<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-3834
CONTINENTAL MATERIALS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2274391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 WEST WACKER DRIVE, SUITE 1800 60606
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code 312-541-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock - $.25 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value (based on March 24, 2000 closing price) of
voting stock held by non-affiliates of registrant: Approximately $23,642,000.
Number of common shares outstanding at March 24, 2000: 1,872,995.
Incorporation by reference: Portions of registrant's definitive proxy
statement for the 2000 Annual meeting of stockholders to be held on May 24, 2000
into Part III of this Form 10-K. (The definitive proxy statement will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year covered by this Form 10-K.)
Index to Exhibits: on page 27 hereof.
1.
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NOTE: References to a "Note" are to the Notes to Consolidated Financial
Statements which are included on pages 16 through 24 of this Annual
Report on Form 10-K.
PART I
Item 1. BUSINESS
There have been no significant changes in the business during the past five
years other than the purchase of substantially all of the assets of Valco,
Inc.'s (Valco) ready-mix concrete and aggregates operation in Pueblo, Colorado
on October 21, 1996. The Company formed a new subsidiary, Transit Mix of Pueblo,
Inc. to hold and operate these acquired assets.
The Company operates primarily in two industry segments, the Heating and Air
Conditioning segment and the Construction Materials segment. The Heating and Air
Conditioning segment is comprised of wall furnaces, console heaters, evaporative
coolers and fan coils which are manufactured by Phoenix Manufacturing, Inc. of
Phoenix, Arizona and Williams Furnace Co. of Colton, California. The
Construction Materials segment is comprised of ready mix concrete, construction
aggregates, building supplies and doors which are offered by Castle Concrete
Company and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and
Transit Mix of Pueblo, Inc. of Pueblo, Colorado.
In addition to the above operating segments, an Other classification is utilized
to cover a small real estate operation and the holding costs for certain mining
interests that remain from the period the Company maintained significant
interests in mining operations. The expenses of the corporate office, which
provides treasury, insurance and tax services as well as strategic business
planning and general management services, are not allocated to the segments.
Expenses related to the Management Information Systems group, which is
headquartered at the corporate office, are allocated to all locations, including
the corporate office, based upon a formula that is intended to capture use of
the system and time spent by MIS staff.
The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP). ORMP is a
general partnership that owns an inactive copper mine near Tucson, Arizona. The
Company is not the managing partner of ORMP and thus its operations are
accounted for on the equity method with the Company's share of ORMP's operations
included in other income and expense in the Company's statement of operations.
See Note 3 on page 18 for further discussion of the Company's accounting for and
valuation of the investment in ORMP.
Financial information relating to industry segments appears in Note 12 on pages
23 and 24 of this Form 10-K.
MARKETING, SALES AND SUPPORT
MARKETING
The Heating and Air Conditioning segment markets its products throughout the
United States through plumbing, heating and air conditioning wholesale
distributors as well as directly to some major retail home-centers and other
retail outlets. Fan coils are also sold to HVAC installing contractors and
equipment manufacturers for commercial applications. Independent manufacturers'
representatives are utilized for all products. The Company also employs and
utilizes a small staff of sales and sales support personnel. Sales in this
segment are predominantly in the United States and are concentrated in the
Western and Southwestern states. Sales of furnaces and console heaters usually
increase in the months of August through January. Sales of evaporative coolers
usually increase in the months of March through
2.
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July. Sales of the fan coil product line are more evenly distributed throughout
the year although the highest volume typically occurs during the late spring and
summer. In order to sell wall furnaces and evaporative coolers during the off
season, extended payment terms (dating) are offered to customers.
The Construction Materials segment markets its products primarily through its
own direct sales representatives and confines its sales to the Front Range area
in southern Colorado. Sales are made to general and sub-contractors, government
entities and individuals. Sales are affected by the general economic conditions
in the areas serviced (as it relates to construction) and weather conditions.
Revenues usually decline in the winter months as the pace of construction slows.
During 1999, no customer accounted for 10% or more of the total sales of the
Company.
CUSTOMER SERVICE AND SUPPORT
The Heating and Air Conditioning segment offers parts departments and help lines
to assist contractors, distributors and end users in servicing the products. The
Company does not perform installation services, nor are maintenance or service
contracts offered. In addition, training and product information sessions for
the furnace, cooler and fan coil product lines are offered at our plants and
other sites for distributors, contractors, utility company employees and other
customers. This segment does not derive any revenue from after-sales service and
support other than from parts sales. The personnel in the Construction Materials
segment routinely take a leadership role in formulation of the products to meet
the specifications of the customers.
BACKLOG
The order backlog at January 1, 2000 and January 2, 1999 for the Heating and Air
Conditioning segment were as follows:
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Furnaces $ 25,000 $ 900,000
Console heaters 5,000 230,000
Evaporative coolers 750,000 1,200,000
Fan coil 2,100,000 860,000
--------------- ---------------
Total $ 2,880,000 $ 3,190 000
=============== ===============
</TABLE>
The above backlogs are expected to be filled during the first quarter of 2000.
At January 1, 2000, the Construction Materials segment had a backlog of
approximately $2,785,000 ($1,900,000 at January 2, 1999) primarily relating to
construction contracts awarded and expected to be filled during the first half
of 2000.
Management does not believe that any of the above backlogs represent a trend but
rather are indicative only of the timing of orders received or contracts
awarded.
RESEARCH AND DEVELOPMENT/PATENTS
In general, the companies rely upon, and intend to continue to rely upon,
unpatented proprietary technology and information. However, research and
development activities in the Heating and Air Conditioning segment have resulted
in a patent related to the Power Cleaning System for the evaporative coolers and
patent applications on the configuration of the heat
3.
<PAGE>
exchanger for furnaces which has increased efficiency above that previously
offered by the industry. A patent is pending related to the Company's new
combination cooling and heating product. The amounts expended on research and
development are not material and are expensed as incurred. The Company believes
its interests in its patent applications, as well as its proprietary knowledge,
are sufficient for its businesses as currently conducted.
MANUFACTURING
The Company conducts its manufacturing operations through a number of facilities
as more completely described in Item 2, Properties, below.
Due to the seasonality of the businesses, furnaces and evaporative coolers build
inventory during their off seasons in order to have adequate supplies to sell
during the season.
In general, raw materials required by the Company can be obtained from various
sources in the quantities desired. The Construction Materials companies have
historically purchased most of their cement requirements from a single supplier.
These companies experienced some difficulty in obtaining cement during the
latter half of 1998 and 1999 but were able to purchase sufficient quantities
from non-traditional sources, which are expected to remain available in the
future. The Company has no long-term supply contracts and does not consider
itself dependent on any individual supplier.
In connection with permits to mine properties in Colorado, the Company is
obligated to reclaim the mined areas. In recent years, reclamation costs have
had a more significant effect on the results of operations compared to prior
years.
COMPETITIVE CONDITIONS
HEATING AND AIR CONDITIONING - The Company is one of four principal companies
producing wall furnaces (excluding units sold to the recreational vehicle
industry) and gas fired console heaters. The wall furnace and console heater
markets are only a small component of the heating industry. The Company serves
these market areas from a plant in Colton, California and a warehouse in Ohio.
The sales force consists of in-house sales personnel and external manufacturers'
representatives. The entire heating industry is dominated by manufacturers (most
of which are substantially larger than the Company) selling diversified lines of
heating and air conditioning units directed primarily toward central heating and
cooling systems. All of the producers compete on a basis of price, service and
timeliness of delivery.
Fan coils are also produced at the Colton plant. Fan coil sales are usually
obtained through a competitive bidding process. International Environmental
Corp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversified
line of commercial and industrial products, dominates this market. There are
also a number of other companies that produce fan coils. All of the producers
compete on the basis of price, ability to meet customers' specific requirements
and timeliness of delivery.
The Company manufactures evaporative air coolers at a plant located in Phoenix,
Arizona. The cooler market is dominated by Adobe Air. The other principal
competitor is Champion/Essick. All producers of evaporative air coolers compete
aggressively on the basis of price and service.
CONSTRUCTION MATERIALS - The Company is one of four companies producing ready
mix concrete in the Colorado Springs area, with one more company expected to
enter the market during
4.
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2000, and one of three companies producing ready mix concrete in the Pueblo
area. Although we hold a significant share of both of the markets served, the
other competitors compete aggressively on the basis of price, service and
product features.
The Company is one of six producers of aggregates in the marketing area served.
All producers compete aggressively on the basis of price, quality of material
and service.
Sales of metal doors and door frames, rebar reinforcement and other building
materials in the Colorado Springs and Pueblo metropolitan areas are subject to
intense competition from two larger companies from Denver, one large company in
Colorado Springs and a number of small local competitors. However, the Company
has a slight competitive advantage in that many of our customers also purchase
concrete, sand and aggregates from us whereas our competitors for these
particular product lines do not offer concrete, sand or aggregates. In addition,
our Pueblo location has a slight competitive advantage with respect to the two
Denver companies based upon delivery costs.
EMPLOYEES
The Company employed 801people as of January 1, 2000. Employment varies
throughout the year due to the seasonal nature of the businesses. A breakdown of
the prior three years employment at year-end by segment was:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Heating and Air Conditioning 433 402 367
Construction Materials 354 332 307
Corporate Office 14 12 11
-------------- ------------- --------------
Total 801 746 685
============== ============= ==============
</TABLE>
The factory employees at the Colton, California plant are represented by the
Carpenters Local 721 Union under a contract that expires in June 2002. Certain
drivers and mechanics at the Pueblo facility are represented by the Western
Conference of Teamsters under a contract that expires in December 2000.
The Company considers relations with its employees and with its unions to be
good.
Item 2. PROPERTIES
The Heating and Air Conditioning segment operates out of one owned (Colton,
California) and one leased (Phoenix, Arizona) facility. Both manufacturing
facilities utilized by this segment are, in the opinion of management, in good
condition and sufficient for the Company's current needs. Productive capacity
exists at the locations such that the Company could exceed the highest volumes
achieved in prior years or expected in the foreseeable future and maintain
timely delivery.
The construction materials segment operates out of five owned facilities in
Colorado Springs, Colorado and two owned facilities in Pueblo, Colorado. These
facilities are, in the opinion of management, in good condition and sufficient
for the Company's current needs. Additionally, this segment owns or leases seven
mining properties in three counties in the vicinity of Colorado Springs and
Pueblo, Colorado. In the opinion of management, these seven properties contain
permitted and minable reserves sufficient to service sand, rock and gravel
requirements for the foreseeable future.
5.
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In the opinion of management, all of the facilities of the Company can be
subject to seasonal fluctuations but are believed to be generally well utilized.
The corporate office operates out of leased facilities in Chicago, Illinois.
Item 3. LEGAL PROCEEDINGS
See Management Discussion and Analysis of Financial Condition and Results of
Operations on pages 8 through 11 and Note 5 on page 19 of this Annual Report on
Form 10-K.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Continental Materials Corporation shares are traded on the American Stock
Exchange under the symbol CUO. Market prices (restated for the stock split, see
Note 6 on pages 19 and 20) for the past two years are:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1999 Fourth Quarter $23 1/8 $21
Third Quarter 23 19 1/4
Second Quarter 20 17 13/16
First Quarter 18 7/16 15 7/8
1998 Fourth Quarter $18 1/4 $14 1/4
Third Quarter 18 5/8 14 5/8
Second Quarter 18 7/8 14 3/16
First Quarter 14 7/16 12 7/8
</TABLE>
At March 17, 2000, the Company had approximately 350 shareholders of record.
The Company has never paid a dividend. The Company's policy is to reinvest
earnings from operations, and the Company expects to follow this policy for the
foreseeable future.
6.
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Item 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
=============================================================================================================
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 118,620 $ 108,744 $ 98,038 $ 91,414 $ 75,560
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 16,209 11,570 9,224 6,703 3,396
Net income $ 6,902 $ 4,618 $ 3,110 $ 2,355 $ 681
PER SHARE DATA
Basic earnings per share $ 3.39 $ 2.15 $ 1.41 $ 1.06 $ .30
Weighted average shares outstanding 2,035 2,147 2,200 2,210 2,270
Diluted earnings per share $ 3.32 $ 2.10$ 1.39$1.05 $ .30
Weighted average shares outstanding 2,082 2,196 2,239 2,228 2,370
FINANCIAL CONDITION
Current ratio 1.7:1 2.0:1 2.4:1 2.1:1 2.0:1
Total assets $ 67,751 $ 63,617 $ 54,355 $ 53,550 $ 47,223
Long-term debt, including current
portion 4,457 6,810 8,300 8,000 4,011
Shareholders' equity 39,043 36,238 31,858 29,350 27,281
Long-term debt to net worth .11 .19 .26 .27 .15
Book value per diluted share $ 18.75 $ 16.50 $ 14.23 $ 13.17 $ 12.02
CASH FLOWS
Net cash provided by (used in):
Operating activities $ 6,228 $ 14,223 $ 6,086 $ 6,676 $ 848
Investing activities (9,038) (6,899) (4,239) (9,174) (3,751)
Financing activities (3,963) (1,728) (702) 1,803 1,199
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents $ (6,773) $ 5,596 $ 1,145 $ (695) $ (1,704)
========= ========= ========= ========= =========
</TABLE>
7.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(References to a "Note" are to Notes to Consolidated Financial Statements)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $347,000 at year-end compared to
$7,120,000 in the prior year. Operations in 1999 provided $6,228,000 of cash
compared to $14,223,000 in 1998 and the $6,086,000 generated in 1997. The
decrease in net cash generated by operating activities in 1999 was primarily due
to an increase in inventories. The increase in inventories was due to the low
level of finished goods furnace inventory on hand at year-end 1998. Raw
materials and work-in-process also increased due to the higher fan coil volume.
The increase in 1998 from the 1997 level was mainly due to higher earnings, a
decrease in inventories and an increase in accounts payable and accrued
expenses.
Net cash used in investing activities was $9,038,000 in 1999, $6,899,000 in 1998
and $4,239,000 in 1997. Capital expenditures for 1999, 1998 and 1997 were
$9,024,000, $6,464,000 and $4,194,000, respectively. The capital expenditures
were principally to support the continuing strong business demand that has been
experienced by the companies in the construction materials segment although
office and warehouse space was added in Phoenix. In addition, the 1999 and 1998
capital additions include approximately $1,100,000 and $1,300,000, respectively,
for the computer project discussed more fully under the heading "Year 2000
Compliance." Also during 1998, the Company invested $470,000 to acquire a new
product line for the heating and air conditioning segment.
Budgeted capital expenditures for 2000 are approximately $6,400,000 ($4,500,000
for the construction materials segment and $1,900,000 for the heating and air
conditioning segment), which is $2,100,000 more than planned depreciation. The
construction materials budget contemplates expansion projects totaling
approximately $1,375,000 and purchases of approximately $1,900,000 of additional
equipment to support the increased business. The heating and air conditioning
budget includes approximately $1,125,000 for new office space. The 2000
expenditures will be funded from internal sources, available borrowing or
leasing capacity.
During 1999, cash of $3,963,000 was used in financing activities. Scheduled
long-term debt repayments of $2,556,000 were made during the year. Costs and
expenses associated with the June cancellation of 79,096 (post-split) shares
were $1,595,000, although only $708,000 was expended as $887,000 remains
unfunded at year-end and is included in accounts payable. An additional
$2,746,000 was used to acquire 139,574 shares of treasury stock. Borrowings
against the revolving credit facility of $1,600,000 and an increase in the
capital lease of $203,000 provided a portion of the above cash while proceeds
from the issuance of treasury shares related to the exercise of stock options
generated $244,000, including $100,000 of related tax savings. During 1998, cash
of $1,728,000 was used in financing activities. Scheduled long-term debt
repayments of $1,900,000 were made during the year and cash of $238,000 was used
to acquire 8,030 shares of treasury stock. A capital lease for $440,000 financed
software related to the computer project. Scheduled repayments aggregating
$30,000 were made against the lease during the year. During 1997, cash of
$702,000 was used in financing activities. The Company converted $2,000,000 from
the revolving credit facility to term debt to fund certain capital expenditures.
Scheduled long-term debt repayments of $1,700,000 were made during the year and
the $400,000 balance outstanding on the revolving line of credit at the end of
1996 was repaid. Cash of $602,000 was used to acquire 22,810 shares of treasury
stock.
8.
<PAGE>
The Company maintains a credit agreement with two banks. The agreement, as
amended at various times, provides for a term loan of $9,250,000 ($4,000,000
outstanding at January 1, 2000) and a revolving credit facility of $11,500,000
for funding of seasonal sales programs related to the furnace and evaporative
cooler product lines. The line is also used for stand-by letters of credit to
insurance carriers in support of self-insured amounts under the Company's
insurance program. Borrowings are unsecured and bear interest at prime or an
adjusted LIBOR rate.
The Company anticipates the primary source of cash flow in 2000 to be from its
operating subsidiaries. This anticipated cash flow, supplemented by the line of
credit, will be sufficient to cover normal and expected future cash needs,
including servicing debt and planned capital expenditures.
The Company purchases insurance coverage for property loss, workers'
compensation, general, product and automobile liability maintaining certain
levels of retained risk (self-insured portion). Provisions for both claims and
unasserted claims that would be covered under the self-insured portion of the
policies are recorded in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of, and for the year ended December 29, 2001.
The Company has not yet adopted this pronouncement but does not expect that it
will have a material impact on the Company's financial position or results of
operations.
OPERATIONS
1999 VS. 1998
Consolidated sales increased $9,876,000, or 9%, to $118,620,000. The net sales
of the construction materials segment rose $5,126,000 (9%) while the net sales
of the heating and air conditioning segment rose $4,743,000 (9%) compared to the
previous year. The construction materials segment continued to report gains due
to a very strong construction market along the Front Range in southern Colorado.
The improvement in the heating and air conditioning segment was due to the
combined improvements in the fan coil and furnace lines offset by the decline in
evaporative cooler sales. The decline in the evaporative cooler line was the
result of an unseasonably cool 1999 spring and summer which also affected the
fourth quarter's pre-season sales.
The Company experienced a high level of price competition in all of its product
lines, which the Company expects to continue into 2000. During 1999, inflation
was not a significant factor at any of the operations.
Cost of sales (exclusive of depreciation, depletion and amortization), as a
percent of sales, improved from 75% to just under 73%. The improvement reflects
the increased volume in the fan coil and furnace lines as well as the
construction materials segment. Cost of sales in the heating and air
conditioning segment were reduced by approximately $361,000 during 1998 due to
liquidation of LIFO inventory layers carried at costs that were lower than the
costs of current purchases.
