<PAGE> 1
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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 DECEMBER 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-1936 6
-------------------------------
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.
219,776,143 shares of Common Stock, $.01 par value, as of January 24, 1998
This report on Form 10-Q includes exhibits. The exhibit index is
located on page 19 of this report.
================================================================================
<PAGE> 2
BAY NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 27, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - December 27, 1997
and June 30, 1997 3
Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended December 27, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended December 27, 1997 and December 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 27, JUNE 30,
1997 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 380,366 $ 529,962
Short-term investments 393,079 105,180
Accounts receivable, net of allowance for doubtful
accounts of $7,058 at December 27, 1997 and
$8,477 at June 30, 1997 312,903 277,860
Inventories 148,454 144,468
Deferred income taxes 133,890 121,596
Other current assets 48,619 69,351
---------- ----------
Total current assets 1,417,311 1,248,417
Investments 216,967 146,367
Property and equipment, net 224,001 241,069
Goodwill 101,479 113,811
Other assets 31,755 16,382
---------- ----------
$1,991,513 $1,766,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,262 $ 117,596
Accrued expenses 213,627 201,266
Accrued income taxes 15,942 39,269
Deferred revenue 65,978 62,678
---------- ----------
Total current liabilities 429,809 420,809
Long-term debt 98,744 109,995
Stockholders' equity 1,462,960 1,235,242
---------- ----------
$1,991,513 $1,766,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 27, DECEMBER 31, DECEMBER 27, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 644,914 $ 514,537 $ 1,246,194 $ 1,037,191
Cost of sales 313,097 284,876 607,985 534,791
------------ ------------ ------------ ------------
Gross profit 331,817 229,661 638,209 502,400
------------ ------------ ------------ ------------
Operating expenses:
Research and development 89,343 68,569 170,270 123,523
Sales and marketing 136,472 151,515 272,362 279,730
General and administrative 24,942 26,430 49,351 46,005
In-process research and development -- 165,538 7,392 208,186
------------ ------------ ------------ ------------
Total operating expenses 250,757 412,052 499,375 657,444
------------ ------------ ------------ ------------
Income (loss) from operations 81,060 (182,391) 138,834 (155,044)
Net interest income and other 9,052 5,284 17,707 11,309
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and cumulative effect
of a change in accounting principle 90,112 (177,107) 156,541 (143,735)
Provision (benefit) for income taxes 30,641 (4,223) 55,740 23,524
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle 59,471 (172,884) 100,801 (167,259)
Cumulative effect of a change in accounting
principle, net of tax 12,018 -- 12,018 --
------------ ------------ ------------ ------------
Net income (loss) $ 47,453 $ (172,884) $ 88,783 $ (167,259)
============ ============ ============ ============
Earnings (loss) per share amounts:
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle:
Basic earnings (loss) per share $ 0.28 $ (0.90) $ 0.48 $ (0.88)
========= ======== ========= =========
Diluted earnings (loss) per share $ 0.27 $ (0.90) $ 0.46 $ (0.88)
========= ======== ========= =========
Cumulative effect of a change in
accounting principle:
Basic earnings per share $ 0.06 $ -- $ 0.06 $ --
========= ======== ========= =========
Diluted earnings per share $ 0.05 $ -- $ 0.05 $ --
========= ======== ========= =========
Net income (loss):
Basic earnings (loss) per share $ 0.22 $ (0.90) $ 0.42 $ (0.88)
========= ======== ========= =========
Diluted earnings (loss) per share $ 0.22 $ (0.90) $ 0.41 $ (0.88)
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
BAY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
DECEMBER 27, DECEMBER 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 88,783 $ (167,259)
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 79,240 55,556
In-process research and development 7,392 208,186
Benefit from deferred income taxes (10,039) (15,306)
Cumulative effect of a change in accounting principle 12,018 --
Changes in operating assets and liabilities:
Accounts receivable (35,043) 70,479
Inventories (3,986) 66,485
Other current assets 20,732 (22,985)
Accounts payable 16,666 5,162
Accrued expenses 4,361 4,913
Accrued income taxes 10,001 894
Deferred revenue 3,300 6,021
----------- -----------
Cash flows provided by operating activities 193,425 212,146
----------- -----------
Cash flows used in investing activities:
Expenditures for property and equipment (63,745) (89,016)
Consulting expenditures on information technology systems (3,259) (1,971)
Purchases of investments (538,909) (94,544)
Proceeds from maturities of investments 172,910 69,371
Proceeds from sales of investments 7,500 13,590
Acquisitions:
LANcity, net of cash acquired -- (58,821)
Penril DSP -- (6,549)
NetICs, net of cash acquired -- (37,087)
Other assets (1,047) 9,937
----------- -----------
Cash flows used in investing activities (426,550) (195,090)
----------- -----------
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) (92)
Purchases of treasury common stock -- (11,827)
Issuances of common stock 95,529 18,780
----------- -----------
Cash flows provided by financing activities 83,529 2,696
----------- -----------
Net increase (decrease) in cash and cash equivalents (149,596) 19,752
Cash and cash equivalents, beginning of period 529,962 315,064
----------- -----------
Cash and cash equivalents, end of period $ 380,366 $ 334,816
=========== ===========
Non-cash investing activities:
Unrealized gain on minority (cost) investments, net $ 10,078 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
BAY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bay Networks, Inc. (the Company or Bay Networks) develops, manufactures,
markets, sells and supports a comprehensive line of data networking products and
services. The Company provides products that meet the connectivity requirements
of corporate enterprises, network service providers and telecommunications
carriers. The Company offers products such as switches, routers, shared media
hubs, remote and Internet access solutions, Internet Protocol (IP) services and
network management applications, that operate under open standards. The
Company's products provide adaptive networking solutions to network managers
that allow seamless operation of multi-protocol and multi-vendor networks.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for the in-process
research and development charges incurred during the six month period ended
December 27, 1997, and the three and six month periods ended December 31, 1996.
The results of operations for the interim periods presented are not necessarily
indicative of results for any future interim period or for the entire fiscal
year. Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. The unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the consolidated financial
statements and notes for the fiscal year ended June 30, 1997, included in the
Company's 1997 Annual Report on Form 10-K.
Beginning with the first quarter of fiscal year 1998, for purposes of
operational efficiency, the Company's fiscal quarters end on the Saturday
closest to the end of each calendar quarter. Accordingly, for fiscal year 1998,
the fiscal quarters end on September 27, 1997, December 27, 1997, March 28,
1998, and the fiscal year will end on June 27, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
2. CONSOLIDATED BALANCE SHEET INFORMATION
Inventories. Inventories, stated at the lower of cost (first-in, first-out)
or market, consist of:
<TABLE>
<CAPTION>
DECEMBER 27, 1997 JUNE 30, 1997
------------------ -------------
(in thousands) (unaudited)
<S> <C> <C>
Raw materials $ 21,831 $ 21,068
Work-in-process 43,310 45,140
Finished goods 83,313 78,260
----------- -----------
Total inventories $ 148,454 $ 144,468
=========== ===========
</TABLE>
Property and Equipment. In November 1997, 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.
6
<PAGE> 7
<TABLE>
<CAPTION>
DECEMBER 27, 1997 JUNE 30, 1997
----------------- -------------
(in thousands) (unaudited)
<S> <C> <C>
Land $ 1,336 $ --
Building and improvements 6,113 --
Machinery and equipment 435,716 402,192
Furniture and fixtures 47,018 45,188
Leasehold improvements 72,966 76,679
----------- ----------
Total property and equipment 563,149 524,059
Accumulated depreciation and amortization (339,148) (282,990)
----------- ----------
Total property and equipment, net $ 224,001 $ 241,069
=========== ==========
</TABLE>
3. FOREIGN EXCHANGE HEDGING
The Company had $21.8 million of short-term foreign exchange forward
contracts outstanding, which approximated the fair value of such contracts and
their underlying transactions at December 27, 1997. These contracts are
denominated in Australian, Canadian, French, German, 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 December 27, 1997, were not material. In
addition, the Company has not terminated or extinguished any foreign exchange
forward contracts. The Company does not anticipate any material adverse effect
on its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments.
4. LONG-TERM DEBT
In November 1997, 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.
5. INCOME TAXES
The Company's provision for income taxes for the three month and six month
periods ended December 27, 1997, is based upon the Company's estimate of the
effective tax rate for fiscal year 1998. The Company's effective tax rate for
the three month and six month periods ended December 27, 1997, was 34% excluding
the effect of the in-process research and development charge which was not
deductible for income tax purposes. The Company's accrued income taxes was
reduced by a tax benefit from employee stock option transactions of $15.3
million and $33.3 million for the three month and six month periods ended
December 27, 1997, respectively, which was credited directly to stockholders'
equity.
6. CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, 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 three and six month periods ended
December 27, 1997. 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.
7
<PAGE> 8
7. 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. 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.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------
DECEMBER 27, DECEMBER 31, DECEMBER 27, DECEMBER 31,
(in thousands, except per share amounts) 1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NUMERATOR:
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle $ 59,471 $ (172,884) $ 100,801 $ (167,259)
----------- ----------- ----------- -----------
Numerator for basic earnings per share -
income (loss) available to common
stockholders $ 59,471 $ (172,884) $ 100,801 $ (167,259)
=========== =========== =========== ===========
Effect of dilutive securities:
5.25% convertible debentures, net of tax 953 -- 1,854 --
----------- ----------- ----------- -----------
Numerator for diluted earnings per share -
income (loss) available to common
stockholders after assumed conversions $ 60,424 $ (172,884) $ 102,655 $ (167,259)
=========== =========== =========== ===========
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 213,054 192,119 211,271 190,194
Effect of dilutive securities:
Employee stock options 9,450 -- 10,282 --
5.25% convertible debentures 2,300 -- 2,511 --
----------- ----------- ----------- -----------
Dilutive potential common shares 11,750 -- 12,793 --
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 224,804 192,119 224,064 190,194
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.28 $ (0.90) $ 0.48 $ (0.88)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.27 $ (0.90)(1) $ 0.46 $ (0.88)(1)
=========== =========== =========== ===========
</TABLE>
(1) Diluted earnings per share does not reflect any potential shares relating to
employee stock options or convertible debentures due to a loss reported for the
period, in accordance with SFAS 128. The assumed issuance of any additional
shares would be antidilutive.
