprietary notices which
appear on such software or computer programs are properly included on
such copies and reproductions.
2.5 Modifications and/or Improvements of Products. Licensee shall
have the right to modify and improve the Products and to apply each
such modification or improvement to the Products, without payment to or
the consent of the Licensor. Any such modification or improvement shall
be the property of Licensee.
2.6 Right to Hire Designated Employees. Licensee shall have the
right to hire within 90 days of the Effective Date as its own employees
up to five designated Licensor employees, whose names are set forth on
Exhibit D attached hereto. Licensee shall, upon the request of Licensor
use its best efforts to assist and facilitate the hiring of such five
employees by Licensee provided any cash expenditures by Licensor to
such employees in connection with such efforts shall be reimbursed by
Licensee.
2.7 Additional Licenses. Licensee acknowledges that a license
under U.S. Patent No. 5,388,124 (University of Maryland - Tretter, et
al.) may be required to practice the Licensed Technology. Licensor and
Licensee shall separately negotiate the particular terms and conditions
of any such license, subject to the following conditions: (a) if
Licensee makes the payment described in Section 6.2 of the Merger
Agreement, the royalty rate for each modem shall not exceed the lesser
of $.30 per modem or the lowest rate then being charged to any other
licensee of such patent for a comparable license, and (b) if no such
payment is made, the royalty rate shall not exceed that then being
charged to
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any other licensee manufacturing a comparable volume of modems
under such license.
3. OBLIGATIONS OF LICENSOR.
3.1 Product Information and Literature. Licensor shall provide
Licensee with catalogues, maintenance manuals and other descriptive
literature with respect to the Products which Licensor has previously
generated, as well as which Licensor otherwise generates during the
first two years hereof term of this Agreement, all at no expense to
Licensee.
3.2 Training and Technical Assistance. To assist Licensee in
exercising its rights hereunder, Licensor agrees to provide appropriate
training and technical assistance to Licensee, its employees and its
permitted sublicensees, so that Licensee will be able to practice the
Patents and use the Licensed Technology to its full potential. Such
training and assistance shall be rendered by Licensor at no expense to
Licensee; provided, however, that Licensor shall not be required to
devote more than 20 man-hours during the term of this Agreement in
rendering such training and technical assistance to Licensee. The
parties hereto shall from time to time determine whether particular
training and assistance shall be rendered at Licensor's facilities or
at Licensee's facilities. Travel costs, lodging and all related
expenses incurred by one party in connection with sending its employees
or permitted sublicensees to the other party's location shall be paid
in full by the party sending such individuals.
3.3 Evaluations. Licensor shall provide Licensee free of charge
with evaluations of Licensee's manufacturing, assembly, service,
testing, installation and technical proposals; provided, however, that
Licensor shall not be required to devote more than 20 man-hours during
the term of this Agreement in rendering such evaluations to Licensee.
Licensor shall use its best efforts to deliver each evaluation to
Licensee within ten (10) days after Licensee's request of such
evaluation.
3.4 Written Inquiries. Licensor shall, at no additional cost to
Licensee, answer all written inquiries from Licensee directly
concerning the manufacture, assembly, installation, testing, use and
servicing of the Products; provided, however, that Licensor shall not
be required to devote more than 20 man-hours during the term of this
Agreement in responding to such written inquiries.
3.5 Locating Sources for Components. Licensor shall use its best
efforts, free of charge, to identify suppliers of components, parts,
tools and test equipment for Products, and to then assist Licensee in
negotiating supply agreements with such suppliers; provided, however,
that Licensor shall not be required to devote more than 20 man-hours
during the term of this Agreement in assisting Licensee pursuant to
this provision.
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3.6 Additional Services.
(a) Licensor shall use its reasonable efforts to provide
Licensee with any and all additional assistance reasonably requested by
Licensee, including without limitation: producing technical, sales,
advertising and other reports and information for Licensee which
Licensee believes might be useful in selling the Products manufactured
hereunder; and assisting Licensee in attempting to obtain from third
parties technical information, drawings, plans, specifications and
other data which are not proprietary to Licensor and which Licensor
does not otherwise have the right to use, in order to enable Licensee
to respond to requests of any potential customer.
(b) Licensor shall bill Licensee for any such services not
expressly provided free of charge in Section 2.2(b) (Use of Technical
Information) or in one of the earlier provisions of this Article 3 at
prices to be agreed in advance by the parties hereto. In all cases the
prices charged by Licensor for the services that it provides to
Licensee shall not exceed the prices that it charges its best customer
or licensee, as the case may be, for the same or similar services, if
any. Licensor shall not commence performance of any part of any
services hereunder until such prices are established in writing by the
parties hereto.
4. COMPENSATION PAYABLE TO LICENSOR.
Licensee shall pay Licensor the amount, if any, specified in
Section 6.2 of the Merger Agreement, such payment, if any, to be in
immediately available funds, at the Effective Date.
5. INVENTIONS.
If Licensor formulates, makes or conceives a patentable invention
or develops any other intellectual property rights which constitutes a
modification and/or improvement of a Product, Licensor may apply, at
its or his own expense and discretion, for appropriate patent and other
intellectual property right registrations of such invention or rights
in any and all jurisdictions. In each jurisdiction where Licensor does
not apply for such patent or registration within ninety (90) days after
having formulated, made or conceived and reduced to practice such
patentable invention or developed such right and after notice from
Licensee to Licensor of Licensee's desire to have such application or
registration made, then Licensee may either: (i) apply for such patent
or registration in such jurisdiction, at its own expense; or (ii)
request Licensor to apply for such patent or registration in such
jurisdiction and then assign all of its or his rights in such
applications to Licensee, all at Licensee's expense. Licensor shall, at
the request of the Licensee, both during and after the term of this
Agreement, execute such documents and render such assistance as may be
appropriate to enable Licensee to maintain or
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obtain registrations of patents or intellectual property rights in any
jurisdiction in accordance with this Article 5.
6. CONFIDENTIAL INFORMATION.
6.1 Confidentiality Maintained. Each party agrees that the other
party hereto has a proprietary interest in its Confidential
Information. During the term of this Agreement and for a period of
three years thereafter, all disclosures of Confidential Information to
the receiving party, its agents and employees shall be held in strict
confidence by such receiving party, its agents and employees, and such
receiving party shall disclose the Confidential Information only to
those of its agents and employees to whom it is necessary in order
properly to carry out their duties as limited by the terms and
conditions hereof. During the term of this Agreement and for a period
of three years thereafter the receiving party shall not use the
Confidential Information except for the purposes of exercising its
rights and carrying out its duties hereunder. Upon the expiration or
earlier termination of this Agreement, each party shall return to the
other all Confidential Information and all copies thereof, and shall
not at any time thereafter use any of such Confidential Information for
any purpose. The provisions of this Section 6.1 shall also apply to any
consultants or subcontractors during the term of this Agreement and for
three years thereafter that the receiving party may engage in
connection with its obligations under this Agreement. Before providing
any Confidential Information to any such consultant or subcontractor,
the receiving party shall obtain a signed undertaking in which such
consultant or subcontractor agrees to be bound by and comply with terms
substantially equivalent to and to the same effect as this Article 6.
6.2 Liability for Disclosure. Notwithstanding anything contained
in this Agreement to the contrary, neither party shall be liable for a
disclosure of the other party's Confidential Information if the
information so disclosed:
(a) was in the public domain at the time it was disclosed by
the disclosing party to the receiving party; or
(b) was known to or contained in the records of the receiving
party from a source other than the disclosing party at the time of
disclosure by the disclosing party to the receiving party and can be so
demonstrated; or
(c) was independently developed by the receiving party and is
so demonstrated promptly upon receipt of the documentation and
technology by the receiving party; or
(d) becomes known to the receiving party from a source other
than the disclosing party without breach of this Agreement by the
receiving party and can be so demonstrated; or
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<PAGE> 94
(e) if in writing, was not identified as Confidential
Information in accordance with Section 1.2 (Definition of Confidential
Information) hereof; or
(f) must be disclosed pursuant to a contract or subcontract
with a governmental agency in order to obtain/retain a procurement
contract; or
(g) was disclosed pursuant to court order or as otherwise
compelled by law.
7. "AS IS" CONDITION.
"AS IS CONDITION". LICENSOR MAKES NO WARRANTY WITH RESPECT TO THE
OPERATING CAPABILITIES AND FUNCTIONALITY OF THE PRODUCTS AND LICENSEE
ACKNOWLEDGES THAT SAME IS BEING LICENSED HEREUNDER "AS IS" WITHOUT
REPRESENTATION OR WARRANTY OF ANY KIND. THE FOREGOING PROVISIONS ARE IN
LIEU OF ANY WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL
(INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE). LICENSOR SHALL HAVE NO LIABILITY ARISING OUT OF THIS
AGREEMENT, THE LICENSE OF THE LICENSED TECHNOLOGY OR THE MANUFACTURE,
LICENSING, SALE OR SUPPLYING OF THE PRODUCTS OR THEIR USE OR
DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE.
IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE OR ANY OTHER PERSON OR
ENTITY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT
NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES)
ARISING OUT OF THIS AGREEMENT, THE LICENSE OF THE LICENSED TECHNOLOGY
OR THE MANUFACTURE, LICENSING, SALE OR SUPPLYING OF THE PRODUCTS.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Each of Licensor and Licensee hereby represents, warrants and
covenants to the other as follows:
8.1 Right, Power and Authority. It has full right, power and
authority to enter into this Agreement and there is nothing which would
prevent it from performing its obligations under the terms and
conditions imposed on it by this Agreement.
8.2 Binding Obligation. This Agreement has been duly authorized by
all necessary corporate and stockholder action of Licensor and
Licensee, respectively, and constitutes a valid and binding obligation
on Licensor and Licensee, respectively, enforceable in accordance with
the terms hereof.
8.3 Corporate Good Standing. Licensor or Licensee, as the case may
be, is a corporation duly organized and validly existing and in good
standing under the laws of its jurisdiction of incorporation and is
duly qualified and authorized to do business wherever the nature of its
activities or properties requires such qualification or authorization.
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<PAGE> 95
8.4 No Government Approvals Needed. No registration with or
approval of any government agency or commission of any jurisdiction is
necessary for the execution, delivery or performance by it of any of
the terms of this Agreement, or for the validity and enforceability
hereof or with respect to its obligations hereunder.
8.5 No Provisions Contravened. There is no provision in its
company or corporate charter, articles of incorporation, By-Laws or
equivalent governing documents, and no provision in any existing
mortgage, indenture, contract or agreement binding on it which would be
contravened by the execution, delivery or performance by it of this
Agreement.
8.6 No Consent of Third Parties Needed. No consent of any trustee
or holder of any of its indebtedness is or shall be required as a
condition to the validity of this Agreement.
8.7 No Law Contravened. Neither its execution nor its delivery of
this Agreement nor its fulfillment of or compliance with the terms and
provisions hereof shall contravene any provision of the laws of any
jurisdiction, including, without limitation, any statute, rule,
regulation, judgment, decree, order, franchise or permit applicable to
it.
8.8 Licensed Technology. Licensor has the right to use, and to
grant licenses to use, the Licensed Technology. Licensor has not, and
shall not in the future during the term of this Agreement, grant rights
or licenses to any other person or entity which prevents Licensee from
practicing under the Licensed Technology hereunder.
