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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
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19366
BAY NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2916246
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4401 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
TELEPHONE: (408) 988-2400
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. [___]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $7,213,259,447 as of August 26, 1997, 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 26, 1997, 210,591,687 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 1997 Annual
Meeting of Stockholders to be held on October 21, 1997 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., together with its worldwide subsidiaries (the Company
or Bay Networks), develops, manufactures, markets, sells and supports a
comprehensive line of data networking products and services. The Company
provides products that meet the connectivity requirements of corporate
enterprises, network service providers and telecommunications carriers. The
Company offers switches, routers, shared media hubs, remote and Internet access
solutions, Internet Protocol (IP) services and network management applications,
all marketed under the Company's Adaptive Networking strategy. The Company's
products and technologies enables customers to transition from today's complex
multi-protocol networks to the IP-optimized networks of tomorrow. These
solutions link people to critical information resources at the desktop, across
corporate enterprise networks or over the public Internet.
The Company's focus is to build networks that are invisible to users,
worry-free for network managers and strategic for the organizations they serve.
Accordingly, the Company offers a single source of open, standards-based
technology, service and support that fulfills the high-performance, availability
and interoperability networking requirements at all levels -- from enterprise
and service provider backbone environments to branch offices and remote users.
To accommodate diverse and rapidly changing customer needs, the Company designs
highly scalable and flexible equipment that provides a smooth migration for
customers to develop the advanced IP-optimized networks of the future without
replacing existing network equipment.
Over the past several years, the Company has grown by both developing new
products and technologies, and by acquiring product lines and technologies
through mergers and acquisitions. 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. At that point, the Company
changed its name to Bay Networks, Inc. During the fiscal year ended June 30,
1995, the Company acquired Centillion Networks, Inc. During the following fiscal
year ended June 30, 1996, the Company acquired Xylogics, Inc., Performance
Technology, Inc. and Armon Networking, Ltd. During the fiscal year ended June
30, 1997, the Company acquired LANcity Corporation, the Digital Signal
Processing (DSP) modem business of Penril DataComm Networks, Inc., NetICs, Inc.,
ISOTRO Network Management, Inc. and Rapid City Communications.
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.
DATA NETWORKING TECHNOLOGY AND MARKETS
In today's business environment, several major networking technology
trends are taking place. The convergence of new, resource-intensive,
Internet-based applications with traditional enterprise applications is placing
a strain on current network infrastructures. These advances in technology and
business requirements are transforming the physical and logical structures of
organizations and their supporting applications and networks.
Strides in computing, networking and telecommunications technology,
coupled with the popularity of the Internet, the World Wide Web, browser
technology, and enterprise networks (Intranets), are redefining the way people
work, learn and play. These technologies allow organizations to share
information by eliminating the constraints of distance and time, resulting in a
global, electronically-linked community.
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Additionally, users' demand for access to emerging applications such as
image processing, data mining, video conferencing at the desktop, information
modeling and multimedia, are dramatically changing networks' service
requirements. These Internet-based applications are causing a fundamental change
in the way users interact with the computer, the network and other users.
Moreover, these next-generation, high-bandwidth applications are driving the
need for networks that deliver greater performance, availability and
scalability.
To streamline operations and reduce networking costs, many businesses and
consumers are turning to network service providers for corporate and residential
Wide Area Network (WAN) support and Internet access, as well as a range of
value-added WAN services, such as fully managed Virtual Private Networks (VPNs),
Web management, or managed network security. As network service providers
including telecommunications carriers, Internet Service Providers (ISPs) and
cable television operators compete to bring businesses and consumers the
fastest, cost effective and highest quality Internet/Intranet access, they face
a new set of challenges in the areas of infrastructure deployment and expansion,
differentiated services capabilities and new services delivery.
One consequence of increased user demand for high-speed access to
bandwidth-intensive applications, worldwide and at anytime, is that both
corporate enterprises and network service providers increasingly require a more
adaptive networking model. These customers need highly scalable, intelligent,
open networks that can quickly adapt to changing network usage patterns and
volume, and growing demands for high quality information access without
compromising performance, reliability, or security. At the same time, many
organizations are faced with the task of upgrading and expanding networks that
already include multiple communications protocols and computing platforms in a
heterogeneous mix.
The Company has responded to these trends by pioneering the concept of
Adaptive Networking, a set of products and technologies that will enable
customers to transition today's complex networks to the IP-optimized networks of
tomorrow.
ADAPTIVE NETWORKING
Through its Adaptive Networking business strategy, the Company delivers
open, scalable products and services to customers while reducing the complexity
of their networks. Adaptive Networking supports the process of building
IP-optimized networks that are invisible to users, worry-free for network
managers and of strategic value to the customer's business. To help build
IP-optimized networks, the Company is focusing on four cornerstone technologies
that provide the foundation for Adaptive Networking: switching/routing, access,
IP services and network management.
Switching/Routing technology enables the building of high-performance,
highly scalable, and cost-effective campus enterprise WAN and teleco/Internet
Service Provider Networks. Switching products connect computer networks by
supporting multiple parallel communications and eliminating network congestion.
Routers provide additional intelligence in connecting networks so that different
types of networks may communicate with each other in a secure manner. The
Company's switching technology is key to the new product category of "Routing
Switch" which combines the characteristics of switches and routers. Routing
switches aim to optimize handling of IP traffic over the network.
Access technology delivers carrier-class and enterprise remote access
solutions, end-to-end virtual private network access, digital modem technology,
and cable modem solutions. Remote users may access their electronic mail,
databases and file servers no matter where they are connected to the network.
IP Services deliver network security, address management, and bandwidth
management, as well as services such as Virtual Private Networking (VPN) and
multimedia applications. For example, VPN allows network users to construct a
network that functions as a private network using the resources of the public
Internet.
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Network Management provides physical and logical views of a network, fault
isolation and troubleshooting, global configuration management, path tracing,
and application monitoring. Through a combination of hardware and software
components, intelligent network management technology gathers network
information and forwards it to a central network management console attached to
the network.
These technologies are combined to support long-term, non-disruptive
network evolution and investment protection; drive operational productivity at
every level of the network; and adapt to continuous changes in network usage and
business requirements.
THE COMPANY'S ORGANIZATION AND PRODUCTS
To execute its Adaptive Networking strategy and provide products that
incorporate the cornerstone technologies, Bay Networks is organized into two
business groups: the Enterprise Business Group (EBG) and the Internet/Telecom
Business Group (ITBG). The Enterprise Business Group provides modular and
stackable hubs, routers and switches, as well as network management hardware and
software. Products in these categories include the Access Node(TM) (AN(R))
family, the Backbone Node(TM) (BN(R)) family and Nautica(TM) family of routers;
the Centillion(TM) line of switches; the BayStack(TM) line of stackable hubs,
routers and switches; the Distributed 5000(TM), System 5000(TM), System
3000(TM), System 2000(TM) and System 800(TM) families of modular and
preconfigured hubs and switches; the NETGEAR(TM) family of small office
networking products; the Optivity(R) line of software and StackProbe(TM) family
of hardware for network management; and NetID(TM) IP naming and address
assignment services.
The Internet/Telecom Business Group provides access products and solutions
for enterprises and network service providers, including ISPs and
telecommunications carriers. These products include the 5000 Multi-Service
Access Switch (MSX(TM)); Model 5399(TM) remote access concentrators and modules;
the Remote Annex(TM) family of remote access communications servers and modules
with BaySecure(TM) Access Control; BayStream(TM) Dial VPN virtual private
networking services; high-speed digital modems and cable TV modems and servers;
and the BayStack(TM) Instant Internet(TM) connectivity products.
In addition to the EBG and ITBG business groups, the Company has
established the Bay Architecture Lab to research and develop new technologies
and products to be incorporated into the Company's product and service
offerings. Through the Lab, the Company will continue to work with industry
standards organizations and academic institutions in the development and
evolution of emerging protocols and technologies.
STRATEGIC ACQUISITIONS
To supplement its internal development activities, the Company has made
several key acquisitions. Each acquisition has extended Bay Networks' product
line with new products and technologies.
On May 15, 1995, the Company acquired Centillion Networks, Inc., a
provider of Local Area Network (LAN) switching products. On December 15, 1995,
the Company acquired Xylogics, Inc., a provider of remote access equipment. On
March 13, 1996, the Company acquired Performance Technology, Inc., a developer
of LAN-to-Internet access technology. On March 31, 1996, the Company acquired
Armon Networking, Ltd., a developer of network monitoring software applications
and hardware probes.
On September 24, 1996, the Company acquired LANcity Corporation, a
provider of advanced cable modem technology. On November 18, 1996, the Company
acquired the DSP modem business of Penril DataComm Networks, Inc., a provider of
advanced DSP-based modems and remote access products. On December 17, 1996, the
Company acquired NetICs, Inc., a developer of high-performance, autosensing Fast
Ethernet work group switches. On April 22, 1997, the Company acquired ISOTRO
Network Management, Inc., a vendor of standards-based Domain Naming Service and
Dynamic Host Configuration Protocol technology. On June 25, 1997, the Company
acquired Rapid City Communications, an early innovator of routing switch and
Gigabit Ethernet technologies.
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The Company may make further acquisitions in the future to implement its
business plans. Business strategies involving mergers and acquisitions
necessarily involve high levels of risk. Acquisitions require significant
financial and management resources both at the time of the transaction and
during the process of integrating the newly acquired business into the Company's
operations. The Company's results of operations, consolidated financial
position, or cash flows, may be adversely affected if it is unable to
successfully integrate such new companies into its operations. There can be no
assurance that any acquired products, technologies or businesses will contribute
at anticipated levels to the Company's sales or earnings, or that sales and
earnings from combined businesses will not be adversely affected by the
integration process. Certain acquisitions or strategic transactions may be
subject to approval by the other party's board or shareholders, domestic or
foreign governmental agencies, or other third parties, creating a risk that
important acquisitions or transactions could fail to be concluded as planned.
Future acquisitions by the Company may also result in the issuance of equity
securities or rights associated with the equity securities, which may
potentially dilute earnings per share. In addition, future acquisitions may
result in additional debt, taxes, or contingent liabilities, amortization
expenses related to goodwill and other intangible assets and expenses incurred
to align the accounting policies and practices of the acquired companies with
those of the Company. There is also a risk that integration of systems,
personnel, and facilities could take longer than expected. These factors could
adversely affect the Company's future consolidated results of operations,
financial position, or cash flows. As the Company's competitors have pursued a
strategy of growth through acquisition, there is a risk that future acquisitions
may be more expensive due to competition among bidders for target companies.
SALES CHANNELS
The Company sells its products worldwide through multiple channels
designed to reach a broad range of customers. Working with more than 2,100
resellers and 2,200 field sales and support personnel, the Company leverages
sales channels to provide appropriate coverage, integration services and
specialized vertical market support. The Company's global market strategy
emphasizes the support of sales and service through a network of value added
resellers (VARs), distributors, network and systems integrators, and directly to
major customers through its domestic field sales force. 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. Sales to VARs are made at
discounts based on purchase volumes and other incentive programs. VARs may
choose to procure the Company's 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 less system integration
service. Distributors purchase at standard discounts and may also include volume
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. These non-exclusive
VARs and distributors may choose to give higher priority to products of other
suppliers or competitors.
VAR and distributor networks 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 may have a material
adverse effect on the Company's revenue and results of operations.
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Field Sales Force. The Company's field sales force manages its sales
activities through multi-channel distribution strategies. In addition to the
sales channels customers described above, the Company's customers also 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) and to enhance brand name
recognition and awareness of its products. 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 product
specifications and ongoing communications with its installed base of end users
customers. The Company's reseller and distribution programs include incentives
and benefits such as co-op marketing funds and reseller marketing programs.
CUSTOMERS AND BACKLOG
The Company's product backlog on June 30, 1997, was approximately $190
million as compared to product backlog on June 30, 1996, of approximately $120
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. If backlog is reduced during any particular period, it may result in
variability and less predictability in the Company's quarter-to-quarter revenue
and operating results. No one customer accounted for more than 10% of the
Company's revenue in fiscal 1997. One reseller, Anixter Inc., a wholly-owned
subsidiary of Anixter International, Inc., accounted for approximately 13% and
14% of the Company's revenue in fiscal 1996 and fiscal 1995, respectively.
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 generally sells products to end users with limited 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 export sales. Following the
expiration of the limited warranty period, if any, the Company offers services
under maintenance contracts or on a time and materials basis. The Company's
worldwide Customer Service Organization, which is ISO 9001 certified, provides
support across the network life cycle with design, implementation, and
operational support services. The Company also provides on-site network support
services such as system installation, network integration services and technical
consulting. In addition, the Company offers service flexibility with
professional consulting services, educational services, network support services
(7x24x365 availability), online information services, and ServiceLink(TM) remote
monitoring.
The market for the Company's products increasingly demands high levels of
customer support and service. As a result, the Company aims to provide
competitive levels of support and service, as well as product warranties. There
is a risk that the Company or its contractors may be unable to provide a level
of service that is acceptable to its customers. There is also a risk that the
Company may incur substantial costs related to warranties or service claims.
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RESEARCH AND DEVELOPMENT
The Company has devoted significant resources to research and development,
spending $269.8 million, $213.5 million and $145.3 million during the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.
During fiscal 1997, the Company continued development of enhancements to
its current products and to the development of new products to address emerging
technologies in areas such as remote access, switched internetworking, and
network management. The Company believes that the markets for its products are
characterized by rapid rates of technological innovation for both hardware and
software, and therefore plans to continue its commitment to research and
development in fiscal 1998 in order to pursue its goal of developing new
products.
The Company plans to bring products to the market more quickly by
continuing its commitment to research and development through both internal
development and, since the industry's technology environment is rapidly
changing, through acquisitions of technology. There can be no assurance that
research and development efforts or acquisitions of technology will result in
commercially successful new technology and products in the future, or that such
technology and products will be introduced in time to meet market requirements.
The Company's research and development efforts may be adversely affected by
other factors noted in this report.
MANUFACTURING
The Company's manufacturing operations are located in Santa Clara and
Sunnyvale, California; Billerica and Andover, Massachusetts; Tel Aviv, Israel;
and since the third quarter of fiscal 1997, in Limerick, Ireland. The Company
also relies upon a number of manufacturing arrangements with suppliers
worldwide. The Company's manufacturing capability may be affected by factors
impacting the operations of its suppliers. In addition, the Company's ability to
meet customer demand may also be dependent on its ability to adjust
manufacturing levels on short notice based on anticipated orders.
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.
The Company relies on support located throughout the world for raw
materials and subcomponents. Most of the components used in the Company's
products are available from more than one supplier. The Company's manufacturing
abilities may be affected by the operations of its manufacturing suppliers,
suppliers' price and capacity, and suppliers' quality control activities. 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 may become necessary to make such
payments again in the future.
The Company has reduced its product manufacturing cycle times by, among
other techniques, turnkey manufacturing, consolidation of certain product lines
and increased focus on balancing inventory levels between anticipated orders and
the risk of obsolescence. However, if shorter cycle times are available from
other manufacturers, the Company's customers may cancel, or not place, orders.
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.
COMPETITION
The data networking industry has grown in recent years. However, the
Company's revenue may fluctuate from year-to-year or quarter-to-quarter based on
competition and customers' decisions to await anticipated product introductions.
This industry is highly competitive and competition is expected to intensify,
which may 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;
network management capabilities; price; performance; product features; technical
support; and distribution.
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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, Inc., Cabletron Systems,
Inc., 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. 3Com Corporation acquired U.S.
Robotics Corporation, and Ascend Communications, Inc. acquired Cascade
Communications Corporation during 1997. Such consolidations by competitors are
likely to create entities with increased market shares, customer bases,
technology and marketing expertise, sales forces, or proprietary technology in
product markets in which the Company competes. 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
may 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 and other intellectual property. The Company maintains as
proprietary the technology incorporated in its 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. Other companies may receive patents on technology
identical to technology independently developed by the Company. In addition,
some foreign countries do not have or enforce laws that 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.
It may become necessary for the Company to enter into technology licenses
from others because of the existence of a large number of patents in the
networking field, the rapid rate of issuance of new patents, new standards that
may issue, or to obtain important technology. Such licenses may impact the
Company's operating results, and there is no assurance that the Company will be
able to license such technology.
The Company has announced a number of strategic technology alliances and
cooperative marketing efforts. There can be no assurance that such alliances
will lead to standards acceptable to the market, or competitive products.
Furthermore, to the extent the Company integrates technology obtained through
strategic alliances in its products, there can be no assurance that the steps
taken by the underlying proprietary rights holder will be adequate to prevent
misappropriation or loss of such holder's proprietary rights upon which the
Company's ownership or use rights in the technology is based.
EMPLOYEES
As of June 30, 1997, the Company employed 5,960 persons, including regular
and temporary employees as well as contract workers. None of these persons are
believed to be represented by a labor union. The Company has experienced no work
stoppages and considers its employee relations to be positive.
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In the fiscal year ended June 30, 1997, the Company appointed a new
Chairman of the Board, President, and Chief Executive Officer; a new Executive
Vice President of Sales, Service, and Marketing; a new Executive Vice President
and Chief Financial Officer; a new Executive Vice President and General Manager,
Internet/Telecom Business Group; and a new Executive Vice President and General
Manager, Enterprise Business Group; and several new Vice Presidents. In
addition, the Company has reorganized its business groups and realigned its
resources and some employees in order to better serve its customers, strengthen
its product development and marketing abilities. The Company's success will
depend on its ability to effect a smooth transition to its new structure and new
management team with minimal disruption in operations. These changes, as well as
future changes in key personnel, may adversely impact the Company's consolidated
financial position, results of operations, or cash flows.
The Company's success also depends upon the continued contributions of its
personnel, many of whom would be difficult to replace. The loss of services of
any of the Company's key employees may have a material adverse effect on the
Company. The Company's success will depend in large part on its ability to
attract and retain highly-skilled managerial, engineering, sales and marketing
personnel and to motivate key employees and officers. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining its key technical and management personnel and in
attracting and retaining the personnel it requires to continue to grow.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Santa Clara,
California. The Company has ongoing research and development activities in
Massachusetts, California, Texas, Maryland, Canada, India, Israel and the United
Kingdom.
The Company's manufacturing and distribution facilities total
approximately 485,000 square feet located in California, Massachusetts, Israel
and Ireland. The Company began manufacturing and distribution in Limerick,
Ireland during the third quarter of fiscal 1997.
The Santa Clara facilities consist of approximately 1,022,000 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 1,205,000 square
feet under leases that will expire through July, 2010 and the Company has an
option to renew certain of these leases for various terms. The Company has
subleased to third parties 200,000 square feet of its Santa Clara facilities and
15,000 square feet of its Massachusetts facilities. Activities at these
locations include administrative, sales and marketing, product development,
manufacturing and support facilities.
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 118,000 square feet of its above Santa Clara facilities from the
limited partnership.
Some of the Company's manufacturing and distribution facilities, as well
as a portion of the Company's research and development, sales and administrative
functions, are located in areas of seismic risk. The Company's future operating
results may be materially affected by a major earthquake.
Subsidiaries of the Company lease and occupy sales and service offices in
38 states throughout the United States and Puerto Rico and 38 countries
worldwide. Bay Networks' worldwide operations are located in Argentina,
Australia, Austria, Barbados, Belgium, Brazil, Canada, Cayman Islands, Chile,
China, Colombia, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia,
Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New
Zealand, Norway, the Philippines, Portugal, Russia, Singapore, South Africa,
Spain, Sweden, Switzerland, Taiwan, Thailand, United Arab Emirates and the
United Kingdom.
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ITEM 3. LEGAL PROCEEDINGS
As with other companies in the networking industry, the Company is subject
to the risk of adverse claims and litigation on a variety of matters, including
intellectual property and securities law matters. Major litigation may result in
substantial costs and expenses to the Company and significant diversion of
efforts by the Company's technical and management personnel. In addition, an
adverse ruling in a major litigation may have a material adverse effect on the
Company's future 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. In most instances the claimants
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.
On March 4, 1997, the Company announced that stockholders filed two
separate lawsuits against the Company and ten of the Company's current and
former officers and directors. One lawsuit has been filed in the United States
District Court for the Northern District of California and alleges violations of
the federal securities laws. The other lawsuit has been filed in California
Superior Court, County of Santa Clara, and alleges violations of the California
Corporations Code. Both lawsuits purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during the period of May
1, 1995 through October 14, 1996. Both cases are in the initial stages and no
trial dates have been set.
On April 18, 1997, a stockholder (represented by some of the same
plaintiffs' law firms as in the aforementioned cases) filed a lawsuit in Santa
Clara County, California Superior Court, alleging violations of the federal
securities laws and California Corporations Code by the Company and nine of its
current and former officers and directors. The lawsuit purports to seek damages
on behalf of a class of stockholders who acquired the Company's common stock
pursuant to the Registration Statement and Prospectus that became effective on
November 15, 1995. This case is in the initial stages and no trial date has been
set.
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, 1997.
10
<PAGE> 11
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
David L. House 54 Mr. House joined the Company in October
Chairman of the Board, 1996 as Chairman of the Board, President
President and and Chief Executive Officer. Prior to
Chief Executive Officer joining the Company, Mr. House was the
Senior Vice President and General
Manager of the Enterprise Service Group
at Intel Corporation. During his 22
years at Intel, Mr. House served in a
number of key general management,
marketing and strategic planning roles.
In 1991, Mr. House headed up the
Architecture, Marketing and Applications
Group, where he managed all corporate
marketing activities, including the
introduction of the highly regarded
"Intel Inside(R)" campaign. From 1992 to
1995, as Senior Vice President of
Corporate Strategy, Mr. House was a key
architect of Intel's major strategic
alliances, including the 1994
Intel-Hewlett Packard alliance for
64-bit architecture. For 12 years, he
held profit and loss responsibility for
Intelx86 microprocessors and related
products. Mr. House also serves on the
Board of Directors of Merisel, Inc.
Lloyd A. Carney 35 Mr. Carney is Executive Vice President
Executive Vice President and General Manager of the Company's
and General Manager, Enterprise Business Group. Most
Enterprise Business Group recently, Mr. Carney served as Executive
Vice President on Special Assignment
assisting David House, the Company's
Chairman, President and Chief Executive
Officer, on operating issues during the
recent management transition. Mr. Carney
joined the Company in 1990 as Director
of Technical Operations and was Vice
President, Worldwide Service from 1993
to 1996.
Stephen G. Pearse 38 Mr. Pearse joined the Company in June
Executive Vice President 1997 as Executive Vice President and
and General Manager, General Manager, Internet/Telecom
Internet/Telecom Business Group Business Group. Prior to joining the
Company, he was President and Chief
Executive Officer of Geotek
Technologies, Inc., a position he held
since June 1996. Prior to June 1996, Mr.
Pearse was Senior Vice President of
Engineering, Technology, Operations and
MIS at Time Warner Communications.
David J. Rynne 56 Mr. Rynne joined the Company in December
Executive Vice President 1996 as Executive Vice President and
and Chief Financial Officer Chief Financial Officer. Prior to
joining the Company, Mr. Rynne was
Senior Vice President and Chief
Financial Officer of Tandem Computers,
Inc. Mr. Rynne served as Chief Financial
Officer of Tandem Computers since 1983.
David A. Shrigley 49 Mr. Shrigley joined the Company in
Executive Vice President for November 1996 as Executive Vice
Sales, Service and Marketing President for Sales, Service and
Marketing. Prior to joining the Company,
Mr. Shrigley was Vice President of
Corporate Marketing at Intel
Corporation, a position he held since
June 1995. From 1990 to 1995, Mr.
Shrigley was Vice President of the Sales
and Marketing Group and General Manager
of Intel's Asia Pacific Operations,
headquartered in Hong Kong.
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
Michael K. Gallagher 38 Mr. Gallagher was appointed Senior Vice
Senior Vice President, President of North America Sales in July
North America Sales 1997. Mr. Gallagher joined the Company
in 1990 and has held several sales and
management positions for the Company,
most recently as Vice President of U.S.
Sales.
John J. Poggi, Jr. 50 Mr. Poggi joined the Company in June
Vice President, General Counsel 1997 as Vice President, General Counsel
and Secretary and Secretary. Mr. Poggi came to the
Company from a private law practice
advising high-technology clients on
business law. Prior to entering private
practice, Mr. Poggi had spent fourteen
years in the roles of General Counsel
and Secretary at Raynet Corporation and
Spectra-Physics, Inc.
Jane A. Risser 46 Ms. Risser joined the Company in April
Vice President and 1997 as Vice President and Corporate
Corporate Treasurer Treasurer. Ms. Risser came to the
Company from Apple Computer where she
spent eleven years in senior financial
management positions, including Director
of Investor Relations, Director of
Finance, and most recently, Vice
President and Treasurer.
Rob G. Seim 38 Mr. Seim joined the Company in February
Vice President and 1996 as Director of Finance, World Wide
Corporate Controller Manufacturing. In November 1996, he
assumed responsibility for corporate
financial planning as well as
manufacturing finance. Mr. Seim was
appointed Vice President and Corporate
Controller in May 1997. Prior to joining
the Company, Mr. Seim held various
financial and accounting management
positions at IBM from February 1982
through January 1996, the latest of
which was Controller of IBM San Jose,
Storage Systems Division.
</TABLE>
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW
- ------------------------------- -------- -------
<S> <C> <C>
First quarter $ 30.00 $ 21.63
Second quarter $ 27.50 $ 18.38
Third quarter $ 24.50 $ 15.50
Fourth quarter $ 26.69 $ 15.75
</TABLE>
<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
</TABLE>
All stock quotations shown represent the high and low closing prices of
the Company's common stock as reported by the New York Stock Exchange and The
Nasdaq Stock Market. (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.) As of June 30, 1997, the Company had
approximately 5,786 stockholders of record. To date, the Company has paid no
cash dividends on its capital stock, and has no current intention to do so.
RECENT SALES OF UNREGISTERED SECURITIES
On June 25, 1997, the Company acquired all of the outstanding shares of
Rapid City Communications (Rapid City) pursuant to a merger of a newly formed,
wholly-owned subsidiary of the Company with and into Rapid City in exchange for
6,407,393 shares of the Company's common stock. Such shares were not registered
under the Securities Act of 1933 as amended (the 1933 Act) in reliance upon the
exemptions provided by Section 4(2) of the 1993 Act and/or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- ---------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 2,093,060 $ 2,056,634 $ 1,403,595 $ 1,136,393 $ 926,154
Income (loss) before provision for
income taxes (1) (248,129) 351,816 220,673 208,221 174,303
Provision for income taxes 36,913 145,491 91,687 83,843 71,023
Net income (loss) (285,042) 206,325 128,986 124,378 103,280
Net income (loss) per share (1.46) 1.04 0.69 0.69 0.58
Total assets 1,766,046 1,506,535 1,155,046 848,496 700,203
Working capital 827,608 816,016 696,085 585,508 479,974
Long-term debt 109,995 110,147 113,430 110,283 110,431
Stockholders' equity 1,235,242 1,094,695 770,086 583,721 458,025
</TABLE>
- ----------
(1) Includes charges of $356.7 million, $39.7 million, $6.7 million, $17.9
million and $17.9 million for the years ended June 30, 1997, 1996, 1995,
1994 and 1993, respectively, for in-process research and development
charges resulting from acquisitions, and restructuring and severance
charges of $32.2 million for the year ended June 30, 1997. For the years
ended June 30, 1996 and 1995, merger related expenses of $10.2 million and
$63.4 million, respectively, were included.
14
<PAGE> 15
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 entitled "Risk Factors That May
Affect Future Results." The Company's future operating results may be affected
by various trends and factors which are beyond the Company's control. These
include, among other factors, changes in general economic conditions, rapid or
unexpected changes in technologies and uncertain business conditions that affect
the data networking industry. Accordingly, past results and trends should not be
used by investors to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. 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 any forward-looking statements.
Results of Operations
Revenue. Revenue increased 1.8% to $2,093.1 million in fiscal 1997 as
compared to $2,056.6 million in fiscal 1996 and $1,403.6 million in fiscal 1995.
The slight absolute dollar increase in fiscal 1997 revenue compared to fiscal
1996 resulted from increased sales of the Company's router, switching and remote
access products, increased service revenue, and growth in international
operations. This increase was offset by competitive price reductions taken by
the Company and an industry wide decline in demand for shared media LAN products
during the year. The Company experienced an overall increase from the prior year
in revenue from its switching and remote access businesses during fiscal 1997
due to growth in Internet and Intranet usage and market acceptance of the
Company's network manageability solutions for total infrastructure support. The
absolute dollar increase in revenue in fiscal 1996 compared to fiscal 1995 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. Revenue from the router
product line grew in fiscal 1996 as sales to the telecommunications industry
increased.
International revenue was $732.9 million or 35.0% of total revenue in
fiscal 1997, compared to $716.5 million or 34.8% of total revenue and $458.4
million or 32.7% of total revenue in fiscal 1996 and fiscal 1995, respectively.