For additional disclosure regarding the 5.25% convertible debentures and
employee stock options, see Notes 3 and 6 in the Company's 1997 Annual Report on
Form 10-K, respectively.
8
<PAGE> 9
8. SIGNIFICANT CUSTOMERS
One reseller customer accounted for 10.2% and another reseller customer
accounted for 10.7% of the Company's revenue in the three month and six month
periods ended December 27, 1997, respectively. No one reseller customer
accounted for more that 10% of the Company's revenue in the three month or six
month periods ended December 31, 1996.
9. SUBSEQUENT EVENTS
In January 1998, the Company acquired New Oak Communications, Inc. (New Oak)
based in Acton, Massachusetts, for consideration of approximately $156.0
million. New Oak is a developer of Extranet Access technology, which provides
scalable, secure, and manageable use of the Internet. The acquisition will be
accounted for as a purchase with the Company exchanging a combination of
5,093,551 million shares of the Company's common stock and cash of approximately
$23.0 million for all of the outstanding shares and options of New Oak. 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. Based on preliminary estimates, the Company expects that a
substantial portion of the total purchase price will be allocated to in-process
research and development and will be charged to operations during the quarter
ended March 28, 1998.
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.
In February 1998, the Company signed a definitive agreement to acquire
Netsation Corporation (Netsation), a developer of multi-vendor network
management, based near Research Triangle Park, North Carolina. The Company will
pay $11.6 million in cash for all of the outstanding shares of Netsation and the
acquisition will be accounted for as a purchase. Based on preliminary estimates,
the Company expects that a substantial portion of the total purchase price will
be allocated to in-process research and development and will be charged to
operations during the quarter ended March 28, 1998.
9
<PAGE> 10
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 $644.9 million for the second quarter of fiscal 1998 as
compared to $514.5 million for the second quarter of fiscal 1997, an increase of
25.3%. For the first half of fiscal 1998 and fiscal 1997, revenue was $1,246.2
million and $1,037.2 million, respectively, an increase of 20.2%. 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
significant growth in 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 33% of
the Company's total revenue in the second quarter of fiscal 1998, more than any
other single product category. Revenue for the second quarter of fiscal 1998
increased $43.6 million or 7.3%, compared to revenue of $601.3 million in the
first quarter of fiscal 1998. Sales increased from the first quarter of fiscal
1998 in all principal product categories, except for shared media.
International revenue increased 40.2% to $260.6 million for the second
quarter of fiscal 1998, as compared to $185.9 million for the comparable period
of the prior year. International revenue represented approximately 40.4% and
36.1% of total revenue for the second quarter of fiscal 1998 and fiscal 1997,
respectively. For the first half of fiscal 1998, international revenue increased
31.3% to $473.2 million, as compared to $360.5 million for the comparable period
of the prior year. International revenue represented approximately 38.0% and
34.8% of total revenue for the first half of fiscal 1998 and 1997, respectively.
The growth in international revenue primarily occurred in Europe and Japan due
to improved international standards-based switching and routing products, and
the strengthening of distribution channels. In addition, despite the currency
devaluation in the Asia/Pacific markets, sales in these regions remained
constant. 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 $102.2 million or 44.5% to $331.8
million or 51.5% of revenue for the second quarter of fiscal 1998, from $229.7
million or 44.6% of revenue for the comparable period of the prior year. For the
first half of fiscal 1998, gross profit increased by $135.8 million or 27.0% to
$638.2 million or 51.2% of revenue from $502.4 million or 48.4% of revenue for
the comparable period of the prior year. The gross profit increase in absolute
dollars 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 was a result of the introduction
of products designed with lower manufacturing costs and management's initiation
of cost reduction programs on existing products. There can be no assurance that
the focus on lower manufacturing costs
10
<PAGE> 11
and cost reduction programs, and 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 second
quarter of fiscal 1998 increased 30.3% to $89.3 million from $68.6 million for
the comparable period of the prior year. As a percentage of revenue, expenses
were 13.9% in the second quarter of fiscal 1998 and 13.3% in the comparable
period of the prior year. Research and development expenses for the first half
of fiscal 1998 increased 37.8% to $170.3 million from $123.5 million for the
comparable period of the prior year. As a percentage of revenue, expenses were
13.7% in the first half of fiscal 1998 compared to 11.9% 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 an increased research
and development staff, including the Company's annual salary review of its
personnel, 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. The Company
believes that continued investment in research and development is vital to the
Company's future success. The Company plans to maintain or moderately increase
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
58.7% and 52.9% of revenue for the three and six month periods ended December
27, 1997, compared to 52.3% and 48.9% 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 second quarter of
fiscal 1998 decreased 9.9% to $136.5 million, from $151.5 million in the
comparable period of the prior year. As a percentage of revenue, expenses
decreased to 21.2% for the second quarter of fiscal 1998, from 29.4% in the
comparable period of the prior year. For the first half of fiscal 1998, sales
and marketing expenses decreased 2.6% to $272.4 million, from $279.7 million in
the comparable period of the prior year. As a percentage of revenue, expenses
decreased to 21.9% for the current fiscal year to date compared to 27.0% for the
comparable period of the prior year. The decreases in absolute dollars and as a
percentage of revenue for both periods are primarily attributable to improved
sales force productivity and utilization of facilities, partially offset by an
increase in headcount along with the Company's annual salary review of its
personnel, and increased costs associated with branding of its products and
other marketing programs. While it is management's intent to maintain strict
controls over 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
second quarter of fiscal 1998 decreased 5.6% to $24.9 million from $26.4 million
in the comparable period of the prior year. As a percentage of revenue, expenses
decreased to 3.9% for the second quarter of fiscal 1998, from 5.1% in the
comparable period of the prior year. General and administrative expenses for the
first half of fiscal 1998 increased 7.3% to $49.4 million, from $46.0 million in
the comparable period of the prior year. As a percentage of revenue, expenses
decreased to 4.0% for the current fiscal year to date compared to 4.4% for the
comparable period of the prior year. The decrease in absolute dollars and as a
percentage of revenue related to the second quarter of fiscal 1998 is due to
improved utilization of facilities and a decrease in outside service fees. In
addition, certain charges were incurred in the second quarter of fiscal 1997
relating to executive management changes and aligning accounting
practices/policies of acquired businesses to those of the Company. The increase
in absolute dollars for the first half of fiscal 1998 is primarily due to
expenditures associated with personnel costs, including new hires, the Company's
annual salary review and college recruiting programs.
11
<PAGE> 12
In-Process Research and Development. In December 1996, the Company acquired
NetICs, Inc. (NetICs), a privately held company developing high-performance,
autosensing Fast Ethernet work group switches. Under the terms of the NetICs
acquisition agreement, the Company would pay an additional purchase price
consideration of $8 million for certain commitment targets associated with
revenue milestones achieved by NetICs prior to December 1997. The revenue
milestones were achieved during the first 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.
Net Interest Income and Other. Net interest income and other increased 71.3%
to $9.1 million for the second quarter of fiscal 1998, compared to $5.3 million
for the comparable period of the prior year and increased as a percentage of
revenue to 1.4% in the second quarter of fiscal 1998 from 1.0% in the comparable
period in the prior year. Current fiscal year to date, net interest income and
other increased 56.6%, to $17.7 million compared to $11.3 million for the
comparable period of the prior year and increased as a percentage of revenue to
1.4% in the first half of fiscal 1998 from 1.1% in the first half 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
second quarter of fiscal 1998 and the first half of fiscal 1998, compared to the
comparable periods in the prior year. The increase in the invested cash and
investment balances resulted primarily from: increased profitability from the
Company's operations; increased inventory turns; and increased stock option
exercise activity during the first half of fiscal 1998. 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 DEC. 27, 1997
----------- ----------- ----------- ----------- ------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents $296,476 $ -- $ -- $ -- $ -- $296,476 $297,092
Average Interest Rate 5.60% -- -- -- -- 5.60%
Investments $225,396 $246,776 $118,609 $12,373 $8,279 $611,433 $610,046
Average Interest Rate 5.54% 5.62% 5.56% 4.21% 6.23% 5.56%
Total Portfolio $521,872 $246,776 $118,609 $12,373 $8,279 $907,909 $907,138
Average Interest Rate 5.57% 5.62% 5.56% 4.21% 6.23% 5.57%
</TABLE>
Impact of Foreign Currency Rate Changes. In the second quarter of fiscal
1998, most currencies in Europe and Asia/Pacific continued to weaken against the
U.S. dollar. Consequently, the translation of the parent company's intercompany
receivables had a negative impact, although not material, on the consolidated
results of the Company. Foreign exchange forward contracts are purchased to
hedge certain intercompany foreign currency denominated balance sheet positions.
These financial instruments may minimize the risks that would otherwise result
from changes in foreign currency exchange rates. Exchange gains and losses did
not have a significant effect on the Company's results for the second quarter of
fiscal 1998 or the first half of fiscal 1998.
