BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ON
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
GENERAL
BroadBand Technologies, Inc. was organized in the state of North Carolina in
July 1988 and reincorporated in the state of Delaware in December 1988. As used
herein, the term "Company" refers to BroadBand Technologies, Inc. The Company's
executive offices are located at 4024 Stirrup Creek Drive, Durham, NC 27703. Its
telephone number is (919)544-0015.
The Company designs, manufactures, markets and supports a sophisticated
electronics and software platform for the telecommunications industry, focusing
primarily on operators of local exchange telephone networks in the United
States. The Company also markets its products in Canada, Europe, Asia/Pacific
and the Middle East markets. Its platform, which involves patented technology,
provides operators of fiber based distribution networks with an integrated
access solution that incorporates ATM switching, transport and xDSL technology
to deliver high speed data and voice services as well as digital video in a wide
array of advanced, interactive entertainment, information, communications,
transaction and other services ("Advanced Interactive Services") to residential
and business subscribers.
RECENT DEVELOPMENTS
NEW LUCENT RELATIONSHIP
On February 4, 1998, the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that establish a new nonexclusive relationship
which replaces the exclusive relationship between the Company and Lucent entered
into in 1995 with respect to the SDBAS joint product. The terms of these
agreements are summarized in greater detail in a Form 8-K filed by the Company
dated March 5, 1998 and include:
o Mutual releases of liabilities
o Replacement of the prior supply agreement for the joint SDBAS product
and terms for continued supply by the Company of the FLX-2500 product
for the joint SDBAS product
o $21 million of development payments over a three year period by Lucent
to the Company for planned development work whose results will be
co-owned by the Company and Lucent, subject to certain restrictions on
use by the Company
o License of loop electronics technology from Lucent to the Company to
enhance the Company's independent product efforts. The Company's use of
the technology is subject to certain restrictions on use
o An agreement by Lucent to supply to the Company on an OEM basis certain
technology to enhance the Company's independent product efforts
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
NEW LUCENT RELATIONSHIP (CONTINUED)
o An agreement by Lucent to provide the Company with contract
manufacturing sufficient to absorb $18 million of manufacturing cost
overhead of the Company over a three year period
o An element manager software agreement valued at $2 million
o Forgiveness by Lucent of the Company's obligations for $5 million of
penalty payments previously recorded as liabilities by the Company and
$6 million of hardware prepayments
COMPANY IS IN DISCUSSIONS WITH GLOBAL TELECOMMUNICATIONS
EQUIPMENT SUPPLIER FOR GLOBAL ACCESS DEVELOPMENT
The Company is in discussions with an international telecommunications equipment
supplier to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN consortium is
developing the global standard and the group consists of 12 international and
domestic telephone companies representing over 300 million access lines and 11
leading international telecommunications equipment providers. The FSAN
architecture is a high bandwidth, asynchronous transmission, and passive optical
network similar to the international version of the FLX-2500 architecture, the
iFLX. The Company's management believes that the FLX-2500 is positioned to
evolve to meet the FSAN standard.
NEW BUSINESS STRATEGY
The agreements with Lucent and the FSAN effort described above
represent two initiatives of the Company's new strategy to leverage its core
loop electronics and broadband competencies in local loop infrastructure and
improve the Company's financial position. The final initiative of the Company's
strategy is a plan to introduce a digital loop carrier access product into the
fast growing $2 billion loop access market which is driven by ever increasing
volumes of Internet and data traffic. Failure to implement any one or more of
the parts of the business strategy would have a material adverse effect on the
Company.
MANAGEMENT CHANGES
The Company recently reorganized its management team. Effective February 1,
1998, John R. Hutchins, III, became the new Chairman of the Board. Salim A.L.
Bhatia, a founder of the Company, departed from the Company effective January
31, 1998 and Larry McLernon, also a board member departed on January 26, 1998.
On March 2, 1998, David J. McLean was appointed Vice President of Engineering
from his previous role as Vice President of Technical Services for which he will
also maintain responsibility. Carl A. Kammire will depart from the company as
Vice President of Engineering effective April 30, 1998. Timothy K. Oakley, Chief
Financial Officer of the Company, also recently announced his intention to
depart from the Company. See "Executive Officers of Registrant" following Item 4
for a description of the foregoing and other recent management changes.
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
FLX-2500 CUSTOMER DEVELOPMENTS
The Company's new relationship with Lucent provides that Lucent will act as the
sole sales, marketing and technical interface with SDBAS customers. Deployment
by Lucent's customers has been delayed due to an unfavorable regulatory
environment, impact of prior product delays and the long evaluation and
implementation process that is typical of customers for major communications
infrastructure changes. However, steady progress has been made in the product
performance of SDBAS, which is now ready for field deployment. Bell Atlantic's
timing and degree of deployment of the SDBAS product is uncertain. Lucent's
customers, other than Bell Atlantic, have methodically moved forward with their
performance evaluations. Internationally, the Company continues to make progress
in the labs and is working toward initial field trials.
PRODUCTS
The mission of the Company is to provide products and services for network and
service providers to implement a robust, flexible and economical electronic
connection providing residential and business customers with advanced voice
services, high speed data and digital video capability, to communicate, access
on-line information, entertainment and other multi-media services. The Company
has announced three product development efforts including development for
Lucent's AnyMedia digital loop carrier, creation of its own digital loop carrier
product and an alliance to deliver a global access platform to meet the emerging
FSAN specifications. The Company's current product, the FLX-2500, is complete
for customer evaluation. However, prior product delays, continued regulatory
uncertainty and the announcement of new products and technology have resulted in
uncertainty as to the timing and volume of shipments.
On February 4, 1998, the Company and Lucent entered into a Research and
Development Agreement (the "R & D Agreement"), for the Company to develop
components for Lucent's new AnyMedia digital loop carrier product. Under the R &
D Agreement, Lucent has committed to pay the Company at least $21 million
payable in equal installments over a three-year period. The Company and Lucent
will co-own the technology developed by the Company under the R&D Agreement with
certain restrictions on its use, including restrictions against licensing third
parties and producing products that are plug compatible with the products of the
other party and limitations on use by the Company solely with the Company's
digital loop carrier products, which the Company is planning to develop.
Although specific components to be developed by the Company for Lucent have not
been identified, the parties agreed to identify specific development projects as
soon as practicable. Lucent also agreed that the components to be developed by
the Company and the configuration of such products would be selected with a view
toward maximizing the ability of the Company to utilize the developed technology
in the Company's own digital loop carrier products. The ability of the Company
to reuse technology developed for Lucent in the Company's products will depend
upon a number of factors, including the products Lucent wants the Company to
design, how alike the Company and Lucent products will be, and the design
schedules for Lucent and the Company's products.
The Company's new, stand-alone digital loop carrier product is aimed at the
opportunity created by the demand for higher speed Internet access and the
convergence of narrowband and broadband access products. The new development
will combine the Company's core technologies; ATM, xDSL and Optics, with
technology gained through the Lucent development and technology license
agreements discussed herein. The new digital loop carrier is being developed to
be complimentary to Lucent's product line and will position the Company for more
near-term market participation, which represents a significant change from the
prior efforts. The expected benefit is that the new product will allow the
Company to offer both narrowband and broadband services and allow the Company to
participate in the business sector
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PRODUCTS (CONTINUED)
where local service competition has begun to emerge. At the same time, the
Company will continue to position itself to benefit from the inevitable
competition for residential services, intended by the Telecom Act of 1996. There
can be no assurance as to the amount, if any, of development for Lucent's
products that will be reusable in the Company's digital loop carrier products.
If the Company is not able to reuse substantial amounts of the technology
developed for Lucent, the value of the R & D Agreement to the Company would be
decreased from the Company's expectations.
The Company and Lucent also entered into a Technology Transfer Agreement and
Element Manager Agreement on February 4, 1998 pursuant to which certain Lucent
technology is licensed to the Company. Under the Technology Transfer Agreement,
Lucent has granted the Company licenses to certain existing narrowband
technology with certain restrictions on its use, including restrictions against
licensing third parties and producing products that are plug compatible with the
products of the Lucent and limitations on use by the Company solely with the
Company's digital loop carrier products. The Company believes this narrowband
technology will enable the Company to increase the cost efficiency of its
digital loop carrier products and will save the Company substantial development
time and development cost. Under the Element Manager Agreement, the Company and
Lucent will evaluate whether the Company will obtain a license of Lucent's
element manager technology. Lucent will pay the Company $2 million to support
the development of its element manager. If the Company does not obtain an
element manager license from Lucent, the Company will seek a license from
another supplier or develop one internally.
The R & D Agreement and the Technology Transfer Agreement described above all
contain provisions that would enable Lucent to terminate the agreements,
including licenses and volume commitments, on certain conditions in a bankruptcy
of the Company, material breach by the Company or a "Change in Control" of the
Company. The Change in Control provision terminates February 4, 2003. Change in
Control is very broadly defined in the agreements and may cause the Company to
have to choose to forego the benefits of its agreements with Lucent to acquire
another company, sell itself to another company or enter into a strategic
alliance with another company, unless Lucent approves of the transaction. In
addition, the Company could lose the benefits of the agreements with Lucent if a
company acquires a control position in the Company stock through market
purchases without the Company's consent. If a change of control occurs, the
Company would have 18 months to redesign the parts of its digital loop carrier
product that include Lucent's intellectual property.
The Company is in discussions with an international telecommunications equipment
provider to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN architecture is a
high bandwidth, asynchronous transmission, and passive optical network similar
to the FLX-2500 architecture. The Company's management believes that the
international version of the FLX-2500, the iFLX, is positioned to evolve to meet
the FSAN standard.
The Company's second-generation product, the FLX-2500, is a "global core"
platform that enables a Digital Loop Carrier (DLC) system, providing the
telephony interfaces, to easily interface with the Company's FLX-2500 System,
which provides broadband video and data interfaces and switching, as well as
transport technology. The FLX-2500 is a second-generation modular platform,
which leverages its patented technology to enable network operators to deploy
the platform in a variety of configurations. Telephony, data, video, and
interactive services can be deployed simultaneously or incrementally at the
network operator's choice. The Company believes the platform provides it with
the flexibility to partner with some of the world's most experienced
telecommunication equipment providers. In North America, the FLX-2500 System is
aligned with Lucent Technologies' high bandwidth digital loop access system. The
Company has distribution agreements with Bosch Telecom GmbH to provide a DLC
Access System in Germany and other selected
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PRODUCTS (CONTINUED)
areas around the globe. The Company also has distribution agreements with SAT,
(Groupe SAGEM) to provide a DLC Access System in France and Samsung Electronics
Company Ltd. and Samwoo Telecommunications Company Ltd. for a DLC Access System
in Korea.
FLX(R)-2500
The Company has completed the development of the telephony and data modules and
substantially completed the video portion of the FLX-2500, a second-generation
Fiber Loop Access (FLX) System. Units have been delivered for system
integration, testing, and is being trialed at SBC and RCN for telephony services
and Telus in Canada for data services. The FLX-2500 product consists of the
switched digital architecture which supports both broadband and telephony
elements of a local access system that have been designed to be integrated with
the telephony and analog video elements of other telecommunications systems
suppliers. The resulting single, integrated full service system is expected to
allow customers to build fiber-to-the-curb local distribution networks that
combine the improved switched digital broadband features of the Company's
platform with the telephony and analog video features of established
telecommunications systems suppliers. Prior product delays continued regulatory
uncertainty and the announcement of new products and technology have resulted in
uncertainty as to the timing and volume of FLX-2500 shipments.
The FLX-2500 consists of a Host Digital Terminal (HDT) and an Optical Network
Unit (ONU) that are installed at different points in a fiber-to-the-curb local
distribution network and that are operated by a sophisticated software program.
These elements provide a full range of switched telephony services as well as
broadcast and interactive video services and high speed Internet access. To
provide these services, the system interfaces to a digital headend, an analog
headend, a telephony system and an Internet service interface provided by other
suppliers. Interfaces to other broadband services can be provided.
The FLX-2500's HDT receives digital telephony signals from the telephony access
system (via fiber optics) and digital broadband signals (via fiber optics)
containing video and data signals from the broadband feeder system and
multiplexes these signals into a single high-speed data stream for transmission
over a pair of optical fibers to the ONU located near the end user. The HDT also
provides switching functions for the broadband signals.
The ONU converts the optical signals received from the HDT back into standard
electrical signals and connects directly with residences using copper wire for
both the telephony and digital broadband connections. Inside the residence, the
telephony signal is connected to a telephone or other appropriate telephony
equipment and the digital broadband signal connects to a set-top, PC, or other
home terminal device, which will be provided by other suppliers. The
architecture also transports an analog video signal directly from the analog
headend over a coax cable to the ONU and from the ONU directly to a television
set without requiring a set-top. The Company successfully completed an ethernet
modem, the NetFLX(TM), that interfaces with the FLX platform and is being
trialed in Canada.
The FLX-2500 provides software programs that operate broadband call processing,
service provisioning, network monitoring and testing functions needed for
broadband services and transport of narrowband services. The Company also
provides a network management capability called the Video Administration Module
(VAM) which interfaces between the FLX System and video billing and event
provisioning systems for digital video service. The VAM can be combined with the
network management systems of other suppliers. The VAM also provides the "video
gateway" that enables both independent programmers to access the network, and
the network operator to act as a common carrier for numerous providers of video
services.
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PRODUCTS (CONTINUED)
FLX(R)-1100
The Company's first generation product, the FLX-1100 System, consists of
software and multiple electronic modules installed at different points in a
fiber-to-the-curb local distribution network, which includes switched digital
video and telephony features. The Company continues to make the first generation
product, the FLX-1100, available to existing customers to maintain and support
existing projects. In December of 1997 the Company notified customers that the
product would be discontinued for new applications or growth of existing
projects. The Company expects this product will not represent a material portion
of revenues as customers migrate to new products.
The FLX-1100 System allows fiber optic cables to be used to extend the public
telecommunications network from the local telephone company's central office
switch to the individual home or business (the "Local Loop"). The FLX-1100
System consists of a HDT, an ONU, a Video Headend and sophisticated software
programs. The FLX-1100 System connects to set-tops and telephones which will be
provided by other suppliers. The Company's HDT can be installed either at the
local central office or at a remote terminal location. The HDT connects with the
switch at the local central office to provide telephony service.
The HDT also contains the broadband switching capability to implement
interactive video services for subscribers served via the FLX-1100 System. The
Company's ONU is installed at the curbside location and converts optical signals
received from the HDT back into standard electrical signals. The ONU connects
directly with residences using copper wire for the telephony connections and
coaxial cable for the video connection. The Company's Video Headend, located at
either the source of the video signals or at the telephone company's central
office, converts analog television signals to 45 Mb/s digital signals or
multiplexes existing digital video signals into the 45 Mb/s signals. The Video
Headend multiplexes the signals together for transmission by fiber to the
Company's HDT.
The Company's software operates broadband call processing, service provisioning,
network monitoring and testing functions that run in the HDT. In addition, the
Company provides a network management capability called the Video Administration
Module (VAM) which interfaces between the FLX-1100 System and video billing and
event provisioning systems. The Video Administration Module also provides the
"video gateway" that both enables independent programmers to access the network,
and the network operator to act as a common carrier for numerous providers of
video services.
MARKET
GENERAL
The Company's primary market is companies that operate, or have plans to
operate, local fiber optics to the curb or companies building distribution
networks to provide transmission services for both narrowband and broadband
services, including a broad range of Advanced Interactive Digital Services, to
residential and business customers. Most local exchange telephone companies and
Competitive Local Exchange Carriers (CLECs) are currently included in this
market or are potentially in this market. The Company initially devoted
substantially all its resources to configuring its products for, and marketing
to, the seven Regional Bell Operating Companies (RBOC's), GTE and the other
independent operators of local exchange telephone networks in the United States.
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MARKET (CONTINUED)
GENERAL (CONTINUED)
Starting in 1994, the Company began development of and recently released to the
market its second-generation product, the FLX-2500 System, that operates as a
global core platform. The open design of the FLX-2500 enables the flexibility to
partner with some of the world's most experienced telecommunications equipment
providers. The Company is aligned with Lucent Technologies in North America to
integrate the FLX-2500 as part of Lucent Technologies' high bandwidth digital
loop carrier access system. The Company's success in the domestic market is
substantially dependent upon Lucent's attractiveness in the digital loop carrier
market with its current SDBAS offering and announced development of AnyMedia.
The Company's global core platform is also intended to be integrated with SAT
(Groupe SAGEM) Access Systems in France, Samsung Electronics Company Ltd. and
Samwoo Telecommunications Company Ltd. in Korea, and with Bosch Telecom GmbH in
Germany and other selected areas around the globe. In 1996 the Company also
began to market its platform to the emerging (CLECs), which will compete
directly with (RBOCs) in the United States.
TELEPHONE INDUSTRY EVALUATION AND PURCHASING PROCEDURES
The telephone industry generally evaluates new equipment and software through a
lengthy and multi-tiered process. Evaluation can take as little as a few months
for products that are only a small change from existing products in the
telephone network and can take as long as several years for complex products
based on completely new technologies. Products that facilitate the deployment of
fiber optic cable in the local distribution network, including the Company's FLX
System, are in the latter category. The process may vary to some extent
depending on the telephone company and the product being evaluated, the
priorities of the telephone companies, budgets and the efficiency with which
decisions are made about priorities and new products.
CUSTOMER STATUS
The new agreements between Lucent and the Company include a Settlement Agreement
and mutual releases by BroadBand and Lucent of all liabilities arising prior to
February 4, 1998. The Settlement Agreement terminates the SDV Supply Agreement
Contract No. LGC-A65-D between Lucent and the Company dated November 15, 1995,
as amended July 12, 1996 (the "Exclusive Agreement"), relating to the
development and sale of the joint Company/Lucent SDBAS product. Pursuant to a
new SDBAS Supply Agreement, the Company will continue to supply its FLX-2500 to
Lucent. Under the Settlement Agreement, the Company agrees to support Lucent's
decisions with customers such as Bell Atlantic and SBC with regard to the
marketing of SDBAS products and the appropriate transition to Lucent's
AnyMedia(TM) products. While Lucent will make all customer related decisions for
the joint SDBAS product, the Company is free to market its FLX-2500 product
independent of the joint SDBAS product either as a stand alone product or in
conjunction with the products of other digital loop carrier vendors.
The Company also signed a general purchase agreement with Bell Atlantic in June
of 1996 for certain elements of the FLX-2500. Prior to this contract award, the
Company operated under its first volume purchase agreement with Bell Atlantic
Network Services, Inc. for its first generation system, the FLX-1100. The supply
agreement for the FLX-1100 covered sales to affiliates of Bell Atlantic
Services. The previous supply agreement for the FLX-2500 with Lucent to provide
the SDBAS product to Bell Atlantic was an exclusive commitment with Lucent to
provide volume Switched
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MARKET (CONTINUED)
CUSTOMER STATUS (CONTINUED)
Digital Broadband (SDB) purchases from the Company over a six and one half year
period. Prior product delays, continued regulatory uncertainty and the
announcement of new products and technology have resulted in uncertainty as to
the timing and volume of FLX-2500 shipments and there can be no assurances as to
the timing of the purchases over the six and one half-year period. The Company's
second-generation product, the FLX-2500, is also being field trialed in
Richardson, Texas as part of a 30,000 home evaluation. The FLX-2500 is also
being tested and evaluated in other Regional Bell Operating Companies (RBOCs),
Competitive Local Exchange Carriers (CLECs) such as RCN, and overseas telephone
companies.
Prior to delivery of the FLX-2500, the Company also delivered its first
generation FLX-1100 System to SBC, Inc. for the initial trial in Richardson,
Texas and has sold its FLX-1100 system and related products to other Regional
Bell Operating Companies, some independent companies, and overseas telephone
companies for field trial evaluation.
COMPETITION
The segment of the telecommunications industry in which the Company competes is
intensely competitive. Many of the Company's competitors have more extensive
engineering, manufacturing, and marketing capabilities and greater financial and
personnel resources than those of the Company. The Company's ability to compete
is dependent upon several factors, including partners' capabilities, product
features, innovation, quality, reliability, service, support and price.
The Company believes its competition may come from companies that have or are
developing products for a number of different types of technology. Included are
technologies that can be described as Switched Digital Broadband (SDB) with
fiber-to-the-curb, Hybrid-Fiber-Coax (HFC), Asynchronous Digital Subscriber Line
(ADSL), ADSL Lite (ADSL at speeds of less than one megabyte), a Very High Speed
Digital Subscriber Line (VDSL), Plain Old Telephone Service (POTS) over
fiber-to-the-curb and wireless broadband.
Companies that have announced plans to develop these technologies are Lucent
Technologies, ADC Communications, Alcatel, DSC, Fujitsu, Next Level
Communications (majority owned by General Instrument), Northern Telecom, Cisco
Systems, Raynet, Reliance (RelTec), Scientific Atlanta, Pairgain, Advanced Fibre
Communications and Westell. Some competitors are developing systems that combine
two or more of these different technologies to transmit different types of
services.
The Company expects price competition to be an important competitive factor for
both its existing FLX-2500 product and its planned digital loop carrier product,
together with other factors, including experience, product performance,
features, reliability and supplier strength. In two Request for Proposal (RFP)
decisions late in 1996 and early in 1997, the Company believes a new or
alternative supplier of switched digital broadband had underbid the Company.
Failure of the Company to meet its development goals could have a material
adverse effect on the Company. The Company believes that the other key criteria
for competition in the market for electronics and software for local
distribution networks will be cost competitiveness, flexibility, revenue
generation capability, compatibility with the existing telephone or cable
television networks and upgradeability, as well as customer support. The Company
believes that it competes favorably on these factors for those telephone
companies that consider the capability to transmit high performance Advanced
Interactive Services important, but there can be no assurance the Company will
continue to compete favorably on these factors.
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
REGULATIONS
On February 8, 1996, President Clinton signed into law the Telecommunications
Reform Act, which intends to liberalize the regulations that govern the
telephone companies, which constitute the Company's primary market. In addition,
this law permits the entry of other network operators into the
telecommunications marketplace. The expectation of increased competition for
local residential narrowband and broadband services has failed to occur
resulting in, along with other factors, delayed deployment of the SDBAS product.
Telephone companies are subject to extensive regulation. Both the federal and
state governments regulate the provision of basic and other telecommunications
services. Prior to using the Company's network technology to provide video
programming in their service territories, telephone companies are required
either to obtain cable television franchises from the relevant local
governments, or comply with federal statutory and regulatory requirements
governing "open video system" operators. Telephone companies offer data services
today and require no special government approval to deliver such services other
than the normal state and federal regulations for basic and other
telecommunications services.
RESEARCH AND PRODUCT DEVELOPMENT
As discussed earlier, the Company's strategy entails three development efforts.
The first initiative is a Research and Development Agreement (the "R & D
Agreement") with Lucent, for the Company to develop products for Lucent's new
AnyMedia digital loop carrier product. Under the R &D Agreement, Lucent has
committed to pay the Company at least $21 million payable in equal installments
over a three-year period. The Company and Lucent will co-own the technology
developed by the Company subject to certain restrictions on use by the Company.
The second initiative involves the intent of the Company and an international
partner to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN architecture is a
high bandwidth, asynchronous transmission, and passive optical network similar
to the FLX-2500 architecture, which will be used as the foundation for the new
product. Last, the Company plans to develop its own digital loop carrier which
will combine the Company's core technologies, ATM, xDSL and Optics, with
technology gained through the Company's AnyMedia development for Lucent and
technology license agreements discussed earlier. The new digital loop carrier is
being developed to be complimentary to the AnyMedia product line and will
position the Company for more near-term revenue opportunity based on current
telephone business models once the product is completed. This new product
approach represents a significant change from prior efforts, which were based on
the assumption that telephone companies would enter the video business using an
integrated platform. The AnyMedia, FSAN and independent digital loop carrier
products are early in the design process with market introductions expected
within 20 to 25 months. There can be no assurances as to the success of these
products or the achievement of these preliminary schedule estimates. (See
Products Section)
The Company has completed the development of the telephony and data modules and
substantially completed the video portion of the FLX-2500, a second-generation
Fiber Loop Access (FLX) System. Units have been delivered for system
integration, testing, and are being trialed at SBC and RCN for telephony
services and Telus in Canada for data services. The Company will support the
FLX-2500 product with sustaining engineering resources and is in the process of
reallocating engineering talent to support AnyMedia product development for
Lucent and the development of an independent digital loop carrier product as
well as analyzing the impact of the FSAN global access effort.
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BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
The FLX-2500 is a second-generation modular platform, which enables network
operators to deploy the platform in a variety of configurations. Telephony,
data, video, and interactive services can be deployed simultaneously or
incrementally at the network operator's choice. The Company is engaging in
further development work on broadband video and data modules that enable the use
of longer and older drop cables in the customer's installed base, as well as
additional software features. Certain broadband capabilities are available today
with enhanced offerings expected to be available for deployment in late fourth
quarter of 1998 or early 1999, although there can be no assurance that
development can be completed on schedule.
The Company's products are expected to continue to evolve because, (1) advances
in technology and applications of its technology will result in cost and
reliability improvements, (2) constant evaluation and implementation of customer
application requirements in the form of new features and feature enhancements
and (3) development of spin-off products to support the SDB deployment or
deployment of the new products that could provide additional sources of revenue.
To further penetrate the market and expand into other areas of
telecommunications, the Company engages in a continuing program of research and
product development. The success of future development efforts will depend on,
among other factors, the Company's ability to attract and retain qualified
design and development personnel who are in great demand and limited supply.
There can be no assurance as to the success of the Company's research and
development effort, or the timing of such effort leading to products being
available for customer shipments.
The Company's research and product development costs charged to expense were
approximately $28,062,000, $22,785,000, and $19,434,000, for the years ended
December 31, 1997, 1996, and 1995, respectively. No software development costs
were capitalized in 1997, 1996, or 1995.
SALES, MARKETING AND CUSTOMER SUPPORT
The agreements reached with Lucent provide for Lucent to have complete control
over the sales, marketing and service of the SDBAS and AnyMedia products or any
other jointly developed products for Lucent's customers in the United States and
Canada. The Company will provide limited marketing resources to support Lucent
for these products. Also, internationally the Company has agreements in place
for its products to be marketed, sold, and serviced by SAT in France, Samsung
Electronics Company Ltd. and Samwoo Telecommunications Company Ltd. in Korea and
Bosch Telecom in Germany and other markets. The Company's sales and marketing
resources maintain contact with the telephone company personnel who have
responsibility for making and implementing the business, technical and
operational decisions relating to purchasing, evaluating and deploying fiber
optic systems for the local loop. The Company's sales personnel typically have
substantial prior experience marketing products to the Regional Bell Operating
Companies (RBOC), GTE, other major independent telephone companies and
Competitive Local Exchange Carriers. The Company also selectively utilizes local
sales representatives in the international market and marketing personnel
maintain contact with telephone companies in these markets. The Company believes
that the knowledge of its sales and marketing personnel about both the personnel
and the operating procedures of the telephone companies for which they have
responsibility are important factors in the Company's sales and marketing
efforts.
The primary function of the Company's customer support personnel is to provide
assistance to telephone company personnel in engineering, installing,
maintaining and operating the FLX System, future products for AnyMedia, the FSAN
effort and the Company's digital loop carrier product. This involves close
coordination with technical and operational personnel of the telephone
companies. Customer support personnel also assist the Company's marketing and
10
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
SALES, MARKETING AND CUSTOMER SUPPORT (CONTINUED)
research and development groups by conveying to both groups the needs of the
telephone companies that have been communicated by telephone company personnel.
In addition, customer support personnel provide documentation, training and
technical assistance to the Company's customers.
MANUFACTURING AND SUPPLIES
The Company depends on outside suppliers for the continued availability of
components and materials, including printed circuit board assemblies. In large
part, final assembly and testing are performed by the Company's personnel at the
Company's manufacturing facility. The Company tests its products extensively
prior to shipment to the customer using an automated testing system that
incorporates proprietary procedures. Testing may include both environmental
testing to ensure products can withstand severe thermal variations and the
electronic simulation of signal problems to test the effectiveness of devices in
the Company's products designed to alert customers of equipment malfunctions.
Many of the components used in the Company's FLX System are standard parts
available from multiple sources. However, certain ASICs and electro-optic
components used in the Company's FLX System are currently primarily available
only from single sources, and other components are available from only a limited
number of sources. Some of the Company's sole-source and limited-source
suppliers are new companies which may prove to be unreliable sources of supply.
To date, the Company has experienced minimal supply problems, all of which have
been managed positively. The Company expects to continue for the foreseeable
future its policy of having the FLX System's subsystems and components
manufactured by third parties.
On February 4, 1998 the Company and Lucent also executed a Manufacturing
Agreement, an agreement for Lucent to act as an OEM ("Original Equipment
Supplier") to the Company and an agreement for the Company to act as an OEM to
Lucent. The Manufacturing Agreement is the only agreement between the Company
and Lucent that contains guaranteed volumes or cash payments in lieu of volume.
The Agreement provides the Company with contract manufacturing of Lucent
products to absorb $18 million of the cost to the Company of maintaining its
manufacturing operations for three years. If Lucent fails to provide orders for
products in sufficient volume to absorb $18 million, Lucent will pay the Company
the amount that is not absorbed by Lucent's orders. As sales of the Company's
current product, the FLX-2500, are uncertain due to regulatory delay and
Lucent's transition to its AnyMedia product, the required absorption orders or
payments will enable the Company to maintain its manufacturing capabilities
while the Company develops new products. Under the OEM agreements, Lucent will
manufacture for the Company certain narrowband components utilizing Lucent
technology and the Company will continue to sell its FLX-2500 product to Lucent.
Neither product has any guaranteed volume commitments. In addition, the Company
and Lucent will from time to time evaluate whether to add additional products to
either or both OEM agreements. It is expected such decisions will depend upon a
number of factors, including price, quality and the availability of other
suppliers.
BACKLOG
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to December 31, 1998. The aggregate sales price of
orders received and included in backlog was approximately $.9 million and $5.6
million on December 31, 1997 and December 31, 1996, respectively. The decrease
in backlog is due to the timing of the testing and evaluation process of the
joint SDBAS product by Lucent's customers, as well as to customer
11
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
BACKLOG (CONTINUED)
delays in moving into the video business and Lucent's transition to its AnyMedia
product. The Company believes that the orders included in the backlog are firm
orders and will be shipped prior to December 31, 1998. However, some orders may
be canceled by the customer without penalty where management believes it is in
the Company's best interest to do so.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company has been awarded patents in the United States. Additional patent
applications are pending in the United States and certain foreign countries.
There can be no assurance that any of these applications will result in the
award of a patent or that the Company would be successful in defending its
patent rights in any subsequent infringement actions.
In 1996 as competitors announced competing products, the Company began to focus
greater attention on assessing its intellectual property. The Company is
continuing such efforts and intends to protect its intellectual property in a
manner that maximizes its business opportunity. The Company believes that its
patents provide a competitive advantage over other providers of switched digital
broadband products. There can be no assurance, however, that the patents of the
Company will be enforceable or that competitors will not be able to develop
products that do not infringe upon the patents of the Company. The Company, on
March 18, 1997, brought an infringement action against General Instrument
Corporation. On March 19, 1997, Next Level Communications, a subsidiary of
General Instrument Corporation, commenced a legal action against the Company in
the U.S. District Court for the Northern District of California. (Next Level
Communications v. BroadBand Technologies, Inc., Civil Action No. C-97-0960),
seeking, among other things, to have the Company's U.S. Patent No. 5,457,560
("the 560 patent") declared invalid and unenforceable, alleging antitrust
violations based upon the suit against General Instrument, alleging that the
Company is infringing two patents of General Instrument Corporation relating to
the encoding and decoding of digital video and seeking an injunction against
further infringement. The Company on February 18, 1998, counterclaimed against
Next Level Communications for infringement of the 560 patent. (See Item 3 Legal
Proceedings).
The Company's patent portfolio covers the basic technology for implementing
switched digital broadband systems in the context of a fiber to the curb
architecture. The issued patents cover systems using a main site (HDT) and a
remote site (ONU) interconnected by fiber, providing downstream digital
broadband and video information to multiple subscriber locations in response to
upstream signals requesting a given channel. An approach for multicasting one
channel to multiple subscribers is also covered by a patent that was recently
issued to the Company as U.S. Patent No. 5,619,498.
Because of the existence of a large number of patents in the telecommunications
field and the rapid rate of issuance of new patents, some components of the
Company's products may be covered by existing patents, without the Company's
knowledge. If so, the Company believes that, based upon industry practices,
necessary licenses or rights under such patents may be obtained on terms, which
would not have a materially adverse financial effect on the Company.
The Company has received Notice of Publication for registration for "BBT", "FLX"
and "BroadBand Technologies" as trademarks for use in the United States.
In addition to the patent protection described above, the Company protects its
software through contractual arrangements with its customers and through
copyright protection procedures.
12
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION (CONTINUED)
The Company acquired ownership rights to a significant amount of its technology
from Siecor Corporation in July 1988. Under that agreement, Siecor Corporation
transferred exclusive ownership of the technology to the Company in return for
the right to receive royalties from the sale of products, incorporating the
transferred technology. Before December 31, 1998, the Company cannot transfer or
license the technology acquired from Siecor Corporation on an exclusive basis
without prior consent of Siecor Corporation. Siecor Corporation may not
unreasonably deny its consent. In 1996 the Company renegotiated the terms of the
royalty agreement which in effect reduced the royalty percentage.
EMPLOYEES
As of December 31, 1997, the Company had a total of 300 employees. The Company
is not a party to any collective bargaining agreement.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing operations are subject to numerous federal, state,
and local laws and regulations designed to protect the environment. There are no
administrative or judicial proceedings pending, or threatened against the
Company alleging violations of such environmental laws or regulations.
