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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-19366
------------------------------
BAY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2916246
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4401 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
TELEPHONE: (408) 988-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
221,885,858 shares of Common Stock, $.01 par value, as of April 25, 1998
This report on Form 10-Q includes exhibits.
The exhibit index is located on page 21 of this report.
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BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 28, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 28, 1998
and June 30, 1997 3
Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended March 28, 1998 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 28, 1998 and March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 28, JUNE 30,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 358,389 $ 529,962
Short-term investments 348,458 105,180
Accounts receivable, net of allowance for doubtful
accounts of $5,803 at March 28, 1998 and
$8,477 at June 30, 1997 328,673 277,860
Inventories 164,612 144,468
Deferred income taxes 124,996 121,596
Other current assets 49,845 69,351
---------- ----------
Total current assets 1,374,973 1,248,417
Investments 228,142 146,367
Property and equipment, net 232,321 241,069
Goodwill 117,477 113,811
Other assets 75,430 16,382
---------- ----------
$2,028,343 $1,766,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 125,685 $ 117,596
Accrued expenses 223,892 201,266
Accrued income taxes -- 39,269
Deferred revenue 68,270 62,678
---------- ----------
Total current liabilities 417,847 420,809
Long-term debt 98,744 109,995
Stockholders' equity 1,511,752 1,235,242
---------- ----------
$2,028,343 $1,766,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ----------------------------
MARCH 28, MARCH 31, MARCH 28, MARCH 31,
1998 1997 1998 1997
--------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 547,182 $ 512,893 $ 1,793,376 $ 1,550,084
Cost of sales 290,909 260,231 898,894 795,022
--------- --------- ----------- -----------
Gross profit 256,273 252,662 894,482 755,062
--------- --------- ----------- -----------
Operating expenses:
Research and development 90,477 73,290 260,747 196,813
Sales and marketing 135,973 129,518 408,335 409,248
General and administrative 25,773 20,110 75,124 66,115
In-process research and development 154,040 -- 161,432 208,186
Restructuring/severance charges -- 32,188 -- 32,188
--------- --------- ----------- -----------
Total operating expenses 406,263 255,106 905,638 912,550
--------- --------- ----------- -----------
Income (loss) from operations (149,990) (2,444) (11,156) (157,488)
Net interest income and other 10,908 2,845 28,615 14,154
--------- --------- ----------- -----------
Income (loss) from continuing operations
before income taxes and cumulative effect
of a change in accounting principle (139,082) 401 17,459 (143,334)
Provision for income taxes 5,084 146 60,824 23,670
--------- --------- ----------- -----------
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle (144,166) 255 (43,365) (167,004)
Cumulative effect of a change in accounting
principle, net of tax -- -- 12,018 --
--------- --------- ----------- -----------
Net income (loss) $(144,166) $ 255 $ (55,383) $ (167,004)
========= ========= =========== ===========
Earnings (loss) per share amounts:
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle:
Basic earnings (loss) per share $ (0.66) $ -- $ (0.20) $ (0.87)
========= ========= =========== ===========
Diluted earnings (loss) per share $ (0.66) $ -- $ (0.20) $ (0.87)
========= ========= =========== ===========
Cumulative effect of a change in accounting principle:
Basic earnings per share $ -- $ -- $ 0.06 $ --
========= ========= =========== ===========
Diluted earnings per share $ -- $ -- $ 0.06 $ --
========= ========= =========== ===========
Net income (loss):
Basic earnings (loss) per share $ (0.66) $ -- $ (0.26) $ (0.87)
========= ========= =========== ===========
Diluted earnings (loss) per share $ (0.66) $ -- $ (0.26) $ (0.87)
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
MARCH 28, MARCH 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows provided by operating activities:
Net loss $ (55,383) $(167,004)
Adjustments to reconcile net loss to cash flows
provided by operating activities:
Depreciation and amortization 118,400 88,144
In-process research and development 161,432 208,186
Restructuring/severance charges -- 9,833
Deferred income taxes 4,505 (26,443)
Cumulative effect of a change in accounting principle 12,018 --
Non-cash compensation 2,269 --
Changes in operating assets and liabilities:
Accounts receivable (50,813) 30,369
Inventories (20,144) 99,216
Other current assets 19,531 (26,204)
Accounts payable 7,633 (11,690)
Accrued expenses 20,075 48,495
Accrued income taxes 2,752 6,912
Deferred revenue 5,592 17,276
--------- ---------
Cash flows provided by operating activities 227,867 277,090
--------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (96,153) (99,310)
Consulting expenditures on information technology systems (10,811) (28,744)
Purchases of investments (738,980) (153,250)
Proceeds from maturities of investments 385,307 146,719
Proceeds from sales of investments 28,620 27,140
Investment in NetSpeak common stock (37,557) --
Acquisitions:
LANcity, net of cash acquired -- (58,821)
Penril DSP -- (6,549)
NetICs, net of cash acquired (8,000) (37,087)
New Oak, net of cash acquired (16,693) --
Netsation (8,756) --
Other assets (3,767) 13,914
--------- ---------
Cash flows used in investing activities (506,790) (195,988)
--------- ---------
Cash flows provided by financing activities:
Payments of short-term borrowings related to the
acquisition of Penril DSP -- (4,165)
Payments of long-term debt (12,000) (152)
Purchases of treasury common stock -- (11,827)
Issuances of common stock 119,350 30,205
--------- ---------
Cash flows provided by financing activities 107,350 14,061
--------- ---------
Net increase (decrease) in cash and cash equivalents (171,573) 95,163
Cash and cash equivalents, beginning of period 529,962 315,064
--------- ---------
Cash and cash equivalents, end of period $ 358,389 $ 410,227
========= =========
Non-cash investing activities:
Unrealized gain on minority (cost) investments, net $ 24,578 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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BAY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bay Networks, Inc. (the Company or Bay Networks) develops, manufactures,
markets, sells and supports a comprehensive line of data networking products and
services. The Company provides products that meet the connectivity requirements
of corporate enterprises, network service providers and telecommunications
carriers. The Company offers products that operate under open standards such as
switches, routers, shared media hubs, remote and Internet access solutions,
Internet Protocol (IP) services and network management applications. The
Company's products provide adaptive networking solutions to network managers
that allow seamless operation of multi-protocol and multi-vendor networks.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for the in-process
research and development charges incurred during the three and nine month
periods ended March 28, 1998, the in-process research and development charges
incurred in the first half of fiscal 1997, and the restructuring/severance
charges incurred during the three month period ended March 31, 1997. The results
of operations for the interim periods presented are not necessarily indicative
of results for any future interim period or for the entire fiscal year. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The
unaudited condensed consolidated financial statements and notes included herein
should be read in conjunction with the consolidated financial statements and
notes for the fiscal year ended June 30, 1997, included in the Company's 1997
Annual Report on Form 10-K.
Beginning with the first quarter of fiscal year 1998, for purposes of
operational efficiency, the Company's fiscal quarters end on the Saturday
closest to the end of each calendar quarter. Accordingly, for fiscal year 1998,
the fiscal quarters end on September 27, 1997, December 27, 1997 and March 28,
1998, and the fiscal year will end on June 27, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the unaudited condensed consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. CONSOLIDATED BALANCE SHEET INFORMATION
Inventories. Inventories, stated at the lower of cost (first-in, first-out)
or market, consist of:
<TABLE>
<CAPTION>
MARCH 28, 1998 JUNE 30, 1997
-------------- -------------
(in thousands) (unaudited)
<S> <C> <C>
Raw materials $ 26,811 $ 21,068
Work-in-process 44,318 45,140
Finished goods 93,483 78,260
-------- --------
Total inventories $164,612 $144,468
======== ========
</TABLE>
Property and Equipment. During the nine months ended March 28, 1998, the
Company purchased property in Massachusetts and Ireland for a total purchase
price of $5.2 million. The total purchase price for each property was allocated
to the assets on the basis of their relative fair market values.
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which are 30 years for buildings, five to ten years for building
improvements, and two to five years for machinery, equipment, furniture and
fixtures. The life of the lease or the useful life, whichever is shorter, is
used for the amortization of leasehold improvements.
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<TABLE>
<CAPTION>
MARCH 28, 1998 JUNE 30, 1997
-------------- -------------
(in thousands) (unaudited)
<S> <C> <C>
Land $ 1,373 $ --
Building and improvements 6,111 --
Machinery and equipment 466,219 402,192
Furniture and fixtures 51,107 45,188
Leasehold improvements 71,614 76,679
--------- ---------
Total property and equipment 596,424 524,059
Accumulated depreciation and amortization (364,103) (282,990)
--------- ---------
Total property and equipment, net $ 232,321 $ 241,069
========= =========
</TABLE>
3. BUSINESS COMBINATIONS
During the nine months ended March 28, 1998, the Company acquired the two
businesses described below, each of which has been accounted for as a purchase.
Pro forma results of operations have not been presented because the effects of
these acquisitions were not material to the Company's consolidated financial
position, results of operations, and cash flows.
In January 1998, the Company acquired New Oak Communications, Inc. (New Oak),
a developer of Extranet Access technology, which provides scalable, secure,
private networks managed over the Internet, based in Acton, Massachusetts. The
Company exchanged 5,093,551 million shares of the Company's common stock and
$23.0 million in cash for all of the outstanding capital stock of New Oak as of
the date of the acquisition. In addition, the Company has reserved 115,619
shares of its common stock for issuance under New Oak's outstanding stock
options, which the Company assumed in the acquisition. The total purchase price
of $166.9 million was allocated to the acquired assets and liabilities based on
their estimated fair values as of the date of the acquisition. This includes an
allocation of $15.6 million to goodwill and $0.9 million to other intangible
assets, which are being amortized on a straight-line basis over a five year
period. Approximately, $146.1 million was allocated to in-process research and
development and charged to operations.
In February 1998, the Company acquired Netsation Corporation (Netsation), a
developer of multi-vendor network management tools, based near Research Triangle
Park, North Carolina, for $11.8 million in cash, of which $2.9 million was paid
to an escrow account for contingent consideration to the founders of Netsation
and will be charged to operations over the next two years. The remaining $8.9
million was accounted for as purchase price consideration and was allocated to
the acquired assets and liabilities based on their estimated fair values as of
the date of acquisition. This includes an allocation of $0.9 million to goodwill
and $0.1 million to other intangible assets, which are being amortized on a
straight-line basis over a five year period. Approximately, $7.9 million was
allocated to in-process research and development and charged to operations.
4. INVESTMENT IN NETSPEAK CORPORATION
In February 1998, the Company and NetSpeak Corporation (NetSpeak), a
developer and marketer of IP telephony technology, entered into a stock purchase
agreement whereby the Company purchased 1,334,171 shares of NetSpeak's common
stock for approximately $37.6 million, representing a 9% ownership in NetSpeak,
on a fully diluted basis.
5. FOREIGN EXCHANGE HEDGING
The Company had $21.2 million of short-term foreign exchange forward
contracts outstanding, which approximated the fair value of such contracts and
their underlying transactions at March 28, 1998. These contracts are denominated
in Australian, British, Canadian, French, Indian, Indonesian, Italian, Japanese,
Mexican, South Korean, Spanish and Singapore currencies. The outstanding
contracts have original maturities that do not exceed three months. The gains
and losses on these contracts are included in earnings when the underlying
foreign currency denominated transaction is recognized. Gains and losses related
to these instruments at March 28, 1998, 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.
7
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6. LONG-TERM DEBT
During the nine months ended March 28, 1998, the Company redeemed and retired
$12.0 million of its outstanding convertible subordinated debentures due in May
2003 for cash. The cash used to purchase the debentures was from the Company's
operating funds.
7. INCOME TAXES
The Company's provision for income taxes for the three and nine month periods
ended March 28, 1998, is based upon the Company's estimate of the effective tax
rate for fiscal year 1998. The Company's effective tax rate for the three and
nine month periods ended March 28, 1998, was 34% excluding the effect of the
in-process research and development charge which was not deductible for income
tax purposes. The Company's accrued income taxes was reduced by a tax benefit
from employee stock option transactions of $8.7 million and $42.0 million for
the three and nine month periods ended March 28, 1998, respectively, which was
credited directly to stockholders' equity.
8. CHANGE IN ACCOUNTING PRINCIPLE
During the nine months ended March 28, 1998, the Emerging Issues Task Force
issued a consensus, Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Reengineering and Information
Technology Transformation (EITF 97-13), effective upon issuance. Under EITF
97-13, substantially all of the costs of business process reengineering
activities should be expensed as incurred. Prior to this consensus, the Company
capitalized such costs. As a result of this accounting change, the Company
recognized a non-cash charge as a cumulative effect of a change in accounting
principle of $12.0 million ($18.2 million pre-tax) for the nine month period
ended March 28, 1998. This charge represents the expense for such costs covered
under this EITF consensus incurred through the date of the consensus. In
accordance with EITF 97-13, prior years have not been restated to reflect the
change in accounting method.
9. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
During the nine months ended March 28, 1998, the Emerging Issues Task Force
issued a consensus, Accounting for Increased Share Authorizations in an IRS
Section 423 Employee Stock Purchase Plan under APB Opinion No. 25, Accounting
for Stock Issued to Employees (EITF 97-12), effective upon issuance. As a result
of this new accounting interpretation, the Company incurred a non-cash charge of
$2.3 million in the third quarter of fiscal 1998 and the impact on basic and
diluted earnings per share is expected to be a charge of approximately $0.01 per
share for each fiscal quarter through the fourth quarter of fiscal 1999.
In addition, there may be changes in accounting interpretations affecting
revenue recognition for software that may impact the Company's business. During
fiscal 1998, the American Institute of Certified Public Accountants issued
Statements of Position (SOPs) 97-2 and 98-4 regarding Software Revenue
Recognition. The Company is in the process of evaluating the applicability of
the SOPs to its financial statements. If applicable, the SOPs may impact the
Company's current revenue accounting practices, and such changes may impact the
Company's consolidated financial position, results of operations, or cash flows.
10. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
SFAS 128 requirements.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive potential common
shares consist of employee stock options using the treasury stock method and
dilutive convertible securities using the if-converted method.
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The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------- -------- --------- ---------
MARCH 28, MARCH 31, MARCH 28, MARCH 31,
(in thousands, except per share amounts) 1998 1997 1998 1997
--------- -------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NUMERATOR:
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle $(144,166) $ 255 $ (43,365) $(167,004)
========= ======== ========= =========
Numerator for basic and diluted earnings
per share - income (loss) available to
common stockholders $(144,166) $ 255 $ (43,365) $(167,004)
========= ======== ========= =========
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 219,106 198,292 213,882 192,893
Effect of dilutive securities:
Employee stock options -- 4,787 -- --
--------- -------- --------- ---------
Dilutive potential common shares -- 4,787 -- --
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 219,106 203,079 213,882 192,893
========= ======== ========= =========
Basic earnings (loss) per share $ (0.66) $ -- $ (0.20) $ (0.87)
========= ======== ========= =========
Diluted earnings (loss) per share $ (0.66)(1) $ -- $ (0.20)(1) $ (0.87)(1)
========= ======== ========= =========
</TABLE>
(1) Diluted earnings per share does not reflect any potential shares relating
to employee stock options or convertible debentures since a loss was
reported for the period, in accordance with SFAS 128. The assumed issuance
of any additional shares would be anti-dilutive.
For additional disclosure regarding employee stock options, see Note 6 in the
Company's 1997 Annual Report on Form 10K.
Diluted earnings per share for the three and six month periods ended December
27, 1997, as reported in the Company's fiscal 1998 second quarter Form 10Q,
incorrectly assumed conversion of the outstanding convertible debentures.
Although not material to the Company, this represents a decrease of $0.01 per
share from the previously reported diluted earnings per share from continuing
operations before cumulative effect of a change in accounting principle and the
previously reported diluted earnings per share from net income. The restated
diluted earnings per share amounts are as follows: income from continuing
operations before cumulative effect of a change in accounting principle -
diluted earnings per share is $0.27 and $0.45 for the three and six month
periods ended December 27, 1997, respectively; and net income - diluted earnings
per share is $0.21 and $0.40 for the three and six month periods ended December
27, 1997, respectively.
11. SIGNIFICANT CUSTOMERS
One reseller customer accounted for 13.2% and another reseller customer
accounted for 10.0% of the Company's revenue in the three month period ended
March 28, 1998, and the same two resellers combined accounted for 21.0% (10.5%
each) of the Company's revenue for the nine month period ended March 28, 1998.
No one reseller customer accounted for more that 10% of the Company's revenue in
the three or nine month periods ended March 31, 1997.
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12. SUBSEQUENT EVENT
In April 1998, the Company held a special meeting of the stockholders and
approved the following employee benefit plans and other matters: an increase in
the maximum number of shares that may be issued under the Company's 1994
Employee Stock Purchase Plan by 2,000,000 shares; adoption of the Company's 1998
Employee Stock Purchase Plan; and an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of the Company's
Common Stock authorized for issuance by 100,000,000 shares.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere herein as
well as the section entitled "Risk Factors That May Affect Future Results." The
Company's future operating results may be affected by various trends and factors
which are beyond the Company's control. These include, among other factors,
changes in general economic conditions, rapid or unexpected changes in
technologies and uncertain business conditions that affect the data networking
industry. Accordingly, past results and trends should not be used by investors
to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties.
These statements may differ materially from actual future events or results. The
Company wishes to caution readers that a number of important factors, including
those identified in the section entitled "Risk Factors That May Affect Future
Results," as well as factors discussed elsewhere in this report and in the
Company's other reports filed with the Securities and Exchange Commission, may
affect the Company's actual results and cause actual results to differ
materially from those in any forward-looking statements.
RESULTS OF OPERATIONS
Revenue. Revenue was $547.2 million for the third quarter of fiscal 1998 as
compared to $512.9 million for the third quarter of fiscal 1997, an increase of
6.7%. For the first nine months of fiscal 1998 and fiscal 1997, revenue was
$1,793.4 million and $1,550.1 million, respectively, an increase of 15.7%. The
growth in both periods resulted primarily from increased sales of the Company's
switching products, service offerings, and remote access products. The Company
experienced a significant growth in sales of its switching products, due to the
positive customer response to several new switching products introduced over the
past year, and market acceptance of the Company's product offerings as a single
source of open, standards-based technology. Revenue from switching products
accounted for 31% of the Company's total revenue in the third quarter of fiscal
1998, more than any other single product category. However, revenue for the
third quarter of fiscal 1998 decreased by $97.7 million or 15.2%, compared to
revenue of $644.9 million in the second quarter of fiscal 1998. Sales decreased
from the second quarter of fiscal 1998 in all principal product categories. This
decline is primarily a result of weaker demand in the industry segments that the
Company serves, combined with a seasonally slow quarter, competitive pricing
actions taken by the Company on workgroup switches, and longer customer purchase
decision cycles.
International revenue increased 13.0% to $204.8 million for the third quarter
of fiscal 1998, as compared to $181.3 million for the comparable period of the
prior year. International revenue represented approximately 37.4% and 35.3% of
total revenue for the third quarter of fiscal 1998 and fiscal 1997,
respectively. For the first nine months of fiscal 1998, international revenue
increased 25.1% to $678.0 million, as compared to $541.8 million for the
comparable period of the prior year. International revenue represented
approximately 37.8% and 35.0% of total revenue for the first nine months of
fiscal 1998 and 1997, respectively. The current year to date growth in
international revenue primarily occurred in Europe due to improved international
standards-based switching and routing products along with the strengthening of
distribution channels. However, this growth was partially offset by the effects
of the economic turmoil in the Asia/Pacific markets, resulting in a reduction of
capital expenditures by businesses located in these regions. The Company's
international revenue is primarily denominated in U.S. dollars. The effect of
foreign exchange rate fluctuations did not have a significant impact on the
Company's operating results in the periods presented. The effects of foreign
exchange rate fluctuations may adversely affect the Company's operating results
in future periods. For a description of additional risks related to foreign
markets, see the section entitled "Risk Factors that May Affect Future Results."
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 increased by $3.6 million or 1.4% to $256.3
million or 46.8% of revenue for the third quarter of fiscal 1998, from $252.7
million or 49.3% of revenue for the comparable period of the prior year. For the
first nine months of fiscal 1998, gross profit increased by $139.4 million or
18.5% to $894.5 million or 49.9% of revenue from $755.1 million or 48.7% of
revenue for the comparable period of the prior year. The gross profit increase
in absolute dollars for both periods is attributable to increased unit sales of
the Company's products, driven by the introduction of new products and
enhancements to existing products. The gross profit percentage increase for the
first nine months of fiscal 1998 was a result of the introduction of products
designed with lower
11
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manufacturing costs and management's initiation of cost reduction programs on
existing products. However, gross profit decreased by $75.5 million or 22.8%
during the third quarter from the second quarter of fiscal 1998 which was
primarily attributable to competitive price reductions, additional price
protection granted to the distribution channels, lower sales volume, and a less
favorable product mix shift towards lower margin products. Despite the focus on
lower manufacturing costs and cost reduction programs, there can be no assurance
that changes in material, labor costs and distribution channels will not 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."
Research and Development. Research and development expenses for the third
quarter of fiscal 1998 increased 23.5% to $90.5 million from $73.3 million for
the comparable period of the prior year. As a percentage of revenue, expenses
were 16.5% in the third quarter of fiscal 1998 and 14.3% in the comparable
period of the prior year. Research and development expenses for the first nine
months of fiscal 1998 increased 32.5% to $260.7 million from $196.8 million for
the comparable period of the prior year. As a percentage of revenue, expenses
were 14.5% for the current fiscal year to date compared to 12.7% in the
comparable period in the prior year. The increase in both absolute dollars and
as a percentage of revenue relates to the costs associated with the addition of
research and development personnel through hiring and business acquisitions,
costs associated with acquisitions of businesses in the process of developing
technologies, costs of prototypes and depreciation of equipment used in the
development of new products and product enhancements, partially offset by a
decline in outside service fees. The Company believes that continued investment
in research and development is vital to the Company's future success. The
Company plans to maintain research and development spending as a percentage of
revenue in order to pursue a broad range of new products needed for timely
product introductions to the market. As a result of the Company's research and
development efforts and acquisitions of development-stage businesses, new
product sales accounted for 55.2% and 53.6% of revenue for the three and nine
month periods ended March 28, 1998, respectively, compared to 40.5% and 46.2% of
revenue for the comparable periods in the prior year.
The Company plans to continue its commitment to research and development
through internal development and, given that the industry's technology
environment is rapidly changing, through acquisitions of technology in an effort
to bring products to the market more quickly and provide end-to-end network
solutions. There can be no assurance that research and development efforts or
acquisitions of technology will result in commercially successful new technology
and products in the future, or that such technology and products will be
introduced in time to meet market requirements. The Company's research and
development efforts may be adversely affected by other factors noted elsewhere
herein. Research and development expenses may vary in absolute dollars and as a
percentage of revenue in future periods.
Sales and Marketing. Sales and marketing expenses for the third quarter of
fiscal 1998 increased 5.0% to $136.0 million, from $129.5 million in the
comparable period of the prior year. As a percentage of revenue, expenses
decreased to 24.8% for the third quarter of fiscal 1998, from 25.3% in the
comparable period of the prior year. For the first nine months of fiscal 1998,
sales and marketing expenses decreased 0.2% to $408.3 million, from $409.2
million in the comparable period of the prior year. As a percentage of revenue,
expenses decreased to 22.8% for the current fiscal year to date compared to
26.4% for the comparable period of the prior year. The decreases as a percentage
of revenue for both periods are primarily attributable to improved sales force
productivity and utilization of facilities. The increase in absolute dollars in
the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 is
due primarily to an increase in headcount, travel related expenses and costs
associated with product branding and other marketing programs, partially offset
by a decline in outside service fees. While it is management's intent to control
discretionary spending, in the future, sales, marketing and customer support
expenses may vary in absolute dollars or as a percentage of revenue to
effectively market Bay Networks and its products to the public.
General and Administrative. General and administrative expenses for the third
quarter of fiscal 1998 increased 28.2% to $25.8 million from $20.1 million in
the comparable period of the prior year. As a percentage of revenue, expenses
increased to 4.7% for the third quarter of fiscal 1998, from 3.9% in the
comparable period of the prior year. The increase in absolute dollars and as a
percentage of revenue is primarily due to expenditures associated with personnel
costs, including new hires and college recruiting programs, travel related
expenses and outside service fees. General and administrative expenses for the
first nine months of fiscal 1998 increased 13.6% to $75.1 million, from $66.1
million in the comparable period of the prior year. As a percentage of revenue,
expenses decreased slightly to 4.2% for the current fiscal year to date compared
to 4.3% for the comparable period of the prior year. The increase in absolute
dollars for the first nine months of fiscal 1998 is a result of expenditures
12
<PAGE> 13
associated with personnel costs to support the infrastructure of the Company's
global business strategy. The slight decline in expenses as a percentage of
revenue for the first nine months of fiscal 1998 is due to improved utilization
of facilities.
In-Process Research and Development. During the nine month period ended March
28, 1998, the Company acquired two businesses for an aggregate total of $175.8
million. Of the aggregate purchase price, $154.0 million was allocated to
in-process research and development related to internetworking technologies and
charged to operations.
Also, during the nine month period ended March 28, 1998, under the terms of
the NetICs fiscal 1997 acquisition agreement, the Company would pay an
additional purchase price consideration of $8 million for certain commitment
targets associated with revenue milestones achieved by NetICs prior to December
1997. The revenue milestones were achieved during the first half of fiscal 1998
and as a result, $7.4 million of the additional consideration was allocated to
in-process research and development and charged to operations. The remaining
$0.6 million was allocated to intangible assets, which are being amortized on a
straight-line basis over a five year period. This treatment is consistent with
the Company's previous purchase price allocation related to the acquisition of
NetICs. During the third quarter of fiscal 1998, the Company paid the additional
consideration of $8 million.
Net Interest Income and Other. Net interest income and other increased 283.4%
to $10.9 million for the third quarter of fiscal 1998, compared to $2.8 million
for the comparable period of the prior year and increased as a percentage of
revenue to 2.0% in the third quarter of fiscal 1998 from 0.6% in the comparable
period in the prior year. Current fiscal year to date, net interest income and
other increased 102.2%, to $28.6 million compared to $14.2 million for the
comparable period of the prior year and increased as a percentage of revenue to
1.6% in the first nine months of fiscal 1998 from 0.9% in the first nine months
of fiscal 1997. The increase in interest income was primarily due to higher
average invested cash and investment balances which yielded more interest income
in the third quarter and the first nine months of fiscal 1998, compared to the
comparable periods in the prior year. The increase in the invested cash and
investment balances during the third quarter and the first nine months of fiscal
1998 resulted primarily from increased profitability from the Company's
operations and increased stock option exercise activity during the respective
periods. The overall net interest income and other increase was partially offset
by the continued strengthening of the U.S. dollar which impacted foreign
exchange losses resulting from the translation of the parent company's accounts
receivable from international subsidiaries from the local currency to the U.S.
dollar. However, the impact from foreign exchange losses was mitigated by the
Company's foreign exchange hedging activities.
Investment Portfolio. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument. The Company
does not expect any material loss with respect to its investment portfolio.