The slight increase in international revenue in fiscal 1997 compared to fiscal
1996 reflects the Company's focus on expansion and growth in both the
Asia/Pacific and European markets, although this increase was offset by weaker
economic conditions in these markets and weaker demand in markets that are only
beginning to adopt networking technologies. International revenue increased in
absolute dollars and as a percentage of revenue in fiscal 1996 compared to
fiscal 1995 primarily due to the expansion and growth in the Asia/Pacific
market, as well as continued growth in the European market. The Company's
international revenue is primarily denominated in U.S. dollars. The effect of
foreign exchange rate fluctuations did not have a significant impact on the
Company's operating results in the periods presented. Fluctuations in foreign
exchange rates may adversely affect the Company's operating results in future
periods.
Revenue in past periods may not be indicative of future revenue, which may
be affected by other factors discussed elsewhere herein, as well as other
business environment and risk factors.
Gross Profit. Gross profit was $1,018.2 million or 48.6% of revenue in
fiscal 1997, compared to $1,111.3 million or 54.0% of revenue and $772.6 million
or 55.0% of revenue in fiscal 1996 and fiscal 1995, respectively. The gross
profit decline in fiscal 1997 compared to the previous years was a result of
competitive price reductions during the year, a shift in product mix from higher
margin shared media and router products to lower margin router, remote access
and switching products, including stackable LAN and WAN equipment used in small
enterprise/small office environments, and factors related to product migration.
Furthermore, the Company charged to operations $20.5 million of reserves in
connection with the consolidation of certain product lines in
15
<PAGE> 16
December 1996. This charge was part of the Company's effort to more closely
align its operations with its core business going forward. Looking forward,
gross profit may improve moderately, compared to fiscal 1997, primarily from the
introduction of new products which generally carry higher margins, initially;
these margins frequently decline over time in response to competitive market
conditions. Other factors, including changes in material and labor costs and
distribution channels, may also have an adverse effect on gross profit
percentages in the future. For a description of additional risks which may
impact gross profit, see the section entitled "Risk Factors that May Affect
Future Results."
Manufacturing Facilities. The Company maintains manufacturing facilities
in California, Massachusetts, and Israel. In addition, the Company began
manufacturing and distribution activities in Limerick, Ireland during the third
quarter of fiscal 1997 with limited production during the initial start-up
phase. The Company also relies on suppliers located throughout the world for raw
materials and subcomponents.
Research and Development. Research and development spending grew by 26.4%
to $269.8 million in fiscal 1997 from $213.5 million in fiscal 1996 and by 46.9%
from $145.3 million in fiscal 1995 as compared with fiscal 1996. As a percentage
of revenue, expenses increased to 12.9% in fiscal 1997, compared to 10.4% for
fiscal 1996 and 1995. The absolute dollar increases in both fiscal 1997 and
fiscal 1996 relate to improving and expanding facilities and depreciation of
equipment used in the development of new products, the associated costs to
enhance current product offerings in order to continue the life cycle of such
products to meet customer demand, and the addition of personnel through hiring
as well as the acquisition of businesses in the process of developing
technologies. In addition, in fiscal 1997 the Company incurred expenses
associated with acquisitions by aligning the accounting practices and policies
of acquired companies with those of the Company. During the year, the Company
continued development of new products to address emerging technologies in areas
such as remote access, switched internetworking, and network management. The
Company plans to continue to increase research and development spending in
absolute dollars in order to pursue its goal of developing an infrastructure of
new products needed for timely product introductions to the market.
The Company plans to continue its commitment to research and development
through internal development and, given that the industry's technology
environment is rapidly changing, through acquisitions of technology in an effort
to bring products to the market more quickly and provide end-to-end network
solutions. There can be no assurance that research and development efforts or
acquisitions of technology will result in commercially successful new technology
and products in the future, or that such technology and products will be
introduced in time to meet market requirements. The Company's research and
development efforts may be adversely affected by other factors noted elsewhere
herein. Research and development expenses may vary in absolute dollars and as a
percentage of revenue in future periods.
Sales and Marketing. Sales and marketing expenses were $537.7 million or
25.7% of revenue in fiscal 1997, compared to $452.3 million or 22.0% of revenue
and $302.5 million or 21.6% of revenue in fiscal 1996 and fiscal 1995,
respectively. The increases in expenses in fiscal 1997 compared to fiscal 1996
and in fiscal 1996 compared to fiscal 1995 were related to, among other things,
the costs associated with an increased sales and customer support staff and
related commissions; continued expansion of the Company's domestic and
international sales presence in certain markets; and investments related to
marketing programs associated with new product introductions. Furthermore, in
fiscal 1997 the Company incurred expenses related to a reduction in certain
excess office space in connection with the Company's effort to more closely
align its operations with its core business going forward. The overall increase
for fiscal 1997 was partially offset by decreases in headcount, facilities, and
travel related spending as a result of the restructuring and organizational
realignment that took place in February 1997 and cost saving initiatives
implemented during the second half of the fiscal year. Although management's
present intention is to appropriately manage discretionary spending, the
Company's investment in its sales, marketing and customer support resources may
vary in absolute dollars or as a percentage of revenue in the future.
General and Administrative. General and administrative expenses were $87.8
million or 4.2% of revenue in fiscal 1997, compared to $72.2 million or 3.5% of
revenue and $55.7 million or 4.0% of revenue in fiscal 1996 and fiscal 1995,
respectively. The increase in expenses from fiscal 1997 compared to fiscal 1996
is primarily due to increased salaries and benefits, rearranging and retooling
of domestic and international facilities, information technology required to
carry out the Company's global business strategy, and costs incurred in aligning
the
16
<PAGE> 17
accounting practices and policies of acquired companies with those of the
Company. However, the overall increase is partially offset by a decline in
headcount, facilities and travel related expenses resulting from the
restructuring and organizational realignment that took place in February 1997.
The absolute dollar increase in expenses from fiscal 1995 to fiscal 1996 related
to the additions of personnel, expenditures related to facilities, and
information technology worldwide. General and administrative expenses may vary
in absolute dollars or as a percentage of revenue in the future although
management's present intention is to appropriately manage discretionary
spending.
During fiscal 1997, the Company acquired five businesses for an aggregate
total of $462.1 million. Of the aggregate purchase price, $356.7 million was
allocated to in-process research and development related to internetworking
technologies and charged to operations. In addition, in fiscal 1996 and fiscal
1995, the Company incurred in-process research and development expenses of $39.7
million and $6.7 million, respectively, related to various acquisitions. Each of
these business combinations was accounted for as a purchase. Pro forma results
of operations have not been presented for any period as the effects of these
acquisitions were not material to the Company's consolidated financial position,
results of operations, or cash flows.
As a result of the various business combinations accounted for as a
pooling of interests in fiscal 1996 and fiscal 1995, the Company incurred merger
related expenses of $16.1 million and $63.4 million, respectively. These
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 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.
Restructuring and Severance Charges. The Company initiated a program in
the third quarter of fiscal 1997, as a result of decisions made by its
management team, to transform the Company's organizational structure in order to
align resources with a new strategic business model and to lower the Company's
cost structure. These actions resulted in a charge of $32.2 million in the third
quarter of fiscal 1997 to provide for a reduction of headcount, executive
terminations, and consolidation of certain facilities.
Following is an analysis of the components of the restructuring and
severance charges recorded during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
BALANCE
TOTAL NON-CASH AS OF
(IN THOUSANDS) PROVISION COSTS UTILIZED JUNE 30, 1997
--------- -------- -------- -------------
<S> <C> <C> <C> <C>
Severance, taxes and benefits $ 15,145 $ 9,833 $ 2,975 $ 2,337
Facilities 17,043 -- 2,563 14,480
-------- ------- ------- ---------
Total $ 32,188 $ 9,833 $ 5,538 $ 16,817
======== ======= ======= =========
</TABLE>
The provision for severance, taxes and benefits was for obligations
related to the reduction of headcount and executive terminations including
agreements with the former President and Chief Executive Officer, the former
Chairman of the Board and the former Chief Technical Officer. The provision
included termination benefits for approximately 161 employees, of which
approximately 84% were based in the United States and the remainder in Europe.
Approximately 86% of the planned terminations were in sales, marketing, and
service/support functions, with the balance coming from manufacturing and
administrative functions. The severance payments will be paid out over the next
two years, with a majority extending over the next six months. The non-cash cost
of $9.8 million represents the value of options granted to certain individuals
which vest beyond their last day worked. This non-cash charge was recorded as
additional paid-in capital in stockholders' equity.
The provision for facilities included primarily noncancelable lease
payments, fixed costs and leasehold impairments, offset by estimated sublease
rental income, associated with plans to permanently vacate excess space
associated with the sales, support, and administrative operations in
approximately 24 leased facilities throughout the United States, one in Europe
and one in Hong Kong. The Company plans to vacate substantially all of these
facilities by December 31, 1997. The leases generally have remaining terms
ranging from four to nine years and as such, the related future minimum lease
payments will be paid out over periods of up to nine years.
17
<PAGE> 18
Net Interest Income and Other. Net interest income and other was $17.9
million, or 0.9% of revenue in fiscal 1997, compared to $28.5 million or 1.4% of
revenue and $21.8 million or 1.6% of revenue in fiscal 1996 and fiscal 1995,
respectively. The interest income from cash and investments was consistent for
the periods presented, however, the overall decrease in absolute dollars and as
a percentage of revenue in fiscal 1997 was due to the strengthening of the U.S.
dollar which impacted foreign exchange gains and losses resulting from the
translation of the parent company's accounts receivable from international
subsidiaries from the local currency to the U.S. dollar; and an aggregate
write-off of $4.4 million associated with several insignificant minority
investments that were deemed incompatible with the Company's global business
strategy. The increase in absolute dollars in interest income in fiscal 1996
from fiscal 1995 was due to higher average invested cash and investment
balances, which yielded higher interest income, respectively.
Investment Portfolio. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument. The Company
does not expect any material loss with respect to its investment portfolio.
The table below provides information about the Company's investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. The
Company's investment policy requires that all investments mature in five years
or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
<TABLE>
<CAPTION>
FAIR VALUE AT
(IN THOUSANDS, EXCEPT INTEREST RATES) FY 1998 FY 1999 FY 2000 FY 2001 TOTAL JUNE 30, 1997
- ------------------------------------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents $484,347 $ -- $ -- $ -- $484,347 $484,594
Average Interest Rate 5.36% -- -- -- 5.36%
Investments $105,633 $102,517 $ 36,079 $ 8,934 $253,163 $251,547
Average Interest Rate 5.45% 5.63% 5.02% 4.19% 5.41%
Total Portfolio $589,980 $102,517 $ 36,079 $ 8,934 $737,510 $736,141
Average Interest Rate 5.38% 5.63% 5.02% 4.19% 5.38%
</TABLE>
Foreign Exchange Hedging. The Company entered into foreign exchange
forward contracts to reduce its exposure to currency fluctuations on
intercompany foreign currency denominated balance sheet positions during fiscal
1997. The objective of these contracts is to neutralize the impact of foreign
currency exchange rate movements on the Company's operating results. The
Company's accounting policy for these instruments is based on the Company's
designation of such instruments as hedging transactions. The Company does not
use derivative financial instruments for speculative or trading purposes. The
Company had $17.9 million of short-term foreign exchange forward contracts
denominated in Japanese, Australian, Swedish, French and U.K. currencies which
approximated the fair value of such contracts and their underlying transactions
at June 30, 1997. Gains and losses related to these instruments at June 30, 1997
were not material. Looking forward, the Company does not anticipate any material
adverse effect on its consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments. There can be no
assurance that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
The following table provides information about the Company's foreign
exchange forward contracts at June 30, 1997. The table presents the value of the
contracts in U.S. dollars at the contract exchange rate as of the contract
maturity date. Due to the short-term nature of these contracts, the contract
rate approximates the weighted average contractual foreign currency exchange
rate and the forward position in U.S. dollars approximates the fair value of the
contract at June 30, 1997.
18
<PAGE> 19
Short-Term Forward Contracts to Sell Foreign Currencies for U.S. Dollars
Related to Intercompany Receivables:
<TABLE>
<CAPTION>
FORWARD
CONTRACT MATURITY CONTRACT POSITION IN
(IN THOUSANDS, EXCEPT CONTRACT RATES) DATE IN 1997 DATE IN 1997 RATE U.S. DOLLARS
- ------------------------------------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Australian Dollar June 25 July 28 .7512 $ 1,878
Australian Dollar June 25 August 27 .7515 $ 2,255
French Francs June 26 July 31 5.813 $ 3,269
French Francs June 26 August 29 5.802 $ 6,032
U.K. Pound Sterling June 25 July 28 1.662 $ 997
Japanese Yen June 25 August 27 113.00 $ 1,991
Japanese Yen June 25 July 28 113.51 $ 396
Swedish Krona June 26 July 31 7.689 $ 1,106
</TABLE>
Impact of Foreign Currency Rate Changes. In the fiscal year ended June 30,
1997, most currencies in Europe and Asia weakened against the U.S. dollar.
Consequently, the translation of the parent company's intercompany receivables
had a negative impact, although not material, on the consolidated results of the
Company. As a result, foreign exchange forward contracts were purchased to hedge
certain intercompany foreign currency denominated balance sheet positions. These
financial instruments may minimize the risks that would otherwise result from
changes in foreign currency exchange rates. Exchange gains and losses did not
have a significant effect on the Company's results of operations for the fiscal
year ended June 30, 1997.
Income Taxes. The Company's effective income tax rate was 34.0%, 37.5% and
37.8% in fiscal 1997, fiscal 1996 and fiscal 1995, respectively, and excludes
the effect of in-process research and development charges and certain merger
related expenses which were not deductible for income tax purposes. The decrease
in the effective income tax rate in fiscal 1997 from fiscal 1996 was primarily
due to the federal research and development tax credits that were reinstated
during fiscal 1997. At June 30, 1997, a valuation allowance of $9.1 million was
offset against the net operating losses and credit carryforwards obtained from
acquired domestic subsidiaries 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.
Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 128, Earnings Per Share, which is
required to be adopted by the Company on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. There is expected to be no impact on primary loss per share for
fiscal 1997, and an expected increase in primary earnings per share of $0.07 and
$0.04 per share for fiscal 1996 and fiscal 1995, respectively. There is expected
to be no impact on fully diluted earnings (loss) per share for fiscal 1997 and
fiscal 1996, and an expected increase in fully diluted earnings per share of
$0.02 per share for fiscal 1995.
In June 1997, the FASB issued Statement No. 130 (SFAS 130), Reporting
Comprehensive Income, and Statement No. 131 (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information. The Company is required to
adopt these Statements in fiscal 1999. SFAS 130 establishes new standards for
reporting and displaying comprehensive income and its components. SFAS 131
requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers.
Adoption of these Statements is expected to have no impact on the Company's
consolidated financial position, results of operations, or business practices.
Liquidity and Capital Resources. As of June 30, 1997, total cash and
short- and long-term investments totaled $781.5 million, up from $588.2 million
at June 30, 1996. Cash generated from operating activities increased to $409.7
million in fiscal 1997, compared to $105.9 million and $258.1 million in fiscal
1996 and fiscal 1995, respectively.
19
<PAGE> 20
Cash provided by operations increased from the prior year primarily due to
decreases in accounts receivable and inventory, and an increase in accrued
liabilities, partially offset by a decrease in accounts payable, an increase in
other current assets, and a decrease in income before depreciation and
amortization, in-process research and development, and restructuring and
severance. The decrease in accounts receivable from June 30, 1996 to June 30,
1997, was due to continued focus on collection efforts and a more linear pattern
of shipments during the fourth quarter of fiscal 1997 compared to the comparable
period in fiscal 1996. Days sales outstanding in receivables decreased to 47
days at June 30, 1997, from 54 days as of June 30, 1996. Days sales outstanding
may vary, due to, among other things, timing of product shipments and increased
international sales which typically have longer collection cycles. The decrease
in inventory is attributable to a reduction in manufacturing cycle times,
resulting in part from turnkey manufacturing, consolidation of certain product
lines, and increased focus on balancing inventory levels between anticipated
orders and the risk of obsolescence.
The Company used $243.7 million, $119.7 million and $298.5 million for
investing activities in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
The consumption of cash in fiscal 1997 resulted from continued investments in
property and equipment and improvements to the Company's information technology
systems required to support the Company's business growth. The Company expects
to spend additional cash related to the acquisition of property, plant and
equipment and information technology, required to support the Company's
operations, in fiscal 1998. In addition, the Company acquired five businesses
during fiscal 1997 as part of the Company's effort to position itself in the
Gigabit Ethernet/routing switch technology and the emerging cable modem
marketplace, to build on its 10/100 Ethernet switch market, and to enhance its
modem and remote access technology. The cash portions of the purchase
consideration for such transactions aggregated approximately $116.2 million.
Furthermore, as a result of interest rate fluctuations, the Company's portfolio
consisted of more cash equivalents than investments as of June 30, 1997 compared
to June 30, 1996. The major investing activities in fiscal 1996 and fiscal 1995
were primarily attributable to various acquisitions and capital additions to
support business operations.
Financing activities provided $48.9 million, $44.9 million and $34.3
million in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The cash
generated from financing activities consisted primarily of cash received in
connection with the issuance of stock under the Company's stock plans, which
resulted in net proceeds of $53.2 million, $45.4 million and $34.0 million, in
fiscal 1997, fiscal 1996, and fiscal 1995, respectively. In fiscal 1997, the
Company paid $4.2 million in short-term borrowings in connection with the
acquisition of Penril DSP.
A subsidiary of the Company has outstanding $110 million of convertible
subordinated debentures which bear interest of 5.25% 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 2,581,717 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.
The Company believes that it has the financial resources needed to meet
business requirements, including capital expenditures, working capital
requirements, debt obligations outstanding and operating lease commitments for
facilities through at least the next twelve months.
Risk Factors That May Affect Future Results.
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition, Bay Networks
identifies the following risk factors which may affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
Risks Related to New Markets. The markets for data networking products are
rapidly changing and highly competitive. If these markets do not continue to
grow, or if the Company's strategies for the data networking markets are
unsuccessful, the Company's consolidated financial position, results of
operations, or cash flows, may be adversely affected.
20
<PAGE> 21
Risks Related to New Products. The Company's future revenue is dependent
on its ability to successfully develop, manufacture and market products for
customers in rapidly evolving markets worldwide. To successfully distribute new
products the Company must establish and maintain new distribution channels.
There can be no assurance that the Company's product development efforts will
result in timely and commercially successful new product offerings in the
future.
Risks Related to Gross Profit. The Company's gross profit percentage is a
function of the product mix sold in any period. Therefore, gross profit
percentage may fluctuate, affecting the Company's operating results. Factors
such as unit volumes, obsolescence/surplus of inventory, heightened price
competition, changes in channels of distribution, shortages and cost increases
in supplies of parts from vendors, and the availability of skilled labor, also
may cause fluctuations in gross profit percentages.
Risks Relating to Manufacturing Operations. The Company operates
manufacturing facilities and relies upon a number of manufacturing arrangements
worldwide. The Company's manufacturing capability may be affected by factors
impacting the operations of its suppliers. In addition, the Company's ability to
meet customer demand may also be dependent on its ability to adjust
manufacturing levels on short notice based on anticipated orders.
Risks Related to Intellectual Property Rights. The Company relies upon a
combination of patents, copyrights, trademarks and trade secrets to establish
and protect intellectual property rights in its products and technology. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology, or that the Company's competitors
will not develop superior technologies. From time to time it may be necessary or
desirable for the Company to enter into technology licenses, strategic alliances
and cooperative marketing efforts with others. There can be no assurance that
the Company consistently will be able to secure third-party rights necessary to
offer competitive products.
Risks Related to Competition. The data networking industry is highly
competitive. There can be no assurance that the Company will be able to compete
successfully in the future with existing or new competitors. Among the
competitive factors that may adversely affect the Company's future results are
conformity to existing and emerging industry standards; interoperability with
other networking products; network management capabilities; price; performance;
product features; technical support; and distribution.
Risks Related to Acquisitions. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's results of operations, consolidated
financial position, or cash flows, may be adversely affected if it is unable to
successfully integrate such new companies into its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about
market risk is set forth under the captions "Investment Portfolio" and "Foreign
Exchange Hedging" in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and "Foreign Exchange Hedging" in Note 1 of
the Notes to Consolidated Financial Statements. Such information is incorporated
herein.
21
<PAGE> 22
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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1997. 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bay Networks, Inc. at June 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 18, 1997
22
<PAGE> 23
BAY NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 529,962 $ 315,064
Short-term investments 105,180 119,093
Accounts receivable, net of allowance for doubtful accounts
of $8,477 in 1997 and $9,683 in 1996 277,860 320,892
Inventories 144,468 239,725
Deferred income taxes 121,596 74,320
Other current assets 69,351 48,615
---------- ----------
Total current assets 1,248,417 1,117,709
Investments 146,367 154,064
Property and equipment, net 241,069 211,674
Goodwill 113,811 3,022
Other assets 16,382 20,066
---------- ----------
Total assets $1,766,046 $1,506,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 117,596 $ 116,894
Accrued payroll and related costs 87,769 63,242
Accrued expenses 49,904 23,108
Accrued marketing costs 23,183 22,019
Accrued merger costs 3,275 5,575
Accrued restructuring and severance charges 16,817 --
Accrued income taxes 39,269 4,818
Accrued warranty 20,318 19,408
Deferred revenue 62,678 46,629
---------- ----------
Total current liabilities 420,809 301,693
---------- ----------
Long-term debt 109,995 110,147
---------- ----------
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 - 207,646,697 shares at June 30, 1997
and 188,537,072 shares at June 30, 1996 2,076 1,885
Additional paid-in capital 911,675 474,322
Retained earnings 321,491 618,488
---------- ----------
Total stockholders' equity 1,235,242 1,094,695
---------- ----------
Total liabilities and stockholders' equity $1,766,046 $1,506,535
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 2,093,060 $ 2,056,634 $ 1,403,595
Cost of sales 1,074,886 945,318 630,983
----------- ----------- -----------
Gross profit 1,018,174 1,111,316 772,612
----------- ----------- -----------
Operating expenses:
Research and development 269,835 213,521 145,336
Sales and marketing 537,676 452,319 302,496
General and administrative 87,841 72,205 55,734
In-process research and development 356,699 39,713 6,741
Merger related -- 10,231 63,419
Restructuring and severance 32,188 -- --
----------- ----------- -----------
Total operating expenses 1,284,239 787,989 573,726
----------- ----------- -----------
Income (loss) from operations (266,065) 323,327 198,886
Net interest income and other 17,936 28,489 21,787
----------- ----------- -----------
Income (loss) before provision for income taxes (248,129) 351,816 220,673
Provision for income taxes 36,913 145,491 91,687
----------- ----------- -----------
Net income (loss) $ (285,042) $ 206,325 $ 128,986
=========== =========== ===========
Net income (loss) per share $ (1.46) $ 1.04 $ 0.69
=========== =========== ===========
Weighted average common shares and equivalents 194,745 198,778 187,659
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
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, 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
Shares issued under stock plans, net 5,132 51 74,960 (11,955) 63,056
Tax benefits from stock plan activity -- -- 17,214 -- 17,214
Shares issued for Penril DSP 5,377 54 129,864 -- 129,918
Shares issued for equity of NetICs 2,194 22 49,742 -- 49,764
Shares issued for equity of Rapid City 6,407 64 165,573 -- 165,637
Net loss -- -- -- (285,042) (285,042)
----------- ----------- ----------- ----------- -----------
BALANCES, JUNE 30, 1997 207,647 $ 2,076 $ 911,675 $ 321,491 $ 1,235,242
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $(285,042) $ 206,325 $ 128,986
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 134,890 82,795 59,202
In-process research and development 356,699 39,713 6,741
Restructuring and severance 9,833 -- --
Benefit from deferred income taxes (46,600) (13,900) (37,596)
Accounts receivable 48,387 (141,506) (27,783)
Inventories 99,958 (144,425) 7,648
Other current assets (21,394) (34,945) (965)
Accounts payable (7,838) 31,366 25,200
Accrued expenses 47,032 22,338 48,363
Accrued restructuring and severance charges 16,817 -- --
Deferred revenue 15,415 17,552 18,788
Accrued income taxes 41,573 40,600 29,475
--------- --------- ---------
Cash flows provided by operating activities 409,730 105,913 258,059
--------- --------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (109,938) (170,574) (79,512)
Consulting expenditures on information technology systems (40,721) -- --
Purchases of investments (183,820) (422,280) (517,868)
Proceeds from maturities of investments 178,290 469,320 293,457
Proceeds from sales of investments 27,140 47,539 15,237
Acquisitions:
Armon Networking, net assets -- (34,231) --
Performance Technology, net of cash acquired -- (11,583) --
LANcity, net of cash acquired (58,821) -- --
Penril DSP (7,880) -- --
NetICs, net of cash acquired (37,410) -- --
ISOTRO, net of cash acquired (11,624) -- --
Rapid City (486) -- --
Other assets 1,532 2,111 (9,823)
--------- --------- ---------
Cash flows used in investing activities (243,738) (119,698) (298,509)
--------- --------- ---------
Cash flows provided by financing activities:
Payments of short-term borrowings related to the
acquisition of Penril DSP (4,165) -- --
Proceeds (payments) from issuance of long-term debt (152) (451) 254
Purchases of treasury common stock (11,827) (57,353) (1,272)
Issuances of common stock 65,050 102,740 35,308
--------- --------- ---------
Cash flows provided by financing activities 48,906 44,936 34,290
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 214,898 31,151 (6,160)
Net equity activity of Centillion upon acquisition -- -- 9,390
Net equity of Scorpion under acquisition -- -- 3,157
Elimination of Xylogics, net cash activity for the
three months ended October 31, 1994 -- -- (2,476)
Cash and cash equivalents at beginning of year 315,064 283,913 280,002
--------- --------- ---------
Cash and cash equivalents at end of year $ 529,962 $ 315,064 $ 283,913
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the year $ 6,218 $ 5,927 $ 6,021
========= ========= =========
Income taxes paid during the year $ 41,907 $ 108,881 $ 98,955
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business. Bay Networks, Inc. (the Company or Bay Networks)
develops, manufactures, markets and supports a comprehensive line of data
networking products and services, including high-speed routers, switches,
intelligent hubs, remote and Internet access solutions and sophisticated
management software providing network design and configuration solutions. These
products enable end users to build or enhance their data network systems,
including all levels from small local area networks to large enterprise-wide
information infrastructures and telecommunication carriers.
Basis of Presentation. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires that management 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 and 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 to various industries in various
geographic locations.
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 for all periods
presented. Foreign exchange transaction gains and losses were not material for
all periods presented 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 foreign exchange rates.
27
<PAGE> 28
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Foreign Exchange Hedging. The Company operates internationally and thus is
exposed to potentially adverse movements in foreign currency rate changes. In
1997, the Company entered into foreign exchange forward contracts to reduce its
exposure to foreign currency rate changes on intercompany foreign currency
denominated balance sheet positions. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on the
Company's operating results.
These contracts require the Company to exchange currencies at rates agreed
upon at the inception of the contracts. The hedge contracts reduce the exposure
to fluctuations in exchange rate movements because the gains and losses
associated with foreign currency balances and transactions are generally offset
with the gains and losses of the hedge contracts. Because the impact of
movements in currency exchange rates on forward contracts offsets the related
impact on the underlying items being hedged, these financial instruments help
alleviate the speculative risk that might otherwise result from changes in
currency exchange rate fluctuations.
The Company's accounting policies for these instruments are based on the
Company's designation of such instruments as hedging transactions. The criteria
the Company uses for designating an instrument as a hedge includes the
instrument's effectiveness in risk reduction. Gains and losses on these
contracts, all of which are designated and effective as hedges of existing
transactions, are recognized in operations in the period in which gains and
losses on the underlying transactions occur. The Company does not use derivative
financial instruments for speculative or trading purposes. In the event of
termination or extinguishment of a contract, associated gains and losses would
be recognized in operations in the period in which the contract was terminated
or extinguished.
These contracts contain credit risk in that the counterparty may be unable to
meet the terms of the agreements. The Company has limited these agreements to
major financial institutions to reduce such credit risk. Furthermore, the
Company monitors the potential risk of loss with any one financial institution
and does not expect any material loss as a result of default by the
counterparties.
Inventories. Inventories, stated at the lower of cost (first-in, first-out)
or market, consist of:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
(IN THOUSANDS) 1997 1996
- ------------- --------- ---------
<S> <C> <C>
Raw materials $ 21,068 $ 98,342
Work-in-process 45,140 54,468
Finished goods 78,260 86,915
--------- ---------
Total inventories $ 144,468 $ 239,725
========= =========
</TABLE>
Property and Equipment. Property and equipment are stated at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets ranging from two to five years. Leasehold
improvements are recorded at cost and are amortized using the straight-line
method over the remaining lease term or the economic useful life of the related
asset, whichever is shorter.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
(IN THOUSANDS) 1997 1996
- ------------- --------- ---------
<S> <C> <C>
Machinery and equipment $ 402,192 $ 309,473
Furniture and fixtures 45,188 36,685
Leasehold improvements 76,679 55,327
--------- -------
Total property and equipment 524,059 401,485
Accumulated depreciation and amortization (282,990) (189,811)
--------- ---------
Total property and equipment, net $ 241,069 $ 211,674
========= =========
</TABLE>
28
<PAGE> 29
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Goodwill. Goodwill represents the excess of the aggregate purchase price over
the fair value of the tangible and intangible assets acquired in various
acquisitions and is being amortized over the estimated useful life of five
years. The Company assesses the recoverability of goodwill by determining
whether the amortized asset over its useful life may be recovered through
estimated future cash flows. Amortization of goodwill charged to operating
expenses was $11.8 million, $0.7 million and $0.2 million in 1997, 1996, and
1995, respectively.