Compliance with these laws and regulations has not had, and is not expected to
have, a material effect upon the capital expenditures, earnings, and competitive
position of the Company.
RISK FACTORS
In connection with the "Safe Harbor" provisions of the private Securities
Litigation Reform Act of 1995, readers of this document are advised that this
document contains both statements of historical facts and forward looking
statements. Such statements include communications about the Company's prior and
new relationships with Lucent, the Company's FLX-1100 and FLX-2500 products and
Lucent's DLC with which the FLX-2500 is paired, a new digital loop carrier
product the Company plans to develop, migration of the FLX-2500 to FSAN, the
expected action of customers, corporate partners, and competitors, and future
financial requirements. Forward looking statements herein, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated by the forward looking statements. These risks
include, but are not limited to the following:
Although management believes the relationship with Lucent offers certain
opportunities to the Company, the relationship includes certain risks as well.
As disclosed in prior filings, the relationship between the Company and Lucent
relating to SDBAS arising out of the November 1995 exclusive agreement did not
meet the Company's expectations and resulted in substantially lower than
expected sales volume. There can be no assurances the new relationship with
Lucent will not fail to meet the Company's expectations. The Company's
relationship with Lucent also may adversely affect the prospect for partnership
with others in the telecommunications industry, especially in light of certain
restrictions contained in the new Lucent agreements including change of control
requirements. Decisions by Lucent or rumors of a decision by Lucent that changes
Lucent's relationship with the Company may have an adverse effect on the market
price of the stock of the Company. In addition, Lucent is a vendor of digital
loop carrier products and the Company's product may compete with Lucent in some
circumstances. Such competition could adversely affect the ability of the
Company and Lucent to cooperate to the extent required under the new agreements.
13
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
To maximize the value of the new agreements with Lucent, the Company must
develop its own digital loop carrier product. Development of such a new digital
loop carrier product by the Company will be subject to significant technical and
other challenges and will require a substantial investment of money and time.
There can be no assurance that the Company will be able to develop a digital
loop carrier product or that any product it develops will be attractive to
customers and price competitive with the products of competitors, including
Lucent.
Given the current regulatory and customer environment as well as prior product
delays, sales volume for the Company's only current product, the FLX-2500, are
expected to remain low. Accordingly, except for development, contract
manufacturing and potential OEM revenues from the new agreements with Lucent,
the Company anticipates low product sales volume until its new digital loop
carrier products are introduced into the market in the next 20 to 25 months.
To remain competitive, the Company must continue to invest substantial resources
in research and development and to achieve development results in its current
products and future products, including the new digital loop carrier product the
Company is planning to develop, as well as upgrades to the Company's products
that meet the specific needs of customers, including product performance,
features, reliability and price competitiveness. Development efforts are in the
planning stage and many challenges exist to successful development. In
particular, the Company will need to attract additional engineers who have
hardware experience in digital loop carrier products. The Company will also be
managing multiple, concurrent projects that will require critical program
management expertise to efficiently allocate scarce engineering resources among
competing initiatives. There can be no assurance the Company will be successful
in such effort.
Failure of the Company to meet its development goals could have a material
adverse effect on the Company. Notwithstanding successful development by the
Company, competitors may develop competing technology and products that are more
attractive to customers than are the technologies and products of the Company
and may offer such products at materially lower prices. The Company expects
price competition to be an important competitive factor, together with other
factors, including experience, product performance, features, reliability,
partner performance and supplier strength.
Other factors include the possibility that telephone companies may not widely
deploy all or part of the Company's current or future products in their local
distribution networks or may require expensive upgrades to the Company's current
product. For example, during 1997 SBC decided to discontinue the video portion
of its trial in Richardson, Texas, which was attributed to federal regulatory
actions which force SBC to sell its wireline services and network to new
competitors at prices below actual cost (see Second Quarter 1997 10Q - Recent
Developments, SBC). Also, the Company's current and future products must meet
the industry standards established by Bell Communications Research and must be
compatible with the products of other telephone company suppliers, including
competitors of the Company. Additionally regulatory delays may continue to
impede competition in the local loop, which may delay the rollout of the
Company's new access products.
Sales of the joint BroadBand/Lucent SDBAS product in the United States and
Canada are substantially dependent on the competitiveness and performance of
Lucent's product capability. Under its new agreement with Lucent, the Company
has no active distribution role and is totally dependent upon Lucent for the
sales and marketing of the SDBAS product in the United States and Canada. If
customers require the Company to produce small volumes of its current FLX-2500
product or to upgrade its current FLX-2500 product without placing large volume
orders, the Company may incur expenses substantially in excess of revenues
generated. The Company's current contracts with Lucent are forward priced
14
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
requiring the Company to deliver its FLX-2500 products at prices, and to invest
to upgrade its product, such that sales of the FLX-2500 products will be
profitable only at high volumes. Other than the manufacturing agreement, the
contracts with Lucent contain no minimum volume purchase commitment and
regulatory/market factors make it unlikely that high volume demand will develop
in the near term. In addition, although the Company will not be required to
market its planned digital loop carrier product through Lucent, successful
marketing of the Company's planned digital loop carrier product may be impacted
in part by market acceptance of Lucent's AnyMedia product.
As the Company or its partners announce new products to better meet the changing
requirements of customers, customers may delay orders of existing products until
the new products are available for shipment, or until small volumes of new
products are adequately field tested. Recent announcements by Lucent
Technologies of its new digital loop carrier product, AnyMedia, are currently
having this effect. The Company expects their adverse affect on sales of its
FLX-2500 product to continue or to increase.
In recent years, the purchasing behavior of the Company's large customers has
increasingly been characterized by the use of fewer, larger contracts. This
trend contributes to the variability of the Company's results and is expected to
intensify, accelerated by merger activity among the Company's major customers
and network operators. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources and in general, require investments, which
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays
and potential penalties for non-performance. For example, customers have
requested that products be priced based on volume estimates of customers' future
requirements, but the failure of such customers to take delivery of product
comparable to volume anticipated, could result in negative margins on product
sales. Certain multi-year contracts may relate to new technologies, which may
not have been previously deployed on a large-scale commercial basis. The Company
may incur significant initial cost overruns and losses on such contracts, which
would be recognized in the quarter in which they became ascertainable. Future
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one-quarter.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $173 million as of December 31, 1997, has never been
profitable and may never achieve profitability. The Company may require
additional capital and may not be able to raise such capital or may be able to
raise such capital only on unfavorable terms. In May 1996, the Company sold $115
million of 5% convertible five-year notes. Failure to pay principal and interest
when due in May 2001 would have a material adverse effect on the Company. If the
Company's new business strategy fails to generate the expectation of sufficient
revenues, or if expenses are greater than expected, the Company will require
additional financing to repay its debt. There can be no assurance additional
financing will be available to the Company.
Currently, the Company is dependent upon two of Lucent's primary customers in
North America, which if lost would deprive the Company of substantially all its
SDBAS revenue. These customers are subject to substantial government regulation,
which could affect their ability and desire to utilize the products of the
Company. It is expected that these customers are likely not to purchase material
quantities of the Company's current FLX-2500 product. As fewer large potential
customers dominate the Company's market, the Company may not have sufficient
bargaining power to sell its products on favorable terms. If the Company is
successful in expanding its sales, growth will place significant strain on
15
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
its operational resources and systems. In some cases, the Company depends on
single source suppliers or parts, which are available only from a limited number
of sources. Delays in filling orders of the Company's customers resulting from
supplier delays may cause customer dissatisfaction.
The Company relies upon technology developed by third party suppliers to provide
key product enabling capability that allows the marketability of the Company's
broadband product to service providers with longer, older and more complex
copper "drop" cable networks. There can be no assurance that the Company can
obtain such technology from its suppliers, which would have a material adverse
affect on the Company's business and results from operations. If the "drop"
technology is not available from third parties, the Company has internal
resources and expertise that may be able to provide the necessary required
technology. However, internal development would further delay product's
availability (See also "Product Development").
The ability of the Company to complete development projects on schedule and to
otherwise compete effectively depends upon its ability to attract and retain
highly skilled engineering, manufacturing, marketing and managerial personnel,
which in the current environment are becoming increasingly difficult to recruit
and retain. This is true for new personnel the Company will require to implement
its plan to develop a digital loop carrier product. In addition, the Company's
inability to sell its current product has caused valuable employees to leave the
Company.
The patent and other proprietary rights of the Company may not prevent the
competitors of the Company from developing non-infringing technology and
products that are more attractive to customers than the technology and products
of the Company. The technology and products of the Company could be determined
to infringe the patents or other proprietary rights of others. Continued pursuit
of international markets exposes the Company to increased risks of currency
fluctuations and controls, political and social risks, trade barriers, new
competitors and other risks associated with international markets.
Until recently, Lucent Technologies had exclusive U.S. and Canadian market
rights to purchase the Company's SDB capability for digital loop carrier
applications. As such, the FLX-2500 product can interface only with Lucent's
digital loop carrier without further product development and interfaces would
have to be changed to partner with any other digital loop carrier supplier.
Development of its own digital loop carrier, designed to interface with the
FLX-2500, would be expected to take up to several years and there can be no
assurance either that the Company would have sufficient monetary and technical
resources to successfully, develop such a product or that the product, if
developed, would be competitive with other access products. Nor can there be any
assurance that the Company could partner with another digital loop carrier
supplier. Whether or not the Company participates with Lucent or another digital
loop carrier supplier for the next generation product or produces its own
product, customers may decide to delay orders for the current generation of
products, which could have a material adverse effect on the Company.
The market price of the Company's securities is affected by many factors other
than the Company's products and performance. For example, NASDAQ has maintenance
criteria that must be met in order to continue to be listed as a NASDAQ National
Market security. These criteria include a minimum number of shareholders,
minimum market value of equity float, minimum bid prices, and tangible net
tangible asset requirements (See Liquidity and Capital Resources). The Company
does not meet the minimum net tangible asset requirements of NASDAQ and its
continued listing on NASDAQ will depend upon meeting the minimum bid requirement
of $5.00 per share. In the event that the Company fails to meet the minimum bid
or other criteria, the Company's securities may no longer be traded on the
NASDAQ
16
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
National Market. In this event, the Company will seek an exception to the
requirements. There can be no guarantee that the Company will be successful in
obtaining an exception and if such exception could not be obtained, the Company
would cease to trade on the NASDAQ National Market. In the event that the
Company's securities are no longer traded on the NASDAQ National Market, the
market value of the Company's securities could be materially adversely affected.
The market price of the Company's securities has been very volatile as a result
of many factors, some of which are outside the control of the Company,
including, but not limited to, quarterly variations in financial results,
announcements by the Company, its competitors, partners, customers, potential
customers or government agencies and predictions by industry analysts, as well
as general economic conditions. Sales by the Company's existing stockholders,
trading by short-sellers and other market factors may adversely affect the
market price of the Company's securities. Any or all these risks could have a
material adverse affect on the market price of the securities of the Company.
ITEM 2. PROPERTIES
The Company leases approximately 96,000 square feet in an office park located
outside of Research Triangle Park, North Carolina. Substantially all the
business operations of the Company are conducted at this facility. The lease has
a term, which commenced in April 1993 and terminates in December 1998, with two
three-year renewal options. The Company is currently in negotiations for an
extended lease of the facility beyond December 1998, which is intended to be
completed and be finalized in the second quarter of 1998. The Company also
leases a sales and marketing facility in The Surrey Research Park located in
Surrey, England. The lease commenced in June 1994. The Company believes that the
above-described facilities are suitable and adequate to meet the Company's
requirements.
ITEM 3. LEGAL PROCEEDINGS
On March 18, 1997, the Company commenced a legal action against General
Instrument Corp. in the U.S. District Court for the Eastern District of North
Carolina (BroadBand Technologies, Inc. vs. General Instrument Corp. and General
Instrument Corporation of Delaware Civil Action No. 5-97-CV-173-BR(2) for
infringement of the Company's United States Patent No. 5,457,560 (the "560
Patent") titled "Fiber Optic Telecommunication System Employing Continuous
Downlink, Burst Uplink Transmission Format and Preset Uplink Guardband." The
Complaint alleges, among other things, that General Instrument, has made, tested
and used a broadband access system that infringes the 560 Patent (the
"Infringing System"), has offered the Infringing System for sale, has contracted
to sell the Infringing System to NYNEX, and has induced others to infringe the
560 patent. The Company is seeking to enjoin General Instrument from further
acts infringing the 560 Patent and to recover compensatory damages and treble
damages. The discovery phase of the case is effectively completed, and both
parties have filed dispositive motions. The trial could commence as early as
June 1, 1998. On March 19, 1997, Next Level Communications, a subsidiary of
General Instrument Corporation, commenced a legal action against the Company in
the U.S. District Court for the Northern District of California (Next Level
Communications v. BroadBand Technologies, Inc., Civil Action No. C-97-0960 SI),
seeking, among other things, to have the Company's 560 Patent declared invalid
and unenforceable alleging antitrust violation based upon the suit against
General Instrument, alleging that the Company is infringing two patents of
General Instrument Corporation relating to the encoding and decoding of digital
video and seeking an injunction against further infringement. The Company on
February 2, 1998 counterclaimed against Next Level Communications for
infringement of the 560 Patent.
17
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
There can be no assurance as to success of the Company's infringement action or
the amount of damages recovered if the Company is successful. Nevertheless, the
Company has invested substantial amounts in developing its technology and
intends to protect its intellectual property in a manner that maximizes its
business opportunity.
The Company's operations are subject to numerous federal, state and local laws
and regulations, including those regarding employment discrimination, safety,
wages and environmental matters. The Company may also be subject to product
liability and breach of contract claims in civil actions. There are no material
administrative or judicial proceedings pending or threatened against the
Company. Compliance with applicable laws and regulations has not had, and is not
expected to have, a material effect upon the operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers are elected annually and serve at the pleasure of the Board
of Directors. The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME OFFICE OFFICER SINCE AGE
---- ------ ------------- ---
<S> <C> <C> <C>
John R. Hutchins, III Chairman of the Board and Director 1988 63
J. Richard Jones Executive Vice President, Assistant Secretary and 1988 50
Director
Timothy K. Oakley Vice President, Chief Financial Officer, Treasurer 1996 36
and Secretary
David E. Orr President, Chief Executive Officer and Director 1997 46
</TABLE>
As of the end of 1997, the following people held these positions:
<TABLE>
<CAPTION>
NAME OFFICE OFFICER SINCE AGE
<S> <C> <C> <C>
Salim A.L. Bhatia Chairman of the Board and Director 1988 47
James L. Chitkowski Vice President Sales and Marketing 1997 51
Leonard D. Hayes Vice President Manufacturing 1997 47
Carl A. Kammire Vice President Engineering 1995 59
</TABLE>
Mr. Orr has served as President, Chief Executive Officer, and Director since he
joined the Company in April 1997. Prior to joining the Company, he was employed
at Alcatel Network Systems, Inc. as President and Chief Executive Officer since
August 1991. At Alcatel Network Systems, which designs, manufactures and markets
a full line of telecommunications systems products for the transport and
management of voice, data, and image traffic, he was responsible for operations
in Raleigh and Clinton, North Carolina; Longview, Texas; Nogales, Mexico;
Georgetown, Canada; and San Jose, California. Prior to joining Alcatel, he was
Vice President and General Manager of Rockwell International's Network
Transmission Systems Division. He held various other management positions at
Rockwell since joining the company in 1985. Prior to joining Rockwell, he held
various positions with GTE including Network Director for General Telephone
Company of Wisconsin.
18
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Dr. Hutchins is a founder of the Company and has served as Chairman of the Board
(except for a period during 1997 and 1998 during which he was Chairman Emeritus)
and a Director of the Company since its formation in July 1988. Except for a
period during 1990 and 1991, he also served as the Company's Treasurer and
Secretary until November 1992. Prior to July 1988, Dr. Hutchins was Executive
Vice President at Siecor Corporation, which he joined in September 1985. Prior
to joining Siecor, Dr. Hutchins served as Senior Vice President, Vice President
and Director of Research and Development at Corning Incorporated for 12 of his
25 years there. Since March 1, 1991, the Company on a part-time basis has
employed Dr. Hutchins. On February 1, 1998, Dr. Hutchins replaced Mr. Bhatia as
Chairman of the Board of Directors.
Dr. Jones is a founder of the Company and has served as Executive Vice President
and a Director of the Company since its formation in July 1988. He is the chief
technical officer of the Company and is responsible for overseeing the
development of advanced technology. From February 1987 until July 1988, he
worked for Siecor Corporation where he held the position of Director of
Broadband Development. Prior to February 1987, Dr. Jones held management and
development-oriented positions at FiberLAN, Inc. (a Siecor-BellSouth joint
venture), Siecor Corporation, Harris Corp., a manufacturer of communications
systems for military and industrial markets, and Bell Laboratories.
Mr. Oakley has served as Vice President and Chief Financial Officer since he
joined the Company in April 1996. Prior to joining the Company, he was employed
at MCI Telecommunications as the Director of Finance, Management Reporting,
Control and Analysis for the consumer/small business marketing segment; and
Chief Financial Officer of the MCI-ASYNC Voice Messaging subsidiary. For the
years prior to joining MCI in 1990, he was employed by the auditing group of
Coopers and Lybrand; and by Domino's Pizza as Director of Finance for a
franchise with 46 stores. Mr. Oakley will depart from the company effective
April 18, 1998.
Mr. Bhatia was a founder of the Company and had served as President, Chief
Executive Officer and as a Director of the Company from July 1988 to March 1997.
Mr. Bhatia had served as Chairman of the Board and as a Director of the Company
from April 1997 to January 31, 1998 when he departed from the Company. Mr.
Bhatia was a Vice President at Siecor Corporation, a supplier of fiber optic
products to the telecommunications industry, from November 1984 to July 1988.
Between February 1981 and July 1988, Mr. Bhatia held various sales, marketing,
strategy and business development positions at Siecor. Prior to 1981, Mr. Bhatia
held various sales, engineering, operations and consulting positions at Corning,
Inc., Arthur D. Little, and Esso Petroleum Co. Ltd. (UK).
Mr. Chitkowski joined the Company in September 1996 as Vice President of Sales.
From March 1997, Mr. Chitkowski has served as Vice President of Sales and
Marketing of the FLX system to companies in North America and Puerto Rico. From
June 1992 to June 1993 he was Vice President of Marketing and Sales for
Telesciences Transmission Systems. From June 1993 to November 1995 he held the
position of Regional Vice President with DSC Communications Corp. From November
1995 to July 1996 he was Vice President of Sales for Tekelec. In July and August
of 1996 he consulted with Manchester International.
Mr. Hayes joined the Company in March 1992 as Director of Materials. From March
1997, Mr. Hayes has served as Vice President of Manufacturing and Quality and is
responsible for all manufacturing and procurement functions inclusive of all
contract construction and administration. In his twenty-three years in materials
and manufacturing operations, he has held executive materials, logistics, and
manufacturing positions at Commodore International Ltd., where he was
responsible for worldwide materials and logistics functions in support of a $1.1
billion revenue stream and senior managemnt positions in materials and
operations at Data General Corporation.
Mr. Kammire joined the Company in October 1990 as Director of Engineering. Mr.
Kammire served as Vice President of Engineering from November 1995 to April 1998
and during that time was responsible for the design and development of the FLX
System. From 1987 to 1990 he served as Director of the Advanced Product Group of
Timeplex. From 1978 to 1987 he served as Director of Software Development for
ITT Advanced Technology Ctr. Effective as April 30, 1998, Mr. Kammire will
depart from the Company.
Mr. McLean joined the Company in October 1996 as Director of Broadband Programs.
In June 1997 he was named Vice President of Technical Services. On March 2, 1998
David J. McLean was appointed Vice President of Engineering. Mr. McLean will be
responsible for introducing a digital loop carrier access product as well as
maintaining responsibility for Technical Services. From 1981 to 1996 he has held
several senior management positions in marketing, development, and manufacturing
at IBM Corporation.
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock, $.01 par value, is traded in the over-the-counter
market and is quoted on the NASDAQ National Market System under the symbol
"BBTK". The following tables set forth the high and low daily bid prices for
each quarter during the past two fiscal years as reported by NASDAQ. Such
quotations reflect inter-dealer prices without markup, markdown or commissions
and may not necessarily represent actual transactions.
1997 LOW HIGH
- ---- --- ----
First Quarter $ 9.12 $ 16.75
Second Quarter 6.75 10.56
Third Quarter 7.37 11.00
Fourth Quarter 3.50 8.50
1996 LOW HIGH
- ---- --- ----
First Quarter $ 15.75 $ 28.25
Second Quarter 23.50 34.62
Third Quarter 20.00 35.00
Fourth Quarter 15.25 23.00
No cash dividends have been declared or paid by the Company and the Company has
no present intention of declaring a cash dividend.
As of March 10, 1998, there were approximately 10,000 holders of record and
beneficiary shareholders of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain condensed statement of income and balance
sheet information of the Company for the five years ended December 31, 1997.
This summary should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report. All amounts except per share
amounts are presented in thousands. No cash dividends have been declared or paid
in any of the years presented.
20
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net Sales $15,012 $23,144 $22,705 $27,012 $15,136
Cost of Products Sold 12,297 21,744 23,917 27,908 19,453
Gross Profit 2,715 1,400 (1,212) (896) (4,317)
Expenses:
Research and Development 28,062 22,785 19,434 15,422 8,907
Performance fees and Obsolete
Equipment 1,841 0 0 0 0
Selling and Administration 13,725 11,648 11,627 11,284 6,965
------ ------ ------ ------ ------
Total expenses 43,628 34,433 31,061 26,706 15,872
------ ------ ------ ------ ------
Operating Loss (40,913) (33,033) (32,273) (27,602) (20,189)
Other Income(Expense), Net: 1,092 2,014 4,371 3,432 1,199
----- ----- ----- ----- -----
Net Loss ($39,821) ($31,019) ($27,902) ($24,170) ($18,990)
========= ========== ========== ========== =========
Average Common Outstanding Shares
Supplemental* 13,278 13,200 13,092 13,030 9,968
====== ====== ====== ====== =====
Historical 13,278 13,200 13,092 13,030 7,284
====== ====== ====== ====== =====
Loss Per Share:
Supplemental * ($3.00) ($2.35) ($2.13) ($1.85) ($1.89)
======= ======= ======= ======= =======
Historical ($3.00) ($2.35) ($2.13) ($1.85) ($2.59)
======= ======= ======= ======= =======
BALANCE SHEET DATA (DEC. 31)
Cash, Cash Equivalents & Investments, including
restricted cash $117,152 $148,758 $65,351 $80,290 $107,400
Total Assets 135,918 171,347 85,958 96,371 125,298
Long-term debt 115,000 115,000 43 331 802
Total Stockholders' (Deficit) Equity ($10,461) $28,901 $58,868 $79,379 $103,273
========= ======= ======= ======= ========
</TABLE>
* Supplemental disclosure is provided for periods presented in the
Company's initial S-1 Registration Statement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales in 1997 were $15.0 million compared to $23.1 million in 1996 and
$22.7 million in 1995. Net loss for 1997 was $39.8 million compared to a net
loss of $31.0 million in 1996 and a net loss of $27.9 million in 1995. The
Company's operating results continue to reflect an unfavorable regulatory
environment, impact of prior product delays, the long evaluation and
implementation process that is typical of customers of major communication
infrastructure changes, as well as investment in the second generation product
and market development of the FLX-2500 platform. Net losses also reflect the
impact of lower net interest income and the expenses associated with the $115
million convertible note offering in May 1996. The Company expects to continue
to incur losses in future periods.
21
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN:
Cost of sales for 1997 was $12.3 million compared to $21.7 million in 1996 and
$23.9 million in 1995. Gross margin as a percent of net sales was a positive 18%
in 1997, a positive 6% in 1996 and a negative 5% in 1995. The improved gross
margin for 1997 is a result of a change in product mix and higher fee revenues
as compared to the prior years.
In two contract awards made late in 1996 and early in 1997, the Company believes
an alternative or new supplier had underbid the Company and expects price
competition to continue to be an important competitive factor, together with
other factors, including experience, product performance, features, reliability
and supplier strength. The Company has also forward priced certain contracts in
anticipation of large volumes, which may or may not occur. Consequently, the
Company expects that price competition could have an adverse impact on the
Company's margins. The Company's ability to continue to meet its cost reduction
goals could have a material effect on the Company's profitability. The Company's
margins are expected to fluctuate due to the uncertainty of shipments of the
existing and new products, as well as a higher mix of fee and software revenues
(See Item 1 Business: Risk Factors).
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses for 1997 were $28.1 million compared to $22.8
million in 1996 and $19.4 million in 1995. The increases in research and
development expenditures were primarily the result of additional resources
engaged in the development of the hardware and software for the Company's
Second-Generation platform, enhancements and support for its First Generation
product as well as competitive salary pressure for engineering resources. The
Company is in the process of aligning its resources with its new strategy
initiatives including the AnyMedia development for Lucent, the FSAN effort
planned with an international partner and its own digital loop carrier
development. Various elements of the Lucent agreement including development
revenues for AnyMedia, technology transfer, reusability of AnyMedia development,
manufacturing payments and prepayment forgiveness should reduce development
costs and accelerate the products introduction to the market. There can be no
assurances that such benefits will occur as expected. (See Item 1, Business:
Recent Developments and Risk Factors).
PERFORMANCE FEES AND OBSOLETE EQUIPMENT
Delays by Lucent and the Company in delivering the SDBAS product to Bell
Atlantic have caused the Company to pay approximately $1 million of performance
fees in 1997. An additional $5 million of performance fees were reserved in the
third quarter and subsequently released in the fourth quarter as a result of the
Company's new agreement with Lucent, which redefined their relationship. Under
the agreement terms, the $5 million of penalties accrued in the third quarter
were forgiven and the Company reversed these liabilities in the fourth quarter.
Additionally, the Company has taken a one-time charge of approximately $.9
million for the write-off of obsolete test equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for 1997 were $13.7 million
compared to $11.6 million for 1996 and $11.6 million for 1995. These expenses
are a result of the Company's investment in resources that enable the Company to
support field service, sales and marketing efforts. The Company expects to
adjust its sales resources as necessary in light of its new alliance with Lucent
Technologies. The Company will continue to maintain a strong marketing
organization and appropriate sales resources to support its own digital loop
carrier product. Additionally in 1997, the Company incurred legal fees and
expenses related to its patent litigation, consulting fees for the Lucent
agreements and other actions as well as additional compensation expenses
associated with its appointment of a new Chief Executive Officer
22
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED):
effective April 1, 1997. The patent legal expenses are expected to accelerate in
1998, (See Sales, Marketing, and Customer Support).
OTHER INCOME (EXPENSE), NET:
Other income (expense) consists primarily of interest income and interest
expense. The interest income (expense) category reflects net interest income
earned on cash, cash equivalents and both short and long-term investment
balances during 1997 of $1.1 million compared to net interest income of $2.0
million and $4.4 million in 1996 and 1995 respectively. Interest income is the
result of investing activities of the cash balances available during the period.
The increase in interest income for 1997 as compared to 1996 was the result of a
higher average cash balance than the prior year. The increase in interest
expense for 1997 and 1996 as compared to 1995 was the result of interest expense
on the convertible note offering in May of 1996. The Company expects net
interest expense to increase due to the continued reduction in the cash balance
resulting from expected losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, which consist of investments in demand deposits,
commercial paper and U.S. Treasury Obligations with maturities of less than 90
days when purchased; short-term investments, which consist of commercial paper
and U.S. Treasury Obligations with maturities of less than 360 days; and
long-term investments with maturities greater than 360 days decreased $32
million during 1997 to $117 million at the end of 1997, compared to $148 million
at the end of 1996, and $65 million at the end of 1995.
The Company has an outstanding stand-by letter of credit in the amount of $3
million, which is collateralized by restricted cash of the same amount.
The Company has restricted cash of $4 million associated with executive
compensation for the new President and CEO, David Orr, who joined the Company on
April 1, 1997. Compensation expense of $4 million is being recognized on a
straight-line basis over the term of the employment agreement of five years.
Additionally, Mr. Orr is entitled to receive the interest income earned by the
$4 million. The compensation is payable on the fifth anniversary of Mr. Orr's
employment or based upon certain triggering events that are detailed in Mr.
Orr's employment contract with the Company.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 10% or
1.3 million shares of common stock outstanding. The actual number of shares to
be purchased and the timing of the purchase will be based on the Company's stock
price, general market conditions and additional factors. Whenever the Company's
stock price is below the put option price of $9.11, the Company is required to
reflect the differential as restricted cash on its balance sheet. The Company
has restricted cash in the amount of $6,032,807 at December 31, 1997 and
$3,771,000 at March 10, 1998, based upon a market value of the stock of $4.12
and $6.25, respectively, in connection with this agreement. If at April 17,
1999, the market value of the stock is below $9.11 (strike price), the Company
would be obligated to pay the option holder the difference between the strike
price and the lower market price at that time. The Company's maximum obligation
would not exceed $11.9 million under the terms of the option agreement.
23
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company issued on May 17, 1996, $115 million of 5% Convertible Subordinated
notes due May 15, 2001 that entitles Holders of Convertible Notes to convert
into shares of the Company's common stock. Interest is payable on May 15th and
November 15th of each year. Each $1,000 note is convertible into 24.1080 shares
of common stock of the Company at a conversion price $41.48 per share. The notes
are not redeemable by the Company prior to May 15, 1999. Thereafter, the Company
may redeem the notes initially at 102%, and at decreasing prices thereafter to
100% at maturity, in each case together with accrued interest. Costs associated
with this financing have been deferred and are being amortized on a
straight-line basis over the term of the debt.
During 1995, the Company received $7.0 million from Bell Atlantic for Warrants
that entitle Bell Atlantic to purchase one million shares of BroadBand
Technologies' Common Stock at an exercise price of $41.75 per share. Property
and equipment additions during 1995, plus cash required for research and
development and other operating activities represented the majority of the
decrease in the cash balance during 1995.
Management expects that cash on hand and cash equivalents at December 31, 1997
and cash generated from the sale of the Company's products and fees to be
received from Lucent will be adequate to fund operating requirements and
property and equipment expenditures in 1998 based on current projections of
operations. However, management recognizes the dynamic nature of the
telecommunications industry and the possibility that the Company's product
initiatives might increase working capital requirements. In such event, the
Company would consider appropriate financing alternatives.
(See Item 1, Business: Risk Factors)
24
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BROADBAND TECHNOLOGIES, INC. -- INDEX TO FINANCIAL STATEMENTS
A. Financial Statements
Report of Independent Auditors...................................27
Statements of operations for the years ended
December 31, 1997, 1996 and 1995.................................28
Balance Sheets as of December 31, 1997 and 1996...............29-30
Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1997, 1996 and 1995...........................31
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................32
Notes to Financial Statements.................................33-43
B. Supplemental Financial Information -- Unaudited..................44
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BroadBand Technologies, Inc.
We have audited the accompanying balance sheets of BroadBand Technologies, Inc.
