EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of April 1, 1998, by and between COYOTE NETWORK
SYSTEMS, INC., a Delaware corporation (the "Company"), and XXXXXX X. XXXXXX (the
"Executive").
R E C I T A L S
WHEREAS, Executive is willing to be employed by Company, and the Company is
willing to employ the Executive, upon the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in order to set forth the terms and conditions of
Executive's employment with Company and in consideration of the covenants and
agreements of the parties herein contained, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Employment Services. Subject to the terms and upon the conditions
hereinafter set forth, the Company hereby employs Executive as President
and Chief Operating Officer. Executive accepts such employment and agrees
to devote his full time and use his best efforts to perform his duties
pursuant to this Agreement and to further the business of the Company.
Executive shall not, without the prior written consent of the Company as
authorized by the Company's Board of Directors ("Board of Directors"),
engage directly or indirectly in any other business or occupation during
his employment under this Agreement. Subject to the foregoing, Executive
shall be permitted to manage his own personal investments and, with the
consent of the Board of Directors, sit on the board of directors (or other
governing body) of other companies.
2. Term and Termination.
2.1 Term. Subject to Section 2.2 hereof, the employment of Executive under this
Agreement shall be deemed to have commenced on April 1, 1998 and will
continue until the occurrence of the first of the following:
(a) March 31, 2003 (i.e., a term of five years);
(b) Executive's death; or
(c) Executive's illness, physical or mental disability or other incapacity
resulting in Executive's inability to effectively perform the
essential functions of his job, with or without reasonable
accommodation, for a cumulative period of twenty-six (26) weeks during
any period of twenty-six (26) consecutive months.
The term of this Agreement may only be extended by the written agreement of
both the Company (as approved by the Board of Directors) and the Executive, as
provided in Section 11.1. The term of Executive's employment by the Company
under this Agreement is referred to herein as the "Term."
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2.2 Termination. The employment of Executive under this Agreement may also be
terminated at the option of the Board of Directors upon the occurrence of
any of the following:
(a) Executive's civil adjudication or criminal conviction of fraud or
Executive's dishonesty involving Company's business,
(b) Executive's chronic absence from work other than by reason of illness
or injury,
(c) Executive's conviction of any felony,
(d) Executive's conviction of any misdemeanor which is substantially
related to Executive's services hereunder,
(e) Executive's continuing use of illegal drugs or other illegal substance
(whether or not on the job) after receiving a written notice from the
Company to halt such usage or Executive's conviction of a crime
involving illegal drugs or other illegal substance,
(f) Executive's continuing abuse of alcohol (whether or not on the job)
after receiving a written notice from the Company to halt such usage
or Executive's conviction of a crime involving alcohol, which impairs
Executive's ability to perform Executive's duties under this Agreement
or has an adverse effect (other than an insignificant effect) on the
reputation of the Company or its relationship with any customer or
supplier of the Company,
(g) Executive's illegal conduct either within or outside the scope of
Executive's employment which has an adverse effect (other than an
insignificant effect) on the reputation of the Company or its
relationship with any customer or supplier of the Company,
(h) Executive's breach of his obligations under Sections 6, 7, 8 or 9
hereof, or
(i) Executive's breach of any other provision of this Agreement.
If the Board of Directors terminates the employment of the Executive
without any such reason as aforesaid, which Executive agrees the Board of
Directors is entitled to do since Executive serves at the discretion of the
Board of Directors, then Executive shall nevertheless be entitled to the
Guaranteed Minimum Salary (defined below) hereunder until the date specified in
Section 2.1 and to deferred compensation for the duration of the Deferred Term
(defined below), and no more. In the case of any other termination of the
Executive's employment, the salary and benefits hereunder will terminate as of
the date of such termination, except as provided in Section 3.2. Reference is
made to Section 11.1 of this Agreement regarding the authority of the Board of
Directors to make determinations on behalf of the Company for purposes of this
Agreement.
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2.3 Effect of Termination. Executive's obligations in Sections 6, 7, 8, and 9
hereof, and the Company's obligations under Section 3.2, shall survive the
termination of Executive's employment hereunder for any reason.