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 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 $22.0 million, $18.2 million and $7.6 million in 1997,
1996 and 1995, respectively.
Net Income (Loss) Per Share. Net income per share was 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.
For the period in which the Company had a net loss, the net loss per share
was computed using only the weighted average number of shares outstanding during
the period.
Stock-Based Compensation. As permitted under the Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, in accounting
for stock-based awards to employees.
Effect of New Accounting Standards. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share,
which is required to be adopted by the Company on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. There is expected to be no impact on primary
loss per share for the fiscal year ended June 30, 1997, and an expected increase
in primary earnings per share of $0.07 and $0.04 per share for the fiscal years
ended June 30, 1996 and 1995, respectively. There is expected to be no impact on
fully diluted earnings (loss) per share for the fiscal years ended June 30, 1997
and 1996, and an expected increase in fully diluted earnings per share of $0.02
per share for the fiscal year ended June 30, 1995.
In June 1997, the FASB issued Statement No. 130 (SFAS 130), Reporting
Comprehensive Income, and Statement No. 131 (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information. The Company is required to
adopt these Statements in 1999. SFAS 130 establishes new standards for reporting
and displaying comprehensive income and its components. SFAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. Adoption of these
Statements is expected to have no impact on the Company's consolidated financial
position, results of operations, or business practices.
Reclassifications. Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation.
29
<PAGE> 30
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. BUSINESS COMBINATIONS
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.
The following information shows revenue and net income (loss) of the separate
companies through the years in which the business combinations were consummated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
(IN THOUSANDS) 1996 1995
- ------------- --------- ---------
<S> <C> <C>
Revenue:
Bay Networks $2,026,038 $1,042,665
Xylogics 30,596 61,302
Wellfleet -- 126,572
SynOptics -- 173,056
--------- ----------
$2,056,634 $1,403,595
========== ==========
Net Income (loss):
Bay Networks $ 214,383 $ 92,633
Xylogics (8,058)(1) (2,013)
Wellfleet -- 21,576
SynOptics -- 16,790
--------- ----------
$ 206,325 $ 128,986
========= ==========
</TABLE>
- ----------
(1) Xylogics' net loss includes a portion of the merger related expenses.
The following table provides information about the Company's merger related
expenses for 1996 and 1995, respectively:
<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>
30
<PAGE> 31
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Of the total merger related expenses 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 $3.3 million accrued at June 30,
1997 allows for accrued rent and severance related expenses to be paid
principally over the next year.
The Company acquired several smaller businesses during 1997, 1996, and 1995,
each of which has been accounted for as a purchase. Bay Networks purchased Rapid
City Communications (Rapid City) for 6,407,393 shares of the Company's common
stock and reserved 137,864 shares of its common stock for issuance under Rapid
City's stock option plans which the Company assumed from the acquisition. The
Company purchased ISOTRO Network Management, Inc. for $11.7 million and NetICs,
Inc. (NetICs) for $36.4 million and 2,193,709 shares of the Company's common
stock. The Company also acquired the Digital Signal Processing (DSP) modem
business of Penril DataComm Networks, Inc. (Penril DSP) for 5,377,028 shares of
the Company's common stock and LANcity Corporation for $59.5 million during
1997. In 1996, the Company purchased Performance Technology, Inc. for $12.6
million and the net assets of Armon Networking, Ltd. for $34.2 million. The
Company acquired Scorpion Ltd. for $9.3 million during 1995. In addition, under
the terms of the NetICs agreement, the Company may pay an additional $8 million
for commitment targets achieved by NetICs prior to December 1997. 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, covenant-not-to-compete,
trademark, customer list, 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 $356.7 million, $39.7 million and $6.7 million in
1997, 1996 and 1995, respectively, were expensed upon the closing of the
respective transactions. Pro forma results of operations have not been presented
since the effects of these acquisitions were not material to the Company's
consolidated financial position, results of operations, or cash flows for the
periods presented.
3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Investments. All of Bay Networks' cash, cash
equivalents and investments are classified as available-for-sale and consist of
the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
(IN THOUSANDS) 1997 1996
- ------------- ----------- ----------
<S> <C> <C>
Estimated Fair Value:
U.S. Treasuries and obligations of U.S. Government agencies $ 155,432 $ 158,000
Obligations of states and political subdivisions 121,323 122,338
Commercial paper 177,058 101,568
Short-term money market funds 240,014 132,740
Bankers' acceptances 8,761 --
Demand deposits 45,368 56,150
Other debt securities 33,553 17,425
---------- ----------
$ 781,509 $ 588,221
========== ==========
</TABLE>
31
<PAGE> 32
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The estimated fair value of available-for-sale securities by contractual
maturity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
(IN THOUSANDS) 1997 1996
- ------------- ----------- ----------
<S> <C> <C>
Due in three months or less $ 529,962 $ 315,064
Due through one year 105,180 119,093
Due after one year through three years 137,623 132,547
Due after three years through five years 8,744 21,517
---------- ----------
$ 781,509 $ 588,221
========== ==========
</TABLE>
Both gross unrealized gains and losses as of June 30, 1997 and 1996, and
realized gains and losses on sales of each type of security for the fiscal years
ended June 30, 1997 and 1996, were not material. At June 30, 1997 and 1996, the
fair 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.
Foreign Exchange Hedging. The Company had $17.9 million of short-term foreign
exchange forward contracts outstanding which approximated the fair value of such
contracts and their underlying transactions at June 30, 1997. These contracts
are denominated in Japanese, Australian, Swedish, French and U.K. currencies.
The outstanding forward contracts have original maturities that do not exceed
two months. The gains and losses on forward exchange contracts are included in
earnings when the underlying foreign currency denominated transaction is
recognized. Gains and losses related to these instruments at June 30, 1997 were
not material. In addition, the Company has not terminated or extinguished any
foreign exchange forward contracts. The Company does not anticipate any material
adverse effect on its consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments.
Long-Term Debt. A subsidiary of the Company has outstanding $110 million of
convertible subordinated debentures which bear interest of 5.25% 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 financial institution
for similar debt and is $104.9 million and $99.7 million as of June 30, 1997 and
1996, respectively. The Company has reserved 2,581,717 shares of common stock
for the conversion of these debentures. Interest expense, primarily related to
these debentures, was $6.2 million, $5.9 million and $6.0 million in 1997, 1996
and 1995, respectively.
4. RESTRUCTURING AND SEVERANCE CHARGES
The Company initiated a program in the third quarter of 1997, as a result of
decisions made by its management team, to transform the Company's organizational
structure in order to align resources with a new strategic business model and to
lower the Company's cost structure. These actions resulted in a charge of $32.2
million in the third quarter of 1997 to provide for a reduction of headcount,
executive terminations, and consolidation of certain facilities. The provision,
supported by appropriate levels of specificity for planned actions, was
established and approved by the Company's executive management and its Board of
Directors. Actual costs will be recognized as reductions in the related accrual
within the period incurred.
32
<PAGE> 33
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is an analysis of the components of the restructuring and severance
charges recorded during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
BALANCE
TOTAL NON-CASH AS OF
(IN THOUSANDS) PROVISION COSTS UTILIZED JUNE 30, 1997
- -------------- --------- --------- -------- -------------
<S> <C> <C> <C> <C>
Severance, taxes and benefits $ 15,145 $ 9,833 $ 2,975 $ 2,337
Facilities 17,043 -- 2,563 14,480
--------- --------- -------- -------------
Total $ 32,188 $ 9,833 $ 5,538 $ 16,817
========= ========= ======== =============
</TABLE>
The provision for severance, taxes and benefits was for obligations related
to the reduction of headcount and executive terminations including agreements
with the former President and Chief Executive Officer, the former Chairman of
the Board and the former Chief Technical Officer. The provision included
termination benefits for approximately 161 employees, of which approximately 84%
were based in the United States and the remainder in Europe. Approximately 86%
of the planned terminations were in sales, marketing, and service/support
functions, with the balance coming from manufacturing and administrative
functions. The severance payments will be paid out over the next two years, with
a majority extending over the next six months. The non-cash cost of $9.8 million
represents the value of options granted to certain individuals which vest beyond
their last day worked. This non-cash charge was recorded as additional paid-in
capital in stockholders' equity.
The provision for facilities included primarily noncancelable lease payments,
fixed costs and leasehold impairments, offset by estimated sublease rental
income, associated with plans to permanently vacate excess space associated with
the sales, support, and administrative operations in approximately 24 leased
facilities throughout the United States, one in Europe and one in Hong Kong. The
Company plans to vacate substantially all of these facilities by December 31,
1997. The leases generally have remaining terms ranging from four to nine years
and as such, the related future minimum lease payments will be paid out over
periods of up to nine years.
5. 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
$44.7 million, $27.5 million and $22.7 million in 1997, 1996 and 1995,
respectively. Sublease rental income was $0.8 million in 1997.
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. Minimum lease
payments under this lease aggregated $11.5 million at June 30, 1997.
Future minimum lease payments as of June 30, 1997, of which $1.2 million has
been accrued as merger related expenses and $14.5 million has been accrued as
restructuring related expenses, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------- OPERATING
FISCAL YEARS ENDING LEASES
------------------- ----------
<S> <C>
1998 $ 39,771
1999 35,614
2000 34,072
2001 27,192
2002 19,547
Thereafter 63,237
----------
Total minimum payments required $ 219,433
==========
</TABLE>
The Company's sublease rental income in relation to the above operating
leases is $9.7 million; $3.3 million in 1998, $2.6 million in 1999, $2.0 million
in 2000, $1.3 million in 2001, and $0.5 million in 2002.
33
<PAGE> 34
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Guarantee. At June 30, 1997, the Company has guaranteed obligations of a
reseller totaling approximately $15.0 million. It is not practical to estimate
the fair value of the above guarantee, however, the Company does not expect to
incur losses as a result of this guarantee.
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 pending 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.
On March 4, 1997, the Company announced that stockholders filed two separate
lawsuits against the Company and ten of the Company's current and former
officers and directors. One lawsuit has been filed in the United States District
Court for the Northern District of California and alleges violations of the
federal securities laws. The other lawsuit has been filed in California Superior
Court, County of Santa Clara, and alleges violations of the California
Corporations Code. Both lawsuits purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during the period of May
1, 1995 through October 14, 1996. Both cases are in the initial stages and no
trial dates have been set.
On April 18, 1997, a stockholder (represented by some of the same plaintiffs'
law firms as in the aforementioned cases) filed a lawsuit in Santa Clara County,
California Superior Court, alleging violations of the federal securities laws
and California Corporations Code by the Company and nine of its current and
former officers and directors. The lawsuit purports to seek damages on behalf of
a class of stockholders who acquired the Company's common stock pursuant to the
Registration Statement and Prospectus that became effective on November 15,
1995. This case is in the initial stages and no trial date has been set.
6. EQUITY
Employee Stock Option Plans. Bay Networks established a Stock Option Plan
(1994 Plan) in 1994 under which it authorized 30.0 million shares of common
stock for granting of either incentive or non-qualified stock options. The
Company increased the shares authorized under the 1994 Plan from 41.7 million to
50.7 million in October 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 value of the stock at the date of grant. Options currently expire
no later than eight years and 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, 1997, 12,265,197 shares of common stock were reserved for future grants
under the 1994 Plan.
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, 1997, 2,460
shares were subject to repurchase. In addition, pursuant to the acquisition of
Xylogics in 1996, 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.
Additionally, on June 25, 1997, pursuant to the acquisition of Rapid City,
the Company assumed 137,864 outstanding options originally issued under various
Rapid City stock option plans. The options generally vest 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 of options prior to vesting
are subject to repurchase by the Company. As of June 30, 1997, 2,644,588 shares
were subject to repurchase.
34
<PAGE> 35
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In October 1996, the Board of Directors authorized the repricing of options
to purchase 9,719,924 shares of common stock effective as of the close of
business on October 28, 1996. These options were repriced to the fair value as
of the previous day, which was $19.50 per share. Each new grant had the same
number of shares as the number of shares unexercised in the grant being
repriced. Under the terms of the repricing, the repriced stock option grants
represent new grants, with a new vesting schedule, whether or not shares were
previously vested under the original grant. The stock option grants which were
repriced originally vested as follows: 25% vest one year after the grant date
(or the hire date in the case of new hire grants) and then ratably over the
following 36 months. Upon repricing, the repriced stock option grants will vest
at the rate of 22% one year after the commencement of the original option being
repriced and then ratably over the following 42 months. No employees owning 3%
or more of the Company's stock participated in the repricing. This repricing may
have a negative impact on the Company's earnings per share in future periods.
Outside Directors Stock Option Plan. Bay Networks established an Outside
Directors Stock Option Plan in 1994 under which it authorized 750,000 shares of
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 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 this plan generally vest at a rate
of 33 1/3% on the one year anniversary of the date of grant and then ratably
over the following 36 months. As of June 30, 1997, 362,500 shares of common
stock were reserved for future grants.
In connection with the Company's restructuring program which occurred in the
third quarter of 1997, the Company recorded $9.8 million in compensation costs
which represents the value of options granted to certain individuals which vest
beyond their last day worked. This non-cash charge was recorded as additional
paid-in capital in stockholders' equity.
Additional information concerning stock option activity under the various
plans is as follows:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED-
NUMBER EXERCISE AVERAGE
OF SHARES PRICES EXERCISE PRICE
---------- ------------- --------------
<S> <C> <C> <C>
OUTSTANDING AT JUNE 30, 1994 27,816,565 $.02 - $35.06 $ 11.63
Granted and assumed 12,907,410 .18 - 26.42 16.28
Exercised (4,468,013) .02 - 22.99 6.25
Forfeited (2,779,672) .10 - 35.06 15.62
----------- ------------- --------
OUTSTANDING AT JUNE 30, 1995 33,476,290 .02 - 35.06 13.65
Granted 6,134,745 19.69 - 43.96 36.86
Exercised (8,625,632) .02 - 35.06 10.19
Forfeited (1,902,955) .10 - 43.81 19.32
----------- ------------- --------
OUTSTANDING AT JUNE 30, 1996 29,082,448 .03 - 43.96 18.68
Granted and assumed 26,945,218 .10 - 29.38 20.35
Exercised (5,038,188) .03 - 26.50 11.26
Forfeited (7,463,091) .18 - 43.96 25.18
Canceled (9,719,924) .18 - 43.96 25.18
----------- ------------- --------
OUTSTANDING AT JUNE 30, 1997 33,806,463 $.03 - $43.96 $ 17.81
=========== ============= ========
OPTIONS EXERCISABLE AT:
JUNE 30, 1997 32,513,376 $.03 - $43.96 $ 17.82
JUNE 30, 1996 26,279,561 $.03 - $43.96 $ 19.06
JUNE 30, 1995 28,498,275 $.02 - $35.06 $ 13.88
</TABLE>
35
<PAGE> 36
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The range of exercise prices for options at June 30, 1997 is wide due
primarily to the low exercise prices of options assumed with specific
acquisitions and the high volatility of the price of the Company's common stock
over the period of the grants.
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.0333 - $12.4933 4,332,268 4.22 $ 5.2942 4,048,696 $ 5.0997
$12.5000 - $15.5833 3,082,313 7.06 $ 14.7140 2,862,259 $ 14.7629
$15.6667 - $16.4167 2,658,854 7.35 $ 16.3092 2,520,396 $ 16.3132
$16.4583 - $17.5000 1,508,249 7.94 $ 17.3313 1,443,587 $ 17.3507
$17.5833 - $18.9667 3,568,815 5.62 $ 18.5675 3,488,935 $ 18.5836
$19.1250 - $19.5000 10,674,090 7.33 $ 19.4995 10,667,490 $ 19.4997
$19.5067 - $21.3750 2,742,368 7.42 $ 20.6982 2,605,233 $ 20.7403
$21.4167 - $23.7500 3,320,589 6.83 $ 23.0628 3,111,538 $ 23.0517
$23.7917 - $30.1250 1,338,105 7.39 $ 25.5260 1,247,420 $ 25.5412
$30.8333 - $43.9583 580,812 6.51 $ 38.6282 517,822 $ 38.1782
---------- ------- --------- ---------- ---------
$ 0.0333 - $43.9583 33,806,463 6.70 $ 17.8112 32,513,376 $ 17.8174
========== ======= ========= ========== =========
</TABLE>
Employee Stock Purchase Plan. Bay Networks established an Employee Stock
Purchase Plan (the Purchase Plan) in 1994 under which 1,587,069 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 value determined as of the beginning of an offering period and the end of a
purchase period. Employees purchased 1,108,222 shares in 1997 (696,712 and
613,070 shares in 1996 and 1995, respectively) for $17.9 million ($13.9 million
and $8.2 million in 1996 and 1995, 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.
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.
Stock-Based Compensation. Under APB 25, the Company generally recognizes no
compensation expense with respect to stock-based awards to employees. Pro forma
information regarding net income (loss) and net income (loss) per share is
required by SFAS 123 for awards granted after June 30, 1995, as if the Company
had accounted for its stock-based awards to employees under the fair value
method of SFAS 123. The fair value method of the Company's stock-based awards to
employees was estimated using the Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating fair
value of traded options that have no vesting restrictions and are fully
transferable. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not
36
<PAGE> 37
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK THE
OPTION PLANS PURCHASE PLAN
-------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (in years) 4.4 4.4 0.5 0.5
Volatility 54% 54% 58% 52%
Risk-free interest rate 6.14% 5.77% 5.39% 5.30%
</TABLE>
The weighted-average estimated fair value of stock options granted during
1997 and 1996 was $6.93 and $15.49 per share, respectively. The weighted-average
estimated fair value of shares granted under the Purchase Plan during 1997 and
1996 was $8.51 and $16.22 per share, respectively. For pro forma purposes, the
estimated fair value of the Company's stock-based awards to employees is
generally amortized over the options' vesting period of four years (for options)
and the six-month purchase period (for stock purchases under the Purchase Plan).
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
- --------------------------------------- ----------- ----------
<S> <C> <C>
Net income (loss)
As reported $ (285,042) $ 206,325
Pro forma $ (350,248) $ 176,222
Net income (loss) per share
As reported $ (1.46) $ 1.04
Pro forma $ (1.80) $ 0.89
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to June 30,
1995, its pro forma effect will not be fully reflected until approximately 1999.
7. 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 formula and up to a
maximum of $1,500 per year. Bay Networks' matching contributions to the Plan
totaled $4.2 million in 1997, $3.4 million in 1996 and were not material in
1995.
8. NOTES RECEIVABLE FROM OFFICERS
In 1997, the Company loaned three of its officers an aggregate of $1.5
million included in other assets. At June 30, 1997, the total amount remains
outstanding. One officer repaid $0.4 million of the principal outstanding in
July 1997. The notes are non-interest bearing and are due over the next five
years. The discount on the notes is amortized and recorded to operations.
37
<PAGE> 38
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
(IN THOUSANDS) 1997 1996 1995
- ------------- --------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 64,028 $ 131,676 $ 103,206
State 11,080 21,262 19,821
Foreign 8,405 6,453 6,256
--------- --------- ---------
83,513 159,391 129,283
Deferred:
Federal (43,737) (8,346) (31,927)
State (5,735) (1,171) (5,669)
Foreign 2,872 (4,383) --
--------- --------- ---------
(46,600) (13,900) (37,596)
--------- --------- ---------
Total provision for income taxes $ 36,913 $ 145,491 $ 91,687
========= ========= =========
</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) 1997 1996 1995
- ------------- --------- --------- ---------
<S> <C> <C> <C>
Domestic $(255,389) $ 363,282 $ 205,273
Foreign 7,260 (11,466) 15,400
--------- --------- ---------
Total $(248,129) $ 351,816 $ 220,673
========= ========= =========
</TABLE>
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,
--------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit (1.4) 3.3 3.5
Tax benefit from Foreign Sales Corporation 0.8 (1.8) (2.6)
Research & development (R&D) tax credits 2.2 -- --
Goodwill amortization (1.2) -- --
In-process R&D costs relating to acquisitions (50.3) -- --
Merger related expenses -- 1.9 3.5
Foreign losses not benefitted -- 1.9 --
Other -- 1.1 2.1
------ ------ ------
(14.9%) 41.4% 41.5%
====== ====== ======
</TABLE>
38
<PAGE> 39
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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) 1997 1996
- ------------ -------- -------
<S> <C> <C>
Reserves not currently deductible for tax purposes $ 105.5 $ 67.8
Compensation accruals not currently deductible for tax purposes 8.5 6.1
Net operating losses and credit carryforwards acquired from domestic entities 9.1 7.0
Less valuation reserve against above carryforwards (9.1) (6.8)
Property and equipment 7.2 2.8
Other individually immaterial items 7.6 5.3
-------- -------
Total $ 128.8 $ 82.2
======== =======
</TABLE>
At June 30, 1997, 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
Performance Technology, Inc. 4.4 million 2007-2009
LANcity, Inc. 9.9 million 1999-2011
General Business Tax Credits Coral Network Corporation $ 0.2 million 2003-2007
Performance Technology, Inc. 0.2 million 2007-2009
</TABLE>
10. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
No one customer accounted for more than 10% of the Company's revenue in 1997.
One reseller customer accounted for approximately 13% ($263.0 million) and 14%
($198.0 million) of the Company's revenue in 1996 and 1995, respectively.
The Company's foreign operations consists primarily of sales, marketing, and
service activities in subsidiaries throughout the world. The Company's export
sales represented 35.0%, 34.8% and 32.7% of revenue in 1997, 1996 and 1995,
respectively. Substantially all of the export sales each year were denominated
in U.S. dollars.
39
<PAGE> 40
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operating income generated by the foreign operations of the Company and their
corresponding identifiable assets were not material to the Company in 1995.
Summarized financial information by major geographic area is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------- ----------- ----------- ------------
<S> <C> <C> <C>
Revenue from unaffiliated customers in the United States $ 1,360,196 $ 1,340,136 $ 945,221
Export sales from the United States:
Europe 478,059 469,762 300,896
Other 254,805 246,736 157,478
----------- ----------- -----------
$ 2,093,060 $ 2,056,634 $ 1,403,595
=========== =========== ===========
Operating Income (loss):
United States $ (275,257) $ 341,765
Europe 4,101 (18,181)
Other 4,599 5,905
Eliminations 492 (6,162)
----------- -----------
$ (266,065) $ 323,327
=========== ===========
Identifiable assets:
United States $ 1,704,239 $ 1,452,935
Europe 52,763 50,241
Other 18,708 11,052
Eliminations (9,664) (7,693)
----------- -----------
$ 1,766,046 $ 1,506,535
=========== ===========
</TABLE>
11. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICE DATA) SEP. 30 DEC. 31 MAR. 31 JUN. 30
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997:
Revenue $ 522,654 $ 514,537 $ 512,893 $ 542,976
Gross profit 272,739 229,661 252,662 263,112
Income (loss) before provision (benefit)
for income taxes (1) 33,372 (177,107) 401 (104,795)
Net income (loss) 5,625 (172,884) 255 (118,038)
Net income (loss) per share 0.03 (0.90) -- (0.59)
1996:
Revenue $ 457,773 $ 541,601 $ 521,715 $ 535,545
Gross profit 251,563 293,388 279,428 286,937
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
</TABLE>
(1) Includes charges of $42.7 million, $165.5 million, and $148.5 million, for
the three months ended September 30, 1996, December 31, 1996, and June 30,
1997, respectively, for in-process research and development charges
resulting from acquisitions, and restructuring and severance charges of
$32.2 million for the three months ended March 31, 1997.
40
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the Company's independent accountants
occurred during the fiscal year ended June 30, 1997.
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 21, 1997. 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
"Executive Officers of Registrant." 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) 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 - Executive Compensation," "-- Stock
Options Granted in Fiscal 1997," "-- Option Exercises and Fiscal 1997 Year-End
Values," "-Severance, Employment and Change of Control Arrangements," and "--
Compensation of Directors," 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 relating to certain relationships and related transactions is set
forth under the caption "Executive Compensation and Other Matters -- Certain
Relationships and Related Transactions" in the Proxy Statement. Such information
is incorporated herein by reference.
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. List of Financial Statements.
Report of Independent Auditors
Consolidated balance sheets at June 30, 1997 and June 30, 1996
Consolidated statements of operations for the three years ended June 30,
1997, 1996 and 1995
Consolidated statements of stockholders' equity for the three years ended
June 30, 1997, 1996 and 1995
Consolidated statements of cash flows for the three years ended June 30,
1997, 1996 and 1995
Notes to consolidated financial statements
Selected quarterly data (unaudited):
Three months ended fiscal years 1997 and 1996
2. Financial Statement Schedule.
II Valuation Accounts for the years ended June 30, 1997, 1996, and 1995
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.
3. List of Exhibits.
The exhibits filed as part of this Form 10-K are listed in the Index to
Exhibits immediately preceding such exhibits, which Index to Exhibits is
incorporated herein by reference.
(b) Reports on Form 8-K.
A report on Form 8-K dated June 25, 1997, was filed by the Company under
Item 5 announcing the completion of a transaction between the Company and
Rapid City Communications (Rapid City) whereby a wholly-owned subsidiary
of the Company merged (the Merger) with and into Rapid City. Upon
completion of the Merger, Rapid City became a wholly-owned subsidiary of
the Company.
(c) See Item 14(a)(3) above.
(d) See Item 14 (a)(2) above.
42
<PAGE> 43
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 24th day of September, 1997.
BAY NETWORKS, INC.
By:/s/ DAVID L. HOUSE
---------------------------------
David L. House
Chairman of the Board, 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
--------- ----- ----
<S> <C> <C>
/s/ DAVID L. HOUSE Chairman of the Board, President September 24, 1997
- ----------------------------- and Chief Executive Officer
David L. House (Principal Executive Officer)
/s/ DAVID J. RYNNE Executive Vice President and September 24, 1997
- ----------------------------- Chief Financial Officer
David J. Rynne (Principal Financial Officer)
/s/ ROB G. SEIM Vice President and September 24, 1997
- ----------------------------- Corporate Controller
Rob G. Seim (Principal Accounting Officer)
/s/ ARTHUR CARR Director September 24, 1997
- -----------------------------
Arthur Carr
/s/ SHELBY H. CARTER, JR. Director September 24, 1997
- -----------------------------
Shelby H. Carter, Jr.
/s/ KATHLEEN A. COTE Director September 24, 1997
- -----------------------------
Kathleen A. Cote
/s/ JOHN S. LEWIS Director September 24, 1997
- -----------------------------
John S. Lewis
/s/ ANDREW K. LUDWICK Director September 24, 1997
- -----------------------------
Andrew K. Ludwick
/s/ BENJAMIN F. ROBELEN Director September 24, 1997
- -----------------------------
Benjamin F. Robelen
/s/ RONALD V. SCHMIDT Director September 24, 1997
- -----------------------------
Ronald V. Schmidt
/s/ PAUL J. SEVERINO Director September 24, 1997
- -----------------------------
Paul J. Severino
</TABLE>
43
<PAGE> 44
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Bay Networks, Inc.
as of June 30, 1997 and 1996, and for each of the three years in the period
ended June 30, 1997, and have issued our report thereon dated July 18, 1997
(included elsewhere in this Form 10-K). Our audits also included the financial
statement schedule of Bay Networks, Inc. listed in Item 14(a) of this Annual
Report (Form 10-K). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, 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.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 18, 1997
44
<PAGE> 45
SCHEDULE II
BAY NETWORKS, INC.
VALUATION ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGE TO AT END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS: OF PERIOD EXPENSE WRITE-OFFS OTHER PERIOD
- -------------------------------- ---------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
June 30, 1997 $ 9,683 $ 1,237 $(2,443) $ -- $ 8,477
======= ======= ======= ======= ==========
June 30, 1996 $10,441 $ 1,364 $(2,122) $ -- $ 9,683
======= ======= ======= ======= ==========
June 30, 1995 $10,935 $ 1,482 $(2,077) $101(1) $ 10,441
======= ======= ======= ======= ==========
</TABLE>
(1) 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.
45
<PAGE> 46
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of the Registrant, which is
incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 (Registration No. 33-92736) filed
on May 26, 1995.
3.2 Bylaws of the Registrant, as amended and restated, which is
incorporated herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-4 (File No. 33-83946) filed with the
Securities and Exchange Commission on September 14, 1994.
4.1 Rights Agreement dated as of February 7, 1995 between the Registrant
and The First National Bank of Boston, which is incorporated herein by
reference to Exhibit 1 to the Registrant's Report on Form 8-K dated
February 7, 1995.
10.1 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, as amended on July 25,
1996.
10.4* Amended and Restated 1994 Outside Directors Stock Option Plan, as
amended effective on August 15, 1996.
10.5* Amended and Restated 1994 Employee Stock Purchase Plan, as amended on
October 17, 1996.
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.
46
<PAGE> 47
EXHIBIT NO. DESCRIPTION
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.
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.
10.18 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., which is incorporated by reference to
Exhibit 2.1 to the Registrant's Annual Report on Form 10-K dated
September 5, 1996.
10.19* Employment Agreement with David L. House, Chairman of the Board,
President and Chief Executive Officer, effective on October 30, 1996.