Depreciation, depletion and amortization increased from $3,992,000 to $4,998,000
due to the increased capital expenditure level the past two years.
Selling and administrative expenses increased $1,090,000. As a percentage of
sales, selling and administrative expenses remained relatively constant at just
under 14%.
9.
<PAGE>
The increased operating income is principally attributed to the improved sales
volume.
The decline in interest expense of $116,000 is the result of the lower term loan
balance and the strong cash position at the beginning of the year which delayed
the use of the line of credit.
The Company wrote off the remaining $100,000 investment in Oracle Ridge Mining
Partners (ORMP) during 1999 and recorded a loss of $56,000 related to on going
carrying costs of the property. Carrying costs at this level are expected to be
on going.
The Company's 1999 effective income tax rate on income (35.7%) reflects federal
and state statutory rates adjusted for non-deductible and other tax items. See
Note 10.
OPERATIONS
1998 VS. 1997
Consolidated sales increased $10,706,000, or 11%, to $108,744,000. The net sales
of the construction materials segment rose $7,190,000 (14%) while the net sales
of the heating and air conditioning segment rose $3,516,000 (7%) compared to the
previous year. The construction materials segment continued to report gains due
to a very strong construction market in the Colorado Springs and Pueblo areas of
Colorado. The improvement in the heating and air conditioning segment was due to
the combined improvements in the fan coil and furnace lines offset by the
decline in evaporative cooler sales. The decline in the evaporative cooler line
was the result of the adverse effect of El Nino especially felt during the
second quarter of 1998.
The Company experienced a high level of price competition in all of its product
lines. During 1998, inflation was not a significant factor at any of the
operations.
Cost of sales (exclusive of depreciation, depletion and amortization), as a
percent of sales, improved slightly from 76% to just over 75%. The improvement
reflects the increased volume in the fan coil and furnace lines as well as the
construction materials segment. Cost of sales were reduced by approximately
$361,000 during 1998 and $225,000 during 1997 due to liquidation of LIFO
inventory layers carried at costs that were lower than the costs of current
purchases.
Depreciation, depletion and amortization increased from $3,493,000 to $3,992,000
due to the increased capital expenditure level the past two years.
Selling and administrative expenses increased $605,000. As a percentage of
sales, selling and administrative expense declined from 15% to 14%. The decrease
is primarily due to the continued increase in the construction materials segment
where these expenses do not increase (or decrease) proportionally with volume.
The increased operating income is principally tied to the improved sales volume.
The decline in interest expense of $336,000 is the result of the lower term loan
balance and the strong cash flow, which allowed the earlier than normal payback
of the line of credit.
The Company wrote down the investment in ORMP from $600,000 to $100,000 during
1998 and recorded a loss of $52,000 related to on going carrying costs of the
property.
10.
<PAGE>
The Company's 1998 effective income tax rate on income (34.0%) reflects federal
and state statutory rates adjusted for non-deductible and other tax items. See
Note 10.
YEAR 2000 COMPLIANCE
The Year 2000 issue related to the way computer hardware and software defined
calendar dates; many use only two digits to represent the year which could cause
failures or miscalculations. In addition, many systems and equipment that are
not typically thought of as "computer-related" (referred to as "non-IT") contain
imbedded hardware or software that may include a time element. While it is
impossible to predict whether there will be future ramifications from this
issue, to date, the Company has not experienced any significant disruptions in
its supply, manufacturing, processing, distribution or financial chains. Nor
have we been affected by Year 2000 interruptions in our customers' operations,
if any, resulting in reduced sales, increased inventory or receivable levels and
cash flow reductions. Additionally, the Company has not identified any of our
products or non-IT systems and equipment that are Year 2000 non-compliant.
During 1998 and 1999 the Company implemented a Year 2000 compliant enterprise
resource planning (ERP) system to replace all non-compliant systems as well as
to modernize and integrate all of the Company's systems. The majority of the
hardware utilized by the Company, including all that may be Year 2000
non-compliant, was also replaced. The cost of the entire project was
approximately $4,300,000 including hardware, software, consulting fees and other
out-of-pocket expenses. Funding was furnished by a lease of approximately
$1,500,000 with the balance provided by operating cash flow. Additional costs to
improve the system are expected and will be expensed as incurred. These
additional costs are not expected to have a material impact on the Company's
financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information available to the Company at the time such
statements were made. When used in this Report, words such as "anticipates,"
"contemplates," "expects" and similar expressions, are intended to identify
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of factors including,
but not limited to: weather, interest rates, availability of raw materials and
their related costs and competitive forces.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks related to interest rates and commodity
prices. To manage these risks, the Company has, from time to time, entered into
various interest rate swaps to create synthetic-debt instruments as authorized
by the Company's policies and procedures. The Company does not use swaps or
hedging instruments for trading purposes, and is not a party to any transaction
involving leveraged derivatives. The Company is not currently involved in any
swaps or hedging contracts.
Interest Rates
The Company utilizes revolving credit and term-loan facilities that bear
interest at either prime or an adjusted LIBOR rate. The amount outstanding under
these facilities aggregated $4 million
11.
<PAGE>
at January 1,2000. In addition, the Company has entered into a capital lease
with fixed interest rates and original maturity dates (based upon the date of
the draw) of 42 months. As the draws occurred during 1998 and 1999 and the total
remaining due is $457,000, its book and fair value was considered to be
approximately the same. See Note 4.
Commodities
The Company purchases commodities, such as steel, copper, cement and cardboard
for packaging, at market prices and does not currently use financial instruments
to hedge commodity prices.
The statements and other information in this section constitute forward-looking
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Statements and Schedule of Continental
Materials Corporation and report thereon:
Consolidated statements of operations and
retained earnings for fiscal years
1999, 1998 and 1997 13
Consolidated statements of cash flows
for fiscal years ended 1999, 1998 and 1997 14
Consolidated balance sheets at January 1, 2000
and January 2, 1999 15
Notes to consolidated financial statements 16-24
Report of Independent Accountants 25
</TABLE>
12.
<PAGE>
CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS FOR FISCAL YEARS 1999, 1998 AND 1997
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
NET SALES $ 118,620 $ 108,744 $ 98,038
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation,
depletion and amortization) 86,181 81,881 74,524
Depreciation, depletion and amortization 4,998 3,992 3,493
Selling and administrative 16,146 15,056 14,451
---------- ---------- ---------
OPERATING INCOME 11,295 7,815 5,570
Interest expense (469) (585) (921)
Other (expense) income, net (84) (237) 161
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 10,742 6,993 4,810
Income tax provision 3,840 2,375 1,700
---------- ---------- ---------
NET INCOME 6,902 4,618 3,110
Retained earnings, beginning of year 35,901 1,283 28,173
---------- ---------- ---------
RETAINED EARNINGS, END OF YEAR $ 42,803 $ 35,901 $ 31,283
========== ========== =========
Basic earnings per share $ 3.39 $ 2.15 $ 1.41
Weighted average shares outstanding 2,035 2,147 2,200
Diluted earnings per share $ 3.32 $ 2.10 $ 1.39
Weighted average shares outstanding 2,082 2,196 2,239
</TABLE>
The accompanying notes are an integral part of the
financial statements.
13.
<PAGE>
CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR FISCAL YEARS 1999, 1998, AND 1997
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,902 $ 4,618 $ 3,110
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, depletion and amortization 4,998 3,992 3,493
Deferred income tax provision (benefit) 109 (708) 141
Provision for doubtful accounts 486 304 264
Loss (gain) on disposition of property
and equipment 57 (42) (26)
Equity loss from mining partnership 56 52 287
Write-down of investment in mining partnership 100 500 --
Changes in operating assets and liabilities
Receivables (3,926) (3,243) 437
Inventories (3,916) 2,243 891
Prepaid expenses (450) 306 (9)
Income taxes (344) 1,050 (229)
Accounts payable and accrued expenses 1,778 5,367 (1,818)
Other 378 (216) (455)
--------- --------- --------
Net cash provided by operating activities 6,228 14,223 6,086
--------- --------- --------
INVESTING ACTIVITIES
Capital expenditures (9,024) (6,464) (4,194)
Investment in new product line -- (470) --
Investment in mining partnership (56) (52) (107)
Proceeds from sale of property and equipment 42 87 62
--------- --------- --------
Net cash used in investing activities (9,038) (6,899) (4,239)
--------- --------- --------
FINANCING ACTIVITIES
Borrowings (repayment) of revolving credit facility 1,600 -- (400)
Long-term borrowings 203 440 2,000
Repayment of long-term debt (2,556) (1,930) (1,700)
Payment to purchase and cancel stock (708) -- --
Proceeds from exercise of stock options 244 -- --
Payments to acquire treasury stock (2,746) (238) (602)
--------- --------- --------
Net cash used in financing activities (3,963) (1,728) (702)
--------- --------- --------
Net (decrease) increase in cash
and cash equivalents (6,773) 5,596 1,145
Cash and cash equivalents
Beginning of year 7,120 1,524 379
--------- --------- --------
End of year $ 347 $ 7,120 $ 1,524
========= ========= ========
Supplemental disclosures of cash flow items
Cash paid during the year
Interest $ 644 $ 471 $ 973
Income taxes 4,062 2,038 1,793
</TABLE>
The accompanying notes are an integral part
of the financial statements.
14.
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED BALANCE SHEETS JANUARY 1, 2000 AND JANUARY 2, 1999
(Amounts in thousands except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 347 $ 7,120
Receivables less allowance of $800 and $775 20,161 16,821
Inventories 15,966 12,050
Prepaid expenses 2,592 2,695
----------- -----------
Total current assets 39,066 38,686
----------- -----------
Property, plant and equipment:
Land and improvements 3,970 2,881
Buildings and improvements 11,837 9,512
Machinery and equipment 57,792 55,103
Mining properties 2,170 2,170
Less accumulated depreciation and depletion (48,878) (46,880)
----------- -----------
26,891 22,786
----------- -----------
Other assets 1,794 2,145
----------- -----------
$ 67,751 $ 63,617
=========== ===========
LIABILITIES
Current liabilities
Bank loan payable $ 1,600 $ --
Current portion of long-term debt 2,582 2,526
Accounts payable 7,263 5,124
Income taxes 927 1,271
Accrued expenses
Compensation 3,214 2,707
Reserve for self-insured losses 2,579 3,210
Profit sharing 2,515 2,108
Other 2,377 2,401
----------- -----------
Total current liabilities 23,057 19,347
----------- -----------
Long-term debt 1,875 4,284
Deferred income taxes 1,227 1,670
Other long-term liabilities 2,549 2,078
Commitments and contingencies (Notes 5 and 8)
SHAREHOLDERS' EQUITY
Common shares, $.25 par value; authorized
3,000,000 shares; issued 2,574,264 and 2,653,176
shares, respectively 643 663
Capital in excess of par value 1,983 3,484
Retained earnings 42,803 35,901
Treasury shares, at cost (6,386) (3,810)
----------- -----------
39,043 36,238
----------- -----------
$ 67,751 $ 63,617
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
15.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Continental Materials Corporation
and all of its subsidiaries (the Company).
Certain prior years' amounts have been reclassified to conform to the current
presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of January 1, 2000 and January 2, 1999 and
the reported amounts of revenues and expenses during each of the three years in
the period ended January 1, 2000. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for approximately 85% of total inventories
at January 1, 2000 (83% at January 2, 1999). The cost of all other inventory is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
as follows:
Buildings 10 to 31 years
Leasehold improvements Terms of leases
Machinery and equipment 3 to 10 years
Depletion of rock and sand deposits and amortization of deferred development
costs are computed by the units-of-production method based upon estimated
recoverable quantities of rock and sand.
The cost of property sold or retired and the related accumulated depreciation,
depletion and amortization are removed from the accounts and the resulting gain
or loss is reflected in other income. Maintenance and repairs are charged to
expense as incurred. Major renewals and betterments are capitalized and
depreciated over their useful lives.
OTHER ASSETS
Amortization of certain other assets is computed on a straight-line basis over
periods of 5 and 10 years.
RETIREMENT PLANS
The Company and certain subsidiaries have various contributory profit sharing
retirement plans for specific employees. The plans allow qualified employees to
make tax deferred contributions pursuant to Internal Revenue Code Section
401(k). The Company makes annual contributions, at its discretion, based
primarily on profitability. Costs under the plans are charged to operations as
incurred.
16.
<PAGE>
RESERVE FOR SELF-INSURED LOSSES
The Company's risk management program provides for certain levels of loss
retention for workers' compensation, automobile liability and general and
product liability claims. The components of the reserve have been recorded in
accordance with the requirements of Statement of Financial Accounting Standards
(SFAS) No. 5, "Accounting for Contingencies," and represent management's best
estimate of future liability.
RECLAMATION
In connection with permits to mine properties in Colorado, the Company is
obligated to reclaim the mined areas. Reclamation costs are calculated using a
rate based on the total estimated reclamation costs, units of production and
estimates of recoverable reserves. Reclamation costs are charged to operations
as the properties are mined.
REVENUE RECOGNITION
The Company's practice is to recognize revenues from product sales when title
transfers.
INCOME TAXES
Income taxes are reported consistent with SFAS No. 109, "Accounting for Income
Taxes." Deferred taxes reflect the future tax consequences associated with the
differences between financial accounting and tax bases of assets and
liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of trade receivables and temporary cash
investments. The Company invests its excess cash in government securities. The
Company has not experienced any losses on these investments.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations. See Note 12
for a description of the Company's customer base and geographical location by
segment.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value is required.
FISCAL YEAR END
The Company's fiscal year end is the Saturday nearest December 31. Fiscal 1999
and 1998 each consist of 52 weeks while 1997 consists of 53 weeks.
2. INVENTORIES
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Finished $ 7,557 $ 6,761
Work in process 1,642 1,176
Raw materials and supplies 6,767 4,113
---------- ----------
$ 15,966 $ 12,050
========== ==========
</TABLE>
If inventories valued on the LIFO basis were valued at current costs,
inventories would be higher as follows: 1999 -- $1,713,000, 1998 -- $1,610,000;
1997-- $2,340,000.
17.
<PAGE>
Reduction in inventory quantities during 1998 at one of the locations, resulted
in liquidation of LIFO inventory layers carried at costs that were lower than
the costs of current purchases. The effect, recorded in the fourth quarter, was
to decrease cost of goods sold by approximately $361,000 and to increase net
earnings by $224,000 or $.10 per diluted share.
3. INVESTMENT IN MINING PARTNERSHIP
The Company has a 30% ownership interest in ORMP, a general partnership, which
operated a copper mine primarily situated in Pima County, Arizona. The equity
method of accounting is used to include 30% of ORMP's income and losses in the
Company's consolidated financial statements.
Production at the mine was halted in February 1996. Although the Partners are
attempting to sell the mine, continued low prices of copper makes it unlikely
that the property will be sold. In accordance with SFAS No. 121, the remaining
investment in the mining partnership was written off as of January 1, 2000. The
related impairment loss of $100,000 is included in the $156,000 loss recorded
for 1999. During 1998, the Company recorded an equity loss of $552,000 including
an impairment loss of $500,000. The equity losses are included in "Other
(expense) income, net" in the Consolidated Statements of Operations. The year
end values for each of the years were based on the estimated fair market value
of the partnership's property and assets less liabilities at the respective
dates. Future cash contributions to ORMP for carrying costs will be expensed
when made.
4. LONG-TERM DEBT
Long-term debt consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Unsecured term loan $ 4,000 $ 6,400
Capital lease 457 410
-------- --------
4,457 6,810
Less current portion 2,582 2,526
-------- --------
$ 1,875 $ 4,284
======== ========
The unsecured term loan is payable to two banks in semi-annual installments with
final principal payment due June 15, 2001. The loan, at the Company's option,
bears interest at either prime or an adjusted LIBOR rate.
The Company is required to maintain certain levels of consolidated tangible net
worth, to attain certain levels of cash flow (as defined) on a rolling
four-quarter basis, and to maintain certain ratios including consolidated debt
to cash flow (as defined). Additional borrowing, acquisition of stock of other
companies, purchase of treasury shares and payment of cash dividends are either
limited or require prior approval by the lenders.
The capital lease is payable in monthly installments through December 2002, with
interest at various rates based upon prevailing interest rates on the due dates
of the draws.
Aggregate long-term debt matures as follows (amounts in thousands):
<CAPTION>
<S> <C> <C>
1999 $ 2,582
2000 1,795
2001 80
---------
$ 4,457
=========
</TABLE>
During 1999 and 1998, the Company had an $11,500,000 unsecured revolving line of
credit. The line is with two banks and is used for short-term cash needs and
standby letters of credit.
18.
<PAGE>
Interest was charged at prime or adjusted LIBOR rates on cash borrowings during
both years. The weighted average interest rate was 7.4% for fiscal 1999 and 7.6%
for fiscal 1998. There was $1,600,000 outstanding as of January 1, 2000 while no
balance was outstanding against the line as of January 2, 1999.
At January 1, 2000, the Company had letters of credit outstanding totaling
approximately $3,494,000 that collateralize the self-insured losses.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its continuing
business, principally product liability matters related to the gas-fired heating
products. In the Company's opinion, none of these proceedings, when concluded,
will have a material adverse effect on the Company's results of operations or
financial position.
6. SHAREHOLDERS' EQUITY
The shareholders approved an amendment to the Restated Certificate of
Incorporation at the May 26,1999 annual meeting effecting a reverse 1-for-50
stock split followed immediately by a forward 100-for-1 stock split of the
Company's Common Stock. As permitted by Delaware law, registered stockholders
whose shares of stock were converted into less than one share in the reverse
1-for-50 split received the right to receive cash equal to the fair value of
those fractional interests. Registered stockholders whose shares of Common
Stock, $.50 par value, are converted into more than one share in the reverse
split will receive, in the forward 100-for-1 split, a number of shares of Common
Stock, $.25 par value, equal to 100 times the number of shares and fractional
shares held after the reverse split. In other words, all registered stockholders
originally holding 50 or more shares of Common Stock, $.50 par value,
immediately prior to the effective date of the transaction will hold twice the
number of shares of Common Stock, $.25 par value, immediately subsequent to the
transaction. The reverse and forward stock splits, together with the related
cash payments to stockholders with small holdings, is referred to below as the
"stock split." The effective date of the stock split was June 7, 1999.