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BroadBand Technologies, Inc. at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
February 4, 1998
Raleigh, North Carolina
26
<PAGE>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 15,012,117 $ 23,144,003 $ 22,705,311
Costs and expenses:
Cost of sales 12,296,689 21,744,255 23,917,118
Research and development 28,062,349 22,784,948 19,433,536
Performance fees and obsolete equipment 1,841,258 - -
Selling, general and administrative 13,725,044 11,647,386 11,627,305
--------------------------------------------------------------------
55,925,340 56,176,589 54,977,959
--------------------------------------------------------------------
Loss from operations (40,913,223) (33,032,586) (32,272,648)
Other income (expense):
Interest expense (6,508,486) (4,063,372) (65,417)
Interest income 7,600,754 6,077,545 4,436,016
====================================================================
Net loss $ (39,820,955) $ (31,018,413) $ (27,902,049)
====================================================================
====================================================================
Net loss per share $ (3.00) $ (2.35) $ (2.13)
====================================================================
Average number of shares used in per share
calculations 13,277,735 13,200,312 13,091,958
====================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
27
<PAGE>
28
BROADBAND TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,464,129 $ 107,221,929
Restricted cash (NOTE 2) 3,000,000 451,042
Short-term investments (NOTE 3) 41,327,242 22,359,232
Accounts receivable, trade 2,371,133 6,284,217
Inventories (NOTE 4) 3,214,361 1,532,907
Prepaid and other current assets 1,546,464 954,288
--------------------------------------------
Total current assets 98,923,329 138,803,615
Long-term investments (NOTE 3) 15,328,088 18,725,698
Restricted cash (NOTE 2) 10,032,807 -
Furniture, fixtures and equipment:
Equipment and software 23,933,440 21,779,766
Furniture and fixtures 695,078 655,487
Leasehold improvements 1,296,647 1,296,647
--------------------------------------------
25,925,165 23,731,900
Accumulated depreciation and amortization (16,817,060) (13,186,825)
--------------------------------------------
Net furniture, fixtures and equipment 9,108,105 10,545,075
Deferred debt issuance costs, (net of accumulated amortization of
$1,212,213 and $464,713) (NOTE 6) 2,525,287 3,272,787
--------------------------------------------
Total assets $ 135,917,616 $ 171,347,175
============================================
</TABLE>
28
<PAGE>
BROADBAND TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities:
Accounts payable $ 2,590,271 $ 3,564,317
Accrued expenses 5,953,541 6,814,276
Deposits 3,263,134 3,258,316
Accrued warranty reserve 4,940,427 5,934,027
Deferred revenue 1,031,000 4,875,000
------------------------------------------
Total current liabilities 17,778,373 24,445,936
Long-term:
Deposits 13,000,000 3,000,000
Convertible Debt (NOTE 6) 115,000,000 115,000,000
Deferred Compensation (NOTE 2) 600,000 -
------------------------------------------
Total long-term liabilities 128,600,000 118,000,000
Commitments (NOTES 2, 5 AND 7)
Stockholders' (deficit) equity:
Series A preferred stock, $ .01 par value; 100,000 shares authorized;
no shares issued and outstanding - -
Convertible preferred stock, $.01 par value; 7,500,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 30,000,000 shares authorized;
13,380,243 and 13,249,480 shares outstanding
133,802 132,495
Additional paid-in capital 163,285,281 161,977,629
Deferred Compensation (NOTE 2) (850,000) -
Accumulated deficit (173,029,840) (133,208,885)
------------------------------------------
Total stockholders' (deficit) equity (10,460,757) 28,901,239
------------------------------------------
Total liabilities and stockholders' (deficit) equity $ 135,917,616 $ 171,347,175
==========================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
29
<PAGE>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN DEFERRED ACCUMULATED DEFICIT
PAR VALUE CAPITAL COMPENSATION TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 130,501 $ 153,537,070 $ - $ (74,288,423) $ 79,379,148
Exercise of stock options
for 94,564 shares 946 234,855 - - 235,801
Issuance of 6,425 shares
under 401(k) plan 65 155,315 - - 155,380
Issuance of stock warrants - 7,000,000 - - 7,000,000
Net loss for the year - - - (27,902,049) (27,902,049)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balance at December 31, 1995 131,512 160,927,240 - (102,190,472) 58,868,280
Exercise of stock options
for 89,225 shares 892 846,929 - - 847,821
Issuance of 9,119 shares
under 401(k) plan 91 203,460 - - 203,551
Net loss for the year - - - (31,018,413) (31,018,413)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1996 132,495 161,977,629 - (133,208,885) 28,901,239
Exercise of stock options
for 25,097 shares 251 73,840 - - 74,091
Issuance of 25,635 shares
for 401(k) Plan 256 234,612 - - 234,868
Restricted stock grant,
80,000 shares 800 999,200 (1,000,000) - -
Amortization of
restricted stock grant - - 150,000 - 150,000
Net loss for the year - - - (39,820,955) (39,820,955)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 133,802 $ 163,285,281 $ (850,000) $(173,029,840) $ (10,460,757)
===============================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
<PAGE>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (39,820,955) $ (31,018,413) $ (27,902,049)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 4,486,273 5,490,625 3,997,416
Amortization of debt issuance costs 747,500 464,713 -
Amortization of deferred compensation 600,000 - -
Amortization of restricted stock grant 150,000 - -
Increase in inventory reserve 204,742 1,416,848 420,451
Loss (gain) on disposal of equipment 850,518 (377,918) -
Changes in operating assets and liabilities:
Accounts receivable, trade 3,913,084 (1,970,752) (216,793)
Inventories (1,886,196) (942,393) 871,278
Prepaid and other current assets (592,176) (262,117) 30,200
Accounts payable and accrued expenses (1,834,782) (57,254) 4,877,770
Deposits 10,004,818 839,540 1,043,215
Accrued warranty reserve (993,600) 3,175,284 419,412
Deferred revenue (3,844,000) (3,318,970) 4,243,970
-------------------------------------------------------------
Net cash used in operating activities (28,014,774) (26,560,807) (12,215,130)
INVESTING ACTIVITIES
Acquisition of furniture, fixtures & equipment (3,921,420) (4,388,284) (9,628,687)
Disposals of furniture, fixtures & equipment 21,600 2,325,000 -
Net increase in investments (15,570,400) (22,982,752) (5,976,519)
-------------------------------------------------------------
Net cash used in investing activities (19,470,220) (25,046,036) (15,605,206)
FINANCING ACTIVITIES
Issuance of common stock 308,959 1,051,372 391,181
Issuance of stock warrants - - 7,000,000
Issuance of long-term debt - 111,262,500 -
Payments on capital lease obligations - (282,823) (486,381)
Restricted cash (12,581,765) 2,255,306 (2,706,348)
-------------------------------------------------------------
Net cash provided by (used in) financing activities (12,272,806) 114,286,355 4,198,452
-------------------------------------------------------------
Increase (decrease) in cash & cash equivalents (59,757,800) 62,679,512 (23,621,884)
Cash and cash equivalents at beginning of year 107,221,929 44,542,417 68,164,301
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 47,464,129 $107,221,929 $ 44,542,417
-------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 5,747,746 $ 3,598,659 $ 65,417
=============================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the financial statements. These policies
are in conformity with generally accepted accounting principles and have been
applied consistently in all material respects. The Company is engaged
principally in the design, engineering, manufacturing and marketing of a
sophisticated electronics and software platform for operators of local exchange
telephone networks in the United States and, in recent years, has expanded its
marketing effort to include international markets. The Company's platform
enables operators of these local exchange telephone networks the capability to
transmit voice, video and data over fiber optics to provide a wide array of
interactive services, including entertainment, communications, information and
other interactive services. The Company's products are still in the early stages
of commercial deployment.
USE OF ESTIMATES
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 financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents consist
principally of funds in demand deposit accounts, U. S. Treasury Obligations, and
commercial paper.
INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in debt
securities at the time of purchase. Debt securities for which the Company has
both the intent and ability to hold to maturity are classified as held to
maturity. These securities are carried at amortized cost. At December 31, 1997,
the Company had no investments that qualified as trading or available for sale.
ACCOUNTS RECEIVABLE
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company's
exposure to credit loss in the event that payment from a customer is not
received for revenue recognized equals the net outstanding accounts receivable
balance from that customer.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) cost flow assumption.
32
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation is determined
for financial reporting purposes using the straight-line method over the
estimated useful lives of the individual assets or, for leasehold improvements,
over the terms of the related leases if shorter. Straight-line and accelerated
methods of depreciation have been used for income tax purposes.
DEFERRED DEBT ISSUANCE COSTS
The Company capitalized certain costs relating to the issuance of debt. The
costs are amortized on a straight-line basis over the term of the debt.
REVENUE RECOGNITION
Generally, revenue is recognized when products are shipped. Deferred revenue
results from product licensing fees and from specific contractual terms for
certain sales agreements. Prepaid product (software) license fees are recorded
as deferred revenue when collected from customers and are recognized as revenue
in accordance with the terms of the related contract.
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
FASB Statement No. 109, Accounting for Income Taxes (see Note 12).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
STOCK OPTIONS
The Company accounts for its employee stock option plans in accordance with
Accounting Principle Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). Under APB 25, no compensation expense has been recognized
since the number of shares granted is fixed and the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, a basic earnings per share excludes any
dilutive effects of options, warrants and
33
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE (CONTINUED)
convertible securities. Diluted earnings per share is very similar to the
previously expected fully dilutive earnings per share. All loss per share
amounts for all periods have been presented to conform to SFAS 128. Due to the
net losses for each of the three periods presented, potential common shares are
considered antidilutive and therefore did not require restatement of prior
periods.
2. EMPLOYMENT AGREEMENT AND RESTRICTED CASH
The Company has outstanding stand-by letters of credit in the amount of
$3,000,000 and $451,042 at December 31, 1997 and 1996, respectively. These
letters of credit are collateralized by restricted cash of the same amount.
The Company restricted cash of $4 million associated with executive compensation
for the new President and CEO, David E. Orr, who joined the Company on April 1,
1997. Compensation expense of $4 million is being recognized on a straight-line
basis over the term of the employment agreement of five years. Additionally, Mr.
Orr is entitled to receive the interest income earned by the $4 million. The
compensation is payable on the fifth anniversary of Mr. Orr's employment or
based upon certain triggering events that are detailed in Mr. Orr's employment
contract with the Company. Mr. Orr was also granted 80,000 shares of restricted
common stock valued at $1 million. Upon issuance of this stock, deferred
compensation equivalent to the market value at the date of grant, $1 million,
has been charged to shareholders' equity and is being amortized as compensation
expense over the employment period of five years.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 10% or
1.3 million shares of common stock outstanding. The actual number of shares to
be purchased and the timing of the purchase will be based on the Company's stock
price, general market conditions, and additional factors. In the event that the
Company's stock price falls below the put option price of $9.11, the Company is
required to reflect the differential as restricted cash on its balance sheet.
Given a stock price of $4.12 at December 31, 1997, the Company has restricted
cash in the amount of $6,032,807 in connection with this agreement. This amount
will fluctuate based upon the market value of the stock. If at April 17, 1999,
the market value of the stock is below $9.11 ("strike price"), the Company would
be obligated to pay the option holder the difference between the strike price
and the lower market price at that time. The Company's maximum obligation would
not exceed $11.9 million under the terms of the option agreement.
3. INVESTMENT IN DEBT SECURITIES
At December 31, 1997, the Company's investments in debt securities were
classified as cash and cash equivalents and both short and long-term
investments. The Company maintains these balances principally in demand deposit
accounts, U. S.
Treasury Obligations, and commercial paper with various financial institutions.
These financial institutions are located in different areas of the U.S. and
Company policy is designed to limit exposure to any one institution, as well as
credit and maturity risks. The Company performs periodic evaluations of the
relative standing of those financial institutions that participate in the
Company's investment strategy.
34
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN DEBT SECURITIES (CONTINUED)
The following is a summary of cash and cash equivalents and short and long-term
investments by balance sheet classification at:
DECEMBER 31
1997 1996
---------------------------------------------
Cash and cash equivalents:
Demand deposit accounts $ 11,090,313 $ 78,899,020
Commercial paper 17,225,114 25,332,655
U.S. Treasury Obligations 19,148,702 2,990,254
---------------------------------------------
$ 47,464,129 $ 107,221,929
=============================================
DECEMBER 31
1997 1996
---------------------------------------------
Short-term investments:
Certificate of deposit $ 2,505,293 $ -
Commercial paper 34,800,200 20,293,691
U.S. Treasury Obligations 4,021,749 2,065,541
---------------------------------------------
$ 41,327,242 $ 22,359,232
=============================================
Long-term investments:
Commercial paper $ 13,296,211 $ 3,669,688
U.S. Treasury Obligations 2,031,877 5,056,010
---------------------------------------------
$ 15,328,088 $ 18,725,698
=============================================
The majority of the long-term investments will mature by April 1999. The
estimated fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of December 31, 1997 and
1996.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31
1997 1996
----------------------------------------
Electronic parts and other components $ 3,882,876 $ 2,583,074
Work-in-process 626,008 603,601
Finished goods 2,245,958 1,681,971
----------------------------------------
----------------------------------------
6,754,842 4,868,646
Inventory valuation reserve (3,540,481) (3,335,739)
----------------------------------------
========================================
$ 3,214,361 $ 1,532,907
========================================
35
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES (CONTINUED)
The Company has entered into a contract with a supplier for the production of
certain subassemblies used in the Company's products. Under the terms of the
contract, the Company had firm purchase commitments to purchase from the
supplier approximately $1,330,000 and $1,455,000 of these subassemblies at
December 31, 1997 and 1996, respectively.
5. LEASES
In prior years, the Company entered into various capital lease arrangements
which had expired as of December 31, 1996. Amortization of assets under capital
leases is included with depreciation and amortization expense.
In February 1993, the Company entered into a non-cancelable operating lease for
the rental of new office facilities. The lease has a term that commenced in
April 1993 and terminates in December 1998 with an option for renewal. During
September 1993, the Company exercised an option to lease additional space. The
amended lease term commenced in January 1994 and terminates in December 1998
with an option for renewal. The total monthly commitment for the entire lease
approximates $72,000. The Company has also entered into various year to year
operating leases related to certain equipment.
Future minimum lease payments under the non-cancelable leases at December 31,
1997 are approximately $850,000. The Company is negotiating new lease terms on
its primary facility for which the current lease expires in December 1998.
Rent expense was approximately $1,500,000, $1,205,000, and $1,351,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
6. LONG-TERM DEBT
The Company issued on May 17, 1996, $115 million of 5% convertible subordinated
notes due May 15, 2001, that entitles the holder to convert the notes into
shares of the Company's common stock. Interest is payable on May 15 and November
15 of each year. Each $1,000 note is convertible into 24.1080 shares of common
stock of the Company at a conversion price $41.48 per share. The notes are not
redeemable by the Company prior to May 15, 1999. Thereafter, the Company may
redeem the notes initially at 102%, and at decreasing prices thereafter to 100%
at maturity, in each case together with accrued interest. Costs associated with
this financing have been deferred and are being amortized on a straight-line
basis over the term of the notes. At December 31, 1997, the estimated fair value
of the term notes, determined by the average of the bid and ask prices on that
date, was approximately $76 million.
7. COMMITMENTS AND CONTINGENCIES
The Company is party to a technology transfer agreement that obligates the
Company to pay a royalty of two percent (2%) of the selling price of any goods
or services provided by the Company that include intellectual property
transferred by the other party to the agreement after such sales exceed, in the
aggregate from inception, $50 million. The royalty will be reduced to one
percent (1%) after such sales, in the aggregate from inception, exceed $200
million. The Company recorded royalty expense under this agreement in 1997, 1996
and 1995 which is included in accrued expense. No royalties will be due and
payable after 1998. Under the agreement, prior to the end of 1998, the Company
may not
36
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
transfer, assign, license or sell, on an exclusive basis, the technology without
written consent of the other party (the agreement includes terms which state
that such consent is not to be unreasonably withheld). In 1996 the Company
renegotiated the terms of the royalty agreement, which in effect reduced the
royalty percentage.
The Company commenced legal action in civil court in March 1997 against a
competitor claiming infringement of a patent the Company owns. The Company is
seeking to enjoin the competitor from further acts infringing the patent and to
recover damages. The competitor has countersued to have the Company's patent
declared invalid and unenforceable and, further, claims infringement by the
Company of two of its patents. The Company's legal action is expected to go to
trial in June 1998. There can be no assurance as to success of the Company's
infringement action or the amount of damages, if any, recovered if the Company
is successful. The Company will vigorously defend itself in the action filed by
its competitor and considers the claims to have no merit.
8. STOCK OPTION PLANS
The Company has adopted an incentive stock option plan for employees, and a
non-qualified stock option plan for consultants and others, a non-qualified
stock option plan in connection with the CEO employment agreement, and a
directors stock option plan for Directors. Common shares available under the
four plans are 2,150,000, 650,000, 350,000 and 100,000 shares, respectively.
Information concerning outstanding stock options to purchase common stock
pursuant to the plans as of December 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
AGGREGATE
PER SHARE EXERCISE NUMBER OF SHARES EXERCISE
PRICE PRICE
---------------------------------------------------------
<S> <C> <C> <C>
Incentive and non-qualified stock options
outstanding:
Vested $ .10 - $ 31.75 693,474 $ 6,647,310
Unvested $ 3.63 - $ 31.75 1,876,666 $ 15,848,505
---------------------------------------------------------
Totals 2,570,140 $ 22,495,815
==================================
</TABLE>
Options are granted at not less than fair market value at the date of grant as
determined by the Board of Directors and may be exercised upon terms approved by
the Board. During 1997, 1,463,835 options were granted under the incentive stock
option plan and 843,136 non-qualified options were granted. Certain
non-qualified grants include provisions, which prohibit exercise, until near the
option expiration date or until the end of the full vesting period or prior to
the Company attaining profitability. Vested options are exercisable at dates
ranging from six months to nine years and nine months from date of grant. Shares
not yet vested are not exercisable. All options granted expire between five and
one half and ten years from the grant date.
37
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
The following table summarizes stock option activity from January 1, 1995
through December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF EXERCISE OPTION PRICE
DESCRIPTION SHARES PRICES PER SHARES TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1994 972,248 $0.10 to $35.75 $12,466,123
Options exercisable at December 31, 1994. 147,811 $0.10 to $26.63 $751,877
Options granted during 1995 210,840 $17.25 to $28.00 $4,916,025
Options canceled during 1995 55,670 $2.70 to $35.75 $1,022,317
Options exercised during 1995 93,651 $0.10 to $10.00 $207,954
Options outstanding at December 31, 1995 1,033,767 $0.10 to $35.75 $16,151,877
Options exercisable at December 31, 1995 535,153 $0.10 to $35.75 $6,407,088
Options granted during 1996 571,428 $16.50 to $32.50 $11,440,944
Options canceled during 1996 66,192 $2.70 to $35.75 $1,327,063
Options exercised during 1996 89,225 $0.80 to $27.25 $847,821
Options outstanding at December 31, 1996 1,449,778 $0.10 to $35.75 $25,417,958
Options exercisable at December 31, 1996 731,231 $0.10 to $35.75 $10,489,122
OPTIONS GRANTED DURING 1997 2,306,971 $3.63 TO $13.38 $19,503,623
OPTIONS CANCELED DURING 1997 1,161,512 $3.16 TO $35.75 $22,351,674
OPTIONS EXERCISED DURING 1997 25,097 $0.80 TO $09.75 $74,092
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 2,570,140 $0.10 TO $31.75 $22,495,815
OPTIONS EXERCISABLE AT DECEMBER 31, 1997 693,474 $0.10 TO $31.75 $6,647,310
</TABLE>
On April 2, 1997, the Board of Directors approved the repricing of 807,253
outstanding incentive stock options. The options, which have been repriced, are
reflected as canceled in 1997 in the above table. The replacement options, which
were repriced at the market value on April 2, 1997, are reflected as 1997 option
grants. Since the repriced option price equals the market price of the
underlying stock on the date the repricing occurred, no compensation expense has
been recognized.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") due to the fact that the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value
38
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following weighted
average assumptions for 1997 and 1996:
1997 1996
--------------------------------------
Risk free interest rate 5.50% 5.69%
Dividends - -
Volatility factor .6105 .6784
The Black-Scholes option valuation model was developed for use in estimating in
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumption can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
DECEMBER 31
1997 1996
----------------------------------------
Pro forma net loss $44,284,810 $32,753,117
Pro forma loss per share $3.34 $2.48
Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.10 to $31.75. The weighted average remaining contractual life of those
options is 8.32 years. The weighted average exercisable price of outstanding
options at December 31, 1997 is $9.59.
9. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1997, the Company had reserved a total of 3,852,714 of its
authorized 30,000,000 shares of common stock for future issuance. Of the total
shares reserved by the Board of Directors, 350,000 shares are subject to
shareholder approval at the May 19, 1998 shareholder meeting.
Outstanding stock options 2,570,140
Outstanding warrants related to a lease line 7,813
Outstanding warrants 1,225,000
Possible future issuance under 401(k) plan 49,761
=====================
Total shares reserved 3,852,714
=====================
39
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. WARRANTS
During 1995, the Company received $7 million for six-year Warrants that entitle
the purchaser of the warrants to acquire 1,000,000 shares of the Company's
Common Stock for $41.75 per share.
11. CAPITAL STOCK
On November 19, 1996, the Board of Directors declared a dividend distribution of
one preferred share purchase right (Right) for each share of Common Stock
outstanding on December 23, 1996. The Rights becomes exercisable only if a
person or group acquires, or obtains the right to acquire, 15% or more of the
Company's Common Stock or commences a tender offer or exchange offer which, if
consummated, would result in that person or group owning at least 15% of the
Company's outstanding Common Stock.
In connection with the November 19, 1996 preferred share dividend distribution,
the Company restated its articles of incorporation, thereby creating a series of
Series A Preferred Stock. 100,000 shares of this series have been authorized,
which have a dividend rate of the greater of $10.00 per share or 1,000 times the
aggregate per share amount of Common Stock dividends. Each share is entitled to
one vote and shall have a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends.
12. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards and
research and development credits of $155.6 million and $3.4 million,
respectively, for income tax purposes that expire in years 2003 through 2011.
For financial reporting purposes, a valuation allowance of $73.1 million ($58.5
million in 1996) has been recognized to offset the deferred tax assets related
to those carryforwards at December 31, 1997. When, and if, realized, the tax
benefit for those items will be reflected in current operations as a reduction
of income tax expense. Significant components of the Company's deferred tax
liabilities and assets at December 31, 1997 are as follows:
40
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over-book depreciation $ - $ 281,000
Deferred tax assets:
Net operating loss carryforwards 62,233,000 51,641,000
Research and experimental credit carryforwards 3,402,000 2,852,000
Executive compensation 300,000 -
Deposits 2,800,000 -
Book over tax depreciation 475,000 -
Deferred revenue 412,000 909,000
Inventory reserve 1,416,000 1,151,000
Warranty reserve 1,976,000 2,274,000
Other 59,000 -
----------------------------------------
Total deferred tax assets 73,073,225 58,827,000
Valuation allowance for deferred tax assets (73,073,225) (58,546,000)
Net deferred tax assets - 281,000
========================================
Net deferred taxes $ - $ -
========================================
</TABLE>
Based on the number of shares of common and preferred stock issued in 1992 and
1993, the Company exceeded the limits allowable under the Tax Reform Act of 1986
related to changes in ownership percentage governing future utilization of net
operating loss carryforwards. The effect of this occurrence limits the annual
utilization of the net operating loss carryforwards to an amount determined by
multiplying the fair market value of the Company immediately prior to the change
in ownership percentage by the federal long-term tax exempt interest rate at the
time of the change. As of December 31, 1997, future use of a portion of the net
operating loss carryforwards are limited to approximately $27 million of taxable
income per year. This limitation applies to all losses incurred through November
12, 1993 in the amount of $50.2 million, the remaining loss of $105.4 million is
not currently limited.
41
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan and Trust covering substantially all employees.
Employees at least 21 years of age are eligible for the Plan. The Company will
provide a matching contribution up to 50% of employee contributions to a maximum
employee contribution of 6% of the employee's wages. In addition, the Company
may make annual discretionary profit sharing contributions to the plan. The
Company's contributions are subject to a five-year vesting period. Contributions
are invested in one or more of eleven investment choices, including the
Company's common stock, at the discretion of the employee. The Company pays the
Plan expenses which totaled approximately $49,000, $24,000, and $32,000 in the
years 1997, 1996 and 1995. Company contributions to the plan for 1997, 1996 and
1995 totaled approximately $503,000, $412,000, and $350,000, respectively.
14. BUSINESS SEGMENT INFORMATION
The Company is engaged in a single business segment consisting of the
development, manufacture, marketing and service of electronic equipment for the
telecommunications industry. Regional Bell Operating Companies ("RBOC's") and
independent telephone companies are the primary users of the Company's products.
During 1996, the Company entered into an agreement with Lucent Technologies,
Inc. ("Lucent"), which was granted the exclusive right to sell the Company's
primary products in the United States and Canada to RBOC's and other users.
Prior to 1996, the Company's sales were made directly to RBOC's. Company sales
to Lucent during 1997 were 43% of total sales and 27% of the Company's accounts
receivable at December 31, 1997 were due from this customer. Company sales to
Lucent during 1996 were 29% of total sales and 65% of the Company's accounts
receivable at December 31, 1996, were due from this customer. Direct RBOC sales
as a percentage of the Company's total revenues were 15%, 51%, and 76% for the
years ended December 31, 1997, 1996 and 1995 respectively. Of the 15% of sales
to the RBOC's in 1997, 97% were transacted with one Regional Bell Operating
Company and 21% of the Company's accounts receivable are from this customer. Of
the 51% of sales to the RBOC's in 1996, 50% were transacted with one Regional
Bell Operating Company and 17% of the Company's accounts receivables were due
from this customer.
On February 4, 1998, the Company entered into a new agreement with Lucent which
redefined the Lucent relationship. Under the agreement terms, certain penalties
due by the Company to Lucent were forgiven and the Company reversed these
previously recorded liabilities as of December 31, 1997. Also, deposits received
under the previous agreement which were recorded as liabilities by the Company
are to be applied against future performance milestones defined under the new
agreement.
42
<PAGE>
BROADBAND TECHNOLOGIES, INC.
QUARTERLY RESULTS
(In thousands, except per share data)
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
1997
----------------------------------------------------------
FOURTH THIRD SECOND FIRST
Revenue $2,344 $2,125 $5,233 $5,310
Gross Margin 264 248 1,190 1,013
Net Loss ($6,054) ($16,510) ($8,795) ($8,462)
======== ========= ======== ========
Net Loss per share ($0.45) ($1.25) ($0.66) ($0.64)
1996
----------------------------------------------------------
FOURTH THIRD SECOND FIRST
Revenue $7,926 $5,706 $5,515 $3,997
Gross Margin 977 393 290 (260)
Net Loss ($8,470) ($8,498) ($6,509) ($7,541)
======== ======== ======== ========
Net Loss per share ($0.64) ($0.64) ($0.49) ($0.57)
======= ======= ======= =======
1995
----------------------------------------------------------
FOURTH THIRD SECOND FIRST
Revenue $6,965 $7,065 $5,455 $3,221
Gross Margin (181) (100) (297) (996)
Net Loss ($6,988) ($6,385) ($6,546) ($7,983)
======== ======== ======== ========
Net Loss per share ($0.53) ($0.49) ($0.50) ($0.61)
======= ======= ======= =======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
43
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company recently reorganized its management team. Effective February 1,
1998, John R. Hutchins, III, became the new Chairman of the Board. Salim A.L.
Bhatia, a founder of the Company, departed from the Company effective January
31, 1998 and Larry McLernon, also a board member departed on January 26, 1998.
On March 2, 1998, David L. McLean was appointed Vice President of Engineering
from his previous role as Vice President of Technical Services for which he will
also maintain responsibility. Carl A. Kammire will depart from the Company as
Vice President of Engineering effective April 30,1998. (See Part I of this
Report for information with respect to executive officers of the Company).
Pursuant to General Instruction G(3), reference is made to the information
contained under the captions "Election of Directors" and "Section 16(a)
Reporting" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1998, which information is incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), reference is made to the information
contained under the caption "Executive Compensation" (except for the information
set forth under the sub caption "Report of Compensation Committee" which is not
incorporated herein) in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1998, which information is incorporated
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to the information
contained under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1998, which information is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to the information
contained in the last paragraph under the caption "Election of
Directors--Compensation of Directors" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998, which
information is incorporated herein.
44
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following financial statements are included in Part II, Item 8 of this
Form 10-K.
1. FINANCIAL STATEMENTS
Report of Independent Auditors.
Statements of Operations for the years ended December 31, 1997, 1996
and 1995.
Balance Sheets as of December 31, 1997 and 1996.
Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 1997, 1996 and 1995.
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995.
Notes to Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are
not applicable, or the required information is included in the
financial statements or notes thereto.
3. EXHIBITS
See Exhibit Index and Exhibits attached to this report.
(B) Reports on Form 8-K
The Company filed a current report on Form 8-K, Commission File No.
0-21766, dated March 5, 1998, to report the execution of several
agreements with Lucent Technologies, Inc., dated as of February 4,
1998, that establish a new nonexclusive relationship which replaces the
exclusive relationship between the Company and Lucent entered into in
1995 with respect to the SDBAS joint product.
(C) See Exhibit Index and Exhibits attached to this report.
(D) Financial Statement Schedules.
45
<PAGE>
BROADBAND TECHNOLOGIES, INC.
EXHIBIT INDEX AND EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Amended and Restated Bylaws (2)
4.1 Amended and Restated Certificate of Incorporation (Included as
Exhibit 3.1 to this Annual Report on Form 10-K)
4.2 Amended and Restated Bylaws (Included as Exhibit 3.2 to this Annual
Report on Form 10-K)
4.3 Form of Common Stock Certificate (1)
4.4 Warrant Agreement, dated
as of March 30, 1995, by and between the Registrant and Bell
Atlantic Corporation (4)
4.5 Form of Warrant Certificate (Included as exhibit to Exhibit 4.4 to
this Annual Report on Form 10-K)
4.6 Rights Agreement, dated as of November 19, 1996, by and between the
Registrant and First Union National Bank, as Rights Agent,
including the form of Certificate of Designations, Preferences and
Rights of Series A Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B, and the Summary of Rights as Exhibit C
(6)
4.7 Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)
4.8 Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)
10.1 Technology Purchase Agreement dated as July 16, 1988, between and
among the Registrant, Siecor Corporation and FiberLAN, Inc. (1)
10.2 Equipment Lease Schedule VL-2 dated as of October 2, 1990, between
the Registrant and Comdisco, Inc. (1)
10.3 Master Equipment Lease Agreement between the Registrant and
MMC/GATX Partnership No. 1 dated September 30, 1992. (1)
10.4 Equipment Lease Schedule No. 1 dated as of September 30, 1992,
between the Registrant and MMC/GATX Partnership No. 1. (1)
10.5 Warrant Agreement dated as of September 30, 1992, between the
Registrant and MMC/GATX Partnership No. 1. (1)
10.6 Form of Investors' Rights Agreement dated as of November 13, 1992,
between the Registrant and certain investors. (1)
10.7 Standstill Agreement dated December 4, 1991, between the Registrant
and AMP Incorporated. (1)
10.8 Volume Purchase Agreement executed February 25, 1993, between the
Registrant and Bell Atlantic Network Services, Inc., as amended by
a Further Agreement and Amendment No. 1 dated as of May 3, 1993.
(3)
10.9 Further Agreement and Amendment No. 2, dated November 15, 1993 to
Volume Purchase Agreement executed February 25, 1993 between the
Registrant and Bell Atlantic Network Services, Inc. (4)
</TABLE>
46
<PAGE>
BROADBAND TECHNOLOGIES, INC.
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C>
10.10 Office Lease dated February 25, 1993, between the Registrant and
The Wachovia Real Estate Fund. (1)
10.11 Amended and Restated 1988 Incentive Stock Option Plan (2)
10.12 Amended and Restated 1992 Nonqualified Stock Option Plan (2)
10.13 Directors' Stock Option Plan (2)
10.14 1993 Flexible Benefits Plan (1)
10.15 Amended 401 (k) Plan dated July 1, 1997 (14) 51
10.16 Warrant Agreement, dated as of March 30, 1995, by and between the
Registrant and Bell Atlantic Corporation (4)
10.17 Agreement Between BroadBand Technologies, Inc. and Lucent
Technologies Executed November 15, 1995. (4) (9)
10.18 Indenture, dated as of May 22, 1996, by and between the Registrant
and Marine Midland Bank, as Trustee (5)
10.18A Cross Reference Sheet (8)
10.19 Purchase Agreement, dated as of May 17, 1996, by and between the
Registrant and Goldman, Sachs & Co., and Bear, Stearns & Co., Inc.
(5)
10.20 Registration Rights Agreement, dated as of May 17, 1996, by and
between the Registrant and Goldman, Sachs & Co., and Bear, Stearns
& Co., Inc. (5)
10.21 Bell Atlantic Network Services, Inc. and BroadBand Technologies,
Inc. Procurement Agreement, Contract No. BA 14494, dated July 1,
1996 (7) (10)
10.22 First Amendment to Agreement LGC-A65-D executed July 12, 1996,
between the Registrant and Lucent Technologies, Inc. (7) (10)
10.23 Rights Agreement, dated as of November 19, 1996, by and between the
Registrant and First Union National Bank, as Rights Agent,
including the form of Certificate of Designations, Preferences and
Rights of Series A Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B, and the Summary of Rights as Exhibit C
(6)
10.24 Employment Agreement between the Registrant and Salim A.L. Bhatia,
dated as of March 5, 1997 (11)
10.25 Employment Agreement between the Registrant and David E. Orr, dated
as of March 10, 1997 (11)
10.26 Umbrella Settlement Agreement dated as of February 4, 1998, between
BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
10.27 Form of Release dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (12)
10.28 Form of Release dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (12)
10.29 Supply Agreement, dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (13)
10.30 Technology Transfer Agreement, dated as of February 4, 1998, between
BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
10.31 Manufacturing Agreement, dated as of February 4, 1998, between
BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
10.32 BBT OEM Agreement, dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (13)
10.33 Lucent OEM Agreement, dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (13)
10.34 Research and Development Agreement, dated as of February 4, 1998,
between BroadBand Technologies, Inc. and Lucent Technologies, Inc.(13)
10.35 Element Manager Software Letter Agreement, dated as of February 4,
1998, between BroadBand Technologies, Inc. and Lucent Technologies,
Inc. (12)
10.36 Goldman Sachs & Co. and BroadBand Technologies, Inc. agreements,
dated April 8, 1997. (14) 123
24.1 Consent of Ernst & Young LLP. (14) 132
27.0 Financial Data Schedule (This exhibit is required to be submitted
electronically pursuant to the rules and regulations of the
Security and Exchange Commission and shall not be deemed filed for
purposes of Section 11 of the Securities Act of 1933 or Section 18
of the Securities Exchange Act of 1934).
</TABLE>
47
<PAGE>
BROADBAND TECHNOLOGIES, INC.
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
(1) (Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-1, No. 33-62754 declared effective on
June 30, 1993.)
(2) (Incorporated by reference to exhibit filed with the Company's Form 10-Q
for the period ended June 30, 1994.)
(3) (Confidential treatment was granted by the Securities and Exchange
Commission on June 30, 1993.)
(4) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated March 30, 1995.)
(5) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated May 22, 1996)
(6) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated November 19, 1996)
(7) (Incorporated by reference to exhibit filed with Registrant's Quarterly
Report, dated August 14, 1996, as amended by Amendment No. 1, dated
November 26, 1996)
(8) (Incorporated by reference to exhibit filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-3, No. 333-09661, dated
September 17, 1996)
(9) (Confidential treatment was granted by the Securities and Exchange
Commission on May 10, 1996)
(10) (Confidential treatment was granted by the Securities and Exchange
Commission on December 12, 1996)
(11) (Incorporated by reference to exhibit filed with Registrant's Annual
Report, dated March 31, 1997).
(12) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated March 5, 1998).
(13) (Incorporated by reference to exhibit filed with Registrant's current
report on Form 8-K, Commission File No. O-21766, dated March 5, 1998
Confidential treatment for certain portions of this agreement is being
requested pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
as amended.)