The following table provides information about the Company's investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. The
Company's investment policy requires that all investments mature in five years
or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
(in thousands, except interest rates)
<TABLE>
<CAPTION>
FY 2002 & FAIR VALUE AT
FY 1998 FY 1999 FY 2000 FY 2001 THEREAFTER TOTAL MARCH 28,1998
--------- --------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents $ 313,435 $ -- $ -- $ -- $ -- $ 313,435 $ 314,212
Average Interest Rate 5.52% -- -- -- -- 5.52%
Investments $ 113,078 $ 248,319 $ 144,603 $ 45,245 $ 26,793 $ 578,038 $ 576,600
Average Interest Rate 5.36% 5.54% 5.42% 4.89% 5.79% 5.45%
Total Portfolio $ 426,513 $ 248,319 $ 144,603 $ 45,245 $ 26,793 $ 891,473 $ 890,812
Average Interest Rate 5.46% 5.54% 5.42% 4.89% 5.79% 5.47%
</TABLE>
13
<PAGE> 14
Impact of Foreign Currency Rate Changes. During the first nine months of
fiscal 1998, most currencies in Europe and Asia/Pacific continued to be weak
against the U.S. dollar. Consequently, the translation of the parent company's
intercompany receivables had a negative impact, although not material, on the
consolidated results of the Company. Foreign exchange forward contracts are
purchased to hedge certain intercompany foreign currency denominated balance
sheet positions. These financial instruments may minimize the risks that would
otherwise result from changes in foreign currency exchange rates. Exchange gains
and losses did not have a significant effect on the Company's results for the
third quarter of fiscal 1998 or the first nine months of fiscal 1998.
Foreign Exchange Hedging. The Company enters into foreign exchange forward
contracts to reduce its exposure to currency fluctuations on intercompany
foreign currency denominated balance sheet positions. The objective of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The Company's accounting policy
for these instruments is based on the Company's designation of such instruments
as hedging transactions. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company had $21.2 million
of short-term foreign exchange forward contracts denominated in Australian,
British, Canadian, French, Indian, Indonesian, Italian, Japanese, Mexican, South
Korean, Spanish and Singapore currencies which approximated the fair value of
such contracts and their underlying transactions at the end of the third quarter
of fiscal 1998. The gains and losses on these contracts are included in earnings
when the underlying foreign currency denominated transaction is recognized.
Gains and losses related to these instruments for the third quarter and the
first nine months of fiscal 1998 were not material to the Company. Looking
forward, the Company does not anticipate any material adverse effect on its
consolidated financial position, results of operations, or cash flows resulting
from the use of these instruments. However, there can be no assurance that these
strategies will be effective or that transaction losses can be minimized or
forecasted accurately.
The following table provides information about the Company's foreign exchange
forward contracts at the end of the third quarter of fiscal 1998. The table
presents the value of the contracts in U.S. dollars at the contract exchange
rate as of the contract maturity date. Due to the short-term nature of these
contracts, the contract rate approximates the weighted average contractual
foreign currency exchange rate and the forward position in U.S. dollars
approximates the fair value of the contract at the end of the third quarter of
fiscal 1998.
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 1998 DATE IN 1998 RATE U.S.DOLLARS
------------ ------------ ---- -----------
<S> <C> <C> <C> <C>
Australian Dollar February 12 April 17 1.4843 $ 4,379
Australian Dollar March 18 May 20 1.5066 $ 1,328
British Pound Sterling March 18 April 20 1.667 $ 1,250
Canadian Dollar February 12 April 17 1.436 $ 1,740
French Francs February 17 April 20 6.103 $ 4,096
Indian Rupee March 12 June 17 41.25 $ 1,818
Indonesian Rupiah March 12 April 16 10,570.0 $ 331
Italian Lira February 12 April 17 1,787.7 $ 305
Japanese Yen February 17 April 20 125.8 $ 2,782
Mexican Peso March 18 May 20 8.820 $ 907
Singapore Dollar March 4 April 9 1.6610 $ 722
South Korean Won February 13 April 20 1,659.0 $ 915
Spanish Peseta March 18 May 20 154.72 $ 646
</TABLE>
Income Taxes. The Company's effective income tax rate for the three and nine
month periods ended March 28, 1998, was 34.0% compared to 36.5% for the
comparable periods in the prior year, respectively, excluding the effect of the
in-process research and development charge which was not deductible for income
tax purposes. The decrease in the effective income tax rate was primarily due to
the reinstatement of the federal research and development tax credits. The
Company does not anticipate any material change to the effective tax rate for
the remainder of fiscal 1998.
14
<PAGE> 15
Change in Accounting Principle. During the nine months ended March 28,1998,
the Emerging Issues Task Force issued a consensus, Accounting for Costs Incurred
in Connection with a Consulting Contract that Combines Business Process
Reengineering and Information Technology Transformation (EITF 97-13), effective
upon issuance. Under EITF 97-13, substantially all of the costs of business
process reengineering activities should be expensed as incurred. Prior to this
consensus, the Company capitalized such costs. As a result of this accounting
change, the Company recognized a non-cash charge as a cumulative effect of a
change in accounting principle of $12.0 million ($18.2 million pre-tax) for the
nine month period ended March 28, 1998. This charge represents the expense for
such costs covered under this EITF consensus incurred through the date of the
consensus. In accordance with EITF 97-13, prior years have not been restated to
reflect the change in accounting method.
Effect of New Accounting Pronouncements. During the nine months ended March
28, 1998, the Emerging Issues Task Force issued a consensus, Accounting for
Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase
Plan under APB Opinion No. 25, Accounting for Stock Issued to Employees (EITF
97-12), effective upon issuance. As a result of this new accounting
interpretation, the Company incurred a non-cash charge of $2.3 million in the
third quarter of fiscal 1998 and the impact on basic and diluted earnings per
share is expected to be a charge of approximately $0.01 per share for each
fiscal quarter through the fourth quarter of fiscal 1999.
In addition, there may be changes in accounting interpretations affecting
revenue recognition for software that may impact the Company's business. During
fiscal 1998, the American Institute of Certified Public Accountants issued
Statements of Position (SOPs) 97-2 and 98-4 regarding Software Revenue
Recognition. The Company is in the process of evaluating the applicability of
the SOPs to its financial statements. If applicable, the SOPs may impact the
Company's current revenue accounting practices, and such changes may impact the
Company's consolidated financial position, results of operations, or cash flows.
The Year 2000. As the millennium "Year 2000" approaches, all companies that
develop, sell or use software are addressing the issues associated with the
date-programming code in older computer systems. The Year 2000 software issue
arises from older computer programs using two digits rather than four to define
the applicable year; as a result, some of these programs may interpret the year
as the calendar year 1900 rather than the calendar year 2000. Systems that do
not properly recognize such information could generate erroneous data or cause a
system to fail.
The Company has initiated a Year 2000 product compliance policy to ensure its
products are Year 2000 compliant. The Company provides up-to-date information on
product compliance to its customers in the market place through its external web
site. Products available for sale since January 1997 are warranted to comply
with Year 2000 requirements as defined under the Company's "Year 2000 Compliance
Definitions" listed on its external web site.
Most of the Company's internally used management information systems were
installed within the last 18 months and are warranted to comply with the Year
2000 requirements. The Company is in the process of conducting a comprehensive
review of its other internal computer systems to identify the systems that could
be affected by the Year 2000 issue and is developing an enterprise-wide
implementation plan to resolve the issue. The Company presently believes that,
with modifications to existing software, the Year 2000 issue will not pose
significant operational problems for the Company's computer systems as so
modified and converted. The Company does expect to incur internal staff costs as
well as consulting and other expenses related to enhancements necessary to
prepare the systems for the Year 2000. The Company has no reasonable estimate of
the amount associated with the transitions of the Company's remaining systems.
If modifications and conversions are not completed timely, the Year 2000 issue
may have a material impact on the Company's operations.
The Company has not fully determined the extent to which the Company's
interface systems may be impacted by third parties' systems, which may not be
Year 2000 compliant. There can be no assurance that the systems of other
companies which the Company deals with or on which the Company's systems rely
will be timely converted, or that any such failure to convert by another company
could not have an adverse effect on the Company's systems, consolidated
financial position, results of operations, or cash flows.
15
<PAGE> 16
European Monetary Unit. The Company's sales to European customers are
primarily U.S. dollar based. However, the Company does recognize the emergence
of a new monetary unit and the potential importance of such a new monetary unit
to its customers residing in the European union. The Company's information
systems are capable of functioning in multiple currencies. The Company has
embarked on system changes to make all infrastructures capable of operations in
the European Monetary Unit. Although not material, the Company does expect to
incur additional expenses for these system changes. The Company does not expect
any disruption in operations due to the European Monetary Unit implementation.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities was $227.9 million for the first
nine months of fiscal 1998, compared to $277.1 million for the comparable period
of the prior year. Cash provided by operations decreased from the prior period
primarily due to increases in accounts receivable and inventory, partially
offset by an increase in accrued expenses. Accounts receivable increased to
$328.7 million at March 28, 1998, from $277.9 million at June 30, 1997. This
increase is primarily a result of a non-linear shipment pattern during the third
quarter of fiscal 1998. Days sales outstanding in receivables increased to 55
days at the end of the third quarter of fiscal 1998, from 47 days as of the end
of fiscal 1997. Days sales outstanding may continue to vary, due to, among other
things, linearity of product shipments and collections, and increased
international sales. The increase in inventory from June 30, 1997 is due to
lower than planned shipments at the end of the third quarter of fiscal 1998 and
an increase in service and evaluation units.
During the current fiscal year to date, the Company invested $107.0 million
in capital expenditures. Major capital expenditures included investments in
property and equipment and improvements to the Company's information technology
systems required to support the Company's operations. During the first nine
months of fiscal 1998, the Company purchased property in Massachusetts and
Ireland for a total purchase price of $5.2 million and the total purchase price
for each property was allocated to the assets on the basis of their relative
fair market values. In addition, the Company acquired two businesses with cash
portions of the purchase consideration, aggregating approximately $25.4 million,
the Company purchased stock in NetSpeak for approximately $37.6 million, and the
Company paid additional purchase price consideration of $8 million related to
the acquisition of NetICs. During the first nine months of fiscal 1997, the
Company invested $128.1 million in capital expenditures and acquired three
businesses with cash portions of the purchase consideration, aggregating
approximately $102.5 million.
Cash provided by financing activities was $107.4 million in the first nine
months of fiscal 1998, compared to $14.1 million in the first nine months of
fiscal 1997. The cash provided by financing activities during the first nine
months of fiscal 1998 consisted primarily of cash received in connection with
the issuance of stock under the Company's stock option plan, partially offset by
the retirement of debt. In November 1997, the Company repurchased and retired
$12.0 million of its outstanding convertible subordinated debentures for cash.
The cash used to purchase the debentures was from the Company's operating funds.
Cash provided by financing activities during the first nine months of fiscal
1997 consisted primarily of cash received in connection with the issuance of
stock under the Company's stock option plan, offset by the Company's purchase of
treasury stock on the open market and the payment of short-term borrowings
related to the acquisition of Penril DSP.
As of March 28, 1998, the Company had $98.0 million of convertible
subordinated debentures outstanding, which mature in May 2003. The debentures
are convertible at the option of the holder into the Company's common stock. The
debentures are redeemable at the option of the Company, initially at
approximately 103.7% and at decreasing prices thereafter to 100% at maturity.
Looking forward, the Company's management may decide to repurchase a portion or
all of the debentures in the open market. The Company does not anticipate any
material adverse effect on its consolidated financial position, results of
operations, or cash flows resulting from the repurchase of the debt.
As of March 28, 1998, cash and short- and long-term investments totaled
$935.0 million, compared to $781.5 million at June 30, 1997. The Company
believes that it has the financial resources needed to meet business
requirements, including capital expenditures, working capital requirements, debt
obligations outstanding and operating lease commitments for facilities at least
through the next twelve months.
16
<PAGE> 17
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 that may affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
Risks Related to New Markets. The markets for data networking products are
rapidly changing and highly competitive. If these markets do not continue to
grow, or if the Company's strategies for the data networking markets are
unsuccessful, the Company's consolidated financial position, results of
operations, or cash flows, may be adversely affected.
Risks Related to New Products. The Company's future revenue is dependent on
its ability to successfully develop, acquire, manufacture and market products
for customers in rapidly evolving markets worldwide. To successfully distribute
new products, the Company must establish and maintain new distribution channels.
There can be no assurance that the Company's product development and acquisition
efforts will result in timely and commercially successful new product offerings
in the future.
Risks Related to Sales. Value added reseller (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.
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 will be able to consistently 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 acquire and integrate into its operations such new companies.
Risks Related to Foreign Markets. Economic and political instability in
foreign markets may adversely affect the Company's operations and its resellers
in those markets. Due to the recent currency devaluation in the Asian markets,
the Company's exposure to foreign currency fluctuations may increase if the
global economic environment fails to improve. Weaker foreign currency values
relative to the U.S. dollar may render the Company's products relatively more
expensive to customers in a particular country and may lead to a reduction in
17
<PAGE> 18
sales or profitability in that country, or result in foreign exchange losses on
the conversion to U.S. dollars of foreign currency accounts receivable resulting
from international operations. In addition, the weakening of certain non-U.S.
currencies may impair customers' ability to repay existing obligations. These
risks may have a material adverse effect on the Company's future consolidated
financial position, results of operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Investment Portfolio" and "Foreign
Exchange Hedging" in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and "Foreign Exchange Hedging" in Note 5 of
the Notes to Condensed Consolidated Financial Statements. Such information is
incorporated herein.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) RECENT SALES OF UNREGISTERED SECURITIES
In January 1998, the Company acquired all of the outstanding shares of
New Oak Communications, Inc. (New Oak), pursuant to a merger of a newly formed,
wholly-owned subsidiary of the Company with and into New Oak in exchange for
5,093,551 shares of the Company's common stock and $23.0 million in cash. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index are filed as
part of this report.
(b) Reports on Form 8-K.
None
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY NETWORKS, INC.
By /s/ Rob G. Seim
--------------------------------
Rob G. Seim
Vice President and
Corporate Controller
(Authorized Officer and
Principal Accounting Officer)
Date: May 8, 1998
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant.
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.
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation, dated April 24, 1998.
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.
10.5* Amended and Restated 1994 Employee Stock Purchase Plan, as
amended on April 24, 1998.
10.32* 1998 Employee Stock Purchase Plan, effective April 24, 1998.
10.33* Sign-On Stock Option Agreement with David L. House, Chairman of
the Board, President and Chief Executive Officer, effective
October 29, 1996.
10.34* Employee Agreement with Ralph R. Russo, Executive Vice
President of Operations, dated October 3, 1997.
10.35* Executive Retention and Severance Plan, effective January 27,
1998.
10.36* Executive Retention and Severance Agreement with David L.
House, Chairman of the Board, President, and Chief Executive
Officer, effective January 27, 1998.
10.37* Executive Retention and Severance Agreement with David J.
Rynne, Executive Vice President and Chief Financial Officer,
effective January 27, 1998.
10.38* Form of the Executive Retention and Severance Agreement.
10.39* Form of the Officer Retention and Severance Agreement.
11 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule - Nine Months Ended March 28, 1998.
27.2 Financial Data Schedule - Six Months Ended December 27, 1997.
27.3 Financial Data Schedule - Three Months Ended September 27,
1997.
27.4 Financial Data Schedule - Fiscal Year Ended June 30, 1997.
27.5 Financial Data Schedule - Nine Months Ended March 31, 1997.
27.6 Financial Data Schedule - Six Months Ended December 31, 1996.
27.7 Financial Data Schedule - Three Months Ended September 30,
1996.
27.8 Financial Data Schedule - Fiscal Year Ended June 30, 1996.
</TABLE>
* Indicates compensatory plan or arrangement.
21
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
BAY NETWORKS, INC.
Bay Networks, Inc. (hereinafter called the "Corporation"), a corporation
organized and existing under the laws of the State of Delaware, hereby certifies
that:
1. The name of the Corporation is Bay Networks, Inc. The
Corporation was originally incorporated under the name "Percom, Inc." by the
filing of a Certificate of Incorporation in the office of the Secretary of State
of the State of Delaware on May 2, 1986.
2. This Restated Certificate of Incorporation has been duly adopted
in accordance with Section 245 of the General Corporation Law of the State of
Delaware.
3. This Restated Certificate of Incorporation restates and
integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation as heretofore amended or supplemented, and there is
no discrepancy between such provisions and the provisions of this Restated
Certificate of Incorporation.
4. The text of the Certificate of Incorporation of this Corporation
is hereby restated and integrated to read in its entirety as follows:
FIRST: The name of the Corporation is
BAY NETWORKS, INC.
SECOND: The registered office of the Corporation is to be
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The
name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The nature of the business or purpose to be conducted or
promoted by the Corporation is as follows:
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To design, manufacture and sell data communications products of
all types and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The total number of shares of all classes of stock which
the Corporation shall have authority to issue is (i) 300,000,000 shares
of Common Stock, $.01 par value per share ("Common Stock"), and (ii)
1,000,000 shares of Preferred Stock, $.001 par value per share
("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or
restrictions thereof in respect of each class of capital stock of the
Corporation.
A. Common Stock.
1. General. The voting, dividend and liquidation
rights of the holders of the Common Stock are subject to and qualified
by the rights of the holders of Preferred Stock of any series as may be
designated by the Board of Directors upon any issuance of the Preferred
Stock of any series.
2. Voting. The holders of the Common Stock are
entitled to one vote for each share held at all meetings of stockholders
(and written actions in lieu of meetings). There shall be no cumulative
voting. The number of authorized shares of Common Stock may be increased
or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
stock of the Corporation entitled to vote.
3. Dividends. Dividends may be declared and paid on
the Common Stock from funds lawfully available therefor as and when
determined by the Board of Directors, subject to any preferential
dividend rights of any then outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation
of the Corporation, whether voluntary or involuntary, holders of Common
Stock will be entitled to receive all assets of the Corporation
available for distribution to its stockholders, subject to any rights of
any then outstanding Preferred Stock.
B. Preferred Stock.
Preferred Stock may be issued from time to time in one or more
series, each of such series to have such terms as stated or expressed
herein and in the resolution or resolutions providing for the issue of
such series adopted by the Board of Directors of the Corporation as
hereinafter provided. Any shares of Preferred Stock which may be
redeemed, purchased or acquired by the Corporation may be reissued
except as otherwise provided by law. Different series of Preferred Stock
shall not be construed to constitute different classes of shares for the
purposes of voting by classes unless expressly provided.
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Authority is hereby expressly granted to the Board of Directors
from time to time to issue the Preferred Stock in one or more series,
and in connection with the creation of any such series, by resolution or
resolutions providing for the issue of the shares thereof, to determine
and fix such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative participating, optional or
other special rights, and qualifications, limitations or restrictions
thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as
shall be stated and expressed in such resolutions, all to the fullest
extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the
resolutions providing for issuance of any series of Preferred Stock may,
subject to the provisions hereof, provide that such series shall be
superior or rank equally or be junior to the Preferred Stock of any
other series to the extent permitted by law. Except as provided herein,
no vote of the holders of the Preferred Stock or Common Stock shall be a
prerequisite to the issuance of any shares of any series of the
Preferred Stock authorized by and complying with the conditions of the
Certificate of Incorporation, the right to have such vote being
expressly waived by all present and future holders of the capital stock
of the Corporation.
Pursuant to the foregoing provision, the Board of Directors has
created one series of Preferred Stock with the following rights, powers,
preferences, qualifications, limitations and restrictions:
1. Designation and Amount. The shares of such
series shall be designated as "Series A Preferred Stock" (the "Series A
Preferred Stock"), $.001 par value per share, and the number of shares
constituting such series shall be 500,000.
2. Dividends and Distributions.
(A) The dividend rate on the shares of
Series A Preferred Stock shall be for each quarterly dividend
(hereinafter referred to as a "quarterly dividend period"), which
quarterly dividend periods shall commence on March 31, June 30,
September 30 and December 31, in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date") (or in the
case of original issuance, from the date of original issuance) and shall
end on and include the day next preceding the first date of the next
quarterly dividend period, at a rate per quarterly dividend period
(rounded to the nearest cent) equal to the greater of (a) $175,000 or
(b) subject to the provisions for adjustment hereinafter set forth,
1,000 times the aggregate per share amount of all cash dividends, and
1,000 times the aggregate per share amount (payable in cash, based upon
the fair market value at the time the non-cash dividend or other
distribution is declared as determined in good faith by the Board of
Directors) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared (but not withdrawn) on the Common Stock, par value $.01 per
share, of the Corporation (the "Common Stock") during the immediately
preceding quarterly dividend period, or, with respect to the first
quarterly dividend period, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event this
Corporation shall at any time after February 27, 1995 (the "Rights
Declaration Date") (i) declare any dividend on
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Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to
such event.
(B) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
shares of Series A Preferred Stock, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of Directors may fix
a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than
45 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a
vote of the stockholders of the Corporation. In the event the
Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided in the
Certificate of Incorporation or By-Laws, the holders of shares of Series
A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders
of the Corporation.
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(C) Except as set forth in the Certificate
of Incorporation and in the By-Laws, holders of Series A Preferred Stock
shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
4. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
5. Liquidation, Dissolution or Winding Up. In the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the holders of the Series A Preferred
Stock shall be entitled to receive the greater of (a) $175,000 per
share, plus accrued dividends to the date of distribution, whether or
not earned or declared, or (b) an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 1,000 times the
aggregate amount to be distributed per share to holders of Common Stock.
In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
pursuant to clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
6. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger, combination or
other transaction in which the shares of Common Stock are exchanged for
or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series A Preferred Stock
shall at the same time be similarly exchanged or changed in an amount
per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be,
into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A
Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the
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denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
8. Fractional Shares. Series A Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and have the
benefit of all other rights of holders of Series A Preferred Stock. All
payments made with respect to fractional shares hereunder shall be
rounded to the nearest whole cent.
9. Certain Restrictions.
(A) Whenever quarterly dividends or other
dividends or distributions payable on the Series A Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on
shares of Series A Preferred Stock outstanding shall have been paid in
full, the Corporation shall not:
(i) declare or pay dividends on,
make any other distributions on, or redeem or purchase or otherwise
acquire for consideration any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock;
(ii) declare or pay dividends on or
make any other distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except dividends paid ratably on the
Series A Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire
for consideration any shares of Series A Preferred Stock, or any shares
of stock ranking on a parity with the Series A Preferred Stock, except
in accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes
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shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the
Corporation could, under paragraph (A) of this Section 9, purchase or
otherwise acquire such shares at such time and in such manner.
10. Ranking. The Series A Preferred Stock shall be
junior to all other series of the Corporation's preferred stock as to
the payment of dividends and the distribution of assets, unless the
terms of any series shall provide otherwise.
11. Amendment. The Certificate of Incorporation of
the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of
the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series A Preferred Stock voting together as a single class.
FIFTH: In furtherance of and not in limitation of powers
conferred by statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.
SIXTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between
this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this Corporation or of any creditor or
stockholder thereof, or on the application of any receiver or receivers
appointed for this Corporation under the provisions of section 291 of
Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation,
as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this Corporation
as consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class
of stockholders, of this Corporation, as the case may be, and also on
this Corporation.
SEVENTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Restated Certificate of
Incorporation, in the manner now
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or hereafter prescribed by statute and the Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are
granted subject to this reservation.
EIGHTH: To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended, a
director of this Corporation shall not be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
NINTH: This Article is inserted for the management of the
business and for the conduct of the affairs of the Corporation, and it
is expressly provided that it is intended to be in furtherance and not
in limitation or exclusion of the powers conferred by the statutes of
the State of Delaware.
1. Number of Directors. The number of directors which shall
constitute the whole Board of Directors shall be determined by
resolution of a majority of the Board of Directors, but in no event
shall be less than three. The number of directors may be decreased at
any time and from time to time by a majority of the directors then in
office, but only to eliminate vacancies existing by reason of the death,
resignation, removal or expiration of the term of one or more directors.
The directors shall be elected at the annual meeting of stockholders by
such stockholders as have the right to vote on such election. Directors
need not be stockholders of the Corporation.
2. Classes of Directors. The Board of Directors shall be
and is divided into three classes: Class I, Class II and Class III. No
one class shall have more than one director more than any other class.
If a fraction is contained in the quotient arrived at by dividing the
authorized number of directors by three, then, if such fraction is
one-third, the extra director shall be a member of Class I and, if such
fraction is two-thirds, one of the extra directors shall be a member of
Class I and the other extra director shall be a member of Class II,
unless otherwise provided for from time to time by resolution adopted by
a majority of the Board of Directors.
3. Election of Directors. Elections of directors need not
be by written ballot except as and to the extent provided in the By-Laws
of the Corporation.
4. Terms of Office. Each director shall serve for a term
ending on the date of the third annual meeting following the annual
meeting at which such director was elected; provided, however, that each
initial director in Class I shall serve for a term ending on the date of
the annual meeting next following the end of the Corporation's fiscal
year ending June 30, 1992; each initial director in Class II shall serve
for a term ending on the date of the annual meeting next following the
end of the Corporation's fiscal year ending June 30, 1993; and each
initial director in Class III shall serve for a term ending on the date
of the annual meeting next following the end of the Corporation's fiscal
year ending June 30, 1994.
5. Allocation of Directors Among Classes in the Event of
Increases or Decreases in the Number of Directors. In the event of any
increase or decrease in the authorized number of directors, (i) each
director then serving as such shall nevertheless
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continue as director of the class of which he is a member until the
expiration of his current term or his prior death, retirement or
resignation and (ii) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the
Board of Directors among the three classes of directors so as to ensure
that no one class has more than one director more than any other class.
To the extent possible, consistent with the foregoing rule, any newly
created directorships shall be added to those classes whose terms of
office are to expire at the latest dates following such allocation, and
any newly eliminated directorships shall be subtracted from those
classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to
time by resolution adopted by a majority of the directors then in
office, although less than a quorum.
6. Tenure. Notwithstanding any provisions to the contrary
contained herein, each director shall hold office until his successor is
elected and qualified, or until his earlier death, resignation or
removal.
7. Vacancies. Any vacancy in the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of
the Board, may be filled only by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining
director. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office, if applicable, and a
director chosen to fill a position resulting from an increase in the
number of directors shall hold office until the next election of the
class for which such director shall have been chosen and until his
successor is elected and qualified, or until his earlier death,
resignation or removal.
8. Quorum. A majority of the total number of the whole
Board of Directors shall constitute a quorum at all meetings of the
Board of Directors. In the event one or more of the directors shall be
disqualified to vote at any meeting, then the required quorum shall be
reduced by one for each such director so disqualified; provided,
however, that in no case shall less than one-third (1/3) of the number
so fixed constitute a quorum. In the absence of the quorum at any such
meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the
meeting, until a quorum shall be present.
9. Action at Meeting. At any meeting of the Board of
Directors at which a quorum is present, the vote of a majority of those
present shall be sufficient to take any action, unless a different vote
is specified by law or the Corporation's Certificate of Incorporation or
By-Laws.
10. Removal. Any one or more or all of the directors may be
removed, with or without cause, by the holders of at least seventy-five
percent (75%) of the shares then entitled to vote at an election of
directors.