Under the Company's Stock Option Plan (the Plan), officers and key employees may
be granted options to purchase the Company's common stock at option prices
established by the Compensation Committee of the Board of Directors provided the
option price is no less than the fair market value at the date of the grant. The
Company has reserved 360,000 shares for distribution under the Plan. On
September 26, 1995, a total of 156,000 options were granted to five individuals
at an exercise price of $6.5625. These shares became exercisable during 1996.
During 1997, one individual who had been granted 24,000 shares left the Company
without exercising his options. During 1999, options for 22,000 shares were
exercised. Per the agreement, 400 reload options were automatically granted when
one of the individuals paid a portion of the option price by delivery of shares
of the Company's common stock. The exercise price of these reload options is
$23.125, the market price of the stock on the date the reload option was
granted. The reload options are vested and retain all terms of the original
options, including the expiration date. The 110,400 outstanding options expire
on September 25, 2005.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
Plan. Accordingly, no compensation expense was recognized for its stock-based
compensation Plan. Had compensation cost for the reload options been determined
based on the fair value at the grant date consistent with the methodology
proscribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
effect on the Company's net income and earnings per share would not have been
significant.
19.
<PAGE>
The following is the common shares and capital in excess of par value activity
during 1999. There was no activity in either of these accounts during 1997 or
1998.
<TABLE>
<CAPTION>
Common Capital in
Common shares excess of
shares amount par value
------ ------ ---------
<S> <C> <C> <C>
Balance at January 2, 1999 1,326,588 $ 663 $ 3,484
Effect of reverse split (39,456) (20) (1,575)
Effect of forward split 1,287,132 -- --
Common shares issued under the
Stock Option Plan (from treasury) -- -- (26)
Tax benefit from exercise of
options -- -- 100
--------- ------ ---------
Balance at January 1, 2000 2,574,264 $ 643 $ 1,983
========= ====== =========
</TABLE>
The Board of Directors of the Company authorized various amounts to be utilized
in acquiring treasury shares during 1999. At their March 2, 2000 meeting, the
Board authorized an additional $2,000,000 to be used at the discretion of
management to repurchase shares. Treasury share activity during 1997, 1998 and
1999 was as follows (dollars in thousands and shares restated for the stock
split):
<TABLE>
<CAPTION>
Number of shares Cost
---------------- -------
<S> <C> <C>
Balance at December 28, 1996 446,754 $ 2,970
Purchase of treasury shares 45,620 602
------- -------
Balance at January 3, 1998 492,374 $ 3,572
Purchase of treasury shares 16,060 238
------- -------
Balance at January 2, 1999 508,434 $ 3,810
Purchase of treasury shares 139,574 2,746
Issuance of treasury shares related
to the Stock Option Plan (22,000) (170)
------- -------
Balance at January 1, 2000 626,008 $ 6,386
======= =======
</TABLE>
Four hundred thousand shares of preferred stock ($.50 par value) are authorized
and unissued.
7. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
pronouncement simplifies the standards for computing earnings per share (EPS)
and requires the presentation of two amounts, basic and diluted EPS. Basic EPS
is computed by dividing net income by the weighted-average number of common
shares outstanding during the period. Diluted EPS is computed by dividing net
income by the weighted-average number of common shares outstanding, adjusted for
dilutive common share equivalents attributed to outstanding options to purchase
common stock.
The following is a reconciliation of the calculation of basic and diluted EPS
for the years-ended 1999, 1998 and 1997 (dollars in thousands and shares
restated for the stock split).
20.
<PAGE>
<TABLE>
<CAPTION>
Weighted
average Per-share
Income shares earnings
------ ------ --------
<S> <C> <C> <C>
1999
Basic EPS $6,902 2,035 $3.39
=====
Effect of dilutive options -- 47
------ -----
Diluted EPS $6,902 2,082 $3.32
====== ===== =====
1998
Basic EPS $4,618 2,147 $2.15
=====
Effect of dilutive options -- 49
------ -----
Diluted EPS $4,618 2,196 $2.10
====== ===== =====
1997
Basic EPS $3,110 2,200 $1.41
=====
Effect of dilutive options -- 39
------ -----
Diluted EPS $3,110 2,239 $1.39
====== ===== =====
8. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company leases certain of its facilities and equipment and is required to
pay the related taxes, insurance and certain other expenses. Rental expense was
$2,460,000, $2,435,000 and $2,170,000 for 1999, 1998 and 1997, respectively.
Future minimum rental commitments under non-cancelable operating leases for 1999
and thereafter are as follows: 2000 -- $1,969,000; 2001 -- $1,748,000; 2002 --
$1,655,000; 2003 -- $984,000; 2004 -- $751,000 and thereafter -- $19,197,000.
Included in these amounts is $300,000 per year and approximately $16,100,000 in
the "thereafter" amount related to an aggregates lease in conjunction with the
Pueblo operation.
The Company also receives annual rental income of $145,000 from a building it
owns. The related lease expires in January 2003 and contains renewal options.
9. RETIREMENT PLANS
As discussed in Note 1, the Company maintains retirement benefit plans for
eligible employees. Total plan expenses charged to operations were $2,783,000,
$2,025,000 and $1,228,000 in 1999, 1998 and 1997, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows (amounts in
thousands):
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal: Current $ 3,221 $ 2,742 $ 1,475
Deferred 98 (634) 126
State: Current 510 341 84
Deferred 11 (74) 15
------- ------- -------
$ 3,840 $ 2,375 $ 1,700
======= ======= =======
</TABLE>
The difference between the tax rate on income for financial statement purposes
and the federal statutory tax rate was as follows:
21.
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Percentage depletion (1.8) (3.2) (3.4)
State income taxes, net of federal benefit 3.0 2.3 1.5
Non-deductible expenses .1 .3 .4
Other .4 .6 2.8
---- ---- ----
35.7% 34.0% 35.3%
==== ==== ====
For financial statement purposes, deferred tax assets and liabilities are
recorded at a blend of the current statutory federal and states' tax rates -
38%. The principal temporary differences and their related deferred taxes are as
follows (amounts in thousands):
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Reserves for self-insured losses $ 1,087 $ 1,130
Deferred compensation 498 396
Asset valuation reserves 1,154 1,038
Other 44 40
-------- --------
Total deferred tax assets 2,783 2,604
-------- --------
Depreciation 1,939 1,873
Investment in mining partnership 14 52
Other 402 142
-------- --------
Total deferred tax liabilities 2,355 2,067
-------- --------
Net deferred tax asset $ 428 $ 537
======== ========
The net current deferred tax assets are $1,654 and $2,208 at year-end 1999 and
1998, respectively, and are included with "Prepaid expenses" on the Consolidated
Balance Sheets.
11. UNAUDITED QUARTERLY FINANCIAL DATA
The following table provides summarized unaudited fiscal quarterly financial
data for 1999 and 1998 (amounts in thousands, except per share amounts; per
share data restated for the stock split):
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
Net sales $24,332 $31,253 $33,426 $29,609
Gross profit 4,950 7,655 6,768 8,624
Depreciation, depletion and
amortization 1,087 1,243 1,377 1,291
Net income 734 2,039 1,598 2,531
Basic income per share .34 .99 .80 1.29
Diluted income per share .33 .97 .78 1.26
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Net sales $22,806 $28,935 $29,069 $27,935
Gross profit 4,592 5,822 6,467 6,330
Depreciation, depletion and
amortization 1,020 1,029 1,045 898
Net income 579 1,232 1,685 1,123
Basic income per share .27 .58 .79 .53
Diluted income per share .26 .56 .77 .51
</TABLE>
22.
<PAGE>
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total for the year.
12. INDUSTRY SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 replaces the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
The Company is organized along its two principal product lines. Wall furnaces,
console heaters, evaporative coolers and fan coils have been aggregated into the
heating and air conditioning segment. Ready mix concrete, construction
aggregates, building supplies and doors are combined to form the construction
materials segment. The heating and air conditioning segment produces heating and
cooling equipment for residential applications which is sold primarily to
wholesale distributors and retail home centers. Fan coils are also sold to HVAC
installing contractors and equipment manufacturers for commercial applications.
A significant portion of fan coil revenues is dependent upon new hotel
construction. Sales are nationwide, but are concentrated in the southwestern
U.S. The construction materials segment is involved in the production and sale
of concrete and other building materials and the exploration, extraction and
sales of construction aggregates. Sales of this segment are confined to the
Front Range area in southern Colorado.
The Company evaluates the performance of its segments and allocates resources to
them based on operating income and return on investment. Other factors are also
considered. Operating income is determined by deducting operating expenses from
all revenues. In computing operating income, none of the following has been
added or deducted: unallocated corporate expenses, interest, income or loss from
unconsolidated investees, other income or loss or income taxes.
The following table presents information about reported segments for the fiscal
years 1999, 1998 and 1997 along with the items necessary to reconcile the
segment information to the totals reported in the financial statements (amounts
in thousands).
<TABLE>
<CAPTION>
Heating and Construction All Unallocated
Air Conditioning Materials Other (a) Corporate Total
---------------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1999
Revenues from external
customers $ 55,860 $ 62,608 $ 145 $ 7 $ 118,620
Depreciation, depletion
and amortization 1,181 3,758 22 37 4,998
Segment operating income 7,793 7,001 43 (3,542) 11,295
Segment assets 31,568 34,157 65 1,961 67,751
Expenditures for segment
assets 2,640 6,262 -- 122 9,024
</TABLE>
23.
<PAGE>
<TABLE>
<CAPTION>
Heating and Construction All Unallocated
Air Conditioning Materials Other (a) Corporate Total
---------------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1998
Revenues from external
customers $ 51,117 $ 57,482 $ 145 $ -- $ 108,744
Depreciation, depletion
and amortization 1,091 2,862 22 17 3,992
Segment operating income 4,183 6,414 41 (2,823) 7,815
Segment assets 25,628 29,888 183 7,918 63,617
Expenditures for segment
assets 1,352 4,994 -- 118 6,464
1997
Revenues from external
customers $ 47,601 $ 50,292 $ 145 $ -- $ 98,038
Depreciation, depletion
and amortization 1,085 2,364 25 19 3,493
Segment operating income 3,334 4,975 (97) (2,642) 5,570
Segment assets 23,927 27,221 720 2,487 54,355
Expenditures for segment
assets 1,191 2,991 3 9 4,194
</TABLE>
(a) All Other represents segments below the quantitative thresholds.
The segments include a small real estate operation and the holding
costs for certain mining interests that remain from the period the
Company maintained significant interests in mining operations.
All long-lived assets are in the United States and no customer accounts for 10%
or more of consolidated revenue.
24.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Continental Materials Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and retained earnings and cash flows
present fairly, in all material respects, the financial position of Continental
Materials Corporation and its subsidiaries at January 1, 2000 and January 2,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 2, 2000
25.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes of accountants and/or disagreements on any matter of
accounting principle or financial statement disclosure during the past 24 months
which would require a filing under Item 9.
PART III
Part III (Items 10, 11, 12,and 13) has been omitted from this 10-K Report since
Registrant will file, not later than 120 days following the close of its fiscal
year ended January 1, 2000, its definitive 2000 proxy statement. The information
required by Part III will be included in that proxy statement and such
information is hereby incorporated by reference, but excluding the information
under the headings "Compensation Committee Report" and "Comparison of Total
Shareholders' Return".
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) 1 Financial statements required by Item 14 are included in Item 8
of Part II.
(a) 2 The following is a list of financial statement schedules filed
as part of this Report:
Report of Independent Accountants
Schedule II Valuation and Qualifying Accounts & Reserves
For the Fiscal Years 1999, 1998 and 1997
All other schedules are omitted because they are not applicable or the
information is shown in the financial statements or notes thereto.
26.
<PAGE>
(a) 3 The following is a list of all exhibits filed as part of this
Report:
Exhibit 3 1975 Restated Certificate of Incorporation dated May 28,
1975 filed as Exhibit 5 to Form 8-K for the month of May
1975, incorporated herein by reference.
Exhibit 3a Registrant's By-laws as amended September 19, 1975 filed as
Exhibit 6 to Form 8-K for the month of September 1975,
incorporated herein by reference.
Exhibit 3b Registrant's Certificate of Amendment of Certificate of
Incorporation dated May 24, 1978 filed as Exhibit 1 to Form
10-Q for quarter ended June 30, 1978, incorporated herein by
reference.
Exhibit 3c Registrant's Certificate of Amendment of Certificate of
Incorporation dated May 27, 1987 filed as Exhibit 3c to Form
10-K for the year ended January 1, 1988, incorporated herein
by reference.
Exhibit 3d Registrant's Certificate of Amendment of Restated
Certificate of Incorporation dated June 4, 1999 filed as
Exhibit 1 to Form 8-K for the month of June 1999,
incorporated herein by reference.
Exhibit 10 Continental Materials Corporation Amended and Restated 1994
Stock Option Plan dated May 25, 1994 filed as Appendix A to
the 1994 Proxy Statement, incorporated herein by reference.*
Exhibit 10a Revolving Credit and Term Loan Agreement between The
Northern Trust Company, LaSalle National Bank and
Continental Materials Corporation dated as of October 21,
1996 filed as Exhibit 2D to Form 8-K for the month of
October 1996, incorporated herein by reference.
Exhibit 10b Acquisition Agreement Between Valco Properties, Ltd. And
Continental Materials Corporation filed as Exhibit 2A to
Form 8-K for the month October 1996, incorporated herein by
reference.
Exhibit 10c Non-Competition and Non-Disclosure Agreement by Valco, Inc.
And Thomas E. Brubaker in favor of Continental Materials
Corporation filed as Exhibit 2B to Form 8-K for the month of
October 1996, incorporated herein by reference.
Exhibit 10d Fee Sand and Gravel Lease Between Valco, Inc. And
Continental Materials Corporation filed as Exhibit 2C to
Form 8-K for the month of October 1996, incorporated herein
by reference.
Exhibit 10e Form of Supplemental Deferred Compensation Agreement filed
as Exhibit 10 to Form 10-Q for the quarter ended July 1,
1983, incorporated herein by reference.*
Exhibit 21 Subsidiaries of Registrant (filed herewith).
Exhibit 23 Consent of Independent Accountants (filed herewith).
Exhibit 27 Financial Data Schedule (filed herewith).
Exhibit 99a Continental Materials Corporation Employee Profit Sharing
Retirement Plan Amended and Restated Generally Effective
October 1, 1997.
Exhibit 99b Continental Materials Corporation Employees Profit Sharing
Retirement Plan on Form 11-K for the year ended January 1,
2000 (to be filed by amendment).
* - Compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
January 1, 2000.
27.
<PAGE>
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.
CONTINENTAL MATERIALS CORPORATION
---------------------------------
Registrant
By: /s/Joseph J. Sum
--------------------------------------
Joseph J. Sum, Vice President, Finance
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY(IES) DATE
- ------------------------------------- ------------------------------------ -----------------------
<S> <C> <C>
/S/ James G. Gidwitz
- -------------------------------------
James G. Gidwitz Chief Executive Officer
and a Director March 28, 2000
/S/ Joseph J. Sum
- -------------------------------------
Joseph J. Sum Vice President
and a Director March 28, 2000
/S/ Mark S. Nichter
- -------------------------------------
Mark S. Nichter Secretary and Controller March 28, 2000
/S/ Thomas H. Carmody
- -------------------------------------
Thomas H. Carmody Director March 28, 2000
/S/ Betsy R. Gidwitz
- -------------------------------------
Betsy R. Gidwitz Director March 28, 2000
/S/ Ralph W. Gidwitz
- -------------------------------------
Ralph W. Gidwitz Director March 28, 2000
/S/ Ronald J. Gidwitz
- -------------------------------------
Ronald J. Gidwitz Director March 28, 2000
/S/ William G. Shoemaker
- -------------------------------------
William G. Shoemaker Director March 28, 2000
/S/ Theodore R. Tetzlaff
- -------------------------------------
Theodore R. Tetzlaff Director March 28, 2000
/S/ Darrell M. Trent
- -------------------------------------
Darrell M. Trent Director March 28, 2000
</TABLE>
28.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Continental Materials Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 2, 2000 appearing in the 1999 Annual Report to Shareholders of
Continental Materials Corporation also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 2, 2000
<PAGE>
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)
for the fiscal years 1999, 1998 and 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E
Balance at Additions
Beginning of Charged to Costs Deductions - Balance at End of
Description Period and Expenses Describe Period
-------------------------------- ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
YEAR 1999
Allowance for doubtful accounts $775,000 $486,000 $461,000 (a) $800,000
================= ================= ================ ==================
Inventory valuation reserve $504,000 $127,000 $ 63,000 (b) $568,000
================= ================= ================ ==================
YEAR 1998
Allowance for doubtful accounts $580,000 $304,000 $109,000 (a) $775,000
================= ================= ================ ==================
Inventory valuation reserve $233,000 $667,000 $396,000 (b) $504,000
================= ================= ================ ==================
YEAR 1997
Allowance for doubtful accounts $ 373,000 $264,000 $ 57,000 (a) $580,000
================= ================= ================ ==================
Inventory valuation reserve $ 404,000 $203,000 $374,000 (b) $233,000
================= ================= ================ ==================
Notes:
(a) Accounts written off, net of recoveries. (c) Reserve deducted in the balance sheet from
the asset to which it applies.
(b) Amounts written off upon disposal of assets. (d) Column C(2) has been omitted as the answer
would be "none".
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Registrant has no parent; see proxy statement for Registrant's principal
shareholders. The following are Registrant's subsidiaries which are included in
the consolidated financial statements:
<TABLE>
<CAPTION>
Name of Subsidiary State or Other
(Each Owned 100% by Registrant Jurisdiction
Except as Otherwise Stated) of Incorporation
------------------------------------------------ ---------------------------
<S> <C>
Castle Concrete Company Colorado
Continental Catalina, Inc.* Arizona
Continental Copper, Inc. Arizona
Continental Quicksilver, Inc. Idaho
Continental Uranium, Inc. Colorado
Edens Industrial Park, Inc. Illinois
Phoenix Manufacturing, Inc. Arizona
ProSoft International, Inc.** Colorado
Transit Mix Concrete Co. Colorado
Transit Mix of Pueblo, Inc. Colorado
Williams Furnace Co. Delaware
</TABLE>
* owned by Continental Copper, Inc.