8.9 Validity of Patents. Licensor is aware of no patents or any
other prior art which invalidate or would invalidate any of the patents
included in the Licensed Technology, or issuance of any of those
patents in any country. To Licensor's knowledge, each patent included
in the Licensed Technology was validly issued under the laws of the
country which issued it.
8.10 Continued Effect of Representations and Warranties. It
covenants and agrees that its representations and warranties contained
in this Agreement shall remain true in all respects for a period of one
year after the Effective Date with the same effect as though such
representations and warranties had been made on and as of each such
subsequent date.
9. TERMINATION OR EXPIRATION.
9.1 Termination. The term of this Agreement shall be
perpetual.
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<PAGE> 96
10. MISCELLANEOUS.
10.1 Assignments. This Agreement shall be binding upon, and inure
to the benefit of, Licensor and Licensee and their respective
successors and permitted assigns. Neither party hereto may assign
rights or obligations hereunder except as permitted by Section 2.3.
10.2 Governing Law. This Agreement shall be governed, interpreted
and construed in accordance with the laws of the Commonwealth of
Massachusetts applicable to agreements made and to be fully performed
therein.
10.3 Waiver. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other
breaches of the same or other provisions of this Agreement.
10.4 Relationship of the Parties. The parties hereto are
independent contractors. Nothing herein contained shall be deemed to
create a joint venture, agency or partnership relationship between the
parties hereto. Neither party shall have any power to enter into any
contracts or commitments in the name of, or on behalf of, the other
party, or to bind the other party in any respect whatsoever.
10.5 Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request,
demand, claim or other communication hereunder shall be deemed duly
delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service,
in each case to the intended recipient as set forth below:
If to the Licensor: Copy to:
Penril Datacomm Networks, Inc. Benesch, Friedlander, Coplan &
1300 Quince Orchard Boulevard Aronoff, P.L.L.
Gaithersburg, Maryland 20878 2300 BP America Building
Attn.: Chairman 200 Public Square
Telecopier: (301) 921-9149 Cleveland, Ohio 44114-2378
Attn.: Irv Berliner, Esq.
Telecopier: (216) 363-4588
If to the Licensee: Copy to:
Bay Networks, Inc. Bay Networks, Inc.
4401 Great America Parkway 4401 Great America Parkway
Santa Clara, California 95052 Santa Clara, California 95052
Attn.: President Attn.: Montgomery Kersten, Esq.
Telecopier: (408) 764-1799 Telecopier: (408) 764-1991
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<PAGE> 97
Any party may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice, request, demand,
claim or other communication shall be deemed to have been duly given
unless and until it actually is received by the party for whom it is
intended. Any party may change the address to which notices, requests,
demands, claims and other communications hereunder are to be delivered
by giving the other party notice in the manner set forth in this
Agreement.
10.6 Entire Understanding. This Agreement embodies the entire
understanding between the parties relating to the subject matter hereof
and there are no prior representations, warranties or agreements
between the parties, whether written or oral, not contained in this
Agreement.
10.7 Invalidity. If any provision of this Agreement is declared
invalid or unenforceable by a court having competent jurisdiction, it
is mutually agreed that this Agreement shall endure except for the part
declared invalid or unenforceable by order of such court. The parties
shall consult and use their best efforts to agree upon a valid and
enforceable provision which shall be a reasonable substitute for such
invalid or unenforceable provision in light of the intent of this
Agreement.
10.8 Amendments. Any amendment or modification of any provision of
this Agreement must be in writing, dated and signed by both parties
hereto.
10.9 Fees Payable. Licensor and Licensee acknowledge that there
are no broker's commissions, finder's fees or other amounts payable
with regard to this transaction, and Licensor and Licensee agree to
indemnify and hold the other harmless from and against all liabilities,
claims, demands, damages or costs of any kind arising from or connected
with any broker's or finder's commission, fee or other amount claimed
to be due any person arising from the indemnitor's conduct with respect
to this Agreement and the transactions contemplated herein.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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10.11 Exhibits. All exhibits referred to in this Agreement are
attached hereto and incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be created on the day and year first above written.
PENRIL DATACOMM NETWORKS, INC., as
Licensor
By_______________________________
Name:
Title:
BAY NETWORKS, INC., as Licensee
By_______________________________
Name:
Title:
Perpetual License Agreement
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<PAGE> 99
EXHIBITS
A Products
B-1 Patents and Patent Applications
B-2 Copyrights
B-3 Mask Work Rights
C Technical Information
D List of Five Employees
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<PAGE> 100
Exhibit A
Products
Licensor will develop for Licensee an 8 Digital Modem Card that
conforms to the attached "V.34+ Xylogics Octal Modem Card Statement of
Work". Such modem architecture shall be compatible with and deliver the
functions and capabilities contained within such Statement of Work,
which is attached herein as part of this Exhibit A.
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Exhibit B-1, B-2, B-3
B1: Patents and Patent Applications
None
B2: Copyright Rights
None
B3: Mask Work Rights
None
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EXHIBIT C
Technical Information
Licensor shall provide Licensee with all Technical Information,
including but not limited to source code, as it pertains to Licensor's
existing ALX V.34 modems, digital modem architectures, T1 channel bank
hardware and software architectures, Series 6000 software architecture,
and NETMUX hardware and software architectures. Licensor shall update
such information at the end of each quarterly period of this Agreement
by supplying Licensee with updated materials for those items that
Licensor has changed. Notwithstanding the foregoing, such Technical
Information shall not include Technical Information pertaining to
custom work being performed specifically on behalf of another customer
of Licensor.
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Exhibit D
Employees to be Hired by Licensee
Jonathan Sieg
Dave Burger
Michael Livshits
Ali Hashmi
Alex Purkovic
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<PAGE> 1
EXHIBIT 10.3
Amended and Restated
BAY NETWORKS, INC.
1994 STOCK OPTION PLAN
1. Establishment and Purpose.
(a) Establishment. The Wellfleet Communications, Inc.
1988 Stock Option Plan was adopted on January 20, 1988 (the "Initial Plan"). The
Initial Plan was amended and restated on May 16, 1991 and was renamed the
Wellfleet Communications, Inc. 1991 Restated Stock Option Plan (the "Prior
Plan"). In connection with the combination of Wellfleet Communications, Inc.
("Wellfleet") and SynOptics Communications, Inc. ("SynOptics") pursuant to the
Agreement and Plan of Merger dated as of July 4, 1994, as amended, by and among
Wellfleet, SynOptics, and a wholly owned subsidiary of Wellfleet, Wellfleet
intends to change its name to Bay Networks, Inc. The Prior Plan, as amended, is
amended and restated in its entirety and renamed the Bay Networks, Inc. 1994
Stock Option Plan (the "Plan").
(b) Purpose. The purpose of the Plan is to secure for Bay
Networks, Inc. (the "Company") and its stockholders the benefits arising from
capital stock ownership by employees and officers of, and consultants or
advisors to, the Company and its parent and subsidiary corporations who are
expected to contribute to the Company's future growth and success. Except where
the context otherwise requires, the term "Company" shall include the parent and
all present and future subsidiaries of the Company as defined in Sections 424(e)
and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from
time to time (the "Code"). Those provisions of the Plan which make express
reference to Section 422 shall apply only to Incentive Stock Options (as that
term is defined in the Plan).
2. Administration.
(a) Administration by Board and/or Committee. The Plan
shall be administered by the Board of Directors of the Company (the "Board of
Directors") and/or by a duly appointed committee of the Board of Directors
having such powers as shall be specified by the Board of Directors. Any
subsequent references herein to the Board of Directors shall also mean the
committee if such committee has been appointed and, unless the powers of the
committee have been specifically limited, the committee shall have all of the
powers of the Board of Directors granted herein, including, without limitation,
the power to terminate or amend the Plan at any time, subject to the terms of
the Plan and any applicable limitations imposed by law. All questions of
interpretation of the Plan or of any options granted under the Plan (an
"Option") shall be determined by the Board of Directors, and such determinations
shall be final and binding upon all persons having an interest in the Plan
and/or any Option.
(b) Disinterested Administration. With respect to the
participation in the Plan of employees who are also officers or directors of the
Company subject to Section 16 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Plan shall be administered by the Board of Directors
in compliance with the "disinterested administration" requirement of Rule 16b-3,
as promulgated under the Exchange Act and amended from time to time or any
successor rule or regulation ("Rule 16b-3").
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<PAGE> 2
(c) Compliance with Section 162(m) of the Code. In the
event a Participating Company is a "publicly held corporation" as defined in
paragraph (2) of Section 162(m) of the Code, as amended by the Revenue
Reconciliation Act of 1993 (P.L. 103-66), and the regulations promulgated
thereunder ("Section 162(m)"), the Company may establish a committee of outside
directors meeting the requirements of Section 162(m) to approve the grant of
Options which might reasonably be anticipated to result in the payment of
employee remuneration that would otherwise exceed the limit on employee
remuneration deductible for income tax purposes pursuant to Section 162(m).
(d) Options Authorized. Options may be either incentive
stock options as defined in Section 422(a) of the Code ("Incentive Stock
Options") or nonstatutory options which are not intended to meet the
requirements of Section 422 of the Code.
(e) Authority of Officers. Any officer of a Participating
Company shall have the authority to act on behalf of the Company with respect to
any matter, right, obligation, or election which is the responsibility of or
which is allocated to the Company herein, provided the officer has apparent
authority with respect to such matter, right, obligation, or election.
3. Eligibility.
Options may be granted to persons who are employees or
officers of, or consultants or advisors to, the Company. For purposes of the
foregoing sentence, "employees" or "officers" shall include prospective
employees or officers to whom Options are granted in connection with written
offers of employment with the Company and "consultants" or "advisors" shall
include prospective consultants or advisors to whom Options are granted in
connection with written consulting or advising offers with the Company. However,
Incentive Stock Options may be granted only to persons who are employees of the
Company at the time of the grant. A person who has been granted an option may,
if he or she is otherwise eligible, be granted additional options if the Board
of Directors shall so determine.
4. Stock Subject to Plan.
Options shall be for the purchase of shares of the authorized
but unissued Common Stock or treasury shares of Common Stock of the Company.
Subject to adjustment as provided in Section 15 below, the maximum number of
shares of Common Stock of the Company which may be issued and sold under the
Plan is forty-one million seven hundred thousand (41,700,000) shares. Subject to
adjustment as provided in Section 15 below, at any such time as the Company is a
"publicly held corporation" as defined in paragraph 2 of Section 162(m), no
person shall be granted within any fiscal year of the Company Options which in
the aggregate cover more than five hundred thousand (500,000) shares; provided,
however, that the foregoing limit shall be one million (1,000,000) shares with
respect to Options granted to any person during the first fiscal year of such
person's employment with the Company or upon the promotion of any person to an
executive office of the Company (the "Per Optionee Limit"). If an option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full and/or shares of Common Stock subject to repurchase are
repurchased by the Company, the unpurchased shares subject to such option or
such repurchased shares shall again be available for subsequent option grants
under the Plan. Notwithstanding the foregoing, any such shares shall be made
subject to a new Option only if the grant of such new Option and the issuance of
such shares pursuant to such new Option would not cause the Plan or any Option
granted under the Plan to contravene Rule 16b-3.
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<PAGE> 3
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each
recipient of an option shall execute an option agreement in such form not
inconsistent with the Plan as may be approved by the Board of Directors. Such
option agreements may differ among recipients.