11. Stockholder Nominations and Introduction of Business,
Etc. Advance notice of stockholder nominations for election of directors
and other business to be brought by stockholders before a meeting of
stockholders shall be given in the manner provided in the By-Laws of the
Corporation.
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12. Amendments to Article. Notwithstanding any other
provisions of law, this Certificate of Incorporation or the
Corporation's By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of
directors or class of directors shall be required to amend or repeal, or
to adopt any provision inconsistent with, this Article NINTH.
TENTH: Until the closing of a firm commitment, underwritten
public offering of the Corporation's Common Stock (a "Public Offering"),
any action required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without a
meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on such action were present and voted.
Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders
who have not consented in writing. Effective upon the closing of a
Public Offering, stockholders of the Corporation may not take any action
by written consent in lieu of a meeting. Notwithstanding any other
provision of law, this Certificate of Incorporation or the Corporation's
By-Laws, as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of
directors or class of directors shall be required to amend or repeal, or
to adopt any provision inconsistent with this Article TENTH.
ELEVENTH: Special meetings of stockholders may be called at any
time by the President or by the Chairman of the Board of Directors.
Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the
notice of meeting. Notwithstanding any other provision of law, this
Certificate of Incorporation or the Corporation's By-Laws, as amended,
and notwithstanding the fact that a lesser percentage may be specified
by law, the affirmative vote of the holders of at least seventy-five
percent (75%) of the votes which all the stockholders would be entitled
to cast at any annual election of directors or class of directors shall
be required to amend or repeal, or to adopt any provision inconsistent
with this Article ELEVENTH.
TWELFTH: 1. Actions, Suits and Proceedings Other than by or in
the Right of the Corporation. The Corporation shall indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that he is
or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in
a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan)
(all such persons being referred to hereafter as an "Indemnitee"), or by
reason of any action alleged to have been taken or
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omitted in such capacity, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such
action, suit or proceeding and any appeal therefrom, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
Notwithstanding anything to the contrary in this Article, except as set
forth in Section 6 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or
part thereof) initiated by the Indemnitee unless the initiation thereof
was approved by the Board of Directors of the Corporation.
2. Actions or Suits by or in the Right of the Corporation.
The Corporation shall indemnify any Indemnitee who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was, or has
agreed to become, a director or officer of the Corporation, or is or was
serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action
alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection
with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery of
Delaware or the court in which such action or suit was brought shall
determine upon application, that, despite the adjudication of such
liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware or
such other court shall deem proper.
3. Indemnification for Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that
an Indemnitee has been successful, on the merits or otherwise, in
defense of any action, suit or proceeding referred to in Sections 1 and
2 of this Article, or in defense of any claim, issue or matter therein,
or on appeal from any such action, suit or proceeding, he shall be
indemnified against all expenses (including attorneys' fees) actually
and reasonably incurred by him or on his behalf in connection therewith.
Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee,
(ii) an adjudication that the Indemnitee was liable to the Corporation,
(iii) a plea of guilty or nolo contendere
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by the Indemnitee, (iv) an adjudication that the Indemnitee did not act
in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and (v) with respect
to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee
shall be considered for the purposes hereof to have been wholly
successful with respect thereto.
4. Notification and Defense of Claim. As a condition
precedent to his right to be indemnified, the Indemnitee must notify the
Corporation in writing as soon as practicable of any action, suit,
proceeding or investigation involving him for which indemnity will or
could be sought. With respect to any action, suit, proceeding or
investigation of which the Corporation is so notified, the Corporation
will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel
reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so as to assume such
defense, the Corporation shall not be liable to the Indemnitee for any
legal or other expenses subsequently incurred by the Indemnitee in
connection with such claim, other than as provided below in this Section
4. The Indemnitee shall have the right to employ his own counsel in
connection with such claim, but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the
defense thereof shall be at the expense of the Indemnitee unless (i) the
employment of counsel by the Indemnitee has been authorized by the
Corporation, and (ii) counsel to the Indemnitee shall have reasonably
concluded that there may be a conflict of interest or position on any
significant issue between the Corporation and the Indemnitee in the
conduct of the defense of such action or (iii) the Corporation shall not
in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel for the Indemnitee
shall be at the expense of the Corporation, except as otherwise
expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense
of any claim brought by or in the right of the Corporation or as to
which counsel for the Indemnitee shall have reasonably made the
conclusion provided for in clause (ii) above.
5. Advance of Expenses. Subject to the provisions of
Section 6 below, in the event that the Corporation does not assume the
defense pursuant to Section 4 of this Article of any action, suit,
proceeding or investigation of which the Corporation receives notice
under this Article, any expenses (including attorneys' fees) incurred by
an Indemnitee in defending a civil or criminal action, suit, proceeding
or investigation or any appeal therefrom shall be paid by the
Corporation in advance of the final disposition of such matter,
provided, however, that the payment of such expenses incurred by an
Indemnitee in advance of the final disposition of such matter shall be
made only upon receipt of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Corporation as authorized in this Article. Such
undertaking may be accepted without reference to the financial ability
of such person to make such repayment.
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<PAGE> 13
6. Procedure for Indemnification. In order to obtain
indemnification or advancement of expenses pursuant to Section 1, 2, 3
or 5 of this Article, the Indemnitee shall submit to the Corporation a
written request, including in such request such documentation and
information as is reasonably available to the Indemnitee and is
reasonably necessary to determine whether and to what extent the
Indemnitee is entitled to indemnification or advancement of expenses.
Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the
Corporation of the written request of the Indemnitee, unless with
respect to requests under Section 1, 2 or 5 the Corporation determines,
by clear and convincing evidence, within such 60-day period that the
Indemnitee did not meet the applicable standard of conduct set forth in
Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of a quorum of the directors of the
Corporation consisting of persons who are not at that time parties to
the action, suit or proceeding in question ("disinterested directors"),
(b) if no such quorum is obtainable, a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for
directors, voting as a single class, which quorum shall consist of
stockholders who are not at that time parties to the action, suit or
proceeding in question, (d) independent legal counsel (who may be
regular legal counsel to the Corporation), or (e) a court of competent
jurisdiction.
7. Remedies. The right to indemnification or advances as
granted by this Article shall be enforceable by the Indemnitee in any
court of competent jurisdiction if the Corporation denies such request,
in whole or in part, or if no disposition thereof is made within the
60-day period referred to above in Section 6. Unless otherwise provided
by law, the burden of proving that the Indemnitee is not entitled to
indemnification or advancement of expenses under this Article shall be
on the Corporation. Neither the failure of the Corporation to have a
determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee
has met the applicable standard of conduct, nor an actual determination
by the Corporation pursuant to Section 6 that the Indemnitee has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable
standard of conduct. The Indemnitee's expenses (including attorneys'
fees) incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such proceeding shall also
be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or
repeal of this Article or of the relevant provisions of the General
Corporation Law of Delaware or any other applicable laws shall affect or
diminish in any way the rights of any Indemnitee to indemnification
under the provisions hereof with respect to any action, suit, proceeding
or investigation arising out of or relating to any actions, transactions
or facts occurring prior to the final adoption of such amendment,
termination or appeal.
9. Other Rights. The indemnification and advancement of
expenses provided by this Article shall not be deemed exclusive of any
other rights to which an Indemnitee seeking indemnification or
advancement of expenses may be entitled under any law (common or
statutory), agreement or vote of stockholders or disinterested directors
or
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<PAGE> 14
otherwise, both as to action in his official capacity and as to action
in any other capacity while holding office for the Corporation, and
shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors
and administrators of the Indemnitee. Nothing contained in this Article
shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors
providing indemnification rights and procedures different from those set
forth in this Article. In addition, the Corporation may, to the extent
authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Corporation
or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
10. Partial Indemnification. If an Indemnitee is entitled
under any provision of this Article to indemnification by the
Corporation for some or a portion of the expenses (including attorneys'
fees), judgments, fines or amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with any
action, suit, proceeding or investigation and any appeal therefrom but
not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in
settlement to which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise (including any
employee benefit plan) against any expense, liability or loss incurred
by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the General
Corporation Law of Delaware.
12. Merger or Consolidation. If the Corporation is merged
into or consolidated with another corporation and the Corporation is not
the surviving corporation, the surviving corporation shall assume the
obligations of the Corporation under this Article with respect to any
action, suit, proceeding or investigation arising out of or relating to
any actions, transactions or facts occurring prior to the date of such
merger or consolidation.
13. Savings Clause. If this Article or any portion hereof
shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each
Indemnitee as to any expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in connection with any action,
suit, proceeding or investigation, whether civil, criminal or
administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion
of this Article that shall not have been invalidated and to the fullest
extent permitted by applicable law.
14. Definitions. Terms used herein and defined in Section
145(h) and Section 145(i) of the General Corporation Law of Delaware
shall have the respective meanings assigned to such terms in such
Section 145(h) and Section 145(i).
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<PAGE> 15
15. Subsequent Legislation. If the General Corporation Law
of Delaware is amended after adoption of this Article to expand further
the indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.
THIRTEENTH: The stockholder vote required to approve Business
Combinations (hereinafter defined) shall be as set forth in this
Article.
1. Higher Vote for Business Combinations. In addition to
any affirmative vote required by law, the By-Laws of the Corporation or
this Certificate of Incorporation, and except as otherwise expressly
provided in Section 3 of this Article THIRTEENTH:
(a) Any merger or consolidation of the Corporation
or any Subsidiary with (i) any Interested Stockholder or (ii) any other
corporation (whether or not itself an Interested Stockholder) which is,
or after such merger or consolidation would be, an Affiliate or
Associate of an Interested Stockholder; or
(b) Any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder of all or a Substantial Part of
the assets of the Corporation or any Subsidiary thereof; or
(c) The issuance, exchange or transfer by the
Corporation or any Subsidiary (in one transaction or a series of
transactions) of any securities of the Corporation or any Subsidiary to
any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder in exchange for cash, securities or other
consideration (or a combination thereof) having an aggregate Fair Market
Value of, equal to or in excess of a Substantial Part of the assets of
the Corporation; or
(d) The adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by or on behalf
of an Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder; or
(e) Any reclassification of securities (including
any reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder; or
(f) Any agreement, contract or other arrangement
with an Interested Stockholder (or in which the Interested Stockholder
has an interest other than proportionately as a stockholder) providing
for any one or more of the actions specified in subsections (a) to (e)
of this Section 1 of this Article THIRTEENTH,
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<PAGE> 16
shall require the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of the then outstanding
shares of capital stock of the Corporation entitled to vote generally in
the election of directors or class of directors (the "Voting Stock"),
voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required or that a
lesser percentage may be specified by law or in any agreement with any
national securities exchange or otherwise.
2. Definition of "Business Combination". The term "Business
Combination" as used in this Article THIRTEENTH shall mean any
transaction which is referred to in any one or more of subsections (a)
through (f) of Section 1.
3. When Higher Vote Is Not Required. The provisions of
Section 1 of this Article THIRTEENTH shall not be applicable to any
particular Business Combination, and such Business Combination shall
require only such affirmative vote, if any, as is required by law and
any other provision of this Certificate of Incorporation or the By-Laws
of the Corporation, if the conditions specified in either of the
following subsections (a) or (b) are met:
(a) Approval by Disinterested Directors. The
Business Combination shall have been approved by a majority of the
Disinterested Directors.
(b) Price and Procedure Requirements. All of the
following eight conditions shall have been met:
(i) The transaction constituting the
Business Combination shall provide that the holders of Common Stock
receive, in exchange for their stock, per share consideration
(consisting of the cash and the Fair Market Value, as of the date of the
consummation of the Business Combination, of consideration other than
cash) at least equal to the highest of the following:
(A) If applicable, the highest per
share price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Stockholder for any share of Common Stock the beneficial ownership of
which it acquired (1) within the two-year period immediately prior to
the initial day in which public trading of the Common Stock occurs
following the first public announcement of the proposed Business
Combination (the "Announcement Date") or (2) in the transaction in which
it became an Interested Stockholder, whichever is higher; or
(B) The Fair Market Value per share
of Common Stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder (the
"Determination Date"), whichever is higher.
All per share prices shall be adjusted to reflect fairly any intervening
stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar event affecting the Common Stock.
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<PAGE> 17
(ii) If the transaction constituting the
Business Combination shall also provide that the holders of any class of
outstanding Voting Stock, other than Common Stock, if any, are to
receive consideration in exchange for their stock, the per share
consideration (consisting of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of
consideration other than cash) shall be at least equal to the highest of
the following (it being intended that the requirements of this
subsection (b)(ii) shall be required to be met with respect to every
class of outstanding Voting Stock, whether or not the Interested
Stockholder beneficially owns any shares of a particular class of Voting
Stock):
(A) If applicable, the highest per
share price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Stockholder for any share of such class of Voting Stock the beneficial
ownership of which it acquired (1) within the two-year period
immediately prior to the Announcement Date or (2) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(B) If applicable, the highest
preferential amount per share to which the holders of shares of such
class of Voting Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
regardless of whether the Business Combination to be consummated
constitutes such an event; or
(C) The Fair Market Value per share
of such class of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
All per share prices shall be adjusted to reflect fairly any intervening
stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar event affecting the Common Stock.
(iii) The consideration to be received by
holders of a particular class of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as was previously
paid by or on behalf of the Interested Stockholder in connection with
its direct or indirect acquisition of beneficial ownership of shares of
such class of Voting Stock. If the Interested Stockholder beneficially
owns shares of any class of Voting Stock which were acquired with
varying forms of consideration, the form of consideration to be received
by holders of such class of Voting Stock shall be either cash or the
form used to acquire the largest number of shares of such class of
Voting Stock beneficially owned by it prior to the Announcement Date.
(iv) After such Interested Stockholder has
become an Interested Stockholder and prior to the consummation of such
Business Combination: (A) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to declare and
pay at the regular date therefor any full quarterly dividends (whether
or not cumulative) on any outstanding preferred stock; and (B) there
shall have been (1) no
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<PAGE> 18
reduction in the annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock)
except as approved by a majority of the Disinterested Directors, and (2)
an increase in such annual rate of dividends (as necessary to prevent
any such reduction) in the event of any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to increase such
annual rate is approved by a majority of the Disinterested Directors.
(v) After such Interested Stockholder has
become an Interested Stockholder, such Interested Stockholder shall not
have received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(vi) A proxy or information statement
describing the proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions replacing such Act,
rules or regulations) shall be mailed by the Interested Stockholder to
all stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
(vii) Such Interested Stockholder shall not
have made any major change in the Corporation's business or equity
capital structure without the approval of the majority of the
Disinterested Directors.
(viii) After such Interested Stockholder has
become an Interested Stockholder and prior to the consummation of such
Business Combination, such Interested Stockholder shall not have become
the beneficial owner of any additional shares of Voting Stock.
4. Certain Definitions. For the purposes of this Article:
(a) The term "person" shall mean any individual,
firm, corporation or other entity and shall include any group comprised
of any person and any other person with whom such person or any
Affiliate or Associate of such person has any agreement, arrangement or
understanding, directly or indirectly, for the purpose of acquiring,
holding, voting or disposing of Voting Stock of the Corporation.
(b) The term "Interested Stockholder" shall mean any
person who or which:
(i) Is at such time the beneficial owner,
directly or indirectly, of shares of the Corporation having more than
fifteen percent (15%) of the voting power of the then outstanding Voting
Stock; or
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<PAGE> 19
(ii) At any time within the two-year period
immediately prior to such time was the beneficial owner, directly or
indirectly, of shares of the Corporation having more than fifteen
percent (15%) of the voting power of the then outstanding Voting Stock;
or
(iii) Is at any time an assignee of or has
otherwise succeeded to the beneficial ownership of any shares of Voting
Stock which were at any time within the two-year period immediately
prior to such time beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933 and such assignment or
succession was not approved by a majority of the Disinterested
Directors;
provided, however, that the term "Interested Stockholder" shall not
include (A) the Corporation or any Subsidiary thereof, (B) any employee
benefit plan of the Corporation or any Subsidiary thereof, (C) any
person holding shares of Voting Stock organized, appointed or
established by the Corporation or any Subsidiary thereof pursuant to the
terms of any such employee benefit plan or any person who, alone or with
its Affiliates or Associates, was the beneficial owner of 15% or more of
the outstanding Voting Stock on June 1, 1991. Notwithstanding the
foregoing, no person shall become an "Interested Stockholder" as the
result of an acquisition of Voting Stock of the Corporation which, by
reducing the number of outstanding shares, increases the proportionate
number of shares beneficially owned by such person to 15% or more of the
Voting Stock of the Corporation then outstanding.
(c) A person shall be a "beneficial owner" of any
shares of Voting Stock:
(i) Which are beneficially owned, directly
or indirectly, by such person or any of its Affiliates or Associates;
(ii) Which such person or any of its
Affiliates or Associates has (A) the right to acquire (whether or not
such right is exercisable immediately) pursuant to any agreement,
arrangement or understanding (other than customary arrangements between
underwriters and selling group members with respect to a bona fide
public offering of securities) or upon the exercise of conversion
rights, exchange rights, warrants or options or otherwise (other than
rights issued under a Stockholder Rights Plan) or (B) the right to vote
pursuant to any agreement, arrangement or understanding (provided that a
person shall not be deemed to be the beneficial owner of any securities
if such agreement or understanding arises solely from a revocable proxy
given in response to a public proxy or consent solicitation); or
(iii) Which are beneficially owned, directly
or indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or understanding
(other than customary arrangements between underwriters and selling
group members with respect to a bona fide public offering of
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<PAGE> 20
securities) for the purpose of acquiring, holding or voting (except
pursuant to a revocable proxy as described in clause (c)(ii)(B) above)
of any shares of Voting Stock.
(d) For the purposes of determining whether a person
is an Interested Stockholder pursuant to subsection 4(b), the number of
shares of Voting Stock deemed to be outstanding shall include shares
deemed owned by an Interested Stockholder through application of
subsection 4(c) but shall not include any other shares of Voting Stock
which may be issuable pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion rights, exchange
rights, warrants or options or otherwise.
(e) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect on June 30, 1991 (the term registrant in said Rule 12b-2 meaning,
in this case, the Corporation).
(f) "Beneficially owned" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on June 15,
1991.
(g) "Disinterested Director" means any member of the
Board of Directors of the Corporation who is not an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder
and who was a member of the Board of Directors on June 15, 1991 or prior
to the time that the Interested Stockholder became an Interested
Stockholder, and any successor of a Disinterested Director who is not an
Interested Stockholder, who is not an Affiliate or Associate of the
Interested Stockholder, and who is recommended or elected to succeed a
Disinterested Director by a majority of the Disinterested Directors then
on the Board of Directors.
(h) "Fair Market Value" means: (i) in the case of
stock, the highest closing sale price during the 30-day period
immediately preceding the date in question of a share of such stock on
the Composite Tape for New York Stock Exchange Listed Stocks or, if such
stock is not quoted on the Composite Tape, on the New York Stock
Exchange or, if such stock is not listed on such Exchange, on the
principal United States securities exchange registered under the
Securities Exchange Act of 1934 on which such registered stock is listed
or, if such stock is not listed on any such exchange, the highest
closing sale price or the highest closing bid quotation, respectively,
with respect to a share of such stock during the 30-day period preceding
the date in question on the National Market System or the National
Association of Securities Dealers, Inc. Automated Quotations System, as
the case may be, or any system then in use or, if no such quotations are
available, the fair market value on the date in question of a share of
such stock as determined by a majority of the Disinterested Directors in
good faith; and (ii) in the case of property other than cash or stock,
the fair market value of such property on the date in question as
determined by the Board of Directors in good faith.
(i) In the event of any Business Combination in
which the Corporation survives, the phrase "consideration other than
cash" as used in subsection 3(b) of this
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Article shall include the shares of Common Stock and/or the shares of
any other class of outstanding Voting Stock retained by the holders of
such shares.
(j) "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the Corporation.
(k) "Substantial Part" of the assets of the
Corporation shall mean more than ten percent (10%) of the fair market
value of the total assets of the Corporation as of the end of its most
recent fiscal quarter ending prior to the time the determination is
made.
5. Power of Board of Directors. The Disinterested Directors
shall have the power and duty to determine for purposes of this Article,
on the basis of information known to them after reasonable inquiry, all
facts necessary to determine compliance with this Article THIRTEENTH,
including, without limitation, (a) whether a person is an Interested
Stockholder, (b) the number of shares of Voting Stock beneficially owned
by any person, (c) whether a person is an Affiliate or Associate of
another, (d) whether the requirements of subsection 3(b) have been met
with respect to any Business Combination and (e) whether the assets
which are the subject of any Business Combination equal or exceed, or
whether the consideration to be received from the issuance or transfer
of securities by the Corporation or any Subsidiary in any Business
Combination equals or exceeds, a Substantial Part of the assets of the
Corporation. Any such determination made in good faith shall be binding
and conclusive.
6. No Effect on Fiduciary Obligations. Nothing contained in
this Article THIRTEENTH shall be construed to relieve any Interested
Stockholder from any fiduciary obligation imposed by law.
7. Consideration. Consideration for shares to be paid to
any stockholder pursuant to this Article shall be the minimum
consideration payable to the stockholder and shall not limit a
stockholder's right under any provision of law or otherwise to receive
greater consideration for any shares of the Corporation.
8. Fiduciary Duty of Directors. The fact that any Business
Combination complies with the provisions of Section 3 of this Article
shall not be construed to impose any fiduciary duty, obligation or
responsibility on the Board of Directors, or any member thereof, to
approve such Business Combination or recommend its adoption or approval
to the stockholders of the Corporation, nor shall such compliance limit,
prohibit or otherwise restrict in any manner the Board of Directors or
any member thereof with respect to evaluations of or actions and
responses taken with respect to such Business Combination.
9. Amendments to Article. Notwithstanding any other
provisions of law, this Certificate of Incorporation or the By-Laws of
the Corporation, and notwithstanding the fact that a lesser percentage
may be specified by law, the affirmative vote of the holders of at least
seventy-five percent (75%) of the votes which all the stockholders would
be
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entitled to cast at any annual election of directors or class of
directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article THIRTEENTH.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate
of Incorporation to be signed by its duly authorized officer on this 27th day of
February, 1995.
BAY NETWORKS, INC.
By: /s/ Montgomery Kerston
------------------------------------
Montgomery Kersten
Vice President, General Counsel
and Secretary
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<PAGE> 1
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION OF
BAY NETWORKS, INC.
(a Delaware corporation)
Bay Networks, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
1. The amendment to the Corporation's Restated Certificate of
Incorporation set forth below was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
2. The first sentence of Article Fourth of the Restated Certificate
of Incorporation of the Corporation is amended to read in its entirety as
follows:
"The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 400,000,000 shares of
Common Stock, $.01 par value per share ("Common Stock"), and (ii)
1,000,000 shares of Preferred Stock, $.001 par value per share
("Preferred Stock")."
IN WITNESS WHEREOF, Bay Networks, Inc. has caused this Certificate to be
signed by its duly authorized officer this 24th day of April, 1998.
BAY NETWORKS, INC.
By: /s/ John J. Poggi, Jr.
-------------------------------------
John J. Poggi, Jr.
Vice President, General Counsel and
Secretary
<PAGE> 1
Exhibit 10.5
BAY NETWORKS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
(As Amended by the Board through February 20, 1998 and
Approved by Stockholders on April 24, 1998)
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 seven million two hundred fifty thousand (7,250,000)
shares of the authorized but unissued common stock of Bay Networks (the
"Shares"). In the event that any Purchase Right
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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.
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;
provided, however, that no Offerings shall commence after April 24, 1998. 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.
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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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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 (the "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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(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 in order to adjust for delays or mistakes in the Company's
processing of subscription agreements,
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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 a Purchase Date (other than the last 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.
(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
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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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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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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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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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Exhibit 10.32
BAY NETWORKS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Bay Networks, Inc. 1998 Employee
Stock Purchase Plan (the "PLAN") is hereby established effective as of the date
of its approval by the stockholders of the Company (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of Company and its stockholders by providing an incentive to attract,
retain and motivate Eligible Employees of the Participating Company Group and by
motivating such persons to contribute to the growth and profitability of the
Participating Company Group. The Plan provides such Eligible Employees with an
opportunity to acquire a proprietary interest in the Company through the
purchase of Stock. The Company intends that the Plan qualify as an "employee
stock purchase plan" under Section 423 of the Code (including any amendments or
replacements of such section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until
the earlier of its termination by the Board or the date on which all of the
shares of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan
but defined for purposes of Section 423 of the Code shall have the same
definition herein. Whenever used herein, the following terms shall have their
respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986,
as amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. 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 amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(d) "COMPANY" means Bay Networks, Inc., a Delaware
corporation, or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any
Offering Period, 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, or any
other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets
the requirements set forth in Section 5 for eligibility to participate in the
Plan.
(g) "EMPLOYEE" means a person treated as an employee
of a Participating Company for purposes of Section 423 of the Code. A
Participant shall be deemed to have ceased to be an Employee either upon an
actual termination of employment or upon the corporation employing the
Participant ceasing to be a Participating Company. For purposes of the Plan, an
individual shall not be deemed to have ceased to be an Employee while such
individual is on any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event an
individual's leave of absence exceeds ninety (90) days, the individual shall be
deemed to have ceased to be an Employee on the ninety-first (91st) day of such
leave unless the individual's right to reemployment with the Participating
Company Group is guaranteed either by statute or by contract. The Company shall
determine in good faith and in the exercise of its discretion whether an
individual has become or has ceased to be an Employee and the effective date of
such individual's employment or termination of employment, as the case may be.
For purposes of an individual's participation in or other rights, if any, under
the Plan as of the time of the Company's determination, all such determinations
by the Company shall be final, binding and conclusive, notwithstanding that the
Company or any governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if
there is then a public market for the Stock, the closing price of a share of
Stock (or the mean of the closing bid and asked prices if the Stock is so quoted
instead) as reported by the New York Stock Exchange (the "NYSE") or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, or as reported in The Wall Street Journal or such
other source as the Company deems reliable; provided, however, that the Fair
Market Value of a share of Stock on the Offering Date of an Offering shall be
the closing price quoted on the NYSE on the last trading day prior to the
Offering Date. If the relevant date does not fall on a day on which the Stock
has traded on such securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date, or such other appropriate day as shall
be determined by the Board, in its sole discretion. If there is then no public
market for the Stock, the Fair Market Value on any relevant date shall be as
determined by the Board.
(i) "OFFERING" means an offering of Stock as
provided in Section 6.
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(j) "OFFERING DATE" means, for any Offering, the
first day of the Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(l) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any
point in time, the Company and all other corporations collectively which are
then Participating Companies.
(p) "PURCHASE DATE" means, for any Offering Period
(or Purchase Period, if so determined by the Board in accordance with Section
6.2), the last day of such period.
(q) "PURCHASE PERIOD" means a period, if any,
established in accordance with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a
share of Stock may be purchased under the Plan, as determined in accordance with
Section 9.
(s) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided in
Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right of
a Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "STOCK" means the common stock of the Company,
as adjusted from time to time in accordance with Section 4.2.