(14) Attached exhibits.
48
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BroadBand Technologies, Inc.
Dated March 20, 1998 By: /S/ Timothy K. Oakley
---------------------
Timothy K. Oakley
Title: Vice President, Chief Financial
Officer, Secretary Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ David E. Orr President, (Principal Executive March 20, 1998
David E. Orr Officer), and Director
/S/ Timothy K. Oakley Vice President, (Principal Financial March 20, 1998
Timothy K. Oakley Officer and Principal Accounting
Officer)
/S/ Dr. John R. Hutchins, III
Dr. John R. Hutchins, III Chairman of the Board March 20, 1998
/S/ Dr. J. Richard Jones
Dr. J. Richard Jones Director March 20, 1998
/S/ Richard P. Clark
Richard P. Clark Director March 20, 1998
/S/ Dr. Charles T. Lee
Dr. Charles T. Lee Director March 20, 1998
</TABLE>
49
BROADBAND TECHNOLOGIES, INC. 401(K) PLAN
(JULY 1, 1997 RESTATEMENT)
FIDELITY MANAGEMENT TRUST COMPANY, ITS AFFILIATES AND EMPLOYEES MAY NOT
PROVIDE YOU WITH LEGAL OR TAX ADVICE IN CONNECTION WITH THE EXECUTION OF
THIS DOCUMENT. IT SHOULD BE REVIEWED BY YOUR ATTORNEY AND/OR ACCOUNTANT
PRIOR TO EXECUTION.
CORPORATE PLAN FOR RETIREMENTSM
VOLUME SUBMITTER
PLAN DOCUMENT SYSTEMSTM
50
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1 - PLAN DEFINITIONS
1.2 - INTERPRETATION
ARTICLE II
SERVICE
2.1 - DEFINITIONS
2.2 - CREDITING OF HOURS OF SERVICE
2.3 - CREDITING OF CONTINUOUS SERVICE
2.4 - ELIGIBILITY SERVICE
2.5 - VESTING SERVICE
2.6 - CREDITING OF SERVICE ON TRANSFER OR AMENDMENT
ARTICLE III
ELIGIBILITY
3.1 - ELIGIBILITY
3.2 - TRANSFERS OF EMPLOYMENT
3.3 - REEMPLOYMENT
3.4 - NOTIFICATION CONCERNING NEW ELIGIBLE EMPLOYEES
3.5 - EFFECT AND DURATION
ARTICLE IV
TAX-DEFERRED CONTRIBUTIONS
4.1 - TAX-DEFERRED CONTRIBUTIONS
4.2 - AMOUNT OF TAX-DEFERRED CONTRIBUTIONS
4.3 - CHANGES IN REDUCTION AUTHORIZATION
4.4 - SUSPENSION OF TAX-DEFERRED CONTRIBUTIONS
4.5 - RESUMPTION OF TAX-DEFERRED CONTRIBUTIONS
4.6 - DELIVERY OF TAX-DEFERRED CONTRIBUTIONS
4.7 - VESTING OF TAX-DEFERRED CONTRIBUTIONS
ARTICLE V
AFTER-TAX AND ROLLOVER CONTRIBUTIONS
5.1 - AFTER-TAX CONTRIBUTIONS
5.2 - AMOUNT OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
5.3 - CHANGES IN PAYROLL WITHHOLDING AUTHORIZATION
5.4 - SUSPENSION OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
5.5 - RESUMPTION OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
5.6 - ROLLOVER CONTRIBUTIONS
5.7 - DELIVERY OF AFTER-TAX CONTRIBUTIONS
5.8 - VESTING OF AFTER-TAX CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS
51
<PAGE>
ARTICLE VI
EMPLOYER CONTRIBUTIONS
6.1 - CONTRIBUTION PERIOD
6.2 - PROFIT-SHARING CONTRIBUTIONS
6.3 - ALLOCATION OF PROFIT-SHARING CONTRIBUTIONS
6.4 - QUALIFIED NONELECTIVE CONTRIBUTIONS
6.5 - ALLOCATION OF QUALIFIED NONELECTIVE CONTRIBUTIONS
6.6 - MATCHING CONTRIBUTIONS
6.7 - ALLOCATION OF MATCHING CONTRIBUTIONS
6.8 - VERIFICATION OF AMOUNT OF EMPLOYER CONTRIBUTIONS BY THE SPONSOR
6.9 - PAYMENT OF EMPLOYER CONTRIBUTIONS
6.10 - ELIGIBILITY TO PARTICIPATE IN ALLOCATION
6.11 - VESTING OF EMPLOYER CONTRIBUTIONS
6.12 - ELECTION OF FORMER VESTING SCHEDULE
6.13 - FORFEITURES TO REDUCE EMPLOYER CONTRIBUTIONS
ARTICLE VII
LIMITATIONS ON CONTRIBUTIONS
7.1 - DEFINITIONS
7.2 - CODE SECTION 402(G) LIMIT
7.3 - DISTRIBUTION OF EXCESS DEFERRALS
7.4 - LIMITATION ON TAX-DEFERRED CONTRIBUTIONS OF HIGHLY COMPENSATED
EMPLOYEES
7.5 - DISTRIBUTION OF EXCESS TAX-DEFERRED CONTRIBUTIONS
7.6 - LIMITATION ON MATCHING CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS
OF HIGHLY COMPENSATED EMPLOYEES
7.7 - FORFEITURE OR DISTRIBUTION OF EXCESS CONTRIBUTIONS
7.8 - MULTIPLE USE LIMITATION
7.9 - DETERMINATION OF INCOME OR LOSS
7.10 - CODE SECTION 415 LIMITATIONS ON CREDITING OF CONTRIBUTIONS AND
FORFEITURES
7.11 - COVERAGE UNDER OTHER QUALIFIED DEFINED CONTRIBUTION PLAN
7.12 - COVERAGE UNDER QUALIFIED DEFINED BENEFIT PLAN
7.13 - SCOPE OF LIMITATIONS
ARTICLE VIII
TRUST FUNDS AND SEPARATE ACCOUNTS
8.1 - GENERAL FUND
8.2 - INVESTMENT FUNDS
8.3 - LOAN INVESTMENT FUND
8.4 - INCOME ON TRUST
8.5 - SEPARATE ACCOUNTS
8.6 - SUB-ACCOUNTS
ARTICLE IX
LIFE INSURANCE CONTRACTS
9.1 - NO LIFE INSURANCE CONTRACTS
52
<PAGE>
ARTICLE X
DEPOSIT AND INVESTMENT OF CONTRIBUTIONS
10.1 - FUTURE CONTRIBUTION INVESTMENT ELECTIONS
10.2 - DEPOSIT OF CONTRIBUTIONS
10.3 - ELECTION TO TRANSFER BETWEEN FUNDS
ARTICLE XI
CREDITING AND VALUING SEPARATE ACCOUNTS
11.1 - CREDITING SEPARATE ACCOUNTS
11.2 - VALUING SEPARATE ACCOUNTS
11.3 - PLAN VALUATION PROCEDURES
11.4 - FINALITY OF DETERMINATIONS
11.5 - NOTIFICATION
ARTICLE XII
LOANS
12.1 - APPLICATION FOR LOAN
12.2 - REDUCTION OF ACCOUNT UPON DISTRIBUTION
12.3 - REQUIREMENTS TO PREVENT A TAXABLE DISTRIBUTION
12.4 - ADMINISTRATION OF LOAN INVESTMENT FUND
12.5 - DEFAULT
12.6 - SPECIAL RULES APPLICABLE TO LOANS
12.7 - LOANS GRANTED PRIOR TO AMENDMENT
ARTICLE XIII
WITHDRAWALS WHILE EMPLOYED
13.1 - WITHDRAWALS OF AFTER-TAX CONTRIBUTIONS
13.2 - WITHDRAWALS OF ROLLOVER CONTRIBUTIONS
13.3 - WITHDRAWALS OF EMPLOYER CONTRIBUTIONS
13.4 - WITHDRAWALS OF TAX-DEFERRED CONTRIBUTIONS
13.5 - LIMITATIONS ON WITHDRAWALS OTHER THAN HARDSHIP WITHDRAWALS
13.6 - CONDITIONS AND LIMITATIONS ON HARDSHIP WITHDRAWALS
13.7 - ORDER OF WITHDRAWAL FROM A PARTICIPANT'S SUB-ACCOUNTS
ARTICLE XIV
TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
14.1 - TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
14.2 - SEPARATE ACCOUNTING FOR NON-VESTED AMOUNTS
14.3 - DISPOSITION OF NON-VESTED AMOUNTS
14.4 - RECREDITING OF FORFEITED AMOUNTS
ARTICLE XV
DISTRIBUTIONS
15.1 - DISTRIBUTIONS TO PARTICIPANTS
15.2 - DISTRIBUTIONS TO BENEFICIARIES
15.3 - CASH OUTS AND PARTICIPANT CONSENT
15.4 - REQUIRED COMMENCEMENT OF DISTRIBUTION
53
<PAGE>
15.5 - REEMPLOYMENT OF A PARTICIPANT
15.6 - RESTRICTIONS ON ALIENATION
15.7 - FACILITY OF PAYMENT
15.8 - INABILITY TO LOCATE PAYEE
15.9 - DISTRIBUTION PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS
ARTICLE XVI
FORM OF PAYMENT
16.1 - FORM OF PAYMENT
16.2 - DIRECT ROLLOVER
16.3 - NOTICE REGARDING FORM OF PAYMENT
ARTICLE XVII
BENEFICIARIES
17.1 - DESIGNATION OF BENEFICIARY
17.2 - SPOUSAL CONSENT REQUIREMENTS
ARTICLE XVIII
ADMINISTRATION
18.1 - AUTHORITY OF THE SPONSOR
18.2 - ACTION OF THE SPONSOR
18.3 - CLAIMS REVIEW PROCEDURE
18.4 - QUALIFIED DOMESTIC RELATIONS ORDERS
18.5 - INDEMNIFICATION
18.6 - ACTIONS BINDING
ARTICLE XIX
AMENDMENT AND TERMINATION
19.1 - AMENDMENT
19.2 - LIMITATION ON AMENDMENT
19.3 - TERMINATION
19.4 - REORGANIZATION
19.5 - WITHDRAWAL OF AN EMPLOYER
ARTICLE XX
ADOPTION BY OTHER ENTITIES
20.1 - ADOPTION BY RELATED COMPANIES
20.2 - EFFECTIVE PLAN PROVISIONS
ARTICLE XXI
MISCELLANEOUS PROVISIONS
21.1 - NO COMMITMENT AS TO EMPLOYMENT
21.2 - BENEFITS
21.3 - NO GUARANTEES
21.4 - EXPENSES
21.5 - PRECEDENT
21.6 - DUTY TO FURNISH INFORMATION
54
<PAGE>
21.7 - WITHHOLDING
21.8 - MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS
21.9 - BACK PAY AWARDS
21.10 - CONDITION ON EMPLOYER CONTRIBUTIONS
21.11 - RETURN OF CONTRIBUTIONS TO AN EMPLOYER
21.12 - VALIDITY OF PLAN
21.13 - TRUST AGREEMENT
21.14 - PARTIES BOUND
21.15 - APPLICATION OF CERTAIN PLAN PROVISIONS
21.16 - LEASED EMPLOYEES
21.17 - TRANSFERRED FUNDS
ARTICLE XXII
TOP-HEAVY PROVISIONS
22.1 - DEFINITIONS
22.2 - APPLICABILITY
22.3 - MINIMUM EMPLOYER CONTRIBUTION
22.4 - ADJUSTMENTS TO SECTION 415 LIMITATIONS
22.5 - ACCELERATED VESTING
ARTICLE XXIII
EFFECTIVE DATE
23.1 - EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT
55
<PAGE>
PREAMBLE
The BroadBand Technologies, Inc. 401(k) Plan, originally effective as of January
1, 1989, is hereby amended and restated in its entirety. The Plan, as amended
and restated hereby, is intended to qualify as a profit-sharing plan under
Section 401(a) of the Code, and includes a cash or deferred arrangement that is
intended to qualify under Section 401(k) of the Code. The Plan is maintained for
the exclusive benefit of eligible employees and their beneficiaries.
Notwithstanding any other provision of the Plan to the contrary, a Participant's
vested interest in his Separate Account under the Plan on and after the
effective date of restatement shall be not less than his
vested interest in his account on the day immediately preceding the effective
date. In addition, notwithstanding any other provision of the Plan to the
contrary, the forms of payment and other Plan provisions that were available
under the Plan immediately prior to the later of the effective date of this
amendment and restatement or the date this amendment and restatement is adopted
and that may not be eliminated under Section 411(d)(6) of the Code shall
continue to be available to Participants who had an account under the Plan on
the day immediately preceding the later of the effective date or the date this
amendment and restatement is adopted.
56
<PAGE>
ARTICLE I
DEFINITIONS
1.1 - PLAN DEFINITIONS
As used herein, the following words and phrases have the meanings hereinafter
set forth, unless a different meaning is plainly required by the context:
The "ADMINISTRATOR" means the Sponsor unless the Sponsor designates another
person or persons to act as such.
An "AFTER-TAX CONTRIBUTION" means any after-tax employee contribution made by a
Participant as may be permitted under Article V.
The "BENEFICIARY" of a Participant means the person or persons entitled under
the provisions of the Plan to receive distribution hereunder in the event the
Participant dies before receiving distribution of his entire interest under the
Plan.
The "CODE" means the Internal Revenue Code of 1986, as amended from time to
time. Reference to a section of the Code includes such section and any
comparable section or sections of any future legislation that amends,
supplements, or supersedes such section.
The "COMPENSATION" of a Participant for any period means the wages as defined in
Section 3401(a) of the Code, determined without regard to any rules that limit
compensation included in wages based on the nature or location of the employment
or services performed, and all other payments made to him for such period for
services as an Employee for which his Employer is required to furnish the
Participant a written statement under Sections 6041(d), 6051(a)(3), and 6052 of
the Code, but determined prior to any exclusions for amounts deferred under
Section 125, 402(e)(3), 402(h)(1)(B), 403(b), or 457(b) of the Code or for
certain contributions described in Section 414(h)(2) of the Code that are picked
up by the employing unit and treated as employer contributions.
In no event, however, shall the Compensation of a Participant taken into account
under the Plan for any Plan Year exceed (1) $200,000 for Plan Years beginning
prior to January 1, 1994, or (2) $150,000 for Plan Years beginning on or after
January 1, 1994 (subject to adjustment annually as provided in Section
401(a)(17)(B) and Section 415(d) of the Code; provided, however, that the dollar
increase in effect on January 1 of any calendar year, if any, is effective for
Plan Years beginning in such calendar year). If the Compensation of a
Participant is determined over a period of time that contains fewer than 12
calendar months, then the annual compensation limitation described above shall
be adjusted with respect to that Participant by multiplying the annual
compensation limitation in effect for the Plan Year by a fraction the numerator
of which is the number of full months in the period and the denominator of which
is 12; provided, however, that no proration is required for a Participant who is
covered under the
57
<PAGE>
Plan for less than one full Plan Year if the formula for allocations is based on
Compensation for a period of at least 12 months. In determining the
Compensation, for purposes of applying the annual compensation limitation
described above, of a Participant who is a five percent owner or among the ten
Highly Compensated Employees receiving the greatest Compensation for the Plan
Year, the Compensation of the Participant's spouse and of his lineal descendants
who have not attained age 19 as of the close of the Plan Year shall be included
as Compensation of the Participant for the Plan Year. If as a result of applying
the family aggregation rule described in the preceding sentence the annual
compensation limitation would be exceeded, the limitation shall be prorated
among the affected family members in proportion to each member's Compensation as
determined prior to application of the family aggregation rules.
A "CONTRIBUTION PERIOD" means the period specified in Article VI for which
Employer Contributions shall be made.
An "ELIGIBLE EMPLOYEE" means any Employee who has met the eligibility
requirements of Article III to have Tax-Deferred Contributions made to the Plan
on his behalf.
The "ELIGIBILITY SERVICE" of an employee means the period or periods of service
credited to him under the provisions of Article II for purposes of determining
his eligibility to participate in the Plan as may be required under Article III
or Article VI.
An "EMPLOYEE" means any employee of an Employer other than (i) a leased
employee, (ii) an employee who is covered by a collective bargaining agreement
or (iii) an employee who is a nonresident alien who does not receive United
States source income.
An "EMPLOYER" means the Sponsor and any entity which has adopted the Plan as may
be provided under Article XX.
An "EMPLOYER CONTRIBUTION" means the amount, if any, that an Employer
contributes to the Plan as may be provided under Article VI or Article XXII.
An "ENROLLMENT DATE" means each day of the Plan Year.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time. Reference to a section of ERISA includes such section and any
comparable section or sections of any future legislation that amends,
supplements, or supersedes such section.
The "GENERAL FUND" means a Trust Fund maintained by the Trustee as required to
hold and administer any assets of the Trust that are not allocated among any
separate Investment Funds as may be provided in the Plan or the Trust Agreement.
No General Fund shall be maintained if all assets of the Trust are allocated
among separate Investment Funds.
58
<PAGE>
A "HIGHLY COMPENSATED EMPLOYEE" means an Employee or former Employee who is a
highly compensated active employee or highly compensated former employee as
defined hereunder.
A "highly compensated active employee" includes any Employee who performs
services for an Employer during the determination year and who (i) was a five
percent owner at any time during the determination year or the look back year,
(ii) received compensation from an Employer during the look back year in excess
of $75,000 (subject to adjustment annually at the same time and in the same
manner as under Section 415(d) of the Code), (iii) was in the top paid group of
employees for the look back year and received compensation from an Employer
during the look back year in excess of $50,000 (subject to adjustment annually
at the same time and in the same manner as under Section 415(d) of the Code),
(iv) was an officer of an Employer during the look back year and received
compensation during that year in excess of 50 percent of the dollar limitation
in effect for that year under Section 415(b)(1)(A) of the Code or, if no officer
received compensation in excess of that amount for the look back year or the
determination year, received the greatest compensation for the look back year of
any officer, or (v) was one of the 100 employees paid the greatest compensation
by an Employer for the determination year and would be described in (ii), (iii),
or (iv) above if the term "determination year" were substituted for "look back
year".
A "highly compensated former employee" includes any Employee who separated from
service from an Employer and all Related Companies (or is deemed to have
separated from service from an Employer and all Related Companies) prior to the
determination year, performed no services for an Employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the date the
Employee attains age 55.
The determination of who is a Highly Compensated Employee hereunder, including
determinations as to the number and identity of employees in the top paid group,
the 100 employees receiving the greatest compensation from an Employer, the
number of employees treated as officers, and the compensation considered, shall
be made in accordance with the provisions of Section 414(q) of the Code and
regulations issued thereunder. For purposes of this definition, the following
terms have the following meanings:
(a) The "determination year" means the Plan Year or, if the
Administrator makes the election provided in paragraph (b) below,
the period of time, if any, which extends beyond the look back year
and ends on the last day of the Plan Year for which testing is
being performed (the "lag period"). If the lag period is less than
12 months long, the dollar amounts specified in (ii), (iii), and
(iv) above shall be prorated based upon the number of months in the
lag period.
(b) The "look back year" means the 12-month period immediately
preceding the determination year; provided, however, that the
Administrator may elect instead to treat the calendar year ending
with or within the determination year as the "look back year".
59
<PAGE>
An "HOUR OF SERVICE" with respect to a person means each hour, if any, that may
be credited to him in accordance with the provisions of Article II.
An "INVESTMENT FUND" means any separate investment Trust Fund maintained by the
Trustee as may be provided in the Plan or the Trust Agreement or any separate
investment fund maintained by the Trustee, to the extent that there are
Participant Sub-Accounts under such funds, to which assets of the Trust may be
allocated and separately invested.
A "MATCHING CONTRIBUTION" means any Employer Contribution made to the Plan on
account of a Participant's Tax-Deferred Contributions as provided in Article VI.
The "NORMAL RETIREMENT DATE" of an employee means the date he attains age 65.
A "PARTICIPANT" means any person who has a Separate Account in the Trust.
The "PLAN" means BroadBand Technologies, Inc. 401(k) Plan, as from time to time
in effect.
A "PLAN YEAR" means the 12-consecutive-month period ending December 31.
A "PROFIT-SHARING CONTRIBUTION" means any Employer Contribution made to the Plan
as provided in Article VI, other than Matching Contributions and Qualified
Nonelective Contributions.
A "QUALIFIED NONELECTIVE CONTRIBUTION" means any Employer Contribution made to
the Plan as provided in Article VI that may be taken into account to satisfy the
limitations on contributions by Highly Compensated Employees under Article VII.
A "RELATED COMPANY" means any corporation or business, other than an Employer,
which would be aggregated with an Employer for a relevant purpose under Section
414 of the Code.
A "ROLLOVER CONTRIBUTION" means any rollover contribution to the Plan made by a
Participant as may be permitted under Article V.
A "SEPARATE ACCOUNT" means the account maintained by the Trustee in the name of
a Participant that reflects his interest in the Trust and any Sub-Accounts
maintained thereunder, as provided in Article VIII.
The "SETTLEMENT DATE" of a Participant means the date on which a Participant's
interest under the Plan becomes distributable in accordance with Article XV.
The "SPONSOR" means BroadBand Technologies, Inc., and any successor thereto.
A "SUB-ACCOUNT" means any of the individual sub-accounts of a Participant's
Separate Account that is maintained as provided in Article VIII.
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A "TAX-DEFERRED CONTRIBUTION" means the amount contributed to the Plan on a
Participant's behalf by his Employer in accordance with his reduction
authorization executed pursuant to Article IV.
The "TRUST" means the trust maintained by the Trustee under the Trust Agreement.
The "TRUST AGREEMENT" means the agreement entered into between the Sponsor and
the Trustee relating to the holding, investment, and reinvestment of the assets
of the Plan, together with all amendments thereto.
The "TRUSTEE" means the trustee or any successor trustee which at the time shall
be designated, qualified, and acting under the Trust Agreement. The Sponsor may
designate a person or persons other than the Trustee to perform any
responsibility of the Trustee under the Plan, other than trustee
responsibilities as defined in Section 405(c)(3) of ERISA, and the Trustee shall
not be liable for the performance of such person in carrying out such
responsibility except as otherwise provided by ERISA. The term Trustee shall
include any delegate of the Trustee as may be provided in the Trust Agreement.
A "TRUST FUND" means any fund maintained under the Trust by the Trustee.
A "VALUATION DATE" means the date or dates designated by the Sponsor and
communicated in writing to the Trustee for the purpose of valuing the General
Fund and each Investment Fund and adjusting Separate Accounts and Sub-Accounts
hereunder, which dates need not be uniform with respect to the General Fund,
each Investment Fund, Separate Account, or Sub-Account; provided, however, that
the General Fund and each Investment Fund shall be valued and each Separate
Account and Sub-Account shall be adjusted no less often than once annually.
The "VESTING SERVICE" of an employee means the period or periods of service
credited to him under the provisions of Article II for purposes of determining
his vested interest in his Employer Contributions Sub-Account, if Employer
Contributions are provided for under either Article VI or Article XXII.
1.2 - INTERPRETATION
Where required by the context, the noun, verb, adjective, and adverb forms of
each defined term shall include any of its other forms. Wherever used herein,
the masculine pronoun shall include the feminine, the singular shall include the
plural, and the plural shall include the singular.
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ARTICLE II
SERVICE
2.1 - DEFINITIONS
For purposes of this Article, the following terms have the following meanings:
(a) The "continuous service" of an employee means the service credited to
him in accordance with the provisions of Section 2.3 of the Plan.
(b) The "employment commencement date" of an employee means the date he
first completes an Hour of Service.
(c) A "maternity/paternity absence" means a person's absence from
employment with an Employer or a Related Company because of the
person's pregnancy, the birth of the person's child, the placement of a
child with the person in connection with the person's adoption of the
child, or the caring for the person's child immediately following the
child's birth or adoption. A person's absence from employment will not
be considered a maternity/paternity absence unless the person furnishes
the Administrator such timely information as may reasonably be required
to establish that the absence was for one of the purposes enumerated in
this paragraph and to establish the number of days of absence
attributable to such purpose.
(d) The "reemployment commencement date" of an employee means the first
date following a severance date on which he again completes an Hour of
Service.
(e) The "severance date" of an employee means the earlier of (i) the date
on which he retires, dies, or his employment with an Employer and all
Related Companies is otherwise terminated, or (ii) the first
anniversary of the first date of a period during which he is absent
from work with an Employer and all Related Companies for any other
reason; provided, however, that if he terminates employment with or is
absent from work with an Employer and all Related Companies on account
of service with the armed forces of the United States, he shall not
incur a severance date if he is eligible for reemployment rights under
the Uniformed Services Employment and Reemployment Rights Act of 1994
and he returns to work with an Employer or a Related Company within the
period during which he retains such reemployment rights.
2.2 - CREDITING OF HOURS OF SERVICE
A person shall be credited with an Hour of Service for each hour for which he is
paid, or entitled to payment, for the performance of duties for an Employer or
any Related Company.
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2.3 - CREDITING OF CONTINUOUS SERVICE
A person shall be credited with continuous service for the aggregate of the
periods of time between his employment commencement date or any reemployment
commencement date and the severance date that next follows such employment
commencement date or reemployment commencement date; provided, however, that an
employee who has a reemployment commencement date within the
12-consecutive-month period following the earlier of the first date of his
absence or his severance date shall be credited with continuous service for the
period between such severance date and reemployment commencement date.
2.4 - ELIGIBILITY SERVICE
There shall be no Eligibility Service credited under the Plan.
2.5 - VESTING SERVICE
Years of Vesting Service shall be determined in accordance with the following
provisions:
(a) An employee shall be credited with years of Vesting Service equal to
his period of continuous service.
(b) Notwithstanding the provisions of paragraph (a), continuous service
completed by an employee prior to a severance date shall not be
included in determining the employee's years of Vesting Service unless
the employee had a nonforfeitable right to any portion of his Separate
Account, excluding that portion of his Separate Account that is
attributable to After-Tax or Rollover Contributions, as of the
severance date, or the period of time between the severance date and
his reemployment commencement date is less than the greater of five
years or his period of continuous service determined as of the
severance date; and provided, however, that solely for purposes of
applying this paragraph, if a person is on a maternity/paternity
absence beyond the first anniversary of the first day of such absence,
his severance date shall be the second anniversary of the first day of
such maternity/paternity absence.
2.6 - CREDITING OF SERVICE ON TRANSFER OR AMENDMENT
Notwithstanding any other provision of the Plan to the contrary, if an Employee
is transferred from employment covered under a qualified plan maintained by an
Employer or a Related Company for which service is credited based on Hours of
Service and computation periods in accordance with Department of Labor
Regulations ss.2530.200 through 2530.203 to employment covered under the Plan
or, prior to amendment, the Plan provided for crediting of service on the basis
of Hours of Service and computation periods, an affected Employee shall be
credited with Vesting Service hereunder equal to:
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(a) the Employee's years of service credited to him under the Hours of
Service method before the computation period in which the transfer or
the effective date of the amendment occurs, plus
(b) the greater of (i) the period of service that would be credited to the
Employee under the elapsed time method provided hereunder for his
employment during the entire computation period in which the transfer
or the effective date of the amendment occurs or (ii) the service taken
into account under the Hours of Service method for such computation
period as of the transfer date or the effective date of the amendment,
plus
(c) the service credited to such Employee under the elapsed time method
provided hereunder for the period of time beginning on the day after
the anniversary of his employment commencement or reemployment
commencement date in the computation period in which the transfer or
the effective date of the amendment occurs.
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ARTICLE III
ELIGIBILITY
3.1 - ELIGIBILITY
Each Employee who was an Eligible Employee immediately prior to the effective
date of this amendment and restatement shall continue to be an Eligible
Employee. Each other Employee shall become an Eligible Employee as of the
Enrollment Date coinciding with or next following the later of (i) his
employment commencement date or (ii) the date on which he has attained age 21.
3.2 - TRANSFERS OF EMPLOYMENT
If a person is transferred directly from employment with an Employer or with a
Related Company in a capacity other than as an Employee to employment as an
Employee, he shall become an Eligible Employee as of the date he is so
transferred if prior to an Enrollment Date coinciding with or preceding such
transfer date he has met the eligibility requirements of Section 3.1. Otherwise,
the eligibility of a person who is so transferred to elect to have Tax-Deferred
Contributions made to the Plan on his behalf or to make After-Tax Contributions
to the Plan shall be determined in accordance with Section 3.1.
3.3 - REEMPLOYMENT
If a person who terminated employment with an Employer and all Related Companies
is reemployed as an Employee and if he had been an Eligible Employee prior to
his termination of employment, he shall again become an Eligible Employee on the
date he is reemployed. Otherwise, the eligibility of a person who terminated
employment with an Employer and all Related Companies and who is reemployed by
an Employer or a Related Company to elect to have Tax-Deferred Contributions
made to the Plan on his behalf or to make After-Tax Contributions to the Plan
shall be determined in accordance with Section 3.1 or 3.2.
3.4 - NOTIFICATION CONCERNING NEW ELIGIBLE EMPLOYEES
Each Employer shall notify the Administrator as soon as practicable of Employees
becoming Eligible Employees as of any date.
3.5 - EFFECT AND DURATION
Upon becoming an Eligible Employee, an Employee shall be entitled to elect to
have Tax-Deferred Contributions made to the Plan on his behalf and to make
After-Tax Contributions to the Plan and shall be bound by all the terms and
conditions of the Plan and the Trust Agreement. A person shall continue as an
Eligible Employee eligible to have Tax-Deferred Contributions made to the Plan
on his behalf and to make After-Tax Contributions to the Plan only so long as he
continues in employment as an Employee.
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ARTICLE IV
TAX-DEFERRED CONTRIBUTIONS
4.1 - TAX-DEFERRED CONTRIBUTIONS
Effective as of the date he becomes an Eligible Employee, or any subsequent
Enrollment Date, each Eligible Employee may elect in writing in accordance with
rules prescribed by the Administrator to have Tax-Deferred Contributions made to
the Plan on his behalf by his Employer as hereinafter provided. An Eligible
Employee's written election shall include his authorization for his Employer to
reduce his Compensation and to make Tax-Deferred Contributions on his behalf and
his election as to the investment of his contributions in accordance with
Article X. Tax-Deferred Contributions on behalf of an Eligible Employee shall
commence with the first payment of Compensation made on or after the date on
which his election is effective.
4.2 - AMOUNT OF TAX-DEFERRED CONTRIBUTIONS
The amount of Tax-Deferred Contributions to be made to the Plan on behalf of an
Eligible Employee by his Employer shall be an integral percentage of his
Compensation. In the event an Eligible Employee elects to have his Employer make
Tax-Deferred Contributions on his behalf, his Compensation shall be reduced for
each payroll period by the percentage he elects to have contributed on his
behalf to the Plan in accordance with the terms of his currently effective
reduction authorization.
4.3 - CHANGES IN REDUCTION AUTHORIZATION
An Eligible Employee may change the percentage of his future Compensation that
his Employer contributes on his behalf as Tax-Deferred Contributions at such
time or times during the Plan Year as the Administrator may prescribe by filing
an amended reduction authorization with his Employer such number of days prior
to the date such change is to become effective as the Administrator shall
prescribe. An Eligible Employee who changes his reduction authorization shall be
limited to selecting a percentage of his Compensation that is otherwise
permitted hereunder. Tax-Deferred Contributions shall be made on behalf of such
Eligible Employee by his Employer pursuant to his amended reduction
authorization filed in accordance with this Section commencing with Compensation
paid to the Eligible Employee on or after the date such filing is effective,
until otherwise altered or terminated in accordance with the Plan.
4.4 - SUSPENSION OF TAX-DEFERRED CONTRIBUTIONS
An Eligible Employee on whose behalf Tax-Deferred Contributions are being made
may have such contributions suspended at any time by giving such number of days
advance written notice to his Employer as the Administrator shall prescribe. Any
such voluntary suspension shall take effect commencing with Compensation paid to
such Eligible Employee on or after the
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expiration of the required notice period and shall remain in effect until
Tax-Deferred Contributions are resumed as hereinafter set forth.
4.5 - RESUMPTION OF TAX-DEFERRED CONTRIBUTIONS
An Eligible Employee who has voluntarily suspended his Tax-Deferred
Contributions may have such contributions resumed at such time or times during
the Plan Year as the Administrator may prescribe, by filing a new reduction
authorization with his Employer such number of days prior to the date as of
which such contributions are to be resumed as the Administrator shall prescribe.
4.6 - DELIVERY OF TAX-DEFERRED CONTRIBUTIONS
As soon after the date an amount would otherwise be paid to an Employee as it
can reasonably be separated from Employer assets, each Employer shall cause to
be delivered to the Trustee in cash all Tax-Deferred Contributions attributable
to such amounts.
4.7 - VESTING OF TAX-DEFERRED CONTRIBUTIONS
A Participant's vested interest in his Tax-Deferred Contributions Sub-Account
shall be at all times 100 percent.
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ARTICLE V
AFTER-TAX AND ROLLOVER CONTRIBUTIONS
5.1 - AFTER-TAX CONTRIBUTIONS
An Eligible Employee may elect in writing in accordance with rules prescribed by
the Administrator to make After-Tax Contributions to the Plan. After-Tax
Contributions may be made either by payroll withholding and/or by delivery of a
cash amount to an Eligible Employee's Employer, as determined by the
Administrator. If the Eligible Employee does not already have an investment
election on file with the Administrator, his election to make After-Tax
Contributions to the Plan shall include his election as to the investment of his
contributions in accordance with Article X. An Eligible Employee's election to
make After-Tax Contributions by payroll withholding may be made effective as of
any Enrollment Date occurring on or after the date on which he becomes an
Eligible Employee. After-Tax Contributions by payroll withholding shall commence
with the first payment of Compensation made on or after the Enrollment Date on
which the Eligible Employee's election is effective.