12
<PAGE> 13
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 $21.8 million
of short-term foreign exchange forward contracts denominated in Australian,
Canadian, French, German, 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 second
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 second
quarter of fiscal 1998 and the first half of fiscal 1998, were not material to
the Company. Looking forward, the Company does not anticipate any material
adverse effect on its consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments. There can be no
assurance that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
The following table provides information about the Company's foreign
exchange forward contracts at the end of the second 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 second 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 1997 DATE IN 1998 RATE U.S.DOLLARS
-------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Australian Dollar December 15 February 17 1.5181 $ 4,282
Canadian Dollar December 16 February 17 1.4220 $ 2,110
French Francs December 17 February 19 5.9175 $ 5,915
German Deutschemark November 14 January 20 1.7225 $ 581
Indian Rupee December 11 March 16 42.650 $ 1,758
Indonesian Rupiah November 12 January 14 3,568.0 $ 560
Italian Lira December 11 February 17 1,728.9 $ 316
Japanese Yen December 17 February 19 125.93 $ 2,779
Mexican Peso December 16 January 20 8.1980 $ 976
Singapore Dollar November 14 January 20 1.5860 $ 520
South Korean Won November 10 January 13 1,021.0 $ 1,273
Spanish Peseta November 14 January 20 145.70 $ 686
</TABLE>
Income Taxes. The Company's effective income tax rate for the three month
and six month periods ended December 27, 1997, 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.
Change in Accounting Principle. In November 1997, 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 three and six month
periods ended December 27, 1997. 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.
13
<PAGE> 14
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. Products available for sale since January
1997 are warranted to comply with the Year 2000 requirements. Although the
Company generally warrants its product for periods of one year or less, to meet
potential customer needs, the Company is in the process of assessing how it will
address certain older products and systems available for sale prior to January
1997 that may be affected by Year 2000 requirements.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities was $193.4 million for the first
half of fiscal 1998, compared to $212.1 million for the comparable period of the
prior year. Accounts receivable increased to $312.9 million at December 27,
1997, from $277.9 million at June 30, 1997. This increase is primarily a result
of increased sales and a non-linear shipment pattern during the second quarter
of fiscal 1998. However, days sales outstanding in receivables decreased to 44
days at the end of the second 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.
During the current fiscal year to date, the Company invested $67.0 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 half of
fiscal 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.
During the first half of fiscal 1997, the Company invested $91.0 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 $83.5 million in the first half of
fiscal 1998, compared to $2.7 million in the first half of fiscal 1997. The cash
provided by financing activities during the first half 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 redeemed 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 half 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.
14
<PAGE> 15
As of December 27, 1997, a subsidiary of the Company had outstanding $98.0
million of convertible subordinated debentures, which mature in May 2003. The
debentures are convertible at the option of the holder into the Company's common
stock. The debentures are redeemable at the option of the Company, initially at
approximately 103.7% and at decreasing prices thereafter to 100% at maturity.
Looking forward, the Company's management may decide to redeem 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 redemption of the debt.
As of December 27, 1997, cash and short- and long-term investments totaled
$990.4 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.
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 Gross Profit. The Company's gross profit percentage is a
function of the product mix sold in any period. Therefore, gross profit
percentage may fluctuate, affecting the Company's operating results. Factors
such as unit volumes, obsolescence/surplus of inventory, heightened price
competition, changes in channels of distribution, shortages and cost increases
in supplies of parts from vendors, and the availability of skilled labor, also
may cause fluctuations in gross profit percentages.
Risks Relating to Manufacturing Operations. The Company operates
manufacturing facilities and relies upon a number of manufacturing arrangements
worldwide. The Company's manufacturing capability may be affected by factors
impacting the operations of its suppliers. In addition, the Company's ability to
meet customer demand may also be dependent on its ability to adjust
manufacturing levels on short notice based on anticipated orders.
Risks Related to Intellectual Property Rights. The Company relies upon a
combination of patents, copyrights, trademarks and trade secrets to establish
and protect intellectual property rights in its products and technology. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology, or that the Company's competitors
will not develop superior technologies. From time to time, it may be necessary
or desirable for the Company to enter into technology licenses, strategic
alliances and cooperative marketing efforts with others. There can be no
assurance that the Company consistently will be able to secure third-party
rights necessary to offer competitive products.
Risks Related to Competition. The data networking industry is highly
competitive. There can be no assurance that the Company will be able to compete
successfully in the future with existing or new competitors. Among the
competitive factors that may adversely affect the Company's future results are:
conformity to existing and emerging industry standards; interoperability with
other networking products; network management capabilities; price; performance;
product features; technical support; and distribution.
15
<PAGE> 16
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
certain 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
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 3 of
the Notes to Condensed Consolidated Financial Statements. Such information is
incorporated herein.
16
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1997, the Annual Meeting of Stockholders of Bay
Networks, Inc. was held in Santa Clara, California. Four matters were submitted
to the stockholders for action or approval.
1. The stockholders elected three Class I directors to hold office for a
three-year term and until their respective successors are elected and
qualified. The votes for these directors are set forth below.
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
<S> <C> <C>
Kathleen A. Cote 179,104,397 2,416,593
John S. Lewis 179,173,893 2,347,097
Benjamin F. Robelen 179,090,297 2,430,693
</TABLE>
The terms of office of the following five directors in Classes II and III
continued after the meeting:
Arthur Carr
David L. House
Shelby H. Carter. Jr.
Ronald V. Schmidt
Paul J. Severino
Other matters voted upon and approved by the stockholders at the meeting,
and the number of votes cast with respect to each such matter, were as follows:
2. The stockholders approved a proposal to increase the maximum number of
shares that may be issued under the Company's 1994 Stock Option Plan by
15,500,000 shares, from 50,700,000 shares to 66,200,000 shares.
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C> <C>
72,923,547 65,227,969 813,053 42,556,421
</TABLE>
3. The stockholders approved a proposal to increase the maximum number of
shares that may be issued under the Company's 1994 Employee Stock Purchase
Plan by 1,500,000 shares, from 3,750,000 shares to 5,250,000 shares.
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C> <C>
100,594,882 37,684,993 684,694 42,556,421
</TABLE>
4. The stockholders approved a proposal to ratify the appointment of Ernst &
Young LLP as the Company's independent public auditors for the fiscal year
ending June 27, 1998:
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C> <C>
177,669,292 425,918 512,780 2,913,000
</TABLE>
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
17
<PAGE> 18
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: February 9, 1998
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant,
which is incorporated herein by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form S-8
(Registration No. 33-92736) filed on May 26, 1995.
3.2 Bylaws of the Registrant, as amended and restated, which
is incorporated herein by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-4 (File No.
33-83946) filed with the Securities and Exchange
Commission on September 14, 1994.
4.1 Rights Agreement dated as of February 7, 1995, between the
Registrant and The First National Bank of Boston, which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated February 7, 1995.
10.29* Revised Letter Agreement with Lloyd A. Carney, Executive Vice President and
General Manager, Enterprise Business Group, dated November 21, 1997.
10.30* Deferred Compensation Plan effective January 1, 1998.
10.31* Deferred Compensation Plan Trust Agreement effective January 1, 1998,
between the Registrant and the First Trust National Association.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
- --------------
* Indicates compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 10.29
November 10, 1997
Lloyd A. Carney
HOME ADDRESS REDACTED
Re: Revised Compensation Package
Dear Lloyd:
This letter confirms our recent discussions regarding revisions to your
compensation package. In addition to the compensation and benefits described in
my March 18, 1997 letter to you, we have agreed that you shall receive the
following benefits:
Stock Options.
You have been granted an option to purchase a total of 70,000 shares of stock
at a per share price of $28.1250 which shall vest in two installments of 8,700
shares on January 3, 2000, and 61,300 shares on January 3, 2001. This option
will be subject to the terms and conditions of Bay Networks' standard stock
option agreement.
In addition, you have been granted an option to purchase 60,000 shares of stock
at a per share price of $28.1250 which shall vest in four equal installments of
15,000 options on each of January 3, 1998, January 3, 1999, January 3, 2000 and
January 3, 2001. This option will be subject to the terms and conditions of Bay
Networks' standard stock option agreement.
Accelerated Vesting of Performance Stock Options.
The terms of your July 25, 1996 grant of the option to purchase 100,000 shares
of stock under the Bay Networks' Performance Stock Option Program are revised to
provide that the option shall vest, without regard to the determination or
achievement of Performance Goals, at a rate of 15,480 shares on January 3, 1998;
28,000 shares on January 3, 1999; and 44,300 shares on January 3, 2000. All
other terms shall remain the same.
Special Bonus.
If you remain employed by Bay Networks on January 3, 2001, and the closing sales
price of Bay Networks stock as listed on the New York Stock Exchange on that
date or, if January 3, 2001 is not a trading day, then on the last trading day
before that date, is less than $46.9608, you will receive a Special Bonus equal
to $1,130,146.00 (One million, one hundred thirty thousand, one hundred forty
six dollars) minus 60,000 (Sixty Thousand) times the difference between closing
sales price of Bay Networks' stock as listed on the New York Stock Exchange on
that date minus $28.1250.
<PAGE> 2
Lloyd A. Carney
November 10, 1997
Page 2
Benefits Upon Termination.
If your employment with Bay Networks terminates as a result of your disability
or your death, you or your heirs and/or beneficiaries shall receive: 1) a lump
sum payment equal to 12 months of your base salary, less applicable withholdings
and deductions; 2) payment of an amount equal to your target Annual Bonus for
the fiscal year in which your disability or death occurs; and 3) your
outstanding stock options shall be subject to accelerated vesting so as to
become 100% vested on the date of your termination of employment.
Lloyd, I believe that the foregoing accurately represents the agreements you and
I have recently reached regarding your compensation. This letter, together with
my letter to you of March 18, 1997, and the relocation agreement and note which
were signed by you upon your relocation to California, states the entire
agreement between Bay Networks and you relating to your employment. Please
indicate your acceptance of these terms by signing and returning the duplicate
original of this letter. As always, I am available to discuss any questions or
concerns you may have regarding your compensation package.
Very truly yours,
BAY NETWORKS, INC.
By: /s/ DAVID L. HOUSE
--------------------------------------------
David L. House
Chairman, President and Chief Executive Officer
ACCEPTED AND AGREED:
By: /s/ LLOYD A. CARNEY
--------------------------------------------
Lloyd A. Carney
Dated: November 21, 1997
<PAGE> 1
EXHIBIT 10.30
BAY NETWORKS, INC.