(u) "SUBSCRIPTION AGREEMENT" means a written
agreement in such form as specified by the Company, stating an Employee's
election to participate in the Plan and authorizing payroll deductions under the
Plan from the Employee's Compensation.
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(v) "SUBSCRIPTION DATE" means a date prior to or on
the Offering Date of an Offering Period as the Company shall establish.
(w) "SUBSCRIPTION PERIOD" means the period of time
prior to and including the Offering Date as specified by the Company.
(x) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are
for convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan, of any
form of agreement or other document employed by the Company in the
administration 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 or the 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.
3.2 AUTHORITY OF EXECUTIVE OFFICERS. Any executive officer
of the Company shall have the authority to act on behalf of the Company with
respect to any matter, right, obligation, determination or election that is the
responsibility of or that is allocated to the Company herein, provided that the
executive officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum or maximum payroll deduction amount
required for participation in an Offering, (b) a limitation on the frequency or
number of changes, if any, permitted in the rate of payroll deduction during an
Offering, (c) an exchange ratio applicable to amounts withheld in a currency
other than United States dollars, (d) a payroll deduction greater than or less
than the amount designated by a Participant in order to adjust for the Company's
delay or mistake in processing a Subscription Agreement or in otherwise
effecting a Participant's election under the Plan or as advisable to comply with
the
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requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be equal to the sum of (a) five hundred
thousand (500,000), plus (b) the aggregate number of shares of Stock available
for issuance under the Company's 1994 Employee Stock Purchase Plan (the "1994
PLAN") that are not required to complete all offerings under the 1994 Plan which
are in progress as of the Effective Date and shall consist of authorized but
unissued or reacquired shares of Stock, or any combination thereof; provided,
however, that the aggregate number of shares of Stock issuable under the Plan
shall not exceed five million (5,000,000) shares. If an outstanding Purchase
Right for any reason expires or is terminated or canceled, the shares of Stock
allocable to the unexercised portion of such Purchase Right shall again be
available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the
event of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
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(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, such Employee would own
or hold options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below,
the Plan shall be implemented by Offerings of approximately six (6) months
duration (an "OFFERING PERIOD"). The first Offering Period shall commence on May
1, 1998 and end on the last day of October 1998. Subsequent Offerings shall
commence on the first day of May and November of each year and end on the last
day of the next October and April, respectively, occurring thereafter.
Notwithstanding the foregoing, the Board may establish a different duration for
one or more future Offering Periods or different commencing or ending dates for
such Offering Periods; provided, however, that no Offering Period may have a
duration exceeding twenty-seven (27) months; provided, however, that if the Code
is amended to provide for a different limitation on the maximum duration of an
Offering Period which is different from the limitation set forth in this
sentence, such different limitation shall be deemed incorporated herein. If the
first or last day of an Offering Period is not a day on which the national
securities exchanges are open for trading, the Company shall specify the trading
day that will be deemed the first or last day, as the case may be, of the
Offering Period.
6.2 PURCHASE PERIODS. If the Board so determines, in its
discretion, each Offering Period may consist of two (2) or more consecutive
Purchase Periods having such duration as the Board shall specify, and the last
day of each such Purchase Period shall be a Purchase Date. If the first or last
day of a Purchase Period is not a day on which the national securities exchanges
are open for trading, the Company shall specify the trading day that will be
deemed the first or last day, as the case may be, of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of
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the Company on or before the Subscription Date for such subsequent Offering
Period. An Employee who becomes an Eligible Employee after the Offering Date of
an Offering Period shall not be eligible to participate in such Offering Period
but may participate in any subsequent Offering Period provided such Employee is
still an Eligible Employee as of the Offering Date of such subsequent Offering
Period.
7.2 CONTINUED PARTICIPATION. A Participant shall
automatically participate in the next Offering Period commencing immediately
after the Purchase Date of each Offering Period in which the Participant
participates provided that such Participant remains an Eligible Employee on the
Offering Date of the new Offering Period and has not either (a) withdrawn from
the Plan pursuant to Section 12.1 or (b) terminated employment as provided in
Section 13. A Participant who may automatically participate in a subsequent
Offering Period, as provided in this Section, is not required to deliver any
additional Subscription Agreement for the subsequent Offering Period in order to
continue participation in the Plan. However, a Participant may deliver a new
Subscription Agreement for a subsequent Offering Period in accordance with the
procedures set forth in Section 7.1 if the Participant desires to change any of
the elections contained in the Participant's then effective Subscription
Agreement. Eligible Employees may not participate simultaneously in more than
one Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below,
unless otherwise specified by the Board pursuant to Section 8.3, on the Offering
Date of each Offering Period, each Participant in such Offering Period shall be
granted automatically a Purchase Right consisting of an option to purchase that
number of whole shares of Stock determined by dividing the "Payroll Deduction
Limit" (as defined below) by eighty-five percent (85%) of the Fair Market Value
of a share of Stock on such Offering Date. No Purchase Right shall be granted on
an Offering Date to any person who is not, on such Offering Date, an Eligible
Employee.
8.2 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section 8.2 shall be applied in
conformance with applicable regulations under Section 423(b)(8) of the Code.
8.3 AMENDMENT TO PURCHASE RIGHT PROVISIONS. The Board, in
its discretion, may grant, for any future Offering Period, a Purchase Right
which provides for a different amount of shares of Stock than the amount
described in Section 8.1, including, without limitation, by amending the Payroll
Deduction Limit set forth below. In the event that the Board establishes an
Offering Period of any duration other than six (6) months, the Purchase Right
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described in Section 8.1 shall be appropriately adjusted to reflect the length
of such Offering Period, unless otherwise specified by the Board. In addition,
if the Code is amended to provide for a different limitation on shares
purchasable under Section 423(b)(8) of the Code different than the limitation
described in Section 8.2, such different limitation shall be deemed incorporated
herein to the extent required or permitted by such amendment to the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired
in an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price shall not be less than eighty-five percent (85%) of the lesser of (a) the
Fair Market Value of a share of Stock on the Offering Date of the Offering
Period or (b) the Fair Market Value of a share of Stock on the Purchase Date.
Unless otherwise provided by the Board prior to the commencement of an Offering
Period, the Purchase Price for that Offering Period shall be eighty-five percent
(85%) of the lesser of (a) the Fair Market Value of a share of Stock on the
Offering Date of the Offering Period, or (b) the Fair Market Value of a share of
Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise
provided herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set forth
the percentage of the Participant's Compensation to be deducted on each payday
during an Offering Period in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions made effective following the first payday during an Offering) or more
than ten percent (10%). The maximum amount of payroll deductions for any
six-month Offering Period shall be Five Thousand Forty Dollars ($5,040), which
amount shall be appropriately adjusted in the event that the Board establishes
an Offering Period of other than six (6) months (the "PAYROLL DEDUCTION LIMIT").
Notwithstanding the foregoing, the Board may change the Payroll Deduction Limit
effective as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. 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 herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of
deductions from his or her Compensation once only during an Offering Period.
However, a Participant may elect to decrease the rate of his or her payroll
deductions to zero percent (0%) and such Participant shall
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nevertheless remain a Participant in the current Offering Period unless such
Participant withdraws from the Plan as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The
Company may, in its sole discretion, suspend a Participant's payroll deductions
under the Plan as the Company deems advisable to avoid accumulating payroll
deductions in excess of the amount that could reasonably be anticipated to
purchase the maximum number of shares of Stock permitted during a calendar year
under the limit set forth in Section 8.2. Payroll deductions shall be resumed at
the rate specified in the Participant's then effective Subscription Agreement at
the beginning of the next Offering Period the Purchase Date of which falls in
the following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts
shall be maintained for each Participant. All payroll deductions from a
Participant's Compensation shall be credited to such Participant's Plan 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.
10.6 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Plan and whose
participation in the Offering has not terminated before such Purchase Date shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole shares of Stock determined by dividing (a) the total
amount of the Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. However, in no event shall the
number of shares purchased by the Participant during an Offering Period exceed
the number of shares subject to the Participant's Purchase Right. No shares of
Stock shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering or the Plan has terminated before such Purchase
Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the
number of shares of Stock which might be purchased by all Participants in the
Plan on a Purchase Date exceeds the number of shares of Stock available in the
Plan as provided in Section 4.1, 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. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after
each Purchase Date, the Company shall arrange the delivery to each Participant,
as appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the
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name of the Participant, or, if requested by the Participant, in the name of the
Participant and his or her spouse, or, if applicable, in the names of the heirs
of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase
Right is exercised, in whole or in part, or at the time a Participant disposes
of some or all of the shares of Stock he or she acquires under the Plan, the
Participant shall make adequate provision for the foreign, federal, state and
local tax withholding obligations of the Participating Company Group, if any,
which arise upon exercise of the Purchase Right or upon such disposition of
shares, respectively. The Participating Company Group may, but shall not be
obligated to, withhold from the Participant's compensation the amount necessary
to meet such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the Offering
Period to which the Purchase Right relates shall expire immediately upon the end
of the Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has
exercised all or part of his or her Purchase Right shall receive, as soon as
practicable after the Purchase Date, a report of such Participant's Plan account
setting forth the total payroll deductions accumulated prior to such exercise,
the number of shares of Stock purchased, the Purchase Price for such shares, the
date of purchase and the cash balance, if any, remaining immediately after such
purchase that is to be refunded or retained in the Participant's Plan account
pursuant to Section 11.4. The report required by this Section may be delivered
in such form and by such means, including by electronic transmission, as the
Company may determine.
12. WITHDRAWAL FROM PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may
withdraw from the Plan by signing and delivering to the Company's designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Such withdrawal must be elected at least one (1) month prior to the end
of an Offering Period (unless otherwise specified by the Board). A Participant
who voluntarily withdraws from the Plan is prohibited from resuming
participation in the Plan in the same Offering from which he or she withdrew,
but may participate in any subsequent Offering by again satisfying the
requirements of Sections 5 and 7.1. The Company may impose, from time to time, a
requirement that the notice of withdrawal from the Plan be on file with the
Company's designated office for a reasonable period prior to the effectiveness
of the Participant's withdrawal.
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12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Section 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares of Stock shall be refunded to the Participant as soon as practicable
after the withdrawal, without the payment of any interest, and the Participant's
interest in the Plan shall terminate. Such accumulated payroll deductions to be
refunded in accordance with this Section may not be applied to any other
Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, death or disability, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated may
again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to
have occurred if any of the following occurs with respect to the Company: (i)
the direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the
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Company or multiple Ownership Change Events are related, and its determination
shall be final, binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the
event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"Acquiring Corporation"), may assume the Company's rights and obligations under
the Plan. If the Acquiring Corporation elects not to assume the Company's rights
and obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise
than by will or the laws of descent and distribution and shall be exercisable
during the lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any securities exchange or market system upon which the
Stock may then be listed. In addition, no Purchase Right may be exercised unless
(a) 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 (b) 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. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
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.
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17. 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
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or 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
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section.
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares 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 require that
until such time as a Participant disposes of shares acquired upon exercise of a
Purchase Right, the Participant shall hold all such shares in the Participant's
name (or, if elected by the Participant, in the name of the Participant and his
or her spouse but not in the name of any nominee) until the lapse of the time
periods with respect to such Purchase Right referred to in the preceding
sentence. 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.
20. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, except as permitted under the Plan, and (b) no amendment may
adversely affect a Purchase Right
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previously granted under the Plan (except to the extent permitted by the Plan or
as may be necessary to qualify the Plan as an employee stock purchase plan
pursuant to Section 423 of the Code or to obtain qualification or registration
of the shares of Stock under applicable federal, state or foreign securities
laws). In addition, an amendment to the Plan must be approved by the
stockholders of the Company 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 Participating Companies. In
the event that the Board approves an amendment to increase the number of shares
authorized for issuance under the Plan (the "ADDITIONAL SHARES"), the Board, in
its sole discretion, may specify that such Additional Shares may only be issued
pursuant to Purchase Rights granted after the date on which the stockholders of
the Company approve such amendment, and such designation by the Board shall not
be deemed to have adversely affected any Purchase Right granted prior to the
date on which the stockholders approve the amendment.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Bay Networks, Inc. 1998 Employee Stock Purchase Plan was duly
adopted by the Board of Directors of the Company on February 20, 1998.
/s/ John J. Poggi, Jr.
-----------------------------------------
Secretary
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Exhibit 10.33
BAY NETWORKS, INC.
SIGN-ON STOCK OPTION AGREEMENT
1. Grant of Option. Bay Networks, Inc. (the "Company"), hereby grants
an option (the "Option") to purchase 500,000 shares of common stock of the
Company to David L. House (the "Optionee") on the October 30, 1996 (the "Grant
Date"), with an exercise price of $18.375, purchasable as set forth in and
subject to the terms and conditions of this Option. 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"). The shares covered by this Option shall be registered by the
Company on Form S-8 prior to the date of any vesting.
2. Non-Statutory Stock Option. This Option is not intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
3. Administration. All questions of interpretation concerning this
Option Agreement shall be determined by the Company's Board of Directors (the
"Board") and/or by a duly appointed committee of the Board. Any subsequent
reference to the Board shall also mean the committee if such committee has been
appointed. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option.
4. Term of Option, Continuous Relationship with the Company Required.
(a) Term of Option. The Option term is 18 months from the date of
grant of the Option, subject to automatic 90 day extensions, which may be
multiple, upon notice to the Company by Optionee that Optionee has reasonably
deemed it imprudent to exercise the option or sell the shares covered by the
Option by virtue of such actions potentially giving rise to liability to
litigation (the "Expiration Date").
(b) Except as otherwise provided in this Section 4, this Option
may not be exercised unless the Optionee, at the time he exercises this Option,
is, and has been at all times since the of grant of this Option, an employee,
officer of, or consultant or advisor to, the Company (an "Eligible Optionee").
5. Exercise and Vesting of Option.
(a) Right to Exercise. The Option shall be immediately
exercisable in its entirety, subject to the Optionee's agreement that any
unvested shares purchased upon exercise are subject to the Company's repurchase
right set forth in Section 11
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<PAGE> 2
below ("Unvested Share Repurchase Option"). Except as provided in Section 5(e)
below, the Option may be exercised on or before the Expiration Date and only in
accordance with the terms of this Option Agreement. The certificate or
certificates for the shares as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the Option.
(b) Vesting of Shares. Shares subject to the Option shall vest in
the Optionee on the date occurring one year after the Grant Date ("the Vesting
Date"). Unless otherwise set forth in this Agreement, prior to the Vesting Date
no shares subject to the Option shall vest in the Optionee. Accordingly, prior
to the Vesting Date all shares acquired by the Optionee shall be subject to the
Unvested Share Repurchase Option.
In the event of (a) a merger in which the Company is not the
surviving corporation; (b) a merger in which the Company is the surviving
corporation where the stockholders 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 of the Company
as defined in Section 424(f) of the Code) (a "Change of Control"), then all of
the Option shares shall become vested.
If Optionee's employment with the Company terminates
involuntarily or if Optionee terminates his employment with the Company
voluntarily for "Good Reason" as defined in section 6 of Optionee's Employment
Agreement with the Company dated October 29, 1996, or if the Optionee dies or
becomes partially or permanently disabled while employed by the Company and the
Company appoints a new Chairman of the Board, President or Chief Executive
Officer or takes any action that would constitute "Good Reason" under the
Employment Agreement, prior to the Option shares becoming vested, then all of
the Option shares shall become vested immediately.
(c) Exercise Procedure. Subject to the conditions set forth in
this Agreement, this Option shall be exercised by the Optionee's delivery of
written notice of exercise to the Company, specifying the number of shares to be
purchased and the purchase price to be paid therefor and accompanied by payment
in full in accordance with Section 6 of this Agreement. Such exercise shall be
effective upon receipt by the Company of such written notice together with the
required payment. The Optionee may purchase less than the number of shares
covered hereby, provided that no partial exercise of this Option may be for any
fractional share.
(d) Exercise Period Upon Termination of Relationship with the
Company. If the Optionee ceases to be an Eligible Optionee for any reason, then,
except as provided in paragraphs 5(e) below, the right to exercise this Option
shall terminate three months after such cessation (but in no event after the
Expiration Date), provided
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<PAGE> 3
that this Option shall be exercisable only to the extent that the Option was
unexercised and vested on the date of such cessation. The Company's obligation
to deliver shares upon the exercise of this Option shall be subject to the
satisfaction of all applicable federal, state and local income and employment
tax withholding requirements, arising by reason of this Option being treated as
a nonstatutory stock option or otherwise.
(e) Exercise Period Upon Death or Disability. If the Optionee
dies or becomes disabled (within the meaning of Section 422(e)(3) of the Code)
prior to the Expiration Date while he is an Eligible Optionee, or if the
Optionee dies within three months after the Optionee ceases to be an Eligible
Optionee, this Option shall be exercisable, within the period of one year
following the date of death or disability of the Optionee (whether or not such
exercise occurs before the Expiration Date), by the Optionee, the Optionee's
guardian or legal representative, or by the person to whom this Option is
transferred by will or the laws of descent and distribution, provided that this
Option shall be exercisable only to the extent that this Option was exercisable
by the Optionee and vested on the date of his death or disability. Except as
otherwise indicated by the context, the term "Optionee", as used in this Option,
shall be deemed to include the Optionee's legal guardian or the estate of the
Optionee or any person who acquires the right to exercise this Option by bequest
or inheritance or otherwise by reason of the death of the Optionee.
6. Payment of Purchase Price.
(a) Method of Payment. Payment of the purchase price for shares
purchased upon exercise of this Option shall be made (i) by delivery to the
Company of cash or a check made payable to the order of the Company in an amount
equal to the purchase price of such shares, (ii) subject to the consent of the
Company, by delivery to the Company of shares of common stock of the Company
then owned by the Optionee having a fair market value equal in amount to the
purchase price of such shares being acquired, (iii) by cash for a portion of the
purchase price not less than the par value of the shares being acquired and the
Optionee's promissory note for the balance of the purchase price, (iv) by
Immediate Sales Proceeds, as defined below, or (v) by any combination of the
foregoing. If the Option being exercised is not vested, written notice shall
also be accompanied by an executed copy of the then current form of escrow
instructions as required pursuant to Section 10.
"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
acquired upon the exercise of the Option pursuant to a program and/or procedure
approved by the Company (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 decline to approve any such program and/or procedure.
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<PAGE> 4
Notwithstanding the foregoing, the Option may not be exercised by the
tender of the Company's stock to the extent such tender of stock would
constitute a violation of applicable law, and unless otherwise specified by the
Board at the time the Option is granted, the promissory note permitted in (iii)
above shall be a full recourse note in a form satisfactory to the Company, with
principal payable in four equal annual installments with the first installment
due on the Vesting Date and the last installment due three years from the
Vesting Date, provided, however, that the Optionee shall tender payment of, and
the principal balance of the promissory note shall be reduced by, all principal
which is due and payable as of the date on which the Option is exercised.
Interest on the principal balance of the promissory note shall be payable in
annual installments at the minimum interest rate necessary to avoid imputed
interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured by the shares of stock acquired pursuant to the
then current form of joint escrow instructions as approved by the Company and
subject to Optionee entering into a restricted stock purchase agreement with the
Company with respect to any unvested shares. At any time the Company is 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. Except as the Company in its sole discretion shall determine, the
Optionee shall pay the unpaid principal balance of the promissory note and any
accrued interest thereon upon termination of the Optionee's employment with the
Company for any reason, with or without cause. Except as the Company and the
Optionee otherwise agree, exercise of the Option following the Optionee's
termination of employment with the Company may not be made by delivery of a
promissory note as provided in this Section 6(a).
(b) Valuation of Shares or Other Non-Cash Consideration Tendered
in Payment of Purchase Price. For the purposes hereof, the fair market value of
any share of the Company's common stock or other non-cash consideration which
may be delivered to the Company in exercise of this Option shall be determined
in good faith by the Board.
(c) Delivery of Shares Tendered in Payment of Purchase Price. If
the Optionee exercises Options by delivery of shares of common stock of the
Company, the certificate or certificates representing the shares of common stock
of the Company to be delivered shall be duly executed in blank by the Optionee
or shall be accompanied by a stock power duly executed in blank suitable for
purposes of transferring such shares to the Company. Fractional shares of common
stock of the Company will not be accepted in payment of the purchase price of
shares acquired upon exercise of this Option.
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<PAGE> 5
(d) Restrictions on Use of Option Stock. Notwithstanding the
foregoing, no shares of common stock of the Company may be tendered in payment
of the purchase price of shares purchased upon exercise of this Option if the
shares to be so tendered were acquired within 12 months before the date of such
tender, through the exercise of an Option granted under this Agreement or any
stock option or restricted stock plan of the Company.
7. Delivery of Shares; Compliance With Securities Laws, Etc.
(a) General. Upon payment of the Option price for the number of
shares purchased, the Company shall make prompt delivery of such shares to the
Optionee, provided that if any law or regulation requires the Company to take
any action with respect to such shares before the issuance thereof, then the
date of delivery of such shares shall be extended for the period necessary to
complete such action.
(b) Listing, Qualification, Etc. This Option shall be subject to
the requirement that if counsel to the Company shall determine that the listing,
registration or qualification of the shares subject hereto 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
hereunder, this Option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, disclosure or
satisfaction of such other condition shall have been effected or obtained on
terms acceptable to the Board of Directors.
8. Nontransferability of Option. This Option is personal and no
rights granted hereunder may be transferred, assigned, pledged or hypothecated
in any way (whether by operation of law or otherwise) nor shall any such rights
be subject to execution, attachment or similar process, except that this Option
may be transferred (i) by will or the laws of descent and distribution or (ii)
pursuant to a qualified domestic relations order as defined in Section 414(p) of
the Code. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of this Option or of such rights contrary to the provisions hereof, or
upon the levy of any attachment or similar process upon this Option or such
rights, this Option and such rights shall, at the election of the Company,
become null and void.
9. No Special Employment or Similar Rights. Nothing contained in this
Option shall be construed or deemed by any person under any circumstances to
bind the Company to continue the employment or other relationship of the
Optionee with the Company for the period within which this Option may be
exercised.
10. Rights as a Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares which may be purchased by exercise of
this
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<PAGE> 6
Option (including, without limitation, any rights to receive dividends or
non-cash distributions with respect to such shares) unless and until a
certificate representing such shares is duly issued and delivered to the
Optionee. 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, except as
provided in Section 12 of this Agreement.
11. Unvested Share Repurchase Option. In the event the Optionee's
employment with the Company is terminated for any reason, with or without cause,
or if the Optionee or the Optionee's legal representative or other holder of
shares acquired pursuant to the Option attempts to sell, exchange, transfer,
pledge or otherwise dispose of any shares acquired upon exercise of the Option
which have not vested in the Optionee pursuant to Section 4(c), other than
pursuant to a "Sale of the Company" as defined below, the Company shall have the
right to repurchase the unvested shares under the terms and subject to the
conditions set forth in this Section 11.
(a) Escrow. To ensure that the unvested shares will be available for
repurchase, the Optionee shall deposit the certificates evidencing the shares
which the Optionee purchases upon exercise of an option with an escrow agent
designated by the Company under the terms and conditions of an escrow agreement
approved by the Company. The Company shall bear the expenses of the escrow.
(b) Exercise of Unvested Share Repurchase Option. The Company may
exercise the Unvested Share Repurchase Option by written notice to the escrow
agent and to the Optionee or the Optionee's legal representative within 60 days
after such termination (or exercise of the Option, if later) or after the
Company has received notice of the attempted disposition. If the Company fails
to give notice within such 60 day period, the Unvested Share Repurchase Option
shall terminate unless the Company and the Optionee have extended the time for
the exercise of the Unvested Share Repurchase Option. The Unvested Share
Repurchase Option must be exercised, if at all, for all of the Unvested Shares
except as the Company and the Optionee otherwise agree.
(c) Payment for Shares and Return of Shares. Payment by the Company
to the escrow agent on behalf of the Optionee or the Optionee's legal
representative shall be made in cash within 60 days after the date of the
mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing, cancellation of any promissory note of
the Optionee to the Company shall be treated as payment to the Optionee in cash
to the extent of the unpaid principal and any accrued interest canceled. The
purchase price per share of stock being purchased by the Company shall be an
amount equal to the Optionee's original cost per share as adjusted pursuant to
Section 12. Within 30 days after payment by the Company, the escrow agent shall
deliver the shares which the Company has purchased to the Company and shall
deliver the payment received from the Company to the Optionee.
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<PAGE> 7
(d) Assignment of Unvested Share Repurchase Option. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Board.
(e) Transfers Not Subject to the Unvested Share Repurchase Option.
The Unvested Share Repurchase Option shall not apply to a transfer to the
Optionee's ancestors, descendants or spouse or to a trustee for the benefit of
the Optionee or the Optionee's ancestors, descendants or spouse, provided that
such transferee shall agree in writing (in a form satisfactory to the Board) to
take the stock subject to all the terms and conditions of this Section 11
providing for an Unvested Share Repurchase Option.
(f) Release from Escrow. As soon as practicable after the expiration
of the Unvested Share Repurchase Option and after full repayment of any
promissory note secured by the shares in escrow, the escrow agent shall deliver
to the Optionee the shares no longer subject to such restriction and no longer
security for any promissory note.
(g) Stock Dividends Subject to Stock Option Agreement. If there is
any stock dividend, stock split or other change in the character or amount of
any of the outstanding stock of the corporation the stock of which is subject to
the provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which Optionee is entitled by reason of
Optionee's ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and any security
interest held by the Company with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and such security interest
immediately before such event.
12. Adjustment Provisions.
(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 or decreased or are 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 the
number and kind of shares or other securities subject to any then outstanding
options under this Agreement, and the price for each share subject to any then
outstanding options, without changing the aggregate purchase price as to which
such options remain exercisable.
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<PAGE> 8
(b) Board Authority to Make Adjustments. Any adjustments under
this Section 12 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 pursuant to this
Option on account of any such adjustments.
13. Mergers, Consolidation, Distributions, Liquidations, Etc. In the
event of a merger or consolidation 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 (a "Sale of the
Company"), prior to the Expiration Date or termination of this Option, the Board
of Directors of the Company, in its sole discretion, may 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 this
Stock Option Agreement. Any Options which are neither exercised as of the date
of the Sale of the Company nor assumed by the surviving, continuing, successor,
or purchasing corporation, as the case may be, shall terminate effective as of
the date of the Sale of the Company.
14. Withholding Taxes. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and other amounts payable to the
Optionee by the Company, and otherwise shall make adequate provision for
federal, state and local tax withholding obligations of the Company, if any,
which arise in connection with the Option including, without limitation,
obligations arising upon (i) the exercise of the Option in whole or in part,
(ii) any transfer, in whole or in part, of any shares acquired on exercise of
the Option, (iii) the operation of any federal or state law providing for the
imputation of interest, or (iv) the lapsing of any restriction with respect to
any shares acquired upon exercise of the Option.
15. Legends. The Company may at any time place legends referencing
the Unvested Share Repurchase Option set forth in Section 11, and any applicable
federal and/or state securities restrictions on all certificates representing
shares of stock subject to the provisions of this Agreement. The Optionee shall,
at the request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to this Option in the
possession of the Optionee in order to effectuate the provisions of this Section
15. Unless otherwise specified by the Company, legends placed on such
certificates may include but shall not be limited to the following:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, OR HIS PREDECESSOR IN INTEREST, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION."