3. Annual and Deferred Compensation.
3.1 Annual Compensation. The Company agrees to pay Executive for each full
fiscal year of the Term (a) a guaranteed minimum annual salary, payable not
less frequently than semi-monthly, at a rate of $300,000 (the "Guaranteed
Minimum Salary") or (b) the Variable Salary Amount (defined below),
whichever is greater, not to exceed fifteen times the Guaranteed Minimum
Salary. The Variable Salary Amount shall be: for the first year of the
Term, 10% of the first $6.0 million of pre-tax income of the Company and 5%
of pre-tax income in excess of $6.0 million; for the second year of the
Term, 7-1/2% of the first $6.0 million of pre-tax income of the Company and
5% of pre-tax income in excess of $6.0 million; and for the third, fourth
and fifth fiscal years of the Term, 5% of the pre-tax income of the
Company. The Company's pre-tax income shall be its consolidated income
after all expenses, adjustments and deductions except income taxes, but
shall not include the effects, if any, of extraordinary items and
accounting changes, as set forth in the Company's consolidated financial
statements as included in its annual report on Form 10-K for such fiscal
year as filed with the Securities and Exchange Commission (in the absence
of such filing, to be based on the Company's financial statements otherwise
prepared). Any amounts due Executive in excess of the Guaranteed Minimum
Salary shall be paid within fifteen days after the Company determines its
pre-tax income for the applicable fiscal year. All payments hereunder shall
be subject to withholding and other deductions by reason of federal or
state law.
Examples of the calculation of Executive's salary are set forth below:
Year Pre-Tax Income Calculation Annual Salary
---- -------------- ------------------------- -------------
1 0 10% x $0 = $0 $300,000
(minimum salary $300,000)
2 $7,000,000 7-1/2% x $6.0 million + $500,000
5% x $1.0 million =
$500,000
3 $12,000,000 5% x $12.0 million = $600,000
$600,000
4 $20,000,000 5% x $20.0 million = $1,000,000
$1,000,000
5 $100,000,000 5% x $100,000,000 = $4,500,000
$5,000,000
(maximum salary of 15 x $300,000)
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3.2. Deferred Compensation. As further compensation for the services to be
performed by Executive hereunder, for a period of five years (or such
shorter duration equal to the number of full years of the Term) following
the Term (the "Deferred Term"), the Company shall pay Deferred Compensation
to Executive as follows. The Deferred Compensation shall be: for the first
year of the Deferred Term, 10% of the pre-tax income of the Company for the
first year of the Term; for the second year of the Deferred Term, 7-1/2% of
pre-tax income of the Company for the second year of the Term; and for the
third, fourth and fifth years of the Deferred Term, 5% of pre-tax income of
the Company for the corresponding year of the Term; provided, however, the
Deferred Compensation for any year shall not exceed two times the
Guaranteed Minimum Salary for the corresponding year of the Term. The first
year of the Deferred Term shall correspond to the first year of the Term
and each subsequent year of the Deferred Term shall correspond to each
subsequent year of the Term. Such Deferred Compensation shall be payable in
equal installments, not less frequently than monthly, and shall be subject
to withholding and other deductions by reason of federal or state law. If
Executive should die during the Deferred Term, the Company shall continue
to make the payments required by this Section 3.2 for the balance of the
Deferred Term to such beneficiary as the Executive may designate for that
purpose in written notice given to the Secretary of the Company prior to
his death or, in the absence of such designation, to his personal
representatives.
Examples of the calculation of Deferred Compensation are set forth below:
Corresponding
Deferred
Compensation
Year (starting Pre-Tax Deferred
Contract after the 5th Income During Compensation
Year Contract Year Contract Year Calculation Amount
-------- -------------- ------------- ---------------------------- ------------
1 1 $ 0 10% x 0 = $0 0
2 2 $ 4,000,000 7-1/2% x $4,000,000 = $300,000 $ 300,000
3 3 $ 6,000,000 5% x $6,000,000 = $300,000 $ 300,000
4 4 $ 10,000,000 5% x $10,000,000 = $500,000 $ 500,000
5 5 $ 20,000,000 5% x $20,000,000 = $1,000,000 $ 600,000
(maximum of double minimum
salary or 2 x $300,000)
4. Reimbursement for Expenses. Company agrees to reimburse Executive for all
reasonable business expenses incurred by him in connection with the
performance of his obligations under this Agreement, subject to established
reimbursement policies of the Company in effect from time-to-time regarding
expense reimbursement.