6. Purchase Price.
(a) General. The purchase price per share of stock
deliverable upon the exercise of an option shall be determined by the Board of
Directors, provided, however, that the exercise price shall not be less than
100% of the fair market value of such stock, as determined by the Board of
Directors, at the time of grant of such option, or less than 110% of such fair
market value in the case of options described in Section 11(b).
(b) Payment of Purchase Price. Options granted under the
Plan may provide for the payment of the exercise price by delivery of cash or a
check to the order of the Company in an amount equal to the exercise price of
such options, or, to the extent provided in the applicable option agreement, (i)
by delivery to the Company of shares of Common Stock of the Company already
owned by the optionee having a fair market value equal in amount to the exercise
price of the options being exercised, (ii) by any other means (including,
without limitation, by delivery of a promissory note of the optionee payable on
such terms as are specified by the Board of Directors) which the Board of
Directors determines are consistent with the purpose of the Plan and with
applicable laws and regulations (including, without limitation, the provisions
of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board) or
(iii) by any combination of such methods of payment. The fair market value of
any shares of the Company's Common Stock or other non-cash consideration which
may be delivered upon exercise of an option shall be determined by the Board of
Directors.
7. Option Period.
Each option and all rights thereunder shall expire on such
date as shall be set forth in the applicable option agreement, except that, in
the case of an Incentive Stock Option, such date shall not be later than ten
years after the date on which the option is granted and, in all cases, options
shall be subject to earlier termination as provided in the Plan.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either
in full or in installments at such time or times and during such period as shall
be set forth in the agreement evidencing such option, subject to the provisions
of the Plan.
9. Nontransferability of Options.
Unless otherwise provided by the Board of Directors at the
time of grant, during the lifetime of the optionee, the Option shall be
exercisable only by the optionee and no Option shall be assignable or
transferable by the optionee, either voluntarily or by operation of law, except
by will or the laws of descent and distribution; provided, however, that
nonstatutory options may be transferred pursuant to a qualified domestic
relations order (as defined in Rule 16b-3).
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10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive
Stock Options, and subject to the provisions of the Plan, the Board of Directors
shall determine the period of time during which an optionee may exercise an
option following (i) the termination of the optionee's employment or other
relationship with the Company or (ii) the death or disability of the optionee.
Such periods shall be set forth in the agreement evidencing such option.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(a) Express Designation. All Incentive Stock Options
granted under the Plan shall, at the time of grant, be specifically designated
as such in the option agreement covering such Incentive Stock Options.
(b) 10% Stockholder. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of the grant of
such option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into account
the attribution of stock ownership rules of Section 424(d) of the Code), then
the following special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
(i) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed
five years from the date of grant.
(c) Dollar Limitation. For so long as the Code shall so
provide, options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute Incentive
Stock Options shall not constitute Incentive Stock Options to the extent that
such options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate fair market value
(determined as of the respective date or dates of grant) of more than $100,000.
(d) Termination of Employment, Death or Disability. No
Incentive Stock Option may be exercised unless, at the time of such exercise,
the optionee is, and has been continuously since the date of grant of his or her
option, employed by the Company, except that:
(i) an Incentive Stock Option may be exercised
within the period of three months after the date the optionee ceases to be an
employee of the Company (or within such lesser period as may be specified in the
applicable option agreement), provided, that the agreement with respect to such
option may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory option
under the Plan;
(ii) if the optionee dies while in the employ of
the Company, or within three months after the optionee ceases to be such an
employee, the Incentive Stock Option may be exercised by the person to whom it
is transferred by will or the laws of descent and distribution
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<PAGE> 5
within the period of one year after the date of death (or within such lesser
period as may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor provision thereto)
while in the employ of the Company, the Incentive Stock Option may be exercised
within the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors
may, in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation,
restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to
make, arrange for or guaranty loans or to transfer other property to optionees
upon exercise of options, or such other provisions as shall be determined by the
Board of Directors; provided that such additional provisions shall not be
inconsistent with any other term or condition of the Plan and such additional
provisions shall not cause any Incentive Stock Option granted under the Plan to
fail to qualify as an Incentive Stock Option within the meaning of Section 422
of the Code.
(b) Acceleration, Extension. Etc. The Board of Directors
may, in its sole discretion, (i) accelerate the date or dates on which all or
any particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised; provided, however, that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3.
13. Compliance With Securities Laws.
Each option shall be subject to the requirement that if, at
any time, counsel to the Company shall determine that the listing, registration
or qualification of the shares subject to such option upon any securities
exchange or under any state or federal law, or the consent or approval of any
governmental or regulatory body, or that the disclosure of non-public
information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction or
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
14. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder
with respect to any shares covered by the option (including, without limitation,
any rights to receive dividends or
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<PAGE> 6
non-cash distributions with respect to such shares) until the date of issue of a
stock certificate to him or her for such shares. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related
Transactions.
(a) General. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, (i) the outstanding shares of
Common Stock are increased, decreased or exchanged for a different number or
kind of shares or other securities of the Company, or (ii) additional shares or
new or different shares or other securities of the Company or other non-cash
assets are distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (1) the
maximum number and kind of shares reserved for issuance under the Plan, (2) the
maximum number and kind of shares described in the Per Optionee Limit, (3) the
number and kind of shares or other securities subject to any then outstanding
options under the Plan, and (4) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment would cause the Plan to fail to comply with Section 422 of the Code
or with Rule 16b-3.
(b) Board Authority to Make Adjustments. Any adjustments
under this Section 15 will be made by the Board of Directors, whose
determination as to what adjustments, if any, will be made and the extent
thereof will be final, binding and conclusive. No fractional shares will be
issued under the Plan on account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of a consolidation or merger or
sale of all or substantially all of the assets of the Company in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity or in the event of a
liquidation of the Company, the Board of Directors of the company, or the board
of directors of any corporation assuming the obligations of the Company, may, in
its discretion, take any one or more of the following actions, as to outstanding
options: (i) provide that such options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such options substituted for Incentive
Stock Options shall meet the requirements of Section 424(a) of the Code, (ii)
upon written notice to the optionees, provide that all unexercised options will
terminate immediately prior to the consummation of such transaction unless
exercised by the optionee within a specified period following the date of such
notice, (iii) in the event of a merger under the terms of which holders of the
Common Stock of the Company will receive upon consummation thereof a cash
payment for each share surrendered in the merger (the "Merger Price"), make or
provide for a cash payment to the optionees equal to the difference between (A)
the Merger Price times the number of shares of Common Stock subject to such
outstanding options (to the extent then exercisable at prices not in excess of
the Merger Price) and (B) the aggregate exercise price of all such outstanding
options in exchange for the termination of such options, and (iv) provide that
all or any outstanding options shall become exercisable in full immediately
prior to such event.
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<PAGE> 7
(b) Substitute Options. The company may grant options
under the Plan in substitution for options held by employees of another
corporation who become employees of the Company, or a subsidiary of the Company,
as the result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as a result of the acquisition by the
Company, or one of its subsidiaries, of property or stock of the employing
corporation. The Company may direct that substitute options be granted on such
terms and conditions as the Board of Directors considers appropriate in the
circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer
upon any optionee any right with respect to the continuation of his or her
employment by the Company or interfere in any way with the right of the Company
at any time to terminate such employment at any time or to increase or decrease
the compensation of the optionee.
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts
as compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time
to time, modify or amend the Plan in any respect, provided, however, that
without the approval of the Company's stockholders, there shall be (i) no
increase in the total number of shares of Stock covered by the Plan (except by
operation of the provisions of paragraph 9 above), (ii) no change in the class
of persons eligible to receive Incentive Stock Options, and (iii) no expansion
in the class of persons eligible to receive nonstatutory options. In addition to
the foregoing, if at any time the approval of the stockholders of the Company is
required under Section 422 of the Code or any successor provision with respect
to Incentive Stock Options, or in order to comply with Rule 16b-3, the Board of
Directors may not effect such modification or amendment without such approval.
(b) The termination or any modification or amendment of
the Plan shall not, without the consent of an optionee, affect his or her rights
under an option previously granted to him or her. With the consent of the
optionee affected, the Board of Directors may amend outstanding option
agreements in a manner not inconsistent with the Plan. The Board of Directors
shall have the right to amend or modify (i) the terms and provisions of the Plan
and of any outstanding Incentive Stock Options granted under the Plan to the
extent necessary to qualify any or all such options for such favorable federal
income tax treatment (including deferral of taxation upon exercise) as may be
afforded incentive stock options under Section 422 of the Code and (ii) the
terms and provisions of the Plan and of any outstanding option to the extent
necessary to ensure the qualification of the Plan under Rule 16b-3.
20. Withholding.
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<PAGE> 8
(a) The Company shall have the right to deduct from
payments of any kind otherwise due to the optionee any federal, state or local
taxes of any kind required by law to be withheld with respect to any shares
issued upon exercise of options under the Plan. Subject to the prior approval of
the Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a fair market value equal to such withholding obligation.
The fair market value of the shares used to satisfy such withholding obligation
shall be determined by the Company as of the date that the amount of tax to be
withheld is to be determined. An optionee who has made an election pursuant to
this Section 20(a) may only satisfy his or her withholding obligation with
shares of Common Stock which are not subject to any repurchase, forfeiture,
unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a
person required to file reports under Section 16(a) of the Exchange Act, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at
any time and from time to time, with the consent of the affected optionees, (i)
the cancellation of any or all outstanding options under the Plan and the grant
in substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Termination of the Plan.
Unless sooner terminated in accordance with Section 16, the
Plan shall terminate, with respect to Incentive Stock Options, upon the earlier
of (i) May 15, 2001, or (ii) the date on which all shares available for issuance
under the Plan have been issued pursuant to the exercise or cancellation of
options granted under the Plan. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate with respect to options which are not
Incentive Stock Options on the date specified in (ii) above. If the date of
termination is determined under (i) above, then options outstanding on such date
shall continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
Notwithstanding any other provision to the contrary, the
Initial Plan and the Prior Plan shall remain in effect in accordance with their
terms and apply to Options granted pursuant to the Initial Plan and the Prior
Plan, respectively.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify
awards or options granted to participants who are foreign nationals or employed
outside the United States to
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<PAGE> 9
recognize differences in laws, rules, regulations or customs of such foreign
jurisdictions with respect to tax, securities, currency, employee benefit or
other matters.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Bay Networks, Inc. 1994 Stock Option Plan was duly adopted by
the Board of Directors of the Company on the 17th day of August, 1994.
_________________________
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<PAGE> 10
BAY NETWORKS, INC.
1994 STOCK OPTION PLAN
PLAN HISTORY
May 16, 1991 Board of Directors adopts the 1991 Restated Stock
Option Plan.
June 1991 Stockholders approve the 1991 Restated Stock Option
Plan.
October 21, 1993 Board of Directors adopts amendment to the 1991
Restated Stock Option Plan to increase the share
reserve from 5,000,000 to 7,500,000 shares.
December 10, 1993 Stockholders approve amendment to the 1991 Restated
Stock Option Plan to increase the share reserve from
5,000,000 to 7,500,000 shares.
April 1994 2:1 common stock split effective, bringing the total
share reserve to 15,000,000 shares;
August 17, 1994 Board of Directors adopts the 1994 Stock Option Plan
with a share reserve of 20,000,000 shares.