5.2 - AMOUNT OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
The amount of After-Tax Contributions made by an Eligible Employee by payroll
withholding shall be an integral percentage of his Compensation of not less than
1 percent nor more than 10 percent.
5.3 - CHANGES IN PAYROLL WITHHOLDING AUTHORIZATION
An Eligible Employee may change the percentage of his future Compensation that
he contributes to the Plan as After-Tax Contributions by payroll withholding at
such time or times during the Plan Year as the Administrator may prescribe by
filing an amended payroll withholding authorization with his Employer such
number of days prior to the date such change is to become effective as the
Administrator shall prescribe. An Eligible Employee who changes his payroll
withholding authorization shall be limited to selecting a percentage of his
Compensation that is otherwise permitted under Section 5.2. After-Tax
Contributions shall be made pursuant to an Eligible Employee's amended payroll
withholding authorization filed in accordance with this Section commencing with
Compensation paid to the Eligible Employee on or after the date such filing is
effective, until otherwise altered or terminated in accordance with the Plan.
5.4 - SUSPENSION OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
An Eligible Employee who is making After-Tax Contributions by payroll
withholding may have such contributions suspended at any time by giving such
number of days advance written notice to his Employer as the Administrator shall
prescribe. Any such voluntary suspension shall take effect commencing with
Compensation paid to such Eligible Employee on or after the expiration of the
required notice period and shall remain in effect until After-Tax Contributions
are resumed as hereinafter set forth.
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5.5 - RESUMPTION OF AFTER-TAX CONTRIBUTIONS BY PAYROLL WITHHOLDING
An Eligible Employee who has voluntarily suspended his After-Tax Contributions
made by payroll withholding in accordance with Section 5.4 may have such
contributions resumed at such time or times during the Plan Year as the
Administrator may prescribe by filing a new payroll withholding authorization
with his Employer such number of days prior to the date as of which such
contributions are to be resumed as the Administrator shall prescribe.
5.6 - ROLLOVER CONTRIBUTIONS
An Employee who was a participant in a plan qualified under Section 401 or 403
of the Code and who receives a cash distribution from such plan that he elects
either (i) to roll over immediately to a qualified retirement plan or (ii) to
roll over into a conduit IRA from which he receives a later cash distribution,
may elect to make a Rollover Contribution to the Plan if he is entitled under
Section 402(c), Section 403(a)(4), or Section 408(d)(3)(A) of the Code to roll
over such distribution to another qualified retirement plan. The Administrator
may require an Employee to provide it with such information as it seems
necessary or desirable to show that he is entitled to roll over such
distribution to another qualified retirement plan. An Employee shall make a
Rollover Contribution to the Plan by delivering, or causing to be delivered, to
the Trustee the cash that constitutes the Rollover Contribution amount within 60
days of receipt of the distribution from the plan or from the conduit IRA in the
manner prescribed by the Administrator. If the Employee does not already have an
investment election on file with the Administrator, the Employee shall also
deliver to the Administrator his election as to the investment of his
contributions in accordance with Article X.
5.7 - DELIVERY OF AFTER-TAX CONTRIBUTIONS
As soon after the date an amount would otherwise be paid to an Employee as it
can reasonably be separated from Employer assets or as soon as reasonably
practicable after an amount has been delivered to an Employer by an Employee,
the Employer shall cause to be delivered to the Trustee in cash the After-Tax
Contributions attributable to such amount.
5.8 - VESTING OF AFTER-TAX CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS
A Participant's vested interest in his After-Tax Contributions Sub-Account and
his Rollover Contributions Sub-Account shall be at all times 100 percent.
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ARTICLE VI
EMPLOYER CONTRIBUTIONS
6.1 - CONTRIBUTION PERIOD
The Contribution Period for Matching Contributions under the Plan shall be each
payroll period. The Contribution Period for Qualified Nonelective Contributions
under the Plan shall be each Plan Year. The Contribution Period for
Profit-Sharing Contributions under the Plan shall be each Plan Year.
6.2 - PROFIT-SHARING CONTRIBUTIONS
Each Employer may, in its discretion, make a Profit-Sharing Contribution to the
Plan for the Contribution Period in an amount determined by the Sponsor.
6.3 - ALLOCATION OF PROFIT-SHARING CONTRIBUTIONS
Any Profit-Sharing Contribution made for a Contribution Period shall be
allocated among the Employees who are eligible to participate in the allocation
of Profit-Sharing Contributions for the Contribution Period, as determined under
this Article. The allocable share of each such Employee shall be in the ratio
which his Compensation from the Employers for the Contribution Period bears to
the aggregate of such Compensation for all such Employees.
6.4 - QUALIFIED NONELECTIVE CONTRIBUTIONS
Each Employer may, in its discretion, make a Qualified Nonelective Contribution
to the Plan for the Contribution Period in an amount determined by the Sponsor.
6.5 - ALLOCATION OF QUALIFIED NONELECTIVE CONTRIBUTIONS
Any Qualified Nonelective Contribution made by an Employer for the Contribution
Period shall be allocated among its Employees during the Contribution Period who
are eligible to participate in the allocation of Qualified Nonelective
Contributions for the Contribution Period, as determined under this Article,
other than any such Employee who is a Highly Compensated Employee. The allocable
share of each such Employee shall be either (i) in the ratio which his
Compensation from the Employer for the Contribution Period bears to the
aggregate of such Compensation for all such Employees or (ii) a flat dollar
amount, as determined by the Sponsor for the Contribution Period.
6.6 - MATCHING CONTRIBUTIONS
Each Employer shall make a Matching Contribution to the Plan for each
Contribution Period in an amount equal to 50 percent of the aggregate
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"eligible Tax-Deferred Contributions" for the Contribution Period made on behalf
of its Employees during the Contribution Period who are eligible to participate
in the allocation of Matching Contributions for the Contribution Period, as
determined under this Article. For purposes of this Article, "eligible
Tax-Deferred Contributions" with respect to an Employee mean the Tax-Deferred
Contributions made on his behalf for the Contribution Period in an amount up to,
but not exceeding, the "match level". For purposes of this Article, the "match
level" means 6 percent of an Employee's Compensation for the Contribution
Period.
6.7 - ALLOCATION OF MATCHING CONTRIBUTIONS
Any Matching Contribution made by an Employer for the Contribution Period shall
be allocated among its Employees during the Contribution Period who are eligible
to participate in the allocation of Matching Contributions for the Contribution
Period, as determined under this Article. The allocable share of each such
Employee shall be an amount equal to 50 percent of the "eligible Tax-Deferred
Contributions" made on his behalf for the Contribution Period.
6.8 - VERIFICATION OF AMOUNT OF EMPLOYER CONTRIBUTIONS BY THE SPONSOR
The Sponsor shall verify the amount of Employer Contributions to be made by each
Employer in accordance with the provisions of the Plan. Notwithstanding any
other provision of the Plan to the contrary, the Sponsor shall determine the
portion of the Employer Contribution to be made by each Employer with respect to
an Employee who transfers from employment with one Employer as an Employee to
employment with another Employer as an Employee.
6.9 - PAYMENT OF EMPLOYER CONTRIBUTIONS
Employer Contributions made for a Contribution Period shall be paid in cash or
in qualifying employer securities, as defined in Section 407(d)(5) of ERISA, to
the Trustee within the period of time required under the Code in order for the
contribution to be deductible by the Employer in determining its Federal income
taxes for the Plan Year.
6.10 - ELIGIBILITY TO PARTICIPATE IN ALLOCATION
Each Employee shall be eligible to participate in the allocation of Employer
Contributions beginning on the date he becomes, or again becomes, an Eligible
Employee in accordance with the provisions of Article III. Notwithstanding the
foregoing, no person shall be eligible to participate in the allocation of
Profit-Sharing Contributions for a Contribution Period unless (i) he is employed
by an Employer or a Related Company on the last day of the Contribution Period
and (ii) he has completed at least 1,000 Hours of Service during the Plan Year;
provided, however, that the foregoing provisions shall not apply to a person who
terminates employment during the Plan Year on or after his Normal Retirement
Date or because of death or physical or mental disability such that either (i)
he can no longer continue in the service of his Employer and is eligible to
receive a
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disability benefit under the terms of the Social Security Act, (ii) he can no
longer continue in the service of his Employer and is eligible to receive a
benefit under his Employer's long-term disability plan, or (iii) he can no
longer continue in the service of his Employer, as determined by the
Administrator on the basis of a written certificate of a physician acceptable to
it; and provided, further, that if the Plan would not otherwise meet the minimum
coverage requirements of Section 410(b) of the Code in any Plan Year, the group
of Employees eligible to participate in the allocation of Profit-Sharing
Contributions shall be expanded to include the minimum number of Employees who
would be eligible to participate except for their failure to complete the
required number of Hours of Service during the Plan Year that is necessary to
meet the minimum coverage requirements. The Employees who become eligible to
participate under the provisions of the immediately preceding clause shall be
those Employees who have completed the greatest number of Hours of Service
during the Plan Year. If the Plan still would not meet the minimum coverage
requirements of Section 410(b) of the Code, the group of Employees shall be
expanded further to include the minimum number of Employees who are not employed
by an Employer or a Related Company on the last day of the Contribution Period
that is necessary to meet the minimum coverage requirements. The Employees who
become eligible to participate under the provisions of the immediately preceding
sentence shall be those Employees who have completed the greatest number of
Hours of Service during the Contribution Period.
6.11 - VESTING OF EMPLOYER CONTRIBUTIONS
A Participant's vested interest in his Qualified Nonelective Contributions
Sub-Account shall be at all times 100 percent. A Participant's vested interest
in his Profit-Sharing and Matching Contributions Sub-Accounts shall be
determined in accordance with the following schedule:
Years of Vesting Service Vested Interest
------------------------ ---------------
Less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
Notwithstanding the foregoing, if a Participant is employed by an Employer or a
Related Company on his Normal Retirement Date, the date dies or the date he
becomes physically or mentally disabled such that either (i) he can no longer
continue in the service of his Employer and is eligible to receive a disability
benefit under the terms of the Social Security Act, (ii) he can no longer
continue in the service of his Employer and is eligible to receive a benefit
under his Employer's long-term disability plan, or (iii) he can no longer
continue in the service of his Employer, as determined by the Administrator on
the basis of a written certificate of a physician acceptable to it, his vested
interest in his Profit-Sharing and Matching Contributions Sub-Accounts shall be
100 percent.
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6.12 - ELECTION OF FORMER VESTING SCHEDULE
If the Sponsor adopts an amendment to the Plan that directly or indirectly
affects the computation of a Participant's vested interest in his Employer
Contributions Sub-Account, any Participant with three or more years of Vesting
Service shall have a right to have his vested interest in his Employer
Contributions Sub-Account continue to be determined under the vesting provisions
in effect prior to the amendment rather than under the new vesting provisions,
unless the vested interest of the Participant in his Employer Contributions
Sub-Account under the Plan as amended is not at any time less than such vested
interest determined without regard to the amendment. A Participant shall
exercise his right under this Section by giving written notice of his exercise
thereof to the Administrator within 60 days after the latest of (i) the date he
receives notice of the amendment from the Administrator, (ii) the effective date
of the amendment, or (iii) the date the amendment is adopted. Notwithstanding
the foregoing, a Participant's vested interest in his Employer Contributions
Sub-Account on the effective date of such an amendment shall not be less than
his vested interest in his Employer Contributions Sub-Account immediately prior
to the effective date of the amendment.
6.13 - FORFEITURES TO REDUCE EMPLOYER CONTRIBUTIONS
Notwithstanding any other provision of the Plan to the contrary, the amount of
the Employer Contribution required under this Article for a Plan Year shall be
reduced by the amount of any forfeitures occurring during the Plan Year that are
not used to pay Plan expenses.
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ARTICLE VII
LIMITATIONS ON CONTRIBUTIONS
7.1 - DEFINITIONS
For purposes of this Article, the following terms have the following meanings:
(a) The "actual deferral percentage" with respect to an Eligible Employee
for a particular Plan Year means the ratio of the Tax-Deferred
Contributions made on his behalf for the Plan Year to his test
compensation for the Plan Year, except that, to the extent permitted by
regulations issued under Section 401(k) of the Code, the Sponsor may
elect to take into account in computing the numerator of each Eligible
Employee's actual deferral percentage the qualified nonelective
contributions made to the Plan on his behalf for the Plan Year;
provided, however, that contributions made on a Participant's behalf
for a Plan Year shall be included in determining his actual deferral
percentage for such Plan Year only if the contributions are made to the
Plan prior to the end of the 12-month period immediately following the
Plan Year to which the contributions relate. The determination and
treatment of the actual deferral percentage amounts for any Participant
shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury.
(b) The "aggregate limit" means the sum of (i) 125 percent of the greater
of the average contribution percentage for eligible participants other
than Highly Compensated Employees or the average actual deferral
percentage for Eligible Employees other than Highly Compensated
Employees and (ii) the lesser of 200 percent or two plus the lesser of
such average contribution percentage or average actual deferral
percentage, or, if it would result in a larger aggregate limit, the sum
of (iii) 125 percent of the lesser of the average contribution
percentage for eligible participants other than Highly Compensated
Employees or the average actual deferral percentage for Eligible
Employees other than Highly Compensated Employees and (iv) the lesser
of 200 percent or two plus the greater of such average contribution
percentage or average actual deferral percentage.
(c) The "annual addition" with respect to a Participant for a limitation
year means the sum of the Tax-Deferred Contributions, Employer
Contributions, and After-Tax Contributions allocated to his Separate
Account for the limitation year (including any excess contributions
that are distributed pursuant to this Article), the employer
contributions, employee contributions, and forfeitures allocated to his
accounts for the limitation year under any other qualified defined
contribution plan (whether or not terminated) maintained by an Employer
or a Related Company concurrently with the Plan, and amounts described
in Sections 415(l)(2) and 419A(d)(2) of the Code allocated to his
account for the limitation year.
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(d) The "Code Section 402(g) limit" means the dollar limit imposed by
Section 402(g)(1) of the Code or established by the Secretary of the
Treasury pursuant to Section 402(g)(5) of the Code in effect on January
1 of the calendar year in which an Eligible Employee's taxable year
begins.
(e) The "contribution percentage" with respect to an eligible participant
for a particular Plan Year means the ratio of the sum of the matching
contributions made to the Plan on his behalf and the After-Tax
Contributions made by him for the Plan Year to his test compensation
for such Plan Year, except that, to the extent permitted by regulations
issued under Section 401(m) of the Code, the Sponsor may elect to take
into account in computing the numerator of each eligible participant's
contribution percentage the Tax-Deferred Contributions and/or qualified
nonelective contributions made to the Plan on his behalf for the Plan
Year; provided, however, that any Tax-Deferred Contributions and/or
qualified nonelective contributions that were taken into account in
computing the numerator of an eligible participant's actual deferral
percentage may not be taken into account in computing the numerator of
his contribution percentage; and provided, further, that contributions
made by or on a Participant's behalf for a Plan Year shall be included
in determining his contribution percentage for such Plan Year only if
the contributions are made to the Plan prior to the end of the 12-month
period immediately following the Plan Year to which the contributions
relate. The determination and treatment of the contribution percentage
amounts for any Participant shall satisfy such other requirements as
may be prescribed by the Secretary of the Treasury.
(f) An "elective contribution" means any employer contribution made to a
plan maintained by an Employer or any Related Company on behalf of a
Participant in lieu of cash compensation pursuant to his written
election to defer under any qualified CODA as described in Section
401(k) of the Code, any simplified employee pension cash or deferred
arrangement as described in Section 402(h)(1)(B) of the Code, any
eligible deferred compensation plan under Section 457 of the Code, or
any plan as described in Section 501(c)(18) of the Code, and any
contribution made on behalf of the Participant by an Employer or a
Related Company for the purchase of an annuity contract under Section
403(b) of the Code pursuant to a salary reduction agreement.
(g) An "eligible participant" means any Employee who is eligible to make
After-Tax Contributions or to have Tax-Deferred Contributions made on
his behalf (if Tax-Deferred Contributions are taken into account in
computing contribution percentages) or to participate in the allocation
of matching contributions.
(h) An "excess deferral" with respect to a Participant means that portion
of a Participant's Tax-Deferred Contributions that when added to
amounts deferred under other plans or arrangements
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described in Sections 401(k), 408(k), or 403(b) of the Code, would
exceed the Code Section 402(g) limit and is includable in the
Participant's gross income under Section 402(g) of the Code.
(i) A "family member" of an Employee means the Employee's spouse, his
lineal ascendants, his lineal descendants, and the spouses of such
lineal ascendants and descendants.
(j) A "limitation year" means the Plan Year.
(k) A "matching contribution" means any employer contribution allocated to
an Eligible Employee's account under the Plan or any other plan of an
Employer or a Related Company solely on account of elective
contributions made on his behalf or employee contributions made by him.
(l) A "qualified nonelective contribution" means any employer contribution
made on behalf of a Participant that the Participant could not elect
instead to receive in cash, that is a qualified nonelective
contribution as defined in Section 401(k) and Section 401(m) of the
Code and regulations issued thereunder, is nonforfeitable when made,
and is distributable only as permitted in regulations issued under
Section 401(k) of the Code.
(m) The "test compensation" of an Eligible Employee for a Plan Year means
compensation as defined in Section 414(s) of the Code and regulations
issued thereunder, limited, however, to (1) $200,000 for Plan Years
beginning prior to January 1, 1994, or (2) $150,000 for Plan Years
beginning on or after January 1, 1994 (subject to adjustment annually
as provided in Section 401(a)(17)(B) and Section 415(d) of the Code;
provided, however, that the dollar increase in effect on January 1 of
any calendar year, if any, is effective for Plan Years beginning in
such calendar year). If the test compensation of a Participant is
determined over a period of time that contains fewer than 12 calendar
months, then the annual compensation limitation described above shall
be adjusted with respect to that Participant by multiplying the annual
compensation limitation in effect for the Plan Year by a fraction the
numerator of which is the number of full months in the period and the
denominator of which is 12; provided, however, that no proration is
required for a Participant who is covered under the Plan for less than
one full Plan Year if the formula for allocations is based on
Compensation for a period of at least 12 months. In determining the
test compensation, for purposes of applying the annual compensation
limitation described above, of a Participant who is a five percent
owner or among the ten Highly Compensated Employees receiving the
greatest test compensation for the limitation year, the test
compensation of the Participant's spouse and of his lineal descendants
who have not attained age 19 as of the close of the limitation year
shall be included as test compensation of the Participant for the
limitation year. If as a result of applying the family aggregation rule
described in the preceding sentence the
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annual compensation limitation would be exceeded, the limitation shall
be prorated among the affected family members in proportion to each
member's test compensation as determined prior to application of the
family aggregation rules.
7.2 - CODE SECTION 402(G) LIMIT
In no event shall the amount of the Tax-Deferred Contributions made on behalf of
an Eligible Employee for his taxable year, when aggregated with any elective
contributions made on behalf of the Eligible Employee under any other plan of an
Employer or a Related Company for his taxable year, exceed the Code Section
402(g) limit. In the event that the Administrator determines that the reduction
percentage elected by an Eligible Employee will result in his exceeding the Code
Section 402(g) limit, the Administrator may adjust the reduction authorization
of such Eligible Employee by reducing the percentage of his Tax-Deferred
Contributions to such smaller percentage that will result in the Code Section
402(g) limit not being exceeded. If the Administrator determines that the
Tax-Deferred Contributions made on behalf of an Eligible Employee would exceed
the Code Section 402(g) limit for his taxable year, the Tax-Deferred
Contributions for such Participant shall be automatically suspended for the
remainder, if any, of such taxable year. If an Employer notifies the
Administrator that the Code Section 402(g) limit has nevertheless been exceeded
by an Eligible Employee for his taxable year, the Tax-Deferred Contributions
that, when aggregated with elective contributions made on behalf of the Eligible
Employee under any other plan of an Employer or a Related Company, would exceed
the Code Section 402(g) limit, plus any income and minus any losses attributable
thereto, shall be distributed to the Eligible Employee no later than the April
15 immediately following such taxable year. Any Tax-Deferred Contributions that
are distributed to an Eligible Employee in accordance with this Section shall
not be taken into account in computing the Eligible Employee's actual deferral
percentage for the Plan Year in which the Tax-Deferred Contributions were made,
unless the Eligible Employee is a Highly Compensated Employee. If an amount of
Tax-Deferred Contributions is distributed to a Participant in accordance with
this Section, matching contributions that are attributable solely to the
distributed Tax-Deferred Contributions, plus any income and minus any losses
attributable thereto, shall be forfeited by the Participant. Any such forfeited
amounts shall be treated as a forfeiture under the Plan in accordance with the
provisions of Article XIV as of the last day of the month in which the
distribution of Tax-Deferred Contributions pursuant to this Section occurs.
7.3 - DISTRIBUTION OF EXCESS DEFERRALS
Notwithstanding any other provision of the Plan to the contrary, if a
Participant notifies the Administrator in writing no later than the March 1
following the close of the Participant's taxable year that excess deferrals have
been made on his behalf under the Plan for such taxable year, the excess
deferrals, plus any income and minus any losses attributable thereto, shall be
distributed to the Participant no later than the April 15
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immediately following such taxable year. Any Tax-Deferred Contributions that are
distributed to a Participant in accordance with this Section shall nevertheless
be taken into account in computing the Participant's actual deferral percentage
for the Plan Year in which the Tax-Deferred Contributions were made. If an
amount of Tax-Deferred Contributions is distributed to a Participant in
accordance with this Section, matching contributions that are attributable
solely to the distributed Tax-Deferred Contributions, plus any income and minus
any losses attributable thereto, shall be forfeited by the Participant. Any such
forfeited amounts shall be treated as a forfeiture under the Plan in accordance
with the provisions of Article XIV as of the last day of the month in which the
distribution of Tax-Deferred Contributions pursuant to this Section occurs.
7.4 - LIMITATION ON TAX-DEFERRED CONTRIBUTIONS OF HIGHLY COMPENSATED
EMPLOYEES
Notwithstanding any other provision of the Plan to the contrary, the
Tax-Deferred Contributions made with respect to a Plan Year on behalf of
Eligible Employees who are Highly Compensated Employees may not result in an
average actual deferral percentage for such Eligible Employees that exceeds the
greater of:
(a) a percentage that is equal to 125 percent of the average actual
deferral percentage for all other Eligible Employees; or
(b) a percentage that is not more than 200 percent of the average actual
deferral percentage for all other Eligible Employees and that is not
more than two percentage points higher than the average actual deferral
percentage for all other Eligible Employees.
In order to assure that the limitation contained herein is not exceeded with
respect to a Plan Year, the Administrator is authorized to suspend completely
further Tax-Deferred Contributions on behalf of Highly Compensated Employees for
any remaining portion of a Plan Year or to adjust the projected actual deferral
percentages of Highly Compensated Employees by reducing their percentage
elections with respect to Tax-Deferred Contributions for any remaining portion
of a Plan Year to such smaller percentages that will result in the limitation
set forth above not being exceeded. In the event of any such suspension or
reduction, Highly Compensated Employees affected thereby shall be notified of
the reduction or suspension as soon as possible and shall be given an
opportunity to make a new Tax-Deferred Contribution election to be effective the
first day of the next following Plan Year. In the absence of such an election,
the election in effect immediately prior to the suspension or adjustment
described above shall be reinstated as of the first day of the next following
Plan Year.
For purposes of applying the limitation contained in this Section, the
Tax-Deferred Contributions, qualified nonelective contributions (to the extent
that such qualified nonelective contributions are taken into account in
computing actual deferral percentages), and test compensation of any
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Eligible Employee who is a family member of another Eligible Employee who is a
five percent owner or among the ten Highly Compensated Employees receiving the
greatest test compensation for the Plan Year shall be aggregated with the
Tax-Deferred Contributions, qualified nonelective contributions, and test
compensation of such other Eligible Employee, and such family member shall not
be considered an Eligible Employee for purposes of determining the average
actual deferral percentage for all other Eligible Employees. In determining the
actual deferral percentage for any Eligible Employee who is a Highly Compensated
Employee for the Plan Year, elective contributions and qualified nonelective
contributions (to the extent that qualified nonelective contributions are taken
into account in computing actual deferral percentages) made to his accounts
under any other plan of an Employer or a Related Company shall be treated as if
all such contributions were made to the Plan; provided, however, that if such a
plan has a plan year different from the Plan Year, any such contributions made
to the Highly Compensated Employee's accounts under the plan for the plan year
ending with or within the same calendar year as the Plan Year shall be treated
as if such contributions were made to the Plan. Notwithstanding the foregoing,
such contributions shall not be treated as if they were made to the Plan if
regulations issued under Section 401(k) of the Code do not permit such plan to
be aggregated with the Plan.
If one or more plans of an Employer or Related Company are aggregated with the
Plan for purposes of satisfying the requirements of Section 401(a)(4) or 410(b)
of the Code, then actual deferral percentages under the Plan shall be calculated
as if the Plan and such one or more other plans were a single plan. For Plan
Years beginning after December 31, 1991, plans may be aggregated to satisfy
Section 401(k) of the Code only if they have the same plan year.
The Administrator shall maintain records sufficient to show that the limitation
contained in this Section was not exceeded with respect to any Plan Year and the
amount of the qualified nonelective contributions taken into account in
computing actual deferral percentages for any Plan Year.
7.5 - DISTRIBUTION OF EXCESS TAX-DEFERRED CONTRIBUTIONS
Notwithstanding any other provision of the Plan to the contrary, in the event
that the limitation contained in Section 7.4 is exceeded in any Plan Year, the
Tax-Deferred Contributions made with respect to a Highly Compensated Employee
that exceed the maximum amount permitted to be contributed to the Plan on his
behalf under Section 7.4, plus any income and minus any losses attributable
thereto, shall be distributed to the Highly Compensated Employee prior to the
end of the next succeeding Plan Year. If excess amounts are attributable to
Participants aggregated under the family aggregation rules described in Section
7.4, the excess shall be allocated among family members in proportion to the
Tax-Deferred Contributions made with respect to each family member. If such
excess amounts are distributed more than 2 1/2 months after the last day of the
Plan Year for which the excess occurred, an excise tax may be imposed under
Section 4979 of the Code on the Employer maintaining the Plan with respect to
such amounts.
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The maximum amount permitted to be contributed to the Plan on a Highly
Compensated Employee's behalf under Section 7.4 shall be determined by reducing
Tax-Deferred Contributions made on behalf of Highly Compensated Employees in
order of their actual deferral percentages beginning with the highest of such
percentages. The determination of the amount of excess Tax-Deferred
Contributions shall be made after application of Section 7.3, if applicable.
If an amount of Tax-Deferred Contributions is distributed to a Participant in
accordance with this Section, matching contributions that are attributable
solely to the distributed Tax-Deferred Contributions, plus any income and minus
any losses attributable thereto, shall be forfeited by the Participant. Any such
forfeited amounts shall be treated as a forfeiture under the Plan in accordance
with the provisions of Article XIV as of the last day of the month in which the
distribution of Tax-Deferred Contributions pursuant to this Section occurs.
7.6 - LIMITATION ON MATCHING CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS OF
HIGHLY COMPENSATED EMPLOYEES
Notwithstanding any other provision of the Plan to the contrary, the matching
contributions and After-Tax Contributions made with respect to a Plan Year by or
on behalf of eligible participants who are Highly Compensated Employees may not
result in an average contribution percentage for such eligible participants that
exceeds the greater of:
(a) a percentage that is equal to 125 percent of the average contribution
percentage for all other eligible participants; or
(b) a percentage that is not more than 200 percent of the average
contribution percentage for all other eligible participants and that is
not more than two percentage points higher than the average
contribution percentage for all other eligible participants.
For purposes of applying the limitation contained in this Section, the matching
contributions, After-Tax Contributions, qualified nonelective contributions and
Tax-Deferred Contributions (to the extent that such qualified nonelective
contributions and Tax-Deferred Contributions are taken into account in computing
contribution percentages), and test compensation of any eligible participant who
is a family member of another eligible participant who is a five percent owner
or among the ten Highly Compensated Employees receiving the greatest test
compensation for the Plan Year shall be aggregated with the matching
contributions, After-Tax Contributions, qualified nonelective contributions,
Tax-Deferred Contributions, and test compensation of such other eligible
participant, and such family member shall not be considered an eligible
participant for purposes of determining the average contribution percentage for
all other eligible participants.
In determining the contribution percentage for any eligible participant who is a
Highly Compensated Employee for the Plan Year, matching contributions,
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employee contributions, qualified nonelective contributions, and elective
contributions (to the extent that qualified nonelective contributions and
elective contributions are taken into account in computing contribution
percentages) made to his accounts under any other plan of an Employer or a
Related Company shall be treated as if all such contributions were made to the
Plan; provided, however, that if such a plan has a plan year different from the
Plan Year, any such contributions made to the Highly Compensated Employee's
accounts under the plan for the plan year ending with or within the same
calendar year as the Plan Year shall be treated as if such contributions were
made to the Plan. Notwithstanding the foregoing, such contributions shall not be
treated as if they were made to the Plan if regulations issued under Section
401(m) of the Code do not permit such plan to be aggregated with the Plan.
If one or more plans of an Employer or a Related Company are aggregated with the
Plan for purposes of satisfying the requirements of Section 401(a)(4) or 410(b)
of the Code, the contribution percentages under the Plan shall be calculated as
if the Plan and such one or more other plans were a single plan. For Plan Years
beginning after December 31, 1989, plans may be aggregated to satisfy Section
401(m) of the Code only if they have the same plan year.
The Administrator shall maintain records sufficient to show that the limitation
contained in this Section was not exceeded with respect to any Plan Year and the
amount of the elective contributions and qualified nonelective contributions
taken into account in computing contribution percentages for any Plan Year.
7.7 - FORFEITURE OR DISTRIBUTION OF EXCESS CONTRIBUTIONS
Notwithstanding any other provision of the Plan to the contrary, in the event
that the limitation contained in Section 7.6 is exceeded in any Plan Year, the
matching contributions and After-Tax Contributions made by or on behalf of a
Highly Compensated Employee that exceed the maximum amount permitted to be
contributed to the Plan by or on behalf of such Highly Compensated Employee
under Section 7.6, plus any income and minus any losses attributable thereto,
shall be forfeited, to the extent forfeitable, or distributed to the Participant
prior to the end of the next succeeding Plan Year as hereinafter provided. If
excess amounts are attributable to Participants aggregated under the family
aggregation rules described in Section 7.5, the excess shall be allocated among
family members in proportion to the matching contributions and After-Tax
Contributions and qualified nonelective contributions (to the extent that
qualified nonelective contributions are taken into account in computing
contribution percentages) made with respect to each family member. If such
excess amounts are distributed more than 2 1/2 months after the last day of the
Plan Year for which the excess occurred, an excise tax may be imposed under
Section 4979 of the Code on the Employer maintaining the Plan with respect to
such amounts.
The maximum amount permitted to be contributed to the Plan by or on behalf
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of a Highly Compensated Employee under Section 7.6 shall be determined by
reducing matching contributions and After-Tax Contributions made by or on behalf
of Highly Compensated Employees in order of their contribution percentages
beginning with the highest of such percentages. The distribution or forfeiture
requirement of this Section shall be satisfied by reducing contributions made by
or on behalf of the Highly Compensated Employee to the extent necessary in the
following order:
After-Tax Contributions made by the Highly Compensated Employee, if
any, shall be distributed.
Matching contributions attributable to Tax-Deferred Contributions
shall be distributed or forfeited, as appropriate.
Any amounts forfeited with respect to a Participant pursuant to this Section
shall be treated as a forfeiture under the Plan in accordance with the
provisions of Article XIV as of the last day of the month in which the
distribution of contributions pursuant to this Section occurs. The amount of
excess After-Tax Contributions of a Participant shall in all cases be
distributable; the excess matching contributions shall be distributable to the
extent the Participant has a vested interest in his Employer Contributions
Sub-Account that is attributable to matching contributions. The determination of
the amount of excess matching contributions and After-Tax Contributions shall be
made after application of Section 7.3, if applicable, and after application of
Section 7.5, if applicable.
7.8 - MULTIPLE USE LIMITATION
Notwithstanding any other provision of the Plan to the contrary, the following
multiple use limitation as required under Section 401(m) of the Code shall
apply: the sum of the average actual deferral percentage for Eligible Employees
who are Highly Compensated Employees and the average contribution percentage for
eligible participants who are Highly Compensated Employees may not exceed the
aggregate limit. In the event that, after satisfaction of Section 7.5 and
Section 7.7, it is determined that contributions under the Plan fail to satisfy
the multiple use limitation contained herein, the multiple use limitation shall
be satisfied by further reducing the actual deferral percentages of Eligible
Employees who are Highly Compensated Employees (beginning with the highest such
percentage) to the extent necessary to eliminate the excess, with such further
reductions to be treated as excess Tax-Deferred Contributions and disposed of as
provided in Section 7.5, or in an alternative manner, consistently applied, that
may be permitted by regulations issued under Section 401(m) of the Code.
7.9 - DETERMINATION OF INCOME OR LOSS
The income or loss attributable to excess contributions that are distributed
pursuant to this Article shall be determined for the preceding Plan Year under
the method otherwise used for allocating income or loss to Participant's
Separate Accounts.