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<PAGE> 9
16. 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.
17. Amendment or Termination. The Board may at any time amend or
terminate the Option; provided, however, that no such amendment or termination
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee.
18. 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.
19. Applicable Law. This 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
California.
Optionee's signature below indicates acceptance of the grant and the terms of
the Agreement.
/s/ ARTHUR CARR EFFECTIVE 10/29/96
- ------------------------------------ ------------------
For Bay Networks, Inc. Date
/s/ DAVID L. HOUSE EFFECTIVE 10/29/96
- ------------------------------------ ------------------
Optionee Date
9
<PAGE> 1
Exhibit 10.34
October 1, 1997
Ralph R. Russo
HOME ADDRESS REDACTED
Dear Ralph:
Re: Revised offer of employment
Following up on our recent discussions, I am pleased to summarize the revised
terms we have discussed for your offer of employment.
OFFER OF EMPLOYMENT: On behalf of Bay Networks, Inc., I am pleased to offer you
the position of Executive Vice President, Operations, reporting directly to me
in my capacity as Chairman, President and Chief Executive Officer.
SALARY: Compensation for this position will be at an annualized salary of
$350,000.00, earned at the biweekly rate of $13,461.54.
EXECUTIVE BONUS: In the role of Executive Vice President, Operations, you will
participate in the Fiscal 1998 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 $210,000.00 for full year participation
(July 1, 1997 - June 30, 1998) in the Fiscal Year 1998 plan. Your bonus will be
prorated to reflect your active employment during the fiscal year (for instance,
if you signed on today, at the beginning of the second fiscal quarter, full
pay-out against a $210,000 annual target would be $157,500 for three fiscal
quarters).
STOCK OPTION: Subject to the approval of the Board of Directors, you will be
granted 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. As we
have discussed, I will use my best efforts to obtain Compensation Committee
approval of this option grant as soon as possible after you accept this offer.
BONUS FORFEITURE PAYMENT: We have discussed Bay Networks' intention to assure
that you will not lose the bonus which you have earned this year from your
current employer. Upon your presentation to Bay Networks of written confirmation
that this bonus has been forfeited, you will be entitled to receive from Bay
Networks a Bonus Forfeiture Payment equal to the forfeited amount, but not
exceeding $150,000.00. It is our understanding that the forfeiture amount will
be the earned bonus (i.e., prorated based upon your tenure of participation in
Allied Signal's current bonus plan).
BENEFITS PLANS. You will be entitled to participate in Bay Networks'
comprehensive benefits plans in accordance with their terms, commencing upon
your start date. Benefits information and enrollment materials will be provided
to you on the first Monday following your first day of employment.
<PAGE> 2
SEVERANCE: In the event your employment should be terminated by Bay Networks for
reasons other than articulable due cause, you will receive a severance package
consisting of twelve (12) months base salary; prorated bonus for the year in
which severance occurs, payable at the normal bonus payment date; and, in the
event that the termination by Bay Networks occurs within twelve months of your
start date, acceleration of the vesting of your stock option in the amount of
8,333.334 share for each full month of active employment.
STANDARD TERMS AND CONDITIONS OF EMPLOYMENT: It should be noted that as a
condition of employment, you will be required to sign an agreement which
addresses the issues of confidentiality, conflict of interest, non-competition
during the term of your employment 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.
RESPONSE AND ACCEPTANCE: Please respond to our offer no later than October 3,
1997, and return a signed copy of this offer letter upon your acceptance.
Ralph, 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
Chairman, President and Chief Executive Officer
cc: Jerry Patton
Vice President, Human Resources
Susan E. Keck-Truman
Director, 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 my 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/ Ralph R. Russo 10/3/97
- ---------------------------------- ----------------------
Ralph R. Russo Date
My start date will be: ___________________________
Please print your name as you would like it to appear for business purposes
(nameplate, etc.)
Ralph
- --------------------------------------------------
<PAGE> 1
Exhibit 10.35
BAY NETWORKS, INC.
EXECUTIVE RETENTION AND SEVERANCE PLAN
ADOPTED JANUARY 26, 1998
This Executive Retention and Severance Plan (the "Plan" or "Retention Plan") was
adopted by the Compensation Committee of the Board of Directors of Bay Networks,
Inc. (the "Company") at a meeting held in Santa Clara, California on January 26,
1998, and approved and ratified by the full Board of Directors on January 27,
1998.
BACKGROUND OF THE PLAN
A. The Company draws upon the knowledge, experience and objective advice of
its executives, managers and employees in order to manage its business for
the benefit of the Company's stockholders.
B. Due to the widespread awareness of the possibility of mergers,
acquisitions and other strategic alliances in the telecommunications and
data networking industry, change of control is increasingly an issue in
competitive recruitment efforts.
C. The Company recognizes that if there occurred a change of control or other
event that could substantially change the nature and structure of the
Company, the resulting uncertainty regarding the consequences of such an
event could adversely affect the Company's ability to attract, retain and
motivate its executives and key employees.
D. The Company initiated a project in October, 1997, to evaluate industry
practices and possible standard approaches to the retention and severance
of executives, officers and key employees in the event of a change of
control of the Company.
E. On January 15, 1998, the Compensation Committee reviewed a market analysis
and preliminary recommendations with respect to the adoption of an
executive retention plan, prepared by a team including the Chief Financial
Officer, counsel to the Company, counsel to the Committee and a
compensation consultant.
F. On January 26, 1998, the Compensation Committee of the Company's Board of
Directors reviewed, approved and adopted the general terms of the
Retention Plan, and directed the Company's counsel to prepare definitive
documentation of the Plan.
G. On January 27, 1998 the Retention Plan was approved and ratified by the
Company's Board of Directors.
<PAGE> 2
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 2
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
1. GENERAL
1.1 Purpose. The purpose of this Plan is to provide specified
compensation and benefits to selected Executives, Officers and Key Employees of
the Company in the event of a Termination Upon Change of Control.
1.2 No employment agreement. This Agreement does not obligate the
Company to continue to employ a Plan Participant for any specific period of
time, or in any specific role or geographic location. Subject to the terms of
any applicable written employment agreement between Company and a Participant,
Company may assign a Participant to other duties, and either the Company or
Participant may terminate Participant's employment at any time for any reason.
1.3 Defined terms. Capitalized terms used in this agreement shall have
the meanings set forth in section 4, unless the context clearly requires a
different meaning.
1.4 Delivery of Agreements. The Executives of the Company are authorized
to deliver written Agreements confirming the provisions of this Plan. The
Company may elect not to deliver individual Agreements to each eligible Key
Employee, and shall not be required to deliver an individual agreement to every
Participant; however, the Company may condition a Participant's entitlement to
receive benefits under the Plan on execution of an Agreement.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic Severance Compensation. In the event of a Participant's
Termination Upon Change of Control, the Participant shall be entitled to the
basic severance compensation described below.
2.1.1 Salary. All salary and accrued vacation earned through the
date of Participant's termination of employment shall be paid to Participant.
2.1.2 Expense reimbursement. Within ten (10) days of submission
of proper expense reports, the Company shall reimburse a Participant for all
expenses reasonably and necessarily incurred by the Participant in connection
with the business of the Company prior to Participant's termination of
employment.
2.1.3 Employee benefits. Participant shall receive the benefits,
if any, under the Company's 401(k) Plan, nonqualified deferred compensation
plan, employee stock purchase plan and other Company benefit plans to which
Participant may be entitled pursuant to the terms of such plans.
2.2 Cash Severance Benefits. In the event of a Participant's Termination
Upon Change of Control, Participant shall be entitled to the additional
severance benefits described below.
<PAGE> 3
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 3
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
2.2.1 Prorated bonus payment. A Participant who is an Executive
or Officer shall receive Participant's target bonus or incentive payment for the
year in which termination occurs, pro rated through the date of termination and
less applicable withholding, paid within thirty (30) days of termination of
employment.
2.2.2 Cash severance payment. A lump sum cash severance payment
shall be made:
(a) to each Participant who is a Key Employee, in the amount which is
the greater of (1) one week (i.e., 0.01923) of Target Annual
Earnings for every $10,000.00 of Target Annual Earnings, plus one
week of Target Annual Earnings for every year of Participant's
service to the Company (rounded to the closest year), or (2)
thirteen weeks of Target Annual Earnings;
(b) to each Participant who is an Officer, in the amount of 125% of
annual Target Annual Earnings; and
(c) to each Participant who is an Executive, in the amount of 200% of
Target Annual Earnings.
All cash severance payments shall be reduced by applicable federal and state
withholding, and paid within thirty (30) days of termination of employment.
2.3 Stock option acceleration.
2.3.1 Acceleration at Termination Upon Change of Control.
(a) All outstanding stock options granted and restricted
stock issued by the Company to a Key Employee prior to the Change of Control
shall have their vesting accelerated as to one year of additional vesting as of
the date of such Termination Upon Change of Control.
(b) All outstanding stock options granted and restricted
stock issued by the Company to an Officer prior to the Change of Control shall
have their vesting accelerated as to two years of additional vesting as of the
date of such Termination Upon Change of Control.
(c) All outstanding stock options granted and restricted
stock issued by the Company to an Executive prior to the Change of Control shall
have their vesting fully accelerated so as to be 100% vested on the date of a
Termination Upon Change of Control.
2.3.2 Acceleration upon non-assumption in a Change of Control. If
there is a Change of Control transaction in which outstanding stock options
granted and restricted stock issued by the Company prior to the transaction are
not fully assumed by the Successor, or replaced by fully equivalent substitute
options or restricted stock, then (1) all such options and restricted stock
shall have their vesting fully accelerated to be 100% vested prior to the
effective
<PAGE> 4
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 4
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
date of the Change of Control and (2) the Company shall provide reasonable prior
written notice to Participant of (a) the date such unexercised options will
terminate and (b) the period during which Participant may exercise the fully
vested options. Alternatively, the Company may elect to deliver to Participant
on the effective date of the Change of Control a cash payment equal to the
difference between (i) the aggregate exercise price of Participant's unexercised
options or restricted stock, and (ii) the value of the consideration deliverable
for an equivalent number of shares as a result of the Change of Control
transaction.
2.4 Extended medical and dental benefits.
2.4.1 Benefit continuation. Participant shall receive continued
provision of the Company's standard employee medical and dental insurance
coverages, as elected by the Participant and in effect immediately prior to the
Change of Control, for the measuring period with respect to which Participant
receives a lump sum cash severance payment pursuant to section 2.2.2; plus, for
any Participant who is a consultant to the Company pursuant to section 2.5, an
additional six months.
2.4.2 Continued medical coverage for U.S. residents. Thereafter,
if Participant resides in the United States, Participant shall be entitled to
elect continued medical insurance coverage in accordance with the applicable
provisions of U.S. federal law (COBRA). If such coverage included dependents of
Participant immediately prior to the date of termination, such dependents also
shall be covered at Company expense during the extension period. For purposes of
title X of the Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the
date of the "qualifying event" for Participant and his dependents shall be the
date upon which the Company-paid coverage terminates.
2.4.3 Termination upon coverage under another medical plan.
Notwithstanding the preceding provisions of this section 2.4, in the event a
Participant becomes covered as a primary insured (that is, not as a beneficiary
under a spouse's or partner's plan) under another employer's group health plan
during the continuation period, Participant promptly shall inform the Company
and the Company shall cease provision of continued group health insurance for
Participant and any dependents.
2.5 Consulting contract.
2.5.1 Six-month Consulting Period. If Participant is an
Executive, or an Officer who is either (a) designated as subject to the
reporting requirements of Section 16 of the Securities Exchange Act, or (b)
deemed an affiliate of the Company by the Company's legal counsel prior to a
change of control, then Participant shall be engaged as a consultant to the
Company for a period of six (6) months after Participant's Termination Upon
Change of Control (the "Consulting Period") to provide advice and assist in the
transition occasioned by the Change of Control.
2.5.2 Consulting Fee. A Participant who is engaged as a
consultant pursuant to section 2.5.1 shall receive during the Consulting Period
a consulting fee in the
<PAGE> 5
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 5
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
amount of fifty percent (50%) of Target Annual Earnings, payable in six equal
monthly installments.
2.5.3 Option continuation during Consulting Period. The stock
options of a Participant entitled to be engaged as a consultant shall continue
in effect during the Consulting Period, in accordance with and to the maximum
extent permissible under the terms of the applicable option plans and
agreements.
2.5.4 Other employment not precluded. During the Consulting
Period Participant shall not be precluded from accepting other employment,
provided Participant is available to the Company at such times and for such
consulting matters as the Company may reasonably request.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 280G
3.1 Reimbursement of excise tax payable by an Executive. If (1) any
amounts payable under this Plan to an Executive are characterized as excess
parachute payments pursuant to Section 4999 of the Internal Revenue Code, and
(2) Executive thereby would be subject to any United States federal excise tax
due to that characterization, then (3) the Company shall reimburse the Executive
for the amount of such excise tax; provided, however, that, no reimbursement
shall be made for any excise tax payable with respect to the reimbursement made
pursuant to this section 3.1. The excise tax reimbursement made pursuant to this
section 3.1 shall be subject to all applicable withholding. The foregoing shall
be conditioned upon the Executive cooperating with the Company in such manner as
may be reasonably requested (other than reducing amounts payable hereunder) so
as to minimize the amount of such excise tax.
3.2 Adjustment of excess payments payable to an Officer. If (1) any
amounts payable to an Officer under this Agreement are characterized as excess
parachute payments pursuant to Section 4999 of the Internal Revenue Code, and
(2) Officer thereby would be subject to any United States federal excise tax due
to that characterization, then (3) the Officer may elect, in Officer's sole
discretion, to reduce the amounts payable under this Agreement or to have any
portion of applicable options or restricted stock not vest in order to avoid any
"excess parachute payment" under Section 280G(b)(1) of the Internal Revenue Code
of 1986, as amended.
3.3 Determination by independent public accountants. Unless the Company
and Participant otherwise agree in writing, any determination required under
this Section 3 shall be made in writing by independent public accountants agreed
to by the Company and the Participant (the "Accountants"), whose determination
shall be conclusive and binding upon Participant and the Company for all
purposes. For purposes of making the calculations required by this Section 3,
the Accountants may rely on reasonable, good faith interpretations concerning
the application of Sections 280G and 4999 of the Code. The Company and
Participant shall furnish to the Accountants such information and documents as
the Accountants may reasonably request in order to make the required
determinations. The Company shall bear all fees and expenses the
<PAGE> 6
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 6
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
Accountants may reasonably charge in connection with the services contemplated
by this Section 3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Plan shall
have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Agreement" shall mean a written agreement conforming to the Plan,
prepared and containing such additional terms and conditions as may be approved
by counsel to the Company prior to a Change of Control, delivered by the Company
to an Executive, Officer or other Participant in the Plan.
4.3 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Participant's ability to perform appropriate
employment duties for the Company;
(b) improper disclosure or use of the Company's confidential,
business or proprietary information by Participant;
(c) the Participant's conviction (including any plea of guilty or
nolo contendere) for a crime involving moral turpitude causing material harm to
the reputation and standing of the Company, as determined by the Company in good
faith; or
(d) gross negligence or willful misconduct in the performance of
Participant's assigned duties (but not mere unsatisfactory performance).
4.4 "Change of Control" means:
(a) 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 a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the Company or (B) the combined voting
power of the Company's then-outstanding securities;
(b) the Company is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
<PAGE> 7
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 7
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
(c) the sale or disposition of all or substantially all of the
Company's assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of
Directors of the Company within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.5 "Company" shall mean Bay Networks, Inc., and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Agreement.
4.6 "Effective Date" means (a) with respect to this Plan, January 27,
1998, and (b) with respect to an Agreement either (1) January 27, 1998 or (2)
such later date as a Participant becomes entitled to participate in the Plan as
a Key Employee, Officer or Executive.
4.7 "Executive" shall mean each officer of the Company elected by the
Board of Directors to serve as an Executive Vice President or as the Chief
Executive Officer as of the Effective Date of the Plan, and such additional
individuals as may be designated thereafter by the Compensation Committee of the
Board of Directors.
4.8 "Good Reason" means the occurrence of any of the following
conditions following a Change of Control, without Participant's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from Participant of such condition(s):
(a) a material decrease in Participant's base salary or target
bonus amount;
(b) the relocation of Participant's work place for the Company to
a location more than 50 miles from the location of the work place prior to the
Change of Control;
(c) in the case of an Executive or Officer, assignment to
responsibilities or duties that are not a Substantive Functional Equivalent (as
defined in this Plan or in an Agreement) of the position which the Executive or
Officer occupied prior to the Change of Control; or
(d) with respect to any individual Participant, any material
breach by the Company of the terms of this Plan or of an Agreement with the
Participant.
4.9 "Incumbent Director" shall mean a director who either (1) is a
director of the Company as of the Effective Date of this Agreement, or (2) is
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 (3) was not elected or
<PAGE> 8
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 8
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
nominated in connection with an actual or threatened proxy contest relating to
the election of directors to the Company.
4.10 "Key Employee" shall mean each employee of the Company who is
designated as a participant in the Key Employees Incentive Plan (KEIP), and such
additional non-officer employees as may be designated from time to time by the
Chief Executive Officer or the Compensation Committee of the Board of Directors.
4.11 "Officer" shall mean each officer of the Company serving with the
title of Senior Vice President or Vice President at the Effective Date of the
Plan, and such additional individuals as may be thereafter appointed to such
offices with the approval of the Compensation Committee of the Board of
Directors.
4.12 "Participant" shall mean a Key Employee, Officer or Executive of
the Company, and such additional individuals as may be designated to participate
in the Plan by the Compensation Committee of the Board of Directors.
4.13 "Permanent Disability" means that:
(a) the Participant has been incapacitated by bodily injury,
illness or disease so as to be prevented thereby from engaging in the
performance of the Participant's duties;
(b) such total incapacity shall have continued for a period of
six consecutive months; and
(c) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
4.14 "Substantive Functional Equivalent" means, with respect to a
Participant who is an Executive or Officer, an employment position occupied
after a Change of Control that:
(a) is in a substantive area of competence (such as, accounting;
engineering management; executive management; finance; human resources;
marketing, sales and service; operations and manufacturing; etc.) that is
consistent with Participant's experience and not materially different from the
position occupied prior to the Change of Control;
(b) requires Participant to serve in a role and perform duties
that are functionally equivalent to those performed prior to the Change of
Control;
(c) carries a title that does not connote a lesser rank or
corporate role than the title held by Participant prior to the Change of
Control;
(d) does not otherwise constitute a material, adverse change in
Participant's responsibilities or duties, as measured against Participant's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
<PAGE> 9
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 9
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
(e) if prior to the Change of Control Participant was identified
as an executive officer of the Company for purposes of the rules promulgated
under Section 16 of the Securities Exchange Act of 1934, identifies Participant
as a Section 16 officer of a publicly traded Successor having net assets and
annual revenues no less than those of the Company prior to the Change of
Control; and
(f) if prior to the Change of Control Participant was identified
as an executive officer of the Company, for purposes of the rules promulgated
under Section 16 of the Securities Exchange Act of 1934, requires Participant to
report directly to an executive officer, committee or board of the Successor
that is no less senior than the executive officer, committee or board, as the
case may be, to whom Participant reported at the Company prior to the Change of
Control.
4.15 "Successor" means the Company as defined above and any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company.
4.16 "Target Annual Earnings" means the sum of annual base salary plus
100% of annual bonus or incentive pay. If different sums would result from
calculations as of (a) the date thirty (30) days prior to the date that the
Company publicly announces it is conducting negotiations leading to a Change of
Control, (b) the date on which a Change of Control occurs or (c) the date of a
Participant's Termination Upon Change of Control, then Target Annual Earnings
shall be determined by the calculation as of the specified date that yields the
highest value.
4.17 "Termination Upon Change of Control" means:
(a) any termination of the employment of a Participant by the
Company without Cause during the period commencing thirty (30) days prior to the
earlier of (1) the date that the Company first publicly announces it is
conducting negotiations leading to a Change of Control, or (2) the date that the
Company enters into a definitive agreement that would result in a Change of
Control (even though still subject to approval by the Company's stockholders and
other conditions and contingencies); and ending on the date which is twelve (12)
months after the Change of Control; or
(b) any resignation by a Participant for Good Reason, as defined
in this Plan or in an Agreement, within twelve (12) months after the occurrence
of any Change of Control; but
(c) "Termination Upon Change of Control" shall not include any
termination of the employment of a Participant (1) by the Company for Cause; (2)
by the Company as a result of the Permanent Disability of the Participant; (3)
as a result of the death of the Participant; or (4) as a result of the voluntary
termination of employment by the Participant for reasons other than Good Reason.
<PAGE> 10
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 10
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Termination Upon Change of Control. The payments and
benefits provided for in Sections 2 and 3 shall constitute the Participant's
sole and exclusive remedy for any alleged injury or other damages arising out of
the cessation of the employment relationship between the Participant and the
Company in the event of Participant's Termination Upon Change of Control.
5.2 No other benefits payable. The Participant shall be entitled to no
other compensation, benefits, or other payments from the Company as a result of
any termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Participant, except as
expressly set forth in a written agreement or in a duly executed employment
agreement between Company and Participant.
5.3 Release of Claims. The Company may condition payment of the cash
severance benefits described in section 2.2 of this Plan and the stock option
acceleration described in section 2.3 upon the delivery by Participant of a
signed release of claims in a form reasonably satisfactory to the Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The forms of Agreement shall provide that Participant agrees to continue to
abide by the terms and conditions of the Company's confidentiality and/or
proprietary rights agreement between the Participant and the Company.
7. NON-SOLICITATION
7.1 Agreement not to solicit. The forms of Agreement shall provide that
if the Company performs its obligations to deliver the severance benefits set
forth in sections 2 and 3 of the Plan, then for a period of one (1) year after
Participant's Termination Upon Change of Control, Participant will not, directly
or indirectly, solicit the services or business of or in any other manner
persuade any employee, distributor, vendor, representative or customer of the
Company to discontinue that person's or entity's relationship with or to the
Company.
7.2 Other agreements not superseded. This provision shall not supersede
or limit the terms, including more restrictive terms, of any other agreement by
Participant to refrain from competition with or from soliciting the employees or
customers of Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of the Plan, the interpretation, validity or enforceability of an
Agreement or the alleged breach thereof shall be submitted by the parties to
binding arbitration by the American Arbitration Association; provided, however,
that (1) the arbitrator shall have no authority to make any ruling or judgment
that would confer any rights with respect to the trade secrets,
<PAGE> 11
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 11
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
confidential and proprietary information or other intellectual property of the
Company upon Participant or any third party; and (2) this arbitration provision
shall not preclude the Company from seeking legal and equitable relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall
be, at Participant's election, either (1) Santa Clara County, California or (2)
Middlesex County, Massachusetts or (3) if Participant's primary assigned work
place prior to the Change of Control was in neither California nor
Massachusetts, a mutually agreed site located within 25 miles of that work
place.
8.3 Cost and expenses borne by Company. All costs and expenses of
arbitration or litigation arising out of the Plan or an Agreement, including but
not limited to reasonable attorneys fees and other costs reasonably incurred by
a Participant, shall be paid by the Company. Notwithstanding the foregoing, if a
Participant initiates the arbitration or litigation, and the finder of fact
finds that Participant's claims were totally without merit or frivolous, then
the Participant shall be responsible for Participant's own attorneys' fees.
9. INTERPRETATION
The Plan and any Agreement shall be interpreted in accordance with and governed
by the laws of the State of California as applied to contracts entered into and
entirely to be performed within that state.
10. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS
10.1 Effect of Agreement. A signed Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Plan and shall be the exclusive agreement for the determination
of any payments and accelerated option vesting due upon Participant's
Termination Upon Change of Control, except as provided in sections 10.2, 10.3
and 14.
10.2 No limitation of regular benefit plans. This Plan is not intended
to and shall not affect, limit or terminate any plans, programs, or arrangements
of the Company that are regularly made available to a significant number of
employees, officers or executives of the Company, including without limitation
the Company's stock option plans.
10.3 Noncumulation of benefits. Participant may not cumulate cash
severance payments, stock option acceleration and excise tax reimbursement
benefits under both this Plan and another agreement. If Participant has any
other binding written agreement with the Company which provides that upon a
Change of Control or termination of employment the Participant shall receive one
or more of the benefits described in sections 2 and 3 of this Plan (i.e., the
payment of cash compensation or prorated bonus, acceleration of vesting of stock
option or restricted stock
<PAGE> 12
EXECUTIVE RETENTION AND SEVERANCE PLAN PAGE 12
ADOPTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF BAY NETWORKS, INC.
rights, and adjustments or payments relating to federal excise tax), then with
respect to those benefits the aggregate amounts payable under this Plan shall be
reduced by the amounts paid or payable under such other and separate agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any Successor
expressly, absolutely and unconditionally to assume and agree to perform this
Plan in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
Failure of the Company to obtain such agreement shall be a material breach of
each Agreement.
11.2 Heirs and representatives of Participant. Agreements issued under
the Plan shall inure to the benefit of and be enforceable by a Participant's
personal and legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees.
12. NOTICES
For purposes of this Plan, notices and all other communications permitted or
provided for in an Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, as follows:
if to the Company: Bay Networks, Inc.
Attention: General Counsel
4401 Great America Parkway
Santa Clara, CA 95052
and if to the Participant at the most recent address recorded in the records of
the Company. Either party may provide the other with notices of change of
address, which shall be effective upon receipt.
13. VALIDITY
13.1 Invalid provisions. If any one or more of the provisions (or any
part thereof) of this Plan shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
13.2 Execution of Agreements by two Company executives or directors.
Each Agreement and any modifications or amendments shall require the signatures
of two executive officers or members of the Board of Directors to be binding on
Company.
14. EFFECTIVE DATE
The Effective Date of this Plan is January 27, 1998.
<PAGE> 1
Exhibit 10.36
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT
Effective Date: January 27, 1998
This Executive Retention and Severance Agreement (the "Agreement") is made and
entered into as of the date written above (the "Effective Date"), by and between
Bay Networks, Inc., a Delaware corporation (the "Company")
4401 Great America Parkway
Santa Clara, California 95052
and
David L. House ("Executive")
residing at HOME ADDRESS REDACTED
RECITALS
A. The Executive is Chairman of the Board of Directors, President and Chief
Executive Officer of Bay Networks, Inc. and possesses valuable knowledge
of the Company, its business and operations and the markets in which the
Company competes.
B. The Company draws upon the knowledge, experience and objective advice of
Executive in order to manage its business for the benefit of the
Company's stockholders.
C. The Company recognizes that if there occurred a change of control or
other event that could substantially change the nature and structure of
the Company, the resulting uncertainty regarding the consequences of
such an event could adversely affect the Company's ability to attract,
retain and motivate its key employees, including Executive.
D. On January 26, 1998, the Compensation Committee of the Company's Board
of Directors approved the Executive Retention and Severance Plan,
authorizing the terms of this Agreement.
E. The Company believes that the existence of this Agreement will serve as
an incentive to Executive to remain in the employ of the Company, and
would enhance
<PAGE> 2
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 2
the Company's ability to call on and rely upon the Executive if a change
of control event were to occur.