October 20, 1994 Stockholders approve the 1994 Stock Option Plan with
a share reserve of 20,000,000 shares.
October 19, 1995 Stockholders approve amendment to the 1994 Stock
Option Plan to increase the share reserve from
20,000,000 to 27,800,000.
November 24, 1995 3:2 common stock split effective, bringing the total
share reserve to 41,700,000 shares.
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<PAGE> 11
PROSPECTUS
BAY NETWORKS, INC.
4401 Great America Parkway, P.O. Box 58185
Santa Clara, California 95052-8185
Telephone: (408) 988-2400
41,700,000 SHARES OF COMMON STOCK
($.01 par value per share)
AMENDED AND RESTATED
1994 STOCK OPTION PLAN
The shares of common stock, $.01 par value per share (the "Common
Stock"), of Bay Networks, Inc. (the "Company") covered by this Prospectus are
offered as set forth under the heading "DESCRIPTION OF THE 1994 STOCK OPTION
PLAN" to certain employees and officers of, and consultants and advisors to, the
Company and its subsidiaries under the Company's 1994 Stock Option Plan (the
"Plan"). This Prospectus also covers such additional shares that may be issuable
under the Plan in the event of any recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar change in the Common
Stock.
The members of the Board of Directors and certain executive officers of
the Company, who may be deemed to be "affiliates", may resell shares of the
Company's Common Stock purchased under the Plan only in accordance with certain
restrictions imposed by the Securities Act of 1933, as amended (the "Securities
Act"), and Rule 144 promulgated thereunder. Any Director or officer acquiring
shares under the Plan should consult with legal counsel prior to reselling
shares of Common Stock. See "RESALE OF SHARES BY OFFICERS AND DIRECTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act. The date of this Prospectus is
April 2, 1996.
<PAGE> 12
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information concerning the Company may be inspected at the
Commission's Public Reference Room, Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. Copies of such material, or any portion thereof,
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
"BNET." Reports, proxy statements and other information concerning the
Registrant may also be inspected and copied at the offices of the Company.
The Company has filed with the Commission a Registration Statement on
Form S-8 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto, as certain
items are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the contents of
any agreement or other document referred to are not necessarily complete. Where
such agreement or other document is an exhibit to the Registration Statement
registering the shares offered under the Plan, each such statement is qualified
in all respects by the provisions of such exhibit, to which reference is hereby
made for a full statement of the provisions thereof. For further information
pertaining to the Company and the shares of Common Stock offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which may be
obtained from the Commission at prescribed rates.
The Company hereby undertakes to provide, without charge, upon written
or oral request of any person to whom this Prospectus is delivered, a copy of
any and all documents incorporated by reference in this Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Any other documents required
to be delivered to participants in the Plan ("Participants") pursuant to Rule
428(b) under the Securities Act shall also be provided, without charge, upon
written or oral request of any Participant. Requests for such information or for
other information regarding the Plan or its administrators should be addressed
to Bay Networks, Inc., Attention: Chief Financial Officer, 4401 Great America
Parkway, Santa Clara, California 95054, (408) 988-2400.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER
PERSON
<PAGE> 13
DEEMED TO BE AN UNDERWRITER. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE
DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
COVERED BY THIS PROSPECTUS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
<PAGE> 14
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY 1
DESCRIPTION OF THE 1994 STOCK OPTION PLAN 1
Shares Subject to the Plan 1
Administration of the Plan 2
Incentive Stock Options and Nonstatutory Options 2
Eligibility 6
General Restrictions 6
Nontransferability 7
Effective Date, Termination and Amendment 7
Consolidation, Merger or Other Reorganization 7
Federal Income Tax Consequences 8
Withholding 10
Employee Retirement Income Security Act of 1974 10
RESALE OF SHARES BY OFFICERS AND DIRECTORS 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 11
</TABLE>
<PAGE> 15
THE COMPANY
Bay Networks, Inc., a Delaware corporation (the "Company"), is the
issuer of the shares of Common Stock covered by this Prospectus. Its principal
offices are located at 4401 Great America Parkway, Santa Clara, California and
its telephone number is (408) 988-2400. The Company was formerly named Wellfleet
Communications, Inc.
DESCRIPTION OF THE 1994 STOCK OPTION PLAN
The Wellfleet Communications, Inc. 1988 Stock Option Plan was adopted
on January 20, 1988 (the "1988 Plan"). The 1988 Plan was amended and restated on
May 16, 1991 and was renamed the Wellfleet Communications, Inc. 1991 Restated
Stock Option Plan (the "1991 Plan"). The 1991 Plan was amended and restated
pursuant to the terms of the Agreement and Plan of Merger dated as of July 4,
1994, as amended, by and among Wellfleet Communications, Inc., SynOptics
Communications, Inc. and Spoke Merger Co., Inc., and renamed the Bay Networks,
Inc. 1994 Stock Option Plan (the "Plan"). The Plan was approved by the
shareholders on October 20, 1994. The Plan provides for the grant of options
which will qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and nonstatutory options.
The purpose of the Plan is to secure for the Company and its
shareholders the benefits arising from capital stock ownership by employees and
officers of, and consultants and advisors to the Company and its subsidiary
corporations who are expected to contribute to the Company's future growth and
success.
The following is a brief summary of the provisions of the Plan. This
summary is qualified in all respects by reference to the full text of the Plan,
which the Company will provide, without charge, upon written or oral request of
any person to whom this Prospectus is delivered. Each person granted an option
under the Plan should also carefully review his or her option agreement.
SHARES SUBJECT TO THE PLAN
A total of 41,700,000 shares of Common Stock are reserved for issuance
pursuant to the Plan. If the outstanding shares of the Common Stock of the
Company are changed by reason of recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar change in the
Company's capital stock, the Board may appropriately adjust the maximum number
of shares reserved for issuance under the Plan, the "Per Employee Limit" as
defined below, the number and kind of shares subject to any then outstanding
options and the price for each share subject to any then outstanding options
without changing the aggregate purchase price as to which such options remain
exercisable.
Shares issued under the Plan consist of authorized but unissued shares
or treasury shares. If an option granted under the Plan expires or terminates
without having been exercised in full and/or shares of Common Stock subject to
repurchase are repurchased by the Company, the unpurchased shares subject to
such option or such repurchased shares shall again be available for subsequent
option grants under the Plan, provided, however, that the grant of such new
option would not cause the Plan or any option under the Plan to contravene Rule
16b-3 under the Securities Exchange Act of 1934 or any successor provision
("Rule 16b-3").
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<PAGE> 16
ADMINISTRATION OF THE PLAN
The Plan is administered by the Board of Directors of the Company (the
"Board"). The directors are elected by the shareholders of the Company in
accordance with the provisions of the Certificate of Incorporation and the
By-Laws of the Company. All questions of interpretation of the Plan or of any
options granted under the Plan shall be determined by the Board of Directors.
The Board's decisions are final and binding.
To the extent permitted by applicable law, the Board may appoint a
committee to administer the Plan (the "Committee") and, in such event, all
references to the Board in this prospectus shall mean such Committee or the
Board. Said Committee must be comprised of not less than two members of the
Board appointed by the Board to administer the Plan, provided that each member
of the Committee shall be a "disinterested person" within the meaning of Rule
16b-3.
The Company may establish a committee of outside directors meeting the
requirements of Section 162(m) of the Code ("Section 162(m)") to approve the
grant of options which might reasonably be anticipated to result in the payment
of employee renumeration that would otherwise exceed the limit on employee
renumeration deductible for income tax purposes pursuant to Section 162(m).
INCENTIVE STOCK OPTIONS AND NONSTATUTORY OPTIONS
The Plan provides for the grant of incentive stock options and
nonstatutory options. Incentive stock options are intended to satisfy the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
Option Agreement. Each optionee shall be required to execute an option
agreement in such form as may be approved by the Board. The Board may include
additional provisions in option agreements, including without limitation,
restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to
make, arrange for or guaranty loans or to transfer other property to optionees
upon exercise of option, provided that such additional provisions shall not be
inconsistent with the Plan or cause any incentive stock option to fail to
qualify under Section 422 of the Code.
Option Exercise Price. Optionees will receive the right to purchase a
specified number of shares of the Common Stock of the Company at some time in
the future at an option price determined by the Board at the time of grant. This
price may not be less than 100% of the fair market value of the Common Stock of
the Company on the date of the grant or less than 110% of the fair market value
in the case of incentive stock options exercised by an employee who is a 10%
shareholder of the Company at the time of the grant.
Duration and Exercise of Option. Each option shall be exercisable and
shall vest at such times and subject to such conditions as the Board may
specify. The Board may at any time accelerate the time at which all or any part
of an option may be exercised or vest. Generally, Options are immediately
exercisable in full on the date of grant, subject to the Company's unvested
share repurchase option as described below. Any option granted as an incentive
stock option must be in compliance with the requirements of Section 422 of the
Code or any statutory provision which may replace such section and any
regulations thereunder. Accordingly, no incentive stock
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<PAGE> 17
option exercise period shall exceed ten years from the date of grant, and the
exercise period shall not exceed five years if the employee is a 10% shareholder
of the Company at the time of the grant.
Terms of Payment. Options granted under the Plan may provide for the
payment of the exercise price by delivery of cash or check in an amount equal to
the exercise price of such options or, to the extent permitted by the applicable
option agreement (and subject, in the case of incentive stock options, to any
limitation required under the Code), by (A) delivery of shares of Common Stock
owned by the optionee, valued at their fair market value, (B) any other means
which the Board determines are consistent with the purpose of the Plan and with
applicable laws and regulations or (C) any combination of the foregoing.
Termination of Employment. The Board shall determine the period of time
during which an optionee may exercise an option following the termination of the
optionee's employment or other relationship with the Company or the optionee's
death or disability. No incentive stock option may be exercised unless, at the
time of such exercise, the optionee is, and has been continuously since the date
of grant of his or her option, employed by the Company, except that:
(a) an incentive stock option may be exercised
within the period of three months after the date the optionee ceases to be an
employee of the Company (or within such lesser period as may be specified in the
applicable option agreement), provided, that the agreement with respect to such
option may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a nonstatutory stock
option under the Plan;
(b) if the optionee dies while in the employ of the
Company, or within three months after the optionee ceases to be such an
employee, the incentive stock option may be exercised by the person to whom it
is transferred by will or the laws of descent and distribution within the period
of one year after the date of death (or within such lesser period as may be
specified in the applicable option agreement); and
(c) if the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the incentive stock option may be exercised within the
period of one year after the date the optionee ceases to be such an employee
because of such disability (or within such lesser period as may be specified in
the option agreement).
Notwithstanding the foregoing provisions, no stock option may be exercised after
its expiration date.
Additional Limitations on Incentive Stock Options. In addition to the
provisions concerning incentive stock options which are described above, options
granted under the Plan which are intended to be incentive stock options shall be
subject to the following additional terms and conditions:
(a) All incentive stock options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such incentive stock options.
(b) For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to
3
<PAGE> 18
constitute incentive stock options will not constitute incentive stock options
to the extent that such options, in the aggregate, become exercisable for the
first time in any one calendar year for shares of Common Stock with an aggregate
fair market value (determined as of the respective date or dates of grant) of
more than $100,000.