DEFERRED COMPENSATION PLAN
EFFECTIVE JANUARY 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE I DEFINITIONS...............................................................1
1.1 "Account"....................................................................1
1.2 "Benchmark Fund".............................................................1
1.3 "Beneficiary"................................................................1
1.4 "Benefit Distribution Election"..............................................1
1.5 "Benefit(s)".................................................................1
1.6 "Board of Directors".........................................................1
1.7 "Bonus"......................................................................1
1.8 "Bonus Deferral".............................................................2
1.9 "Change of Control"..........................................................2
1.10 "Code".......................................................................2
1.11 "Committee"..................................................................2
1.12 "Company"....................................................................2
1.13 "Company Credit".............................................................2
1.14 "Deferral Election"..........................................................2
1.15 "Distribution Date"..........................................................2
1.16 "Effective Date".............................................................2
1.17 "Eligible Employee"..........................................................2
1.18 "Employer"...................................................................2
1.19 "Entry Date".................................................................2
1.20 "Initial Entry Date".........................................................3
1.21 "Interest"...................................................................3
1.22 "Interest Rate"..............................................................3
1.23 "Interim Agreement"..........................................................3
1.24 "Participant"................................................................3
1.25 "Plan".......................................................................3
1.26 "Plan Year"..................................................................3
1.27 "Salary".....................................................................3
1.28 "Salary Deferral"............................................................3
1.29 "Total Disability"...........................................................3
1.30 "Trust"......................................................................3
1.31 "Trust Agreement"............................................................3
1.32 "Trustee"....................................................................3
1.33 "Year of Service"............................................................4
ARTICLE II ELIGIBILITY...............................................................4
2.1 Eligibility..................................................................4
2.2 Commencement of Participation................................................4
2.3 Cessation of Participation...................................................4
ARTICLE III DEFERRALS.................................................................4
3.1 Salary Deferrals.............................................................4
3.2 Bonus Deferrals..............................................................5
3.3 Limitations on Deferrals.....................................................5
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
3.4 Time for Making Deferral Elections...........................................6
3.5 Vesting......................................................................6
ARTICLE IV COMPANY CREDITS...........................................................6
4.1 Company Credits..............................................................6
4.2 Vesting......................................................................6
ARTICLE V ACCOUNTS..................................................................6
5.1 Account......................................................................6
5.2 Interest Credited to Accounts at Least Monthly...............................7
5.3 Determination of Interest Rate...............................................7
ARTICLE VI BENEFIT DISTRIBUTIONS AND ACCOUNT WITHDRAWALS.............................7
6.1 Benefit Amount...............................................................7
6.2 Timing of Distributions......................................................7
6.3 Planned Benefit Distributions................................................8
6.4 Distribution Following a Change of Control...................................8
6.5 Form of Distribution of Benefits.............................................8
6.6 Method of Distribution Following Plan Termination............................9
6.7 Death Benefits...............................................................9
6.8 Early Withdrawal.............................................................9
6.9 Financial Hardship Withdrawal...............................................10
6.10 Limitation on Distributions to Covered Employees............................10
6.11 Tax Withholding.............................................................11
ARTICLE VII BENEFICIARIES............................................................11
7.1 Designation of Beneficiary..................................................11
7.2 No Designated Beneficiary...................................................11
ARTICLE VIII TRUST OBLIGATION TO PAY BENEFITS.........................................11
8.1 Deferrals Transferred to the Trust..........................................11
8.2 Source of Benefit Payments..................................................11
8.3 Investment Discretion.......................................................11
8.4 No Secured Interest.........................................................12
ARTICLE IX PLAN ADMINISTRATION, AMENDMENT AND TERMINATION...........................12
9.1 Committee Powers and Responsibilities.......................................12
9.2 Decisions of the Committee..................................................13
9.3 Plan Amendment..............................................................13
9.4 Plan Termination............................................................13
9.5 Additional Power and Responsibility Following a Change of Control...........13
ARTICLE X MISCELLANEOUS............................................................14
10.1 No Assignment...............................................................14
10.2 Successors..................................................................14
10.3 Termination of Interim Agreement............................................14
</TABLE>
ii
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<TABLE>
<CAPTION>
Page
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<S> <C> <C> <C>
10.4 No Employment Agreement.....................................................14
10.5 Attorneys' Fees.............................................................14
10.6 Arbitration.................................................................14
10.7 Governing Law...............................................................14
10.8 Entire Agreement............................................................14
</TABLE>
iii
<PAGE> 5
BAY NETWORKS, INC.
DEFERRED COMPENSATION PLAN
EFFECTIVE JANUARY 1, 1998
The Bay Networks, Inc. Deferred Compensation Plan (the "Plan") is
adopted effective January 1, 1998, by Bay Networks, Inc., a Delaware
corporation, for the purpose of providing a tax-deferred capital accumulation
program through the deferral of Salary and Bonuses as well as additional
corporate contributions to a select group of management or highly compensated
employees of the Company and its subsidiaries. This Plan is intended to be an
unfunded, nonqualified deferred compensation plan. Plan participants shall have
the status of unsecured creditors of the Company with respect to the payment of
Plan benefits.
ARTICLE I
DEFINITIONS
Whenever used herein, the masculine pronoun shall be deemed to include
the feminine, and the singular to include the plural, unless the context clearly
indicates otherwise, and the following definitions shall govern the Plan:
1.1 "Account" means the book entry account(s) established under the Plan
for each Participant to which are credited Salary Deferrals, Bonus Deferrals,
Company Credits, amounts credited to a Participant's Account, if any, under an
Interim Agreement and the Interest with respect thereto. Account balances shall
be reduced by any distributions made to the Participant or the Participant's
Beneficiary(ies) therefrom and any charges that may be imposed on such Account
pursuant to the terms of the Plan.
1.2 "Benchmark Fund" shall mean one or more of the mutual funds or
contracts selected by the Committee pursuant to Section 5.3.1.
1.3 "Beneficiary" means one, some, or all (as the context shall require)
of those persons, trusts or other entities designated by a Participant to
receive the undistributed value of his or her Account following the
Participant's death.
1.4 "Benefit Distribution Election" means the election, whereby a
Participant may elect an installment distribution pursuant to Section 6.5.2., a
planned Distribution Date pursuant to Section 6.3 or an early withdrawal of
Benefits pursuant to Section 6.8. Such election shall be made in such manner as
may be prescribed by the Committee from time to time.
1.5 "Benefit(s)" means the total vested amount credited to a
Participant's Account.
1.6 "Board of Directors" or "Board" means the Board of Directors of the
Company.
1.7 "Bonus" shall mean cash amounts, if any, paid under such of the
Employer's bonus plans as may be designated by the Committee as eligible for
deferral under the Plan.
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1.8 "Bonus Deferral" means the amount or percentage of a Participant's
Bonus that the Participant elects to defer pursuant to Article III.
1.9 "Change of Control" means (a) the purchase or other acquisition by
any person(s) or entity(ies), within the meaning of section 13(d) or 14(d) of
the Securities Exchange Act of 1934 (the "Act") or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3 under the
Act) of thirty percent (30%) or more of the outstanding shares of common stock
or the combined voting power of the Company's outstanding voting securities; (b)
the approval by the Company's stockholders of a reorganization, merger or
consolidation transaction when after such transaction the Company's stockholders
entitled to vote for the transaction own less than fifty percent (50%) of the
combined voting power of the surviving or resulting entity owned before such
transaction; (c) a dissolution or liquidation of the Company; or (d) the sale of
all or substantially all of the Company assets.
1.10 "Code" means the Internal Revenue Code of 1986, as amended.
1.11 "Committee" means the Bay Networks Retirement Plan Committee
composed of individuals appointed by the Board. The Committee shall function as
the Plan administrator and shall interpret and administer this Plan and take
such other actions as may be specified herein, in its sole discretion.
1.12 "Company" means Bay Networks, Inc., a Delaware corporation, and any
successor organization thereto.
1.13 "Company Credit" means an amount credited to a Participant's
Account by the Company in its discretion on behalf of a Participant pursuant to
Article IV.
1.14 "Deferral Election" means the election whereby a Participant elects
to make Salary Deferrals and/or Bonus Deferrals to the Plan. Deferral Elections
shall be made in such manner as may be prescribed by the Committee from time to
time.
1.15 "Distribution Date" means the date on which distribution of a
Participant's Benefits is made or commenced pursuant to Article VI.
1.16 "Effective Date" means the date on which the Plan shall be first
effective, which is January 1, 1998.
1.17 "Eligible Employee" means an employee of the Employer who is
designated by the Committee, in its sole discretion, as a member of the select
group of management and highly compensated employees who are eligible to
participate in the Plan.
1.18 "Employer" means the Company or a subsidiary thereof that has
adopted this Plan.
1.19 "Entry Date" means the first day of each Plan Year.
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1.20 "Initial Entry Date" means December ___, 1997, or, if later, the
first Monday of the calendar quarter following the date on which an individual
is designated as an Eligible Employee who is eligible to participate in the
Plan.
1.21 "Interest" means the investment return or loss determined in
accordance with Article V, which shall be credited to the Participant's Account.
1.22 "Interest Rate" shall have the meaning set forth in Section 5.3.3.
1.23 "Interim Agreement" means the Interim Deferred Compensation
Agreement entered into between the Company and certain Participants as of July
30, 1997.
1.24 "Participant" means an Eligible Employee who has elected to
participate in the Plan by submitting a Deferral Election to the Committee and
any Eligible Employee who is a party to an Interim Agreement. A Participant
shall also mean an Eligible Employee for whom Company Credits are made,
regardless of whether such Eligible Employee has submitted a Deferral Election.
1.25 "Plan" means this Bay Networks, Inc. Deferred Compensation Plan,
effective January 1, 1998, as it may be amended from time to time in the future.
1.26 "Plan Year" means the 12-month period beginning on July 1 and
ending on June 30 of each calendar year; provided, however, that the first Plan
Year shall be the period commencing on the Effective Date and ending on June 30,
1998.