10.20* Letter Agreement with Lloyd A. Carney, Executive Vice President and
General Manager, Enterprise Business Group, dated March 18, 1997 and
Promissory Note dated May 22, 1997.
10.21* Letter Agreement with Stephen G. Pearse, Executive Vice President and
General Manager, Internet/Telecom Business Group, dated June 16, 1997.
10.22* Letter Agreement with David J. Rynne, Executive Vice President and
Chief Financial Officer, effective on December 30, 1996.
10.23* Employment Agreement with David A. Shrigley, Executive Vice President
for Sales, Service and Marketing, effective on November 6, 1996.
10.24* Letter Agreement with Andrew K. Ludwick, former President and Chief
Executive Officer, dated January 23, 1997.
10.25* Letter Agreement with Paul J. Severino, former Chairman of the Board,
dated January 23, 1997.
10.26* Letter Agreement with Ronald V. Schmidt, former Chief Technical
Officer, dated January 23, 1997.
10.27* Employee Retention Agreement with Bruce I. Sachs, former Executive
Vice President and General Manager, Internet/Telecom Business Group
dated as of October 31, 1992, Modification of Employee Retention
Agreement with Bruce I. Sachs, effective September 5, 1995, and Letter
Agreement with Bruce I. Sachs, dated November 25, 1996.
47
<PAGE> 48
EXHIBIT NO. DESCRIPTION
10.28* Agreement with Richard D. Eyestone, former Senior Vice President,
Product and Market Management, Enterprise Business Unit, dated
February 5, 1997.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
----------
* Indicates compensatory plan or arrangement.
48
<PAGE> 1
Exhibit 10.3
BAY NETWORKS, INC.
1994 STOCK OPTION PLAN
(As Amended by the Board through July 25, 1996)
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
1
<PAGE> 2
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").
(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 fifty million seven hundred thousand (50,700,000) 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 seven hundred fifty thousand (750,000) shares;
provided, however, that the foregoing limit shall be one million five hundred
thousand (1,500,000) shares with respect to
2
<PAGE> 3
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.
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.
3
<PAGE> 4
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).
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.
4
<PAGE> 5
(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 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
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<PAGE> 6
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 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.
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<PAGE> 7
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.
(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.
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<PAGE> 8
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.
(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
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<PAGE> 9
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 recognize differences in laws, rules, regulations
or customs of such foreign jurisdictions with respect to tax, securities,
currency, employee benefit or other matters.
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IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing is the Bay Networks, Inc. 1994 Stock Option Plan
as duly adopted by the Board on August 17, 1994 and amended by the Board
through July 25, 1996.
--------------------------------------
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<PAGE> 1
EXHIBIT 10.4
BAY NETWORKS, INC.
1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
(As Amended by the Board through August 15, 1996)
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").
(b) Effective Time and Purpose. The Plan was 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. 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
"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.
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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 seven
hundred fifty thousand (750,000) shares, as adjusted to reflect the 50% stock
dividend paid by the Company on October 30, 1995. In the event that any
outstanding Option for any reason expires or is terminated or canceled 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.
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 forty-five
thousand (45,000) 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 fifty-two thousand five hundred (52,500) shares of Stock
upon such election or appointment.
(ii) Each Outside Director shall be granted an additional
Option to purchase fifteen thousand (15,000) 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 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.
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(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) Periodic Grant of Options. Subject to execution by the
Outside Director of an appropriate Option Agreement, the Board may grant
additional Options to purchase a number of shares to be determined by the Board
in recognition of services provided by an Outside Director in his or her
capacity as a director provided such grants are in compliance with the
requirements of Rule 16b-3, as promulgated under the Securities Exchange Act of
1934, as amended, and amended from time to time or any successor rule or
regulation ("Rule 16b-3").
(c) 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 New York Stock Exchange ("NYSE") 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 NYSE 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.
(d) Exercise Period of Options. Any Option granted hereunder
shall be exercisable for a term of ten (10) years.
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<PAGE> 4
(e) Vesting. Options granted pursuant to the Plan shall first
become vested on the day which is one year from the date on which the Option was
granted (the "Initial Vesting Date"). The Option shall be vested on and after
the Initial Vesting Date as follows:
Vested Ratio
------------
(i) Prior to Initial Vesting Date 0
On Initial Vesting Date, 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 month 1/36
of the Optionee's continuous
service as a director of the
Company from the Initial
Vesting Date
In no event shall the
Vested Ratio exceed 1/1
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(e), in addition to the acceleration of
vesting described in paragraph 9 below.
(f) 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 full
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.
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<PAGE> 5
(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.
(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 the grants thereunder 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).
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In the event of a Transfer of Control, the Optionee shall be deemed to
have completed twelve (12) full months of service as a director of the Company
more than such Optionee had completed at the time of the Transfer of Control and
the remainder of the vesting schedule for the Option shall be accelerated by
twelve (12) months as of the date 30 days prior to the Transfer of Control.
However, in no event shall the Vested Ratio exceed 1/1. 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.
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. 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 is the Bay Networks, Inc. 1994 Outside Directors Stock Option
Plan duly adopted by the Board on August 17, 1994 and amended by the Board
through August 15, 1996.
-----------------------------
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EXHIBIT A
BAY NETWORKS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL GRANT)
Bay Networks, Inc. granted to the individual named below an option to
purchase certain shares of common stock of the Company, in the manner and
subject to the provisions of this Option Agreement.
1. Definitions:
(a) "Optionee" shall mean _______________________.
(b) "Date of Option Grant" shall mean _______________________.
(c) "Number of Option Shares" shall mean fifty-two thousand five
hundred (52,500) shares of common stock of the Company as adjusted from time to
time pursuant to paragraph 9 below.
(d) "Exercise Price" shall mean $_______ per share as adjusted
from time to time pursuant to paragraph 9 below.
(e) "Initial Exercise Date" shall be the date occurring one (1)
year after the Date of Option Grant.
(f) "Initial Vesting Date" shall be the date occurring one (1)
year after the Date of Option Grant.
(g) Determination of "Vested Ratio":
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/3
provided the Optionee has
continuously served as a
director of the Company from
the Date of Option Grant until
the Initial Vesting Date
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Plus
For each month of the 1/36
Optionee's continuous service
as a director of the Company
from the Initial Vesting Date
In no event shall the Vested
Ratio exceed 1/1
In the event of a Transfer of Control, as defined in paragraph 8 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 1(g), in addition to the acceleration of
vesting described in paragraph 8 below.
(h) "Option Term Date" shall mean the date ten (10) years after
the Date of Option Grant.
(i) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(j) "Company" shall mean Bay Networks, Inc., a Delaware
corporation, and any successor corporation thereto.
(k) "Plan" shall mean the Bay Networks, Inc. 1994 Outside
Directors Stock Option Plan.
2. Status of Option. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in section 422(b) of the Code.
3. Administration. All questions of interpretation concerning this
Option Agreement shall be determined 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 reference 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 in the Plan,
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 determinations by the Board shall be final and binding upon all persons
having an interest in the 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.
4. Exercise of the Option.
(a) Right to Exercise. The Option shall first become exercisable
on the Initial Exercise Date. The Option shall be exercisable on and after the
Initial Exercise Date and prior to the termination of the Option in the amount
equal to the Number of Option Shares multiplied by
2
<PAGE> 9
the Vested Ratio as set forth in paragraph 1 above less the number of shares of
stock previously acquired upon exercise of the Option. In no event shall the
Option be exercisable for more shares than the Number of Option Shares.
Notwithstanding the foregoing, in the event that the adoption of the Plan or any
amendment of the Plan is subject to the approval of the Company's stockholders
in order for the Plan to comply with the requirements of Rule 16b-3, promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Option shall not be exercisable prior to such stockholder approval if the
Optionee is subject to Section 16(b) of the Exchange Act.
(b) Method of Exercise. The Option may be exercised by written
notice to the Company which must state the election to exercise the Option, the
number of shares of stock for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Company, prior to the termination of the Option as set
forth in paragraph 6 below, accompanied by full payment of the Exercise Price
for the number of shares of stock being purchased.
(c) Form of Payment of Exercise Price. Such payment shall be
made (i) in cash, by check, or in cash equivalent, or (ii) by Immediate Sales
Proceeds, as defined below.
"Immediate Sales Proceeds" shall mean the assignment in a
form acceptable to the Company of the proceeds of a sale of some or all of the
shares being acquired upon the exercise of the 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). 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 the Option by means of
Immediate Sales Proceeds.
(d) Withholding. 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.
(e) Certificate Registration. The certificate or certificates
for the shares of stock as to which the Option shall be exercised shall be
registered in the name of the Optionee, or, if applicable, the heirs of the
Optionee.
(f) Restriction on Grant of Option and Issuance of Shares. The
grant of the Option and the issuance of the shares of stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal or state law with respect to such securities. The Option may not be
exercised if the issuance of shares of stock upon such exercise
3
<PAGE> 10
would constitute a violation of any applicable federal or state securities law
or other law or regulations. In addition, no Option may be exercised unless (i)
a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. As a condition to the
exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
(g) Fractional Shares. The Company shall not be required to
issue fractional shares upon the exercise of the Option.
5. Non-Transferability of the Option. The Option may be exercised
during the lifetime of the Optionee only by the Optionee and may not be assigned
or transferred in any manner except by will or by the laws of descent and
distribution.
6. Termination of the Option. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following the Optionee's
termination of service as a director of the Company as described in paragraph 7
below, or (c) upon a Transfer of Control to the extent provided in paragraph 8
below.
7. Termination of Service as a Director.
(a) Termination of Director Status. If the Optionee ceases to be
a director of the Company for any reason (including termination of director
status pursuant to a Transfer of Control as described in paragraph 8 below), the
Option, to the extent unexercised and exercisable by the Optionee on the date on
which the Optionee ceased to be a director, may be exercised by the Optionee (or
the Optionee's legal representative) at any time prior to the expiration of
twelve (12) months from the date the Optionee's service as a director of the
Company terminated, but in any event no later than the Option Term Date.
(b) Exercise Prevented by Law. Except as provided in this
paragraph 7, the Option shall terminate and may not be exercised after the
Optionee's service as a director of the Company terminates unless the exercise
of the Option in accordance with this paragraph 7 is prevented by the provisions
of Paragraph 4(f) above. If the exercise of the Option is so prevented, the
Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Term Date.
8. 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:
4
<PAGE> 11
(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 Ratio calculated in
paragraph 1(g) above shall be increased by 1/3 as of 30 days prior to the
Transfer of Control, resulting in the remainder of the vesting schedule being
accelerated by twelve full months. The exercise and/or vesting of any portion of
the Option that was permissible solely by reason of this paragraph 8 shall be
conditioned upon the consummation of the Transfer of Control. The Option shall
continue in effect in accordance with this Option Agreement to the extent that
the Option is assumed or substituted for by the surviving, continuing, successor
or purchaser corporation and otherwise shall terminate effective as of the date
of the Transfer of Control to the extent that the Option is unexercised.
9. Effect of Change in Stock Subject to the Option. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, combination, reclassification, or like change in the
capital structure of the Company. In the event a majority of the shares which
are of the same class as the shares that are subject to the Option are exchanged
for, converted into, or otherwise become shares of another corporation (the "New
Shares"), the Company may unilaterally amend the Option to provide that the
Option is exercisable for New Shares. In the event of any such amendment, the
number of shares and the exercise price shall be adjusted in a fair and
equitable manner.
10. Rights as a Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of stock covered by the Option until the
date of the issuance of a certificate or certificates for the shares for which
the Option has been exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above.
11. Legends. The Company may at any time place legends referencing any
applicable federal or state securities law restrictions on this Option Agreement
and/or all certificates representing shares of stock subject to the provisions
of this Option Agreement. The Optionee shall, at the request of the Company,
promptly present to the Company this Option Agreement and/or any and all
certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to effectuate the provisions of this
paragraph.
5
<PAGE> 12
12. Binding Effect. This Option Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
13. Termination or Amendment. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the Option at any
time; provided. however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Optionee.
14. Integrated Agreement. This Option Agreement constitutes the entire
understanding and agreement of the Optionee and the Company with respect to the
subject matter contained herein, and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the Company
other than those as set forth or provided for herein. To the extent contemplated
herein, the provisions of this Option Agreement shall survive any exercise of
this Option and shall remain in full force and effect.
15. Applicable Law. This Option Agreement shall be governed by the laws
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
BAY NETWORKS, INC.
By:
-------------------------------
Title:
----------------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
Date:
------------------------------ ---------------------------------
6
<PAGE> 13
EXHIBIT B
BAY NETWORKS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(SUBSEQUENT GRANT)
Bay Networks, Inc. granted to the individual named below an option to
purchase certain shares of common stock of the Company, in the manner and
subject to the provisions of this Option Agreement.
1. Definitions:
(a) "Optionee" shall mean __________.
(b) "Date of Option Grant" shall mean __________.
(c) "Number of Option Shares" shall mean fifteen thousand
(15,000) shares of common stock of the Company as adjusted from time to time
pursuant to paragraph 9 below.
(d) "Exercise Price" shall mean $______________ per share as
adjusted from time to time pursuant to paragraph 9 below.
(e) "Initial Exercise Date" shall be the date occurring one (1)
year after the Date of Option Grant.
(f) "Initial Vesting Date" shall be the date occurring one (1)
year after the Date of Option Grant.
(g) Determination of "Vested Ratio":
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date 1/3
provided the Optionee has
continuously served as a
director of the Company from
the Date of Option Grant until
the Initial Vesting Date
1
<PAGE> 14
Plus
For each full month of the 1/36
Optionee's continuous service
as a director of the Company from
the Initial Vesting Date
In no event shall the Vested
Ratio exceed 1/1.
In the event of a Transfer of Control, as defined in paragraph 8 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 1(g), in addition to the acceleration of
vesting described in paragraph 8 below.
(h) "Option Term Date" shall mean the date ten (10) years after
the Date of Option Grant.
(i) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(j) "Company" shall mean Bay Networks, Inc., a Delaware
corporation, and any successor corporation thereto.
(k) "Plan" shall mean the Bay Networks, Inc. 1994 Outside
Directors Stock Option Plan.
2. Status of Option. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in section 422(b) of the Code.
3. Administration. All questions of interpretation concerning this
Option Agreement shall be determined 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 reference 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 in the Plan,
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 determinations by the Board shall be final and binding upon all persons
having an interest in the 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.
2
<PAGE> 15
4. Exercise of the Option.
(a) Right to Exercise. The Option shall first become exercisable
on the Initial Exercise Date. The Option shall be exercisable on and after the
Initial Exercise Date and prior to the termination of the Option in the amount
equal to the Number of Option Shares multiplied by the Vested Ratio as set forth
in paragraph 1 above less the number of shares of stock previously acquired upon
exercise of the Option. In no event shall the Option be exercisable for more
shares than the number of Option Shares. Notwithstanding the foregoing, in the
event that the adoption of the Plan or any amendment of the Plan is subject to
the approval of the Company's stockholders in order for the Plan to comply with
the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior
to such stockholder approval if the Optionee is subject to Section 16(b) of the
Exchange Act.
(b) Method of Exercise. The Option may be exercised by written
notice to the Company which must state the election to exercise the Option, the
number of shares of stock for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Company, prior to the termination of the Option as set
forth in paragraph 6 below, accompanied by full payment of the Exercise Price
for the number of shares of stock being purchased.
(c) Form of Payment of Exercise Price. Such payment shall be
made (i) in cash, by check, or in cash equivalent, or (ii) by Immediate Sales
Proceeds, as defined below.
"Immediate Sales Proceeds" shall mean the assignment in a
form acceptable to the Company of the proceeds of a sale of some or all of the
shares being acquired upon the exercise of the 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). 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 the Option by means of
Immediate Sales Proceeds.
(d) Withholding. 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.
(e) Certificate Registration. The certificate or certificates
for the shares of stock as to which the Option shall be exercised shall be
registered in the name of the Optionee, or, if applicable, the heirs of the
Optionee.
3
<PAGE> 16
(f) Restriction on Grant of Option and Issuance of Shares. The
grant of the Option and the issuance of the shares of stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal or state law with respect to such securities. The Option may not be
exercised if the issuance of shares of stock upon such exercise would constitute
a violation of any applicable federal or state securities law or other law or
regulations. In addition, no Option may be exercised unless (i) a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. As a condition to the exercise
of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
(g) Fractional Shares. The Company shall not be required to
issue fractional shares upon the exercise of the Option.
5. Non-Transferability of the Option. The Option may be exercised
during the lifetime of the Optionee only by the Optionee and may not be assigned
or transferred in any manner except by will or by the laws of descent and
distribution.
6. Termination of the Option. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following the Optionee's
termination of service as a director of the Company as described in paragraph 7
below, or (c) upon a Transfer of Control to the extent provided in paragraph 8
below.
7. Termination of Service as a Director.
(a) Termination of Director Status. If the Optionee ceases to be
a director of the Company for any reason (including termination of director
status pursuant to a Transfer of Control as described in paragraph 8 below), the
Option, to the extent unexercised and exercisable by the Optionee on the date on
which the Optionee ceased to be a director, may be exercised by the Optionee (or
the Optionee's legal representative) at any time prior to the expiration of
twelve (12) months from the date the Optionee's service as a director of the
Company terminated, but in any event no later than the Option Term Date.
(b) Exercise Prevented by Law. Except as provided in this
paragraph 7, the Option shall terminate and may not be exercised after the
Optionee's service as a director of the Company terminates unless the exercise
of the Option in accordance with this paragraph 7 is prevented by the provisions
of paragraph 4(f) above. If the exercise of the Option is so prevented, the
Option shall remain exercisable until three (3) months after the date the
Optionee
4
<PAGE> 17
is notified by the Company that the Option is exercisable, but in any event no
later than the Option Term Date.
8. 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 Ratio calculated in
paragraph 1(g) above shall be increased by 1/3 as of 30 days prior to the
Transfer of Control, resulting in the remainder of the vesting schedule being
accelerated by twelve full months. The exercise and/or vesting of any portion of
the Option that was permissible solely by reason of this paragraph 8 shall be
conditioned upon the consummation of the Transfer of Control. The Option shall
continue in effect in accordance with this Option Agreement to the extent that
the Option is assumed or substituted for by the surviving, continuing, successor
or purchaser corporation and otherwise shall terminate effective as of the date
of the Transfer of Control to the extent that the Option is unexercised.
9. Effect of Change in Stock Subject to the Option. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, combination, reclassification, or like change in the
capital structure of the Company. In the event a majority of the shares which
are of the same class as the shares that are subject to the Option are exchanged
for, converted into, or otherwise become shares of another corporation (the "New
Shares"), the Company may unilaterally amend the Option to provide that the
Option is exercisable for New Shares. In the event of any such amendment, the
number of shares and the exercise price shall be adjusted in a fair and
equitable manner.
10. Rights as a Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of stock covered by the Option until the
date of the issuance of a certificate or certificates for the shares for which
the Option has been exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above.
5
<PAGE> 18
11. Legends. The Company may at any time place legends referencing
any applicable federal or state securities law restrictions on this Option
Agreement and/or all certificates representing shares of stock subject to the
provisions of this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company this Option Agreement and/or any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to effectuate the provisions of this
paragraph.
12. Binding Effect. This Option Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
13. Termination or Amendment. The Board, including any duly
appointed committee of the Board, may terminate or amend the Plan and/or the
Option at any time; provided, however, that no such termination or amendment may
adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee.
14. Integrated Agreement. This Option Agreement constitutes the
entire understanding and agreement of the Optionee and the Company with respect
to the subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties among the Optionee
and the Company other than those as set forth or provided for herein. To the
extent contemplated herein, the provisions of this Option Agreement shall
survive any exercise of this Option and shall remain in full force and effect.
15. Applicable Law. This Option Agreement shall be governed by the
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
BAY NETWORKS, INC.
By:
---------------------------------
Title:
------------------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
Date:
------------------------------- ---------------------------------
6
<PAGE> 1
Exhibit 10.5
BAY NETWORKS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
(As Amended by the Board through October 17, 1996)
1. Purpose. The Bay Networks, Inc. 1994 Employee Stock Purchase
Plan (the "Plan") is established to provide eligible employees of Bay Networks,
Inc. ("Bay Networks"), and any current or future parent or subsidiary
corporations of Bay Networks which the Board of Directors of Bay Networks (the
"Board") determines should be included in the Plan (collectively referred to as
the "Company"), with an opportunity to acquire a proprietary interest in the
Company by the purchase of common stock of Bay Networks. (Bay Networks and any
parent or subsidiary corporation designated by the Board as a participating
corporation shall be individually referred to herein as a "Participating
Company." 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 Internal
Revenue Code of 1986, as amended (the "Code")).
It is intended that the Plan shall qualify as an "employee stock
purchase plan" under section 423 of the Code (including any future amendments
or replacements of such section), and the Plan shall be so construed. Any term
not expressly defined in the Plan but defined for purposes of section 423 of
the Code shall have the same definition herein.
An employee participating in the Plan (a "Participant") may withdraw
such Participant's accumulated payroll deductions (if any) therein at any time
during an Offering Period (as defined below). Accordingly, each Participant
is, in effect, granted an option pursuant to the Plan (a "Purchase Right")
which may or may not be exercised at the end of a Purchase Period and which is
intended to qualify as an option described in section 423 of the Code.
2. Administration. The Plan shall be administered by 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 to the Board shall also
mean the committee if a committee has been appointed. The Board shall have the
sole and absolute discretion to determine from time to time what parent
corporations and/or subsidiary corporations shall be Participating Companies.
All questions of interpretation of the Plan or of any Purchase Right shall be
determined by the Board and shall be final and binding upon all persons having
an interest in the Plan and/or any Purchase Right. Subject to the provisions
of the Plan, the Board shall determine all of the relevant terms and conditions
of Purchase Rights granted pursuant to the Plan; provided, however, that all
Participants granted Purchase Rights pursuant to the Plan shall have the same
rights and privileges within the meaning of section 423(b)(5) of the Code. All
expenses incurred in connection with the administration of the Plan shall be
paid by the Company.
3. Share Reserve. The maximum number of shares which may be
issued under the Plan shall be three million seven hundred fifty thousand
(3,750,000) shares of the authorized but unissued common stock of Bay Networks
(the "Shares"). In the event that any Purchase Right
1
<PAGE> 2
for any reason expires or is canceled or terminated, the Shares allocable to
the unexercised portion of such Purchase Right may again be subjected to a
Purchase Right.
4. Eligibility. Any employee of a Participating Company is
eligible to participate in the Plan except the following:
(a) employees who are customarily employed by the Company
for less than twenty (20) hours a week;
(b) employees whose customary employment is for not more
than five (5) months in any calendar year; and
(c) employees who own or hold options to purchase or who,
as a result of participation in this Plan, would own or hold options to
purchase, stock of the Company possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of any one of the
corporations referred to as the Company within the meaning of section 423(b)(3)
of the Code; and
5. Offerings.
(a) Offering Periods. Effective for offerings beginning
on and after November 1, 1996, the Plan shall be implemented by offerings
(individually an "Offering") of twenty-four (24) months duration (an "Offering
Period"). An Offering shall commence on May 1 and November 1 of each year.
The Offering commencing on May 1 shall end on April 30 of the second following
year. The Offering commencing on November 1 shall end on October 31 of the
second following year. Notwithstanding the foregoing, the Board may establish
a different term for one or more Offerings and/or different commencing and/or
ending dates for such Offerings. The first day of an Offering shall be the
"Offering Date" for such Offering.
(b) Purchase Periods. Each Offering Period shall consist
of four (4) consecutive purchase periods of six (6) months duration (the
"Purchase Period"). The last day of each Purchase Period shall be the
"Purchase Date" for such Purchase Period. A Purchase Period commencing on May
1 shall end on the next October 31. A Purchase Period commencing on November 1
shall end on the next April 30. The Board may establish a different term for
one or more Purchase Periods and/or different commencing dates and/or Purchase
Dates for such Purchase Periods. In the event a Purchase Date is not a
business day, the Company shall specify the business day that will be deemed
the Purchase Date.
(c) Governmental Approval; Shareholder Approval.
Notwithstanding any other provision of the Plan to the contrary, any Purchase
Right granted pursuant to the Plan shall be subject to (i) obtaining all
necessary governmental approvals and/or qualifications of the sale and/or
issuance of the Purchase Rights and/or the Shares, and (ii) obtaining
shareholder approval of the Plan. Notwithstanding the foregoing, shareholder
approval shall not be necessary in order to grant any Purchase Right granted on
the Offering Date of the Plan's initial Offering Period; provided, however,
that the exercise of any such Purchase Right shall be subject to obtaining
shareholder approval of the Plan.
2
<PAGE> 3
6. Participation in the Plan.
(a) Initial Participation. An eligible employee shall
become a participant in the Plan (a "Participant") on the first Offering Date
after satisfying the eligibility requirements and delivering to the Company's
payroll office two (2) weeks prior to such Offering Date or as may be
established by the Company from time to time (the "Subscription Date") a
subscription agreement indicating the employee's election to participate in the
Plan and authorizing payroll deductions. An eligible employee who does not
deliver a subscription agreement to the Company on or before the Subscription
Date shall not participate in the Plan for that Offering or for any subsequent
Offering unless such eligible employee subsequently enrolls in the Plan by
complying with the provisions of paragraph 4 and by filing a subscription
agreement with the Company on or before the Subscription Date for such
subsequent Offering. An employee who becomes eligible to participate in the
Plan after an Offering has commenced shall not be eligible to participate in
such Offering but may participate in any subsequent Offering provided such
employee is still eligible to participate in the Plan as of the commencement of
any such subsequent Offering.
(b) Continued Participation. Participation in the Plan
shall continue until (i) the Participant ceases to be eligible as provided in
paragraph 4, (ii) the Participant withdraws from the Plan pursuant to paragraph
11, or (iii) the Participant terminates employment or dies as provided in
paragraphs 11(e) and 11(f). If a Participant is automatically withdrawn from
an Offering at the end of the first Purchase Period of such Offering pursuant
to paragraph 11(c), then the Participant shall automatically participate in the
Offering Period commencing concurrently with or immediately after the
termination of such Purchase Period. At the end of an Offering Period, each
Participant in such terminating Offering Period shall automatically participate
in the first subsequent Offering Period according to the same elections
contained in the Participant's subscription agreement effective for the
Offering Period which has just ended, provided such Participant is still
eligible to participate in the Plan as provided in paragraph 4. However, a
Participant may file a subscription agreement with respect to such subsequent
Offering Period if the Participant desires to change any of the Participant's
elections contained in the Participant's then effective subscription agreement.
7. Maximum Right to Purchase Shares.
(a) Except as set forth in subparagraph (b) below, during
an Offering Period each Participant shall have a Purchase Right consisting of
the right to purchase that number of whole Shares which may be purchased at the
applicable Offering Exercise Price (as defined in paragraph 8, below), with
amount of the Participant's accumulated payroll deductions for such Offering
Period, up to a maximum equal to that number of whole Shares arrived at by
dividing twenty thousand one hundred sixty dollars ($20,160) by eighty-five
percent (85%) of the fair market value of the Shares, as determined in
accordance with paragraph 8, below on the Offering Date.
(b) Notwithstanding any other provision of the Plan, no
Participant shall be entitled to purchase Shares under the Plan at a rate which
exceeds $25,000 in fair market value,
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<PAGE> 4
determined as of the Offering Date for each Offering Period (or such other
limit as may be imposed by the Code), for each calendar year in which the
Participant participates in the Plan.
8. Purchase Price. The purchase price at which Shares may be
acquired at the end of a Purchase Period pursuant to the exercise of all or any
portion of a Purchase Right granted under the Plan (the "Offering Exercise
Price") shall be eighty-five percent (85%) of the lesser of (a) the fair market
value of the Shares on the Offering Date of such Offering or (b) the fair
market value of the Shares on the Purchase Date or such higher price as may be
set by the Board prior to the commencement of an Offering. The fair market
value of the Shares on the Offering Date will be the closing price quoted on
the New York Stock Exchange ("NYSE") on the last trading day prior to the
Offering Date and the fair market value of the Shares on the Purchase Date will
be the closing price quoted on the NYSE on the Purchase Date.
9. Payroll Deductions and Payment of Purchase Price.
(a) Payroll Deductions. Shares which are acquired
pursuant to the exercise of all or any portion of a Purchase Right for a given
Offering Period may be paid for only by means of payroll deductions from the
Participant's Compensation accumulated during the Offering Period. For
purposes of the Plan, a Participant's "Compensation" with respect to an
Offering shall include all amounts paid in cash and includable as "wages"
subject to tax under section 3101(a) of the Code without applying the dollar
limitation of section 3121(a) of the Code. Accordingly, Compensation shall
include, without limitation, salaries, commissions, bonuses, and overtime.
Compensation shall not include reimbursements of expenses, allowances, or any
amount deemed received without the actual transfer of cash or any amounts
directly or indirectly paid pursuant to the Plan or any other stock purchase or
stock option plan. Except as set forth below, the amount of Compensation to be
withheld from a Participant's Compensation during each pay period shall be
determined by the Participant's subscription agreement.
(b) Election to Increase or Decrease Withholding. During
an Offering Period, except as provided in subparagraph 9(b)(ii), below, a
Participant may elect to increase or decrease the amount withheld from his or
her Compensation by filing an amended subscription agreement with the Company
on or before the Change Notice Date. The "Change Notice Date" shall initially
be two (2) weeks prior to the end of the first pay period for which such
election is to be effective; however, the Company may change such Change Notice
Date from time to time.