**owned by Transit Mix Concrete Co.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-23671) of Continental Materials Corporation
of our reports dated March 2, 2000 relating to the financial statements and
financial statement schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 347
<SECURITIES> 0
<RECEIVABLES> 20,161<F1>
<ALLOWANCES> 0
<INVENTORY> 15,966
<CURRENT-ASSETS> 39,066
<PP&E> 26,891<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,751
<CURRENT-LIABILITIES> 23,057
<BONDS> 0
643
0
<COMMON> 0
<OTHER-SE> 38,400
<TOTAL-LIABILITY-AND-EQUITY> 67,751
<SALES> 118,620
<TOTAL-REVENUES> 118,620
<CGS> 86,181<F3>
<TOTAL-COSTS> 107,325
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> 10,742
<INCOME-TAX> 3,840
<INCOME-CONTINUING> 6,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,902
<EPS-BASIC> 3.39
<EPS-DILUTED> 3.32
<FN>
<F1>Net of allowance for doubtful accounts
<F2>Net of accumulated depreciation and depletion
<F3>Exclusive of depreciation, depletion and amortization
</FN>
</TABLE>
'<PAGE>
- --------------------------------------------------------------------------------
--------------------------------------------------------
CONTINENTAL MATERIALS CORPORATION
EMPLOYEES PROFIT SHARING
RETIREMENT PLAN
--------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE ONE--DEFINITIONS
1.1 Account
1.2 Administrator
1.3 Beneficiary
1.4 Break in Service
1.5 Code
1.6 Company Stock
1.7 Compensation
1.8 Disability
1.9 Effective Date
1.10 Employee
1.11 Employer
1.12 Employment Date
1.13 Highly-Compensated Employee
1.14 Hour of Service
1.15 Leased Employee
1.16 Nonhighly-Compensated Employee
1.17 Normal Retirement Date
1.18 Participant
1.19 Plan
1.20 Plan Year
1.21 Trust
1.22 Trustee
1.23 Valuation Date
1.24 Year of Service
ARTICLE TWO--SERVICE DEFINITIONS AND RULES
2.1 Year of Service
2.2 Break in Service
2.3 Leave of Absence
2.4 Year(s) of Service on Return to Employment
2.5 Service in Excluded Job Classifications or with Related Companies
ARTICLE THREE--PLAN PARTICIPATION
3.1 Participation
3.2 Re-employment of Former Participant
3.3 Termination of Eligibility
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS,
ROLLOVERS AND TRANSFERS FROM OTHER PLANS
4.1 Elective Deferrals
4.2 Employer Contributions
4.3 Rollovers and Transfers of Funds from Other Plans
4.4 Timing of Contributions
4.5 Employee "After-Tax" Contributions
ARTICLE FIVE--ACCOUNTING RULES
5.1 Investment of Accounts and Accounting Rules
5.2 Participants Omitted in Error
ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS
6.1 Vesting
6.2 Forfeiture of Nonvested Balance
6.3 Return to Employment Before Distribution of Vested Account Balance
6.4 Normal Retirement
6.5 Disability
ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS
7.1 Manner of Payment
7.2 Time of Commencement of Benefit Payments
7.3 Furnishing Information
7.4 Amount of Death Benefit
7.5 Designation of Beneficiary
7.6 Distribution of Death Benefits
7.7 Eligible Rollover Distributions
ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS
8.1 Loans
8.2 Hardship Distributions
8.3 Withdrawals After Age 59-1/2
8.4 Withdrawals of After-Tax and Rollover Contributions
8.5 For Former Williams Furnace Plan Participants:
Withdrawals of Employer Contributions for Other
Financial Needs
ARTICLE NINE--ADMINISTRATION OF THE PLAN
9.1 Plan Administration
9.2 Claims Procedure
9.3 Trust Agreement
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS
10.1 Distribution of Excess Elective Deferrals
10.2 Limitations on 401(k) Contributions
10.3 Nondiscrimination Test for Employer Matching and Employee
After-Tax Contributions
10.4 Limitation on the Multiple Use Alternative
ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS
11.1 Rules and Definitions
ARTICLE TWELVE--AMENDMENT AND TERMINATION
12.1 Amendment
12.2 Termination of the Plan
ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS
13.1 Applicability
13.2 Definitions
13.3 Allocation of Employer Contributions and Forfeitures for a
Top-Heavy Plan Year
13.4 Vesting
ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS
14.1 Plan Does Not Affect Employment
14.2 Successor to the Employer
14.3 Repayments to the Employer
14.4 Benefits not Assignable
14.5 Merger of Plans
14.6 Investment Experience not a Forfeiture
14.7 Distribution to Legally Incapacitated
14.8 Construction
14.9 Governing Documents
14.10 Governing Law
14.11 Headings
14.12 Counterparts
14.13 Location of Participant or Beneficiary Unknown
</TABLE>
<PAGE>
CONTINENTAL MATERIALS CORPORATION EMPLOYEES
PROFIT SHARING RETIREMENT PLAN
WHEREAS, Continental Materials Corporation (hereinafter referred to as the
"Employer") heretofore adopted the Continental Materials Corporation Employees
Profit Sharing Retirement Plan (hereinafter referred to as the "Plan") for the
benefit of its eligible Employees; and
WHEREAS, the Employer reserved the right to amend the Plan; and
WHEREAS, Phoenix Manufacturing, Inc., a wholly-owned subsidiary of the Employer,
heretofore adopted the Phoenix Manufacturing, Inc. Employees Profit Sharing
Retirement Plan (hereinafter referred to as the "Phoenix Plan") for the benefit
of its eligible employees; and
WHEREAS, Phoenix Manufacturing, Inc. reserved the right to amend the Phoenix
Plan;
WHEREAS, the Employer and Phoenix Manufacturing, Inc. desire to merge the
Phoenix Plan into the Plan and the Employer desires to amend the Plan to reflect
the merger, as well as to modify certain administrative features of the Plan;
and
WHEREAS, it is intended that the Plan is to continue to be a qualified plan
under Section 401(a) of the Internal Revenue Code for the exclusive benefit of
the Participants and their Beneficiaries;
NOW, THEREFORE, the Phoenix Plan is merged into the Plan, and the Plan is hereby
amended by restating the Plan in its entirety as follows, effective as of
October 1, 1997.
<PAGE>
ARTICLE ONE--DEFINITIONS
For purposes of the Plan, unless the context or an alternative definition
specified within another Article provides otherwise, the following words and
phrases shall have the definitions provided:
1.1 "ACCOUNT" shall mean the individual bookkeeping accounts maintained for a
Participant under the Plan which shall record (a) the Participant's allocations
of Employer contributions and forfeitures, if applicable, (b) amounts of
Compensation deferred to the Plan pursuant to the Participant's election, (c)
any amounts transferred to this Plan under Section 4.3 from another qualified
retirement plan, (d) any "after-tax" contributions made to the Plan, and (e) the
allocation of Trust investment experience.
1.2 "ADMINISTRATOR" shall mean the Plan Administrator appointed from time to
time in accordance with the provisions of Article Nine hereof.
1.3 "BENEFICIARY" shall mean any person, trust, organization, or estate
designated by a participant to receive payment under the terms of the Plan upon
the death of a Participant.
1.4 "BREAK IN SERVICE" shall mean the twelve (12)-month computation period
specified in Article Two.
1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
1.6 "COMPANY STOCK" shall mean shares of common stock of Continental Materials
Corporation.
1.7 "COMPENSATION" shall mean the compensation paid to a Participant by the
Employer in the Plan Year, but exclusive of any program of deferred compensation
or additional benefits payable other than in cash and any compensation received
prior to his becoming a Participant in the Plan. Compensation shall include any
amounts deferred under a salary reduction agreement in accordance with Section
4.1 or under a Code Section 125 plan maintained by the Employer.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, the annual
Compensation of each Participant taken into account under the Plan shall not
exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation
limit is $150,000, as adjusted by the Secretary of the Treasury or his delegate
for increases in the cost of living in accordance with Section 401(a)(17)(B) of
the Code. The cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding twelve (12) months, over which Compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than twelve (12) months, the OBRA `93
annual compensation limit shall be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is twelve (12).
1
<PAGE>
Any reference in the Plan to the limitation under Section 401(a)(17) of the Code
shall mean the OBRA `93 annual compensation limit set forth in this provision.
If Compensation for any prior determination period is taken into account in
determining a Participant's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA `93
annual compensation limit in effect for that prior determination period.
For purposes of determining who is a Highly-Compensated Employee, Compensation
shall mean compensation as defined in Code Section 414(q)(7).
1.8 "DISABILITY." Disability shall mean a "total and permanent" disability
incurred by a Participant while in the employ of the Employer. For this purpose,
a total and permanent disability shall mean suffering from a physical or mental
condition which, in the opinion of the Administrator and based upon appropriate
medical advice and examination, renders the Participant unable to perform his
normal work for the Employer or any other work for which he is qualified by
reason of education, training or experience.
1.9 "EFFECTIVE DATE." The Effective Date of this restated Plan, on and after
which it supersedes the terms of the existing Plan document, is October 1, 1997,
except where the provisions of the Plan shall otherwise specifically provide.
1.10 "EMPLOYEE" shall mean a common law employee of the Employer, who for the
entire period of his employment, was also treated as a common law employee on
the payroll records of the Employer.
1.11 "EMPLOYER" shall mean Continental Materials Corporation and any subsidiary
or affiliate which is a member of its "related group" (as defined in Section
2.5) which has adopted the Plan (a "Participating Affiliate"), and shall include
any successor(s) thereto which adopt this Plan. Any such subsidiary or affiliate
of Continental Materials Corporation may adopt the Plan with the approval of its
board of directors (or noncorporate counterpart) subject to the approval of
Continental Materials Corporation. The provisions of this Plan shall apply
equally to each Participating Affiliate and its Employees except as specifically
set forth in the Plan; provided, however, notwithstanding any other provision of
this Plan, the amount and timing of contributions under Article 4 to be made by
any Employer which is a Participating Affiliate shall be made subject to the
approval of Continental Materials Corporation. For purposes hereof, each
Participating Affiliate shall be deemed to have appointed Continental Materials
Corporation as its agent to act on its behalf in all matters relating to the
administration, amendment, termination of the Plan and the investment of the
assets of the Plan. For purposes of the Code and ERISA, the Plan as maintained
by Continental Materials Corporation and the Participating Affiliates shall
constitute a single plan rather than a separate plan of each Participating
Affiliate. All assets in the Trust shall be available to pay benefits to all
Participants and their Beneficiaries.
1.12 "EMPLOYMENT DATE" shall mean the first date as of which an Employee is
credited with an Hour of Service, provided that, in the case of a Break in
Service, the Employment Date shall be the first date thereafter as of which an
Employee is credited with an Hour of Service.
2
<PAGE>
1.13 "HIGHLY-COMPENSATED EMPLOYEE" shall mean any Employee of the Employer who:
(a) was a five percent (5%) owner of the Employer (as defined in Code
Section 416(i)(1)) during the "determination year" or "look-back year";
or
(b) earned more than $80,000 (as increased by cost-of-living adjustments)
of Compensation from the Employer during the "look-back year" and, if
the Employer elects, was in the top twenty percent (20%) of Employees
by Compensation for such year.
An Employee who separated from Service prior to the "determination year" shall
be treated as a Highly-Compensated Employee for the "determination year" if such
Employee was a Highly-Compensated Employee when such Employee separated from
Service, or was a Highly-Compensated Employee at any time after attaining age
fifty-five (55).
For purposes of this Section, the "determination year" shall be the Plan Year
for which a determination is being made as to whether an Employee is a
Highly-Compensated Employee. The "look-back year" shall be the twelve (12) month
period immediately preceding the "determination year".
1.14 "HOUR OF SERVICE" shall mean:
(a) each hour for which an Employee is paid or entitled to payment for the
performance of duties for the Employer. These hours shall be credited
to the Employee for the computation period in which the duties are
performed; and
(b) each hour for which an Employee is paid, or entitled to payment, by the
Employer on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, involuntary military duty, or leave of
absence. No more than five hundred and one (501) Hours of Service shall
be credited under this subsection for any single continuous period
during which no duties are performed (whether or not such period occurs
in a single computation period). Hours under this subsection shall be
calculated and credited pursuant to Section 2530.200b-2(b) and (c) of
the Department of Labor Regulations which are incorporated herein by
this reference; and
(c) each hour for which back pay, irrespective of mitigation of damages, is
either awarded or agreed to by the Employer. The same Hours of Service
shall not be credited both under subsection (a) or subsection (b), as
the case may be, and under this subsection (c). These hours shall be
credited to the Employee for the computation period or periods to which
the award or agreement pertains rather than the computation period in
which the award, agreement, or payment is made.
In crediting Hours of Service for Employees who are paid on an hourly basis, the
"actual" method shall be utilized. For this purpose, the "actual" method shall
mean the determination of Hours of Service from records of hours worked and
hours for which the Employer makes payment or for which payment is due from the
Employer, subject to the limitations enumerated above. In crediting Hours of
Service for
3
<PAGE>
Employees who are not paid on an hourly basis, the "weeks of employment" method
shall be utilized. Under this method, an Employee shall be credited with
forty-five (45) Hours of Service for each week for which the Employee would be
required to be credited with at least one (1) Hour of Service pursuant to the
provisions enumerated above.
1.15 "LEASED EMPLOYEE" shall mean any person who, pursuant to an agreement
between the Employer and any other person or organization, has performed
services for the Employer (determined in accordance with Code Section 414(n)(6))
on a substantially full-time basis for a period of at least one (1) year and
where such services are performed under the primary direction and control of the
Employer. A person shall not be considered a Leased Employee if the total number
of Leased Employees does not exceed twenty percent (20%) of the
Nonhighly-Compensated Employees employed by the Employer, and if any such person
is covered by a money purchase pension plan providing (a) a nonintegrated
employer contribution rate of at least ten percent (10%) of compensation, as
defined in Section 11.1(b)(2) of the Plan but including amounts contributed
pursuant to a salary reduction agreement which are excludable from the
employee's gross income under Code Sections 125, 402(g) or 403(b), (b) immediate
participation, and (c) full and immediate vesting.
1.16 "NONHIGHLY-COMPENSATED EMPLOYEE" shall mean an Employee of the Employer who
is not a Highly-Compensated Employee.
1.17 "NORMAL RETIREMENT DATE" shall mean a Participant's sixtieth (60th)
birthday.
1.18 "PARTICIPANT" shall mean any Employee who has satisfied the eligibility
requirements of Article Three and who is participating in the Plan.
1.19 "PLAN" shall mean the Continental Materials Corporation Employees Profit
Sharing Retirement Plan, as set forth herein and as may be amended from time to
time.
1.20 "PLAN YEAR" shall mean the twelve (12)-consecutive month period beginning
January 1 and ending December 31.
1.21 "TRUST" shall mean the Trust Agreement entered into between the Employer
and the Trustee forming part of this Plan, together with any amendments thereto.
"Trust Fund" shall mean any and all property held by the Trustee pursuant to the
Trust Agreement, together with income therefrom.
1.22 "TRUSTEE" shall mean the Trustee or Trustees appointed by the Employer, and
any successors thereto.
4
<PAGE>
1.23 "VALUATION DATE" shall mean the date or dates established by the
Administrator for the valuation of the assets of the Plan. In no event shall the
assets of the Plan be valued less frequently than once each Plan Year.
1.24 "YEAR OF SERVICE" OR "SERVICE" and the special rules with respect to
crediting Service are in Article Two of the Plan.
5
<PAGE>
ARTICLE TWO--SERVICE DEFINITIONS AND RULES
Service is the period of employment credited under the Plan. Definitions and
special rules related to Service are as follows:
2.1 YEAR OF SERVICE. For purposes of determining an Employee's eligibility to
participate in the Plan, an Employee shall be credited with a Year of Service if
he completes at least one thousand (1,000) Hours of Service during the twelve
(12)-consecutive month period commencing on his Employment Date. If an Employee
fails to be credited with at least one thousand (1,000) Hours of Service during
that computation period, he shall be credited with a Year of Service if he is
credited with at least one thousand (1,000) Hours of Service in any Plan Year
commencing on or after his Employment Date. For purposes of determining an
Employee's nonforfeitable right to that portion of his Account attributable to
Employer contributions, an Employee shall be credited with a Year of Service for
each Plan Year in which he is credited with at least one thousand (1,000) Hours
of Service. For eligibility purposes, an Employee shall be credited with a Year
of Service as of the last day of each such twelve (12) month period. For vesting
purposes, an Employee shall be credited with a Year of Service upon completion
of the one thousandth (1,000th) hour in each such twelve (12)-month period.
For purposes of this Section 2.1, any Employee who was a participant in the
Phoenix Manufacturing, Inc. Employees Profit Sharing Retirement Plan (the
"Phoenix Plan") and whose account balance thereunder was transferred to the Plan
in connection with the merger of the Phoenix Plan as of October 1, 1997, shall
be credited with any "Year(s) of Service" completed under the Phoenix Plan.
Notwithstanding the foregoing, in no event shall any individual be credited with
"Year(s) of Service" while employed as an independent contractor.
2.2 BREAK IN SERVICE. A Break in Service shall be a twelve (12)-month
computation period (as used for measuring Years of Service for vesting purposes)
in which an Employee or Participant is not credited with at least five hundred
and one (501) Hours of Service.
2.3 LEAVE OF ABSENCE. A Participant on an unpaid leave of absence pursuant to
the Employer's normal personnel policies shall be credited with Hours of Service
at his regularly-scheduled weekly rate while on such leave, provided the
Employer acknowledges in writing that the leave is with its approval. These
Hours of Service shall be credited only for purposes of determining if a Break
in Service has occurred and, unless specified otherwise by the Employer in
writing, shall not be credited for eligibility to participate in the Plan,
vesting, or qualification to receive an allocation of Employer contributions and
forfeitures, if applicable. Hours of Service during a paid leave of absence
shall be credited as provided in Section 1.14.
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<PAGE>
For any individual who is absent from work for any period by reason of the
individual's pregnancy, birth of the individual's child, placement of a child
with the individual in connection with the individual's adoption of the child,
or by reason of the individual's caring for the child for a period beginning
immediately following such birth or adoption, the Plan shall treat as Hours of
Service, solely for determining if a Break in Service has occurred, the
following Hours of Service:
(a) the Hours of Service which otherwise normally would have been credited
to such individual but for such absence; or
(b) in any case where the Administrator is unable to determine the Hours of
Service, on the basis of an assumed eight (8) hours per day.
In no event shall more than five hundred and one (501) of such hours be credited
by reason of such period of absence. The Hours of Service shall be credited in
the computation period (used for measuring Years of Service for vesting
purposes) which starts after the leave of absence begins. However, the Hours of
Service shall instead be credited in the computation period in which the absence
begins if it is necessary to credit the Hours of Service in that computation
period to avoid the occurrence of a Break in Service.