Unvested Share Repurchase Option. Generally, shares acquired upon the
exercise of an option which are not vested are subject to the right of the
Company to repurchase a certain number of the shares at their original cost per
share upon termination of the optionee's employment with the Company for any
reason, with or without cause, or if the optionee (or the optionee's legal
representative) attempts to sell, exchange, transfer, pledge, or otherwise
dispose of any shares acquired on the exercise of an option before such shares
have vested (the "Unvested Share Repurchase Option"). The number of shares
subject to the Unvested Share Repurchase Option decreases over time, as the
shares vest. Usually, one quarter of the shares will be vested on the Initial
Vesting Date, which means the date occurring one year after the date on which
the optionee commenced employment with the Company or one year from the grant
date, and for each full month of continuous service with the Company completed
by the optionee after the Initial Vesting Date, the shares will be vested at a
rate of one-forty-eighth per month. The vesting schedule for any option grant is
set at the discretion of the Board, and is determined at the time that the grant
is made. The vesting schedule will be set out in the option agreement for each
grant.
To insure that the unvested shares will be available for repurchase,
the optionee must deposit the certificates evidencing the shares which the
optionee purchases upon exercise of an option with an escrow agent designated by
the Board under the terms and conditions of an escrow agreement approved by the
Board. The Company will bear the expenses of the escrow.
The Company may exercise the Unvested Share Repurchase Option by
written notice to the escrow agent and to the optionee or the optionee's legal
representative within sixty days after such termination of employment (or
exercise of the option, if later) or after the Company has received notice of
the attempted disposition. If the Company fails to give notice within such sixty
day period, the Unvested Share Repurchase Option will terminate unless the
Company and the optionee have extended the time for the exercise of the Unvested
Share Repurchase Option. The Unvested Stock Repurchase Option must be exercised,
if at all, for all of the unvested shares except as the Company and the optionee
otherwise agree.
Payment by the Company to the escrow agent on behalf of the optionee or
the optionee's legal representative will be made in cash within thirty days
after the date of the mailing of the written notice of exercise of the Unvested
Share Repurchase Option. Cancellation of any promissory note of the optionee to
any Company will be treated as payment to the optionee in cash to the extent of
the unpaid principal and any accrued interest canceled. Within thirty days after
payment by the Company, the escrow agent will deliver the shares which the
Company has purchased to the Company and will deliver the payment received from
the Company to the optionee.
The Company may assign the Unvested Share Repurchase Option at any
time, whether or not such option is then exercisable, to one or more persons as
may be selected by the Board.
The Unvested Share Repurchase Option will not apply to a transfer to
the optionee's ancestors, descendants or spouse or to a trustee for the benefit
of the optionee or the optionee's ancestors, descendants or spouse, provided
that such transferee agrees in writing (in a form
4
<PAGE> 19
satisfactory to the Board) to take the shares subject to all the terms and
conditions of the Unvested Shares Repurchase Option.
As soon as practicable after the expiration of the Unvested Share
Repurchase Option and after full repayment on any promissory note secured by the
shares in escrow, the escrow agent will deliver to the optionee the shares no
longer subject to such restriction and no longer security for any promissory
note.
ELIGIBILITY
Under the terms of the Plan, all employees and officers of and
consultants and advisors to the Company or any subsidiary who are expected to
contribute to the Company's future growth and success, are eligible for the
grant of options under the Plan. For the purposes of the foregoing sentence,
"employees" or "officers" shall include prospective employees or officers to
whom options are granted in connection with written offers of employment with
the Company and "consultants" or "advisors" shall include prospective
consultants or advisors to whom options are granted in connection with written
consulting or advising offers with the Company. Incentive stock options may be
awarded only to persons eligible to receive such options under the Code. Options
may be granted to employees who are foreign nationals or employed outside the
United States on such terms different from those specified in the Plan as may,
in the judgment of the Board, be necessary or advisable to achieve the purposes
of the Plan or comply with applicable laws.
GENERAL RESTRICTIONS
For so long as the Company is a "publicly held corporation" as defined
in Section 162(m), no person may be granted within any fiscal year options which
in the aggregate cover more than 500,000 shares, provided, however, that this
limit shall be 1,000,000 shares with respect to options granted to any person
during the first fiscal year of such person's employment with the Company or
upon the promotion of any person to an executive office of the Company (the "Per
Optionee Limit").
An option granted under the Plan may not be exercised (i) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, (ii) if the outstanding stock is at the
time listed on any stock exchange, until the shares to be delivered have been
listed or authorized to be listed on such exchange upon official notice of
notice of issuance, and (iii) until all other legal matters in connection with
the issuance and delivery of such shares have been approved by the Company's
counsel.
No person shall have any claim or right to be granted an option under
the Plan, and the grant of an option shall not be construed as giving an
optionee the right to continued employment or service for the Company. The
Company expressly reserves the right at any time to dismiss an optionee free
from any liability or claim under the Plan, except as expressly provided in the
applicable option agreement.
Subject to the provisions of the applicable option, no optionee shall
have any rights as a shareholder with respect to any shares of Common Stock to
be distributed under the Plan until he or she becomes the record holder thereof.
5
<PAGE> 20
NONTRANSFERABILITY
Unless otherwise provided by the Board at the time of grant, during the
lifetime of the optionee, the option shall be exercisable only by the optionee
and no option may be assignable or transferable by the optionee except by will
or the laws of descent and distribution. However, nonstatutory options may be
transferred pursuant to a qualified domestic relations order (as defined in Rule
16b-3).
EFFECTIVE DATE, TERMINATION AND AMENDMENT
The Plan was approved by the shareholders of the Company on October 20,
1994, and became effective on that date.
The Plan will terminate, with respect to incentive stock options upon
the earlier of (i) May 15, 2001, or (ii) the date on which all shares available
for issuance under the Plan have been issued pursuant to the exercise or
cancellation of options granted under the Plan, and with respect to nonstatutory
options on the date specified in (ii). If the Plan is terminated on May 15, 2001
then options outstanding on that date shall continue to have force and effect in
accordance with the provisions of the instruments evidencing such options.
The Board may amend the Plan at any time and in any respect provided,
however, that without the approval of the Company's shareholders there shall be
(i) no increase in the total number of shares covered by the Plan, (ii) no
change in the class of persons eligible to receive incentive stock options and
(iii) no expansion in the class of persons eligible to receive nonstatutory
options. The termination or amendment of the Plan shall not affect an optionee's
rights under an option previously granted, without the consent of the optionee.
With such consent the Board may amend outstanding option agreements in a manner
not inconsistent of the Plan. The Board may amend or modify the terms and
provisions of the Plan and any incentive stock option granted under the Plan to
the extent necessary to qualify such options for favorable income tax treatment
under Section 422 of the Code and to ensure the qualification of the Plan under
Rule 16b-3. Further, no amendment may be made without shareholder approval if
such approval is required under Section 422 of the Code or any successor
provision with respect to incentive stock options or is necessary to comply with
Rule 16b-3.
CONSOLIDATION, MERGER OR OTHER REORGANIZATION
In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
entity or in the event of a liquidation of the Company, the Board, or the board
of directors of any corporation assuming the obligations of the Company, may, in
its discretion, take any one or more of the following actions as to outstanding
options: (i) provide that such options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation provided that
any options substituted for incentive stock options shall meet the requirements
of Section 424(a) of the Code, (ii) upon written notice to the optionees,
provide that all unexercised options will terminate immediately prior to the
consummation of such transaction unless exercised by the optionee within a
specified period, (iii) in the event of a merger under the terms of which
holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the merger (the "Merger
Price"), make or provide for a specified cash payment to the optionees equal to
the difference
6
<PAGE> 21
between (A) the Merger Price times the number of shares of Common Stock subject
to such outstanding options (to the extent then vested at prices not in excess
of the Merger Price) and (B) the aggregate exercise price of all such
outstanding options in exchange for the termination of such options, and (iv)
provide that all or any outstanding options will become vested in full prior to
the effective date of such event.
The Company may grant options under the Plan in substitution for
options held by employees of another corporation who become employees of the
Company or a subsidiary of the Company as a result of a merger or consolidation
of the employing corporation with the Company or a subsidiary of the Company or
as a result of the acquisition by the Company or one of its subsidiaries of
property or stock of the employing corporation. The substitute options shall be
granted on such terms and conditions as the Board considers appropriate in the
circumstances.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax treatment of
options granted under the Plan. The tax consequences recognized by an optionee
may vary; therefore, an optionee should consult his or her tax advisor for
advice concerning any specific transaction.
Incentive Stock Options. No taxable income will be recognized by an
optionee upon the grant or exercise of an incentive stock option granted under
the Plan (provided that the difference between the option exercise price and the
fair market value of the stock on the date of exercise must be included in the
optionee's "alternative minimum taxable income" as described below), and no
corresponding expense deduction will be available to the Company. Generally, if
an optionee holds shares acquired upon the exercise of incentive stock options
until the later of (i) two years from the grant of the option and (ii) one year
from the date of transfer of the purchased shares to him or her (the "Statutory
Holding Period"), any gain to the optionee upon a sale of such shares will be
treated as capital gain. The gain recognized upon the sale of the stock is the
difference between the option price and the sale price of the stock. The net
federal income tax effect on the holder of incentive stock options is to defer,
until the stock is sold, taxation of any increase in the stock's value from the
time of grant to the time of exercise, and to cause all such increase to be
treated as capital gain.
If the optionee sells the shares prior to the expiration of the
Statutory Holding Period (a "disqualifying disposition"), he or she will realize
taxable income at ordinary income tax rates in an amount equal to the lesser of
(i) the fair market value of the shares on the date of exercise less the option
price, or (ii) the amount realized on the sale less the option price, and the
Company will receive a corresponding business expense deduction. Any additional
gain will be treated as long-term capital gain if the shares are held for more
than one year prior to the sale and as short-term capital gain if the shares are
held for a shorter period. If the optionee sells the stock for less than the
option price, he or she will recognize a capital loss equal to the difference
between the sale price and the option price. The loss will be a long-term
capital loss if the shares are held for more than one year prior to the sale and
as a short-term capital loss if the shares are held for a shorter period.
Special rules may apply to options held by directors and officers. If
the optionee making a disqualifying disposition is a person required to file
reports pursuant to Section 16 of the Exchange Act or any successor provision (a
"Reporting Person"), and the option was exercised within six months of the date
of grant, the amount of taxable income realized at ordinary income tax rates
(and the amount of the Company's business expense deduction) will be equal to
the lesser of (i)
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<PAGE> 22
the fair market value of the shares on the date that is six months after the
date of grant less the option price, or (ii) the amount realized on sale less
the option price.
For purposes of the "alternative minimum tax" applicable to
individuals, the exercise of an incentive stock option is treated in the same
manner as the exercise of a nonstatutory option. Thus, an optionee must, in the
year of option exercise, include the difference between the exercise price and
the fair market value of the stock on the date of exercise in alternative
minimum taxable income. The alternative minimum tax is imposed upon an
individual's alternative minimum taxable income currently at rates of 26% to
28%, but only to the extent that such tax exceeds the taxpayer's regular income
tax liability for the taxable year.