(c) Limitations on Payroll Withholding.
(i) The amount of payroll withholding with
respect to the Plan for any Participant during any pay period shall not exceed
ten percent (10%) of the Participant's Compensation for such pay period.
Amounts shall be withheld in whole percentages only and shall be reduced by any
amounts contributed by the Participant and applied to the purchase of Company
stock pursuant to any other employee stock purchase plan qualifying under
section 423 of the Code.
(ii) The maximum amount of payroll deductions for
any Purchase Period may not exceed five thousand forty dollars ($5,040).
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<PAGE> 5
(d) Payroll Withholding. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.
(e) Participant Accounts. Individual accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such account and shall be deposited with the
general funds of the Company. All payroll deductions received or held by the
Company may be used by the Company for any corporate purpose.
(f) No Interest Paid. Except as otherwise required by
applicable law, interest shall not be paid on sums withheld from a
Participant's Compensation.
10. Exercise of Purchase Right.
(a) Automatic Exercise of Purchase Right. On each
Purchase Date of an Offering Period, each Participant who has not withdrawn
from the Offering or whose participation in the Offering has not terminated on
or before such last day and each beneficiary who has elected to exercise a
deceased Participant's Purchase Right (pursuant to paragraph 11(f) below) shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole Shares arrived at by dividing the total amount of the
Participant's accumulated payroll deductions for the Purchase Period by the
Offering Exercise Price; provided, however, in no event shall the number of
Shares purchased by the Participant or the beneficiary exceed the limitations
set forth in paragraph 7. Except as provided in paragraph 11(f) below, no
Shares shall be purchased on behalf of a Participant whose participation in the
Offering or the Plan has terminated on or before the date of such exercise.
(b) Return of Cash Balance. Any cash balance remaining
in the Participant's account shall be refunded to the Participant as soon as
practical after the Purchase Date. In the event the cash to be returned to a
Participant pursuant to the preceding sentence is an amount less than the
amount necessary to purchase a whole Share, the Company may establish
procedures whereby such cash is maintained in the Participant's account and
applied toward the purchase of Shares in the subsequent Purchase or Offering
Period.
(c) Withholding. At the time the Purchase Right is
exercised, in whole or in part, or at the time some or all of the Shares are
disposed of, the Company shall withhold from the Participant's Compensation the
amount, if any, necessary to satisfy the foreign, federal and state tax
withholding obligations of the Company which may arise upon exercise of the
Purchase Right and/or upon disposition of Shares, unless the Participant makes
other arrangements with the Company to meet such withholding obligations.
(d) Company Established Procedures. The Company may,
from time to time, establish (A) a minimum required withholding amount for
participation in any Offering, (B) limitations on the frequency and/or number
of changes in the amount withheld during an Offering, (C) an exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars, (D)
payroll withholding in excess of or less than the amount designated by a
Participant
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<PAGE> 6
in order to adjust for delays or mistakes in the Company's processing of
subscription agreements, and/or (E) such other limitations or procedures as
deemed advisable by the Company in the Company's sole discretion which are
consistent with the Plan.
(e) Allocation of Shares. In the event the number of
Shares which might be purchased by all Participants in the Plan exceeds the
number of Shares available in the Plan, the Company shall make a pro rata
allocation of the remaining Shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable.
(f) Expiration of Purchase Right. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the
Offering Period to which such Purchase Right relates shall expire immediately
upon the end of such Offering Period.
11. Withdrawal and Termination of Employment.
(a) Voluntary Withdrawal From an Offering. A Participant
may withdraw from an Offering by signing a written notice of withdrawal on a
form provided by the Company for such purpose and delivering such notice to the
Company at any time prior to the end of an Offering Period; however, if a
Participant withdraws after the Purchase Date for the first Purchase Period of
an Offering, the withdrawal shall not affect Shares acquired by the Participant
in the prior Purchase Period. A Participant may not thereafter resume
participation in the same Offering upon withdrawal from such Offering. Unless
otherwise indicated by the Participant, withdrawal from an Offering shall not
result in a withdrawal from the Plan or any succeeding Offering therein. The
Company may, from time to time, impose a requirement that the notice of
withdrawal be on file with the Company for a reasonable period prior to the
effectiveness of the Participant's withdrawal from an Offering.
(b) Voluntary Withdrawal from the Plan. A Participant
may withdraw from the Plan by signing a written notice of withdrawal on a form
provided by the Company for such purpose and delivering such notice to the
Company. Withdrawals made after the first Purchase Date of an Offering Period
shall not affect shares acquired by the Participant on such Purchase Date. In
the event a Participant voluntarily elects to withdraw from the Plan, the
Participant may not resume participation in the Plan during the same Offering
Period, but may participate in any subsequent Offering under the Plan by again
satisfying the requirements of paragraphs 4 and 6. The Company may impose,
from time to time, a requirement that the notice of withdrawal be on file with
the Company for a reasonable period prior to the effectiveness of the
Participant's withdrawal from the Plan.
(c) Automatic Withdrawal From an Offering. If the fair
market value of the Shares on the first Purchase Date of an Offering is less
than the fair market value of the Shares on the Offering Date for such
Offering, then every Participant shall automatically (i) be withdrawn from the
Offering at the close of the Purchase Date and after the acquisition of Shares
for such Purchase Period, and (ii) be enrolled in the Offering commencing
concurrently with or immediately after the termination of such Purchase Period.
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<PAGE> 7
(d) Waiver of Withdrawal Right. The Company may, from
time to time, establish a procedure pursuant to which a participant may elect
(an "Irrevocable Election"), prior to the commencement of an Offering Period or
Purchase Period, to have all payroll deductions accumulated in his or her Plan
account as of the Purchase Date applied to purchase shares under the Plan and
(i) to waive his or her right to withdraw from the Offering or the Plan
pursuant to this paragraph 11, and (ii) to waive his or her right to increase,
decrease, or cease payroll deductions from his or her compensation for such
Offering during the time such election is in effect. Such election shall be
made in writing on a form provided by the Company for such purpose and must be
delivered to the Company not later than the close of business on the day prior
to the first day of the Offering Period or the Purchase Period for which such
election is to first be effective.
(e) Termination of Employment. Termination of a
Participant's employment with the Company for any reason, including retirement,
other than death while in the employ of the Company, shall terminate the
Participant's participation in the Plan immediately. A Participant whose
participation has been so terminated may again become eligible to participate
in the Plan by again satisfying the requirements of paragraphs 4 and 6.
(f) Death of a Participant. Upon termination of the
Participant's employment with the Company because of death, his or her
beneficiary (as defined in paragraph 13) shall have the right to elect, by
written notice given to the Company prior to the first to occur of (A) the
expiration of the period of sixty (60) days commencing with the date of the
death of the Participant, or (B) the Purchase Date next following the date of
the Participant's death, either
(i) to withdraw all of the payroll deductions
credited to the Participant's account under the Plan; or
(ii) to exercise the Participant's Purchase Right
on the Purchase Date next following the date of the Participant's death for the
purchase of the number of whole Shares which the accumulated payroll deductions
in the Participant's account at the applicable Offering Exercise Price, and any
excess in such account will be returned to said beneficiary.
In the event that no such written notice of election shall be duly received by
the Company, the beneficiary shall automatically be deemed to have elected to
withdraw the payroll deductions credited to the Participant's account at the
date of the Participant's death.
12. Repayment of Payroll Deductions. In the event a Participant's
interest in the Plan or any Offering therein is terminated for any reason, the
balance held in the Participant's account balance shall be returned as soon as
practical after such termination to the Participant (or, in the case of the
Participant's death, to the Participant's beneficiary) and all of the
Participant's rights under the Plan shall terminate except as otherwise
provided herein. Such account balance may not be applied to any other Offering
under the Plan. Except as otherwise required by applicable law, no interest
shall be paid on sums returned to a Participant pursuant to this paragraph 12.
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<PAGE> 8
13. Designation of Beneficiary.
(a) Each Participant shall have the right to designate on
forms provided by the Company a beneficiary to receive the Shares and/or cash
upon the Participant's death as provided in paragraph 11(f).
(b) If, upon the death of a Participant, former
Participant or beneficiary, there is no valid designation of beneficiary on
file with the Company, or if the designated beneficiary is not then living, the
Company shall designate as the Beneficiary, in order of priority:
(i) the surviving spouse;
(ii) surviving children, including adopted
children;
(iii) surviving parents; or
(iv) the Participant's estate, provided that at
all times the Company shall have the right to designate as beneficiary the
Participant's estate irrespective of said order of priority.
The determination of the Company as to which persons, if any, qualify within
the aforementioned categories shall be final and conclusive upon all persons.
14. 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
Control Company. For purposes of applying this paragraph 14, the "Control
Company" shall mean the Participating Company whose stock is subject to the
Purchase Right.
(a) a merger in which the shareholders before such merger
do not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Control Company; or
(b) the sale or exchange of all or substantially all of
the Control Company's assets (other than a sale or transfer to a subsidiary of
the Company as defined in section 424(f) of the Code).
In the event of a Transfer of Control, the Board, in its sole
discretion, shall either (i) provide that Purchase Rights granted under the
Plan shall be fully exercisable to the extent of each Participant's account
balance for the Offering Period as of a date prior to the Transfer of Control,
as the Board so determines or (ii) arrange with the surviving, continuing,
successor, or purchasing corporation, as the case may be, that such corporation
assume the Company's rights and obligations under the Plan. All Purchase
Rights shall terminate effective as of the date of the Transfer of Control to
the extent that the Purchase Right is neither exercised as of the date of the
Transfer of Control nor assumed by the surviving, continuing, successor, or
purchasing corporation, as the case may be.
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<PAGE> 9
15. Capital Changes. In the event of changes in the common stock
of the Company due to a stock split, reverse stock split, stock dividend,
combination, reclassification, or like change in the Company's capitalization,
or in the event of any merger, sale or other reorganization, appropriate
adjustments shall be made by the Company in the Plan's share reserve, the
number of Shares subject to a Purchase Right and in the purchase price per
share. Furthermore, in the event of any such change the Board may terminate
any outstanding Offering effective on or after the effective date of any such
change; provided, however, the date of such termination shall be deemed a
Purchase Date and shall be not sooner than thirty (30) days after giving notice
of such termination to the Participants.
16. Rights as a Stockholder and Employee. A Participant shall
have no rights as a stockholder by virtue of the Participant's participation in
the Plan until the date of the issuance of a stock certificate(s) for the
Shares being purchased pursuant to the exercise of the Participant's Purchase
Right. No adjustment shall be made for cash dividends or distributions or
other rights for which the record date is prior to the date such stock
certificate(s) are issued. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Company or interfere in any way with any
right of the Company to terminate the Participant's employment at any time.
17. Reports. Each Participant who exercised all or part of the
Participant's Purchase Right for a Purchase Period shall receive as soon as
practical after the last day of such Purchase Period a report of such
Participant's account setting forth the total payroll deductions accumulated,
the number of Shares purchased and the remaining cash balance to be refunded or
retained in the Participant's account pursuant to paragraph 9(b), if any.
18. Plan Term. This Plan shall continue until terminated by the
Board or until all of the Shares reserved for issuance under the Plan have been
issued, whichever shall first occur.
19. Restriction on Issuance of Shares. The issuance of shares
pursuant to the Purchase Right shall be subject to compliance with all
applicable requirements of federal or state law with respect to such
securities. The Purchase Right may not be exercised if the issuance of shares
upon such exercise would constitute a violation of any applicable federal or
state securities laws or other law or regulations. In addition, no Purchase
Right may be exercised unless (i) a registration statement under the Securities
Act of 1933, as amended, shall at the time of exercise of the Purchase Right be
in effect with respect to the shares issuable upon exercise of the Purchase
Right, or (ii) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Purchase Right may be issued in accordance with
the terms of an applicable exemption from the registration requirements of said
Act. As a condition to the exercise of the Purchase Right, the Company may
require the Participant to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and
to make any representation or warranty with respect thereto as may be requested
by the Company.
20. Legends. The Company may at any time place legends or other
identifying symbols referencing any applicable federal and/or state securities
restrictions and any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present
to the Company any and all certificates representing shares acquired pursuant
to a
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<PAGE> 10
Purchase Right in the possession of the Participant in order to effectuate the
provisions of this paragraph 20.
21. Non-Transferability. During the lifetime of the Participant,
the Purchase Right shall be exercisable only by said Participant. No Purchase
Right shall be assignable or transferable by the Participant, except by will or
by the laws of descent and distribution. The Company, in its absolute
discretion, may impose such restrictions on the transferability of the shares
purchasable upon the exercise of a Purchase Right as it deems appropriate and
any such restriction shall be set forth in the respective subscription
agreement and may be referred to on the certificates evidencing such shares.
The Company may require the employee to give the Company prompt notice of any
disposition of shares of stock acquired by exercise of a Purchase Right within
two years from the date of granting such Purchase Right or one year from the
date of exercise of such Purchase Right. The Company may direct that the
certificates evidencing shares acquired by exercise of a Purchase Right refer
to such requirement to give prompt notice of disposition.
22. Amendment or Termination of the Plan. The Board may at any
time amend or terminate the Plan, except that such termination shall not affect
Purchase Rights previously granted under the Plan, nor may any amendment make
any change in a Purchase Right previously granted under the Plan which would
adversely affect the right of any Participant (except as otherwise specifically
provided in this Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to section 423 of the Code). In addition, an
amendment to the Plan must be approved by the stockholders of the Company,
within the meaning of section 423 of the Code, within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as a
corporation the employees of which are eligible to participate in the Plan. 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 promulgated under the
Exchange Act, and amended from time to time or any successor rule or
regulation.
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<PAGE> 1
Exhibit 10.19
BAY NETWORKS, INC.
EMPLOYMENT AGREEMENT
This Agreement is made by and between Bay Networks, Inc. (the
"Company"), and David House ("Executive").
1. Duties and Scope of Employment.
(a) Position: Employment Commencement Date. The Company shall
employ the Executive as the President and Chief Executive Officer of the Company
reporting to the Board of Directors of the Company (the "Board"). Additionally,
Executive shall serve as Chairman of the Board during the period of his
employment hereunder. Executive's employment with the Company and tenure as
Chairman of the Board pursuant to this Agreement shall commence on October 30,
1996 (the "Effective Date").
(b) Obligations. Executive shall devote his full business efforts
and time to the Company. Executive agrees not to actively engage in any other
employment, occupation or consulting activity for any direct or indirect
remuneration without the prior approval of the Board, provided, however, that
Executive may serve in any capacity with any civic, educational or charitable
organization without the approval of the Board, so long as such activities do
not interfere with his duties and obligations under this Agreement; provided,
further that (i) Executive may maintain his membership and participation as a
member of the board of directors of Merisel, Inc., and (ii) that for a
reasonable period of time following the Effective Date, on the order of six
months, Executive may devote a reasonable amount of time to assisting his prior
employer.
2. Employee and Fringe Benefits. During his employment hereunder,
Executive shall be eligible to participate in the employee benefit and fringe
benefit plan and programs maintained by the Company for its senior executives at
a level comparable to that of other senior executives of the Company.
3. Compensation and Stock Options.
(a) Base Salary. While employed by the Company pursuant to this
Agreement, the Company shall pay the Executive as compensation for his services
a base salary at the minimum annualized rate of $500,000 (the "Base Salary").
Such salary shall be paid periodically in accordance with normal Company payroll
practices and subject to the usual, required withholding. Executive's salary
shall be reviewed annually for possible raises in light of Executive's
performance of his duties, as determined by the Board.
(b) Bonus. Executive shall receive a bonus on account of the
Company's 1997 fiscal year equal to one million dollars ($1,000,000), payable in
a lump sum (subject to applicable withholding) promptly upon the close of the
fiscal year. Executive's bonus target amount shall be
<PAGE> 2
reviewed annually for possible increases in light of Executive's performance of
his duties, as determined by the Board.
(c) Stock Options.
(i) Initial Grant. Executive shall be granted a stock option,
which shall be, to the extent possible under the $100,000 rule of Section 422(d)
of the Internal Revenue Code of 1986, as amended (the "Code") an "incentive
stock option" (as defined in Section 422 of the Code) to purchase a total of one
million five hundred thousand (1,500,000) shares of Company Common Stock, with a
per share exercise price equal to $18.375. This option shall be for a term of
eight years and shall vest at the rate of 25% of the shares originally subject
to the option one year from the Effective Date and one-forty-eighth of the
shares originally subject to the option each month thereafter (so as to be 100%
vested four years after the Effective Date), conditioned upon Executive's
continued employment with the Company as of each vesting date. The option shall
be exercisable at any time, including by means of Executive entering into a
fully recourse promissory note covering the aggregate exercise price, subject to
Executive entering into a restricted stock purchase agreement with the Company
with respect to any unvested shares. The shares covered by the stock option
shall be registered on Form S-8 by the Company prior to the date of any vesting.
(ii) Sign-On Grant. On the Effective Date, Executive shall be
granted an additional stock option to purchase a total five hundred thousand
(500,000) shares of Company Common Stock, with a per share exercise price equal
to $18.375. This option shall be for a term of eighteen months, subject to
automatic ongoing extensions which may be multiple, each of ninety (90) days in
duration, upon notice to the Company by Executive that Executive has reasonably
deemed it imprudent to exercise the option or sell shares covered thereby by
virtue of such actions potentially giving rise to liability to litigation. The
option shall vest as to 100% of the shares originally subject to the option one
year from the Effective Date, conditioned upon Executive's continued employment
with the Company as of such vesting date. The option shall be exercisable at any
time, including by means of Executive entering into a fully recourse promissory
note covering the aggregate exercise price, subject to Executive entering into a
restricted stock purchase agreement with the Company with respect to any
unvested shares. The shares covered by the stock option shall be registered on
Form S-8 by the Company prior to the date of any vesting.
4. Expenses. The Company will pay or reimburse Executive for
reasonable travel, entertainment or other expenses incurred by Executive in the
furtherance of or in connection with the performance of Executive's duties
hereunder in accordance with the Company's established policies.
5. Life Insurance. The Company will obtain and pay premiums for,
during the term of Executive's employment hereunder, term life insurance for
Executive in the amount of $1,000,000 payable to the beneficiary designated by
Executive. Executive shall be fully "grossed-up" by the Company for this benefit
so that the economic effect to Executive is the same as if this benefit was
provided to Executive on a non-taxable basis.
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<PAGE> 3
6. Severance Benefits. If Executive's employment with the Company
terminates involuntarily or if Executive terminates his employment with the
Company voluntarily for "Good Reason" (as defined herein), then (i) Executive
shall be entitled to receive a lump-sum severance payment from the Company,
within 30 days of such termination, equal to twelve months' of Executive's Base
Salary as in effect as of the date of such termination, plus 100% of Executives'
target bonus for the year in which the termination occurs, plus a pro-rated
target bonus equal to the bonus target amount for the year in which the
termination occurs amount multiplied by a fraction, the numerator of which is
the number of days from the Effective Date until the date of termination and the
denominator of which is three hundred and sixty-five (all less applicable
withholding), (ii) Executive's outstanding stock options and any stock subject
to restricted stock purchase agreements shall have their vesting accelerated as
to one year's additional vesting as of the date of termination, (iii) to the
extent permitted by law, Executive's accounts under any Company deferred
compensation plans or arrangements shall have their vesting accelerated as to
one year's additional vesting as of the date of termination, including as to any
amounts contributed by the Company, and (iv) the Company shall provide to
Executive one hundred percent (100%) Company-paid health, dental, vision and
life insurance coverage at the same level of coverage as was provided to
Executive immediately prior to the date of termination (the "Company-Paid
Coverage"). If such coverage included the Executive's dependents immediately
prior to the date of termination, such dependents shall also be covered at
Company expense. Company-Paid Coverage shall continue until the earlier of (x)
one year from the date of termination, or (y) the date that the Executive and
his dependents become covered under another employer's group health, dental,
vision and life insurance plans that provide Executive and his dependents with
comparable benefits and levels of coverage. For purposes of Title X of the
Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the date of the
"qualifying event" for Executive and his dependents shall be the date upon which
the Company-Paid Coverage terminates.
For this purpose, "Good Reason" is defined as (i) the significant
reduction of the Executive's title, duties, authority or responsibilities,
relative to the Executive's title, duties, authority or responsibilities as in
effect immediately prior to such reduction; (ii) a reduction by the Company in
the Base Salary or bonus target amount of the Executive as in effect immediately
prior to such reduction; (iii) the relocation of the Executive to a facility or
a location more than thirty (30) miles from the Executive's then present
location, without the Executive's express written consent; (iv) any material
breach of this Agreement by the Company, or (v) any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Executive.
7. Change of Control. In the event of a change of control of the
Company (i) Executive's outstanding stock options and any stock subject to
restricted stock purchase agreements shall have their vesting accelerated as to
one year's additional vesting (this would, for example, make the stock option
referred to in subsection 3(c)(ii) hereof become fully vested if a change of
control occurs in the year following the Effective Date), and (ii) if a change
of control of the Company occurs within one year after the Effective Date, the
Company shall pay Executive an amount equal to twelve months' of Executive's
Base Salary as in effect as of the date immediately prior to such change of
control, plus 100% of Executive's target bonus for the year in which the change
of control occurs, plus a pro-rated target bonus equal to the bonus target
amount for the year in which the change of control occurs
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<PAGE> 4
amount multiplied by a fraction, the numerator of which is the number of days
from the Effective Date until the date of the change of control and the
denominator of which is three hundred and sixty-five (all less applicable
withholding). For this purpose, "change of control of the Company" is defined
as:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) becomes the "beneficial
owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or
(b) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors; provided, however, that such
provision shall not be effective until November 5, 1997 (and the determination
of who is an Incumbent Director shall be made as of such date) if Proposition
211 is approved by the voters of California on November 5, 1996. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of the date hereof (or, if Proposition 211 is approved, as of November 5, 1997),
or (B) are elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(c) The consummation of a merger or consolidation of the Company
with any other corporation other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(d) The consummation of the sale or disposition by the Company of
all or substantially all of the Company's assets.
8. Golden Parachute Excise Tax Gross-Up. In the event that the
benefits provided for in this Agreement or otherwise payable to the Executive
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and will be subject to
the excise tax imposed by Section 4999 of the Code, then the Executive shall
receive (i) a payment from the Company sufficient to pay such excise tax, and
(ii) an additional payment from the Company sufficient to pay the excise tax and
federal and state income taxes arising from the payments made by the Company to
Executive pursuant to this sentence. Unless the Company and the Executive
otherwise agree in writing, the determination of Executive's excise tax
liability and the amount required to be paid under this Section 8 shall be made
in writing by the Accountants. For purposes of making the calculations required
by this Section 8, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith
-4-
<PAGE> 5
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 8.
9. Death and Disability. If (i) Executive dies or becomes partially or
permanently disabled while employed by the Company, and (ii) the Company
appoints a new Chairman of the Board, President or Chief Executive Officer or
takes any action that would constitute Good Reason under Section 6 hereof, then
Executive's outstanding stock options and any stock subject to restricted stock
purchase agreements shall have their vesting accelerated in full so as to become
100% vested.
10. Indemnification Insurance. Upon the commencement of his employment
with the Company, Executive shall be offered an Indemnification agreement
comparable in form and substance to agreements entered into by and between the
Company and its executive officers and members of the Board. During the period
of Executive's employment with the Company, the Company agrees to maintain
director and officer liability insurance in scope and amounts reasonably
satisfactory to Executive, to the extent available. Following the termination of
Executive's employment or directorship for any reason, the Company agrees to
honor the indemnification agreement previously entered into with Executive.
11. Enforcement. In the event of any action to enforce the terms of
this Agreement, the prevailing party in such action shall be entitled to such
party's reasonable costs and expenses of enforcement including, without
limitation, reasonable attorneys' fees.
12. Assignment. This Agreement shall be binding upon and inure to the
benefit of (a) the heirs, executors and Legal representatives of Executive upon
Executive's death and (b) any successor of the Company. Any such successor of
the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" shall include any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company.
13. Notices. All notices, requests, demands and other communications
called for hereunder shall be in writing and shall be deemed given if delivered
personally or three (3) days after being mailed by registered or certified mail,
or sent by Federal Express or a similar private delivery company, return receipt
requested, prepaid and addressed to the parties or their successors in interest
at the following addresses, or at such other addresses as the parties may
designate by written notice in the manner aforesaid:
If to the Company: Bay Networks, Inc.
4401 Great America Parkway
Santa Clara, CA 95052
-5-
<PAGE> 6
If to Executive: David House
HOME ADDRESS REDACTED
14. Severability. In the event that any provision hereof becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
15. Entire Agreement. This Agreement represents the entire agreement
and understanding between the Company and Executive concerning Executive's
employment relationship with the Company, and supersedes and replaces any and
all prior agreements and understandings concerning Executive's employment
relationship with the Company.
16. No Oral Modification, Cancellation or Discharge. This Agreement
may only be amended, canceled or discharged in writing signed by Executive and
the Company.
17. Governing Law. This Agreement shall be governed by the laws of
the State of California.
18. Effective Date. This Agreement is effective immediately after it
has been signed.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the respective dates set forth below.
BAY NETWORKS. INC.
By: /s/ MONTGOMERY KERSTEN /s/ PAUL J. SEVERINO
----------------------- -----------------------
Signature
Date: 10/29/96
---------------------
DAVID HOUSE
Date: 10/29/96 /s/ DAVID L. HOUSE
--------------------- -----------------------
Signature
-6-
<PAGE> 1
Exhibit 10.20
[BAY NETWORKS LETTERHEAD]
March 18, 1997
Lloyd Carney
HOME ADDRESS REDACTED [BAY NETWORKS LOGO]
Dear Lloyd:
On behalf of Bay Networks, Inc., I am pleased to confirm your new position of
Executive Vice President, Enterprise Business Group, reporting directly to me in
my capacity as President & Chief Executive Officer. Compensation for this
position will be at an annualized salary of $250,000.00, earned and payable at
the biweekly rate of $9,615.39.
In addition to base salary, you will participate in Bay Networks Executive
Compensation Plan as discussed. At target your annual compensation will be
$450,000.00 Your participation in the plan will be prorated from January 22,
1997, the date of your new assignment, through the end of the fiscal year which
ends June 30, 1997.
Subject to the approval of the Board of Directors, you also will have an option
to purchase 115,000 shares of stock. Vesting of the stock option is 25%
following the first year of the grant date and 1/48 per month during the period
between 13 and 48 months from the initial grant date. This schedule provides
complete vesting four years following the grant date.
Bay Networks will assist with expenses incurred for relocation of your family
including your mother-in-law. The moving of your household goods, temporary
storage for the period of time that you are in temporary living, and final
airfare to the work location will be billed directly to Bay Networks. Bay
Networks will also reimburse you for expenses for temporary living quarters
which will be available for you and your family after you relocate and until
your home is available.
In addition, you will receive mortgage assistance in the form of annualized
interest cost reimbursement on a loan for a primary residence in the Northern
California Bay Area for a period of three years. The amount of mortgage
assistance would be calculated by subtracting the equity and mortgage of your
Massachusetts home from the purchase price of your new home with $1,100,000.00
maximum on the mortgage assistance amount. This amount would then be grossed up
for tax purposes. In the unlikely event that a change in management caused you
to be removed from your job, Bay Networks would continue your mortgage
assistance for 6 months or until you've found another position outside of Bay
Networks, whichever comes first.
If you sell your home on your own, Bay Networks will reimburse you the costs for
reasonable and customary sales commissions and non-recurring closing costs
associated with the sale of your Massachusetts home. Bay will also arrange to
have a third-party relocation company provide you home marketing assistance. If
after 60 days on the market your Massachusetts home does not sell, Bay Networks
will arrange to purchase your home for a pre-agreed upon price. Details on this
program will be provided at a later date. In either case, Bay Networks will
reimburse you the costs for reasonable and customary sales commissions and
non-recurring closing costs associated with the sale of your Massachusetts home.
<PAGE> 2
Bay Networks also agrees to provide assistance on a return move to
Massachusetts. If at any time in the next five years you (or Carole in the event
of your incapacity) so desire, the Company will provide move assistance to
include, but not limited to, the movement of your household goods, temporary
storage, and airfare to Massachusetts. Movement back to Massachusetts would be
forfeited if you were to voluntarily resign or be terminated for cause.
As you are aware, Bay Networks also provides employees with life insurance up to
two times Targeted Annual Income. You may also purchase supplemental life
insurance to bring your total combined coverage up to $1,000,000.
Lloyd, we know what a tremendous commitment and sacrifice a move to the West
Coast will mean to you and your family. We want to afford you the opportunity to
experience the adventure and cultural diversity of living on the West Coast in
the time that you are here. In an effort to make this transition as easy as
possible for you, Carole, and your children, we want to help you get to know the
area, people, resources, and more, as quickly as possible.