1.27 "Salary" shall mean the base salary paid by the Employer, but shall
not include any other form of compensation, whether taxable or non-taxable,
including, but not limited to, Bonuses, commissions, incentive payments,
non-monetary awards, disability payments and other forms of additional
compensation.
1.28 "Salary Deferral" means the amount or percentage of a Participant's
Salary that the Participant has elected to defer pursuant to Article III.
1.29 "Total Disability" means a determination by the Social Security
Administration that the Participant is totally and permanently disabled and
eligible for Social Security disability benefits or a determination by the
insurer under the Employer's long-term disability insurance policy that the
Participant is disabled and eligible for long-term disability benefits under
such policy.
1.30 "Trust" means the legal entity created by the Trust Agreement.
1.31 "Trust Agreement" means that trust agreement entered into in
connection with this Plan and any amendments thereto. The Trust Agreement is
attached to this Plan as Exhibit A.
1.32 "Trustee" means the original Trustee(s) named in the Trust
Agreement and any duly appointed successor or successors thereto.
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<PAGE> 8
1.33 "Year of Service" means a period of 12 consecutive months during
which the Participant is employed by the Employer. Employment commences on the
date the Participant first performs an hour of service for the Employer and ends
on the date that the Participant's employment is terminated for any reason or on
the date the Participant retires, is discharged, is determined to be Totally
Disabled or dies.
ARTICLE II
ELIGIBILITY
2.1 Eligibility. Eligibility for participation in the Plan shall be
limited to key management or highly compensated employees of the Employer who
are selected by the Committee, in its sole discretion, to participate in the
Plan. Individuals who are in this select group shall be notified as to their
eligibility to participate in the Plan.
2.2 Commencement of Participation. An Eligible Employee may begin
participation in the Plan upon his Initial Entry Date or any subsequent Entry
Date thereafter, subject to making a Deferral Election pursuant to Article III.
In addition, participation of an Eligible Employee who has not otherwise
commenced participation in the Plan, shall commence when a Company Credit is
made to the Account of such Eligible Employee pursuant to the provisions of
Article IV.
2.3 Cessation of Participation. Active participation in the Plan shall
end when a Participant's employment terminates for any reason. No contributions
to the Plan shall be made with respect to Salary or Bonuses paid after such
termination date. Upon termination of employment, a Participant shall remain an
inactive Participant in the Plan until all of the Benefits to which he or she is
entitled under this Plan have been paid in full.
ARTICLE III
DEFERRALS
3.1 Salary Deferrals.
3.1.1 As of the Participant's Initial Entry Date, the Participant
may elect to reduce his or her Salary by the amount or percentage (up to a
maximum of 80% of Salary) set forth in a written and signed Deferral Election
that is filed with the Committee. Salary Deferrals shall be subject to the
limitations of Section 3.3 below. The Salary Deferral shall not be paid to the
Participant, but shall be withheld from the Participant's Salary and an amount
equal to the Salary Deferral shall be credited to the Participant's Account.
3.1.2 Each election to make or cease Salary Deferrals shall apply
only to Salary earned after the effective date of such election.
3.1.3 A Participant may revoke his or her Salary Deferral Election
at any time by filing a written revocation in such form as the Committee may
prescribe. Upon such revocation, no further Salary Deferrals may be made with
respect to such Participant for the Plan
4
<PAGE> 9
Year in which such revocation is made. A Participant may elect to resume Salary
Deferrals as of any subsequent Plan Year, as provided in Section 3.1.4, below.
Except for a revocation as provided in this Section 3.1.3, a Participant may not
modify a Salary Deferral Election except as provided in Section 3.1.4.
3.1.4 Effective as of the first day of Plan Year, a Participant may
modify, terminate, or resume Salary Deferrals by filing a new Deferral Election
for such Plan Year.
3.1.5 Unless amended to cease or modify Salary Deferrals, the
Participant's Salary Deferral Election shall continue in effect until the
Participant terminates employment with the Employer.
3.2 Bonus Deferrals.
3.2.1 As of the Participant's Initial Entry Date, and the first day
of each Plan Year thereafter, the Participant may elect to reduce his or her
cash Bonus payable with respect to the Plan Year by the amount or percentage (up
to a maximum of 95%) set forth in a written and signed Deferral Election form
that is filed with the Committee. Bonus Deferrals shall be subject to the
limitation provisions of Section 3.3 below. The Bonus Deferral shall not be paid
to the Participant, but shall be withheld from the Participant's Bonus payments
and an amount equal to the Bonus Deferral shall be credited to the Participant's
Account. For purposes of this Section 3.2, a Bonus shall be payable with respect
to a Plan Year if it relates to a Plan Year or is calculated based on
performance during a Plan Year, regardless of when such Bonus is actually paid.
3.2.2 Notwithstanding any other provision herein to the contrary, a
Participant may make a Bonus Deferral election upon his or her Initial Entry
Date only if such Initial Entry Date is at least six (6) months prior to the end
of the Plan Year in which such Initial Entry Date occurs.
3.2.3 An election to make Bonus Deferrals shall be irrevocable
throughout the Plan Year for which it was made. A Participant's Bonus Deferral
election shall be valid only for the Bonus, if any, payable with respect to the
Plan Year for which it was made. A new Bonus Deferral election must be filed
each year.
3.3 Limitations on Deferrals. A Participant's Salary Deferrals and Bonus
Deferrals shall be limited as follows:
3.3.1 A Participant must defer a minimum of $5,000 each Plan Year.
This minimum deferral amount may be satisfied by Salary Deferrals, Bonus
Deferrals or a combination of both. In the event the total deferral in a Plan
Year is less than $5,000, the amount deferred during that Plan Year shall be
paid out to the Participant as soon as administratively feasible after the end
of the Plan Year.
3.3.2 The Participant's Salary and/or Bonus Deferral elections shall
be reduced by the amount(s), if any, which may be necessary:
5
<PAGE> 10
3.3.2.1 To satisfy all applicable income and employment tax
withholding and FICA contributions;
3.3.2.2 To satisfy all garnishments or other amounts required to be
withheld by applicable law or court order.
3.3.2.3 To satisfy contributions under the Company's employee stock
purchase plan and other welfare benefit plans.
3.3.3 Any salary deferral elections or discretionary profit sharing
contributions made under the Company's 401(k) Plan shall be determined based on
the Participant's compensation after reduction for the Salary Deferral and/or
Bonus Deferral Contributions to this Plan.
3.4 Time for Making Deferral Elections. A Deferral Election for a
Participant's initial participation must be received by the Committee within
thirty (30) days of the Participant's Initial Entry Date (or such other time as
the Committee may specify) and shall be effective as soon as administratively
feasible after the properly completed Deferral Election is received by the
Committee. A Deferral Election for any subsequent Plan Year must be received by
the Committee at least twenty (20) days prior to the first day of such Plan Year
(or such other time as the Committee may specify) and shall be effective for the
first pay period which begins in the Plan Year for which such election is made.
3.5 Vesting. Salary Deferrals, Bonus Deferrals and the Interest credited
to the Participant's Account with respect thereto shall be 100% vested at all
times.
ARTICLE IV
COMPANY CREDITS
4.1 Company Credits. In addition to Salary and Bonus Deferrals, a
Participant's Account shall be credited with such amounts and at such times as
the Company may, in its sole discretion, determine and communicate to the
Participant. The Company shall be under no obligation to continue to make
Company Credits and may discontinue or change the amount or method of
calculating the amount of such Company Credits at any time.
4.2 Vesting. Company Credits and the Interest credited to the
Participant's Account with respect thereto shall be 100% vested at all times,
unless otherwise specified by the Committee, in its sole discretion.
ARTICLE V
ACCOUNTS
5.1 Account. An Account shall be established and maintained for each
Participant. The Participant's Account shall be credited with the Participant's
Salary Deferrals, Bonus Deferrals and Company Credits, if any, made on behalf of
each Participant. In addition, the
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<PAGE> 11
amount, if any, credited as of December 31, 1997 to a Participant's Deferral
Account pursuant to an Interim Agreement shall be credited to such Participant's
Account under this Plan. The Participant's Account shall be credited (debited)
with the applicable Interest, as set forth in Section 5.2. The Participant's
Account shall be reduced by distributions therefrom and any charges which may be
imposed on the Account pursuant to the terms of the Plan.
5.2 Interest Credited to Accounts at Least Monthly. Each Account shall
be credited (debited) monthly, or more frequently as the Committee may specify,
in an amount equal to the Account balance on the last day of the prior
accounting period multiplied by the Interest Rate.
5.3 Determination of Interest Rate.
5.3.1 The Company shall designate the particular funds or contracts
which shall constitute the Benchmark Funds, and may, in its sole discretion,
change or add to the Benchmark Funds; provided, however, that the Committee
shall notify the Participants of any such change prior to the effective date
thereof.
5.3.2 Each Participant may select among the Benchmark Funds and
specify the manner in which his or her Account shall be deemed to be invested,
solely for purposes of determining the Participant's Interest Rate. The
Committee shall establish and communicate the rules, procedures and deadlines
for making and changing Benchmark Fund selections. The Company shall have no
obligation to acquire investments corresponding to the Participant's Benchmark
Fund selections.
5.3.3 The Interest Rate is the investment return, net of
administrative fees and investment management fees and other applicable fees or
charges for a specified accounting period, of the Benchmark Fund(s) designated
by Participant and other applicable fees or charges. The Interest Rate may be
negative if the applicable Benchmark Fund(s) sustained a loss during the
specified accounting period.
ARTICLE VI
BENEFIT DISTRIBUTIONS AND ACCOUNT WITHDRAWALS
6.1 Benefit Amount. The value of the Participant's Benefit shall be
equal to the vested value of the Participant's Account on the last day of the
calendar month prior to the Distribution Date, adjusted for any Salary or Bonus
Deferrals or withdrawals which have been subsequently credited thereto or made
therefrom prior to the Distribution Date.