Nonstatutory Stock Options. No taxable income is recognized by the
optionee upon the grant of a nonstatutory option. The optionee must recognize as
ordinary income in the year in which the option is exercised the amount by which
the fair market value of the purchased shares on the date of exercise exceeds
the option price (and the Company is required to withhold an appropriate amount
for tax purposes). However, the following special rules apply to Reporting
Persons. If a Reporting Person exercises the option within six months of the
date of grant, upon exercise of such option no income will be recognized by the
optionee until six months have expired from the date the option was granted, and
the income then recognized will include any appreciation in the value of the
shares during the period between the date of exercise and the date six months
after the date of grant, unless the optionee makes an election under Section
83(b) of the Code to have the difference between the exercise price and fair
market value at the time of exercise recognized as ordinary income as of the
time of exercise.
The Company will be entitled to a business expense deduction equal to
the amount of ordinary income recognized by the optionee. Any additional gain or
any loss recognized upon the subsequent disposition of the purchased shares will
be a capital gain or loss, and will be a long-term gain or loss if the shares
are held for more than one year.
This tax summary is general and does not apply to gifts or any
dispositions other than sales. Also, under certain circumstances, a grantee may
be entitled to a credit for alternative minimum tax already paid. In addition,
in some individual cases, it will be important to consider the state and foreign
tax consequences of participation in the Plan and the effect, if any, of gift,
estate and inheritance taxes. For advice as to your specific situation, you
should consult your tax advisor.
WITHHOLDING
The Company shall have the right to deduct from payments due to the
optionee any taxes required by law to be withheld with respect to any shares
issued upon the exercise of options granted under the Plan. In the Board's
discretion, and subject to such conditions as the Board may establish, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the exercise of an option creating the tax obligation,
valued at their fair market value. Such shares may not be subject to any
repurchase, forfeiture, unfulfilled vesting or other similar requirements.
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<PAGE> 23
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
The Plan is not qualified under Section 401(a) of the Code and the
Company believes that the Plan is not subject to the Employee Retirement Income
Security Act of 1974.
RESALE OF SHARES BY OFFICERS AND DIRECTORS
Shares of Common Stock purchased upon exercise of options granted under
the Plan may be resold freely, except that any Participant deemed to be an
"affiliate" of the Company, within the meaning of the Securities Act and the
rules and regulations promulgated thereunder, may not sell securities acquired
under the Plan unless such securities have been registered by the Company under
the Securities Act for resale by such affiliate or an exemption from
registration under the Securities Act is available. Rule 144 under the
Securities Act provides an exemption from registration provided certain
limitations on the manner of sale and the amount of shares sold are observed
(holding period limitations will not apply). An employee who is not an executive
officer, member of the Board of Directors or 10% shareholder of the Company
generally would not be deemed to be an "affiliate" of the Company.
Any Director or officer acquiring shares under the Plan should consult
with legal counsel prior to reselling shares of Common Stock. Such sale may
implicate securities laws other than Rule 144, including Rule 10b-5 and Section
16 under the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which are filed with the Commission, are
incorporated in this Prospectus by reference:
(1) The Company's latest annual report filed pursuant to
Sections 13(a) or 15(d) of the Exchange Act, or the latest prospectus filed
pursuant to Rule 424(b) under the Securities Act that contains audited financial
statements for the registrant's latest fiscal year for which such statements
have been filed.
(2) All other reports filed pursuant to Sections 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the annual
reports or the prospectus referred to in (1) above.
(3) The description of the Common Stock of the Company
contained in a Registration Statement filed under the Exchange Act, including
any amendment or report filed for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a
post-effective amendment which indicates that all shares of Common Stock offered
hereby have been sold or which deregisters all shares of Common Stock then
remaining unsold, shall be deemed to be incorporated by reference herein and to
be part hereof from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or
9
<PAGE> 24
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
10
<PAGE> 1
EXHIBIT 10.4
AMENDED AND RESTATED
BAY NETWORKS, INC.
1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. Establishment and Purpose.
(a) Establishment. The Wellfleet Communications, Inc.
1991 Director Stock Option Plan was adopted on May 16, 1991 and was amended on
June 29, 1993 (the "Prior Plan"). In connection with the combination of
Wellfleet Communications, Inc. ("Wellfleet") and SynOptics Communications, Inc.
("SynOptics") pursuant to the Agreement and Plan of Merger dated as of July 4,
1994, as amended, by and among Wellfleet, SynOptics and a wholly owned
subsidiary of Wellfleet (the "Merger Agreement"), Wellfleet changed its name to
Bay Networks, Inc. Wellfleet terminated the Prior Plan and adopted the Bay
Networks, Inc. 1994 Outside Directors Stock Option Plan (the "Plan") which was
approved by the stockholders on October 20, 1994. Amendment of the Plan was
approved by the stockholders on October 19, 1995.
(b) Effective Time and Purpose. The Plan is established
effective as of the Effective Time (as defined in the Merger Agreement) to
create additional incentive for the outside directors of Bay Networks, Inc. and
any successor corporation thereto (collectively referred to as the "Company") to
promote the financial success and progress of the Company and its subsidiaries.
2. Administration. The Plan shall be administered by the Board of
Directors of the Company (the "Board") and/or by a duly appointed committee of
the Board having such powers as shall be specified by the Board. Any subsequent
references herein to the Board shall also mean the committee if such committee
has been appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to terminate or amend
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law. The Board shall have no authority, discretion, or
power to select the non-employee directors of the Company who will receive
options under the Plan, to set the exercise price of the options granted under
the Plan, to determine the number of shares of common stock to be granted under
option or the time at which such options are to be granted, to establish the
duration of option grants, or alter any other terms or conditions specified in
the Plan, except in the sense of administering the Plan subject to the
provisions of the Plan. All questions of interpretation of the Plan or of any
options granted under the Plan (an "Option") shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan and/or any Option. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with respect to
such matter, right, obligation, or election.
3. Eligibility and Type of Option. Options may be granted only to
directors of the Company who are not employees of the Company or any present or
future parent and/or subsidiary corporations of the Company. Options granted to
eligible directors of the Company ("Outside Directors") shall be nonqualified
stock options; that is, options which are not treated as having been granted
under section 422(b) of the Internal Revenue Code of 1986, as amended (the
1
<PAGE> 2
"Code"). For purposes of the Plan, a parent corporation and a subsidiary
corporation shall be as defined in sections 424(e) and 424(f) of the Code.
4. Shares Subject to Option. Options shall be options for the
purchase of the authorized but unissued common stock of the Company (the
"Stock"), subject to adjustment as provided in paragraph 8 below. The maximum
number of shares of Stock which may be issued under the Plan shall be five
hundred thousand (500,000) shares. In the event that any outstanding Option for
any reason expires or is terminated or cancelled and/or shares of Stock subject
to repurchase are repurchased by the Company, the shares allocable to the
unexercised portion of such Option, or such repurchased shares, may again be
subjected to an Option. Notwithstanding the foregoing, any such shares shall be
made subject to a new Option only if the grant of such new Option and the
issuance of such shares pursuant to such new Option would not cause the Plan or
any Option granted under the Plan to contravene Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, and as amended from time to time or any
successor rule or regulation ("Rule 16b-3").
5. Time for Granting Options. All Options shall be granted, if at
all, within ten (10) years from the Effective Time.
6. Terms, Conditions and Form of Options. Options granted
pursuant to the Plan shall be evidenced by written agreements specifying the
number of shares of Stock covered thereby, in substantially the form attached
hereto as Exhibit A for initial grants and in substantially the form attached
hereto as Exhibit B for subsequent grants, and incorporated herein by reference
(the "Option Agreements"), and shall comply with and be subject to the following
terms and conditions:
(a) Automatic Grant of Options. Subject to execution by each
Outside Director of the appropriate Option Agreement:
(i) At the Effective Time, each Outside Director
who was on the Board immediately prior to the Effective Time and continues to
serve on the Board at the Effective Time shall be granted an Option to purchase
thirty thousand (30,000) shares of Stock. Each Outside Director who is first
elected or appointed to serve on the Board at or after the Effective Time shall
be granted an Option to purchase thirty-five thousand (35,000) shares of Stock
upon such election or appointment.
(ii) Each Outside Director shall be granted an
additional Option to purchase ten thousand (10,000) shares of Stock upon the
second though seventh Anniversary Dates of the initial option grant to such
Outside Director.
(iii) The Anniversary Date of an Outside Director
who was on the Board at the Effective Time shall be the date which is twelve
(12) months after the Effective Time and successive anniversaries thereof. The
Anniversary Date of an Outside Director who is elected or appointed to the Board
after the Effective Time shall be the date which is twelve (12) months after
such election or appointment and successive anniversaries thereof.
(iv) Notwithstanding the foregoing, any Outside
Director may elect not to receive an Option granted pursuant to this paragraph
6(a) by delivering written notice of such election to the Board (1) in the case
of an initial Option grant, no later than the Effective Time or
2
<PAGE> 3
the date upon which such Outside Director commences service on the Board, or (2)
in the case of an anniversary Option grant, no later than six (6) months prior
to the applicable Anniversary Date.
(v) Notwithstanding any other provision of the
Plan, no Option shall be granted to any individual who is no longer serving as
an Outside Director of the Company on an Anniversary Date which would otherwise
be a date of grant.
(b) Option Price. The option price per share for an Option
shall be the fair market value of the common stock of the Company, as determined
by the closing price of a share of Stock on the National Association of
Securities Dealers Automated Quotations system (the "NASDAQ System") or other
national securities exchange on the date immediately preceding the date of the
granting of the Option. If the date immediately preceding the date of the
granting of the Option does not fall on a day on which the common stock of the
Company is trading on the NASDAQ System or other national securities exchange,
the date on which the option price per share shall be established shall be the
last day on which the common stock of the Company was so traded prior to the
date of the granting of the Option. Notwithstanding the foregoing, an Option may
be granted with an exercise price lower than the minimum exercise price set
forth above if such Option is granted pursuant to an assumption or substitution
for another option in a manner qualifying with the provisions of section 424(a)
of the Code.
(c) Exercise Period of Options. Any Option granted hereunder
shall be exercisable for a term of ten (10) years.
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<PAGE> 4
(d) Vesting. Options granted pursuant to the Plan shall first
become vested on the day (the "Initial Vesting Date") which is one year from the
date on which the Option was granted. The Option shall be vested on and after
the Initial Vesting Date as follows:
<TABLE>
<CAPTION>
Vested Percentage
-----------------
<S> <C>
(i) Prior to Initial Vesting Date 0
On Initial Vesting Date, 33-1/3%
provided the Optionee has
continuously served as a
director of the Company
from the date the Option was
granted until the Initial
Vesting Date.
Plus
----
(ii) For each full year 33-1/3%
of the Optionee's continuous
service as a director of the
Company from the Initial
Vesting Date.
</TABLE>
In the event of a Transfer of Control, as defined in paragraph
9 below, if the Option is assumed or substituted for by the surviving,
continuing, successor or purchaser corporation, the Option shall continue to
vest according to the provisions of this paragraph 6(d), in addition to the
acceleration of vesting described in paragraph 9 below.
(e) Payment of Option Price. Payment of the option price for
the number of shares of Stock being purchased pursuant to any Option shall be
made (i) in cash, by check, in cash equivalent, (ii) by the assignment of the
proceeds of a sale of some or all of the shares being acquired upon the exercise
of an Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) or (iii) by the Optionee's recourse
promissory note. No promissory note shall be permitted if an exercise using a
promissory note would be a violation of any law. Any permitted promissory note
shall be due and payable not more than five (5) years after the Option is
exercised, and interest shall be payable at least annually and be at least equal
to the minimum interest rate necessary to avoid imputed interest pursuant to all
applicable sections of the Code. The Board shall have the authority to permit or
require the Optionee to secure any promissory note used to exercise an Option
with the shares of Stock acquired on exercise of the Option and/or with other
collateral acceptable to the Company.