2.4 YEAR(S) OF SERVICE ON RETURN TO EMPLOYMENT. An Employee who returns to
employment after a Break in Service shall retain credit for his pre-Break Years
of Service; provided, however, that if a Participant incurs five (5) or more
consecutive Breaks in Service, any Years of Service performed thereafter shall
not be used to increase the nonforfeitable interest in his Account accrued prior
to such five (5) or more consecutive Breaks in Service.
2.5 SERVICE IN EXCLUDED JOB CLASSIFICATIONS OR WITH RELATED COMPANIES.
(a) SERVICE WHILE A MEMBER OF AN INELIGIBLE CLASSIFICATION OF EMPLOYEES. An
Employee who is a member of an ineligible classification of Employees
shall not be eligible to participate in the Plan while a member of such
ineligible classification. However, if any such Employee is transferred
to an eligible classification, such Employee shall be credited with any
prior Years of Service completed while a member of such an ineligible.
For this purpose, an Employee shall be considered a member of an
ineligible classification of Employees for any period during which: (i)
he is a Leased Employee; or (ii) he is employed in a job classification
which is excluded from participating in the Plan under Section 3.1
below.
(b) SERVICE WITH RELATED GROUP MEMBERS. For each Plan Year in which the
Employer is a member of a "related group", as hereinafter defined, all
Service of an Employee with any one or more members of such related
group shall be treated as employment by the Employer for purposes of
determining the Employee's Years of Service. The transfer of employment
by any such Employee to another member of the related group shall not
be deemed to constitute a retirement or other termination of employment
by the Employee for purposes of the Plan, but the Employee shall be
deemed to have continued in employment with the Employer for
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<PAGE>
purposes hereof. For purposes of this subsection (b), "related group"
shall mean the Employer and all corporations, trades or businesses
(whether or not incorporated) which constitute a controlled group of
corporations with the Employer, a group of trades or businesses under
common control with the Employer, or an affiliated service group which
includes the Employer, within the meaning of Section 414(b), Section
414(c), or Section 414(m), respectively, of the Code or any other
entity required to be aggregated under Code Section 414(o).
(c) CONSTRUCTION. This Section is included in the Plan to comply with the
Code provisions regarding the crediting of Service, and not to extend
any additional rights to Employees in ineligible classifications other
than as required by the Code and regulations thereunder.
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<PAGE>
ARTICLE THREE--PLAN PARTICIPATION
3.1 PARTICIPATION. All Employees participating in the Plan (or the Phoenix
Manufacturing, Inc. Employees Profit Sharing Retirement Plan) as of September
30, 1997 shall automatically be eligible to participate in the Plan as of the
Effective Date, subject to the terms hereof.
Each other Employee shall become a Participant under the Plan effective as of
the first day of the month coincident with or next following the Employee's
completion of one (1) Year of Service.
In no event, however, shall any Employee participate under the Plan while he is
a Leased Employee, independent contractor, or included in a unit of Employees
covered by a collective bargaining agreement between the Employer and the
Employee representatives under which retirement benefits were the subject of
good faith bargaining.
3.2 RE-EMPLOYMENT OF FORMER PARTICIPANT. A Participant whose participation
ceased because of termination of employment with the Employer shall participate
as soon as administratively possible following his re-employment.
3.3 TERMINATION OF ELIGIBILITY. In the event a Participant is no longer a member
of an eligible class of Employees and he becomes ineligible to participate, such
Employee shall participate as soon as administratively possible following his
return to an eligible class of Employees.
In the event an Employee who is not a member of an eligible class of Employees
becomes a member of an eligible class, such Employee shall participate as soon
as administratively possible thereafter, if such Employee has satisfied the
eligibility requirements of Section 3.1 and would have otherwise previously
become a Participant.
Notwithstanding the foregoing, if a Participant becomes covered by a collective
bargaining agreement and, as a result, becomes eligible to participate in the
Williams Furnace Co. Employees Profit Sharing Retirement Plan (the "Williams
Furnace Plan"), his Account under the Plan shall be transferred to the Williams
Furnace Plan and his Years of Service under the Plan shall be credited to the
Williams Furnace Plan. Correspondingly, if a Participant in the Williams Furnace
Plan transfers his classification and, as a result, becomes eligible to
participate in the Plan, his account under the Williams Furnace Plan shall be
transferred to the Plan and his "years of service" under the Williams Furnace
Plan shall be credited to the Plan.
9
<PAGE>
ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS,
ROLLOVERS AND TRANSFERS FROM OTHER PLANS
4.1 ELECTIVE DEFERRALS.
(a) ELECTIONS. A Participant may elect to defer a portion of his
Compensation for a Plan Year. The amount of a Participant's
Compensation that is deferred in accordance with the Participant's
election shall be withheld by the Employer from the Participant's
Compensation on a ratable basis throughout the Plan Year, or in the
case of any bonus, on a non ratable, single-sum basis. The amount
deferred on behalf of each Participant shall be contributed by the
Employer to the Plan and allocated to the Participant's Account.
(b) CHANGES IN ELECTION. A Participant may prospectively elect to change or
revoke the amount (or percentage) of his elective deferrals during the
Plan Year by filing a written election with the Employer, or via a
telephone "voice response" system designated by the Administrator,
provided that a written confirmation is forwarded in response to such
oral request.
(c) LIMITATIONS ON DEFERRALS. No Participant shall defer an amount which
exceeds $9,500 (or such amount as adjusted for cost-of-living increases
under Section 402(g) of the Code) for any calendar year ending with or
within the Plan Year.
(d) ADMINISTRATIVE RULES. All elections made under this Section 4.1,
including the amount and frequency of deferrals, shall be subject to
the rules of the Administrator which shall be consistently applied and
which may be changed from time to time.
4.2 EMPLOYER CONTRIBUTIONS.
(a) EMPLOYER CONTRIBUTIONS. For each Plan Year, the Employer may contribute
to the Plan, on behalf of the Participants eligible under Section
4.2(b), such amount, if any, as may be determined by its board of
directors. Such contribution shall be allocated among the Accounts of
such eligible Participants employed by the applicable Employer in
accordance with the ratio that each such eligible Participant's
Compensation bears to the total Compensation of all such eligible
Participants employed by the Employer for the Plan Year. Provided,
however, that for such purposes, a Participant's Compensation shall be
taken into account only for the period during which the Participant
made elective deferrals for the Plan Year.
(b) ELIGIBILITY FOR EMPLOYER CONTRIBUTIONS. To be eligible for a share of
Employer contributions under Section 4.2(a) for a Plan Year, a
Participant must (1) have made elective deferrals during such Plan
Year, (2) have been credited with at least one thousand (1,000) Hours
of Service in the Plan Year, and (3) be employed by the Employer on the
last day of the Plan Year; provided, however, that if the Participant's
failure to be credited with at least one thousand (1,000) Hours of
Service and/or to be employed by the Employer on the last day of the
Plan Year is due to the Participant's Disability, death or retirement
on or after his Normal Retirement Date during the Plan Year, such
Participant shall nevertheless be entitled to share in the allocation
of any such contributions for such Plan Year.
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<PAGE>
4.3 ROLLOVERS AND TRANSFERS OF FUNDS FROM OTHER PLANS. With the approval of the
Administrator, there may be paid to the Trustee amounts which have been held
under other plans qualified under Code Section 401 either (a) maintained by the
Employer which have been discontinued or terminated with respect to any
Employee, or (b) maintained by another employer with respect to which any
Employee has ceased to participate. Any such transfer or rollover may also be
made by means of an Individual Retirement Account qualified under Section 408 of
the Code, where the Individual Retirement Account was used as a conduit from the
former plan. Any amounts so transferred on behalf of any Employee shall be
nonforfeitable and shall be maintained under a separate Plan account, to be paid
in addition to amounts otherwise payable under this Plan. The amount of any such
account shall be equal to the fair market value of such account as adjusted for
income, expenses, gains, losses, and withdrawals attributable thereto.
Notwithstanding anything contained herein to the contrary, in no event shall the
Administrator accept on behalf of any Employee a transfer of funds from a
qualified plan which would subject the Plan to the provisions of Section
401(a)(11) of the Code.
An Employee who would otherwise be eligible to participate in the Plan but for
the failure to satisfy the service requirement for participation as set forth
under Section 3.1, shall be eligible to complete a rollover to the Plan. Such an
Employee shall also be eligible to obtain a loan or withdrawal in accordance
with the provisions of Article Eight prior to satisfying service requirement.
4.4 TIMING OF CONTRIBUTIONS. Employer contributions shall be made to the Plan no
later than the time prescribed by law for filing the Employer's Federal income
tax return (including extensions) for its taxable year ending with or within the
Plan Year, or as soon as administratively possible thereafter. Elective
deferrals under Section 4.1 shall be paid to the Plan as soon as
administratively possible, but no later than the time prescribed by applicable
law, following receipt of such deferrals by the Administrator.
4.5 EMPLOYEE "AFTER-TAX" CONTRIBUTIONS. A Participant shall be permitted to make
"after-tax" contributions to the Plan, subject to rules and procedures as may be
established by the Plan Administrator from time to time. These contributions
shall be subject to the limitations under Section 10.3 and Section 11.1 and
shall not exceed ten percent (10%) of the Participant's Compensation for the
Plan Year.
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<PAGE>
ARTICLE FIVE--ACCOUNTING RULES
5.1 INVESTMENT OF ACCOUNTS AND ACCOUNTING RULES.
(a) INVESTMENT FUNDS. The investment of Participants' Accounts shall be
made in a manner consistent with the provisions of the Trust. The
Administrator, in its discretion, may allow the Trust to provide for
separate funds for the directed investment of each Participant's
Account, including a Company Stock fund. In connection therewith, it is
hereby provided that more than ten percent (10%) of the fair market
value of the Plan's assets may be invested in the Company Stock fund.
It is also hereby provided that a portion of the Company Stock fund
shall be invested in cash and cash equivalents for liquidity purposes.
(b) PARTICIPANT DIRECTION OF INVESTMENTS. Each Participant may direct how
his Account is to be invested, among the available investment funds, in
whole percentages as established by the Administrator. In the event a
Participant fails to make an investment election, with respect to all
or any portion of his Account, the Trustee shall invest all or such
portion of his Account in the investment fund to be designated by the
Administrator. A Participant may change his investment election, with
respect to future contributions and, if applicable, forfeitures, and/or
amounts previously accumulated in the Participant's Account, in
writing, on such form as the Administrator shall specify, or via a
telephone "voice response" system designated by the Administrator,
provided that a written confirmation is forwarded in response to such
oral request. Any such change in a Participant's investment election
shall be effective at such time as may be prescribed by the
Administrator. If the Plan's recordkeeper or investments are changed,
the Administrator may suspend the Participants' investment direction of
their Accounts.
(c) ALLOCATION OF INVESTMENT EXPERIENCE. As of each Valuation Date, the
investment fund(s) of the Trust shall be valued at fair market value,
and the income, loss, appreciation and depreciation (realized and
unrealized), and any paid expenses of the Trust attributable to such
fund shall be apportioned among Participants' Accounts within the fund
based upon the value of each Account within the fund as of the
preceding Valuation Date.
(d) ALLOCATION OF CONTRIBUTIONS. Employer contributions shall be allocated
to the Account of each eligible Participant as of the last day of the
period for which the contributions are made, or as soon as
administratively possible thereafter. Elective deferrals shall be
allocated to the Account of each Participant as soon as
administratively practical following receipt of such contributions by
the Administrator.
(e) MANNER AND TIME OF DEBITING DISTRIBUTIONS. For any Participant who is
entitled to receive a distribution from his Account, such distribution
shall be made in accordance with the provisions of Section 7.2. The
amount distributed shall be based upon the fair market value of the
Participant's vested Account as of the Valuation Date preceding the
distribution.
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<PAGE>
5.2 PARTICIPANTS OMITTED IN ERROR. In the event a Participant is not allocated a
share of the Employer contribution and/or forfeitures, if applicable, as a
result of an administrative error in any Plan Year, the Employer may elect to
either (a) make an additional contribution on behalf of such omitted Participant
in an appropriate amount, or (b) deduct the appropriate amount from the next
succeeding Employer contribution and/or forfeitures and allocate such amount to
the Participant's Account prior to making the allocations set forth under
Section 5.1(d).
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<PAGE>
ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS
6.1 VESTING. A Participant shall at all times have a nonforfeitable (vested)
right to his Account derived from elective deferrals, "after-tax" contributions,
Employer "fail-safe" contributions under Section 10.2, and rollovers or
transfers from other plans, as adjusted for investment experience. Except as
otherwise provided with respect to Normal Retirement, Disability, or death, a
Participant shall have a nonforfeitable (vested) right to a percentage of the
value of his Account derived from Employer contributions under Section 4.2(a) as
follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
<S> <C>
LESS THAN 1 YEAR 0%
1 YEAR BUT LESS THAN 2 20%
2 YEARS BUT LESS THAN 3 30%
3 YEARS BUT LESS THAN 4 40%
4 YEARS BUT LESS THAN 5 60%
5 YEARS BUT LESS THAN 6 80%
6 YEARS AND THEREAFTER 100%
</TABLE>
6.2 FORFEITURE OF NONVESTED BALANCE. The nonvested portion of a Participant's
Account, as determined in accordance with Section 6.1, shall be forfeited as of
the earlier of (i) the date on which the Participant receives distribution of
his vested Account or (ii) the last day of the Plan Year in which the
Participant incurs five (5) consecutive Breaks in Service. However, no
forfeiture shall occur solely as a result of a Participant's withdrawal of
after-tax contributions. The amount forfeited shall be first used to pay
administrative expenses then used to reduce future Employer contributions under
Section 4.2(a).
If the Participant returns to the employment of the Employer prior to incurring
five (5) consecutive Breaks in Service, and prior to receiving distribution of
his vested Account, the nonvested portion shall be restored. However, if the
nonvested portion of the Participant's Account was allocated as a forfeiture as
the result of the Participant receiving distribution of his vested Account
balance, the nonvested portion shall be restored if:
(a) the Participant resumes employment prior to incurring five (5)
consecutive Breaks in Service; and
(b) for Plan distributions made on and after the Effective Date, the
Participant repays to the Plan, as of the earlier of (i) the date which
is five (5) years after his reemployment date or (ii) the date which is
the last day of the period in which the Participant incurs five (5)
consecutive Breaks in Service, an amount equal to such total
distribution derived from Employer contributions under Section 4.2 and,
if applicable, Section 13.3.
The nonvested amount shall be restored to the Participant's Account, without
interest or adjustment for interim Trust valuation experience, by a special
Employer contribution or from the next succeeding Employer contribution and
forfeitures, as appropriate.
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<PAGE>
6.3 RETURN TO EMPLOYMENT BEFORE DISTRIBUTION OF VESTED ACCOUNT BALANCE. If
distribution is made to an Employee of less than the Employee's entire vested
Account, and if the Employee returns to Service, a separate record shall be
maintained of said Account balance. The Employee's vested interest at any time
in this separate account shall be an amount equal to the formula P(AB+D)-D,
where P is the vested percentage at the relevant time, AB is the Account balance
at the relevant time, and D is the amount of the distribution made to the
Employee.
6.4 NORMAL RETIREMENT. A Participant who is in the employment of the Employer at
his Normal Retirement Date shall have a nonforfeitable interest in one hundred
percent (100%) of his Account, if not otherwise one hundred percent (100%)
vested under the vesting schedule in Section 6.1. A Participant who continues
employment with the Employer after his Normal Retirement Date shall continue to
participate under the Plan.
6.5 DISABILITY. If a Participant incurs a Disability, the Participant shall have
a nonforfeitable interest in one hundred percent (100%) of his Account, if not
otherwise one hundred percent (100%) vested under the vesting schedule in
Section 6.1. Payment of such Participant's Account balance shall be made at the
time and in the manner specified in Article Seven, following receipt by the
Administrator of the Participant's written distribution request.
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<PAGE>
ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS
7.1 MANNER OF PAYMENT. The Participant's vested Account shall be distributed to
the Participant (or to the Participant's Beneficiary in the event of the
Participant's death) in a single lump-sum payment. Distribution will normally be
made in the form of cash. However, any portion of the Participant's Account
invested in the Company Stock fund (as described in Section 5.1(a)) may, at the
election of the Participant or, as the case may be, the Participant's
Beneficiary, be distributed in the form of Company Stock; provided, however,
that any fractional shares, and the cash and cash equivalent portions of such
fund, shall be distributed in cash.
7.2 TIME OF COMMENCEMENT OF BENEFIT PAYMENTS. Distribution of the Participant's
Account balance for a Participant who terminates employment on or after his
Normal Retirement Date, or as a result of his Disability, shall be made or
commence no later than sixty (60) days following the close of the Plan Year in
which such event occurred, or, if later, as soon as administratively practical,
following the filing of the Participant's election to receive distribution;
provided, however, that if the amount required to be distributed cannot be
ascertained by such date, distribution shall be made no later than sixty (60)
days after the earliest date on which such amount can be ascertained; and
provided, further, subject to the following provisions of this Section, if the
Participant's Account balance exceed $5,000 distribution shall not be made or
commence, unless the Participant otherwise requests in writing. In such event,
distribution shall commence as soon as administratively practical following
receipt by the Administrator of the Participant's written request.
If a Participant terminates employment for any reason other than Normal
Retirement, Disability or death, and if the Participant's vested Account does
not exceed $5,000, distribution of his vested Account balance shall be made or
commence as soon as administratively practical, following the close of the Plan
Year in which he separates from service. Subject to the following provisions of
this Section, if the vested balance of a Participant's Account exceeds $5,000,
distribution shall not be made or commence unless the Participant otherwise
requests in writing.
The failure of a Participant to consent to a distribution while his vested
Account balance is immediately distributable shall be deemed to be an election
to defer commencement of payment of his vested Account balance.
Notwithstanding any provision contained herein to the contrary, a Participant
who is not vested in any portion of his Account balance attributable to Employer
contributions shall be deemed to have received distribution of such portion of
his Account as of the end of the Plan Year in which he incurs a Break in
Service.
In no event shall distribution under the Plan be made later than the April 1st
following the end of the calendar year in which the Participant attains age
seventy and one-half (70 1/2), or, except for a Participant who is a five
percent (5%) owner of the Employer (within the meaning of Section 401(a)(9) of
the Code), if later, the April 1st following the calendar year in which the
Participant retires or otherwise separates from service. Notwithstanding the
foregoing, the provisions of this paragraph shall be subject to any prior
election form complying with the provisions of Section 242(b) of TEFRA.