6.2 Timing of Distributions. Benefits shall be paid (or installment
payments shall commence) as soon as practicable after the earlier of:
6.2.1 The first day of the month following the end of the calendar
quarter in which the Participant's employment with the Employer terminates; or
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<PAGE> 12
6.2.2 The Distribution Date designated by the Participant in advance
in accordance with Section 6.3; or
6.2.3 The date that the Plan is terminated in accordance with
Section 9.4.
6.3 Planned Benefit Distributions.
6.3.1 Three-Year Advance Election. A Participant may elect a
Distribution Date by filing a Benefit Distribution Election at such time and in
such manner as the Committee shall specify. Such Benefit Distribution Election
shall specify a Distribution Date that is at least three years after the date
the Benefit Distribution Election is received by the Committee. Except as
otherwise provided in this Article VI, the Benefit Distribution Election shall
apply to the Participant's Salary Deferrals and Bonus Deferrals and shall also
apply to Company Credits, except to the extent the Company has specified
otherwise, for the Plan Year(s) specified in the Benefit Distribution Election
and the Interest credited thereto until the Distribution Date, or to such lesser
dollar amount as may be specified in the Benefit Distribution Election.
6.3.2 Revocation of Benefit Distribution Election. A Participant may
revoke a Benefit Distribution Election by filing a revocation at least twelve
(12) months in advance of the Distribution Date specified in the prior Benefit
Distribution Election. Benefits subject to a revoked Benefit Distribution
Election shall be distributed as provided in Section 6.2 (without regard to the
provisions of Section 6.2.2).
6.3.3. Amendment of Benefit Distribution Election. A Participant may
amend a Benefit Distribution Election by filing an amended Benefit Distribution
Election at least twelve (12) months in advance of the Distribution Date
specified in the prior Benefit Distribution Election. Any new Distribution Date
elected in an amended Benefit Distribution Election must be a date later than
the Distribution Date specified in the prior Benefit Distribution Election which
is being amended. A Participant may amend a Benefit Distribution Election no
more than twice in such Participant's lifetime.
6.3.4 Termination Before the Planned Distribution Date.
Notwithstanding any prior Benefit Distribution Election, if the employment of a
Participant by the Employer terminates for any reason before his elected
Distribution Date, distribution of the Participant's Account shall commence as
soon as administratively feasible after the first day of the month following the
end of the quarter in which the employment termination occurs.
6.4 Distribution Following a Change of Control. In the event of a Change
of Control, as defined in Section 1.9, the Committee may decide, in its sole
discretion, that the Plan shall be terminated and all Accounts shall be
distributed as soon as administratively feasible after the termination date of
the Plan.
6.5 Form of Distribution of Benefits.
6.5.1 Lump Sum Payments. Unless the Participant elects an
installment distribution as provided in Section 6.5.2, below, the Participant's
Benefits shall be distributed in a single lump sum payment.
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<PAGE> 13
6.5.2 Election to Receive Installment Payments. Notwithstanding the
provisions of paragraph 6.5.1, a Participant who satisfies the requirements set
forth in Section 6.5.3 may elect to have his or her Benefits paid in 20
quarterly installments, or 40 quarterly installments.
6.5.3 Participants Eligible for Installment Distributions.
Notwithstanding the provisions of paragraph 6.5.1, a Participant who satisfies
the requirements set forth in Section 6.5.3 may elect to have his or her
Benefits paid in 20 quarterly installments, or 40 quarterly installments.
6.5.3.1 A Participant may elect an installment distribution
if:
6.5.3.1.1 The value of the Benefits payable, determined in
accordance with Section 6.1, exceeds $25,000 and the Participant has completed
at least five Years of Service for the Employer; and
6.5.3.1.2 Benefits are payable on account of a termination of
employment (A) after the Participant has attained age 55, or (B) as the result
of the Participant's Total Disability.
6.5.3.2 An election to receive installments may be made,
revoked or amended by filing a written Benefit Distribution Election, in the
form required by the Committee, at least one year in advance of the Distribution
Date.
6.5.3.3 For purposes of this Section 6.5.2, installment
payments shall be substantially equal payments. The amount of each payment shall
be determined by dividing the value of the Participant's Benefits at the time of
such installment by the number of payments remaining.
6.6 Method of Distribution Following Plan Termination. Generally, all
Benefits shall be paid in a lump sum cash payment following termination of the
Plan. Notwithstanding the foregoing, if a lump sum payment will result in an
"excess parachute payment" to a Participant, as that term is defined in the
Code, the Committee, in its sole discretion, may determine that such
Participant's Account shall be paid by some other method.
6.7 Death Benefits. If a Participant dies before his Benefit payments
have commenced, then such Participant's Benefits shall be paid to his designated
Beneficiary in a lump sum cash payment as soon as administratively feasible
after the Committee is notified of the Participant's death and receives evidence
satisfactory to it thereof. If a Participant dies after his Benefit payments
have commenced but before his or her Benefits have been fully distributed, the
Participant's remaining Benefits shall be paid to his or her Beneficiary in [a
lump sum] [accordance with the method of distribution elected by Participant on
a Benefit Distribution Election filed with the Committee at least one (1) year
prior to the Participant's date of death].
6.8 Early Withdrawal. Notwithstanding any other provision of the Plan, a
Participant or Beneficiary (including a Participant or Beneficiary in pay
status) may withdraw ninety percent (90%) (but not less than 90%) of the total
amount of his or her vested Benefits at any time. The amount so withdrawn shall
be paid in a single lump sum. Upon such withdrawal, the remaining
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<PAGE> 14
ten percent (10%) of the total Benefits and any unvested Benefits shall be
forfeited and the Participant shall have no further right thereto. A Participant
making such withdrawal shall be prohibited from making any further Salary
Deferrals or Bonus Deferrals pursuant to the Plan and no Company Credits shall
be made to the Participant's Account for the remainder of the Plan Year in which
an early withdrawal occurs and for the entire Plan Year thereafter. A
Participant shall be permitted to take a maximum of two early withdrawals.
6.9 Financial Hardship Withdrawal. With the consent of the Committee, a
Participant or Beneficiary (including a Participant or Beneficiary in pay
status) may withdraw up to one hundred percent (100%) of his or her vested
Benefits as may be required to meet an unforeseeable financial emergency of the
Participant. Such hardship distribution shall be subject to the following
provisions:
6.9.1 The hardship withdrawal must be necessary, in the sole
discretion of the Committee, to satisfy the unforeseeable emergency.
6.9.2 The amount of the financial hardship withdrawal shall not
exceed the amount reasonably required to relieve the financial need after taking
into account other resources that are reasonably available to the Participant
for this purpose.
6.9.3 The Participant must certify that the financial need cannot be
relieved: (i) through reimbursement or compensation by insurance or otherwise;
(ii) by reasonable liquidation of the Participant's assets, to the extent such
liquidation would not itself cause an immediate and heavy financial need; (iii)
by discontinuing the Participant's Salary and Bonus Deferrals; or (iv) by
borrowing from commercial sources on reasonable commercial terms.
6.9.4 An "unforeseeable financial emergency" is defined as a severe
financial hardship to Participant resulting from a sudden and unexpected illness
or accident of Participant or of a dependent of Participant (as defined in
section 152(a) of the Code), loss of Participant's property due to casualty, or
other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the control of Participant. Neither the need to pay tuition
expenses on behalf of the Participant or the Participant's spouse or children
nor the desire to purchase a home shall be considered an unforeseeable
emergency.
6.9.5 The Committee, in its sole discretion, shall determine if
there is an unforeseeable financial emergency, if the Participant has other
resources to satisfy such emergency and the amount of the hardship withdrawal
that is required to alleviate the Participant's financial hardship.
6.9.6 A Participant shall be prohibited from making any further
Salary Deferrals and Bonus Deferrals and the Company shall not make any Company
Credits pursuant to the Plan for the remainder of the Plan Year in which a
financial hardship withdrawal occurs and for the entire Plan Year thereafter.
6.10 Limitation on Distributions to Covered Employees. Notwithstanding
any other provision of this Article VI in the event that the Participant is a
"covered employee" as that term
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is defined in section 162(m)(3) of the Code, or would be a covered employee if
Benefits were distributed in accordance with his or her Benefit Distribution
Election or early withdrawal request, the maximum amount which may be
distributed from the Participant's Account in any Plan Year shall not exceed one
million dollars ($1,000,000) less the amount of compensation paid to the
Participant in such Plan Year which is not "performance-based" (as defined in
Code section 162(m)(4)(C)), which amount shall be reasonably determined by the
Committee at the time of the proposed distribution. Any amount which is not
distributed to the Participant in a Plan Year as a result of this limitation
shall be distributed to the Participant in the next Plan Year, subject to
compliance with the foregoing limitation set forth in this Section 6.10.
6.11 Tax Withholding. Distribution and withdrawal payments under this
Article VI shall be subject to all applicable withholding requirements for
federal, state, local and foreign income taxes and to any other federal, state,
local or foreign taxes that may be applicable to such payments.
ARTICLE VII
BENEFICIARIES
7.1 Designation of Beneficiary. The Participant shall have the right to
designate on such form as may be prescribed by the Committee, one or more
Beneficiaries to receive any Benefits due under Article VI which may remain
unpaid on the date of the Participant's death. The Participant shall have the
right at any time to revoke such designation and to substitute one or more other
Beneficiaries.
7.2 No Designated Beneficiary. If, upon the death of the Participant,
there is no valid Beneficiary designation, the Beneficiary shall be the
Participant's surviving spouse. In the event there is no surviving spouse, then
the Participant's Beneficiary shall be the Participant's estate.
ARTICLE VIII
TRUST OBLIGATION TO PAY BENEFITS
8.1 Deferrals Transferred to the Trust. The Company may transfer Salary
Deferrals, Bonus Deferrals or Company Credits, if any, made by or on behalf of a
Participant under this Plan or an Interim Agreement to the Trustee to be held
pursuant to the terms of the Trust Agreement.