5. Fringe Benefits. Executive shall be entitled to the following fringe
benefits during the term of his employment under this Agreement. The
Executive understands that he will recognize income to the extent provided
by law in respect of certain of the benefits hereunder, and that these
benefits shall be subject to withholding and other deductions by reason of
federal or state law.
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5.1 Vacation. Executive shall be allowed four (4) weeks of vacation per year,
with full pay and without loss of any other compensation or benefits,
during the term of this Agreement. Executive shall coordinate the schedule
of his vacations with other executives and the personnel of Company and its
affiliates so as to avoid any adverse effects on the Company's operations.
5.2 Stock Options. Executive shall be entitled to receive ten-year stock
options of the Company for 450,000 shares of stock, with vesting and
exercise prices set forth below:
Number of Shares Vesting (years) Exercise Price
90,000 1 $4.00
90,000 2 $8.00
90,000 3 $12.00
90,000 4 $16.00
90,000 5 $20.00
The options must be exercised within five (5) years after termination of
employment.
5.3 Medical Benefits. During the Term and the Deferred Term, the Company will
pay or reimburse Executive for all medical expenses for the Executive, his
spouse and unemancipated children, including physician, hospital, dental,
optometrical, nursing, nursing home and drug expenses.
5.4 Other Fringe Benefits. Executive may receive such other additional fringe
benefits, if any, as the Board of Directors may from time-to-time make
available to Executive at the Board of Directors' sole discretion.
5.5 Other Benefits. The Board may, in its sole discretion, award additional
compensation to Executive, by way of increased salary, bonus, options or
otherwise, as a result of the Company's operating performance or other
factors.
5.6 Change of Control. In the event of a Change of Control, the stock options
for all 450,000 shares of stock referred to in Section 5.2 shall
immediately vest, the Company shall pay to Executive in a lump sum all
accrued but unpaid Deferred Compensation under Section 3.2 and the Company
shall pay to Executive in a lump sum the Guaranteed Minimum Salary that
would be earned over the remainder of the Term (in each case net of
applicable withholding and other taxes). In addition, any subsequently
earned Variable Salary Amount and Deferred Compensation shall be paid to
Executive within fifteen days after the Company determines its pre-tax
income for the applicable year of the Term. In the event that Employee
ceases to be an employee of the Company for any reason following such
Change of Control, whether upon voluntary resignation, involuntary
termination or otherwise (except if such employment is terminated by the
Company pursuant to Section 2.2), then Executive shall be entitled to
receive Deferred Compensation and Variable Salary Amount prorated and
calculated through the end of the fiscal quarter of such termination, and
all medical benefits set forth in Section 5.3 shall continue to be provided
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for the remainder of the originally-scheduled Term and the full five year
originally-scheduled Deferred Term. As used herein, a Change of Control
means any transaction in which substantially all the assets of the Company
are acquired or 50% or more of the issued and outstanding common stock of
the Company is acquired by a single person, entity or group of such persons
or entities. Nothing herein shall limit Executive's damages in the event
Executive is terminated without cause following a Change of Control or
otherwise.
6. Definitions.
As used in this Agreement, the following words have the meanings specified:
(a) "Proprietary Ideas" means ideas, suggestions, inventions and work
relating in any way to the business and activities of Company which
may be subjects of protection under applicable laws, including common
law, including patents, copyrights, trade secrets, trademarks, service
marks or other intellectual property rights.
(b) "Inventions" means inventions, designs, discoveries, improvements and
ideas, whether or not patentable, including without limitation, novel
or improved products, processes, machines, software, promotional and
advertising materials, business data processing programs and systems,
and other manufacturing and sales techniques, which either (a) relate
to (i) the business of Company as conducted from time-to-time or (ii)
the Company's actual or demonstrably anticipated research or
development, or (b) result from any work performed by Executive for
Company.
(c) "Confidential Information" means Proprietary Ideas and also
information related to Company's business, whether or not in written
or printed form, not generally known in the trade or industry of which
Executive has or will become informed during the period of employment
by the Company, which may include but is not limited to product
specifications, manufacturing procedures, methods, equipment,
compositions, technology, formulas, trade secrets, know-how, research
and development programs, sales methods, customer lists, mailing
lists, customer usages and requirements, software and other
confidential technical or business information and data; provided,
however, that Confidential Information shall not include any
information which is in the public domain by means other than
disclosure by Executive.