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7.10 - CODE SECTION 415 LIMITATIONS ON CREDITING OF CONTRIBUTIONS AND
FORFEITURES
Notwithstanding any other provision of the Plan to the contrary, the annual
addition with respect to a Participant for a limitation year shall in no event
exceed the lesser of (i) $30,000 (adjusted as provided in Section 415(d) of the
Code, with the first adjustment being made for limitation years beginning on or
after January 1, 1996) or (ii) 25 percent of the Participant's compensation, as
defined in Section 415(c)(3) of the Code and regulations issued thereunder, for
the limitation year. If the annual addition to the Separate Account of a
Participant in any limitation year would otherwise exceed the amount that may be
applied for his benefit under the limitation contained in this Section, the
limitation shall be satisfied by reducing contributions made by or on behalf of
the Participant to the extent necessary in the following order:
After-Tax Contributions made by the Participant for the limitation
year, if any, shall be reduced.
Tax-Deferred Contributions made on the Participant's behalf for the
limitation year that have not been matched, if any, shall be
reduced.
Tax-Deferred Contributions made on the Participant's behalf for the
limitation year that have been matched and the matching
contributions attributable thereto, if any, shall be reduced pro
rata. Employer Contributions (other than matching contributions and
qualified nonelective contributions) otherwise allocable to the
Participant's Separate Account for the limitation year shall be
reduced.
Qualified nonelective contributions made on the Participant's
behalf for the limitation year shall be reduced.
The amount of any reduction of Tax-Deferred Contributions or After-Tax
Contributions (plus any income attributable thereto) shall be returned to the
Participant. The amount of any reduction of Employer Contributions shall be
deemed a forfeiture for the limitation year. Amounts deemed to be forfeitures
under this Section shall be held unallocated in a suspense account established
for the limitation year and shall be applied against the Employer's contribution
obligation for the next following limitation year (and succeeding limitation
years, as necessary). If a suspense account is in existence at any time during a
limitation year, all amounts in the suspense account must be allocated to
Participants' Separate Accounts (subject to the limitations contained herein)
before any further Tax-Deferred Contributions, Employer Contributions, or
After-Tax Contributions may be made to the Plan by or on behalf of Participants.
No suspense account established hereunder shall share in any increase or
decrease in the net worth of the Trust. For purposes of this Article,
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excesses shall result only from the allocation of forfeitures, a reasonable
error in estimating a Participant's annual compensation (as defined in Section
415(c)(3) of the Code and regulations issued thereunder), a reasonable error in
determining the amount of Tax-Deferred Contributions that may be made with
respect to any Participant under the limits of Section 415 of the Code, or other
limited facts and circumstances that justify the availability of the provisions
set forth above.
7.11 - COVERAGE UNDER OTHER QUALIFIED DEFINED CONTRIBUTION PLAN
If a Participant is covered by any other qualified defined contribution plan
(whether or not terminated) maintained by an Employer or a Related Company
concurrently with the Plan, and if the annual addition for the limitation year
would otherwise exceed the amount that may be applied for the Participant's
benefit under the limitation contained in Section 7.10, such excess shall be
reduced first by returning the employee contributions made by the Participant
for the limitation year under all of the defined contribution plans other than
the Plan and the income attributable thereto to the extent necessary. If the
limitation contained in Section 7.10 is still not satisfied after returning all
of the employee contributions made by the Participant under all such other
plans, the excess shall be reduced by returning the elective contributions made
on the Participant's behalf for the limitation year under all such other plans
and the income attributable thereto to the extent necessary on a pro rata basis
among all of such plans. If the limitation contained in Section 7.10 is still
not satisfied after returning all of the elective contributions made on the
Participant's behalf under all such other plans, the procedure set forth in
Section 7.10 shall be invoked to eliminate any such excess. If the limitation
contained in Section 7.10 is still not satisfied after invocation of the
procedure set forth in Section 7.10, the portion of the employer contributions
and of forfeitures for the limitation year under all such other plans that has
been allocated to the Participant thereunder, but which exceeds the limitation
set forth in Section 7.10, shall be deemed a forfeiture for the limitation year
and shall be disposed of as provided in such other plans; provided, however,
that if the Participant is covered by a money purchase pension plan, the
forfeiture shall be effected first under any other defined contribution plan
that is not a money purchase pension plan and, if the limitation is still not
satisfied, then under such money purchase pension plan.
7.12 - COVERAGE UNDER QUALIFIED DEFINED BENEFIT PLAN
If a Participant in the Plan is also covered by a qualified defined benefit plan
(whether or not terminated) maintained by an Employer or a Related Company, in
no event shall the sum of the defined benefit plan fraction (as defined in
Section 415(e)(2) of the Code) and the defined contribution plan fraction (as
defined in Section 415(e)(3) of the Code) exceed 1.0 in any limitation year. If,
before October 3, 1973, the Participant was an active participant in a qualified
defined benefit plan maintained by an Employer or a Related Company and
otherwise satisfies the requirements of Section 2004(d)(2) of ERISA, then for
purposes of applying this Section, the
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defined benefit plan fraction shall not exceed 1.0. In the event the special
limitation contained in this Section is exceeded, the benefits otherwise payable
to the Participant under any such qualified defined benefit plan shall be
reduced to the extent necessary to meet such limitation.
7.13 - SCOPE OF LIMITATIONS
The limitations contained in Sections 7.10, 7.11, and 7.12 shall be applicable
only with respect to benefits provided pursuant to defined contribution plans
and defined benefit plans described in Section 415(k) of the Code.
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ARTICLE VIII
TRUST FUNDS AND SEPARATE ACCOUNTS
8.1 - GENERAL FUND
The Trustee shall maintain a General Fund as required to hold and administer any
assets of the Trust that are not allocated among the Investment Funds as
provided in the Plan or the Trust Agreement. The General Fund shall be held and
administered as a separate common trust fund. The interest of each Participant
or Beneficiary under the Plan in the General Fund shall be an undivided
interest. The General Fund may be invested in whole or in part in equity
securities issued by an Employer or a Related Company that are publicly traded
and are "qualifying employer securities" as defined in Section 407(d)(5) of
ERISA.
8.2 - INVESTMENT FUNDS
The Sponsor shall determine the number and type of Investment Funds and select
the investments for such Investment Funds. The Sponsor shall communicate the
same and any changes therein in writing to the Administrator and the Trustee.
Each Investment Fund shall be held and administered as a separate common trust
fund. The interest of each Participant or Beneficiary under the Plan in any
Investment Fund shall be an undivided interest.
The Sponsor may determine to offer one or more Investment Funds that are
invested in whole or in part in equity securities issued by an Employer or a
Related Company that are publicly traded and are "qualifying employer
securities" as defined in Section 407(d)(5) of ERISA.
8.3 - LOAN INVESTMENT FUND
If a loan from the Plan to a Participant is approved in accordance with the
provisions of Article XII, the Sponsor shall direct the establishment and
maintenance of a loan Investment Fund in the Participant's name. The assets of
the loan Investment Fund shall be held as a separate trust fund. A Participant's
loan Investment Fund shall be invested in the note reflecting the loan that is
executed by the Participant in accordance with the provisions of Article XII.
Notwithstanding any other provision of the Plan to the contrary, income received
with respect to a Participant's loan Investment Fund shall be allocated and the
loan Investment Fund shall be administered as provided in Article XII.
8.4 - INCOME ON TRUST
Any dividends, interest, distributions, or other income received by the Trustee
with respect to any Trust Fund maintained hereunder shall be allocated by the
Trustee to the Trust Fund for which the income was received.
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8.5 - SEPARATE ACCOUNTS
As of the first date a contribution is made by or on behalf of an Employee,
there shall be established a Separate Account in his name reflecting his
interest in the Trust. Each Separate Account shall be maintained and
administered for each Participant and Beneficiary in accordance with the
provisions of the Plan. The balance of each Separate Account shall be the
balance of the account after all credits and charges thereto, for and as of such
date, have been made as provided herein.
8.6 - SUB-ACCOUNTS
A Participant's Separate Account shall be divided into individual Sub-Accounts
reflecting the portion of the Participant's Separate Account that is derived
from Tax-Deferred Contributions, After-Tax Contributions, Rollover
Contributions, or Employer Contributions. Each Sub-Account shall reflect
separately contributions allocated to each Trust Fund maintained hereunder and
the earnings and losses attributable thereto. The Employer Contributions
Sub-Account shall reflect separately that portion of such Sub-Account that is
derived from Employer Contributions that may be taken into account to satisfy
the limitations on contributions for Highly Compensated Employees contained in
Article VII. Such other Sub-Accounts may be established as are necessary or
appropriate to reflect a Participant's interest in the Trust.
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ARTICLE IX
LIFE INSURANCE CONTRACTS
9.1 - NO LIFE INSURANCE CONTRACTS
There shall be no life insurance contracts purchased under the Plan.
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ARTICLE X
DEPOSIT AND INVESTMENT OF CONTRIBUTIONS
10.1 - FUTURE CONTRIBUTION INVESTMENT ELECTIONS
Each Eligible Employee shall make an investment election in the manner and form
prescribed by the Administrator directing the manner in which his Tax-Deferred
Contributions, After-Tax Contributions, Rollover Contributions, and Employer
Contributions shall be invested. An Eligible Employee's investment election
shall specify the percentage, in the percentage increments prescribed by the
Administrator, of such contributions that shall be allocated to one or more of
the Investment Funds with the sum of such percentages equaling 100 percent. The
investment election by a Participant shall remain in effect until his entire
interest under the Plan is distributed or forfeited in accordance with the
provisions of the Plan or until he files a change of investment election with
the Administrator, in such form as the Administrator shall prescribe. A
Participant's change of investment election may be made effective as of the date
or dates prescribed by the Administrator.
10.2 - DEPOSIT OF CONTRIBUTIONS
All Tax-Deferred Contributions, After-Tax Contributions, Rollover Contributions,
and Employer Contributions shall be deposited in the Trust and allocated among
the Investment Funds in accordance with the Participant's currently effective
investment election; provided, however, that any contributions made to the Plan
in qualifying employer securities shall be allocated to the Employer securities
Investment Fund established by the Sponsor, pending directions to the
Administrator regarding their future investment. If no investment election is on
file with the Administrator at the time contributions are to be deposited to a
Participant's Separate Account, the Participant shall be notified and an
investment election form shall be provided to him. Until such Participant shall
make an effective election under this Section, his contributions shall be
allocated among the Investment Funds as directed by the Administrator.
10.3 - ELECTION TO TRANSFER BETWEEN FUNDS
A Participant may elect to transfer investments from any Investment Fund to any
other Investment Fund. The Participant's transfer election shall specify either
(i) a percentage, in the percentage increments prescribed by the Administrator,
of the amount eligible for transfer, which percentage may not exceed 100
percent, or (ii) a dollar amount that is to be transferred. Subject to any
restrictions pertaining to a particular Investment Fund, a Participant's
transfer election may be made effective as of the date or dates prescribed by
the Administrator.
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ARTICLE XI
CREDITING AND VALUING SEPARATE ACCOUNTS
11.1 - CREDITING SEPARATE ACCOUNTS
All contributions made under the provisions of the Plan shall be credited to
Separate Accounts in the Trust Funds by the Trustee, in accordance with
procedures established in writing by the Administrator, either when received or
on the succeeding Valuation Date after valuation of the Trust Fund has been
completed for such Valuation Date as provided in Section 11.2, as shall be
determined by the Administrator.
11.2 - VALUING SEPARATE ACCOUNTS
Separate Accounts in the Trust Funds shall be valued by the Trustee on the
Valuation Date, in accordance with procedures established in writing by the
Administrator, either in the manner adopted by the Trustee and approved by the
Administrator or in the manner set forth in Section 11.3 as Plan valuation
procedures, as determined by the Administrator.
11.3 - PLAN VALUATION PROCEDURES
With respect to the Trust Funds, the Administrator may determine that the
following valuation procedures shall be applied. As of each Valuation Date
hereunder, the portion of any Separate Accounts in a Trust Fund shall be
adjusted to reflect any increase or decrease in the value of the Trust Fund for
the period of time occurring since the immediately preceding Valuation Date for
the Trust Fund (the "valuation period") in the following manner:
(a) First, the value of the Trust Fund shall be determined by valuing all
of the assets of the Trust Fund at fair market value.
(b) Next, the net increase or decrease in the value of the Trust Fund
attributable to net income and all profits and losses, realized and
unrealized, during the valuation period shall be determined on the
basis of the valuation under paragraph (a) taking into account
appropriate adjustments for contributions, loan payments, and transfers
to and distributions, withdrawals, loans, and transfers from such Trust
Fund during the valuation period.
(c) Finally, the net increase or decrease in the value of the Trust Fund
shall be allocated among Separate Accounts in the Trust Fund in the
ratio of the balance of the portion of such Separate Account in the
Trust Fund as of the preceding Valuation Date less any distributions,
withdrawals, loans, and transfers from such Separate Account balance in
the Trust Fund since the Valuation Date to the aggregate balances of
the portions of all Separate Accounts in the Trust Fund similarly
adjusted, and each Separate Account in the Trust Fund shall be credited
or charged with the amount of its
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allocated share. Notwithstanding the foregoing, the Administrator may
adopt such accounting procedures as it considers appropriate and
equitable to establish a proportionate crediting of net increase or
decrease in the value of the Trust Fund for contributions, loan
payments, and transfers to and distributions, withdrawals, loans, and
transfers from such Trust Fund made by or on behalf of a Participant
during the valuation period.
11.4 - FINALITY OF DETERMINATIONS
The Trustee shall have exclusive responsibility for determining the balance of
each Separate Account maintained hereunder. The Trustee's determinations thereof
shall be conclusive upon all interested parties.
11.5 - NOTIFICATION
Within a reasonable period of time after the end of each Plan Year, the
Administrator shall notify each Participant and Beneficiary of the balances of
his Separate Account and Sub-Accounts as of a Valuation Date during the Plan
Year.
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ARTICLE XII
LOANS
12.1 - APPLICATION FOR LOAN
A Participant who is a party in interest may make written application to the
Administrator for a loan from his Separate Account, other than that portion of
his Separate Account attributable to Employer Contributions.
As collateral for any loan granted hereunder, the Participant shall grant to the
Plan a security interest in his vested interest under the Plan equal to the
amount of the loan; provided, however, that in no event may the security
interest exceed 50 percent of the Participant's vested interest under the Plan
determined as of the date as of which the loan is originated in accordance with
Plan provisions. In the case of a Participant who is an active employee, the
Participant also shall enter into an agreement to repay the loan by payroll
withholding. No loan in excess of 50 percent of the Participant's vested
interest under the Plan shall be made from the Plan. Loans shall not be made
available to Highly Compensated Employees in an amount greater than the amount
made available to other employees.
A loan shall not be granted unless the Participant consents in writing to the
charging of his Separate Account for unpaid principal and interest amounts in
the event the loan is declared to be in default.
12.2 - REDUCTION OF ACCOUNT UPON DISTRIBUTION
Notwithstanding any other provision of the Plan, the amount of a Participant's
Separate Account that is distributable to the Participant or his Beneficiary
under Article XIII or XV shall be reduced by the portion of his vested interest
that is held by the Plan as security for any loan outstanding to the
Participant, provided that the reduction is used to repay the loan. If
distribution is made because of the Participant's death prior to the
commencement of distribution of his Separate Account and less than 100 percent
of the Participant's vested interest in his Separate Account (determined without
regard to the preceding sentence) is payable to his surviving spouse, then the
balance of the Participant's vested interest in his Separate Account shall be
adjusted by reducing the vested account balance by the amount of the security
used to repay the loan, as provided in the preceding sentence, prior to
determining the amount of the benefit payable to the surviving spouse.
12.3 - REQUIREMENTS TO PREVENT A TAXABLE DISTRIBUTION
Notwithstanding any other provision of the Plan to the contrary, the following
terms and conditions shall apply to any loan made to a Participant under this
Article:
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(a) The interest rate on any loan to a Participant shall be a
reasonable interest rate commensurate with current interest rates
charged for loans made under similar circumstances by persons in
the business of lending money.
(b) The amount of any loan to a Participant (when added to the
outstanding balance of all other loans to the Participant from the
Plan or any other plan maintained by an Employer or a Related
Company) shall not exceed the lesser of:
(i) $50,000, reduced by the excess, if any, of the highest
outstanding balance of any other loan to the
Participant from the Plan or any other plan maintained
by an Employer or a Related Company during the
preceding 12-month period over the outstanding balance
of such loans on the date a loan is made hereunder; or
(ii) 50 percent of the vested portions of the Participant's
Separate Account and his vested interest under all
other plans maintained by an Employer or a Related
Company.
(c) The term of any loan to a Participant shall be no greater than five
years, except in the case of a loan used to acquire any dwelling
unit which within a reasonable period of time is to be used
(determined at the time the loan is made) as a principal residence
of the Participant.
(d) Except as otherwise permitted under Treasury regulations,
substantially level amortization shall be required over the term of
the loan with payments made not less frequently than quarterly.
12.4 - ADMINISTRATION OF LOAN INVESTMENT FUND
Upon approval of a loan to a Participant, the Administrator shall direct the
Trustee to transfer an amount equal to the loan amount from the Investment Funds
in which it is invested, as directed by the Administrator, to the loan
Investment Fund established in the Participant's name. Any loan approved by the
Administrator shall be made to the Participant out of the Participant's loan
Investment Fund. All principal and interest paid by the Participant on a loan
made under this Article shall be deposited to his Separate Account and shall be
allocated upon receipt among the Investment Funds in accordance with the
Participant's currently effective investment election. The balance of the
Participant's loan Investment Fund shall be decreased by the amount of principal
payments and the loan Investment Fund shall be terminated when the loan has been
repaid in full.
12.5 - DEFAULT
If a Participant fails to make or cause to be made, any payment required under
the terms of the loan within 90 days following the date on which such payment
shall become due or there is an outstanding principal balance
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existing on a loan after the last scheduled repayment date, the Administrator
shall direct the Trustee to declare the loan to be in default, and the entire
unpaid balance of such loan, together with accrued interest, shall be
immediately due and payable. In any such event, if such balance and interest
thereon is not then paid, the Trustee shall charge the Separate Account of the
borrower with the amount of such balance and interest as of the earliest date a
distribution may be made from the Plan to the borrower without adversely
affecting the tax qualification of the Plan or of the cash or deferred
arrangement.
12.6 - SPECIAL RULES APPLICABLE TO LOANS
Any loan made hereunder shall be subject to the following rules:
(a) Loans limited to Eligible Employees: No loans shall be made to an
Employee who makes a Rollover Contribution in accordance with
Article V, but who is not an Eligible Employee as provided in
Article III.
(b) Minimum Loan Amount: A Participant may not request a loan for less
than $1,000.
(c) Maximum Number of Outstanding Loans: A Participant with an
outstanding loan may not apply for another loan until the existing
loan is paid in full and may not refinance an existing loan or
attain a second loan for the purpose of paying off the existing
loan. A Participant may not apply for more than one loan during the
Plan Year. The provisions of this paragraph shall not apply to any
loans made prior to the effective date of this amendment and
restatement; provided, however, that a Participant may not apply
for a new loan hereunder until all outstanding loans made to the
Participant prior to the effective date of this amendment and
restatement have been paid in full.
(d) Maximum Period for Real Estate Loans: The term of any loan to a
Participant that is used to acquire any dwelling unit which within
a reasonable period of time is to be used (determined at the time
the loan is made) as a principal residence of the Participant shall
be no greater than ten years.
(e) Pre-Payment Without Penalty: A Participant may pre-pay the balance
of any loan hereunder prior to the date it is due without penalty.
(f) Effect of Termination of Employment: Upon a Participant's
termination of employment, the balance of any outstanding loan
hereunder shall immediately become due and owing.
12.7 - LOANS GRANTED PRIOR TO AMENDMENT
Notwithstanding any other provision of this Article to the contrary, any loan
made under the provisions of the Plan as in effect prior to this amendment and
restatement shall remain outstanding until repaid in accordance with its terms
or the otherwise applicable Plan provisions.
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ARTICLE XIII
WITHDRAWALS WHILE EMPLOYED
13.1 - WITHDRAWALS OF AFTER-TAX CONTRIBUTIONS
A Participant who is employed by an Employer or a Related Company may elect in
writing, subject to the limitations and conditions prescribed in this Article,
to make a cash withdrawal from his After-Tax Contributions Sub-Account.
13.2 - WITHDRAWALS OF ROLLOVER CONTRIBUTIONS
A Participant who is employed by an Employer or a Related Company and has
attained age 59 1/2, has been a Participant under the Plan for 60 or more months
or is determined by the Administrator to have incurred a hardship as defined in
this Article may elect in writing, subject to the limitations and conditions
prescribed in this Article, to make a cash withdrawal from his Rollover
Contributions Sub-Account. In addition, a Participant who is employed by an
Employer or a Related Company may elect in writing, subject to the limitations
and conditions prescribed in this Article, to make a withdrawal from amounts
that have been credited to his Rollover Contributions Sub-Account for a period
of two or more years.
13.3 - WITHDRAWALS OF EMPLOYER CONTRIBUTIONS
A Participant who is employed by an Employer or a Related Company and has
attained age 59 1/2 may elect in writing, subject to the limitations and
conditions prescribed in this Article to make a cash withdrawal from his vested
interest in his Employer Contributions Sub-Account. The maximum amount that a
Participant may withdraw pursuant to this Section shall be an amount ("X")
determined by the following formula:
X = P(AB + D) - D
For purposes of the formula:
P = The Participant's vested interest in his Employer
Contributions Sub-Account on the date distribution is
to be made.
AB = The balance of the Participant's Employer
Contributions Sub-Account as of the Valuation Date
immediately preceding the date distribution is to be
made.
D = The amount of all prior withdrawals from the
Participant's Employer Contributions Sub-Account made
pursuant to this Section.
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13.4 - WITHDRAWALS OF TAX-DEFERRED CONTRIBUTIONS
A Participant who is employed by an Employer or a Related Company and who has
attained age 59 1/2 or is determined by the Administrator to have incurred a
hardship as defined in this Article may elect in writing, subject to the
limitations and conditions prescribed in this Article, to make a cash withdrawal
from his Tax-Deferred Contributions Sub-Account. The maximum amount that a
Participant may withdraw pursuant to this Section because of a hardship is the
balance of his Tax-Deferred Contributions Sub-Account, exclusive of any earnings
credited to such Sub-Account.
13.5 - LIMITATIONS ON WITHDRAWALS OTHER THAN HARDSHIP WITHDRAWALS
Withdrawals made pursuant to this Article, other than hardship withdrawals,
shall be subject to the following conditions and limitations:
A Participant must file a written withdrawal application with the
Administrator such number of days prior to the date as of which it
is to be effective as the Administrator shall prescribe.
Withdrawals may be made effective as soon as reasonably practicable
following the Administrator's receipt of the Participant's
directions.
A Participant who makes a withdrawal from his After-Tax
Contributions Sub-Account may not make a further withdrawal of
After-Tax Contributions under this Article during the remainder of
the Plan Year in which the withdrawal is effective.
13.6 - CONDITIONS AND LIMITATIONS ON HARDSHIP WITHDRAWALS
A Participant must file a written application for a hardship withdrawal with the
Administrator such number of days prior to the date as of which it is to be
effective as the Administrator may prescribe. Hardship withdrawals may be made
effective as soon as reasonably practicable following the Administrator's
receipt of the Participant's directions. The Administrator shall grant a
hardship withdrawal only if it determines that the withdrawal is necessary to
meet an immediate and heavy financial need of the Participant. An immediate and
heavy financial need of the Participant means a financial need on account of:
(a) expenses previously incurred by or necessary to obtain for the
Participant, the Participant's spouse, or any dependent of the
Participant (as defined in Section 152 of the Code) medical care
described in Section 213(d) of the Code;
(b) costs directly related to the purchase (excluding mortgage
payments) of a principal residence for the Participant;
(c) payment of tuition, related educational fees, and room and board
expenses for the next 12 months of post-secondary education for the
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Participant, the Participant's spouse, or any dependent of the
Participant; or
(d) the need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
A withdrawal shall be deemed to be necessary to satisfy an immediate and heavy
financial need of a Participant only if all of the following requirements are
satisfied:
The withdrawal is not in excess of the amount of the immediate and
heavy financial need of the Participant.
The Participant has obtained all distributions, other than hardship
distributions, and all non-taxable loans currently available under
all plans maintained by an Employer or any Related Company.
The Participant's Tax-Deferred Contributions and After-Tax
Contributions and the Participant's elective tax-deferred
contributions and employee after-tax contributions under all other
tax-qualified plans maintained by an Employer or any Related
Company shall be suspended for at least twelve months after his
receipt of the withdrawal.
The Participant shall not make Tax-Deferred Contributions or
elective tax-deferred contributions under any other tax-qualified
plan maintained by an Employer or any Related Company for the
Participant's taxable year immediately following the taxable year
of the withdrawal in excess of the applicable limit under Section
402(g) of the Code for such next taxable year less the amount of
the Participant's Tax-Deferred Contributions and elective
tax-deferred contributions under any other plan maintained by an
Employer or any Related Company for the taxable year of the
withdrawal.
The minimum hardship withdrawal that a Participant may make is $1,000. The
amount of a hardship withdrawal may include any amounts necessary to pay any
Federal, state, or local income taxes or penalties reasonably anticipated to
result from the distribution. A Participant shall not fail to be treated as an
Eligible Employee for purposes of applying the limitations contained in Article
VII of the Plan merely because his Tax-Deferred Contributions are suspended in
accordance with this Section.
13.7 - ORDER OF WITHDRAWAL FROM A PARTICIPANT'S SUB-ACCOUNTS
Distribution of a withdrawal amount shall be made from a Participant's
Sub-Accounts, to the extent necessary, in the order prescribed by the
Administrator, which order shall be uniform with respect to all Participants and
non-discriminatory. If the Sub-Account from which a Participant is receiving a
withdrawal is invested in more than one Investment Fund, the withdrawal shall be
charged against the Investment Funds as directed by the Administrator.
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ARTICLE XIV
TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
14.1 - TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
A Participant's Settlement Date shall occur on the date he terminates employment
with an Employer and all Related Companies because of death, disability,
retirement, or other termination of employment. Written notice of a
Participant's Settlement Date shall be given by the Administrator to the
Trustee.
14.2 - SEPARATE ACCOUNTING FOR NON-VESTED AMOUNTS
If as of a Participant's Settlement Date the Participant's vested interest in
his Employer Contributions Sub-Account is less than 100 percent, that portion of
his Employer Contributions Sub-Account that is not vested shall be accounted for
separately from the vested portion and shall be disposed of as provided in the
following Section. If prior to his Settlement Date such a Participant made a
withdrawal in accordance with the provisions of Article XIII, the vested portion
of his Employer Contributions Sub-Account shall be equal to the maximum
withdrawable amount as determined under Article XIII.
14.3 - DISPOSITION OF NON-VESTED AMOUNTS
That portion of a Participant's Employer Contributions Sub-Account that is not
vested upon the occurrence of his Settlement Date shall be disposed of as
follows:
(a) If the Participant has no vested interest in his Separate Account
upon the occurrence of his Settlement Date or his vested interest
in his Separate Account as of the date of distribution does not
exceed $3,500 resulting in the Participant's receipt of a single
sum payment of such vested interest, the non-vested balance
remaining in the Participant's Employer Contributions Sub-Account
will be forfeited and his Separate Account closed as of (i) the
Participant's Settlement Date, if the Participant has no vested
interest in his Separate Account, or (ii) the date the single sum
payment occurs.
(b) If the Participant's vested interest in his Separate Account
exceeds $3,500 and the Participant is eligible for and consents in
writing to a single sum payment of his vested interest in his
Separate Account, the non-vested balance remaining in the
Participant's Employer Contributions Sub-Account will be forfeited
and his Separate Account closed as of the date the single sum
payment occurs, provided that such distribution occurs prior to the
end of the second Plan Year beginning on or after the Participant's
Settlement Date.
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(c) If neither paragraph (a) nor paragraph (b) is applicable, the
non-vested portion of the Participant's Employer Contributions
Sub-Account will continue to be held in such Sub-Account and will
not be forfeited until the end of the five-year period beginning on
his Settlement Date.
Whenever the non-vested portion of a Participant's Employer Contributions
Sub-Account is forfeited under the provisions of the Plan with respect to a Plan
Year, the amount of such forfeiture, as of the last day of the Plan Year, shall
be applied first against Plan expenses and then against the Employer
Contribution obligations for the Plan Year in which the forfeiture occurs.
Notwithstanding the foregoing, however, should the amount of all such
forfeitures for any Plan Year with respect to any Employer exceed the amount of
such Employer's Employer Contribution obligation for the Plan Year, the excess
amount of such forfeitures shall be held unallocated in a suspense account
established with respect to the Employer and shall for all Plan purposes be
applied against the Employer's Employer Contribution obligations for the
following Plan Year.
14.4 - RECREDITING OF FORFEITED AMOUNTS
A former Participant who forfeited the non-vested portion of his Employer
Contributions Sub-Account in accordance with the provisions of this Article and
who is reemployed by an Employer or a Related Company shall have such forfeited
amounts recredited to a new Separate Account in his name, without adjustment for
interim gains or losses experienced by the Trust, if:
(a) he returns to employment with an Employer or a Related Company
before the end of the five-year period beginning on the later of
his Settlement Date or the date he received distribution of his
vested interest in his Separate Account;
(b) he resumes employment covered under the Plan before the end of the
five-year period beginning on the date he is reemployed; and
(c) if he received distribution of his vested interest in his Separate
Account, he repays to the Plan the full amount of such distribution
before the end of the five-year period beginning on the date he is
reemployed.
Funds needed in any Plan Year to recredit the Separate Account of a Participant
with the amounts of prior forfeitures in accordance with the preceding sentence
shall come first from forfeitures that arise during such Plan Year, and then
from Trust income earned in such Plan Year, with each Trust Fund being charged
with the amount of such income proportionately, unless his Employer chooses to
make an additional Employer Contribution, and shall finally be provided by his
Employer by way of a separate Employer Contribution.
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ARTICLE XV
DISTRIBUTIONS
15.1 - DISTRIBUTIONS TO PARTICIPANTS
A Participant whose Settlement Date occurs shall receive distribution of his
vested interest in his Separate Account in the form provided under Article XVI
beginning as soon as reasonably practicable following his Settlement Date or the
date his application for distribution is filed with the Administrator, if later.
In addition, a Participant who continues in employment with an Employer or a
Related Company after his Normal Retirement Date may elect to receive
distribution of all or any portion of his Separate Account in the form provided
under Article XVI at any time following his Normal Retirement Date.
15.2 - DISTRIBUTIONS TO BENEFICIARIES
If a Participant dies prior to the date distribution of his vested interest in
his Separate Account begins under this Article, his Beneficiary shall receive
distribution of the Participant's vested interest in his Separate Account in the
form provided under Article XVI beginning as soon as reasonably practicable
following the date the Beneficiary's application for distribution is filed with
the Administrator. Unless distribution is to be made over the life or over a
period certain not greater than the life expectancy of the Beneficiary,
distribution of the Participant's entire vested interest shall be made to the
Beneficiary no later than the end of the fifth calendar year beginning after the
Participant's death. If distribution is to be made over the life or over a
period certain no greater than the life expectancy of the Beneficiary,
distribution shall commence no later than:
(a) If the Beneficiary is not the Participant's spouse, the end of the
first calendar year beginning after the Participant's death; or
(b) If the Beneficiary is the Participant's spouse, the later of (i)
the end of the first calendar year beginning after the
Participant's death or (ii) the end of the calendar year in which
the Participant would have attained age 70 1/2.
If distribution is to be made to a Participant's spouse, it shall be made
available within a reasonable period of time after the Participant's death that
is no less favorable than the period of time applicable to other distributions.
If a Participant dies after the date distribution of his vested interest in his
Separate Account begins under this Article, but before his entire vested
interest in his Separate Account is distributed, his Beneficiary shall receive
distribution of the remainder of the Participant's vested interest in his
Separate Account beginning as soon as reasonably practicable following the
Participant's date of death in a form that provides for distribution at least as
rapidly as under the form in which the Participant was receiving distribution.
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15.3 - CASH OUTS AND PARTICIPANT CONSENT
Notwithstanding any other provision of the Plan to the contrary, if a
Participant's vested interest in his Separate Account does not exceed $3,500,
distribution of such vested interest shall be made to the Participant in a
single sum payment as soon as reasonably practicable following his Settlement
Date. If a Participant's vested interest in his Separate Account is $0, he shall
be deemed to have received distribution of such vested interest as of his
Settlement Date. If a Participant's vested interest in his Separate Account
exceeds $3,500, distribution shall not commence to such Participant prior to his
Normal Retirement Date without the Participant's written consent. If at the time
of a distribution or deemed distribution to a Participant from his Separate
Account, the Participant's vested interest in his Separate Account exceeded
$3,500, then for purposes of this Section, the Participant's vested interest in
his Separate Account on any subsequent date shall be deemed to exceed $3,500.
15.4 - REQUIRED COMMENCEMENT OF DISTRIBUTION
Notwithstanding any other provision of the Plan to the contrary, distribution of
a Participant's vested interest in his Separate Account shall commence to the
Participant no later than the earlier of:
(a) 60 days after the close of the Plan Year in which (i) the
Participant's Normal Retirement Date occurs, (ii) the 10th
anniversary of the year in which he commenced participation in the
Plan occurs, or (iii) his Settlement Date occurs, whichever is
latest; or
(b) the April 1 following the close of the calendar year in which he
attains age 70 1/2, whether or not his Settlement Date has
occurred, except that if a Participant attained age 70 1/2 prior to
January 1, 1988, and was not a five-percent owner (as defined in
Section 416 of the Code) at any time during the five-Plan-Year
period ending within the calendar year in which he attained age 70
1/2, distribution of such Participant's vested interest in his
Separate Account shall commence no later than the April 1 following
the close of the calendar year in which he attains age 70 1/2 or
retires, whichever is later.