F. The Company and the Executive desire to enter into this Agreement in
order (1) to encourage Executive to continue to devote Executive's full
attention and dedication to the success of the Company, and (2) to
provide specified compensation and benefits to the Executive in the
event of a Termination Upon Change of Control, pursuant to the terms of
this Agreement.
THE COMPANY AND EXECUTIVE AGREE AS FOLLOWS:
1. GENERAL
1.1 Purpose. The purpose of this Agreement is to provide specified
compensation and benefits to the Executive in the event of a Termination Upon
Change of Control.
1.2 No employment agreement. This Agreement does not obligate the
Company to continue to employ Executive for any specific period of time, or in
any specific role or geographic location. Subject to the terms of any applicable
written employment agreement between Company and Executive, Company may assign
Executive to other duties, and either Executive or Company may terminate
Executive's employment at any time for any reason.
1.3 Defined terms. Capitalized terms used in this agreement shall have
the meanings set forth in section 4, unless the context clearly requires a
different meaning.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic Severance Compensation. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the basic
severance compensation described below.
2.1.1 All salary and accrued vacation earned through the date of
Executive's termination shall be paid to Executive.
2.1.2 Within ten (10) days of submission of proper expense
reports by the Executive, the Company shall reimburse the Executive for all
expenses reasonably and necessarily incurred by the Executive in connection with
the business of the Company prior to Executive's termination of employment.
2.1.3 Executive shall receive the benefits, if any, under the
Company's 401(k) Plan, nonqualified deferred compensation plan, employee stock
purchase plan and
<PAGE> 3
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 3
other Company benefit plans to which Executive may be entitled pursuant to the
terms of such plans.
2.2 Executive Cash Severance Benefits. In the event of the
Executive's Termination Upon Change of Control, Executive shall be entitled to
the additional executive severance benefits described below.
2.2.1 Prorated bonus payment. Executive shall receive
Executive's target bonus or incentive payment for the year in which termination
occurs, pro rated through the date of termination and less applicable
withholding, paid within thirty (30) days of termination of employment.
2.2.2 Cash severance payment. Executive shall receive a lump sum
payment in the amount of 200% of Executive's Target Annual Earnings, less
applicable federal and state withholding, paid within thirty (30) days of
termination of employment.
2.3 Stock option acceleration.
2.3.1 Acceleration at Termination Upon Change of Control. All
outstanding stock options granted and restricted stock issued by the Company to
the Executive prior to the Change of Control shall have their vesting fully
accelerated so as to be 100% vested on the date of a Termination Upon Change of
Control.
2.3.2 Acceleration upon non-assumption in a Change of Control.
If there is a Change of Control transaction in which outstanding stock options
granted and restricted stock issued by the Company prior to the transaction are
not fully assumed by the Successor, or replaced by fully equivalent substitute
options or restricted stock, then (1) all such options and restricted stock
shall have their vesting fully accelerated to be 100% vested prior to the
effective date of the Change of Control and (2) the Company shall provide
reasonable prior written notice to Executive of (a) the date such unexercised
options will terminate and (b) the period during which Executive may exercise
the fully vested options. Alternatively, the Company may elect to deliver to
Executive on the effective date of the Change of Control a cash payment equal to
the difference between (i) the aggregate exercise price of Executive's
unexercised options or restricted stock, whether vested unvested, and (ii) the
value of the consideration deliverable for an equivalent number of shares as a
result of the Change of Control transaction.
2.4 Extended medical and dental benefits.
2.4.1 Benefit continuation for thirty months. Executive shall
receive continued provision of the Company's standard employee medical and
dental insurance coverages, as elected by the Executive and in effect
immediately prior to the Change of Control, for thirty (30) months following the
date of termination.
2.4.2 Continued medical coverage for U.S. residents. Thereafter,
if Executive resides in the United States, Executive shall be entitled to elect
continued
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EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 4
medical insurance coverage in accordance with the applicable provisions of U.S.
federal law (COBRA). If such coverage included the Executive's dependents
immediately prior to the date of termination, such dependents also shall be
covered at Company expense during the extension period. 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.
2.4.3 Termination upon coverage under another plan.
Notwithstanding the preceding provisions of this section 2.4, in the event
Executive becomes covered as a primary insured (that is, not as a beneficiary
under a spouse's or partner's plan) under another employer's group health plan
during the period provided for herein, Executive promptly shall inform the
Company and the Company shall cease provision of continued group health
insurance for Executive and any dependents.
2.5 Consulting contract.
2.5.1 Six-month Consulting Period. Executive shall be engaged as
a consultant to the Company for a period of six (6) months after a Termination
Upon Change of Control (the "Consulting Period") to provide advice and assist in
the transition occasioned by the Change of Control.
2.5.2 Consulting Fee. During the Consulting Period Executive
shall receive a consulting fee in the amount of fifty percent (50%) of Target
Annual Earnings, payable in six equal monthly installments.
2.5.3 Option continuation during Consulting Period. Executive's
stock options, if any, shall continue in effect during the Consulting Period, in
accordance with and to the maximum extent permissible under the terms of the
applicable option plans and agreements.
2.5.4 Other employment not precluded. During the Consulting
Period Executive shall not be precluded from accepting other employment,
provided Executive is available to the Company at such times and for such
consulting matters as the Company may reasonably request.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 280G
3.1 Reimbursement of excise tax. If (1) any amounts payable under this
Agreement are characterized as excess parachute payments pursuant to Section
4999 of the Internal Revenue Code, and (2) Executive thereby would be subject to
any United States federal excise tax due to that characterization, then (3) the
Company shall reimburse the Executive for the amount of such excise tax;
provided, however, that, no reimbursement shall be made for any excise tax
payable with respect to the reimbursement made pursuant to this section 3.1. The
excise tax reimbursement made pursuant to this section 3.1 shall be subject to
all applicable withholding. The foregoing
<PAGE> 5
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 5
shall be conditioned upon the Executive cooperating with the Company in such
manner as may be reasonably requested (other than reducing amounts payable
hereunder) so as to minimize the amount of such excise tax.
3.2 Determination by independent public accountants. Unless the
Company and Executive otherwise agree in writing, any determination required
under this Section 3 shall be made in writing by independent public accountants
agreed to by the Company and the Executive (the "Accountants"), whose
determination shall be conclusive and binding upon Executive and the Company for
all purposes. For purposes of making the calculations required by this Section
3, the Accountants may rely on reasonable, good faith interpretations concerning
the application of Sections 280G and 4999 of the Code. The Company and Executive
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make the required determinations.
The Company shall bear all fees and expenses the Accountants may reasonably
charge in connection with the services contemplated by this Section 3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Agreement
shall have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Executive's ability to perform appropriate employment
duties under this Agreement;
(b) improper disclosure or use of the Company's confidential,
business or proprietary information by Executive;
(c) the Executive's conviction (including any plea of guilty or
nolo contendere) for a crime involving moral turpitude causing material harm to
the reputation and standing of the Company, as determined by the Company in good
faith; or
(d) gross negligence or willful misconduct in the performance of
Executive's assigned duties (but not mere unsatisfactory performance).
4.3 "Change of Control" means:
(a) 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 a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the
<PAGE> 6
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 6
Company or (B) the combined voting power of the Company's then-outstanding
securities;
(b) the Company is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(c) the sale or disposition of all or substantially all of the
Company's assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of
Directors of the Company within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.4 "Company" shall mean Bay Networks, Inc., and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Agreement.
4.5 "Effective Date" means, with respect to this Agreement, (1) January
27, 1998 or (2) such later date as Executive first became an officer of the
Company.
4.6 "Good Reason" means the occurrence of any of the following
conditions following a Change of Control, without Executive's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from Executive of such condition(s):
(a) a material decrease in Executive's base salary or target
bonus amount;
(b) assignment of Executive to responsibilities or duties that
are not a Substantive Functional Equivalent of the position which Executive
occupied prior to the Change of Control;
(c) the relocation of Executive's work place for the Company to
a location more than 50 miles from the location of the work place prior to the
Change of Control; or
(d) any material breach of this Agreement by the Company.
4.7 "Incumbent Director" shall mean a director who either (1) is a
director of the Company as of the Effective Date of this Agreement, or (2) is
elected, or nominated for election, to the Board of Directors of the Company
with the affirmative votes of at
<PAGE> 7
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 7
least a majority of the Incumbent Directors at the time of such election or
nomination, but (3) was not elected or nominated in connection with an actual or
threatened proxy contest relating to the election of directors to the Company.
4.8 "Permanent Disability" means that:
(a) the Executive has been incapacitated by bodily injury,
illness or disease so as to be prevented thereby from engaging in the
performance of the Executive's duties;
(b) such total incapacity shall have continued for a period of
six consecutive months; and
(c) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
4.9 "Substantive Functional Equivalent" means an employment position
occupied by an Executive after a Change of Control that:
(a) is in a substantive area of competence (such as, accounting;
engineering management; executive management; finance; human resources;
marketing, sales and service; operations and manufacturing; etc.) that is
consistent with Executive's experience and not materially different from the
position occupied prior to the Change of Control;
(b) requires Executive to serve in a role and perform duties
that are functionally equivalent to those performed prior to the Change of
Control as the Chairman of the Board of Directors, President and Chief Executive
Officer;
(c ) carries a title that does not connote a lesser rank or
corporate role than the title of Chairman of the Board of Directors, President
and Chief Executive Officer held by Executive prior to the Change of Control;
(d) does not otherwise constitute a material, adverse change in
Executive's responsibilities or duties, as measured against Executive's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
(e) is identified as an executive officer, for purposes of the
rules promulgated under Section 16 of the Securities Exchange Act of 1934, of a
publicly traded Successor having net assets and annual revenues no less than
those of the Company prior to the Change of Control; and
(f) reports directly to an executive officer, committee or board
of the Successor that is no less senior than the executive officer, committee or
board, as the case may be, to whom Executive reported at the Company prior to
the Change of Control.
<PAGE> 8
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 8
4.10 "Successor" means the Company as defined above and any successor or
assign to substantially all of its business and/or assets.
4.11 "Target Annual Earnings" means the sum of annual base salary plus
100% of annual bonus or incentive pay. If different sums would result from
calculations as of (a) the date thirty (30) days prior to the date that the
Company publicly announces it is conducting negotiations leading to a Change of
Control, (b) the date on which a Change of Control occurs or (c) the date of
Executive's Termination Upon Change of Control, then Target Annual Earnings
shall be determined by the calculation as of the specified date that yields the
highest value.
4.12 "Termination Upon Change of Control" means:
(a) any termination of the employment of the Executive by the
Company without Cause during the period commencing thirty (30) days prior to the
earlier of (1) the date that the Company first publicly announces it is
conducting negotiations leading to a Change of Control, or (2) the date that the
Company enters into a definitive agreement that would result in a Change of
Control (even though still subject to approval by the Company's stockholders and
other conditions and contingencies); and ending on the date which is twelve (12)
months after the Change of Control; or
(b) any resignation by the Executive for Good Reason within
twelve (12) months after the occurrence of any Change of Control; but
(c) "Termination Upon Change of Control" shall not include any
termination of the employment of the Executive (1) by the Company for Cause; (2)
by the Company as a result of the Permanent Disability of the Executive; (3) as
a result of the death of the Executive; or (4) as a result of the voluntary
termination of employment by the Executive for reasons other than Good Reason.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Termination Upon Change of Control.The payments and
benefits provided for in Sections 2 and 3 shall constitute the Executive's sole
and exclusive remedy for any alleged injury or other damages arising out of the
cessation of the employment relationship between the Executive and the Company
in the event of Executive's Termination Upon Change of Control.
5.2 No other benefits payable. The Executive shall be entitled to no
other compensation, benefits, or other payments from the Company as a result of
any termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Executive, except as
expressly set forth in this Agreement or, subject to the provisions of sections
10 and 14, in a duly executed employment agreement between Company and
Executive.
<PAGE> 9
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 9
5.3 Release of Claims. The Company may condition payment of the cash
severance and consulting benefits described in sections 2.2 and 2.5 of this
Agreement and the stock option acceleration described in section 2.3.1 upon the
delivery by Executive of a signed release of claims in a form reasonably
satisfactory to the Company; provided, however, that Executive shall not be
required to release any rights Executive may have to be indemnified by the
Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Executive agrees to continue to abide by the terms and conditions of the
Company's confidentiality and/or proprietary rights agreement between the
Executive and the Company.
7. NON-SOLICITATION
7.1 Agreement not to solicit. If Company performs its obligations to
deliver the severance benefits set forth in sections 2 and 3 of this Agreement,
then for a period of one (1) year after Executive's Termination Upon Change of
Control, Executive will not, directly or indirectly, solicit the services or
business of or in any other manner persuade any employee, distributor, vendor,
representative or customer of the Company to discontinue that person's or
entity's relationship with or to the Company.
7.2 Other agreements not superseded. This provision shall not supersede
or limit the terms, including more restrictive terms, of any other agreement by
Executive to refrain from competition with or from soliciting the employees or
customers of Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of this Agreement, the interpretation, validity or enforceability of
this Agreement or the alleged breach thereof shall be submitted by the parties
to binding arbitration by the American Arbitration Association; provided,
however, that (1) the arbitrator shall have no authority to make any ruling or
judgment that would confer any rights with respect to the trade secrets,
confidential and proprietary information or other intellectual property of the
Company upon Executive or any third party; and (2) this arbitration provision
shall not preclude the Company from seeking legal and equitable relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall
be, at Executive's election, either (1) Santa Clara County, California or (2)
Middlesex County, Massachusetts or (3) if Executive's primary assigned work
place prior to the Change of Control was in neither California nor
Massachusetts, a mutually agreed site located within 25 miles of that work
place.
<PAGE> 10
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 10
8.3 Cost and expenses borne by Company. All costs and expenses of
arbitration or litigation, including but not limited to reasonable attorneys
fees and other costs reasonably incurred by the Executive, shall be paid by the
Company. Notwithstanding the foregoing, if the Executive initiates the
arbitration or litigation, and the finder of fact finds that Executive's claims
were totally without merit or frivolous, then Executive shall be responsible for
Executive's own attorneys' fees.
9. INTERPRETATION
Executive and the Company agree that this Agreement shall be interpreted in
accordance with and governed by the laws of the State of California as applied
to contracts entered into and entirely to be performed within that state.
10. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS
10.1 Effect of Agreement. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments and accelerated option vesting due upon
Executive's Termination Upon Change of Control, except as provided in sections
10.2, 10.3 and 14.
10.2 No limitation of regular benefit plans. This Agreement is not
intended to and shall not affect, limit or terminate any plans, programs, or
arrangements of the Company that are regularly made available to a significant
number of employees or officers of the Company, including without limitation the
Company's stock option plans.
10.3 Noncumulation of cash benefits. Executive may not cumulate cash
severance payments and excise tax reimbursement benefits under both this
Agreement and another agreement. If Executive has any other binding written
agreement with the Company which provides that upon a Change of Control or
termination of employment the Executive shall receive one or more of the
benefits described in sections 2.2, 2.5 and 3 of this Agreement (i.e., the
payment of cash compensation or prorated bonus, post-termination consulting and
adjustments or payments relating to federal excise tax), then with respect to
each such benefit the amount payable under this Agreement shall be reduced by
the corresponding amount paid or payable under such other agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such agreement shall be a material
breach of this Agreement.
<PAGE> 11
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 11
11.2 Acknowledgement by Company. If after a Change of Control the
Company (or any Successor) fails to reasonably confirm that it has performed the
obligation described in section 11.1 within ten (10) days after written notice
from Executive, Executive shall be entitled to terminate Executive's employment
with the Company for Good Reason, and to receive the benefits provided under
this Agreement in the event of Termination Upon Change of Control.
11.3 Heirs and representatives of Executive. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
12. NOTICES
For purposes of this Agreement, notices and all other communications provided
for in the Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, as follows:
if to the Company: Bay Networks, Inc.
Attention: General Counsel
4401 Great America Parkway
Santa Clara, CA 95052
and if to the Executive at the address specified on the first page of this
Agreement. Either party may provide the other with notices of change of address,
which shall be effective upon receipt.
13. NO REPRESENTATIONS
Executive acknowledges that in entering into this Agreement, Executive is not
relying and has not relied on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.
14. MODIFICATION AND AMENDMENT
This Agreement may be modified, amended or superseded only by a supplemental
written agreement signed with the same formality as this Agreement by Executive
and by the Company. However, the noncumulation of benefits provision of section
10.3 shall apply to any subsequent agreement, unless (1) such provision is
explicitly disclaimed in the subsequent agreement, and (2) the subsequent
agreement has been authorized by the Company's Board of Directors or a committee
thereof.
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EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 12
15. VALIDITY
15.1 Invalid provisions. If any one or more of the provisions (or any
part thereof) of this Agreement shall be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
15.2 Execution by two Company executive officers or directors. This
Agreement and any modifications or amendments shall require the signatures of
two executive officers or members of the Board of Directors of the Company.
15.3 Consultation with legal and financial advisers. Executive
acknowledges that this Agreement confers significant legal rights, and may also
involve the waiver of rights under other agreements; that Company has encouraged
Executive to consult with Executive's personal legal and financial advisers; and
that Executive has had adequate time to consult with Executive's advisers before
signing this agreement.
16. SIGNATURES
The parties have executed this Agreement, intending to be legally bound as of
the Effective Date.
EXECUTIVE BAY NETWORKS, INC.
/s/ David L. House By: /s/ Arthur Carr
- ---------------------------------- ---------------------------------------
Executive's signature Printed name: Arthur Carr
----------------------------
Printed name: David L. House Title: Director
-------------------- ----------------------------------
By: /s/ Shelby H. Carter, Jr.
---------------------------------------
Printed name: Shelby H. Carter, Jr.
Title: Director
<PAGE> 1
Exhibit 10.37
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT
Effective Date: January 27, 1998
This Executive Retention and Severance Agreement (the "Agreement") is made and
entered into as of the date written above (the "Effective Date"), by and between
Bay Networks, Inc., a Delaware corporation (the "Company")
4401 Great America Parkway
Santa Clara, California 95052
and
David J. Rynne ("Executive")
residing at HOME ADDRESS REDACTED
RECITALS
A. The Executive is Executive Vice President and Chief Financial Officer of
Bay Networks, Inc. and possesses valuable knowledge of the Company, its
business and operations and the markets in which the Company competes.
B. The Company draws upon the knowledge, experience and objective advice of
Executive in order to manage its business for the benefit of the Company's
stockholders.
C. The Company recognizes that if there occurred a change of control or other
event that could substantially change the nature and structure of the
Company, the resulting uncertainty regarding the consequences of such an
event could adversely affect the Company's ability to attract, retain and
motivate its key employees, including Executive.
D. On January 26, 1998, the Compensation Committee of the Company's Board of
Directors approved the Executive Retention and Severance Plan, authorizing
the terms of this Agreement.
E. The Company believes that the existence of this Agreement will serve as an
incentive to Executive to remain in the employ of the Company, and would
enhance the Company's ability to call on and rely upon the Executive if a
change of control event were to occur.
<PAGE> 2
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 2
F. The Company and the Executive desire to enter into this Agreement in order
(1) to encourage Executive to continue to devote Executive's full attention
and dedication to the success of the Company, and (2) to provide specified
compensation and benefits to the Executive in the event of a Termination
Upon Change of Control, pursuant to the terms of this Agreement.
THE COMPANY AND EXECUTIVE AGREE AS FOLLOWS:
1. GENERAL
1.1 Purpose. The purpose of this Agreement is to provide specified
compensation and benefits to the Executive in the event of a Termination Upon
Change of Control.
1.2 No employment agreement. This Agreement does not obligate the
Company to continue to employ Executive for any specific period of time, or in
any specific role or geographic location. Subject to the terms of any applicable
written employment agreement between Company and Executive, Company may assign
Executive to other duties, and either Executive or Company may terminate
Executive's employment at any time for any reason.
1.3 Defined terms. Capitalized terms used in this agreement shall have
the meanings set forth in section 4, unless the context clearly requires a
different meaning.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic Severance Compensation. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the basic
severance compensation described below.
2.1.1 All salary and accrued vacation earned through the date of
Executive's termination shall be paid to Executive.
2.1.2 Within ten (10) days of submission of proper expense
reports by the Executive, the Company shall reimburse the Executive for all
expenses reasonably and necessarily incurred by the Executive in connection with
the business of the Company prior to Executive's termination of employment.
2.1.3 Executive shall receive the benefits, if any, under the
Company's 401(k) Plan, nonqualified deferred compensation plan, employee stock
purchase plan and other Company benefit plans to which Executive may be entitled
pursuant to the terms of such plans.
<PAGE> 3
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 3
2.2 Executive Cash Severance Benefits. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the
additional executive severance benefits described below.
2.2.1 Prorated bonus payment. Executive shall receive Executive's
target bonus or incentive payment for the year in which termination occurs, pro
rated through the date of termination and less applicable withholding, paid
within thirty (30) days of termination of employment.
2.2.2 Cash severance payment. Executive shall receive a lump sum
payment in the amount of 200% of Executive's Target Annual Earnings, less
applicable federal and state withholding, paid within thirty (30) days of
termination of employment.
2.3 Stock option acceleration.
2.3.1 Acceleration at Termination Upon Change of Control. All
outstanding stock options granted and restricted stock issued by the Company to
the Executive prior to the Change of Control shall have their vesting fully
accelerated so as to be 100% vested on the date of a Termination Upon Change of
Control.
2.3.2 Acceleration upon non-assumption in a Change of Control. If
there is a Change of Control transaction in which outstanding stock options
granted and restricted stock issued by the Company prior to the transaction are
not fully assumed by the Successor, or replaced by fully equivalent substitute
options or restricted stock, then (1) all such options and restricted stock
shall have their vesting fully accelerated to be 100% vested prior to the
effective date of the Change of Control and (2) the Company shall provide
reasonable prior written notice to Executive of (a) the date such unexercised
options will terminate and (b) the period during which Executive may exercise
the fully vested options. Alternatively, the Company may elect to deliver to
Executive on the effective date of the Change of Control a cash payment equal to
the difference between (i) the aggregate exercise price of Executive's
unexercised options or restricted stock, whether vested unvested, and (ii) the
value of the consideration deliverable for an equivalent number of shares as a
result of the Change of Control transaction.
2.4 Extended medical and dental benefits.
2.4.1 Benefit continuation for thirty months. Executive shall
receive continued provision of the Company's standard employee medical and
dental insurance coverages, as elected by the Executive and in effect
immediately prior to the Change of Control, for thirty (30) months following the
date of termination.
2.4.2 Continued medical coverage for U.S. residents. Thereafter,
if Executive resides in the United States, Executive shall be entitled to elect
continued medical insurance coverage in accordance with the applicable
provisions of U.S. federal law (COBRA). If such coverage included the
Executive's dependents immediately prior to the date of termination, such
dependents also shall be covered at Company expense
<PAGE> 4
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 4
during the extension period. 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.
2.4.3 Termination upon coverage under another plan.
Notwithstanding the preceding provisions of this section 2.4, in the event
Executive becomes covered as a primary insured (that is, not as a beneficiary
under a spouse's or partner's plan) under another employer's group health plan
during the period provided for herein, Executive promptly shall inform the
Company and the Company shall cease provision of continued group health
insurance for Executive and any dependents.
2.5 Consulting contract.
2.5.1 Six-month Consulting Period. Executive shall be engaged as
a consultant to the Company for a period of six (6) months after a Termination
Upon Change of Control (the "Consulting Period") to provide advice and assist in
the transition occasioned by the Change of Control.
2.5.2 Consulting Fee. During the Consulting Period Executive
shall receive a consulting fee in the amount of fifty percent (50%) of Target
Annual Earnings, payable in six equal monthly installments.
2.5.3 Option continuation during Consulting Period. Executive's
stock options, if any, shall continue in effect during the Consulting Period, in
accordance with and to the maximum extent permissible under the terms of the
applicable option plans and agreements.
2.5.4 Other employment not precluded. During the Consulting
Period Executive shall not be precluded from accepting other employment,
provided Executive is available to the Company at such times and for such
consulting matters as the Company may reasonably request.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 280G
3.1 Reimbursement of excise tax. If (1) any amounts payable under this
Agreement are characterized as excess parachute payments pursuant to Section
4999 of the Internal Revenue Code, and (2) Executive thereby would be subject to
any United States federal excise tax due to that characterization, then (3) the
Company shall reimburse the Executive for the amount of such excise tax;
provided, however, that, no reimbursement shall be made for any excise tax
payable with respect to the reimbursement made pursuant to this section 3.1. The
excise tax reimbursement made pursuant to this section 3.1 shall be subject to
all applicable withholding. The foregoing shall be conditioned upon the
Executive cooperating with the Company in such manner as may be reasonably
requested (other than reducing amounts payable hereunder) so as to minimize the
amount of such excise tax.
<PAGE> 5
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 5
3.2 Determination by independent public accountants. Unless the Company
and Executive otherwise agree in writing, any determination required under this
Section 3 shall be made in writing by independent public accountants agreed to
by the Company and the Executive (the "Accountants"), whose determination shall
be conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section 3, the Accountants
may rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and Executive shall furnish to
the Accountants such information and documents as the Accountants may reasonably
request in order to make the required determinations. The Company shall bear all
fees and expenses the Accountants may reasonably charge in connection with the
services contemplated by this Section 3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Agreement
shall have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Executive's ability to perform appropriate employment
duties under this Agreement;
(b) improper disclosure or use of the Company's confidential,
business or proprietary information by Executive;
(c) the Executive's conviction (including any plea of guilty or
nolo contendere) for a crime involving moral turpitude causing material harm to
the reputation and standing of the Company, as determined by the Company in good
faith; or
(d) gross negligence or willful misconduct in the performance of
Executive's assigned duties (but not mere unsatisfactory performance).
4.3 "Change of Control" means:
(a) 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 a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the Company or (B) the combined voting
power of the Company's then-outstanding securities;
<PAGE> 6
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 6
(b) the Company is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(c) the sale or disposition of all or substantially all of the
Company's assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of
Directors of the Company within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.4 "Company" shall mean Bay Networks, Inc., and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Agreement.
4.5 "Effective Date" means, with respect to this Agreement, (1) January
27, 1998 or (2) such later date as Executive first became an officer of the
Company.
4.6 "Good Reason" means the occurrence of any of the following
conditions following a Change of Control, without Executive's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from Executive of such condition(s):
(a) a material decrease in Executive's base salary or target
bonus amount;
(b) assignment of Executive to responsibilities or duties that
are not a Substantive Functional Equivalent of the position which Executive
occupied prior to the Change of Control;
(c) the relocation of Executive's work place for the Company to a
location more than 50 miles from the location of the work place prior to the
Change of Control; or
(d) any material breach of this Agreement by the Company.
4.7 "Incumbent Director" shall mean a director who either (1) is a
director of the Company as of the Effective Date of this Agreement, or (2) is
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 (3) was not elected or nominated in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company.