First, for the next three years, Bay Networks would like you to take advantage
of two round-trip excursions of up to one week each from California to
Massachusetts annually for you and your family to assist you in maintaining your
East Coast relationships with friends and family. Second, Bay Networks will
provide you with opportunities to attend events and local attractions such as
Great America Amusement Park, Santa Cruz Beach/Boardwalk, concerts, skiing in
Tahoe, and more through our "Bay Box" connections. Third, Bay Networks will
provide you and your family four weekend get-away trips, arranged by our Travel
Services department, to the locations of your choice in California. The Bay Area
offers many organizations, affiliations, and associations representing interests
of all kinds. We will assist you with identifying and connecting with the
interests of your choice. Many families who have moved to the Bay Area have
found this just one good way to meet people with similar interests and
experiences. Finally, we will pay for a family membership to the health club of
your choice for your first year in California.
We hope that we have communicated the strong desire for you to relocate to the
Santa Clara area, as well as our great concern in making this a positive
adventure for the Carney family. Please let us know if we can answer any
questions you or your family might have.
Lloyd, I feel confident that you will continue to make a significant
contribution to Bay Networks' success. I look forward to working with you in
your new assignment.
Sincerely
/s/ DAVE HOUSE
- ---------------------------------------------
Dave House
Chairman, President & Chief Executive Officer
CC. Jerry Patton,
Vice President, Human Resources
I concur with the above conditions for continuing employment with Bay Networks,
Inc., and understand fully that they do not constitute an employment contract or
an offer of employment for any specified period of time.
I acknowledge the acceptance of this offer.
/s/ LLOYD A. CARNEY 4/97
- ---------------------------------- ----------------------------------
Lloyd Carney Date
<PAGE> 3
PROMISSORY NOTE
$416,450.00 May 22, 1997
FOR VALUE RECEIVED, the undersigned, Lloyd Carney ("Borrower"), hereby
promises to pay to Bay Networks, Inc., a Delaware corporation ("Lender"), or
order, the principal sum of Four Hundred Sixteen Thousand Four Hundred Fifty
Dollars ($416,450.00), without interest, as provided herein.
A. Payment Schedule.
1. Principal. The principal indebtedness shall be payable in
full on June 30, 1997 (the "Maturity Date").
2. Form of Payment. Principal and all other amounts due
hereunder are to be paid in lawful money of the United States of America in
federal or other immediately available funds.
B. Events of Default.
1. Definition of Event of Default. The occurrence of any one or
more of the following events shall constitute an "Event of Default" hereunder:
(i) Borrower's failure to pay any amount payable
hereunder in accordance with the terms hereof; or
(ii) Borrower's institution of proceedings against
Borrower, or Borrower's filing of a petition or answer or consent seeking
reorganization or release, under the federal Bankruptcy Code, or any other
applicable federal or state law relating to creditor rights and remedies, or
Borrower's consent to the filing of any such petition or the appointment of a
receiver, liquidator, assignee, trustee or other similar official of any
substantial part of Borrower's property, or Borrower's making of an assignment
for the benefit of creditors,.
2. Rights and Remedies on Event of Default. During the
continuance of an Event of Default, Lender shall have the right to accelerate
the payment of the principal and charges owing hereunder and to enforce this
Note by exercise of the rights and remedies granted to it by applicable law.
C. Other Provisions.
1. Notices. Any notice or communication required or desired to
be served, given or delivered hereunder shall be in the form and manner
specified below, and shall be addressed to the party to be notified as follows:
If to Lender: Bay Networks, Inc.
4401 Great America Parkway
Santa Clara, CA 95052-8185
Attention: Jane A. Risser, Vice President & Corporate
Treasurer
If to Borrower: Lloyd Carney
HOME ADDRESS REDACTED
or to such other address as each party designates to the other by notice in the
manner herein prescribed. Notice shall be deemed given hereunder if (i)
delivered personally or otherwise actually received, (ii) sent by overnight
delivery service, or (iii) mailed by first-class United States mail, postage
prepaid, registered or certified, with return receipt requested. Notice mailed
as provided in clause (iii) above shall be effective upon the expiration of
three (3) business days after its deposit in the United States mail. Notice
given in any other manner described in this section
1
<PAGE> 4
shall be effective upon receipt by the addressee thereof; provided, however,
that if any notice is tendered to an addressee and delivery thereof is refused
by such addressee, such notice shall be effective upon such tender unless
expressly set forth in such notice.
2. Lender's Rights; Borrower Waivers. Lender's acceptance of
partial or delinquent payment from Borrower hereunder, or Lender's failure to
exercise any right hereunder, shall not constitute a waiver of any obligation
of Borrower hereunder, or any right of Lender hereunder, and shall not affect
in any way the right to require full performance at any time thereafter.
Borrower waives presentment, diligence, demand of payment, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note and, to the greatest extent
permitted by law, Borrower waives any defense based upon any statutes of
limitation. In any action on this Note, Lender need not produce or file the
original of this Note, but need only file a photocopy of this Note certified by
Lender be a true and correct copy of this Note in all material respects.
3. Enforcement Costs. Borrower shall pay all costs and expenses,
including, without limitation, reasonable attorneys' fees and expenses Lender
expends or incurs in connection with the enforcement of this Note, the
collection of any sums due hereunder, any actions for declaratory relief in any
way related to this Note, or the protection or preservation of any rights of
Lender hereunder, including all costs and expenses incurred during a bankruptcy
or similar proceeding of Borrower.
4. Severability. Whenever possible each provision of this Note
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision is prohibited by or invalid under
applicable law, it shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of the provision or the
remaining provisions of this Note.
5. Amendment Provisions. This Note may not be amended or
modified, nor may any of its terms be waived, except by written instruments
signed by Borrower and Lender.
6. Binding Effect. This Note shall be binding upon, and shall
inure to the benefit of, Borrower and Lender and their respective successors
and assigns; provided, however, that Borrower's rights and obligations shall
not be assigned or delegated without Lender's prior written consent, given in
its sole discretion, and any purported assignment or delegation without such
consent shall be void ab initio.
7. Time of Essence. Time is of the essence of each and every
provision of this Note.
8. Governing Law. This Note shall be governed by California law,
without giving effect to conflicts of law principles.
9. Headings. Section headings used in this Note have been set
forth herein for convenience of reference only. Unless the contrary is
compelled by the context, everything contained in each section hereof applies
equally to this entire Note.
/s/ LLOYD CARNEY
--------------------------
Lloyd Carney
2
<PAGE> 1
Exhibit 10.21
[BAY NETWORKS LETTERHEAD]
June 16, 1997
Stephen G. Pearse [BAY NETWORKS LOGO]
HOME ADDRESS REDACTED
Dear Steve:
On behalf of Bay Networks, Inc., I am pleased to offer you the position of
Executive Vice President, General Manager, Internet/Telecom Business Group,
reporting directly to me in my capacity as Chairman, President and Chief
Executive Officer. Compensation for this position will be at an annualized
salary of $300,000.00, earned and payable at the biweekly rate of $11,538.47. In
addition, you will be eligible to participate in the Executive Bonus Program,
effective July 1, 1997 (Fiscal Year 1998 bonus program). Currently, this is an
"open-ended" program with no maximum payout. However, for comparison purposes,
the position you are considering has a target bonus of $150,000.00 for full year
participation in the Fiscal Year 1998 plan prorated at the time your employment
begins.
Subject to the approval of the Board of Directors, you also will have an option
to purchase 200,000 shares of stock. Vesting of the stock option is 25%
following the first year of employment and 1/48 per month during the period
between 13 and 48 months from the initial date of employment. This schedule
provides full vesting four years following the first day of employment.
Bay Networks is also prepared to provide you with a one time signing bonus of
$60,000,00 (gross). This bonus will be paid to you within 30 days of employment.
Bay Networks will assist with expenses incurred for relocation. The moving of
your household goods, temporary storage for up to two months, two house hunting
trips to the Ballerica area, temporary housing for 60 days, and final airfare to
the work location will be billed directly to Bay Networks. In addition, you will
receive $26,315.00 (gross) to be paid in lump sum within 30 days from your start
date. This amount will be reported as income, and taxes will be deducted by Bay
Networks' Payroll Department at the rate of approximately 43%. You are
responsible for tracking and reporting all relocation expenses in order to
report them on your state and/or federal income tax returns.
Bay Networks will pay all realtor costs associated with the sale of your home.
Through our third-party relocation service provider, we will sell your home
using an amended sale value closing program which allows significant tax
savings. Bay Networks requires the use of this program to complete the ultimate
sale and closing of your primary residence. Additional guidelines with details
on the amended sale program will be provided under separate cover. In the event
your home has not been sold in 120 days from market entry, Bay Networks will
authorize a company third-party purchase of your home.
You will be liable for Bay Networks comprehensive benefits plan upon your start
date. Benefits information and enrollment materials will be provided to you on
the first Monday following your first day of employment.
Consistent with Bay Networks' Executive Severance policy, if your employment
with the company terminates involuntarily, without due cause, you will be
entitled to receive a severance payment. Within 30 days of such termination you
will receive 12 months severance including base salary and bonus at 100% of
target, and one year additional vesting of outstanding stock options. In
addition you will be entitled to a prorated target bonus equal to the bonus
target amount for the year in which the termination occurs. Currently, Bay
Networks is looking to implement a new executive severance program. As a member
of the Executive Team, you would be included in the new program, replacing the
severance program as detailed above.
Please respond to our offer no later than June 27, 1997, and return a signed
copy of this offer letter upon your acceptance.
<PAGE> 2
It should be noted that as a condition of employment, you will be required to
sign an agreement which addresses the issues of confidentiality, conflicts of
interest, non-competition, and patent assignments. In addition, on your first
day of employment, you must provide Bay Networks with appropriate documents to
establish your eligibility to work in the United States (e.g. U.S. passport, or
driver's license and social security card) to satisfy the requirements of
Employment Eligibility Verification (Form I-9) as required by Federal law.
Steve, I feel confident that you can make a significant contribution to Bay
Networks' success. I look forward to your favorable reply and to working with
you in the near future.
Sincerely,
/s/ DAVE HOUSE
- -------------------------------------
Dave House
President and Chief Executive Officer
cc: Jerry Patton
Vice President Human Resources
Susan E. Keck-Truman
Director, Human Resources
/jg
This letter includes all terms and conditions of the offer of employment and
supersedes any other communications relating to the terms of my employment with
Bay Networks, Inc.
I concur with the above conditions for commencing employment with Bay Networks,
Inc., and understand fully that they do not constitute an employment contract or
an offer of employment for any specified period of time.
I acknowledge the acceptance of this offer:
/s/ STEPHEN G. PEARSE 6/18/97
- ---------------------------------- ----------------------------------
Stephen G. Pearse Date
My start date will be: 6/18/97
--------------
Please print your name as you would like it to appear for business purposes:
(email/phonemail and nameplate)
STEPHEN PEARSE
- -------------------------------------------
<PAGE> 1
[BAY NETWORKS LETTERHEAD]
EXHIBIT 10.22
December 27, 1996
David J. Rynne
HOME ADDRESS REDACTED
Dear David:
On behalf of Bay Networks, Inc., I am pleased to offer you the position of Chief
Financial Officer, reporting directly to me in my capacity as Chairman,
President and Chief Executive Officer. Compensation for this position will be at
an annualized salary of $450,000.00, earned and payable at the biweekly rate of
$17,307.70. In addition, you will be eligible to participate in the Executive
Bonus Program, effective July 1, 1996 (Fiscal Year 1997 bonus program).
Currently, this is an "open-ended" program with no maximum payout. However, for
comparison purposes, the position you are considering has a target bonus of
$225,000.00 for full year participation in the Fiscal Year 1997 plan with a
guaranteed minimum prorated pay for the six (6) months you will be on board in
Fiscal 1997.
Subject to the approval of the Board of Directors, you also will have an option
to purchase 400,000 shares of stock. Vesting of the stock option is 25%
following the first year of employment and 1/48 per month during the period
between 13 and 48 months from the initial date of employment. This schedule
provides full vesting four years following the first day of employment.
In addition as we discussed, in the event of a change in control of the Company
that results in a significant reduction of your duties or responsibilities, you
would receive one (1) year's base pay and bonus and an acceleration of one (1)
year's worth of stock vesting.
Additionally, on your third anniversary with the Company or in the case of
termination other than for cause or in the event of a change in control of the
Company as described above, you would be entitled to a special bonus of $2
million minus the appreciation of your vested shares of stock at that point in
time.
You will be eligible for Bay Networks comprehensive benefits plan upon your
start date. Benefits information and enrollment materials will be provided to
you on the first Monday following your first day of employment.
Our standard termination policy for a position at this level for termination
other than due cause would result in a payment of 12 months severance, including
base, bonus and stock vesting.
Please respond to our offer no later than December 30, 1996, and return a signed
copy of this offer letter upon your acceptance. We would like to commence
employment with us no later than January 9, 1997, or sooner if possible.
Offer Letter
Conformed as of 09/09/97
Effective 12/30/96
<PAGE> 2
December 27, 1996
Mr. David J. Rynne
Page 2.
It should be noted that as a condition of employment, you will be required to
sign an agreement which address the issues of confidentiality, conflicts of
interest, non-competition and patent assignments. In addition, on your first day
of employment, you must provide Bay Networks with appropriate documents to
establish your eligibility to work in the United States (e.g., U.S. passport, or
driver's license and social security card) to satisfy the requirements of
Employment Eligibility Verification (Form I-9) as required by Federal law.
New employee orientation is held from 8:30 AM to 4:00 PM on Mondays. Please
report to the lobby of Building 2 (4301 Great America Parkway) in Santa Clara at
8:30 AM on Monday morning of your first week of employment.
Following orientation on Monday, you will report directly to your work area.
David, I feel confident that you can make a significant contribution to Bay
Networks' success. I look forward to your favorable reply and to working with
you in the near future.
Sincerely,
/s/ DAVE HOUSE -----------------------------------
Dave House Effective Date
Chairman, President and Chief Executive
Officer
cc: J. Patton, VP/Human Resources
This letter includes all terms and conditions of the offer of employment and
supersedes any other communications relating to the terms of my employment with
Bay Networks, Inc.
I concur with the above conditions for commencing employment with Bay Networks,
Inc., and understand fully that they do not constitute an employment contract or
an offer of employment for any specified period of time.
I acknowledge the acceptance of this offer:
/s/ DAVID J. RYNNE 12-30-96
- ------------------------------------ -----------------------------------
David J. Rynne Effective Date
My start date will be:
--------------------
Please print your name as you would like it to appear for business purposes:
- ------------------------------------------
Offer Letter
Conformed as of 09/09/97
Effective 12/30/96
<PAGE> 1
EXHIBIT 10.23
BAY NETWORKS, INC.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Agreement is amended and restated as of September 12, 1997, and
supersedes any other oral or written agreements or understandings between Bay
Networks, Inc. (the "Company"), and David Shrigley ("Executive") regarding the
subject matter of this Agreement.
1. Duties and Scope of Employment.
(a) Position; Employment Commencement Date. The Company shall employ the
Executive as the Executive Vice President responsible for world-wide
sales, service and marketing, reporting to the Chief Executive Officer
of the Company. Executive's employment with the Company pursuant to this
Agreement shall commence on November 6, 1996 (the "Effective Date").
(b) Obligations. Executive shall devote his full business efforts and
time to the Company. Executive agrees not to actively engage in any
other employment, occupation or consulting activity for any direct or
indirect remuneration without the prior approval of the Board; provided,
however, that Executive may serve in any capacity with any civic,
educational or charitable organization without the approval of the
Board, so long as such activities do not interfere with his duties and
obligations under this Agreement; provided, further, that for a
reasonable period of time following the Effective Date, on the order of
six months, Executive may devote a reasonable amount of time to
assisting his prior employer.
2. Employee and Fringe Benefits. During his employment hereunder, Executive
shall be eligible to participate in the employee benefit and fringe
benefit plans and programs maintained by the Company for its senior
executives at a level comparable to that of other senior executives of
the Company.
3. Compensation and Stock Options.
(a) Base Salary. While employed by the Company pursuant to this
Agreement, the Company shall pay the Executive as compensation for his
services a base salary at the minimum annualized rate of $250,000 (the
"Base Salary"). Such salary shall be paid periodically In accordance
with normal Company payroll practices and subject to the usual, required
withholding. Executive's salary shall be reviewed annually for possible
raises in light of Executive's performance of his duties, as determined
by the Board.
(b) Bonus.
(i) Fiscal Year Bonuses. Executive shall receive a bonus on
account of the Company's 1997 fiscal year equal to three hundred
thousand dollars ($300,000), pro-rated for the number of days Executive
is employed by the Company in the 1997 fiscal year, payable in a lump
sum (subject to applicable withholding) promptly upon the close of the
fiscal year. In subsequent fiscal years of the Company, Executive's
bonus target amount, of at least $300,000, shall be reviewed annually
for possible increases in light of Executive's performance of his
duties, as determined by the Board.
(ii) Replacement Bonus. In the event that Executive does not
receive the Intel 1996 Executive Bonus, the Company shall pay to
Executive a replacement bonus of $250,000, subject to applicable
withholding.
(iii) Special Bonus.
(A) First Anniversary Bonus. If Executive remains employed by
the Company as of the first anniversary of the Effective Date
(the "First Anniversary"), then within ten (10) days following
the First Anniversary, the Company shall pay to Executive a cash
bonus (subject to applicable withholding) equal to one million
dollars ($1,000,000) minus three hundred thousand times* the
dollar amount obtained by subtracting $20.375* from the closing
sales price of Company common stock as listed on the New York
Stock Exchange on the last trading day on or before the First
Anniversary (the "First Anniversary Bonus") see subsection (L)
below for an explanation of the asterisk (*).
EXAMPLE: Executive is employed by the Company on the First
Anniversary. On the First Anniversary, which is a trading day,
the closing sales price of the Company common stock on
Amended and Restated Employment Agreement
September 12, 1997
Page 1
<PAGE> 2
the New York Stock Exchange is $22.375 (or $20.375* plus $2.00).
The First Anniversary Bonus is $1,000,000 minus [300,000* x $2]
and thus equals $400,000, less applicable withholding.
(B) Second Anniversary Bonus. If Executive remains employed by
the Company as of the second anniversary of the Effective Date
(the "Second Anniversary") then within ten (10) days following
the Second Anniversary, the Company shall pay to Executive a
cash bonus (subject to applicable withholding) equal to two
million three hundred thousand dollars ($2,300,000) minus (i)
four hundred thousand times the dollar amount obtained by
subtracting $20.375 from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the Second Anniversary, and (ii)
the gross amount, if any, of the First Anniversary Bonus (the
"Second Anniversary Bonus").
EXAMPLE: Executive is employed by the Company on the Second
Anniversary. On the Second Anniversary, which is a trading day,
the closing sales price of the Company common stock on the New
York Stock Exchange is $24.375 ($20.375 plus $4.00). The First
Anniversary Bonus was $400,000. The Second Anniversary Bonus is
$2,300,000 minus [400,000 x $4] minus $400,000, and thus equals
$300,000, less applicable withholding.
(C) Modification of Special Bonus if Death or Disability
Benefits Are Triggered On or Prior to First Anniversary. If
Executive's benefits under Section 9 hereof are triggered on or
prior to the First Anniversary, then (i) the First Anniversary
Bonus shall be equal to one million dollars ($1,000,000) minus
six hundred thousand (600,000) times the dollar amount obtained
by subtracting $20.375 from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the First Anniversary (subject to
applicable withholding), and (ii) the Second Anniversary Bonus
shall be equal to two million three hundred thousand dollars
($2,300,000) minus (x) six hundred thousand (600,000) times the
dollar amount obtained by subtracting $20.375 from the closing
sales price of Company common stock as listed on the New York
Stock Exchange on the last trading day on or before the Second
Anniversary, and (y) the gross amount, if any, of the First
Anniversary Bonus (less applicable withholding).
EXAMPLE: Executive's benefits under Section 9 of this Agreement
are triggered prior to the First Anniversary. On the First
Anniversary, which is a trading day, the closing sales price of
the Company common stock on the New York Stock Exchange is
$22.375 ($20.375 plus $2.00). The First Anniversary Bonus is
equal to $1,000,000 minus [600,000 x $2] and thus no payment is
made. On the Second Anniversary, which is a trading day, the
closing sales price of the Company common stock on the New York
Stock Exchange is $23.375 ($20.375 plus $3.00). The Second
Anniversary Bonus is equal to $2,300,000 minus [600,000 x $3]
and thus equals $500,000 (less applicable withholding).
(D) Modification of Second Anniversary Bonus if Death or
Disability Benefits Are Triggered After First Anniversary and On
or Prior to Second Anniversary. If Executive's benefits under
Section 9 hereof are triggered after the First Anniversary and
on or prior to the Second Anniversary, then, notwithstanding any
other provisions of this subsection 3(b)(iii), the Second
Anniversary Bonus shall be equal to two million three hundred
thousand dollars ($2,300,000) minus (i) six hundred thousand
(600,000)' times the dollar amount obtained by subtracting
$20.375' from the closing sales price of Company common stock as
listed on the New York Stock Exchange on the last trading day on
or before the Second Anniversary, and (ii) the gross amount, if
any, of the First Anniversary Bonus (less applicable
withholding).
(E) Modification of Special Bonus if Section 6 and 7 Benefits
Were Both Triggered On or Prior to First Anniversary. If
Executive's benefits under Sections 6 and 7 hereof are both
triggered on or prior to the First Anniversary, then (i) the
First Anniversary Bonus shall be equal to one million dollars
($1,000,000) minus the product obtained by multiplying three
hundred thousand (300,000)* plus the product obtained by
multiplying eight thousand three hundred and thirty-three
(8,333) times the number equal to (x) twelve (12) plus (y) the
number of full months following the Effective Date that elapsed
prior to the triggering of benefits under Section 6, by the
dollar amount obtained by subtracting $20.375' from the closing
sales price
Amended and Restated Employment Agreement
September 12, 1997
Page 2
<PAGE> 3
of Company common stock as listed on the New York Stock Exchange
on the last trading day on or before the First Anniversary (less
applicable withholding), and (ii) the Second Anniversary Bonus
shall be equal to two million three hundred thousand dollars
($2,300,000) minus (x) the product obtained by multiplying three
hundred thousand (300,000)* plus the product obtained by
multiplying eight thousand three hundred and thirty-three
(8,333)* times the number equal to (A) twelve (12) plus (B) the
number of full months following the Effective Date that elapsed
prior to the triggering of benefits under Section 6, by the
dollar amount obtained by subtracting $20.375* from the closing
sales price of Company common stock as listed on the New York
Stock Exchange on the last trading day on or before the Second
Anniversary and (y) the gross amount, if any, of the First
Anniversary Bonus (less applicable withholding).
(F) Modification of Special Bonus if Section 7 Benefits Are
Triggered On or Prior to First Anniversary and Section 6
Benefits Are Triggered Following the First Anniversary and On or
Prior to the Second Anniversary. If Executive's Section 7
benefits are triggered on or prior to First Anniversary and
Executive's Section 6 benefits are triggered following the First
Anniversary and on or prior to the Second Anniversary, then (i)
the First Anniversary Bonus shall be equal to one million
dollars ($1,000,000) minus the product obtained by multiplying
four hundred thousand (400,000)* by the dollar amount obtained
by subtracting $20.375 from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the First Anniversary (less
applicable withholding), and (ii) the Second Anniversary Bonus
shall be equal to two million three hundred thousand dollars
($2,300,000) minus (A) the product obtained by multiplying four
hundred thousand (400,000)* plus the product obtained by
multiplying eight thousand three hundred and thirty-three
(8,333)* times the number of full months following the Effective
Date that elapsed prior to the triggering of benefits under
Section 6, by the dollar amount obtained by subtracting $20.375*
from the closing sales price of Company common stock as listed
on the New York Stock Exchange on the last trading day on or
before the Second Anniversary, and (B) the gross amount, if any,
of the First Anniversary Bonus (less applicable withholding).
(G) Modification of Second Anniversary Bonus if Section 6 and 7
Benefits Are Both Triggered Following the First Anniversary and
On or Prior to the Second Anniversary. If Executive's benefits
under Sections 6 and 7 hereof are both triggered following the
First Anniversary and on or prior to the Second Anniversary,
then the Second Anniversary Bonus shall be equal to two million
three hundred thousand dollars ($2,300,000) minus (x) the
product obtained by multiplying four hundred thousand (400,000)*
plus the product obtained by multiplying eight thousand three
hundred and thirty-three (8,333)* times the number of full
months following the Effective Date that elapsed prior to the
triggering of benefits under Section 6, by the dollar amount
obtained by subtracting $20.375* from the closing sales price of
Company common stock as listed on the New York Stock Exchange on
the last trading day on or before the Second Anniversary, and
(y) the gross amount, if any, of the First Anniversary Bonus
(less applicable withholding).
(H) Modification of Special Bonus if Section 7 Benefits Are
Triggered on or Prior to First Anniversary and the Section 6
Benefit Is Not Triggered On or Prior to the Second Anniversary.
If Executive's benefits under Section 7 hereof are triggered on
or prior to the First Anniversary and the Section 6 benefit is
not triggered on or Prior to the Second Anniversary, then (i)
the First Anniversary Bonus shall be equal to one million
dollars ($1,000,000) minus the product obtained by multiplying
four hundred thousand (400,000)* by the dollar amount obtained
by subtracting $20.375* from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the First Anniversary (less
applicable withholding), and (ii) the Second Anniversary Bonus
shall be equal to two million three hundred thousand dollars
($2,300,000) minus (x) the product obtained by multiplying five
hundred thousand (500,000)* by the dollar amount obtained by
subtracting $20.375* from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the Second Anniversary and (y) the
gross amount, if any, of the First Anniversary Bonus (less
applicable withholding).
Amended and Restated Employment Agreement
September 12, 1997
Page 3
<PAGE> 4
(I) Modification of Special Bonus if Section 6 Benefits Are
Triggered On or Prior to First Anniversary and Section 7 Benefit
Is Not Triggered Prior Thereto. If Executive's benefits under
Section 6 hereof are triggered on or prior to the First
Anniversary and the Section 7 benefit is not triggered on or
prior thereto, then (i) the First Anniversary Bonus shall be
equal to one million dollars ($1,000,000) minus the product
obtained by multiplying three hundred thousand (300,000)* plus
the product obtained by multiplying eight thousand three hundred
and thirty-three (8,333)* times the number of full months
following the Effective Date that elapsed prior to the
triggering of benefits under Section 6, by the dollar amount
obtained by subtracting $20.375* from the closing sales price of
Company common stock as listed on the New York Stock Exchange on
the last trading day on or before the First Anniversary (less
applicable withholding), and (ii) the Second Anniversary Bonus
shall be equal to two million three hundred thousand dollars
($2,300,000) minus (x) the product obtained by multiplying three
hundred thousand (300,000)* plus the product obtained by
multiplying eight thousand three hundred and thirty-three
(8,333)* times the number of full months following the Effective
Date that elapsed prior to the triggering of benefits under
Section 6, by the dollar amount obtained by subtracting $20.375*
from the closing sales price of Company common stock as listed
on the New York Stock Exchange on the last trading day on or
before the Second Anniversary, and (y) the gross amount, if any,
of the First Anniversary Bonus (less applicable withholding).
(J) Modification of Second Anniversary Bonus if Neither Section
6 nor Section 7 Benefits Are Triggered On or Prior to the First
Anniversary and Section 6. But Not Section 7 Benefits Are
Triggered Following the First Anniversary and On or Prior to the
Second Anniversary. If neither of Executive's benefits under
Section 6 nor Section 7 are triggered on or prior to the First
Anniversary and (i) Executive's benefits under Section 6 hereof
are triggered, and (ii) Executive's benefits under Section 7
hereof are not triggered, following the First Anniversary and on
or prior to the Second Anniversary, then the Second Anniversary
Bonus shall be equal to two million three hundred thousand
dollars ($2,300,000) minus (x) the product obtained by
multiplying three hundred thousand (300,000)* plus the product
obtained by multiplying eight thousand three hundred and
thirty-three (8,333)* times the number of full months following
the Effective Date that elapsed prior to the triggering of
benefits under Section 6 by the dollar amount obtained by
subtracting $20.375* from the closing sales price of Company
common stock as listed on the New York Stock Exchange on the
last trading day on or before the Second Anniversary and (y) the
gross amount, if any, of the First Anniversary Bonus (less
applicable withholding).
(K) Modification of Second Anniversary Bonus if Neither Section
6 nor Section 7 Benefits Are Triggered On or Prior to the First
Anniversary and Section 7 But Not Section 6 Benefits Are
Triggered Following the First Anniversary and On or Prior to the
Second Anniversary. If neither of Executive's benefits under
Section 6 nor Section 7 are triggered on or prior to the First
Anniversary and (i) Executive's benefits under Section 7 hereof
are triggered, and (ii) Executive's benefits under Section 6
hereof are not triggered, following the First Anniversary and on
or Prior to the Second Anniversary, then the Second Anniversary
Bonus shall be equal to two million three hundred thousand
dollars ($2,300,000) minus (x) the product obtained by
multiplying five hundred thousand (500,000)* by the dollar
amount obtained by subtracting $20.375* from the closing sales
price of Company common stock as listed on the New York Stock
Exchange on the last trading day on or before the Second
Anniversary and (y) the gross amount, if any, of the First
Anniversary Bonus (less applicable withholding).