(1) The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to establish, decline
to approve and/or terminate any program and/or procedures for the exercise of
Options by means of an assignment of the proceeds of a sale of some or all of
the shares of Stock to be acquired upon such exercise.
4
<PAGE> 5
(2) Unless otherwise provided by the Board, in
the event the Company at any time becomes subject to the regulations promulgated
by the Board of Governors of the Federal Reserve System or any other
governmental entity affecting the extension of credit in connection with the
Company's securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
7. Authority to Vary Terms. The Board shall have the authority
from time to time to vary the terms of the Option Agreements set forth as
Exhibit A and Exhibit B, respectively, either in connection with the grant of an
individual Option or in connection with the authorization of a new standard form
or forms; provided, however, that the terms and conditions of such revised or
amended form or forms of stock option agreement shall be in accordance with the
terms of the Plan. Such authority shall include, but not by way of limitation,
the authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of stock acquired by the
Optionee on exercise of an Option in the event such Optionee's service as a
director of the Company is terminated for any reason.
8. Effect of Change in Stock Subject to Plan. Appropriate
adjustments shall be made in the number and class of shares of Stock subject to
the Plan and to any outstanding Options and in the option price of any
outstanding Options in the event of a stock dividend, stock split, reverse stock
split, combination, reclassification, or like change in the capital structure of
the Company.
9. Transfer of Control. A "Transfer of Control" shall be deemed
to have occurred in the event any of the following occurs with respect to the
Company.
(a) the sale or exchange by the stockholders of the Company of
all or substantially all of the stock of the Company where the stockholders of
the Company before such sale or exchange do not retain, directly or indirectly,
at least a majority of the beneficial interest in the voting stock of the
Company;
(b) a merger in which the stockholders of the Company before
such merger do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Company; or
(c) the sale or exchange of all or substantially all of the
Company's assets (other than a sale or transfer to a subsidiary corporation of
the Company).
In the event of a Transfer of Control, the Vested Percentage calculated
in paragraph 6(d) above shall be increased by 33-1/3% as of 30 days prior to the
Transfer of Control. However, in no event shall the Vested Percentage exceed
100%. The exercise and/or vesting of any Option that was permissible solely by
reason of this paragraph 9 shall be conditioned upon the consummation of the
Transfer of Control. Any Options which are not exercised as of the date of the
Transfer of Control shall terminate effective as of the date of the Transfer of
Control except, however, if the Options are assumed or substituted for by the
surviving, continuing, successor or purchaser corporation, they shall continue
in effect in accordance with their terms.
10. Options Non-Transferable. During the lifetime of the Optionee,
the Option shall be exercisable only by the Optionee. No Option shall be
assignable or transferable by the Optionee, except by will or by the laws of
descent and distribution.
5
<PAGE> 6
11. Termination or Amendment of Plan and Options. The Board,
including any duly appointed committee of the Board, may terminate or amend the
Plan and/or any Option at any time; provided, however, that without the approval
of the stockholders of the Company, there shall be (a) no increase in the total
number of shares of Stock covered by the Plan (except by operation of the
provisions of paragraph 8 above) and (b) no expansion in the class of person
eligible to receive Options; and provided further, that the provisions of the
Plan addressing eligibility to participate in the Plan and the amount, price and
timing of grants of Options shall not be amended more than once every six (6)
months, other than to comport to changes in the Code, or the rules thereunder.
In addition to the foregoing, the approval of the Company's stockholders shall
be sought for any amendment to the Plan for which the Board deems stockholder
approval necessary in order to comply with Rule 16b-3. In any event, no
termination or amendment may adversely affect any then outstanding Option, or
any unexercised portion thereof, without the consent of the Optionee.
12. Continuation of Prior Plan as to Outstanding Options.
Notwithstanding any other provision to the contrary, the Prior Plan shall remain
in effect in accordance with its terms and apply to Options granted pursuant to
the Prior Plan.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Bay Networks, Inc. 1994 Outside Directors Stock Option Plan
was duly adopted by the Board of Directors of the Company on the 17th day of
August, 1994 and amended with approval of the stockholders on the 19th day of
October 1995.
______________________________
6
<PAGE> 7
BAY NETWORKS, INC.
1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
PLAN HISTORY
August 17, 1994 Board of Directors approves the plan with a share
reserve of 500,000 shares.
October 20, 1994 Stockholders approve the plan with a share reserve
of 500,000 shares.
October 19, 1995 Stockholders approve amendment to the 1994 Outside
Directors Stock Option Plan to provide that shares
subject to outstanding and new grants will vest over
a period of three years (rather than four years), and
to increase the number of shares each non-employee
director is granted on the second through seventh
anniversary date of his or her initial grant from
7,500 shares to 10,000 shares.
November 24, 1995 3:2 common stock split effective, bringing the total
share reserve to 750,000 shares.
7
<PAGE> 8
PROSPECTUS
BAY NETWORKS, INC.
4401 Great America Parkway, P.O. Box 58185
Santa Clara, California 95052-8185
Telephone: (408) 988-2400
750,000 SHARES OF COMMON STOCK
($.01 par value per share)
AMENDED AND RESTATED
1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
The shares of common stock, $.01 par value per share (the "Common
Stock"), of Bay Networks, Inc. (the "Company") covered by this Prospectus are
offered as set forth under the heading "DESCRIPTION OF THE 1994 OUTSIDE
DIRECTORS STOCK OPTION PLAN" to certain directors of the Company who are not
employees of the Company or any of its subsidiaries under the Company's 1994
Outside Directors Stock Option Plan ("Plan"). This Prospectus also covers such
additional shares that may be issuable under the Plan in the event of any stock
dividend, stock split, reverse stock split, combination, reclassification or
other similar change in the Common Stock.
Members of the Board of Directors are deemed to be "affiliates" of the
Company and may resell shares of the Company's Common Stock purchased under the
Plan only in accordance with certain restrictions imposed by the Securities Act
of 1933, as amended (the "Securities Act") and Rule 144 promulgated thereunder.
Any Director acquiring shares under the Plan should consult with legal counsel
prior to reselling shares of Common Stock. See "RESALE OF SHARES BY DIRECTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act. The date of this Prospectus is
November 27, 1995.
<PAGE> 9
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information concerning the Company may be inspected at the
Commission's Public Reference Room, Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. Copies of such material, or any portion thereof,
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
"BNET". Reports, proxy statements and other information concerning the
Registrant may also be inspected and copied at the offices of the Company.
The Company has filed with the Commission a Registration Statement on
Form S-8 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto, as certain
items are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the contents of
any agreement or other document referred to are not necessarily complete. Where
such agreement or other document is an exhibit to the Registration Statement
registering the shares offered under the Plan, each such statement is qualified
in all respects by the provisions of such exhibit, to which reference is hereby
made for a full statement of the provisions thereof. For further information
pertaining to the Company and the shares of Common Stock offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which may be
obtained from the Commission at prescribed rates.
The Company hereby undertakes to provide, without charge, upon written
or oral request of any person to whom this Prospectus is delivered, a copy of
any and all documents incorporated by reference in this Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Any other documents required
to be delivered to participants pursuant to Rule 428(b) under the Securities Act
shall also be provided, without charge, upon written or oral request of any
participant in the Plan. Requests for such information or for additional
information about the Plan or its administrators should be addressed to Bay
Networks, Inc., Attention: Chief Financial Officer, 4401 Great America Parkway,
Santa Clara, California 95054, telephone (408) 988-2400.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER
PERSON
<PAGE> 10
DEEMED TO BE AN UNDERWRITER. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE
DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
COVERED BY THIS PROSPECTUS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY 1
DESCRIPTION OF THE 1994 OUTSIDE DIRECTORS STOCK
OPTION PLAN 1
Shares Subject to the Plan 1
Administration of the Plan 1
Terms, Conditions and Forms of Options 2
Eligibility 3
Effective Date, Termination and Amendment 3
Transfer of Control 3
Federal Income Tax Consequences 4
Employee Retirement Income Security Act of 1974 5
RESALE OF SHARES BY DIRECTORS 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 5
</TABLE>
<PAGE> 12
THE COMPANY
Bay Networks, Inc., a Delaware corporation (the "Company"), is the
issuer of the shares of Common Stock covered by this Prospectus. Its principal
offices are located at 4401 Great America Parkway, Santa Clara, California and
its telephone number is (408) 988-2400.
DESCRIPTION OF THE 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
On August 17, 1994, the Board of Directors adopted, and on October 20,
1994 the stockholders approved, the 1994 Outside Directors Stock Option Plan
(the "Plan"). On October 19, 1995 the stockholders approved an amendment to the
Plan. The Plan provides for the grant of nonstatutory options not intended to
meet the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The purpose of the Plan is to create additional incentive
for the outside directors of the Company to promote the financial success and
progress of the Company and its subsidiaries.
The following is a brief summary of the provisions of the Plan. This
summary is qualified in all respects by reference to the full text of the Plan,
which the Company will provide, without charge, upon written or oral request of
any person to whom this Prospectus is delivered. Each person granted an option
under the Plan should also carefully review his or her option agreement.
SHARES SUBJECT TO THE PLAN
The original version of the Plan reserved a total of 500,000 shares of
the Company's Common Stock (subject to adjustment for any dividend, stock split,
reverse stock split, combination, reclassification or other relevant changes in
the Company's capitalization) for issuance pursuant to the Plan. A three-for-two
stock split effective on November 24, 1995 resulted in an adjusted reserve of
750,000 Shares. Shares issued under the Plan consist of authorized but unissued
shares or treasury shares. In the event that any outstanding option expires or
is terminated or cancelled or shares subject to repurchase are repurchased by
the Company, the shares allocable to the unexercised portion of such option, or
such repurchased shares, may again be subjected to an option, provided, however,
that the grant of such new option and issuance of shares pursuant to its
exercise would not cause the Plan or any option granted under the Plan to
contravene Rule 16b-3 under the Exchange Act ("Rule 16b-3").
ADMINISTRATION OF THE PLAN
The Plan is administered by the Board of Directors of the Company (the
"Board") or by a committee appointed by the Board (the "Committee"). Any
subsequent reference to the Board shall also mean the Committee, if one has been
appointed. The directors are elected by the stockholders of the Company in
accordance with the provisions of the Certificate of Incorporation and the
By-Laws of the Company. None of the members of the Board of Directors receives
any additional compensation for services in connection with the administration
of the Plan. Grants of stock options under the Plan and the amount, exercise
price, nature and recipients of those options are automatic and
non-discretionary according to the provisions of the Plan. However, the Board of
Directors is authorized to interpret the provisions of the Plan.