<PAGE> 7
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 7
4.8 "Permanent Disability" means that:
(a) the Executive has been incapacitated by bodily injury,
illness or disease so as to be prevented thereby from engaging in the
performance of the Executive's duties;
(b) such total incapacity shall have continued for a period of
six consecutive months; and
(c) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
4.9 "Substantive Functional Equivalent" means an employment position
occupied by an Executive after a Change of Control that:
(a) is in a substantive area of competence (such as, accounting;
engineering management; executive management; finance; human resources;
marketing, sales and service; operations and manufacturing; etc.) that is
consistent with Executive's experience and not materially different from the
position occupied prior to the Change of Control;
(b) requires Executive to serve in a role and perform duties that
are functionally equivalent to those performed prior to the Change of Control as
the Executive Vice President and Chief Financial Officer;
(c ) carries a title that does not connote a lesser rank or
corporate role than the title of Executive Vice President and Chief Financial
Officer held by Executive prior to the Change of Control;
(d) does not otherwise constitute a material, adverse change in
Executive's responsibilities or duties, as measured against Executive's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
(e) is identified as an executive officer, for purposes of the
rules promulgated under Section 16 of the Securities Exchange Act of 1934, of a
publicly traded Successor having net assets and annual revenues no less than
those of the Company prior to the Change of Control; and
(f) reports directly to an executive officer, committee or board
of the Successor that is no less senior than the executive officer, committee or
board, as the case may be, to whom Executive reported at the Company prior to
the Change of Control.
4.10 "Successor" means the Company as defined above and any successor or
assign to substantially all of its business and/or assets.
<PAGE> 8
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 8
4.11 "Target Annual Earnings" means the sum of annual base salary plus
100% of annual bonus or incentive pay. If different sums would result from
calculations as of (a) the date thirty (30) days prior to the date that the
Company publicly announces it is conducting negotiations leading to a Change of
Control, (b) the date on which a Change of Control occurs or (c) the date of
Executive's Termination Upon Change of Control, then Target Annual Earnings
shall be determined by the calculation as of the specified date that yields the
highest value.
4.12 "Termination Upon Change of Control" means:
(a) any termination of the employment of the Executive by the
Company without Cause during the period commencing thirty (30) days prior to the
earlier of (1) the date that the Company first publicly announces it is
conducting negotiations leading to a Change of Control, or (2) the date that the
Company enters into a definitive agreement that would result in a Change of
Control (even though still subject to approval by the Company's stockholders and
other conditions and contingencies); and ending on the date which is twelve (12)
months after the Change of Control; or
(b) any resignation by the Executive for Good Reason within
twelve (12) months after the occurrence of any Change of Control; but
(c) "Termination Upon Change of Control" shall not include any
termination of the employment of the Executive (1) by the Company for Cause; (2)
by the Company as a result of the Permanent Disability of the Executive; (3) as
a result of the death of the Executive; or (4) as a result of the voluntary
termination of employment by the Executive for reasons other than Good Reason.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Termination Upon Change of Control. The payments and
benefits provided for in Sections 2 and 3 shall constitute the Executive's sole
and exclusive remedy for any alleged injury or other damages arising out of the
cessation of the employment relationship between the Executive and the Company
in the event of Executive's Termination Upon Change of Control.
5.2 No other benefits payable. The Executive shall be entitled to no
other compensation, benefits, or other payments from the Company as a result of
any termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Executive, except as
expressly set forth in this Agreement or, subject to the provisions of sections
10 and 14, in a duly executed employment agreement between Company and
Executive.
5.3 Release of Claims. The Company may condition payment of the cash
severance and consulting benefits described in sections 2.2 and 2.5 of this
Agreement and the stock option acceleration described in section 2.3.1 upon the
delivery by Executive of a signed release of claims in a form reasonably
satisfactory to the Company; provided,
<PAGE> 9
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 9
however, that Executive shall not be required to release any rights Executive
may have to be indemnified by the Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Executive agrees to continue to abide by the terms and conditions of the
Company's confidentiality and/or proprietary rights agreement between the
Executive and the Company.
7. NON-SOLICITATION
7.1 Agreement not to solicit. If Company performs its obligations to
deliver the severance benefits set forth in sections 2 and 3 of this Agreement,
then for a period of one (1) year after Executive's Termination Upon Change of
Control, Executive will not, directly or indirectly, solicit the services or
business of or in any other manner persuade any employee, distributor, vendor,
representative or customer of the Company to discontinue that person's or
entity's relationship with or to the Company.
7.2 Other agreements not superseded. This provision shall not supersede
or limit the terms, including more restrictive terms, of any other agreement by
Executive to refrain from competition with or from soliciting the employees or
customers of Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of this Agreement, the interpretation, validity or enforceability of
this Agreement or the alleged breach thereof shall be submitted by the parties
to binding arbitration by the American Arbitration Association; provided,
however, that (1) the arbitrator shall have no authority to make any ruling or
judgment that would confer any rights with respect to the trade secrets,
confidential and proprietary information or other intellectual property of the
Company upon Executive or any third party; and (2) this arbitration provision
shall not preclude the Company from seeking legal and equitable relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall
be, at Executive's election, either (1) Santa Clara County, California or (2)
Middlesex County, Massachusetts or (3) if Executive's primary assigned work
place prior to the Change of Control was in neither California nor
Massachusetts, a mutually agreed site located within 25 miles of that work
place.
8.3 Cost and expenses borne by Company. All costs and expenses of
arbitration or litigation, including but not limited to reasonable attorneys
fees and other costs reasonably incurred by the Executive, shall be paid by the
Company. Notwithstanding the foregoing, if the Executive initiates the
arbitration or litigation, and
<PAGE> 10
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 10
the finder of fact finds that Executive's claims were totally without merit or
frivolous, then Executive shall be responsible for Executive's own attorneys'
fees.
9. INTERPRETATION
Executive and the Company agree that this Agreement shall be interpreted in
accordance with and governed by the laws of the State of California as applied
to contracts entered into and entirely to be performed within that state.
10. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS
10.1 Effect of Agreement. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments and accelerated option vesting due upon
Executive's Termination Upon Change of Control, except as provided in sections
10.2, 10.3 and 14.
10.2 No limitation of regular benefit plans. This Agreement is not
intended to and shall not affect, limit or terminate any plans, programs, or
arrangements of the Company that are regularly made available to a significant
number of employees or officers of the Company, including without limitation the
Company's stock option plans.
10.3 Noncumulation of cash benefits. Executive may not cumulate cash
severance payments and excise tax reimbursement benefits under both this
Agreement and another agreement. If Executive has any other binding written
agreement with the Company which provides that upon a Change of Control or
termination of employment the Executive shall receive one or more of the
benefits described in sections 2.2, 2.5 and 3 of this Agreement (i.e., the
payment of cash compensation or prorated bonus, post-termination consulting and
adjustments or payments relating to federal excise tax), then with respect to
each such benefit the amount payable under this Agreement shall be reduced by
the corresponding amount paid or payable under such other agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such agreement shall be a material
breach of this Agreement.
11.2 Acknowledgement by Company. If after a Change of Control the
Company (or any Successor) fails to reasonably confirm that it has performed the
obligation described in section 11.1 within ten (10) days after written notice
from Executive, Executive shall be entitled to terminate Executive's employment
with the
<PAGE> 11
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 11
Company for Good Reason, and to receive the benefits provided under
this Agreement in the event of Termination Upon Change of Control.
11.3 Heirs and representatives of Executive. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
12. NOTICES
For purposes of this Agreement, notices and all other communications provided
for in the Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, as follows:
if to the Company: Bay Networks, Inc.
Attention: General Counsel
4401 Great America Parkway
Santa Clara, CA 95052
and if to the Executive at the address specified on the first page of this
Agreement. Either party may provide the other with notices of change of address,
which shall be effective upon receipt.
13. NO REPRESENTATIONS
Executive acknowledges that in entering into this Agreement, Executive is not
relying and has not relied on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.
14. MODIFICATION AND AMENDMENT
This Agreement may be modified, amended or superseded only by a supplemental
written agreement signed with the same formality as this Agreement by Executive
and by the Company. However, the noncumulation of benefits provision of section
10.3 shall apply to any subsequent agreement, unless (1) such provision is
explicitly disclaimed in the subsequent agreement, and (2) the subsequent
agreement has been authorized by the Company's Board of Directors or a committee
thereof.
<PAGE> 12
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 12
15. VALIDITY
15.1 Invalid provisions. If any one or more of the provisions (or any
part thereof) of this Agreement shall be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
15.2 Execution by two Company executive officers or directors.This
Agreement and any modifications or amendments shall require the signatures of
two executive officers or members of the Board of Directors of the Company.
15.3 Consultation with legal and financial advisers. Executive
acknowledges that this Agreement confers significant legal rights, and may also
involve the waiver of rights under other agreements; that Company has encouraged
Executive to consult with Executive's personal legal and financial advisers; and
that Executive has had adequate time to consult with Executive's advisers before
signing this agreement.
16. SIGNATURES
The parties have executed this Agreement, intending to be legally bound as of
the Effective Date.
EXECUTIVE BAY NETWORKS, INC.
/s/ David J. Rynne By: /s/ Shelby H. Carter, Jr.
- -------------------------------- -------------------------------
Executive's signature Printed name: Shelby H. Carter, Jr.
----------------------
Printed name: David J. Rynne Title: Director
----------------- -----------------------------
By: /s/ Arthur Carr
-------------------------------
Printed name: Arthur Carr
----------------------
Title: Director
-----------------------------
<PAGE> 1
Exhibit 10.38
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT
Effective Date: January 27, 1998
This Executive Retention and Severance Agreement (the "Agreement") is made and
entered into as of the date written above (the "Effective Date"), by and between
Bay Networks, Inc., a Delaware corporation (the "Company")
4401 Great America Parkway
Santa Clara, California 95052
and
[name] ("Executive")
residing at [street address]
[city, state, zip]
RECITALS
A. The Executive is an Executive Vice President of Bay Networks, Inc. who
possesses valuable knowledge of the Company, its business and operations
and the markets in which the Company competes.
B. The Company draws upon the knowledge, experience and objective advice of
Executive in order to manage its business for the benefit of the Company's
stockholders.
C. The Company recognizes that if there occurred a change of control or other
event that could substantially change the nature and structure of the
Company, the resulting uncertainty regarding the consequences of such an
event could adversely affect the Company's ability to attract, retain and
motivate its key employees, including Executive.
D. On January 26, 1998, the Compensation Committee of the Company's Board of
Directors approved the Executive Retention and Severance Plan, authorizing
the terms of this Agreement.
E. The Company believes that the existence of this Agreement will serve as an
incentive to Executive to remain in the employ of the Company, and would
<PAGE> 2
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 2
enhance the Company's ability to call on and rely upon the Executive if a
change of control event were to occur.
F. The Company and the Executive desire to enter into this Agreement in order
(1) to encourage Executive to continue to devote Executive's full
attention and dedication to the success of the Company, and (2) to provide
specified compensation and benefits to the Executive in the event of a
Termination Upon Change of Control, pursuant to the terms of this
Agreement.
THE COMPANY AND EXECUTIVE AGREE AS FOLLOWS:
1. GENERAL
1.1 Purpose. The purpose of this Agreement is to provide specified
compensation and benefits to the Executive in the event of a Termination Upon
Change of Control.
1.2 No employment agreement. This Agreement does not obligate the
Company to continue to employ Executive for any specific period of time, or in
any specific role or geographic location. Subject to the terms of any applicable
written employment agreement between Company and Executive, Company may assign
Executive to other duties, and either Executive or Company may terminate
Executive's employment at any time for any reason.
1.3 Defined terms. Capitalized terms used in this agreement shall have
the meanings set forth in section 4, unless the context clearly requires a
different meaning.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic Severance Compensation. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the basic
severance compensation described below.
2.1.1 All salary and accrued vacation earned through the date of
Executive's termination shall be paid to Executive.
2.1.2 Within ten (10) days of submission of proper expense
reports by the Executive, the Company shall reimburse the Executive for all
expenses reasonably and necessarily incurred by the Executive in connection with
the business of the Company prior to Executive's termination of employment.
2.1.3 Executive shall receive the benefits, if any, under the
Company's 401(k) Plan, nonqualified deferred compensation plan, employee stock
purchase plan and
<PAGE> 3
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 3
other Company benefit plans to which Executive may be entitled pursuant to the
terms of such plans.
2.2 Executive Cash Severance Benefits. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the
additional executive severance benefits described below.
2.2.1 Prorated bonus payment. Executive shall receive Executive's
target bonus or incentive payment for the year in which termination occurs, pro
rated through the date of termination and less applicable withholding, paid
within thirty (30) days of termination of employment.
2.2.2 Cash severance payment. Executive shall receive a lump sum
payment in the amount of 200% of Executive's Target Annual Earnings, less
applicable federal and state withholding, paid within thirty (30) days of
termination of employment.
2.3 Stock option acceleration.
2.3.1 Acceleration at Termination Upon Change of Control. All
outstanding stock options granted and restricted stock issued by the Company to
the Executive prior to the Change of Control shall have their vesting fully
accelerated so as to be 100% vested on the date of a Termination Upon Change of
Control.
2.3.2 Acceleration upon non-assumption in a Change of Control. If
there is a Change of Control transaction in which outstanding stock options
granted and restricted stock issued by the Company prior to the transaction are
not fully assumed by the Successor, or replaced by fully equivalent substitute
options or restricted stock, then (1) all such options and restricted stock
shall have their vesting fully accelerated to be 100% vested prior to the
effective date of the Change of Control and (2) the Company shall provide
reasonable prior written notice to Executive of (a) the date such unexercised
options will terminate and (b) the period during which Executive may exercise
the fully vested options. Alternatively, the Company may elect to deliver to
Executive on the effective date of the Change of Control a cash payment equal to
the difference between (i) the aggregate exercise price of Executive's
unexercised options or restricted stock, whether vested unvested, and (ii) the
value of the consideration deliverable for an equivalent number of shares as a
result of the Change of Control transaction.
2.4 Extended medical and dental benefits.
2.4.1 Benefit continuation for thirty months. Executive shall
receive continued provision of the Company's standard employee medical and
dental insurance coverages, as elected by the Executive and in effect
immediately prior to the Change of Control, for thirty (30) months following the
date of termination.
2.4.2 Continued medical coverage for U.S. residents. Thereafter,
if Executive resides in the United States, Executive shall be entitled to elect
continued
<PAGE> 4
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 4
medical insurance coverage in accordance with the applicable provisions of U.S.
federal law (COBRA). If such coverage included the Executive's dependents
immediately prior to the date of termination, such dependents also shall be
covered at Company expense during the extension period. 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.
2.4.3 Termination upon coverage under another plan.
Notwithstanding the preceding provisions of this section 2.4, in the event
Executive becomes covered as a primary insured (that is, not as a beneficiary
under a spouse's or partner's plan) under another employer's group health plan
during the period provided for herein, Executive promptly shall inform the
Company and the Company shall cease provision of continued group health
insurance for Executive and any dependents.
2.5 Consulting contract.
2.5.1 Six-month Consulting Period. Executive shall be engaged as
a consultant to the Company for a period of six (6) months after a Termination
Upon Change of Control (the "Consulting Period") to provide advice and assist in
the transition occasioned by the Change of Control.
2.5.2 Consulting Fee. During the Consulting Period Executive
shall receive a consulting fee in the amount of fifty percent (50%) of Target
Annual Earnings, payable in six equal monthly installments.
2.5.3 Option continuation during Consulting Period. Executive's
stock options, if any, shall continue in effect during the Consulting Period, in
accordance with and to the maximum extent permissible under the terms of the
applicable option plans and agreements.
2.5.4 Other employment not precluded. During the Consulting
Period Executive shall not be precluded from accepting other employment,
provided Executive is available to the Company at such times and for such
consulting matters as the Company may reasonably request.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 280G
3.1 Reimbursement of excise tax. If (1) any amounts payable under this
Agreement are characterized as excess parachute payments pursuant to Section
4999 of the Internal Revenue Code, and (2) Executive thereby would be subject to
any United States federal excise tax due to that characterization, then (3) the
Company shall reimburse the Executive for the amount of such excise tax;
provided, however, that, no reimbursement shall be made for any excise tax
payable with respect to the reimbursement made pursuant to this section 3.1. The
excise tax reimbursement made pursuant to this section 3.1 shall be subject to
all applicable withholding. The foregoing
<PAGE> 5
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 5
shall be conditioned upon the Executive cooperating with the Company in such
manner as may be reasonably requested (other than reducing amounts payable
hereunder) so as to minimize the amount of such excise tax.
3.2 Determination by independent public accountants. Unless the Company
and Executive otherwise agree in writing, any determination required under this
Section 3 shall be made in writing by independent public accountants agreed to
by the Company and the Executive (the "Accountants"), whose determination shall
be conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section 3, the Accountants
may rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and Executive shall furnish to
the Accountants such information and documents as the Accountants may reasonably
request in order to make the required determinations. The Company shall bear all
fees and expenses the Accountants may reasonably charge in connection with the
services contemplated by this Section 3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Agreement
shall have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Executive's ability to perform appropriate employment
duties under this Agreement;
(b) improper disclosure or use of the Company's confidential,
business or proprietary information by Executive;
(c) the Executive's conviction (including any plea of guilty or
nolo contendere) for a crime involving moral turpitude causing material harm to
the reputation and standing of the Company, as determined by the Company in good
faith; or
(d) gross negligence or willful misconduct in the performance of
Executive's assigned duties (but not mere unsatisfactory performance).
4.3 "Change of Control" means:
(a) 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 a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the
<PAGE> 6
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 6
Company or (B) the combined voting power of the Company's then-outstanding
securities;
(b) the Company is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(c) the sale or disposition of all or substantially all of the
Company's assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of
Directors of the Company within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.4 "Company" shall mean Bay Networks, Inc., and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Agreement.
4.5 "Effective Date" means, with respect to this Agreement, (1) January
27, 1998 or (2) such later date as Executive first became an officer of the
Company.
4.6 "Good Reason" means the occurrence of any of the following
conditions following a Change of Control, without Executive's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from Executive of such condition(s):
(a) a material decrease in Executive's base salary or target
bonus amount;
(b) assignment of Executive to responsibilities or duties that
are not a Substantive Functional Equivalent of the position which Executive
occupied prior to the Change of Control;
(c) the relocation of Executive's work place for the Company to a
location more than 50 miles from the location of the work place prior to the
Change of Control; or
(d) any material breach of this Agreement by the Company.
4.7 "Incumbent Director" shall mean a director who either (1) is a
director of the Company as of the Effective Date of this Agreement, or (2) is
elected, or nominated for election, to the Board of Directors of the Company
with the affirmative votes of at
<PAGE> 7
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 7
least a majority of the Incumbent Directors at the time of such election or
nomination, but (3) was not elected or nominated in connection with an actual or
threatened proxy contest relating to the election of directors to the Company.
4.8 "Permanent Disability" means that:
(a) the Executive has been incapacitated by bodily injury,
illness or disease so as to be prevented thereby from engaging in the
performance of the Executive's duties;
(b) such total incapacity shall have continued for a period of
six consecutive months; and
(c) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
4.9 "Substantive Functional Equivalent" means an employment position
occupied by an Executive after a Change of Control that:
(a) is in a substantive area of competence (such as, accounting;
engineering management; executive management; finance; human resources;
marketing, sales and service; operations and manufacturing; etc.) that is
consistent with Executive's experience and not materially different from the
position occupied prior to the Change of Control;
(b) requires Executive to serve in a role and perform duties that
are functionally equivalent to those performed prior to the Change of Control
(such as, business unit executive with P&L responsibility; product line manager;
marketing strategist; geographic sales manager; section 16 corporate executive
officer; R&D manager);
(c) carries a title that does not connote a lesser rank or
corporate role than the title (such as, Executive Vice President) held by
Executive prior to the Change of Control;
(d) does not otherwise constitute a material, adverse change in
Executive's responsibilities or duties, as measured against Executive's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
(e) is identified as an executive officer, for purposes of the
rules promulgated under Section 16 of the Securities Exchange Act of 1934, of a
publicly traded Successor having net assets and annual revenues no less than
those of the Company prior to the Change of Control; and
<PAGE> 8
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 8
(f) reports directly to an executive officer, committee or board
of the Successor that is no less senior than the executive officer, committee or
board, as the case may be, to whom Executive reported at the Company prior to
the Change of Control.
4.10 "Successor" means the Company as defined above and any successor or
assign to substantially all of its business and/or assets.
4.11 "Target Annual Earnings" means the sum of annual base salary plus
100% of annual bonus or incentive pay. If different sums would result from
calculations as of (a) the date thirty (30) days prior to the date that the
Company publicly announces it is conducting negotiations leading to a Change of
Control, (b) the date on which a Change of Control occurs or (c) the date of
Executive's Termination Upon Change of Control, then Target Annual Earnings
shall be determined by the calculation as of the specified date that yields the
highest value.
4.12 "Termination Upon Change of Control" means:
(a) any termination of the employment of the Executive by the
Company without Cause during the period commencing thirty (30) days prior to the
earlier of (1) the date that the Company first publicly announces it is
conducting negotiations leading to a Change of Control, or (2) the date that the
Company enters into a definitive agreement that would result in a Change of
Control (even though still subject to approval by the Company's stockholders and
other conditions and contingencies); and ending on the date which is twelve (12)
months after the Change of Control; or
(b) any resignation by the Executive for Good Reason within
twelve (12) months after the occurrence of any Change of Control; but
(c) "Termination Upon Change of Control" shall not include any
termination of the employment of the Executive (1) by the Company for Cause; (2)
by the Company as a result of the Permanent Disability of the Executive; (3) as
a result of the death of the Executive; or (4) as a result of the voluntary
termination of employment by the Executive for reasons other than Good Reason.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Termination Upon Change of Control. The payments and
benefits provided for in Sections 2 and 3 shall constitute the Executive's sole
and exclusive remedy for any alleged injury or other damages arising out of the
cessation of the employment relationship between the Executive and the Company
in the event of Executive's Termination Upon Change of Control.
5.2 No other benefits payable. The Executive shall be entitled to no
other compensation, benefits, or other payments from the Company as a result of
any termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Executive, except as
expressly set forth in
<PAGE> 9
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 9
this Agreement or, subject to the provisions of sections 10 and 14, in a duly
executed employment agreement between Company and Executive.
5.3 Release of Claims. The Company may condition payment of the cash
severance and consulting benefits described in sections 2.2 and 2.5 of this
Agreement and the stock option acceleration described in section 2.3.1 upon the
delivery by Executive of a signed release of claims in a form reasonably
satisfactory to the Company; provided, however, that Executive shall not be
required to release any rights Executive may have to be indemnified by the
Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Executive agrees to continue to abide by the terms and conditions of the
Company's confidentiality and/or proprietary rights agreement between the
Executive and the Company.
7. NON-SOLICITATION
7.1 Agreement not to solicit. If Company performs its obligations to
deliver the severance benefits set forth in sections 2 and 3 of this Agreement,
then for a period of one (1) year after Executive's Termination Upon Change of
Control, Executive will not, directly or indirectly, solicit the services or
business of or in any other manner persuade any employee, distributor, vendor,
representative or customer of the Company to discontinue that person's or
entity's relationship with or to the Company.
7.2 Other agreements not superseded. This provision shall not supersede
or limit the terms, including more restrictive terms, of any other agreement by
Executive to refrain from competition with or from soliciting the employees or
customers of Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of this Agreement, the interpretation, validity or enforceability of
this Agreement or the alleged breach thereof shall be submitted by the parties
to binding arbitration by the American Arbitration Association; provided,
however, that (1) the arbitrator shall have no authority to make any ruling or
judgment that would confer any rights with respect to the trade secrets,
confidential and proprietary information or other intellectual property of the
Company upon Executive or any third party; and (2) this arbitration provision
shall not preclude the Company from seeking legal and equitable relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall
be, at Executive's election, either (1) Santa Clara County, California or (2)
Middlesex County, Massachusetts or (3) if Executive's primary assigned work
place prior to the Change of
<PAGE> 10
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 10
Control was in neither California nor Massachusetts, a mutually agreed site
located within 25 miles of that work place.
8.3 Cost and expenses borne by Company. All costs and expenses of
arbitration or litigation, including but not limited to reasonable attorneys
fees and other costs reasonably incurred by the Executive, shall be paid by the
Company. Notwithstanding the foregoing, if the Executive initiates the
arbitration or litigation, and the finder of fact finds that Executive's claims
were totally without merit or frivolous, then Executive shall be responsible for
Executive's own attorneys' fees.
9. INTERPRETATION
Executive and the Company agree that this Agreement shall be interpreted in
accordance with and governed by the laws of the State of California as applied
to contracts entered into and entirely to be performed within that state.
10. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS
10.1 Effect of Agreement. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments and accelerated option vesting due upon
Executive's Termination Upon Change of Control, except as provided in sections
10.2, 10.3 and 14.
10.2 No limitation of regular benefit plans. This Agreement is not
intended to and shall not affect, limit or terminate any plans, programs, or
arrangements of the Company that are regularly made available to a significant
number of employees or officers of the Company, including without limitation the
Company's stock option plans.
10.3 Noncumulation of cash benefits. Executive may not cumulate cash
severance payments and excise tax reimbursement benefits under both this
Agreement and another agreement. If Executive has any other binding written
agreement with the Company which provides that upon a Change of Control or
termination of employment the Executive shall receive one or more of the
benefits described in sections 2.2, 2.5 and 3 of this Agreement (i.e., the
payment of cash compensation or prorated bonus, post-termination consulting and
adjustments or payments relating to federal excise tax), then with respect to
each such benefit the amount payable under this Agreement shall be reduced by
the corresponding amount paid or payable under such other agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such
<PAGE> 11
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 11
succession or assignment had taken place. Failure of the Company to obtain such
agreement shall be a material breach of this Agreement.
11.2 Acknowledgement by Company. If after a Change of Control the
Company (or any Successor) fails to reasonably confirm that it has performed the
obligation described in section 11.1 within ten (10) days after written notice
from Executive, Executive shall be entitled to terminate Executive's employment
with the Company for Good Reason, and to receive the benefits provided under
this Agreement in the event of Termination Upon Change of Control.
11.3 Heirs and representatives of Executive. This Agreement shall inure
to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
12. NOTICES
For purposes of this Agreement, notices and all other communications provided
for in the Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, as follows:
if to the Company: Bay Networks, Inc.
Attention: General Counsel
4401 Great America Parkway
Santa Clara, CA 95052
and if to the Executive at the address specified on the first page of this
Agreement. Either party may provide the other with notices of change of address,
which shall be effective upon receipt.
13. NO REPRESENTATIONS
Executive acknowledges that in entering into this Agreement, Executive is not
relying and has not relied on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.
14. MODIFICATION AND AMENDMENT
This Agreement may be modified, amended or superseded only by a supplemental
written agreement signed with the same formality as this Agreement by Executive
and by the Company. However, the noncumulation of benefits provision of section
10.3 shall apply to any subsequent agreement, unless (1) such provision is
explicitly disclaimed in the subsequent agreement, and (2) the subsequent
agreement has been authorized by the Company's Board of Directors or a committee
thereof.