8.2 Source of Benefit Payments. All benefits payable to a Participant
hereunder shall be paid by the Trustee to the extent of the assets held in the
Trust by the Trustee, and by the Company to the extent the assets in the Trust
are insufficient to pay a Participant's Benefits as provided under this Plan.
8.3 Investment Discretion. The Benchmark Funds established pursuant to
Section 5.3 shall be for the sole purpose of determining the Interest Rate to be
used for determining the Interest credited to the Participant's Account. Neither
the Trustee nor the Committee shall have
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any obligation to invest the Participant's Account in accordance with his or her
deemed investment directions or in any other investment.
8.4 No Secured Interest. Except as otherwise provided by the Trust
Agreement, the assets of the Trust, shall be subject to the claims of creditors
of the Company. Except as provided in the Trust Agreement, the Participant (or
the Participant's Beneficiary) shall be a general unsecured creditor of the
Company with respect to the payment of Benefits under this Plan.
ARTICLE IX
PLAN ADMINISTRATION, AMENDMENT AND TERMINATION
9.1 Committee Powers and Responsibilities. The Committee shall have
complete control of the administration of the Plan herein set forth with all
powers necessary to enable it properly to carry out its duties in that respect.
Not in limitation, but in amplification of the foregoing, the Committee shall
have the power and authority to:
9.1.1 Construe the Plan and Trust Agreement to determine all
questions that shall arise as to interpretations of the Plan's provisions
including determination of which individuals are Eligible Employees and the
determination of the amounts credited to a Participant's Account, and the
appropriate timing and method of Benefit payments;
9.1.2 Establish reasonable rules and procedures which shall be
applied in a uniform and nondiscriminatory manner with respect to Deferral
Elections and Benefit Distribution Elections;
9.1.3 Require, as a condition to any distribution as to which the
Committee believes there may be conflicting legal claims, that the recipient
provide, as a condition to receiving the distribution, an indemnification of the
Plan, Trust, Trustee and Committee in such form as the Committee may specify;
9.1.4 Establish rules and procedures by which the Plan will operate
that are consistent with the terms of the Plan documents;
9.1.5 Compile and maintain all records it determines to be
necessary, appropriate or convenient in connection with the administration of
the Plan;
9.1.6 Adopt amendments to the Plan document and/or the Trust
Agreement which are deemed necessary or desirable to facilitate administration
of the Plan and/or to bring these documents into compliance with all applicable
laws and regulations, provided that the Committee shall not have the authority
to adopt any Plan amendment that will result in increased Company Credits or
substantially increased administrative costs unless such amendment is contingent
upon ratification by the Board before becoming effective;
12
<PAGE> 17
9.1.7 Employ such persons or organizations to render service or
perform services with respect to the administrative responsibilities of the
Committee under the Plan as the Committee determines to be necessary and
appropriate, including but not limited to attorneys, accountants, and benefit,
financial and administrative consultants;
9.1.8 Select, review and retain or change the Benchmark Funds which
are used for determining the Interest Rate under the Plan;
9.1.9 Select, review and retain or change the Benchmark Funds used
to determine the Interest Rate;
9.1.10 Direct the investment of the assets of the Trust;
9.1.11 Review the performance of the Trustee with respect to the
Trustee's duties, responsibilities and obligations under the Plan and Trust
Agreement; and
9.1.12 Take such other action as may be necessary or appropriate to
the management and investment of the Plan assets.
9.2 Decisions of the Committee. Decisions of the Committee made in good
faith upon any matter within the scope of its authority shall be final,
conclusive and binding upon all persons, including Participants and their legal
representatives or Beneficiaries. Any discretion granted to the Committee shall
be exercised in accordance with rules and policies established by the Committee.
9.3 Plan Amendment. This Plan may be amended by the Company at any time
in its sole discretion. Additionally, the Plan may be amended upon an action of
the members of the Committee, subject to the provisions in Section 9.1. However,
no amendment may be made that alters the nature of a Deferral Election or
Benefit Distribution Election or which would reduce the amount credited to a
Participant's Account on the date of such amendment; and provided further that
no amendment that affects the Trustee's duties and obligations under the Plan
may be made without the Trustee's consent.
9.4 Plan Termination. The Company reserves the right to terminate the
Plan in its entirety at any time upon fifteen (15) days notice to the
Participants. The termination of the Plan shall automatically revoke all
outstanding Benefit Distribution Elections and all elections to have Benefits
paid in installments. If the Plan is terminated, all benefits shall be paid as
set forth in Section 6.6. Any amounts remaining in the Trust after all benefits
have been paid shall revert to the Employer. Notwithstanding the foregoing, in
the event of a Change of Control, the Plan may be terminated in the sole
discretion of the Committee.
9.5 Additional Power and Responsibility Following a Change of Control.
In the event of a Change of Control, the Plan may be amended only by a unanimous
vote of the Committee. Additionally, the successor to the Company shall have no
right to dismiss any member of the Committee or add members to the Committee
without the express unanimous consent of the Committee members. Such limitations
on the rights of any successor corporation or business entity shall take effect
on the date of the Change of Control and shall remain in effect for a period
13
<PAGE> 18
of 12 months following the Change of Control unless the Committee unanimously
agrees to withdraw these limitations earlier.
ARTICLE X
MISCELLANEOUS
10.1 No Assignment. The right of any Participant, any Beneficiary, or
any other person to the payment of any benefits under this Plan shall not be
assigned, transferred, pledged or encumbered.
10.2 Successors. This Plan shall be binding upon and inure to the
benefit of the Employer, its successors and assigns and the Participant and his
or her heirs, executors, administrators and legal representatives.
10.3 Termination of Interim Agreements. All amounts credited as of
December 31, 1997 to the Deferral Account of a Participant pursuant to an
Interim Agreement as of December 31, 1997, shall be transferred to such
Participant's Account in this Plan. Thereupon, all rights of the Participant
with respect to such amounts shall be governed by the terms of this Plan and the
Interim Agreement shall have no further force or effect.
10.4 No Employment Agreement. Nothing contained herein shall be
construed as conferring upon any Participant the right to continue in the employ
of the Employer as an employee.
10.5 Attorneys' Fees. If the Employer, the Participant, any Beneficiary,
the Trustee and/or a successor in interest to any of the foregoing, brings legal
action to enforce any of the provisions of this Plan, the prevailing party in
such legal action shall be reimbursed by the other party, the prevailing party's
costs of such legal action including, without limitation, reasonable fees of
attorneys, accountants and similar advisors and expert witnesses.
10.6 Arbitration. Any dispute or claim relating to or arising out of
this Plan shall be fully and finally resolved by binding arbitration conducted
by the American Arbitration Association in Santa Clara County, California.
10.7 Governing Law. This Plan shall be construed in accordance with and
governed by the laws of the State of California.
14
<PAGE> 19
10.8 Entire Agreement. This Plan constitutes the entire understanding
and agreement with respect to the subject matter contained herein, and there are
no agreements, understandings, restrictions, representations or warranties among
any Participant and the Employer other than those as set forth or provided for
herein.
IN WITNESS WHEREOF, this Plan has been adopted by the Company effective
as of the Effective Date.
BAY NETWORKS, INC.
Dated: January 9, 1998 By: /s/ JOHN J. POGGI, JR.
--------------------- ---------------------------------
15
<PAGE> 1
EXHIBIT 10.31
BAY NETWORKS, INC.
DEFERRED COMPENSATION PLAN
TRUST AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 ESTABLISHMENT OF TRUST....................................................1
ARTICLE 2 PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.....................2
ARTICLE 3 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN
COMPANY IS INSOLVENT......................................................2
ARTICLE 4 PAYMENTS TO THE COMPANY...................................................3
ARTICLE 5 INVESTMENT AUTHORITY......................................................3
ARTICLE 6 DISPOSITION OF INCOME.....................................................4
ARTICLE 7 ACCOUNTING BY TRUSTEE.....................................................4
ARTICLE 8 RESPONSIBILITY OF TRUSTEE.................................................4
ARTICLE 9 COMPENSATION AND EXPENSES OF TRUSTEE......................................5
ARTICLE 10 RESIGNATION AND REMOVAL OF TRUSTEE........................................5
ARTICLE 11 APPOINTMENT OF SUCCESSOR TRUSTEE..........................................6
ARTICLE 12 AMENDMENT OR TERMINATION..................................................6
ARTICLE 13 MISCELLANEOUS.............................................................6
ARTICLE 14 EFFECTIVE DATE............................................................8
</TABLE>
i
<PAGE> 3
BAY NETWORKS, INC.
DEFERRED COMPENSATION PLAN
EFFECTIVE JANUARY 1, 1998
TRUST AGREEMENT
THIS TRUST AGREEMENT is entered into effective as of the 1st day of
January, 1998, by and between Bay Networks, Inc., a Delaware corporation (the
"Company"), and First Trust National Association (the "Trustee").
ARTICLE 1
ESTABLISHMENT OF TRUST
(a) The Company will deposit with Trustee money which shall become the
principal of the Trust to be held, administered and disposed of by Trustee as
provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of participants in the Bay Networks, Inc. Deferred
Compensation Plan (the "Plan") and general creditors as herein set forth. Plan
participants and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured contractual
rights of Plan participants and their beneficiaries against the Company. Any
assets held by the Trust will be subject to the claims of the Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Article 3(a) herein.
(e) The Company, in its sole discretion, may at any time, or from time
to time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan
participant or beneficiary shall have any right to compel such additional
deposits.
(f) Upon a Change of Control, the Company shall, as soon as possible,
but in no event longer than thirty (30) days following such Change of Control,
as defined herein, make an irrevocable contribution to the Trust in an amount
that is sufficient to pay each Plan participant or beneficiary the benefits to
which they would be entitled pursuant to the terms of the Plan as of the date on
which the Change of Control occurred.
1
<PAGE> 4
ARTICLE 2
PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
(a) The Company's Retirement Plans Administrative Committee shall have
the sole right and authority to administer the Plan and shall be referred to
hereafter as the Plan Administrator.