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<PAGE>
In the event distribution is required to be made while the Participant is
employed by the Employer, such Participant may elect to receive only the minimum
amount required under Section 401(a)(9) of the Code and the regulations
thereunder.
7.3 FURNISHING INFORMATION. Prior to the payment of any benefit under the Plan,
each Participant or Beneficiary may be required to complete such administrative
forms and furnish such proof as may be deemed necessary or appropriate by the
Employer, Administrator, and/or Trustee.
7.4 AMOUNT OF DEATH BENEFIT.
(a) DEATH BEFORE TERMINATION OF EMPLOYMENT. In the event of the death of a
Participant while in the employ of the Employer, vesting in the
Participant's Account shall be one hundred percent (100%), if not
otherwise one hundred percent (100%) vested under Section 6.1, with the
credit balance of the Participant's Account being payable to his
Beneficiary.
(b) DEATH AFTER TERMINATION OF EMPLOYMENT. In the event of the death of a
former Participant after termination of employment, but prior to the
complete distribution of his vested Account balance under the Plan, the
undistributed vested balance of the Participant's Account shall be paid
to the Participant's Beneficiary.
7.5 DESIGNATION OF BENEFICIARY. Each Participant shall file with the
Administrator a designation of Beneficiary to receive payment of any death
benefit payable hereunder if such Beneficiary should survive the Participant.
However, no Participant who is married shall be permitted to designate a
Beneficiary other than his spouse unless the Participant's spouse has signed a
written consent witnessed by a Plan representative or a notary public, which
provides for the designation of an alternate Beneficiary.
Subject to the above, Beneficiary designations may include primary and
contingent Beneficiaries, and may be revoked or amended at any time in similar
manner or form, and the most recent designation shall govern. In the absence of
an effective designation of Beneficiary, or if the Beneficiary dies before
complete distribution of the Participant's vested Account, all amounts shall be
paid to the surviving spouse of the Participant, if living, or, if there is no
surviving spouse, to the Participant's descendants (including legally adopted
children and their descendants) PER STIRPES, or, if none, to the Participant's
estate. Notification to Participants of the death benefits under the Plan and
the method of designating a Beneficiary shall be given at the time and in the
manner provided by regulations and rulings under the Code.
7.6 DISTRIBUTION OF DEATH BENEFITS. Distribution of any death benefit hereunder
shall be made within one (1) year of the Participant's death or, in the case of
a surviving spouse, within a reasonable time after the Participant's death or,
if the surviving spouse so elects and if the Participant's vested Account
exceeds $5,000, no later than the date on which the Participant would have
reached age seventy and one-half (70 1/2). If a surviving spouse dies before
distributions to the spouse begin, this paragraph shall be applied as if the
surviving spouse were the Participant.
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<PAGE>
Nothing within this Section shall, however, invalidate any Participant's
previous designation of a mode of paying death benefits, provided such
designation was made prior to January 1, 1984 and was in accordance with all
requirements announced by the Internal Revenue Service with respect to the
transitional rule established under Section 242(b) of TEFRA. No modification of
the mode set out in any such election shall be allowed, however, unless it is in
compliance with this Section 7.6.
7.7 ELIGIBLE ROLLOVER DISTRIBUTIONS. Notwithstanding the foregoing provisions of
this Article Seven, the provisions of this Section 7.7 shall apply to
distributions made under the Plan.
(a) A distributee may elect, at the time and in the manner prescribed by
the Administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
(b) Definitions:
(i) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the distributee or the
joint lives (or joint life expectancies) of the distributee
and the distributee's designated Beneficiary, or for a
specified period of ten (10) years or more; any distribution
to the extent such distribution is required under Section
401(a)(9) of the Code; and the portion of any distribution
that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with
respect to employer securities).
(ii) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is 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 the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
(iii) DISTRIBUTEE. A distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's
surviving spouse and the Employee's or former Employee's
spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Section
414(p) of the Code, are distributees with regard to the
interest of the spouse or former spouse.
(iv) DIRECT ROLLOVER. A direct rollover is a payment by the Plan
to the eligible retirement plan specified by the distributee.
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<PAGE>
(c) If a distribution is one to which Sections 401(a)(11) and 417 of the
Code do not apply, such distribution may commence less than 30 days
after the notice required under Section 1.411(a)-11(c) of the Income
Tax Regulations is given, provided that:
(i) the Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or
not to elect a distribution (and, if applicable, a particular
distribution option), and
(ii) the Participant, after receiving the notice, affirmatively
elects a distribution.
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<PAGE>
ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS
8.1 LOANS.
(a) PERMISSIBLE AMOUNT AND PROCEDURES. Upon the application of a
Participant, the Administrator may, in accordance with a uniform and
nondiscriminatory policy, direct the Trustee to grant a loan to the
Participant, which loan shall be secured by the Participant's vested
Account balance. The Participant's signature shall be required on a
promissory note. In determining a rate of interest on such loan, the
Administrator may refer to the rate of interest used for obligations of
a comparable nature by commercial lending institutions within a radius
of fifty (50) miles of the Employer's principal place of business.
Participant loans shall be treated as segregated investments, and
interest repayments shall be credited only to the Participant's
Account.
(b) LIMITATION ON AMOUNT OF LOANS. A Participant's loan shall not exceed
the lesser of:
(1) $50,000, which amount shall be reduced by the highest outstanding
loan balance during the preceding twelve (12)-month period; or
(2) one-half (1/2) of the vested value of the Participant's Account,
determined as of the Valuation Date preceding the date of the
Participant's loan.
Any loan must be repaid within five (5) years, unless made for the purpose of
acquiring the primary residence of the Participant, in which case such loan may
be repaid over a longer period of time not to exceed fifteen (15) years. The
repayment of any loan must be made in at least quarterly installments of
principal and interest. If a Participant defaults on any outstanding loan, the
unpaid balance, and any interest due thereon, shall become due and payable in
accordance with the terms of the underlying promissory note; provided, however,
that such foreclosure on the promissory note and attachment of security shall
not occur until a distributable event occurs in accordance with the provisions
of Article Seven.
If a Participant terminates employment while any loan balance is outstanding,
the unpaid balance, and any interest due thereon, shall become due and payable
in accordance with the terms of the underlying promissory note. If such amount
is not paid to the Plan, it shall be charged against the amounts that are
otherwise payable to the Participant or the Participant's Beneficiary under the
provisions of the Plan.
In the case of a Participant who has loans outstanding from other plans of the
Employer (or a member of the Employer's related group (within the meaning of
Section 2.5(b)), the Administrator shall be responsible for reporting to the
Trustee the existence of said loans in order to aggregate all such loans within
the limits of Section 72(p) of the Code.
8.2 HARDSHIP DISTRIBUTIONS. In the case of a financial hardship resulting from a
proven immediate and heavy financial need, a Participant may receive a
distribution not to exceed the lesser of (i) the vested value of the
Participant's Account (excluding earnings on his elective deferrals) determined
as of the Valuation Date immediately preceding such withdrawal request, or (ii)
the amount necessary to satisfy
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the financial hardship. The amount of any such immediate and heavy financial
need may include any amounts necessary to pay Federal, state or local income
taxes or penalties reasonably anticipated to result from the distribution. Such
distribution shall be made in accordance with nondiscriminatory and objective
standards consistently applied by the Administrator. In this regard, any such
withdrawal shall first be made from any after-tax contributions, then from any
rollover contributions, then from any Employer contributions made pursuant to
Section 4.2 and then from any elective deferrals. Hardship distributions under
this Section shall be deemed to be the result of an immediate and heavy
financial need if such distribution is to (a) pay expenses for medical care (as
described in Section 213(d) of the Code) previously incurred by the Participant,
the Participant's spouse, or any dependents of the Participant (as defined in
Section 152 of the Code), or to permit the Participant, the Participant's
spouse, or any dependents of the Participant to obtain such medical care, (b)
purchase the principal residence of the Participant (excluding mortgage
payments), (c) pay tuition and related educational fees for the next twelve (12)
months of post-secondary education for the Participant, Participant's spouse, or
any of the Participant's dependents or (d) prevent the eviction of the
Participant from his principal residence or foreclosure on the Participant's
principal residence. In addition, any hardship distribution hereunder shall only
be made provided that the funds for such hardship are not available from other
financial resources of the Participant, the Participant's spouse or the
Participant's children. Distributions paid pursuant to this Section shall be
deemed to be made as of the Valuation Date immediately preceding the hardship
distribution, and the Participant's Account shall be reduced accordingly.
The provisions of this Section (relating to hardship distributions) are intended
to comply with Treasury Regulations issued under Section 401(k) of the Code, and
shall be so interpreted.
8.3 WITHDRAWALS AFTER AGE 59-1/2. After attaining age fifty-nine and one-half
(59-1/2), a Participant, by giving written notice to the Administrator, may
withdraw from the Plan a sum (a) not in excess of the credit balance of his
vested Account as of the Valuation Date preceding such notice and (b) not less
than such minimum amount as the Administrator may establish from time to time to
facilitate administration of the Plan. Any such withdrawals shall be made in
accordance with nondiscriminatory and objective standards consistently applied
by the Administrator.
8.4 WITHDRAWALS OF AFTER-TAX AND ROLLOVER CONTRIBUTIONS. A Participant, by
giving written notice to the Administrator, may withdraw from the Plan an amount
(a) not in excess of the credit balance of his Account attributable to any
rollover contributions and/or after-tax contributions made pursuant to Section
4.3, and Section 4.5, respectively and (b) not less than such minimum amount as
the Administrator may establish from time to time to facilitate administration
of the Plan. Any such withdrawals shall be made in accordance with
non-discriminatory and objective standards consistently applied by the
Administrator.
8.5 FOR FORMER WILLIAMS FURNACE PLAN PARTICIPANTS: WITHDRAWALS OF EMPLOYER
CONTRIBUTIONS FOR OTHER FINANCIAL NEEDS. The provisions of this Section shall
apply only to a Participant who has a portion of his Account transferred from
the Williams Furnace Co. Employees Profit Sharing Retirement Plan (the "Williams
Furnace Plan"). Where funds are needed to complete a major renovation to such
Participant's principal residence, or in the event of any other BONA FIDE
financial emergency as determined by the Administrator, the Participant may
receive a distribution not to exceed the lesser of (i) the vested value of the
Participant's Account derived from any Employer contributions transferred from
the Williams Furnace Plan and any Employer
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contributions made under Section 4.2(a), determined as of the Valuation Date
immediately preceding such withdrawal request, or (ii) the amount necessary to
satisfy such financial need. The amount of such financial need may, however,
include any amounts necessary to pay Federal, state or local income taxes or
penalties reasonably anticipated to result from the distribution. Such
distribution shall be made in accordance with non-discretionary and objective
standards consistently applied by the Administrator.
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ARTICLE NINE --ADMINISTRATION OF THE PLAN
9.1 PLAN ADMINISTRATION. The Employer shall be the Plan Administrator,
hereinbefore and hereinafter called the Administrator, and "named fiduciary"
(for purposes of Section 402(a)(1) of the Employee Retirement Income Security
Act of 1974, as amended from time to time) of the Plan. The Employer may
designate a person or committee of persons to be the Administrator and named
fiduciary. The administration of the Plan, as provided herein, including a
determination of the payment of benefits to Participants and their
Beneficiaries, shall be the responsibility of the Administrator; provided,
however, that the Administrator may delegate any of its powers, authority,
duties or responsibilities to any person or committee of persons. In the event
more than one party shall act as Administrator, all actions shall be made by
majority decisions. In the administration of the Plan, the Administrator may (a)
employ agents to carry out nonfiduciary responsibilities (other than Trustee
responsibilities), (b) consult with counsel, who may be counsel to the Employer,
and (c) provide for the allocation of fiduciary responsibilities (other than
Trustee responsibilities) among its members. Actions dealing with fiduciary
responsibilities shall be taken in writing and the performance of agents,
counsel and fiduciaries to whom fiduciary responsibilities have been delegated
shall be reviewed periodically.
The expenses of administering the Plan and the compensation of all employees,
agents, or counsel of the Administrator, including accounting fees,
recordkeeper's fees, and the fees of any benefit consulting firm, shall be paid
by the Plan, or shall be paid by the Employer if the Employer so elects. To the
extent required by applicable law, compensation may not be paid by the Plan to
full-time Employees of the Employer.
In the event the Employer pays the expenses of administering the Plan, the
Employer may seek reimbursement from the Plan for the payment of such expenses.
Reimbursement shall be permitted only for Plan expenses paid by the Employer
within the last twelve (12)-month period.
The Administrator shall obtain from the Trustee, not less often than annually, a
report with respect to the value of the assets held in the Trust Fund, in such
form as may be required by the Administrator.
The Administrator shall administer the Plan and adopt such rules and regulations
as, in the opinion of the Administrator, are necessary or advisable to implement
and administer the Plan and to transact its business.
9.2 CLAIMS PROCEDURE. Pursuant to procedures established by the Administrator,
adequate notice in writing shall be provided to any Participant or Beneficiary
whose claim for benefits under the Plan has been denied within ninety (90) days
of receipt of such claim. Such notice shall be written in a manner calculated to
be understood by the claimant, shall advise the claimant the right to
administrative review, and shall set forth the specific reason for such denial,
the specific references to the pertinent Plan provisions on which the denial is
based, and a description of any additional material or information necessary to
perfect the claim, and an explanation of why such material or information is
necessary. If such review is requested by the claimant or his authorized
representative within ninety (90) days after receipt by the claimant of written
notification of denial of his claim, the Administrator shall afford a reasonable
opportunity for a full and fair review by the Administrator of the decision
denying the claim. The review shall focus on the additional facts, legal
interpretations or material, if any, presented by the claimant. The
Administrator shall, within sixty (60) days (or if special circumstances apply,
one hundred twenty (120) days) of a request for review, render a written
decision on its review setting forth the specific reasons for such decision,
written in a manner calculated to be understood by the claimant.
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9.3 TRUST AGREEMENT. The Trust Agreement entered into by and between the
Employer and the Trustee, including any supplements or amendments thereto, or
any successor Trust Agreement, is incorporated by reference herein.
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ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS
10.1 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS. If the amount of any elective
deferrals made by a Participant exceeds the dollar limitation of Section 4.1(c),
then the excess amount, and any income allocable thereto, shall be distributed
to such Participant subject to the requirements of applicable law.
10.2 LIMITATIONS ON 401(K) CONTRIBUTIONS.
(a) AVERAGE ACTUAL DEFERRAL PERCENTAGE TEST. Amounts contributed as
elective deferrals under Section 4.1(a) and any "fail-safe"
contributions made under this Section, are considered to be amounts
deferred pursuant to Section 401(k) of the Code. For purposes of this
Article, these amounts are referred to as the "deferred amounts." For
purposes of the "average actual deferral percentage test" described
below, such deferred amounts must be made before the last day of the
twelve (12)-month period immediately following the Plan Year to which
the contributions relate. The Employer shall maintain records
sufficient to demonstrate satisfaction of the average actual deferral
percentage test and the deferred amounts used in such test.
As of the last day of each Plan Year, the deferred amounts for the Plan
Year for the Participants who are Highly-Compensated Employees shall
satisfy either of the following tests:
(1) The average actual deferral percentage for the eligible
Participants who are Highly-Compensated Employees shall not exceed
the average actual deferral percentage for eligible Participants
who are Nonhighly-Compensated Employees multiplied by 1.25; or
(2) The average actual deferral percentage for eligible Participants
who are Highly-Compensated Employees shall not exceed the average
actual deferral percentage of eligible Participants who are
Nonhighly-Compensated Employees multiplied by two (2), provided
that the average actual deferral percentage for eligible
Participants who are Highly-Compensated Employees does not exceed
the average actual deferral percentage for eligible Participants
who are Nonhighly-Compensated Employees by more than two (2)
percentage points, or such lesser amount as the Secretary of the
Treasury shall prescribe to prevent the multiple use of this
alternative limitation with respect to any Highly-Compensated
Employee.
For purposes of the above tests, the "actual deferral percentage" shall mean the
ratio (expressed as a percentage) that the deferred amounts, which are allocated
to the Participant's Account as of any day in the Plan Year, on behalf of each
eligible Participant for the Plan Year bears to the eligible Participant's
compensation, as defined in Code Section 414(s) and the regulations promulgated
thereunder. The "average actual deferral percentage" shall mean the average
(expressed as a percentage) of the actual deferral percentages of the eligible
Participants in each group. "Eligible Participant" shall mean each Employee who
is eligible to participate in the Plan under Section 3.1.
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For purposes of this Section 10.2, the actual deferral percentage for any
eligible Participant who is a Highly-Compensated Employee for the Plan Year and
who is eligible to have elective deferrals allocated to his account under two
(2) or more plans or arrangements described in Code Section 401(k) that are
maintained by the Employer or any employer who is a related group member (within
the meaning of Section 2.5(b)) shall be determined as if all such deferrals were
made under a single arrangement. In the event that this Plan satisfies the
requirements of Code Section 410(b) only if aggregated with one (1) or more
other plans, or if one (1) or more other plans satisfy the requirements of Code
Section 410(b) only if aggregated with this Plan, then the provisions of this
Section 10.2 shall be applied by determining the actual deferral percentage of
eligible Participants as if all such plans were a single plan.
The determination and treatment of deferred amounts and the actual deferral
percentage of any Participant shall be subject to the prescribed requirements of
the Secretary of the Treasury.
In the event the average actual deferral percentage test is not satisfied for a
Plan Year, the Employer, in its discretion, may make a special "fail-safe"
contribution on behalf of any Participants who are Nonhighly Compensated
Employees, to be allocated among their Accounts in proportion to their
Compensation for the Plan Year.
(b) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.
(1) IN GENERAL. If the average actual deferral percentage test of
Section 10.2(a) is not satisfied for a Plan Year, then the "excess
contributions", and income allocable thereto, shall be
distributed, to the extent required under Treasury regulations, no
later than the last day of the Plan Year following the Plan Year
for which the excess contributions were made. However, if such
excess contributions are distributed later than two and one-half
(2-1/2) months following the last day of the Plan Year in which
such excess contributions were made, a ten percent (10%) excise
tax shall be imposed upon the Employer with respect to such excess
contributions.