<PAGE> 12
EXECUTIVE RETENTION AND SEVERANCE AGREEMENT PAGE 12
15. VALIDITY
15.1 Invalid provisions. If any one or more of the provisions (or any
part thereof) of this Agreement shall be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
15.2 Execution by two Company executive officers or directors. This
Agreement and any modifications or amendments shall require the signatures of
two executive officers or members of the Board of Directors of the Company.
15.3 Consultation with legal and financial advisers. Executive
acknowledges that this Agreement confers significant legal rights, and may also
involve the waiver of rights under other agreements; that Company has encouraged
Executive to consult with Executive's personal legal and financial advisers; and
that Executive has had adequate time to consult with Executive's advisers before
signing this agreement.
16. SIGNATURES
The parties have executed this Agreement, intending to be legally bound as of
the Effective Date.
EXECUTIVE BAY NETWORKS, INC.
By:
- -------------------------------- --------------------------------------
Executive's signature Printed name:
----------------------------
Printed name: Title:
------------------ -----------------------------------
By:
-------------------------------------
Printed name:
----------------------------
Title:
-----------------------------------
<PAGE> 1
Exhibit 10.39
OFFICER RETENTION AND SEVERANCE AGREEMENT
Effective Date: January 27, 1998
This Officer Retention and Severance Agreement (the "Agreement") is made and
entered into as of the date written above (the "Effective Date"), by and between
Bay Networks, Inc., a Delaware corporation (the "Company")
4401 Great America Parkway
Santa Clara, California 95052
and
[name] ("Officer")
residing at [street address]
[city, state, zip]
RECITALS
A. The Officer is a Vice President of Bay Networks, Inc., or an officer of
one of its subsidiaries of affiliates, who possesses valuable knowledge of
the Company, its business and operations and the markets in which the
Company competes.
B. The Company draws upon the knowledge, experience and objective advice of
Officer in order to manage its business for the benefit of the Company's
stockholders.
C. The Company recognizes that if there occurred a change of control or other
event that could substantially change the nature and structure of the
Company, the resulting uncertainty regarding the consequences of such an
event could adversely affect the Company's ability to attract, retain and
motivate its key employees, including Officer.
D. On January 26, 1998, the Compensation Committee of the Company's Board of
Directors approved the Executive Retention and Severance Plan, authorizing
the terms of this Agreement.
E. The Company believes that the existence of this Agreement will serve as an
incentive to Officer to remain in the employ of the Company, and would
enhance the Company's ability to call on and rely upon the Officer if a
proposed change of control event were to occur.
<PAGE> 2
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 2
F. The Company and the Officer desire to enter into this Agreement in order
(1) to encourage Officer to continue to devote Officer's full attention
and dedication to the success of the Company, and (2) to provide specified
compensation and benefits to the Officer in the event of a Termination
Upon Change of Control, pursuant to the terms of this Agreement.
THE COMPANY AND OFFICER AGREE AS FOLLOWS:
1. GENERAL
1.1 Purpose. The purpose of this Agreement is to provide specified
compensation and benefits to the Officer in the event of a Termination Upon
Change of Control.
1.2 No employment agreement. This Agreement does not obligate the
Company to continue to employ Officer for any specific period of time, or in any
specific role or geographic location. Subject to the terms of any applicable
written employment agreement between Company and Officer, Company may assign
Officer to other duties, and either Officer or Company may terminate Officer's
employment at any time for any reason.
1.3 Defined terms. Capitalized terms used in this agreement shall have
the meanings set forth in section 4, unless the context clearly requires
otherwise.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic Severance Benefits. In the event of the Officer's termination
of employment under any circumstances, Officer shall be entitled to the basic
severance benefits described below.
2.1.1 All salary and accrued vacation earned through the date of
Officer's termination shall be paid to Officer.
2.1.2 Within ten (10) days of submission of proper expense
reports by the Officer, the Company shall reimburse the Officer for all expenses
reasonably and necessarily incurred by the Officer in connection with the
business of the Company prior to Officer's termination of employment.
2.1.3 Officer shall receive the benefits, if any, under the
Company's 401(k) Plan, nonqualified deferred compensation plan, employee stock
purchase plan and other Company benefit plans to which Officer may be entitled
pursuant to the terms of such plans.
<PAGE> 3
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 3
2.2 Officer Cash Severance Benefits. In the event of the Officer's
Termination Upon Change of Control, Officer shall be entitled to the additional
officer severance benefits described below.
2.2.1 Prorated bonus payment. Officer shall receive Officer's
target bonus or incentive payment for the year in which termination occurs, pro
rated through the date of termination and less applicable withholding, paid
within thirty (30) days of termination of employment.
2.2.2 Cash severance payment. Officer shall receive a lump sum
payment in the amount of 125% of Officer's Target Annual Earnings, less
applicable federal and state withholding, paid within thirty (30) days of
termination of employment.
2.3 Stock option acceleration.
2.3.1 Acceleration at Termination Upon Change of Control. All
outstanding stock options granted and restricted stock issued by the Company to
the Officer prior to the Change of Control shall have their vesting accelerated
as to two years of additional vesting as of the date of such Termination Upon
Change of Control. The Company recognizes that the standard forms of Officer
Stock Option Agreement approved for use by the Company provide for an additional
one year of vesting upon a change of control, as defined in such Stock Option
Agreement. Notwithstanding any other provision in any stock option or employment
agreement or in this Agreement, the additional vesting provided in this
subsection shall be in lieu of and not in addition to any additional vesting
provided for in any other agreement, and to the extent such additional vesting
is provided under another agreement then the additional vesting provided in this
section shall be reduced such that the total vesting of any affected stock
option shall not exceed (1) the period of time between the grant of the option
(or specified initial measuring date for vesting purposes) and the Termination
Upon Change of Control, plus (2) two years.
2.3.2 Acceleration upon non-assumption in a Change of Control. If
there is a Change of Control transaction in which outstanding stock options
granted and restricted stock issued by the Company prior to the transaction are
not fully assumed by the Successor, or replaced by fully equivalent substitute
options or restricted stock, then (1) all such options and restricted stock
shall have their vesting fully accelerated to be 100% vested prior to the
effective date of the Change of Control and (2) the Company shall provide
reasonable prior written notice to Officer of (a) the date such unexercised
options will terminate and (b) the period during which Officer may exercise the
fully vested options. Alternatively, the Company may elect to deliver to Officer
on the effective date of the Change of Control a cash payment equal to the
difference between (i) the aggregate exercise price of Officer's unexercised
options or restricted stock, whether vested unvested, and (ii) the value of the
consideration deliverable for an equivalent number of shares as a result of the
Change of Control transaction.
2.4 Extended medical and dental benefits.
<PAGE> 4
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 4
2.4.1 Benefit continuation for twenty-one months.Officer shall
receive continued provision of the Company's standard employee medical and
dental insurance coverages, as elected by the Officer and in effect immediately
prior to the Change of Control, for twenty-one (21) months following the date of
termination.
2.4.2 Continued medical coverage for U.S. residents. Thereafter,
if Officer resides in the United States, Officer shall be entitled to elect
continued medical insurance coverage in accordance with the applicable
provisions of U.S. federal law (COBRA). If such coverage included the Officer's
dependents immediately prior to the date of termination, such dependents also
shall be covered at Company expense during the extension period. For purposes of
title X of the Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the
date of the "qualifying event" for Officer and his dependents shall be the date
upon which the Company-paid coverage terminates.
2.4.3 Termination upon coverage under another plan.
Notwithstanding the above, in the event Officer becomes covered as a primary
insured (that is, not as a beneficiary under a spouse's plan) under another
employer's group health plan during the period provided for herein, Officer
promptly shall inform the Company and the Company shall cease provision of
continued group health insurance for Officer and any dependents.
2.5 Consulting contract.
2.5.1 Six-month consulting period. Officer shall be engaged as a
consultant to the Company for a period of six (6) months after a Termination
Upon a Change of Control (the "Consulting Period") to provide advice and assist
in the transition occasioned by the Change of Control.
2.5.2 Consulting fee. During the Consulting Period Officer shall
receive a consulting fee in the amount of fifty percent (50%) of Target Annual
Earnings, payable in six equal monthly installments.
2.5.3 Option continuation during Consulting Period. Officer's
stock options, if any, shall continue in effect during the Consulting Period, in
accordance with and to the maximum extent permissible under the terms of the
applicable option plans and agreements.
2.5.4 Other employment not precluded. During the Consulting
Period Officer shall not be precluded from accepting other employment, provided
Officer is available to the Company at such times and for such consulting
matters as the Company may reasonably request.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 280G
3.1 Election to reduce benefits subject to excise tax.If (1) any amounts
payable under this Agreement are characterized as excess parachute payments
pursuant to Section 4999 of the Internal Revenue Code, and (2) Officer thereby
would be subject to any United States federal excise tax due to that
characterization, then (3) the Officer may elect, in
<PAGE> 5
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 5
Officer's sole discretion, to reduce the amounts payable under this Agreement or
to have any portion of applicable options or restricted stock not vest in order
to avoid any "excess parachute payment" under Section 280G(b)(1) of the Internal
Revenue Code of 1986, as amended.
3.2 Determination by independent public accountants. Unless the Company
and Officer otherwise agree in writing, any determination required under this
Section 3 shall be made in writing by independent public accountants agreed to
by the Company and the Officer (the "Accountants"), whose determination shall be
conclusive and binding upon Officer and the Company for all purposes. For
purposes of making the calculations required by this Section 3, the Accountants
may rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and Officer shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make the required determinations. The Company shall bear all
fees and expenses the Accountants may reasonably charge in connection with the
services contemplated by this Section 3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Agreement
shall have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Officer's ability to perform appropriate employment
duties under this Agreement;
(b) improper disclosure or use of the Company's confidential,
business or proprietary information by Officer;
(c) the Officer's conviction (including any plea of guilty or
nolo contendere) for a crime involving moral turpitude causing material harm to
the reputation and standing of the Company, as determined by the Company in good
faith; or
(d) gross negligence or willful misconduct in the performance of
Officer's assigned duties (but not mere unsatisfactory performance).
4.3 "Change of Control" means:
(a) 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 a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the
<PAGE> 6
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 6
Exchange Act), directly or indirectly, of securities of the Company representing
50% or more of (A) the outstanding shares of common stock of the Company or (B)
the combined voting power of the Company's then-outstanding securities;
(b) the Company is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(c) the sale or disposition of all or substantially all of the
Company's assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of
Directors of the Company within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.4 "Company" shall mean Bay Networks, Inc., and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Agreement.
4.5 "Effective Date" means the day and year first set forth above.
4.6 "Good Reason" means the occurrence of any of the following
conditions following a Change of Control, without Officer's written consent,
which condition(s) remain(s) in effect ten (10) days after written notice to the
Company from Officer of such condition(s):
(a) a material decrease in Officer's base salary or target bonus
amount;
(b) assignment of Officer to responsibilities or duties that are
not a Substantive Functional Equivalent of the position which Officer occupied
prior to the Change of Control;
(c) the relocation of Officer's work place for the Company to a
location more than 50 miles from the location of the work place prior to the
Change of Control; or
(d) any material breach of this Agreement by the Company.
4.7 "Incumbent Director" shall mean a director who either (1) is a
director of the Company as of the Effective Date of this Agreement, or (2) is
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 (3) was
<PAGE> 7
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 7
not elected or nominated in connection with an actual or threatened proxy
contest relating to the election of directors to the Company.
4.8 "Permanent Disability" means that:
(a) the Officer has been incapacitated by bodily injury, illness
or disease so as to be prevented thereby from engaging in the performance of the
Officer's duties;
(b) such total incapacity shall have continued for a period of
six consecutive months; and
(c) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
4.9 "Substantive Functional Equivalent" means an employment position
occupied by an Officer after a Change of Control that:
(a) is in a substantive area of competence (such as, accounting;
engineering management; executive management; finance; human resources;
marketing, sales and service; operations and manufacturing; etc.) that is
consistent with Officer's experience and not materially different from the
position occupied prior to the Change of Control;
(b) requires Officer to serve in a role and perform duties that
are functionally equivalent to those performed prior to the Change of Control
(such as, business unit manager with P&L responsibility; geographic sales
manager; marketing strategist; product line manager; R&D manager; section 16
corporate staff officer);
(c) carries a title that does not connote a lesser rank or
corporate role than the title (such as, vice president) held by Officer prior
to the Change of Control;
(d) does not otherwise constitute a material, adverse change in
Officer's responsibilities or duties, as measured against Officer's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
(e) is identified as an executive officer, for purposes of the
rules promulgated under Section 16 of the Securities Exchange Act of 1934, of a
publicly traded Successor having net assets and annual revenues no less than
those of the Company prior to the Change of Control; and
(f) reports directly to an executive officer, committee or board
of the Successor that is no less senior than the executive officer, committee or
board, as the case may be, to whom Officer reported at the Company prior to the
Change of Control.
4.10 "Successor" means the Company as defined above and any successor or
assign to substantially all of its business and/or assets.
<PAGE> 8
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 8
4.11 "Target Annual Earnings" means the sum of annual base salary plus
100% of annual bonus or incentive pay. If different sums would result from
calculations as of (a) the date thirty (30) days prior to the date that the
Company publicly announces it is conducting negotiations leading to a Change of
Control, (b) the date on which a Change of Control occurs or (c) the date of
Executive's Termination Upon Change of Control, then Target Annual Earnings
shall be determined by the calculation as of the specified date that yields the
highest value.
4.12 "Termination Upon Change of Control" means:
(a) any termination of the employment of the Officer by the
Company without Cause during the period commencing thirty (30) days prior to the
earlier of (1) the date that the Company first publicly announces it is
conducting negotiations leading to a Change of Control, or (2) the date that the
Company enters into a definitive agreement that would result in a Change of
Control (even though still subject to approval by the Company's stockholders and
other conditions and contingencies); and ending on the date which is twelve (12)
months after the Change of Control; or
(b) any resignation by the Officer for Good Reason within twelve
(12) months after the occurrence of any Change of Control; but
(c) "Termination Upon Change of Control" shall not include any
termination of the employment of the Officer (1) by the Company for Cause; (2)
by the Company as a result of the Permanent Disability of the Officer; (3) as a
result of the death of the Officer; or (4) as a result of the voluntary
termination of employment by the Officer for reasons other than Good Reason.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Termination Upon Change of Control. The payments and
benefits provided for in Sections 2 and 3 shall constitute the Officer's sole
and exclusive remedy for any alleged injury or other damages arising out of the
cessation of the employment relationship between the Officer and the Company in
the event of Officer's Termination Upon Change of Control.
5.2 No other benefits payable. The Officer shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Officer, except as
expressly set forth in this Agreement or, subject to the provisions of sections
10 and 14, in a duly executed employment agreement between Company and Officer.
5.3 Release of Claims. The Company may condition payment of the cash
severance and consulting benefits described in sections 2.2 and 2.5 of this
Agreement and the stock option acceleration described in section 2.3.1 upon the
delivery by Officer of a signed release of claims in a form reasonably
satisfactory to the Company; provided, however, that
<PAGE> 9
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 9
Officer shall not be required to release any rights Officer may have to be
indemnified by the Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Officer agrees to continue to abide by the terms and conditions of the
Company's confidentiality and/or proprietary rights agreement between the
Officer and the Company.
7. CONFLICT OF INTEREST; NON-SOLICITATION
7.1 Agreement not to solicit. If Company performs its obligations to
deliver the severance benefits set forth in sections 2 and 3 of this Agreement,
then for a period of one (1) year after Officer's Termination Upon Change of
Control, Officer will not, directly or indirectly, solicit the services or
business of or in any other manner persuade any employee, distributor, vendor,
representative or customer of the Company to discontinue that person's or
entity's relationship with or to the Company.
7.2 This provision shall not supersede or limit the more restrictive
terms of any other agreement by Officer to refrain from competition with or from
soliciting the employees or customers of Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of this Agreement, the interpretation, validity or enforceability of
this Agreement or the alleged breach thereof shall be submitted by the parties
to binding arbitration by the American Arbitration Association; provided,
however, that (1) the arbitrator shall have no authority to make any ruling or
judgment that would confer any rights with respect to the trade secrets,
confidential and proprietary information or other intellectual property of the
Company upon Officer or any third party; and (2) this arbitration provision
shall not preclude the Company from seeking legal and equitable relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall
be, at Officer's election, either (1) Santa Clara County, California or (2)
Middlesex County, Massachusetts or (3) if Officer's primary assigned work place
prior to the Change of Control was in neither California nor Massachusetts, a
mutually agreed site located within 25 miles of that work place.
8.3 Cost and expenses borne by Company. All costs and expenses of
arbitration or litigation, including but not limited to reasonable attorneys
fees and other costs reasonably incurred by the Officer, shall be paid by the
Company. Notwithstanding the foregoing, if the Officer initiates the arbitration
or litigation, and the finder of fact finds that Officer's claims were totally
without merit or frivolous, then Officer shall be responsible for Officer's own
attorneys' fees.
<PAGE> 10
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 10
9. INTERPRETATION
Officer and the Company agree that this Agreement shall be interpreted in
accordance with and governed by the laws of the State of California as applied
to contracts entered into and entirely to be performed within that state.
10. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS
10.1 Effect of Agreement. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments and accelerated option vesting due upon Officer's
Termination Upon Change of Control, except as provided in sections 10.2, 10.3
and 14.
10.2 No limitation of regular benefit plans. This Agreement is not
intended to and shall not affect, limit or terminate any plans, programs, or
arrangements of the Company that are regularly made available to a significant
number of employees or officers of the Company, including without limitation the
Company's stock option plans.
10.3 Noncumulation of benefits. Officer may not cumulate cash severance
payments, stock option acceleration and excise tax adjustment or reimbursement
benefits under both this Agreement and another agreement. If Officer has any
other binding written agreement with the Company which provides that after a
Change of Control or termination of employment the Officer shall receive one or
more of the benefits described in sections 2.2, 2.5 and 3 of this Agreement
(i.e., the payment of cash compensation or prorated bonus, post-termination
consulting and adjustments or payments relating to federal excise tax), then
with respect to each such benefit the amount payable under this Agreement shall
be reduced by the corresponding amount paid or payable under such other
agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such agreement shall be a material
breach of this Agreement.
11.2 Acknowledgement by Company. If after a Change of Control the
Company (or any Successor) fails to reasonably confirm that it has performed the
obligation described in section 11.1 withinten (10) days after written notice
from Officer, Officer shall be entitled to terminate Officer's employment with
the Company for Good Reason, and to receive the benefits provided under this
Agreement in the event of Termination Upon Change of Control.
<PAGE> 11
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 11
11.3 Heirs and Representatives of Officer. This Agreement shall inure to
the benefit of and be enforceable by the Officer's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees.
12. NOTICES
For purposes of this Agreement, notices and all other communications provided
for in the Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, as follows:
if to the Company: Bay Networks, Inc.
Attention: General Counsel
4401 Great America Parkway
Santa Clara, CA 95052
and if to the Officer at the address specified on the first page of this
Agreement. Either party may provide the other with notices of change of address,
which shall be effective upon receipt.
13. NO REPRESENTATIONS
Officer acknowledges that in entering into this Agreement, Officer is not
relying and has not relied on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.
14. MODIFICATION AND AMENDMENT
This Agreement may be modified, amended or superseded only by a supplemental
written agreement signed with the same formality as this Agreement by Officer
and by the Company. However, the noncumulation of benefits provision of section
10.3 shall apply to any subsequent agreement, unless (1) such provisions is
explicitly disclaimed in the subsequent agreement, and (2) the subsequent
agreement has been authorized by the Company's Board of Directors or a committee
thereof.
15. VALIDITY
15.1 Invalid provisions. If any one or more of the provisions (or any
part thereof) of this Agreement shall be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
15.2 Execution by two Company executive officers or directors.This
Agreement and any modifications or amendments shall require the signatures of
two executive officers or members of the Board of Directors of the Company.
15.3 Consultation with legal and financial advisers. Officer
acknowledges that this Agreement confers significant legal rights, and may also
involve the waiver of rights
<PAGE> 12
OFFICER RETENTION AND SEVERANCE AGREEMENT PAGE 12
under other agreements; that Company has encouraged Officer to consult with
Officer's personal legal and financial advisers; and that Officer has had
adequate time to consult with Officer's advisers before signing this agreement.
16. SIGNATURES
The parties have executed this Agreement, intending to be legally bound as of
the Effective Date.
OFFICER BAY NETWORKS, INC.
By:
- --------------------------------- ------------------------------------
Officer's signature Printed name:
-------------------------
Printed name: Title:
-------------------- --------------------------------
--------------------------------
By:
------------------------------------
Printed name:
-------------------------
Title:
--------------------------------
--------------------------------
<PAGE> 1
EXHIBIT 11
BAY NETWORKS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Information relating to computation of earnings per share is set forth under
the caption "Earnings Per Share" in Note 10 of the Notes to Condensed
Consolidated Financial Statements. Such information is incorporated by
reference.
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-28-1998
<CASH> 358,389
<SECURITIES> 348,458
<RECEIVABLES> 334,476
<ALLOWANCES> 5,803
<INVENTORY> 164,612
<CURRENT-ASSETS> 1,374,973
<PP&E> 596,424
<DEPRECIATION> 364,103
<TOTAL-ASSETS> 2,028,343
<CURRENT-LIABILITIES> 417,847
<BONDS> 98,744
0
0
<COMMON> 2,214
<OTHER-SE> 1,509,538
<TOTAL-LIABILITY-AND-EQUITY> 2,028,343
<SALES> 1,793,376
<TOTAL-REVENUES> 1,793,376
<CGS> 898,894
<TOTAL-COSTS> 898,894
<OTHER-EXPENSES> 260,747
<LOSS-PROVISION> (35)
<INTEREST-EXPENSE> 4,425
<INCOME-PRETAX> 17,459
<INCOME-TAX> 60,824
<INCOME-CONTINUING> (43,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 12,018
<NET-INCOME> (55,383)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-27-1997
<CASH> 380,366
<SECURITIES> 393,079
<RECEIVABLES> 319,961
<ALLOWANCES> 7,058
<INVENTORY> 148,454
<CURRENT-ASSETS> 1,417,311
<PP&E> 563,149
<DEPRECIATION> 339,148
<TOTAL-ASSETS> 1,991,513
<CURRENT-LIABILITIES> 429,809
<BONDS> 98,744
0
0
<COMMON> 2,144
<OTHER-SE> 1,460,816
<TOTAL-LIABILITY-AND-EQUITY> 1,991,513
<SALES> 1,246,194
<TOTAL-REVENUES> 1,246,194
<CGS> 607,985
<TOTAL-COSTS> 607,985
<OTHER-EXPENSES> 170,270
<LOSS-PROVISION> (75)
<INTEREST-EXPENSE> 3,005
<INCOME-PRETAX> 156,541
<INCOME-TAX> 55,740
<INCOME-CONTINUING> 100,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 12,018
<NET-INCOME> 88,783
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-27-1997
<CASH> 560,374
<SECURITIES> 266,262
<RECEIVABLES> 257,876
<ALLOWANCES> 7,693
<INVENTORY> 144,096
<CURRENT-ASSETS> 1,391,024
<PP&E> 547,808
<DEPRECIATION> 310,583
<TOTAL-ASSETS> 1,900,405
<CURRENT-LIABILITIES> 425,314
<BONDS> 110,744
0
0
<COMMON> 2,112
<OTHER-SE> 1,362,235
<TOTAL-LIABILITY-AND-EQUITY> 1,900,405
<SALES> 601,280
<TOTAL-REVENUES> 601,280
<CGS> 294,888
<TOTAL-COSTS> 294,888
<OTHER-EXPENSES> 80,927
<LOSS-PROVISION> (286)
<INTEREST-EXPENSE> 1,165
<INCOME-PRETAX> 66,429
<INCOME-TAX> 25,099
<INCOME-CONTINUING> 41,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,330
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 410,227
<SECURITIES> 118,192
<RECEIVABLES> 304,064
<ALLOWANCES> 8,561
<INVENTORY> 145,210
<CURRENT-ASSETS> 1,146,860
<PP&E> 511,330
<DEPRECIATION> 258,847
<TOTAL-ASSETS> 1,617,408
<CURRENT-LIABILITIES> 360,770
<BONDS> 109,995
0
0
<COMMON> 1,989
<OTHER-SE> 1,144,654
<TOTAL-LIABILITY-AND-EQUITY> 1,617,408
<SALES> 1,550,084
<TOTAL-REVENUES> 1,550,084
<CGS> 795,022
<TOTAL-COSTS> 795,022
<OTHER-EXPENSES> 196,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,617
<INCOME-PRETAX> (143,334)
<INCOME-TAX> 23,670
<INCOME-CONTINUING> (167,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167,004)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 334,816
<SECURITIES> 130,839
<RECEIVABLES> 264,423
<ALLOWANCES> 9,030
<INVENTORY> 177,941
<CURRENT-ASSETS> 1,062,971
<PP&E> 492,467
<DEPRECIATION> 244,463
<TOTAL-ASSETS> 1,552,562
<CURRENT-LIABILITIES> 322,800
<BONDS> 110,055
0
0
<COMMON> 1,973
<OTHER-SE> 1,117,734
<TOTAL-LIABILITY-AND-EQUITY> 1,552,562
<SALES> 1,037,191
<TOTAL-REVENUES> 1,037,191
<CGS> 534,791
<TOTAL-COSTS> 534,791
<OTHER-EXPENSES> 123,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,977
<INCOME-PRETAX> (143,735)
<INCOME-TAX> 23,524
<INCOME-CONTINUING> (167,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167,259)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 340,727
<SECURITIES> 111,200
<RECEIVABLES> 302,945
<ALLOWANCES> 8,741
<INVENTORY> 214,736
<CURRENT-ASSETS> 1,101,139
<PP&E> 447,937
<DEPRECIATION> 216,694
<TOTAL-ASSETS> 1,532,708
<CURRENT-LIABILITIES> 330,213
<BONDS> 110,080
0
0
<COMMON> 1,885
<OTHER-SE> 1,090,530
<TOTAL-LIABILITY-AND-EQUITY> 1,532,708
<SALES> 522,654
<TOTAL-REVENUES> 522,654
<CGS> 249,915
<TOTAL-COSTS> 249,915
<OTHER-EXPENSES> 54,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,510
<INCOME-PRETAX> 33,372
<INCOME-TAX> 27,747
<INCOME-CONTINUING> 5,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,625
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 315,064
<SECURITIES> 119,093
<RECEIVABLES> 330,575
<ALLOWANCES> 9,683
<INVENTORY> 239,725
<CURRENT-ASSETS> 1,117,709
<PP&E> 401,485
<DEPRECIATION> 189,811
<TOTAL-ASSETS> 1,506,535
<CURRENT-LIABILITIES> 301,693
<BONDS> 110,147
0
0
<COMMON> 1,885
<OTHER-SE> 1,092,810
<TOTAL-LIABILITY-AND-EQUITY> 1,506,535
<SALES> 2,056,634
<TOTAL-REVENUES> 2,056,634
<CGS> 945,318
<TOTAL-COSTS> 945,318
<OTHER-EXPENSES> 213,521
<LOSS-PROVISION> 1,364
<INTEREST-EXPENSE> 5,927
<INCOME-PRETAX> 351,816
<INCOME-TAX> 145,491
<INCOME-CONTINUING> 206,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,325
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.04
</TABLE>