Distributions required to commence under this Section shall be made in the form
provided under Article XVI and in accordance with Section 401(a)(9) of the Code
and regulations issued thereunder, including the minimum distribution incidental
benefit requirements.
15.5 - REEMPLOYMENT OF A PARTICIPANT
If a Participant whose Settlement Date has occurred is reemployed by an Employer
or a Related Company, he shall lose his right to any distribution or further
distributions from the Trust arising from his prior Settlement Date and his
interest in the Trust shall thereafter be treated in the same manner as that of
any other Participant whose Settlement Date has not occurred.
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15.6 - RESTRICTIONS ON ALIENATION
Except as provided in Section 401(a)(13) of the Code relating to qualified
domestic relations orders and Section 1.401(a)-13(b)(2) of Treasury regulations
relating to Federal tax levies and judgments, no benefit under the Plan at any
time shall be subject in any manner to anticipation, alienation, assignment
(either at law or in equity), encumbrance, garnishment, levy, execution, or
other legal or equitable process; and no person shall have power in any manner
to anticipate, transfer, assign (either at law or in equity), alienate or
subject to attachment, garnishment, levy, execution, or other legal or equitable
process, or in any way encumber his benefits under the Plan, or any part
thereof, and any attempt to do so shall be void.
15.7 - FACILITY OF PAYMENT
If the Administrator finds that any individual to whom an amount is payable
hereunder is incapable of attending to his financial affairs because of any
mental or physical condition, including the infirmities of advanced age, such
amount (unless prior claim therefor shall have been made by a duly qualified
guardian or other legal representative) may, in the discretion of the
Administrator, be paid to another person for the use or benefit of the
individual found incapable of attending to his financial affairs or in
satisfaction of legal obligations incurred by or on behalf of such individual.
The Trustee shall make such payment only upon receipt of written instructions to
such effect from the Administrator. Any such payment shall be charged to the
Separate Account from which any such payment would otherwise have been paid to
the individual found incapable of attending to his financial affairs and shall
be a complete discharge of any liability therefor under the Plan.
15.8 - INABILITY TO LOCATE PAYEE
If any benefit becomes payable to any person, or to the executor or
administrator of any deceased person, and if that person or his executor or
administrator does not present himself to the Administrator within a reasonable
period after the Administrator mails written notice of his eligibility to
receive a distribution hereunder to his last known address and makes such other
diligent effort to locate the person as the Administrator determines, that
benefit will be forfeited. However, if the payee later files a claim for that
benefit, the benefit will be restored.
15.9 - DISTRIBUTION PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS
Notwithstanding any other provision of the Plan to the contrary, if a qualified
domestic relations order so provides, distribution may be made to an alternate
payee pursuant to a qualified domestic relations order, as defined in Section
414(p) of the Code, regardless of whether the Participant's Settlement Date has
occurred or whether the Participant is otherwise entitled to receive a
distribution under the Plan.
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ARTICLE XVI
FORM OF PAYMENT
16.1 - FORM OF PAYMENT
Distribution shall be made to a Participant, or his Beneficiary, if the
Participant has died, in a single sum payment. Notwithstanding the foregoing, if
a Participant continues in employment with an Employer or a Related Company
after the date as of which distribution of his vested interest must commence in
accordance with the requirements of Section 401(a)(9) of the Code, such
Participant may elect to receive distribution in periodic payments, made not
less frequently than annually, equal to the minimum amount necessary to satisfy
the distribution requirements of Section 401(a)(9) of the Code and regulations
issued thereunder for the remainder of the period that he continues in
employment with an Employer or a Related Company. Distribution of the fair
market value of the Participant's Separate Account shall be made in cash or in
kind, as elected by the Participant, except that distribution shall not be made
in Employer stock.
16.2 - DIRECT ROLLOVER
Notwithstanding any other provision of the Plan to the contrary, in lieu of
receiving distribution in the form of payment provided under this Article, a
"qualified distributee" may elect in writing, in accordance with rules
prescribed by the Administrator, to have any portion or all of a distribution
made on or after January 1, 1993, that is an "eligible rollover distribution"
paid directly by the Plan to the "eligible retirement plan" designated by the
"qualified distributee"; provided, however, that this provision shall not apply
if the total distribution is less than $200 and that a "qualified distributee"
may not elect this provision with respect to a portion of a distribution that is
less than $500. Any such payment by the Plan to another "eligible retirement
plan" shall be a direct rollover. For purposes of this Section, the following
terms have the following meanings:
(a) An "eligible retirement plan" means an individual retirement
account described in Section 408(a) of the Code, an individual
retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a
qualified trust described in Section 401(a) of the Code that
accepts rollovers; provided, however, that, in the case of a direct
rollover by a surviving spouse, an eligible retirement plan does
not include a qualified trust described in Section 401(a) of the
Code.
(b) An "eligible rollover distribution" means any distribution of all
or any portion of the balance of a Participant's Separate Account;
provided, however, that an eligible rollover distribution does not
include: any distribution to the extent such distribution is
required under Section 401(a)(9) of the Code; and the portion of
any distribution that consists of the Participant's After-Tax
Contributions.
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(c) A "qualified distributee" means a Participant, his surviving
spouse, or his spouse or former spouse who is an alternate payee
under a qualified domestic relations order, as defined in Section
414(p) of the Code.
16.3 - NOTICE REGARDING FORM OF PAYMENT
Within the 60 day period ending 30 days before the date as of which distribution
of a Participant's Separate Account commences, the Administrator shall provide
the Participant with a written explanation of his right to defer distribution
until his Normal Retirement Date, or such later date as may be provided in the
Plan, his right to make a direct rollover, and the form of payment provided
under the Plan. Distribution of the Participant's Separate Account may commence
less than 30 days after such notice is provided to the Participant if (i) the
Administrator clearly informs the Participant of his right to consider his
election of whether or not to make a direct rollover or to receive a
distribution prior to his Normal Retirement Date for a period of at least 30
days following his receipt of the notice and (ii) the Participant, after
receiving the notice, affirmatively elects an early distribution.
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ARTICLE XVII
BENEFICIARIES
17.1 - DESIGNATION OF BENEFICIARY
A married Participant's Beneficiary shall be his spouse, unless the Participant
designates a person or persons other than his spouse as Beneficiary with his
spouse's written consent. A Participant may designate a Beneficiary on the form
prescribed by the Administrator. If no Beneficiary has been designated pursuant
to the provisions of this Section, or if no Beneficiary survives the Participant
and he has no surviving spouse, then the Beneficiary under the Plan shall be the
Participant's estate. If a Beneficiary dies after becoming entitled to receive a
distribution under the Plan but before distribution is made to him in full, and
if no other Beneficiary has been designated to receive the balance of the
distribution in that event, the estate of the deceased Beneficiary shall be the
Beneficiary as to the balance of the distribution.
17.2 - SPOUSAL CONSENT REQUIREMENTS
Any written spousal consent given pursuant to this Article must acknowledge the
effect of the action taken and must be witnessed by a Plan representative or a
notary public. In addition, the spouse's written consent must either (i) specify
any non-spouse Beneficiary designated by the Participant and that such
Beneficiary may not be changed without written spousal consent or (ii)
acknowledge that the spouse has the right to limit consent to a specific
Beneficiary, but permit the Participant to change the designated Beneficiary
without the spouse's further consent. A Participant's spouse will be deemed to
have given written consent to the Participant's designation of Beneficiary if
the Participant establishes to the satisfaction of a Plan representative that
such consent cannot be obtained because the spouse cannot be located or because
of other circumstances set forth in Section 401(a)(11) of the Code and
regulations issued thereunder. Any written consent given or deemed to have been
given by a Participant's spouse hereunder shall be valid only with respect to
the spouse who signs the consent.
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ARTICLE XVIII
ADMINISTRATION
18.1 - AUTHORITY OF THE SPONSOR
The Sponsor, which shall be the administrator for purposes of ERISA and the plan
administrator for purposes of the Code, shall be responsible for the
administration of the Plan and, in addition to the powers and authorities
expressly conferred upon it in the Plan, shall have all such powers and
authorities as may be necessary to carry out the provisions of the Plan,
including the power and authority to interpret and construe the provisions of
the Plan, to make benefit determinations, and to resolve any disputes which
arise under the Plan. The Sponsor may employ such attorneys, agents, and
accountants as it may deem necessary or advisable to assist in carrying out its
duties hereunder. The Sponsor shall be a "named fiduciary" as that term is
defined in Section 402(a)(2) of ERISA. The Sponsor may:
(a) allocate any of the powers, authority, or responsibilities for the
operation and administration of the Plan (other than trustee
responsibilities as defined in Section 405(c)(3) of ERISA) among
named fiduciaries; and
(b) designate a person or persons other than a named fiduciary to carry
out any of such powers, authority, or responsibilities;
except that no allocation by the Sponsor of, or designation by the Sponsor with
respect to, any of such powers, authority, or responsibilities to another named
fiduciary or a person other than a named fiduciary shall become effective unless
such allocation or designation shall first be accepted by such named fiduciary
or other person in a writing signed by it and delivered to the Sponsor.
18.2 - ACTION OF THE SPONSOR
Any act authorized, permitted, or required to be taken under the Plan by the
Sponsor and which has not been delegated in accordance with Section 18.1, may be
taken by a majority of the members of the board of directors of the Sponsor,
either by vote at a meeting, or in writing without a meeting, or by the employee
or employees of the Sponsor designated by the board of directors to carry out
such acts on behalf of the Sponsor. All notices, advice, directions,
certifications, approvals, and instructions required or authorized to be given
by the Sponsor as under the Plan shall be in writing and signed by either (i) a
majority of the members of the board of directors of the Sponsor or by such
member or members as may be designated by an instrument in writing, signed by
all the members thereof, as having authority to execute such documents on its
behalf, or (ii) the employee or employees authorized to act for the Sponsor in
accordance with the provisions of this Section.
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18.3 - CLAIMS REVIEW PROCEDURE
Whenever a claim for benefits under the Plan filed by any person (herein
referred to as the "Claimant") is denied, whether in whole or in part, the
Sponsor shall transmit a written notice of such decision to the Claimant within
90 days of the date the claim was filed or, if special circumstances require an
extension, within 180 days of such date, which notice shall be written in a
manner calculated to be understood by the Claimant and shall contain a statement
of (i) the specific reasons for the denial of the claim, (ii) specific reference
to pertinent Plan provisions on which the denial is based, and (iii) a
description of any additional material or information necessary for the Claimant
to perfect the claim and an explanation of why such information is necessary.
The notice shall also include a statement advising the Claimant that, within 60
days of the date on which he receives such notice, he may obtain review of such
decision in accordance with the procedures hereinafter set forth. Within such
60-day period, the Claimant or his authorized representative may request that
the claim denial be reviewed by filing with the Sponsor a written request
therefor, which request shall contain the following information:
(a) the date on which the Claimant's request was filed with the
Sponsor; provided, however, that the date on which the Claimant's
request for review was in fact filed with the Sponsor shall control
in the event that the date of the actual filing is later than the
date stated by the Claimant pursuant to this paragraph;
(b) the specific portions of the denial of his claim which the Claimant
requests the Sponsor to review;
(c) a statement by the Claimant setting forth the basis upon which he
believes the Sponsor should reverse the previous denial of his
claim for benefits and accept his claim as made; and
(d) any written material (offered as exhibits) which the Claimant
desires the Sponsor to examine in its consideration of his position
as stated pursuant to paragraph (c) of this Section.
Within 60 days of the date determined pursuant to paragraph (a) of this Section
or, if special circumstances require an extension, within 120 days of such date,
the Sponsor shall conduct a full and fair review of the decision denying the
Claimant's claim for benefits and shall render its written decision on review to
the Claimant. The Sponsor's decision on review shall be written in a manner
calculated to be understood by the Claimant and shall specify the reasons and
Plan provisions upon which the Sponsor's decision was based.
18.4 - QUALIFIED DOMESTIC RELATIONS ORDERS
The Sponsor shall establish reasonable procedures to determine the status of
domestic relations orders and to administer distributions under domestic
relations orders which are deemed to be qualified orders. Such procedures shall
be in writing and shall comply with the provisions of Section 414(p) of the Code
and regulations issued thereunder.
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18.5 - INDEMNIFICATION
In addition to whatever rights of indemnification the members of the board of
directors of the Sponsor or any employee or employees of the Sponsor to whom any
power, authority, or responsibility is delegated pursuant to Section 18.2, may
be entitled under the articles of incorporation or regulations of the Sponsor,
under any provision of law, or under any other agreement, the Sponsor shall
satisfy any liability actually and reasonably incurred by any such person or
persons, including expenses, attorneys' fees, judgments, fines, and amounts paid
in settlement (other than amounts paid in settlement not approved by the
Sponsor), in connection with any threatened, pending or completed action, suit,
or proceeding which is related to the exercising or failure to exercise by such
person or persons of any of the powers, authority, responsibilities, or
discretion as provided under the Plan, or reasonably believed by such person or
persons to be provided hereunder, and any action taken by such person or persons
in connection therewith, unless the same is judicially determined to be the
result of such person or persons' gross negligence or willful misconduct.
18.6 - ACTIONS BINDING
Subject to the provisions of Section 18.3, any action taken by the Sponsor which
is authorized, permitted, or required under the Plan shall be final and binding
upon the Employers, the Trustee, all persons who have or who claim an interest
under the Plan, and all third parties dealing with the Employers or the Trustee.
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ARTICLE XIX
AMENDMENT AND TERMINATION
19.1 - AMENDMENT
Subject to the provisions of Section 19.2, the Sponsor may at any time and from
time to time, by action of its board of directors, or such officers of the
Sponsor as are authorized by its board of directors, amend the Plan, either
prospectively or retroactively. Any such amendment shall be by written
instrument executed by the Sponsor.
19.2 - LIMITATION ON AMENDMENT
The Sponsor shall make no amendment to the Plan which shall decrease the accrued
benefit of any Participant or Beneficiary, except that nothing contained herein
shall restrict the right to amend the provisions of the Plan relating to the
administration of the Plan and Trust. Moreover, no such amendment shall be made
hereunder which shall permit any part of the Trust to revert to an Employer or
any Related Company or be used or be diverted to purposes other than the
exclusive benefit of Participants and Beneficiaries.
19.3 - TERMINATION
The Sponsor reserves the right, by action of its board of directors, to
terminate the Plan as to all Employers at any time (the effective date of such
termination being hereinafter referred to as the "termination date"). Upon any
such termination of the Plan, the following actions shall be taken for the
benefit of Participants and Beneficiaries:
(a) As of the termination date, each Investment Fund shall be valued
and all Separate Accounts and Sub-Accounts shall be adjusted in the
manner provided in Article XI, with any unallocated contributions
or forfeitures being allocated as of the termination date in the
manner otherwise provided in the Plan. The termination date shall
become a Valuation Date for purposes of Article XI. In determining
the net worth of the Trust, there shall be included as a liability
such amounts as shall be necessary to pay all expenses in
connection with the termination of the Trust and the liquidation
and distribution of the property of the Trust, as well as other
expenses, whether or not accrued, and shall include as an asset all
accrued income.
(b) All Separate Accounts shall then be disposed of to or for the
benefit of each Participant or Beneficiary in accordance with the
provisions of Article XV as if the termination date were his
Settlement Date; provided, however, that notwithstanding the
provisions of Article XV, if the Plan does not offer an annuity
option and if neither his Employer nor a Related Company
establishes or maintains another defined contribution plan (other
than an employee stock ownership plan as defined in Section
4975(e)(7) of
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the Code), the Participant's written consent to the commencement of
distribution shall not be required regardless of the value of the
vested portions of his Separate Account.
(c) Notwithstanding the provisions of paragraph (b) of this Section, no
distribution shall be made to a Participant of any portion of the
balance of his Tax-Deferred Contributions Sub-Account prior to his
separation from service (other than a distribution made in
accordance with Article XIII or required in accordance with Section
401(a)(9) of the Code) unless (i) neither his Employer nor a
Related Company establishes or maintains another defined
contribution plan (other than an employee stock ownership plan as
defined in Section 4975(e)(7) of the Code, a tax credit employee
stock ownership plan as defined in Section 409 of the Code, or a
simplified employee pension as defined in Section 408(k) of the
Code) either at the time the Plan is terminated or at any time
during the period ending 12 months after distribution of all assets
from the Plan; provided, however, that this provision shall not
apply if fewer than two percent of the Eligible Employees under the
Plan were eligible to participate at any time in such other defined
contribution plan during the 24-month period beginning 12 months
before the Plan termination, and (ii) the distribution the
Participant receives is a "lump sum distribution" as defined in
Section 402(e)(4) of the Code, without regard to clauses (i), (ii),
(iii), and (iv) of sub-paragraph (A), sub-paragraph (B), or
sub-paragraph (H) thereof.
Notwithstanding anything to the contrary contained in the Plan, upon any such
Plan termination, the vested interest of each Participant and Beneficiary in his
Employer Contributions Sub-Account shall be 100 percent; and, if there is a
partial termination of the Plan, the vested interest of each Participant and
Beneficiary who is affected by the partial termination in his Employer
Contributions Sub-Account shall be 100 percent. For purposes of the preceding
sentence only, the Plan shall be deemed to terminate automatically if there
shall be a complete discontinuance of contributions hereunder by all Employers.
19.4 - REORGANIZATION
The merger, consolidation, or liquidation of any Employer with or into any other
Employer or a Related Company shall not constitute a termination of the Plan as
to such Employer. If an Employer disposes of substantially all of the assets
used by the Employer in a trade or business or disposes of a subsidiary and in
connection therewith one or more Participants terminates employment but
continues in employment with the purchaser of the assets or with such
subsidiary, no distribution from the Plan shall be made to any such Participant
prior to his separation from service (other than a distribution made in
accordance with Article XIII or required in accordance with Section 401(a)(9) of
the Code), except that a distribution shall be permitted to be made in such a
case, subject to the Participant's consent (to the extent required by law), if
(i) the distribution would constitute a "lump sum distribution" as defined in
section 402(e)(4) of the Code, without regard to clauses (i), (ii), (iii), or
(iv) of sub-paragraph (A),
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sub-paragraph (B), or sub-paragraph (H) thereof, (ii) the Employer continues to
maintain the Plan after the disposition, (iii) the purchaser does not maintain
the Plan after the disposition, and (iv) the distribution is made by the end of
the second calendar year after the calendar year in which the disposition
occurred.
19.5 - WITHDRAWAL OF AN EMPLOYER
An Employer other than the Sponsor may withdraw from the Plan at any time upon
notice in writing to the Administrator (the effective date of such withdrawal
being hereinafter referred to as the "withdrawal date"), and shall thereupon
cease to be an Employer for all purposes of the Plan. An Employer shall be
deemed automatically to withdraw from the Plan in the event of its complete
discontinuance of contributions. Upon the withdrawal of an Employer, the
withdrawing Employer shall determine whether a partial termination has occurred
with respect to its Employees. In the event that the withdrawing Employer
determines a partial termination has occurred, the action specified in Section
19.3 shall be taken as of the withdrawal date, as on a termination of the Plan,
but with respect only to Participants who are employed solely by the withdrawing
Employer, and who, upon such withdrawal, are neither transferred to nor
continued in employment with any other Employer or a Related Company. The
interest of any Participant employed by the withdrawing Employer who is
transferred to or continues in employment with any other Employer or a Related
Company, and the interest of any Participant employed solely by an Employer or a
Related Company other than the withdrawing Employer, shall remain unaffected by
such withdrawal; no adjustment to his Separate Accounts shall be made by reason
of the withdrawal; and he shall continue as a Participant hereunder subject to
the remaining provisions of the Plan.
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ARTICLE XX
ADOPTION BY OTHER ENTITIES
20.1 - ADOPTION BY RELATED COMPANIES
A Related Company that is not an Employer may, with the consent of the Sponsor,
adopt the Plan and become an Employer hereunder by causing an appropriate
written instrument evidencing such adoption to be executed in accordance with
the requirements of its organizational authority. Any such instrument shall
specify the effective date of the adoption.
20.2 - EFFECTIVE PLAN PROVISIONS
An Employer who adopts the Plan shall be bound by the provisions of the Plan in
effect at the time of the adoption and as subsequently in effect because of any
amendment to the Plan.
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ARTICLE XXI
MISCELLANEOUS PROVISIONS
21.1 - NO COMMITMENT AS TO EMPLOYMENT
Nothing contained herein shall be construed as a commitment or agreement upon
the part of any person to continue his employment with an Employer or Related
Company, or as a commitment on the part of any Employer or Related Company to
continue the employment, compensation, or benefits of any person for any period.
21.2 - BENEFITS
Nothing in the Plan nor the Trust Agreement shall be construed to confer any
right or claim upon any person, firm, or corporation other than the Employers,
the Trustee, Participants, and Beneficiaries.
21.3 - NO GUARANTEES
The Employers, the Administrator, and the Trustee do not guarantee the Trust
from loss or depreciation, nor do they guarantee the payment of any amount which
may become due to any person hereunder.
21.4 - EXPENSES
The expenses of administration of the Plan, including the expenses of the
Administrator and fees of the Trustee, shall be paid from the Trust as a general
charge thereon, unless the Sponsor elects to make payment. Notwithstanding the
foregoing, the Sponsor may direct that administrative expenses that are
allocable to the Separate Account of a specific Participant shall be paid from
that Separate Account and the costs incident to the management of the assets of
an Investment Fund or to the purchase or sale of securities held in an
Investment Fund shall be paid by the Trustee from such Investment Fund.
21.5 - PRECEDENT
Except as otherwise specifically provided, no action taken in accordance with
the Plan shall be construed or relied upon as a precedent for similar action
under similar circumstances.
21.6 - DUTY TO FURNISH INFORMATION
The Employers, the Administrator, and the Trustee shall furnish to any of the
others any documents, reports, returns, statements, or other information that
the other reasonably deems necessary to perform its duties hereunder or
otherwise imposed by law.
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21.7 - WITHHOLDING
The Trustee shall withhold any tax which by any present or future law is
required to be withheld, and which the Administrator notifies the Trustee in
writing is to be so withheld, from any payment to any Participant or Beneficiary
hereunder.
21.8 - MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS
The Plan shall not be merged or consolidated with any other plan, nor shall any
of its assets or liabilities be transferred to another plan, unless, immediately
after such merger, consolidation, or transfer of assets or liabilities, each
Participant in the Plan would receive a benefit under the Plan which is at least
equal to the benefit he would have received immediately prior to such merger,
consolidation, or transfer of assets or liabilities (assuming in each instance
that the Plan had then terminated).
21.9 - BACK PAY AWARDS
The provisions of this Section shall apply only to an Employee or former
Employee who becomes entitled to back pay by an award or agreement of an
Employer without regard to mitigation of damages. If a person to whom this
Section applies was or would have become an Eligible Employee after such back
pay award or agreement has been effected, and if any such person who had not
previously elected to make Tax-Deferred Contributions pursuant to Section 4.1
shall within 30 days of the date he receives notice of the provisions of this
Section make an election to make Tax-Deferred Contributions in accordance with
such Section 4.1 (retroactive to any Enrollment Date as of which he was or has
become eligible to do so), then such Participant may elect that any Tax-Deferred
Contributions not previously made on his behalf but which, after application of
the foregoing provisions of this Section, would have been made under the
provisions of Article IV and any After-Tax Contributions which he had not
previously made but which, after application of the foregoing provisions of this
Section, he would have made under the provisions of Article V, shall be made out
of the proceeds of such back pay award or agreement. In addition, if any such
Employee or former Employee would have been eligible to participate in the
allocation of Employer Contributions under the provisions of Article VI for any
prior Plan Year after such back pay award or agreement has been effected, his
Employer shall make an Employer Contribution equal to the amount of the Employer
Contribution which would have been allocated to such Participant under the
provisions of Article VI as in effect during each such Plan Year. The amounts of
such additional contributions shall be credited to the Separate Account of such
Participant. Any additional contributions made by such Participant and by an
Employer pursuant to this Section shall be made in accordance with, and subject
to the limitations of the applicable provisions of Articles IV, V, VI, and VII.
21.10 - CONDITION ON EMPLOYER CONTRIBUTIONS
Notwithstanding anything to the contrary contained in the Plan or the Trust
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Agreement, any contribution of an Employer hereunder is conditioned upon the
continued qualification of the Plan under Section 401(a) of the Code, the exempt
status of the Trust under Section 501(a) of the Code, and the deductibility of
the contribution under Section 404 of the Code. Except as otherwise provided in
this Section and Section 21.11, however, in no event shall any portion of the
property of the Trust ever revert to or otherwise inure to the benefit of an
Employer or any Related Company.
21.11 - RETURN OF CONTRIBUTIONS TO AN EMPLOYER
Notwithstanding any other provision of the Plan or the Trust Agreement to the
contrary, in the event any contribution of an Employer made hereunder:
(a) is made under a mistake of fact, or
(b) is disallowed as a deduction under Section 404 of the Code,
such contribution may be returned to the Employer within one year after the
payment of the contribution or the disallowance of the deduction to the extent
disallowed, whichever is applicable. In the event the Plan does not initially
qualify under Section 401(a) of the Code, any contribution of an Employer made
hereunder may be returned to the Employer within one year of the date of denial
of the initial qualification of the Plan, but only if an application for
determination was made within the period of time prescribed under Section
403(c)(2)(B) of ERISA.
21.12 - VALIDITY OF PLAN
The validity of the Plan shall be determined and the Plan shall be construed and
interpreted in accordance with the laws of the State or Commonwealth in which
the Sponsor has its principal place of business, except as preempted by
applicable Federal law. The invalidity or illegality of any provision of the
Plan shall not affect the legality or validity of any other part thereof.
21.13 - TRUST AGREEMENT
The Trust Agreement and the Trust maintained thereunder shall be deemed to be a
part of the Plan as if fully set forth herein and the provisions of the Trust
Agreement are hereby incorporated by reference into the Plan.
21.14 - PARTIES BOUND
The Plan shall be binding upon the Employers, all Participants and Beneficiaries
hereunder, and, as the case may be, the heirs, executors, administrators,
successors, and assigns of each of them.
21.15 - APPLICATION OF CERTAIN PLAN PROVISIONS
A Participant's Beneficiary, if the Participant has died, or alternate payee
under a qualified domestic relations order shall be treated as a
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Participant for purposes of directing investments as provided in Article X. For
purposes of the general administrative provisions and limitations of the Plan, a
Participant's Beneficiary or alternate payee under a qualified domestic
relations order shall be treated as any other person entitled to receive
benefits under the Plan. Upon any termination of the Plan, any such Beneficiary
or alternate payee under a qualified domestic relations order who has an
interest under the Plan at the time of such termination, which does not cease by
reason thereof, shall be deemed to be a Participant for all purposes of the
Plan.
21.16 - LEASED EMPLOYEES
Any leased employee, other than an excludable leased employee, shall be treated
as an employee of the Employer for which he performs services for all purposes
of the Plan with respect to the provisions of Sections 401(a)(3), (4), (7), and
(16), and 408(k), 410, 411, 415, and 416 of the Code; provided, however, that no
leased employee shall accrue a benefit hereunder based on service as a leased
employee except as otherwise specifically provided in the Plan. A "leased
employee" means any person who performs services for an Employer or a Related
Company (the "recipient") (other than an employee of the recipient) pursuant to
an agreement between the recipient and any other person (the "leasing
organization") on a substantially full-time basis for a period of at least one
year, provided that such services are of a type historically performed, in the
business field of the recipient, by employees. An "excludable leased employee"
means any leased employee of the recipient who is covered by a money purchase
pension plan maintained by the leasing organization which provides for (i) a
nonintegrated employer contribution on behalf of each participant in the plan
equal to at least ten percent of compensation, (ii) full and immediate vesting,
and (iii) immediate participation by employees of the leasing organization
(other than employees who perform substantially all of their services for the
leasing organization or whose compensation from the leasing organization in each
plan year during the four-year period ending with the plan year is less than
$1,000); provided, however, that leased employees do not constitute more than 20
percent of the recipient's nonhighly compensated work force. For purposes of
this Section, contributions or benefits provided to a leased employee by the
leasing organization that are attributable to services performed for the
recipient shall be treated as provided by the recipient.
21.17 - TRANSFERRED FUNDS
If funds from another qualified plan are transferred or merged into the Plan,
such funds shall be held and administered in accordance with any restrictions
applicable to them under such other plan to the extent required by law and shall
be accounted for separately to the extent necessary to accomplish the foregoing.
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ARTICLE XXII
TOP-HEAVY PROVISIONS
22.1 - DEFINITIONS
For purposes of this Article, the following terms shall have the following
meanings:
(a) The "compensation" of an employee means compensation as defined in
Section 415 of the Code and regulations issued thereunder. In no
event, however, shall the compensation of a Participant taken into
account under the Plan for any Plan Year exceed (1) $200,000 for
Plan Years beginning prior to January 1, 1994, or (2) $150,000 for
Plan Years beginning on or after January 1, 1994 (subject to
adjustment annually as provided in Section 401(a)(17)(B) and
Section 415(d) of the Code; provided, however, that the dollar
increase in effect on January 1 of any calendar year, if any, is
effective for Plan Years beginning in such calendar year). If the
compensation of a Participant is determined over a period of time
that contains fewer than 12 calendar months, then the annual
compensation limitation described above shall be adjusted with
respect to that Participant by multiplying the annual compensation
limitation in effect for the Plan Year by a fraction the numerator
of which is the number of full months in the period and the
denominator of which is 12; provided, however, that no proration is
required for a Participant who is covered under the Plan for less
than one full Plan Year if the formula for allocations is based on
Compensation for a period of at least 12 months. In determining the
compensation, for purposes of applying the annual compensation
limitation described above, of a Participant who is a five-percent
owner or one of the ten Highly Compensated Employees receiving the
greatest compensation for the Plan Year, the compensation of the
Participant's spouse and of his lineal descendants who have not
attained age 19 as of the close of the Plan Year shall be included
as compensation of the Participant for the Plan Year. If as a
result of applying the family aggregation rule described in the
preceding sentence the annual compensation limitation would be
exceeded, the limitation shall be prorated among the affected
family members in proportion to each member's compensation as
determined prior to application of the family aggregation rules.
(b) The "determination date" with respect to any Plan Year means the
last day of the preceding Plan Year, except that the determination
date with respect to the first Plan Year of the Plan, shall mean
the last day of such Plan Year.
(c) A "key employee" means any Employee or former Employee who is a key
employee pursuant to the provisions of Section 416(i)(1) of the
Code and any Beneficiary of such Employee or former Employee.
(d) A "non-key employee" means any Employee who is not a key employee.
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(e) A "permissive aggregation group" means those plans included in each
Employer's required aggregation group together with any other plan
or plans of the Employer, so long as the entire group of plans
would continue to meet the requirements of Sections 401(a)(4) and
410 of the Code.
(f) A "required aggregation group" means the group of tax-qualified
plans maintained by an Employer or a Related Company consisting of
each plan in which a key employee participates and each other plan
that enables a plan in which a key employee participates to meet
the requirements of Section 401(a)(4) or Section 410 of the Code,
including any plan that terminated within the five-year period
ending on the relevant determination date.
(g) A "super top-heavy group" with respect to a particular Plan Year
means a required or permissive aggregation group that, as of the
determination date, would qualify as a top-heavy group under the
definition in paragraph (i) of this Section with "90 percent"
substituted for "60 percent" each place where "60 percent" appears
in the definition.
(h) A "super top-heavy plan" with respect to a particular Plan Year
means a plan that, as of the determination date, would qualify as a
top-heavy plan under the definition in paragraph (j) of this
Section with "90 percent" substituted for "60 percent" each place
where "60 percent" appears in the definition. A plan is also a
"super top-heavy plan" if it is part of a super top-heavy group.
(i) A "top-heavy group" with respect to a particular Plan Year means a
required or permissive aggregation group if the sum, as of the
determination date, of the present value of the cumulative accrued
benefits for key employees under all defined benefit plans included
in such group and the aggregate of the account balances of key
employees under all defined contribution plans included in such
group exceeds 60 percent of a similar sum determined for all
employees covered by the plans included in such group.
(j) A "top-heavy plan" with respect to a particular Plan Year means
(i), in the case of a defined contribution plan (including any
simplified employee pension plan), a plan for which, as of the
determination date, the aggregate of the accounts (within the
meaning of Section 416(g) of the Code and the regulations and
rulings thereunder) of key employees exceeds 60 percent of the
aggregate of the accounts of all participants under the plan, with
the accounts valued as of the relevant valuation date and increased
for any distribution of an account balance made in the five-year
period ending on the determination date, (ii), in the case of a
defined benefit plan, a plan for which, as of the determination
date, the present value of the cumulative accrued benefits payable
under the plan (within the meaning of Section 416(g) of the Code
and the regulations and rulings thereunder) to key employees
exceeds 60 percent of the
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present value of the cumulative accrued benefits under the plan for
all employees, with the present value of accrued benefits to be
determined under the accrual method uniformly used under all plans
maintained by an Employer or, if no such method exists, under the
slowest accrual method permitted under the fractional accrual rate
of Section 411(b)(1)(C) of the Code and including the present value
of any part of any accrued benefits distributed in the five-year
period ending on the determination date, and (iii) any plan
(including any simplified employee pension plan) included in a
required aggregation group that is a top-heavy group. For purposes
of this paragraph, the accounts and accrued benefits of any
employee who has not performed services for an Employer or a
Related Company during the five-year period ending on the
determination date shall be disregarded. For purposes of this
paragraph, the present value of cumulative accrued benefits under a
defined benefit plan for purposes of top-heavy determinations shall
be calculated using the actuarial assumptions otherwise employed
under such plan, except that the same actuarial assumptions shall
be used for all plans within a required or permissive aggregation
group. A Participant's interest in the Plan attributable to any
Rollover Contributions, except Rollover Contributions made from a
plan maintained by an Employer or a Related Company, shall not be
considered in determining whether the Plan is top-heavy.