(d) As used in Sections 6, 7, 8, and 9 only, the term "Company" shall
include all entities affiliated with the Company.
7. Disclosure and Assignment of Inventions. Executive agrees to disclose to
the Company (and, if requested to do so, to provide a written description
thereof to the Company), and hereby assigns to Company all of Executive's
rights in and to, any Inventions conceived or reduced to practice at any
time during Executive's employment by Company, either solely or jointly
with others and whether or not developed on Executive's own time or with
Company's resources. Executive agrees that Inventions first reduced to
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practice within one (1) year after termination of Executive's employment by
Company shall be treated as if conceived during such employment unless
Executive can establish specific events giving rise to the conception which
occurred after such employment. Further, Executive disclaims and will not
assert any rights in Inventions as having been made, conceived or acquired
prior to employment by Company except such as are specifically listed at
the conclusion of this Agreement. Executive shall cooperate with Company
and shall execute and deliver such documents and do such other acts and
things as Company may request, at Company's expense, to obtain and maintain
letters patent or registrations covering any Inventions and to vest in
Company all rights therein free of all encumbrances and adverse claims.
8. Confidential Information. Except as required by law or regulatory agencies,
Executive shall not disclose to Company or induce Company to use any secret
or confidential information belonging to persons not affiliated with
Company, including any former employer of Executive. In addition to all
duties of loyalty imposed on Executive by law, Executive shall maintain
Confidential Information in strict confidence and secrecy and shall not at
any time, during or at any time after termination of employment with
Company, directly or indirectly, use or disclose to others any Confidential
Information, or use it for the benefit of any person or entity (including
Executive) other than Company, without the prior written consent of any
duly authorized officer of Company (except for disclosures to persons
acting on Company's behalf with a need to know such information). Executive
shall carefully preserve any documents, records and tangible data relating
to Inventions or Confidential Information coming into Executive's
possession and shall deliver the same and any copies thereof to Company
upon request and, in any event, upon termination of Executive's employment
by Company.
9. Non-Competition.
(a) At all times during Executive's employment by the Company (whether
pursuant to this Agreement or otherwise) and, to the fullest extent
permitted by applicable law, for a period of twelve (12) months
following the termination of such employment, Executive will not, in
any capacity whatsoever, in any state in the United States or in any
other country, directly or indirectly, participate in or assist in the
ownership, management, operation or control of, or have any beneficial
interest in, or provide employment, consulting or other services for,
any corporation, partnership, association or other person or entity
("Competitive Business") which is engaged in the development,
manufacture, marketing, distribution, service and/or sale of voice or
data switching equipment, and which directly competes or is planning
to directly compete with the Company's products or services (including
products and services under development). If the business is
multi-faceted, this restriction shall apply to only that part of the
business which is competitive to Company.
(b) In furtherance of the foregoing, but as an independent obligation of
Executive, Executive agrees that he will not, to the fullest extent
permitted by applicable law, during the one-year period following
termination of his employment with Company, be connected in any way
with the solicitation of any then current or potential customers or
suppliers of Company if such solicitation is likely to result in a
loss of business for Company.
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(c) In furtherance of the foregoing, but as an independent obligation of
the Executive, Executive agrees that, to the fullest extent permitted
by applicable law, during the one year following termination of his
employment with the Company, he will not solicit for employment,
employ or engage as a consultant any person who had been an employee
of the Company at any time in the one-year period prior to termination
of Executive's employment with Company.
(d) In the event the covenants set forth in this Section 9 are found to be
unenforceable or invalid by reason of being overly broad, the parties
hereto intend that such covenants shall be limited to such scope,
geographic area and duration as shall make such covenants valid and
enforceable.
10. Government Laws, Regulations and Contracts. Executive agrees to comply, and
to do all things necessary for Company to comply, with all federal, state,
local and foreign laws and regulations and government contracts which may
be applicable to the business and operations of Company.
11. Miscellaneous.
11.1 Amendment and Modification. Company (by action of its Board of Directors)
and Executive may amend, modify and supplement this Agreement only in such
manner as may be agreed upon by Company and Executive in writing. This
provision shall be applicable to any extension of the term of this
Agreement as provided in Section 2.1. All determinations, waivers,
consents, approvals or other acts on the part of the Company that are
permitted or required by this Agreement shall similarly require the
approval of the Board of Directors.