(b) The Plan Administrator shall direct the Trustee as to when amounts
are payable to a Plan participant (or the participant's beneficiaries) and the
manner in which such amounts shall be paid. Such directions shall be in writing
and in a form acceptable to the Trustee. Except as otherwise provided herein,
the Trustee shall make payments to Plan participants and their beneficiaries in
accordance with the Plan Administrator's directions. The Trustee shall make
provision for the reporting and withholding of any federal, state or local taxes
that may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company.
(c) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by the Plan Administrator or such
party as it shall designate under the Plan, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the Plan.
ARTICLE 3
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY
WHEN COMPANY IS INSOLVENT
(a) Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is Insolvent. The Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Article 1(d) hereof, the principal and income of the Trust shall be used solely
for the payment of Plan benefits to participants and beneficiaries unless the
Company is determined to be Insolvent. If the Company is Insolvent, all assets
in the Trust shall be subject to claims of the Company's general creditors under
federal and state law as set forth below.
(1) A member of the Retirement Plans Administrative Committee of the
Company shall have the duty to inform the Plan Administrator of the Company's
Insolvency. The Plan Administrator shall have the duty to inform the Trustee in
writing of the Company's Insolvency. If a person claiming to be a creditor of
the Company alleges in writing to Trustee that the Company has become Insolvent,
Trustee shall contact the Plan Administrator and request a determination as to
whether the Company is insolvent. Pending a determination as to whether the
Company is Insolvent, the Trustee shall discontinue payment of benefits to Plan
participants
2
<PAGE> 5
or their beneficiaries. The Trustee shall have no obligation to independently
determine whether the Company is Insolvent.
(2) Unless Trustee has actual knowledge of the Company's Insolvency,
or has received notice from the Plan Administrator or a person claiming to be a
creditor alleging that the Company is Insolvent, Trustee shall have no duty to
inquire whether the Company is Insolvent. Trustee may in all events rely on the
Plan Administrator's determination as to whether the Company is Insolvent.
(3) If at any time the Trustee is informed by the Plan Administrator
that the Company is Insolvent, Trustee shall discontinue payments to Plan
participants or their beneficiaries and shall hold the assets of the Trust for
the benefit of the Company's general creditors, who shall include Plan
participants and beneficiaries. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan participants or their beneficiaries to pursue their
rights as general creditors of the Company with respect to benefits due under
the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Article 2 of this Trust
Agreement only after the Plan Administrator has informed the Trustee in writing
of its determination that the Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Article 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
ARTICLE 4
PAYMENTS TO THE COMPANY
Except as provided in Article 3 hereof, the Company shall have no right
or power to direct Trustee to return to the Company or to divert to others any
of the Trust assets before all payment[s] of benefits have been made to Plan
participants and their beneficiaries pursuant to the terms of the Plan.
ARTICLE 5
INVESTMENT AUTHORITY
(a) In no event may Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by the Company, other than a de
minimis amount held in common investment vehicles in which Trustee invests. All
rights associated with the assets of the Trust shall be exercised by Trustee or
the person designated by Trustee, and shall in no event be exercisable by or
rest with Plan participants.
3
<PAGE> 6
(b) In addition to the general investment powers set forth above in this
Article 5, the following provisions shall apply:
(i) Investment Guidelines and Directives. The Trustee shall manage,
acquire, or dispose of the assets of the Trust in accordance with this Trust
Agreement and the directions of the Plan Administrator. To the extent permitted
by law, the Trustee shall not be liable for any investment made pursuant to the
Plan Administrator's direction.
(ii) Trustee Powers. The Trustee shall have the following powers,
rights and duties subject to Article 8 and the other provisions of this Trust
Agreement:
(A) To receive and hold all contributions paid to it by the
Plan Administrator;
(B) To effectuate the written investment instructions given by
the Plan Administrator without regard to any law now or hereafter in force
limiting investments of fiduciaries;
(C) To have the authority to invest and reinvest assets of the
Trust in shares of common or preferred stock, bonds, notes, debentures,
short-term securities, mutual funds (including any such fund from which the
Trustee or any affiliate thereof receives an investment management fee or any
other fee), common Trust funds and other property, real or personal, of any
kind; to purchase and sell "put" and "call" options on publicly traded
securities; and to acquire, hold, manage, operate, sell, contract to sell, grant
options with respect to, convey, exchange, transfer, abandon, lease, manage, and
otherwise deal with respect to assets of the Trust;
(D) To acquire, hold or dispose of insurance or annuity
contracts as directed by the Plan Administrator;
(E) To borrow from anyone such amount or amounts of money
necessary to carry out the purpose of this Trust and for that purpose to
mortgage or pledge all or any part of the Trust;
(F) To retain in the Trust for investment or pending
distributions, any portion of the Trust in cash deemed appropriate by the
Trustee;
(G) To establish accounts in any affiliate of the Trustee and
in such other banks and financial institutions as the Trustee deems appropriate
to carry out the purposes of the Trust;
(H) To deposit securities with a clearing corporation as
defined in Article Eight of the Uniform Commercial Code; to hold the
certificates representing securities, including those in bearer form, in bulk
form with and to merge such certificates into certificates of the same class of
the same issuer which constitute assets of other accounts or owners, without
4
<PAGE> 7
certification as to the ownership attached; and to utilize a book-entry system
for the transfer or pledge of securities held by the Trustee or by a clearing
corporation, provided that the records of the Trustee shall indicate the actual
ownership of the securities and other property of the Trust Fund.
ARTICLE 6
DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
ARTICLE 7
ACCOUNTING BY TRUSTEE
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between the
Company and Trustee. Within sixty (60) days following the close of each calendar
year and within sixty (60) days after the removal or resignation of Trustee,
Trustee shall deliver to the Company a written account of its administration of
the Trust during such Plan Year or during the period from the close of the last
preceding Plan Year to the date of such removal or resignation, setting forth
all investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
ARTICLE 8
RESPONSIBILITY OF TRUSTEE
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by the Company or the Plan Administrator which is contemplated
by, and in conformity with, the terms of the Plan or this Trust and is provided
in writing by the Company or the Plan Administrator. In the event of a dispute
between the Company and a party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, Trustee may obtain payment from the Trust.
Notwithstanding the foregoing provisions, neither the Company nor the Trust
shall be responsible for the payment of
5
<PAGE> 8
any costs, expenses and liabilities (including, without limitation, attorneys'
fees and expenses) that result from negligence, a breach of the terms of this
Trust Agreement, or criminal misconduct on the part of the Trustee or any
employee or agent of the Trustee.
(c) Trustee may consult with legal counsel (who may also be counsel for
the Company generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
Trustee shall have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Code.
ARTICLE 9
COMPENSATION AND EXPENSES OF TRUSTEE
The Company shall pay all of the Trustee's fees and expenses that are
directly related to the performance of the Trustee's duties and obligations as
set forth in this Trust Agreement. If not so paid, the fees and expenses shall
be paid from the Trust.
ARTICLE 10
RESIGNATION AND REMOVAL OF TRUSTEE
(a) Trustee may resign at any time by written notice to the Company,
which shall be effective sixty (60) days after receipt of such notice unless the
Company and Trustee agree otherwise.
(b) Trustee may be removed by the Company on sixty (60) days notice or
upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, Trustee may not be removed by the Company
for twelve (12) months.
(d) If Trustee resigns or is removed within twelve (12) months of a
Change of Control, the Trustee shall select a successor Trustee in accordance
with the provisions of Article 11(b) prior to the effective date of Trustee's
resignation or removal.
6
<PAGE> 9
(e) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within ninety (90) days after receipt
of notice of resignation, removal or transfer, unless the Company extends the
time limit.
ARTICLE 11
APPOINTMENT OF SUCCESSOR TRUSTEE
(a) If Trustee resigns or is removed in accordance with Article 10(a) or
(b) hereof, the Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state law, as a successor to replace Trustee upon resignation or removal. The
appointment shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the Company or the successor
Trustee to evidence the transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of
Article 10(d) and selects a successor Trustee, the Trustee may appoint any third
party such as a bank trust department or other party that may be granted
corporate trustee powers under state law. The appointment of a successor Trustee
shall be effective when accepted in writing by the new Trustee. The new Trustee
shall have all the rights and powers of the former Trustee, including ownership
rights in Trust assets. The former Trustee shall execute any instrument
necessary or reasonably requested by the successor Trustee to evidence the
transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Articles 7 and 8 hereof. The successor Trustee shall not be responsible for and
the Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
ARTICLE 12
AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and the Company. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Plan or shall make the Trust revocable.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan. Upon termination of the Trust any assets remaining in
the Trust shall be returned to the Company.
ARTICLE 13
MISCELLANEOUS
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
7
<PAGE> 10
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of California.
(d) For purposes of this Trust, "Change of Control" shall mean: (a) the
purchase or other acquisition by any person(s) or entity(ies), within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the
"Act") or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 under the Act) of thirty percent (30%) or more of the
outstanding shares of common stock or the combined voting power of the Company's
outstanding voting securities; (b) the approval by the Company's stockholders of
a reorganization, merger or consolidation transaction when after such
transaction the Company's stockholders own less than fifty percent (50%) of the
combined voting power owned before such transaction; (c) a dissolution or
liquidation of the Company; or (d) the sale of all or substantially all of the
Company assets.
8
<PAGE> 11
ARTICLE 14
EFFECTIVE DATE
The effective date of this Trust Agreement shall be January 1, 1998.
BAY NETWORKS, INC.
By: /s/ JOHN J. POGGI, JR.
------------------------------------
Its: VICE PRESIDENT
-----------------------------------
FIRST TRUST NATIONAL ASSOCIATION
By: /s/ SANDY HEGAN
------------------------------------
Its: VICE PRESIDENT
-----------------------------------
9
<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 7 of the Notes to Condensed
Consolidated Financial Statements. Such information is incorporated by
reference.
<TABLE> <S> <C>
<ARTICLE> 5
<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> 0.41
</TABLE>