(L) Special Bonus Clarifications. Executive shall not be
entitled to more than one First Anniversary Bonus and one Second
Anniversary Bonus hereunder. Once paid, neither the First
Anniversary Bonus nor the Second Anniversary Bonus shall be
subject to any reduction or diminishment. Except if benefits
have been triggered under Sections 6, 7 or 9 hereof, Executive
must be employed by the Company on the First Anniversary Date to
receive the First Anniversary Bonus and on the Second
Anniversary Date to receive the Second Anniversary Bonus.
Numbers marked with an asterisk throughout the preceding
sections shall be adjusted in proportion to future stock
dividends which may be issued or splits in Company stock.
Amended and Restated Employment Agreement
September 12, 1997
Page 4
<PAGE> 5
(c) Stock Options. Executive shall be granted a stock option, which
shall be, to the extent possible under the $100,000 rule of Section
422(d) of the Internal Revenue Code of 1986, as amended (the "Code") an
"incentive stock option" (as defined in Section 422 of the Code) to
purchase a total of six hundred thousand (600,000) shares of Company
common stock, with a per share exercise price equal to $20.375. This
option shall be for a term of eight years and shall vest as to 300,000
shares one year from the Effective Date and as to one thirty-sixth of
the shares originally subject to the option each month thereafter (so as
to be 100% vested four years after the Effective Date), conditioned upon
Executive's continued employment with the Company as of each vesting
date. The option shall be exercisable at any time, including by means of
Executive entering into a fully recourse promissory note covering the
aggregate exercise price, subject to Executive entering into a
restricted stock purchase agreement with the Company with respect to any
unvested shares. The shares covered by the stock option shall be
registered on Form S-8 by the Company prior to the date of any vesting.
(d) Loan. Promptly following the Effective Date, the Company will loan
Executive an amount sufficient to retire Executive's outstanding loan
with his prior employer with a principal amount of $500,000, on the same
terms and conditions as set forth in the promissory note between
Executive and his prior employer relating to such loan, attached hereto
as Exhibit A.
4. Expenses. The Company will pay or reimburse Executive for reasonable
travel, entertainment or other expenses incurred by Executive in the
furtherance of or in connection with the performance of Executive's
duties hereunder in accordance with the Company's established policies.
5. Life Insurance. The Company will obtain and pay premiums for, during
the term of Executive's employment hereunder, term life insurance for
Executive in the amount of $1,000,000 payable to the beneficiary
designated by Executive. Executive shall be fully "grossed-up" by the
Company for this benefit so that the economic effect to Executive is the
same as if this benefit was provided to Executive on a non-taxable
basis.
6. Severance Benefits. If Executive's employment with the Company
terminates involuntarily or if Executive terminates his employment with
the Company voluntarily for "Good Reason" (as defined herein), then (i)
Executive shall be entitled to receive a lump-sum severance payment from
the Company, within 30 days of such termination, equal to twelve months'
of Executive's Base Salary as in effect as of the date of such
termination, plus 100~o of Executive's target bonus for the year in
which the termination occurs, plus a pro-rated target bonus equal to the
bonus target amount for the year in which the termination occurs
multiplied by a fraction, the numerator of which is the number of days
from the Effective Date until the date of termination and the
denominator of which is three hundred and sixty-five (all less
applicable withholding), (ii) Executive's outstanding stock options and
any stock subject to restricted stock purchase agreements shall have
their vesting accelerated as to one year's additional vesting as of the
date of termination, (iii) Executive shall receive (but only if and to
the extent that he has not already received such) the First Anniversary
Bonus and the Second Anniversary Bonus, (iv) to the extent permitted by
law, Executive's accounts under any Company deferred compensation plans
or arrangements shall have their vesting accelerated as to one year's
additional vesting as of the date of termination, including as to any
amounts contributed by the Company, and (v) the Company shall provide to
Executive one hundred percent (100~) Company-paid health, dental, vision
and life insurance coverage at the same level of coverage as was
provided to Executive immediately prior to the date of termination (the
"Company-Paid Coverage"). If such coverage included the Executive's
dependents immediately prior to the date of termination, such dependents
shall also be covered at Company expense. Company-Paid Coverage shall
continue until the earlier of (x) one year from the date of termination,
or (y) the date that the Executive and his dependents become covered
under another employer's group health, dental, vision and life insurance
plans that provide Executive and his dependents with comparable benefits
and levels of coverage. For purposes of Title X of the Consolidated
Budget Reconciliation Act of 1985 ("COBRA"), the date of the "qualifying
event" for Executive and his dependents shall be the date upon which the
Company-Paid Coverage terminates.
For this purpose, "Good Reason" is defined as (i) the significant
reduction of the Executive's title, duties, authority, responsibilities,
relative to the Executive's title, duties, authority or responsibilities
as in effect immediately prior to such reduction, or a reduction in the
office to whom Executive reports
Amended and Restated Employment Agreement
September 12, 1997
Page 5
<PAGE> 6
(i.e., the Chief Executive Officer); (ii) a reduction by the Company in
the Base Salary or bonus target amount of the Executive as in effect
immediately prior to such reduction; (iii) the relocation of the
Executive to a facility or a location more than thirty (30) miles from
the Executive's then present location, without the Executive's express
written consent; (iv) any material breach of this Agreement by the
Company; or (v) any act or set of facts or circumstances which would,
under California case law or statute, constitute a constructive
termination of the Executive.
7. Change of Control. In the event of a change of control of the Company
(i) Executive's outstanding stock options and any stock subject to
restricted stock purchase agreements shall have their vesting
accelerated as to one year's additional vesting, and (ii) if a change of
control of the Company occurs within one year after the Effective Date,
the Company shall pay Executive an amount equal to twelve months' of
Executive's Base Salary as in effect as of the date immediately prior to
such change of control, plus 100~o of Executive's target bonus for the
year in which the change of control occurs, plus a pro-rated target
bonus equal to the bonus target amount for the year in which the change
of control occurs multiplied by a fraction, the numerator of which is
the number of days from the Effective Date until the date of the change
of control and the denominator of which is three hundred and sixty-five
(all less applicable withholding). For this purpose, "change of control
of the Company" is defined as:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) becomes the "beneficial
owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50~o or more of
the total voting power represented by the Company's then outstanding
voting securities; or
(b) A change in the composition of the Board of Directors of the Company
occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors; provided, however,
that such provision shall not be effective until November 5, 1997 (and
the determination of who is an Incumbent Director shall be made as of
such date) if Proposition 211 is approved by the voters of California on
November 5, 1996. "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof (or, if
Proposition 211 is approved, as of November 5, 1997), or (B) are
elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but
shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(c) The consummation of a merger or consolidation of the Company with
any other corporation other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity) at
least fifty percent (50%) of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(d) The consummation of the sale or disposition by the Company of all or
substantially all of the Company's assets.
8. Golden Parachute Excise Tax Gross-Up. In the event that the benefits
provided for in this Agreement or otherwise payable to the Executive
constitute "parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") and will be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive shall receive (i) a payment from the Company sufficient to pay
such excise tax, and (ii) an additional payment from the Company
sufficient to pay the excise tax and federal and state income taxes
arising from the payments made by the Company to Executive pursuant to
this sentence. Unless the Company and the Executive otherwise agree in
writing, the determination of Executive's excise tax liability and the
amount required to be paid under this Section 8 shall be made in writing
by the Accountants. For purposes of making the calculations required by
this Section 8, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable,
good faith interpretations concerning the application of Sections 280G
and 4999 of the Code. The Company and the Executive shall furnish to the
Accountants such information and
Amended and Restated Employment Agreement
September 12, 1997
Page 6
<PAGE> 7
documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 8.
9. Death and Disability. If (i) Executive dies or becomes partially or
permanently disabled while employed by the Company, and (ii) the Company
appoints a new Executive Vice President responsible for world-wide
sales, service and marketing or takes any action that would constitute
Good Reason under Section 6 hereof, then Executive's outstanding stock
options and any stock subject to restricted stock purchase agreements
shall have their vesting accelerated in full so as to become 100% vested
and Executive shall be entitled to the Special Bonus as set forth in
Section 3(b)(iii) hereof
10. Indemnification: Insurance. Upon the commencement of his employment with
the Company, Executive shall be offered an indemnification agreement
comparable in form and substance to indemnification agreements entered
into by and between the Company and its executive officers and members
of the Board. During the period of Executive's employment with the
Company, the Company agrees to maintain director and officer liability
insurance in scope and amounts reasonably satisfactory to Executive, to
the extent available. Following the termination of Executive's
employment or directorship for any reason, the Company agrees to honor
the indemnification agreement previously entered into with Executive.
11. Vacation. During the term hereof, Executive shall be entitled to paid
vacation of a minimum of four weeks per year.
12. Enforcement. In the event of any action to enforce the terms of this
Agreement, the prevailing party in such action shall be entitled to such
party's reasonable costs and expenses of enforcement including, without
limitation, reasonable attorneys' fees.
13. Assignment. This Agreement shall be binding upon and inure to the
benefit of (a) the heirs, executors and legal representatives of
Executive upon Executive's death and (b) any successor of the Company.
Any such successor of the Company shall be deemed substituted for the
Company under the terms of this Agreement for all purposes. As used
herein, "successor" shall include any person, firm, corporation or other
business entity which at any time, whether by purchase, merger or
otherwise, directly or indirectly acquires all or substantially all of
the assets or business of the Company.
14. Notices. All notices, requests, demands and other communications called
for hereunder shall be in writing and shall be deemed given if delivered
personally or three (3) days after being mailed by registered or
certified mail, or sent by Federal Express or a similar private delivery
company, return receipt requested, prepaid and addressed to the parties
or their successors in interest at the following addresses, or at such
other addresses as the parties may designate by written notice in the
manner aforesaid:
Amended and Restated Employment Agreement
September 12, 1997
Page 7
<PAGE> 8
If to the Company: Bay Networks, Inc.
4401 Great America Parkway
Santa Clara CA 95052
If to Executive: David Shrigley
HOME ADDRESS REDACTED
15. Severability. In the event that any provision hereof becomes or
is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
16. Entire Agreement. This Agreement represents the entire agreement
and understanding between the Company and Executive concerning Executive's
employment relationship with the Company, and supersedes and replaces any and
all prior agreements and understandings concerning Executive's employment
relationship with the Company.
17. No Oral Modification, Cancellation or Discharge. This Agreement
may only be amended, canceled or discharged in writing signed by Executive and
the Company.
18. Governing Law. This Agreement shall be governed by the laws of
the State of California.
19. Effective Date. This Agreement is effective immediately after it
has been signed.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below.
BAY NETWORKS, INC.
By: /s/ DAVID L. HOUSE
----------------------------------
David L. House
Chairman of the Board, President
and Chief Executive Officer
Date: 9/11/97
--------------
DAVID SHRIGLEY
/s/ DAVID A. SHRIGLEY
---------------------------------
Signature
Date: 9/11/97
----------------
Amended and Restated Employment Agreement
September 12, 1997
Page 8
<PAGE> 9
EXHIBIT A
PROMISSORY NOTE
THIS NOTE CONTAINS AN ACCELERATION CLAUSE
Date: November 26, 1996
Principal amount: $542,166.67
Lender: Bay Networks, Inc.
Borrower: David A. Shrigley and Anita R. Shrigley
Residence address: REDACTED
City of Los Gatos, County of Santa Clara, State of California
FOR VALUE RECEIVED, the undersigned, David A. Shrigley and Anita R. Shrigley
(collectively, "Borrower"), hereby promise to pay to Bay Networks, Inc., a
Delaware corporation having its principal office at 4401 Great America Parkway,
Santa Clara, CA 95052 - 8185 ("Lender), the sum of Five-hundred-forty-two-
thousand-one-hundred-sixty-six and 67/100 dollars ($542,166.67) plus interest
on the unpaid balance at the rates and under the terms as set forth below.
1. Definitions
a. "Applicable Federal Rate" shall mean the monthly short-term
applicable Federal Rate (as defined in the Code) as of the
date of the occurrence of the event which on the terms and
conditions of this Note causes interest to accrue at the
Applicable Federal Rate.
b. "Borrower" shall mean David A. Shrigley and Anita R.
Shrigley, who are married residents of California.
c. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
d. "Due Date" shall mean the earliest to occur of any of the
following:
i. June 9, 2000;
ii. the sale, conveyance, alienation, or other
transfer by Borrower of all or any portion of its
interest in the Principal Residence, whether
<PAGE> 10
PROMISSORY NOTE Page 2
David A. Shrigley and Anita R. Shrigley November 26, 1996
voluntary or involuntary, by act of law or
otherwise (except to a living trust of which
Borrower is the trustee);
iii. the refinancing of any loan secured by a Deed of
Trust or Mortgage on the Principal Residence;
iv. upon the Termination of Employment of Employee by
Lender;
v. any other change that removes Borrower as a holder
of record of title to the Principal Residence;
vi. Employee ceases to occupy the Principal Residence
as Employee's principal residence for any reason;
vii. such earlier date as may be required by Lender
upon acceleration of the Due Date in accordance
with Section 5 of this Note.
e. "Employee" shall mean David A. Shrigley who is an employee
of Lender.
f. "Lender" shall mean Bay Networks, Inc., a Delaware
corporation.
g. "Principal Residence" shall mean the personal residence used
by Employee as a principal residence within the meaning of
Section 217 of the Code and the Regulations thereunder,
which Principal Residence is located at HOME ADDRESS
REDACTED and more fully described in the Deed of Trust
attached hereto as EXHIBIT A.
h. "Termination of Employment" shall mean the termination of
Employee's employment relationship with Lender for any
reason or no reason, with or without cause, including the
death, disability or retirement of Employee.
2. Interest and Payments
a. Except as provided in Section 6, this Note shall bear simple
interest at the rate of six percent (6.00%) per annum.
b. No payment of principal or interest shall be due and payable
until the Due Date, at which time all unpaid accrued
interest and the principal balance of this Note shall be due
and payable.
c. In the event that all unpaid accrued interest and the
principal balance of this Note shall be due and payable as a
result of the Termination of Employment of Employee.
Borrower irrevocably consents and acknowledges that Lender
shall, at its election, be entitled to deduct from sums due
Employee from Lender (including, without limitation, salary,
bonus, incentive, 401(k) and refunds
<PAGE> 11
PROMISSORY NOTE Page 3
David A. Shrigley and Anita R. Shrigley November 26, 1996
from the Bay Networks Employee Stock Purchase Plan and
termination pay) such sums as are necessary to repay this
Note in full or in part. No such deduction by Lender shall
operate to discharge any remaining unpaid amount due under
this Promissory Note.
d. All payments shall be applied first against accrued
interests, and then against principal.
e. All payments required or permitted under the terms of this
Note shall be made to Lender. Attention: Treasurer, at
Lender's principal place of business.
3. Prepayment. Borrower may prepay all or part of this Note without
penalty, fee or acceleration of the due date of this Note.
4. Security. This Note shall be secured by a Deed of Trust on the
Borrower's Principal Residence which is identified in said Deed of
Trust or Mortgage and which is attached hereto as EXHIBIT A.
5. Acceleration of Due Date. The entire unpaid principal balance of this
Note and accrued interest thereon, shall, at the election of Lender,
become immediately due and payable upon the occurrence of any of the
following, irrespective of the Due Date as otherwise defined in this
Note:
a. Any failure on the part of the Borrower to make any payment
when due;
b. Any failure on the part of the Borrower (i) to perform or
observe any of its obligations under the Deed of Trust
securing this Note, and (ii) to commence and proceed
diligently to cure such default within fifteen (15) days
after the written notice thereof is given by Lender, or
(iii) in any event to cure such default within thirty (30)
days after the date on which such notice is given;
c. The destruction or condemnation of the real property subject
to the Deed of Trust or Mortgage or any material portion
thereof.
6. Collection Costs Borne by Borrower. In the event of any failure on the
part of the Borrower to make any payment when the same is due, Lender
shall be entitled to recover from Borrower all costs of effecting
collection of the same, including reasonable attorneys' fees and all
costs of collection. After the date any payment is due, unpaid
principal and interest subject to collection shall bear interest
compounded monthly at the Applicable Federal Rate.
7. Purpose of Loan/Certification of Employee. This loan is being made by
Lender to Borrower pursuant to an offer of employment to Employee,
solely in order to repay a loan secured by the Principal Residence and
payable by Borrower to
<PAGE> 12
PROMISSORY NOTE Page 4
David A. Shrigley and Anita R. Shrigley November 26, 1996
Employee's prior employer. Borrower hereby certifies that the proceeds
of this loan shall be used only for such purpose. Employee further
certifies that Employee reasonably expects to be entitled to and will
itemize deductions for each year during which this loan is
outstanding.
8. Governing Law. The Note shall be enforced in accordance with the laws
of the State of California and shall be construed in accordance
therewith.
9. Successors. This Note shall be binding upon and shall inure to the
benefit of the parties hereto and their respective representatives,
heirs, administrators, successors and assigns, except as otherwise
provided herein.
10. No Assignment. In no event shall the benefits provided by this Note be
transferred or assigned by Borrower.
11. Signatures. Borrower has set its band to this Note, intending to be
legally bound, effective as of the Date first set forth above.
/s/ DAVID A. SHRIGLEY /s/ ANITA R. SHRIGLEY
- --------------------------------- ---------------------------------
David A. Shrigley Anita R. Shrigley
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss
COUNTY OF SANTA CLARA )
On______________________,1997 before me, _____________________________personally
appeared DAVID A. SHRIGLEY AND ANITA R. SHRIGLEY, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the persons whose
names are subscribed to the within instrument and acknowledged to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument each such person(s), or the entity on behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
SIGNATURE
--------------------------------- (SEAL)
<PAGE> 1
Exhibit 10.24
[BAY NETWORKS LETTERHEAD]
January 23, 1997
Mr. Andrew K. Ludwick
Bay Networks, Inc. [BAY NETWORKS LOGO]
4401 Great America Parkway
Santa Clara, CA 95054
Dear Andy:
This will confirm the following arrangement between you and Bay Networks, Inc.
regarding your employment as has been previously approved by the Compensation
Committee of the Board of Directors.
1. Employment of Ludwick. You will continue as an employee of our company
through the close of the 1997 fiscal year, and for a time thereafter until you
have expended your accrued vacation at which time your employment will terminate
(the "Termination Date"). During this time, you will be available to assist the
company and its management on a variety of matters as may be requested by the
Board of Directors or its Chairman.
2. Salary and benefits for Ludwick. Until the Termination Date you will continue
to receive your current base salary, paid in customary bi-weekly installments,
and you will continue to vest under your previously-granted stock options in
accordance with the terms of the agreements which reflect your stock options.
Also, until the Termination Date you will continue to receive from the company
standard employee benefits including health and life insurance, and the
opportunity to participate in the company's employee stock purchase plan. You
will not receive a bonus for FY1997.
BAY NETWORKS, INC
By: /s/ SHELBY H. CARTER, JR.
-----------------------------------
Shelby H. Carter, Jr.
Director
<PAGE> 1
Exhibit 10.25
[BAY NETWORKS LETTERHEAD]
January 23, 1997
[BAY NETWORKS LOGO]
Mr. Paul Severino
Bay Networks, Inc. BAY NETWORKS
4401 Great America Parkway
Santa Clara, CA 95054
Dear Paul:
This will confirm the following arrangement between you and Bay Networks, Inc.
regarding your employment as has been previously approved by the Compensation
Committee of the Board of Directors.
1. EMPLOYMENT OF SEVERINO. You will continue as an employee of our company
through the close of the 1997 fiscal year, and for a time thereafter until you
have expended your accrued vacation at which time your employment will terminate
(the "Termination Date"). During this time, you will be available to assist the
company and its management on a variety of matters as may be requested by the
Board of Directors or its Chairman.
2. SALARY AND BENEFITS FOR SEVERINO. Until the Termination Date you will
continue to receive your current base salary, paid in customary bi-weekly
installments, and you will continue to vest under your previously-granted stock
options in accordance with the terms of the agreements which reflect your stock
options. Also, until the Termination Date you will continue to receive from the
company standard employee benefits including health and life insurance, and the
opportunity to participate in the company's employee stock purchase plan. You
will not receive a bonus for FY1997.
BAY NETWORKS, INC.
By: /s/ SHELBY H. CARTER, JR.
--------------------------------
Shelby H. Carter, Jr.
Director
<PAGE> 1
Exhibit 10.26
[BAY NETWORKS LETTERHEAD]
January 23, 1997
[BAY NETWORKS LOGO]
BAY NETWORKS
Mr. Ronald V. Schmidt
Bay Networks, Inc.
4401 Great America Parkway
Santa Clara, CA 95054
Dear Ron:
This will confirm the following arrangement between you and Bay Networks, Inc.
regarding your employment as has been previously approved by the Compensation
Committee of the Board of Directors.
1. EMPLOYMENT OF SCHMIDT. You will continue as an employee of our company
through the close of the 1997 fiscal year, and for a time thereafter until you
have expended your accrued vacation at which time your employment will terminate
(the "Termination Date"). During this time, you will be available to assist the
company and its management on a variety of matters as may be requested by the
Board of Directors or its Chairman.
2. SALARY AND BENEFITS FOR SCHMIDT. Until the Termination Date you will continue
to receive your current base salary, paid in customary bi-weekly installments,
and you will continue to vest under your previously-granted stock options in
accordance with the terms of the agreements which reflect your stock options.
Also, until the Termination Date you will continue to receive from the company
standard employee benefits including health and life insurance, and the
opportunity to participate in the company's employee stock purchase plan. You
will not receive a bonus for FY1997.
BAY NETWORKS, INC.
By: /s/ SHELBY H. CARTER, JR.
-----------------------------
Shelby H. Carter, Jr.
Director
<PAGE> 1
EXHIBIT 10.27
XYLOGICS, INC.
53 Third Avenue
Burlington, MA 01803
October 31, 1992
Dear Bruce:
The Board of Directors (the "Board") of Xylogics, Inc. (the "Company")
has determined that appropriate steps should be taken to encourage the continued
attention and dedication of the Company's management and key employees,
including yourself, to their assigned duties without distraction in the face of
any potentially disturbing circumstances which might arise from the possibility
of a change in control of the Company. This Agreement supersedes any other prior
agreement between you and the Company insofar as such agreements provide for
payments to you upon a change in control of the Company or upon your termination
of employment prior to or subsequent to a change in control or a "qualifying
sale" as such term is defined herein.
In order to induce you to remain in its employ, the Company agrees
with you as follows:
1. Compensation Upon Termination Prior to Change in Control
(a) For Any Reason Other Than Cause or Disability. If your
employment with the Company is terminated during the Term and prior to any
Change in Control (as defined in Section 3) by the Company for any reason other
than for Cause or Disability, you shall be entitled to the following benefits:
(i) Cash Payments. The Company shall pay you your full base
salary which shall exclude, for purposes of this subsection (i), amounts, if
any, to be received by you pursuant to the Company's then current automobile
expense allowance policy) and all other earned or accrued compensation through
your last date of employment at the rate then in effect, plus all other amounts
to which you are entitled under any compensation plan of the Company at the time
such payments are due, and, in lieu of further salary payments for periods
subsequent thereto and cash payments under any Company severance plan applicable
to you, the Company will pay you a lump sum cash payment as severance pay in an
amount equal to your monthly base salary then in effect multiplied by nine.
<PAGE> 2
Mr. Bruce Sachs
October 31, 1992
Page 2
(ii) Time of Payment. Payments provided for in this subsection
(i) above shall be made by the tenth day following the last day of employment;
provided, however, that, if the amount of such payment cannot be finally
determined on or before such day, the Company shall pay to you on such day an
estimate, as determined in good faith by the Company, of the minimum amount of
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(d) of the Code) as soon as the
amount thereof can be determined but in no event later than the thirtieth day
after the last day of employment. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to you, payable on the fifth day
after demand by the Company (together with interest at the rate provided in
Section 1274(d) of the Code).
(iii) Benefits. For a nine-month period after the last day of
employment, the Company shall arrange to provide you with benefits substantially
similar to those which you received immediately prior to the last day of
employment (including, without limitation, life, disability, accident and health
insurance but excluding any automobile expense allowance) and at the same cost
to you (if any) as in effect immediately prior to the last date of employment.
Notwithstanding the foregoing, the Company shall not provide any benefit
otherwise receivable by you pursuant to this Section l(a)(iii) if an equivalent
benefit is actually received by you from another employer during the nine-month
period after the last date of employment. Any such benefit actually received by
you must be reported by you to the Company.
(iv) Outplacement Program. The Company shall pay your cost and
expenses of participating in the "executive outplacement program" of Drake Beam
Morin, Inc. or a comparable plan selected by the Company.
(b) Qualifying Sale.
(i) If your employment with the Company is involuntarily
terminated by the Company other than for Cause or Disability as a result of a
Qualifying Sale (as such term is defined below) within six months following a
Qualifying Sale, you shall be entitled to the benefits of Section 2 hereof,
subject to the provisions of Section 5 hereof; notwithstanding the fact that a
Change in Control has not occurred.
<PAGE> 3
Mr. Bruce Sachs
October 31, 1992
Page 3
(ii) A "Qualifying Sale" shall mean a sale by the Company
during the Term of a segment of its business to a single buyer (either a company
or a group of individuals) and all affiliates thereof (collectively, the
"Purchaser") that results in net proceeds to the Company in excess of $7.5
million from the Purchaser, provided that such sale does not itself constitute
or result in a Change in Control.
(iii) Notwithstanding any other provision to the contrary, if
you are entitled to receive benefits under this Section l(b), (A) any rights you
have or may have to receive benefits under Section l(a) will immediately
terminate, (B) if you are entitled or subsequently become entitled to receive
benefits under Section 2 hereof, such benefits will be offset to the same extent
that you receive any benefits under this Section l(b), and (C) if you are
offered employment with the Purchaser to commence not later than ten days after
your termination of employment with the Company subsequent to a Qualifying Sale,
the same terms and conditions as set forth in paragraphs (A) and (B) of Section
3(a)(i) shall apply, provided that the term "Purchaser" hereunder shall be
substituted for the term "Acquiror" thereunder and the term "Qualifying Sale"
hereunder shall be substituted for the term "Sale" thereunder.
(c) Duty to Mitigate; Offset. Except as provided in the second
sentence of Section 1(a)(iii) above or as provided in Section 3(a)(i) as made
applicable by this Section 1, you shall not be required to mitigate the amount
of any payment provided for in this section by seeking other employment or
otherwise nor shall the amount of any payment or benefit provided for in this
Section 1 be reduced by any compensation earned by you as the result of
employment by another employer, by retirement benefits (including, without
limitation, any benefits payable to you under the salary continuation program
for officers of the Company) or be offset against any amount claimed to be owed
by you to the Company or otherwise.
2. Compensation Upon Termination Following Change in Control.
(a) Compensation. If a Change in Control shall have occurred during
the Term and your employment with the Company is terminated within 12 months
after such Change in Control by the Company other than for Cause or Disability
or by you for Good Reason, you shall be entitled to the following benefits:
<PAGE> 4
Mr. Bruce Sachs
October 31, 1992
Page 4
(i) Cash Payment. Subject to paragraphs (A) and (B) of this
subsection (i), the Company shall pay you your full base salary (which shall
exclude, for purposes of this subsection (i), amounts, if any, to be received by
you pursuant to the Company's then current automobile expense allowance policy)
and all other earned or accrued compensation through the Date of Termination at
the rate in effect at the time the Notice of Termination is given, plus all
other amounts to which you are entitled under any compensation plan of the
Company at the time such payments are due, and, in lieu of further salary
payments for periods subsequent to the Date of Termination and cash payments
under any Company severance plan applicable to you, the Company will pay you a
lump sum cash payment as severance pay (together with the benefits provided in
subsection (iii) below, the "Severance Amount") in an amount equal to your
monthly base salary then in effect multiplied by 15.
(A) Notwithstanding the foregoing, upon any Change in Control
resulting from the sale or disposition by the Company of all or substantially
all of the Company's assets (a "Sale"), if you are offered employment by the
acquiror of such assets (the "Acquiror") to commence not later than ten days
after your termination of employment with the Company subsequent to such Sale
and the terms and conditions of such employment offered by the Acquiror are such
that you would not have Good Reason to terminate your employment with the
Company if such terms and conditions had been imposed by the Company following a
Change in Control, the Company (unless the Acquiror has explicitly assumed all
obligations of the Company to you hereunder in writing) shall place in escrow
the payment set forth in this subsection (i) to be held for your benefit and
pending distribution to you, in whole or in part, as follows:
(I) If you do not accept the offer of employment by the
Acquiror or you accept such employment but subsequently such employment is
terminated by the Acquiror for Cause or Disability or by you without Good
Reason, all amounts in escrow shall be retained by the Company and you shall not
be entitled to any of such amounts, and
(II) Within 12 months of such Sale your employment with the
Acquiror is terminated by the Acquiror other than for Cause or Disability or is
terminated by you for Good Reason, then, all amounts in escrow less any amounts
of cash compensation actually received by you as a result of your employment by
the Acquiror shall be delivered to you within ten days of the
<PAGE> 5
Mr. Bruce Sachs
October 31, 1992
Page 5
termination of employment with the Acquiror and any remaining amounts in escrow
shall be delivered to the Company or its assigns.
(B) If the Acquiror has explicitly assumed all obligations of the
Company to you hereunder in writing and all of the conditions of paragraph (A)
above are otherwise met in all respects, the Company need not establish such
escrow and the Acquiror shall perform all obligations of the Company hereunder,
including without limitation making the payments, if any, under paragraph (A)
above.