11.2 Entire Agreement. This instrument embodies the entire agreement between the
parties hereto with respect to the employment relationship created hereby
and supersedes and discharges any prior agreements pertaining to employment
between Executive and the Company. There have been and are no agreements,
representations or warranties between the parties other than those set
forth or provided for herein relating to such employment relationship.
11.3 Assignment. This Agreement shall not be assigned by either party without
the written consent of the other party. Inasmuch as this Agreement
contemplates the provision of personal services by the Executive,
ordinarily this Agreement shall not be assignable by the Executive. This
Agreement shall not be assigned by the Company except with the prior
written consent of the Executive, which he shall not unreasonably withhold.
Any attempted assignment without such written consent shall be null and
void and without legal effect.
11.4 Binding Effect; Specific Performance. Subject to Section 11.3 hereof, this
Agreement shall be binding upon and inure to the benefit of the respective
parties hereto and their successors, assigns, heirs, executors,
administrators and personal representatives. The parties hereto shall be
entitled, at their option, to the remedy of specific performance to the
fullest extent permitted by applicable law in enforcing the provisions of
this Agreement.
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11.5 Arbitration. Any dispute, controversy or claim arising out of or relating
to this Agreement, or the breach hereof, or the employment relationship
hereunder, shall be settled by binding arbitration in Los Angeles,
California administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
11.6 Agreement Severable; Waiver. This is a severable Agreement and in the event
that any part of this Agreement shall be held to be unenforceable, all
other parts of this Agreement shall remain valid and fully enforceable as
if the unenforceable part or parts had not been included herein. No waiver
of any provision of this Agreement shall be binding unless executed in
writing by the party to be bound hereby. No waiver of a breach of any of
the provisions of this Agreement shall be deemed to be or shall constitute
a waiver of a breach of any other provision of this Agreement, whether or
not similar, nor shall such waiver constitute a continuing waiver of such
breach unless otherwise expressly provided. No failure or delay in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power
or remedy preclude any other or further exercise thereof or the exercise of
any other right, power or remedy.
11.7 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 actually delivered to the recipient
or when mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
If to Executive, to: Xxxxx X. Xxxxxxx
0000 Xxxx Xxxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, XX 00000
If to Company, to: Coyote Network Systems, Inc.
Attn: Board of Directors
0000 Xxxx Xxxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, XX 00000
or to such other address as either party may have furnished to the other in
writing in accordance herewith except that notices of a change of address
shall be effective only upon receipt.
11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE
CHOICE OF LAW PRINCIPLES THEREOF.
EXECUTIVE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A COPY OF THIS
AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND AGREES THAT, WITH RESPECT TO
THE SUBJECT MATTER HEREOF, IT CONSTITUTES EXECUTIVE'S ENTIRE AGREEMENT WITH
COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS,
REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF
ITS OFFICIALS OR REPRESENTATIVES.
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Notwithstanding anything to the contrary in Section 7 hereof, this
Agreement does not apply to an Invention for which no equipment, supplies,
facility, or trade secret information of the Company was used and which was
developed entirely on Executive's own time, unless (a) the Invention
relates (i) to the business of the Company as conducted from time-to-time
or (ii) to the Company's actual or demonstrably anticipated research or
development, or (b) the Invention results from any work performed by the
Executive for the Company.
NOTWITHSTANDING THE FORGOING PROVISIONS OF SECTION 7, EXECUTIVE IS HEREBY
NOTIFIED BY THE COMPANY THAT SUCH PROVISIONS DO NOT APPLY TO ANY INVENTION
THAT QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE. BY HIS SIGNATURE BELOW, EXECUTIVE HEREBY ACKNOWLEDGES RECEIPT
OF SUCH NOTIFICATION.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and effective as of the day and year first above written.
COYOTE NETWORK SYSTEMS, INC. ("Company")
By: /s/ Xxxx X. Xxxxxxxx
-------------------------
Xxxx X. Xxxxxxxx
XXXXXX X. XXXXXX ("Executive")
By: /s/ Xxxxxx X. Xxxxxx
-------------------------
Xxxxxx X. Xxxxxx
List of Inventions Excepted From Section 7 Above:
None
MW1-130274-3
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