1
<PAGE> 13
TERMS, CONDITIONS AND FORMS OF OPTIONS
The Plan provides for option grants by the Company to eligible
directors. Each director who is serving on the Board immediately prior to the
Effective Time (as defined in the Agreement and Plan of Merger dated as of July
4, 1994, as amended, by and between Wellfleet Communications, Inc., SynOptics
Communications, Inc. and Spoke Merger Co., Inc.) and continues to serve on the
Board at or after the Effective Time will be granted, at the Effective Time, an
option to purchase 45,000 shares of Common Stock (adjusted for November 1995
stock split). Each director who is first elected or appointed to serve on the
Board at or after the Effective Time will be granted, on the date of his or her
election or appointment, an option to purchase 52,500 shares of Common Stock
(adjusted for November 1995 stock split). The Plan also provides for the grant
of an option to purchase 15,000 shares of Common Stock (adjusted for November
1995 stock split) to each eligible director on the second through seventh
anniversary of his or her initial option grant under the Plan. The option
exercise price per share for each option granted under the Plan is the last
reported sale price per share of the Company's Common Stock on the Nasdaq
National Market on the date immediately preceding the date of grant (or if no
such price is reported on such date, such price as reported on the nearest
preceding date). An option may be granted with an exercise price that is lower
than the price as determined above if such option is granted pursuant to an
assumption of or substitution for another option in a manner qualifying with the
provisions of Section 424(a) of the Code.
Each option grant shall be evidenced by a written agreement specifying
the number of shares covered by the option. An option granted under the Plan is
not transferable by the optionee otherwise than by will or by the laws of
descent and distribution and may be exercised during the lifetime of the
optionee only by such optionee.
Each option vests in equal annual installments over a period of three
years beginning one year after the date of grant, provided that the optionee has
continuously served as a director of the Company from the date the option was
granted. No option is exercisable after the expiration of ten years from the
date of the grant.
Options may be exercised only by written notice to the Company at its
principal office accompanied (i) by payment in cash or cash equivalent or by
check, (ii) by assignment of the proceeds of a sale of some or all of the shares
being acquired by the exercise of the option (subject to the Company's approval)
or (iii) by the optionee's recourse promissory note when authorized by the
Board.
A director may elect not to receive an option granted under the Plan by
delivering written notice to the Board, in the case of an initial grant, no
later than the date such director would receive such grant, and in the case of
subsequent option grants, six months prior to such grants.
ELIGIBILITY
Only directors of the Company who are not employees of the Company or
any present or future parent or subsidiary of the Company are eligible to be
granted options under the Plan.
2
<PAGE> 14
EFFECTIVE DATE, TERMINATION AND AMENDMENT
The Plan was adopted by the Board of Directors on August 17, 1994 and
approved by the stockholders on October 20, 1994. Pursuant to its terms, the
Plan became effective on October 21, 1994. On October 19, 1995 the stockholders
approved an amendment to the Plan to provide that shares subject to outstanding
and new grants will vest over a period of three years, and to increase the
number of shares each non-employee director is granted on the second through
seventh anniversary date of his or her initial grant to 10,000 shares.
The Board of Directors may terminate or amend the Plan or any option
granted under the Plan in any respect whatsoever; provided, however, that
without approval of the stockholders of the Company no revision or amendment may
change the number of shares subject to the Plan or expand the class of persons
eligible to receive options. The approval of the Company's stockholders shall be
sought for any amendment to the Plan for which the Board deems stockholder
approval necessary in order to comply with Rule 16b-3. The provisions of the
Plan addressing eligibility and the amount, price and timing of grants may not
be amended more than once in any six-month period other than to comport to
changes in the Code. No termination or amendment of the Plan may adversely
affect any then outstanding option, or any unexercised portion thereof, without
the consent of the optionee.
TRANSFER OF CONTROL
In the event of a Transfer of Control, as defined below, the vested
portion of any option shall be increased by 33-1/3%, up to a maximum of the
total number of shares represented by the option, as of 30 days prior to the
Transfer of Control. Such vesting and exercise of an option is conditioned upon
the consummation of the Transfer of Control.
A Transfer of Control shall be deemed to have occurred in a event of
(i) the sale or exchange by the stockholders of the Company of all or
substantially all of the stock of the Company, or a merger, whereby the
stockholders of the Company immediately before such sale or exchange or merger
do not retain at least a majority of the beneficial interest in the voting stock
of the Company or (ii) the sale or exchange of all or substantially all of the
Company's assets (other than a sale or transfer to a subsidiary corporation of
the Company).
Any options which are not exercised as of the date of the Transfer of
Control shall terminate effective as of such date provided, however, that if the
options are assumed or substituted by the surviving, continuing, successor or
purchaser corporation, they shall continue in effect in accordance with their
terms.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax treatment of
nonstatutory stock options. The tax consequences recognized by an optionee may
vary; therefore, an optionee should consult his or her tax advisor for advice
concerning any specific transaction.
No taxable income is recognized by the optionee upon the grant of a
nonstatutory option.
In the case of the consummation of a merger, consolidation, or other
event described in Section 9(b) of the Plan whereby an option granted under the
Plan may be exercised less than six
3
<PAGE> 15
months after the date of grant, upon exercise less than six months after the
grant, the optionee must either (1) recognize as ordinary income, on the date
six months after the date of grant, the difference between the fair market value
on such date and the exercise price, or (2) pursuant to Section 83(b) of the
Code, elect to have the difference between the exercise price and the fair
market value at the time of exercise recognized as ordinary income at the time
of exercise. Such an election must be made within 30 days of the option
exercise.
Upon exercise more than six months after the grant, the optionee must
recognize as ordinary income the difference between the exercise price and the
fair market value at the time of exercise.
The Company will be entitled to a business expense deduction equal to
the amount of ordinary income recognized by the optionee. Any gain or any loss
recognized upon the subsequent disposition of the purchased shares will be a
capital gain or loss, and will be a long-term gain or loss if the shares are
held for more than one year.
At the time the option is exercised, in whole or in part, or at any
time thereafter as requested by the Company, the Optionee shall make adequate
provision for foreign, federal and state tax withholding obligations of the
Company, if any, which arise in connection with the option including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the option, or (ii) the transfer, in whole or in part, of any shares of stock
acquired on exercise of the option.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
The Plan is not qualified under Section 401(a) of the Code and the
Company believes that the Plan is not subject to the Employee Retirement Income
Security Act of 1974.
RESALE OF SHARES BY DIRECTORS
Shares of Common Stock purchased upon exercise of options granted under
the Plan may be resold freely, except that any participant deemed to be an
"affiliate" of the Company, within the meaning of the Securities Act and the
rules and regulations promulgated thereunder, may not sell shares acquired upon
exercise of options granted under the Plan unless such shares have been
registered by the Company under the Securities Act for resale by such affiliate
or an exemption from registration under the Securities Act is available. Rule
144 under the Securities Act provides an exemption from registration provided
certain limitations on the manner of sale and the amount of shares sold are
observed (holding period limitations will not apply). All directors of the
Company are deemed to be "affiliates" and, accordingly, any director intending
to sell shares acquired upon exercise of options granted under the Plan should
consult with legal counsel before making any sales. Such sale may implicate
securities laws other than Rule 144, including Rule 10b-5 and Section 16 under
the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which are filed with the Commission, are
incorporated in this Prospectus by reference:
4
<PAGE> 16
(1) The Company's latest annual report filed pursuant to
Sections 13(a) or 15(d) of the Exchange Act, or the latest prospectus filed
pursuant to Rule 424(b) under the Securities Act that contains audited financial
statements for the registrant's latest fiscal year for which such statements
have been filed.
(2) All other reports filed pursuant to Sections 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the annual
reports or the prospectus referred to in (1) above.
(3) The description of the Common Stock of the Company
contained in a Registration Statement filed under the Exchange Act, including
any amendment or report filed for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a
post-effective amendment which indicates that all shares of Common Stock offered
hereby have been sold or which deregisters all shares of Common Stock then
remaining unsold, shall be deemed to be incorporated by reference herein and to
be part hereof from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
5
<PAGE> 1
EXHIBIT 11.1
BAY NETWORKS, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income..................................... $206,325 $128,986 $124,378
======== ======== ========
Weighted average common shares outstanding..... 185,056 177,347 169,143
Common stock equivalents resulting from stock
options...................................... 13,722 10,312 10,945
-------- -------- --------
Total common and common equivalent shares for
calculation of primary net income per
share........................................ 198,778 187,659 180,088
Additional dilutive effect due to stock
options...................................... 419 1,558 329
-------- -------- --------
Total common and common equivalent shares for
calculation of fully diluted net income per
share........................................ 199,197 189,217 180,417
======== ======== ========
Net income per primary common and common
equivalent share............................. $ 1.04 $ 0.69 $ 0.69
======== ======== ========
Net income per fully diluted common and common
equivalent share............................. $ 1.04 $ 0.68 $ 0.69
======== ======== ========
</TABLE>
All share and per share data for prior periods have been retroactively
restated to reflect the acquisition with Xylogics, Inc., in a pooling of
interests transaction effective December 15, 1995.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF BAY NETWORKS, INC.
Registrant's significant consolidated subsidiaries and the state or
jurisdiction of organization of each subsidiary are shown below:
Bay Networks USA, Inc. (Delaware)
Bay Networks Group, Inc. (Delaware)
Xylogics, Inc. (Delaware)
Centillion Networks, Inc. (Delaware)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Our audits included the financial statement schedule of Bay Networks, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. We
did not audit the financial statements of Wellfleet Communications, Inc., which
statements reflect net income constituting approximately 51% of the related 1994
consolidated financial statement total. We have been furnished with the report
of other auditors with respect to the financial statement schedule of Wellfleet
Communications, Inc. In our opinion, based on our audits, and for 1994 the
report of other auditors, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-42297, 33-85460, 33-85462, 33-85464, 33-85466,
33-92736 and 33-80897) of our report dated July 19, 1996, with respect to the
consolidated financial statements of Bay Networks, Inc. included in the Annual
Report (Form 10-K) for the year ended June 30, 1996, and our report included in
the preceding paragraph with respect to the financial statement schedule
included in this Annual Report (Form 10-K) of Bay Networks, Inc.
ERNST & YOUNG LLP
Palo Alto, California
September 3, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-42297, 33-85460, 33-85462, 33-85464, 33-85466,
33-92736 and 33-80897) of Bay Networks, Inc. of our reports dated July 18, 1994
relating to the financial statements of Wellfleet Communications, Inc., which
reports are included in this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 3, 1996
<PAGE> 1
EXHIBIT 23.3
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Wellfleet Communications, Inc.
Our audit of the consolidated financial statements referred to in our
report dated July 18, 1994 (which report is included in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule (not
presented separately herein) listed in Item 14(a) of the Form 10-K of Wellfleet
Communications, Inc. for the year ended June 30, 1994. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 18, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 315,064
<SECURITIES> 119,093
<RECEIVABLES> 330,575
<ALLOWANCES> 9,683
<INVENTORY> 239,725
<CURRENT-ASSETS> 1,117,709
<PP&E> 401,485
<DEPRECIATION> 189,811
<TOTAL-ASSETS> 1,506,535
<CURRENT-LIABILITIES> 301,693
<BONDS> 110,147
0
0
<COMMON> 1,885
<OTHER-SE> 1,092,810
<TOTAL-LIABILITY-AND-EQUITY> 1,506,535
<SALES> 2,056,634
<TOTAL-REVENUES> 2,056,634
<CGS> 945,318
<TOTAL-COSTS> 945,318
<OTHER-EXPENSES> 213,521
<LOSS-PROVISION> 1,364
<INTEREST-EXPENSE> 5,927
<INCOME-PRETAX> 351,816
<INCOME-TAX> 145,491
<INCOME-CONTINUING> 206,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,325
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