(ii) Time of Payment. The payments provided for in subsection
(i) above shall be made by the tenth day following the applicable Date of
Termination; provided, however, that, if the amount of such payment cannot be
finally determined on or before such day, the Company shall pay or cause to be
paid to you on such day an estimate, as determined in good faith by the Company,
of the minimum amount of such payments and shall pay the remainder of such
payments (together with interest at the rate provided in Section 1274(d) of the
Code) as soon as the amount thereof can be determined but in no event later than
the thirtieth day after the Date of Termination. In the event that the amount of
the estimated payments exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan by the Company to you, payable on the
fifth day after demand by the Company (together with interest at the rate
provided in Section 1274(d) of the Code).
(iii) Benefits. For a 15-month period after the Date of
Termination by the Company, the Company shall arrange to provide you with life,
disability, accident and health insurance benefits substantially similar to
those which you received immediately prior to the Date of Termination and at the
same cost to you (if any) as in effect immediately prior to the Date of
Termination. Notwithstanding the foregoing, the Company shall not provide any
benefit otherwise receivable by you pursuant to this Section 2(a)(iii) if an
equivalent benefit is actually received by you from another employer during the
15-month period after the Date of Termination. Any such benefit actually
received by you must be reported by you to the Company.
(iv) Outplacement Program. The Company shall pay your costs and
expenses of participating in the "executive outplacement program" of Drake Beam
Morin, Inc. or a comparable plan selected by the Company.
<PAGE> 6
Mr. Bruce Sachs
October 31, 1992
Page 6
(b) Duty to Mitigate; Offset. Except as provided in the last two
sentences of Section 2(a)(i) or the second sentence of Section 2(a)(iii) above,
you shall not be required to mitigate the amount of any payment provided for in
this Section 2 by seeking other employment or otherwise, nor shall the amount of
any payment or benefit provided for in this Section 2 be reduced by any
compensation earned by you as a result of employment by another employer, by
retirement benefits (including, without limitation, any benefits payable to you
under the salary continuation program for officers of the Company) or be offset
against any amount claimed to be owed by you to the Company or otherwise.
(c) Escrow. Any escrow agreement entered into pursuant to Section
2(a) above shall be in a form reasonably acceptable to you and the Company with
any bank in the Boston, Massachusetts area having capital and surplus in excess
of $50,000,000 acting as escrow agent. The Company shall pay all costs of the
escrow agent and undertake all indemnity obligations under the escrow agreement.
3. Change in Control.
For purposes of this Agreement, a "Change in Control" shall occur
only in the event the occurrence of one or more of the following:
(a) Beneficial Ownership. Any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any corporation
owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of stock of the Company),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
25% or more of the combined voting power of the Company's then outstanding
securities;
(b) Merger or Consolidation. The stockholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than:
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than a majority of the combined voting
power of the
<PAGE> 7
Mr. Bruce Sachs
October 31, 1992
Page 7
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as hereinabove defined) acquires more than 25% of the combined voting power of
the Company's then outstanding securities;
(c) Liquidation or Sale of Assets. The stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the Company's
assets; or
(d) Majority of Directors. Individuals who at the beginning of the
Term constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect any transaction described in clause (a), (b) or (c) of this Section 3)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the directors then
in office who were either directors at the beginning of the Term or whose
election or whose nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board.
Notwithstanding the foregoing, in the event you become entitled to receive a
severance payment and/or health or other insurance benefits under this Agreement
and under another contract or plan providing for a severance payment and/or
continuation of benefits to you upon termination of your employment, you shall
be required to elect the agreement, plan or program under which you will receive
payment.
4. Employment Status; Termination Following Change in Control;
Definitions.
(a) Employment Status. This Agreement is not a contract of
employment and does not impose on the Company any obligation to retain you as an
employee. This Agreement does not prevent you from terminating your employment
at any time. You will be eligible for benefits under this Section 4 only if you
are employed by the Company upon a Change in Control and, within 12 months
following a Change in Control (i) you are terminated from employment by the
Company other than for Cause or Disability (as such terms are defined below), or
(ii) you terminate your employment for Good Reason (as defined below). If your
employment
<PAGE> 8
Mr. Bruce Sachs
October 31, 1992
page 8
is terminated for any reason prior to a Change in Control, you will not be
entitled to any benefits under this Section 4.
(b) Subsequent Termination. Any termination of your employment by
the Company or by you following a Change in Control during the Term shall be
communicated by written notice of termination ("Notice of Termination") to the
other party to this Agreement in accordance with Section 10. The "Date of
Termination" shall mean the effective date of such termination as specified in
the Notice of Termination.
(c) Definitions.
(i) Disability. For purposes of this Agreement, "Disability"
shall mean that as a result of incapacity due to physical or mental illness, you
have been absent from the full-time performance of your duties with the Company
for six consecutive months and, within 30 days after written notice of
termination is given to you, you have not returned to the full-time performance
of your duties.
(ii) Cause. For purposes of this Agreement, termination by the
Company of your employment for "Cause" means termination upon (A) your willful
and continued failure to substantially perform your duties with the Company
(other than any failure resulting from your incapacity due to physical or
mental illness or any actual or anticipated failure after you have issued a
Notice of Termination for Good Reason), provided that a written demand for
substantial performance has been delivered to you by the Company specifically
identifying the manner in which the Company believes that you have not
substantially performed your duties and you have not cured such failure within
30 days after such demand, or (B) your conviction of (or acceptance of a plea of
nolo contendere with respect to) any felony involving any act of dishonesty, or
(C) your violation of any provision of any confidentiality, non-disclosure,
assignment of invention, noncompetition or similar agreement entered into by you
in connection with your employment by the Company. For purposes of this
subsection, no act or failure to act on your part shall be deemed "willful"
unless done or omitted to be done by you not in good faith and without
reasonable belief that your action or omission was in the best interest of the
Company.
(iii) Good-Reason. For purposes of this Agreement, "Good
Reason" means, without your written consent, the occurrence after a Change in
Control of any of the following circumstances:
<PAGE> 9
Mr. Bruce Sachs
October 31, 1992
Page 9
(A) the assignment to the Employee of any duties inconsistent with
the highest position in the Company that the Employee held at any time during
the 90-day period immediately preceding the Change in Control of-the Company, or
a significant adverse alteration in the nature or status of the Employee's
responsibilities or the conditions of the Employee's employment from those in
effect at any time during the 90-day period immediately preceding such Change in
Control;
(B) any reduction in your annual base salary as in affect at the
beginning of the Term or as increased during the Term;
(C) the failure by the Company to continue any benefit or
compensation plan (including bonus plans), investment or retirement plan, life
insurance plan, health-and-accident plan or disability plan applicable to you at
the time of a Change in Control (or plans providing you with substantially
similar benefits), the taking of any action by the Company which would adversely
affect your participation in or which would materially reduce your benefits
under any of such plans or deprive you of any material fringe benefit you
enjoyed at the time of the Change in Control, or the failure by the Company to
provide you with the number of paid vacation days to which you are then entitled
in accordance with the Company's normal vacation policy in effect immediately
prior to the Change in Control;
(D) any requirement by the Company or of any person in control of
the Company that the location at which you perform your principal duties for the
Company be outside a radius of 50 miles from the location at which you performed
such duties immediately prior to a Change in Control;
(E) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform the Agreement, as contemplated
in Section 7;
(F) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Section 10 below (and, if applicable, the requirements of Section 4(c)(ii)); or
(G) if you are an employee of a subsidiary of the Company, a sale
of all or substantially all of the capital stock or assets of such subsidiary.
<PAGE> 10
Mr. Bruce Sachs
October 31, 1992
page 10
5. Certain Reduction of Payments by the Company.
(a) (i) Anything in this Agreement to the contrary notwithstanding,
in the event that any payment or distribution by the Company to or for your
benefit (whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise) (a "Payment") would be nondeductible by
the Company for federal income tax purposes because of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate
present value of amounts payable or distributable to or for your benefit
pursuant to this Agreement shall be reduced to the Reduced Amount.
(ii) The "Reduced Amount" shall be the amount, expressed in
present value, which maximizes the aggregate present value of the Severance
Amount without causing any Payment to be nondeductible by the Company because of
Section 280G of the Code. For purposes of this Section 5, present value shall be
determined in accordance with Section 280(d)(4) of the Code.
(b) All determinations required to be made under this Section 6
shall be made by the Company's independent public accountants (the "Accounting
Firm") which shall provide detailed supporting calculations both to the Company
and to you. Any such determination by the Accounting Firm shall be binding upon
the Company and you.
(c) It is possible that as a result of the uncertainty in the
application of Section 280G of the Code at the time of the initial determination
by the Accounting Firm, a portion of the Severance Amount will have been made by
the Company which should not have been made ("Overpayment") or that an amount in
addition to the Severance Payment which will not have been made could have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder.
(i) Overpayment. In the event that the Accounting Firm, based
upon the assertion or a deficiency by the Internal Revenue Service against you
which the Accounting Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Company to or for the benefit of you shall be treated for all purposes as a
loan ab initio (from the beginning) to you which you shall repay to the Company
together with interest at the applicable federal rate provided for in Section
1274(d) of the Code; provided, however, that no such loan shall be deemed to
have been made and no amount shall be payable by you to the Company if and to
the extent such loan and payment would not either reduce the amount on
<PAGE> 11
Mr. Bruce Sachs
October 31, 1992
Page 11
which the employee is subject to tax under Section 1 and Section 4999 of the
Code or generate a refund of such taxes.
(ii) Underpayment. If precedent or other substantial authority
indicates that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Company to or for the benefit of you together with interest
at the applicable federal rate provided for in Section 1274(d) of the Code.
6. Non-Compete.
(a) While you are employed by the Company and for a period of one
year after the termination or cessation of your employment for any reason, you
agree that you will not, directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender or in any other capacity
whatsoever (other than as the holder of not more than one percent (1%) of the
total outstanding stock of a publicly held company), engage in the business of
developing, producing, marketing or selling products of the kind or type
developed or being developed, produced, marketed or sold by the Company while
you were employed by the Company;
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment with, or
otherwise cease their relationship with, the Company; or
(iii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers or
accounts or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by you while employed by the Company.
(b) If your employment is terminated prior to a Change in Control,
the Company shall pay to you, as additional consideration for your obligations
under this Section 6, on a monthly basis, during the one year period following
the termination of your employment, a sum equal to the difference between your
base salary at the time of termination and your monthly rate of compensation at
any new non-competing position of employment you may obtain. As a condition to
such payment, you must establish to the Company's reasonable satisfaction that
you have used diligent efforts to obtain employment at a compensation level
commensurate to the base salary received from the Company
<PAGE> 12
Mr. Bruce Sachs
October 31, 1992
Page 12
and that you have been unable to do so primarily due to the restrictions
contained in this Section 6.
(c) The Company may, at any time upon 30 days prior written notice
to you, notify you that it will not be obligated to make any payments to you
under subsection (b) in which event you will be relieved of your obligations
under this Section 6 as of the end of such thirty-day period.
(d) If any restriction set forth In this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(e) The restrictions contained in this Section 6 are necessary for
the protection of the business and goodwill of the Company and are considered by
you to be reasonable for such purpose. You agree that any breach of this Section
6 will cause the Company substantial and irrevocable damage and therefore, in
the event of any such breach, in addition to such other remedies which may be
available, the Company shall have the right to seek specific performance and
injunctive relief.
(f) The provisions of this Section 6 shall survive termination of
this Agreement.
7. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all at
substantially all of the business or assets of the Company (including without
limitation any Acquiror or Purchaser) to expressly assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company and any successor to its business or assets as aforesaid
which assumes and agrees to perform this Agreement by operation of law, or
otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Company and its successors and assigns and by your personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees if you should die while any amount would still be payable
to you under this Agreement if you had continued to live, all such amounts
<PAGE> 13
Mr. Bruce Sachs
October 31, 1992
page 13
shall be paid in accordance with the terms of this Agreement to your devisee,
legatee or other designee or if there is no such designee, to your estate.
8. Enforcement of Rights; Reimbursement of Expenses.
(a) Any dispute or controversy between the Company and the Employee
which the parties are unable to resolve by negotiation shall be settled
exclusively by arbitration, conducted before a panel of three arbitrators in
Boston, Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrators' award in
any court having jurisdiction. Punitive damages shall not be assessed in any
arbitration proceeding.
(b) The Company shall pay to you 85% of the reasonable legal fees
and expenses incurred by in seeking to obtain or enforce any right or benefit
provided by this Agreement.
9. Term of the Agreement.
The term of this Agreement (the "Term") shall commence on the date
you sign this Agreement and shall continue in effect through October 31, 1993.
The Term shall be automatically extended for additional one-year periods after
that date unless at least four months prior to the end of the original term or
the end of any such one-year period, respectively, the Board has determined that
the Term will not be further extended; provided that, if a Change in Control has
occurred during the original or extended term of this Agreement, this Agreement
shall continue in effect for a period of 12 months beyond the month in which
such Change in Control occurred.
10. Notice.
Notices and other communications provided for in this Agreement
shall be in writing and shall be duly given when delivered or when mailed by
United States registered or certified mail, return receipt requested, postage
prepaid, addressed to the President of the Company, at 53 Third Avenue,
Burlington, Massachusetts 01803, and to you at the address shown below or to
such other address as either the Company or you may have furnished to the other
in writing.
<PAGE> 14
Mr. Bruce Sachs
October 31, 1992
Page. 14
11. Miscellaneous.
(a) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(b) Captions of sections have been added only for convenience and
shall not be deemed to be a part of this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
(d) No waiver by either party at any time of any breach of, or
compliance with, any provision of this Agreement to be performed by the others
shall be deemed a waiver of that or any other provision at any subsequent time.
(e) Any payments provided for in this Agreement shall be paid net
of any applicable withholding required under federal, state or local law.
(f) This Agreement sets forth the entire agreement of the parties
to this Agreement in respect of the subject matter contained in this Agreement
and supersedes all prior agreements and understandings, whether oral or written,
in respect of such subject matter; provided however, that this Agreement does
not supersede any confidentiality and noncompetition agreement between you and
the Company which are hereby ratified and confirmed in all respects.
If this letter accurately sets forth our agreement, kindly sign and
return to the Company the enclosed copy of this letter which will then
constitute our agreement on this subject.
Sincerely,
XYLOGICS INC.
By /s/ BRUCE J. BERGMAN
------------------------------
Name:
Title:
<PAGE> 15
Mr. Bruce Sachs
october 31, 1992
Page 15
Agreed to as of the 31st day of October 1992.
/s/ BRUCE I. SACHS
- ----------------------------------------
(signature)
Bruce Sachs
- ----------------------------------------
(print name)
Address: REDACTED
------------------------------
<PAGE> 16
MODIFICATION OF EMPLOYEE RETENTION AGREEMENT
THIS MODIFICATION OF EMPLOYEE RETENTION AGREEMENT (this "Agreement")
is entered into as of September 5, 1995 between Bay Networks, Inc., a Delaware
corporation ("Bay Networks") and Bruce Sachs, an officer of Xylogics
("Officer").
A. Xylogics and Officer have entered into an Employee Retention
Agreement, dated as of October 31, 1992, as amended (the "Retention Agreement"),
whereby Xylogics agreed to provide certain benefits to Officer in the event of
the termination of Officer's employment following a Change of Control (as
defined in the Retention Agreement).
B. An Agreement and Plan of Merger (the "Merger Agreement") has been
executed on the date of this Agreement among Bay Networks, Xylogics Merger Co.,
Inc., a wholly-owned subsidiary of Bay Networks ("Sub"), and Xylogics, whereby
Sub will be merged into Xylogics and Xylogics will become a wholly-owned
subsidiary of Bay Networks in a "reverse triangular merger" (the "Merger").
C. In order to realize the value of its substantial investment in
Xylogics, Bay Networks intends to continue the operation of Xylogics as an
independent business unit thereby gaining the benefits of Xylogics as a going
concern and leveraging the special expertise of Xylogics in the remote access
and small/home office markets.
D. In order to realize such benefits, Bay Networks wishes to encourage
Officer to provide continued attention and dedication and valuable technical
and/or managerial expertise to Xylogics and to Bay Networks, as the sole
stockholder of Xylogics, after the Merger.
In consideration of the mutual promises and obligation described
below, the parties to this Agreement agree as follows:
1. All amendments to the Retention Agreement made by this Agreement
will be effective upon the Effective Time (as defined in the Merger Agreement).
This Agreement shall be null and void and shall be automatically rescinded if
the Effective Time does not occur by March 6, 1996. To the extent necessary to
effect the amendment of the Retention Agreement or the terms of this Agreement,
Bay Networks will cause Xylogics to become a party to this Agreement at the
Effective Time by execution of this Agreement in the space provided for such
execution below. Except as modified by this Agreement, the Retention Agreement
will continue in full force and effect. Further, to the extent necessary to
effect the terms of this Agreement or the Retention Agreement upon the Effective
Time as modified by this Agreement, Bay Networks hereby becomes a party to the
Retention Agreement upon the Effective Time, as so amended, and Officer consents
to Bay Networks' inclusion as a party.
1
<PAGE> 17
2. As used in this Agreement, including in all amendments to the
Retention Agreement effected by this Agreement, the following terms shall have
the following meanings:
(a) "Bay Networks Termination Date" shall mean the earlier of (i)
the date 24 months from the Bay Networks Termination Notice Date (as defined
below) or (ii) the date on which Officer commences any gainful employment with
any of the following competitors of Xylogics or Bay Networks: Cabletron Systems,
Inc., Cisco Systems, Inc., 3Com Corporation or Shiva Corporation.
(b) "Bay Networks Termination Notice Date" shall mean (i) the date
after the Effective Time that Xylogics delivers a written notice to Officer of
its intention to terminate Officer's employment with Xylogics on the Bay
Networks Termination Date or (ii) the date after the Effective Time that Officer
delivers a written notice to Xylogics of his or her intention to terminate his
or her employment with Xylogics for Good Reason (as defined in the Retention
Agreement).
(c) "Pre-Termination Period" shall mean the time period between the
Bay Networks Termination Notice Date and the Bay Networks Termination Date.
3. Section I of the Retention Agreement is deleted in its entirety.
4. Section 2 of the Retention Agreement is amended as follows:
(a) The introductory paragraph of Section 2(a) is amended to read
in its entirety as follows:
"If, within 12 months after the Effective Time (as defined in the
Merger Agreement), the Company notifies you of its intention to
terminate your employment with the Company as of the Bay Networks
Termination Date, other than for Cause or Disability or by you for
Good Reason, you shall be entitled to the following benefits during
the Pre-Termination Period and to no benefits after the Bay Networks
Termination Date:"
(b) Sections 2(a)(i) and (ii) are amended to provide in their
entireties that the only cash payments which Officer shall be paid during the
Pre-Termination Period is his full monthly base salary (but excluding any
automobile allowance) as of the date of this Agreement and that such salary
shall be paid in installments in accordance with the Xylogics' normal payroll
procedures.
(c) Section 2(a)(iii) is amended to provide in its entirety that,
during the Pre-Termination Period, Officer shall be entitled to continue to
receive the benefits which he received immediately prior to the Bay Networks
Termination Notice Date (including, without limitation, life, disability,
accident and health insurance but excluding any car allowance and any
entitlement to participate on any basis, pro rata or otherwise, in any bonus
plans) and at the same cost to Officer (if any) as in effect immediately prior
to the Bay Networks Termination Notice Date.
2
<PAGE> 18
(d) Section 2(c) is deleted in its entirety.
5. Section 3 of the Retention Agreement is deleted in its entirety.
6. All references to "Change of Control" in Section 4 of the Retention
Agreement shall be deemed references to the Merger.
7. Section 4 of the Retention Agreement is amended as follows:
(a) The third sentence of Section 4(a) is amended to read in its
entirety as follows:
"You will be eligible for the benefits under Section 2(a) and the
Company will be obligated to provide you those benefits and not to
terminate your employment until the Bay Networks Termination Date only
if you are employed by the Company at the Effective Time and within 12
months of the Effective Time you receive a written notice from the
Company of its intention to terminate your employment other than for
Cause or Disability or you deliver a written notice to the Company of
your intention to terminate your employment for Good Reason and, if
you are terminated from employment by the Company after the Effective
Time for Cause or Disability or voluntarily terminate employment with
the Company other than for Good Reason, you will be entitled to no
benefits under Section 2(a) or under any other provision of this
Agreement or otherwise."
(b) A new sentence is added to the end of Section 4(a) which reads
as follows:
"If your employment is terminated by the Company for any reason other
than Cause or Disability or is terminated by you for Good Reason after
the Effective Time, then, during the Pre-Termination Period, Officer
agrees to perform those employment duties as he and the Vice President
of Human Resources of the Company or Bay Networks agree is appropriate
consistent with Bay Network's past practice."
8. Section 9 of the Retention Agreement is amended to provide in its
entirety that the Retention Agreement shall terminate on the date 12 months from
the Effective Time, provided however that, in the event of the occurrence of a
Bay Networks Termination Notice Date within such 12-month period, then Xylogics'
obligations under Section 2(a) shall continue in force and effect until the
expiration of the Pre-Termination Period.
9. Notwithstanding the provisions of Section 8 above, Section 6 of the
Retention Agreement shall survive the termination of the Retention Agreement as
modified by this Agreement.
3
<PAGE> 19
10. This Agreement may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which shall
constitute one and the same agreement.
4
<PAGE> 20
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date and year first above written.
OFFICER BAY NETWORKS, INC
/s/ BRUCE I. SACHS
- -----------------------------
By: /s/ ANDREW K. LUDWICK
PRESIDENT AND -------------------------
CHIEF EXECUTIVE OFFICER Title: President and Chief
- ----------------------------- Executive Officer
AGREED TO AND ACCEPTED AS OF THE
EFFECTIVE DATE:
XYLOGICS, INC.
By: /s/ GERALD LODGE
-----------------------------
Title: DIRECTOR
--------------------------
5
<PAGE> 21
[BAY NETWORKS LETTERHEAD]
November 25, 1996
Mr. Bruce Sachs
Bay Networks, Inc. [BAY NETWORKS LOGO]
4401 Great America Parkway
Santa Clara, CA 95054
Dear Bruce:
This letter confirms our agreement to modify as described below, the Employee
Retention Agreement between you and Xylogics, Inc. dated October 31, 1992,
which agreement was subsequently modified and accepted by Bay Networks, Inc.
("Bay Networks") as of September 5, 1995 (the "Retention Agreement"). If you
are in agreement with the following, please sign and return to me a copy of the
enclosed letter.
1. Background to this letter modification. As you are aware, Bay Networks
is desirous of continuing your services past December 15, 1996 and wishes to
modify the Retention Agreement as provided in this letter.
2. Extension of termination date. The introductory paragraph of Section
2(a) of the Retention Agreement is amended to read as follows:
"If, any time up to and including June 30, 1997, the Company notifies
you of its intention to terminate your employment with the Company other
than for Cause or Disability, or if you terminate your employment for
Good Reason, you shall be entitled to receive the benefits described in
this Agreement during the Pre-Termination Period and to no benefits
after the Bay Networks Termination Date."
3. Clarification of definitions of "Bay Networks Termination Date" and of
"Bay Networks Termination Notice Date."
As stated in the Modification of Employment Agreement between Bay Networks and
you dated September 5, 1995, "Bay Networks Termination Date" means the earlier
of (a) the date 24 months from the Bay Networks Termination Notice Date (as
defined below) or (b) the date on which Officer commences gainful employment
with any of the following competitors of Xylogics or Bay Networks: Cabletron
Systems, Inc., Cisco Systems, Inc., 3Com Corporation or Shiva Corporation.
As stated in the Modification of Retention Agreement between Bay Networks and
you dated September 5, 1995, and as further clarified by this letter, "Bay
Networks Termination Notice Date" means (a) the date after the Effective Time
that Xylogics or Bay Networks delivers a written notice to Officer of its
intention to terminate Officer's employment on the Bay Networks Termination
Date, or (b) the date after the Effective Time that Officer delivers a written
notice to Xylogics or Bay Networks of his intention to terminate his employment
with Xylogics and Bay Networks for Good Reason (as defined in the Retention
Agreement).
<PAGE> 22
Mr. Bruce Sachs
November 25, 1996
Page 2
4. PRO RATED BONUS. If at any time up to and including June 30, 1997 (a) you
choose to deliver a written notice to Bay Networks of your intention to
terminate your employment for Good Reason, or (b) Bay Networks or Xylogics
deliver a written notice to you of its intention to terminate your employment,
you shall be entitled to receive, in addition to the benefits conferred by the
Retention Agreement, an amount equal to the bonus amount you would have
received under the Company's current bonus plan as of the close of Bay
Networks' FY 97, pro-rated for the number of days during FY 97 which have
elapsed as of the date of such termination of employment.
5. ACKNOWLEDGMENT REGARDING GOOD CAUSE. The parties acknowledge that you may
believe that the current duties performed by you, in relation to those duties
you performed on behalf of Xylogics before the Effective Time, are such that
you regard your current duties, or those to which you may be assigned through
June 30, 1997, as Good Cause for you to terminate your employment under the
Retention Agreement, and Bay Networks will not dispute such belief.
If you are in agreement with the foregoing, please sign and return the enclosed
copy of this Letter.
BAY NETWORKS, INC. AGREED:
By: /s/ DAVID HOUSE /s/ BRUCE SACHS
------------------------ -------------------------
David House Bruce Sachs
<PAGE> 1
EXHIBIT 10.28
- --------------------------------------------------------------------------------
To: Dick Eyestone
From: Lloyd Carney
Date: February 5, 1997
cc: Jerry Patton
- --------------------------------------------------------------------------------
As per our discussion, I have agreed to the following terms as stated on your
transition proposal.
o Transition from full-time position to part-time (20 hour) position at
Bay Networks as of April 1, 1997
PART-TIME ROLE WILL INCLUDE:
o Sales training for the field and channel
o Product training for internal Bay Networks employees
o Process and systems work within the EBU (NPI, IDI, etc.)
o Direction/Architecture projects both for Bay Networks and the industry
o Competitive analysis and positioning
o Customer/Industry presentations
o M&A activities
o Business model analysis for non-U.S.
o Customer surveys
o Other assignments as appropriate
BAY NETWORKS AGREES TO PROVIDE THE FOLLOWING:
o Continue base salary of $200,000
o Withdraw your participation in the Executive Bonus Program with an
allowance for a pro-rated FY '97 bonus
o Allow for your participation in its Stock Option Plan and Employee
Benefits program for a period of one year
o Reimburse all reasonable and customary expenses incurred as a result of
discharge from assigned duties
o Pay for expenses incurred for relocation to the southeastern United
States, including costs associated with Realtor's fees,
packing/moving/unpacking of household goods with an option of storage
for a maximum of 120 days, and third-party home buyout
o Evaluate continuance of this agreement on April 1, 1998. At that time,
should continuance of this agreement be desired by both parties, a new
agreement will be negotiated
I accept the terms and conditions as stated in this agreement and acknowledge
that this document replaces and supersedes all previous agreements.
/s/ RICHARD D. EYESTONE /s/ LLOYD A. CARNEY
- ---------------------------------- ---------------------------------------
Richard Eyestone For Bay Networks, Inc.
<PAGE> 1
EXHIBIT 11
BAY NETWORKS, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) $(285,042) $ 206,325 $ 128,986
========= ========= =========
Weighted average common shares outstanding 194,745 185,056 177,347
Common stock equivalents resulting from stock options -- 13,722 10,312
--------- --------- ---------
Total common and common equivalent shares for calculation of
primary net income (loss) per share 194,745 198,778 187,659
Additional dilutive effect due to stock options -- 419 1,558
--------- --------- ---------
Total common and common equivalent share for calculation of
fully diluted net income (loss) per share 194,745 199,197 189,217
========= ========= =========
Net income (loss) per primary common and common
equivalent share $ (1.46) $ 1.04 $ 0.69
========= ========= =========
Net income (loss) per fully diluted common and common
equivalent share $ (1.46) $ 1.04 $ 0.68
========= ========= =========
</TABLE>
<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)
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We 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,
33-80897, 333-19665, and 333-30907) of our reports dated July 18, 1997, with
respect to the consolidated financial statements and schedule of Bay Networks,
Inc. included in this Annual Report (Form 10-K) for the year ended June 30,
1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000876516
<NAME> BAY NETWORKS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 529,962
<SECURITIES> 105,180
<RECEIVABLES> 286,337
<ALLOWANCES> 8,477
<INVENTORY> 144,468
<CURRENT-ASSETS> 1,248,417
<PP&E> 524,059
<DEPRECIATION> 282,990
<TOTAL-ASSETS> 1,766,046
<CURRENT-LIABILITIES> 420,809
<BONDS> 109,995
0
0
<COMMON> 2,076
<OTHER-SE> 1,233,166
<TOTAL-LIABILITY-AND-EQUITY> 1,766,046
<SALES> 2,093,060
<TOTAL-REVENUES> 2,093,060
<CGS> 1,074,886
<TOTAL-COSTS> 1,074,886
<OTHER-EXPENSES> 269,835
<LOSS-PROVISION> 1,237
<INTEREST-EXPENSE> 6,218
<INCOME-PRETAX> (248,129)
<INCOME-TAX> 36,913
<INCOME-CONTINUING> (285,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (285,042)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