Notwithstanding the foregoing, if a plan is included in a required
or permissive aggregation group that is not a top-heavy group, such
plan shall not be a top-heavy plan.
(k) The "valuation date" with respect to any determination date means
the most recent Valuation Date occurring within the 12-month period
ending on the determination date.
22.2 - APPLICABILITY
Notwithstanding any other provision of the Plan to the contrary, the provisions
of this Article shall be applicable during any Plan Year in which the Plan is
determined to be a top-heavy plan as hereinafter defined. If the Plan is
determined to be a top-heavy plan and upon a subsequent determination date is
determined no longer to be a top-heavy plan, the vesting provisions of Article
VI shall again become applicable as of such subsequent determination date;
provided, however, that if the prior vesting provisions do again become
applicable, any Employee with three or more years of Vesting Service may elect
in accordance with the provisions of Article VI, to continue to have his vested
interest in his Employer Contributions Sub-Account determined in accordance with
the vesting schedule specified in Section 22.5.
22.3 - MINIMUM EMPLOYER CONTRIBUTION
If the Plan is determined to be a top-heavy plan, the Employer Contributions
allocated to the Separate Account of each non-key employee who is an Eligible
Employee and who is employed by an Employer or a Related Company on the last day
of such top-heavy Plan Year shall be no less than
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the lesser of (i) three percent of his compensation or (ii) the largest
percentage of compensation that is allocated as an Employer Contribution and/or
Tax-Deferred Contribution for such Plan Year to the Separate Account of any key
employee; except that, in the event the Plan is part of a required aggregation
group, and the Plan enables a defined benefit plan included in such group to
meet the requirements of Section 401(a)(4) or 410 of the Code, the minimum
allocation of Employer Contributions to each such non-key employee shall be
three percent of the compensation of such non-key employee. Any minimum
allocation to a non-key employee required by this Section shall be made without
regard to any social security contribution made on behalf of the non-key
employee, his number of hours of service, his level of compensation, or whether
he declined to make elective or mandatory contributions. Notwithstanding the
minimum top-heavy allocation requirements of this Section, if the Plan is a
top-heavy plan, each non-key employee who is an Eligible Employee and who is
employed by an Employer or a Related Company on the last day of a top-heavy Plan
Year and who is also covered under any other top-heavy plan or plans of an
Employer will receive the top-heavy benefits provided under such other plan in
lieu of the minimum top-heavy allocation under the Plan.
22.4 - ADJUSTMENTS TO SECTION 415 LIMITATIONS
If the Plan is determined to be a top-heavy plan and an Employer maintains a
defined benefit plan covering some or all of the Employees that are covered by
the Plan, the defined benefit plan fraction and the defined contribution plan
fraction, described in Article VII, shall be determined as provided in Section
415 of the Code by substituting "1.0" for "1.25" each place where "1.25"
appears, except that such substitutions shall not be applied to the Plan if (i)
the Plan is not a super top-heavy plan, (ii) the Employer Contribution for such
top-heavy Plan Year for each non-key employee who is to receive a minimum
top-heavy benefit hereunder is not less than four percent of such non-key
employee's compensation, and (iii) the minimum annual retirement benefit accrued
by a non-key employee who participates under one or more defined benefit plans
of an Employer or a Related Company for such top-heavy Plan Year is not less
than the lesser of three percent times years of service with an Employer or a
Related Company or thirty percent.
22.5 - ACCELERATED VESTING
If the Plan is determined to be a top-heavy plan, a Participant's vested
interest in his Employer Contributions Sub-Account shall be determined no less
rapidly than in accordance with the following vesting schedule:
Years of Vesting Service Vested Interest
------------------------ ---------------
Less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
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ARTICLE XXIII
EFFECTIVE DATE
23.1 - EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT
This amendment and restatement is effective as of July 1, 1997.
* * *
EXECUTED AT BROADBAND TECHNOLOGIES, INC., DURHAM, NC., this 27th day
of June, 1997.
BROADBAND TECHNOLOGIES, INC.
By: Timothy K. Oakley
--------------------
Title:Vice President/Chief Financial Officer
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EXHIBIT 10.36
CASHLESS COLLAR
OTC ISSUER STOCK OPTION MASTER AGREEMENT
TERMS AND CONDITIONS
The terms and conditions below shall govern all transactions in Options
(as hereinafter defined) between Goldman Sachs & Co. ("GS&Co.") and the
undersigned (the "Company"). These terms and conditions are collectively
referred to as the "Agreement". Please acknowledge your agreement to and
acceptance of this Agreement by signing and returning the enclosed copy hereof.
Until the signed copy of this Agreement is received, any Option transactions
entered into between the Company and GS&Co. shall nevertheless be governed
hereby.
1. Definitions.
(a) American Option: An Option which may be exercised on any Business Day,
except on the Expiration Date, between the hours of 9:00 A.M. and 2:30 P.M. New
York time, and on the Expiration Date between the hours of 9:00 A.M. and 4:30
P.M., New York time.
(b) Averaging Period: The number of consecutive Business Days indicated in the
Confirmation beginning on and including the Exercise Date.
(c) Business Day: Any day that (1) Federal Reserve Member Banks in New York, NY
are open for business, and (2) the primary market for trading the Option
Securities is (or, but for the existence of a Market Disruption Event, would be)
open for business.
(d) Confirmation: The written evidence of an Option delivered by GS&Co. to the
Company, containing the specific terms with respect thereto. Each Confirmation,
together with this Agreement, shall constitute the written agreement between the
Company and GS&Co. with respect to such Option.
(e) Contracts: The "Trading Unit" of an Option, consisting initially of 100
shares of the Option Security, subject to adjustment as provided in Section 2.
(f) Early Termination Amount: The net amount payable by one party to the other,
calculated by the Non-Defaulting party by aggregating and setting-off, as
applicable:
(i) the outstanding payments due (or that would have been due but for
Section 6) under this Agreement to each party immediately prior to the Early
Termination Date;
(ii) the Replacement Value of Options to be settled under Section 9
which are unexercised immediately prior to the Early Termination Date;
(iii) the Non-Defaulting Party's Other Expenses; and
(iv) at the option of the Non-Defaulting Party, any cash collateral or
the liquidation value of non-cash collateral.
(g) European Option: An Option which may be exercised only on the Expiration
Date between the hours of 9:00 A.M. and 4:30 P.M. New York time.
(h) Exercise Date: The Business Day on which exercise of an Option is, or is
deemed to be, effective.
(i) Exercise Price: The price per share, as set forth in a Confirmation, at
which an Option Security may be purchased or sold or otherwise settled upon
exercise of the related Option.
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(j) Expiration Date: For an Option means 4:30 P.M., New York time, on the date
identified as the Expiration Date in the related Confirmation, at which time, if
an Option has not been exercised, the rights granted to the holder thereunder
expire and the Option is deemed terminated. If an Expiration Date is not a
Business Day, then the next succeeding Business Day shall be deemed to be the
Expiration Date for such Option.
(k) Major Dealer: A securities broker/dealer or bank other than an affiliate of
the Non-Defaulting Party selected by the Non-Defaulting Party, which has a net
worth of at least U.S.$200,000,000 (or its equivalent) and regularly makes
markets in Options on securities and indices.
(l) Market Disruption Event: The occurrence during the half hour period
immediately prior to the time at which valuation will take place of the material
suspension or material limitation of trading in (i) Option Securities on the
primary market or (ii) options or futures on Option Securities on the primary
market or on any other exchange on which such options or futures are traded. For
the purposes of this definition, (X) a limitation on the hours and number of
days of trading will not constitute a Market Disruption Event if it results from
an announced change in the regular business hours of the primary market or other
relevant exchange and (Y) a limitation on trading imposed during the course of a
day by reason of movements in price otherwise exceeding levels permitted by the
primary market or other relevant stock exchange may, if GS&Co. so determines,
constitute a Market Disruption Event.
(m) Market Price: The closing sale price (or, if no closing sale price is
reported, the average of the bid and asked prices) reported on the New York
Stock Exchange or, in the event the Option Security is not listed on the New
York Stock Exchange, such other national or regional stock exchange upon which
the Option Security is listed and principally traded. If the Option Security is
not listed on a national or regional securities exchange, then the Market Price
will be the average of the closing bid and asked prices reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
(n) Option: The right, but not the obligation, of the holder (purchaser) of an
Option to purchase from the issuer (seller) of the Option (in the case of a
"Call Option") or to sell to its issuer (in the case of a "Put Option") the
number of Contracts set forth in the applicable Confirmation.
(o) Option Security: With respect to any Option, the security of the Company
identified in the related Confirmation for purchase or sale upon exercise of the
Option.
(p) Other Expenses: In relation to an Early Termination Date, all costs, losses
and expenses (including, without limitation, legal fees, stamp, registration,
documentation and similar taxes, and value added taxes but for the avoidance of
doubt, without duplication of any amounts falling within subparagraphs (i) and
(ii) of the definition of Early Termination Amount) incurred or suffered by the
Non-Defaulting Party as a result of the other party's default, any steps taken
by it to implement, protect or enforce its rights under the Agreement and all
commercially reasonable steps taken by it as a result of the default (or in
contemplation of the impending default), including purchase or sale of Option
Securities pursuant to Options exercised but not settled, in order to unwind any
hedges or cover any expenses.
(q) Premium: The purchase price of an Option specified in the Confirmation.
(r) Quotation: In respect of an Option, a quotation from a Major Dealer of the
amount that would be required to be paid by or to the Non-Defaulting Party for
an instrument that would have the effect of preserving the economic equivalent
of the payment and/or delivery obligations of the parties under the Option that
would, but for the occurrence of the Early Termination Date, otherwise have
fallen due.
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(s) Replacement Value: With respect to an Option, the value of the Option
calculated as an amount equal to:
(i) the arithmetic mean of three Quotations; or
(ii) if only two Quotations are available to the Non-Defaulting
Party, the arithmetic mean of those two Quotations; or
(iii) if only one Quotation is available, that Quotation; or
(iv) if no Quotation is available, the amount reasonably determined
by the Non-Defaulting Party to be the value of the Option on
the Early Termination Date.
(t) Settlement Value: The amount in U.S. dollars by which the Exercise Price
exceeds the Market Price (in the case of a Put Option) or the Market Price
exceeds the Exercise Price (in the case of a Call Option) in either case
multiplied by the number of shares of the Option Security covered by an exercise
notice given pursuant to Section 3 below. The Market Price shall be determined
as of the Exercise Date, or, if an Averaging Period is indicated in the
Confirmation, the average of the Market Prices for each Business Day in the
Averaging Period.
2. Adjustments. The Exercise Price and the Trading Units of an Option are each
subject to adjustments as follows:
(a) During the term an Option is in effect (the "Exercise Period"), if any
adjustment is made by the Options Clearing Corporation or its successors ("OCC")
in the terms of outstanding OCC-issued options ("OCC Options") on the Option
Securities, an equivalent and pro rata adjustment shall be made in the terms of
such Option to the extent such adjustment is applicable on the date of any
exercise of such Option. Except as provided in Sub-paragraph (b) below, no
adjustments shall be made in the terms of such Option in any event that does not
result in an adjustment to the terms of outstanding OCC Options on Option
Securities. Without limiting the generality of the foregoing NO ADJUSTMENT SHALL
BE MADE IN THE TERMS OF ANY OPTION FOR ORDINARY CASH DIVIDENDS ON OPTION
SECURITIES. A summary of the terms under which the OCC may make adjustments is
set forth below:
(i) Whenever there is a dividend, stock dividend, stock distribution,
stock split, reverse stock split, rights offering, distribution, reorganization,
recapitalization, reclassification or similar event in respect of the Option
Securities or a merger, consolidation, dissolution or liquidation of the issuer
of the Option Securities, the number of option contracts, the unit of trading,
the exercise price, and the Option Securities, or any of them, with respect to
all outstanding option contracts open for trading in the Option Securities may
be adjusted.
(ii) All adjustments pursuant to this Section shall be made by GS&Co.
by reference to actions taken by the Securities Committee of the OCC and in
consultation with the Company. The Securities Committee determines whether to
make adjustments to reflect particular events in respect of the Option
Securities and the nature and extent of any such adjustment, based on its
judgment as to what is appropriate for the protection of investors and the
public interest, taking into account such factors as fairness to holders and
writers of option contracts on the Option Securities, the maintenance of a fair
and orderly market in options on the Option Securities, consistency of
interpretation and practice, efficiency of exercise settlement procedures, and
the coordination with other clearing agencies of the clearance and settlement of
transactions in the Option Securities. The Securities Committee of the OCC may,
in addition to determining adjustments on a case-by-case basis, adopt statements
of policy or interpretation having general application to specified types of
events.
(iii) In the case of a stock dividend, stock distribution or stock
split whereby one or more Option Securities are issued with respect to each
outstanding Option Security, each Option covering the Option Securities shall be
increased by the same number of additional rights as the number of shares issued
with respect to each Option Security under the Option. The Exercise Price per
share in effect immediately prior to such event shall be proportionately
reduced, and the unit of trading shall remain the same.
(iv) In the case of a stock dividend, stock distribution or stock split
whereby other than a whole number of Option Securities are issued in respect of
each outstanding share, the Exercise Price in effect immediately prior to such
event shall be proportionately reduced, and conversely, in the case of a reverse
stock split or combination of shares of the Option Security, the Exercise Price
in effect immediately prior to such event shall be proportionately increased.
Whenever the Exercise Price with respect to an Option has been reduced or
increased in accordance with this Sub-paragraph (iv), the unit of trading shall
be proportionately increased or reduced, as the case may be.
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(v) In the case of any distribution made with respect to Option
Securities, other than cash distributions subject to paragraph (a) and other
than distributions for which adjustments are provided in Sub-paragraphs (iii) or
(iv), if an adjustment is determined by the Securities Committee of the OCC to
be appropriate, 1) the Exercise Price in effect immediately prior to such event
shall be reduced by the value per share of the distributed property, in which
event the unit of trading shall not be adjusted, or 2) the unit of trading in
effect immediately prior to such event shall be adjusted so as to include the
amount of property distributed with respect to the number of shares of the
Option Security represented by the unit of trading in effect prior to such
adjustment, in which event the Exercise Price shall not be adjusted.
(vi) Adjustments shall as a general rule become effective on the
"ex-date" established by the primary market on which the Option Securities are
open for trading.
(b) If at any time during the life of an Option there shall be no outstanding
OCC options on Option Securities, and an event shall occur for which an
adjustment might have been required under the By-Laws, Rules and stated policies
of the OCC applicable to the adjustment of OCC options, as described above, (the
"OCC Adjustment Rules"), Company and GS&Co. shall mutually determine, applying
the principles set forth in the OCC Adjustment Rules, whether to adjust the
terms of such Option, and the nature of any such adjustment.
(c) No adjustment of the Exercise Price shall be required unless such adjustment
would require an increase or decrease in such price of at least one U.S. cent:
provided that any adjustment which by reason of this Sub-paragraph (c) is not
required to be made shall be carried forward and taken into account (as if such
adjustment had been made at the time when it would have made but for the
provisions of this Sub-paragraph (c)) in any subsequent adjustment. All
calculations under this Sub-paragraph shall be made to the nearest U.S. cent
with five tenths or more of a U.S. cent to be considered (rounded up) a full
cent.
(d) If the Exercise Date falls on or after a date with effect from which an
adjustment takes retroactive effect pursuant to any of the provisions of this
Section 2 and such adjustment has not yet been reflected on such Exercise Date,
the Settlement Value will be adjusted to reflect the additional Option
Securities, being equal to the excess of the number of the Option Securities
which would have been used in the calculation of the Settlement Value at such
retroactively adjusted Exercise Price over the number of Option Securities
covered by the Option immediately prior to such adjustment.
3. Exercise Procedure; Automatic Exercise.
(a) An Option may be exercised by the holder thereof by giving notice of
exercise either orally or in writing to the person specified for such purpose in
the space provided below the signature block of this Agreement or as otherwise
notified in writing to the holder of such Option. Oral notice of exercise shall
be confirmed in writing within three Business Days. An Option may be exercised
only in whole and not in part unless "Exercisable in part" is specified in the
related Confirmation.
(b) If the holder has not given notice of exercise or notice of intent not to
exercise to the writer by 4:30 P.M., New York time, on the Expiration Date, the
Option shall be deemed to have been exercised by the holder if such Option is
in-the-money based upon the Market Price on the Expiration Date. An Option is
"in the money" as of 4:30 P.M. on the Expiration Date if the Settlement Value of
the unexercised portion of such Option is based on an amount equal to or greater
than twenty-five cents ($.25) per share. GS&Co. shall attempt to notify the
Company of such automatic exercise as soon as practicable but in any case by the
close of business in New York on the Business Day following the Expiration Date.
Failure or inability to give such notice will not affect the validity of the
exercise.
4. Exercise Limit. If an Option is an American style option, the maximum
aggregate number of shares of the Option Security as to which such Option and
any similar (i.e., put or call) Option then outstanding may be exercised by the
holder on any Business Day is the number of shares, if any, specified in the
related Confirmation as the "Exercise Limit".
5. Settlement upon Exercise.
(a) If "Physical Settlement" is specified in the related Confirmation,
within three Business Days following the Exercise Date (or such other period as
agreed to by the Company and GS&Co.) payment for the Option Securities shall be
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made at the Exercise Price per share therefor in clearing house funds against
delivery of such Option Securities. Option Securities will be delivered in good
transferable form as is customary for that type of Option Security. Whenever an
Option Security is transferable or deliverable by wire transfer or book entry at
a depository or clearing house at which both parties or their clearing agents
are members, such method will be used to effect transfer or delivery. Physical
delivery shall only be made if the foregoing cannot be effected.
(b) If "Cash Settlement" is specified in the related Confirmation, an
Option shall be settled by a payment in clearing house funds of an amount equal
to the Settlement Value on the third Business Day following the Exercise Date or
as otherwise stated in the Confirmation.
(c) If "Physical Settlement" is specified in the related Confirmation
and "Cash Settlement at Company's Election" is specified in such Confirmation,
then, unless the Company has notified GS&Co. to the contrary at least two
Business Days before the Exercise Date (or such other period as may be specified
in the related Confirmation), the Option will settle by physical delivery of the
Option Securities pursuant to Section 5(a) above. Such notice may be given
orally or in writing. Oral notice shall be confirmed in writing within one
Business Day.
(d) If "Net Share Settlement" is specified in the related Confirmation,
then the Company may elect to have the related Option settled by payment of the
Settlement Value in shares of the Option Security by giving notice of such
election to GS&Co. at least two Business Days before the Exercise Date, provided
that, the Option Security shall be listed for trading on the New York Stock
Exchange or Nasdaq at the time of such notice and on the Exercise Date.
If such election is made, settlement shall be made by delivery of the
number of shares of the Option Security equal in value to the Settlement Value,
with such shares valued based on the average of the Market Prices for the
consecutive Business Days in the Net Share Valuation Period. The "Net Share
Valuation Period" shall commence on (but exclude) the final Business Day of any
Averaging Period and end on (and include) the date which follows it by the same
number of Business Days in the Averaging Period. If no Averaging Period is
indicated on the Confirmation, the Net Share Valuation Period shall be deemed to
be the Business Day following the Exercise Date. Delivery of such shares shall
be made "free" in good transferable form by the third Business Day following the
Net Share Valuation Period.
Net Share Settlement of an Option issued by the Company is subject to
the following conditions precedent being fulfilled on the Exercise Date: the
Company shall have (i) registered pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, the offering and
sale by Goldman of not less than 125% of the shares of the Option Security
necessary to fulfill the delivery obligation by the Company assuming that the
number of such shares were determined on the basis of the average of the Market
Prices on the five (5) Business Days prior to the Exercise Date; (ii) delivered
to Goldman such number of prospectuses relating thereto as Goldman shall have
reasonably requested; and (iii) entered into an indemnification agreement
reasonably acceptable to Goldman covering the information contained in such
prospectus. If these conditions precedent are not satisfied on the Exercise
Date, Goldman may require such Option to be settled in cash pursuant to Section
5(b).
(e) Settlement for Fair Value: On any Business Day prior to the
Expiration Date (the "Notification Date"), the Company may irrevocably elect to
Net Share Settle an Option (in whole or in part) at the fair market value (as
determined below) by orally notifying GS&Co. of the number of shares of the
Option Security for which such election applies. The Company shall deliver
written notice of such election by the close of business on the following
Business Day by fax to Rachel Parrish at 212-346-2126. Upon receiving such
notice, GS&Co. will quote to the Company a "Settlement Warrant Price", and a
"Settlement Share Price" both expressed in dollars per share. If the Company
accepts such Settlement Warrant Price and Settlement Share Price, the
"Settlement Value" shall be the product of (i) the number of shares designated
by the Company on its notice, multiplied by (ii) the Settlement Warrant Price.
Where an Option is to be settled by Settlement for Fair Value, the options shall
settle on the third Business Day following the Notification Date by delivery of
a number of shares to the holder of such Option. Where the Company is the writer
of such Option, then delivery of shares under this provision is subject to the
conditions precedent set forth in paragraph 5 (d)
(f) With respect to any Option that is to be cash-settled or that is to
be settled by Net Share Settlement, if GS&Co. determines that a Market
Disruption Event is occurring on what would otherwise be the Exercise Date, then
the Exercise Date shall be the next Business Day on which a Market Disruption
Event is not occurring, provided that if a Market Disruption Event is still
subsisting on the fifth Business Day after the Exercise Date, then such fifth
Business Day shall be
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the Exercise Date and GS&Co. shall determine the Market Price as of such fifth
day. In the event that GS&Co. determines that a Market Disruption Event is
occurring on a Business Day in an Averaging Period or a Net Share Valuation
Period, then such period shall be extended so that the number of Business Days
in such period on which a Market Disruption Event is not occurring equals the
number of days indicated in the Confirmation for the Averaging Period, provided
that if a Market Disruption Event is subsisting for five Business Days, then
such fifth Business Day shall be deemed to conclude the Averaging Period or the
Net Share Valuation Period.
6. No Default. Each obligation of a party in respect of each Option to make a
payment or deliver Option Securities is subject to the condition precedent that
no Event of Default or event that, with the lapse of time or the giving of
notice or both, would become an Event of Default by the other party has occurred
and is continuing.
7. Representations, Warranties and Covenants.
(a) The Company and GS&Co. each represent and warrant to and covenant with the
other with respect to this Agreement and each Option entered into hereunder
that:
(i) This Agreement has been duly authorized, executed and delivered by
such party and constitutes its valid and legally binding obligation, enforceable
against such party in accordance with its terms; and the issuance, sale and
purchase, as the case may be, of each Option will be duly authorized, executed
and, when delivered by such party, will constitute the valid and legally binding
obligation of such party enforceable against such party in accordance with the
terms thereof.
(ii) The execution and delivery of this Agreement by such party does
not, and the performance by it of its obligations hereunder and under each
Option will not, violate, conflict with or constitute a breach under any
agreement or instrument to which it is party or which is binding on any of its
properties.
(b) Each party represents and warrants to the other that it has the right to
enter into the Option transactions entered into hereunder.
(c) In addition to the foregoing, the Company represents and warrants to Goldman
that (i) as of the trade date of each Option hereunder the Company's most recent
Annual Report on Form 10-K, together with all reports subsequently filed by the
Company pursuant to the Exchange Act, taken together, do not contain any untrue
statement of a material fact or any omission of a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading; and (ii) it has taken
such advice from its legal, tax and accounting advisors as it has deemed
necessary prior to entering into this Agreement, and is not relying on Goldman
for any such advice regarding this Agreement or any action either party may take
or refrain from taking thereunder.
8. Default. If any of the following events (each an "Event of Default") shall
occur with respect to a party to an Option (the "Defaulting Party"), the party
which is not in default (the "Non-Defaulting Party") shall have the rights set
forth in Section 9:
(i) the Defaulting Party fails to perform any obligation required to be
performed under this Agreement or any Option entered into hereunder, including,
without limitation, the failure to pay any Premium when due, and such failure is
not cured within three Business Days after receipt of notice thereof;
(ii) the Defaulting Party repudiates any of its obligations hereunder
or under any Option;
(iii) a case in bankruptcy shall be commenced or consented to or a
petition for the appointment of a receiver shall be filed by the Defaulting
Party or brought against the Defaulting Party or the Defaulting Party shall make
a general assignment for the benefit of creditors or admit in writing that it is
unable to pay its debts as they become due, or shall suspend the transaction of
its usual business or any material portion thereof or (if a corporation) shall
be dissolved or shall be a party, other than the surviving party, to a merger or
consolidation; or
(iv) the Non-Defaulting Party shall reasonably believe in good faith
that the Defaulting Party will be unable to meet its obligations when due for
any reason and the Defaulting Party fails, after 10 Business Days prior written
notice from the Non-Defaulting party to provide the Non-Defaulting Party with
adequate assurance of its ability to perform.
127
<PAGE>
9. Remedies.
(a) Upon the occurrence of an Event of Default and with respect to all unexpired
but unexercised Options (for which purpose a partially exercised Option is an
unexercised Option but only as to the unexercised portion), the Non-Defaulting
Party may by written notice to the Defaulting Party sent while the Event of
Default is continuing and specifying the relevant Event of Default, elect to
terminate and settle all Options (but not some only) in accordance with this
Section 9 on the Early Termination Date, being the date specified in and no
earlier than the date of the notice.
(b) If an Early Termination Date occurs, the Non-Defaulting Party shall
calculate the Early Termination Amount payable by one party to the other and
shall as soon as reasonably practicable give to the Defaulting Party a statement
thereof (including details of any relevant Quotations).
(c) The Early Termination Amount shall be payable on the Business Day
immediately after notice of its amount is given to the Defaulting Party and,
unless payable by the Non-Defaulting Party, shall be paid together with interest
thereon from (and including) the Early Termination Date to (but excluding) the
date of payment at the rate, to the extent permitted by applicable law, of 2 per
cent per annum above Morgan Guaranty Trust Company's prime (or base) commercial
loan rate for short term borrowings as in effect from time to time.
(d) The parties agree that the amounts recoverable under this Section 9 are a
reasonable pre-estimate of loss and not a penalty. Such amounts are payable for
the loss of bargain and the loss of protection against future risks.
(e) The Non-Defaulting Party's rights under this Section 9 shall be in addition
to, and not in limitation or exclusion of, any other rights which the
Non-Defaulting Party may have (whether by agreement, operation of law or
otherwise) against the Defaulting Party.
10. Miscellaneous.
(a) A Confirmation sent by GS&Co. to the Company on a Business Day shall be
deemed to have been received by the Company on the same day (or, if sent on a
day which is not a Business Day, on the next succeeding Business Day) if sent by
same-day messenger, by telex or other telecommunication device capable of
transmitting or creating a written record of transmission, and on the third day
after the day it is sent if by first class mail, postage prepaid (or, if mailed
on a day which is a Federal holiday, three days after the next succeeding day
which is not a Federal holiday). If the Company fails to object to the terms
contained in a Confirmation within three Business Days after receipt thereof,
the terms of such Option (as evidenced by the Confirmation) shall be deemed to
have been accepted.
(b) Neither this Agreement nor any Option may be assigned or transferred by
either party hereto without the consent of the other party, except for an
assignment and delegation of all of GS&Co.'s rights and obligations hereunder in
whatever form GS&Co. determines may be appropriate to a partnership,
corporation, trust or other organization in whatever form that succeeds to all
or substantially all of GS&Co.'s assets and business and that assumes such
obligations by contract, operation of law or otherwise. Upon any such delegation
and assumption of obligations, GS&Co. shall be relieved of and fully discharged
from all obligations hereunder, whether such obligations arose before or after
such delegation and assumption.
(c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA WITHOUT GIVING
EFFECT TO CONFLICTS OF LAW PRINCIPLES.
(d) This Agreement and each Option entered into hereunder shall be subject to
all laws, rules and regulations applicable thereto, including, but not by way of
limitation, the provisions of the Securities Act of 1933, and the Securities
Exchange Act of 1934, as amended and all rules and regulations, promulgated or
to be promulgated thereunder. The Company and GS&Co. each acknowledge that the
Options acquired by it from the other party hereunder will not be registered
under the Securities Act of 1933, as amended (the "Act") and will be sold by the
issuer of the Option in reliance upon the exemption for private placements
pursuant to Section 4(2) of the Act.
(e) The parties agree that this Agreement and the terms of each Option entered
into hereunder are confidential and may not be publicly disclosed by either
party except with the prior written consent of the other party or pursuant to
the demand or requirement of any court or regulatory agency having jurisdiction
over a party.
128
<PAGE>
(f) Each Option is being entered into by the parties hereto acting as principal
for their respective own account. Subject to the termination of any Option by
expiration or full performance upon exercise, no failure on the part of either
party to exercise, and no delay in exercising, any contractual right prior to
termination of any such Option as aforesaid will operate as a waiver thereof,
nor will any single or partial exercise by either party of any right preclude
any other or future exercise thereof or the exercise of any other right. No
modification or waiver of any provision hereof nor any consent to any departure
by either party therefrom shall in any event be effective unless the same shall
be in writing, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. All written notices
hereunder shall be sent to a party at its address by mail, hand delivery or
facsimile transmission as set forth below, or to such other address or telex
number as a party shall have last notified the other party in writing, or to
such other address as either party shall have last notified the other party in
writing. For purposes of telephone notice, GS&Co.'s relevant telephone number
and the Company's relevant telephone number are set forth below and each of
GS&Co. and the Company shall notify the other in writing of any change thereof.
11. Arbitration.
(A) ARBITRATION IS FINAL AND BINDING ON THE COMPANY AND GS&CO.
(B) THE COMPANY AND GS&CO. ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO A JURY TRIAL.
(C) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM
COURT PROCEEDINGS.
(D) THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY
THE ARBITRATORS IS STRICTLY LIMITED.
(E) THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
ANY CONTROVERSY BETWEEN OR AMONG GS&CO. OR ITS AFFILIATES, OR ANY OF
ITS OR THEIR PARTNERS, DIRECTORS, AGENTS OR EMPLOYEES, ON THE ONE HAND, AND THE
COMPANY OR ITS AGENTS AND AFFILIATES, ON THE OTHER HAND, ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OPTION ENTERED INTO HEREUNDER, SHALL BE
SETTLED BY ARBITRATION, IN ACCORDANCE WITH THE THEN CURRENT RULES OF, AT THE
COMPANY'S ELECTION, THE AMERICAN ARBITRATION ASSOCIATION ("AAA") OR THE BOARD OF
ARBITRATION OF THE NEW YORK STOCK EXCHANGE ("BANYSE"). IF THE COMPANY DOES NOT
MAKE SUCH ELECTION BY REGISTERED MAIL ADDRESSED TO GS&CO. WITHIN FIVE (5)
BUSINESS DAYS AFTER RECEIPT OF NOTIFICATION FROM GS&CO. REQUESTING SUCH
ELECTION, THEN THE COMPANY IRREVOCABLY AUTHORIZES GS&CO. TO MAKE SUCH ELECTION
ON BEHALF OF THE COMPANY. THE AWARD OF THE ARBITRATORS SHALL BE FINAL, AND
JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT, STATE OR FEDERAL,
HAVING JURISDICTION.
NEITHER PARTY SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION; WHO IS A MEMBER OF A PUTATIVE
CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED
BY THE PUTATIVE CLASS ACTION UNTIL:
(I) THE CLASS CERTIFICATION IS DENIED;
(II) THE CLASS IS DECERTIFIED; OR
(III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE COURT.
SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A
WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
129
<PAGE>
BY SIGNING BELOW, THE COMPANY ACKNOWLEDGES RECEIPT OF A COPY OF THIS
OPTIONS AGREEMENT. A PRE-DISPUTE ARBITRATION CLAUSE IS CONTAINED IN SECTION 11
HEREOF.
GOLDMAN, SACHS & CO.
Name: Tony Monaco
Address: 85 Broad Street
New York, New York 10004
Telex No.:
Domestic: WU Tlex 12-5654 Goldsachs
International: ITT421344GOLSAX
TRT 177784 GSUT
WUI62506GOLSAC
Telefax No.: 212-902-8996
Telephone No.: 212-902-0112
Exercise Notice to: Equity Operations: Options
and Derivatives
Accepted and Agreed to this
8th day of April, 1997.
BROADBAND TECHNOLOGIES, INC.
By:
Name: Timothy K. Oakley
Address: 4024 Stirrup Creek Drive, Suite 150
Telex No:
Domestic:
International:
Telefax No.: (919) 405-4544
Telephone No.: (919) 544-0015
Exercise Notice to: Equity Operations: Options & Derivatives
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements: Form S-8 No. 33-67076 and Form S-8 No. 33-87630 pertaining to the
BroadBand Technologies, Inc. 1988 Incentive Stock Option Plan; Form S-8 No.
33-67724 pertaining to the BroadBand Technologies, Inc. 1992 Nonqualified Stock
Option Plan; Form S-8 No. 33-73802 pertaining to the BroadBand Technologies,
Inc. 401 (k) Plan; Form S-8 No. 333-09661 pertaining to the BroadBand
Technologies, Inc. 5% Convertible Subordinated Notes due May 15, 2001 and Form
S-8 No. 333-10443 pertaining to the BroadBand Technologies, Inc. 1,000,000
shares of common stock issuable upon exercise of outstanding warrants of our
report dated February 4, 1998 with respect to the financial statements of
BroadBand Technologies, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1997.
/S/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Raleigh, North Carolina
March 27, 1998
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