(2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess
contributions" shall consist of the excess of the aggregate amount
of deferred amounts made by or on behalf of the affected
Highly-Compensated Employee over the maximum amount of all such
contributions permitted under the test under Section 10.2(a). In
reducing the excess contribution hereunder, the reduction shall be
first applied to the Highly-Compensated Employee with the highest
percentage under Section 10.2(a). If reductions are further
required to comply with Section 10.2(a), such reductions shall be
applied to the Highly-Compensated Employee with the next highest
percentage, and so forth until the nondiscrimination test of
Section 10.2(a) is satisfied.
(3) DETERMINATION OF INCOME. The income allocable to excess
contributions shall be determined by multiplying the income
allocable to the Participant's deferred amounts for the Plan Year
by a fraction, the numerator of which is the excess contributions
made on behalf of the Participant for the Plan Year, and the
denominator of which is the sum of the Participant's Account
balances attributable to the Participant's deferred amounts on the
last day of the Plan Year.
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(4) MAXIMUM DISTRIBUTABLE AMOUNT. The excess contributions to be
distributed to a Participant shall be adjusted for income and, if
there is a loss allocable to the excess contribution, shall in no
event be less than the lesser of the Participant's Account under
the Plan or the Participant's deferred amounts for the Plan Year.
Excess contributions shall be distributed from that portion of the
Participant's Account attributable to such deferred amounts to the
extent allowable under Treasury regulations.
10.3 NONDISCRIMINATION TEST FOR EMPLOYER MATCHING AND EMPLOYEE AFTER-TAX
CONTRIBUTIONS.
(a) AVERAGE CONTRIBUTION PERCENTAGE TEST. The provisions of this Section
shall apply if Employer contributions are made in any Plan Year under
Section 4.2(a) and/or if Employee after-tax contributions are made to
the Plan under Section 4.5.
As of the last day of each Plan Year, the average contribution
percentage for Highly-Compensated Employees for the Plan Year shall
satisfy either of the following tests:
(1) The average contribution percentage for eligible Participants who
are Highly-Compensated Employees shall not exceed the average
contribution percentage for eligible Participants who are
Nonhighly-Compensated Employees for the Plan Year multiplied by
1.25; or
(2) The average contribution percentage for eligible Participants who
are Highly-Compensated Employees shall not exceed the average
contribution percentage for eligible Participants who are
Nonhighly-Compensated Employees for the Plan Year multiplied by
two (2), provided that the average contribution percentage for
eligible Participants who are Highly-Compensated Employees does
not exceed the average contribution percentage for eligible
Participants who are Nonhighly-Compensated Employees by more than
two (2) percentage points or such lesser amount as the Secretary
of the Treasury shall prescribe to prevent the multiple use of
this alternative limitation with respect to any Highly-Compensated
Employee.
For purposes of the above tests, the "average contribution percentage" shall
mean the average (expressed as a percentage) of the contribution percentages of
the "eligible Participants" in each group. The contribution percentage" shall
mean the ratio (expressed as a percentage) that the sum of Employer
contributions, and, if applicable, Employee after-tax contributions, and
elective deferrals (to the extent such elective deferrals are not used to
satisfy the average actual deferral percentage test of Section 10.2) under the
Plan on behalf of the eligible Participant for the Plan Year bears to the
eligible Participant's compensation (as defined in Code Section 414(s) and the
regulations promulgated thereunder) for the Plan Year. "Eligible Participant"
shall mean each Employee who is eligible to participate in the Plan under
Section 3.1.
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For purposes of this Section 10.3, the contribution percentage for any eligible
Participant who is a Highly-Compensated Employee for the Plan Year and who is
eligible to have Employer contributions or elective deferrals allocated to his
account under two (2) or more plans described in Section 401(a) of the Code or
under arrangements described in Section 401(k) of the Code that are maintained
by the Employer or any member of the Employer's related group (within the
meaning of Section 2.5(b)), shall be determined as if all such contributions and
elective deferrals were made under a single plan.
In the event that this Plan satisfies the requirements of Section 410(b) of the
Code only if aggregated with one (1) or more other plans, or if one (1) or more
other plans satisfy the requirements of Section 410(b) of the Code only if
aggregated with this Plan, then the provisions of this Section 10.3 shall be
applied by determining the contribution percentages of eligible Participants as
if all such plans were a single plan.
The determination and treatment of the contribution percentage of any
Participant shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury.
(b) DISTRIBUTION OF EXCESS EMPLOYER MATCHING CONTRIBUTIONS.
(1) IN GENERAL. If the nondiscrimination tests of Section 10.3(a) are
not satisfied for a Plan Year, then the "excess contributions",
and any income allocable thereto, shall be forfeited, if otherwise
forfeitable, no later than the last day of the Plan Year following
the Plan Year for which the nondiscrimination tests are not
satisfied, and shall be used to reduce Employer contributions
under Section 4.2(a). To the extent that such "excess
contributions" are nonforfeitable, such excess contributions shall
be distributed to the Participant on whose behalf the excess
contributions were made no later than the last day of the Plan
Year following the Plan Year for which such "excess contributions"
were made. However, if such excess contributions are distributed
later than two and one-half (2-1/2) months following the last day
of the Plan Year in which such excess contributions were made, a
ten percent (10%) excise tax shall be imposed upon the Employer
with respect to such excess contributions. For purposes of the
limitations of Section 11.1(b)(1) of the Plan, excess
contributions shall be considered annual additions.
(2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess
contributions" shall consist of the excess of the amount of
Employer contributions and, if applicable, Employee after-tax
contributions, and elective deferrals (to the extent not used to
satisfy the average actual deferral percentage test of Section
10.2) made on behalf of the affected Highly-Compensated Employee
over the maximum amount of all such contributions permitted under
the nondiscrimination tests under Section 10.3(a). In reducing the
excess contribution hereunder, the reduction shall be first
applied to the Highly-Compensated Employee with the highest
percentage under Section 10.3(a). If reductions are further
required to comply with Section 10.3(a), such reductions shall be
applied to the Highly-Compensated Employee with the next highest
percentage, and so forth until the nondiscrimination tests of
Section 10.3(a) are satisfied.
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(3) DETERMINATION OF INCOME. The income allocable to excess
contributions shall be determined by multiplying the income
allocable to the Employer contributions and, if applicable,
Employee after-tax contributions, and such elective deferrals by a
fraction, the numerator of which is the excess contributions on
behalf of the Participant for the Plan Year, and the denominator
of which is the sum of the Participant's Account balances
attributable to Employer contributions and, if applicable,
Employee after-tax contributions, and such elective deferrals, on
the last day of the Plan Year.
Notwithstanding the foregoing, to the extent otherwise required to
comply with the requirements of Section 401(a)(4) of the Code and
the regulations thereunder, vested Employer contributions made
pursuant to Section 4.2(a) may be forfeited.
10.4 LIMITATION ON THE MULTIPLE USE ALTERNATIVE. The sum of the average actual
deferral percentage of Highly-Compensated Employees under Section 10.2(a) and
the average contribution percentage of Highly-Compensated Employees under
Section 10.3(a) shall not exceed the "aggregate limit", as defined in Section
401(m)(9) of the Code and the regulations promulgated thereunder.
If the aggregate limit is exceeded, the average contribution percentage of the
Highly-Compensated Employees shall be reduced in accordance with the provisions
of Section 10.3(b). In lieu of reducing the average contribution percentage, the
Administrator may reduce the average actual deferral percentage of the
Highly-Compensated Employees in accordance with the provisions of Section
10.2(b). The reductions under this Section shall be made only to the extent
necessary to comply with the restrictions on the multiple use of the
"alternative limitation" within the meaning of Code Section 401(m)(9).
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ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS
11.1 RULES AND DEFINITIONS.
(a) RULES. The following rules shall limit additions to Participants'
Accounts:
(1) If the Participant does not participate, and has never
participated, in another qualified plan maintained by the
Employer, the amount of annual additions which may be credited to
the Participant's Account for any limitation year shall not exceed
the lesser of the "maximum permissible" amount (as hereafter
defined) or any other limitation contained in this Plan. If the
Employer contribution that would otherwise be allocated to the
Participant's Account would cause the annual additions for the
limitation year to exceed the maximum permissible amount, the
amount allocated shall be reduced so that the annual additions for
the limitation year shall equal the maximum permissible amount.
(2) Prior to determining the Participant's actual compensation for the
limitation year, the Employer may determine the maximum
permissible amount for a Participant on the basis of a reasonable
estimation of the Participant's compensation for the limitation
year, uniformly determined for all Participants similarly
situated.
(3) As soon as is administratively feasible after the end of the
limitation year, the maximum permissible amount for the limitation
year shall be determined on the basis of the Participant's actual
compensation for the limitation year.
(4) If there is an excess amount, the excess shall be disposed of as
follows:
(A) Any nondeductible voluntary Employee after-tax contributions
and, to the extent elected by the Administrator pursuant to a
nondiscriminatory procedure, elective deferrals under Section
4.1(a), and any earnings thereon, to the extent they would
reduce the excess amount, shall be returned to the
Participant.
(B) If an excess amount still exists after the application of
subparagraph (A), and the Participant is covered by the Plan
at the end of the limitation year, the excess amount in the
Participant's Account shall be used to reduce Employer
contributions (including any allocation of forfeitures, if
applicable) for such Participant in the next limitation year,
and each succeeding limitation year if necessary;
(C) If an excess amount still exists after the application of
subparagraphs (A) and (B), and the Participant is not covered
by the Plan at the end of the limitation year, the excess
amount shall be held unallocated in a suspense account and
applied to reduce future Employer contributions (including
allocation of any forfeitures) for all remaining Participants
in the next limitation year, and each succeeding limitation
year if necessary.
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(D) If a suspense account is in existence at any time during the
limitation year pursuant to this Section 11.1(a)(4), it shall
not participate in the allocation of the Trust's investment
gains and losses. In addition, all amounts held in the
suspense account shall be allocated and reallocated to
Participants' Accounts before any Employer or Employee
contributions may be made for the limitation year.
(5) If, in addition to this Plan, the Participant is covered under
another defined contribution plan maintained by the Employer, or a
welfare benefit fund, as defined in Code Section 419(e),
maintained by the Employer, or an individual medical account, as
defined in Code Section 415(1)(2), maintained by the Employer
which provides an annual addition, the annual additions which may
be credited to a Participant's account under all such plans for
any such limitation year shall not exceed the maximum permissible
amount. Benefits shall be reduced under any discretionary defined
contribution plan before they are reduced under any defined
contribution pension plan. If both plans are discretionary
contribution plans, they shall first be reduced under this Plan.
Any excess amount attributable to this Plan shall be disposed of
in the manner described in Section 11.1(a)(4).
(6) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan, the
sum of the Participant's defined benefit plan fraction and defined
contribution plan fraction shall not exceed 1.0 in any limitation
year. The annual additions which may be credited to the
Participant's Account under this Plan for any limitation year
shall be limited so that if the limitations of Code Section 415(e)
become applicable, benefits under a defined contribution plan
shall have first been provided before benefits under a defined
benefit plan are provided.
(7) In any Plan Year in which the Plan becomes a Super Top-Heavy Plan
(as defined in Section 13.2(b)), the denominators of the defined
benefit fraction and defined contribution fraction shall be
computed using one hundred percent (100%) of the maximum dollar
limitation instead of one hundred and twenty-five percent (125%).
(8) In any year in which the Plan is a Top-Heavy Plan (as defined in
Section 13.2(c)) (but not a Super Top-Heavy Plan), the limitations
shall be similarly reduced, subject to the special provisions of
Section 13.3, which provide for the use of the one hundred and
twenty-five percent (125%) limitation subject to the added minimum
allocations.
(b) DEFINITIONS.
(1) ANNUAL ADDITIONS: The following amounts credited to a
Participant's Account for the limitation year shall be treated as
annual additions:
(A) Employer contributions;
(B) Elective deferrals;
(C) Employee after-tax contributions, if any;
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(D) Forfeitures, if any; and
(E) Amounts allocated after March 31, 1984 to an individual
medical account, as defined in Section 415(l)(2) of the Code,
which is part of a defined benefit plan maintained by the
Employer. Also, amounts derived from contributions paid or
accrued after December 31, 1985 in taxable years ending after
such date which are attributable to post-retirement medical
benefits allocated to the separate account of a Key Employee,
as defined in Section 419A(d)(3), and amounts under a welfare
benefit fund, as defined in Section 419(e), maintained by the
Employer, shall be treated as annual additions to a defined
contribution plan.
For this purpose, any excess amount applied under Section
11.1(a)(4) in the limitation year to reduce Employer
contributions shall be considered annual additions for such
limitation year.
(2) COMPENSATION: For purposes of determining maximum permitted
benefits under this Section, compensation shall include all
of a Participant's earned income, wages, salaries, and fees
for professional services, and other amounts received for
personal services actually rendered in the course of
employment with the Employer, including, but not limited to,
commissions paid to salesmen, compensation for services on
the basis of a percentage of profits, commissions on
insurance premiums, tips and bonuses, and excluding the
following:
(A) Employer contributions to a plan of deferred
compensation which are not included in the Employee's
gross income for the taxable year in which contributed,
or Employer contributions under a simplified employee
pension plan (funded with individual retirement accounts
or annuities) to the extent such contributions are
deductible by the Employee, or any distributions from a
plan of deferred compensation;
(B) Amounts realized from the exercise of a nonqualified
stock option, or when restricted stock (or property)
held by the Employee either becomes freely transferable
or is no longer subject to a substantial risk of
forfeiture;
(C) Amounts realized from the sale, exchange, or other
disposition of stock acquired under a qualified stock
option; and
(D) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under
a salary reduction agreement) toward the purchase of an
annuity described in Section 403(b) of the Code (whether
or not the amounts are actually excludable from the
gross income of the Employee).
Compensation shall be measured on the basis of compensation
paid in the limitation year.
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(3) DEFINED BENEFIT FRACTION: This shall mean a fraction, the
numerator of which is the sum of the Participant's projected
annual benefits under all the defined benefit plans
maintained or previously maintained by the Employer, and the
denominator of which is the lesser of one hundred and
twenty-five percent (125%) of the dollar limitation in effect
for the limitation year under Section 415(b)(1)(A) of the
Code or one hundred and forty percent (140%) of the highest
average compensation including any adjustment under Code
Section 415(b).
(4) DEFINED CONTRIBUTION FRACTION: This shall mean a fraction,
the numerator of which is the sum of the annual additions to
the Participant's account under all the defined contribution
plans (whether or not terminated), welfare benefit funds, and
individual medical accounts maintained by the Employer for
the current and all prior limitation years, and the
denominator of which is the sum of the maximum aggregate
amounts for the current and all prior limitation years of
Service with the Employer, regardless of whether a defined
contribution plan was maintained by the Employer.
The maximum aggregate amount in any limitation year is the
lesser of one hundred and twenty-five percent (125%) of the
dollar limitation then in effect under Section 415(c)(1)(A)
of the Code or thirty-five (35%) of the Participant's
compensation for such year.
If the Employee, as of the end of the first day of the first
limitation year beginning after December 31, 1986, was a
participant in one (1) or more defined contribution plans
maintained by the Employer which were in existence on May 5,
1986, the numerator of this fraction shall be adjusted if the
sum of this fraction and the defined benefit fraction would
otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (i) the excess
of the sum of the fractions over 1.0 and (ii) the denominator
of this fraction, will be permanently subtracted from the
numerator of this fraction. The adjustment is calculated
using the fractions as they would be computed as of the end
of the last limitation year beginning before January 1, 1987,
and disregarding any changes in the terms and conditions of
the Plan made after May 5, 1986, but using the Code Section
415 limitation applicable to the first limitation year
beginning on or after January 1, 1987.
The annual addition for any limitation year beginning before
January 1, 1987, shall not be recomputed to treat all
Employee contributions as annual additions.
(5) DEFINED CONTRIBUTION DOLLAR LIMITATION: This shall mean the
greater of $30,000 or one-fourth (1/4) of the defined benefit
dollar limitation of Section 415(b)(1) of the Code in effect
for the limitation year.
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(6) EMPLOYER: This term refers to the Employer that adopts this
Plan, and all members of a controlled group of corporations
(as defined in Section 414(b) of the Code, as modified by
Section 415(h)), commonly-controlled trades or businesses (as
defined in Section 414(c), as modified by Section 415(h)), or
affiliated service groups (as defined in Section 414(m)) of
which the Employer is a part, or any other entity required to
be aggregated with the Employer under Code Section 414(o).
(7) HIGHEST AVERAGE COMPENSATION: This means the average
compensation for the three (3) consecutive limitation years
with the Employer that produces the highest average.
(8) LIMITATION YEAR: This shall mean the Plan Year.
(9) MAXIMUM PERMISSIBLE AMOUNT: This shall mean an amount equal
to the lesser of the defined contribution dollar limitation
or twenty-five percent (25%) of the Participant's
compensation for the limitation year. If a short limitation
year is created because of an amendment changing the
limitation year to a different twelve (12)-consecutive month
period, the maximum permissible amount shall not exceed the
defined contribution dollar limitation multiplied by the
following fraction:
NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR
12
(10) PROJECTED ANNUAL BENEFIT: This is the annual retirement
benefit (adjusted to an actuarially equivalent straight life
annuity if such benefit is expressed in a form other than a
straight life annuity or qualified joint and survivor
annuity) to which the Participant would be entitled under the
terms of the plan, assuming:
(A) the Participant will continue employment until normal
retirement age under the plan (or current age, if
later), and
(B) the Participant's compensation for the current
limitation year and all other relevant factors used to
determine benefits under the plan will remain constant
for all future limitation years.
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ARTICLE TWELVE--AMENDMENT AND TERMINATION
12.1 AMENDMENT. The Employer, by resolution of its board of directors, (or, to
the extent permitted by resolution of such board of directors, by action of a
duly authorized officer of the Employer) shall have the right to amend, alter or
modify the Plan at any time, or from time to time, in whole or in part. Any such
amendment shall become effective under its terms upon adoption by the Employer.
However, no amendment affecting the duties, powers or responsibilities of the
Trustee may be made without the written consent of the Trustee. No amendment
shall be made to the Plan which shall:
(a) make it possible (other than as provided in Section 14.3) for any part
of the corpus or income of the Trust Fund (other than such part as may
be required to pay taxes and administrative expenses) to be used for or
diverted to purposes other than the exclusive benefit of the
Participants or their Beneficiaries;
(b) decrease a Participant's account balance or eliminate an optional form
of payment with respect to benefits accrued as of the later of (i) the
date such amendment is adopted, or (ii) the date the amendment becomes
effective; or
(c) alter the schedule for vesting in a Participant's Account with respect
to any Participant with three (3) or more Years of Service for vesting
purposes without his consent or deprive any Participant of any
nonforfeitable portion of his Account.
Notwithstanding the other provisions of this Section or any other provisions of
the Plan, any amendment or modification of the Plan may be made retroactively if
necessary or appropriate to conform to or to satisfy the conditions of any law,
governmental regulation, or ruling, and to meet the requirements of the Employee
Retirement Income Security Act of 1974, as it may be amended.
12.2 TERMINATION OF THE PLAN. The Employer, by resolution of its board of
directors, reserves the right at any time and in its sole discretion to
discontinue payments under the Plan and to terminate the Plan. In the event the
Plan is terminated, or upon complete discontinuance of contributions under the
Plan by the Employer, the rights of each Participant to his Account on the date
of such termination or discontinuance of contributions, to the extent of the
fair market value under the Trust Fund, shall become fully vested and
nonforfeitable. The Employer shall direct the Trustee to distribute the Trust
Fund in accordance with the Plan's distribution provisions to the Participants
and their Beneficiaries, each Participant or Beneficiary receiving a portion of
the Trust Fund equal to the value of his Account as of the date of distribution.
These distributions may be implemented by the continuance of the Trust and the
distribution of the Participants' Account shall be made at such time and in such
manner as though the Plan had not terminated, or by any other appropriate
method, including rollover into Individual Retirement Accounts. Upon
distribution of the Trust Fund, the Trustee shall be discharged from all
obligations under the Trust and no Participant or Beneficiary shall have any
further right or claim therein. If a partial termination of the Plan is deemed
to have occurred, this Section shall apply only to those Participant's affected
by such partial termination.
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ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS
13.1 APPLICABILITY. The provisions of this Article shall become applicable only
for any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section
13.2(c)). The determination of whether the Plan is a Top-Heavy Plan shall be
made each Plan Year by the Administrator.
13.2 DEFINITIONS. For purposes of this Article, the following definitions shall
apply:
(a) "KEY EMPLOYEE": "Key Employee" shall mean any Employee or former
Employee (and the Beneficiaries of such Employee) who, at any time
during the determination period, was (1) an officer of the Employer
earning compensation (as defined in Section 416(i) of the Code) in
excess of fifty percent (50%) of the dollar limitation under Section
415(b)(1)(A) of the Code, (2) an owner (or considered an owner under
Section 318 of the Code) of both more than a one-half percent (1/2%)
interest in the Employer and one of the ten (10) largest interests in
the Employer if such individual's compensation exceeds the dollar
limitation under Section 415(c)(1)(A) of the Code, (3) a five percent
(5%) owner of the Employer, or (4) a one percent (1%) owner of the
Employer who has an annual compensation of more than $150,000. For
purposes of this Section, annual compensation shall mean compensation
as defined in Code Section 415(c)(3), but including amounts contributed
by the Employer pursuant to a salary reduction agreement which are
excludable from the Employee's income under Code Sections 125, 402(g),
402(h) or 403(b). The determination period of the Plan is the Plan Year
containing the "determination date" as defined in Section 13.2(c)(4)
and the four (4) preceding Plan Years.
The determination of who is a Key Employee (including the terms "5%
owner" and "1% owner") shall be made in accordance with Section
416(i)(1) of the Code and the regulations thereunder.
(b) "SUPER TOP-HEAVY PLAN": The Plan shall constitute a "Super Top-Heavy
Plan" if it meets the test for status as a Top-Heavy Plan, where "90%"
is substituted for "60%" at each place in Section 13.2(c).
(c) "TOP-HEAVY PLAN":
(1) The Plan shall constitute a "Top-Heavy Plan" if any of the
following conditions exist:
(A) The top-heavy ratio for the Plan exceeds sixty percent (60%)
and the Plan is not part of any required aggregation group or
permissive aggregation group of plans; or
(B) The Plan is part of a required aggregation group of plans
(but is not part of a permissive aggregation group) and the
top-heavy ratio for the group of plans exceeds sixty percent
(60%); or
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<PAGE>
(C) The Plan is a part of a required aggregation group of plans
and part of a permissive aggregation group and the top-heavy
ratio for the permissive aggregation group exceeds sixty
percent (60%).
(2) If the Employer maintains one (1) or more defined contribution
plans (including any simplified employee pension plan funded with
individual retirement accounts or annuities) and the Employer
maintains or has maintained one (1) or more defined benefit plans
which have covered or could cover a Participant in this Plan, the
top-heavy ratio is a fraction, the numerator of which is the sum
of account balances under the defined contribution plans for all
Key Employees and the actuarial equivalents of accrued benefits
under the defined benefit plans for all Key Employees, and the
denominator of which is the sum of the account balances under the
defined contribution plans for all Participants and the actuarial
equivalents of accrued benefits under the defined benefit plans
for all Participants. Both the numerator and denominator of the
top-heavy ratio shall include any distribution of an account
balance or an accrued benefit made in the five (5)-year period
ending on the determination date and any contribution due to a
defined contribution pension plan but unpaid as of the
determination date. In determining the accrued benefit of a
non-Key Employee who is participating in a plan that is part of a
required aggregation group, the method of determining such benefit
shall be either (i) in accordance with the method, if any, that
uniformly applies for accrual purposes under all plans maintained
by the Employer or any member of the Employer's related group
(within the meaning of Section 2.5(b)), or (ii) if there is no
such method, as if such benefit accrued not more rapidly than the
slowest accrual rate permitted under the fractional accrual rate
of Code Section 411(b)(1)(C).
(3) For purposes of (1) and (2) above, the value of account balances
and the actuarial equivalents of accrued benefits shall be
determined as of the most recent Valuation Date that falls within
or ends with the twelve (12)-month period ending on the
determination date. The account balances and accrued benefits of a
Participant who is not a Key Employee but who was a Key Employee
in a prior year shall be disregarded. The accrued benefits and
account balances of Participants who have performed no Hours of
Service with any Employer maintaining the plan for the five
(5)-year period ending on the determination date shall be
disregarded. The calculations of the top-heavy ratio, and the
extent to which distributions, rollovers, and transfers are taken
into account shall be made under Section 416 of the Code and
regulations issued thereunder. Deductible Employee contributions
shall not be taken into account for purposes of computing the
top-heavy ratio. When aggregating plans, the value of account
balances and accrued benefits shall be calculated with reference
to the determination dates that fall within the same calendar
year.
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<PAGE>
(4) DEFINITION OF TERMS FOR TOP-HEAVY STATUS:
(A) "TOP-HEAVY RATIO" shall mean the following:
(1) If the Employer maintains one or more defined
contribution plans (including any simplified employee
pension plan funded with individual retirement accounts
or annuities) and the Employer has never maintained any
defined benefit plans which have covered or could cover
a Participant in this Plan, the top-heavy ratio is a
fraction, the numerator of which is the sum of the
account balances of all Key Employees as of the
determination date (including any part of any account
balance distributed in the five (5)-year period ending
on the determination date), and the denominator of which
is the sum of the account balances (including any part
of any account balance distributed in the five (5)-year
period ending on the determination date) of all
Participants as of the determination date. Both the
numerator and the denominator shall be increased by any
contributions due but unpaid to a defined contribution
pension plan as of the determination date.
(B) "PERMISSIVE AGGREGATION GROUP" shall mean the required
aggregation group of plans plus any other plan or plans of
the Employer which, when considered as a group with the
required aggregation group, would continue to satisfy the
requirements of Section 401(a)(4) and/or 410 of the Code.
(C) "REQUIRED AGGREGATION GROUP" shall mean (i) each qualified
plan of the Employer (including any terminated plan) in which
at least one Key Employee participates, and (ii) any other
qualified plan of the Employer which enables a plan described
in (i) to meet the requirements of Section 401(a)(4) and/or
410 of the Code.
(D) "DETERMINATION DATE" shall mean, for any Plan Year subsequent
to the first Plan Year, the last day of the preceding Plan
Year. For the first Plan Year of the Plan, "determination
date" shall mean the last day of that Plan Year.
(E) "VALUATION DATE" shall mean the last day of the Plan Year.
(F) Actuarial equivalence shall be based on the interest and
mortality rates utilized to determine actuarial equivalence
when benefits are paid from any defined benefit plan. If no
rates are specified in said plan, the following shall be
utilized: pre- and post-retirement interest -- five percent
(5%); post-retirement mortality based on the Unisex Pension
(1984) Table as used by the Pension Benefit Guaranty
Corporation on the date of execution hereof.
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<PAGE>
13.3 ALLOCATION OF EMPLOYER CONTRIBUTIONS AND FORFEITURES FOR A TOP-HEAVY PLAN
YEAR.
(a) Except as otherwise provided below, in any Plan Year in which the Plan
is a Top-Heavy Plan, the Employer contributions and forfeitures, if
applicable, allocated on behalf of any Participant who is a non-Key
Employee shall not be less than the lesser of three percent (3%) of
such Participant's compensation (as defined in Section 11.1(b)(2)) or
the largest percentage of Employer contributions and forfeitures, if
applicable, as a percentage of the Key Employee's Compensation,
allocated on behalf of any Key Employee for that Plan Year. This
minimum allocation shall be made even though, under other Plan
provisions, the Participant would not otherwise be entitled to receive
an allocation or would have received a lesser allocation for the Plan
Year because of insufficient Employer contributions under Section 4.2,
the Participant's failure to complete one thousand (1,000) Hours of
Service or the Participant's failure to make elective deferrals under
Section 4.1.
(b) The minimum allocation under this Section shall not apply to any
Participant who was not employed by the Employer on the last day of the
Plan Year.
(c) The minimum allocation under this Section shall be offset and reduced
by any allocation of contributions and forfeitures, if applicable,
under Section 4.2, and under any other defined contribution plan (if
such contributions are not treated as matching contributions under Code
Section 401(m)) with a Plan Year ending in the same calendar year as
the Valuation Date.
(d) For purposes of the Plan, a non-Key Employee shall be any Employee or
Beneficiary of such Employee, any former Employee, or Beneficiary of
such former Employee, who is not or was not a Key Employee during the
Plan Year ending on the determination date, nor during the four (4)
preceding Plan Years.
(e) If no defined benefit plan has ever been part of a permissive or
required aggregation group of plans of the Employer, the contributions
and forfeitures, if applicable, under this step shall be offset by any
allocation of contributions and forfeitures, if applicable, under any
other defined contribution plan of the Employer with a Plan Year ending
in the same calendar year as this Plan's Valuation Date.
(f) There shall be no duplication of the minimum benefits required under
Code Section 416. Benefits shall be provided under defined contribution
plans before defined benefit plans. If a defined benefit plan (active
or terminated) is part of the permissive or required aggregation group
of plans, the allocation method of subparagraph (a) above shall apply,
except that "3%" shall be increased to "5%."
(g) There shall be no duplication of the minimum benefits required under
Code Section 416. Benefits shall be provided under defined contribution
plans before defined benefit plans. If a defined benefit plan (active
or terminated) is part of the permissive or required aggregation group
of plans, and if any Participant in the Plan would have his benefits
limited due to the application of the Code limitation rule in Section
11.1 in a Plan Year in which the Plan is a Top-Heavy Plan but not a
Super Top-Heavy Plan, the allocation method of subparagraph (f) above
shall apply, except that "5%" shall be increased to "7.5%."
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<PAGE>
13.4 VESTING. The provisions contained in Section 6.1 relating to vesting shall
continue to apply in any Plan Year in which the Plan is a Top-Heavy Plan, and
apply to all benefits within the meaning of Section 411(a)(7) of the Code except
those attributable to Employee contributions and elective deferrals under
Section 4.1, including benefits accrued before the effective date of Section 416
and benefits accrued before the Plan became a Top-Heavy Plan. Further, no
reduction in vested benefits may occur in the event the Plan's status as a
Top-Heavy Plan changes for any Plan Year and the vesting schedule is amended. In
addition, if a Plan's status changes from a Top-Heavy Plan to that of a
non-Top-Heavy Plan, a Participant with three (3) Years of Service for vesting
purposes shall continue to have his vested rights determined under the schedule
which he selects, in the event the vesting schedule is subsequently amended.
Payment of a Participant's vested Account balance under this Section shall be
made in accordance with the provisions of Article Seven.
40
<PAGE>
ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS
14.1 PLAN DOES NOT AFFECT EMPLOYMENT. Neither the creation of this Plan, any
amendment thereto, the creation of any fund nor the payment of benefits
hereunder shall be construed as giving any legal or equitable right to any
Employee or Participant against the Employer, its officers or Employees, or
against the Trustee. All liabilities under this Plan shall be satisfied, if at
all, only out of the Trust Fund held by the Trustee. Participation in the Plan
shall not give any Participant any right to be retained in the employ of the
Employer, and the Employer hereby expressly retains the right to hire and
discharge any Employee at any time with or without cause, as if the Plan had not
been adopted, and any such discharged Participant shall have only such rights or
interests in the Trust Fund as may be specified herein.
14.2 SUCCESSOR TO THE EMPLOYER. In the event of the merger, consolidation,
reorganization or sale of assets of the Employer, under circumstances in which a
successor person, firm, or corporation shall carry on all or a substantial part
of the business of the Employer, and such successor shall employ a substantial
number of Employees of the Employer and shall elect to carry on the provisions
of the Plan, such successor shall be substituted for the Employer under the
terms and provisions of the Plan upon the filing in writing with the Trustee of
its election to do so.
14.3 REPAYMENTS TO THE EMPLOYER. Notwithstanding any provisions of this Plan to
the contrary:
(a) Any monies or other Plan assets attributable to any contribution made
to this Plan by the Employer because of a mistake of fact shall be
returned to the Employer within one (1) year after the date of
contribution.
(b) Any monies or other Plan assets attributable to any contribution made
to this Plan by the Employer shall be refunded to the Employer, to the
extent such contribution is predicated on the deductibility thereof
under the Code and the income tax deduction for such contribution is
disallowed. Such amount shall be refunded within one (1) taxable year
after the date of such disallowance or within one (1) year of the
resolution of any judicial or administrative process with respect to
the disallowance. All Employer contributions hereunder are expressly
contributed based upon such contributions' deductibility under the
Code.
However, the provisions of this Section shall not apply to elective deferrals
made by a Participant under Section 4.1.
14.4 BENEFITS NOT ASSIGNABLE. Except as provided in Section 414(p) of the Code
with respect to "qualified domestic relations orders," the rights of any
Participant or his Beneficiary to any benefit or payment hereunder shall not be
subject to voluntary or involuntary alienation or assignment.
With respect to any "qualified domestic relations order" relating to the Plan,
the Plan shall permit distribution to an alternate payee under such order at any
time, irrespective of whether the Participant has attained his "earliest
retirement age" (within the meaning of Section 414(p)(4)(B) of the Code) under
the Plan. A distribution to an alternate payee prior to the Participant's
attainment of his earliest retirement age
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<PAGE>
shall, however, be available only if the order specifies distribution at that
time or permits an agreement between the Plan and the alternate payee to
authorize an earlier distribution. Nothing in this paragraph shall, however,
give a Participant a right to receive distribution at a time otherwise not
permitted under the Plan nor does it permit the alternate payee to receive a
form of payment not otherwise permitted under the Plan or under said Section
414(p) of the Code.
14.5 MERGER OF PLANS. In the case of any merger or consolidation of this Plan
with, or transfer of the assets or liabilities of the Plan to, any other plan,
the terms of such merger, consolidation or transfer shall be such that each
Participant would receive (in the event of termination of this Plan or its
successor immediately thereafter) a benefit which is no less than what the
Participant would have received in the event of termination of this Plan
immediately before such merger, consolidation or transfer.
14.6 INVESTMENT EXPERIENCE NOT A FORFEITURE. The decrease in value of any
Account due to adverse investment experience shall not be considered an
impermissible "forfeiture" of any vested balance.
14.7 DISTRIBUTION TO LEGALLY INCAPACITATED. In the event any benefit is payable
to a minor or to a person deemed to be incompetent or to a person otherwise
under legal disability, or who is by sole reason of advanced age, illness, or
other physical or mental incapacity incapable of handling the disposition of his
property, the Administrator, may direct the Trustee to apply all or any portion
of such benefit directly to the care, comfort, maintenance, support, education
or use of such person or to pay or distribute the whole or any part of such
benefit to (a) the spouse of such person, (b) the parent of such person, (c) the
guardian, committee, or other legal representative, wherever appointed, of such
person, (d) the person with whom such person shall reside, (e) any other person
having the care and control of such person, or (f) such person. The receipt of
any such payment or distribution shall be a complete discharge of liability for
Plan obligations.
14.8 CONSTRUCTION. Wherever appropriate, the use of the masculine gender shall
be extended to include the feminine and/or neuter or vice versa; and the
singular form of words shall be extended to include the plural; and the plural
shall be restricted to mean the singular.
14.9 GOVERNING DOCUMENTS. A Participant's rights shall be determined under the
terms of the Plan as in effect at the Participant's date of separation from
Service.
14.10 GOVERNING LAW. The provisions of this Plan shall be construed under the
laws of the state of Illinois, except to the extent such laws are preempted by
Federal law.
14.11 HEADINGS. The Article headings and Section numbers are included solely for
ease of reference. If there is any conflict between such headings or numbers and
the text of the Plan, the text shall control.
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<PAGE>
14.12 COUNTERPARTS. This Plan may be executed in any number of counterparts,
each of which shall be deemed an original; said counterparts shall constitute
but one and the same instrument, which may be sufficiently evidenced by any one
counterpart.
14.13 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN. In the event that all or
any portion of the distribution payable to a Participant or to a Participant's
Beneficiary hereunder shall, at the expiration of five (5) years after it shall
become payable, remain unpaid solely by reason of the inability of the
Administrator to ascertain the whereabouts of such Participant or Beneficiary,
after sending a registered letter, return receipt requested, to the last known
address, and after further diligent effort, the amount so distributable shall be
handled in the same manner as a forfeiture under Section 6.2 pursuant to this
Plan. In the event a Participant or Beneficiary is located subsequent to the
reallocation of his Account balance, such Account balance shall be restored in
accordance with the provisions of Section 6.2.
------------------------------------------
IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has caused
this Plan to be executed on the 1st day of October, 1997.
--- --------
CONTINENTAL MATERIALS CORPORATION
By /s/Illegible
-------------------------------------------
Authorized Officer
43
